1
OBLIGATIONS AND CONTRACTS
Part I — Obligations
CHAPTER 1
GENERAL PROVISIONS
§1.00
Generally
Art. 1156. An obligation is a juridical necessity
to give, to do or not to do. (n)
Art. 1157. Obligations arise from:
(1)
Law;
(2)
Contracts;
(3)
Quasi-contracts;
(4)
Acts or omissions punished by law; and
(5)
Quasi-delicts. (1089a)
Art. 1158. Obligations derived from law are not
presumed. Only those expressly determined in this
Code or in special laws are demandable, and shall
be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090)
Art. 1159. Obligations arising from contracts
have the force of law between the contracting parties and should be complied with in good faith.
(1091a)
Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter
1, Title XVII, of this Book. (n)
1
2
OBLIGATIONS AND CONTRACTS
Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws,
subject to the provisions of Article 2177, and of the
pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this
Book, regulating damages. (1092a)
Art. 1162. Obligations derived from quasidelicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws.
(1093a)
§2.00
Obligation defined
An obligation is a juridical necessity to give, to do or not to
do.1
This definition emphasizes the obligation of the obligor or debtor to give, to do, or not to do, and implies the correlative right of the
obligee or creditor to demand the performance of the act or conduct.
It is a settled principle that where there is a right in favor of a person, there is a remedy for violation thereof, which entitles the latter
to a remedy to assure its observance and vindication therefor.2
Obligation in its totality may thus be defined as follows:
“An obligation is a juridical relation whereby a person
(called the creditor) may demand from another (called the
debtor) the observance of a determinate conduct and, in
case of breach may obtain satisfaction from the assets of
the latter.”3
For instance, the obligation to pay rentals or deliver the thing in
contract of lease falls within the prestation “to give.”4 An obligation
“to do” includes all kinds of work or service, while an obligation “to
give” consists in the delivery of a movable or an immovable thing
in order to create a real right, or the use of the recipient, or for its
simple possession, or in order to return it to its owner.5
Art. 1156, Civil Code.
RUBEN E. AGPALO, Statutory Construction, 2003 Ed., p. 166.
3
Quoted in TOLENTINO, Commentaries and Jurisprudence on the Civil Code, Vol.
4, p. 56.
4
Philippine National Construction Corp. v. CA, 272 SCRA 183 [1997].
5
Ibid.
1
2
CHAPTER 1
GENERAL PROVISIONS
3
An obligation “not to do’’ is a negative obligation which restrains
or prohibits the obligor to perform or do some act. For instance,
an employment contract provides that after its termination or the
employee’s separation from work for any reason, he must not do
similar service or undertake similar business as that of his former
employer for a reasonable period of time, the usual reason for such
restriction being to prevent him from making use, for a limited
period, of trade secrets learned in the course of his previous service
in his previous employment.6
§3.00
Essential elements of obligation
The essential elements of obligation are:
1.
The vinculum juris or judicial tie which is the efficient
cause established by the various sources of obligations, namely, law,
contracts, quasi-contract, delict and quasi-delict;
2.
The object which is the prestation or conduct, required to
be observed in the obligation to give, to do or not to do; and
3.
The subject-persons who, viewed from the demandability
of the obligation, are the active (obligee) and the passive (obligor)
subjects.7
Civil obligations, which are provided for in Arts. 1156 et seq.
differ from natural obligations, which are governed by Arts. 1423
to 1430 of the Civil Code. Civil obligations, when breached, give the
offended or aggrieved party cause of action to compel performance
or to ask for damages. Natural obligations cannot be enforced by
court action and depended solely on the conscience of the party who
makes them and on equity and sense of justice.
§4.00
Sources of obligations
Obligations arise from (1) law, (2) contracts, (3) quasi-contracts,
(4) acts or omissions punished by law, and (5) quasi-delicts.
There is one common element or factor which underlines all
sources of obligations, which is that the obligor has done something
or has committed an act or has omitted an act, from which the
obligation to give, to do or not to do arises as provided by law,
contract, quasi-contract, delict and quasi-delict, as the case may be.
6
7
See Tiu v. Platinum Plans Phil., G.R. No. 163315, Feb. 26, 2007.
Ang Yu Asuncion v. CA, 238 SCRA 602, 610 [1994].
4
OBLIGATIONS AND CONTRACTS
There can be no obligation without any of these sources at play, and
no obligation may arise without the obligor doing something, either
voluntarily or involuntarily or omitting an act required to be done.
§5.00
Obligations arising from law
Except obligations arising from contract, the obligations arising
from law, quasi-contract, acts or omissions punishable law, and
quasi-delict are imposed or required by law and are made obligatory
upon the obligor without his consent. It is only in obligations required
by contract that the parties are bound by their mutual consent.
§6.00
Meaning of “law”
The term “law” which requires to be published before it becomes
effective refers to all laws and not only to those of general application,
but also to those of local application, city charters, private laws,
presidential decrees, executive orders, and administrative rules and
regulations implementing existing laws.8
Obligations arising from law are independent of the agreement
or consent of the parties, the obligor and the obligee. They arise from
the voluntary acts of the obligor, affecting the right of the obligee,
the commission or non-performance of which acts create, by law, an
obligation to perform or to do on the part of the obligor in favor of
the obligee. The obligation is a statutory consequence of such act or
omission. Thus, the Tax Code requires every person with taxable
income to file his income tax return every taxable year and to pay
the corresponding taxes on his taxable income. If he fails to perform
such act, he becomes liable therefor to the government.
Generally, letter of instruction is not a law, upon which obligation arises. To qualify a letter of instruction as a law, from which
obligation may arise, it must satisfy the following requirements:
“To form part of the law of the land, the decree, order
or LOI must be issued by the President in the exercise of
his extraordinary power of legislation as contemplated in
Section 6 of the 1976 amendments to the Constitution,
whenever in his judgment, there exists a grave emergency
or threat or imminence thereof, or whenever the interim
Batasang Pambansa or the regular National Assembly
8
Tañada v. Tuvera, 146 SCRA 446 [1986].
CHAPTER 1
GENERAL PROVISIONS
5
fails or is unable to act adequately on any matter for any
reason that in his judgment requires immediate action.9
§7.00
Obligations derived from law are not presumed
Obligations arising from law may either be from provisions
of the Civil Code or from those of special laws, and they must be
expressly determined by specific provisions of the Civil Code or by
special law.
For instance, one of the provisions of the Civil Code which
expressly determines the obligations arising therefrom is Art. 19 of
the Code on abuse of rights. Article 19 of the Civil Code provides:
“Every person must, in the exercise of his right and
in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.”
If a person gravely abuses his right to the damage of another,
he becomes liable for damages in favor of the latter. This rule is
expressed in Art. 19 of the Civil Code.
It has been held that there is abuse of right when it is exercised
for the only purpose of prejudicing or injuring another.10 A person
who abuses his right or performs his duty to the damage of another
may be held liable under Art. 19 of the Civil Code, for the exercise
of right or the performance of duty must be done with justice and in
good faith. Hence, a person who acts unfairly against one in favor
of other persons, or who disposes of his property — a perfectly legal
act — in order to escape the reach of his creditor, or who terminates
an agency — also a legal act — when terminating it would deprive
the agent of his legitimate business, may be held liable for damages
under said article.11
Where a right, as recognized by law, is exercised in a manner
which does not conform with the norms enshrined in Article 19 of
the Civil Code and results in damage to another, a legal wrong is
committed and the latter may have a cause of action for damages
against the former. The elements of abuse of right that may be
actionable are:
(1)
there must be a legal right or duty;
Poliand Industrial Limited v. NDC, 467 SCRA 500 [2005].
Hongkong and Shanghai Banking Corp. v. Catalan, 440 SCRA 495 [2004].
11
Llorente v. Sandiganbayan, 202 SCRA 309 [1991].
9
10
6
OBLIGATIONS AND CONTRACTS
(2)
the right is exercised in bad faith; and
(3) it is for the sole intent of prejudicing or injuring
another.12
The case of GF Equity, Inc. v. Valenzona,13 illustrates the rule
on abuse of right as basis for damages. In this case, the corporation and Valenzona, as coach, entered into an agreement which provides for a fixed monthly salary and other benefits, for a term of two
years.
Under the contract, GF Equity would pay Valenzona the sum of
Thirty Five Thousand Pesos (P35,000.00) monthly, net of taxes, and
provide him with a service vehicle and gasoline allowance. While the
employment period agreed upon was for two years commencing on
January 1, 1988 and ending on December 31, 1989, the last sentence
of paragraph 3 of the contract carried the following condition:
3.
x x x If at any time during the contract, the
COACH, in the sole opinion of the CORPORATION, fails
to exhibit sufficient skill or competitive ability to coach the
team, the CORPORATION may terminate this contract.
Valenzona was later advised by the management of GF Equity
by letter of September 26, 1988 of the termination of his services in
this wise:
We regret to inform you that under the contract of
employment dated January 1, 1988 we are invoking our
rights specified in paragraph 3.
You will continue to be paid until your outstanding
balance which, as of September 25, 1988, is P75,868.38
has been fully paid.
Please return the service vehicle to my office no later
than September 30, 1988.
Valenzona sued for payment of compensation arising from
the arbitrary and unilateral termination of his employment. The
12
Albenson Enterprises Corp. v. CA, 217 SCRA 167 [1993]; BPI Express Card
Corp. v. CA, 296 SCRA 260 [1998]; Sea Commercial Co. v. CA, 319 SCRA 210 [1999];
Hongkong and Shanghai Banking Corp. v. Catalan, 440 SCRA 495 [2004].
13
G.R. No. 156841, June 30, 2005.
CHAPTER 1
GENERAL PROVISIONS
7
Supreme Court ruled that the dismissal of Valenzona constituted
abuse of the company’s right and awarded him damages, thus:
“The assailed stipulation being violative of the
mutuality principle underlying Article 1308 of the Civil
Code, it is null and void.
The nullity of the stipulation notwithstanding, GF
Equity was not precluded from the right to pre-terminate
the contract. The pre-termination must have legal basis,
however, if it is to be declared justified.
GF Equity failed, however, to advance any ground to
justify the pre-termination. It simply invoked the assailed
provision which is null and void.
While GF Equity’s act of pre-terminating Valenzona’s
services cannot be considered willful as it was based on a
stipulation, albeit declared void, it, in doing so, failed to
consider the abuse of rights principle enshrined in Art. 19
of the Civil Code which provides:
Art. 19. Every person must, in the exercise
of his rights and in the performance of his
duties, act with justice, give everyone his due,
and observe honesty and good faith.
This provision of law sets standards which must be
observed in the exercise of one’s rights as well as in the
performance of its duties, to wit: to act with justice; give
everyone his due; and observe honesty and good faith.
Since the pre-termination of the contract was
anchored on an illegal ground, hence, contrary to law,
and GF Equity negligently failed to provide legal basis for
such pre-termination, e.g., that Valenzona breached the
contract by failing to discharge his duties thereunder, GF
Equity failed to exercise in a legitimate manner its right
to pre-terminate the contract, thereby abusing the right
of Valenzona to thus entitle him to damages under Art.
19 in relation to Article 20 of the Civil Code the latter of
which provides:
Art. 20. Every person who, contrary to
law, willfully or negligently causes damage
to another, shall indemnify the latter for the
same.
8
OBLIGATIONS AND CONTRACTS
In De Guzman v. NLRC, this Court quoted the
following explanation of Tolentino why it is impermissible
to abuse our rights to prejudice others.
The exercise of a right ends when the
right disappears, and it disappears when it is
abused, especially to the prejudice of others.
The mask of a right without the spirit of justice
which gives it life is repugnant to the modern
concept of social law. It cannot be said that a
person exercises a right when he unnecessarily prejudices another or offends morals or good
customs. Over and above the specific precepts
of positive law are the supreme norms of justice
which the law develops and which are expressed
in three principles: honeste vivere, alterum non
laedere and jus suum quique tribuere; and he
who violates them violates the law. For this
reason, it is not permissible to abuse our rights
to prejudice others.
The disquisition in Globe Mackay Cable and Radio
Corporation v. Court of Appeals is just as relevant as it is
illuminating on the present case. In that case, this Court
declared that even granting that the therein petitioners
might have had the right to dismiss the therein respondent
from work, the abusive manner in which that right
was exercised amounted to a legal wrong for which the
petitioners must be held liable.
§8.00
Obligations arising from contracts
Contract is defined as a juridical convention manifested in
legal form, by virtue of which one or more persons bind themselves
in favor of another or others, or reciprocally, to the fulfillment of a
prestation to give, to do, or not to do.14
An obligation “to do” includes all kinds of work or service, while
an obligation’s “to give” is a prestation which consists in the delivery
of a movable or an immovable thing in order to create a real right, or
14
Jardine Davies, Inc. v. CA, 333 SCRA 684 [2000].
CHAPTER 1
GENERAL PROVISIONS
9
for the use of the recipient, or for its simple possession, or in order to
return it to its owner.15
An obligation “not to do” is a negative obligation which restrains
or prohibits the obligor to perform or do some act. For instance,
an employment contract provides that after its termination or the
employee’s separation from service for any reason, he must not do
similar service or undertake similar business as that of his former
employer for a reasonable period of time, the usual justification being
to prevent him from making use, for a limited period, of trade secrets
learned in the course of his service in his previous employment.16
Article 1305 of the Civil Code defines a contract as the “meeting
of the minds between two (or more) persons whereby one binds
himself, with respect to the other, to give something or to render
some service. There must be a meeting of the minds among the
contracting parties, from which the obligation arises, otherwise
there is no contract. In other words, until the contract is perfected,
it cannot, as an independent source of obligation, serve as a binding
juridical relation.17
It has been held that in order that obligations arising from
contract may have the force of law between the parties, there must
be mutuality between the parties based on their essential equality.
A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void.18 Any contract which appears to be
heavily weighed in favor of one of the parties so as to lead to an
unreasonable result is void.19
§9.00
Obligations from quasi-contract
A quasi-contact is a legal fiction of legal relation, which Art.
2142 of the Civil Code creates where there is no existing contract,
and which arises from the principle that no one should be allowed
to unjustly enrich himself at the expense of another by the latter’s
voluntary and unilateral act, so as to prevent the person benefited
from taking advantage of such lawful, voluntary and unilateral act at
15
Phil. National Construction Corp. v. CA, 272 SCRA 183, 191 [1997]; Phil.
National Construction Corp. v. CA, 272 SCRA 183, 191 [1997].
16
Cf. Tiu v. Platinum Plans Phil., G.R. No. 163512, Feb. 26, 2007.
17
Ang Yu v. CA, 238 SCRA 602, 611 [1994].
18
PNB v. CA, 196 SCRA 536 [1991].
19
Almeda v. CA, 256 SCRA 292 [1996].
10
OBLIGATIONS AND CONTRACTS
the expense of the actor20 and to entitle the latter to reimbursement
or return of what has been paid.21
Article 2142 creates the legal fiction of a quasi-contract precisely
because of the absence of any contractual agreement between the
parties concerned. The act is voluntary because the actor in quasicontract is not bound by any pre-existing obligation to act. It is
unilateral because it arises from the sole will of the actor who is
not previously bound by any reciprocal or bilateral agreements. The
reason why the law creates a juridical relation and imposes certain
obligations is to prevent a situation where a person is able to benefit
or take advantage of such lawful, voluntary and unilateral acts at the
expense of said actor. Article 2142 does not apply where the parties
have existing contractual agreement, in which case said agreement
applies and governs their respective rights and liabilities.22
§10.00 Requisites of quasi-contract
The requisites of quasi-contract include: (1) absence of contract; (2) the act done in favor of another person is voluntary and
unilateral; (3) the law imposes upon the person the obligation to
reimburse what has been spent or compensate the services done, or
return what has been paid, for no one must be unjustly enriched at
the expense of another.23
Quasi-contracts include negotiorum gestio,24 solutio indebiti,25
and other quasi-contracts.26
§11.00 Obligations arising from crimes
Article 1161 of the Civil Code should be read and construed
along with the pertinent provisions of the Revised Penal Code and
Rule 111 of the Revised Rules of Criminal Procedure. Rule 111 of the
Revised Rules of Criminal Procedure governs the prosecution of the
civil action arising from a crime.
Cruz v. J.M. Tuason & Co., Inc., 76 SCRA 543 [1977].
Catindig v. Roque, 74 SCRA 83 [1976].
22
Cruz v. J.M. Tuason & Co., Inc., 76 SCRA 543 [1977].
23
Arts. 2142-2143, Civil Code; Ramie Textiles, Inc. v. Mathay, Sr., 89 SCRA
586 [1979].
24
Arts. 2144 to 2153, Civil Code.
25
Arts. 2154 to 2163.
26
Arts. 2154 to 2175.
20
21
CHAPTER 1
GENERAL PROVISIONS
11
§12.00 Civil liability arising from crimes, generally
The rules regarding civil liability arising from crimes may be
re-stated, generally, as follows:
1.
Every person criminally liable for a felony is also civilly
liable. When a criminal action is instituted, the civil action for
recovery of civil liability arising from the offense charged is impliedly
instituted with the criminal action, unless the offended party
expressly waives the civil action or reserves his right to institute it
separately.
2.
The plaintiff in the criminal action is the State. Its purpose
is to obtain a judgment of conviction imposing the corresponding
penalty for the vindication of the disturbance to the social order
caused by the offender. On the other hand, a private person is the
plaintiff in the civil action. The satisfaction of the civil liability does
not extinguish the criminal action. Extinction of the penal action
does not carry with it extinction of the civil, unless the extinction
proceeds from a declaration in a final judgment that the fact from
which the civil liability might arise did not exist.
3.
Although the criminal and civil actions may be joined in
the criminal case, they are distinct from each other. The plaintiffs in
two actions are different. Thus, even if the accused started serving
his sentence within the fifteen-day period from the promulgation of
the judgment of conviction by the lower court, thereby making the
judgment against him final, the complainant may, within the fifteenday reglementary period, still ask that the civil liability be fixed by
the court, if the judgment does not adjudicate any civil liability, as
the judgment regarding the civil liability has not become final and
the court still has jurisdiction to adjudge the civil liability.
4.
The extinction of the civil liability is governed by the rules
of the civil law regarding obligations.
5.
Actions to recover damages for an injury to person or
property, real or personal, may be commenced against an executor or
administrator. For the recovery or protection of the property rights
of the deceased, an executor or administrator may bring or defend,
the right of the deceased, actions for causes which survive.27
27
People v. Satorre, 72 SCRA 439, 442-443 [1976].
12
OBLIGATIONS AND CONTRACTS
§13.00 Obligations arising from quasi-delicts
Article 2176 of the Civil Code defines quasi-delict as follows:
“Art. 2176. Whoever by act or omission causes damage
to another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence, if there is
no pre-existing contractual relation between the parties,
is called a quasi-delict and is governed by the provisions
of this Chapter.”
Quasi-delict or culpa-contractual is a separate legal institution
with substantiality all of its own, and individuality that is entirely
apart and independent from a delict or crime. A distinction exists
between the civil liability arising from a crime and the responsibility
for quasi-delicts or culpa extra-contractual. The same negligence
causing damages may produce civil liability arising from a crime
under the Revised Penal Code, or create an action for quasi-delicto
or culpa aquiliana under the Civil Code. Therefore, the acquittal
or conviction in the criminal case is entirely irrelevant in the civil
case, except when the extinction of the penal action proceeds from a
declaration from a final judgment that the fact from which the civil
action might arise did not exist.28
This separate legal institution is entirely apart and independent
from a delict or crime. The same negligent act causing damage may
produce civil liability arising from a crime under the Revised Penal
Code or create an action for quasi-delicto or culpa extra-contractual
under the Civil Code. Delicts are not as broad as quasi-delicts
because the former are punished only if there is a penal law clearly
covering them, while the latter, quasi-delictos, include all acts in
which any kind of fault or negligence intervenes.29
The concept of culpa aquiliana or quasi-delict includes acts
which are criminal in character or in violation of the penal law,
whether voluntary or negligent.30
It is an act or omission which causes damage to another, there
being fault or negligence and there being no pre-existing contractual
relation between the parties. The person guilty of quasi-delict is
liable to pay for the damage done.31
Castillo v. CA, 176 SCRA 591 [1989].
Diana v. Batangas Transpo. Co., 93 Phil. 391 [1953].
30
Elcano v. Hill, 77 SCRA 98 [1977].
31
Syquia v. CA, 217 SCRA 625 [1993].
28
29
CHAPTER 1
GENERAL PROVISIONS
13
The fault or negligence in Article 2176 of the Civil Code
covers not only acts not punishable by law but also acts criminal
in character, whether intentional or voluntary or negligent.32 The
concept of quasi-delict is so broad that it includes not only injuries
to persons but also damage to property.33
§14.00 Quasi-contract
It is a legal fiction of legal relation, which Art. 2142 of the
Civil Code creates where there is no existing contract, and which
arises from the principle that no one should be allowed to unjustly
enrich himself at the expense of another by the latter’s voluntary
and unilateral act, so as to prevent the person benefited from taking
advantage of such lawful, voluntary and unilateral act at the expense
of the actor34 and to entitle the latter to reimbursement or return of
what has been paid.35
Quasi-contract refers to obligation which does not arise from
law, contracts, quasi-contracts or criminal offenses. It is known as
culpa aquiliana in Spanish terminology.36
It is an act or omission which causes damage to another, there
being fault or negligence and there being no pre-existing contractual
relation between the parties. The person guilty of quasi-delict is
liable to pay for the damage done.37 The fault or negligence in Article
2176 of the Civil Code covers not only acts not punishable by law but
also acts criminal in character, whether intentional or voluntary or
negligent.38 The concept of quasi-delict is so broad that it includes
not only injuries to persons but also damage to property.39
§15.00 Elements of quasi-delict
The elements of quasi-delict are:
(1)
damage suffered by plaintiff;
(2) act or omission of defendant supposedly constituting fault
or negligence; and
Wylie v. Rarang, 209 SCRA 357 [1992].
Cinco v. Canonoy, 90 SCRA 369 [1979].
34
Cruz v. J.M. Tuason & Co., Inc., 76 SCRA 543 [1977].
35
Catindig v. Roque, 74 SCRA 83 [1976].
36
Cacheco v. Manila Yellow Taxicab Co., Inc., 101 Phil. 523 [1957].
37
Syquia v. CA, 217 SCRA 625 [1993].
38
Wylie v. Rarang, 209 SCRA 357 [1992].
39
Cinco v. Canonoy, 90 SCRA 369 [1979].
32
33
14
OBLIGATIONS AND CONTRACTS
(3) causal connection between the act and the damage sustained by plaintiff.
Furthermore, to constitute quasi-delict, the fault or negligence
must be the proximate cause of the damage or injury suffered by
the plaintiff. Proximate cause is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause,
produces the injury and without which the result would not have
occurred. Proximate cause is determined by the facts of each case
upon mixed considerations of logic, common sense, policy and precedent.40
A complaint which alleges the foregoing elements is one for
damages arising from quasi-delict, even if the relief prayed for conveys a different cause.41
In case of negligence, the injured party has a choice between an
action to enforce civil liability arising from crime and an action for
quasi-delict. Accordingly, the fact that he reserved in the criminal
action to file an independent civil action did not preclude him from
filing an action based on quasi-delict; conversely, even without
such reservation, the acquittal of the accused does not generally
preclude him from subsequently filing an action for damages based
on quasi-delict.42 The two actions being separate and independent,
as they arise from two different sources of obligation, a separate
civil action 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
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.43
In other words, actions based on quasi-delict may be filed
independently of the criminal action, regardless of the result of the
criminal action, except that a plaintiff cannot recover damages twice
for the same act or omission of the defendant.44 The dismissal of
40
American Express International, Inc. v. Cordero, 473 SCRA 42, 47-48
[2002].
41
Bulao v. CA, 218 SCRA 321 [1993]; Andamo v. IAC, 191 SCRA 195 [1990];
FGU Ins. Corp. v. CA, 287 SCRA 718 [1998].
42
Bermudez v. Melencio-Herrera, 158 SCRA 168 [1988].
43
Virata v. Ochoa, 81 SCRA 472 [1978].
44
Lanuzo v. Ping, 100 SCRA 205 [1980].
CHAPTER 1
GENERAL PROVISIONS
15
the action based on quasi-delict is not a bar to enforcement of the
subsidiary liability of the employer when the employee, who has been
convicted, is shown to have committed the crime in the discharge of
his duties as such employee.45
§16.00 No existing contract in quasi delict; exceptions
The general rule is that obligations arising from quasi-delict
occur when there is no pre-existing contractual relations between
the parties.46 But there are exceptions. For instance, there may be
an action for quasi-delict notwithstanding that there is a subsisting
contract between the parties. A liability for tort may arise even under
a contract, where tort is that which breaches the contract. Stated
differently, when an act which constitutes a breach of contract would
have itself constituted the source of a quasi-delictual liability, the
contract can be said to have been breached by tort, thereby allowing
the rules on tort to apply.47
In YHT Realty Corp. v. CA,48 petitioners therein contend that
plaintiff McLoughlin’s case was mounted on the theory of contract,
but the trial court and the appellate court upheld the grant of the
claims of the latter on the basis of tort. The Court ruled that there is
nothing anomalous in how the lower courts decided the controversy
for the Court has pronounced a jurisprudential rule that tort liability
can exist even if there are already contractual relations. The act
that breaks the contract may also be tort.
§17.00 Quasi-contractual relation
Where a contractor performed construction work, which arose
from a quasi-contractual relations, as there was no formal contract,
the contractor is entitled to payment for his services on the basis
of quantum meruit, entitling him to as much as he reasonably
deserves, as distinguished from quantum valebant or as much as
what is reasonably worth.49
Mendoza v. La Mallorca Bus Co., 82 SCRA 243 [1978].
Phil. Shell Petroleum Corp. v. John Boardman Ltd. of IIoilo, Inc., 473 SCRA
151 [2005].
47
American Express International, Inc. v. Cordero, 473 SCRA 42, 47-48
[2002].
48
G.R. No. 126780, Feb. 17, 2005.
49
F.F. Manacop Const. Co., Inc. v. CA, 266 SCRA 235 [1997].
45
46
16
OBLIGATIONS AND CONTRACTS
CHAPTER 2
NATURE AND EFFECT
OF OBLIGATIONS
§18.00 Duty to take care of thing diligently
Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the
law or the stipulation of the parties requires another standard of care. (1094a)
The above provision refers to the effect of a person’s obligation
to give a determinate thing, as opposed to generic thing.
§19.00 Ordinary diligence
Every person obliged to give a determinate thing has to take
care of it with the required diligence. A determinate thing is specific
and is of particular designation, as opposed to indeterminate thing
which is confined to its nature and to its genus.1 The general rule
is that the diligence be that of a good father of a family, or what
is expected of a good father or of a prudent man. This is ordinary
diligence.
Where there is no contractual obligation, the diligence required
is that of a good father of a family in accordance with Art. 1173 of
the Civil Code. The diligence of a good father of a family requires
only that diligence which an ordinary prudent man would exercise
with regard to his own property.2
1
2
De Leon v. Soriano 87 Phil. 193 [1950].
Wildvalley Shipping Co., Ltd. v. CA, 342 SCRA 213 [2000].
16
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
17
§20.00 When diligence of more than good father is required
The exception to ordinary diligence is when the law or stipulation of the parties provides for a higher standard, in which case the
latter applies. Thus, the law requires that a common carrier must
exercise extraordinary diligence in safely carrying its passengers
or goods.3 In case of vehicular accident, the law presumes that the
negligence of the driver is also the negligence of the carrier, and the
latter may be held liable except by showing that it exercised due
diligence in the selection and supervision of its employees.4
The degree of diligence is sometimes dictated by the nature
of the business of the person or company. Thus, a bank is greatly
affected with public interest; hence, it should exercise even a higher
degree of diligence in the handling of its affairs than that expected
of an ordinary business firm. Depositors and the investing public in
general, entrust with it their funds, giving rise to the obligation of
the bank to live up to this trust and take all reasonable measures to
prevent the dissipation of such funds due to the fault or negligence
its employees.5 Such kind of diligence is required by the fiduciary
nature of banking.6
§21.00 Obligation to give generic or determinate thing
The obligation to give may refer to a generic or determinate
thing. The thing promised to be delivered may either be determinate
or indeterminate. A thing is determinate when it is specific and is of
particular designation. A thing is indeterminate when it is generic
or it belongs to a class. A generic thing is one whose determination
is confined to that of its nature, to the genus to which it pertains.7
There are incidental obligations arising from the obligation
to deliver a determinate thing, namely, to take care of the thing,
to deliver the fruits of the thing, and to deliver its accessions and
accessories. These incidental obligations do not generally arise from
the obligation to deliver a generic or indeterminate thing.
Arada v. CA, 210 SCRA 624 [1992].
Fabre v. CA, G.R. No. 111127, July 26, 1996.
5
Lim Sio Bio v. CA, 221 SCRA 307 [1993].
6
Consolidated Bank & Trust Corp. v. Court of Appeals, 448 SCRA 347.
7
De Leon v. Soriano, 87 Phil. 193 [1950].
3
4
18
OBLIGATIONS AND CONTRACTS
§22.00 Creditor entitled rights from time obligation to deliver
arises
Art. 1164. The creditor has a right 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.
(1095)
The creditor has a right to the fruits of the thing from the time
the obligation to deliver arises. The time of delivery may either
be on the date fixed in the contract or upon the occurrence of its
condition.
The term “delivery” or tradition has two aspects: (1) the de
jure delivery or the execution of deeds of conveyance, and (2) the
delivery of the material possession. In estate proceedings, the usual
practice is that, if the land to be delivered is in the name of the
decedent, the administrator executes a deed, conveying the land to
the distributee. That deed, together with the project of partition, the
order approving it, the letters of administration and the certification
as to the payment of the estate, inheritance and realty taxes, is
registered in the corresponding registry of deeds. Title would then be
issued to the distributee. Thereafter, the administrator or executor
places him in material possession of the land if the same is in the
custody of the former.8
In sale, a thing is understood as delivered when it is placed in
the control and possession of the vendee. Generally, the execution
of a public document evidencing the sale is equivalent to delivery of
the object of the contract. Delivery produces the effect of conveyance
of ownership, without prejudice to the right of the vendor to claim
payment of the price.9
In all forms of delivery, it is necessary that the act of delivery,
whether constructive or actual, be coupled with the intention of
delivering the thing. The act, without the intention, is insufficient.
In other words, the critical factor in the different modes of effecting
delivery, which gives legal effect to the act, is the actual intention of
the vendor to deliver, and its acceptance by the vendee.10
Lucero v. Banaga, 60 SCRA 202 [1974].
Municipality of Victorias v. CA, 149 SCRA 32 [1987].
10
Norkis Distributors, Inc. v. CA, 193 SCRA 694, 698-699.
8
9
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
19
If the obligor fails to make the delivery of a determinate thing,
the creditor may compel delivery by specific performance, including
accessions and accessories, and seek damages. Accession is the
gradual and successive accumulation of alluvial deposits to land in
non-navigable river.11 Accessory is improvement joined to the thing.
If the thing is generic, the debtor may be compelled to do it as
his expense. If the thing is generic, and the obligor incurs in delay
or has promised the same thing to two or more persons who do not
have the same interest in the thing, the debtor shall be responsible
for fortuitous event until he has effected delivery.
§23.00 What consists of obligation to deliver determinate thing
Art. 1165. When what is to be delivered is a
determinate thing, the creditor, in addition to the
right granted him by Article 1170, may compel the
debtor to make the delivery.
If the thing is indeterminate or generic, he
may ask that the obligation be complied with at the
expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons who do
not have the same interest, he shall be responsible
for any fortuitous event until he has effected the
delivery. (1096)
Art. 1166. The obligation to give a determinate
thing includes that of delivering all its accessions
and accessories, even though they may not have
been mentioned. (1097a)
§24.00 When obligation is executed at obligor’s expense
Art. 1167. If a person obliged to do something
fails to do it, the same shall be executed at his
cost.
This same rule shall be observed if he does
it in contravention of the tenor of the obligation.
11
Jaguanding v. CA, 194 SCRA 607 [1991].
20
OBLIGATIONS AND CONTRACTS
Furthermore, it may be decreed that what has been
poorly done be undone. (1098)
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. (1099a)
An obligation may be executed at the obligor’s expense if he
fails to do what has been obliged to do, if he does it in contravention
of the tenor of the obligation, or if he does it poorly. If the obligor does
what has been forbidden, it can be undone at the obligor’s expense.
The creditor may have the thing done, at the obligor’s expense or
undone, as the case may be, plus damages occasioned thereby.
§25.00 Delay in performance of obligations
Art. 1169. Those obliged to deliver or to do
something incur in delay from the time the obligee
judicially or extrajudicially demands from them
the fulfillment of their obligation.
However, the demand by the creditor shall not
be necessary in order that delay may exist:
(1) When the obligation or the law expressly
so declare; or
(2) 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
or the service is to be rendered was a controlling
motive for the establishment of the contract; or
(3) 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.
(1100a)
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
21
§26.00 Meaning of delay
Delay in the performance of an obligation means default or
mora in its fulfillment, which ordinarily occurs from the time the
obligee judicially or extrajudicially demands its fulfillment.
Delay is synonymous to default in the fulfillment of an obligation. It is the non-fulfillment of the obligation with respect to time.
In order for the debtor to be in default, it is necessary that the following requisites be present:
1.
That the obligation be demandable and already liquidat-
2.
That the debtor delays performance; and
ed;
3.
That the creditor requires performance judicially or extrajudicially.12
There are only three instances when demand, judicial or
extrajudicial, is not necessary to render an obligor in default,
namely:
(a)
clares;
when the obligation or the law expressly so de-
(b) when from the nature and circumstances of the
obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(c) when demand would be useless, as when the obligor
has rendered it beyond his power to perform.13
§27.00 Delay in reciprocal obligations
The last paragraph of Article 1169 states:
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. (1100a)
12
13
Ventura Horcarna Foundation, Inc. v. Santos, 441 SCRA 472 [2004].
SSS v. Moonwalk Dev. and Housing Corp., 221 SCRA 119 [1993].
22
OBLIGATIONS AND CONTRACTS
Reciprocal obligations are those created or established at the
same time, out of the same cause, and which result in a mutual relationship of creditor and debtor between the parties. In reciprocal
obligations, the performance of one is conditioned on the simultaneous fulfillment of the other obligation.14
Reciprocal obligations are to be performed simultaneously such
that the performance of one is conditioned upon the simultaneous
fulfillment of the other.15 In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other.16 The
obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind
the contract.17
§28.00 Grounds for damages for non-performance of obligations
The grounds for liability in the non-performance of obligations
include fraud, negligence, delay, and contravention of the terms of
the contract. These are provided for in Articles 1170, 1171, 1172,
1173 and 1174, which read:
Art. 1170. Those who in the performance of
their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene
the tenor thereof, are liable for damages. (1101)
Art. 1171. Responsibility arising from fraud is
demandable in all obligations. Any waiver of an action for future fraud is void. (1102a)
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. (1103)
Art. 1173. The fault or negligence of the obligor
consists in the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of the persons, of
Vermen Realty Dev. Corp. v. CA, 224 SCRA 549 [1993].
Ong v. CA, 310 SCRA 1 [1999].
16
Rose Packing Co., Inc. v. CA, 167 SCRA 309 [1988].
17
Songcuan v. IAC, 191 SCRA 28 [1990].
14
15
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
23
the time and of the place. When negligence shows
bad faith, the provisions of Articles 1171 and 2201,
paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family
shall be required. (1104a)
Art. 1174. Except in cases expressly specified by
the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable. (1105a)
§29.00 Fraud defined
Fraud has been defined as the deliberate intention to cause
damage or prejudice. It is the voluntary execution of a wrongful
act, or a willful omission, knowing and intending the effects which
naturally and necessarily arise from such act or omission. The fraud
referred to in Article 1170 of the Civil Code is the deliberate and
intentional evasion of the normal fulfillment of obligation.18
§30.00 Presumption of fault in breach of contract
When the source of an obligation is derived from a contract,
the breach or non-fulfillment of the prestation gives rise to the
presumption of fault on the part of the obligor. This rule is no
different in the case of common carriers in the carriage of goods
which are bound to observe not just the due diligence of a good father
of a family but that of extraordinary care in the vigilance over the
goods.19
§31.00 Fraud as basis of liability
The fraud referred to in Art. 1170 is the deliberate and intentional evasion of the normal fulfillment of obligation. It is the voluntary execution of a wrongful act, or a willful omission, knowing
18
19
International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
Sabena Belgian World Airways v. CA, 255 SCRA 25 [1996].
24
OBLIGATIONS AND CONTRACTS
and intending the effects which naturally and necessarily arise from
such act or omission.20
Fraud is a generic term embracing all multifarious means
which human ingenuity can device, and which are resorted to by one
individual to secure an advantage over another by false suggestions
or by suppression of truth and includes surprise, trick, cunning,
dissembling and any unfair way by which another is cheated.21
Fraud refers to all kinds of deception, whether through insidious
machination, manipulation, concealment or misrepresentation to
lead another party into error. Silence or concealment, by itself, does
not constitute fraud, unless there is a special duty to disclose certain
facts.22
§32.00 Negligence defined
Negligence consists in the omission of the diligence which is
demanded by the nature of an obligation and corresponds with the
circumstances of the person, of the time, and of the place.23 Negligence
is the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human
affairs, would not, or the doing of something which a prudent and
reasonable man would not do. It is also defined as the failure to
observe for the protection of the interests of another person, that
degree of care, precaution, and vigilance which the circumstances
justly demand, whereby such other person suffers injury.24
There is no hard and fast rule whereby such degree of care and
vigilance is measured; it is dependent upon circumstances in which
a person finds himself so situated. All that the law requires is that
it is always incumbent upon a person to use that care and diligence
expected of reasonable men under similar circumstances.25
20
International Corporate Bank v. Gueco, 351 SCRA 516 [2001]; Legaspi Oil
Co., Inc. v. CA, 224 SCRA 213 [1993].
21
Alleje v. CA, 240 SCRA 495 [1995].
22
Maestrado v. CA, 327 SCRA 678 [2000]; People v. Balasa, 295 SCRA 49
[1998].
23
Sabena Belgian World Airways v. CA, 255 SCRA 25 [1996]; Syquia v. CA, 217
SCRA 625 [1993].
24
McKee v. IAC, 211 SCRA 517 [1992]; Fernando v. CA, 208 SCRA 714 [1992];
Valenzuela v. CA, 253 SCRA 303 [1996].
25
Cusi v. Phil. National Railways, 90 SCRA 357 [1979].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
25
The test to determine the existence of negligence in a particular
case is: Did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent man would
have used in the same situation? If not, then he is negligent.26 Where
the danger is great, a high degree of care is necessary, and the failure
to observe it is a want of ordinary care under the circumstances.27
§33.00 Where both parties are mutually negligent
When both parties to a transaction are mutually negligent in
the performance of their obligations, the fault of one cancels the negligence of the other and their rights and obligations may be determined equitably under the law proscribing unjust enrichment.28
§34.00 Those negligent may be held liable therefor
Those who fail to discharge the required diligence may be held
liable for damages by the consequences of their acts or omissions
for failure to discharge the standard of diligence. Even acts of God
may not render them free and harmless from liability, where the
effect or damage is in part due to their active intervention, neglect
or failure to act. It has been held that acts of God or force majeure
are extraordinary events not foreseeable or avoidable, events that
could not be foreseen, or which, though foreseen, are inevitable. It
is one impossible to foresee or to avoid. As a general rule, no person
shall be responsible for those events which could not be foreseen or
which though foreseen were inevitable, except where the effect or
damage is in part the result of the participation of man, whether due
to his active intervention or neglect or failure to act, in which case
he is liable therefor as the whole occurrence is then humanized and
removed from the rules applicable to acts of God.29
§35.00 Liability arising from negligence
In negligence cases, the same act or omission can create two
kinds of liability on the part of the offender, that is, civil liability
ex delicto and civil liability quasi delicto. The aggrieved party has
Civil Aeronautics Adm. v. CA, 167 SCRA 28 [1988].
Corliss v. Manila Railroad Co., 27 SCRA 674 [1969].
28
Rodzssen Supply Co., Inc. v. Far East Bank & Trust Co., 357 SCRA 618
[2001].
29
NPC v. CA, 211 SCRA 162 [1992].
26
27
26
OBLIGATIONS AND CONTRACTS
the choice between (1) an action to enforce civil liability arising
from crime under Article 100 of the Revised Penal Code, and (2) a
separate action for quasi-delict under Article 2176 of the Civil Code.
Once the choice is made, the injured party can not avail himself of
any other remedy because he may not recover damages twice for
the same negligent act or omission of the accused. This is the rule
against double recovery.30
§36.00 Illustrative cases of liability arising from negligence
In YHT Realty Corp. v. CA,31 the issue raised is whether the hotelkeeper is liable for the loss of the guest’s cash and other valuables
deposited in the hotel’s deposit box. In seeking to exculpate itself
from liability, the hotel keeper raised the defense that it had posted
notices that it would not be liable for loss of the guest’s cash and
other items, that the loss was due to theft which was force majeure,
that the guest was negligent. In holding the hotel owner liable and
rejecting all its defenses, the Court held:
Under Article 1170 of the New Civil Code, those
who, in the performance of their obligations, are guilty of
negligence, are liable for damages. As to who shall bear
the burden of paying damages, Article 2180, paragraph (4)
of the same Code provides that the owners and managers
of an establishment or enterprise are likewise responsible
for damages caused by their employees in the service of
the branches in which the latter are employed or on the
occasion of their functions. Also, this Court has ruled that
if an employee is found negligent, it is presumed that the
employer was negligent in selecting and/or supervising
him for it is hard for the victim to prove the negligence
of such employer. Thus, given the fact that the loss of
McLoughlin’s money was consummated through the
negligence of Tropicana’s employees in allowing Tan to
open the safety deposit box without the guest’s consent,
both the assisting employees and YHT Realty Corporation
itself, as owner and operator of Tropicana, should be held
solidarily liable pursuant to Article 2193.
30
31
Rafael Reyes Trucking Corp. v. People, 329 SCRA 600 [2000].
G.R. No. 126780, Feb. 17, 2005.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
The issue of whether the “Undertaking For The Use
of Safety Deposit Box” executed by McLoughlin is tainted
with nullity presents a legal question appropriate for
resolution in this petition. Notably, both the trial court
and the appellate court found the same to be null and void.
We find no reason to reverse their common conclusion.
Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself
from responsibility by posting notices to the effect that
he is not liable for the articles brought by the guest.
Any stipulation between the hotel-keeper and the guest
whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be
void.
Article 2003 was incorporated in the New Civil
Code as an expression of public policy precisely to apply
to situations such as that presented in this case. The
hotel business like the common carrier’s business is
imbued with public interest. Catering to the public, hotelkeepers are bound to provide not only lodging for hotel
guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The
law in turn does not allow such duty to the public to be
negated or diluted by any contrary stipulation in so-called
“undertakings” that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature.
In an early case, the Court of Appeals through its
then Presiding Justice (later Associate Justice of the
Court) Jose P. Bengzon, ruled that to hold hotel keepers
or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees. It is enough that such effects are
within the hotel or inn. With greater reason should the
liability of the hotel-keeper be enforced when the missing
items are taken without the guest’s knowledge and consent from a safety deposit box provided by the hotel itself,
as in this case.
Paragraphs (2) and (4) of the “undertaking” manifestly contravene Article 2003 of the New Civil Code
for they allowed Tropicana to be released from liability
27
28
OBLIGATIONS AND CONTRACTS
arising from any loss in the contents and/or use of the
safety deposit box for any cause whatsoever. Evidently,
the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit
box whether or not negligence was incurred by Tropicana
or its employees. The New Civil Code is explicit that the
responsibility of the hotel-keeper shall extend to loss of,
or injury to, the personal property of the guests even if
caused by servants or employees of the keepers of hotels
or inns as well as by strangers, except as it may proceed
from any force majeure. It is the loss through force majeure that may spare the hotel-keeper from liability. In
the case at bar, there is no showing that the act of the
thief or robber was done with the use of arms or through
an irresistible force to qualify the same as force majeure.
Petitioners likewise anchor their defense on Article
2002 which exempts the hotel-keeper from liability if the
loss is due to the acts of his guest, his family, or visitors.
Even a cursory reading of the provision would lead us to
reject petitioners’ contention. The justification they raise
would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the
employer or its employees facilitated the consummation
of a crime committed by the registered guest’s relatives
or visitor? Should the law exculpate the hotel from liability since the loss was due to the act of the visitor of the
registered guest of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the loss. A depositary is not responsible for
the loss of goods by theft, unless his actionable negligence
contributes to the loss.
In the case at bar, the responsibility of securing the
safety deposit box was shared not only by the guest himself
but also by the management since two keys are necessary
to open the safety deposit box. Without the assistance of
hotel employees, the loss would not have occurred. Thus,
Tropicana was guilty of concurrent negligence in allowing
Tan, who was not the registered guest, to open the safety
deposit box of McLoughlin, even assuming that the latter
was also guilty of negligence in allowing another person
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
29
to use his key. To rule otherwise would result in undermining the safety of the safety deposit boxes in hotels for
the management will be given imprimatur to allow any
person, under the pretense of being a family member or
a visitor of the guest, to have access to the safety deposit
box without fear of any liability that will attach thereafter
in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy with the
guest’s relatives and visitors.
Another illustrative case of negligence is Ridjo Tape & Chemical
Corp. v. CA.32 The facts are:
On November 16, 1990, petitioners applied for and was granted electric service by MERALCO. Ten months later, however, or on
September 4, 1991, petitioners received a letter from MERALCO
demanding payment of P415,317.66, allegedly representing unregistered electric consumption for the period November 7, 1990 to February 13, 1991. MERALCO justified its demand on the ground that
the unregistered electric consumption was due to the defects of the
electric meter located in the premises of petitioners.
The electric service contract in question reads in part:
Bills will be rendered by the Company to the Customer monthly in accordance with the applicable rate
schedule. Said Bills are payable to collectors or at the
main or branch offices of the Company or at its authorized banks within ten (10) days after the regular reading date of the electric meters. The word ‘month’ as used
herein and in the rate schedule is hereby defined to be
the elapsed time between two succeeding meter readings
approximately thirty (30) days apart. In the event of the
stoppage or the failure by any meter to register the full
amount of energy consumed, the Customer shall be billed
for such period on an estimated consumption based upon
his use of energy in a similar period of like use.”
In disclaiming any liability, petitioners (consumers) assert
that the phrase “stoppage or failure by any meter to register the full
amount of energy consumed” can only refer to tampering on the part
32
G.R. No. 126074, Feb. 24, 1998.
30
OBLIGATIONS AND CONTRACTS
of the customer and not mechanical failure or defects. Meralco, on
the other hand, argues that to follow the interpretation advanced
by petitioners would constitute an unjust enrichment in favor of its
customers.
The Court held that Meralco was negligent and must suffer its
consequences. The Court ruled:
“At this juncture, we hasten to point out that the production and distribution of electricity is a highly technical
business undertaking, and in conducting its operation, it
is only logical for public utilities, such as MERALCO, to
employ mechanical devices and equipment for the orderly
pursuit of its business.
xxx
Clearly, therefore, the rationale of the provision in
the Service Agreement was primarily to cover situations
similar to the instant case, for there are instances when
electric meters do fail to record the quantity of the current used for whatever reason. It is precisely this kind of
predicament that MERALCO seeks to protect itself from
so as to avert business losses or reverses. It must be borne
in mind that construction of the terms of a contract which
would amount to impairment or loss of right is not favored;
conservation and preservation, not waiver, abandonment
or forfeiture of a right, is the rule. Since MERALCO supplied electricity to petitioners for a fee, no intent to donate
the same can be gleaned from the terms of the Agreement.
Hence, the stipulation must be upheld.
Corollarily, it must be underscored that MERALCO
has the imperative duty to make a reasonable and proper
inspection of its apparatus and equipment to ensure that
they do not malfunction, and the due diligence to discover
and repair defects therein. Failure to perform such duties
constitutes negligence.
A review of the records, however, discloses that the
unpaid charges covered the periods from November 7,
1990 to February 13, 1991 for Civil Case No. Q-92-13045
and from July 15, 1991 to April 13, 1992 for Civil Case
No. 13879, approximately three months and nine months,
respectively. On such basis, we take judicial notice that
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
during those periods, personnel representing MERALCO
inspected and examined the electric meters of petitioners regularly for the purpose of determining the monthly
dues payable. So, why were these defects not detected and
reported on time?
It has been held that notice of a defect need not be
direct and express; it is enough that the same had existed
for such a length of time that it is reasonable to presume
that it had been detected, and the presence of a conspicuous defect which has existed for a considerable length
of time will create a presumption of constructive notice
thereof. Hence, MERALCO’s failure to discover the defect, if any, considering the length of time, amounts to
inexcusable negligence. Furthermore, we need not belabor the point that as a public utility, MERALCO has the
obligation to discharge its functions with utmost care and
diligence.
Accordingly, we are left with no recourse but to
conclude that this is a case of negligence on the part of
MERALCO for which it must bear the consequences. Its
failure to make the necessary repairs and replacement of
the defective electric meter installed within the premises
of petitioners was obviously the proximate cause of the
instant dispute between the parties.
Indeed, if an unusual electric consumption was
not reflected in the statements of account of petitioners,
MERALCO, considering its technical knowledge and vast
experience in providing electric service, could have easily
verified any possible error in the meter reading. In the
absence of such a mistake, the electric meters themselves
should be inspected for possible defects or breakdowns
and forthwith repaired and, if necessary, replaced. Furthermore, if MERALCO discovered that contraptions or
illegal devices were installed which would alter the result of the meter reading, then it should have filed the
appropriate criminal complaint against petitioners under
Presidential Decree No. 401.
The rationale behind this ruling is that public utilities should be put on notice, as a deterrent, that if they
completely disregard their duty of keeping their electric
31
32
OBLIGATIONS AND CONTRACTS
meters in serviceable condition, they run the risk of forfeiting, by reason of their negligence, amounts originally
due from their customers. Certainly, we cannot sanction
a situation wherein the defects in the electric meter are
allowed to continue indefinitely until suddenly the public
utilities concerned demand payment for the unrecorded
electricity utilized when, in the first place, they should
have remedied the situation immediately. If we turn a
blind eye on MERALCO’s omission, it may encourage
negligence on the part of public utilities, to the detriment
of the consuming public.
In view of the foregoing discussion, the liability of
petitioners for consumed but unrecorded electricity must
be limited by reason of MERALCO’s negligence. Hence,
an equitable solution would be for petitioners to pay only
the estimated consumption on a three-month average before the period in controversy. To hold otherwise would
unjustly enrich petitioners who would be allowed to utilize additional electricity, albeit unrecorded, at no extra
cost.
To summarize, it is worth emphasizing that it is not
our intention to impede or diminish the business viability
of MERALCO, or any public utility company for that matter. On the contrary, we would like to stress that, being a
public utility vested with vital public interest, MERALCO
is impressed with certain obligations towards its customers and any omission on its part to perform such duties
would be prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise such
prudence in the discharge of their duties shall be made to
bear the consequences of such oversight.”
The Court reiterated the ruling in Ridjo Tape & Chemical
Corp. v. CA,33 in Meralco v. T.E.A.M. Electronics Corp.,34 and in other
similar case, as follows:
“If it is true that there was evidence of tampering
found on September 28, 1987 and again on June 7, 1988,
the better view would be that the defective meters were
33
34
Ibid.
G.R. No. 131723, Dec. 13, 2007.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
33
not actually corrected after the first inspection. If so, then
Manila Electric Company v. Macro Textile Mills Corporate would apply, where we said that we cannot sanction
a situation wherein the defects in the electric meter are
allowed to continue indefinitely until suddenly, the public
utilities demand payment for the unrecorded electricity
utilized when they could have remedied the situation immediately. Petitioner’s failure to do so may encourage neglect of public utilities to the detriment of the consuming
public. Corollarily, it must be underscored that petitioner
has the imperative duty to make a reasonable and proper
inspection of its apparatus and equipment to ensure that
they do not malfunction, and the due diligence to discover
and repair defects therein. Failure to perform such duties
constitutes negligence. By reason of said negligence, public utilities run the risk of forfeiting amounts originally
due from their customers.”
§37.00 Doctrine of imputed negligence
The doctrine, which is expressed in Article 2180 of the Civil
Code, makes a person liable for torts committed by others with
whom he has certain relationship and for whom he is responsible.
Articles 2179 and 2180 provide:
Art. 2176. Whoever by act or omission causes
damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter. (1902a)
xxx
Art. 2178. The provisions of Articles 1172 to
1174 are also applicable to a quasi-delict. (n)
xxx
Art. 2180. The obligation imposed by Article
2176 is demandable not only for one’s own acts or
omissions, but also for those of persons for whom
one is responsible.
34
OBLIGATIONS AND CONTRACTS
The father and, in case of his death or incapacity, the mother, are responsible for the damages
caused by the minor children who live in their company.
Guardians are liable for damages caused by
the minors or incapacitated persons who are under
their authority and live in their company.
The owners and managers of an establishment
or enterprise are likewise responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on
the occasion of their functions.
Employers shall be liable for the damages
caused by their employees and household helpers within the scope of their assigned tasks, even
though the former are not engaged in any business
or industry.
The State is responsible in like manner when
it acts through a special agent; but not when the
damage has been caused by the official to whom the
task done properly pertains, in which case what is
provided in Article 2176 shall be applicable.
Lastly, teachers or heads of establishments of
arts and trades shall be liable for damages caused
by their pupils and students or apprentices, so long
as they remain in their custody.
The responsibility treated of in this article
shall cease when the persons herein mentioned
prove that they observed all the diligence of a good
father of a family to prevent damage. (1903a)
Thus, the law imposes civil liability upon the father and, in
case of his death, or incapacity, the mother, for any damage that may
be caused by a minor child who lives with them, based on parental
authority or on their actual or physical custody over the child.35
35
Tamargo v. CA, 209 SCRA 518 [1992].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
35
§38.00 Common carrier’s negligence and liability
Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers
or goods, or both — by land, water, or air — when this service is offered to the public for compensation. It has been held the vessel is
clearly a common carrier, because it offers to the public its business
of transporting goods through its vessels.36
In Lea Ner Industries, Inc. v. Malayan Insurance Co.,37 the
Court ruled:
Common carriers are bound to observe extraordinary
diligence in their vigilance over the goods and the safety
of the passengers they transport, as required by the nature of their business and for reasons of public policy. Extraordinary diligence requires rendering service with the
greatest skill and foresight to avoid damage and destruction to the goods entrusted for carriage and delivery.
Common carriers are presumed to have been at fault
or to have acted negligently for loss or damage to the
goods that they have transported. This presumption can
be rebutted only by proof that they observed extraordinary diligence, or that the loss or damage was occasioned
by any of the following causes:
“(1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
“(2) Act of the public enemy in war, whether international or civil;
“(3) Act or omission of the shipper or owner of the
goods;
“(4) The character of the goods or defects in the
packing or in the containers;
“(5) Order or act of competent public authority.”
36
37
Lea Ner Industries, Inc. v. Malayan Insurance Co., 471 SCRA 698 [2005].
Ibid.
36
OBLIGATIONS AND CONTRACTS
§39.00 When force majeure or caso fortuito exempts liability
Art. 1174. Except in cases expressly specified by
the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which could not be foreseen, or
which, though foreseen, were inevitable. (1105a)
§40.00 Kinds of fortuitous events
A fortuitous event under Article 1174 may either be (1) an “act
of God,” or (2) natural occurrences such as floods or typhoons, or (3)
an “act of man,” such as riots, strikes or wars.38 These events exempt
an obligor from liability, except in cases expressly specified by the
law, or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk.
An act of God has been defined as an accident, due directly
and exclusively to natural causes without human intervention,
which by no amount of foresight, pains or care, reasonably to have
been prevented. The principle requires that the act must be one
occasioned exclusively by the violence of nature and all human
agencies are to be excluded from creating or entering into the
cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of
man, whether it be from active intervention or neglect, or failure to
act, the whole occurrence is thereby humanized and removed from
being acts of God, and he is thereby liable for the loss or damage. To
be exempt from liability for loss because of an act of God, he must
be free from any previous negligence or misconduct by which such
loss or damage may have been occasioned. For one who negligently
creates a dangerous condition cannot escape liability for the natural
and probable consequence thereof, although the act of a third person
or an act of God intervenes to participate in the loss.39
Acts of God or force majeure are extraordinary events not
foreseeable or avoidable, events that could not be foreseen, or which,
though foreseen, are inevitable. It is one impossible to foresee or to
avoid. As a general rule, no person shall be responsible for those
38
Phil. Communications Satellite Corp. v. Globe Telecom, Inc., G.R. No. 147324,
May 15, 2004.
39
Juan F. Nakpil & Sons v. CA 144 SCRA 596 [1986].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
37
events which could not be foreseen or which though foreseen were
inevitable, except where the effect or damage is in part the result
of the participation of man, whether due to his active intervention
or neglect or failure to act, in which case he is liable therefor as the
whole occurrence is then humanized and removed from the rules
applicable to acts of God.40
§41.00 Elements of force majeure
In order that causo fortuito or force majeure may exempt a
person from liability under Art. 1174 of the Civil Code, it is necessary
that the following elements must concur:
(1) the cause of the breach of the obligation must be independent of the human will (the will of the debtor or the obligor);
(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; and
(4) the debtor must be free from any participation in, or
aggravation of the injury to the creditor.41
The characteristics of force majeure or causo fortuito are: (1) the
cause of the unforeseen and unexpected occurrence, or of the failure
of the debtor to comply with his obligation, must be independent
of human will; (2) it must be impossible to foresee the event which
constitutes the causo fortuito or if it can be foreseen, it must be
impossible to avoid; (3) the occurrence must be such as to render it
impossible for one debtor to fulfill his obligation in a normal manner;
and (4) the obligor must be free from any participation in the
aggravation of the injury resulting to the creditor. Where, however,
the obligor’s negligence concurs with force majeure or aggravates
the damage resulting from the unforeseen event, the debtor is liable
even though the damage is the direct result of the fortuitous event.42
The debtor is liable even though the damage is the direct result of
the fortuitous event.43 To exempt from liability, the obligor must be
NPC v. CA, 211 SCRA 162 [1992].
Gacal v. PAL, 183 SCRA 189 [1990].
42
Sia v. CA, 222 SCRA 24 [1993]; Africa v. Caltex [Phil.], Inc., 16 SCRA 448
[1966].
43
Sia v. CA, 222 SCRA 24 [1993]; Bacolod Murcia Milling Co. v. CA, 182 SCRA
24 [1990].
40
41
38
OBLIGATIONS AND CONTRACTS
shown that the event must be occasioned exclusively by an act of
God, and not where human factor — negligence or imprudence —
had intervened.44
§42.00 Fortuitous event does not suspend prescription
Article 1174 which defines fortuitous event should be read in
relation to Art. 1154, which reads:
Art. 1154. The period during which the obligee
was prevented by a fortuitous event from enforcing
his right is not reckoned against him.
In Phil. Free Press v. CA,45 the issue raised was whether or
not the whole period of martial law constituted fortuitous event and
suspended the prescriptive period to annul a contract. In answering
this issue in the negative, the Court ruled that the question must be
answered on a case-to-case basis, and the facts obtaining impelled a
negative answer to the issue. Thus, the Court ruled:
We can not accept the petitioners’ contention that
the period during which authoritarian rule was in force
had interrupted prescription and that the same began
to run only on February 25, 1986, when the Aquino
government took power. It is true that under Article 1154
[of the Civil Code] x x x fortuitous events have the effect of
tolling the period of prescription. However, we cannot say,
as a universal rule, that the period from September 21,
1972 through February 25, 1986 involves a force majeure.
Plainly, we cannot box in the “dictatorial” period within
the term without distinction, and without, by necessity,
suspending all liabilities, however demandable, incurred
during that period, including perhaps those ordered
by this Court to be paid. While this Court is cognizant
of acts of the last regime, especially political acts, that
might have indeed precluded the enforcement of liability
against that regime and/or its minions, the Court is not
inclined to make quite a sweeping pronouncement . . . It is
our opinion that claims should be taken on a case-to-case
basis. This selective rule is compelled, among others, by
44
45
NPC v. CA, 222 SCRA 415 [1993].
G.R. No. 132864, Oct. 24, 2005.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
39
the fact that not all those imprisoned or detained by the
past dictatorship were true political oppositionists, or, for
that matter, innocent of any crime or wrongdoing. Indeed,
not a few of them were manipulators and scoundrels.
It has been held that where a fortuitous even occurs, such as
fire, the same results in the suspension of the obligor’s work, but
does not automatically extend the period of the agreement, nor
terminate the agreement. The fortuitous event relieves the parties
of their respective obligations, but it does not stop the running of the
period of the contract.46
§43.00 Illustrative cases on fortuitous events
In Phil. Communications Satellite Corp. v. Globe Telecom,
Inc.,47 one of the issues raised is whether the termination of the RPUS Military Bases Agreement, the non-ratification of the Treaty of
Friendship, Cooperation and Security, and the consequent withdrawal of US military forces and personnel from Cubi Point constitute force majeure which would exempt Globe from complying with
its obligation to pay rentals under its Agreement with Philcomsat.
In support of its position, Philcomsat contends that under
Article 1174 of the Civil Code, an event must be unforeseen in order
to exempt a party to a contract from complying with its obligations
therein. It insists that since the expiration of the RP-US Military
Bases Agreement, the non-ratification of the Treaty of Friendship,
Cooperation and Security and the withdrawal of US military forces
and personnel from Cubi Point were not unforeseeable, but were
possibilities known to it and Globe at the time they entered into the
Agreement, such events cannot exempt Globe from performing its
obligation of paying rentals for the entire five-year term thereof. The
Court ruled that the events exempt Globe from paying rentals for
the entire five-year term of the agreement. The Court ruled:
“However, Article 1174, which exempts an obligor
from liability on account of fortuitous events or force
majeure, refers not only to events that are unforeseeable,
but also to those which are foreseeable, but inevitable:
46
47
Ace-Agro Dev. Corp. v. CA, 266 SCRA 429 [1997].
G.R. No. 147324, May 15, 2004.
40
OBLIGATIONS AND CONTRACTS
Art. 1174. Except in cases specified by the law, or
when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk,
no person shall be responsible for those events which,
could not be foreseen, or which, though foreseen were inevitable.
A fortuitous event under Article 1174 may either
be an “act of God,” or natural occurrences such as floods
or typhoons, or an “act of man,” such as riots, strikes or
wars.
Philcomsat and Globe agreed in Section 8 of the
Agreement that the following events shall be deemed
events constituting force majeure:
1.
Any law, order, regulation, direction or request
of the Philippine Government;
2.
Strikes or other labor difficulties;
3.
Insurrection;
4.
Riots;
5.
National emergencies;
6.
War;
7.
Acts of public enemies;
8.
Fire, floods, typhoons or other catastrophes or
acts of God;
9.
parties.
Other circumstances beyond the control of the
Clearly, the foregoing are either unforeseeable, or
foreseeable but beyond the control of the parties. There
is nothing in the enumeration that runs contrary to, or
expands, the concept of a fortuitous event under Article
1174.
Furthermore, under Article 1306 of the Civil Code,
parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem fit, as
long as the same do not run counter to the law, morals,
good customs, public order or public policy.
Article 1159 of the Civil Code also provides that
“[o]bligations arising from contracts have the force of law
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
between the contracting parties and should be complied
with in good faith. Courts cannot stipulate for the parties
nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of
the parties, and would run contrary to the function of the
courts to give force and effect thereto.
Not being contrary to law, morals, good customs,
public order, or public policy, Section 8 of the Agreement
which Philcomsat and Globe freely agreed upon has the
force of law between them.
In order that Globe may be exempt from non-compliance with its obligation to pay rentals under Section 8,
the concurrence of the following elements must be established: (1) the event must be independent of the human
will; (2) the occurrence must render it impossible for the
debtor to fulfill the obligation in a normal manner; and (3)
the obligor must be free of participation in, or aggravation
of, the injury to the creditor.
The Court agrees with the Court of Appeals and the
trial court that the abovementioned requisites are present in the instant case. Philcomsat and Globe had no control over the non-renewal of the term of the RP-US Military Bases Agreement when the same expired in 1991,
because the prerogative to ratify the treaty extending the
life thereof belonged to the Senate. Neither did the parties have control over the subsequent withdrawal of the
US military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the
RP-US Military Bases Agreement (and its Supplemental
Agreements) under its Resolution No. 141. (Exhibit “2”)
on September 16, 1991 is beyond the control of the parties. This resolution was followed by the sending on December 31, 1991 o[f] a “Note Verbale” (Exhibit “3”) by the
Philippine Government to the US Government notifying
the latter of the former’s termination of the RP-US Military Bases Agreement (as amended) on 31 December 1992
and that accordingly, the withdrawal of all U.S. military
forces from Subic Naval Base should be completed by said
41
42
OBLIGATIONS AND CONTRACTS
date. Subsequently, defendant [Globe] received a formal
order from Cdr. Walter F. Corliss II Commander USN
dated July 31, 1992 and a notification from ATT dated
July 29, 1992 to terminate the provision of T1s services
(via an IBS Standard B Earth Station) effective November 08, 1992. Plaintiff [Philcomsat] was furnished with
copies of the said order and letter by the defendant on
August 6, 1992.
Resolution No. 141 of the Philippine Senate and the
Note Verbale of the Philippine Government to the US Government are acts, direction or request of the Government
of the Philippines and circumstances beyond the control
of the defendant. The formal order from Cdr. Walter Corliss of the USN, the letter notification from ATT and the
complete withdrawal of all the military forces and personnel from Cubi Point in the year-end 1992 are also acts and
circumstances beyond the control of the defendant.
Considering the foregoing, the Court finds and so
holds that the afore-narrated circumstances constitute
“force majeure or fortuitous event(s) as defined under
paragraph 8 of the Agreement.
xxx
From the foregoing, the Court finds that the defendant is exempted from paying the rentals for the facility
for the remaining term of the contract.
As a consequence of the termination of the RP-US
Military Bases Agreement (as amended) the continued
stay of all US Military forces and personnel from Subic
Naval Base would no longer be allowed, hence, plaintiff
would no longer be in any position to render the service
it was obligated under the Agreement. To put it bluntly (sic), since the US military forces and personnel left
or withdrew from Cubi Point in the year end December
1992, there was no longer any necessity for the plaintiff
to continue maintaining the IBS facility…
The aforementioned events made impossible the
continuation of the Agreement until the end of its fiveyear term without fault on the part of either party. The
Court of Appeals was thus correct in ruling that the hap-
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
43
pening of such fortuitous events rendered Globe exempt
from payment of rentals for the remainder of the term of
the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though Philcomsat cannot be
compelled to perform its corresponding obligation under
the Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSAT’s position. PHILCOMSAT would like to charge
GLOBE rentals for the balance of the lease term without there being any corresponding telecommunications
service subject of the lease. It will be grossly unfair and
iniquitous to hold GLOBE liable for lease charges for a
service that was not and could not have been rendered
due to an act of the government which was clearly beyond GLOBE’s control. The binding effect of a contract on
both parties is based on the principle that the obligations
arising from contracts have the force of law between the
contracting parties, and there must be mutuality between
them based essentially on their equality under which it is
repugnant to have one party bound by the contract while
leaving the other party free therefrom. (Allied Banking
Corporation v. Court of Appeals, 284 SCRA 357).”
In F. Nakpil & Sons, Inc. v. CA,48 the pivotal issue is whether
or not an act of God — an unusually strong earthquake — which
caused the failure of the PBA building, exempts from liability, the
parties who are otherwise liable because of their negligence. The
Court ruled that the architects and contractors were liable for the
resulting damages. The Court ruled:
On the other hand, the general rule is that no person
shall be responsible for events which could not be foreseen or which though foreseen, were inevitable. (Article
1174, New Civil Code).
An act of God has been defined as an accident, due
directly and exclusively to natural causes without human
intervention, which by no amount of foresight, pains or
care, reasonably to have been expected, could have been
prevented. (1 Corpus Juris 1174).
48
144 SCRA 596 [1986].
44
OBLIGATIONS AND CONTRACTS
There is no dispute that the earthquake of August 2,
1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article
1174 of the Civil Code, for a breach of an obligation due to
an “act of God,” the following 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 unforeseeable 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 injury to the creditor. (Vasquez v. Court of Appeals, 138 SCRA 553; Estrada
v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals,
39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring
Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or
an act of God, there concurs a corresponding fraud, negligence, delay or violation or contravention in any manner
of the tenor of the obligation as provided for in Article
1170 of the Civil Code, which results in loss or damage,
the obligor cannot escape liability.
The principle embodied in the act of God doctrine
strictly requires that the act must be one occasioned exclusively by the violence of nature and all human agencies are to be excluded from creating or entering into the
cause of the mischief. When the effect, the cause of which
is to be considered, is found to be in part the result of
the participation of man, whether it be from active intervention or neglect, or failure to act, the whole occurrence
is thereby humanized, as it were, and removed from the
rules applicable to the acts of God. (1 Corpus Juris, pp.
1174-1175).
Thus it has been held that when the negligence of
a person concurs with an act of God in producing a loss,
such person is not exempt from liability by showing that
the immediate cause of the damage was the act of God.
To be exempt from liability for loss because of an act of
God, he must be free from any previous negligence or
misconduct by which that loss or damage may have been
occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v.
Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith,
45 Phil. 657).
The negligence of the defendant and the third-party
defendants petitioners were established beyond dispute
both in the lower court and in the Intermediate Appellate
Court. Defendant United Construction Co., Inc. was found
to have made substantial deviations from the plans and
specifications. and to have failed to observe the requisite
workmanship in the construction as well as to exercise
the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in
the plans and specifications prepared by them. As correctly assessed by both courts, the defects in the construction
and in the plans and specifications were the proximate
causes that rendered the PBA building unable to withstand the earthquake of August 2, 1968. For this reason
the defendant and third-party defendants cannot claim
exemption from liability. (Decision, Court of Appeals, pp.
30-31).
xxx
There should be no question that the NAKPILS and
UNITED are liable for the damage resulting from the
partial and eventual collapse of the PBA building as a
result of the earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E. Gutierrez (now
an Associate Justice of the Supreme Court) while still an
Associate Justice of the Court of Appeals:
There is no question that an earthquake
and other forces of nature such as cyclones,
drought, floods, lightning, and perils of the sea
are acts of God. It does not necessarily follow,
however, that specific losses and suffering resulting from the occurrence of these natural
force are also acts of God. We are not convinced
on the basis of the evidence on record that from
the thousands of structures in Manila, God singled out the blameless PBA building in Intra-
45
46
OBLIGATIONS AND CONTRACTS
muros and around six or seven other buildings
in various parts of the city for collapse or severe
damage and that God alone was responsible for
the damages and losses thus suffered.
The record is replete with evidence of defects
and deficiencies in the designs and plans, defective
construction, poor workmanship, deviation from
plans and specifications and other imperfections.
These deficiencies are attributable to negligent men
and not to a perfect God.
The act-of-God arguments of the defendantsappellants and third party defendants-appellants
presented in their briefs are premised on legal generalizations or speculations and on theological fatalism both of which ignore the plain facts. The lengthy
discussion of United on ordinary earthquakes and
unusually strong earthquakes and on ordinary fortuitous events and extraordinary fortuitous events
leads to its argument that the August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of
the particular negligence alleged, the injury would
have been produced. If we follow this line of speculative reasoning, we will be forced to conclude that under such a situation scores of buildings in the vicinity and in other parts of Manila would have toppled
down. Following the same line of reasoning, Nakpil
and Sons alleges that the designs were adequate in
accordance with pre-August 2, 1968 knowledge and
appear inadequate only in the light of engineering information acquired after the earthquake. If this were
so, hundreds of ancient buildings which survived the
earthquake better than the two-year old PBA building must have been designed and constructed by architects and contractors whose knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to
earth explanation of the collapse. The failure of the
PBA building, as a unique and distinct construction
with no reference or comparison to other buildings,
to weather the severe earthquake forces was traced
to design deficiencies and defective construction, fac-
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
tors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God
acts in mysterious ways His wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction.
There is no mystery about these acts of negligence.
The collapse of the PBA building was no wonder performed by God. It was a result of the imperfections
in the work of the architects and the people in the
construction company. More relevant to our mind is
the lesson from the parable of the wise man in the
Sermon on the Mount “which built his house upon
a rock; and the rain descended and the floods came
and the winds blew and beat upon that house; and
it fen not; for it was founded upon a rock” and of the
“foolish upon the sand. And the rain descended and
man which built his house the floods came, and the
winds blew, and beat upon that house; and it fell
and great was the fall of it. (St. Matthew 7: 24-27).”
The requirement that a building should withstand
rains, floods, winds, earthquakes, and natural forces
is precisely the reason why we have professional
experts like architects, and engineers. Designs and
constructions vary under varying circumstances and
conditions but the requirement to design and build
well does not change.
xxx
Relative thereto, the ruling of the Supreme Court
in Tucker v. Milan (49 O.G. 4379, 4380) which may be in
point in this case reads:
“One who negligently creates a dangerous
condition cannot escape liability for the natural
and probable consequences thereof, although
the act of a third person, or an act of God for
which he is not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was
not purely an act of God. Truth to tell hundreds
of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing
47
48
OBLIGATIONS AND CONTRACTS
spells out the fatal difference; gross negligence
and evident bad faith, without which the damage would not have occurred.”
§44.00 Exceptions from fortuitous events
The occurrence of fortuitous event does not exempt a person
from liability in the following instances:
1.
In cases expressly specified by law. Thus, Article 552, 2nd
par. of the Civil Code provides that “A possessor in bad faith shall
be liable for deterioration or loss in every case, even if caused by a
fortuitous event.”
2.
When otherwise declared by stipulation of the parties. In
other words, the contracting parties may stipulate that the obligor
or debtor shall be liable even if performance is prevented by force
majeure.
3.
When the nature of the obligation requires the assumption
of risk. For instance, the business of manufacturing firecrackers is a
risky business, and the manufacturer or owner assumes the risk of
possible loss or damage to persons or properties when firecrackers
explode causing fire, loss or damage to persons or properties. The
manufacturer or owner may not claim exemption from liability by
reason of force majeure because the nature of his business requires
the assumption of risks.
4.
When the obligor’s negligence concurs with force majeure
or aggravates the damage resulting from the unforeseen event, the
debtor is liable even though the damage is the direct result of the
fortuitous event.49
5.
Fortuitous event does not apply to payment of money. This
rule is based on the principle that the genus of a thing can never
perish. Genus nunquan perit. An obligation to pay money is generic;
therefore, it is not excused by fortuitous loss of any specific property
of the debtor. It does not apply when the obligation is pecuniary in
nature.50
49
Sia v. CA, 222 SCRA 24 [1993]; Bacolod Murcia Milling Co. v. CA, 182 SCRA
24 [1990].
50
Gaisano Cagayan, Inc. v. Insurance Co. of North American, 490 SCRA 286
[2006].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
49
6.
The rule that an obligor should be exempt from liability
when the loss occurs thru a fortuitous event only holds true when the
obligation consists in the delivery of a determinate thing and there
is no stipulation holding him liable even in case of fortuitous event.
Under Article 1263 of the Civil Code, “[i]n an obligation to deliver a
generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation.” If the obligation is generic in
the sense that the object thereof is designated merely by its class or
genus without any particular designation or physical segregation
from all others of the same class, such as sugar or copra, the loss or
destruction of anything of the same kind even without the debtor’s
fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.51
In Mondragon v. CA,52 the Court held:
Petitioner’s claim, that the respondents
could not be held in default because of a fortuitous event, is untenable. Said event, the Asian
financial crisis of 1997, is not among the fortuitous events contemplated under Article 1174
of the Civil Code. x x x
As pointed out by the respondents, the
loan agreement was entered into on June 30,
1997, or when the Asian economic crisis had already started. Petitioner, as a long established
corporation, should have been well aware of the
economic environment at that time, yet it still
took the risk to expand operations. Likewise,
the closure of the Mimosa Regency Casino was
not an unforeseeable or unavoidable event, in
the context of the contract of lease between petitioner and CDC. Every business venture involves risks. Risks are not unforeseeable; they
are inherent in business.
Worthy of note, risk is an exception to the
general rule on fortuitous events. Under the law,
these exceptions are: (1) when the law expressly
51
Gaisano Cagayan, Inc. v. Insurance Co. of North American, 490 SCRA 286
[2006].
52
460 SCRA 279 [2005].
50
OBLIGATIONS AND CONTRACTS
so specifies; (2) when it is otherwise declared
by the parties; and (3) when the nature of the
obligation requires the assumption of risks.
We find that in the Omnibus Agreement, the
parties expressly agreed that any enactment,
official action, act of war, act of nature or other
force majeure or other similar circumstances
shall in no way affect the obligation of the
borrowers to make payments.
§45.00 Those who contravene in any manner tenor of performance
of contract are liable for damages
Article 1170 of the Civil Code provides that those who in any
manner contravene the tenor of the contract are liable for damages.
The contract being the law of the parties, they are bound to comply
therewith in good faith.
It has been held that difficulty of performance does not excuse
non-performance of contract:
“Where a person by his contract charges himself with
an obligation possible to be performed, he must perform
it, unless performance is rendered impossible by the act of
God, by the law, or by the other party, it being the rule that
in case the party desires to be excused from the performance
in the event of contingencies arising, it is his duty to
provide therefor in his contract, Hence, performance is not
excused by subsequent inability to perform, by unforeseen
difficulties, by unusual or suspected expenses, by change,
by inevitable accident, by the breaking of machinery, by
strikes, by sickness, by failure of a party to avail himself
of the benefits to be had under the contract, by weather
conditions, by financial stringency, or by stagnation of
business. Neither is performance excused by the fact
that the contract turns out be hard and improvident,
unprofitable or impracticable, ill-advised, or even foolish,
or less profitable, or unexpectedly burdensome.”53
It is well-settled that the law does not relieve a party from the
effects of a contract, entered into with all the required formalities
53
Laguna Tayabas Bus Co. v. Manabat, 58 SCRA 650, 659-660 [1974].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
51
and with full awareness of what he was doing simply because the
contract turned to be a foolish or unwise investment.54
§46.00 Usurious transactions
Art. 1175. Usurious transactions shall be governed by special laws. (n)
Usury may be defined as contracting for or receiving something
in excess of the amount allowed by law for the loan or forbearance of
money, goods or chattels. It is the taking of more interest for the use
of money, goods or chattels or credits than the law allows.55
The elements of usury are: (1) a loan, express or implied; (2) an
understanding between the parties that the money lent shall or may
be returned; (3) that for such loan a greater rate or interest that is
allowed by law shall be paid, or agreed to be paid, as the case may
be; and (4) a corrupt intent to take more than the legal rate for the
use of money loaned.56
Central Bank Circular No. 905-82, which took effect on January
1, 1983, did not repeal the usury law, or Act No. 2655, as amended.
Said Central Bank Circular simply suspended the effectivity of the
usury law.57
P.D. No. 1684 and CB Circular No. 905 no more than allow
contracting parties to stipulate freely regarding any subsequent
adjustment in the interest rate that shall accrue on any loan or
forbearance of money, goods or credits. In fine, they can agree to
adjust, upward or downward, the interest previously stipulated.
The said law and CB Circular did not authorize either party to
unilaterally raise the interest rate without the other’s consent.58
Article 1956 of the Civil Code provides that “No interest shall
be due unless it has been expressly stipulated in writing.” This
provision precludes one party to unilaterally increase the interest
agreed upon, and such unilateral increase is void as violative of the
principle of mutuality of contract.59 The parties may agree on the
Heirs of Joaquin Teves v. CA, 316 632, 649 [1999].
Tolentino v. Gonzalez, Sy Chian, 50 Phil. 558 [1937].
56
Herrera v. Petrophil Corp., 146 SCRA 385 [1986].
57
Banco Filipino v. Ybañez, 445 SCRA 482 [2004].
58
PNB v. CA, 238 SCRA 20, 25 [1994].
59
New Sampaguita Builder Construction, Inc. v. PNB, 435 SCRA 565 [2004].
54
55
52
OBLIGATIONS AND CONTRACTS
rate of interest, but an agreement in excess of rate which the law
allows is void. In simple loan with stipulation of usurious interest,
the prestation of the debtor to pay the principal loan is valid, but not
the stipulated usurious interest.60
Loan contracts stipulating escalation of rate of interest may be
valid if there is mutuality among the parties based on their essential
equality, which requires that if there is escalation there should also
be de-escalation when certain events occur. An agreement which
grants a bank to successively and gradually increase the interest to
an unprecedented height without the borrower’s agreeing in writing
is void and unconscionable.61
The courts may still strike down interests even though the rate
of interest has been agreed upon by the parties, where such interest
is unreasonable or unconscionable, and reduce them to 12% per
annum.62
§47.00 Presumptions
Art. 1176. The receipt of the principal by the
creditor without reservation with respect to the interest, shall give rise to the presumption that said
interest has been paid.
The receipt of a later installment of a debt
without reservation as to prior installments, shall
likewise raise the presumption that such installments have been paid. (1110a)
The presumption is rebuttable. The creditor may present
evidence to refute the presumption.
§48.00 Rights of creditors
Art. 1177. The creditors, after having pursued
the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring
all the actions of the latter for the same purpose,
save those which are inherent in his person; they
Puerto v. CA, 383 SCRA 185 [2002].
Almeda v. CA, 256 SCRA 292 [1996].
62
Dino v. Jardines, G.R. No. 145871, Jan. 31, 1996, 481 SCRA 226 [2006].
60
61
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
53
may also impugn the acts which the debtor may
have done to defraud them. (1111)
The rights granted to the creditor by Art. 1177 include the
following:
1.
The right of subrogation in place of the debtor, in all
actions of the debtor to satisfy the creditor’s claims, except those
which are inherent in the person of the debtor. Thus, if the debtor
has claims against third persons, the creditor may file a suit against
the latter to recover the claims to be applied to his claims.
2.
The right to impugn or nullify acts of the debtor designed
to defraud the creditor. The creditor may also file a suit to nullify the
sale or transfer made by the debtor in fraud of his creditor. A sale or
transfer may be fraudulent if it shows any of the following badges of
fraud: (1) the fact that the consideration is fictitious or inadequate;
(2) the transfer is made during the pendency of a suit; (3) the sale
is upon credit of an insolvent; (4) evidence of large indebtedness or
complete insolvency; (5) transfer of all or nearly all of his property,
especially when he is insolvent or greatly embarrassed financially;
(6) the fact that transfer is between father and son; and (7) failure of
vendee to take exclusive possession of all the property.63
§49.00 Subsidiary remedy
The remedies to enforce any of the above rights of the creditor
are subsidiary remedies. A subsidiary remedy has been defined as
the exhaustion of all remedies against the debtor by the prejudiced
creditor to collect claims due him before he can exercise such rights.
In other words, the creditor must allege and prove that he has
exhausted his remedies against the debtor, otherwise his complaint
against the third person or for nullification of the fraudulent act is
not maintainable.64
The creditor must first secure a final judgment in his favor.
And he must exhaust all available legal remedies to enforce such
judgment, leading to execution of judgment. When the judgment is
not satisfied, the creditor must also apply to the court for examination
of the judgment debtor, as to his properties, real or personal, as
63
64
Oria v. McMicking, 21 Phil. 243 [1912].
Siguan v. Lim, 318 SCRA 725 [1999].
54
OBLIGATIONS AND CONTRACTS
well as credits. If notwithstanding all available remedies, still the
judgment remains unsatisfied, the creditor may then exercise any of
the rights provided for in Article 1177 of the Civil Code.
See Arts. 1381, 1383, infra.
§50.00 Exemptions from execution, etc.
Article 2236 of the Civil Code provides that “The debtor is
liable with all his property, present and future, for the fulfillment of
his obligations subject to the exemptions provided by law.” Article
1177 does not cover those properties of the debtor which are exempt
from execution.
These exemptions include the following:
1.
Exemptions as provided in Sec. 13 of Rule 39 of Revised
Rules of Court.
Section 13. Property exempt from execution. — Except
as otherwise expressly provided by law, the following
property, and no other, shall be exempt from execution:
(a) The judgment obligor’s family home as provided by law, or the homestead in which he resides, and land
necessarily used in connection therewith;
(b) Ordinary tools and implements personally used
by him in his trade or employment, or livelihood;
(c) Three horses, or three cows, or three carabaos,
or other beasts of burden, such as the judgment obligor
may select necessarily used by him in his ordinary occupation;
(d) His necessary clothing, and articles for ordinary personal use, excluding jewelry;
(e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the judgment
obligor and his family, such as the judgment obligor may
select of a value not exceeding one hundred thousand pesos;
(f) Provisions for individual or family or family
use sufficient for four months;
(g) The professional libraries and equipment of
judges, lawyers, physicians, pharmacists, dentists, engi-
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
55
neers, surveyors, clergymen, teachers, and other professionals, not exceeding three thousand pesos in value;
(h) One fishing boat and accessories not exceeding
the total value of one hundred thousand pesos owned by
a fisherman and by the lawful use of which he earns his
livelihood;
(i) So much of the salaries, wages, or earnings of
the judgment obligor for his personal services within the
four months preceding the levy as are necessary for the
support of his family;
(j)
Lettered gravestones;
(k) Monies, benefits, privileges, or annuities accruing or in any manner growing out of any life insurance;
(l) The right to receive legal support, or money or
property obtained as such support, or any pension or gratuity from the Government;
(m) Properties especially exempted by law.
But no article or species of property mentioned in
this section shall be exempt from execution issued upon
a judgment recovered for its price or upon a judgment of
foreclosure of a mortgage thereon.
The general rule is that the debtor must assert his right that
the property being levied for execution by the sheriff is exempt from
execution, to prevent any waiver of his right.
2.
Conjugal property, when exempt from execution.
Conjugal property is exempt from execution of the judgment
incurred by the husband which arose from his having executed,
without the consent of the wife, an accommodation suretyship in
favor of a third party, as this did not benefit the conjugal partnership.65 The Court summarized the rule:
“(A) If the husband himself is the principal obligor
in the contract, i.e., he directly received the money and
services to be used in or for his own business or his own
65
Ayala Investment & Development Corp. v. Court of Appeals, 286 SCRA 272
[1998]; Alfredo Ching and Encarnacion Ching v. Court of Appeals, G.R. No. 124642,
Feb. 24, 2004.
56
OBLIGATIONS AND CONTRACTS
profession, that contract falls within the term . . . obligations for the benefit of the conjugal partnership.” Here, no
actual benefit may be proved. It is enough that the benefit
to the family is apparent at the time of the signing of the
contract. From the very nature of the contract of loan or
services, the family stands to benefit from the loan facility or services to be rendered to the business or profession
of the husband. It is immaterial, if in the end, his business or profession fails or does not succeed. Simply stated,
where the husband contracts obligations on behalf of the
family business, the law presumes, and rightly so, that
such obligation will redound to the benefit of the conjugal
partnership.
(B) On the other hand, if the money or services are
given to another person or entity, and the husband acted
only as a surety or guarantor, that contract cannot, by
itself, alone be categorized as falling within the context of
“obligations for the benefit of the conjugal partnership.”
The contract of loan or services is clearly for the benefit of
the principal debtor and not for the surety or his family. No
presumption can be inferred that, when a husband enters
into a contract of surety or accommodation agreement,
it is “for the benefit of the conjugal partnership.” Proof
must be presented to establish benefit redounding to the
conjugal partnership.”66
The burden of proof that the debt was contracted for the benefit
of the conjugal partnership of gains lies with the creditor-party
litigant claiming as such. Ei incumbit probatio qui dicit, non qui
negat (he who asserts, not he who denies, must prove).67
3.
Retirement benefits exempt from attachment, etc.
Under Section 4 of RA No. 1568, otherwise known as an act
to provide life pension of the chairmen and members of Constitutional Commissions, the retirement benefits granted to them shall
not be subject to garnishment, levy or execution. Under Section 33
of PD No. 1146, as amended, otherwise known as the Revised Government Insurance Act of 1977, the benefits granted therein shall
66
Ayala Investment & Development Corp. v. Court of Appeals, 286 SCRA 272,
281-282 [1998].
67
Homeowners Savings & Loan Bank v. Dailo, 453 SCRA 293 [2005].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
57
not be subject to attachment, garnishment, levy or other processes.
These statutory provisions preclude retirement pay accruing to a
public officer from being withheld and applied to his indebtedness
to the government or to a private person. Unless otherwise clearly
provided by law, the pension should inure wholly to the benefit of
the pensioner, the intention of retirement laws being to provide for
the retiree’s sustenance and comfort, when he is no longer capable
of earning his livelihood.68
4.
Family home exempt from attachment, etc.
The family home is deemed automatically constituted from the
time it is occupied as a family residence.69 The Family Code took
effect on August 3, 1988, as it was published in full in the August
4, 1987 issue of the Manila Chronicle.70 Hence, all family homes
existing on such date or thereafter are considered family home,
without the need of judicial constitution, as provided in Rule 106,
which is deemed repealed.
The provisions of the Family Code on the family home read as
follows:
ART. 152. The family home, constituted jointly
by the husband and the wife or by an unmarried
head of a family, is the dwelling house where they
and their family reside, and the land on which it is
situated.
ART. 153. The family home is deemed constituted on a house and lot from the time it is occupied as a family residence. From the time of its
constitution and so long as any of its beneficiaries
actually resides therein, the family home continues
to be such and is exempt from the execution, forced
sale or attachment except as hereinafter provided
and to the extent of the value allowed by law.
ART. 154. The beneficiaries of a family home
are:
(1) The husband and wife, or an unmarried
person who is the head of a family; and
68
Tantuico v. Domingo, 230 SCRA 391 [1994]; Cruz v. Tantuico, 166 SCRA 670
[1988].
69
70
Art. 152. Family Code
Art. 257, ibid.
58
OBLIGATIONS AND CONTRACTS
(2) Their parents, ascendants, descendants,
brothers and sisters, whether the relationship be
legitimate or illegitimate, who are living in the
family home and who depend upon the head of the
family for legal support.
ART. 155. The family home shall be exempt
from execution, forced sale or attachment except:
(1)
For nonpayment of taxes;
(2) For debts incurred prior to the constitution of the family home;
(3) For debts accrued by mortgages on the
premises before or after such constitution; and
(4) For debts due to laborers, mechanics, architects, builders, material men and others who
have rendered service or furnished material for
the construction of the building.
ART. 156. The family home must be part of the
properties of the absolute community or the conjugal partnership, or of the exclusive properties of
either spouse with the latter’s consent. It may also
be constituted by an unmarried head of a family on
his or her own property.
Nevertheless, property that is the subject of a
conditional sale on installments where ownership
is reserved by the vendor only to guarantee payment of the purchase price may be constituted as a
family home.
ART. 157. The actual value of the family home
shall not exceed, at the time of its constitution, the
amount of three hundred thousand pesos in urban
areas, and two hundred thousand pesos in rural areas, or such amounts as may hereafter be fixed by
law.
In any event, if the value of the currency
changes after the adoption of this Code, the value
most favorable for the constitution of a family home
shall be the basis of evaluation.
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
For purposes of this Article, urban areas are
deemed to include chartered cities and municipalities whose annual income at least equals that legally required for chartered cities. All others are
deemed to be rural areas.
ART. 158. The family home may be sold, alienated, donated, assigned or encumbered by the owner or owners thereof with the written consent of the
person constituting the same, the latter’s spouse,
and a majority of the beneficiaries of legal age. In
case of conflict, the court shall decide.
ART. 159. The family home shall continue despite the death of one or both spouses or of the
unmarried head of the family for a period of ten
years or for as long as there is a minor beneficiary,
and the heirs cannot partition the same unless the
court finds compelling reasons therefor. This rule
shall apply regardless of whoever owns the property or constituted the family home.
ART. 160. When a creditor whose claim is
not among those mentioned in Article 155 obtains
a judgment in his favor, and he has reasonable
grounds to believe that the family home is actually
worth more than the maximum amount fixed in Article 157, he may apply to the court which rendered
the judgment for an order directing the sale of the
property under execution. The court shall so order
if it finds that the actual value of the family home
exceeds the maximum amount allowed by law as of
the time of its constitution. If the increased actual
value exceeds the maximum allowed in Article 157
and results from subsequent voluntary improvements introduced by the person or persons constituting the family home, by the owner or owners
of the property, or by any of the beneficiaries, the
same rule and procedure shall apply.
At the execution sale, no bid below the value
allowed for a family home shall be considered. The
proceeds shall be applied first to the amount mentioned in Article 157, and then to the liabilities un-
59
60
OBLIGATIONS AND CONTRACTS
der the judgment and the costs. The excess, if any,
shall be delivered to the judgment debtor.
ART. 161. For purposes of availing of the benefits of a family home as provided for in this Chapter, a person may constitute, or be the beneficiary
of, only one family home.
ART. 162. The provisions in this Chapter shall
also govern existing family residences insofar as
said provisions are applicable.
The sale or mortgage of conjugal property by one spouse without the consent of the other spouse is null and void, including that
portion which pertains to the spouse who sold or mortgaged the
same.71
Any person who claims exemption from execution or attachment
must claim the same and show the factual and legal bases thereof,
otherwise he may be estopped.
§51.00 Transmissible rights
Art. 1178. Subject to the laws, all rights acquired
in virtue of an obligation are transmissible, if there
has been no stipulation to the contrary. (1112)
Article 1178 should be read in relation to Article 1311, par. 1,
of the Civil Code, which reads:
Article 1311. Contracts take effect only between the
parties, their assigns and heirs, except in case where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the
property he received from the decedent.
As a general rule, the death of either the creditor or the debtor
does not extinguish the obligation. Obligations are transmissible to
the heirs, except when the transmission is prevented by the law,
the stipulations of the parties, or the nature of the obligation. Only
71
Homeowners Savings & Loan Bank v. Dailo, 453 SCRA 293 [2005].
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
61
obligations that are personal or are identified with the persons
themselves are extinguished by death.72
Section 5 of Rule 86 of the Rules of Court expressly allows the
prosecution of money claims arising from a contract against the
estate of a deceased debtor. Evidently, those claims are not actually extinguished. What is extinguished is only the obligee’s action
or suit filed before the court, which is not then acting as a probate
court. (Ibid.).
Whatever monetary liabilities or obligations under the performance bond were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the
extinguishments of those obligations or liabilities, which merely
passed on to his estate. Death is not a defense that he or his estate
can set up to wipe out the obligations under the performance bond.
Consequently, the death of the surety cannot use his death to escape
its monetary obligation under its performance bond.73
In DKC Holdings Corp. v. CA,74 the issue is whether or not
the Contract of Lease with Option to Buy entered into by the late
Encarnacion Bartolome with petitioner was terminated upon her
death or whether it binds her sole heir, Victor, even after her demise.
In answering the issue in the affirmative, the Court ruled:
“The general rule, therefore, is that heirs are bound
by contracts entered into by their predecessors-in-interest
except when the rights and obligations arising therefrom
are not transmissible by (1) their nature, (2) stipulation
or (3) provision of law.
In the case at bar, there is neither contractual stipulation nor legal provision making the rights and obligations under the contract intransmissible. More importantly, the nature of the rights and obligations therein
are, by their nature, transmissible.
The nature of intransmissible rights as explained by
Arturo Tolentino, an eminent civilist, is as follows:
72
Stronghold Ins. Co. v. Republic-Asahi Glass Corp., 492 SCRA 17, June 22,
73
Ibid.
329 SCRA 666.
2006.
74
62
OBLIGATIONS AND CONTRACTS
“Among contracts which are intransmissible are those which are purely personal, either by provision of law, such as in cases of
partnerships and agency, or by the very nature
of the obligations arising therefrom, such as
those requiring special personal qualifications
of the obligor. It may also be stated that contracts for the payment of money debts are not
transmitted to the heirs of a party, but constitute a charge against his estate. Thus, where
the client in a contract for professional services of a lawyer died, leaving minor heirs, and
the lawyer, instead of presenting his claim for
professional services under the contract to the
probate court, substituted the minors as parties for his client, it was held that the contract
could not be enforced against the minors; the
lawyer was limited to a recovery on the basis of
quantum meruit.’’
In American jurisprudence, “(W)here acts stipulated
in a contract require the exercise of special knowledge,
genius, skill, taste, ability, experience, judgment, discretion, integrity, or other personal qualification of one or
both parties, the agreement is of a personal nature, and
terminates on the death of the party who is required to
render such service.” mar
It has also been held that a good measure for determining whether a contract terminates upon the death of
one of the parties is whether it is of such a character that
it may be performed by the promissor’s personal representative. Contracts to perform personal acts which cannot
be as well be performed by others are discharged by the
death of the promissor. Conversely, where the service or
act is of such a character that it may as well be performed
by another, or where the contract, by its terms, shows
that performance by others was contemplated, death does
not terminate the contract or excuse non-performance.
In the case at bar, there is no personal act required
from the late Encarnacion Bartolome. Rather, the obligation of Encarnacion in the contract to deliver possession
of the subject property to petitioner upon the exercise by
CHAPTER 2
NATURE AND EFFECT OF OBLIGATIONS
63
the latter of its option to lease the same may very well be
performed by her heir Victor.
As early as 1903, it was held that “(H)e who contracts does so for himself and his heirs.’’ In 1952, it was
ruled that if the predecessor was duty-bound to reconvey
land to another, and at his death the reconveyance had
not been made, the heirs can be compelled to execute the
proper deed for reconveyance. This was grounded upon
the principle that heirs cannot escape the legal consequence of a transaction entered into by their predecessor-in-interest because they have inherited the property
subject to the liability affecting their common ancestor.
§52.00 Obligations are transmissible; exceptions
The general rule is that a party’s rights and obligations are
transmissible to his assigns or heirs or successors. The exceptions
are those which are not transmissible: (1) by their nature, (2) by
stipulations, or (3) by operation of law. Obligations which are purely
personal are not transmissible. They are not also transmissible where
the contract so specifically provides that they are not transmissible.
Where the contract is silent, it is deemed transmissible because a
party is deemed to have contracted for him and his heirs and assigns.
They are also intransmissible by operation of law, such as in legal
support, parental authority, usufruct, contract for a piece of work,
partnership and agency.75
75
Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 [1956]; DKC Holdings
Corp. v. CA, 329 SCRA 666.
64
OBLIGATIONS AND CONTRACTS
CHAPTER 3
DIFFERENT KINDS
OF OBLIGATIONS
SECTION 1. — Pure and Conditional Obligations
§53.00 Different kinds of obligations
Obligations may be pure, conditional, with a term, alternative,
joint, solidary, divisible and with a penal clause.
§54.00 Pure obligation
Art. 1179. Every obligation whose performance
does not depend upon a future or uncertain event,
or upon a past event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory
condition shall also be demandable, without prejudice to the effects of the happening of the event.
(1113)
A pure obligation is one whose performance does not depend
upon a future or uncertain event, or upon a past event unknown
to the parties. It is one which has no condition or term and is
immediately demandable. For instance, a promissory note states:
“I will pay my debt of P20,000.” This is a demand note, which is
immediately payable upon demand at any time. However, if the note
states that “I will pay you P20,000 on March 23, 2010,” this note is
a note with a fixed period, and hence, this note is a time note, which
is not payable until March 23, 2010.1
1
See Sec. 184, Negotiable Instruments Law.
64
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
65
§55.00 Demand necessary; exceptions
There must be a demand, otherwise the obligation does not
become due. The word “due” means immediately payable.2
As a rule, demand is necessary before an obligation becomes
due or the debtor is in default in the performance of obligation.
The second paragraph of Article 1179 provides that “every obligation which contains a resolutory condition shall also be demandable.” A resolutory condition is one which, upon its happening, extinguishes rights and obligations already existing.3
§56.00 Obligation with a period
Art. 1180. When the debtor binds himself to pay
when his means permit him to do so, the obligation
shall be deemed to be one with a period, subject to
the provisions of Article 1197. (n)
Article 1180 does not entitle the creditor to file a complaint
for a sum of money; he must first file a suit for the court to fix the
period, and once the period is fixed, he can then demand that it be
paid pursuant thereto, and in case of refusal to pay, the creditor may
then file a complaint for a sum of money.4
See Articles 1193-1198, infra.
§57.00 Conditional obligation
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishments or
loss of those already acquired, shall depend upon
the happening of the event which constitutes the
condition. (1114)
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends
upon chance or upon the will of a third person, the
2
Commissioner of Internal Revenue v. Visayan Electric Co., 23 SCRA 715
[1968].
3
4
Baluran v. Navarro, 79 SCRA 309 [1971].
Patente v. Omega, 93 Phil. 218 [1953].
66
OBLIGATIONS AND CONTRACTS
obligation shall take effect in conformity with the
provisions of this Code. (1115)
Art. 1183. Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which
depends upon them. If the obligation is divisible,
that part thereof which is not affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing
shall be considered as not having been agreed
upon. (1116a)
Art. 1184. The condition that some event 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.
(1117)
Art. 1185. The condition that some event will
not happen at a determinate time shall render 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 probably
been contemplated, bearing in mind the nature of
the obligation. (1118)
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119)
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.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
In obligations to do and not to do, the courts
shall determine, in each case, the retroactive effect of the condition that has been complied with.
(1120)
Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right.
The debtor may recover what during the same
time he has paid by mistake in case of a suspensive
condition. (1121a)
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:
(1) If the thing is lost without the fault of the
debtor, the obligation shall be extinguished;
(2) 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 it cannot be recovered;
(3) When the thing deteriorates without the
fault of the debtor, the impairment is to be borne
by the creditor;
(4) If it deteriorates through the fault of the
debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or
by time, the improvement shall inure to the benefit
of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to
the usufructuary. (1122)
67
68
OBLIGATIONS AND CONTRACTS
Art. 1190. When the conditions have for their
purpose the extinguishment of an obligation to
give, the parties, upon the fulfillment of said conditions, shall return to each other what they have
received.
In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding
article shall be applied to the party who is bound to
return.
As for the obligations to do and not to do, the
provisions of the second paragraph of Article 1187
shall be observed as regards the effect of the extinguishments of the obligation. (1123)
§58.00 Condition defined
Condition has been defined as every future and uncertain event
upon which an obligation or provision is made to depend. It is a
future and uncertain event upon which the acquisition or resolution
of rights is made to depend by those who execute the juridical act.
When the consent of a party to a contract is given subject to the
fulfillment of a suspensive condition, the contract is not perfected
unless that condition is first complied with. Thus, without it, a
contract of sale of property cannot be perfected.5
It has been held that when the obligation assumed by a party
to a contract is expressly subjected to a condition, the obligation
cannot be enforced against him unless the condition is complied
with. Furthermore, the obligatory force of a conditional obligation
is subordinated to the happening of a future and uncertain event,
so that if that event does not take place, the parties would stand
as if the conditional obligation had never existed. Thus, where in a
contract of sale of land the seller agreed to secure title in his name
before the buyer can be obligated to buy the same, the titling of the
land in the seller’s name is a suspensive condition the non-fulfillment
of which the obligation by the seller precludes the obligation to buy
the land from arising and the buyer cannot be compelled to purchase
it. Similarly, the seller cannot rescind the contract because he did
5
Gonzales v. Heirs of Tomas and Paula Cruz, 314 SCRA 585 [1999].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
69
not fulfill his obligation to secure title in his name. For there can
be no rescission (or resolution) of an obligation as yet non-existent
because the suspensive condition has not happened.6
The word “condition” in the context of a perfected contract of
sale pertains to the compliance by one party of an undertaking the
fulfillment of which would beckon, in turn, the demandability of the
reciprocal prestation of the other party. The reciprocal obligations
would normally be, in the case of the vendee, the payment of the
agreed purchase price and, in the case of the vendor, the fulfillment
of certain express warranties.7
§59.00 What constitutes condition
The condition may be a future and uncertain event, upon the
happening of which depends the acquisition or resolution of rights
of the parties who executed the juridical act. A condition may also
be a past event unknown to the parties. The event is certain, but
the condition is the future knowledge of such event, which may be
shown by evidence.
§60.00 Conditional obligations
A conditional obligation is one whose efficacy or obligatory force
is subordinated to the happening of a future and uncertain event
so that if the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never existed.8
§61.00 Conditional contract and conditional obligation
There is a distinction between a condition imposed on the
perfection of a contract and a condition imposed on the performance
of an obligation. Failure to comply with the first condition results in
the failure of the contract, while failure to comply with the second
condition only gives the other party the option either to refuse to
proceed with the contract or to waive the condition.9
Thus, in a contract of sale of realty, the buyer gave earnest
money and agreed to pay the balance of the purchase price with
Gonzales v. Heirs of Tomas and Paula Cruz, 314 SCRA 585 [1999].
Romero v. CA, G.R. No. 107207, Nov. 23, 1995.
8
Rose Packing Co., Inc. v. CA, 167 SCRA 309 [1988].
9
Lim v. CA, 263 SCRA 569 [1996].
6
7
70
OBLIGATIONS AND CONTRACTS
an agreed period, while the seller agreed to clear the property of
squatters within a specified time. The failure of the seller to eject the
squatters within the specified time gives the buyer the option either
to rescind the contract for breach of obligation by the seller to eject
the squatters and demand the return of the earnest money or to insist
to the sale of the property and waive the condition that seller eject
squatters. The seller cannot rescind the sale and return the earnest
money to the buyer because he is not the injured party, otherwise
he would be violating the principle of mutuality of contracts which
prohibits allowing the validity and performance of the contract to be
left to the will of one of the parties.10 The option belongs to the buyer,
and where the buyer has opted to proceed with the sale, the seller
and buyer have to comply with their obligations.11
§62.00 Condition in perfected contract
A perfected contract of sale may either be absolute or
conditional, depending on whether the agreement is devoid of, or
subject to, any condition imposed on the passing of title of the thing
to be conveyed or the obligation of a party thereto. When ownership
is retained until the fulfillment of a positive condition the breach of
the obligation will simply prevent the duty to reconvey title thereto
from acquiring an obligatory force. If the condition is imposed on the
obligation of a party which is not complied with, the party may either
refuse to proceed or waive said condition.12 Where the condition is
imposed upon the perfection of the contract itself, the failure of such
condition would prevent the juridical relation itself from coming into
existence.13
The term “condition” in the context of a perfected contract of sale
pertains, in reality, to the compliance by one party of an undertaking
the fulfillment of which would beckon, in turn, the demandability of
the reciprocal prestation of the other party. Reciprocal obligation
referred to would normally be, in the case of vendee, the payment
of the agreed purchase price and, in the case of the vendor, the
fulfillment of the express warranties.14
Lim v. CA, supra.
Romero v. CA, 250 SCRA 223, 232 [1995].
12
Art. 1545, Civil Code.
13
Romero v. CA, 250 SCRA 223, 232 [1995].
14
Ibid., p. 233.
10
11
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
71
From the moment the contract is perfected, 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, may be in keeping with good faith, usage and law.15
§63.00 Suspensive and resolutory conditions
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishments or
loss of those already acquired, shall depend upon
the happening of the event which constitutes the
condition. (1114)
Article 1181 refers to suspensive and resolutory conditions.
A suspensive condition is a condition upon the happening of which
obligation arises and becomes due and demandable.16 It is a condition,
the happening of which makes the obligation absolute.17
Upon the other hand, the non-happening of the condition
prevents the obligation from acquiring binding force. In a contract
to sell, where the ownership is retained by the seller until the
full payment of the price, such payment is a positive suspensive
condition, the failure of which is not a breach, casual or serious,
but simply an event that prevented the obligation of the vendor to
convey title from acquiring binding force.18
It has been said that the “condition” in Art. 1181 of the Civil
Code is different from the same word in Art. 764 of the Civil Code
on donation, in that the word “condition” in the latter article does
not refer to uncertain events on which the birth or extinguishment
of a juridical relation depends, but is used in the vulgar sense of
obligations or charges imposed by the donor on the donee.19
Ibid., pp. 233-234.
Hermosa v. Angara, 93 Phil. 977 [1953].
17
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93
[1972].
18
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., Ibid.; Buot v. CA,
357 SCRA 846 [2001].
19
Dissent of Justice Davide, Jr., Central Philippine University v. CA, 246
SCRA 521.
15
16
72
OBLIGATIONS AND CONTRACTS
§64.00 Suspensive condition
When a contract is subject to a suspensive condition, its birth
or effectivity can take place only if and when the event which constitutes the condition happens or is fulfilled. If the suspensive condition does not take place, the parties would stand as if the conditional
obligation had never existed.20
In contracts subject to suspensive condition, the birth or
effectivity of such contracts only takes place if and when the
event constituting the condition happens or is fulfilled, and if the
suspensive condition does not take place, the parties would stand as
if the conditional obligations had never existed.21
In a suspensive condition, the happening of the condition makes
the obligation absolute; upon the other hand, the non-happening of
the condition prevents the obligation from acquiring binding force.22
For instance, In a contract to sell, where the ownership
is retained by the seller until the full payment of the price, such
payment is a positive suspensive condition, the failure of which is
not a breach, casual or serious, but simply an event that prevented
the obligation of the vendor to convey title from acquiring binding
force.23
In a contract to sell realty, the payment of the price is a
suspensive condition, and if the price is not paid as agreed, there
will be no contract of sale.24
§65.00 Resolutory condition
A resolutory condition is a condition, the happening of which
extinguishes rights and obligations already existing.25
Thus, when a person donates land to another on the condition
that the latter would build upon the land a school, the condition
imposed was not a condition precedent or a suspensive condition,
but a resolutory one. It is not correct to say that the schoolhouse
Javier v. CA, 183 SCRA 171 [1990]; Cheng v. Genato, 300 SCRA 722 [1998].
Mortel v. KASSOR, Inc., 348 SCRA 391, 398 [2000].
22
Javier v. CA, 183 SCRA 171 [1990].
23
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93
[1972].
24
Ching v. Genato, Ibid.
25
Baluran v. Navarro, 79 SCRA 309 [1971].
20
21
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
73
had to be constructed before the donation became effective, that is,
before the donee could become the owner of the land, otherwise it
would be invading the property rights of the donor. If there was no
fulfillment or compliance with the condition, the donation may be
revoked and all rights which the donee may have acquired under it
shall be deemed lost and extinguished.26
For instance, A and B agreed that A would transfer the physical
possession of his property residential lot to B who then could build
his house therein, and B agreed to transfer the physical possession
of his ricefield to A who could then gather the crops therein planted,
with the condition that should the children of A would desire to
live in the community and build their residential building therein,
B should return the presidential lot to A’s children, with damages,
and A would return the ricefield to B. In an action to recover the
residential lot from B, the children of A, to whom the lot was donated,
claimed ownership of said lot. The Court held that the contract,
which merely transferred the physical possession of the parties’
respective properties to each other and to enjoy the use of the same,
“was subject to a resolutory condition the happening of which would
terminate the right of possession and use.” “A resolutory condition is
one which extinguishes rights and obligations already existing. The
right of material possession granted in the agreement x x x ends if
and when any of the children of” A would reside in the municipality
and build his house in the property. Inasmuch as the condition
imposed is not dependent solely on one of the contracting parties to
the contract x x x but partly dependent on the will of third persons x
x x the same is valid” and should be enforced.27
§66.00 Potestative condition
Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends
upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the
provisions of this Code. (1115)
A potestative condition is one dependent solely on the will of one
party that might otherwise be void in accordance with Article 1182
26
27
Central Philippine University v. CA, 248 SCRA 511, 517 [1995].
Baluran v. Navarro, 79 SCRA 309 [1971].
74
OBLIGATIONS AND CONTRACTS
of the Civil Code. A mixed potestative condition is one dependent not
on the will of the one party alone but also of that of a third person.
Where the potestative condition is dependent not on the birth of
the obligation but on its fulfillment only the condition is avoided,
leaving unaffected the obligation itself.28
§67.00 Kinds of potestative conditions
Potestative conditions are of three (3) kinds, namely:
(1) a condition whose fulfillment depends solely upon
the will of the debtor;
(2)
one which depends upon chance; and
(3)
one which depends upon the will of a third person.
§68.00 Purely potestative condition
The first kind of potestative condition in a contract is one which
leaves the effectivity and enjoyment of contract rights to the sole
and exclusive will of one party.29 It is a condition the happening of
which depends exclusively upon the will or discretion of the obligor;
it is for that reason null and void.30
The Civil Code prohibits purely potestative, suspensive,
conditional obligations that depend on the whims of the debtor
because such obligations are usually not meant to be fulfilled.31
A purely potestative condition is a condition in a contract
whereby it leaves the effectively and enjoyment of contract rights
to the sole and exclusive will of one party.32 It is a condition the
happening of which depends exclusively upon the will or discretion
of the obligor; it is for that reason null and void.33
Thus, in a contract of lease, it is there stipulated that the lessee
can enjoy the lease “for as long as the defendant (lessee) needed the
Romero v. CA, 250 SCRA 223, 233 [1995].
Lao Lim v. CA, 191 SCRA 150 [1990].
30
Hermosa v. Langara, 93 Phil. 977 [1953]; Berg v. Magdalena Estate, Inc., 92
Phil. 110 [1952].
31
Vda. De Mistica v. Naguiat, 418 SCRA 73 [2003].
32
Lao Lim v. CA, 191 SCRA 150 [1990].
33
Hermosa v. Langara, Ibid.; Berg v. Magdalena Estate, Inc., Ibid.
28
29
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
75
premises and can meet and pay said increases.” It was held that
such condition is a purely potestative condition, and hence null and
void.34 Where the buyer of shares of stock agreed to pay the price
thereof as soon as he would be able to harvest fish from his fishpond,
it was held that the condition was void because the same was a
purely potestative one.35
The condition that payment of the amounts in the promissory
note shall be dependent upon a debtor’s operation of the concession
he acquired from the creditor is a void conditional obligation because
its fulfillment is made to depend upon the exclusive will of the debtor,
namely, whether or not he will operate the concession.36
§69.00 Mixed potestative condition
The last two types are valid because they do not depend exclusively upon the will of the debtor.
A mixed potestative condition is one dependent not on the will
of the one party alone but also of that of a third person.
Where in a contract of sale of property, in which the buyer
agreed to pay the balance of the purchase price upon the seller’s
ejecting or removing the squatters therein, the removal of the
squatters is not solely upon the seller but also upon third persons,
such as the squatters and government agencies. It is a mixed
potestative condition.37
For instance, A sold his house to B, who agreed to pay the price
thereof as soon as C vacated the premises and B would take care
of seeing the house was vacated. It was held that this contract was
valid because the condition was mixed, depending partly upon the
will of the buyer and depending upon the will of a third person.38
§70.00 Where condition is on fulfillment only
Where the potestative condition is dependent not on the birth
of the obligation but on its fulfillment only, the condition is avoided,
leaving unaffected the obligation itself. Thus, in a sale of land, the
Lao Lim v. CA, 191 SCRA 150 [1990].
Trillana v. Quezon Colleges, Inc., 93 Phil. 383.
36
Tible v. Aquino, 65 SCRA 207 [1975].
37
Romero v. CA, 250 SCRA 223, 233 [1995].
38
Jacinto v. Cheng, 45 O.G. 2919.
34
35
76
OBLIGATIONS AND CONTRACTS
buyer agreed to pay the balance of price after the seller shall have
evicted the squatters therein. The buyer may waive the condition
and insist that the sale proceed, thus obligating the buyer to pay
the balance of the purchase price and the seller to deliver title
thereto.39
§71.00 Impossible conditions
Art. 1183. Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which
depends upon them. If the obligation is divisible,
that part thereof which is not affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing
shall be considered as not having been agreed
upon. (1116a)
§72.00 Impossibility of performance
There are two kinds of impossibility in the performance of
contract. One is natural impossibility and the other is impossibility
in fact, in the absence of the thing stipulated to be performed.
Impossibility must consist in the nature of the thing to be done and
not in the inability of the party to do it. The first renders the contract
void; the second does not.40
Impossible conditions are of two kinds, namely, those contrary
to good customs or public policy, and those prohibited by law.
Impossible conditions annul the obligation which depends upon
them. Even contracts are considered void or inexistent, which
contemplate impossible service, or whose cause, object or purpose
is contrary to law, morals, good customs, public or public policy, or
which are expressly prohibited or declared by law as void.41
Article 1183 implies that the impossibility must exist at the time
the obligation is created, in which case the impossibility annuls the
condition. However, there have been cases in which the impossibility
is subsequent to the creation of the obligation, but nonetheless the
Romero v. CA, 250 SCRA 223, 233 [1995].
Reyes v. Caltex (Phil.), Inc., 84 Phil. 654 [1949].
41
Art. 1409, Civil Code.
39
40
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
77
same annuls the obligation. However, the annulment should have
been predicated on some other provisions, such as force majeure,
legal impossibility which arose after the creation of the obligation.42
The last paragraph of Art. 1183, which considers the condition
not to do an impossible thing as not having been agreed, renders the
obligation pure and immediately demandable, or one not subject to
any condition.
Art. 1184. The condition that some event 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.
(1117)
Art. 1185. The condition that some event will
not happen at a determinate time shall render 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 probably
been contemplated, bearing in mind the nature of
the obligation. (1118)
§73.00 Constructive fulfillment of condition
Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119)
This article refers to constructive fulfillment of the condition
by the obligor preventing its fulfillment.
§74.00 Effects of conditional obligation to give
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
42
157.
See TOLENTINO, Civil Code of the Philippines, Vol. 4, 1991 Reprint, pp. 156-
78
OBLIGATIONS AND CONTRACTS
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.
In obligations to do and not to do, the courts
shall determine, in each case, the retroactive effect of the condition that has been complied with.
(1120)
Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right.
The debtor may recover what during the same
time he has paid by mistake in case of a suspensive
condition. (1121a)
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:
(1) If the thing is lost without the fault of the
debtor, the obligation shall be extinguished;
(2) 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 it cannot be recovered;
(3) When the thing deteriorates without the
fault of the debtor, the impairment is to be borne
by the creditor;
(4) If it deteriorates through the fault of the
debtor, the creditor may choose between the rescis-
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
79
sion of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or
by time, the improvement shall inure to the benefit
of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to
the usufructuary. (1122)
Art. 1190. When the conditions have for their
purpose the extinguishments of an obligation to
give, the parties, upon the fulfillment of said conditions, shall return to each other what they have
received.
In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding
article shall be applied to the party who is bound to
return.
As for the obligations to do and not to do, the
provisions of the second paragraph of Article 1187
shall be observed as regards the effect of the extinguishments of the obligation. (1123)
§75.00 Conditional obligations
When the obligation assumed by a party to a contract is
expressly subjected to a condition, the obligation cannot be enforced
against him unless the condition is complied with.43 In contracts
subject to a suspensive condition, the birth or effectivity of such
contracts only takes place if and when the event constituting the
condition happens or is fulfilled, and if the suspensive conditions
does not take place or is not fulfilled, the parties would stand as if
the conditional obligation had never existed.44
A conditional obligation is one whose efficacy or obligatory force
is subordinated to the happening of a future and uncertain event
so that if the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never existed.45
Insular Life Assurance Corp. v. Young, 373 SCRA 626, 639 [2002].
Insular Life Assurance Corp. v. Young, Ibid.
45
Rose Packing Co., Inc. v. CA, 167 SCRA 309 [1988].
43
44
80
OBLIGATIONS AND CONTRACTS
§76.00 Suspensive condition
A suspensive condition is one where the happening of the
event gives rise to an obligation. For its non-fulfillment there will
be no contract to speak of, the obligator having failed to perform the
suspension which enforces a juridical relation. Thus, in a contract
to sell, payment of the purchase price is a positive suspensive
condition, the failure of which is not a breach, casual or serious, but
a situation that prevents the obligation of the vendor to convey title
from acquiring an obligatory force.46
For instance, in Insular Life Assurance Corp. v. Young,47 the
agreement involving shares in a bank contains the following conditions:
b.
Conditions precedents:
Upon the signing of this Agreement and prior to the
execution of a Deed of Sale by the parties, the following
events shall occur:
1.
The Vendor shall infuse an additional capital
of FIFTY MILLION PESOS (P50,000,000.00) into the
Bank,
2.
The Vendee shall undertake a due diligence
audit on the bank for a period not exceeding 60 days from
the date of the signing of this Agreement, and the audit
shall be undertaken to determine that the provision for
SIXTY MILLION PESOS (P60,000,000.00) for doubtful
account is sufficient,
3.
After signing of this Agreement and during the
60 days due diligence audit of the Vendee, as mentioned
in No. 2, the Vendor shall endorse and deliver the stock
certificates representing TWENTY-FIVE percent (25%)
of the total outstanding capital stock of the bank to the
Vendee, the stock certificates shall be returned to the
Vendor at the end of the 60 days due diligence audit and
after the Vendee is satisfied that the provision of SIXTY
MILLION PESOS (P60,000,000.00) for doubtful accounts
is sufficient.”
46
47
Cheng v. Genato, 300 SCRA 722 [1998].
373 SCRA 626 [2002].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
81
The Court ruled that the foregoing provisions of the MOA
negate the existence of a perfected contract of sale, and added:
The MOA is merely a contract to sell since the parties therein specifically undertook to enter into a contract
of sale if the stipulated conditions are met and the representation and warranties given by Young prove to be true.
The obligation of petitioner Insular Life to purchase, as
well as the concomitant obligation of Young to convey to it
the shares, are subject to the fulfillment of the conditions
contained in the MOA. Once the conditions, representation and warranties are satisfied, then it is incumbent
upon the parties to perform their respective obligations
under the contract. Conversely, in the event that these
conditions are not met or complied with, no obligation
on the part of either party arises. This is in accord with
Article 1181 of the Civil Code which provides that “(i)n
conditional obligations, the acquisition of rights, as well
as the extinguishments or loss of those already acquired,
shall depend upon the happening of the event which constitutes the condition.” And when the obligation assumed
by a party to a contract is expressly subjected to a condition, the obligation cannot be enforced against him unless
the condition is complied with.
Here, the MOA provides that Young shall infuse additional capital of P50,000,000.00 into the Bank. It likewise
specifies the warranty given by Young that the doubtful
accounts of petitioner Bank amounted to P60,000,000.00
only. However, records show that Young failed to infuse
the required additional capital. Moreover, the due diligence audit shows that Young was involved in fraudulent
schemes like check-kiting which amounted to a staggering P344,000,000.00. This belies his representation that
the doubtful accounts of petitioner Bank amounted only
to P60,000,000.00. As a result of these anomalous transactions, the reserves of the Bank were depleted and it had
to undergo a ten-year rehabilitation plan under the supervision of the Central Bank.
Significantly, respondents do not dispute petitioners’
assertion that Young committed fraud, misrepresented
the warranties and failed to comply with his obligations
under the MOA. Accordingly, no right in favor of Young
82
OBLIGATIONS AND CONTRACTS
arose and no obligation on the part of Insular Life was
created. In Mortel v. Kassco, Inc., this Court held:
“In contracts subject to a suspensive condition, the
birth or effectivity of such contracts only takes place if
and when the event constituting the condition happens or
is fulfilled, and if the suspensive condition does not take
place or is not fulfilled, the parties would stand as if the
conditional obligation had never existed.”
Since no sale transpired between the parties, the
Court of Appeals erred in concluding that Insular Life
purchased 55% of the total shares of the Bank under the
MOA. Consequently, its findings that the debt of Young
has been fully paid and that Insular Life is liable to pay
for the remaining 45% equity have no basis. It must be
emphasized that the MOA did not convey title of the
shares to Insular Life. If ever there was delivery of the
said shares to Insular Life, it was because they were
pledged by Young to Insular Life under the Credit Agreement.
It would be unfair on the part of Young to demand
compliance by Insular Life of its obligations when he himself was remiss in his own. Neither can he feign ignorance
of the stipulation in the MOA since it is presumed that he
read the same and was satisfied with its provisions before
he affixed his signature therein. The fact that no deed of
sale was subsequently executed by the parties confirms
the conclusion that no sale transpired between them.48
§77.00 Rescission in reciprocal obligations
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 and the rescission of the obligation, with
the payment of damages in either case. He may also
seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
48
Insular Life Assurance Corp. v. Young, 373 SCRA 626 [2002].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
83
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. (1124)
§78.00 Rescission defined
To rescind is to declare a contract void in its inception and to
put an end to it as though it never was. It is not merely to terminate
it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative
positions which they would have occupied had no contract been
made.49
Rescission is a remedy granted by law to the contracting
parties and even to third persons, to secure reparation for damages
caused to them by a contract, even if this should be valid, by means
of the restoration of things to their original condition at the moment
prior to the celebration of said contract. It is a relief allowed for the
protection of one of the contracting parties and even third persons
from all injury and damage the contract may cause, or to protect
some incompatible and preferential right created by the contract.50
Rescission refers to the revocation of, or the act of rescinding,
a contract by the aggrieved party for material breach thereof by the
offending party, which may either be judicial or extrajudicial. Where
the contract provides that it can be revoked and cancelled for violation
of any of its terms and conditions, the aggrieved party may treat the
contract rescinded and notify the other party of such rescission, at
his own risk. The latter party may either agree to such rescission or
oppose it by filing the corresponding action in court to question the
rescission and enforce the contract. The court will either sustain the
resolution of the contract, with consequent indemnity awarded to
the party prejudiced, or reject the rescission as not warranted and
sentence the responsible party to pay damages.51
49
Ocampo v. CA, 233 SCRA 551 [1994]; Luzon v. Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93 [1972].
50
Guzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 [1992].
51
Luzon v. Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93
[1972].
84
OBLIGATIONS AND CONTRACTS
§79.00 Rescission implied in reciprocal obligations
The power to rescind is implied in reciprocal obligations, in
case one of the obligors should not comply with what is incumbent
upon him.
Reciprocal obligations are those created or established at the
same time, out of the same cause, and which result in a mutual relationship of creditor and debtor between the parties. In reciprocal
obligations, the performance of one is conditioned on the simultaneous fulfillment of the other obligation.52 It is an obligation where the
obligation or promise of each party is the consideration for that of
the other.53 In reciprocal obligations, the obligation of one is a resolutory condition of the obligation of the other, the non-fulfillment of
which entitles the other party to rescind the contract.54
For example, a contract of sale gives rise to a reciprocal obligation of the parties. The seller is to deliver title and property to the
buyer and the latter is to pay the price. The reciprocal obligations of
the parties arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to be performed
simultaneously, so that the performance of one is conditioned upon
the simultaneous fulfillment of the other.55
§80.00 Instances of rescission
The Civil Code speaks of “rescission” in four instances,
namely;
1)
Article 1191 of the Civil Code, the general provision on
rescission of reciprocal obligations;
2)
Article 1659, which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the
lessee in contracts of lease are concerned;
3)
Article 1380 with regard to the rescission of contracts;56
and
Vermen Realty Dev. Corp. v. CA, 224 SCRA 549 [1993].
Rose Packing Co., Inc. v. CA, 167 SCRA 309 [1988].
54
Songcuan v. IAC, 191 SCRA 28 [1990]; Ong v. CA, 310 SCRA 1 [1999].
55
Cortes v. CA, 494 SCRA 579, July 12, 2006.
56
Cannu v. Galang, 459 SCRA 80 [2005].
52
53
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
85
4)
Art. 1592, on the sale of immovable property which can
only be rescinded by judicial or notarial act.
Article 1659 of the Civil Code refers to a rescission of lease
contract in case the lessor or the lessee does not comply with their
respective obligations. Article 1659 provides:
If the lessor or the lessee should not comply with the
obligations set forth in Articles 1654 (obligations of the
lessor) and 1657 (obligations of the lessee), the aggrieved
party may ask for the rescission of the contract and
indemnification for damages, or only the latter allowing
the contract to remain in force. (1556)
On the other hand, Article 1380 of the Civil Code refers to the
rescission of rescissible contracts specified in Art. 1381, which are
the following:
(1) Those which are entered into by guardians
whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things which
are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
(3) Those undertaken in fraud of creditors when
the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if
they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
(5) All other contracts specially declared by law to
be subject to rescission. (1291a)
Apart from the foregoing instances of rescission, there are also
special laws on rescission, namely, the so-called Recto Law on the
rescission of sale of personalty payable in installments as provided
in Art. 1434, and the so-called Maceda Law on sale of realty payable
in installments. In rescissions provided for in RA No. 6552 (Maceda
Law), the general law on rescission of reciprocal obligations does not
apply.
86
OBLIGATIONS AND CONTRACTS
See discussion on the Recto Law and Maceda Law, infra.
§81.00 Rescission presupposes extant obligation
The obligation referred to in Art. 1191 is a binding obligation
which does not depend upon the happening of a condition to make
it binding or one already a binding and existing obligation. Article
1191 contemplates the obligor’s failure to comply with an obligation
already extant, not a failure of a condition to render binding that
obligation.57 Thus, in a contract to sell, the failure to pay the price
is not a breach of contract but an event which prevents the vendor’s
obligation to convey title from acquiring binding force. Hence, the
contract is not rescissible under Article 1191 of the Civil Code.58
Article 1191 does not apply to a contract with a suspensive
obligation. When a contract is subject to a suspensive condition, the
birth or effectivity can take place only if and when the event which
constitutes the condition happens or is fulfilled. If the condition does
not take place, the parties would stand as if the conditional obligation
had never existed. There can be no rescission of a contract with a
suspensive obligation until the suspensive condition has occurred.
Before its happening there is yet no contract to be rescinded.59
§82.00 Rescission requires material breach
The right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the
other party who violates the reciprocity between them. The breach
contemplated in the said provision is the obligor’s failure to comply
with an existing obligation. When the obligor cannot comply with
what is incumbent upon it, the obligor may seek rescission and, in
the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.60
Rescission under Article 1191 of the Civil Code will be ordered
only where the breach complained of is so substantial as to defeat
the object of the parties in entering into the agreement. Thus, the
non-performance of the obligor’s obligation to execute the deed of
Padilla v. Paredes, 328 SCRA 434, 445 [2000].
Rivera v. Del Rosario, 419 SCRA 626, 639 [2003].
59
Cheng v. Genato, 300 SCRA 722 [1998].
60
Velarde v. CA, 361 SCRA 56, 68 [2001].
57
58
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
87
assignment, as required in the contract, is a substantial breach that
warrants the rescission.61 Casual breach is not enough. Only for such
substantial and fundamental breach as would defeat the very object
of the parties in making the agreement would warrant recission.62
Under Art. 1191 of the Civil Code, the power to rescind is not
absolute and must be based on a serious breach of an obligation as
to defeat the object of parties in making the agreement. In an action
to rescind the court may allow a period within which the defaulting
party may be permitted to perform the stipulation upon which the
claim for rescission of the contract is based.63
§83.00 Where there is substantial breach
Rescission or revocation of contract for breach by one party
will not be permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very object
of the parties in executing the agreement. The question of whether
a breach of a contract is substantial depends upon the attendant
circumstances.64
For instance, a corporation and a patentee agreed that the latter
would be appointed vice-president in return for the latter’s allowing
the former to use his patent and trademark. The dismissal of the
vice-present without cause entitles him to rescind plus damages, the
breach, namely, dismissal, being a substantial breach.65
In a contract of sale of realty, which provides that the seller
shall deliver a clean title, a slight delay in securing such clean title
is not a sufficient ground for resolution of the agreement, where time
is not the essence of the agreement.66
Where the deed of sale provides that 25% of the purchase price
will be paid within a time frame before the transfer of title of the
property will be effected, the failure by the buyer to pay the 25%
De Dios v. CA, 212 SCRA 519 [1992].
Bacolod-Murcia Milling Co., Inc. v. CA, 182 SCRA 24 [1990]; Universal Food
Corp. v. CA, 33 SCRA 1 [1970].
63
Massive Construction, Inc. v. IAC, 223 SCRA 1 [1993]; Vermen Realty Dev.
Corp. v. CA, 224 SCRA 549 [1993].
64
Vermen Realty Dev. Corp. v. CA, 224 SCRA 549 [1993].
65
Universal Food Corp. v. CA, 33 SCRA 1 [1970].
66
Tan v. CA, 175 SCRA 656 [1989].
61
62
88
OBLIGATIONS AND CONTRACTS
of the purchase price within the agreed period entitles the seller to
rescind the contract.67
The execution and notarization of a contract entitled an
“agreement to sell real property,” which did not stipulate that title
would pass to buyer until full payment of the price, is equivalent
to an absolute deed of sale and title would pass to the buyer, even
if the latter has not paid the full purchase price, as agreed. The
subsequent non-payment of the price at the time agreed upon did
not convert the contract into one without cause or consideration,
a nudum pactum. The situation was rather one in which there is
failure to pay the consideration, with its consequences, such as that
the seller has the right to demand interest for the delay or to demand
rescission either judicially or by notarial act.68
§84.00 Only injured party is entitled to rescind
Article 1191 of the Civil Code gives the injured party the power
to rescind the contract or to ask for specific performance. Where the
plaintiff is the party who did not perform the undertaking which
he was bound by the terms of the agreement to perform, he is
not entitled to insist upon the performance of the contract by the
defendant, or recover damages by reason of his own breach.69
A party to a contract cannot demand performance of the other party’s obligations unless he is in a position to comply with his
own obligations. Similarly, the right to rescind a contract can be
demanded only if a party thereto is ready, willing and able to comply with his own obligation thereunder.70 In a contract of sale, the
vendor is bound to transfer the ownership of and deliver, as well as
warrant, the thing which is the object of the sale;71 he warrants that
the buyer shall from the time ownership is passed, have and enjoy
the legal and peaceful possession of the thing.72
In Cortes v. CA,73 the Court ruled that delay in the performance
of obligation by one entitles the other party to rescind; conversely,
Vda. de Umali v. CA, 175 SCRA 142 [1989].
Ocampo v. CA, 233 SCRA 551 [1994].
69
Boysaw v. Interphil Promotons, 148 SCRA 635, 643.
70
Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; PARAS, Civil Code
of the Philippines, 12th ed., Vol. IV, p. 200.
71
Art. 1496, Civil Code.
72
Binalbagan Tech., Inc. v. CA, 219 SCRA 777, 783 [1993].
73
494 SCRA 579, July 12, 2006.
67
68
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
89
where there is mutual delay by both parties, the delay of one cancels
the other, and proscribes rescission. The Court ruled:
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.
The issue therefore is whether there is delay in the
performance of the parties’ obligation that would justify
the rescission of the contract of sale. To resolve this issue,
we must first determine the true agreement of the parties.
The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as shown
not necessarily by the terminology used in the contract
but by their conduct, words, actions and deeds prior to,
during and immediately after executing the agreement.
As such, therefore, documentary and parol evidence may
be submitted and admitted to prove such intention.
In the case at bar, the stipulation in the Deed of
Absolute Sale was that the Corporation shall pay in full
the P2,200,000.00 down payment upon execution of the
contract. However, as correctly noted by the Court of Appeals, the transcript of stenographic notes reveal Cortes’
admission that he agreed that the Corporation’s full payment of the sum of P2,200,000.00 would depend upon his
delivery of the TCTs of the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon him by delivering to the Corporation the TCTs
and the carbon duplicate of the Deed of Absolute Sale, but
the latter refused to pay in full the down payment. x x x
What further confirmed the agreement to deliver the
TCTs is the testimony of Cortes that the title of the lots
will be transferred in the name of the Corporation upon
full payment of the P2,200,000.00 down payment.
By agreeing to transfer title upon full payment of
P2,200,000.00, Cortes’ impliedly agreed to deliver the
TCTs to the Corporation in order to effect said transfer.
Hence, the phrase “execution of this instrument” as ap-
90
OBLIGATIONS AND CONTRACTS
pearing in the Deed of Absolute Sale, and which event
would give rise to the Corporation’s obligation to pay in
full the amount of P2,200,000.00, can not be construed as
referring solely to the signing of the deed. The meaning of
“execution” in the instant case is not limited to the signing of a contract but includes as well the performance or
implementation or accomplishment of the parties’ agreement. With the transfer of titles as the corresponding reciprocal obligation of payment, Cortes’ obligation is not
only to affix his signature in the Deed, but to set into motion the process that would facilitate the transfer of title
of the lots, i.e., to have the Deed notarized and to surrender the original copy thereof to the Corporation together
with the TCTs.
Having established the true agreement of the parties, the Court must now determine whether Cortes delivered the TCTs and the original Deed to the Corporation.
The Court of Appeals found that Cortes never surrendered said documents to the Corporation. Cortes testified
that he delivered the same to Manny Sanchez, the son
of the broker, and that Manny told him that her mother,
Marcosa Sanchez, delivered the same to the Corporation.
However, Marcosa Sanchez’s unrebutted testimony
is that, she did not receive the TCTs. She also denied
knowledge of delivery thereof to her son, Manny, thus:
What further strengthened the findings of the Court
of Appeals that Cortes did not surrender the subject documents was the offer of Cortes’ counsel at the pre-trial
to deliver the TCTs and the Deed of Absolute Sale if the
Corporation will pay the balance of the down payment.
Indeed, if the said documents were already in the hands
of the Corporation, there was no need for Cortes’ counsel
to make such offer.
Since Cortes did not perform his obligation to have
the Deed notarized and to surrender the same together
with the TCTs, the trial court erred in concluding that
he performed his part in the contract of sale and that it
is the Corporation alone that was remiss in the performance of its obligation. Actually, both parties were in
delay. Considering that their obligation was reciprocal,
performance thereof must be simultaneous. The mutual
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
91
inaction of Cortes and the Corporation therefore gave rise
to a compensation morae or default on the part of both
parties because neither has completed their part in their
reciprocal obligation. Cortes is yet to deliver the original
copy of the notarized Deed and the TCTs, while the Corporation is yet to pay in full the agreed down payment of
P2,200,000.00. This mutual delay of the parties cancels
out the effects of default, such that it is as if no one is
guilty of delay.
§85.00 Rescission must be effected judicially; exceptions
The power to rescind obligations must be invoked judicially,
which means that the injured party has to file a court action for such
purpose, with damages. He cannot just claim that the contract is
rescinded. If he does so, he assumes risk of his action.
The law on obligations and contract does not prohibit contracting parties from entering into agreement providing that a violation
of the terms of the contract would cause its cancellation even without judicial intervention.74 Even when there is such stipulation in
the contract, the courts will ultimately decide the issue of extrajudicial rescission in case the other party disputes the rescission, as
there is still the question whether or not the breach is substantial
or whether the parties can mutually return what they have received
under the contract.
If there is a stipulation in the contract authorizing the injured
party to extrajudically rescind the obligation, he may do so, but is
always subject to court approval if the other party does not agree and
seeks judicial relief. In the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be exercised solely
on a party’s own judgment that the other has committed a breach of
the obligation. Where there is nothing in the contract empowering
a party to rescind it without resort to the courts, the party’s action
in unilaterally terminating the contract is unjustified.75 On the
other hand, where there is an express stipulation, the injured party,
when he considers the contract rescinded, must notify the other
party in writing of his action, who may question it in court or agrees
thereto.76
Rosenback v. Maceren, Jr., 480 SCRA 362 [2006].
Tan v. CA, 175 SCRA 656 [1989].
76
Cheng v. Genato, 300 SCRA 722 [1998].
74
75
92
OBLIGATIONS AND CONTRACTS
§86.00 Requirement of extrajudicial rescission
A party who considers a contract cancelled or rescinded by
virtue of its stipulation authoring automatic rescission in case of
breach of the terms and conditions thereof, must still send a written
notice to the defaulter informing him of such rescission. For such
act is always provisional and is subject to judicial review in case the
alleged defaulter brings the matter to the proper court.77
Where the contract provides that it can be revoked and cancelled
for violation of any of its terms and conditions, the aggrieved party
may treat the contract rescinded and notify the other party of such
rescission. The latter party may either agree to such rescission or
oppose it by filing the corresponding action in court to question the
rescission and enforce the contract. The court will either sustain the
resolution of the contract, with consequent indemnity awarded to
the party prejudiced, or reject the rescission as not warranted and
sentence the responsible party to pay damages.78
§87.00 Unopposed rescission produces effect
An unopposed rescission of a contract has legal effect. Thus,
where the party has written the other party rescinding the contract
and considering it automatically cancelled, the latter should have
gone to court to question the rescission; his silence precluded him
from questioning the rescission.79 Where the one party has given
notice to the other that he has cancelled the contract, the latter’s
failure to question the validity of the extrajudicial rescission and to
ask for specific performance for more than one year shows that he
assented to the rescission. In other words, extrajudicial rescission is
legally effective where the other party does not oppose it.80
§88.00 Mutual restitution in case of rescission
Rescission creates the obligation to return the things which
were the object of the contract, together with their fruits, and the
price with its interest. Consequently, it can be carried out only when
he who demands rescission can return whatever he may be obliged
77
78
Cheng v. Genato, 300 SCRA 722 [1998].
Luzon v. Brokerage Co., Inc. v. Maritime Building Co., Inc., 43 SCRA 93
[1972].
79
80
People’s Industrial and Commercial Corp. v. CA, 281 SCRA 206 [1997].
Agustin v. CA, 186 SCRA 375 [1990].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
93
to restore. Furthermore, where a contract is resolved or rescinded, it
is the duty of the court to require the parties to surrender that which
they have severally received and to place each so far as practicable
in his original situation. The party seeking resolution cannot ask
performance in part and resolution as to remainder.81
Mutual restitution is required in rescission, but this presupposes
that both parties may be restored in their original situation. Where
such restitution has become impossible, as when the land which is
the object of the contract has been foreclosed, award of damages may
be decreed instead of restitution.82
In Lateral v. Solid Homes, Inc.,83 the Court made it clear that
in rescission mutual rescission is required. Thus:
It is petitioners’ thesis that inasmuch as the
rescission of the Revised Agreements and its Addendum
was made pursuant to Article 1191 of the Civil Code,
the provision of Article 1385 of the same Code, which
requires mutual restitution — should not apply because
Article 1385 applies only if the rescission is made under
the instances enumerated in Article 1381 of the Code.
We do not agree.
Mutual restitution is required in cases involving
rescission under Article 1191. In Velarde v. Court of
Appeals this Court, in no uncertain terms, squarely ruled
on this matter:
Considering that the rescission of the contract is
based on Article 1191 of the Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000
and P23,925 (totaling P874,150.00) advanced by petitioners should be returned by private respondents, lest the
latter unjustly enrich themselves at the expense of the
former.
81
Grace Park Engineering Co., Inc. v. Dimaporo, 107 SCRA 266, 273 [1981]; Co
v. CA, 312 SCRA 528 [1999].
82
Asuncion v. Evangelista, 316 SCRA 848 [1999].
83
460 SCRA 375 [2005].
94
OBLIGATIONS AND CONTRACTS
Rescission creates the obligation to return the object
of the contract. It can be carried out only when the one
who demands rescission can return whatever he may
be obliged to restore (citing Co v. Court of Appeals, 312
SCRA 528, August 17, 1999; and Vitug, Compendium of
Civil Law and Jurisprudence, 1993 revised ed., p. 556).
To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is
not merely to terminate it and release the parties from
further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative
positions as if no contract has been made (citing Ocampo
v. Court of Appeals, 233 SCRA 551, June 30, 1994).
Despite the fact that Article 1124 of the old Civil
Code from whence Article 1191 was taken, used the term
“resolution,” the amendment thereto (presently, Article
1191) explicitly and clearly used the term “rescission.”
Unless Article 1191 is subsequently amended to revert
back to the term “resolution,” this Court has no alternative
but to apply the law, as it is written.
Again, since Article 1385 of the Civil Code expressly
and clearly states that “rescission creates the obligation
to return the things which were the object of the contract,
together with their fruits, and the price with its interest,”
the Court finds no justification to sustain petitioners’
position that said Article 1385 does not apply to rescission
under Article 1191.
In Palay, Inc. v. Clave, this Court applied Article
1385 in a case involving “resolution” under Article 1191,
thus:
Regarding the second issue on refund of
the installment payments made by private respondent. Article 1385 of the Civil Code provides:
“ART. 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and
the price with its interest; consequently, it can
be carried out only when he who demands rescission can return whatever he may be obliged
to restore.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
95
“Neither shall rescission take place when
the things which are the object of the contract
are legally in the possession of third persons
who did not act in bad faith.
“In this case, indemnity for damages may
be demanded from the person causing the loss.”
§89.00 Exception to mutual rescission
In Solid Homes v. Spouses Tan and de Jesus Tan,84 the issue
raised is whether upon the rescission of the deed of sale of the
subdivision lot for material breach of contract, the lot developer
should return to the buyers only the purchase paid several years
therefrom and not the current market value thereof. The Court
ruled that it should pay the current market value:
“It is true that this Court have, in the past, applied
the provision of Article 1385 to cases of rescission due to
breach of obligation under Article 1191. But this notwithstanding, the Court finds no reason to alter the ruling of
the Court of Appeals.
In many instances, this Court has refused to apply
the literal import of a particular provision of law when to
do so would lead to unjust, unfair and absurd results. After all, it is the function of courts to see to it that justice is
dispensed, fairness is observed and absurdity prevented.
xxx
Were we to follow the letter of Article 1385, we will
in effect be paving the way to an absurd situation whereby subdivision developers who have reneged on their contractual and legal obligation to provide utility systems
and facilities for the use of subdivision lot owners may
themselves profit from their very own wrongs and shortcomings.”
§90.00 Specific performance may be asked by injured party
Article 1191 states that “the injured party may choose between
fulfillment and rescission of the obligation, with the payment of
damages in either case.”
84
G.R. Nos. 145156-57, July 29, 2005.
96
OBLIGATIONS AND CONTRACTS
As a rule, the remedy of the injured party is either to seek
specific performance of the obligation with damages or rescission
with damages. The exercise of one remedy is conclusive and precludes
the other,85 except that he may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.86
In Carrascoso v. CA,87 the Court held:
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
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.
Reciprocal obligations are those which arise from
the same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to
be performed simultaneously such that the performance
of one is conditioned upon the simultaneous fulfillment of
the other.
The right of rescission of a party to an obligation
under Article 1191 is predicated on a breach of faith by the
other party who violates the reciprocity between them.
A contract of sale is a reciprocal obligation. The
seller obligates itself to transfer the ownership of and
deliver a determinate thing, and the buyer obligates itself
to pay therefor a price certain in money or its equivalent.
The non-payment of the price by the buyer is a resolutory
condition which extinguishes the transaction that for
a time existed, and discharges the obligations created
Borden v. Service Specialist, Inc., 258 SCRA 634 [1996].
Art. 1191, Civil Code.
87
477 SCRA 666 [2005].
85
86
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
97
thereunder. Such failure to pay the price in the manner
prescribed by the contract of sale entitles the unpaid
seller to sue for collection or to rescind the contract.
The mere pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it constitute any
defense to an action for of specific performance. And the mere fact
of insolvency of a debtor is not an excuse for the non-fulfillment of
an obligation but instead it is taken as a breach of the contract by
him.88
Where a bank committed to lend money to a borrower for a
specific amount, and part thereof has been released to the borrower,
the subsequent Central Bank resolution prohibiting the bank from
conducting further business does not relieve the bank from its
obligations. However, specific performance in favor of the borrower
cannot be granted because the CB resolution precludes the bank
from undertaking further banking operations, leaving the other
party with no remedy but for rescission of the contract with damages
with respect to the unleashed portion of the loan.89
Other kinds of damages may be decreed in case the injured
party opted for specific performance with damages. It has been held
that only damages consistent with the remedy of rescission may be
granted, but if the injured party opted for specific performance, other
kind of damages would be called for which are absolutely distinct
from those kinds of damages accruing in the case of rescission.90
§91.00 Waiver of right or option to rescind
While the parties in a mutual obligation may rescind the
contract upon the non-fulfillment by the other of his obligation, the
late performance by the latter of such obligation and its acceptance
thereof by the former may amount to a waiver of his right to rescind.
The right to rescind is not absolute and will not be granted where
there has been substantial compliance by partial payment of
installments provided in the contract.91
Central Bank v. CA, 139 SCRA 46 [1985].
Central Bank v. CA, Ibid.
90
Asuncion v. Evangelista, 316 SCRA 848 [1999].
91
Tayag v. CA, 219 SCRA 480 [1993].
88
89
98
OBLIGATIONS AND CONTRACTS
The seller who unqualifiedly accepts payment of the price after
the period to pay has expired constitutes a waiver of the period and,
hence, of the ground to rescind under Art. 1592.92
In installment payments provided in a contract, which grants
the creditor the right to rescind it upon failure to pay an installment,
the acceptance by the creditor of the delayed installment payments
without protest amounts to a waiver of the right to rescind.93
Where the contract provides that the vendor may rescind it
upon failure of the buyer to pay installments for three months, the
failure of the vendor to rescind the contract and he instead continues
to accept delayed installment payments constitutes waiver of the
right to rescind and places him in estoppel.94
§92.00 Rescission under Art. 1191 and Art. 1381 distinguished
Articles 1191 and 1382 of the Civil Code both speak of “recission.” However, they are different. Article 1383 reads:
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. (1294)
Article 1191 grants the injured party the principal action either
to rescind or to fulfill the obligation, with damages in either case,
while Art. 1383 makes the action a subsidiary and not a principal
remedy. The distinction lies in the fact that the rescission under
Art. 1383 is by reason of lesion or economic prejudice. The injury
under Art. 1191, which is reparation of damages for breach is purely
secondary. Under Art. 1383, the cause of action is subordinated to the
existence of the prejudice, and where the defendant makes good the
damages caused, the action cannot be maintained or continued.95
In Rivera v. Del Rosario,96 the Court distinguished rescission
under Art. 1191 and rescission under Art. 1381, thus:
Ocampo v. CA, 233 SCRA 551 [1994].
Rapanut v. CA, 246 SCRA 323 [1995].
94
Rapanut v. CA, Ibid.
95
Concurring Opinion of Justice J.B.L. Reyes in Universal Food Corp. v. CA, 33
SCRA 1, 22-23 [1970].
96
419 SCRA 626 [2003].
92
93
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
99
“Rescission of reciprocal obligations under Article
1191 of the New Civil Code should be distinguished from
rescission of contracts under Article 1383 of the same Code.
Both presuppose contracts validly entered into as well
as subsisting, and both require mutual restitution when
proper, nevertheless they are not entirely identical.
In countless times there has been confusion between
rescission under Articles 1381 and 1191 of the Civil Code.
Through this case we again emphasize that rescission
of reciprocal obligations under Article 1191 is different
from rescissible contracts under Chapter 6 of the law on
contracts under the Civil Code. While Article 1191 uses
the term rescission, the original term used in Article 1124
of the old Civil Code, from which Article 1191 was based,
was resolution. Resolution is a principal action that is
based on breach of a party, while rescission under Article
1383 is a subsidiary action limited to cases of rescission
for lesion under Article 1381 of the New Civil Code, which
expressly enumerates the rescissible contracts.”
Where the property of a third person has been attached to
satisfy a judgment rendered in a case in which said third party is
not a party litigant, the insistence of the judgment creditor with the
attachment and sale of the levied property has no legal basis. The
judgment creditor’s claim requires a rescissory action which cannot
be done in the same case, in which the judgment was rendered.97
Rescission is a relief which the law grants on the premise that
the contract is valid for the protection of one of the contracting parties
and third persons from all injury and damage the contract may
cause, or to protect some incompatible and preferential right created
by the contract. An action for rescission may not be raised or set up
in a summary proceeding through a motion, but in an independent
civil action and only after a full-blown trial, in accordance with Art.
1383 of the Civil Code.98
§93.00 Rescission and termination distinguished
To rescind is to declare a contract void in its exception and to
put an end to it as though it never were. It is not merely to termi97
98
Air France v. CA, 245 SCRA 485 [1995].
Air France v. CA, Ibid.
100
OBLIGATIONS AND CONTRACTS
nate it and release parties from further obligations to each other
but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever
made. Termination or cancellation of a contract would necessarily
entail enforcement of the term prior to the declaration of its cancellation.99
The Court in Pryce Corp. v. Phil. Amusement and Gaming
Corp.,100 distinguished termination and rescission, as follows:
Now, as to the distinction between termination (or
cancellation) and rescission (more properly, resolution),
Huibonhoa v. CA held that, where the action prayed for
the payment of rental arrearages, the aggrieved party actually sought the partial enforcement of a lease contract.
Thus, the remedy was not rescission, but termination or
cancellation, of the contract. The Court explained:
“x x x. By the allegations of the complaint, the Gojoccos’ aim was to cancel or terminate the contract because
they sought its partial enforcement in praying for rental
arrearages. There is a distinction in law between cancellation of a contract and its rescission. To rescind is to declare a contract void in its inception and to put an end to
it as though it never were. It is not merely to terminate it
and release parties from further obligations to each other
but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied
had no contract ever been made.
“x x x. The termination or cancellation of a contract
would necessarily entail enforcement of its terms prior to
the declaration of its cancellation in the same way that
before a lessee is ejected under a lease contract, he has to
fulfill his obligations thereunder that had accrued prior
to his ejectment. However, termination of a contract need
not undergo judicial intervention. x x x.”
Rescission has likewise been defined as the “unmaking of a contract, or its undoing from the beginning, and
not merely its termination.” Rescission may be effected
by both parties by mutual agreement; or unilaterally by
99
Huibonhoa v. CA, 320 SCRA 625 [1999].
G.R. No. 157480, May 6, 2005.
100
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
101
one of them declaring a rescission of contract without the
consent of the other, if a legally sufficient ground exists or
if a decree of rescission is applied for before the courts On
the other hand, termination refers to an “end in time or
existence; a close, cessation or conclusion.” With respect
to a lease or contract, it means an ending, usually before
the end of the anticipated term of such lease or contract,
that may be effected by mutual agreement or by one party
exercising one of its remedies as a consequence of the default of the other.
Thus, mutual restitution is required in a rescission
(or resolution), in order to bring back the parties to their
original situation prior to the inception of the contract.
Applying this principle to this case, it means that PPC
would re-acquire possession of the leased premises, and
PAGCOR would get back the rentals it paid the former for
the use of the hotel space.
In contrast, the parties in a case of termination
are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its
termination, the parties are obliged to comply with their
contractual obligations. Only after the contract has been
cancelled will they be released from their obligations.
In this case, the actions and pleadings of petitioner
show that it never intended to rescind the Lease Contract
from the beginning. This fact was evident when it first
sought to collect the accrued rentals from September to
November 1993 because, as previously stated, it actually
demanded the enforcement of the Lease Contract prior to
termination. Any intent to rescind was not shown, even
when it abrogated the Contract on November 25, 1993,
because such abrogation was not the rescission provided
for under Article 1659.
In short, in rescission, no rental arrearage or future
rentals may be collected; in termination, such rental arrearages or future rental for the remaining term may be
collected.
§94.00 Remedies of reformation or of rescission
Where the agreement did not reflect the true intention of the
parties and said agreement has been materially breached, the party
102
OBLIGATIONS AND CONTRACTS
alleging the same has a choice of remedy, either reformation of the
contract or rescission with damages. Given a choice of remedy, the
party concerned has a right to reject reformation and to choose
rescission, as the more effective protection of his interests.101
§95.00 Mandamus does not lie to enforce contract
A contractual obligation is not a duty specifically enjoined by
law resulting from office, trust, or station, and the rule universally
accepted is that mandamus never lies to enforce the performance of
contractual obligations. The aggrieved party’s remedy is an action
for specific performance, if proper, based on a contractual obligation,
and not mandamus.102
§96.00 Recto Law applicable to sale of personal property in
installment
The Recto Law is what is now Art. 1484 of the Civil Code, which
provides that in a contract of sale of personal property the price of
which is payable in installments, the vendor may exercise any of the
following remedies:
1)
exact fulfillment of the obligation, should the
vendee fail to pay;
2) cancel the sale, should the vendee’s failure to
pay cover two or more installments;
3) foreclose the chattel mortgage on the thing
sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In case of foreclosure of chattel mortgage, he shall have no further action against the purchaser to recover any unpaid balance
of the price.103
The three remedies are alternative and not cumulative, and availment of one excludes the others.104
Where the creditor chose not to foreclose the chattel and instead sued for specific performance, the creditor is not limited to the
De Dios v. CA, 212 SCRA 519 [1992].
Aprueba v. Ganzon, 18 SCRA 8 [1966].
103
De la Cruz v. Asian Consumer & Industrial Finance Corp., 214 SCRA 103
[1992].
104
De la Cruz v. Asian Consumer & Industrial Finance Corp., Ibid.
101
102
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
103
proceeds of the sale of the mortgaged chattel, on execution of the
judgment, but may still recover the unpaid balance against other
properties of the debtor. It is only when the creditor had elected
to foreclose the chattel mortgage that he is limited to the proceeds
thereof.105
§97.00 Rescission under Maceda law of realty in installment
The rescission of contract of sale involving realty may involve
a contract of sale or a contract to sell. In the sale of realty, Articles
1191 and 1592 apply to contract of sale of realty, while in contract
to sell realty, the applicable law is Republic Act No. 6552, otherwise
known as Maceda Law because he was the principal author of said
law.106
The Maceda Law reads:
REPUBLIC ACT NO. 6552
SECTION 1. This Act shall be known as the “Realty
Installment Buyer Protection Act.”
SEC. 2. It is hereby declared a public policy to protect buyers of real estate on installment payments against
onerous and oppressive conditions.
SEC. 3. In all transactions or contracts, involving the
sale or financing of real estate on installment payments,
including residential condominium apartments but excluding industrial lots, commercial buildings and sales to
tenants under Republic Act Numbered Thirty-Eight hundred forty-four as amended by Republic Act Sixty-three
hundred eighty-nine, where the buyer has paid at least
two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:
(a) To pay, without additional interest, the unpaid
installments due within the total grace period for every
one year of installment payments made; Provided, That
this right shall be exercised by the Buyer only once in ev-
105
106
Tajanlangit v. Southern Motors, Inc., 101 Phil. 606 [1957].
Ramos v. Heruela, 473 SCRA 79 [2005].
104
OBLIGATIONS AND CONTRACTS
ery five years of the life of the contract and its extensions,
if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty percent of the
total payments made and, after five years of installments,
an additional five per cent every year but not to exceed
ninety per cent of the total payments made; Provided,
That the actual cancellation or the demand for rescission
of the contract by a notarial act and upon full payment of
the cash surrender value to the buyer.
Down payments, deposits or options on the contract
shall be included in the computation of the total number
of installment payments made.
SEC. 4. In case where less than two years of installments were paid the seller shall give the buyers a grace
period of not less than sixty days from the date the installment become due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller
may cancel the contract after thirty days from receipt by
the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act.
SEC. 5. Under Section 3 and 4, the buyer shall have
the right to sell his rights or assign the same to another
person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The deed of sale or assignment shall
be done by notarial act.
SEC. 6. The buyer shall have the right to pay in
advance any installments or the full unpaid balance of
the purchase price any time without interest and to have
such full payment of the purchase price annotated in the
certificate of title covering the property.
SEC. 7. Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and
6, shall be null and void.
SEC. 8. If any provisions of this Act is held invalid
or unconstitutional no other provision shall be affected
thereby.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
105
SEC. 9. This Act shall take effect upon its approval.
Approved August 26, 1972.
In Ramos v. Herueta,107 quoting Rillo v. Court of Appeals, involving the Maceda Law, the Court declared:
x x x Known as the Maceda Law, R.A. No. 6552 recognizes in 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 is simply an event that prevents the
obligation of the vendor to convey title from acquiring
binding force. It also provides the right of the buyer on
installments in case he defaults in the payment of succeeding installments x x x.
In this case, the spouses Heruela paid less than two
years of installments. Thus, Section 4 of RA 6552 applies.
However, there was neither a notice of cancellation nor
demand for rescission by notarial act to the spouses Heruela. In Olympia Housing, Inc. v. Panasiatic Travel Corp.,
the Court ruled that the vendor could go to court to demand judicial rescission in lieu of a notarial act of rescission. However, an action for reconveyance is not an action
for rescission. The Court explained in Olympia:
The action for reconveyance filed by petitioner was
predicated on an assumption that its contract to sell executed in favor of respondent buyer had been validly cancelled or rescinded. The records would show that, indeed,
no such cancellation took place at any time prior to the
institution of the action for reconveyance. x x x
xxx
x x x Not only is an action for reconveyance conceptually different from an action for rescission but that,
also, the effects that flow from an affirmative judgment
in either case would be materially dissimilar in various
respects. The judicial resolution of a contract gives rise to
mutual restitution which is not necessarily the situation
that can arise in an action for reconveyance. Additionally,
107
473 SCRA 79.
106
OBLIGATIONS AND CONTRACTS
in an action for rescission (also often termed as resolution), unlike in an action for reconveyance predicated on
an extrajudicial rescission (rescission by notarial act), the
Court, instead of decreeing rescission, may authorize for
a just cause the fixing of a period.
In the present case, there being no valid rescission of
the contract to sell, the action for reconveyance is premature. Hence, the spouses Heruela have not lost the statutory grace period within which to pay. The trial court
should have fixed the grace period to sixty days conformably with Section 4 of RA 6552.
The spouses Heruela are not entirely fault-free.
They have been remiss in performing their obligation.
The trial court found that the spouses Heruela offered
once to pay the balance of the purchase price. However,
the spouses Heruela did not consign the payment during
the pendency of the case. In the meanwhile, the spouses
Heruela enjoyed the use of the land.
For the breach of obligation, the court, in its discretion, and applying Article 2209 of the Civil Code, may
award interest at the rate of 6% per annum on the amount
of damages. The spouses Heruela have been enjoying the
use of the land since 1982. In 1995, they allowed their
daughter and son-in-law, the spouses Pallori, to construct
a house on the land. Under the circumstances, the Court
deems it proper to award interest at 6% per annum on the
balance of the purchase price.
The records do not show when the spouses Ramos
made a demand from the spouses Heruela for payment
of the balance of the purchase price. The complaint only
alleged that the spouses Heruela’s “unjust refusal to pay
in full the purchase price x x x has caused the Deed of
Conditional Sale to be rescinded, revoked and annulled.”
The complaint did not specify when the spouses Ramos
made the demand for payment. For purposes of computing
the legal interest, the reckoning period should be the filing
on 27 January 1998 of the complaint for reconveyance,
which the spouses Ramos erroneously considered an
action for rescission of the contract.
The Court notes the reduction of the land area from
306 square meters to 282 square meters. Upon subdivision
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
107
of the land, 24 square meters became part of the road.
However, Santiago Heruela expressed his willingness to
pay for the 306 square meters agreed upon despite the
reduction of the land area. Thus, there is no dispute on
the amount of the purchase price even with the reduction
of the land area.
Contract of loan involves reciprocal obligations, wherein the
obligation or promise of each party is the consideration for that of
the other. Only when a party has performed his part of the contract
can he demand that the other party also fulfills his own obligation
and if the latter fails, default sets in.108
Ong v. CA,109 illustrates the rule on reciprocal obligation, the
distinction between rescission under Art. 1191 and Art. 1383 of the
Civil Code, and the requirements of rescission under Art. 1191. The
Court ruled:
“The only pertinent legal issue raised is: (1) whether
the contract entered into by the parties may be validly
rescinded under Article 1191 of the New Civil Code; x x x
The Court disposed of the legal issue as follows:
“Petitioner contends that Article 1191 of the New
Civil Code is not applicable since he has already paid respondent-spouses a considerable sum and has therefore
substantially complied with his obligation. He cites Article 1383 instead, to the effect that where specific performance is available as a remedy, rescission may not be
resorted to.
xxx
Rescission, as contemplated in Article 1380, et seq.,
of the New Civil Code, is a remedy granted by law to the
contracting parties and even to third persons, to secure
the reparation of damages caused to them by a contract,
even if this should be valid, by restoration of things to
their condition at the moment prior to the celebration of
the contract. It implies a contract, which even if initially
valid, produces a lesion or a pecuniary damage to someone.
108
109
BPI Investment Corp. v. CA, 377 SCRA 117 [2002].
G.R. No. 97347, July 6, 1999, 310 SCRA 1 [1999].
108
OBLIGATIONS AND CONTRACTS
On the other hand, Article 1191 of the New Civil
Code refers to rescission applicable to reciprocal obligations. Reciprocal obligations are those which arise from
the same cause, and in which each party is a debtor and
a creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to
be performed simultaneously such that the performance
of one is conditioned upon the simultaneous fulfillment of
the other. Rescission of reciprocal obligations under Article 1191 of the New Civil Code should be distinguished
from rescission of contracts under Article 1383. Although
both presuppose contracts validly entered into and subsisting and both require mutual restitution when proper,
they are not entirely identical.
While Article 1191 uses the term “rescission,” the
original term which was used in the old Civil Code, from
which the article was based, was “resolution.” Resolution
is a principal action which is based on breach of a party,
while rescission under Article 1383 is a subsidiary action
limited to cases of rescission for lesion under Article 1381
of the New Civil Code, which expressly enumerates the
following rescissible contracts:
1.
Those which are entered into by guardians
whenever the wards whom they represent suffer lesion by
more than one fourth of the value of the things which are
the object thereof;
2.
Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding
number;
3.
Those undertaken in fraud of creditors when
the latter cannot in any manner collect the claims due
them;
4.
Those which refer to things under litigation if
they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent
judicial authority;
5.
All other contracts specially declared by law to
be subject to rescission.
Obviously, the contract entered into by the parties
in the case at bar does not fall under any of those men-
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
tioned by Article 1381. Consequently, Article 1383 is inapplicable.
May the contract entered into between the parties,
however, be rescinded based on Article 1191?
A careful reading of the parties’ “Agreement of Purchase and Sale” shows that it is in the nature of a contract
to sell, as distinguished from a contract of sale. In a contract of sale, the title to the property passes to the vendee
upon the delivery of the thing sold; while in a contract to
sell, ownership is, by agreement, reserved in the vendor
and is not to pass to the vendee until full payment of the
purchase price. In a contract to sell, the payment of the
purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey
title from acquiring an obligatory force.
Respondents in the case at bar bound themselves to
deliver a deed of absolute sale and clean title covering
the two parcels of land upon full payment by the buyer of
the purchase price of P2,000,000.00. This promise to sell
was subject to the fulfillment of the suspensive condition
of full payment of the purchase price by the petitioner.
Petitioner, however, failed to complete payment of the
purchase price. The non-fulfillment of the condition of
full payment rendered the contract to sell ineffective
and without force and effect. It must be stressed that
the breach contemplated in Article 1191 of the New Civil
Code is the obligor’s failure to comply with an obligation
already extant, not a failure of a condition to render
binding that obligation. Failure to pay, in this instance, is
not even a breach but merely an event which prevents the
vendor’s obligation to convey title from acquiring binding
force. Hence, the agreement of the parties in the case at
bench may be set aside, but not because of a breach on the
part of petitioner for failure to complete payment of the
purchase price. Rather, his failure to do so brought about
a situation which prevented the obligation of respondent
spouses to convey title from acquiring an obligatory
force.
109
110
OBLIGATIONS AND CONTRACTS
§98.00 Where both parties breach their obligations
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.
(n)
This article enunciates the rule that if both parties committed
a breach of obligation, and it cannot be determined who is the first
infractor, each party should bear his damages.110
This article authorizes the court to equitably offset the
respective liabilities of the parties in case both of them are in default
in the performance of their obligations.111
Where in reciprocal obligation both parties are at fault, as
provided for Art. 1192, the liability of the first infractor shall be
equitably tempered by the courts, as by offsetting the liability of the
second infractor.112
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 a resolutory period take effect at once, but terminate upon arrival of the day
certain.
A day certain is understood to be that which
must necessarily come, 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. (1125a)
Grace Park Engineering Co., Inc. v. Dimaporo, 107 SCRA 266, 273 [1981].
Central Bank v. CA, 139 SCRA 46 [1985].
112
Central Bank v. CA, Ibid.
110
111
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day
certain, the rules in Article 1189 shall be observed.
(n)
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 the fruits and interests. (1126a)
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. (1127)
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. (1128a)
Art. 1198. The debtor shall lose every right to
make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
(2) When he does not furnish to the creditor
the guaranties or securities which he has promised;
(3) When by his own acts he has impaired
said guaranties or securities after their establishment, and when through a fortuitous event they
disappear, unless he immediately gives new ones
equally satisfactory;
111
112
OBLIGATIONS AND CONTRACTS
(4) When the debtor violates any undertaking, in consideration of which the creditor agreed
to the period;
(5)
(1129a)
When the debtor attempts to abscond.
§99.00 Period defined
It is a length of existence; duration. A point of time marking
a termination as of a cause or an activity; an end, a limit, a bound;
conclusion; termination. A series of years, months or days in which
something is completed. A time of definite length. Definite, having
distinct or certain limits; determinate in extent or character; limited;
fixed — as definite period.113
The term period refers to the length of existence; duration. A
point in time marking a termination as of a cause or an activity;
an end, a limit, a bound; conclusion; termination. A series of years,
months or days in which something is completed. A time of definite
length or the period from one fixed date to another fixed date.114
A period is defined as a space of time which has an influence
on obligation as a result of a juridical act, and either suspends their
demandableness or produces their extinguishment.115
Period relates to length of existence; duration or even a series
of years, months, or days in which something is completed.116
§100.00 Period to accept offer
A period to accept an offer, if not founded upon or supported
by a consideration, can be withdrawn before its acceptance or
before the offeror learns of such acceptance; a period supported by a
consideration is a contract of option and cannot be withdrawn without
committing a breach thereof. The option is an independent contract
by itself and is different from the projected main agreement.117
Capiral v. Manila Electric Co., Inc., 9 SCRA 804 [1963].
Phil. Village Hotel v. NLRC, 230 SCRA 423 [1994].
115
Lirag Textile Mills, Inc. v. CA, 63 SCRA 374 [1975].
116
Rantael v. CA, 97 SCRA 543 [1980].
117
Ang Yu Asuncion v. CA, 238 SCRA 602 [1994].
113
114
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
§101.00
113
Day certain
A day certain is understood to be that which must necessarily
come, although it may not be known when.118 It is understood to be
that which must necessarily arrive, even though it is not known
when. In order that an obligation is with a term, it is necessary
that it should arrive, sooner or later; if its arrival is uncertain, the
obligation is conditional.119
In determining the validity of an employment contract with
a fixed or specified period, what is important is not the nature of
work that the employee will perform but the day certain agreed
upon for the commencement and termination of the employment
relationship. Day certain is that which necessarily comes, although
it may be unknown when.120
§102.00
Obligations with a period
They are those whose consequences are subject in one way or
another to the expiration of the period or term. Obligations with a
resolutory period take effect at once, but terminate upon arrival of
the day certain. A day certain is understood to be that which must
necessarily come, although it may not be known when.121
SECTION 3. — Alternative Obligations
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.
(1131)
Art. 1200. The right of choice belongs to the
debtor, unless it has been expressly granted to the
creditor.
The debtor shall have no right to choose those
prestations which are impossible, unlawful or
118
Escareal v. NLRC, 213 SCRA 472 [1992]; Lirag Textile Mills, Inc. v. CA, 63
SCRA 374 [1975].
119
Berg v. Magdalena Estate, Inc., 92 Phil. 110 [1952].
120
Phil. Village Hotel v. NLRC, 230 SCRA 423 [1994].
121
Lirag Textile Mills, Inc. v. CA, 63 SCRA 374 [1975].
114
OBLIGATIONS AND CONTRACTS
which could not have been the object of the obligation. (1132)
Art. 1201. The choice shall produce no effect
except from the time it has been communicated.
(1133)
Art. 1202. The debtor shall lose the right of
choice when among the prestations whereby he is
alternatively bound, only one is practicable. (1134)
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. (n)
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 value of the last thing which disappeared, or
that of the service which last became impossible.
Damages other than the value of the last thing
or service may also be awarded. (1135a)
Art. 1205. When the choice has been expressly
given to the creditor, the obligation shall cease to
be alternative from the day when the selection has
been communicated to the debtor.
Until then the responsibility of the debtor shall
be governed by the following rules:
(1) 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;
(2) If the loss 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;
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
115
(3) If all the things are lost through the fault
of the debtor, the choice by the creditor shall fall
upon the price of any one of them, also with indemnity for damages.
The same rules shall be applied to obligations
to do or not to do in case one, some or all of the
prestations should become impossible. (1136a)
Art. 1206. When only one prestation has been
agreed upon, but the obligor may render another in
substitution, the obligation is called facultative.
The loss or deterioration of the thing intended
as a substitute, through the negligence of the
obligor, does not render him liable. But once the
substitution has been made, the obligor is liable for
the loss of the substitute on account of his delay,
negligence or fraud. (n)
§103.00 Alternative obligation defined
Alternative obligation is one where the debtor has assumed
two or more alternative prestations, in which case he may choose to
fully perform one, which results in the discharge of the other. The
debtor has the right of choice, unless there is an agreement giving
the creditor the choice. But once the creditor has made a choice as
agreed, the obligation ceases to be alternative.
For instance, a person owed somebody money in amount of
P1,000,000 and he agreed to pay the same on a fixed date or failure
which he agreed to sell the property mortgaged to the creditor. This
is an alternative obligation. The debtor has the choice.122
In a policy agreement, the insured property is destroyed. The
policy provides that the insurer may pay the value of the insured
property or build in a more or less substantial manner. The property
was destroyed. This is an alternative obligation, as the obligor, the
insurer, may choose which of the alternative prestations may be
performed.123
122
123
Agoncillo v. Javier, 30 Phil. 124.
Ong Guan Can v. Century Insurance Co., 46 Phil. 592.
116
OBLIGATIONS AND CONTRACTS
The creditor cannot be compelled to receive part of one and
part of the other undertaking.
§104.00 Facultative obligation
Where only one prestation has been agreed upon, but the obligor
may render another in substitution, the obligation is facultative. For
instance, in a contract of loan, the parties agreed that upon failure
of the borrower to pay the loan in a fixed date, the borrower shall
mortgage the property to secure payment of the obligation.124
The difference between alternative and facultative is that in
the former, there are two or more prestations, any one of which may
be performed, while in the latter, only one prestation is agreed but
the debtor is given the right to perform another in substitution of
the one agreed upon.
§105.00
Illustration of alternative obligations
In Chavez v. Public Estate Authority,125 the Court ruled that
the joint venture agreement for the transfer to Amari of reclaimed
lands or to be reclaimed from the sea was null and void, because
the same violated the Constitution and the object of the agreement
— reclaimed land, is beyond the commerce of men. Justice YnaresSantiago, dissented, and said dissent is worth analyzing in light of
Civil Code provisions on alternative obligations, thus:
“We must remember that the Amended JVA is a contract and, as such, is governed by the Civil Code provisions on Contracts, the essential requisites of which are
laid out in the following provision:
Art. 1318. There is no contract unless the
following requisites concur:
(1)
Consent of the contracting parties;
(2) Object certain which is the subject
matter of the contract;
(3) Cause of the obligation which is
established.
124
125
Quizana v. Redugerio, 94 Phil. 922 [1954].
G.R. No. 133250, July 9, 2002.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
117
The main decision states that the Amended JVA is
void because its “object” is contrary law, morals, good customs, public order or public policy, and that the “object” is
also outside the commerce of man, citing as authority Article 1409 of the Civil Code. However, it has been opined,
and persuasively so, that the object of a contract is either the thing, right or service which is the subject matter of the obligation arising from the contract.126 In other
words, the object of the contract is not necessarily a physical thing that by its very nature cannot be the subject of
a contract. The object of a contract can, as it appears so
in this case, contemplates a service. I submit, therefore,
that the object herein is not the reclaimed land, x x x. The
proper object is the service that was to be rendered by
Amari, which is the act of reclamation. Surely, reclamation, in and of itself, is neither contrary to law, morals,
good customs, public order nor to public policy. The act of
reclamation is most certainly not outside the commerce of
man. x x x
Furthermore, in Section 1.1(g) of the Amended JVA,
the term “Joint Venture Proceeds” is defined as follows:
“Joint Venture Proceeds” shall refer to
all proceeds, whether land or money or their
equivalent arising from the project or from the
sale, lease or any other form or disposition or
from the allocation of the Net Usable Area of
the Reclamation Area.
It is actually upon this provision of the Amended
JVA that its validity hinges. If it is the contemplated
transfer of lands of the public domain to private corporation which renders the Amended JVA constitutionally
infirm, then resort to the alternative prestation referred
to in this provision will cure the contract. The Civil Code
provision on alternative obligations reads as follows:
Art. 1199. A person alternatively bound by
different prestations shall completely perform
one of them.
126
IV TOLENTINO, Commentaries and Jurisprudence on the Civil Code of the
Philippines (Quezon City, 1991), p. 520.
118
OBLIGATIONS AND CONTRACTS
The creditor cannot be compelled to receive
part of one and part of the other undertaking.
In an alternative obligation, there is more than one
object, and the fulfillment of one is sufficient, determined
by the choice of the debtor who generally has the right of
election.127 From the point of view of Amari, once it fulfills
its obligations under the Amended JVA, then it would be
entitled to its stipulated share of the Joint Venture Profits.
In this instance, Amari would stand as creditor, with PEA
as the debtor who has to choose between two payment
forms: 70% of the Joint Venture Profits, in the form of
cash or a corresponding portion of the land reclaimed.
Since it has been ruled that the transfer of any of the
reclaimed lands to Amari would be unconstitutional, one
of the prestations of this alternative obligation has been
rendered unlawful. In such case, the following Civil Code
provision becomes pertinent:
Art. 1202. The debtor shall lose the right of
choice when among the prestations whereby he
is alternatively bound, only one is practicable.
If all the prestations, except one, are impossible
or unlawful, it follows that the debtor can choose and
perform only one. The obligation ceases to be alternative,
and is converted into a simple obligation to perform the
only feasible or practicable prestation. Even if PEA had
insisted on paying Amari with tracts of reclaimed land,
it could not have done so, since it had no right to choose
undertakings that are impossible or illegal.128
We must also remember that, in an alternative
obligation, the fact that one of the prestations is found
to be unlawful does not result in the total nullity of the
amended JVA. The Civil Code provides:
Art. 1420. In case of a divisible contract,
if the illegal terms can be separated from the
legal ones, the latter may be enforced.
As a general rule, Article 1420 is applied if there are
several stipulations in the contract, some of which are
127
128
Id., p. 203.
Legarda v. Miailhe, 88 Phil. 637 [1951].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
119
valid and some void. If the stipulations can be separated
from each other, then those which are void will not have
any effect, but those which are valid will be enforced. In
case of doubt, the contract must be considered as divisible
or separable. The contract itself provides for severability
in case any of its provisions are deemed invalid.”
SECTION 4. — Joint and Solidary Obligations
§106.00 Joint obligation, defined
Art. 1207. The concurrence of two or more
creditors or of two or more debtors in one and the
same obligation does not imply that each one of
the former has a right to demand, or that each one
of the latter is bound to render, entire compliance
with the prestation. There is a solidary liability only
when the obligation expressly so states, or when
the law or the nature of the obligation requires
solidarity. (1137a)
Art. 1208. If from the law, or the nature or the
wording of the obligations to which the preceding
article refers the contrary does not appear, the
credit or debt shall be presumed to be divided into
as many shares as there are creditors or debtors,
the credits or debts being considered distinct from
one another, subject to the Rules of Court governing
the multiplicity of suits. (1138a)
Joint obligation is one in which each of the debtors is liable only
for a proportionate part of the debt, and each creditor is entitled only
to a proportionate part of the credit. Hence, each creditor can recover
only his share of the obligation, and each debtor can be made to pay
only his part.129 It presupposes that there be two or more debtors.
§107.00 Solidary obligation, defined
There is a solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation requires
solidarity.
129
Quisumbing v. CA, 189 SCRA 325 [1990].
120
OBLIGATIONS AND CONTRACTS
A solidary obligation is one in which each debtor is liable for
the entire obligation, and each creditor is entitled to demand the
whole obligation. Hence, a creditor may enforce the entire obligation,
and each debtor may be obligated to pay it in full. It may also be
referred to as joint and several obligation130 or individually and
jointly.131 A solidary obligation is also known as joint and several.132
It presupposes that there are two or more creditors.
The joint or solidary obligation requires a plurality of subjects,
two or more debtors or two or more creditors or both debtors and
creditors. The rule has no application where there is only one debtor
and one creditor.133
As distinguished from a joint obligation where each of the
debtors is liable only for a proportionate part of the debt and the
creditor is entitled only to a proportionate part of the credit, in a
solidary obligation the creditor may enforce the entire obligation
against one of the debtors.134
The Court in a case ruled:
“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.
In a joint obligation each obligor answers only for a part
of the whole liability and to each obligor belongs only a
part of the correlative rights.
Well-entrenched is the rule that solidary obligation
cannot lightly be inferred. 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.”135
Ibid.
Ronquillo v. CA, 132 SCRA 274 [1984].
132
Ibid.
133
Abella v. Co Bun Kim, 100 Phil. 1019 [1957].
134
Imperial Insurance, Inc. v. David, 133 SCRA 317 [1984].
135
Industrial Management International Dev. Corp. v. NLRC, 331 SCRA 640,
646-647 [2000].
130
131
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
121
§108.00 Solidary obligation may not be lightly inferred
In Solidbank Corp. v. Mindanao Ferroalloy Corp.,136 the Court
held that solidary liability may not be lightly inferred.
“Moreover, it is axiomatic that solidary liability
cannot be lightly inferred. Under Article 1207 of the Civil
Code, “there is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
obligation requires solidarity.” Since solidary liability is
not clearly expressed in the Promissory Note and is not
required by law or the nature of the obligation in this
case, no conclusion of solidary liability can be made.
Furthermore, nothing supports the alleged joint liability of the individual petitioners because, as correctly
pointed out by the two lower courts, the evidence shows
that there is only one debtor: the corporation. In a joint
obligation, there must be at least two debtors, each of
whom is liable only for a proportionate part of the debt;
and the creditor is entitled only to a proportionate part of
the credit.
Moreover, it is rather late in the day to raise the alleged joint liability, as this matter has not been pleaded
before the trial and the appellate courts. Before the lower
courts, petitioner anchored its claim solely on the alleged
joint and several (or solidary) liability of the individual
respondents. Petitioner must be reminded that an issue
cannot be raised for the first time on appeal, but seasonably in the proceedings before the trial court.
So too, the Promissory Note in question is a negotiable instrument. Under Section 19 of the Negotiable Instruments Law, agents or representatives may sign for
the principal. Their authority may be established, as in
other cases of agency. Section 20 of the law provides that
a person signing “for and on behalf of a [disclosed] principal or in a representative capacity x x x is not liable on
the instrument if he was duly authorized.”
The authority of Respondents Cu and Hong to sign
for and on behalf of the corporation has been amply estab136
464 SCRA 409 [2005].
122
OBLIGATIONS AND CONTRACTS
lished by the Resolution of Minfaco’s Board of Directors,
stating that “Atty. Ricardo P. Guevara (President and
Chairman), or Ms. Teresita R. Cu (Vice President), acting
together with Mr. Jong Won Hong (Vice President), be as
they are hereby authorized for and in behalf of the Corporation to: 1. Negotiate with and obtain from (petitioner)
the extension of an omnibus line in the aggregate of P30
million x x x; and 2. Execute and deliver all documentation necessary to implement all of the foregoing.”
Further, the agreement involved here is a “contract
of adhesion,” which was prepared entirely by one party
and offered to the other on a “take it or leave it” basis. Following the general rule, the contract must be read against
petitioner, because it was the party that prepared it, more
so because a bank is held to high standards of care in the
conduct of its business.
In the totality of the circumstances, we hold that
Respondents Cu and Hong clearly signed the Note merely
as representatives of Minfaco.
It is also a settled doctrine that when a final judgment
does not provide that the defendants are liable jointly
and severally to pay the obligations, none of them may
be compelled to satisfy in full said judgment, even if the
contract upon which said judgment was based provided
for a solidary obligation, for the judgment having become
final the same became immutable and unalterable and
any amendment by the court or the sheriff making the
obligation solidary is null and void.137
§109.00 Joint and several liability; husband and wife
The wife may exercise any profession, occupation or engage in
business without the consent of the husband. Hence, the husband
cannot be held jointly and severally liable for any obligation that she
may be held liable in her contractual obligations, pursuant to the
principle that contracts produce effect only as between the parties
who execute them.138
137
Industrial Management International Dev. Corp. v. NLRC, 331 SCRA 640
[2000].
138
Go v. CA, 272 SCRA 752 [1997].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
123
§110.00 Joint liability cannot be converted into solidary by
admission
Where the contract provides for the liability of two or more
debtors as joint, their admission in their brief that their liability is
a solidary one does not convert the joint character of their obligation
into solidary. For what determines the nature of the obligation is the
tenor of the obligation itself and not the admission of the parties.139
§111.00 Principles of joint and several liability
In Lagarge Cement Phil., Inc. v. Continental Cement Corp.,140
the Court discussed at length the nature of a joint liability and a
joint and several liability:
“We have assiduously maintained this legal principle
as early as 1912 in Worcester v. Ocampo, in which we
held:
“x x x The difficulty in the contention of the appellants
is that they fail to recognize that the basis of the present
action is tort. They fail to recognize the universal doctrine
that each joint tortfeasor is not only individually liable for
the tort in which he participates, but is also jointly liable
with his tortfeasors. x x x
“It may be stated as a general rule that joint
tortfeasors are all the persons who command, instigate,
promote, encourage, advise, countenance, cooperate in, aid
or abet the commission of a tort, or who approve of it after
it is done, if done for their benefit. They are each liable as
principals, to the same extent and in the same manner as
if they had performed the wrongful act themselves. x x x
“Joint tortfeasors are jointly and severally liable for
the tort which they commit. The persons injured may sue
all of them or any number less than all. Each is liable
for the whole damages caused by all, and all together are
jointly liable for the whole damage. It is no defense for
one sued alone, that the others who participated in the
wrongful act are not joined with him as defendants; nor is
139
140
Tiu v. CA, 228 SCRA 51 [1993].
G.R. No. 155173, Nov. 23, 2004.
124
OBLIGATIONS AND CONTRACTS
it any excuse for him that his participation in the tort was
insignificant as compared to that of the others. x x x
“Joint tortfeasors are not liable pro rata. The damages cannot be apportioned among them, except among
themselves. They cannot insist upon an apportionment,
for the purpose of each paying an aliquot part. They are
jointly and severally liable for the whole amount. x x x
“A payment in full for the damage done, by one of the
joint tortfeasors, of course satisfies any claim which might
exist against the others. There can be but satisfaction.
The release of one of the joint tortfeasors by agreement
generally operates to discharge all. x x x
“Of course the court during trial may find that some
of the alleged tortfeasors are liable and that others are
not liable. The courts may release some for lack of evidence while condemning others of the alleged tortfeasors.
And this is true even though they are charged jointly and
severally.”
In a “joint” obligation, each obligor answers only for
a part of the whole liability; in a “solidary” or “joint and
several” obligation, the relationship between the active
and the passive subjects is so close that each of them
must comply with or demand the fulfillment of the whole
obligation. The fact that the liability sought against the
CCC is for specific performance and tort, while that sought
against the individual respondents is based solely on tort
does not negate the solidary nature of their liability for
tortuous acts alleged in the counterclaims. Article 1211 of
the Civil Code is explicit on this point:
“Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.”
The solidary character of respondents’ alleged
liability is precisely why credence cannot be given to petitioners’ assertion. According to such assertion, Respondent CCC cannot move to dismiss the counterclaims on
grounds that pertain solely to its individual co-debtors. In
cases filed by the creditor, a solidary debtor may invoke
defenses arising from the nature of the obligation, from
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
125
circumstances personal to it, or even from those personal
to its co-debtors.”
§112.00 The general rule and exception in joint or solidary obligations
Art. 1209. If the division is impossible, the right
of the creditors may be prejudiced only by their
collective acts, and the debt can be enforced only
by proceeding against all the debtors. If one of the
latter should be insolvent, the others shall not be
liable for his share. (1139)
Art. 1210. The indivisibility of an obligation
does not necessarily give rise to solidarity. Nor
does solidarity of itself imply indivisibility. (n)
Art. 1211. Solidarity may exist although the
creditors and the debtors may not be bound in the
same manner and by the same periods and conditions. (1140)
Art. 1212. Each one of the solidary creditors
may do whatever may be useful to the others, but
not anything which may be prejudicial to the latter. (1141a)
Art. 1213. A solidary creditor cannot assign his
rights without the consent of the others. (n)
Art. 1214. The debtor may pay any one of the
solidary creditors; but if any demand, judicial or
extrajudicial, has been made by one of them, payment should be made to him. (1142a)
The general rule is that the concurrence of two or more creditors
or of two or more debtors in one and the same obligation does not
imply that each one of the former has a right to demand, or that
each one of the latter is bound to render, entire compliance with
the prestation. The presumption is that the liability of two or more
debtors or the claim of two or more creditors is joint. For instance,
two or more persons executed a contract, and no words are used to
make each liable for the full amount, the liability is joint, each being
liable only for a proportionate amount of the contract.141
141
Pimentel v. Gutierrez, 14 Phil. 49.
126
OBLIGATIONS AND CONTRACTS
If from the law or the nature of the wording of the obligation
the contrary does not appear, an obligation is presumed to be only
joint, and the debt is divided into as many equal shares as there are
debtors, each debt being considered distinct from one another.142
The exceptions to the general rule are:
1.
When the obligation expressly so states. Thus, where two
persons signed a promissory note, promising to pay the debt jointly
and severally, their obligation is solidary, and the creditor can
demand payment for the whole amount from either or both of them.
Similarly, where an instrument containing the words “I”, “We” or
“Either of us” promise to pay is signed by two or more persons, they
are deemed to be jointly and severally liable on the instrument.143
Where a document signed by several persons stipulated that they
are individually and jointly liable, it means that they are severally
liable or the obligation can be enforced against one of the numerous
obligors.144
2.
There is a solidary liability when the law so requires.
Thus, the law makes the liability of co-participants in a crime or
quasi-delict solidary.
3.
There is also solidary liability when by its very nature the
obligation requires solidarity. Obligations arising from tort are, by
their very nature, always solidary.145
§113.00 Defenses available to one inures to benefit of other
solidary debtors
Article 1222 of the Civil Code provides:
“A solidary debtor may, in actions filed by the creditor, avail itself 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.”
Alipio v. CA, 341 SCRA 441, 449 [2000].
Republic Planters Bank v. CA, 216 SCRA 738 [1992].
144
Ronquillo v. CA, 132 SCRA 274 [1984].
145
Lafarge Cement Philippines, Inc. v. Continental Cement Corp., 443 SCRA
522 [2004].
142
143
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
127
The act of a solidary debtor — that of filing a motion to dismiss
the counterclaim on grounds that pertain only to its individual codebtors — is allowed.146
Where only one or two solidary debtors appealed the adverse
judgment and secured favorable decision, releasing the appellants
from liability, said favorable decision inures to the benefit of the
solidary debtors who did not appeal. When the obligation of the
other solidary debtors is so dependent on that of their co-solidary
debtors, the release of one who appealed provided it be not on
grounds personal to such appealing appellant operates as well as to
the others who did not appeal, and such favorable decision can be
invoked as res judicata by the other solidary debtors.147
§114.00 Secondary and subsidiary liability
Secondary liability is a personal liability which attaches when
the remedy against one primarily liable has been exhausted, and
which may be satisfied from all assets of one secondarily liable.148
The subsidiary liability of an employer under Art. 103 of the
Revised Penal Code requires: (a) the existence of an employeremployee relationship; (b) that the employer is engaged in some
kind of industry; (c) that the employee is adjudged guilty of the
wrongful act and found to have committed the offense in the
discharge of such duties; and (d) that said employee is insolvent.
The judgment of conviction of the employee concludes the employer
and the subsidiary liability may be enforced in the same criminal
case, but the employer should be heard on the conditions required
therefore by law.149 Such subsidiary liability may be enforced as part
of the execution proceedings against the employee in the criminal
case, after the employer shall have been heard, the employer being
in effect a party to the criminal case.150
A felony committed by their servants, pupils, workmen, apprentices, or employees in the discharge of their duties renders the
employers, teachers, persons and corporations, as the case may be,
subsidiarily liable. In the absence of collusion between the defen-
Ibid.
Universal Motors Corp. v. CA, 205 SCRA 448 [1992].
148
Enjay, Inc. v. NLRC, 245 SCRA 588 [1995].
149
Yonaha v. CA, 255 SCRA 397 [1996]; Carpio v. Doroja, 180 SCRA 1 [1990].
150
Carpio v. Doroja, Ibid.
146
147
128
OBLIGATIONS AND CONTRACTS
dant and the offended party, a judgment of conviction is conclusive
upon the person subsidiarily liable not only with regard to the civil
liability but also with regard to the amount thereof.151
A judgment of conviction against an employee for criminal
negligence is conclusive upon the employer not only with regard to
the latter’s civil liability but also with regard to its amount, and the
court has no power to amend or modify it. The enforcement of the
subsidiary liability is a part of the proceeding for the execution of
judgment.152
§115.00 Liability of business partnership and partners
Pursuant to Art. 1816 of the Civil Code, the liability of a business or commercial partnership, as distinguished from a professional law partnership, is primary. However, the liability of partners in
business or commercial partnership is subsidiary and pro-rata or
joint among all partners, whether or not all of them are sued.153 This
requires that there be, first, a final judgment holding the partnership liable, second, remedies for exhaustion of the properties of the
partnership by the creditor shall have been pursued and the same
yielded no partnership properties, and, third, each partner, in an
appropriate action, is held liable with his properties jointly with the
other partners after the partner is given opportunity to be heard.154
However, all partners in a business or commercial partnership
are liable jointly and severally with the partnership for wrongful acts
or fraud committed under Arts. 1822 and 1823 of the Civil Code.
§116.00 Liability of professional or law partnership
A professional partnership is an entirely different thing, whether or not the same is registered with the Securities and Exchange
Commission, specially a law partnership. For a law partnership,
unlike a business or commercial partnership, is not a legal entity,
which means it has no legal personality distinct and different from
the partners.155
151
152
Jocson v. Glorioso, 22 SCRA 316 [1968].
Pajarito v. Seneris, 97 SCRA 275 [1979]; Alvarez v. CA, 158 SCRA 57
[1988].
Co-Pitco v. Yulo, 8 Phil. 544.
Cf. Siguan v. Lim, 318 SCRA 725 [1999].
155
In re petition to continue use of Law Firm Name, 92 SCRA 1 [1979].
153
154
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
129
A professional law partnership is not even a taxpayer, unlike
a commercial or business partnership, whether or not the professional partnership is registered, as the taxpayers in a professional
partnership are the individual partners based on their respective
distributive shares, which are the ones taxable.156 Their liabilities
with respect to contracts would thus depend upon their individual
and actual performance of acts upon which liability may arise, such
that those who did not participate therein cannot be held liable, except as may have otherwise been stipulated by them. This rule is a
logical result of the doctrine that no one shall be prejudiced by the
act or omission by another.
The reason why a partnership in the practice of law is not a
legal entity and is different from a partnership formed for trade or
business or for holding property is that law is a profession and a law
profession is not a trade nor a business, thus:
The law as a profession proceeds from the basic premise that
membership in the bar is a privilege burdened with conditions and
carries with it the responsibility to live up to its exacting standards
and honored traditions. A person enrolled in its ranks is called
upon to aid in the performance of one of the basic purposes of the
State — the administration of justice.157 That the practice of law is a
profession explains why lawyers of repute and of eminence welcome
their designation as counsel de oficio, as an opportunity to manifest
fidelity to the concept that law is a profession.158
The law must be thought of as ignoring commercial standards of
success. The lawyer’s conduct is to be measured not by the standards
of trade and counting house but by those of his profession. The Code
of Professional Responsibility, particularly the ethical rule against
advertising or solicitation of professional employment, rests on the
fundamental postulate that the practice of law is a profession.159
In the matter of fixing his fees, an attorney should never forget
that “the profession is a branch of the administration of justice
and not a mere money-making trade’’160 and that his standing as a
member of the bar “is not enhanced by quibbling relative to just fees,
Tan v. Del Rosario, Jr., 237 SCRA 324, 333-334 [1994].
Ledesma v. Climaco, 57 SCRA 473 [1974].
158
People v. Rosqueta, Jr., 55 SCRA 486 [1974]; Ledesma v. Climaco, supra.
159
Re Rothman, 12 NJ 528, 97 A2d 627, 39 ALR2d 1032 [1953].
160
Canon 12, Canons of Professional Ethics; Jayme v. Baulan, 58 Phil. 422
[1935].
156
157
130
OBLIGATIONS AND CONTRACTS
equivalent to the bargaining between a prospective purchaser and
a merchant in the market before a sale is made.’’161 Law advocacy is
not capital that yields profits. The returns are simple rewards for a
job done or service rendered. It is a calling that, unlike mercantile
pursuits which enjoy a greater deal of freedom from government
interference, is impressed with public interest, for which it is
subject to State regulation.162 However, while the practice of law is a
profession and an attorney is primarily an officer of the court, he is
as much entitled to protection from the court against any attempt by
his client to escape payment of his just fees,163 as the client against
exaction by his counsel of excessive fees.164
To summarize, the primary characteristics which distinguish
the legal profession from business are:
(a) “a duty of public service, of which emolument
is a by-product, and in which one may attain the highest
eminence without making much money’’;
(b) “a relation as officer of the court to the administration of justice involving thorough sincerity, integrity,
and reliability’’;
(c) “a relation to client in the highest degree fiduciary’’; and
(d) “a relation to colleagues at the bar characterized
by candor, fairness, and unwillingness to resort to current
business methods of advertising and encroachment on
their practice, or dealing directly with their clients.’’165
§117.00 Effects of other acts or omissions of solidary creditors or
solidary debtors
Articles 1215 to 2222 of the Civil Code provide for the effects of
acts or omissions by a solidary debtor or by solidary creditor.
Arce v. Philippine National Bank, 62 Phil. 569, 571.
Canlas v. Court of Appeals, 164 SCRA 160 [1989]; Metropolitan Bank &
Trust Co. v. Court of Appeals, 181 SCRA 367 [1990].
163
Albano v. Coloma, 21 SCRA 411 [1967]; Aro v. Nanawa, 27 SCRA 1090
[1969]; Fernandez v. Bello, 107 Phil. 1140 [1960].
164
Sta. Maria v. Tuason, 11 SCRA 562 [1964]; Gorospe v. Gochangco, 106 Phil.
425 [1959]; In re Booram, 39 Phil. 247 [1918].
165
In re Sycip, 92 SCRA 1 [1979], quoting H.S. DRINKER, Legal Ethics [1953], 4.5;
see also RUBEN E. AGPALO, Comments on the Code of Professional Responsibility and
The Code of Judicial Conduct, 2004 ed., pp 3-5.
161
162
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
Art. 1215. Novation, compensation, confusion
or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors,
shall extinguish the obligation, without prejudice
to the provisions of Article 1219.
The creditor who may have executed any of
these acts, as well as he who collects the debt, shall
be liable to the others for the share in the obligation corresponding to them. (1143)
Art. 1216. The creditor may proceed against
any one of the solidary debtors or some or all of
them simultaneously. The demand made against
one of them shall not be an obstacle to those which
may subsequently be directed against the others,
so long as the debt has not been fully collected.
(1144a)
Art. 1217. Payment made by one of the solidary
debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may
choose which offer to accept.
He who made the payment may claim from
his co-debtors only the share which corresponds
to each, with the interest for the payment already
made. If the payment is made before the debt is
due, no interest for the intervening period may be
demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the
debtor paying the obligation, such share shall be
borne by all his co-debtors, in proportion to the
debt of each. (1145a)
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. (n)
Art. 1219. The remission made by the creditor
of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had
131
132
OBLIGATIONS AND CONTRACTS
been totally paid by anyone of them before the remission was effected. (1146a)
Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does
not entitle him to reimbursement from his co-debtors. (n)
Art. 1221. If the thing has been lost or if 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.
If through a fortuitous event, the thing is lost
or the performance has become impossible after
one of the solidary debtors has incurred in delay
through the judicial or extrajudicial demand upon
him by the creditor, the provisions of the preceding
paragraph shall apply. (1147a)
§118.00 Instances of solidary obligation
Section 17(g) of the Negotiable Instrument Law provides that
where the instrument containing the words “I promise to pay” is
signed by two or more persons, they are to be jointly and severally
liable thereto. This provision, read in relation to Article 1216 of the
Civil Code, means that the payee is entitled to hold any one or two of
the signers of the promissory note liable for payment of the amount
of the note, and the fact that one of the co-makers already died when
the complaint was filed did not preclude the payee from suing and
holding the other co-maker liable therefor.166
In a case, the Court held:
“Under the Negotiable Instruments Law, persons
who write their names on the face of promissory notes
are makers and are liable as such. By signing the notes,
166
PNB v. Concepcion Mining Co., Inc., 5 SCRA 745 [1962].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
133
the maker promises to pay to the order of the payee or
any holder according to the tenor thereof. Based on the
above provisions of law, there is no denying that private
respondent Fermin Canlas is one of the co-makers of the
promissory notes. As such, he cannot escape liability
arising therefrom.
Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are
deemed to be jointly and severally liable thereon. An instrument which begins with “I,” :We,” or “Either of use”
promise to pay, when signed by two or more persons,
makes them solidarily liable. The fact that the singular
pronoun is used indicates that the promise is individual
as to each other; meaning that each of the co-maker is
deemed to have made an independent singular promises
to pay the notes in full.”167
The three promissory notes uniformly provide:
“FOR VALUE RECEIVED, I/We jointly, severally and
solidarily, promise to pay to PHILTRUST BANK or
order...” An instrument which begins with “I”, “We”, or
“Either of us” promise to pay, when signed by two or
more persons, makes them solidarily liable. Also, the
phrase “joint and several” binds the makers jointly and
individually to the payee so that all may be sued together
for its enforcement, or the creditor may select one or more
as the object of the suit. Having signed under such terms,
the maker assumed the solidary liability of a debtor, and
the creditor may choose to enforce the notes against him
alone or jointly with other parties who signed the same
solidarily.168
§119.00 Surety’s liability is solidary
A surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the obligation of
the latter, and that liabilities are interwoven as to be inseparable.
Although the contract of surety is in essence secondary only to a
Republic Planters Bank v. Court of Appeals, 216 SCRA 738, 744 [1992].
Astro Electronics Corp. v. Phil. Export and Foreign Loan Guarantee Corp.,
Sept. 23, 2003.
167
168
134
OBLIGATIONS AND CONTRACTS
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 obligation nor does he receive any benefit therefrom. The creditor
may proceed against only one of the solidary debtors.169
In Western Guaranty Corp. v. Ranada,170 the Court held that
the liability of a surety is several:
By the very nature of its being the surety of the
defendants, WGC is bound to answer for the obligations
of Lourdes Zambrano Korshak and LZK Holdings and
Development Corporation. While the contract of a surety
is in essence secondary only to a valid principal obligation,
the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over
the obligations nor does he receive any benefit therefrom.
Thus, it has been stressed that while the surety contract is
secondary to the principal obligation, the surety assumes
liability as a regular party to the undertaking.
Thus, there is no need to implead WGC as a defendant
before it may be made to answer for its obligation. Neither
is there a need for a directive from the trial court for WGC
to be liable on the performance bond it issued. The surety’s
liability to the creditor or promisee of the principal is said
to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal, and the
creditor may proceed against such solidary debtor. (Ibid.)
§120.00 Mortgagor not solidarily liable with borrower
Where a contract of loan evidenced by a promissory note is
signed only the borrower, a third person who executed a mortgage to
secure payment of the loan is not solidarily liable with the borrower,
as he answers only when the mortgaged property is foreclosed. The
mortgagor does not become a co-debtor, jointly and severally liable
with the principal debtor. There is no legal provision nor jurisprudence which makes a third person who secures the fulfillment of
another’s obligation by mortgaging his own property to be solidarily bound with the principal obligor. The fact that a mortgage is an
169
170
Molina v. Security Diners International Corp., 363 SCRA 358 [2001].
G.R. No. 171173, June 14, 2006.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
135
accessory contract does not, by such fact alone, make a third-party
mortgagor solidarily bound with the principal debtor in fulfilling the
principal obligation to pay the loan. It is only upon the default of
the latter that the creditor has recourse on the mortgagor by foreclosing the mortgaged property in lieu of an action for the recovery of the amount of the loan. And the liability of the third-party
mortgagor extends only to the property mortgaged. Should there be
any deficiency, the creditor has recourse only against the principal
debtor.171
SECTION 5. — Divisible and Indivisible
Obligations
Art. 1223. The divisibility or 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. (1149)
Art. 1224. A joint indivisible obligation gives
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 not 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. (1150)
Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance
shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible
of partial performance, it shall be divisible.
However, even though the object or service
may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties.
171
Cerna v. CA, 220 SCRA 517 [1993].
136
OBLIGATIONS AND CONTRACTS
In obligations not to do, divisibility or indivisibility shall be determined by the character of the
prestation in each particular case. (1151a)
§121.00 General rule on divisibility and indivisibility
An obligation is divisible if it can be performed in parts or
there can be partial performance; conversely, it is indivisible if it
can only be performed in whole, and the obligee can refuse part
performance.
The divisibility or indivisibility of obligation may be conventional or by agreement of the parties. For instance, in a construction
contract, the parties may agree on a stage-by-stage contraction and
payment; this agreement contemplates divisible obligation.172
On the other hand, the law may provide for indivisibility of
obligation. Thus, Articles 2089 and 2090 of the Civil Code provide:
Art. 2089. A pledge or mortgage is indivisible,
even though the debt may be divided among
the successors in interest of the debtor or of the
creditor.
Therefore, the debtor’s heir who has paid a
part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long
as the debt is not completely satisfied.
Neither can the creditor’s heir who received
his share of the debt return the pledge or cancel
the mortgage, to the prejudice of the other heirs
who have not been paid.
From these provisions is expected the case in
which, there being several things given in mortgage
or pledge, each one of them guarantees only a
determinate portion of the credit.
The debtor, in this case, shall have a right
to the extinguishment of the pledge or mortgage
as the portion of the debt for which each thing is
specially answerable is satisfied. (1860)
172
Pasay City Government v. CFI of Manila, 132 SCRA 156 [1984].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
137
Art. 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are
not solidarily liable. (n)
§122.00 Where obligation is divisible, nullity of one prestation
does not nullify the whole obligation
If the obligation is divisible, consisting of two or more gestations,
the invalidity of one does not render the other invalid, and the latter
can be enforced. For instance, in a contract of loan, with interest, if
the interest stipulated is usurious and therefore null and void, the
nullity of the usurious interest does not affect the validity of the
principal loan and the same can be enforced.173
§123.00 Where obligation is indivisible, nullity of one prestation
extends to the other prestations
On the other hand, if the obligation is indivisible, the invalidity
of one provision extends to the other provision and nullifies the whole
obligation. Metropolitan Bank v. SLGT Holdings, Inc.,174 illustrates
this rule. The Court ruled:
Given the foregoing perspective, the next question
to be addressed turns on whether or not the nullity (of
the mortgage for not having been approved by Housing
and Land Use Regulatory Board [HLURB]) extends to the
entire mortgage contract.
The poser should be resolved, as the CA and OP did
resolve it, in the affirmative. This disposition stems from
the basic postulate that a mortgage contract is, by nature,
indivisible. Consequent to this feature, a debtor cannot ask
for the release of any portion of the mortgaged property
or of one or some of the several properties mortgaged
unless and until the loan thus secured has been fully
paid, notwithstanding the fact that there has been partial
fulfillment of the obligation. Hence, it is provided that the
debtor who has paid a part of the debt cannot ask for the
proportionate extinguishments of the mortgage as long as
the debt is not completely satisfied.
173
174
Angel Jose Merchandising Co. v. Chalda Enterprises, 23 SCRA 119 [1968].
G.R. No. 175181, Sept. 14, 2007.
138
OBLIGATIONS AND CONTRACTS
The situation obtaining in the case at bench is within
the purview of the aforesaid rule on the indivisibility of
mortgage. It may be that Section 18 of PD 957 allows
partial redemption of the mortgage in the sense that
the buyer is entitled to pay his installment for the lot or
unit directly to the mortgagee so as to enable him — the
said buyer — to obtain title over the lot or unit after full
payment thereof. Such accommodation statutorily given
to a unit/lot buyer does not, however, render the mortgage
contract also divisible. Generally, the divisibility of the
principal obligation is not affected by the indivisibility
of the mortgage. The real estate mortgage voluntarily
constituted by the debtor (ASB) on the lots or units is
one and indivisible. In this case, the mortgage contract
executed between ASB and the petitioner banks is
considered indivisible, that is, it cannot be divided among
the different buildings or units of the Project. Necessarily,
partial extinguishment of the mortgage cannot be allowed.
In the same token, the annulment of the mortgage is an all
or nothing proposition. It cannot be divided into valid or
invalid parts. The mortgage is either valid in its entirety
or not valid at all. In the present case, there is doubtless
only one mortgage to speak of. Ergo, a declaration of
nullity for violation of Section 18 of PD 957 should result
to the mortgage being nullified wholly.
But even if a mortgage is, by nature, indivisible, the parties may
agree on partial release of the mortgage corresponding the payment
of part of the obligation secured by the mortgage. This means that
the parties may modify the indivisibility by mutual agreement of the
parties.175
SECTION 6. — Obligations with a Penal Clause
§124.00 Penalty clause defined
Art. 1226. In obligations with a penal clause,
the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the con175
Ibid.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
139
trary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions of
this Code. (1152a)
A penalty clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled.
As a rule, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-performance, except
when there is a stipulation to the contrary; when the obligor is sued
for refusal to pay the agreed penalty; and when the obligor is guilty
of fraud.176
§125.00 Functions and purposes of penalty clause
A penal clause in a contract is an accessory undertaking to
assume greater liability in case of breach of contract. It has a double
function:
(1)
to provide for liquidated damages; and
(2) to strengthen the coercive force of the obligation by the
threat of greater responsibility in the event of breach.177
A penal clause is intended to prevent the obligor from defaulting
in the performance of his obligation, for if there is default the penalty
may be enforced.178
A penalty clause in a contract is not limited to actual or compensatory damages. Its purpose is usually to create an effective deterrent against breach of the obligation, by making the consequences
of such breach as onerous as it may be possible.179
Country Bankers, Ins. Corp. v. CA, 201 SCRA 458 [1991].
Florentino v. Supervalue, Inc., G.R. No. 172384, Sept. 12, 2007.
178
SSS v. Moonwalk Dev. and Housing Corp., 221 SCRA 119 [1993].
179
Yulo v. Chan Pe, 101 Phil. 134 [1957].
176
177
140
OBLIGATIONS AND CONTRACTS
§126.00 Penalty has to be expressly provided
A penalty has to be expressly provided in the contract, otherwise it cannot be imposed. In Filinvest Land, Inc. v. CA,180 the Court
ruled:
A penal clause is an accessory undertaking to
assume greater liability in case of breach. It is attached
to an obligation in order to insure performance and has
a double function: (1) to provide for liquidated damages;
and (2) to strengthen the coercive force of the obligation by
the threat of greater responsibility in the event of breach.
Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of interests
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.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
As a general rule, courts are not at liberty to ignore
the freedom of the parties to agree on such terms and
conditions as they see fit as long as they are not contrary
to law, morals, good customs, public order or public policy.
Nevertheless, courts may equitably reduce a stipulated
penalty in the contract in two instances: (1) if the principal
obligation has been partly or irregularly complied; and
(2) even if there has been no compliance if the penalty is
iniquitous or unconscionable in accordance with Article
1229 of the Civil Code which provides:
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.
180
470 SCRA 260 [2005].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
141
§127.00 Kinds of penalty clauses
There are two kinds of penalty clauses. The first is one in which
the penalty is imposed essentially as penalty in case of breach of
contract, and the second is that in which the penalty is imposed
as indemnity for damages in cases where there has been neither
partial nor irregular compliance.
In Filinvest Land, Inc. v. CA,181 the Court held:
“The Supreme Court in Laureano instructed that a
distinction between a penalty clause imposed essentially
as penalty in case of breach and a penalty clause imposed
as indemnity for damages should be made in cases where
there has been neither partial nor irregular compliance
with the terms of the contract. In cases where there has
been partial or irregular compliance, as in this case, there
will be no substantial difference between a penalty and
liquidated damages insofar as legal results are concerned.
The distinction is thus more apparent than real especially
in the light of certain provisions of the Civil Code of the
Philippines which provides in Articles 2226 and Article
2227 thereof:
Art. 2226. Liquidated damages are those
agreed upon by the parties to a contract to be
paid in case of breach thereof.
Art. 2227. Liquidated damages, whether
intended as an indemnity or a penalty, shall
be equitably reduced if they are iniquitous or
unconscionable.
Thus, we lamented in one case that “(t)here is no justification for the Civil Code to make an apparent distinction between a penalty and liquidated damages because
the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are
concerned and that either may be recovered without the
necessity of proving actual damages and both may be reduced when proper.
181
470 SCRA 260 [2005].
142
OBLIGATIONS AND CONTRACTS
In a lease contract, the parties may stipulate that
in case of breach thereof, the lessee shall be liable for
the rentals corresponding to unexpired term, as penalty.
However, this rule applies only if the lease is rescinded,
and not if it is annulled.
With respect to the remaining sub-issue of future
rentals, Rios v. Jacinto is inapplicable, because the remedy resorted to by the lessors in that case was rescission,
not termination. The rights and obligations of the parties
in Rios were governed by Article 1659 of the Civil Code;
hence, the Court held that the damages to which the lessor was entitled could not have extended to the lessee’s
liability for future rentals.
Upon the other hand, future rentals cannot be
claimed as compensation for the use or enjoyment of
another’s property after the termination of a contract.
We stress that by abrogating the Contract in the present case, PPC released PAGCOR from the latter’s future
obligations, which included the payment of rentals. To
grant that right to the former is to unjustly enrich it at
the latter’s expense.
Liquidated damages are those agreed upon by the
parties to a contract, to be paid in case of a breach thereof.
Liquidated damages are identical to a penalty insofar
as legal results are concerned. Intended to ensure the
performance of the principal obligation, such damages are
accessory and subsidiary obligations. Since the principal
obligation was void, there was no contract that could
have been breached; thus, the stipulation on liquidated
damages provided therein was inexistent. The nullity of
the principal obligation carried with it the nullity of the
accessory obligation of liquidated damages. Since there is
no contract, where the contract is void, the injured party
may only recover through other sources of obligations
such as a law or a quasi-contract. A party recovering
through these other sources of obligations may not claim
liquidated damages, which is an obligation arising from a
contract.182
182
Menchavez v. Teves, Jr., 449 SCRA 380 [2005].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
143
In Pryce Corp. v. Phil. Amusement and Gaming Corp.,183 the
Court ruled that the payment of future rentals, when so stipulated,
may be part of the penalty clause:
However, it appears that Section XX(c) was intended
to be a penalty clause. That fact is manifest from a reading
of the mandatory provision under subparagraph (a) in
conjunction with subparagraph (c) of the Contract. A
penal clause is “an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a
special prestation (generally consisting in the payment of
a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled.”
Quite common in lease contracts, this clause functions to strengthen the coercive force of the obligation and
to provide, in effect, for what could be the liquidated damages resulting from a breach. There is nothing immoral
or illegal in such indemnity/penalty clause, absent any
showing that it was forced upon or fraudulently foisted on
the obligor.
In obligations with a penal clause, the general rule
is that the penalty serves as a substitute for the indemnity for damages and the payment of interests in case of
noncompliance; that is, if there is no stipulation to the
contrary, in which case proof of actual damages is not necessary for the penalty to be demanded. There are exceptions to the aforementioned rule, however, as enumerated
in paragraph 1 of Article 1226 of the Civil Code: 1) when
there is a stipulation to the contrary; 2) when the obligor
is sued for refusal to pay the agreed penalty; and 3) when
the obligor is guilty of fraud. In these cases, the purpose
of the penalty is obviously to punish the obligor for the
breach. Hence, the obligee can recover from the former
not only the penalty, but also other damages resulting
from the nonfulfillment of the principal obligation.
In the present case, the first exception applies because Article XX(c) provides that, aside from the payment
of the rentals corresponding to the remaining term of the
lease, the lessee shall also be liable “for any and all dam183
G.R. No. 157480, May 6, 2005.
144
OBLIGATIONS AND CONTRACTS
ages, actual or consequential, resulting from such default
and termination of this contract.” Having entered into the
Contract voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It
cannot evade further liability for liquidated damages.”
§128.00 Reduction of Penalty
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. (1154a)
In certain cases, a stipulated penalty may nevertheless be
equitably reduced by the courts. This power is explicitly sanctioned
by Articles 1229 and 2227 of the Civil Code:
“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.”
“Art. 2227. Liquidated damages, whether intended
as an indemnity or a penalty, shall be equitably reduced
if they are iniquitous or unconscionable.”
The question of whether a penalty is reasonable or iniquitous
is addressed to the sound discretion of the courts. To be considered
in fixing the amount of penalty are factors such as — but not limited
to — the type, extent and purpose of the penalty; the nature of
the obligation; the mode of the breach and its consequences; the
supervening realities; the standing and relationship of the parties;
and the like.184
§129.00 Proof of damages not necessary
Art. 1228. Proof of actual damages suffered
by the creditor is not necessary in order that the
penalty may be demanded. (n)
184
Ibid.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
145
Where there is a penalty clause in a contract, proof of the
amount of damages or penalties may be dispensed with, the penalty
clause as to the measure of damages being sufficient. Thus, it has
been held that the penalty clause being sufficient to provide for what
could be liquidated damages resulting from the breach of contract
without the necessity of proof on the existence and on the measure
of damages caused by the breach.185
With a penalty clause, the Court in Florentino v. Supervalue,
Inc.,186 held that the obligor would then be bound to pay the stipulated
indemnity without the necessity of proof of the existence and the
measure of damages caused by the breach. Article 1226 of the Civil
Code states:
Art. 1226. In obligations with a penal clause, the
penalty shall substitute the indemnity for damages and
the payment of interests in case of noncompliance, 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.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.
§130.00 Factors taken into account to reduce penalty
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.
Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or
public policy, a stipulated penalty, nevertheless, may be equitably
reduced by the courts.187 The courts may thus equitably reduce a
stipulated penalty in the contracts in two instances:
Ligutan v. Court of Appeals, G.R. No. 138677, Feb. 12, 2002.
G.R. No. 172384, Sept. 12, 2007.
187
Ligutan v. Court of Appeals, Ibid.
185
186
146
OBLIGATIONS AND CONTRACTS
(1) if the principal obligation has been partly or irregularly
complied with; and
(2) even if there has been no compliance if the penalty is
iniquitous or unconscionable in accordance with Article 1229 of the
Civil Code.
Among the factors taken into account when the penalty is
reduced by the courts are: the same is iniquitous or unconscionable
or the principal obligation has been partly or irregularly complied
with. In Ligutan v. Court of Appeals,188 the Court explained the
factors taken into account in reducing the penalty:
(W)e pointed out that the question of whether a
penalty is reasonable or iniquitous can be partly subjective
and partly objective as its “resolution would depend on
such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the
supervening realities, the standing and relationship of
the parties, and the like, the application of which, by and
large, is addressed to the sound discretion of the court.”
In herein case, there has been substantial compliance
in good faith on the part of Pecorp which renders
unconscionable the application of the full force of the
penalty especially if we consider that in 1979 the amount
of P15,000.00 as penalty for delay per day was quite steep
indeed. Nothing in the records suggests that Pecorp’s
delay in the performance of 5.47% of the contract was due
to it having acted negligently or in bad faith. Finally, we
factor in the fact that Filinvest is not free of blame either
as it likewise failed to do that which was incumbent upon
it, i.e., it failed to pay Pecorp for work actually performed
by the latter in the total amount of P1,881,867.66. Thus,
all things considered, we find no reversible error in the
Court of Appeals’ exercise of discretion in the instant
case.
In Rizal Commercial Banking Corp. v. Court of Appeals,189 the
Court has tempered the penalty charges after taking into account the
188
189
Ibid.
289 SCRA 297.
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
147
debtor’s pitiful situation and its offer to settle the entire obligation
with the creditor bank. The stipulated penalty might likewise be
reduced when a partial or irregular performance is made by the
debtor. The stipulated penalty might even be deleted such as when
there has been substantial performance in good faith by the obligor,
when the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it.
In Pryce Corp. v. Phil. Amusement and Gaming Corp.,190 while
the Court affirmed the penalty clause in the form of amounts of
rental for the unexpired term of the lease, it however reduced the
amount thereof because of the circumstances obtaining, thus:
In this case, PAGCOR’s breach was occasioned by
events that, although not fortuitous in law, were in fact
real and pressing. From the CA’s factual findings, which
are not contested by either party, we find that PAGCOR
conducted a series of negotiations and consultations before
entering into the Contract. It did so not only with the PPC,
but also with local government officials, who assured it
that the problems were surmountable. Likewise, PAGCOR
took pains to contest the ordinances before the courts,
which consequently declared them unconstitutional. On
top of these developments, the gaming corporation was
advised by the Office of the President to stop the games
in Cagayan de Oro City, prompting the former to cease
operations prior to September 1993.
Also worth mentioning is the CA’s finding that PAGCOR’s casino operations had to be suspended for days on
end since their start in December 1992; and indefinitely
from July 15, 1993, upon the advice of the Office of President, until the formal cessation of operations in September 1993. Needless to say, these interruptions and stoppages meant that PAGCOR suffered a tremendous loss
of expected revenues, not to mention the fact that it had
fully operated under the Contract only for a limited time.
While petitioner’s right to a stipulated penalty is
affirmed, we consider the claim for future rentals to the
tune of P7,037,835.40 to be highly iniquitous. The amount
should be equitably reduced. Under the circumstances,
190
G.R. No. 157480, May 6, 2005.
148
OBLIGATIONS AND CONTRACTS
the advanced rental deposits in the sum of P687,289.50
should be sufficient penalty for respondent’s breach.
In Filinvest Land, Inc. v. CA,191 the Court sustained the reduction
of penalties because the amounts thereof were unconscionable:
In herein case, the trial court ruled that the penalty
charge for delay — pegged at P15,000.00 per day of delay
in the aggregate amount of P3,990,000.00 — was excessive
and accordingly reduced it to P1,881,867.66 “considering
the amount of work already performed and the fact that
[Filinvest] consented to three (3) prior extensions.” The
Court of Appeals affirmed the ruling but added as well
that the penalty was unconscionable “as the construction
was already not far from completion.” Said the Court of
Appeals:
Turning now to plaintiff’s appeal, We likewise agree
with the trial court that a penalty interest of P15,000.00
per day of delay as liquidated damages or P3,990,000.00
(representing 32% penalty of the P12,470,000.00 contract
price) is unconscionable considering that the construction
was already not far from completion. Penalty interests
are in the nature of liquidated damages and may be
equitably reduced by the courts if they are iniquitous or
unconscionable. (Garcia v. Court of Appeals, 167 SCRA 815;
Lambert v. Fox, 26 Phil. 588). 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
(Art. 1229, New Civil Code). Moreover, plaintiff’s right to
indemnity due to defendant’s delay has been cancelled by
its obligations to the latter consisting of unpaid works.
This Court finds no fault in the cost estimates
of the court-appointed commissioner as to the cost to
repair deficiency or defect in the works which was based
on the average between plaintiff’s claim of P758,080.37
and defendant’s P306,567.67 considering the following
factors: that “plaintiff did not follow the standard practice
191
470 SCRA 260 [2005].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
of joint survey upon take over to establish work already
accomplished, balance of work per contract still to be
done, and estimate and inventory of repair.” (Exhibit “H”)
As for the cost to finish the remaining works, plaintiff’s
estimates were brushed aside by the commissioner on the
reasoned observation that “plaintiff’s cost estimate for
work (to be) done by the plaintiff to complete the project
is based on a contract awarded to another contractor
(JPT), the nature and magnitude of which appears to be
inconsistent with the basic contract between defendant
PECORP and plaintiff FILINVEST.”
We are hamstrung to reverse the decision of the
Court of Appeals as it is rudimentary that the application
of Article 1229 is essentially addressed to the sound
discretion of the court. As it is settled that the project was
already 94.53% complete and that Filinvest did agree
to extend the period for completion of the project, which
extensions Filinvest included in computing the amount of
the penalty, the reduction thereof is clearly warranted.
The case of Laureano v. Kilayco decided in 1915
caution courts to distinguish between two kinds of penalty
clauses in order to better apply their authority in reducing
the amount recoverable. We held therein that:
[I]n any case wherein there has been a partial or
irregular compliance with the provisions in a contract for
special indemnification in the event of failure to comply
with its terms, courts will rigidly apply the doctrine of
strict construction against the enforcement in its entirety
of the indemnification, where it is clear from the terms of
the contract that the amount or character of the indemnity
is fixed without regard to the probable damages which
might be anticipated as a result of a breach of the terms
of the contract; or, in other words, where the indemnity
provided for is essentially a mere penalty having for its
principal object the enforcement of compliance with the
contract. But the courts will be slow in exercising the
jurisdiction conferred upon them in Article 1154 so as to
modify the terms of an agreement upon indemnification
where it appears that in fixing such indemnification the
parties had in mind a fair and reasonable compensation
for actual damages anticipated as a result of a breach
149
150
OBLIGATIONS AND CONTRACTS
of the contract, or, in other words, where the principal
purpose of the indemnification agreed upon appears to
have been to provide for the payment of actual anticipated
and liquidated damages rather than the penalization of a
breach of the contract.
Filinvest contends that the subject penalty clause
falls under the second type, i.e., the principal purpose
for its inclusion was to provide for payment of actual
anticipated and liquidated damages rather than the
penalization of a breach of the contract. Thus, Filinvest
argues that had Pecorp completed the project on time, it
(Filinvest) could have sold the lots sooner and earned its
projected income that would have been used for its other
projects.
Finally, Filinvest advances the argument that while
it may be true that courts may mitigate the amount of
liquidated damages agreed upon by the parties on the
basis of the extent of the work done, this contemplates
a situation where the full amount of damages is payable
in case of total breach of contract. In the instant case, as
the penalty clause was agreed upon to answer for delay
in the completion of the project considering that time is
of the essence, the parties thus clearly contemplated the
payment of accumulated liquidated damages despite, and
precisely because of, partial performance. In effect, it is
Filinvest’s position that the first part of Article 1229 on
partial performance should not apply precisely because, in
all likelihood, the penalty clause would kick in situations
where Pecorp had already begun work but could not
finish it on time, thus, it is being penalized for delay in its
completion.
The above argument, albeit sound, is insufficient to
reverse the ruling of the Court of Appeals. It must be remembered that the Court of Appeals not only held that
the penalty should be reduced because there was partial
compliance but categorically stated as well that the penalty was unconscionable. Otherwise stated, the Court of
Appeals affirmed the reduction of the penalty not simply
because there was partial compliance per se on the part
of Pecorp with what was incumbent upon it but, more
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
151
fundamentally, because it deemed the penalty unconscionable in the light of Pecorp’s 94.53% completion rate.
In ascertaining whether the penalty is unconscionable or
not, the court set out the following standard in Ligutan v. Court of
Appeals,192 to wit:
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective.
Its resolution would depend on such factor as, but not
necessarily confined to, the type, extent and purpose of
the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the
sound discretion of the court.
§131.00 Penalty and interests may be stipulated
The Civil Code allows the parties to agree upon the penalty,
apart from the monetary interest. Thus, in Ligutan v. CA,193 the
court ruled:
The essence or rationale for the payment of interest,
quite often referred to as cost of money, is not exactly the
same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is
an agreement to that effect, the two being distinct concepts which may separately be demanded. What may
justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express stipulation
therefor in a valid agreement, may not equally justify the
non-payment or reduction of interest.
However, the penalty may be refused, when the circumstances
obtaining so justify, as when the obligor has shown honest desire
to pay his loan as by partially paying the same and offering to
compromise. Compounding of interest is allowed, if so agreed by the
parties.194
G.R. No. 138677, Feb. 12, 2002.
Ibid.
194
Tan v. CA, 367 SCRA 571 [2001].
192
193
152
OBLIGATIONS AND CONTRACTS
The rate of interest in actual and compensatory damages is as
follows:
1.
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
2.
When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially, but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin
to run only from the date the judgment of the court is made, on the
amount finally adjudged.
3.
When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of
credit.195
§132.00 Recovery of other damages
In Cannu v. Galang,196 the Court ruled that other damages may
be recovered, apart from the penalty:
In obligations with a penal clause, the general rule
is that the penalty serves as a substitute for the indemnity for damages and the payment of interests in case of
non-compliance; that is, if there is no stipulation to the
195
196
Eastern Shipping Lines, Inc. v. CA, 234 SCRA 78 [1994].
459 SCRA 80 [2005].
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
153
contrary, in which case proof of actual damages is not necessary for the penalty to be demanded. There are exceptions to the aforementioned rule, however, as enumerated
in paragraph 1 of Article 1226 of the Civil Code: 1) when
there is a stipulation to the contrary, 2) when the obligor
is sued for refusal to pay the agreed penalty, and 3) when
the obligor is guilty of fraud. In these cases, the purpose
of the penalty is obviously to punish the obligor for the
breach. Hence, the obligee can recover from the former
not only the penalty, but also other damages resulting
from the nonfulfillment of the principal obligation.
§133.00 Reduction of interest
Apart from the penalty, the parties may agree as to the
payment of interest in case the obligation is not paid. However, like
the penalty, the interest may likewise be reduced by Court when
the amount thereof is unconscionable or unreasonable under the
circumstances.
The Court ruled that the measure of damages in the delay in
discharging obligation consisting of the payment of a sum of money
is the payment of penalty interest at the rate agreed upon by the
parties. In the absence of stipulation of a particular rate of penalty
interest, payment of interest equal to the regular or monetary
interest becomes proper, which is 6% or 12% in the case loans or
forbearance of money. This rule applies to payment of indemnity
in the concept of damages arising from delay in the discharge of
obligations.197
§134.00 Reduction of interest when same is excessive
In Carpo v. Chua,198 the Court reduced the interest provided in
the contract for being excessive. The Court ruled:
In the Carpo case, petitioners therein contracted
a loan in the amount of P175,000.00 from respondents
therein, payable within six months with an interest rate
of 6% per month. The loan was not paid upon demand.
197
198
Castelo v. CA, 244 SCRA 180 [1995].
G.R. No. 150773, Sept. 30, 2005.
154
OBLIGATIONS AND CONTRACTS
Therein petitioners claimed that following the Court’s
ruling in Medel v. Court of Appeals, the rate of interest
of 6% per month or 72% per annum as stipulated in the
principal loan agreement is null and void for being excessive, iniquitous, unconscionable and exorbitant.
The Court then held thus:
In a long line of cases, this Court has invalidated
similar stipulations on interest rates for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v. Salazar, we annulled the stipulation of 6% per
month or 72% per annum interest on a P60,000.00 loan.
In Imperial v. Jaucian, we reduced the interest rate from
16% to 1.167% per month or 14% per annum. In Ruiz v.
Court of Appeals, we equitably reduced the agreed 3% per
month or 36% per annum interest to 1% per month or
12% per annum interest. The 10% and 8% interest rates
per month on a P1,000,000.00 loan were reduced to 12%
per annum in Cuaton v. Salud. Recently, this Court, in
Arrofo v. Quino, reduced the 7% interest per month on a
P15,000.00 loan amounting to 84% interest per annum to
18% per annum.
There is no need to unsettle the principle affirmed in
Medel and like cases. From that perspective, it is apparent
that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to
the freedom of contract principle embodied in Article 1306
of the Civil Code, contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. In
the ordinary course, the codal provision may be invoked
to annul the excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6%
per month, or 72% per annum. By the standards set in the
above-cited cases, this stipulation is similarly invalid.
Applying the afore-cited rulings to the instant case,
the inescapable conclusion is that the agreed interest
rate of 9% per month or 108% per annum, as claimed
by respondent; or 10% per month or 120% per annum,
as claimed by petitioner, is clearly excessive, iniquitous,
CHAPTER 3
DIFFERENT KINDS OF OBLIGATIONS
155
unconscionable and exorbitant. Although respondent
admitted that she agreed to the interest rate of 9%, which
she believed was exorbitant, she explained that she was
constrained to do so as she was badly in need of money at
that time. As declared in the Medel case and Imperial v.
Jaucian, “[i]niquitous and unconscionable stipulations on
interest rates, penalties and attorney’s fees are contrary
to morals.” Thus, in the present case, the rate of interest
being charged on the principal loan of P165,000.00, be it
9% or 10% per month, is void. The CA correctly reduced
the exorbitant rate to “legal interest.”
§135.00 Other consequences of accessory clauses
A penalty clause is an accessory obligation. Its other consequences are as follows:
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 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. (1153a)
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. (1155)
156
OBLIGATIONS AND CONTRACTS
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
GENERAL PROVISIONS
§136.00 Generally
Art. 1231. Obligations are extinguished:
(1)
By payment or performance;
(2)
By the loss of the thing due;
(3)
debt;
By the condonation or remission of the
(4) By the confusion or merger of the rights
of creditor and debtor;
(5)
By compensation;
(6)
By novation.
Other causes of extinguishment of obligations, such
as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.
(1156a)
SECTION 1. — Payment or Performance
§137.00 Payment defined
Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n)
Art. 1246. When the obligation consists in the
delivery of an indeterminate or generic thing, whose
156
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
157
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.
(1167a)
Art. 1247. Unless it is otherwise stipulated, the
extrajudicial expenses required by the payment
shall be for the account of the debtor. With regard
to judicial costs, the Rules of Court shall govern.
(1168a)
Obligations are extinguished by payment or performance.1 In
the absence of an agreement, express or implied, payment means
the discharge of debt or obligation in money.2 Article 1232 of the
Civil Code defines payment not only the delivery of money but also
the performance, in any other manner, of an obligation.
§138.00 Payment of debt
Articles 1233, 1248, and 1249 of the Civil Code specifically
mention “debt.” Debt may refer to payment of money or to the
performance of an obligation, depending upon the context in which
it is used.
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. (1157)
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 in part unliquidated, the creditor may demand
and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)
1
2
Art. 1231, Civil Code.
PAL v. CA, 181 SCRA 557 [1990].
158
OBLIGATIONS AND CONTRACTS
Art. 1249. The payment 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.
x x x.
§139.00 Debt, meaning of
A debt is a demand for a sum certain; an amount actually ascertained, as opposed to unliquidated damages.3
The word, as used in the constitutional provision against
imprisonment for debt, refers to debts arising from actions ex
contractu, and not to those arising from ex delicto.4
It is defined as an obligation to pay money at some fixed future
time, or at a time which becomes definite and fixed by acts of either
party and which they expressly or impliedly agree to perform in the
contract.5
In its comprehensive sense, it embraces not merely money due
by contract, but whatever one is bound to render another, either for
contract or the requirement of the law. Where statutes impose a
personal liability for a tax, the tax becomes at least in a broad sense
a debt.6
In its wider sense, it includes all that is due to a man under
any form or obligation or promises, and covers not only obligations
arising under contract, but also those arising from tort or crimes as
well as those imposed by law without contract.7
§140.00 Debt and claim distinguished
A debt is a claim which has been formally passed upon by the
highest authority to which it can in law be submitted and has been
declared to be a debt. A claim, on the other hand, is a debt in embryo.
It is mere evidence of a debt and must pass through the process
Compania General de Tabacos v. French, 39 Phil. 34 [1918].
Ganaway v. Quillen, 42 Phil. 805 [1922]; Alano v. Inserto, 71 SCRA 166 [1976];
Lazano v. Martinez, 146 SCRA 323 [1986].
5
Lirag Textile Mills, Inc. v. SSS, 153 SCRA 338 [1987].
6
Commissioner of Internal Revenue v. Palanca, 18 SCRA 496 [1966].
7
Artates v. Urbi, 37 SCRA 395 [1971].
3
4
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
159
prescribed by law before it develops into what is properly called a
debt.8
§141.00 Payment by means of legal tender
Art. 1249. The payment 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.
The delivery of promissory notes payable
to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only
when they have been cashed, or when through the
fault of the creditor they have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the abeyance.
(1170)
See detailed discussion on payment of check, infra.
A debt must be paid in legal tender, and not by a substitute for
money, otherwise the creditor may refuse to accept it to discharge
the obligation.
Negotiable instruments are not money but mere substitutes for
money. Nor are they legal tender. Legal tender is the currency which
has been made suitable by law for the purpose of tender of payment
of debts. Section 52 of Republic Act No. 7653, otherwise known as
the New Central Bank Act, defines a legal tender as follows:
“Sec. 52. Legal Tender Power. — All notes and coins
issued by the Bangko Sentral shall be fully guaranteed
by the Government of the Republic of the Philippines
and shall be legal tender in the Philippines for all debts,
both public and private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins shall be
legal in amounts not exceeding Fifty pesos (P50.00) for
all denominations of Twenty-five centavos and above,
and in amounts not exceeding Twenty pesos (P20.00), for
denominations of Ten centavos or less.”
8
Republic v. Sandiganbayan, 346 SCRA 760 [2000].
160
OBLIGATIONS AND CONTRACTS
§142.00 Evidence of payment
A debt shall not be considered paid unless the thing or service
in which the obligation consists has been completely delivered or
rendered, as the case may be.9
§143.00 Burden of proving payment
The burden of proof of payment lies with the debtor.10 Where
the debtor introduces evidence of payment, the burden of going
forward with the evidence — as distinct from the general burden of
proof — shifts to the creditor, who is then under a duty of producing
some evidence to show non-payment.11
The Court held in G & M Philippines, Inc. v. Cuambot,12 that
one who pleads payment has the burden of proving it:
One who pleads payment has the burden of proving
it. The reason for the rule is that the pertinent personnel
files, payrolls, records, remittances and other similar
documents — which will show that overtime, differentials,
service incentive leave, and other claims of workers have
been paid — are not in the possession of the worker but
in the custody and absolute control of the employer.
Thus, the burden of showing with legal certainty that the
obligation has been discharged with payment falls on the
debtor, in accordance with the rule that one who pleads
payment has the burden of proving it.13 Only when the
debtor introduces evidence that the obligation has been
extinguished does the burden shift to the creditor, who
is then under a duty of producing evidence to show why
payment does not extinguish the obligation.14 In this case,
petitioner was unable to present ample evidence to prove
its claim that respondent had received all his salaries and
benefits in full.
PNB v. CA, 256 SCRA 44 [1996].
PNB v. CA, 256 SCRA 44 [1996].
11
Jimenez v. NLRC, 256 SCRA 84 [1996].
12
G.R. No. 162308, Nov. 22, 2006.
13
Villar v. National Labor Relations Commission, 387 Phil. 706, 716 (2000).
14
G & M (Phil.), Inc. v. Batomalaque, G.R. No. 151849, June 23, 2005, 461
SCRA 111, 118.
9
10
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
161
In Borbon II v. Servicewide Specialists, Inc.,15 the Court ruled
that the burden of proving payment to discharge an obligation rests
on the debtor:
As a rule, one who pleads payment has the burden
of proving it. Even where the plaintiff must allege nonpayment, the general rule is that the burden rests on the
defendant to prove payment, rather than on the plaintiff to prove non-payment. The debtor has the burden of
showing with legal certainty that the obligation has been
discharged by payment.
§144.00 Evidence of payment
Evidence of payment is a written acknowledgment, handed
down by one party to the other, of the manual custody of money or
other personality.16 The word means money received.17
A receipt is defined as a written and signed acknowledgment
that money has been paid or goods have been delivered. The rule
is settled that a receipt of payment is the best evidence of the fact
of payment.18 However, it has been held that a receipt is merely
a presumptive evidence and is not conclusive; hence, it may be
explained, contradicted or rebutted by other evidence of mistake or
of non-payment or of the circumstances under which it was given.
Other evidence may be presented in lieu thereof if they are not
available, as in case of loss, destruction or disappearance. The fact
of payment may be established not only by documentary evidence,
but also by parol evidence.19
A creditor who receives and acknowledges full payment from his
debtor causes the extinguishment of his claim against the debtor.20
259 SCRA 634 [1996]; Dela Cruz v. Dela Cruz, 419 SCRA 648 [2004].
Cruz v. CA, 192 SCRA 209 [1990].
17
Consolidated Mines, Inc. v. CTA, 58 SCRA 618 [1974].
18
Dela Cruz v. Dela Cruz, 419 SCRA 648 [2004].
19
PNB v. CA, 256 SCRA 309 [1996]; Dela Cruz v. Dela Cruz, 419 SCRA 648
[2004].
20
MC Engineering, Inc. v. CA, 380 SCRA 116 [2002].
15
16
162
OBLIGATIONS AND CONTRACTS
§145.00 Value of currency at time of establishment of obligation
in case of extraordinary inflation or deflation
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 be the basis of
payment, unless there is an agreement to the contrary. (n)
By extraordinary inflation or deflation of currency is understood
to be any uncommon decrease or increase in the purchasing power of
currency which the parties could not have reasonably foreseen and
which has been due to war and the effects thereof, or any unusual
force majeure or fortuitous event.21 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 decrease or increase
could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of
the obligation.22
§146.00 Existence of extraordinary inflation requires Central Bank
declaration
The effects of extraordinary inflation are not to be applied without an official declaration thereby from competent authority, which
is the Bangko Sentral.23
Apart from official declaration of the Bangko Sentral of the
existence of an extraordinary inflation or deflation, the effects thereof
cannot also be taken into account in the absence of an agreement
to that effect. In Telengtan Brothers & Sons, Inc. v. United States
Lines, Inc.,24 the Court ruled:
Lest it be overlooked, Article 1250 of the Code, as
couched, clearly provides that the value of the peso at the
time of the establishment of the obligation shall control
Hahn v. CA, 173 SCRA 675 [1989]; Serra v. CA, 229 SCRA 60 [1994].
Huibonhoa v. CA, 320 SCRA 625 [1999].
23
Singzon v. Caltex (Phil.), Inc., 342 SCRA 91 [2000]; Telengtan Brothers &
Sons, Inc. v. United States Lines, Inc., G.R. No. 132284, Feb. 28, 2006.
24
G.R. No. 132284, Feb. 28, 2006.
21
22
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
163
and be the basis of payment of the contractual obligation,
unless there is “agreement to the contrary.” It is only when
there is a contrary agreement that extraordinary inflation
will make the value of the currency at the time of payment,
not at the time of the establishment of obligation, the
basis for payment.”
§147.00 Payment in foreign currency is allowed, if so stipulated
Republic Act No. 8183, which repealed previous law, which
prohibited payment in foreign currency now allows payment in
foreign currency, if so stipulated by the parties. Republic Act No.
8182 reads:
SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in
the Philippines. However, the parties may agree that the
obligation or transaction shall be settled in any other currency at the time of payment.
SEC. 2. Republic Act Numbered Five Hundred and
Twenty-Nine (R.A. No. 529), as amended, entitled “An
Act to Assure the Uniform Value of Philippine Coin and
Currency” is hereby repealed.
In C.F. Sharp & Co., Inc. v. Northwest Airlines, Inc.,25 the Court
ruled that the repeal of R.A. No. 529 by R.A. No. 8183 has the effect
of removing the prohibition on the stipulation of currency other than
Philippine currency, such that obligations or transactions may now
be paid in the currency agreed upon by the parties. Just like R.A. No.
529, however, the new law does not provide for the applicable rate of
exchange for the conversion of foreign currency-incurred obligations
in their peso equivalent. It follows, therefore, that the jurisprudence
established in R.A. No. 529 regarding the rate of conversion remains
applicable. Thus, in Asia World Recruitment, Inc. v. National Labor
Relations Commission, the Court, applying R.A. No. 8183, sustained
the ruling of the NLRC that obligations in foreign currency may be
discharged in Philippine currency based on the prevailing rate at
the time of payment. The wisdom on which the jurisprudence interpreting R.A. No. 529 is based equally holds true with R.A. No. 8183.
Verily, it is just and fair to preserve the real value of the foreign
exchange-incurred obligation to the date of its payment.
25
G.R. 133498, April 18, 2002.
164
OBLIGATIONS AND CONTRACTS
§148.00 Requisites of payment
An obligation may be extinguished by payment. There are two
requisites of payment as extinguishment of obligation, which must
concur: (1) identity of the prestation; and (2) its integrity. The first
means that the very thing due must be delivered or released; and
the second, that the prestation be fulfilled completely.26
Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover
as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)
To show such payment, the creditor must “receive and acknowledge full payment” from the debtor. If no such acknowledgment nor
proof of full payment is shown to the satisfaction of the court, then
the claim of payment must fail. What was due from the debtor was
the payment of a sum of money. Not only that, the debtor must also
pay the amount due in its entirety for his obligation to be considered
extinguished by payment.27
§149.00 Where payment may be made
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 determinate 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.
These provisions are without prejudice to venue under the Rules of Court. (1171a)
26
27
Dela Cruz v. Dela Cruz, 419 SCRA 648 [2004].
Ibid.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
165
§150.00 Waiver of incomplete or irregular performance
Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection,
the obligation is deemed fully complied with. (n)
Thus, when the obligee accepted the debtor’s installment
payments despite the alleged charges incurred by the latter, and
without any showing that he protested the irregularity of such
payment, nor demanded the payment of the alleged charges, the
debtor’s liability, if any for said charges, is deemed fully satisfied.28
§151.00 Payment by third person
Art. 1236. The creditor is not bound to accept
payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from
the debtor what he has paid, except that if he paid
without the knowledge or against the will of the
debtor, he can recover only insofar as the payment
has been beneficial to the debtor. (1158a)
Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the
latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage,
guaranty, or penalty. (1159a)
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. (n)
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 Arti-
28
Palanca v. Guides, 452 SCRA 461, Feb. 28, 2005.
166
OBLIGATIONS AND CONTRACTS
cle 1427 under the Title on “Natural Obligations.’’
(1160a)
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. (1162a)
Art. 1241. Payment to a person 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 proved in the following cases:
(1) If after the payment, the third person acquires the creditor’s rights;
(2) If the creditor ratifies the payment to the
third person;
(3) If by the creditor’s conduct, the debtor
has been led to believe that the third person had
authority to receive the payment. (1163a)
Art. 1242. Payment made in good faith to any
person in possession of the credit shall release the
debtor. (1164)
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. (1165)
Art. 1244. The debtor of a thing cannot compel
the creditor to receive a different one, although the
latter may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will. (1166a)
Payment by third person presupposes a debtor-creditor relationship, in which the third person pays the indebtedness of the
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
167
debtor. The provision does not apply, where there is no debtor-creditor relationship.29
§152.00 Guarantor cannot be required to pay principal’s debt
The Court in JN Dev. Corp. v. Phil. Export and Guarantee Loan
Corp.,30 ruled that a guarantor cannot be compelled to pay the debt
of the debtor without the creditor first exhausting all legal remedies
against the debtor, which is known as the benefit of excussion. However, the benefit of excussion may be waived. The Court explained:
Under a contract of guarantee, the guarantor binds
himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The
guarantor who pays for a debtor, in turn, must be indemnified by the latter. However, the guarantor cannot
be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor and resorted to
all the legal remedies against the debtor. This is what is
otherwise known as the benefit of excussion.
It is clear that excussion may only be invoked after legal remedies against the principal debtor have been
expanded. Thus, it was held that the creditor must first
obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, “for obviously
the ‘exhaustion of the principal’s property’ cannot even
begin to take place before judgment has been obtained.”
The law imposes conditions precedent for the invocation of
the defense. Thus, in order that the guarantor may make
use of the benefit of excussion, he must set it up against
the creditor upon the latter’s demand for payment and
point out to the creditor available property of the debtor
within the Philippines sufficient to cover the amount of
the debt.
While a guarantor enjoys the benefit of excussion,
nothing prevents him from paying the obligation once
demand is made on him. Excussion, after all, is a right
granted to him by law and as such he may opt to make
29
30
Tanguilig v. CA, 266 SCRA 78 [1997].
468 SCRA 555 [2005].
168
OBLIGATIONS AND CONTRACTS
use of it or waive it. PhilGuarantee’s waiver of the right of
excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor
to indemnify the guarantor what the latter has paid.
Petitioners’ claim that PhilGuarantee had no more
obligation to pay TRB because of the alleged expiration
of the contract of guarantee is untenable. The guarantee,
dated 17 December 1979, states:
In the event of default by JNDC and as a consequence
thereof, PHILGUARANTEE is made to pay its obligation
arising under the aforesaid guarantee PHILGUARANTEE
shall pay the BANK the amount of P1.4 million or 70% of
the total obligation unpaid.
This guarantee shall be valid for a period of one (1)
year from date hereof but may be renewed upon payment
by JNDC of the guarantee fee at the same rate of 1.5% per
annum.
The guarantee was only up to 17 December 1980. JN’s
obligation with TRB fell due on 30 June 1980, and demand
on PhilGuarantee was made by TRB on 08 October 1980.
That payment was actually made only on 10 March 1981
does not take it out of the terms of the guarantee. What is
controlling is that default and demand on PhilGuarantee
had taken place while the guarantee was still in force.
There is likewise no merit in petitioners’ claim that
PhilGuarantee’s failure to give its express consent to the
alleged extensions granted by TRB to JN had extinguished
the guarantee. The requirement that the guarantor should
consent to any extension granted by the creditor to the
debtor under Art. 2079 is for the benefit of the guarantor.
As such, it is likewise waivable by the guarantor. Thus,
even assuming that extensions were indeed granted by
TRB to JN, PhilGuarantee could have opted to waive the
need for consent to such extensions. Indeed, a guarantor
is not precluded from waiving his right to be notified of or
to give his consent to extensions obtained by the debtor.
Such waiver is not contrary to public policy as it is purely
personal and does not affect public interest. In the instant
case, PhilGuarantee’s waiver can be inferred from its
actual payment to TRB after the latter’s demand, despite
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
169
JN’s failure to pay the renewal/guarantee fee as indicated
in the guarantee.
For the above reasons, there is no basis for petitioner’s
claim that PhilGuarantee was a mere volunteer payor
and had no legal obligation to pay TRB. The law does not
prohibit the payment by a guarantor on his own volition,
heedless of the benefit of excussion. In fact, it recognizes
the right of a guarantor to recover what it has paid, even
if payment was made before the debt becomes due, or if
made without notice to the debtor, subject of course to
some conditions.
§153.00 Payment by assignment
Where the debtor fully pays the purchase price of a car, before
he became aware of the assignment of the receivables or instruments
which he executed, he is released from all obligations thereunder.31
The Civil Code so provides:
ARTICLE 1626. The debtor who, before having
knowledge of the assignment, pays his creditor, shall be
released from the obligation.
An assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal cause, such
as sale, dation in payment, exchange or donation, and without the
consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to enforce
it to the same extent as the assignor could enforce it against the
debtor. It may be in the form of sale, but at times it may constitute
a dation in payment, such as when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has against
a third person.32
§154.00 Dacion en pago as form of extinguishing obligation
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 of sales. (n)
31
32
Aguilar v. City Trust Finance Corp., 474 SCRA 285 [2005].
Agrifina Aquintey v. Tibong, G.R. No. 166704, Dec. 30, 2006.
170
OBLIGATIONS AND CONTRACTS
Dacion en pago is a form of extinguishing obligation, whereby
property is alienated to the creditor in satisfaction of a debt in
money. It extinguishes the obligation to the extent of the value of
the thing delivered, either as agreed upon by the parties or as may
be proved, unless the parties by agreement, express or implied, or
by their silence, consider the thing as equivalent to the obligation,
in which case the obligation is totally extinguished. It is governed by
the law of sales.33
§155.00 Dacion requires elements of sale
As a special mode of payment, the debtor offers another
thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking partakes in one sense of the
nature of sale, that is, the creditor is really buying the thing or
property of the debtor, payment for which is to be charged against
the debtor’s debt. As such, the essential elements of a contract of
sale, namely, consent, object certain, and cause or consideration,
must be present. In its modern concept, what actually takes place
in dacion en pago is an objective novation of the obligation where
the thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale, while
the debt is considered as the purchase price.34
The surrender by the debtor to the creditor of the property
as security for a loan is not dation in payment, but is only part of
the security arrangement, which will still require foreclosure in
accordance with the procedure adopted for such proceedings.35
§156.00 Requisites of dacion en pago
The requisites for dacion en pago are: (1) there must be a
performance of the prestation in lieu of payment (animo solvendi)
which may consist in the delivery of a corporeal thing or a real
right or a credit against the third person; (2) there must be some
difference between the prestation due and that which is given in
substitution (aliud pro alio); and (3) there must be an agreement
33
Lopez v. CA, 114 SCRA 671 [1982]; Caltex (Phil.), Inc. v. IAC, 215 SCRA 580
[1992].
34
35
Filinvest Credit Corp. v. Phil. Acetylene Co., Inc., 111 SCRA 421 [1982].
PNB v. Pineda, 197 SCRA 1 [1991].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
171
between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different
from that due.36
§157.00 Illustrative case regarding discharge of obligation by
novation, dacion en pago and assignment
In Agrifina Aquintey v. Tibong,37 the Court discussed novation,
dacion en pago, and assignments of credits as modes of discharging
obligations. The issue in the main is whether the obligations
of Tibong spouses had been extinguished totally or partially by
novation, dacion en pago or assignment of credit.
The Court ruled:
Under Article 1231(b) of the New Civil Code, novation is enumerated as one of the ways by which obligations
are extinguished. Obligations may be modified by changing their object or principal creditor or by substituting
the person of the debtor. The burden to prove the defense
that an obligation has been extinguished by novation falls
on the debtor.38 The nature of novation was extensively
explained in Iloilo Traders Finance, Inc. v. Heirs of Sps.
Oscar Soriano, Jr., as follows:
Novation may either be extinctive or modificatory,
much being dependent on the nature of the change and
the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate;
in cases where it is implied, the acts of the parties must
clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of
the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total
on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility
is whether they can stand together, each one having an
independent existence; if they cannot and are irreconciliable, the subsequent obligation would also extinguish the
first.
Vda. de Jayme v. Court of Appeals, 439 SCRA 19 [2002].
G.R. No. 166704, Dec. 30, 2006.
38
RULES OF COURT, Rule 131, Section 5.
36
37
172
OBLIGATIONS AND CONTRACTS
An extinctive novation would thus have the twin
effects of, first, extinguishing an existing obligation and,
second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites:
(1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment
of the old obligation; and (4) the birth of a valid new obligation. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance,
the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant
some but not all of its provisions.
Novation which consists in substituting a new debtor
(delegado) in the place of the original one (delegante) may
be made even without the knowledge or against the will
of the latter but not without the consent of the creditor.
Substitution of the person of the debtor may be effected
by delegacion, meaning, the debtor offers, and the creditor (delegatario), accepts a third person who consents to
the substitution and assumes the obligation. Thus, the
consent of those three persons is necessary. In this kind
of novation, it is not enough to extend the juridical relation to a third person; it is necessary that the old debtor
be released from the obligation, and the third person or
new debtor take his place in the relation.39 Without such
release, there is no novation; the third person who has
assumed the obligation of the debtor merely becomes a codebtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated
jointly.40
In Di Franco v. Steinbaum, the appellate court ruled
that as to the consideration necessary to support a contract of novation, the rule is the same as in other contracts. The consideration need not be pecuniary or even
beneficial to the person promising. It is sufficient if it be
Lopez v. Court of Appeals, L-33157, June 29, 1982, 114 SCRA 671, 688.
COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINES, Vol. IV, p. 360.
39
40
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
a loss of an inconvenience, such as the relinquishment of
a right or the discharge of a debt, the postponement of a
remedy, the discontinuance of a suit, or forbearance to
sue.
xxx
We find in this case that the CA correctly found that
respondents’ obligation to pay the balance of their account
with petitioner was extinguished, pro tanto, by the deeds
of assignment of credit executed by respondent Felicidad
in favor of petitioner.
An assignment of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by a
legal cause, such as sale, dation in payment, exchange or
donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same
extent as the assignor could enforce it against the debtor.
It may be in the form of sale, but at times it may constitute a dation in payment, such as when a debtor, in order
to obtain a release from his debt, assigns to his creditor a
credit he has against a third person.
In Vda. de Jayme v. Court of Appeals, the Court held
that dacion en pago is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an
accepted equivalent of the performance of the obligation.
It is a special mode of payment where the debtor offers
another thing to the creditor who accepts it as equivalent
of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is,
the creditor is really buying the thing or property of the
debtor, payment for which is to be charged against the
debtor’s obligation. As such, the essential elements of a
contract of sale, namely, consent, object certain, and cause
or consideration must be present. In its modern concept,
what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an
accepted equivalent of the performance of an obligation
is considered as the object of the contract of sale, while
the debt is considered as the purchase price. In any case,
common consent is an essential prerequisite, be it sale or
173
174
OBLIGATIONS AND CONTRACTS
novation, to have the effect of totally extinguishing the
debt or obligation.
The requisites for dacion en pago are: (1) there must
be a performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a
corporeal thing or a real right or a credit against the third
person; (2) there must be some difference between the prestation due and that which is given in substitution (aliud pro alio); and (3) there must be an agreement between
the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation
different from that due.
All the requisites for a valid dation in payment are
present in this case. As gleaned from the deeds, respondent Felicidad assigned to petitioner her credits “to make
good” the balance of her obligation. Felicidad testified
that she executed the deeds to enable her to make partial
payments of her account, since she could not comply with
petitioner’s frenetic demands to pay the account in cash.
Petitioner and respondent Felicidad agreed to relieve the
latter of her obligation to pay the balance of her account,
and for petitioner to collect the same from respondent’s
debtors.
Admittedly, some of respondents’ debtors, like Edna
Papat-iw, were not able to affix their conformity to the
deeds. In an assignment of credit, however, the consent of
the debtor is not essential for its perfection; the knowledge
thereof or lack of it affecting only the efficaciousness or
inefficaciousness of any payment that might have been
made. The assignment binds the debtor upon acquiring
knowledge of the assignment but he is entitled, even
then, to raise against the assignee the same defenses he
could set up against the assignor necessary in order that
assignment may fully produce legal effects. Thus, the duty
to pay does not depend on the consent of the debtor. The
purpose of the notice is only to inform that debtor from
the date of the assignment. Payment should be made to
the assignee and not to the original creditor.
The transfer of rights takes place upon perfection
of the contract, and ownership of the right, including all
appurtenant accessory rights, is acquired by the assignee
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
who steps into the shoes of the original creditor as subrogee
of the latter from that amount, the ownership of the right
is acquired by the assignee. The law does not require any
formal notice to bind the debtor to the assignee, all that
the law requires is knowledge of the assignment. Even if
the debtor had not been notified, but came to know of the
assignment by whatever means, the debtor is bound by
it. If the document of assignment is public, it is evidence
even against a third person of the facts which gave rise
to its execution and of the date of the latter. The transfer
of the credit must therefore be held valid and effective
from the moment it is made to appear in such instrument,
and third persons must recognize it as such, in view of
the authenticity of the document, which precludes all
suspicion of fraud with respect to the date of the transfer
or assignment of the credit.
As gleaned from the deeds executed by respondent
Felicidad relative to the accounts of her other debtors, petitioner was authorized to collect the amounts of P6,000.00
from Cabang, and P63,600.00 from Cirilo. They obliged
themselves to pay petitioner. Respondent Felicidad, likewise, unequivocally declared that Cabang and Cirilo no
longer had any obligation to her.
Equally significant is the fact that, since 1990, when
respondent Felicidad executed the deeds, petitioner no
longer attempted to collect from respondents the balance
of their accounts. It was only in 1999, or after nine (9) years
had elapsed that petitioner attempted to collect from respondents. In the meantime, petitioner had collected from
respondents’ debtors the amount of P301,000.00.
While it is true that respondent Felicidad likewise
authorized petitioner in the deeds to collect the debtors’
accounts, and for the latter to pay the same directly, it
cannot thereby be considered that respondent merely authorized petitioner to collect the accounts of respondents’
debtors and for her to apply her collections in partial payments of their accounts. It bears stressing that petitioner,
as assignee, acquired all the rights and remedies passed
by Felicidad, as assignee, at the time of the assignment.
Such rights and remedies include the right to collect her
debtors’ obligations to her.
175
176
OBLIGATIONS AND CONTRACTS
xxx
Case law is that, an assignment will, ordinarily, be
interpreted or construed in accordance with the rules of
construction governing contracts generally, the primary
object being always to ascertain and carry out the intention of the parties. This intention is to be derived from a
consideration of the whole instrument, all parts of which
should be given effect, and is to be sought in the words
and language employed.
Subsection 1 — Application of Payments
§158.00 Application defined
Art. 1252. He who has various debts of the
same kind in favor of one and the same creditor,
may declare at the time of making the payment, to
which of them the same must be applied. Unless
the parties so stipulate, or when the application of
payment is made by the party for whose benefit the
term has been constituted, application shall not be
made as to debts which are not yet due.
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. (1172a)
Application of payment is the designation at the time of making
the payment by a debtor, who has two or more debts of the same
kind, which are all due, in favor of a creditor, as to which debt or
debts the payment may be applied.
§159.00 Application presupposes person owning several debts
The rules in Arts. 1253 to 1254 of the Civil Code apply to a
person owning several debts of the same kind of a single creditor.
They cannot be made applicable to a person whose obligation as a
mere surety is both contingent and singular; his liability is confined
to such obligation, and he is entitled to have all payments made
applied exclusively to said application and to no other. Articles 1253
of the Civil Code is merely directory and not mandatory.41
41
Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967 [1966].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
177
§160.00 Right to make application of payment
The right to specify which among his various obligations to the
same creditor is to be satisfied from rests with the debtor. Where the
debtor did not specify which of many debts are to be satisfied, the
creditor may make the application of payment in the receipt which
the creditor will issue, if the debtor accepts the same. The “receipt”
in Art. 1252 of the Civil Code is the evidence of payment executed
by the creditor at the time of payment, and not the statement of
account executed several days thereafter. Such acceptance of the
application of payment must be unconditional and unbounded in
order that concurrence can give rise to a perfected contract. The
debtor’s silence as regards the application of payment cannot mean
that he consented thereto. The consent must be clear and definite.42
After the debtor has indicated the debt to which payment
should be applied, he cannot later claim that it should be understood
as applied to another debt.43
§161.00 Rule on application of payment
Under Art. 1252, if the debtor did not declare at the time he
made the payment to which his debts with the creditor the payment
is to be applied, no payment is to be made to a debt that is not yet
due, unless the parties so stipulated or when the application of
payment is made by the party for whose benefit the term has been
constituted, and the payment has to be applied first to the debt most
onerous to the debtor.44
The right to specify which among his various obligations to the
same creditor rests with the debtor, as provided for in Art. 1252. At
the time of payment, the debtor must specify to which particular
debt or debts the payment would be applied. In the absence of such
specification, the law requires that no payment shall be made to a
debt that is not due and the payment has to be applied first to the
debt most onerous to the debtor.45
Paculdo v. Regalado, 345 SCRA 134 [2000].
Bachrach Garage & Taxicap Co v. Golingco, 39 Phil. 912.
44
Paculdo v. Regalado, Ibid.
45
Ibid.
42
43
178
OBLIGATIONS AND CONTRACTS
§162.00 When creditor may make application
The creditor may make its application as to what payment
would be applied, when the debtor and creditor have previously
made written agreement relating thereto.
Where there is no agreement, the creditor at the time of payment
made by the creditor may issue a receipt specifying to which debt or
debts the payment is applied. If the debtor accepts such application,
the debtor is bound thereby. The statement of account prepared by
the creditor is not the receipt contemplated by law. The receipt is
the evidence of payment executed at the time of payment and not
the statement of account executed several days thereafter.46
Where it appears that at the time of payment the debtor specified
as to which debt the payment would be applied, and thereafter he
offered to apply such payment to various debts, the fact that the
debtor received the offer with the application made by the creditor
and keeping silent thereon does not show that the application made
by the creditor has been accepted by the debtor. The acceptance of
the offer must be unconditional and unbounded in order that the
concurrence can give rise to a perfected contract.47
§163.00 Application of installment payments with interest
Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered.
(1173)
In a contract involving installment payments 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 nonpayment of installments on the principal.48
Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be deemed to have been made
Ibid.
Ibid.
48
Rapanut v. CA, 246 SCRA 323, 328 [1995].
46
47
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
179
until the interest has been covered. In this case, the private respondent would not have signed the receipts describing the payments
made by the petitioner as “capital repayment” if the obligation to
pay the interest was still subsisting. The receipts, as well as private
respondent’s summary of payments, lend credence to petitioner’s
claim that the payments were for the principal loans and that the
interests on the three consolidated loans were waived by the private respondent during the undisputed renegotiation of the loans
on account of the business reverses suffered by the petitioner at the
time.49
§164.00 Payment shall be applied to most onerous debts
Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if
application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been
satisfied.
If the debts due are of the same nature and
burden, the payment shall be applied to all of them
proportionately. (1174a)
What is most onerous debt is a question of fact, which must be
proved. As a rule, the most onerous debt is as follows:
1.
The debt with interest or penalty as against a debt lower
or with no interest. The interest should first be paid that of the
principal.
2.
Debt secured by a mortgage or pledge than one without
security.
3.
equal.
The older debt than the earlier debt, all things being
4.
Where the debts are of the same nature and burden,
application of payment representing amounts not sufficient to pay
all the debts may be made pro rata.
As a rule, the oldest debt covered by surety is most onerous.50
Swagma Hotel & Travels, Inc. v. CA, 455 SCRA 174 [2005].
People’s Surety and Ins. Co., Inc. v. Gabriel and Sons Transp. Co., Inc., 9
SCRA 573 [1963].
49
50
180
OBLIGATIONS AND CONTRACTS
Subsection 2 — Payment by Cession
§165.00 Payment by cession
Art. 1255. The debtor may cede or assign his
property to his creditors in payment of his debts.
This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The
agreements which, on the effect of the cession, are
made between the debtor and his creditors shall be
governed by special laws. (1175a)
This article refers to a voluntary cession or assignment of the
debtor’s property to his two or more creditors, who must all agree
to the assignment. The cession or assignment does not transfer
the title or ownership of the property to the creditors but it only
authorizes them to sell the property and apply the proceeds thereof
to pay the debts. The debtor is released from his responsibility only
to the extent of the proceeds of the sale, except when they have a
stipulation the contrary.
Article 1255 requires that there be two or more creditors and
involves the assignment of all the debtor’s property. Hence, it does
not apply where there is only one creditor.51
Subsection 3 — Tender of Payment and
Consignation
§166.00 Tender of payment defined
Art. 1256. If the creditor to whom tender of
payment has been made refuses without just cause
to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum
due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown,
or does not appear at the place of payment;
51
Cuba v. CA, 118367, Jan. 5, 1998.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
181
(2) When he is incapacitated to receive the
payment at the time it is due;
(3) When, without just cause, he refuses to
give a receipt;
(4) When two or more persons claim the same
right to collect;
(5) When the title of the obligation has been
lost. (1176a)
Tender of payment is the manifestation made by the debtor
to the creditor of his desire to comply with his obligation, with the
offer of immediate performance. Generally, it is an act preparatory
to consignation as an attempt to make a private settlement before
proceeding to the solemnities of consignation.52
For a valid tender of payment, it is necessary that there be
fusion of intent, ability and capability to make good such offer, which
must be absolute and must cover the amount due.53
In order to be valid, tender of payment must be made in cash
or in lawful currency. While payment of check by the debtor may be
accepted as valid, if no prompt objection to said payment in check is
made, the fact that in previous years payment in check was accepted
does not place the creditor in estoppel from requiring the debtor to
pay in obligation in cash.54
Where the objection to the tender of certified check in payment
of an obligation is to the sufficiency of the amount thereof and not
to the fact that the check is not a legal tender, there is valid tender;
and the consignation thereof in court results in the discharge of the
obligation.55
§167.00 Distinction between tender of payment and consignation
Tender of payment is a pre-requisite in consignation. The two
terms are different. Tender is the antecedent of consignation, that
is, an act preparatory to the consignation, which is the principal,
52
53
Legaspi v. CA, 142 SCRA 82 [1986].
Far East Bank & Trust Co. v. Diaz Realty, Inc., G.R. No. 138588, Aug. 23,
2001.
54
55
Soco v. Militante, 123 SCRA 160 [1983].
Pabugais v. Sahijwani, G.R. No. 146846, Feb. 23, 2003.
182
OBLIGATIONS AND CONTRACTS
and from which are derived the immediate consequences which the
debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of
the first is the attempt to make a private settlement before proceeding to the solemnities of consignation.56
Tender of payment, if refused, does not extinguish obligation,
unless completed or followed by consignation of the sum due in
court. The tender must be in cash, not check, and both tender and
consignation must be unconditional. Consignation must follow, supplement or complement tender of payment, if discharge of obligation
is to be obtained. The effect of valid tender of payment, without consignation, is merely to exempt the debtor from payment of interest
and/or damages.57
The thing tendered or consigned not only must be due and
demandable, but put before the creditor in such wise that he could
have no valid excuse for refusing; no choice but to accept it or run the
risk for its loss. Conditional tender or consignation is a contradiction,
self-nullifying, in the juridical sense.58
§168.00 Tender of check in the exercise of right
There is a difference between payment of “debt” by means of a
check, and the “exercise of a right or option” by the tender of a check.
“Debt” is an obligation to pay money at some fixed or future time, or
at a time which becomes definite and fixed by acts of either or both
parties.59 The right to accept a check in payment of such debt belongs
to the creditor, who may refuse it. On the other hand, the exercise
of a right or option, as in the redemption of a foreclosed property,
is a privilege, not an obligation, of the person who has the right
or option to exercise it. He may exercise the right, by a tender of a
check, within the period, which is considered effective to preserve
such right.60 Article 1249 of the Civil Code applies to the payment
of debt by means of a check, which gives the creditor the right to
refuse tender of a check in payment of debt, but not to the right of
redemption.
Soco v. Militante, 123 SCRA 160 [1983].
PNB v. Relativo, 92 Phil. 203 [1952].
58
Rustria v. Aguinaldo, 93 Phil. 727 [1953].
59
Lirag Textile Mills, Inc. v. SSS, 153 SCRA 388 [1987].
60
Fortunato v. CA, 196 SCRA 269 [1991].
56
57
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
183
Thus, where a party is given the right to redeem or repurchase
property within a specified period by paying the amount involved, a
mere valid tender to pay within the period, even without consignation,
is sufficient to preserve the right. The requirements of tender and
consignation apply only as a means to discharge an obligation or
debt; they do not apply to the exercise of a right.61
Tender of payment is sufficient to preserve a right or privilege
in the case of an option contract, or in legal redemption, or in a sale
with right to repurchase. Consignation is not necessary to preserve
such right, consignation being necessary only in the performance of
an obligation.62
Where a party is given the right to redeem or repurchase property within a specified period by paying the amount involved, a mere
valid tender to pay within the period, even without consignation, is
sufficient to preserve the right. The requirements of tender and consignation apply only as a means to discharge an obligation or debt;
they do not apply in the exercise of a right.63
Tender of payment is sufficient to preserve a right or privilege
in the case of an option contract, or in legal redemption, or in a sale
with right to repurchase. Consignation is not necessary to preserve
such right, consignation being necessary only in the performance of
an obligation.64
§169.00 Check for redemption is valid
Case law has distinguished between a check in payment of a
debt or obligation and a check for redemption or exercise of a right or
option. Thus, while a check is not a legal tender and the creditor may
refuse to accept it in payment of the debtor’s debt, it has been held
that a tender of a manager’s check for the redemption of a mortgaged
property foreclosed extrajudicially by the creditor made within the
period of redemption is valid. Citing Javellana v. Mirasol,65 the
Court stated that it has already sanctioned redemption by check in
Co v. PNB.66 This rule requires that the check be good or honored,
Francisco v. Bautista, 192 SCRA 388 [1990].
Adelfa Properties, Inc. v. CA, 240 SCRA 565 [1995].
63
Francisco v. Bautista, 192 SCRA 388 [1990].
64
Adelfa Properties, Inc. v. CA, 240 SCRA 565 [1995].
65
40 Phil. 761.
66
114 SCRA 842 [1982].
61
62
184
OBLIGATIONS AND CONTRACTS
for if the check is dishonored, the redemption is null and void; or
the check be presented for payment within a reasonable time from
issue, for if the check becomes stale in the hands of the creditor, by
his fault or negligence, and without the fault or negligence of the
redemptioner, it would be unfair to deprive him of his rights that he
acquired as redemptioner.67
In New Pacific Timber & Supply Co., Inc. v. Seneris,68 the
issue was whether or not the deposit of cashier’s check, issued by a
reputable bank, with the Sheriff as payment of a judgment debt to
prevent the latter from selling at public auction the debtor’s property
to satisfy the judgment is a valid satisfaction of judgment. The Court
rejected the trial court’s argument that a check is not a legal tender;
and that delivery of notes payable to order or bills of exchange
does not produce the effect of payment until encashed or impaired
thru the fault of the creditor, and ruled that the judgment creditor
cannot validly refuse to accept the cashier’s check in payment of the
judgment obligation because the cashier’s check is deemed as cash.
§170.00 Consignation defined
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. (1177)
Art. 1258. Consignation shall be made by depositing the things 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.
The consignation having been made, the interested parties shall also be notified thereof. (1178)
Art. 1259. The expenses of consignation, when
properly made, shall be charged against the creditor. (1178)
67
68
Crystal v. CA, 71 SCRA 443 [1975].
101 SCRA 686 [1980].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
185
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. (1180)
Art. 1261. If, the consignation having been
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. (1181a)
Consignation is the act of depositing with the court or judicial
authority the thing or amount due whenever the creditor refuses or
cannot accept payment of the amount due.69
If a check is tendered for payment of an obligation, which complies with the requisites of a valid tender, notwithstanding which
the same is refused because it is not a legal tender, it must be followed by consignation so as to constitute a valid payment of obligation.70
§171.00 Requisites of consignation
Consignation is the act of depositing the thing due with the
court or judicial authorities whenever the creditor cannot accept or
refuses to accept payment and it generally requires a prior tender
of payment. In order that consignation may be effective, the debtor
must show that:
(1)
there was a debt due;
(2) the consignation of the obligation had been made because
the creditor to whom tender of payment was made refused to accept
it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due or because
the title to the obligation has been lost;
69
70
Quirino v. Palarca, 29 SCRA 1 [1969].
Francisco v. Bautista, 192 SCRA 388 [1990].
186
OBLIGATIONS AND CONTRACTS
(3) previous notice of the consignation had been given to the
person interested in the performance of the obligation;
(4)
the amount due was placed at the disposal of the court;
and
(5) after the consignation had been made, the person interested was notified thereof.71
In order that the consignation may be effective, the debtor
must first comply with the following requisites: (1) that there is a
debt due and demandable; (2) that the consignation of the obligation
has been made because the creditor to whom tender of payment is
made refused to accept it, or because he was absent or incapacitated,
or because several persons claim to be entitled to receive the amount
due; (3) that previous notice of the consignation has been given to the
person interested in the performance of the obligation; (4) that the
amount due is placed at the disposal of the court; and (5) that after
the consignation has been made the person interested is notified
thereof.72
Performance of these conditions will release the debtor from
responsibility to pay his debt.73
It has been held that the essential requites of valid consignation
must be strictly and mandatorily complied with. Failure in any of
these requirements is enough to render consignation ineffective.74
§172.00 Consignated amount may be withdrawn
Acceptance of the amount consigned or deposited in court,
without reservation, discharges the obligation of the debtor.75 However, acceptance with reservation of the amount consigned is not a
waiver of the balance of the obligation.76
Banco Filipino v. Diaz, 493 SCRA 248, June 27, 2006.
Dungao v. Roque, 90 Phil. 657 [1951]; Gardner v. CA, 80 SCRA 399 [1977];
Soco v. Militante, 123 SCRA 160 [1983].
73
State Investment House, Inc. v. CA, 198 SCRA 390 [1991].
74
Soco v. Militante, 123 SCRA 160 [1983]; Dungao v. Roque, 90 Phil. 657 [1951];
Gardner v. CA, 80 SCRA 399 [1977].
75
Riesenbeck v. CA, 209 SCRA 656 [1992].
76
Riesenbeck v. CA, Ibid.
71
72
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
187
In Banco Filipino v. Diaz,77 the issue relates to the right of
the debtor to withdraw the amount deposited before its acceptance.
Article 1260 of the Civil Code provides:
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 confirmation that the consignation has been properly made,
the debtor may withdraw the thing or the sum deposited, allowing
the obligation to remain in force.
The Court in Banco Filipino v. Diaz,78 explains the above provision as follows:
“The right of the debtor to withdraw the thing or
amount deposited in court, depends upon whether or not
the consignation has already been accepted or judicially
declared proper. Before that time, the debtor is still the
owner, and he may withdraw it; in this case, the obligation
will remain in full force as before the deposit. But once
the consignation has been accepted by the creditor or
judicially declared as properly made, the debtor loses his
right over the thing or amount deposited, and he cannot
withdraw the same without the consent of the creditor; if
the creditor consents to the withdrawal in such case, the
obligation is revived as against the debtor personally, but
all rights of preference of the creditor over the thing and
all his actions against co-debtors, guarantors and sureties
are extinguished.
xxx
x x x We believe, however, that the contrary view
is more acceptable. Before the consignation has been
accepted by the creditor or judicially declared as properly
made, the debtor is still the owner of the thing or amount
deposited, and, therefore, the other parties liable for the
obligation have no right to oppose his withdrawal of such
thing or amount. The debtor merely uses his right, and
unless the law expressly limits that use of his right, it
77
78
493 SCRA 248, June 27, 2006.
Ibid.
188
OBLIGATIONS AND CONTRACTS
cannot be prevented by the objections of anyone. Our
law grants to the debtor the right to withdraw, without
any limitation, and we should not read a non-existing
limitation into the law. Although the other parties
liable for the obligation would have been benefited if the
consignation had been allowed to become effective, before
that moment they have not acquired such an interest as
would give them a right to oppose the exercise of the right
of the debtor to withdraw the consignation.
Before the consignation has been judicially declared
proper, the creditor may prevent the withdrawal by the
debtor, by accepting the consignation, even with reservations. Thus, when the amount consigned does not cover
the entire obligation, the creditor may accept it, reserving
his right to the balance. x x x
Thus, under Article 1260 of the Civil Code, the debtor may
withdraw, as a matter of right, the thing or amount deposited on
consignation in the following instances:
a)
tion; or
before the creditor has accepted the consigna-
b)
before a judicial declaration that the consignation has been properly made.
§173.00 Consignation is retroactive
In Ramos v. Sarao,79 the Court defines tender of payment and
its requirements, and ruled that consignation, when complied with,
has retroactive effect. The Court ruled:
“Tender of payment is the manifestation by debtors
of their desire to comply with or to pay their obligation.
If the creditor refuses the tender of payment without just
cause, the debtors are discharged from the obligation by
the consignation of the sum due. Consignation is made by
depositing the proper amount to the judicial authority,
before whom the tender of payment and the announcement of the consignation shall be proved. All interested
79
451 SCRA 103 [2005].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
parties are to be notified of the consignation. Compliance
with these requisites is mandatory.
The trial and the appellate courts held that there
was no valid consignation, because petitioner had failed
to offer the correct amount and to provide ample consignation notice to Sarao. This conclusion is incorrect.
Note that the principal loan was P1,310,430 plus 4.5
percent monthly interest compounded for six months. Expressing her desire to pay in the fifth month, petitioner
averred that the total amount due was P1,633,034.19,
based on the computation of Sarao herself. The amount
of P2,911,579.22 that the latter demanded from her to
settle the loan obligation was plainly exorbitant, since
this sum included other items not covered by the agreement. The property had been used solely as security for
the P1,310,430 loan; it was therefore improper to include
in that amount payments for gasoline and miscellaneous
expenses, taxes, attorney’s fees, and other alleged loans.
When Sarao unjustly refused the tender of payment in
the amount of P1,633,034.20, petitioner correctly filed
suit and consigned the amount in order to be released
from the latter’s obligation.
The two lower courts cited Article 1257 of the Civil
Code to justify their ruling that petitioner had failed to
notify Respondent Sarao of the consignation. This provision of law states that the obligor may be released, provided the consignation is first announced to the parties
interested in the fulfillment of the obligation.
The facts show that the notice requirement was complied with. In her August 1, 1991 letter, petitioner said
that should the respondent fail to accept payment, the
former would consign the amount. This statement was an
unequivocal announcement of consignation. Concededly,
sending to the creditor a tender of payment and notice of
consignation — which was precisely what petitioner did
— may be done in the same act.
Because petitioners’ consignation of the amount of
P1,633,034.20 was valid, it produced the effect of payment.
“The consignation, however, has a retroactive effect, and
the payment is deemed to have been made at the time of
189
190
OBLIGATIONS AND CONTRACTS
the deposit of the thing in court or when it was placed
at the disposal of the judicial authority.” “The rationale
for consignation is to avoid making the performance of an
obligation more onerous to the debtor by reason of causes
not imputable to him.”
§174.00 When consignation alone discharges obligation
As rule, to release the debtor from his obligation to pay money,
there must be tender of payment, and if refused, the amount of
the indebtedness be consignated in court, with notice made to the
creditor. However, consignation alone shall result in the discharge
of obligation, in any of the instances provided for in Art. 1256, which
reads:
Consignation alone shall produce the same (release
from obligation) effect in the following cases:
(1) When the creditor is absent or unknown, or
does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3)
receipt;
When, without just cause, he refuses to give a
(4) When two or more persons claim the same right
to collect;
(5)
When the title of the obligation has been lost.
When two or more persons claim the same right to collect
the obligation, and only one of them is entitled thereto, the debtor
may file an interpleader case80 and deposit the amount in court, for
the court to determine who among the persons has right to collect
amount.81
§175.00 Consignation in ejectment
To prevent the execution of the appealed decision in an ejectment suit, the lessee-appellant must make a monthly valid consig80
81
Beltran v. People’s Homesite and Housing Corp., 29 SCRA 145 [1969].
Eternal Garden Memorial Park Corp. v. IAC, 165 SCRA 439 [1988].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
191
nation of the rentals due, which means that he has to comply with
all the requirements of valid consignation, such as tender of payment of monthly rentals; notice of prior consignation to the lessor
every monthly consignation; and actual deposit in court of monthly
rentals.82
§176.00 Consignation under B.P. 25
Batas Pambansa Blg. 25, as amended, provides that in case of
refusal by the lessor to accept payment of the rental agreed upon,
the lessee shall either deposit, by way of consignation, the amount
in court or in a bank in the name of and with notice to the lessor.
Failure of a lessee to comply with such requirement entitles the
lessor to eject.83
PAYMENT BY MEANS CHECK
§177.00 When payment by check produces effect of payment
Article 1249 of the Civil Code reads in part:
“The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
have been impaired.
“In the meantime, the action derived from the original obligation shall be held in abeyance.”
§178.00 Purpose of checks as substitute for money
The use or purpose of negotiable instruments, such as checks,
as substitutes for money, enables businessmen and other persons to
carry on business without handling big amounts of cash and to avoid
the inconvenience, danger or risk of carrying large sums of money
itself. Thus, a negotiable instrument must contain an unconditional
promise or order to pay a sum certain in money and its main characteristics of negotiability from one person to another serves such
use or purpose.
82
83
Soco v. Militante, 123 SCRA 160 [1983].
Manuel v. CA, 199 SCRA 603 [1991].
192
OBLIGATIONS AND CONTRACTS
§179.00 Check is not legal tender; when considered cash
Legal tender means the currency which has been made suitable
by law for the purpose of payment of debt.84 Section 52 of Republic
Act No. 7653 makes all notes and coins issued by the Bangko Sentral
and guaranteed by the Republic of the Philippines legal tender in
the Philippines for all debts, both public and private.
Settled is the doctrine that a check is only a substitute for
money and not money, and the delivery of such an instrument does
not, by itself, operate payment. This is especially true in the case of
postdated check.85
Payment of a debt or obligation by means of check, if accepted,
is provisional, and it produces the effect of payment only when it has
been encashed or when through the fault of the creditor it has been
impaired.86 If the check is dishonored, the obligation or debt subsists
and the creditor may hold the debtor liable for recovery of the debt
or obligation.
A check will be equivalent to cash when the payee or indorsee
presents it to the drawee bank for encashment and the latter pays
it in cash. It may also be considered equivalent to cash when it is
deposited in the bank and the same is cleared and credited to the account of the creditor. Section 60 of Republic Act No. 7653 provides:
“Sec. 60. Legal Character. — Checks representing
demand deposits do not have legal tender power and
their acceptance in the payment of debts, both public and
private is at the option of the creditor: Provided, however,
That a check which has been cleared and credited to the
account of the creditor shall be equivalent to a delivery to
the creditor of cash.”
He who claims that he has issued or endorsed a check has
the burden of showing, by competent evidence, that it was actually
encashed or deposited and the proceeds thereof credited to his
account. Such evidence is the returned check itself and pertinent
bank records. If such proof is not presented or shown, it is presumed
that the check was not encashed or credited in favor of the person
intended.87
Peralta v. Serrano, 110 Phil. 307 [1960].
BPI Express Card Corp. v. CA, 296 SCRA 260 [1998].
86
Crystal v. CA, 62 SCRA 501 [1975].
87
Naguiat v. CA, G.R. No. 118375, Oct. 3, 2003.
84
85
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
193
§180.00 Checks may be refused as tender of payment
In the absence of an agreement, either express or implied,
payment means the discharge of a debt or obligation in money and
unless the parties so agree, a debtor has no rights, except at his own
peril, to substitute something in lieu of cash as medium of payment of
his debt. Hence, delivery of negotiable instrument or check, whether
manager’s check or ordinary check, does not, by itself, operate as
payment, nor does it discharge an obligation under a judgment.88
A check, whether manager’s check or ordinary check, is not
legal tender, and an offer of a check in payment of a debt is not a
valid tender of payment and may be refused receipt by the obligee or
creditor.89 However, if accepted by a creditor, expressly or impliedly,
a check which has been cleared and credited to the account of the
creditor shall be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account.90
While a check does not constitute legal tender, the creditor
has the option and discretion of refusing or accepting the check in
payment of the obligor’s debt. If he accepts it and the check is well
funded, and the drawee bank honors it, the same constitutes valid
payment. Thus, it has been held:
“Though a check is not legal tender, and a creditor
may validly refuse to accept it if tendered as payment,
one who in fact accepted a fully funded check after the
debtor’s manifestation that it had been given to settle
an obligation is estopped from later on denouncing the
efficacy of such tender of payment.”91
Illustrative of the rule is Far East Bank & Trust Co. v. Diaz
Realty, Inc.92 In this case, the records show that petitioner bank purchased respondent’s account from PBC in December 1986, and that
the latter was notified of the transaction only on March 23, 1988.
Thereafter, Antonio Diaz, president of respondent corporation, inquired from petitioner on the status and the amount of its obligation.
He was informed that the obligation summed up to P1,447,142.03.
PAL v. CA, 181 SCRA 557 [1990].
Roman Catholic Bishop of Malolos, Inc. v. IAC, 191 SCRA 411 [1990].
90
Tibajia v. CA, 223 SCRA 163 [1993].
91
Far East Bank & Trust Co. v. Diaz Realty, Inc., G.R. No. 138588, Aug. 23,
88
89
2001.
92
363 SCRA 659 [2001].
194
OBLIGATIONS AND CONTRACTS
On November 14, 1988, petitioner received from respondent Interbank Check No. 81399841 dated November 13, 1988, bearing the
amount of P1,450,000, with the notation “Re: Full Payment of Pacific Bank Account now turn[ed] over to Far East Bank.” The check
was subsequently cleared and honored by Interbank, as shown by
the Certification it issued on January 20, 1992. In holding that there
has been valid tender of the check in payment of the obligation and
its acceptance, the Court said:
True, jurisprudence holds that, in general, a check
does not constitute legal tender, and that a creditor may
validly refuse it. It must be emphasized, however, that
this dictum does not prevent a creditor from accepting a
check as payment. In other words, the creditor has the
option and the discretion of refusing or accepting it.
In the present case, petitioner bank did not refuse
respondent’s check. On the contrary, it accepted the check
which, it insisted, was a deposit. As earlier stated, the
check proved to be fully funded and was in fact honored
by the drawee bank. Moreover, petitioner was in possession of the money for several months.
In further contending that there was no valid tender
of payment, petitioner emphasizes our pronouncement in
Roman Catholic Bishop of Malolos, Inc. v. Intermediate
Appellate Court, as follows:
“Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency
as payment to the obligee for the former’s obligation and
demanding that the latter accept the same.
xxx
“Thus, tender of payment cannot be presumed by a
mere inference from surrounding circumstances. At most,
sufficiency of available funds is only affirmative of the
capacity or ability of the obligor to fulfill his part of the
bargain. But whether or not the obligor avails himself of
such funds to settle his outstanding account remains to
be proven by independent and credible evidence. Tender
of payment presupposes not only that the obligor is able,
ready, and willing, but more so, in the act of performing
his obligation. Ab posse ad actu non vale illatio. ‘A proof
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
that an act could have been done is no proof that it was
actually done.’”
In other words, tender of payment is the definitive act
of offering the creditor what is due him or her, together
with the demand that the creditor accept the same. More
important, there must be a fusion of intent, ability and capability to make good such offer, which must be absolute
and must cover the amount due.
That respondent intended to settle its obligation with
petitioner is evident from the records of the case. After
learning that its loan balance was P1,447,142.03, it presented to petitioner a check in the amount of P1,450,000,
with the specific notation that it was for full payment of
its Pacific Bank account that had been purchased by petitioner. The latter accepted the check, even if it now insists that it considered the same as a mere deposit. The
check was sufficiently funded, as in fact it was honored
by the drawee bank. When petitioner refused to release
the mortgage, respondent instituted the present case to
compel the bank to acknowledge the tender of payment,
accept payment and cancel the mortgage. These acts demonstrate respondent’s intent, ability and capability to fully settle and extinguish its obligation to petitioner.
That respondent subsequently withdrew the money
from petitioner-bank is of no moment, because such withdrawal would not affect the efficacy or the legal ramifications of the tender of payment made on November 14,
1988. As already discussed, the tender of payment to settle respondent’s obligation as computed by petitioner was
accepted, the check given in payment thereof converted
into money, and the money kept in petitioner’s possession
for several months.
Finally, petitioner points out that, in any case, tender of payment extinguishes the obligation only after
proper consignation, which respondent did not do.
The argument does not persuade. For a consignation to be necessary, the creditor must have refused, without just cause, to accept the debtor’s payment. However,
as pointed out earlier, petitioner accepted respondent’s
check.
195
196
OBLIGATIONS AND CONTRACTS
To iterate, the tender was made by respondent for
the purpose of settling its obligation. It was incumbent
upon petitioner to refuse, or accept it as payment. The latter did not have the right or the option to accept and treat
it as a deposit. Thus, by accepting the tendered check and
converting it into money, petitioner is presumed to have
accepted it as payment. To hold otherwise would be inequitable and unfair to the obligor.”
§181.00 Tender of cash or check and consignation
For a valid tender of payment, it is necessary that there be fusion
of intent, ability and capability to make good such offer, which must
be absolute and must cover the amount due.93 If a check is tendered
for payment of an obligation, which complies with the requisites of
a valid tender, notwithstanding which the same is refused because
it is not a legal tender, it must be followed by consignation so as to
constitute a valid payment of obligation.94 Tender is the antecedent of
consignation, that is, an act preparatory to the consignation, which
is the principal action, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain. Tender
of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private
settlement before proceeding to the solemnities of consignation.95
Consignation is the act of depositing with the court or judicial
authority the thing or amount due whenever the creditor refuses
or cannot accept payment of the amount due.96 In order that the
consignation may be effective, the debtor must first comply with the
following requisites: (1) that there is a debt due and demandable; (2)
that the consignation of the obligation has been made because the
creditor to whom tender of payment is made refused to accept it, or
because he was absent or incapacitated, or because several persons
claim to be entitled to receive the amount due; (3) that previous
notice of the consignation has been given to the person interested in
the performance of the obligation; (4) that the amount due is placed
93
Far East Bank & Trust Co. v. Diaz Realty, Inc., G.R. No. 138588, Aug. 23,
2001.
Francisco v. Bautista, 192 SCRA 388 [1990].
Soco v. Militante, 123 SCRA 160 [1983].
96
Quirino v. Palarca, 29 SCRA 1 [1969].
94
95
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
197
at the disposal of the court; and (5) that after the consignation has
been made the person interested is notified thereof.97
Where the objection to the tender of certified check in payment
of an obligation is to the sufficiency of the amount thereof and not
to the fact that the check is not a legal tender, there is valid tender;
and the consignation thereof in court results in the discharge of the
obligation. In Pabugais v. Sahijwani,98 the Court ruled:
Consignation is the act of depositing the thing due
with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it
generally requires a prior tender of payment. In order
that consignation may be effective, the debtor must show
that: (1) there was a debt due; (2) the consignation of the
obligation had been made because the creditor to whom
tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due
or because the title to the obligation has been lost; (3)
previous notice of the consignation had been given to the
person interested in the performance of the obligation; (4)
the amount due was placed at the disposal of the court;
and (5) after the consignation had been made the person
interested was notified thereof. Failure in any of these
requirements is enough ground to render a consignation
ineffective.
The issues to be resolved in the instant case concerns one of the important requisites of consignation, i.e.,
the existence of a valid tender of payment. As testified by
the counsel for respondent, the reasons why his client did
not accept petitioner’s tender of payment were – (1) the
check mentioned in the August 5, 1994 letter of petitioner
manifesting that he is settling the obligation was not attached to the said letter; and (2) the amount tendered was
insufficient to cover the obligation. It is obvious that the
reason for respondent’s non-acceptance of the tender of
payment was the alleged insufficiency thereof – and not
97
Dungao v. Roque, 90 Phil. 657 [1951]; Gardner v. CA, 80 SCRA 399 [1977];
Soco v. Militante, 123 SCRA 160 [1983].
98
G.R. No. 146846, Feb. 23, 2003.
198
OBLIGATIONS AND CONTRACTS
because the said check was not tendered to respondent,
or because it was in the form of manager’s check. While
it is true that in general, a manager’s check is not legal
tender, the creditor has the option of refusing or accepting it. Payment in check by the debtor may be acceptable
as valid, if no prompt objection to said payment is made.
Consequently, petitioner’s tender of payment in the form
of manager’s check is valid.
Acceptance of the amount consigned or deposited in court,
without reservation, discharges the obligation of the debtor.99
§182.00 Tender of check in the exercise of right
There is a difference between payment of “debt” by means of
a check, and the “exercise of a right or option” by the tender of a
check. “Debt” is an obligation to pay money at some fixed or future
time, or at a time which becomes definite and fixed by acts of either
or both parties.100 The right to accept a check in payment of such
debt belongs to the creditor, who may refuse it. On the other hand,
the exercise of a right or option, as in the redemption of a foreclosed
property, is a privilege, not an obligation, of the person who has
the right or option to exercise it. He may exercise the right, by a
tender of a check, within the period, which is considered effective to
preserve such right.101 Article 1249 of the Civil Code applies to the
payment of debt by means of a check, which gives the creditor the
right to refuse tender of a check in payment of debt, but not to the
right of redemption.
Thus, where a party is given the right to redeem or repurchase
property within a specified period by paying the amount involved, a
mere valid tender to pay within the period, even without consignation, is sufficient to preserve the right. The requirements of tender
and consignation apply only as a means to discharge an obligation
or debt; they do not apply to the exercise of a right.102
Tender of payment is sufficient to preserve a right or privilege
in the case of an option contract, or in legal redemption, or in a sale
with right to repurchase. Consignation is not necessary to preserve
Riesenbeck v. CA, 209 SCRA 656 [1992].
Lirag Textile Mills, Inc. v. SSS, 153 SCRA 388 [1987].
101
Fortunato v. CA, 196 SCRA 269 [1991].
102
Francisco v. Bautista, 192 SCRA 388 [1990].
99
100
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
199
such right, consignation being necessary only in the performance of
an obligation.103
§183.00 Check for redemption is valid
Case law has distinguished between a check in payment of a
debt or obligation and a check for redemption or exercise of a right or
option. Thus, while a check is not a legal tender and the creditor may
refuse to accept it in payment of the debtor’s debt, it has been held
that a tender of a manager’s check for the redemption of a mortgaged
property foreclosed extrajudicially by the creditor made within the
period of redemption is valid. Citing Javellana v. Mirasol,104 the
Court stated that it has already sanctioned redemption by check in
Co v. PNB.105 This rule requires that the check be good or honored,
for if the check is dishonored, the redemption is null and void; or
the check be presented for payment within a reasonable time from
issue, for if the check becomes stale in the hands of the creditor, by
his fault or negligence, and without the fault or negligence of the
redemptioner, it would be unfair to deprive him of his rights that he
acquired as redemptioner.106
The distinction between a check in payment of a debt or
obligation and a check for redemption or exercise of a right or option
and the consequent effects of the latter are explained in detail in
Fortunato v. Court of Appeals,107 as follows:
“The central issue in this case is whether or not redemption had been validly effected by the private respondents.
“It is contended by the private respondents that Article 1249 of the New Civil Code is inapplicable as it ‘deals
with a mode of extinction of debts’ while the ‘right to redeem is not an obligation, nor is it intended to discharge
a pre-existing debt.’
They rely on Javellana, where we held that ‘redemption of property sold under execution is not rendered invalid by reason of the fact that the payment to the sheriff
Adelfa Properties, Inc. v. CA, 240 SCRA 565 [1995].
40 Phil. 761.
105
114 SCRA 842 [1982].
106
Crystal v. CA, 71 SCRA 443 [1975].
107
196 SCRA 269 [1991].
103
104
200
OBLIGATIONS AND CONTRACTS
for the purpose of redemption is offered by means of a
check for the amount due.
The petitioners, on the other hand, invoke Belisario
v. Natividad, where it was held that ‘even if the check had
been good, the defendant was not legally bound to accept
it because such check does not satisfy the requirements
of a legal tender.’ They also cite Villanueva v. Santos, Legarda v. Miailhe, New Pacific Timber and Supply, Inc. v.
Seneris, and Philippine Airlines v. Court of Appeals, all of
which, they claim, have overruled Javellana.
The Court does not agree with these conclusions. It
would appear from a study of the jurisprudence invoked
by the parties that the case applicable to the present controversy is Javellana v. Mirasol.
The cases cited by the petitioners do not invoke redemption by check. The check tendered in Belisario was
in the exercise of an option to repurchase; in Villanueva
in connection with pacto de retro; in Legarda and New Pacific as payment of a mortgage indebtedness; and in PAL
case in satisfaction of a judgment.
Tolentino v. Court of Appeals, besides citing Javellana, stresses the liberality of the courts in redemption
cases. On the issue of the applicability of Article 1249 of
the Civil Code and the validity of the tender of payment
through crossed check, this Court held:
x x x the afore-quoted Article should not be applied
to the instant case x x x.
To start with, the Tolentinos are not indebted to BPI
their mortgage indebtedness having been extinguished
with the foreclosure and sale of the mortgaged properties. After said foreclosure and sale, what remains is the
right vested by law in favor of the Tolentinos to redeem
the properties within the prescribed period. This right of
redemption is an absolute privilege, the exercise of which
is entirely dependent upon the will and discretion of the
redemptioner. There is, thus, no legal obligation to exercise the right of redemption. Said rights can, in no sense,
be considered an obligation, for the Tolentinos are under
no compulsion to exercise the same. Should they choose
not to exercise it, nobody can compel them to do so nor
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
will such choice give rise to a cause of action in favor of
the purchaser at the auction sale. In fact, the relationship between said purchaser and the redemptioners is not
even that of a creditor and debtor.
On the other hand, if the redemptioners choose to
exercise their right of redemption, it is the policy of the
law to aid rather than to defeat the right of redemption.
It stands to reason therefore, that redemptions should be
looked upon with favor and where no injury is to follow, a
liberal construction will be given to our redemption laws
as well as to the exercise of the right of redemption. In the
instant case, the ends of justice would be better served by
affording the Tolentinos the opportunity to redeem the
properties in question other than the homestead land, in
line with the policy aforesaid. x x x.
xxx
x x x And the redemption is not rendered invalid
by the fact that the said officer accepted a check for the
amount necessary to make the redemption instead of
requiring payment in money. It goes without saying that
if he had seen fit to do so, the officer could have required
payment to be made in lawful money, and be undoubtedly,
in accepting a check, placed himself in a position where
he could be liable to the purchaser at the public auction
if any damage had been suffered by the latter as a result
of the medium in which payment was made. But this
cannot affect the validity of the payment. The check as
a medium of payment in commercial transaction is too
firmly established by usage to permit of any doubt upon
this point as the present day. No importance may thus
be attached to the circumstance that a stop-payment
order was issued against the check the day following the
deposit, for the same will not militate against the right
of the Tolentinos to redeem, in the same manner that
a withdrawal of the redemption money being deposited
cannot be deemed to have forfeited the right to redeem,
such redemption being optional and not compulsory.
Withal, it is not clearly shown that said stop-payment
order was made in bad faith. x x x.”108
108
Ibid., pp. 274-276.
201
202
OBLIGATIONS AND CONTRACTS
In New Pacific Timber & Supply Co., Inc. v. Seneris,109 the issue was whether or not the deposit of cashier’s
check, issued by a reputable bank, with the Sheriff as payment of a judgment debt to prevent the latter from selling at public auction the debtor’s property to satisfy the
judgment is a valid satisfaction of judgment. The Court
rejected the trial court’s argument that a check is not a
legal tender; and that delivery of notes payable to order
or bills of exchange does not produce the effect of payment
until encashed or impaired thru the fault of the creditor,
and ruled that the judgment creditor cannot validly refuse to accept the cashier’s check in payment of the judgment obligation because the cashier’s check is deemed as
cash. Ruled the Court:
“It is to be emphasized in this connection that
the check deposited by the petitioner in the amount of
P50,000.00 is not an ordinary check but a cashier’s check
of the Equitable Banking Corporation, a bank of good
standing and reputation. As testified to by the Ex-Official
Sheriff with whom it has been deposited, it is a certified
crossed check. It is a well-known and accepted practice
in the business sector that a cashier’s check is deemed as
cash. Moreover, since the said check had been certified
by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the
maker to that of the payee or holder, and for all intents
and purposes, the latter becomes the depositor of the
drawee bank, with rights and duties of one institution. x x
x The object of certifying a check, as regards both parties,
is to enable the holder to use it as money. x x x We see no
valid reason for the private respondent to have refused
acceptance of the payment of the obligation in his favor. x
x x Thus, petitioner’s motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and
the respondent Judge gravely abused his discretion in not
granting the same under the circumstances.”110
109
110
101 SCRA 686 [1980].
Ibid., pp. 692-694.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
203
§184.00 Impairment of note or bill produces effect of payment
Article 1249 of the Civil Code reads:
“Art. 1249. The payment 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.
“The delivery of promissory notes payable to order,
or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
have been impaired.
“In the meantime, the action derived from the original obligation shall be held in abeyance.”
Article 1249 of the Civil Code applies to bills of exchange which
are discharged for not having been protested upon refusal of the
drawee to pay and that failure to protest such dishonor discharged
the liability on the bill. In Quiros v. Tan-Guinlay,111 construing Art.
1170 of the old Civil Code, now Art. 1249, the Court ruled:
“(2) The goods referred to in the complaint sold to
the defendant in two parcels. The value of the first lot
was 2,235.95 pesos. For the purpose of paying this sum
the defendant delivered to the plaintiff a bill of exchange
for 2,700 pesos, purporting to be drawn by Juan Vy-Teco
to the order of Chua-Sengco on Lucio Icaza. When this
bill of exchange was delivered to the plaintiff by the defendant it had been indorsed by Chua-Sengco, and by the
defendant, and apparently accepted by Lucio Icaza. By
the terms of the acceptance the bill of exchange was payable on the 26th of December 1893. The plaintiff took the
bill of exchange and paid the defendant in cash the difference between 2,700 pesos and the value of the bonds sold,
2,235.95 pesos. At the maturity of the acceptance Icaza
refused to pay the bill of exchange, on the ground that
his signature thereto was a forgery, and nothing was ever
realized thereon. The plaintiff neglected to have the bill
of exchange protested for this non-payment. The defen-
111
5 Phil. 675 [1906].
204
OBLIGATIONS AND CONTRACTS
dant claims that the court committed an error in ordering
judgment for the full value of the goods sold, inasmuch
as the plaintiff, by reason of his failure to protest the bill
of exchange, must suffer the loss occasioned by its nonpayment. This contention, we think, should be sustained.
Article 1170 of the Civil Code is as follows:
‘Payments of debts of money shall be
made in the specie stipulated and, should it not
be possible to deliver the specie, then in legal
silver or gold coin current in Spain.
The delivery of promissory notes to order
or drafts or other commercial paper shall only
produce the effects of payment when collected
or when, by the fault of the creditor, their value
has been affected.
In the meantime the action arising from
the original obligation shall be suspended.’
We have already held, in the case of Compania
General de Tabacos vs. Molina (No. 2091, 3 Off. Gaz. 678)
that this section applies both to mercantile documents
executed by the debtors themselves, and to those executed
by third persons and delivered by the debtor to the
creditor. The bill of exchange in this case comes within
the second class and by the terms of the second paragraph
of Article 1170 it must be considered as payment of the
debt, inasmuch as its value has been affected by the fault
of the creditor (the plaintiff) in failing to have the bill
of exchange protested for nonpayment. These should be
deducted, therefore, from the sum allowed the plaintiff,
2,235.95 pesos.”112
It should be noted that the Court in Quiros v. Tan-Guinlay
supra., ruled that the old provision, Art. 1170 on the subject, applies
“both to commercial documents executed by the debtors themselves,
and to those executed by third persons and delivered by the debtor
to the creditor.” Article 1170 of the old Civil Code is now Article
1240 of the revised Civil Code. The bill of exchange used to pay the
goods in Quiros was executed by a third person and indorsed by
112
Ibid., pp. 676-677.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
205
the purchaser and delivered to the seller, the creditor. Since the
bill of exchange was dishonored, and the creditor did not protest
its dishonor for nonpayment, the Court held that pursuant to said
Civil Code provision the delivery of the bill to the creditor or seller
produced the effect of payment of the obligation because the bill was
impaired through the fault of the creditor.
However, in the subsequent case of National Marketing Corp.
v. Federation of United Narmaco Distributors, Inc.,113 the Court
ruled that the “clause of Article 1249 relative to the impairment of
the negotiable character of the commercial paper by the fault of the
creditor, is applicable only to instruments executed by third persons
and delivered by the debtor to the creditor, and does not apply to
instruments executed by the debtor himself and delivered to the
creditor.” In this case, it is claimed by the debtor (Federation) that
the delivery of its drafts to the creditor (Namarco) and the latter’s
failure to comply with the requirements of the drafts that they be
presented to the debtor for acceptance before they can be honored by
the bank have discharged its debt under the drafts. In rejecting such
claim, the Court ruled:
“Furthermore the mere delivery by the Federation of
the domestic letters of credit to Namarco did not operate
to discharge the debt of the Federation. As shown by the
appealed judgment Namarco accepted the letters of credit
‘to insure the payment of those goods by the Federation
x x x.’ It was given therefore as a mere guarantee for the
payment of the merchandise. The delivery of promissory
notes payable to order, or bills of exchange or drafts or other
mercantile document shall produce the effect of payment
only when realized, or when by the fault of the creditor,
the privileges inherent in their negotiable character have
been impaired. (Art. 1249, New Civil Code). The clause of
Article 1249 relative to the impairment of the negotiable
character of the commercial paper by the fault of the
creditor, is applicable only to instruments executed by
third persons and delivered by the debtor to the creditor,
and does not apply to instruments executed by the debtor
himself and delivered to the creditor. In the case at bar
it is not even pretended that the negotiable character of
the sight drafts was impaired as a result of the fault of
113
49 SCRA 238 [1973].
206
OBLIGATIONS AND CONTRACTS
Namarco. The fact that Namarco attempted to collect from
the Philippine National Bank on the drafts on March 10,
1960, is of no material significance. As heretofore stated
they were never taken, in the first instance as payment.
There was no agreement that they should be accepted as
payment. The mere fact that Namarco proceeded in good
faith to try to collect payments thereon, did not amount
to an appropriation by it of the amounts mentioned in
the sight drafts so as to release its claims against the
Federation. A mere attempt to collect or enforce a bill
or note from which no payment results is not such an
appropriation of it as to discharge the debt.”114
There is thus an inconsistency between the decision in
Namarco, supra. and that in Quiros, supra., in that in Namarco, it
held that the note or bill of exchange in payment of a debt applies
only when the note or bill is executed by a third person and delivered
to the creditor, while in Quiros, it held that a note or bill applies
to instruments issued by the debtor himself and delivered to the
creditor and by a third person and indorsed or delivered by the
debtor to the creditor.
The apparent reason underlying the doctrine in Namarco is that
where the instrument is issued by the debtor himself and delivered
to the creditor, as payment of the obligation, the debtor is a drawer
and the impairment of the instrument thru the fault of the creditor
discharges the instrument to the extent of the loss caused thereby,
and if no such loss is shown by the debtor, the latter’s obligation
is not discharged.115 If the instrument is issued by a third person
which the debtor indorses and delivers to the creditor, in payment
of his obligation, the third person is a drawer and the debtor is an
indorser, and the latter is released from liability on the instrument
when the instrument is impaired by the fault of the creditor, as when
the latter, upon presentment of the instrument for payment and its
dishonor, did not protest or give notice of dishonor.116
It should be noted that Article 1249 of the Civil Code did not
distinguish whether the note or bill of exchange is issued by a debtor
himself or by a third person which the debtor delivers to the creditor
in payment of debt, and following the maxim, when the law does
Ibid., pp. 270-271.
See International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
116
Philippine National Bank v. Seeto, 91 Phil. 756 [1952].
114
115
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
207
not distinguish, courts should not do so, the ruling in Namarco,
which limits the application of Article 1249 of the Civil Code to
promissory note and bill of exchange to those issued by third persons
and delivered to creditor, is not in consonance with such maxim.
The ruling in Quiros v. Tan-Guinlay, which makes the Civil Code
provision applicable to notes or bills issued by the debtor himself
and delivered to the creditor and those issued by third persons and
delivered to the creditor appears to be more in conformity with Article
1249 of the Civil Code, as the latter did not make any distinction or
qualification as whether the maker of the note or the drawer of the
bill is the debtor himself or a third person.117
It should also be noted that Article 1249 states that the delivery
of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment when
through the fault of the creditor they have been impaired, such as
his non-presentation or delayed presentation of the instrument for
payment. This means that the maker of the note or the drawer of
a bill of exchange is released from his obligation arising from the
debt itself and from the note or bill of exchange. However, Section
186 of the NIL provides that insofar as checks are concerned, which
are bills of exchange, the impairment of a check for not having been
presented for payment within a reasonable time after its issue,
or beyond six (6) months from its issue will discharge the drawer
from his liability on the check “to the extent of the loss caused by
the delay.”118 There is thus an apparent contradiction, for under
Article 1249 of the Civil Code, the impairment of a bill of exchange,
including a check, through the fault of the creditor by the latter’s
failure to present it for payment or to present it within a reasonable
period, discharges the maker from his liability or the drawer to the
full extent of the face value of the instrument,119 while under Section
186 of the NIL, the drawer is discharged only to the extent of the
loss caused thereby. Thus, the Court held:
“(F)ailure to present for payment within a reasonable
time will result to the discharge of the drawer only to the
extent of the loss caused by the delay. Failure to present
on time, thus, does not totally wipe out all liability. In
fact, the legal situation amounts to an acknowledgement
Papa v. A.U. Valencia & Co., Inc., 284 SCRA 643 [1998].
International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
119
Papa v. A.U. Valencia & Co., Inc., Ibid.
117
118
208
OBLIGATIONS AND CONTRACTS
of the liability in the sum stated in the check. In this case,
the Gueco spouses have not alleged, much less shown that
they have or the bank which issued the manager’s check
has suffered damage or loss caused by the delay or nonpresentment. Definitely, the original obligation to pay
certainly has not been erased.”120
Article 1249 of the Civil Code and Section 186 of the Negotiable
Instruments Law should be reconciled, they being statutory provisions in pari materia, such that Section 186 of the NIL should be
construed as an exception to the general rule expressed in Article
1249 of the Civil Code, and if they cannot be reconciled or are irreconcilable, the latter should prevail since it is the latest expression of
legislative intent.121
§185.00 Time to present check for payment
Sec. 186. Within what time a check must be presented. — A check must be presented for payment
within a reasonable time after its issue or the drawer will be discharged from liability thereon to the
extent of the loss caused by the delay.
§186.00 Reasonable time to present check for payment
A check must be presented for payment within a reasonable
time after its issue, and in determining what is reasonable time,
regard is to be had to the nature of the instrument, the usage of
trade or business within respect to such instruments, and the facts
of the particular case. The test is whether the payee employed such
diligence as a prudent man exercises in his own affairs. This is
because the nature and theory behind the use of a check points to its
immediate use and payability.122
A check usually becomes stale after six (6) months from its
issue.123 Hence, the general rule is that a reasonable period to present
International Corporate Bank v. Gueco, 351 SCRA 516, 528-529 [2001].
City of Naga v. Agna, 71 SCRA 176 [1976]. See RUBEN E. AGPALO, Statutory
Construction, Fifth Edition (2003), pp. 268 et seq., for detailed discussion on the subject.
122
International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
123
Wong v. CA, 351 SCRA 100 [2001].
120
121
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
209
a check for payment is within six (6) months from issue, beyond which
the period becomes unreasonable.124 There may be a shorter period
than six (6) months, depending upon the circumstances obtaining
in each case, when the period would become unreasonable, or there
may be longer period than six (6) months when the check may not
become stale.125
In a case, a check payable on demand which was long overdue
by about two and one-half years was considered a stale check. Failure
of a payee to encash a check for more than ten years undoubtedly
resulted in the check becoming stale. Thus, even a delay of one
week or two days under the specific circumstances of the cited cases
constituted unreasonable time as a matter of law.126
§187.00 Stale check
A stale check is one which has not been presented for payment
within reasonable time after its issue. By current banking practice,
a check becomes stale after more than six (6) months or 180 days.127
A stale check is valueless and, therefore, should not be paid.
There is a difference between the dishonor of a check and
the check being stale for not being presented for payment at all.
If the check intended to pay an obligation is dishonored, then the
obligation cannot be said to have been paid. However, if the check is
delivered to the creditor for payment of an obligation and the same
became stale for not having been presented for payment, it becomes
imperative that the circumstances that caused its non-presentment
be determined. If the non-presentment was due to the fault of the
creditor, then such circumstance might produce the effect of payment
of the obligation.128
§188.00 Effect of failure of presentment or delay in notice of
dishonor
Failure to present a check for payment within a reasonable
time will result to the discharge of the drawer only to the extent
International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
Ibid.
126
Ibid.
127
Wong v. CA, 351 SCRA 100 [2001].
128
Crystal v. CA, 71 SCRA 443 [1976].
124
125
210
OBLIGATIONS AND CONTRACTS
of the loss caused by the delay. Failure to present on time, thus,
does not totally wipe out all liability of the drawer, but only if loss
is caused by the delay and only to the extent of the loss. In fact,
the legal situation amounts to an acknowledgment of liability in the
sum stated in the check.129
The same effect results in case of delay in giving notice of
dishonor of a check. Under common law, delay in notice of dishonor,
where such notice is required, discharges the drawer only to the
extent of the loss caused by the delay. This rule finds application
in this jurisdiction pursuant to Section 196 of the Negotiable
Instruments Law which states, “Any case not provided for in this
Act shall be governed by the provisions of existing legislation, or in
default thereof, by the rules of the Law Merchant.” Under Section
186 of the Negotiable Instruments Law, delay in the presentment
of checks discharges the drawer from liability thereon to the extent
of the loss caused by the delay. However, Section 186 refers only to
delay in presentment of checks but is silent on delay in giving notice
of dishonor. Consequently, the common law or Law Merchant can
supply this gap in accordance with Section 196 of the Negotiable
Instruments Law. Hence, delay in giving notice of dishonor of a
check discharges the drawer only to the extent of the loss caused by
the delay.130
The rule is different with respect to the indorser. The failure
to present the check for payment or the unreasonable delay in its
presentment for payment discharges the indorser from liability,
irrespective of any loss caused thereby. The reason is that the
indorser suffered loss either actually or presumptively.131
§189.00 Sec. 186 of NIL and Art. 1249 of Civil reconciled
Pursuant to Article 1249 of the Civil Code, while delivery of
a check produces the effect of payment only when it is encashed, it
has been held in Pio Barretto Realty Dev. Corp. v. Court of Appeals,132
that the “rule is otherwise if the debtor was prejudiced by the
creditor’s unreasonable delay in presentment. Acceptance of a check
International Corporate Bank v. Gueco, 351 SCRA 516 [2001].
Great Asian Sales Center Corp. v. Court of Appeals, G.R. No. 105774, April
25, 2002.
131
PNB v. Seeto, 91 Phil. 756 [1952].
132
360 SCRA 127 [2001].
129
130
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
211
by a payee implies an undertaking on his part of due diligence in
presenting it for payment. If the payee or holder does not present it
for payment, the drawer cannot be held liable irrespective of loss or
injury sustained by the payee. Payment will be deemed effected and
the obligation for which the check was given as conditional payment
will be discharged.”133
The above ruling was based on Article 1249 of the Civil Code.
However, Section 186 of the NIL provides that a “check must be
presented for payment within a reasonable time after its issue or the
drawer will be discharged from liability thereon to the extent of the
loss caused by the delay.” Pio Barretto Realty Dev. Corp. holds that
“if the payee or holder does not present it for payment, the drawer
cannot be held liable irrespective of loss or injury sustained by the
payee,” and cites, in support thereof, Papa v. A.U. Valencia and Co.,
Inc.,134 which also makes a similar ruling. In Papa, a check was used
to pay the purchase price of a piece of land and while the seller
received the check, the latter claimed that he had not encashed it, and
refused to deliver the title and possession of the land to the buyer for
non-payment of the price. In holding that the unreasonable period to
present said check for payment produced the effect of payment, the
Court citing Article 1249 of the Civil Code, ruled:
“Granting that petitioner had never encashed the
check, his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check for
his unreasonable and unexplained delay.
While it is true that the delivery of a check produces
the effect of payment only when it is cashed, pursuant to
Article 1249 of the Civil Code, the rule is otherwise if the
debtor is prejudiced by the creditor’s unreasonable delay
in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment,
and if from whom it is received sustains loss by want of
such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given. It
has, likewise, been held that if no presentment is made at
all, the drawer cannot be held liable irrespective of loss or
injury unless presentment is otherwise excused. This is in
harmony with Article 1249 of the Civil Code under which
133
134
Ibid., pp. 139-140.
284 SCRA 643 [1998].
212
OBLIGATIONS AND CONTRACTS
payment by way of check or other negotiable instrument
is conditioned on its being cashed, except when through
the fault of the creditor, the instrument is impaired. The
payee of a check would be a creditor under this provision
and if its non-payment is caused by his negligence, payment will be deemed effected and the obligation for which
the check was given as conditional payment will be discharged.
Considering that respondents Valencia and Panarroyo had fulfilled their part of the contract of sale by delivering the payment of the purchase price, said respondents, therefore, had the right to compel petitioner to
delivery to them the owner’s duplicate of TCT No. 28993
of Angela M. Butte and the peaceful possession and enjoyment of the lot in question.”135
Article 1249 of the Civil Code and Section 186 of the Negotiable
Instruments Law should be reconciled, they being in pari materia.136
Section 186 of the NIL should be limited in its operation, as an
exception to the general rule in Article 1249 of the Civil Code, as
follows: (a) where what is involved is a check, (b) the impairment of
the check refers to the delay of its presentment for payment within
a reasonable period, i.e., six (6) months from issue, and (c) the effect
of such impairment discharges the drawer from liability only to the
extent of the loss caused by such delay, which means that if the
drawer can prove such loss, he will be relieved from liability either
totally or partially to the extent of the amount of loss shown and
proved.
Section 186 does not apply to promissory notes or other bills of
exchange; what is applicable in these instruments is Article 1249 of
the Civil Code. Nor does Section 186 apply to checks which are not
presented for payment at all, as to which Article 1249 of the Civil
Code applies and the impairment of the check for non-presentment
for payment or for other reasons due to the fault of the payee operates
to discharge the drawer from liability, regardless of any loss caused
thereby.137
Ibid., p. 653.
See §§185, 21, supra.
137
Papa v. A.U. Valencia & Co., Inc., 284 SCRA 643 [1998].
135
136
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
213
§190.00 Presentation for unreasonable time discharges indorser
Philippine National Bank v. Seeto,138 raises the issue as to
whether or not an indorser of a check, who received the proceeds
thereof in cash from a bank upon his unqualified endorsement of
the check, is discharged from liability when the bank unreasonably
delayed the presentation for payment of said check to the drawee
bank. It appears that Seeto called at the PNB Branch in Surigao,
Surigao and presented a check drawn by one Gan Yek Kiao against
the Philippine Bank of Commerce Branch in Cebu and succeeded
in encashing it upon his unqualified indorsement thereof. At that
time, Kiao had sufficient funds in his bank to cover the check. The
PNB Branch mailed to PNB Cebu Branch, which received it about
ten days later and which presented it to the drawee bank for payment. The check was dishonored for insufficient funds. Seeto who
was sued for refund of the value of the check claimed that he had
been released from liability because of the unreasonable delay in
presenting the check for payment to the drawee bank. PNB contended that the check need not be presented for acceptance, unlike
a bill of exchange as required by Section 143 and accordingly, Section 144, which releases the drawer and all endorsers from liability
for failure to present it for acceptance for an unreasonable period of
time, is not applicable. In upholding the claim of Seeto and holding
him discharged from liability as endorser of the check, the Court
ruled:
“It is true that Sections 143 and 144 of the law are
not applicable, because these are provisions having to do
with the presentation of a bill of exchange for acceptance,
and are not applicable to a check, as to which presentment
for acceptance is not required.
It is also true that Section 84 is applicable, but its
application is subject to the condition imposed by Section
186, to the effect that the check must be presented for
payment within a reasonable time after its issue.
‘Sec. 186. Within what time a check must
be presented. — A check must be presented
for payment within a reasonable time after its
issue or the drawer will be discharged from
138
91 Phil. 756 [1952].
214
OBLIGATIONS AND CONTRACTS
liability thereon to the extent of the loss caused
by the delay.’
Counsel for petitioner, however, argues that inasmuch as the above section expressly provides for the discharge of the drawer from liability to the extent of the
loss caused by the delay, and, on the other hand, it is silent as to the liability of the indorser, the latter may not
be considered discharged from liability by reason of the
delay in the presentment for payment under the general
principle inclusio unius est exclusio alterius. We find no
reason nor merit in the argument. The silence of Section
186 as to the endorser is due to the fact that his discharge
is already expressly covered by the provision of Section
84, the indorser being a person secondarily liable on the
instrument. The reason for the difference between the liability of the indorser and that of the drawer in case of
dishonor is that the drawer is not probably or necessarily
prejudiced thereby, while an indorser is, actually or by
legal presumption.
Innumerable decisions have already been rendered
in the State courts of the United States to the effect
that although the drawer of a check is discharged only
to the extent of loss caused by unreasonable delay in
presentment, an indorser is wholly discharged thereby
irrespective of any question of loss or injury. x x x
xxx
We have been unable to find any authority sustaining
the proposition that an indorser of a check is not discharged
from liability for an unreasonable delay in presentation
for payment. This is contrary to the essential nature and
character of negotiable instruments – their negotiability.
They are supposed to be passed on with promptness in
the ordinary course of business transactions; not to be
retained or kept for such time as the holder may want,
otherwise the smooth flow of commercial transactions
would be hindered.
xxx
x x x The fact, admitted by the witnesses for the
petitioner, that checks of the drawer issued subsequent
to March 13, 1948, drawn against the same bank and
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
215
cashed at the same Surigao agency were not dishonored
positively shows that the drawer had enough funds when
he issued the check in question, and that had it not
been for the unreasonable delay in its presentation for
payment, the petitioner herein would have been able to
receive payment therefor. x x x.”
§191.00 Period to send notice of dishonor thru clearing house
The collecting bank is required to be notified if checks sent
for clearing through the clearing house are dishonored. The earlier
case law on the matter requires that failure to return the forged
or dishonored instrument to the collecting bank within 24 hours
absolved the latter from liability. In Republic Bank v. CA,139 and cases
cited therein, it was held that failure to return to the collecting bank
forged instrument sent for clearing thru the clearing house within
24 hours absolved the latter from liability. The Court said that when
an endorsement is forged, the collecting bank or last endorser, as a
general rule, bears the loss, but the unqualified endorsement of the
collecting bank on the check should be read together with the 24hour regulation on clearing house operation, and when the drawee
bank fails to return a forged or altered check to the collecting bank
within the 24-hour clearing period, the collecting bank is absolved
from liability.
However, in Associated Bank v. Court of Appeals,140 the Court
modified the rule. It held that the rule mandates that the checks be
returned within twenty-four hours after discovery of the forgery but
in no event beyond the period fixed by law for filing a legal action,
which is ten years, as the action is upon a written contract. The
rationale of the rule is to give the collecting bank (which indorsed
the check) adequate opportunity to proceed against the forger. If
prompt notice is not given, the collecting bank may be prejudiced and
lose the opportunity to go after its depositor. In said case, the Court
found that while the drawee bank did not return the questioned
checks to collecting bank within twenty-four hours, as mandated by
the rules, the drawee bank did not commit negligent delay under the
circumstances and the collecting bank was not prejudiced in going
after the forger, as a consequence of which the collecting bank was
held liable under its indorsement.141
196 SCRA 100 [1991].
252 SCRA 620 [1996].
141
Ibid., pp. 628-638.
139
140
216
OBLIGATIONS AND CONTRACTS
The clearing house rule applied in Associated Bank is an
amendment of the rule applied in earlier cases, which absolved
the collecting bank from liability for failure of the drawee bank to
return the forged checks or forged indorsements within 24 hours.
The existing clearing house rules sustain the decision in Associated
Bank and overruled the decisions in the earlier cases. Sections 20
and 21 of the 1994 Clearing House Rules and Regulations, which are
binding upon participating banks, read:
“Sec. 20. Regular return item procedure. —
20.1. Any check/item sent for clearing through CHC
on which payment should be refused by the Drawee Bank
in accordance with long standing and accepted banking
practices, such as but not limited to the fact that:
It bears the forged or unauthorized signature of the
drawer(s); or
It is drawn against a closed account; or
It is drawn against insufficient funds; or
Payment thereof has been stopped; or
It is post-dated or stale-dated; and
It is a cahiers/manager’s/treasurer’s check of the
drawer which has been materially altered;
shall be returned through the PCHC not later than
the next regular clearing for local exchange and the acceptance of said return by the Sending Bank shall be
mandatory.
20.2. Failure of the Drawee Bank to return such
items within said ‘reglementary period’ shall deprive the
Bank of its right to return the items thru the PCHC.
20.3. However, the right of the Drawer Bank to return the amount of the item(s) returned shall remain to
be governed by the general principles of law when the
defect(s) are discovered after the ‘reglementary period.’
20.4. Return items shall be presented to the Clearing House via the use of MICR Document Center Envelopes and/or other procedure that they may be prescribed
by PCHC. The exchanges and settlement of these items
shall be governed by the applicable and pertinent provisions of these Clearing House Rules and Regulations.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
217
xxx
Sec. 21. Special return items beyond the reglementary clearing period.
Items which have been the subject of material alteration or items bearing a forged endorsement when
such endorsement is necessary for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the regular clearing house facilities within the period prescribed by law for the filing of
a legal action by return bank/branch, institution or entity
against the bank/branch, institution or entity sending the
same.
x x x”
The banks in the country have incorporated the
Philippine Clearing House Corporation, whose articles
of incorporation provide for an arbitration of disputes
arising from its functions in clearing of checks and other
clearing items. Under its rules, any dispute or controversy between two or more clearing participants involving
any check/item cleared thru the PCHC shall be submitted
to its arbitration committee. Participation by any bank in
the clearing operation is deemed a written and subscribed
consent to the binding effect of the arbitration agreement,
and the decision of the arbitration committee may be appealed to the Regional Trial Court on questions of law. A
third-party complaint without first resorting to the PCHC
would be premature. Primary recourse should be to the
PCHC, without prejudice to an appeal to the trial courts.142
It should be stressed that the clearing house rules do not
preclude any non-member bank nor any entity or person,
not a bank, from filing the action in court directly by one
who has been prejudiced by the encashment of the forged
check or endorsement thereof, as the clearing house rules
apply only to member banks.143
142
Associated Bank v. CA, 233 SCRA 137 [1994]; Allied Banking Corp. v. CA,
294 SCRA 803 [1998].
143
Ibid.
218
OBLIGATIONS AND CONTRACTS
SECTION 2. — Loss of the Thing Due
§192.00 Loss of determinate thing
Art. 1262. An obligation which consists in
the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in
delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be
responsible for damages. The same rule applies
when the nature of the obligation requires the assumption of risk. (1182a)
Article 1262 refers to the loss of a determinate thing. A determinate thing is a particularized object indicated by its own individuality, as opposed to a generic thing which is one whose determination is confined to that of its nature, to the genus (genora) to which
it pertains, such as horse or a chair. As a rule, the loss of a determinate thing extinguishes the obligation to deliver, while the loss of a
generic thing does not extinguish an obligation to deliver a generic
thing.144 For instance, the obligation to deliver 600 piculs of sugar or
copra refers to a generic thing, and its loss even by fortuitous even
does not extinguish the obligation.145 The maxim is genus nunquin
perit.146
§193.00 Loss of generic thing does not extinguish obligation
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. (n)
Art. 1264. The courts shall determine whether,
under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n)
Del Leon v. Soriano, 57 Phil. 193 [1950].
Yun Decs & Co. v. Gonzalez. 29 Phil. 384.
146
Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Co., 91
Phil. 861 [1952].
144
145
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
219
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 apply in
case of earthquake, flood, storm, or other natural
calamity. (1183a)
Under Article 1263 of the Civil Code, “[i]n an obligation to
deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation.” If the obligation is
generic in the sense that the object thereof is designated merely by
its class or genus without any particular designation or physical
segregation from all others of the same class, the loss or destruction of
anything of the same kind even without the debtor’s fault and before
he has incurred in delay will not have the effect of extinguishing the
obligation. This rule is based on the principle that the genus of a
thing can never perish. Genus nunquan perit. An obligation to pay
money is generic; therefore, it is not excused by fortuitous loss of any
specific property of the debtor.147
The Court ruled in Gaisano Cagayan, Inc. v. Insurance Co. of
North American:148
If the obligation is generic in the sense that the
object thereof is designated merely by its class or genus
without any particular designation or physical segregation
from all others of the same class, the loss or destruction
of anything of the same kind even without the debtor’s
fault and before he has incurred in delay will not have
the effect of extinguishing the obligation. This rule is
based on the principle that the genus of a thing can never
perish. Genus nunquan perit. An obligation to pay money
is generic; therefore, it is not excused by fortuitous loss of
any specific property of the debtor.
§194.00 Right of creditor where thing is determinate
Art. 1165. When what is to be delivered is a
determinate thing, the creditor, in addition to the
147
Gaisano Cagayan, Inc. v. Insurance Co. of North American, 490 SCRA 286
[2006].
148
490 SCRA 286 [2006].
220
OBLIGATIONS AND CONTRACTS
right granted him by Article 1170, may compel the
debtor to make the delivery.
If the thing is indeterminate or generic, he
may ask that the obligation be complied with at the
expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons who do
not have the same interest, he shall be responsible
for any fortuitous event until he has effected the
delivery. (1096)
Art. 1170. Those who in the performance of
their obligations are guilty of fraud, negligence,
or delay, and those who in any manner contravene
the tenor thereof, are liable for damages. (1101)
The rights of creditor where the thing to be delivered is
determinate include the following:
a)
He may compel the debtor to make the delivery.
b)
He may hold the debtor liable for damages if the debtor is
guilty of fraud, negligence, or delay.
c)
If the thing is indeterminate or generic, he may ask that
the obligation be complied with at the expense of the debtor.
§195.00 Covers only obligation to do
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. (1184a)
This article covers only obligations to do, and not to give, and
is an exception to the obligatory force of contracts. An obligation to
do includes all kinds of work or service, while an obligation to give
consists in the delivery of a movable or an immovable thing in order
to create a real right, or the use of the recipient, or for its simple
possession, or in order to return it to its owner.149
149
Philippine National Construction Corp. v. CA, 272 SCRA 183 [1997].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
221
The obligation to pay rentals or deliver the thing in a contract
of lease falls within the prestation “to give;” hence, the same is not
covered by Art. 1266.150
Article 1267 refers to facts beyond contemplation of the
parties.
Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part. (n)
§196.00 Rebus sic stantibus doctrine
Under the doctrine of rebus sic stantibus, the parties stipulate
in the light of certain prevailing conditions, and once these conditions
cease to exist, the contract also ceases to exist. This doctrine is said
to be the basis of Article 1267 of the Civil Code.
This article, which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the principle of
rebus sic stantibus, which would endanger the security of contractual
relations. The parties in the contract must be presumed to have
assumed the risk of unfavorable developments. It is therefore only
in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor. Thus, the abrupt change in the
political climate of the country after the EDSA Revolution and the
poor financial condition did not render performance of the contract
impractical and inimical to the corporate survival of the obligor.151
This article enunciates the doctrine of unforeseen events. It
is not an absolute application of principle of rebus sic stantibus,
which would endanger the security of contractual relations. Under
the theory of rebus sic stantibus, the parties stipulate in the light
of certain prevailing conditions, and once these conditions cease to
exist, the contract also ceases to exist. However, the parties to a
contract must be presumed to have assumed the risks of unfavorable
developments. It is only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.152
Ibid.
Phil. National Construction Corp. v. CA, 272 SCRA 183, 191 [1997].
152
Phil. National Construction Corp. v. CA, 272 SCRA 183 [1997].
150
151
222
OBLIGATIONS AND CONTRACTS
Article 1267 speaks of “service.” “Service” should be understood
as referring to the “performance” of the obligation. Considering
practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief
in favor of the party prejudiced.153
§197.00 Difficulty of performance does not excuse non-performance of contract
As a general rule, difficulty of performance of the service does
not release the obligor from his obligations. Art. 1267, Civil Code,
thus, the Court ruled:
“Where a person by his contract charges himself with
an obligation possible to be performed, he must perform
it, unless performance is rendered impossible by the act of
God, by the law, or by the other party, it being the rule that
in case the party desires to be excused from the performance
in the event of contingencies arising, it is his duty to
provide therefor in his contract. Hence, performance is not
excused by subsequent inability to perform, by unforeseen
difficulties, by unusual or suspected expenses, by change,
by inevitable accident, by the breaking of machinery, by
strikes, by sickness, by failure of a party to avail himself
of the benefits to be had under the contract, by weather
conditions, by financial stringency, or by stagnation of
business. Neither is performance excused by the fact
that the contract turns out to be hard and improvident,
unprofitable or impracticable, ill-advised, or even foolish,
or less profitable, or unexpectedly burdensome.”154
It is well-settled that the law does not relieve a party from the
effects of a contract, entered into with all the required formalities
and with full awareness of what he was doing simply because the
contract turned to be a foolish or unwise investment.155
The rationale for Art. 1267 of the Civil Code is stated by the
Code Commission, thus:
Naga Telephone Co., Inc. v. CA, 230 SCRA 351 [1994].
Laguna Tayabas Bus Co. v. Manabat, 58 SCRA 650, 659-660 [1974].
155
Heirs of Joaqin Teves v. CA, 316 SCRA 632, 649 [1999].
153
154
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
223
“The general rule is that impossibility of performance
releases the obligor. However, it is submitted that when
the service has become so different as to be manifestly
beyond the contemplation of the parties, the court should
be authorized to release the obligor in whole or in part.
The intention of the parties should govern and if it appears
that the service turns out to be so difficult as have been
beyond their contemplation, it would be doing violence to
that intention to hold the obligor still responsible.”156
§198.00 When loss proceeds from criminal offense; rights of
creditor
Art. 1268. When the debt of a thing certain and
determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of
its price, whatever may be the cause for the loss,
unless the thing having been offered by him to the
person who should receive it, the latter refused
without justification to accept it. (1185)
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.
(1186)
In Gaisano Cagayan, Inc. v. Insurance Co. of North American,
490 SCRA 286 (2006), petitioner argues that IMC bears the risk
of loss because it expressly reserved ownership of the goods by
stipulating in the sales invoices that “[i]t is further agreed that
merely for purpose of securing the payment of the purchase price
the above described merchandise remains the property of the vendor
until the purchase price thereof is fully paid.”
The Court ruled rejecting such argument:
The present case clearly falls under paragraph (1),
Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the
goods remain at the seller’s risk until the own156
Quoted in Occena v. Jabson, 78 SCRA 637, 640 [1976].
224
OBLIGATIONS AND CONTRACTS
ership therein is transferred to the buyer, but
when the ownership therein is transferred
to the buyer the goods are at the buyer’s risk
whether actual delivery has been made or not,
except that:
(1) Where delivery of the goods has been
made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership
in the goods has been retained by the seller
merely to secure performance by the buyer of
his obligations under the contract, the goods
are at the buyer’s risk from the time of such
delivery.
xxx
Thus, when the seller retains ownership
only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer.
Accordingly, petitioner bears the risk of loss of
the goods delivered.
§199.00 Loss by the sinking of a vessel due to force majeure
In Lea Ner Industries, Inc. Malayan Insurance Co.,157 one of the
issues raised is whether petitioner is liable as a common carrier for
the loss of the cargo caused by the sinking of a vessel claimed to be
due to fortuitous event. The Court ruled that the common carrier
was liable because it failed to show that it exercised extraordinary
diligence, thus:
“Common carriers are bound to observe extraordinary diligence in their vigilance over the goods and the
safety of the passengers they transport, as required by
the nature of their business and for reasons of public policy. Extraordinary diligence requires rendering service
with the greatest skill and foresight to avoid damage and
destruction to the goods entrusted for carriage and delivery.
Common carriers are presumed to have been at fault
or to have acted negligently for loss or damage to the
157
471 SCRA 698 [2005].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
225
goods that they have transported. This presumption can
be rebutted only by proof that they observed extraordinary diligence, or that the loss or damage was occasioned
by any of the following causes:
“(1) Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
“(2) Act of the public enemy in war, whether international or civil;
“(3) Act or omission of the shipper or owner of the
goods;
“(4) The character of the goods or defects in the
packing or in the containers;
“(5) Order or act of competent public authority.”
xxx
To excuse the common carrier fully of any liability,
the fortuitous event must have been the proximate and
only cause of the loss. Moreover, it should have exercised
due diligence to prevent or minimize the loss before, during and after the occurrence of the fortuitous event.
In case the thing is lost before he has delivered the thing and
the loss is due to the illegal or negligent act of a third person, the
debtor has the right to hold the third person liable. However, Art.
1269 gives the creditor the right of action to hold the third person
and the debtor liable.
SECTION 3 — Condonation or Remission
of the Debt
§200.00 Generally
Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by
the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the
rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the
forms of donation. (1187)
226
OBLIGATIONS AND CONTRACTS
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 which the former had against the latter.
If in order to nullify this waiver it should be
claimed to be inofficious, the debtor and his heirs
may uphold it by proving that the delivery of the
document was made in virtue of payment of the
debt. (1188)
§201.00 Condonation defined
In obligations, condonation is the act of liberality by means of
which a creditor renounces the enforcement of an obligation contracted in his favor; the pardoning or remitting of a debt.158
§202.00 Where there is express or implied condonation
Condonation may be express or implied. There is express condonation when the creditor waives or renounces the debt. There are
implied condonations in those mentioned in Arts. 1272 to 1274 of the
Civil Code.
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. (1189)
Art. 1273. The renunciation of the principal
debt shall extinguish the accessory obligations; but
the waiver of the latter shall leave the former in
force. (1190)
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. (1191a)
158
Bañez v. Young, 92 Phil. 1067 [1952].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
227
SECTION 4 — Condonation or Merger
of Rights
§203.00 Generally
Art. 1275. The obligation is extinguished from
the time the characters of creditor and debtor are
merged in the same person. (1192a)
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. (1193)
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. (1194)
§204.00 When rights are merged extinguishing obligations
Rights are said to be merged when the same person who is
bound to pay is also entitled to receive. This is more properly called
a confusion of rights, or extinguishment of obligation. For example:
a man becomes indebted to a woman in a sum of money, and afterwards marries her; there is a confusion of rights, and the debt is
merged or extinguished.
There is confusion or merger when the characters or qualification
of creditor and debtor are merged in the same person. It takes place
between the creditor and the principal debtor. Thus, there is no
merger, where one is a principal debtor and the other is a guarantor,
although the release of the former benefits the latter.159 Neither does
confusion extinguish a joint obligation, except as regards the share
corresponding to the creditor or debtor in whom the two characters
concur.160
Where the children as heirs of the creditor are also the heirs of
the debtor, the obligation sued upon had been extinguished by the
merger in their persons of the character of creditor and debtor of the
same obligation.161
Art. 1276, CC.
Art. 1277, CC.
161
Chittick v. CA, 166 SCRA 219 [1988].
159
160
228
OBLIGATIONS AND CONTRACTS
§205.00 Elements of merger
In Valmonte v. CA,162 the Court enumerated the elements of
merger and gave an illustration:
Merger as one of the means of extinguishing an obligation has the following elements: (1) the merger of the
characters of the creditor and debtor must be in the same
person; (2) it must take place in the person of either the
principal creditor or the principal debtor; and (3) it must
be complete and definite.
As can be gleaned from the attendant facts and circumstances there were two mortgages constituted on the
subject properties by the appellants. The first mortgage
was for a loan of P16,000.00 and the second one was for
a loan of P5,000.00, by and between petitioners and the
PNB. What the Bank did was to foreclose the second
mortgage embodied in a separate mortgage contract.
Under ordinary circumstance, if a person has a mortgage credit over a property which was sold in an auction
sale, the only right left to him was to collect its mortgage
credit from the purchaser thereof during the sale conducted. This is so because a mortgage directly and immediately subjects the property on which it is constituted,
whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created. However,
these steps need not be taken in the present case because
PNB was the purchaser of subject properties and it did
so with full knowledge that it had a mortgage thereon.
Obligations are extinguished by the merger of the rights
of the creditor and debtor.
In the case under consideration, the merger took
place in the person of PNB, the principal creditor in the
case. The merger was brought about when during the
auction sale, PNB purchased the properties on which it
had another subsisting mortgage credit. x x x In effect,
the mortgage for the P16,000.00 loan was deemed extinguished.
162
G.R. No. L-41621, February 18, 1999.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
229
“x x x The purchaser in the extrajudicial sale is appellee bank itself. As such purchaser, it acquired the right
to pay off the claim of the senior mortgage. However, the
senior mortgagee is also appellee bank. In such a case,
Art. 1275 of the New Civil Code as invoked by defendantsappellees in their respective briefs, to wit:
“Art. 1275. The obligation is extinguished
from the time the characters of creditor and
debtor are merged in the same person” applies.
The rights pertaining to the personalities of
the debtor (mortgagor) and of the creditor
(mortgagee) are merged and therefore, in
case where the mortgagees of both the senior
and junior motgages are one and the same
(herein appellee bank), and especially where
the mortgagors of said encumbrances are also
one and the same (herein appellant Pastora
Valmonte de Leon), the sale to appellee bank
operated to divest the rights of the mortgagor
(appellant Pastora) of her rights and to vest her
rights with respect to the senior mortgage, in
the purchaser (appellee bank), subject to such
rights and to vest her rights with respect to the
senior mortgage, in the purchaser (appellee
bank), subject to such rights of redemption as
may be required by law. Records show however
that appellant mortgagor failed to redeem the
property within the one-year period provided
by Act No. 3135, as amended.
SECTION 5. — Compensation
§206.00 Compensation defined
Art. 1278. Compensation shall take place when
two persons, in their own right, are creditors and
debtors of each other. (1195)
Compensation is a mode of extinguishing to the concurrent
amount the obligation of persons who in their own right and as prin-
230
OBLIGATIONS AND CONTRACTS
cipal are reciprocally debtors and creditors of each other.163 Compensation is the offsetting of two obligations which are reciprocally extinguished if they are of equal value, or extinguished to the current
amount of different values.164
The object of compensation is the prevention of unnecessary
suits and payments thru the mutual extinction by operation of law
of concurring debts.165
§207.00 Legal compensation
Art. 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter
has been stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5) That over neither of them there be any
retention or controversy, commenced by third persons and communicated in due time to the debtor.
(1196)
There are two kinds of compensation, the first being legal
compensation and the other conventional. Compensation may also
be total or partial.
Art. 1281. Compensation may be total or partial. When the two debts are of the same amount,
there is a total compensation. (n)
PNB Madecor v. Uy, 363 SCRA 128 [2002].
E.G.V. Realty Dev. Corp. v. CA, 310 SCRA 657 [1999].
165
Nadela v. Engineering and Construction Corp., 474 SCRA 168 [2005].
163
164
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
231
§208.00 When legal compensation takes place
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.
(1202a)
Legal compensation takes place by operation of law when all
the requisites are present. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors
of each other, are extinguished where the requirements provided for
in Art. 1279 of the Civil Code are met.166
There is legal compensation where all the requirements of
legal compensation are present, the obligation is extinguished, even
without the knowledge of the parties. It operates even against the
will of the interested parties. Its effects arise on the very day on
which all its requisites concur.167
In Nadela v. Engineering and Construction Corp.,168 the Court
explained when legal compensation takes place:
We find that legal compensation is proper in this case.
The requisites for legal compensation are present. Nadela
and ECCO-ASIA are creditors and debtors of each other.
Nadela owes ECCO-ASIA P476,365.69, representing the
value of the tools, equipment and construction materials
of ECCO-ASIA for which Nadela is accountable. On the
other hand, in a final and executory judgment in a labor
case, ECCO-ASIA was ordered to pay Nadela P52,188.81
representing unpaid salaries and P28,500 representing
separation pay. The debts, consisting of a sum of money,
are due, liquidated, and demandable. Thus, compensation
is proper up to the concurrent amount in this case where
ECCO-ASIA owes Nadela P80,688.81 for unpaid salaries
and separation pay while Nadela owes ECCO-ASIA
P476,365.69.
Francia v. IAC, 162 SCRA 753 [1988].
BPI v. CA, 255 SCRA 571 [1996].
168
474 SCRA 168 [2005].
166
167
232
OBLIGATIONS AND CONTRACTS
Where a person purchased a car from the owner, but has not paid
the price thereof, and the latter owed the car buyer a substantially
equal amount, compensation takes place to the extent of the price
of the car. This is the situation in Trinidad v. Acapulco,169 in which
the Court ruled:
The claim of respondent that there could be no
legal compensation in this case as one of the obligations
consists of delivery of a car and not a sum of money must
also fail. Respondent sold the car to petitioner on March
4, 1991 for P500,000.00 while she filed her complaint
for nullification of the sale only on May 6, 1991. As legal
compensation takes place ipso jure, and retroacts to the
date when its requisites are fulfilled, legal compensation
has already taken place at the time of the sale. At such
time, petitioner owed respondent the sum of P500,000.00
which is the price of the vehicle.
Consequently, by operation of law, the P500,000.00
which petitioner owed respondent is off-set against the
P566,000.00 owed by respondent to petitioner, leaving a
balance of P66,000.00, which respondent should pay with
12% interest per annum from date of judicial or extrajudicial deed. Since there was no extrajudicial deed in this
case, the interest shall be resolved from the date petitioner filed its Supplemental Motion for Reconsideration invoking for the first time legal compensation, that is, May
20, 1992.
In Mavest (U.S.A.), Inc. v. Sampaguita Garments Corp.,170 the
Court summed up legal and conventional compensations as follows:
Compensation may be legal or conventional. Legal
compensation takes place ipso jure when all the requisites of law are present, as opposed to conventional or
voluntary compensation which occurs when the parties
agree to the mutual extinguishment of their credits or to
compensate their mutual obligations even in the absence
of some of the legal requisites.
169
170
G.R. No. 147477, June 27, 2006.
G.R. No. 127454, Sept. 21, 2005.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
233
For compensation to validly take place, the governing Civil Code provisions require the concurrence of
well-defined conditions. At its minimum, compensation
presupposes two persons who, in their own right and as
principals, are mutually indebted to each other respecting equally demandable and liquidated obligations over
any of which no retention or controversy commenced and
communicated in due time to the debtor exists. But while
compensation, be it legal or conventional, requires the
confluence in the parties of the characters of mutual debtors and creditors, their rights as such creditors, or their
obligations as such debtors, need not spring from one and
the same contract or transaction.
Where the parties are not mutually debtors and creditors
in their own, as when the claim of one against the other is for
damages which have not been duly proved, there can be no legal
compensation.171
§209.00 Conventional compensation
Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
Conventional compensation is by agreement of the parties,
whereby they agree to the mutual extinguishment of their credits,
even if not all the requisites of compensation are present. Conventional compensation takes place when the parties agree to compensate their mutual obligations, even in the absence of some requisites.172
§210.00 When guarantor may set up compensation
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. (1197)
§211.00 When compensation may be set up by guarantor
Art. 1283. If one of the parties to a suit over
an obligation has a claim for damages against the
171
172
Ibid.
PNB Madecor v. Uy, 363 SCRA 128 [2001].
234
OBLIGATIONS AND CONTRACTS
other, the former may set it off by proving his right
to said damages and the amount thereof. (n)
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. (n)
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. (1199a)
Art. 1289. If a person should have against him
several debts which are susceptible of compensation, the rules on the application of payments shall
apply to the order of the compensation. (1201)
§212.00 When compensation may not be proper
Art. 1287. Compensation shall not be proper
when one of the debts arises from a depositum or
from the obligations of a depositary or of a bailee in
commodatum.
Neither can compensation be set up against a
creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of
paragraph 2 of Article 301. (1200a)
Art. 1288. Neither shall there be compensation
if one of the debts consists in civil liability arising
from a penal offense. (n)
Where one requisite is absent, there can be no legal compensation.173 Compensation is not proper where one of the debts consists of
civil liability arising from a crime.174
§213.00 Compensation not allowed in taxes
It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot be
173
PNB Madecor v. Uy, 363 SCRA 128 [2001]; Silahis Marketing Corp. v. IAC,
180 SCRA 21 [1990].
174
Metropolitan Bank and Trust Co. v. Tonda, 338 SCRA 254 [2000].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
235
the subject of compensation because the government and taxpayer
are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off.175
Taxes are not subject to compensation or set-off. The reason is
because taxes are not in the nature of contracts between the parties
but grow out of a duty to, and are positive acts of the government
to the making and enforcing of which the personal consent of the
taxpayer is not required. The government and the taxpayer are not
mutually creditors and debtors of each other.176
§214.00 When assignee may be bound by compensation
Art. 1285. The debtor who has consented to the
assignment of rights made by a creditor in favor
of a third person, cannot set up against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at the time he gave his consent,
that he reserved his right to the compensation.
If the creditor communicated the cession to
him but the debtor did not consent thereto, the latter may set up the compensation of debts previous
to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation
of all credits prior to the same and also later ones
until he had knowledge of the assignment. (1198a)
Compensation as a mode of extinguishing obligations can
defeat the assignee’s rights where before the notice of assignment
was given compensation discharging the debtor’s obligation under
the assigned document had taken place by operation of law between
the assignor and the debtor. It is firmly settled doctrine that the
rights of the assignee are not greater than the rights of the assignor,
since the assignee acquires his rights subject to the equities — i.e.,
175
176
Caltex Phil., Inc. v. Commission on Audit, 208 SCRA 726 [1992].
Republic v. Mambulao Lumber Co., 4 SCRA 622 [1962].
236
OBLIGATIONS AND CONTRACTS
defenses — which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor.177
§215.00 Compensation applies between depositor and bank
In Nisce v. Equitable PCI Bank,178 the issue in this case is
whether or not compensation may take place between a bank depositor and the bank where said deposit is made. The Court ruled in
the affirmative.
Article 1980 of the New Civil Code provides that
fixed, savings and current deposits of money in banks and
similar institutions shall be governed by the provisions
concerning simple loans. Under Article 1953, of the same
Code, a person who secures a loan of money or any other
fungible thing acquires the ownership thereof, and is
bound to pay the creditor an equal amount of the same
kind and quality. The relationship of the depositors and
the Bank or similar institution is that of creditor-debtor.
Such deposit may be set-off against the obligation of the
depositor with the bank or similar institution.
When petitioner Natividad Nisce deposited her
US$20,500.00 with the PCIB on July 19, 1984, PCIB became the debtor of petitioner. However, when upon petitioner’s request, the amount of US$20,000.00 was transferred to PCI Capital (which forthwith issued Certificate
of Deposit No. 01612), PCI Capital, in turn, became the
debtor of Natividad Nisce. Indeed, a certificate of deposit
is a written acknowledgment by a bank or borrower of
the receipt of a sum of money or deposit which the Bank
or borrower promises to pay to the depositor, to the order of the depositor; or to some other person; or to his
order whereby the relation of debtor and creditor between
the bank and the depositor is created. The issuance of a
certificate of deposit in exchange for currency creates a
debtor-creditor relationship.
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala
177
178
Sesbreno v. CA, 222 SCRA 466 [1993].
G.R. No. 167434, Feb. 19, 2007.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
(HK) Ltd.] has an independent and separate juridical
personality from that of the respondent Bank, its parent
company; hence, any claim against the subsidiary is not a
claim against the parent company and vice versa. The evidence on record shows that PCIB, which had been merged
with Equitable Bank, owns almost all of the stocks of PCI
Capital. However, the fact that a corporation owns all of
the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to
those arising in their respective business. A corporation
has a separate personality distinct from its stockholders
and from other corporations to which it may be conducted. This separate and distinct personality of a corporation
is a fiction created by law for convenience and to prevent
injustice.
This Court, in Martinez v. Court of Appeals held
that, being a mere fiction of law, peculiar situations or
valid grounds can exist to warrant, albeit sparingly, the
disregard of its independent being and the piercing of the
corporate veil. The veil of separate corporate personality
may be lifted when, inter alia, the corporation is merely
an adjunct, a business conduit or an alter ego of another
corporation or where the corporation is so organized and
controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation; or when the corporation is used as a
cloak or cover for fraud or illegality; or to work injustice;
or where necessary to achieve equity or for the protection
of the creditors. In those cases where valid grounds exist
for piercing the veil of corporate entity, the corporation
will be considered as a mere association of persons. The
liability will directly attach to them.
xxx
Under Article 1278 of the New Civil Code, compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. In order
that compensation may be proper, petitioners were burdened to establish the following:
237
238
OBLIGATIONS AND CONTRACTS
(1) That each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money,
or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter
has been stated;
(3)
That the two debts be due;
(4)
That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
xxx
As its minimum, compensation presupposes two
persons who, in their own right and as principals, are
mutually indebted to each other respecting equally demandable and liquidated obligations over any of which no
retention or controversy commenced and communicated
in due time to the debtor exists. Compensation, be it legal or conventional, requires confluence in the parties of
the characters of mutual debtors and creditors, although
their rights as such creditors or their obligations as such
debtors need not spring from one and the same contract
or transaction.
SECTION 6. — Novation
§216.00 Novation defined
Art. 1291. Obligations may be modified by:
(1)
tions;
(2)
Changing their object or principal condiSubstituting the person of the debtor;
(3) Subrogating a third person in the rights
of the creditor. (1203)
Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
239
is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on
every point incompatible with each other. (1204)
Novation is the extinguishment of obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or
by subrogating a third person in the rights of the creditor. 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 extinguishments of the old contract;
4.
There must be validity of the new contract.179
and
Where there is no prior obligation and what was executed was
a subsequent one, there would be no novation by substitution of
debtor.180
It is the extinguishment of an obligation by the substitution
or change of the obligation by a subsequent one which extinguishes
or modifies the first, either by changing the object or principal
conditions, or by substituting another in the place of the debtor, or
by subrogating a third person in the rights of the creditor. Novation
is a juridical act with a dual function, namely, it extinguishes an
obligation and creates a new one in lieu of the old. It can be objective,
subjective, or mixed. Objective novation occurs when there is a
change of the object or principal conditions of an existing obligation,
while subjective novation occurs when there is a change of either
the person of the debtor or of the creditor in an existing obligation.
When the change of the object or principal conditions of an obligation
occurs at the same time with the change of either in the person of
the debtor or creditor a mixed novation occurs.181
Agro Conglomerates, Inc. v. CA, 348 SCRA 450, 458-459 [2000].
Ibid.
181
Ajax Marketing & Dev. Corp. v. CA, 248 SCRA 222 [1995]; Cochingyan v. R
& R Surety and Ins. Co., Inc., 151 SCRA 339 [1987].
179
180
240
OBLIGATIONS AND CONTRACTS
Unlike other modes of extinction of obligations, novation is a
juridical act with a dual function — it extinguishes an obligation
and creates a new one in lieu of the old.182
§217.00 Nature of novation and how novation effected
In Kwong v. Gargantos,183 the Court explained the nature of
novation and how it is effected:
Novation is the extinguishment of an obligation by
the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either
by changing the object or principal conditions, or, by substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor.
Under Article 1292 of the Civil Code, in order that
an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared
in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. The
parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one. In the
absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point.
In Iloilo Traders Finance, Inc. v. Heirs of Soriano,
Jr., the nature of novation was explained, thus:
Novation may either be extinctive or modificatory,
much being dependent on the nature of the change and
the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate;
in cases where it is implied, the acts of the parties must
clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of
the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total
on every point such that the old obligation is completely
superseded by the new one. The test of incompatibility
182
183
De Cortes v. Venturanza, 79 SCRA 709 [1977].
G.R. No. 152984, Nov. 22, 2006.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
241
is whether they can stand together, each one having an
independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the
first.
The test of incompatibility between two obligations
or contracts is whether or not they can stand together,
each one having an independent existence. If they cannot,
they are incompatible, and the later obligation novates
the first.’
§218.00 Consideration of novation
In Agrifina Aquintey v. Tibong,184 the Court, citing US cases,
ruled what consideration supports novation and when change of
debtor amounts to novation, thus:
It has been held In Di Franco v. Steinbaum, 177
S.W. 2d 697, the consideration necessary to support a
contract of novation is the same as in other contracts. The
consideration need not be pecuniary or even beneficial to
the person promising. It is sufficient if it be a loss of an
inconvenience, such as the relinquishment of a right or
the discharge of a debt, the postponement of a remedy,
the discontinuance of a suit, or forbearance to sue.
§219.00 Kinds of novation
Novation can be (a) objective, (b) subjective, or (c) mixed.
Novation is done either (1) by changing its object or principal
conditions, known as objective or real novation or (2) by substituting
a new debtor in place of the old one, called subjective novation or (3)
by subrogating a third person to the rights of the creditor, also called
subjective or personal novation.185
Novation through a change of the object or principal conditions
of an existing obligation is referred to as objective (or real) novation.
Novation by the change of either the person of the debtor or of the
G.R. No. 166704, Dec. 30, 2006.
Young v. CA, 196 SCRA 797 [1991]; Agro Conglomerates, Inc. v. CA, 348
SCRA 450 [2000]; Cochingyan v. R & R Surety and Ins. Co., Inc., 151 SCRA 339
[1987].
184
185
242
OBLIGATIONS AND CONTRACTS
creditor is described as subjective (or personal) novation. Novation
may also be objective and subjective (mixed) at the same time. In
both objective and subjective novation, a dual purpose is achieved
— an obligation is extinguished and a new one is created in lieu
thereof.186
Novation in its broad sense may be extinctive or modificatory.
An extinctive novation is one where the old obligation is terminated
by the creation of a new obligation that takes the place of the former.
It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement.187
§220.00 Where there is only modificatory novation
In Swagman Hotels and Travels, Inc. v. CA,188 the Court held
than there was only modificatory novation, where only the interests
were waived and the principal debt made payable by installments,
thus:
Under Article 1253 of the Civil Code, if the debt
produces interest, payment of the principal shall not be
deemed to have been made until the interest has been
covered. In this case, the private respondent would not
have signed the receipts describing the payments made
by the petitioner as “capital repayment” if the obligation
to pay the interest was still subsisting. The receipts, as
well as private respondent’s summary of payments, lend
credence to petitioner’s claim that the payments were for
the principal loans and that the interests on the three
consolidated loans were waived by the private respondent
during the undisputed renegotiation of the loans on
account of the business reverses suffered by the petitioner
at the time.
There was therefore a novation of the terms of the
three promissory notes in that the interest was waived
and the principal was payable in monthly installments
186
Broadway Centrum Condominium Corp. v. Tropical Hut Food Market, Inc.,
224 SCRA 302 [1993]; Young v. CA, 196 SCRA 797 [1991].
187
California Bus Lines, Inc. v. State Investment House, Inc., 418 SCRA 297
[2003].
188
G.R. No. 161135, April 8, 2005.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
243
of US$750. Alterations of the terms and conditions of the
obligation would generally result only in modificatory
novation unless such terms and conditions are considered
to be the essence of the obligation itself. The resulting
novation in this case was, therefore, of the modificatory
type, not the extinctive type, since the obligation to pay a
sum of money remains in force.
In an obligation to pay a sum of money, there is no novation
where the instrument expressly recognizes the old, changes only the
terms of payment, adds other obligations not incompatible with the
old, and supplements the old one.189
§221.00 Kinds of novation by substituting the debtor
Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or
against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor
gives him the rights mentioned in Articles 1236 and
1237. (1205a)
There are two forms of novation by substituting the person of
the debtor, and they are: (1) expromision; and (2) delegacion. In the
former, the initiative for the change does not come from the debtor
and may even be made without his knowledge, since it logically
requires the consent of the third person and the creditor. In the
latter, the debtor offers and the creditor accepts a third person who
consents to the substitution and assumes the obligation. In these two
forms of substitution, the consent of the creditor is an indispensable
requirement.190
Novation consisting of a change of debtor to be valid requires
the consent of the creditor.191
Novation which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge
or against the will of the latter, but not without the consent of the
189
California Bus Lines, Inc. v. State Investment House, Inc., 418 SCRA 297
[2003].
190
191
De Cortes v. Venturanza, 79 SCRA 709 [1977].
GSIS v. CA, 169 SCRA 244 [1989].
244
OBLIGATIONS AND CONTRACTS
creditor. Payment by the new debtor gives him the rights mentioned
in Articles 1236 and 1237.
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
obligations shall not give rise to any liability on the
part of the original debtor. (n)
Art. 1295. The insolvency of the new 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
the delegated his debt. (1206a)
§222.00 Novation by substituting creditor
Novation by substitution of the creditor requires an agreement
among the three parties concerned — the original creditor, the
debtor and the new creditor. It is a new contractual relation based
on the mutual agreement among all the necessary parties. There is
no novation if no new contract was executed by the parties.192
§223.00 Requisites of extinctive novation
Extinctive novation has the following requisites: (1) the
existence of a previous valid obligation; (2) the agreement of all
the parties to the new contract; (3) the extinguishment of the old
obligation or contract; and (4) the validity of the new one. Novation
is effected only when a new contract has extinguished an earlier
contract between the same parties. Hence, there can be no novation
when the new contract is not between the same parties as in the old
contract.193
The mere fact that the creditor receives a guaranty or accepts
payment from a third person who has agreed to assume the obligation,
when there is no agreement that the first debtor shall be released
Reyes v. CA, G.R. No. 120817, Nov. 4, 1996.
Velasquez v. CA, 309 SCRA 539 [1999]; Fabrigas v. San Francisco del Monte,
476 SCRA 247 [2005].
192
193
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
245
from responsibility, does not constitute a novation, and the creditor
can still enforce the obligation against the original debtor.194 The
third person becomes merely as co-debtor or surety or co-surety.195
A mere extension of payment and the addition of another
obligation not incompatible with the old one is not a novation.196
There is no novation, where the parties in the new agreement
recognized the continuing validity of the old one, and there is no
incompatibility between the new and the old agreements.197 Similarly,
there is no novation, where there is only an acceptance of partial
payment of the old obligation or there is only a chance of place and
manner of payment.198
For novation to exist, there must be change, substitution, or
renewal of an obligation or obligatory relation, with intention of
extinguishing or modifying essentially the former, debitum pro
debito. A mere extension of the period to pay an obligation is not a
novation.199
§224.00 Two (2) ways of bringing about novation
1.
The first is that novation must be expressly stated and
declared in unequivocal terms, the reason being that novation is not
presumed. It must be proven as a fact. In other words, the parties to
a contract must expressly agree that they are abrogating their old
contract in favor of the new one. Where there is no clear agreement to
create a new contract in place of the extinguished contract, novation
cannot be presumed to take place.200
2.
The second is that the old and new obligations must be
incompatible on every point. The test of incompatibility is whether
or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and
the latter obligation novates the first.201
194
Magdalena Estate, Inc. v. Rodriguez, 18 SCRA 967 [1966]; Velasquez v. CA,
309 SCRA 539, 548 [1999].
195
Mercantile Ins. Co., Inc. v. CA, 196 SCRA 197 [1991].
196
Tible v. Aquino, 65 SCRA 207 [1965].
197
Idolor v. CA, 351 SCRA 399 [2001].
198
Diongzon v. CA, 321 SCRA 477 [1999].
199
Pascual v. Lacsamana, 100 Phil. 381 [1956]; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967 [1966]; Velasquez v. CA, 309 SCRA 539, 548 [1999].
200
Espina v. CA, 334 SCRA 186 [2000].
201
Nyco Sales Corp. v. BA Finance Corp., 200 SCRA 637 [1991].
246
OBLIGATIONS AND CONTRACTS
§225.00 Test of incompatibility
When the parties are silent as to whether they are explicitly
novating or changing the old contract, there may still be novation
when the new contract is incompatible with the old contract. In this
connection, the test of incompatibility is as follows:
“The test of incompatibility is whether the two obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and
the latter obligation novates the first. Novation must be
established either by the express terms of the new agreement or by the acts of the parties clearly demonstrating
the intent to dissolve the old obligation as a consideration for the emergence of the new one. The will to novate, whether totally or partially, must appear by express
agreement of the parties, or by their acts which are too
clear or unequivocal to be mistaken.
There is no doubt that the upgrading was a novation
of the original agreement covering the first credit card issued to Danilo Alto, basically since it was committed with
the intent of canceling and replacing the said card. However, the novation did not serve to release petitioner from
her surety obligations because in the Surety Undertaking
she expressly waived discharge in case of change or novation in the agreement governing the use of the first credit
card.202
Stated differently, the test of incompatibility is:
There are two kinds of novation, first, by explicit
declaration, and second, by material incompatibility (or
implied). The test of incompatibility is whether the two
obligations can stand together, each one having its independent existence. If they cannot, they are incompatible and the latter obligation novates the first. Novation
must be established either by the express terms of the
new agreement or by the acts of the parties clearly demonstrating the intent to dissolve the old obligation as a
consideration for the emergence of the new one. The will
202
[2001].
Molino v. Security Diners International Corp., 363 SCRA 358, 366 et seq.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
247
to novate, whether totally or partially, must appear by
express agreement of the parties, or by their acts which
are too unequitable to be mistaken.’’203
Where a diner’s card which sets a limit of a fixed amount
was upgraded to an unlimited amount, secured by a surety which
stipulated that the surety would not be released from any change
in the agreement entered into by the diner’s card holder and the
company, the upgrading amounted to a novation of the original
agreement limiting the amount to a fixed amount, However, the
surety agreement which provided that the surety would not be
released from any change in the original agreement amounted to
a waiver of the novation, rendering the surety still liable under the
upgraded card agreement.204
For instance, it has been held:
“Furthermore, several incompatibilities between the
1989 Agreement and the 1980 original obligation demonstrate that the two cannot co-exist. While the 1980 credit
accommodation had stipulated that the amount of loan
was not to exceed P8 million, the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different.
Likewise, the later contract contained conditions,
positive covenants and negative covenants not found in
the earlier obligation. As an example of a positive covenant, Sta. Ines undertook from time to time upon request
by the Lender, [to] perform such further acts and/or exercise and deliver such additional documents and writings as may be necessary or proper to effectively carry
out the provisions and purposes of this Loan Agreement.
Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.”205
Molina v. Security Diners International Corp., 363 SCRA 358 [2001].
Molina v. Security Diners International Corp., Ibid.; Far East Bank & Trust
Co. v. Dia Realty, Inc., 363 SCRA 659, 666 et seq. [2001].
205
Security Bank & Trust Co., Inc. v. Cuenca, 341 SCRA 781, 797 [2000].
203
204
248
OBLIGATIONS AND CONTRACTS
§226.00 Examples of incompatibility
When not expressed, incompatibility is required so as to ensure
that the parties have indeed intended such novation despite their
failure to express it in categorical terms. The incompatibility, to
be sure, should take place in any of the essential elements of the
obligation, i.e., (1) the juridical relation or tie, such as from a mere
commodatum to lease of things, or from negotiorum gestio to agency,
or from a mortgage to antichresis, or from a sale to one of loan; (2)
the object or principal conditions, such as a change of the nature
of the prestation; or (3) the subjects, such as the substitution of a
debtor or the subrogation of the creditor. Extinctive novation does
not necessarily imply that the new agreement should be complete by
itself; certain terms and conditions may be carried, expressly or by
implication, over to the new obligation.206
It is not proper to consider an obligation novated by unimportant modifications which do not alter its essence.207
In Tanedo v. Allied Banking Corp.,208 the basic issue raised
is whether the execution by the respondent Bank of the Fourth
Amendatory Agreement extinguished petitioner’s obligations as
surety.
Resolving the first issue, the Court ruled:
“(T)he amendatory agreement between the respondent Allied Banking Corporation and Cheng Ban Yek &
Co., Inc. extended the maturity of the promissory notes
without notice or consent of the petitioner as surety of the
obligations. However, the ‘continuing guarantee’ executed by the petitioner provided that he consents and agrees
that the bank may, at any time or from time to time extend or change the time of payments and/or the manner,
place or terms of payment of all such instruments, loans,
advances, credits or other obligations guaranteed by the
surety. Hence, the extensions of the loans did not release
the surety.
xxx
Swagma Hotel & Travels, Inc. v. CA, 455 SCRA 174 [2005].
Indolor v. CA, 351 SCRA 399, 407 [2001].
208
374 SCRA 100, 105 [2002].
206
207
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
249
Article 1291 provides that obligations may be modified by changing their object or principal conditions. Dacion en pago is a form of novation in which a change takes
place in the object involved in the original contract. There
is no novation by respondents’ indorsement and delivery
of the certificates of stock; by petitioner’s receipt of dividends covering a period of time; and the fact that respondents have not instituted any action to recover the shares,
as these stipulations were merely in compliance with
Arts. 2093 and 2095 the Civil Code, which respectively requires that the thing pledged be placed in the possession
of the creditor or third person of a common agreement,
and which states that if the thing pledged are shares of
stock, the instrument proving the right pledged must be
delivered to the creditor.’’209
In Fabrigas v. San Francisco del Monte,210 the Court ruled that
there was a novation when the subsequent contract changed the
terms of the old one, thus:
Notwithstanding the improper rescission, the facts
of the case show that Contract to Sell No. 2482-V was
subsequently novated by Contract to Sell No. 2491-V. The
execution of Contract to Sell No. 2491-V accompanied an
upward change in the contract price, which constitutes a
change in the object or principal conditions of the contract.
In entering into Contract to Sell No. 2491-V, the parties
were impelled by causes different from those obtaining
under Contract to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions of Contract
to Sell No. 2491-V not only to acquire ownership over the
subject property but also to avoid the consequences of
their default under Contract No. 2482-V. On Del Monte’s
end, the upward change in price was the consideration for
entering into Contract to Sell No. 2491-V.
The case of Swagma Hotel & Travels, Inc. v. CA,211 illustrates
modificatory novation:
See also Lim Tay v. CA, 293 SCRA 634 [1998].
476 SCRA 247 [2005].
211
455 SCRA 174 [2005].
209
210
250
OBLIGATIONS AND CONTRACTS
It is worthy to note that the cash voucher dated January 1998 states that the payment of US$750 represents
“INVESTMENT PAYMENT.” All the succeeding cash
vouchers described the payments from February 1998 to
September 1999 as “CAPITAL REPAYMENT.” All these
cash vouchers served as receipts evidencing private respondent’s acknowledgment of the payments made by the
petitioner: two of which were signed by the private respondent himself and all the others were signed by his
representatives. The private respondent even identified
and confirmed the existence of these receipts during the
hearing. Significantly, cognizant of these receipts, the
private respondent applied these payments to the three
consolidated principal loans in the summary of payments
he submitted to the court.
Under Article 1253 of the Civil Code, if the debt
produces interest, payment of the principal shall not be
deemed to have been made until the interest has been
covered. In this case, the private respondent would not
have signed the receipts describing the payments made
by the petitioner as “capital repayment” if the obligation
to pay the interest was still subsisting. The receipts, as
well as private respondent’s summary of payments, lend
credence to petitioner’s claim that the payments were for
the principal loans and that the interests on the three
consolidated loans were waived by the private respondent
during the undisputed renegotiation of the loans on
account of the business reverses suffered by the petitioner
at the time.
There was therefore a novation of the terms of the
three promissory notes in that the interest was waived
and the principal was payable in monthly installments
of US$750. Alterations of the terms and conditions of the
obligation would generally result only in modificatory
novation unless such terms and conditions are considered
to be the essence of the obligation itself. The resulting
novation in this case was, therefore, of the modificatory
type, not the extinctive type, since the obligation to pay a
sum of money remains in force.
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
251
§227.00 Novation is only relative extinguishment of obligation
While novation is one of the modes of extinguishing obligations,
it does not necessarily result in the extinguishment of obligation.
Novation produces only a relative extinguishment of the obligation
in the sense that by this mode, obligations are not extinguished
but rather substituted by others. Novation under the rules of the
civil law is a mode of extinguishing one obligation by another; the
substitution, not of a new paper or note, but of a new obligation in
lieu of an old one, the effect of which is to pay, dissolve, or otherwise
discharge it.212
Thus, it has been held that the later contract to the effect that the
“First Loan shall be applied to liquidate the principal portion of the
Borrower’s present and outstanding Indebtedness to the Loan (the
Indebtedness) while the Second Loan shall be applied to liquidate the
past due interest and penalty portion of the Indebtedness” amounts
to an express abrogation of the old obligation, the word “liquidate”
being indicative of such purpose and intent.213
§228.00 Effects of novation
Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may
benefit third persons who did not give their consent. (1207)
Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended
that the former relation should be extinguished in
any event. (n)
Art. 1298. The novation is void if the original
obligation was void, except when annulment may
be claimed only by the debtor or when ratification
validates acts which are voidable. (1208a)
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. (n)
212
213
PNB v. Mallari, 104 Phil. 437 [1958].
Security Bank & Trust Co., Inc. v. Cuenca, 341 SCRA 781, 796 [2000].
252
OBLIGATIONS AND CONTRACTS
§229.00 Dacion en pago as form of novation
Dacion en pago is a form of novation in which a change takes
place in the object of the original contract. Absent an explicit agreement, dacion en pago cannot be presumed.214
§230.00 Subrogation
Art. 1300. Subrogation of a third person in the
rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be
clearly established in order that it may take effect.
(1209a)
Art. 1301. Conventional subrogation of a third
person requires the consent of the original parties
and of the third person. (n)
Art. 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor
who is preferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the
obligation, pays with the express or tacit approval
of the debtor;
(3) When, even without the knowledge of the
debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of
confusion as to the latter’s share. (1210a)
Art. 1303. Subrogation transfers to the persons
subrogated the credit with all the rights thereto
appertaining, either against the debtor or against
third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional
subrogation. (1212a)
Art. 1304. A creditor, to whom partial payment
has been made, may exercise his right for the re214
Lim Tay v. CA, 293 SCRA 634 [1998].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
253
mainder, and he shall be preferred to the person
who has been subrogated in his place in virtue of
the partial payment of the same credit. (1213)
§231.00 Subrogation defined
Articles 1300 to 1304 refer to substitution of the creditor by a
new creditor, who steps into the shoes of the former. This new legal
relationship is called subrogation.
It is the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. It is an act by which a
third party pays the obligation of the debtor to the creditor with the
latter’s consent. As a consequence, the paying third party steps into
the shoes of the original creditor as subrogee of the latter.215
§232.00 Kinds of subrogation
Subrogation may either be legal or conventional. Legal
subrogation is that which takes place without agreement but by
operation of law because of certain acts. Conventional subrogation
is that which takes place by agreement of the parties, namely, the
third party who pays the obligation, the debtor, and the creditor.216
It is an act by which a third party pays the obligation of the
debtor to the creditor with the latter’s consent. As a consequence,
the paying third party steps into the shoes of the original creditor as
subrogee of the latter.217
§233.00 Subrogation in insurance
In the law on insurance, payment by the insurer to the assured
of the latter’s insurance claim under the policy makes the insurer
subrogated to the rights of the assured to recover from the wrongdoer
to the extent that the insurer has been obligated to pay. The payment
operates as an equitable assignment to the insurer of all remedies
which the assured may have against the third party whose negligence
or wrongful act caused the loss. However, subrogation does not take
Rodriguez v. CA, 207 SCRA 553 [1992].
Chemphil Export & Import Corp. v. CA, 251 SCRA 257 [1995].
217
Rodriguez v. CA, Ibid.
215
216
254
OBLIGATIONS AND CONTRACTS
place (1) where the assured by his own act releases the wrongdoer
from liability, (2) where the insurer pays the assured the value of
the goods lost without notifying the carrier who has in good faith
settled the assured’s claim for loss, or (3) where the insurer pays
the assured for a loss not covered by the policy, although the insurer
may recover under Art. 1236 of the Civil Code.218 As the insurer is
subrogated to the rights of the assured, the subrogee is subrogated
in the contract between the latter and the third party.219
Subrogation is a normal incident of indemnity insurance.
Upon payment of the loss by the insurer, the latter is entitled to be
subrogated pro tanto to the right of action which the insured may
have against the third person whose negligence or wrongful act
caused the loss. The loss in the first instance is that of the insured
but after reimbursement or compensation, it becomes the loss of
the insurer. The payment operates as an equitable assignment to
the insurer of the property and all remedies which the insured may
have for recovery of the loss.220
An insurer which paid the claim of the insured for damages
to cargo due to fault or negligence of the common carrier under the
insurance is subrogated to the rights of the assured, and as subrogee
it can recover only the amount that is recoverable by the assured,
even if it paid the assured more than such amount.221
Subrogation is an equitable assignment to the insurer of all
remedies which the insured may have against third person whose
negligence or wrongful act caused the loss covered by the insurance
policy, which is created as the legal effect of payment by the insurer
as an assignee in equity. The loss in the first instance is that of
the insured but after reimbursement or compensation it becomes
the loss of the insurer. It has been referred to as the doctrine of
substitution and rests on the principle that substantial justice
should be attained regardless of form, that is, its basis is the doing
of complete, essential, and perfect justice between all the parties
without regard to form.222
Pan Malayan Ins. Corp. v. CA, 184 SCRA 54 [1990].
National Union Fire Ins. Co. of Pittsburgh v. Stolt-Nielsen Phil., Inc., 184
SCRA 682 [1990].
220
Malayan Ins. Co., Inc. v. CA, 165 SCRA 536 [1988].
221
St. Paul Fire & Marine Ins. Co. v. Macondray & Co., Inc., 70 SCRA 122
[1976].
222
Fireman’s Fund Ins. Co. v. Jamila & Co., Inc., 70 SCRA 323 [1976].
218
219
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
255
§234.00 Assignment, generally
An assignment is a transfer or making over to another of the
whole of any property, real or personal, in possession or in action,
or of any estate or right therein. It includes transfer of all kinds of
property, and is peculiarly applicable to intangible personal property
and accordingly, it is ordinarily employed to describe the transfer of
non-negotiable chooses in action and of rights in or connected with
property as distinguished from the particular item or property.223
Assignment is a contract between the assignor and the assignee. It generally operates by way of such contract or agreement. It
is subject to the same requisites as to validity of contract. Whether
or not a trans of a particular right or interest, an assignment or
some other transactions depends, not on the name by which it calls
itself, but on the legal effect of its provisions. This rule applies in
determining whether a particular transaction is an assignment or a
sale.224
In assignment, a consideration is not always a requisite, unlike
in sales. Thus, an assignee may maintain an action based on his
title and it is immaterial whether or not he paid any consideration
therefor. Furthermore, in an assignment, title is transferred but
possession need not be delivered.225
§235.00 Assignment and subrogation, distinguished
In subrogation, the third party pays the obligation of the debtor
to the creditor with the latter’s consent. As a consequence, the paying
third party steps into the shows of the original creditor as subrogee of
the latter. An assignment of credit, on the other hand, is the process
of transferring the right of the assignor to the assignee who would
then have the right to proceed against the debtor. The assignment
may be done either gratuitously or onerously, in which case, the
assignment has an effect similar to that of a sale. The consent of
the debtor is not necessary in assignment. Once the debtor is given
notice of the assignment, he has to pay the debt to the assignee. The
purpose of the notice is only to inform the debtor that from the date
of the assignment, payment should be made to the assignee and not
the original creditor.226
PNB v. CA, 272 SCRA 291, 312 [1997].
Ibid.
225
Ibid.
226
Rodriguez v. CA, 207 SCRA 553 [1992].
223
224
256
OBLIGATIONS AND CONTRACTS
The assignment of credit in favor of another makes the latter
subrogated to the rights and obligations, including warranty, of
the assignor. The assignee acquires no greater right than what
was possessed by the assignor and simply stands into the shoes of
the latter, except when what has been assigned to the assignee is
a negotiable instrument and the assignee takes it as purchaser in
good faith.227
A creditor may assign his credit in a contract in favor of another
person, but until the debtor shall have been duly notified of such
assignment he is not bound thereby. The debtor may set up against
the claim of the assignee any defense acquired before the notice of
assignment that would avail him against the assignor had there
been no assignment, and payment by the debtor to the assignor or
any compromise or release of the assigned claim by the latter and
before notice will be valid against the assignee and discharge the
debtor.228
§236.00 Assignee acquires no better right than the assignor
An assignee cannot acquire greater right than that pertaining
to the assignor. Nor can the act of assignment operate to erase liens
or restrictions burdening the right assigned.229
The general rule is that an assignee of a non-negotiable chose
in action acquires no greater right than what was possessed by his
assignor and simply stands into the shoes of the latter.230
It is firmly settled doctrine that the rights of an assignee are
not any greater than the rights of the assignor, since the assignee is
merely substituted in the place of the assignor and that the assignee
acquires his rights subject to equities — i.e., the defenses — which
the debtor could have set up against the original assignor before the
notice of assignment was given to the debtor.231
An assignment to guarantee an obligation is in effect a mortgage.232
Koa v. CA, 219 SCRA 541 [1993].
Sison v. Yap Tico, 37 Phil. 586 [1918].
229
Gonzales v. Land Bank, 183 SCRA 520 [1990].
230
Koa v. Court of Appeals, 219 SCRA 541, 546 [1993].
231
Sesbreno v. Court of Appeals, 222 SCRA 466, 478 [1993].
232
Dev. Bank v. CA, 284 SCRA 14 [1998].
227
228
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
257
OTHER CAUSES OF EXTINGUISHMENT
OF OBLIGATIONS
Article 1231 of the Civil Code provides in part, thus:
Other causes of extinguishments of obligations, such
as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this
Code. (1156a)
Annulment, rescission and fulfillment of resolutory condition
as causes of extinguishments of obligations have been previously
discussed.
Prescription of action is another cause of extinguishments of
obligation.
§237.00 Prescription of action
Articles 1139 to 1155 of the Civil Code govern the prescription
of actions. The term “action” is generally understood to mean an
ordinary suit in a court of justice by which one party prosecutes
another for the enforcement or protection of a right, or the prevention
or redress of a wrong. An action and suit are synonymous. A claim
is converted into an action or suit when filed in court, not when it is
filed in another office.233
Action means an ordinary suit in a court of justice, by which
one party prosecutes another for the enforcement or protection of
a right, or the prosecution or redress of a wrong. A cause of action
is the fact or combination of facts which affords a party a right to
judicial interference in his behalf.234
§238.00 Prescription defined
Prescription is regarded as a statute of repose whose object is
to suppress fraudulent and stale claims for springing up at great
distances of time and surprising the parties or their representatives
when the facts have become obscure from the lapse of time or death
or removal of witnesses.235
Lopez v. Filipinas Compania de Seguros, 16 SCRA 855 [1966].
De Guzman v. CA, 192 SCRA 507 [1990].
235
Penoles v. IAC, 145 SCRA 223 [1986].
233
234
258
OBLIGATIONS AND CONTRACTS
As a general rule, a statute of limitation extinguishes the
remedy only. Although the remedy to enforce a right may be barred,
that right may be enforced by some other available remedy which is
not barred.236
Prescription as a cause of extinguishment of obligation refers
to the loss of rights and actions by lapse of time, or the limitation
of action.237 It is a statute of repose whose object is to suppress
fraudulent and stale claims from springing up at great distances of
time and surprising the parties or their representatives when the
facts have become obscure from the lapse of time or the defective
memory of death or removal of witnesses.238
§239.00 Prescription and laches distinguished
The defense of laches applies independently of prescription.
Laches is different from the Statute of Limitations. Prescription is
concerned with the fact of delay, whereas laches is concerned with
the effect of delay. Prescription is a matter of time; laches is principally a question of inequity of permitting a claim to be enforced, this
inequity being founded on some change in the condition of the property or the relation of the parties. Prescription is statutory; laches is
not. Laches applies in equity, whereas prescription applies at law.
Prescription is based on fixed-time; laches is not. The prevailing doctrine is that the right to have a contract declared void ab initio may
be barred by laches although not barred by prescription.239
The elements of laches are:
(1) conduct on the part of the defendant, or one
under whom he claims, giving rise to the situation that
led to the complaint and for which the complaint seeks a
remedy;
(2) delay in asserting the complainant’s rights,
having had knowledge or notice of the defendant’s conduct and having been afforded an opportunity to institute
a suit;
Callanta v. Carnation Phil., Inc., 145 SCRA 268 [1986].
Morales v. CFI of Misamis Occidental, 97 SCRA 872 [1980].
238
Ochagabia v. CA, 304 SCRA 587 [1999]; Golden Thread Knitting Industries,
Inc. v. NLRC, 304 SCRA 587 [1999].
239
MWSS v. CA, 297 SCRA 287, 305 [1998].
236
237
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
259
(3) lack of knowledge or notice on the part of the
defendant that the complainant would assert the right on
which he bases his suit; and
(4) injury or prejudice to the defendant in the
event relief is accorded to the complainant, or the suit is
not held barred.240
In GF Equity, Inc. v. Valenzona,241 the Court ruled:
Laches has been defined as the failure or neglect for
an unreasonable and unexplained length of time to do
that which by exercising due diligence, could or should
have been done earlier, thus giving rise to a presumption
that the party entitled to assert it either has abandoned
or declined to assert it. It is not concerned with mere lapse
of time; the fact of delay, standing alone, is insufficient to
constitute laches.
Laches applies in equity, whereas prescription applies at law. Our courts are basically courts of law, not
courts of equity. Laches cannot thus be invoked to evade
the enforcement of an existing legal right. Equity, which
has been aptly described as a “justice outside legality,” is
applied only in the absence of, and never against, statutory law. Aequetas nunquam contravenit legis. Thus,
where the claim was filed within the statutory period of
prescription, recovery therefor cannot be barred by laches. The doctrine of laches should never be applied earlier
than the expiration of time limited for the commencement
of actions at law, unless, as a general rule, inexcusable
delay in asserting a right and acquiescence in existing
conditions are proven.
§240.00 Periods of limitation
It refers to the period provided for by law, within which an action
may be brought, otherwise it is barred. Prescription is concerned
with fact of delay, as distinguished from laches which deals with the
effect of unreasonable delay.242
MWSS v. CA, 297 SCRA 287, 305 [1998].
G.R. No. 156841, June 30, 2000.
242
PNB v. CA, 217 SCRA 347 [1993].
240
241
260
OBLIGATIONS AND CONTRACTS
Articles 1139 to 1155 of the Civil Code on the prescription of
actions read:
PRESCRIPTION OF ACTIONS
Art. 1139. Actions prescribe by the mere lapse
of time fixed by law. (1961)
Art. 1140. Actions to recover movables shall
prescribe eight years from the time the possession
thereof is lost, unless the possessor has acquired
the ownership by prescription for a less period,
according to Articles 1132, and without prejudice
to the provisions of Articles 559, 1505, and 1133.
(1962a)
Art. 1141. Real actions over immovables prescribe after thirty years.
This provision is without prejudice to what is
established for the acquisition of ownership and
other real rights by prescription. (1963)
Art. 1142. A mortgage action prescribes after
ten years. (1964a)
Art. 1143. The following rights, among others
specified elsewhere in this Code, are not extinguished by prescription:
(1) To demand a right of way, regulated in
Article 649;
(2) To bring an action to abate a public or
private nuisance. (n)
Art. 1144. The following actions must be
brought within ten years from the time the right of
action accrues:
(1)
Upon a written contract;
(2)
Upon an obligation created by law;
(3)
Upon a judgment. (n)
Art. 1145. The following actions must be commenced within six years:
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
(1)
Upon an oral contract;
(2)
Upon a quasi-contract. (n)
Art. 1146. The following actions must be instituted within four years:
(1)
Upon an injury to the rights of the plain-
(2)
Upon a quasi-delict;
tiff;
However, when the action arises from or out
of any act, activity, or conduct of any public officer
involving the exercise of powers or authority arising from Martial Law including the arrest, detention and/or trial of the plaintiff, the same must be
brought within one (1) year. (As amended by PD No.
1755, Dec. 24, 1980.)
Art. 1147. The following actions must be filed
within one year:
(1)
For forcible entry and detainer;
(2)
For defamation. (n)
Art. 1148. The limitations of action mentioned
in Articles 1140 to 1142, and 1144 to 1147 are without prejudice to those specified in other parts of
this Code, in the Code of Commerce, and in special
laws. (n)
Art. 1149. All other actions whose periods are
not fixed in this Code or in other laws must be
brought within five years from the time the right of
action accrues. (n)
Art. 1150. The time for prescription for all
kinds of actions, when there is no special provision
which ordains otherwise, shall be counted from the
day they may be brought. (1969)
Art. 1151. The time for the prescription of actions which have for their object the enforcement
of obligations to pay principal with interest or annuity runs from the last payment of the annuity or
of the interest. (1970a)
261
262
OBLIGATIONS AND CONTRACTS
Art. 1152. The period for prescription of actions
to demand the fulfillment of obligation declared by
a judgment commences from the time the judgment
became final. (1971)
Art. 1153. The period for prescription of actions to demand accounting runs from the day the
persons who should render the same cease in their
functions.
The period for the action arising from the result of the accounting runs from the date when said
result was recognized by agreement of the interested parties. (1972)
Art. 1154. The period during which the obligee
was prevented by a fortuitous event from enforcing
his right is not reckoned against him. (n)
Art. 1155. The prescription of actions is interrupted when they are filed before the court, when
there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgment of the debt by the debtor. (1973a)
§241.00 When to count period of prescription
In Filipinas Shell Petroleum Corp. v. John Boardman Ltd. of
Iloilo,243 the Court laid down the following rules when to count the
prescriptive period:
Actions based upon a written contract should be
brought within ten years from the time the right of action
accrues. This accrual refers to the cause of action, which
is defined as the act or the omission by which a party
violates the right of another.
Jurisprudence is replete with the elements of a cause
of action: (1) a right in favor of the plaintiff by whatever
means and under whatever law it arises or is created; (2)
an obligation on the part of the named defendant to respect
or not to violate the right; and (3) an act or omission on the
part of the defendant violative of the right of the plaintiff
243
473 SCRA 151 [2005].
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
or constituting a breach of an obligation to the latter. It is
only when the last element occurs that a cause of action
arises.
Applying the foregoing elements, it can readily be
determined that a cause of action in a contract arises
upon its breach or violation. Therefore, the period of
prescription commences, not from the date of the execution
of the contract, but from the occurrence of the breach.
The cause of action resulting from a breach of contract is dependent on the facts of each particular case.
The following cases involving prescription illustrate this
statement.
Nabus v. Court of Appeals dealt with an action to
rescind a Contract of Sale. The cause of action arose at
the time when the last installment was not paid. Since
the case was filed ten years after that date, the action was
deemed to have prescribed.
In Elido v. Court of Appeals, the overdraft Agreement stipulated that the obligation was payable on demand. Thus, the breach started only when that judicial
demand was made. This rule was applied recently to China Banking Corporation v. Court of Appeals which held
that the prescriptive period commenced on the date of the
demand, not on the maturity of the certificate of indebtedness. In that case, the certificate had stipulated that
payment should be made upon presentation.
Banco Filipino Savings & Mortgage Bank v. Court
of Appeals involved a Contract of Loan with real estate
mortgages, whereby the creditor could unilaterally increase the interest rate. When the debtor failed to pay the
loan, the creditor foreclosed on the mortgage. The Court
ruled that the cause of action for the annulment of the
foreclosure sale should be counted from the date the debtor discovered the increased interest rate.
In Cole v. Gregorio, the agreement to buy and sell
was conditioned upon the conduct of a preliminary survey
of the land to verify whether it contained the area stated
in the Tax Declaration. Both the agreement and the survey were made in 1963. The Court ruled that the right of
263
264
OBLIGATIONS AND CONTRACTS
action for specific performance arose only in 1966, when
the plaintiff discovered the completion of the survey.
Serrano v. Court of Appeals dealt with money claims
arising from a Contract of Employment, which would prescribe in three years from the time the cause of action
accrued. The Court noted that the cause of action had
arisen when the employer made a definite denial of the
employee’s claim. It was deemed that the issues had not
yet been joined prior to the definite denial of the claim,
because the employee could have still been reinstated.
Naga Telephone Co. v. Court of Appeals involved the
reformation of a Contract. Among others, the grounds for
the action filed by the plaintiff included allegations that
the contract was too one-sided in favor of the defendant,
and that certain events had made the arrangement
inequitable. The Court ruled that the cause of action for a
reformation would arise only when the contract appeared
disadvantageous.
In other words, prescription of action starts from violation of
the right of the other party or from breach of contract and not from
the date of such contract or specifically from the time the cause of
action accrues.244
An action for reconveyance of real property to enforce an implied
trust prescribes in ten years, the period reckoned from the issuance
of the adverse title to the property which operates as a constructive
notice.245
An action for reconveyance based on a void contract is imprescriptible. This rule does not apply where the action for reconveyance is based on fraud. The prescriptive period for the reconveyance
of fraudulently registered real property is ten (10) years from the
date of the issuance of the certificate of title.246
The prescriptive period for an action for reconveyance based
on fraud is ten years from the issuance of the Torrens Title over the
property.247
Elido v. CA, 216 SCRA 637 [1992].
Gonzales v. IAC, 204 SCRA 106 [1991].
246
Casipit v. CA, 204 SCRA 691 [1991].
247
Tale v. CA, 208 SCRA 267 [1992].
244
245
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
265
Actions upon a judgment or final order of the court must be
brought within ten (10) years from the time the right of action
accrues or within ten (10) years counted from the time judgment
became final.248
The prescriptive period for the enforcement of constructive
or implied trust is ten (10) years. However, it may be barred by a
shorter period by means of laches.249
The prescriptive period for the enforcement of quasi-contract of
solutio indebiti is six (6) years.250
An action to annul a deed of sale of land on the ground of fraud
prescribes in four (4) years from registration of the deed of sale.251
An action for tortious interference against the Central Bank
for closing and liquidating a bank prescribes in four (4) years.252
An action based on quasi-delict prescribes in four years from
the date it may be brought. The filing of a criminal action does
not interrupt the institution of the civil action based on a quasidelict.253
Money claims arising from employer-employee relation prescribes in three years from the time the cause of action accrues.254
The prescriptive period for refund of national internal revenue
tax erroneously or illegally collected is two (2) years, while that for
recovery of municipal license taxes is six (6) years.255
When tax is paid in installments, the prescriptive period of two
years to seek a refund thereof is counted from the date of the final
payment or last installment.256
An action to invalidate a certificate of title on the ground of
fraud prescribes after the expiration of one (1) year from the entry
of the decree of registration.257
Soriano v. CA, 198 SCRA 549 [1991].
PNB v. CA, 217 SCRA 347 [1993].
250
Ibid.
251
Cultura v. Tapucar, 140 SCRA 311 [1985].
252
Tan v. CA, 195 SCRA 355 [1991].
253
Capuno v. Pepsi-Cola Bottling Co. of the Phils., 13 SCRA 658 [1965].
254
Blue Bar Coconut Phils., Inc. v. NLRC, 208 SCRA 371 [1992].
255
Municipality of Open v. Caltex (Phils.), Inc., 22 SCRA 755 [1968].
256
Commissioner of Internal Revenue v. TMX Sales, Inc., 205 SCRA 184
[1992].
257
Bishop v. CA, 208 SCRA 636 [1992].
248
249
266
OBLIGATIONS AND CONTRACTS
In quo warranto involving right to an office, the action must be
filed within one (1) year from the time petitioner has been dismissed
or illegally dispossessed thereof.258
Actions based on the Carriage by Sea Act must be brought
within one (1) year after delivery of the goods or the date when the
goods should have been delivered.259
An action to quiet title to property in one’s possession is
imprescriptible. For possession is a continuing right as is the
right to defend such possession. Hence, an owner of real property
in possession has a continuing right to invoke a court of equity to
remove a cloud that is a continuing menace to his title.260
An action to quiet title is imprescriptible if the plaintiff is in
possession of the property.261
An action to compel a trustee to convey a property registered
in his name in trust for the benefit of the cestui que trust does not
prescribe.262
An action to declare the nullity of a void judgment does not
prescribe.263
Actions to declare the inexistence of contracts do not prescribe.264
The registered land owner has the right to eject any person
illegally occupying his land. Such right is imprescriptible. And such
person cannot acquire the land by acquisitive prescription.265
While prescription is unavailing against a holder of a valid
certificate of title over a piece of land, the equitable doctrine of laches
may be applied against him for failure to assert his ownership for
such an unreasonable length of time against its occupant.266
Unabia v. City of Mayor, 99 Phil. 235 [1956].
Go Chan & Co., Inc. v. Aboitiz & Co., Inc., 98 Phil. 179 [1955]; Tan Liao v.
American President Lines, Ltd., 98 Phil. 203 [1956].
260
Pingol v. Court of Appeals, 226 SCRA 118 [1993].
261
Mamadsual v. Moson, 190 SCRA 82 [1990].
262
Bancairen v. Diones, 98 Phil. 122 [1955].
263
Macay v. CA, 206 SCRA 244 [1992].
264
Manaclang v. Baun, 208 SCRA 189 [1992].
265
Ibid.
266
Republic v. CA, 204 SCRA 160 [1991].
258
259
CHAPTER 4
EXTINGUISHMENT OF OBLIGATIONS
267
Prescription of action for partition does not lie except when
the co-ownership is properly repudiated by the co-owner. Otherwise
stated, a co-owner cannot acquire by prescription the share of the
other co-owners absent a clear repudiation of co-ownership duly
communicated to the other co-owners. Moreover, an action to demand
partition is imprescriptible and cannot be barred by laches.267
An action for reconveyance based on an implied or constructive
trust prescribes in ten (10) years.268
Prescription, as a mode of terminating co-ownership, must be
preceded by repudiation of the co-ownership. The act of repudiation
is subject to certain conditions, to wit: (1) a co-owner repudiates the
co-ownership; (2) such act of repudiation is clearly made known to
the other co-owners; (3) evidence thereon is clear and conclusive; and
(4) he has been in possession through open, continuous, exclusive,
and notorious possession of the property for the period required by
law. Registration of the property in his own name is not sufficient,
by itself, as an act of repudiation; the same must be made known
to the co-owners or the latter learned of it, from which to count the
prescriptive period and not from date of registration.269
The prescriptive period to rescind under Arts. 1191 and 1592
of the Civil Code is as provided in Art. 1144, which is within ten (10)
years from the time the right of action accrues.270
The action for declaration of nullity of contract is imprescriptible.271
§242.00 Prescription, when interrupted
Prescription of action is interrupted by: (1) the filing of an
action, (2) a written extrajudicial demand by the creditor, and (3) a
written acknowledgment of the debt by the debtor.272
When the prescriptive period is interrupted by any of the
foregoing acts, it wipes out the period that has already elapsed. In the
case of written extrajudicial demand and written acknowledgment
Mariategui v. CA, 205 SCRA 337 [1992].
Salvatierra v. CA, G.R. No. 107797, Aug. 26, 1996.
269
Mariategui v. CA, Ibid.
270
Iringan v. CA, 366 SCRA 41 [2001].
271
Santos v. Santos, 366 SCRA 395 [2001].
272
Ledesma v. CA, 224 SCRA 175 [1993].
267
268
268
OBLIGATIONS AND CONTRACTS
of debt, the period of prescription starts to run anew. In the case of
judicial demand, the period of prescription starts to run anew from
time action is dismissed and dismissal becomes final.273
Where prescription is interrupted by any of the means recognized by law, it renews the period of prescription.274
When extinctive prescription is interrupted judicially or extrajudicially, the full time for the prescription must be reckoned from
the cessation of the interruption.275
The period of prescription in a petition for reinstatement
with back wages by public employees is interrupted by their filing
of termination cases with the Department of Labor and the Civil
Service Commission; it is also interrupted by their picketing with
placards demanding immediate reinstatement, similar to a written
demand.276
In the collection of taxes, the prescriptive period provided by
law to make a collection by distraint or levy or by a proceeding in
court is interrupted once a taxpayer requests for reinvestigation or
reconsideration of the assessment.277
Ledesma v. CA, Ibid.
Mina v. CA, 97 Phil. 590 [1955].
275
Sagucio v. Bulos, 5 SCRA 798 [1962].
276
Aldovino v. Alunan, 230 SCRA 825 [1994].
277
Commissioner of Internal Revenue v. Wyeth Suaco Laboratories, Inc., 202
SCRA 125 [1991].
273
274
269
Part II — Contracts
CHAPTER 1
CONTRACT IN GENERAL
§243.00 Generally
Contract is the meeting of the minds of two or more persons who
bind themselves with respect to the others to perform obligations
to give, to do or not to do and to hold themselves liable for breach
thereof. Articles 1303 to 1422 of the Civil govern contracts in general.
This part of the book discusses contracts in general.
However, there are special contracts, which include sales, barter or exchange, lease, partnership, agency, loan, deposit, aleatory
contracts such as insurance and gambling, compromises and arbitration, accessory contracts such guaranty, pledge, mortgage and
antichresis, and extra-contractual obligations. These are called special contracts because they are governed by specific provisions of the
Civil Code and by special laws on the specific subject, although the
general requisites of contract in general also apply to special contracts, except as otherwise provided in specific provisions pertaining
to specific subject matters.
§244.00 Stages of contract formation
The stages of contract formation are:
(a) Preparation, conception, or generation, which is the period
of negotiation and bargaining, ending at the moment of agreement
of the parties;
(b) Perfection or birth of the contract, which is the moment
when the parties come to agree on the terms of the contract; and
269
270
OBLIGATIONS AND CONTRACTS
(c) Consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract.1
Differently stated, the stages of contract formation are as
follows:
Negotiation covers the period from the time prospective contracting parties indicate interest in the contract
to the time the contract is concluded (perfected).
The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A contract
which is consensual as to perfection is so established upon
the meeting of the minds, i.e., the concurrence of offer
and acceptance, on the object and on the cause thereof.
A contract which requires, in addition the delivery of the
object of the agreement, as in a pledge or commodatum,
is referred to as a real contract. In a solemn contract,
compliance with certain formalities prescribed by law,
such as in a donation of real property, is essential in order
to make the act valid, the prescribed form being thereby
an essential element thereof.
The stage of consummation begins when the parties
perform their respective undertakings under the contract
culminating in the extinguishment thereof.2
§245.00 Contract defined
Contract is defined as follows:
Art. 1305. A contract is a meeting of minds
between two persons whereby one binds himself,
with respect to the other, to give something or to
render some service. (1254a)
Contract is a juridical convention manifested in legal form,
by virtue of which one or more persons bind themselves in favor of
another or others, or reciprocally, to the fulfillment of a prestation to
give, to do, or not to do.3
Moreno, Jr. v. Private Management Office, G.R. No. 159373, Nov. 16, 2006.
Ang Yu Asuncion v. CA, 238 SCRA 602 [1994].
3
Jardine Davies, Inc. v. CA, 333 SCRA 684 [2000].
1
2
CHAPTER 1
CONTRACT IN GENERAL
271
It is an accord of two or more persons with previously diverging
interests for the purpose of creating, modifying or extinguishing a
juridical relation between them.4 A contract need not be contained in
a single writing. It may be collected from several different writings
which do not conflict with each other and which, when connected,
show the parties, subject matter, terms and consideration, as
in contracts entered into by correspondence. A contract may be
encompassed in several instruments even though every instrument
is not signed by the parties, since it is sufficient if the unsigned
instruments are clearly identified or referred to and made part of the
signed instrument or instruments. Similarly, a written agreement
of which there are two copies, one signed by each of the parties, is
binding on both the same extent as though there had been only one
copy of the agreement and both had signed it.5
§246.00 Freedom to contract
Art. 1306. The contracting parties may establish
such stipulations, clauses, terms and conditions
as they may deem convenient, provided they are
not contrary to law, morals, good customs, public
order, or public policy. (1255a)
Article 1306 expresses the freedom to contract, and contracting
parties are free to stipulate any terms and conditions they wish to
make, the only limitations being that such terms and conditions are
not contrary to: (1) law, (2) morals, (3) good customs, (4) public order,
and (5) public policy.
It has been held that freedom of contract is not absolute. It is
subject to reasonable legislative regulation aimed at the promotion
of public health, morals and safety and general welfare.6 This refers
to the exercise of police power of the State, to which the freedom of
contract must yield.
See discussion on impairment of contract. Infra.
Courts may not interfere with the parties’ freedom to contract,
unless the contract is contrary to law, morals, good customs, public
Bachelder v. Central Bank, 44 SCRA 45 [1972].
BF Corporation v. CA, 288 SCRA 267 [1998]; Mindanao Terminal and Brokerage Services, Inc. v. Roldan Confessor, 272 SCRA 161 [1997].
6
Abe v. Fortes Wheeler Corp., 110 Phil. 198 [1950].
4
5
272
OBLIGATIONS AND CONTRACTS
policy or public order.7 Neither abstract justice nor the rule of liberal
interpretation justifies the creation by the courts of a contract for
the parties which they did not make themselves or the imposition
upon one party to a contract of an obligation not assumed.8
In Limpo v. CA,9 the Court ruled:
The principle of autonomy of contracts must be
respected. x x x The duty of the court is confined to the
interpretation of the agreement that the contracting
parties 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.
§247.00 Court cannot make contract for the parties
As a consequence of the freedom to contract, subject to
limitations, courts are not allowed to make contracts for the parties.
For this reason, it has been held:
Courts are not allowed to make contracts for the
parties; rather, they will intervene only when the terms
thereof are ambiguous, equivocal or uncertain and only to
construe them to seek the real intent of the parties and
not to alter it.10
Courts have no power to impose upon the parties an agreement
different from their real agreement or against the very terns they
did not stipulate. The principle of autonomy of contracts must be
respected.11 Neither do the courts function to relieve a party from the
effects of an unwise or unfavorable contract freely entered into.12
In Sps. Buenaventura v. CA,13 the Court ruled:
Courts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unMC Engineering, Inc. v. CA, 380 SCRA 116 [2002].
Riviera Filipinas, Inc. v. CA, 380 SCRA 245 [2002].
9
G.R. No. 144732, Feb. 13, 2006.
10
New Life Enterprises v. CA, 207 SCRA 669 [1992].
11
Limpo v. CA, G.R. No. 144732, Feb. 13, 2006.
12
Phil. Aluminum Wheels, Inc. v. FASGI Enterprises, Inc., 342 SCRA 722
[2000].
13
G.R. No. 126376, Nov. 20, 2003.
7
8
CHAPTER 1
CONTRACT IN GENERAL
273
wise investments, relieve him from one-sided contracts,
or annul the effects of foolish acts. Courts cannot constitute themselves guardians of persons who are not legally
incompetent. Courts operate not because one person has
been defeated or overcome by another, but because he has
been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money by them — indeed, all they have
in the world; but not for that alone can the law intervene
and restore. There must be, in addition, a violation of the
law, the commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of
the situation and remedy it.
§248.00 Limitations on freedom to contract
“It is a familiar doctrine in the law on contracts that the parties
are bound by the stipulations, clauses, terms and conditions they
have agreed to, the only limitation being that these stipulations,
clauses, terms and conditions are not contrary to any law, morals,
public order or public policy. Where they are not contrary to any
legal proscription, the agreement entered into by the parties must
be respected and held to be the law between them.”14
In other words, the freedom to contract is not unlimited. While
the parties are free to stipulate any terms and conditions therein,
such stipulations must not be contrary to (1) law, (2) morals, (3) good
customs, (4) public order, or public policy, otherwise the contract
will be void.
§249.00 Contract contrary to law
A law or statute is an act of the legislature as an organized
body, expressed in the form and passed according to the procedure
required to constitute it as part of the law of the land. Other laws
which are of the same category and binding force as laws or statutes
are Presidential decrees issued by the President in the exercise of
his legislative power during the period of martial law under the
1973 Constitution. and Executive Orders issued by the President in
the exercise of his legislative power during the Revolutionary period
under the Freedom Constitution.
14
Odyssey Park, Inc. v. CA, 280 SCRA 253 [1997]; Ong Lin Sinb v. FEB leasing
and Finance Corp., 524 SCRA 333 [2007].
274
OBLIGATIONS AND CONTRACTS
The law is deemed written into every contract. Although a
contract is the law between the parties, the provisions of positive
law which regulate contracts are deemed written therein and shall
limit and govern the relations between the parties.15 It is firmly
settled that provisions of applicable laws are deemed written into
contracts. Private parties cannot constitutionally contract away the
otherwise applicable provisions of law.16
Not only are existing laws deemed read into contracts in order to
fix the obligations as between the parties, but also the constitutional
principles enshrined in the Constitution and reservation of the
essential attributes of sovereign power as a postulate of the legal
order.17
For instance, an employment contract for 12 months, which
provides for summary dismissal and dispenses with notice, cannot
be given effect, as the labor laws require two requisites for valid
dismissal, namely, the existence of a cause as provided, and the
observance of due process, including the opportunity given the
employee to be heard and defend himself.18
However, while a contract is entered into by the parties on the
basis of the law then obtaining and is deemed read into it, the repeal
or amendment of said law will not affect the terms of the contract,
nor impair the rights of the parties thereunder. This rule applies
even if one of the contracting parties is the government.19
A stipulation in a deed of mortgage which states that upon
failure of the mortgagor pledgor to pay the debt within the agreed
period, the mortgaged or pledged property covered thereby shall
become the property of the mortgagee or pledgee and the property
considered payment of the indebtedness. Such stipulation is against
the law. This is known as pactum commissorium and is null and
void.20
Heirs of Severino San Miguel v. CA, 364 SCRA 523 [2001].
Gen. Milling Co., Inc. v. Torres, 196 SCRA 215 [1991].
17
Basa v. Federacion Obrera de la Industria Tabaquera, 61 SCRA 93 [1974].
18
Asia World Recruitment, Inc. v. NLRC, 313 SCRA 1 [1999].
19
Recana, Jr. v. CA, 349 SCRA 24, 34 [2001].
20
Reyes v. Nebreja, 98 Phil. 639 [1956]; Yau v. CA, 177 SCRA 793 [1989]; Uy
Tong v. CA, 161 SCRA 383 [1988]; Nakpil v. IAC, 225 SCRA 456 [1993].
15
16
CHAPTER 1
CONTRACT IN GENERAL
275
§250.00 Contrary to good customs and good morals
Custom has been defined as a rule of conduct formed by
repetition of acts, uniformly observed as a social rule, legally binding
and obligatory. Courts take no judicial notice of custom. A custom
must be proved as a fact, according to the rules or evidence.21
In order to declare the agreement void for being contrary to good
customs and morals, it must first be shown that the object, cause
or purpose thereof contravenes the generally accepted principles
of morality which have received some kind of social and practical
confirmation.22
§251.00 Contract contrary to public order or public policy
Public order, which is found in the Spanish Civil Code, is not
as broad as public policy, as the latter may refer not only to public
safety but also, to considerations which are moved by the common
good. The term ‘public policy’ is vague and uncertain in meaning,
floating and changeable in connotation. It may be said, however,
that, in general, a contract which is neither prohibited by law nor
condemned by judicial decision, nor contrary to public morals,
contravenes no public policy. In the absence of express legislation
or constitutional prohibition, a court, in order to declare a contract
void as against public policy, must find that the contract as to the
consideration or thing to be done, has a tendency to injure the public,
is against the public good, or contravenes some established interests
of society, or is inconsistent with sound policy and good morals, or
tends clearly to undermine the security of individual rights, whether
of personal liability or of private property.23
For instance, an employment contract which requires as a
condition of employment or continuation of employment that a
woman shall not get married, or to stipulate expressly or tacitly that
upon getting married, a woman employee shall be deemed resigned,
is against the law, good morals, good customs, public or public policy.
Such contract is void.24
21
In the Matter of Petition for Authority to Continue Use of the Law Firm
Name, 92 SCRA 1 [1988]; Yao Kee v. Sy-Gonzales, 167 SCRA 736 [1988].
22
Paderes v. CA, 463 SCRA 505 [2005].
23
Phil. Bank of Communications v. Echiverri, 99 SCRA 508 [1980].
24
Phil. Telegraph and Telephone Co. v. NLRC, 272 SCRA 596 [1997].
276
OBLIGATIONS AND CONTRACTS
Any agreement entered into because of the actual or
supposed influence which the party has, engaging him to influence
executive officials in the discharge of their government duties,
which contemplates the use of personal influence and solicitation
rather than an appeal to the judgment of the official on the merits
of the object sought is contrary to public policy. Such consultancy
agreement is null and void as against public policy.25
In Avon Cosmetics, Inc. v. Luna,26 the Court defined public
policy:
Plainly put, public policy is that principle of the
law which holds that no subject or citizen can lawfully
do that which has a tendency to be injurious to the
public or against the public good. As applied to contracts,
in the absence of express legislation or constitutional
prohibition, a court, in order to declare a contract void as
against public policy, must find that the contract as to the
consideration or thing to be done, has a tendency to injure
the public, is against the public good, or contravenes
some established interests of society, or is inconsistent
with sound policy and good morals, or tends clearly to
undermine the security of individual rights, whether of
personal liability or of private property.
§252.00 Innominate contracts
Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules
governing the most analogous nominate contracts,
and by the customs of the place. (n)
Innominate contract is an implied contract based on the
principle that no one shall unjustly enrich himself at the expense of
another. It is contract of facio et des or “I do and you give.”27
Marubeni Corp. v. Lirag, 362 SCRA 620 [2001].
G.R. No. 153674, Dec. 20, 2006.
27
Corpus v. CA, 98 SCRA 428 [1980].
25
26
CHAPTER 1
CONTRACT IN GENERAL
277
In Soler v. CA,28 the Court held:
“It is essential for the proper operation of the principle that there is an acceptance of the benefits by one
sought to be charged for the services rendered under
circumstances as reasonably to notify him that the lawyer
performing the task was expecting to be paid compensation therefor. The doctrine of quantum meruit is a device
to prevent undue enrichment based on the equitable postulate that it is unjust for a person to retain benefit without paying for it.”
§253.00 Legal basis of unjust enrichment as innominate contract
The doctrine of unjust enrichment has its legal basis is Art. 22 of
the Civil Code, which provides that every person who through an act
or performance by another, or by any other means, acquires or comes
into possession of something at the expense of the latter without just
or legal ground, shall return the same to him. The conditions which
generally concur before the rule on unjust enrichment can apply,
are: (a) a person is unjustly benefited, and (b) such benefit is derived
at another’s expense or damage.29
The Court in U.P. v. Philab Industries, Inc.,30 ruled that unjust
enrichment claims do not simply lie because one party has benefited
from the efforts of another. There are requirements which must be
present as basis for unjust enrichment. The Court held:
We reject the ruling of the CA holding the petitioner
liable for the claim of the respondent based on the maxim
that no one should enrich itself at the expense of another.
Unjust enrichment claims do not lie simply because
one party benefits from the efforts or obligations of others,
but instead it must be shown that a party was unjustly
enriched in the sense that the term unjustly could mean
illegally or unlawfully.
Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally prove that anothG.R. No. 123892, May 21, 2001.
MC Engineering, Inc. v. CA, 380 SCRA 116 [2002].
30
439 SCRA 467 [2004].
28
29
278
OBLIGATIONS AND CONTRACTS
er party knowingly received something of value to which
he was not entitled and that the state of affairs are such
that it would be unjust for the person to keep the benefit. Unjust enrichment is a term used to depict result or
effect of failure to make remuneration of or for property
or benefits received under circumstances that give rise
to legal or equitable obligation to account for them; to be
entitled to remuneration, one must confer benefit by mistake, fraud, coercion, or request. Unjust enrichment is not
itself a theory of reconveyance. Rather, it is a prerequisite
for the enforcement of the doctrine of restitution.
xxx
In order that accion in rem verso may prosper, the
essential elements must be present: (1) that the defendant
has been enriched, (2) that the plaintiff has suffered a
loss, (3) that the enrichment of the defendant is without
just or legal ground, and (4) that the plaintiff has no other
action based on contract, quasi-contract, crime or quasidelict.
An accion in rem verso is considered merely an
auxiliary action, available only when there is no other
remedy on contract, quasi-contract, crime, and quasidelict. If there is an obtainable action under any other
institution of positive law, that action must be resorted
to, and the principle of accion in rem verso will not lie.
§254.00 Implied-in-fact contract
A contract may be implied from the facts and circumstances
obtaining in a particular situation, which show all the elements of
contract. The case of U.P. v. Philab Industries, Inc.,31 illustrates an
implied-in-fact contract. In this case, the Court ruled:
We agree with the petitioner that, based on the records, an implied-in-fact contract of sale was entered into
between the respondent and FEMF. A contract impliedin-fact is one implied from facts and circumstances showing a mutual intention to contract. It arises where the
intention of the parties is not expressed, but an agree31
Ibid.
CHAPTER 1
CONTRACT IN GENERAL
ment in fact creating an obligation. It is a contract, the
existence and terms of which are manifested by conduct
and not by direct or explicit words between parties but is
to be deduced from conduct of the parties, language used,
or things done by them, or other pertinent circumstances
attending the transaction. To create contracts impliedin-fact, circumstances must warrant inference that one
expected compensation and the other to pay. An impliedin-fact contract requires the parties’ intent to enter into a
contract; it is a true contract. The conduct of the parties is
to be viewed as a reasonable man would view it, to determine the existence or not of an implied-in-fact contract.
The totality of the acts/conducts of the parties must be
considered to determine their intention. An implied-infact contract will not arise unless the meeting of minds is
indicated by some intelligent conduct, act or sign.
In this case, the respondent was aware, from the
time Padolina contacted it for the fabrication and supply
of the laboratory furniture until the go-signal was given
to it to fabricate and deliver the furniture to BIOTECH
as beneficiary, that the FEMF was to pay for the same.
Indeed, Padolina asked the respondent to prepare the
draft of the contract to be received by the FEMF prior to
the execution of the parties (the respondent and FEMF),
but somehow, the respondent failed to prepare one. The
respondent knew that the petitioner was merely the
donee-beneficiary of the laboratory furniture and not the
buyer; nor was it liable for the payment of the purchase
price thereof. From the inception, the FEMF paid for the
bills and statement of accounts of the respondent, for
which the latter unconditionally issued receipts to and
under the name of the FEMF.
xxx
Admittedly, the respondent sent to the petitioner its
bills and statements of accounts for the payments of the
laboratory furniture it delivered to the petitioner which
the petitioner, through Padolina, transmitted to the
FEMF for its payment. However, the FEMF failed to pay
the last statement of account of the respondent because
of the onset of the EDSA upheaval. It was only when the
respondent lost all hope of collecting its claim from the
government and/or the PCGG did it file the complaint
279
280
OBLIGATIONS AND CONTRACTS
against the petitioner for the collection of the payment of
its last delivery of laboratory furniture.
§255.00 Mutuality of contract
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot
be left to the will of one of them. (1256a)
Article 1308 should be read in relation to Art. 1138 which
reads:
“Art. 1102. When the fulfillment of the condition
depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon
the will of a third person, the obligation shall take effect
in conformity with the provisions of this Code.”
Articles 1308 and 1138 express the principle of mutuality of
contract and of the rule that the validity or performance of contract
should not be left to the sole will of one of the parties, known as
purely potestative condition of a contract.
In order that obligations arising from contract may have the
force of law between the parties, there must be mutuality of the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is purely
protestative and is void.32
The binding effect of any agreement between parties to a
contract is premised on two settled principles: (1) that any obligation
rising from contract has the force of law between the parties; and (2)
that there must be mutuality between the parties based on their
essential equality. Any contract which appears to be heavily weighed
in favor of one of the parties so as to lead to an unconscionable result
is void. Any stipulation regarding the validity or compliance with
the contract which is left solely to the will of one of the contracting
parties is likewise void.33 This condition is purely potestative and
vitiates the contract as null and void.34
Florendo v. CA, G.R. No. 101771, Dec. 17, 1996.
Almeda v. CA, 256 SCRA 292 [1996].
34
Hermosa v. Langara, 93 Phil. 977 [1953]; Berg v. Magdalena Estate, Inc., 92
Phil. 110 [1952].
32
33
CHAPTER 1
CONTRACT IN GENERAL
281
§256.00 When escalation clause offends mutuality
Escalation clause is defined as one in which the contract fixes
a base price but contains a provision that in the event of specified
cost increase, the seller or contractor may increase the price up to a
certain fixed percentage of the base. It is called cost of living index
adjustment clause. It is widely used in commercial contracts, in social
security and pension benefits, and in labor contracts. The purpose
is to maintain fiscal stability and to retain “real dollar” value to the
terms of longer term contract.35
The escalation clause is also used in loan agreements, which
authorize lending institutions or banks to increase the rates of
interest to a certain fixed percentage whenever there is a law or
Central Bank Regulation authorizing the increase in interest rate not
to exceed a pertain percentage. To be valid, the contract embodying
the escalation clause must also provide for a de-escalation clause
authorizing the decrease in interest rate when a law or Central
Bank regulation reduces such interest rate. The purpose of the deescalation clause is to prevent one-sidedness in favor of the lender
which is considered repugnant to the principle of mutuality of
contracts. Where the contract contains only an escalation clause
without any clause on de-escalation, the contract pertaining to such
escalation is void, as violative of the principle of mutuality essential
in contracts.36
Mutuality is one of the characteristics of a contract. Its validity
or performance or compliance cannot be left to the will of only one of
the parties. This is enshrined in Article 1308 of the New Civil Code.
Article 1308 is based firstly, on the principle that obligations arising
from contracts have the force of law between the contracting parties and secondly, that there must be mutuality between the parties
based on their essential equality to which is repugnant to have one
party bound by the contract leaving the other free therefrom. Its
ultimate purpose is to render void a contract containing a condition
which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties.37
35
Banco Filipino Savings and Mortgage Bank v. Navarro, 152 SCRA 346
[1987].
36
37
Lloren, Jr. v. CA, 218 SCRA 436 [1993].
GF Equity, Inc. v. Valenzona, G.R. No. 156841, June 8, 2005.
282
OBLIGATIONS AND CONTRACTS
§257.00 Termination of contract dependent upon third person
Where the lease contract provides that the lessor will terminate
the lease on the ground that his children need the premises for their
own use, the resolution of the lease is not a condition dependent
solely upon the will of the lessor. The happening of the condition
depends upon the will of a third person – the lessor’s children.
Whenever the latter require the use of the leased premises for their
needs, then the lease contract shall be deemed terminated. The said
contract is valid.38
§258.00 Illustrations where mutuality is not violated
In Allied Banking Corp. v. CA,39 the lease contract specifically
provides that it “may be renewed for a like term at the option of the
lessee.”
The issue is whether this provision of the lease is valid or void
as violative of Art 1308 of the Civil Code. In sustaining the validity
of the provision, the Court ruled that the principle of mutuality is
not violated, nor does it leave the renewal to the sole will of one of
the parties. The Court ruled:
ALLIED insists before us that Provision No. 1 of the
lease contract was mutually agreed upon hence valid and
binding on both parties, and the exercise by petitioner
of its option to renew the contract was part of their
agreement and in pursuance thereof.
We agree with petitioner. Article 1308 of the Civil
Code expresses what is known in law as the principle
of mutuality of contracts. It provides that “the contract
must bind both the contracting parties; its validity or
compliance cannot be left to the will of one of them.” This
binding effect of a contract on both parties is based on
the principle that the obligations arising from contracts
have the force of law between the contracting parties, and
there must be mutuality between them based essentially
on their equality under which it is repugnant to have
one party bound by the contract while leaving the other
free therefrom. The ultimate purpose is to render void a
38
39
Ducasin v. CA, 122 SCRA 280 [1983].
G.R. No. 124290, Jan. 16, 1998.
CHAPTER 1
CONTRACT IN GENERAL
283
contract containing a condition which makes its fulfillment
dependent solely upon the uncontrolled will of one of the
contracting parties.
An express agreement which gives the lessee the
sole option to renew the lease is frequent and subject
to statutory restrictions, valid and binding on the
parties. This option, which is provided in the same lease
agreement, is fundamentally part of the consideration in
the contract and is no different from any other provision
of the lease carrying an undertaking on the part of the
lessor to act conditioned on the performance by the lessee.
It is a purely executory contract and at most confers a
right to obtain a renewal if there is compliance with the
conditions on which the right is made to depend. The
right of renewal constitutes a part of the lessee’s interest
in the land and forms a substantial and integral part of
the agreement.
The fact that such option is binding only on the lessor
and can be exercised only by the lessee does not render
it void for lack of mutuality. After all, the lessor is free
to give or not to give the option to the lessee. And while
the lessee has a right to elect whether to continue with
the lease or not, once he exercises his option to continue
and the lessor accepts, both parties are thereafter bound
by the new lease agreement. Their rights and obligations
become mutually fixed, and the lessee is entitled to retain
possession of the property for the duration of the new lease,
and the lessor may hold him liable for the rent therefor.
The lessee cannot thereafter escape liability even if he
should subsequently decide to abandon the premises.
Mutuality obtains in such a contract and equality exists
between the lessor and the lessee since they remain with
the same faculties in respect to fulfillment.
In Jespajo Realty v. Court of Appeals,40 the Court enunciated
the rule that the express provision in the lease agreement of the
parties that violation of any of the terms and conditions of the contract shall be sufficient ground for termination thereof by the lessor,
removes the contract from the application of Article 1308.
40
390 SCRA 27, 39 [2002].
284
OBLIGATIONS AND CONTRACTS
In Taylor v. Uy Tieng Piao,41 the Court ruled that Article
1256 (now Art. 1308) creates no impediment to the insertion in a
contract for personal service of a resolutory condition permitting the
cancellation of the contract by one of the parties. Such a stipulation,
as can be readily seen, does not make either the validity of the
fulfillment of the contract dependent upon the will of the party
to whom is conceded the privilege of cancellation; for where the
contracting parties have agreed that such option shall exist, the
exercise of the option is as much in the fulfillment of the contract as
any other act which may have been the subject of agreement.
§259.00 Where no advantage is taken by one party
In Avon Cosmetics, Inc. v. Luna,42 one of the issues raised refers
to the validity of the termination clause of the agreement, which
reads:
6)
Either party may terminate this agreement at will, with
or without cause, at any time upon notice to the other.
The Court ruled that the termination clause is valid because
the termination “with or without cause” is equally available to
both parties and no advantage is taken against each other by the
contracting parties. The Court ruled:
“In the case of Petrophil Corporation v. Court of
Appeals, this Court already had the opportunity to opine
that termination or cancellation clauses such as that
subject of the case at bar are legitimate if exercised in good
faith. The facts of said case likewise involved a termination
or cancellation clause that clearly provided for two ways
of terminating the contract, i.e., with or without cause.
The utilization of one mode will not preclude the use of
the other. Therein, we stated that the finding that the
termination of the contract was “for cause,” is immaterial.
When petitioner terminated the contract “without cause,”
it was required only to give x x x a 30-day prior written
notice, which it did.
In the case at bar, the termination clause of the
Supervisor’s Agreement clearly provides for two ways of
41
42
43 Phil. 873 [1922].
G.R. No. 153674, Dec. 20, 2006.
CHAPTER 1
CONTRACT IN GENERAL
285
terminating and/or canceling the contract. One mode does
not exclude the other. The contract provided that it can
be terminated or cancelled for cause, it also stated that
it can be terminated without cause, both at any time and
after written notice. Thus, whether or not the termination
or cancellation of the Supervisor’s Agreement was “for
cause,” is immaterial. The only requirement is that of
notice to the other party. When petitioner Avon chose to
terminate the contract, for cause, respondent Luna was
duly notified thereof.
Worth stressing is that the right to unilaterally
terminate or cancel the Supervisor’s Agreement with or
without cause is equally available to respondent Luna,
subject to the same notice requirement. Obviously, no
advantage is taken against each other by the contracting
parties.”
§260.00 Where mutuality is violated, rendering contract void
The case of GF Equity, Inc. v. Valenzona43 illustrates the rule
that a contract which violates the principle of mutuality is void.
One of the issues raised is whether the questioned last sentence of
paragraph 3 of the contract is violative of the principle of mutuality
of contracts. The provision states in part:
3.
x x x If at any time during the contract, the COACH,
in the sole opinion of the CORPORATION, fails to exhibit
sufficient skill or competitive ability to coach the team, the
CORPORATION may terminate this contract.
The Court ruled that the agreement violates the principle of
mutuality, thus:
Mutuality is one of the characteristics of a contract,
its validity or performance or compliance of which cannot
be left to the will of only one of the parties. This is enshrined
in Article 1308 of the New Civil Code, whose underlying
principle is explained in Garcia v. Rita Legarda, Inc.,
viz.:
43
G.R. No. 156841, June 30, 2005.
286
OBLIGATIONS AND CONTRACTS
Article 1308 of the New Civil Code reads as follows:
“The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of
them.”
The above legal provision is a virtual reproduction
of Article 1256 of the old Civil Code but it was so phrased
as to emphasize the principle that the contract must bind
both parties. This, of course is based firstly, on the principle that obligations arising from contracts have the force
of law between the contracting parties and secondly, that
there must be mutuality between the parties based on
their essential equality to which is repugnant to have one
party bound by the contract leaving the other free therefrom (8 Manresa 556). Its ultimate purpose is to render
void a contract containing a condition which makes its
fulfillment dependent exclusively upon the uncontrolled
will of one of the contracting parties.
The ultimate purpose of the mutuality principle is
thus to nullify a contract containing a condition which
makes its fulfillment or pre-termination dependent exclusively upon the uncontrolled will of one of the contracting
parties.
Not all contracts though which vest to one party
their determination of validity or compliance or the
right to terminate the same are void for being violative
of the mutuality principle. Jurisprudence is replete with
instances of cases where this Court upheld the legality of
contracts which left their fulfillment or implementation
to the will of either of the parties. In these cases, however,
there was a finding of the presence of essential equality
of the parties to the contracts, thus preventing the
perpetration of injustice on the weaker party.
In the case at bar, the contract incorporates in
paragraph 3 the right of GF Equity to pre-terminate the
contract — that “if the coach, in the sole opinion of the
corporation, fails to exhibit sufficient skill or competitive
ability to coach the team, the corporation may terminate
the contract.” The assailed condition clearly transgresses
the principle of mutuality of contracts. It leaves the determination of whether Valenzona failed to exhibit suf-
CHAPTER 1
CONTRACT IN GENERAL
287
ficient skill or competitive ability to coach Alaska team
solely to the opinion of GF Equity. Whether Valenzona
indeed failed to exhibit the required skill or competitive
ability depended exclusively on the judgment of GF Equity. In other words, GF Equity was given an unbridled
prerogative to pre-terminate the contract irrespective of
the soundness, fairness or reasonableness, or even lack of
basis of its opinion.
To sustain the validity of the assailed paragraph
would open the gate for arbitrary and illegal dismissals,
for void contractual stipulations would be used as justification therefor.
The assailed stipulation being violative of the mutuality principle underlying Article 1308 of the Civil Code,
it is null and void.
In Lao Lim v. CA,44 the lease contract provides that the lessee
can stay in the premises for as long as he needs the premises and
can meet and pay the rentals. The Court held that this stipulation
is purely potestative condition and hence, null and void, because
it leaves the effectivity and enjoyment of the leasehold rights to
the sole and exclusive will of the lessee. It is likewise a suspensive
condition because the renewal of the lease, which gives rise to a new
lease, depends upon said conditions. Such stipulation cannot be used
as a defense in a ejectment suit. If such stipulation is allowed as a
defense, the owner would never be able to discontinue the lease; and
conversely, although the owner should desire the lease to continue,
the lessee could effectively thwart his purpose if he should prefer to
terminate the contract by simple expedient of stopping payment of
the rentals. This is prohibited by Art. 1308 of the Civil Code.45
§261.00 Essence of mutuality
Once a contract has been entered into, no party can renounce
it unilaterally without the consent of the other party. This is the
essence of mutuality. The Court, in Professional Academic Plans,
Inc. v. Crisostomo,46 explained:
191 SCRA 150 [1990].
Lao Lim v. CA, 191 SCRA 150 [1990].
46
453 SCRA 343 [2005].
44
45
288
OBLIGATIONS AND CONTRACTS
Once a contract is entered into, no party can renounce
it unilaterally or without the consent of the other. This
is the essence of the principle of mutuality of contracts
entombed in Article 1308 of the Civil Code. To effectuate
abandonment of a contract, mutual assent is always
required. The mere fact that one has made a poor bargain
may not be a ground for setting aside the agreement.
Contracting parties cannot amend, modify, limit, restrict or
circumscribe legal remedies or the jurisdiction of courts. Rules of
procedure are matters of public order and interest and unless the
rules themselves so allow, they cannot be altered, changed or regulated by agreements between or stipulations of the parties for their
singular convenience, otherwise the stipulation is void.47
A party to a contract cannot just evade compliance with his
contractual obligations by the simple expedient of denying the
execution of such contract. If, after a perfect and binding contract
has been executed between the parties, it occurs to one of them to
allege some defect therein as a reason for annulling it, the alleged
defect must be proven since the validity and fulfillment of contracts
cannot be left to the will of one of the contracting parties.48
§262.00 Determination is left to third person
Art. 1309. The determination of the performance may be left to a third person, whose decision
shall not be binding until it has been made known
to both contracting parties. (n)
The application of the above provisions requires that the parties
agree in writing to the determination of the performance by a third
person. Article 1309 is similar to Rule 32 of the Rules of Court on
trial by commissioner, which may be invoked when the parties agree
in writing or upon application in court by one of the parties.
Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the
courts shall decide what is equitable under the circumstances. (n)
47
48
Metro Construction, Inc. v. Chatham Properties, Inc., 365 SCRA 697 [2001].
Hemedes v. CA, 316 SCRA 347, 365 [1999].
CHAPTER 1
CONTRACT IN GENERAL
289
§263.00 Contracts take effect only between parties
Art. 1311. Contracts take effect only between
the parties, their assigns and heirs, except in case
where the rights and obligations arising from the
contract are not transmissible by their nature, or
by stipulation or by provision of law. The heir is not
liable beyond the value of the property he received
from the decedent.
If a contract should contain some stipulation
in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to
the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient.
The contracting parties must have clearly and deliberately conferred a favor upon a third person.
(1257a)
The above provision should be read in relation to Art. 1178 of
the Civil Code, which reads:
Subject to the laws, all rights acquired in virtue of
an obligation are transmissible, if there has been no stipulation to the contrary.
The general rule is that a party’s rights and obligations are
transmissible to his assigns or heirs or successors. The exceptions
are those which are not transmissible: (1) by their nature, (2) by
stipulations, or (3) by operation of law. Obligations which are purely
personal are not transmissible. They are not also transmissible where
the contract so specifically provides that they are not transmissible.
Where the contract is silent, it is deemed transmissible because a
party is deemed to have contracted for him and his heirs and assigns.
They are also intrasmissible by operation of law, such as in legal
support, parental authority, usufruct, contract for a piece of work,
partnership and agency.49
In Limpo v. CA,50 the Court ruled that the sound reason for the
exclusion of non-parties to an agreement is the absence of a vinculum
49
Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 [1956]; DKC Holdings
Corp. v. CA, 329 SCRA 666.
50
G.R. No. 144732, Feb. 13, 2006.
290
OBLIGATIONS AND CONTRACTS
or juridical tie which is the efficient cause for the establishment of
an obligation.
§264.00 Principle of relativity; exceptions to general rule
The principle of relativity of contract states that contract can
only bind the parties who entered into it, and it cannot favor nor
prejudice a third person, even if he is aware of such contract and
has acted with knowledge thereof. This principle is known as the
principle of relativity.51
“It is a basic principle in law that contracts can only
bind the parties who had entered into it, and cannot favor
or prejudice a third person. Only those who are parties to
contracts are liable for their breach. Parties to a contract
cannot thereby impose any liability on one who, under its
terms, is a stranger to the contract.’’52
There are exceptions to the general rule that contracts bind
only the contracting parties, their assigns and heirs, such as the
following:
1.
It is a basic postulate that the law and the Constitution
are deemed read into every contract and the law or the Constitution
may modify on such contract or even impose obligations upon parties
or even non-contracting parties thereto subject to such limitations
as the Constitution prescribes.
Thus, P.D. 957 requires a non-party to a contract to comply
herewith, as if the latter is a contractual party, bound thereby. The
Court in PNB v. Office of the President, G.R. No. 104528, January
18, 1996, ruled:
As to the second issue of non-privity, petitioner avers
that, in view of the provisions of Article 1311 of the Civil
Code, PNB, being a “total stranger to the land purchase
agreement,’’ cannot be made to take the developer’s
place.
We disagree, P.D. 957 being applicable, Section 18 of
said law obliges petitioner Bank to accept the payment of
the remaining unpaid amortizations tendered by private
respondents.
51
52
Packaging Corp. v. CA, 333 SCRA 170 [2000].
Garcia v. CA, 258 SCRA 446 [1996].
CHAPTER 1
CONTRACT IN GENERAL
291
“SEC. 18. Mortgages. — No mortgage on any unit
or lot shall be made by the owner or developer without
prior written approval of the Authority. Such approval
shall not be granted unless it is shown that the proceeds
of the mortgage loan shall be used for the development
of the condominium or subdivision project and effective
measures have been provided to ensure such utilization.
The loan value of each lot or unit covered by the mortgage
shall be determined and the buyer thereof, if any, shall
be notified before the release of the loan. The buyer
may, at his option, pay his installment for the lot or unit
directly to the mortgagee who shall apply the payments
to the corresponding mortgage indebtedness secured by
the particular lot or unit being paid for, with a view to
enabling said buyer to obtain title over the lot or unit
promptly after full payment thereof.’’
Privity of contracts as a defense does not apply in this
case for the law explicitly grants to the buyer the option
to pay the installment payment for his lot or unit directly
to the mortgagee (petitioner), which is required to apply
such payments to reduce the corresponding portion of the
mortgage indebtedness secured by the particular lot or
unit being paid for. And, as stated earlier, this is without
prejudice to petitioner Bank’s seeking relief against the
subdivision developer.
2.
Where the non-party is prejudiced in his rights with
respect to one of the contracting parties and can show the detriment
which would positively result to him, in which case the non-party
may challenge the validity of the contract.53
Thus, where a person is entitled to 1/4 of the property, which
a surviving wife sold the whole property to another, the person
entitled to 1/4 thereof may file an action to annul the deed of sale,
even if he is not privy to the deed of sale, as the sale has prejudiced
his rights thereto.54
Only those who are principally or subsidiarily bound in the
contract are entitled to ask for its annulment, and those who are not
so liable have no right to ask for its annulment. Thus, in the sale or
53
54
Lodovica v. CA, 65 SCRA 154 [1975].
Fernandez v. Fernandez, 363 SCRA 811 [2001].
292
OBLIGATIONS AND CONTRACTS
award of a lot from the PHHC to an awardee, a squatter of the lot
has no right to seek the annulment of the award because he is not
principally or subsidiarily bound by the award and a squatter has no
possessory right which is affected by said award.55
3.
Where persons who come into possession of real rights as
object of contract must respect the contract even if they are nonparties thereto.
Art. 1312. In contracts creating real rights,
third persons who come into possession of the object of the contract are bound thereby, subject to
the provisions of the Mortgage Law and the Land
Registration Laws. (n)
Thus, a purchaser of a mortgaged land or a real property which
has been previously sold, in which the mortgage or previous sale is
duly registered, must respect the mortgage or previous sale, even if
the purchaser is a non-party to the mortgage or previous sale.
4.
Creditors may challenge validity of sale or alienations by
debtors in fraud of their creditors even if the latter are non-parties
to the sale or alienation by the debtors.
Art. 1313. Creditors are protected in cases of
contracts intended to defraud them. (n)
5.
Where a third person unlawfully induces a contracting
party to violate the contract, the third party may be held liable for
damages and injunction, even if he is a non-party to the contract.
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n)
The action is based on tortious interference with contractual
relations, discussed infra.
6.
Where the contract contains a stipulation pour autrui,
the beneficiary can enforce said stipulation, even if he is not a party
to the contract.
55
Astudillo v. Board of Directors of PHHC, 72 SCRA 15 [1976].
CHAPTER 1
CONTRACT IN GENERAL
293
§265.00 Stipulation pour autrui
The second par. of Art. 1311 defines stipulation pour autrui as
follows:
“If a contract should contain some stipulation in
favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest
of a person is not sufficient. The contracting parties must
have clearly and deliberately conferred a favor upon a
third person.”
The requisites of stipulation pour autrui are:
(a) the stipulation in favor of a third person, the third-party
beneficiary, should be a part, not the whole, of the contract;
(b) the contracting parties must have clearly and deliberately
conferred a favor upon a third person, not a mere incidental benefit
or interest;
(c) the favorable stipulations should not be conditioned or
compensated by any kind of obligation whatsoever;
(d) the third person must have communicated his acceptance
to the obligor before its revocation;
(e) neither of the contracting parties bears the legal representation or authorization of the third party.56
Given the presence of the elements of stipulation pour autrui,
the person for whose benefit the stipulation has been entered into
may demand its fulfillment and to sue for damages in case of breach
thereof.57 He may even require that a notation or registration of said
stipulation pour autrui be annotated at the back of the title of the
property involved to secure continued enforcement and fulfillment
thereof.58
56
Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005; Florentino v. Encarnacion, 79 SCRA 192 [1977].
57
Constantino v. Espirito, 39 SCRA 206.
58
Florentino v. Encarnacion, Sr., 79 SCRA 192 [1977].
294
OBLIGATIONS AND CONTRACTS
§266.00 Who may be beneficiaries in stipulation pour autrui
The third-party who is benefited by stipulation pour autrui
may be: (a) a donee beneficiary; or (b) a creditor beneficiary.
A donee beneficiary is regarded as such only if it appears from
the terms of the promisee, in view of the accompanying circumstances, that the purpose of the promisee in obtaining the promise of and/
or part of the performance thereof is to make a gift to the beneficiary
or to confer upon him a right against the promisee to secure performance neither due nor supposed or asserted to be due from the
promisee to the beneficiary.59
The creditor beneficiary is one who is a primary party-in-interest,
The intent to grant interest may be gleaned from the construction of
the contract in the light of the surrounding circumstances. Intent, in
a legal sense, is defined as the purpose to use a particular manner to
effect a certain result. If the performance of a promise will satisfy an
actual or supposed or asserted duty of the promisee to the beneficiary,
he is a creditor beneficiary and may enforce the promise. The right
of recovery of a third-party beneficiary is upon the theory that the
contracting parties intended to create a cause of action in his favor.
The right of the beneficiary is, however, limited by the terms of the
promise.60
§267.00 Acceptance of benefits may be express or implied
The acceptance of the benefits of a stipulation pour autrui may
be express or implied. There is express acceptance when the thirdparty beneficiary communicates in writing his acceptance of the
stipulation. There is implied acceptance, by the third person enjoying the fruits flowing therefrom.61
“The acceptance does not have to be in any particular form, even when the stipulation is for the third person
an act of liberality or generosity on the part of the promisor or promisee.
It need not be made expressly and formally. Notification of acceptance, other than such as is involved in the
making of demand, is unnecessary.
Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005.
Ibid.
61
Florentino v. Encarnacion, 79 SCRA 192 [1977].
59
60
CHAPTER 1
CONTRACT IN GENERAL
295
A trust constituted between two contracting parties
for the benefit of a third person is not subject to the rules
governing donation of real property. The beneficiary of a
trust may demand performance of the obligation without
having formally accepted the benefit of the trust in a public document, upon mere acquiescence in the formation of
the trust and acceptance under the law.’’62
Making use of the stipulation constitutes not only acceptance
but also communication to the obligor. In Mandarin Villa, Inc. v.
CA,63 the Court ruled:
While private respondent may not be a party to the
said agreement, the above-quoted stipulation conferred a
favor upon the private respondent, a holder of credit card
validly issued by BANKARD. This stipulation is a stipulation pour autrui and under Article 1311 of the Civil Code
private respondent may demand its fulfillment provided
he communicated his acceptance to the petitioner before
its revocation. In this case, private respondent’s offer to
pay by means of his BANKARD credit card constitutes
not only an acceptance of the said stipulation but also an
explicit communication of his acceptance to the obligor.
§268.00 Illustrations of stipulation pour autrui
In Mandarin Villa, Inc. v. CA,64 the agreement between the bank
issuing a credit card and the merchant that the latter will honor the
credit card as a means of payment is a stipulation pour autrui. The
cardholder can demand its fulfillment provided he communicated
his acceptance before its revocation. The cardholder’s offer to pay by
means of the credit card constitutes not only an acceptance of the
stipulation but also an explicit communication of his acceptance to
the obligor.
In Florentino v. Encarnacion,65 the extrajudicial agreement of
the co-owners contains a stipulation that the fruits of one of the
lands would be used to defray expenses in the annual celebration of
Holy Week of the Church. The church had been enjoying the benefits
Ibid.
257 SCRA 538, 542 [1996].
64
257 SCRA 538 [1996].
65
Supra.
62
63
296
OBLIGATIONS AND CONTRACTS
of this stipulation for 17 years. The Court ruled that the stipulation
is a stipulation pour autrui, duly accepted impliedly by the Church,
that such stipulation be annotated in the title of the properties; and
that such stipulation cannot be revoked.
In Baluyot v. CA,66 the issue is whether the contract contains
a stipulation of pour autrui, as basis for a complaint for specific
performance by the intended beneficiaries. The trial and appellant
courts dismissed the complaint, but the Supreme Court reversed the
decision and remanded the case for further proceedings:
“Under this provision of the Civil Code, the following
requisites must be present in order to have a stipulation
pour autrui:
(1)
there must be a stipulation in favor of a third
person;
(2)
the stipulation must be a part, not the whole of
the contract;
(3)
the contracting parties must have clearly and
deliberately conferred a favor upon a third person, not a mere incidental benefit or interest;
(4)
the third person must have communicated his
acceptance to the obligor before its revocation;
and
(5)
neither of the contracting parties bears the
legal representation or authorization of the
third party.’’
The Court ruled that the foregoing elements have been alleged
in the amended complaint, sufficient to bring the action within the
second par. of Art. 1311 of the Civil Code.
§269.00 Perfection of consensual contract
Contracts may be consensual or real. Article 1315 refers to
consensual contracts, while Article 1316 refers to real contract.
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound
not only to the fulfillment of what has been express66
G.R. No. 122947, July 22, 1999.
CHAPTER 1
CONTRACT IN GENERAL
297
ly stipulated but also to all the consequences which,
according to their nature, may be in keeping with
good faith, usage and law. (1258)
Contracts that are consensual in nature are perfected upon
mere meeting of the minds. Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration, and
terms of payment a contract is produced.67
§270.00 Perfection of real contract
Art. 1316. Real contracts, such as deposit,
pledge and commodatum, are not perfected until
the delivery of the object of the obligation. (n)
A real contract is one which is perfected upon the delivery of
the object of the contract. For instance, a contract of loan is held to
be a real contract, and is perfected upon the release of the loan in
favor of the borrower and gives to the latter the obligation to pay the
same.68
There are five (5) real contracts, namely, commudatum defined
in Art.1933; mutuum defined in Art. 1933; depositum defined in Art.
1962; contract of pledge; and antichresis.
A real contract is perfected upon the delivery of the object
thereof. The term “delivery” or tradition has two aspects: (1) the
de jure delivery or the execution of deeds of conveyance, and (2) the
delivery of the material possession.
In sale, a thing is understood as delivered when it is placed in
the control and possession of the vendee. Generally, the execution
of a public document evidencing the sale is equivalent to delivery of
the object of the contract. Delivery produces the effect of conveyance
of ownership, without prejudice to the right of the vendor to claim
payment of the price.69
In Santos v. Santos,70 the Court held that to be effective to
produce legal effect, delivery must be with the actual intention to
deliver and its acceptance by the other party:
ABS-CBN Broadcasting Corp. v. CA, 301 SCRA 572, 592-593 [1999].
BPI Investment Corp. v. CA, 377 SCRA 117 [2002]; Liwanag v. CA, 281 SCRA
225 [1997].
69
Municipality of Victorias v. CA, 149 SCRA 32 [1987].
70
366 SCRA 395 [2001].
67
68
298
OBLIGATIONS AND CONTRACTS
“(W)e held that the execution of a public instrument
to effect tradition, the purchaser must be laced in control
of the thing sold. When there is no impediment to prevent
the thing sold from converting in tenancy of the purchaser
by the will of the vendor, symbolic through the execution
of a public instrument is sufficient. But if notwithstanding
the execution of the instrument, the purchaser cannot
have the enjoyment and material tenancy nor make use
of it himself or trough another in his name, then delivery
has not been effected.
xxx
“x x x we held that the critical factor in the different
modes of effecting delivery, which gives legal effect to the
act is the actual intention of the vendor to deliver, and the
acceptance by the render. Without that intention, there is
no tradition.”71
§271.00 Tortious interference with contractual relations
Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n)
The above provision refers to tort interference by inducing
another to violate his contract. The elements of tort interference
are:
(1)
existence of a valid contract;
(2) knowledge on the part of the third person of the existence
of contract; and
(3) interference of the third person is without legal justification or excuse.
A duty which the law of torts is concerned with is respect for the
property of others, and a cause of action ex delicto may be predicated
upon an unlawful interference by one person of the enjoyment by
the other of his private property. This may pertain to a situation
where a third person induces a party to renege on or violate his
understanding under a contract.72
71
Santos v. Santos, 366 SCRA 604-605; Norkis Distributors, Inc. v. CA, 193
SCRA 694.
72
So Ping Blum v. CA, 314 SCRA 751 [1999].
CHAPTER 1
CONTRACT IN GENERAL
299
§272.00 Illustrative cases on tortious interference
In Lagon v. CA,73 the sellers of the property did not inform
the buyer that the property is under lease and this lease was not
registered. Sued for damages for interference with the lease contract,
the buyer was held liable therefor by the trial court. He elevated the
case to the Supreme Court, which exonerated him, and held that the
elements of interference were not proved. Court ruled:
Article 1314 of the Civil Code provides that any
third person who induces another to violate his contract
shall be liable for damages to the other contracting
party. The tort recognized in that provision is known as
interference with contractual relations. The interference
is penalized because it violates the property rights of a
party in a contract to reap the benefits that should result
therefrom.
The core issue here is whether the purchase by
petitioner of the subject property, during the supposed
existence of private respondent’s lease contract with the
late Bai Tonina Sepi, constituted tortious interference for
which petitioner should be held liable for damages.
The Court, in the case of So Ping Bun v. Court of
Appeals, laid down the elements of tortious interference
with contractual relations: (a) existence of a valid contract;
(b) knowledge on the part of the third person of the
existence of the contract; and (c) interference of the third
person without legal justification or excuse. In that case,
petitioner So Ping Bun occupied the premises which the
corporation of his grandfather was leasing from private
respondent, without the knowledge and permission of the
corporation. The corporation, prevented from using the
premises for its business, sued So Ping Bun for tortious
interference.
As regards the first element, the existence of a valid
contract must be duly established. To prove this, private
respondent presented in court a notarized copy of the
purported lease renewal. While the contract appeared as
duly notarized, the notarization thereof, however, only
73
G.R. No. 119107, March 18, 2005.
300
OBLIGATIONS AND CONTRACTS
proved its due execution and delivery but not the veracity
of its contents. Nonetheless, after undergoing the rigid
scrutiny of petitioner’s counsel and after the trial court
declared it to be valid and subsisting, the notarized copy
of the lease contract presented in court appeared to be
incontestable proof that private respondent and the late
Bai Tonina Sepi actually renewed their lease contract.
Settled is the rule that until overcome by clear, strong
and convincing evidence, a notarized document continues
to be prima facie evidence of the facts that gave rise to its
execution and delivery.
The second element, on the other hand, requires
that there be knowledge on the part of the interferer that
the contract exists. Knowledge of the subsistence of the
contract is an essential element to state a cause of action
for tortious interference. A defendant in such a case
cannot be made liable for interfering with a contract he
is unaware of. While it is not necessary to prove actual
knowledge, he must nonetheless be aware of the facts
which, if followed by a reasonable inquiry, will lead to a
complete disclosure of the contractual relations and rights
of the parties in the contract.
In this case, petitioner claims that he had no
knowledge of the lease contract. His sellers (the heirs of
Bai Tonina Sepi) likewise allegedly did not inform him of
any existing lease contract.
xxx
Assuming ex gratia argumenti that petitioner knew
of the contract, such knowledge alone was not sufficient
to make him liable for tortious interference. Which brings
us to the third element. According to our ruling in So Ping
Bun, petitioner may be held liable only when there was
no legal justification or excuse for his action or when his
conduct was stirred by a wrongful motive. To sustain a
case for tortious interference, the defendant must have
acted with malice or must have been driven by purely
impious reasons to injure the plaintiff. In other words,
his act of interference cannot be justified.
Furthermore, the records do not support the allegation of private respondent that petitioner induced the
CHAPTER 1
CONTRACT IN GENERAL
heirs of Bai Tonina Sepi to sell the property to him. The
word “induce” refers to situations where a person causes
another to choose one course of conduct by persuasion or
intimidation. The records show that the decision of the
heirs of the late Bai Tonina Sepi to sell the property was
completely of their own volition and that petitioner did
absolutely nothing to influence their judgment. x x x
In So Ping Bun, the Court discussed whether
interference can be justified at all if the interferer acts
for the sole purpose of furthering a personal financial
interest, but without malice or bad faith. As the Court
explained it:
x x x, as a general rule, justification for interfering
with the business relations of another exists where the
actor’s motive is to benefit himself. Such justification
does not exist where the actor’s motive is to cause harm
to the other. Added to this, some authorities believe that
it is not necessary that the interferer’s interest outweigh
that of the party whose rights are invaded, and that
an individual acts under an economic interest that is
substantial, not merely de minimis, such that wrongful
and malicious motives are negated, for he acts in selfprotection. Moreover, justification for protecting one’s
financial position should not be made to depend on a
comparison of his economic interest in the subject matter
with that of the others. It is sufficient if the impetus of his
conduct lies in a proper business interest rather than in
wrongful motives.
The foregoing disquisition applies squarely to the
case at bar. In our view, petitioner’s purchase of the
subject property was merely an advancement of his
financial or economic interests, absent any proof that he
was enthused by improper motives. In the very early case
of Gilchrist v. Cuddy, the Court declared that a person
is not a malicious interferer if his conduct is impelled by
a proper business interest. In other words, a financial or
profit motivation will not necessarily make a person an
officious interferer liable for damages as long as there is
no malice or bad faith involved.”
301
302
OBLIGATIONS AND CONTRACTS
In Yu v. CA,74 a person and a manufacturer have entered into an
agreement, whereby the former is appointed by the latter as exclusive
distributor of certain goods. The third person purchased through
another person from the exclusive distributor and thereafter engaged
in retailing them, in competition with the exclusive distributor. The
exclusive distributor sued for damages and injunction for tortious
interference with the agreement. The Court held that “injunction
is the appropriate remedy to prevent a wrongful interference with
contracts by stranger to such contracts.” The Court further held that
the liability of said third person does not emanate from contract for
he is not a party thereto, but from “an independent act generative
of civil liability.” The “right to perform an exclusive distributorship
agreement and to reap the profits resulting from such performance
are proprietary rights which a party may protect.”75
§273.00 Contract on behalf of principal; when binding
Art. 1317. No one may contract in the name of
another without being authorized by the latter, or
unless he has by law a right to represent him.
A contract entered into in the name of another
by one who has no authority or legal representation,
or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or
impliedly, by the person on whose behalf it has
been executed, before it is revoked by the other
contracting party. (1259a)
The Court in Gozun v. Mercado,76 explains when an agent can
bind the principle and when the agent is personally liable for the
contract he entered into. Thus:
By the contract of agency a person binds himself to
render some service or to do something in representation
or on behalf of another, with the consent or authority of
the latter. Contracts entered into in the name of another
person by one who has been given no authority or legal
217 SCRA 328 [1993].
Yu v. CA, 217 SCRA 328, 331-332 [1993].
76
G.R. No. 167812, Dec. 10, 2006.
74
75
CHAPTER 1
CONTRACT IN GENERAL
303
representation or who has acted beyond his powers are
classified as unauthorized contracts and are declared
unenforceable, unless they are ratified.
Generally, the agency may be oral, unless the law
requires a specific form. However, a special power of attorney is necessary for an agent to, as in this case, borrow
money, unless it be urgent and indispensable for the preservation of the things which are under administration.
Since nothing in this case involves the preservation of
things under administration, a determination of whether
Soriano had the special authority to borrow money on behalf of respondent is in order.
Lim Pin v. Liao Tian, et al. held that the requirement
of a special power of attorney refers to the nature of the
authorization and not to its form.
The requirements are met if there is a clear
mandate from the principal specifically authorizing the
performance of the act. As early as 1906, this Court in
Strong v. Gutierrez-Repide (6 Phil. 680) stated that such
a mandate may be either oral or written. The one thing
vital being that it shall be express. And more recently, We
stated that, if the special authority is not written, then it
must be duly established by evidence:
xxx
It bears noting that Lilian signed in the receipt in
her name alone, without indicating therein that she was
acting for and in behalf of respondent. She thus bound
herself in her personal capacity and not as an agent of
respondent or anyone for that matter.
It is a general rule in the law on agency that, in order to bind the principal by a mortgage on real property
executed by an agent, it must upon its face purport to be
made, signed and sealed in the name of the principal, otherwise, it will bind the agent only. It is not enough merely
that the agent was in fact authorized to make the mortgage, if he has not acted in the name of the principal.
In the case of juridical entities, which have personality to
sue or be sued, such as a corporation or a commercial or business
304
OBLIGATIONS AND CONTRACTS
partnership, its representative or officer must be duly authorized by
the board of directors or by resolution of the partners, as the case
may be.
In case the entity is a sole or single proprietorship, which has
no legal personality, the proprietor or owner of the proprietorship is
the person who can bind the entity and is the one personally liable
therefor.77
Minors or other incapacitated persons may act only through
their duly appointed guardians or guardians authorized by law to
act for them.
77
Juansing v. Mendoza, 115 SCRA 783 [1982]; Jariol, Jr. v. Sandiganbayan,
188 SCRA 475.
305
CHAPTER 2
ESSENTIAL REQUISITES
OF CONTRACT
GENERAL PROVISIONS
§274.00 Requisites of contract
Art. 1318. There is no contract unless the
following requisites concur:
(1)
Consent of the contracting parties;
(2) Object certain which is the subject matter
of the contract;
(3) Cause of the obligation which is established. (1261)
Consent is defined and qualified in Arts. 1319 et seq., while
the object is defined and explained in Arts. 1347 et seq. The cause is
defined in Arts. 1340 et seq. of the Civil Code.
All three elements of a contract must concur to constitute a valid
contract. Where one element is absent, the contract is void.1 The fact
there was a duly executed written document does not conclusively
prove that there is a contract, where the evidence adduced shows
that there was no meeting of minds of the parties.2
Any contract must be assented to by both parties either in person or by their authorized agents. The contract, to be binding, must
have been a completed and contracted one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon or deter1
Islamic Directorate of the Phil. v. CA, 72 SCRA 454 [1997]; Gochan v. Heirs of
Raymundo Baba, G.R. No. 138945, Aug. 19, 2003.
2
Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 [2000].
305
306
OBLIGATIONS AND CONTRACTS
mined, before it shall take effect.3 “Until the contract is perfected, it
cannot, as an independent source of obligation, serve as a binding
juridical relation.”4
§275.00 Essential requisites of contract must be shown
In Insular Life Assurance Co. v. Asset Builders Corp.,5 the Court
held that the elements of valid contract must be shown, and that the
same may not be shown by estoppel, unless estoppel is proved by
clear, convincing and satisfactory evidence:
“Estoppel cannot be sustained by mere argument
or doubtful inference; it must be clearly proved in all its
essential elements by clear, convincing and satisfactory
evidence.” It is hardly separable from the waiver of a right.
The party claiming estoppel must show the following
elements: “(1) lack of knowledge and of the means of
knowledge of the truth as to the facts in question; (2)
reliance, in good faith, upon the conduct or statements of
the party to be estopped; and (3) action or inaction based
thereon of such character as to change the position or
status of the party claiming the estoppel, to his injury,
detriment or prejudice.”
SECTION 1. — Consent
§276.00 Consent defined
Art. 1319. Consent is manifested by the meeting
of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The
offer must be certain and the acceptance absolute.
A qualified acceptance constitutes a counter-offer.
Acceptance made by letter or telegram does
not bind the offerer except from the time it came
to his knowledge. The contract, in such a case, is
presumed to have been entered into in the place
where the offer was made. (1262a)
Great Pacific Assurance Co. v. CA, 89 SCRA 543 [1979].
Ang Yu Asuncion v. CA, 238 SCRA 602 [1994]; Limketkai Sons Milling, Inc.
v. CA, 250 SCRA 523 [1995].
5
G.R. No. 147410, Feb. 5, 2004.
3
4
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
307
A contract is perfected at the moment there is a meeting of
minds upon the thing which is the object of the contract and upon
the price. Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute.6
The essence of consent is the conformity of the parties to the
terms of the contract, the acceptance by one of the offer made by the
other; it is the concurrence of the minds of the parties on the object
and the cause which shall constitute the contract. Where there is
merely an offer by one party without acceptance by the other, there
is no consent and the contract does not come into existence.7
§277.00 Where there is offer but no acceptance or where offer is
withdrawn before acceptance, there is no contract
The rule is settled that if there is only an offer but no acceptance
or if the offer is withdrawn before the same is accepted, no contract
results. This rule is better appreciated by illustrated cases.
In Greater Metropolitan Manila Solid Waste Management
Committee v. Jancom Environmental Corp.,8 the Court ruled:
The Amended Agreement was, as petitioners correctly allege, merely a draft document containing the proposals of JANCOM, subject to the approval of the MMDA.
xxx
The original contract itself provides in Article 17.6
that it “may not be amended except by a written [c]ontract
signed by the parties.”
It is elementary that, being consensual, a contract
is perfected by mere consent. The essence of consent is
the conformity of the parties to the terms of the contract,
the acceptance by one of the offer made by the other; it is
the concurrence of the minds of the parties on the object
and the cause which shall constitute the contract. Where
there is merely an offer by one party without acceptance
Moreno, Jr. v. Private Management Office, G.R. No. 159373, Nov. 16, 2006.
Greater Metropolitan Manila Solid Waste Management Committee v. Jancom Environmental Corp., 494 SCRA 280, June 30, 2006.
8
494 SCRA 280, June 30, 2006.
6
7
308
OBLIGATIONS AND CONTRACTS
by the other, there is no consent and the contract does not
come into existence.
As distinguished from the original contract in which
this Court held in G.R. No. 147465:
x x x the signing and execution of the contract by the
parties clearly show that, as between the parties, there
was concurrence of offer and acceptance with respect to
the material details of the contract, thereby giving rise to
the perfection of the contract. The execution and signing
of the contract is not disputed by the parties x x x
The parties did not, with respect to the Amended
Agreement, get past the negotiation stage. No meeting of
minds was established. While there was an initial offer
made, there was no acceptance.
xxx
While respondents aver that an acceptance was
made, they have not proffered any proof. x x x
Only an absolute or unqualified acceptance of a
definite offer manifests the consent necessary to perfect
a contract. If at all, the MMDA letter only shows that
the parties had not gone beyond the preparation stage,
which is the period from the start of the negotiations
until the moment just before the agreement of the parties.
Obviously, other material considerations still remained
before the Amended Agreement could be perfected. At any
time prior to the perfection of a contract, unaccepted offers
and proposals remain as such and cannot be considered
as binding commitments.
In Insular Life Assurance Co. v. Asset Buildings Corp.,9 the
Court further explained the rule on offer and acceptance, producing
a valid contract:
It is elementary that, being consensual, a contract is
perfected by mere consent. From the moment of a meeting
of the offer and the acceptance upon the object and the
cause that would constitute the contract, consent arises.
However, “the offer must be certain” and “the acceptance
9
G.R. No. 147410, Feb. 5, 2004.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
seasonable and absolute; if qualified, the acceptance
would merely constitute a counter-offer.”
Equally important are the three distinct stages of a
contract — its “preparation or negotiation, its perfection,
and finally, its consummation.” Negotiation begins when
the prospective contracting parties manifest their interest in the contract and ends at the moment of their agreement. The perfection or birth of the contract occurs when
they agree upon the essential elements thereof. The last
stage is its consummation, wherein they “fulfill or perform the terms agreed upon in the contract, culminating
in the extinguishment thereof.”
In the case at bar, the parties did not get past the negotiation stage. The events that transpired between them
were indeed initiated by a formal offer, but this policitacion was merely an imperfect promise that could not be
considered a binding commitment. At any time, either of
the prospective contracting parties may stop the negotiation and withdraw the offer.
In the present case, in fact, there was only an offer
and a counter-offer that did not sum up to any final
arrangement containing the elements of a contract.
Clearly, no meeting of minds was established. First, only
after the bid bond had lapsed were post-qualification
proceedings, inspections, and credit investigations
conducted. Second, the inter-office memoranda issued by
petitioner, as well as other memoranda between it and its
own project manager, were simply documents to which
respondent was not privy. Third, petitioner proposed a
counter-offer to adjust respondent’s bid to accommodate
the wage increase of December 3, 1993.
In effect, the rule on the concurrence of the offer and
its acceptance did not apply, because other matters or details — in addition to the subject matter and the consideration — would still be stipulated and agreed upon by
the parties. While there was an initial offer made, there
was no acceptance; but when there allegedly came an acceptance that could have had a binding effect, the offer
was already lacking. The offer and its acceptance “did not
meet to give birth to a contract.”
309
310
OBLIGATIONS AND CONTRACTS
Moreover, the Civil Code provides that no contract
shall arise unless its acceptance is communicated to the
offeror. That is, the mere determination to accept the
proposal of a bidder does not constitute a contract; that
decision must be communicated to the bidder. Although
consent may be either express or implied, the Instruction
to Bidders prepared by petitioner itself expressly required
(1) a formal acceptance and (2) a period within which such
acceptance was to be made known to respondent. The effect of giving the Notice of Award to the latter would have
been the perfection of the contract. No such acceptance
was communicated to respondent; therefore, no consent
was given. Without that express manifestation, as required by the terms of its proposal, there was no contract.
The due execution of documents representing a contract
is one thing, but its perfection is another.
There is no issue as regards the subject of the contract or the cause of the obligation. The controversy lies in
the consent — whether there was an acceptance by petitioner of the offer made by respondent; and, if so, whether
that acceptance was communicated to the latter, thereby
perfecting the contract. The period given to the former
within which to accept the offer was not itself founded
upon or supported by any consideration. Therefore, under
the law, respondent still had the freedom and the right to
withdraw the offer by communicating such withdrawal to
petitioner before the latter’s acceptance of the offer; or, if
the offer has been accepted, before the acceptance came to
be known by respondent.
§278.00 When withdrawal of offer effective
In Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.,10 the
Court held when an offer may be withdrawn, as to prevent the
perfection of a contract:
A negotiation is formally initiated by an offer. An
imperfect promise (policitacion) is merely an offer. Public
advertisements or solicitations and the like are ordinarily
construed as mere invitations to make offers or only as
10
G.R. No. 106063, Nov. 21, 1996.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
proposals. These relations, until a contract is perfected,
are not considered binding commitments. Thus, at any
time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing
and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period
is given to the offeree within which to accept the offer, the
following rules generally govern:
(1) If the period is not itself founded upon or
supported by a consideration, the offeror is still free and has
the right to withdraw the offer before its acceptance, or, if
an acceptance has been made, before the offeror’s coming
to know of such fact, by communicating that withdrawal
to the offeree (see Art. 1324, Civil Code; see also Atkins,
Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479,
modifying the previous decision in South Western Sugar
vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil
Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135
SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to
withdraw, however, must not be exercised whimsically or
arbitrarily; otherwise, it could give rise to a damage claim
under Article 19 of the Civil Code which ordains that
‘every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith.’
(2) If the period has a separate consideration, a
contract of ‘option’ is deemed perfected, and it would be a
breach of that contract to withdraw the offer during the
agreed period. The option, however, is an independent
contract by itself, and it is to be distinguished from the
projected main agreement (subject matter of the option)
which is obviously yet to be concluded. If, in fact, the
optioner-offeror withdraws the offer before its acceptance
(exercise of the option) by the optionee-offeree, the latter
may not sue for specific performance on the proposed
contract (‘object’ of the option) since it has failed to reach
its own stage of perfection. The optioner-offeror, however,
renders himself liable for damages for breach of the
option.
311
312
OBLIGATIONS AND CONTRACTS
§279.00 To which area of consent extends
The area of agreement must extend to all points that the parties
deem material or there is no contract. Thus, even if the parties have
already a meeting of the offer, the acceptance upon the thing and the
cause, there is yet no contract where there are some details still to
be agreed upon. An acceptance subject to the terms being arranged
by the parties constitutes no binding agreement.11
§280.00 How consent is manifested
Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the
contract. For instance, the signing and execution of the contract by
the parties show that, as between the parties, there was concurrence
of offer and acceptance with respect to the material details of the
contract, thereby giving rise to the perfection of the contract.12
The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer. An acceptance may
be express or implied.13
For instance, the signing and execution of the contract by the
parties show that, as between the parties, there was concurrence
of offer and acceptance with respect to the material details of
the contract, thereby giving rise to the perfection of the contract.
Neither party can renounce unilaterally or withdraw without the
consent of the other. It is a general principle of that law that no one
may be permitted to change his mind thereto, to the prejudice of
the other party. If after a perfected and binding contract has been
executed between the parties, it occurs to one of them to allege some
defect therein as reason for annulling it, the alleged defect must
be conclusively proven in an appropriate action, since the validity
and the fulfillment of the contract cannot be left to the will of one
them.14
11
12
A. Magsaysay, Inc. v. Cebu Portland Cement Co., 100 Phil. 351 [1956].
Manila Dev. Authority v. Jancom Environmental Corp., 375 SCRA 320
[2000].
Villomco Realty Com. v. Barmheco, Inc., 65 SCRA 352 [1975].
Metropolitan Manila Dev. Authority v. JANCOM Environmental Corp., 375
SCRA 320 [2000].
13
14
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
313
§281.00 Objective theory of contract
In Moreno, Jr. v. Private Management Office,15 the Court explained the objective theory of contract:
Under American jurisprudence, mutual assent is
judged by an objective standard, looking to the express
words the parties used in the contract. Under the objective
theory of contract, understandings and beliefs are effective
only if shared. Based on the objective manifestations of
the parties in the case at bar, there was no meeting of
the minds. That the letter constituted a definite, complete
and certain offer is the subjective belief of petitioner
alone. The letter in question is a mere evidence of a
memorialization of inconclusive negotiations, or a mere
agreement to agree, in which material term is left for
future negotiations. It is a mere evidence of the parties’
preliminary transactions which did not crystallize into
a perfected contract. Preliminary negotiations or an
agreement still involving future negotiations is not the
functional equivalent of a valid, subsisting agreement.
For a valid contract to have been created, the parties
must have progressed beyond this stage of imperfect
negotiation. But as the records would show, the parties
are yet undergoing the preliminary steps towards the
formation of a valid contract. Having thus established
that there is no perfected contract of sale in the case at
bar, the issue on estoppel is now moot and academic.
§282.00 Contract of Adhesion raises the question whether there
is valid consent
A contract of adhesion is a contract whereby one party imposes
a ready made form of contract, usually written in fine print, on the
other who either rejects it entirely or adheres to it in which case
he gives his consent thereto. While it is not entirely prohibited,
neither is a blind reliance thereon encouraged, and the court does
not hesitate to rule out blind adherence to its terms when facts and
circumstances so require.16
G.R. No. 159373, Nov. 16, 2006.
Pan American World Airways, Inc. v. Rapada, 209 SCRA 67 [1992]; Pan
American World Airways, Inc. v. IAC, 164 SCRA 268 [1988].
15
16
314
OBLIGATIONS AND CONTRACTS
In a contract of adhesion. one party prepares the stipulation in
the contract, while the other party merely affixes his signature or his
adhesion thereto, giving no room for negotiation and depriving the
latter of the opportunity to bargain on equal footing. Nevertheless,
these types of contract have been declared as binding as ordinary
contracts, the reason being that the party who adheres to the court
is free to reject it entirely. The court is not, however, precluded
from ruling out blind adherence to their terms where the attendant
circumstances so justify.17
It has been declared that a contract of adhesion may be struck
down as void and unenforceable for being subversive to public policy,
only when the weaker party is imposed upon in dealing with the
dominant bargaining party and is reduced to the alternative of taking
it or leaving it, completely deprived of the opportunity to bargain on
equal footing. And when it has been shown that the complainant is
knowledgeable enough to have understood the terms and conditions
of the contract, or one whose stature is such that he is expected to
be more prudent and cautious with respect to his transaction, such
party cannot later on be heard to complain for being ignorant or
having been forced into merely consenting to the contract.18
§283.00 When contract of adhesion invalid
Where facts and circumstances show that contracts of adhesion
should be ignored because of their basically one-sided nature, the
Court does not hesitate to rule out blind adherence to their terms.
Thus, in a plane ticket, which is contract of adhesion and which
limits amounts of liability of the carrier. If the loss of life or property
is caused by the gross negligence or arbitrary acts of the airline or
the contents of the lost luggage are proved by satisfactory evidence
other than the self-serving declarations of one party, the court will
not hesitate to disregard the fine print in a contract of adhesion.19
In Aznar v. Citibank,20 the Court nullified the stipulation of a
credit card agreement, which is a contract of adhesion, and which
reads:
17
Phil. Commercial International Bank v. CA, 255 SCRA 299 [1996]; Saludo v.
Court of Appeals, 207 SCRA 498 [1992].
18
First Commercial International Bank v. CA, 255 SCRA 299 [1996].
19
Pan American World Airways, Inc. v. Rapadas, 209 SCRA 67 [1992].
20
G.R. No. 164273, March 28, 2007.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
315
15. LIMITATION OF LIABILITY. In any action
arising from this agreement or any incident thereto
which [the cardholder] or any other party may file
against [Citibank], [Citibank’s] liability shall not exceed
One Thousand Pesos [P1,000.00] or the actual damages
proven, whichever is lesser.
On this point, the Court agrees with Aznar that the
terms and conditions of Citibank’s Mastercard constitute
a contract of adhesion. It is settled that contracts between
cardholders and the credit card companies are contracts
of adhesion, so-called, because their terms are prepared
by only one party while the other merely affixes his
signature signifying his adhesion thereto.
Citibank also invokes paragraph 15 of its terms and
conditions which limits its liability to P1,000.00 or the
actual damage proven, whichever is lesser.
Again, such stipulation cannot be considered as
valid for being unconscionable as it precludes payment
of a larger amount even though damage may be clearly
proven. This Court is not be precluded from ruling out
blind adherence to the terms of a contract if the attendant
facts and circumstances show that they should be ignored
for being obviously too one-sided.
However, where the party in whose favor the adhesion contract
limiting his liability to a certain amount acted fraudulently and in
bad faith, he cannot avail of said adhesion contract. It has been held
that notwithstanding the enforceability of a contractual limitation,
responsibility arising from a fraudulent act cannot be exculpated
because the same is contrary to public policy. Article 21 of the Civil
Code is quite explicit in providing that the any person who willfully
causes loss or injury to another is a manner that is contrary to
morals, good customs or public policy shall compensate the latter
for the damage. Freedom of contract is subject to the limitation that
the agreement must not be against public policy and any agreement
or contract made in violation this rule is not binding and will not be
enforced.21
21
First Commercial International Bank v. CA, 255 SCRA 299 [1996].
316
OBLIGATIONS AND CONTRACTS
§284.00 Contracts of adhesion strictly construed
There are certain contracts almost all the provisions of which
have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion because the only participation
of the party is the affixing of his signature or his “adhesion” thereto.
Such contracts are strictly construed against the party which prepared it.22
§285.00 Acceptance of offer
Acceptance must be identical in all respects with that of the
offer so as to produce consent or meeting of the minds.23
It has been held that an acceptance may contain a request
for certain changes in the terms of the offer and yet be a binding
acceptance, so long as it is clear that the meaning of the acceptance
is positively and unequivocally to accept the offer, whether such
request is granted or not, a contract is formed.24 However, this ruling
has been changed in the subsequent case of ABS-CBN v. CA,25 to the
effect that acceptance must be identical in all respects with that of
the offer so as to produce consent or meeting of the minds.26
It has been held that a definite agreement on the manner
of payment of the purchase price is an essential element in the
formation of a binding and enforceable contract of sale. Where
there has been offer and counter-offer of how the price is to be paid,
and neither of the parties has expressed acceptance of the offer or
counter offer, clearly no agreement has been concluded between the
contracting parties.27
§286.00 Stages of contract formation
In Moreno, Jr. v. Private Management Office,28 the Court stated
that contract formation undergoes three stages:
22
BPI Credit Corp. v. CA, 204 SCRA 601 [1991]; Ayala Corp. v. Ray Burton
Dev. Corp., 294 SCRA 48 [1998]; Geraldez v. CA, 230 SCRA 320 [1994].
23
Limketkai v. CA, 250 SCRA 523 [1995]; ABS-CBN v. CA, 301 SCRA 572, 593
[1999].
24
Villomco Realty Com. v. Bormaheco, Inc., 65 SCRA 352 [1975].
25
301 SCRA 572, 593 [1999].
26
Limketkai v. CA, 255 SCRA 626, 639 [1999].
27
Marnelego v. Banco Filipino, 480 SCRA 399 [2006].
28
G.R. No. 159373, Nov. 16, 2006.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
317
Contract formation undergoes three distinct stages
– preparation or negotiation, perfection or birth, and
consummation. Negotiation begins from the time the
prospective contracting parties manifest their interest in
the contract and ends at the moment of agreement of the
parties. The perfection or birth of the contract takes place
when the parties agree upon all the essential elements
thereof. The last stage is the consummation of the contract
wherein the parties fulfill or perform the terms agreed
upon, culminating in its extinguishments. Once there is
concurrence of the offer and acceptance of the object and
cause, the stage of negotiation is finished.
§287.00 Offer defined
In the course of negotiation for a contract, one party makes
an offer, which is a unilateral proposition from one party to the
other. A certain offer means that the offer must be absolute and
unconditional; it must not be speculative. It must be such that its
absolute and unqualified acceptance will result in a valid contract
and will not require any further negotiation as to other details of the
terms and conditions thereof. The Court held:
By “offer” is meant a unilateral proposition which
one party makes to the other for the celebration of the
contract. There is an “offer” in the context of Article 1319
only if the contract can come into existence by the mere
acceptance of the offeree, without any further act on the
part of the offeror. Hence, the “offer” must be definite,
complete and intentional.29
§288.00 What constitutes acceptance
To convert the offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional, and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the
original offer. Consequently, when something is desired which is
not exactly what is proposed in the offer, such acceptance is not
29
Paredes v. CA, G.R. No. 147074, July 15, 2005.
318
OBLIGATIONS AND CONTRACTS
sufficient to generate consent because any modification or variance
from the terms of the offer annuls the offer.30 A qualified acceptance
constitutes a counter-offer and will not result in a contract.
In Moreno, Jr. v. Private Management Office,31 the Court
explained how a contract is perfected:
To reach that moment of perfection, the parties
must agree on the same thing in the same sense, so that
their minds meet as to all the terms. They must have a
distinct intention common to both and without doubt or
difference; until all understand alike, there can be no
assent, and therefore no contract. The minds of parties
must meet at every point; nothing can be left open for
further arrangement. So long as there is any uncertainty
or indefiniteness, or future negotiations or considerations
to be had between the parties, there is not a completed
contract, and in fact, there is no contract at all.
§289.00 How acceptance made
Art. 1320. An acceptance may be express or
implied. (n)
Art. 1321. The person making the offer may fix
the time, place, and manner of acceptance, all of
which must be complied with. (n)
Art. 1322. An offer made through an agent is
accepted from the time acceptance is communicated
to him. (n)
Art. 1323. An offer becomes ineffective upon
the death, civil interdiction, insanity, or insolvency
of either party before acceptance is conveyed. (n)
Under Art. 1323 of the Civil Code, an offer becomes ineffective
upon the death, civil interdiction, insanity, or insolvency of either
party (such as a bank) before acceptance is conveyed. The reason
for this rule is that the “contract is not perfected except by the
concurrence of two wills which exist and continue until the moment
that they occur. The contract is not yet perfected at any time before
30
31
ABS-CBN Broadcasting Corp. v. CA, 301 SCRA 572, 592-593 [1999].
G.R. No. 159373, Nov. 16, 2006.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
319
acceptance is conveyed; hence, the disappearance of either party or
his loss of capacity before perfection prevents the contractual tie
from being formed.”32
§290.00 Period to accept offer
Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something
paid or promised. (n)
It has been held that “where a time is stated in an offer for
its acceptance, the offer is terminated at the expiration of the time
given for its acceptance. The offer may also be terminated when the
person to whom the offer is made either rejects the offer outright or
makes a counter-offer of his own.”33
§291.00 Consensual contract; when binding contract results
“Contracts that are consensual in nature are perfected upon
mere meeting of the minds. Once there is concurrence between the
offer and the acceptance upon the subject matter, consideration
of the terms of payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the acceptance must
be absolute and must not qualify the terms of the offer; it must be
plain, unequivocal, unconditional and without variance of any sort
from the proposal. A qualified acceptance, or one that involves a new
proposal, constitutes a counter-offer and is a rejection of the original
offer. Consequently, when something is desired which is not exactly
what is proposed in the offer, such acceptance is not sufficient to
generate consent because any modification or variance from terms
of the offer annuls the offer.’’34
The acceptance of the offer must be unqualified and absolute,
i.e., it must be identical in all respects with that of the offer so as
to produce consent or meeting of the minds. However, a vendor’s
change in a phrase of the offer to purchase, which change does
32
Villanueva v. CA, 224 SCRA 395, 404, quoting TOLENTINO, Civil Code of the
Phil., Vol. IV, 463 [1985] ed.
33
Villegas v. CA, G.R. No. 111495, Aug. 18, 2006.
34
ABS-CBN Broadcasting Corp. v. CA, 301 SCRA 572, 592-593 [1999].
320
OBLIGATIONS AND CONTRACTS
not essentially change the terms of the offer, does not amount to a
rejection of the offer and the tender of a counter-offer. But when any
of the elements of the contract is modified upon acceptance, such
alteration amounts to a counter-offer and a rejection of the other.35
§292.00 Offer and acceptance
Article 1324 of the Civil Code provides that when an offeror
has allowed the offeree a certain period to accept, the offer may be
withdrawn except when the option is founded upon consideration,
as something paid or promised. An accepted unilateral promise to
buy and sell a determinate thing for a price certain is binding upon
the promissor if the promise is supported by a consideration distinct
from the price. A stipulated price of not greater than a fixed amount
per square meter is a certain or definite.36
In a unilateral promise to sell, where the debtor fails to
withdraw the promise before the acceptance by the creditor, the
transaction becomes a bilateral contract to sell and to buy, because
upon acceptance by the creditor of the offer to sell by the debtor,
there is already a meeting of the minds of the parties as to the thing
which is determinate and the price which is certain. In which case,
the parties may then reciprocally demand performance.37
An option contract is a privilege existing only to one party —
the buyer. For a separate consideration paid, he is given the right
to decide to purchase or not, a certain merchandise or property, at
any time within the agreed period, at a fixed price. This being his
prerogative, he may not be compelled to exercise the option to buy
before the time expires.38
In Insular Life Assurance Co. v. Asset Builders Corp.,39 the
Court explains when withdrawal of offer may be effected:
The period given to the former within which to accept
the offer was not itself founded upon or supported by any
consideration. Therefore, under the law, respondent still
had the freedom and the right to withdraw the offer by
communicating such withdrawal to petitioner before the
Ibid.
Serra v. CA, 229 SCRA 60 [1994].
37
Ibid.
38
Ibid.
39
G.R. No. 147410, Feb. 5, 2004.
35
36
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
321
latter’s acceptance of the offer; or, if the offer has been
accepted, before the acceptance came to be known by
respondent.
§293.00 How mutual consent shown
Mutual consent being a state of mind, its existence may only
be inferred from the confluence of two acts of the parties: an offer
certain as to the object of the contract and its consideration, and
an acceptance of the offer which is absolute in that it refers to the
exact object and consideration embodied in said offer. While it is
impossible to expect the acceptance to echo every nuance of the offer,
it is imperative that it assents to those points in the offer which,
under the operative facts of each contract, are not only material but
motivating as well. Anything short of that level of mutuality produces
not a contract but a mere counter-offer awaiting acceptance. More
particularly on the matter of the consideration of the contract, the
offer and its acceptance must be unanimous both on the rate of the
payment and on its term. An acceptance of an offer which agrees to
the rate but varies the term is ineffective.40
In Camacho v. CA,41 the Court held when a thing is determinate:
The requisite that a thing be determinate is satisfied
if at the time the contract is entered into, the thing is
capable of being made determinate without the necessity
of a new or further agreement between the parties.
In this case, the object of the contract is the 5,000sq.m. portion of Lot 261, Balanga Cadastre. The failure of
the parties to state its exact location in the contract is of
no moment; this is a mere error occasioned by the parties’
failure to describe with particularity the subject property,
which does not indicate the absence of the principal object
as to render the contract void. Since Camacho bound
herself to deliver a portion of Lot 261 to Atty. Banzon,
the description of the property subject of the contract is
sufficient to validate the same.
40
41
Villanueva v. PNB, G.R. No. 154493, Dec. 6, 2006.
G.R. No. 127520, Feb. 9, 2007.
322
OBLIGATIONS AND CONTRACTS
§294.00 Invitation for bidders to make offer
Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer.
(n)
Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest
bidder, unless the contrary appears. (n)
§295.00 Bidding defined
In its most comprehensive sense, bidding means making an offer
or an invitation to prospective contractors whereby the government
or entity concerned manifests its intention to make proposals for
the purchase of supplies, materials, equipment and construction for
official business or public use, or for public works or repair.42
The purpose of competitive bidding is to invite competitions
and to guard against favoritism, fraud and corruption. It is held for
the protection of the public and to give the public the best possible
advantage by means of open competition among bidders.43
The three principles in public bidding are the offer to the public,
an opportunity for competition and a basis for exact comparison of
bids. A regulation of the matter which excludes any of these factors
destroys the distinctive character of the system and thwarts the
purpose of its adoption.44
Where the invitation to bid states that notice of acceptance of
bid will be made and within ten days therefrom the contract will be
executed, there is no contract when such requirements are not complied with. A mere determination to accept the proposal of a bidder
does not constitute a contract. The acceptance must be communicated to the wining bidder and a formal contract must be executed.45
Where the invitation to bid contains separate items, with each
having specified amount as the cost thereof, the submission of a bid
JG Summit Holdings, Inc. v. CA, 345 SCRA 143 [2000].
San Diego v. Municipality of Naujan, 107 Phil. 118 [1960].
44
Malaga v. Penachos, 213 SCRA 516 [1992].
45
Santander v. CA, 187 SCRA 706 [1990].
42
43
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
323
for the particular item and the acceptance thereof, result in a binding
contract, even if the performance bond required has not been made,
the latter being for the benefit of the creditor who may waive it, and
insist to the prosecution of the project as bidded and accepted.46
§296.00 Reservation of right to reject any or all bids
Where the contractor, or government agency, has published
for submission of bidder to undertake a project, has reserved the
right to reject any or all bids or to declare a failure of bidding, or
waive any defect of the offer, the discretion to reject or accept a bid
and to award the contract has a wide latitude to exercise the same
and courts will not interfere except when the same is exercised
arbitrarily or is used as a shield to a fraudulent award. The exercise
of such discretion is a policy decision that requires prior inquiry,
investigation, comparison, evaluation and deliberation, which task
properly belongs to the contractor or agency concerned. Courts will
not, as a rule, interfere with such discretion.47
Unless the losing bidders can show unfairness or injustice in the
choice of the bidder, the losing bidders have no cause to complain nor
the right to dispute the choice. The discretion to accept or reject a bid
and award contracts is vested in the entity concerned or government
agencies entrusted with that function. The discretion given is of
such wide latitude that the courts will not interfere with, unless it is
apparent that it is used as a shield to a fraudulent award. The role
of the courts is to ascertain whether a branch or instrumentality of
the government has transgressed its constitutional boundaries. But
the courts will not interfere with executive or legislative discretion
exercised within those boundaries. Otherwise, it strays into the real
of policy decision-making.48
The highest or lowest bidder, as the case may be, is not entitled
to an award as a matter of right. Even the lowest bid or any bid may
be rejected or, in the exercise of sound discretion, the award may be
made to another than the lowest bidder.49
Valencia v. RFC, 103 Phil. 444 [1958].
Albay Accredited Constructors Assn., Inc. v. Desierto, 480 SCRA 520 [2006].
48
Bureau Veritas v. Office of the President, 205 SCRA 705 [1992].
49
Bureau Veritas v. Office of the President, Ibid.; C & C Commercial Corp. v.
Menor, 120 SCRA 112 [1983].
46
47
324
OBLIGATIONS AND CONTRACTS
§297.00 Who can give consent
Foremost of the requisites of a contract is consent, and the
capacity to give consent of the parties is an essential element for
the existence of the contract because it is an indispensable condition
for the existence of consent. There is no effective consent in law
without the capacity to give such consent. Thus, there is said to be
no consent, and consequently, no contract. when the agreement is
entered into by one in behalf of another who has never given him
authorization therefor, subject to exceptions, namely:
a)
The person has by law a right to represent the contracting
party,50 such as a duly appointed guardian; and
b)
When the contract is subsequently confirmed or ratified.
the transaction becomes valid and binding against him and he is
estopped to question its legality.51 The ratification may be expressed
by the contracting party himself or by the latter enjoying the fruits
of the contract. For settled is the rule:
A party to a contract cannot deny its validity after
enjoying its benefits without outrage to one’s sense of
justice and fairness.52
The parties must be capable of giving consent. In the case of
an entity, it must not only be possessed of legal personality, or one
which, by law, can sue or be sued, but its consent must be through
its duly authorized representative. In the case of a corporation, the
agent or officer giving consent must be duly authorized by its board
of directors or trustees, pursuant to a board resolution duly passed
and certified by the board secretary; and if it involves the sale of all
or substantially all assets of the corporation, the sale must also be
concurred by 2/3 of its stockholders owning outstanding shares of
stock or 2/3 of the members in the case of non-stock corporations,
without which requirements there is no valid consent and the sale is
void.53
Delos Reyes v. CA, 313 SCRA 632 [1999].
Ibid.
52
Alcasid v. CA, 237 SCRA 419 [1994].
53
Islamic Directorate of the Phil. v. CA, 272 SCRA 454 [1997].
50
51
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
325
§298.00 Party giving consent must have legal personality
Consent must be given by the party with legal personality or
one who can legally sue or be sued, whether or not the party is a
natural person or a juridical entity.54 Thus, a non-legal entity cannot
give consent because it has no legal personality to sue or be sued.55
Only the person who actually represents the non-legal entity may
give consent and who may be held personally liable for the contract
it has entered into.56
In the case of a juridical or corporate entity, the consent may
be given only thru its board of directors enacting a board resolution
specifying the person duly authorized to give its consent.
A natural person who is an unemancipated minor or an insane
or demented person, or a deaf-mute who does not know how to write,
cannot give consent. He may legally give consent only through his
duly appointed guardian.
In Gochan v. Heirs of Raymundo Baba.57 the Court explains
when there is valid and effective consent:
Under Article 1318 of the Civil Code, there is no contract unless the following requisites concur: (1) consent
of the contracting parties; (2) object certain which is the
subject matter of the contract; and (3) cause of the obligation. The absence of any of these essential requisites
renders the contract inexistent and an action or defense
to declare said contract void ab initio does not prescribe,
pursuant to Article 1410 of the same Code. In Delos Reyes
v. Court of Appeals, it was held that one of the requisites
of a valid contract under Article 1318 of the Civil Code,
namely, the consent and the capacity to give consent of
the parties to the contract, is an indispensable condition
for the existence of consent. There is no effective consent
in law without the capacity to give such consent. In other
words, legal consent presupposes capacity. Thus, there is
said to be no consent, and consequently, no contract when
the agreement is entered into by one in behalf of another
Ibid.
Cf. Ventura v. Militante, 316 SCRA 226.
56
Albert v. University Publishing Co., Inc., 13 SCRA 84; Yao Ka Sin Trading
v. CA, 209 SCRA 763.
57
G.R. No. 138945, Aug. 19, 2003.
54
55
326
OBLIGATIONS AND CONTRACTS
who has never given him authorization therefor unless he
has by law a right to represent the latter.
§299.00 Who cannot give consent
Art. 1327. The following cannot give consent to
a contract:
(1)
Unemancipated minors;
(2) Insane or demented persons, and deafmutes who do not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state
of drunkenness or during a hypnotic spell are voidable. (n)
Art. 1329. The incapacity declared in Article
1327 is subject to the modifications determined by
law, and is understood to be without prejudice to
special disqualifications established in the laws.
(1264)
§300.00 Unemancipated minors
The following provisions of the Family Code on guardians of
unemancipated minors are pertinent:
Art. 225. The father or, in his absence or incapacity,
the mother, shall be the legal guardian of the property of
the unemancipated child without the necessity of a court
appointment.
Where the value of the property or the annual income of the child exceeds P50,000, the parent concerned
shall be required to furnish a bond in such amount as the
court may determine, but not less than ten per centum
(10%) of the value of the property or annual income to
guarantee the performance of the obligations prescribed
for general guardians.
A verified petition for approval of the bond shall be
filed in the proper court of the place where the child resides, or if the child resides in a foreign country, in the
proper court of the place where the property or any part
thereof is situated.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
327
The petition shall be docketed as a summary special
proceeding in which all incidents and issues regarding the
performance of the obligations referred to in the second
paragraph of this Article shall be heard and resolved. All
such incidents and issues shall be decided in an expeditious and inexpensive manner without regard to technical
rules.
The ordinary rules on guardianship shall be merely
suppletory except when the child is under substitute parental authority, or the guardian is a stranger, or a parent has remarried, in which case the ordinary rules on
guardianship shall apply.
Art. 226. The property of an unemancipated child
earned or acquired with his work industry or by onerous
or gratuitous title shall belong to the child in ownership
and shall be devoted exclusively to the latter’s support
and education, unless the title or transfer provides otherwise.
The right of the parents over the fruits and income
of the child’s property shall be limited primarily to the
child’s support and secondarily to the collective daily
needs of the family.
Art. 227. If the parents entrust the management or
administration of any of their properties to an unemancipated child, the net proceeds of such property shall belong to the owner. The child shall be given a reasonable
monthly allowance in an amount not less than that which
the owner would have paid if the administrator were a
stranger, unless the owner, grants the entire proceeds to
the child. In any case, the proceeds thus given in whole or
in part shall not be charged to the child’s legitime.
Pursuant to Section 225 of the Family Code, regardless of the
value of the unemancipated common child’s property, the father or,
in his absence or incapacity, the mother ipso jure becomes the legal
guardian of the child’s property. However, if the market value of
the property or the annual income of the child exceeds P50,000.00,
a bond has to be posted by the parents concerned to guarantee the
performance of the obligations of a general guardian.58
58
Pineda v. CA, 226 SCRA 754 [1993].
328
OBLIGATIONS AND CONTRACTS
The power or authority of the parents as legal guardians extends
only to the power of possession and management. The power to sell,
mortgage, encumber or otherwise dispose of the property of the minor
child must proceed from the court, which requires court authority
and approval, regardless of the value of the child’s property.
The foregoing provisions do not preclude the court from appointing a guardian of the child’s property when the best interests of
the child so require. Thus, Article 222 of the Family Code provides:
Art. 222. The courts may appoint a guardian of the
child’s property, or a guardian ad litem when the best
interests of the child so require.
§301.00 Capacity to contract not affected by advanced age
A person is not incapacitated to contract merely because of
advanced years or by reason of physical infirmities. Only when
such age or infirmities impair his mental facilities to such extent
as to prevent him from properly, intelligently, and fairly protecting
his property rights, is he considered incapacitated. The party
challenging the mental capacity of the contracting party has the
burden of proving the same.59
§302.00 Person presumed to be of sound mind
A person is presumed to be of sound mind to continue to exist, in
the absence of proof to the contrary. Competency and freedom from
undue influence, shows to have existed in the other acts or contracts
executed, presumed to continue until the contrary is shown.60
The general rule is that a person is not incompetent to contract
merely because of advanced years or by reason of physical infirmities.
Only when such age or infirmities have impaired the mental faculties
so as to prevent the person from properly, intelligently, and firmly
protecting his property rights that he is undeniably incapacitated.61
§303.00 Effect where party is incapable of giving consent
A contract where one of the parties is incapable of giving consent or where consent is vitiated by mistake, fraud, or intimidation
Mendezona v. Ozamis, 376 SCRA 482 [2003].
Mendezona v. Ozamis, Ibid.
61
Doming v. CA, 367 SCRA 368 [2001].
59
60
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
329
is not void ab initio but only voidable and is binding upon the parties
unless annulled by proper court action within the prescribed period.
The effect of annulment is to restore the parties to the status quo
ante insofar as logically and equitably possible – this much is dictated by Article 1398 of the Civil Code. As an exception however to
the principle of mutual restitution, Article 1399 provides that when
the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution,
except when he has been benefited by the things or price received by
him.62
§304.00 When consent is vitiated as to render contract voidable
Art. 1330. A contract where consent is given
through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a)
Under Art. 1330 of the Civil Code, consent may be vitiated by
any of the following: (1) mistake, (2) violence, (3) intimidation, (4)
undue influence, and (5) fraud. The presence of any of these vices
renders the contract voidable, not void ab initio. This means that
the contract is binding upon the parties unless annulled by proper
court action within the prescribed period.63
Consent may be vitiated by mistake, violence, intimidation,
undue influence or fraud. Any of these defects does not render the
contract void, but only voidable, However, the law assumes that the
consent of the contracting party imputing the consent by any of the
vices, which vitiates consent, does not cover a situation where there
is a complete absence of consent, in which case the contract is void,
not merely voidable, for one of the elements of contract is absent.64
§305.00 When one party is unable to read
Art. 1332. When one of the parties is unable
to read, or if the contract is in a language not
understood by him, and mistake or fraud is alleged,
the person enforcing the contract must show that
Katipunan v. Katipunan, Jr., 375 SCRA 199 [2002].
Kapunan v. Kapunan, Jr., Ibid.
64
Hemedes v. CA, 316 SCRA 347, 367-368 [1999]; Gochan v. Heirs of Raymundo Baba, G.R. No. 138945, Aug. 19, 2003.
62
63
330
OBLIGATIONS AND CONTRACTS
the terms thereof have been fully explained to the
former. (n)
Article 1332 was intended for the protection of a party to a
contract who is at a disadvantage due to his illiteracy, ignorance,
mental weakness or other handicap. This article contemplates a
situation wherein a contract has been entered into, but the consent
of one of the parties is vitiated by mistake or fraud committed by the
other contracting party.65
Under Art. 1332 of the Civil Code, where a party to a contract
is illiterate, or can not read nor understand the language in which
the contract is written, the burden is on the party interested in
enforcing the contract to prove that the terms thereof are fully
explained to the former in a language understood by him. In all
contractual, property or other relations, where of the parties is at a
disadvantage on account of his physical, mental or other handicap,
the courts must be careful and vigilant for his protection.66
The rationale of Art. 1332 of the Civil Code is that there is still
a fairly large number of illiterates in the country, and documents
are usually drawn up in English or Spanish. It is also in accord
with the state policy of promoting social justice. It also supplements
Article 24 of the Civil Code which calls on courts to be vigilant in the
protection of the rights of those who are disadvantaged in life.67
Article 1332 of the Civil Code was intended for the protection
of a party to a contract who is at a disadvantage due to his illiteracy,
ignorance, mental weakness or other handicap. This article contemplates a situation wherein a contract has been entered into, but the
consent of one of the parties is vitiated by mistake or fraud committed by the other contracting party.68
Where one of the contracting parties is unable to read, or if
the contract is in a language not understood by him, and mistake or
fraud is alleged, the person enforcing the contract must show that
the terms thereof have been fully explained to the former. Settled is
the rule that where a party to a contract is illiterate, or cannot read
or cannot understand the language in which the contract is written,
the burden is on the party interested in enforcing the contract to
Hemedes v. CA, 316 SCRA 347, 367-368 [1999].
Cayabyab v. IAC, 232 SCRA 1 [1994].
67
Lim v. CA, 229 SCRA 616 [1994].
68
Hemedes v. CA, 316 SCRA 347, 367-368 [1999].
65
66
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
331
prove that the terms thereof are fully explained to the former in a
language understood by him.69
§306.00 When there is mistake or error
Art. 1331. In order that mistake may invalidate
consent, it should refer to the substance of the thing
which is the object of the contract, or to those conditions which have principally moved one or both
parties to enter into the contract.
Mistake as to the identity or qualifications of
one of the parties will vitiate consent only when
such identity or qualifications have been the principal cause of the contract.
A simple mistake of account shall give rise to
its correction. (1266a)
Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting
the object of the contract. (n)
Art. 1334. Mutual error as to the legal effect of
an agreement when the real purpose of the parties
is frustrated, may vitiate consent. (n)
§307.00 When mistake may invalidate consent
In order that mistake may invalidate consent, it should refer
to the substance of the thing which is the object of the contract, or to
those conditions which have principally moved one or both parties to
enter into the contract. Fraud, on the other hand, is present when,
through insidious words or machinations of one of the contracting
parties, the other is induced to enter into a contract which, without
them, he could not have agreed to. Clearly, Article 1332 assumed
that the consent of the contracting party imputing the mistake or
fraud was given, though vitiated, and does not cover a situation
where there is a complete absence of consent.70
69
70
Lustan v. Cam, 266 SCRA 663 [1997].
Hemedes v. CA, 316 SCRA 347, 367-368 [1999].
332
OBLIGATIONS AND CONTRACTS
§308.00 Mistake that vitiates contract
“Mistake” has been defined as a “misunderstanding of the
meaning or implication of something” or “a wrong action or statement
proceeding from a faulty judgment.”71
In Domingo Realty, Inc. v. CA,72 the Court explained when there
is mistake, thus:
Article 1333 of the Civil Code; however, states that
“there is no mistake if the party alleging it knew the doubt,
contingency or risk affecting the object of the contract.”
Under this provision of law, it is presumed that the
parties to a contract know and understand the import
of their agreement. Thus, civil law expert Arturo M.
Tolentino opined that:
To invalidate consent, the error be real error, and
not one that could have been avoided by the party alleging
it. The error must arise from facts unknown to him. He
cannot allege an error which refers to a fact known to
him, or which he should have known by ordinary diligent
examination of the facts. An error so patent and obvious
that nobody could have made it, or one which could have
been avoided by ordinary prudence, cannot be invoked
by the one who made it in order to annul his contract.
A mistake that is caused by manifest negligence cannot
invalidate a juridical act.
xxx
In this factual milieu, respondent Acero could have
easily averted the alleged mistake in the contract; but
through palpable neglect, he failed to undertake the measures expected of a person of ordinary prudence. Without
doubt, this kind of mistake cannot be resorted to by respondent Acero as a ground to nullify an otherwise clear,
legal, and valid agreement, even though the document
may become adverse and even ruinous to his business.
To invalidate consent, the error must be real and not one that
could have been avoided by the party alleging it. The error must
71
72
Domingo Realty, Inc. v. CA, Jan. 26, 2007.
Ibid.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
333
have arisen from facts unknown to him. He cannot allege an error
which refers to a fact known to him or which he should have known
by ordinary diligent examination of the facts. An error so patent and
obvious that nobody could have made it, or one which could have
been avoided by ordinary prudence, cannot be invoked by the one
who made it in order to annul his contract.73
§309.00 When there is violence or intimidation
Art. 1335. There is violence when in order to
wrest consent, serious or irresistible force is employed.
There is intimidation when one of the contracting parties is compelled by a reasonable and
well-grounded fear of an imminent and grave evil
upon his person or property, or upon the person or
property of his spouse, descendants or ascendants,
to give his consent.
To determine the degree of intimidation, the
age, sex and condition of the person shall be borne
in mind.
A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not
vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall annul
the obligation, although it may have been employed
by a third person who did not take part in the contract. (1268)
§310.00 Intimidation vitiates consent
Intimidation, which vitiates consent to a contract, exists when
one of the contracting parties suffers with a reasonable and wellgrounded fear of an imminent and serious injury to his person or
property.74
Intimidation means unlawful coercion; extortion; duress; putting in fear. To take or attempt to take, by intimidation, means will73
74
Alcasid v. CA, 237 SCRA 419, 423 [1994].
Vales v. Villa, 35 Phil. 769 [1916].
334
OBLIGATIONS AND CONTRACTS
fully to take, or to attempt to take, by putting in fear of bodily harm.
Material violence is not indispensable for intimidation; intense fear
produced in the mind of the victim which restricts or hinders the
exercise of the will is sufficient.75
In order that intimidation may vitiate consent and render the
contract invalid, the following requisites must concur:
1.
That the intimidation must be the determining cause of
the contract, or must have caused the consent to be given;
2.
That the threatened act be unjust or unlawful;
3.
That the threat be real and serious, there being an evident
disproportion between the evil and the resistance which all men can
offer, leading to the choice of the contracts the lesser evil; and
4.
That it produces a reasonable and well-grounded fear
from the fact that the person from whom it comes has the necessary
means or ability to inflict the threatened injury.76
§311.00 Threat to enforce just claim is not intimidation
A threat to enforce one’s claim through competent authority, if
the claim is just or legal, does not vitiate consent. Thus, the threat
to foreclose the mortgage would not in itself vitiate consent as it is a
threat to enforce a just or legal claim through competent authority.
It bears emphasis that the foreclosure of mortgaged properties in
case of default in payment of a debtor is a legal remedy given by law
to a creditor. In the event of default by the mortgage debtor in the
performance of the principal obligation, the mortgagee undeniably
has the right to cause the sale at public auction of the mortgaged
property for payment of the proceeds to the mortgagee.77
§312.00 Undue influence
Art. 1337. There is undue influence when a person takes improper advantage of his power over the
will of another, depriving the latter of a reasonable
freedom of choice. The following circumstances
shall be considered: the confidential, family, spiri-
People v. Alfeche, 211 SCRA 770 [1992].
De Leon v. CA, 186 SCRA 345, 358 [1990].
77
DBP v. CA, 494 SCRA 25, June 30, 2006.
75
76
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
335
tual and other relations between the parties, or the
fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or
was ignorant or in financial distress. (n)
§313.00 When undue influence vitiates consent
There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the latter
of a reasonable freedom of choice. The following circumstances shall
be considered: the confidential, family, spiritual and other relations
between the parties or the fact that the mental weakness or was
ignorant or in financial distress. For undue influence to be present,
the influence exerted must have so overpowered or subjugated the
mind of a contracting party as to destroy the latter’s free agency,
making said party express the will of another rather than its own.78
Undue influence is employed upon a party which, under the
circumstances, he could not well resist and which controlled his
volition and induced him to give his consent to the contract, which
otherwise he would not have entered into. It must in some measure
destroy the free agency of a party and interfere with the exercise of
that independent discretion which is necessary for determining the
advantages or disadvantages of a proposed contract. If a competent
person has once assented to a contract freely and fairly, he is bound
thereby.79
In DBP v. CA,80 the Court ruled that there is no undue influence
when the debtors signed the promissory notes and mortgage
document to secure restructuring of their loans, thus:
Respondents’ allegation that they had no “choice”
but to sign is tantamount to saying that DBP exerted undue influence upon them. The Court is mindful that the
law grants an aggrieved party the right to obtain the annulment of a contract on account of factors such as mistake, violence, intimidation, undue influence and fraud
which vitiate consent. However, the fact that the representatives were “forced” to sign the promissory notes and
mortgage contracts in order to have respondents’ original
DBP v. CA, Ibid.
Alcasid v. CA, 237 SCRA 419, 423-424 [1994].
80
494 SCRA 25 [2006].
78
79
336
OBLIGATIONS AND CONTRACTS
loans restructured and to prevent the foreclosure of their
properties does not amount to vitiated consent.
The financial condition of respondents may have motivated them to contract with DBP, but undue influence
cannot be attributed to DBP simply because the latter
had lent money. The concept of undue influence is defined
as follows:
There is undue influence when a person takes improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential, family, spiritual and other relations between the
parties or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness,
or was ignorant or in financial distress.
While respondents were purportedly financially distressed, there is no clear showing that those acting on
their behalf had been deprived of their free agency when
they executed the promissory notes representing respondents’ refinanced obligations to DBP. For undue influence
to be present, the influence exerted must have so overpowered or subjugated the mind of a contracting party
as to destroy the latter’s free agency, making such party
express the will of another rather than its own. The alleged lingering financial woes of a debtor per se cannot be
equated with the presence of undue influence.
§314.00 Fraud that vitiates consent
In order that fraud may vitiate consent and be a cause for
annulment of contract, the following must concur:
1.
It must have been employed by one contracting party
upon the other;81
2.
It must have induced the other party to enter into the
contract;82
81
82
Arts. 1342 and 1344, Civil Code.
Art. 1338, Civil Code.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
3.
337
It must have been serious;83
4.
It must have resulted in damage and injury to the party
seeking annulment.84
§315.00 When there is fraud
Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a
contract which, without them, he would not have
agreed to. (1269)
Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not
have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages. (1270)
§316.00 Fraud that vitiates contract
The fraud that vitiates a contract must be the determining
cause of the contract or must have caused the consent to be given. It
refers to those insidious words or machinations resorted to by one of
the contracting parties to induce the other to enter into a contract
which without them he would not have agreed to.85 The will of the
victim, in effect, is maliciously vitiated by means of false appearance
of reality.86 Fraud must be established by clear and convincing
evidence. Mere preponderance of evidence is not sufficient.87
§317.00 Two kinds of civil fraud
There are two kinds of civil fraud in contract. One is that which
vitiates a contract or dolo causante and the other is that renders
the party who employs it liable only for damages or dolo incidente.
Fraud that vitiates a contract is one which is the cause of the contract, the inducement to the making of the contract. It is committed
Art. 1344, Civil Code.
TOLENTINO IV, Commentaries on the Civil Code the Philippines, 507 [1991 ed.];
Alcasid v. CA, 237 SCRA 419, 422-423 [1994].
85
Rural Bank of Sta. Maria, Pangasinan v. CA, 314 SCRA 255 [1999]; Reyes v.
CA, 216 SCRA 152 [1992].
86
Periquet v. IAC, 238 SCRA 697 [1994].
87
Cu v. CA, 195 SCRA 647 [1991].
83
84
338
OBLIGATIONS AND CONTRACTS
prior to or simultaneously with the execution of the contract. Dolo
incidente refers to fraud in the performance of the contract and is
thus subsequent to its execution.88
Dolo causante determines or is the essential cause of the consent, while dolo incidente refers only to some particular or accident
of the obligation. The effects of dolo causante are the nullity of the
contract and the indemnification of damages, and dolo incidente also
obliges the person employing it to pay damages.89
The rule is that fraud cannot be presumed; that it must be
alleged and proved, at least satisfactorily, if not conclusively by
the one who alleges its existence. The rule is founded on public
policy to guard against the speculative tendencies of the human
mind and its readiness to accept as fact theories that appeal to the
imagination.90
Fraud is never lightly inferred; it is good that it is. Under the
Rules of Court, it is presumed that “a person is innocent of crime or
wrong” and that “private transactions have been fair and regular.”
While disputable, these presumptions can be overcome only by clear
and preponderant evidence.91
§318.00 Bad faith or fraud in contract vitiating consent
Bad faith is essentially a state of mind affirmatively operating
with furtive design or with some motive of ill-will. It does not simply
connote bad judgment or negligence. It imports a dishonest purpose
or some moral obliquity and conscious doing of wrong. Bad faith
is thus synonymous with fraud and involves a design to mislead
or deceive another, not prompted by an honest mistake as to one’s
rights or duties, but by some interested or sinister motive. Bad faith
or fraud must be proved by clear and convincing evidence.92
§319.00 Silence or concealment
Art. 1339. Failure to disclose facts, when there
is a duty to reveal them, as when the parties are
Woodhouse v. Halili, 93 Phil. 527 [1953].
Geraldez v. CA, 230 SCRA 320 [1994].
90
Hilado v. Assad, 97 Phi. 451 [1955].
91
Trinidad v. IAC, 204 SCRA 524 [1991].
92
Samson v. CA, 238 SCRA 397 [1994].
88
89
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
339
bound by confidential relations, constitutes fraud.
(n)
Pursuant to Art. 1339 of the Civil Code, silence or concealment,
by itself, does not constitute fraud, unless there is a special duty to
disclose certain facts, or unless according to the good faith and the
usages of commerce the communication should be made.93
§320.00 Usual exaggerations not fraudulent
Art. 1340. The usual exaggerations in trade,
when the other party had an opportunity to know
the facts, are not in themselves fraudulent. (n)
Art. 1341. A mere expression of an opinion
does not signify fraud, unless made by an expert
and the other party has relied on the former’s special knowledge. (n)
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the
same is mutual. (n)
Art. 1343. Misrepresentation made in good
faith is not fraudulent but may constitute error.
(n)
§321.00 Simulation of contract
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter,
when the parties conceal their true agreement. (n)
Art. 1346. An absolutely simulated or fictitious
contract is void. A relative simulation, when it does
not prejudice a third person and is not intended for
any purpose contrary to law, morals, good customs,
public order or public policy binds the parties to
their real agreement. (n)
93
Riviera Filipina, Inc. v. CA, 380 SCRA 245 [2002]; Rural Bank of Sta. Maria,
Pangasinan v. CA, 314 SCRA 255 [1999].
340
OBLIGATIONS AND CONTRACTS
§322.00 Kinds of simulation of contract
Simulations of contract are of two kinds. The first is absolutely
simulated or fictitious contract, and the other is relative simulation.
The former takes place when the parties do not intend to be bound
at all; the latter, when the parties conceal their true agreement.
The first is void, and produces no legal effect. The second is binding
upon the parties to their real agreement, except when it prejudices
a third person and when it is intended for a purpose not contrary to
law, morals, good customs, public order or public policy, which thus
binds the parties to their real agreement.
§323.00 Simulation of contract defined; its characteristics
Simulation is defined as the declaration of a fictitious will,
deliberately made by agreement of the parties, in order to produce,
for the purposes of deception, the appearance of a judicial act which
does not exist or is different from that which was really executed.
The requisites of simulation are: (a) outlawed declaration of will
different from the will of the parties; (b) the false appearance must
have been intended by mutual agreement; and (c) the purpose is to
deceive third persons.94
The basic characteristic of an absolutely simulated or fictitious
contract is that the apparent contract is not really denied or intended
to produce legal effects or alter the juridical situation of the parties
in any way. Where the parties undertook certain acts which were
directed towards fulfillment of their respective covenants under the
contract, these indicate that they intended to give effect to their
agreement, negating the claim of simulation of contract.95
An absolutely simulated or fictitious contract is void. The
reason is that in a fictitious and simulated contract, consent is
lacking, consent being an essential requisite to render a contract
valid and enforceable.96
The burden of proof to show that the deed was simulated was
on the party impugning the same by evidence that is clear, convincing and more than merely preponderant.97
94
Mendezona v. Ozamis, 376 SCRA 482 [2000]; Penalosa v. Santos, 363 SCRA
545, 556 [2001].
95
Penalosa v. Santos, Ibid.
96
Manila Banking Corp. v. Silverio, 466 SCRA 458 [2005].
97
Mendezona v. Ozamis, 376 SCRA 482 [2000].
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
341
§324.00 Illustrative case of simulated transfer and its effects
Manila Banking Corp. v. Silverio,98 illustrates the rule that a
simulated transfer is null and void and produces no legal effect.
The issue in this case is whether or not the transfer or sale of
the property in question from Silverio, Sr. to his nephew, Edmundo
Silverio, is simulated and is therefore void or whether the same is
valid, as to be beyond the reach of Manila Banking Corp. as judgment
creditor of Silverio, Jr. to satisfy its judgment claim against the
judgment debtor. The MBC, after having secured a judgment against
Silverio, attached the property in question which was annotated at
its TCT. Edmundo Silverio filed a petition for cancellation of the
annotation on the ground that the property was sold or transferred
to him by Silverio, Sr. before the levy of the property. The issue thus
hinges on whether said sale or transfer was simulated. In holding
that transfer or sale is simulated, the Supreme Court ruled:
Basic is the rule that only properties belonging to
the debtor can be attached, and an attachment and sale of
properties belonging to a third party are void. At the pith
of the controversy, therefore, is the issue of ownership of
the subject properties at the time of the levy thereof as the
right of petitioner TMBC, as creditor, depends on whether
such properties were still owned by its debtor, Ricardo,
Sr., and not by Edmundo, who is concededly not a debtor
of TMBC. If the properties were validly transferred to
Edmundo before the levy thereof then cancellation of the
annotation is in order. If, however, the sale was absolutely
simulated and was entered into between uncle and nephew
for the lone reason of removing the properties from the
reach of TMBC, then the annotation should stay.
The issue of whether the contract is simulated or
real is factual in nature, and the Court eschews factual
examination in a petition for review under Rule 45 of the
Rules of Court. This rule, however, is not without exceptions, one of which is when there exists a conflict between
the factual findings of the trial court and of the appellate
court, as in the case at bar.
xxx
98
466 SCRA 458 [2005].
342
OBLIGATIONS AND CONTRACTS
An absolutely simulated contract, under Article
1346 of the Civil Code, is void. It takes place when the
parties do not intend to be bound at all. The characteristic
of simulation is the fact that the apparent contract is not
really desired or intended to produce legal effects or in
any way alter the juridical situation of the parties. Thus,
where a person, in order to place his property beyond
the reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest himself of
his title and control of the property; hence, the deed of
transfer is but a sham. Lacking, therefore, in a fictitious
and simulated contract is consent which is essential to a
valid and enforceable contract.
In herein case, badges of fraud and simulation permeate the whole transaction, thus, we cannot but refuse
to give the sale validity and legitimacy. x x x
xxx
Taken together with the other circumstances surrounding the sale, Edmundo’s failure to exercise acts of
dominion over the subject properties buttresses TMBC’s
position that the former did not at all intend to be bound
by the contract of sale. In Suntay, as reiterated in such
cases as Santiago v. Court of Appeals, Cruz v. Bancom
Finance Corporation and Ramos v. Heirs of Ramos, Sr.,
we held that “the most protuberant index of simulation is
the complete absence of an attempt in any manner on the
part of the [ostensible buyer] to assert his rights of ownership over the [properties] in question.” The supposed
buyer’s failure to take exclusive possession of the property allegedly sold or, in the alternative, to collect rentals,
is contrary to the principle of ownership. Such failure is a
clear badge of simulation that renders the whole transaction void pursuant to Article 1409 of the Civil Code.
xxx
In sum, considering that an absolutely simulated
contract is not a recognized mode of acquiring ownership,
the levy of the subject properties on 02 July 1990 pursuant to a writ of preliminary attachment duly issued by the
RTC in favor of TMBC and against its debtor, Ricardo,
Sr., was validly made as the properties were invariably
his. Consequently, Edmundo, who has no legal interest
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
343
in these properties, cannot cause the cancellation of the
annotation of such lien for the reasons stated in his petition.”
§325.00 Government contracts
As a general rule, the law on government contracts requires
the following requisites:
1.
Project proposal requiring expenditure of public funds by
the government agency concerned;
2.
Certification of availability of funds by the government
officials concerned;
3.
Public bidding, which usually contains a reservation to
reject any and all binds;
4.
The contract that may be executed must not be grossly
disadvantageous to the government and cause undue injury to the
latter.99
If the requirements in Nos. 2, 3 and 4, above, are not complied
with, the contract that may be executed may be declared void, and
may even render the officials concerned civilly and criminally liable
for violation of the Anti-Graft and Corrupt Practices Law.
Generally, the law requires public bidding before a contract
is awarded and there is, after such bidding, an award in favor of
the winning bidder. The extension, amendment or alteration of said
contract will require another public bidding, for otherwise the very
purpose of public bidding is defeated.100
As a matter of general policy, government contracts for public
service or for furnishing supplies, materials and equipment to the
Government should be subjected to public bidding.101
SECTION 2. — Object of Contracts
§326.00 Objects of contract
Art. 1347. All things which are not outside the
commerce of men, including future things, may be
La’O v. Republic, G.R. No. 160719, Jan. 23, 2006.
San Diego v. Municipality of Naujan, 107 Phil. 118 [1960].
101
Manila International Airport Authority v. Mabunay, G.R. No. 126151, January 20, 2000.
99
100
344
OBLIGATIONS AND CONTRACTS
the object of a contract. All rights which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized
by law.
All services which are not contrary to law,
morals, good customs, public order or public policy
may likewise be the object of a contract. (1271a)
The following may be the object of contracts, namely:
1.
of men;
All things or properties, which are within the commerce
2.
All future things;
3.
All rights which are not intransmissable; and
4.
All services which are not contrary to law, morals, good
customs, public order or public policy.
§327.00 Properties outside the commerce of men
Lands of public dominion owned by the State are outside the
commerce of men. They cannot be alienated. These are those enumerated in Art. 420 of the Civil Code, as follows:
Art. 420. The following things are property of
public dominion:
(1) Those intended for public use, such as
roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads,
and others of similar character;
(2) Those which belong to the State, without
being for public use, and are intended for some
public service or for the development of the national wealth.
Any alienation of properties outside the commerce of men is
void. Properties of public dominion cannot be the object of contract,
and any such contract is a nullity. Thus, it has been held that the
lease of a public street by the local government unit in favor of stall-
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
345
holders is null and void, as a public street is beyond the commerce of
man and the lease is against the law.102
§328.00 Patrimonial property may be object of contract
Patromonial properties of the State include those specified in
Arts. 421 and 433 of the Civil Code:
Art. 421. All other property of the State, which
is not of the character stated in the preceding
article (Art. 420), is patrimonial property.
Art. 422. Property of public dominion, when no
longer intended for public use or for public service,
shall form part of the patrimonial property of the
State.
In Chavez v. Public Estates Authority,103 the Court ruled:
The grant of legislative authority to sell public lands
in accordance with Section 60 of CA No. 141 does not
automatically convert alienable lands of the public domain
into private or patrimonial lands. The alienable lands of
the public domain must be transferred to qualified private
parties, or to government entities not tasked to dispose
of public lands, before these lands can become private or
patrimonial lands. Otherwise, the constitutional ban will
become illusory if Congress can declare lands of the public
domain as private or patrimonial lands in the hands of a
government agency tasked to dispose of public lands. This
will allow private corporations to acquire directly from
government agencies limitless areas of lands which, prior
to such law, are concededly public lands.
Before lands of the public dominion may be alienated, two requisites must be complied with, namely: they are classified as alienable or disposable lands open to disposition, and they are declared
no longer needed for public service.104
Dacanay v. Asistio, Jr., 208 SCRA 404 [1992].
G.R. No. 133250, July 9, 2002.
104
Chavez v. Public Estates Authority, G.R. No. 133250, July 9, 2002.
102
103
346
OBLIGATIONS AND CONTRACTS
While patrimonial property can be alienated or sold by the government, there must be a law authorizing its sale or alienation by the
President or by another officer before conveyance can be executed on
behalf of the government. Section 48, Book I of the Administrative
Code of 1987 requires such statutory authorization. It reads:
Section 48. Official Authorized to Convey Real Property. — Whenever real property of the Government is authorized by law to be conveyed, the deed of conveyance
shall be executed in behalf of the government by the following:
For property belonging to and titled in the name of
the Republic of the Philippines, by the President, unless
authority therefor is expressly vested by law in another
officer;
For property belonging to the Republic of the Philippines but titled in the name of any political subdivision or
of any corporate agency or instrumentality, by the executive head of the agency or instrumentality.
The sale of the privately owned lands of the government must
be in favor of qualified citizens and in accordance with the procedure
provided by law. In the absence of any specific law on the subject, the
sale of patrimonial property shall be in accordance with the provisions of the Com. Act No. 141, as amended, which means that there
shall be a public bidding and in favor of such persons, corporations
as are entitled to purchase or lease agricultural public lands and
subject to the limitations therein provided.105 These persons are citizens of the Philippines or private corporations the capital of which
is at least 60% owned by citizens of the Philippines.
§329.00 What cannot be objects of contract
Art. 1347. x x x All rights which are not intransmissible may also be the object of contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized
by law.
105
Public Act No. 3038.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
347
All services which are not contrary to law,
morals, good customs, public order or public policy
may likewise be the object of a contract. (1271a)
Art. 1348. Impossible things or services cannot
be the object of contracts. (1272)
The following cannot be objects of contract:
a)
All rights which are intransmissible. These include those
not transmissible: (1) by their nature, (2) by stipulations, or (3) by
operation of law. Obligations which are purely personal are not
transmissible. They are not also transmissible where the contract so
specifically provides that they are not transmissible. Where the contract is silent, it is deemed transmissible because a party is deemed
to have contracted for him and his heirs and assigns. They are also
instramissible by operation of law, such as in legal support, parental
authority, usufruct, contract for a piece of work, partnership and
agency.106
b)
Future inheritance except in cases expressly authorized
by law. Future inheritance, which cannot be the object of a contract,
is any property or right, not in existence or capable of determination
at the time of the contract, that a person may in the future acquire
by succession.107
c)
Impossible things or services.
There are two kinds of impossibility in the performance of
contract. One is natural impossibility and the other is impossibility
in fact, in the absence of the thing stipulated to be performed.
Impossibility must consist in the nature of the thing to be done and
not in the inability of the party to do it. The first renders the contract
void; the second does not.108
d) All services which are contrary to law, morals, good
customs, public order or public policy.
In Phil. Bank of Communicatons v. Echiverri,109 the Court
clarified the concepts of law, morals, good customs, and public policy.
thus:
Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 [1956].
Blas v. Santos, 1 SCRA 899 [1961].
108
Reyes v. Caltex (Phil.), Inc., 84 Phil. 654 [1949].
109
99 SCRA 508 [1980].
106
107
348
OBLIGATIONS AND CONTRACTS
The law and the precepts of morals or good customs
need no definition. They need only to be cited and none
has or can be cited as being transgressed by the cited
provisions in question. As to the remaining fields of
public order and public policy, the Court has since the
early case of Ferrazzini vs. Gsell, pointed out that the
two terms are practically equivalent, citing Manresa that
“Public policy (order publico) which does not here signify
the material keeping of public order represents in the
law of persons the public, social and legal interest, that
which is permanent and essential of the institutions, that
which, even in favoring an individual in whom the right
lies, cannot be left to his own will.” The Code Commission
however in drafting our present Code included the two
terms, stating in its report that “Public order, which is
found in the Spanish Civil Code, is not as broad as public
policy, as the latter may refer not only to public safety but
also, to considerations which are moved by the common
good.
Avon Cosmetics, Inc. v. Luna,110 defines public policy as follows:
“Plainly put, public policy is that principle of the
law which holds that no subject or citizen can lawfully
do that which has a tendency to be injurious to the
public or against the public good. As applied to contracts,
in the absence of express legislation or constitutional
prohibition, a court, in order to declare a contract void as
against public policy, must find that the contract as to the
consideration or thing to be done, has a tendency to injure
the public, is against the public good, or contravenes
some established interests of society, or is inconsistent
with sound policy and good morals, or tends clearly to
undermine the security of individual rights, whether of
personal liability or of private property.”
It has been held that a consultancy agreement entered into
because of the actual or supposed influence which the party has,
engaging him to influence executive officials in the discharge of
their duties, which contemplates the use of personal influence and
110
G.R. No. 153674, Dec. 20, 2006.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
349
solicitation rather than an appeal to the judgment of the official
on the merits of the object sought is contrary to public policy.
Consequently, the agreement, assuming that the parties agreed to
the consultancy, is null and void as against public policy, and the
same is unenforceable before a court of justice.111
§330.00 Object of contract must be certain
Art. 1349. The object of every contract must be
determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to
the existence of the contract, provided it is possible
to determine the same, without the need of a new
contract between the parties.
The object of a contract must also be certain and determinate.
In order to be considered as “certain,” it need not specify such object
with absolute certainty. It is enough that the object is determinable
in order for it to be considered as “certain.”
It has been held that where the title of the property contains
a technical description that provides the metes and bounds of the
property, the property is determinable.112
In Bercero v. Capital Dev. Corp.,113 the Court held that “void
are all contracts in which the cause or object does not exist at the
time of the transaction.” This ruling must be qualified because Art.
1347 provides that “future things” may be an object of a contract.
However, such future things must exist at the time the contract is
performed or carried out.
SECTION 3. — Cause of Contracts
§331.00 Cause defined
Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other;
Marubeni Corp. v. Lirag, 362 SCRA 620 [2001].
Domingo Realty, Inc. v. CA, Jan. 26, 2007.
113
G.R. No. 154765, March 29, 2007.
111
112
350
OBLIGATIONS AND CONTRACTS
in remuneratory ones, the service or benefit which
is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)
Cause is the essential reason which moves the contracting
parties to enter into it. The cause is the immediate, direct and
proximate reason which justifies the creation of an obligation through
the will of the contracting parties. For instance, in a contract of sale
of a piece of land, the cause of the vendor in entering into the contract
is to obtain the price, and for the vendee, it is the acquisition of the
land.114
§332.00 Consideration is the same as cause
Consideration is more properly denominated as cause. It can
take different forms, such as the prestation or promise of a thing or
the service by another.115
In the law on contract, it is some right, interest, benefit, or
advantage conferred upon the promissor, to which he is otherwise not
lawfully entitled, or any detriment, prejudice, loss, or disadvantage
suffered or undertaken by the promisee other than to such as he is
at the time of consent bound to suffer.116
The consideration of a contract is the “why of the contract,”
the essential reason which moves the contracting parties to enter
into the contract.117 A valuable consideration, however small or
nominal, if given or stipulated in good faith, in the absence of fraud
is sufficient to support a contract. A stipulation in consideration of
$1 is just as effectual and valuable a consideration as a larger sum
stipulated for or paid.118
In onerous contracts, the consideration need not be monetary
but could consist of other things or undertakings, if the consideration
is not monetary, these must be things or undertakings of value.
When a consideration is not monetary, said consideration must be
clearly specified as such in the contract.119
Uy v. CA, 314 SCRA 69 [1999].
Torres v. CA, 320 SCRA 428 [1999].
116
Gabriel v. Monte de Piedad, 71 Phil. 497 [1941].
117
Villamor v. CA, 202 SCRA 607 [1991]; Domingo v. CA, 367 SCRA 368
[2001].
118
Rodriguez v. CA, 207 SCRA [1992].
119
Bible Baptist Church v. CA, G.R. No. 126454, November 26, 2004.
114
115
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
351
The presumption is that a contract is supported by a consideration, and the party alleging lack of consideration has the burden
of proving such allegation, absent of which the presumption stands.
Assuming that the consideration of P1.00 is suspicious, this circumstance, alone, does not justify the inference that the buyer is not a
purchaser in good faith and for value. Neither does this inference
warrant the conclusion that the sale was null and void ab initio. Bad
faith and inadequacy of the money consideration do not render a
conveyance inexistent, for the assignor’s liberality may be sufficient
cause for a valid cause. Fraud or bad faith may render a contract
rescissible or voidable, although valid until annulled.120
In Camacho v. CA,121 the Court held that the consideration is
the prestation or promise of the service by another:
In general, the cause is the why of the contract or
the essential reason which moves the contracting parties
to enter into the contract. For the cause to be valid, it
must be lawful such that it is not contrary to law, morals,
good customs, public order or public policy. Petitioner
insists that the cause of the subject contract is illegal.
However, under the terms of the contract, Atty. Banzon
was obliged to negotiate with the municipal government
of Balanga for the transfer of the proposed new public
market to Camacho’s property (Lot 261); to sell 1,200
square meters right at the market site; and to take charge
of the legal phases incidental to the transaction which
include the ejectment of persons unlawfully occupying the
property (whether through amicable settlement or court
action), and the execution of the Deed of Donation and
other papers necessary to consummate the transaction.
There was thus nothing wrong with the services which
respondent undertook to perform under the contract.
They are not contrary to law, morals, good customs, public
order or public policy.
Under existing jurisprudence, a conveyance of realty for inadequate consideration is not rendered invalid and can still be registered, but the Register of Deeds will assess the taxes and other
registration fees by considering the zonal valuation or fair market
120
121
Ong v. Ong, 139 SCRA 133 [1985].
G.R. No. 127520, Feb. 9, 2007.
352
OBLIGATIONS AND CONTRACTS
value of the property as basis for computation of the assessments
and require payment thereof before the deed may be registered.
§333.00 Definite agreement on the manner of payment
It is a rule that a definite agreement on the manner of payment
of the price is an essential element in the formation of a binding and
enforceable contract of sale. This is so because the agreement as to
the manner of payment goes into the price such that a disagreement
on the manner of payment is tantamount to a failure to agree on the
price. Definiteness as to the price is an essential element of binding
agreement to sell property.122
§334.00 Consideration of accessory contract
The consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to the
principal alone being sufficient. A guarantor or surety is bound by
the same consideration that makes the contract effective between
the principal parties thereto.123
The consideration of the accessory contract of real mortgage
is the same as that of the principal contract. For the debtor, the
consideration of the obligation to pay is the existence of a debt.
Thus, in the accessory of real estate mortgage, the consideration
of the debtor in furnishing the mortgage is the existence of a valid,
voidable, or unenforceable debt. The fact that at the time the
contract of mortgage was executed there was no debt yet as the
lender had not released the loan or part thereof does not make the
real estate mortgage void for lack of consideration. It may either
be a prior or a subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when
the debt secured by it is created as a binding contract to pay. And
when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure. Where the indebtedness
actually owing to the holder of the mortgage is less than the sum
named in the mortgage, the mortgage cannot be enforced for more
than the actual sum due.124
122
Toyota Show, Inc. v. CA, 244 SCRA 320 [1995]; Limketkai Sons Milling, Inc.
v. CA, 255 SCRA 626.
123
Willex Plastic Industries Corp. v. CA, 256 SCRA 478 [1996].
124
Central Bank v. CA, 139 SCRA 46 [1985].
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
353
§335.00 Consideration is presumed
Art. 1354. Although the cause is not stated in
the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277)
Under Art. 1354 of the Civil Code, consideration is presumed
unless the contrary is proven. The presumption that a contract has
sufficient consideration cannot be overthrown by a mere assertion
that it has no consideration. A notarial document is evidence of the
facts therein expressed, one of which is the receipt by the seller that
he has been paid the consideration thereof. Said document has in its
favor the presumption of regularity. To contradict such presumption,
there must be evidence that is clear, convincing and more than mere
preponderant.125
§336.00 Where there is no consideration, contract is void
The presumption that there exists a valid consideration may
be overcome. Thus, it has been held:
The lone testimony of a witness, if credible, is sufficient to prove that the contract of sale of lots had no consideration. The fact that the deed of sale was notarized
is no guarantee of the validity of its contents. Though
the notarization of the deed of sale vests in its favor the
presumption of regularity, it is not the intention nor the
function of the notary public to validate and make binding the instrument never, in the first place, intended to
have any binding legal effect upon the parties thereto.
The intention of the parties still and always is the primary consideration in determining the true nature of a
contract.126 Thus, where the trial court and the Court of
Appeals found the testimony of a lone witness that the
deed of sale was without consideration, the fact that said
deed of sale was notarized did not preclude the Court
from declaring that the deed of sale was void for lack of
consideration.127
Fernandez v. Fernandez, 363 SCRA 811 [2001].
Nazareno v. CA, 343 SCRA 637 [2000].
127
Ibid.
125
126
354
OBLIGATIONS AND CONTRACTS
§337.00 Consideration and motive, distinguished
Art. 1351. The particular motives of the parties
in entering into a contract are different from the
cause thereof. (n)
Cause is the essential reason for the contract, while motive is
the particular reason of a contracting party which does not affect the
other party and which does not preclude the existence of a different
consideration.128
The cause of a contract is the essential reason which moves
the contracting parties to enter into it. It is the immediate, direct
and proximate reason which justifies the creation of an obligation
through the will of the contracting parties. It is different from
motive, which is the particular reason of a contracting party which
does not affect the other party.129
§338.00 When motive predetermines cause
When the motive predetermines the cause, the motive may be
regarded as the cause. Thus, in a sale of land, if the motive to use
the land for housing cannot be attained because of the quality of
the land for such purpose, the motive predetermines the cause and
the negation of such motive grants the vendee the right to cancel
the sale, not under Art. 1191 of the Civil Code, but rather under
Art. 1318 of the Civil Code, which provides that there is no contract
where the cause of the obligation is wanting.130
§339.00 Where motive predetermining cause is unlawful or immoral
Where motive predetermines the cause and the motive is
unlawful or immoral, the contract is void.
For instance, where the motive of the vendor in selling his
property to another was to illegally frustrate the rightful heir’s right
to inheritance and to avoid payment of estate tax, the illegal motive
128
Republic v. Cloribel, 36 SCRA 534, 545 [1970]; Uy v. CA, 314 SCRA 69
[1990]; Basic Books (Phil.), Inc. v. Lopez, 16 SCRA 291 [1966].
129
Uy v. CA, 314 SCRA 69 [1999].
130
Uy v. CA, Ibid.
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
355
pre-determines the purpose of the contract and renders such contract null and void.131
Where an old married man donated a piece of land to a 15-year
woman on the condition that he would have sexual relations with
her, his motive predetermines the cause and the same is immoral or
illegal, which vitiates the donation.132
Under certain circumstances, however, the motive of the parties may be regarded as the consideration when it predetermines
the purpose of the contract. When they blend to that degree, and
the motive is unlawful, then the contract entered into is null and
void.133
§340.00 Illegal cause nullifies contract
Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause
is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)
Art. 1353. The statement of a false cause in
contracts shall render them void, if it should not be
proved that they were founded upon another cause
which is true and lawful. (1276)
It has been held that where the consideration of a promissory
note, upon which plaintiff based his action to recover the amount
thereof, is illegal or contrary to law, morals, good customs public
order or public policy, such as to stifle criminal prosecution or to
dismiss a criminal case, the promissory note is null and void, and
the defense of illegality can be raised for the first time on appeal.134
§341.00 Cause is important element of contract
Cause is one of the important elements of a valid contract,
without which or with unlawful cause the contract is void and
produces no legal effect whatsoever. The cause is unlawful if it is
contrary to law, morals, good customs, public order or public policy.
Olegario v. CA, 238 SCRA 96, 101-102 [1994].
Liquez v. CA, 103 Phil. 577 [1957].
133
Olegario v. CA, 238 SCRA 96, 101-102 [1994].
134
Carrido v. Cardinas, 103 Phil. 435 [1958].
131
132
356
OBLIGATIONS AND CONTRACTS
In Bercaro v. Capitol Dev. Corp.,135 the Court ruled that where
the cause or object of a contract does not exist, the contract is void:
Void are all contracts in which the cause or object
does not exist at the time of the transaction. In the present
case, the lease contract between petitioner and respondent
is void for having an inexistent cause — respondent did
not have the right to lease the property to petitioner
considering that its lease contract with R.C. Nicolas
was still valid and subsisting, albeit pending litigation.
Having granted to R.C. Nicolas the right to use and enjoy
its property from 1983 to 1993, respondent could not grant
that same right to petitioner in 1988. When petitioner
entered into a lease contract with respondent, the latter
was still obliged to maintain R.C. Nicolas’ peaceful and
adequate possession and enjoyment of its lease for the 10year duration of the contract.”
§342.00 Public order and public policy
Public order and public policy are practically equivalent. Public
order represents in the law of persons the public, social and legal
interest, that which is permanent and essential to the institutions,
that which, even in favoring an individual in whom the right lies,
cannot be left to his own will. Public order is not as broad as public
policy, as the latter may refer not only to public safety but also to
considerations which are moved by the common good.136
§343.00 Effect or inadequacy of cause
Art. 1355. Except in cases specified by law,
lesion or inadequacy of cause shall not invalidate
a contract, unless there has been fraud, mistake or
undue influence.
Art. 1470. Gross inadequacy of price does not
affect a contract of sale, except as may indicate a
defect in the consent, or that the parties really intended a donation or some other act or contract.
Inadequacy of cause or gross inadequacy of price does not affect
the validity of the contract, unless there has been fraud, mistake
or undue influence. The burden to prove any of these factors lies
135
136
G.R. No. 154765, March 29, 2007.
Phil. Bank of Communications v. Echiverri, 99 SCRA 508 [1980].
CHAPTER 2
ESSENTIAL REQUISITES OF CONTRACT
357
with the party who seeks to invalidate the contract on any of such
grounds, the presumption being that a contract is supported by valid
consideration. Moreover, there is no requirement that the price be
equal to the exact value of the subject matter of sale.137
In Bercaro v. Capitol Dev. Corp.,138 the Court ruled:
Respondent’s unilateral rescission of its lease contract with R.C. Nicolas, without waiting for the final outcome of the ejectment case it filed against the latter, is
unlawful. A lease is a reciprocal contract and its continuance, effectivity or fulfillment cannot be made to depend
exclusively upon the free and uncontrolled choice of just
one party to a lease contract. Thus, the lease contract entered into between petitioner and respondent, during the
pendency of the lease contract with R.C. Nicolas, is void.
There is no merit to petitioner’s claim of good faith in
dealing with respondent. Good faith is ordinarily used to
describe that state of mind denoting “honesty of intention,
and freedom from knowledge of circumstances which
ought to put the holder upon inquiry; an honest intention
to abstain from taking any unconscionable advantage of
another, even through technicalities of law, together with
absence of all information, notice, or benefit or belief of
facts which render the transaction unconscionable.” Being
privy to the pendency of the ejectment case involving the
leasehold rights of R.C. Nicolas since he was impleaded
as a party-defendant in said ejectment case, petitioner
cannot feign innocence of the existence thereof. Petitioner
was fully aware that R.C. Nicolas had a lease contract with
respondent which was subject of a pending litigation.
§344.00 Effect where there is no consideration
A contract of sale is void and produces no effect whatsoever
where the price, which appears thereon as paid, has in fact never been
paid by the purchaser to the vendor.139 The absence of consideration
nullifies the contract, consideration being an important requisite
thereof.
Paguyo v. Astorga, 470 SCRA 33 [2005].
G.R. No. 154765, March 29, 2007.
139
Vda. De Catindig v. Heirs of Catalina Roque, 74 SCRA 83, 88 [1976].
137
138
358
OBLIGATIONS AND CONTRACTS
CHAPTER 3
FORM OF CONTRACT
§345.00 Contract in whatever form valid
Art. 1356. Contracts shall be obligatory, in
whatever form they may have been entered into,
provided all the essential requisites for their validity are present. However, when the law requires
that a contract be in some form in order that it
may be valid or enforceable, or that a contract be
proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of
the parties stated in the following article cannot be
exercised. (1278a)
Except as the law so provides, there is a binding contract
between the parties whose minds have met on a certain matter
notwithstanding that they did not affix their signature to its written
form.1 Thus, a contract of sale is born from the moment there is a
meeting of minds upon the thing which is the object of the contract
and upon the price.2 This rule applies to consensual contract, but not
to real contract, where the delivery and release of the object perfects
the contract.3
A consensual contract 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. Being a consensual contract, a contract
of sale has the force of law between the contracting parties and they
are expected to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which requires the
People’s Industrial and Commercial Corp. v. CA, 281 SCRA 206 [1997].
Kapunan v. Kapunan, 375 SCRA 199 [2002].
3
BPI Investment Corp. v. CA, 377 SCRA 117 [2002].
1
2
358
CHAPTER 3
FORM OF CONTRACT
359
embodiment of certain contracts in a public instrument, is only
for convenience, and registration of the instrument only adversely
affects third parties. Formal requirements are, therefore, does not
affect the validity of the contract nor the contractual rights and
obligations of the parties thereunder.4
§346.00 Contract which requires a document or special form
Art. 1357. If the law requires a document or
other special form, as in the acts and contracts
enumerated in the following article, the contracting
parties may compel each other to observe that form,
once the contract has been perfected. This right
may be exercised simultaneously with the action
upon the contract. (1279a)
The Court in a case ruled:
“Contracts for which the law requires that they be
in some particular form (writing) in order to make them
valid and enforceable (the so-called formal contract). Of
these the typical example is the donation of immovable
property that the law (Article 749) requires to be in public
instrument in order that the donation may be valid, i.e.,
existing or binding. x x x
Contracts that the law requires to be proved by some
writing (memorandum) of its terms as to those covered
by Statutes of fraud, now Article 1405(2) of the Civil
Code. Their existence not probable by oral testimony
(unless partly or wholly executed). These contracts are
exceptional in requiring and embodying the terms thereof
for their enforceability by action in court.5
§347.00 Contracts which must appear in public document
Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their
object the creation, transmission, modification or
4
5
Fule v. CA, 286 SCRA 698 [1998].
Deuden-Hernandez v. De los Angeles, 27 SCRA 1276, 1282 [1969].
360
OBLIGATIONS AND CONTRACTS
extinguishment of real rights over immovable property; sales of real property or of an interest therein
as governed by Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation
of hereditary rights or of those of the conjugal partnership of gains;
(3) The power to administer property, or any
other power which has for its object an act appearing or which should appear in a public document,
or should prejudice a third person;
(4) The cession of actions or rights proceeding from an act appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or
things in action are governed by Articles 1403, No.
2 and 1405. (1280a)
§348.00 What are public documents
Public documents are those authenticated by a notary public
or by a competent public official, with formalities required by law.
There are two classes of public documents, those executed by private
individuals which must be authenticated by notaries public, and
those issued by competent public officials by reason of their office.6
Public documents, such as notarized agreements, are admissible
in court without further proof of their authenticity. They are entitled
to full faith and credit in the absence of competent evidence showing
that their execution was tainted with defects and irregularities that
invalidate them.7
A public document enjoys the presumption of validity and is
evidence even against third persons of the fact which gives rise to
its execution and of the date of the latter.8 To contradict the facts
contained in a notarial document and the presumption of regularity
6
Lim v. CA, 65 SCRA 161 [1975]; Intestate Estate of Pareja v. Pareja, 95 Phil.
167 [1954].
7
Surban v. CA, 219 SCRA 309 [1993].
8
Yturralde v. Vagilidad, 28 SCRA 393 [1969].
CHAPTER 3
FORM OF CONTRACT
361
in its favor, there must be evidence that is clear, convincing and
more than merely preponderant.9
Acts and contracts, which have for their object the creation,
transmission, modification or extinguishment of real rights over immovable property, must appear in a public document, which means
that they must be notarized by or acknowledged before a notary
public.10
§349.00 Non-notarization does not invalidate a contract
Article 1358 of the Civil Code enumerates the acts or contract
which must appear in a public document. It has been held that
Article 1358 does not invalidate the contracts enumerated therein if
they are not embodied in public documents. The purpose of the law is
only to insure the efficacy of the contracts therein enumerated, and
that reducing such acts or contracts into writing either in a public or
private document is not an essential requisite for their validity. The
writing required in Art. 1358 is merely for convenience, and the fact
that the agreement referred to in said article is not in writing does
not preclude its enforcement in court.11
The fact that the deed of sale still has to be signed and notarized
does not mean that no contract had already been perfected. A sale
of land is valid regardless of the form it may have been entered into.
The requisite form under Art. 1358 is merely for greater efficacy
and binding effect of the act between the parties. If the law requires
a document or other special form, as in the sale of real property,
the contracting parties may compel each other to observe that form,
once the contract has been perfected. Their right may be exercised
simultaneously with action upon the contract.12
In Resuena v. CA,13 the Court reiterated the rule:
Indeed, there is no writing presented to evidence any
claim of ownership or right to occupancy to the subject
properties. There is no lease contract that would vest on
petitioners the right to stay on the property. As discussed
Yturralde v. Azurin, 28 SCRA 407 [1969]; Favor v. CA, 194 SCRA 308 [1991].
Pornellosa v. Land Tenure Administration, 1 SCRA 375 [1961].
11
Shaffer v. Palma, 22 SCRA 934 [1968].
12
Limketkai Sons Milling, Inc. v. CA, 523 [1995]; Penalosa v. Santos, 363 SCRA
545 [2001].
13
G.R. No. 128338, March 28, 2005.
9
10
362
OBLIGATIONS AND CONTRACTS
by the Court of Appeals, Article 1358 of the Civil Code
provides that acts which have for their object the creation,
transmission, modification or extinguishments of real
rights over immovable property must appear in a public
instrument. How then can this Court accept the claim of
petitioners that they have a right to stay on the subject
properties, absent any document which indubitably
establishes such right? Assuming that there was any
verbal agreement between petitioners and any of the
owners of the subject lots, Article 1358 grants a coercive
power to the parties by which they can reciprocally compel
the documentation of the agreement.
§350.00 When law requires contract in writing
There are contracts which the law requires that they be in
writing, such as the following:
1.
Donation of personal or movable property under Art. 748
of the Civil Code, and its acceptance, where the value is in excess of
P5,000.00;
2.
Agency to sell immovable property, under Art. 1874;
3.
Loan agreement providing for payment of interest under
Art. 1956;
4.
Contract of antichresis under Art. 2134;
5.
Those transactions covered by the Statute of Frauds.
There are contracts which require that they be in public
documents for their validity. These are:
a)
Donations of immovable property or real rights for
their validity, under Art. 749;
b)
Contract of commercial or business partnership,
where immovable properties or real rights are contributed to
the common fund under Arts. 1771 and 1772.
§351.00 Conveyances be in public documents and registered
The pertinent provisions of the Property Registration Decree
read:
CHAPTER 3
FORM OF CONTRACT
(A) CONVEYANCES AND TRANSFERS
Sec. 57. Procedure in registration of conveyances.
— An owner desiring to convey his registered land in fee
simple shall execute and register a deed of conveyance
in a form sufficient in law. The Register of Deeds shall
thereafter make out in the registration book a new certificate of title to the grantee and shall prepare and deliver
to him an owner’s duplicate certificate. The Register of
Deeds shall note upon the original and duplicate certificate the date of transfer, the volume and page of the registration book in which the new certificate is registered and
a reference by number to the last preceding certificate.
The original and the owner’s duplicate of the grantor’s
certificate shall be stamped “cancelled.” The deed of conveyance shall be filled and indorsed with the number and
the place of registration of the certificate of title of the
land conveyed.
Sec. 58. Procedure where conveyance involves portion of land. — If a deed or conveyance is for a part only
of the land described in a certificate of title, the Register of Deeds shall not enter any transfer certificate to the
grantee until a plan of such land showing all the portions
or lots into which it has been subdivided and the corresponding technical descriptions shall have been verified and approved pursuant to Section 50 of this Decree.
Meanwhile, such deed may only be annotated by way of
memorandum upon the grantor’s certificate of title, original and duplicate, said memorandum to serve as a notice
to third persons of the fact that certain unsegregated portion of the land described therein has been conveyed, and
every certificate with such memorandum shall be effectual for the purpose of showing the grantee’s title to the
portion conveyed to him, pending the actual issuance of
the corresponding certificate in his name. Upon the approval of the plan and technical descriptions, the original
of the plan, together with a certified copy of the technical descriptions shall be filed with the Register of Deeds
for annotation in the corresponding certificate of title and
thereupon said officer shall issue a new certificate of title
to the grantee for the portion conveyed, and at the same
time cancel the grantor’s certificate partially with respect
363
364
OBLIGATIONS AND CONTRACTS
only to said portion conveyed, or, if the grantor so desires,
his certificate may be cancelled totally and a new one issued to him describing therein the remaining portion:
Provided, however, That pending approval of said plan,
no further registration or annotation of any subsequent
deed or other voluntary instrument involving the unsegregated portion conveyed shall be effected by the Register
of Deeds, except where such unsegregated portion was
purchased from the Government or any of its instrumentalities. If the land has been subdivided into several lots,
designated by numbers or letters, the Register of Deeds
may, if desired by the grantor, instead of canceling the
latter’s certificate and issuing a new one to the same for
the remaining unconveyed lots, enter on said certificate
and on its owner’s duplicate a memorandum of such deed
of conveyance and of the issuance of the transfer certificate to the grantee for the lot or lots thus conveyed, and
that the grantor’s certificate is cancelled as to such lot or
lots.
Sec. 59. Carry over of encumbrances. — If, at the
time of any transfer, subsisting encumbrances or annotations appear in the registration book, they shall be carried over and stated in the new certificate or certificates;
except so far as they may be simultaneously released or
discharged.
CHAPTER XIII
DEALINGS WITH UNREGISTERED LANDS
Sec. 113. Recording of instruments relating to unregistered lands. — No deed, conveyance, mortgage, lease,
or other voluntary instrument affecting land not registered under the Torrens system shall be valid, except as
between the parties thereto, unless such instrument shall
have been recorded in the manner herein prescribed in
the office of the Register of Deeds for the province or city
where the land lies.
(a) The Register of Deeds for each province or city
shall keep a Primary Entry Book and a Registration Book.
The Primary Entry Book shall contain, among other particulars, the entry number, the names of the parties, the
CHAPTER 3
FORM OF CONTRACT
365
nature of the document, the date, hour and minute it was
presented and received. The recording of the deed and
other instruments relating to unregistered lands shall be
effected by any of annotation on the space provided therefor in the Registration Book, after the same shall have
been entered in the Primary Entry Book.
(b) If, on the face of the instrument, it appears that
it is sufficient in law, the Register of Deeds shall forthwith
record the instrument in the manner provided herein.
In case the Register of Deeds refuses its administration
to record, said official shall advise the party in interest
in writing of the ground or grounds for his refusal, and
the latter may appeal the matter to the Commissioner
of Land Registration in accordance with the provisions
of Section 117 of this Decree. It shall be understood that
any recording made under this section shall be without
prejudice to a third party with a better right.
(c) After recording on the Record Book, the Register of Deeds shall endorse among other things, upon the
original of the recorded instruments, the file number and
the date as well as the hour and minute when the document was received for recording as shown in the Primary
Entry Book, returning to the registrant or person in interest the duplicate of the instrument, with appropriate annotation, certifying that he has recorded the instrument
after reserving one copy thereof to be furnished the provincial or city assessor as required by existing law.
A document of conveyancing, unless duly notarized or acknowledged before a notary public, cannot be registered with the Registry
of Deeds of the Province or City where the land is located, and the
person in whose favor the conveyance is made cannot secure a title
in his name. Section 112 of the Property Registration Decree provides:
Sec. 112. Forms in conveyancing. — The Commissioner of Land Registration shall prepare convenient
blank forms as may be necessary to help facilitate the
proceedings in land registration and shall take charge
of the printing of land title forms. Deeds, conveyances,
encumbrances, discharges, powers of attorney and other
voluntary instruments, whether affecting registered or
366
OBLIGATIONS AND CONTRACTS
unregistered land, executed in accordance with law in the
form of public instruments shall be registrable: Provided,
That, every such instrument shall be signed by the person
or persons executing the same in the presence of at least
two witnesses who shall likewise sign thereon, and shall
acknowledged to be the free act and deed of the person or
persons executing the same before a notary public or other
public officer authorized by law to take acknowledgment.
Where the instrument so acknowledged consists of two or
more pages including the page whereon acknowledgment
is written, each page of the copy which is to be registered
in the office of the Register of Deeds, or if registration is
not contemplated, each page of the copy to be kept by the
notary public, except the page where the signatures already appear at the foot of the instrument, shall be signed
on the left margin thereof by the person or persons executing the instrument and their witnesses, and all the
ages sealed with the notarial seal, and this fact as well as
the number of pages shall be stated in the acknowledgment. Where the instrument acknowledged relates to a
sale, transfer, mortgage or encumbrance of two or more
parcels of land, the number thereof shall likewise be set
forth in said acknowledgment.
Registration is the means whereby registered real property
is made subject to the terms of the instrument. It is the operative
act that gives validity to the transfer or creates a lien upon the
land.14 Prior registration of a lien creates preference, since the act of
registration is the operative act to convey and affect the land.15 Hence,
as between an earlier unregistered deed of sale or an unregistered
deed of mortgage and a duly registered attachment, the latter has
preference and prevails over the former.16
§352.00 Generally, when terms of a contract are reduced to writing,
it is deemed to embody all the terms
It is a long-held cardinal rule that when the terms of an agreement are reduced to writing, it is deemed to contain all the terms
DBP v. CA, 96 SCRA 343 [1980].
Santos v. Aquino, 205 SCRA 127 [1992].
16
Capistrano v. PNB, 101 Phil. 1117 [1957]; Guerrero v. Agustin, 7 SCRA 773
[1963].
14
15
CHAPTER 3
FORM OF CONTRACT
367
agreed upon and no evidence of such terms can be admitted other
that the contents of the agreement itself. Otherwise the courts have
no authority to modify the contract. It is not the province of the
courts to amend a contract by construction, or to make a new contract for the parties by interjecting material stipulation, or even to
read into the contract words which it does not contain.17
The foregoing is known as the parol evidence rule. There are
exceptions to the parol evidence, such as the following:
1.
There is an intrinsic ambiguity, mistake or imperfection
in the writing;
2.
The written agreement fails to express the true agreement
and intent of the parties thereto;
3.
The validity of the written agreement is in question; and
4.
There exists other terms agreed by the parties or their successors-in-interest after the execution of the written agreement.18
To bring the case under any of the exceptions to the parol
evidence rule, the exceptions must be pleaded and raised as an issue
in the case.
§353.00 Statute of frauds
See discussion on Statute of Frauds, in Chapter on unenforceable contracts, infra.
17
18
Sabio v. International Corporate Bank, Inc., 364 SCRA 385 [2001].
Ibid.
368
OBLIGATIONS AND CONTRACTS
CHAPTER 4
REFORMATION OF INSTRUMENTS
§354.00 Reformation of instrument defined
Art. 1359. When, there having been a meeting
of the minds of the parties to a contract, their
true intention is not expressed in the instrument
purporting to embody the agreement, by reason of
mistake, fraud, inequitable conduct or accident,
one of the parties may ask for the reformation of
the instrument to the end that such true intention
may be expressed.
If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the minds of
the parties, the proper remedy is not reformation
of the instrument but annulment of the contract.
Reformation is a remedy in equity by means of which a written agreement is made or constructed so as to express or conform
to the real intention of the parties. An action for reformation is in
personam, not in rem, even when real estate is involved. It is merely
an equitable relief granted to the parties when through mistake or
fraud, the instrument failed to express the real agreement or intention of the parties. While it is a recognized remedy afforded by
courts of equity it may not be applied if it is contrary to well-settled
principles or rules. It is a long-standing principle that equity follows
the law. It is applied in the absence of and never against statutory
law. Courts are bound by rules of law and have no arbitrary discretion to disregard them.1
1
Huibonhoa v. CA, 320 SCRA 625 [1999].
368
CHAPTER 4
REFORMATION OF INSTRUMENTS
369
§355.00 Requisites or elements of reformation
An action for reformation of instrument may prosper only upon
the concurrence of the following requisites:
a)
there must have been a meeting of the minds of the
parties to the contract;
b)
the instrument does not express the true intention
of the parties; and
c)
the failure of the instrument to express the true
intention of the parties is due to mistake, fraud, inequitable
conduct or accident.2
§356.00 Parties in action for reformation
Aside from the foregoing requisites, all persons claiming an
interest in the land or party thereof purportedly conveyed by the
instrument sought to be reformed, and whose interest will be affected
by the reformation of the instrument are necessary parties to action
and should be impleaded therein.3
Every party to a contract has a clear interest that the instrument embodying its terms should conform to the actual and true
agreement had by and between the contracting parties. Hence, if by
accident or mistake, as expressed in the complaint, the document
does not conform to or reflect the actual agreement, either party can
ask for reformation of the instrument.4
In actions for reformation of contract, the onus probandi is
upon the party who insists that the contract should be reformed.5
§357.00 Rationale of reformation of instrument
Article 1267 of the Civil Code does not apply to reformation of
contract. Reformation may be invoked, when the instrument fails
to express the true intent of the parties due to error or mistake,
2
Huibonhoa v. CA, 320 SCRA 625 [1999]; Tuason v. CA, 341 SCRA 707 [2000];
NIA v. Gamit, 215 SCRA 436 [1992].
3
Toyota Motor Phil. Corp. v. CA, 416 SCRA 236 [1992].
4
City of Cabanatuan v. Lazaro, 39 SCRA 653 [1971].
5
Huibonhoa v. CA, 320 SCRA 625 [1999]; Tuason v. CA, 341 SCRA 707 [2000];
NIA v. Gamit, 215 SCRA 436 [1992].
370
OBLIGATIONS AND CONTRACTS
accident or fraud. The rationale of reformation is explained by the
Code Commission:
“Equity dictates the reformation of an instrument
in order that the true intention of the contracting parties
may be expressed. The courts by the reformation do not
attempt to make a new contract for the parties, but to
make the instrument express their real intention. The rationale of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting of the
minds of the parties. The rigor of the legalistic rule that a
written instrument should be the first and inflexible criterion and measure of the rights and obligations of the contracting parties is thus tempered to forestall the effects of
mistake, fraud, inequitable conduct, or accident.”6
§358.00 Instances when reformation may be possible
Art. 1368. Reformation may be ordered at the
instance of either party or his successors in interest,
if the mistake was mutual; otherwise, upon petition
of the injured party, or his heirs and assigns.
Art. 1361. When a mutual mistake of the parties
causes the failure of the instrument to disclose their
real agreement, said instrument may be reformed.
Art. 1362. If one party was mistaken and the
other acted fraudulently or inequitably in such a
way that the instrument does not show their true
intention, the former may ask for the reformation
of the instrument.
Art. 1363. When one party was mistaken and
the other knew or believed that the instrument
did not state their real agreement, but concealed
that fact from the former, the instrument may be
reformed.
Art. 1364. When through the ignorance, lack
of skill, negligence or bad faith on the part of the
6
Quoted in Naga Telephone Co., Inc. v. CA, 230 SCRA 351, 361 [1994].
CHAPTER 4
REFORMATION OF INSTRUMENTS
371
person drafting the instrument or of the clerk or
typist, the instrument does not express the true
intention of the parties, the courts may order that
the instrument be reformed.
Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the
instrument states that the property is sold absolutely or with a right of repurchase, reformation of
the instrument is proper.
When the terms of an agreement have been reduced to writing,
it is considered as containing all the terms agreed upon. As such,
there can be, between the parties and their successors-in-interest,
no evidence of such terms other than the contents of the written
agreement, except when it fails to express the true intent and
agreement of the parties. In such an exception, one of the parties
may bring an action for the reformation of the instrument to the end
that their true intention may be expressed.7
The requirements of Article 1359 of the Civil Code for a
reformation of contract are that the contracting parties fail to express
their true intention in the contract and that such failure is caused
by mistake, fraud, inequitable conduct, or accident. However, the
fact that the complaint was categorized to be one for reformation of
instrument does not preclude the court from passing upon the issue
of whether or not the transaction is in fact an equitable mortgage,
so long as the same has been squarely raised in the complaint and
has been the subject of arguments and evidence of the parties. It has
been held that it is not the caption of the pleading but the allegations
therein that determine the nature of action, and the Court shall
grant relief warranted by the allegations and the proof even if no
such relief is prayed for.8
§359.00 Reformation is not making a new contract for the parties
An action for reformation is a remedy in equity by means of
which a written instrument is made or construed so as to express or
conform to the real intention of the parties. In granting reformation,
equity is not really making a new contract for the parties, but is
7
8
Huibonhoa v. CA, 320 SCRA 625 [1999].
Lorbes v. CA, 351 SCRA 712, 730 [2001].
372
OBLIGATIONS AND CONTRACTS
confirming and perpetuating the real contract between the parties
which, under the technical rules of law, could not be enforced but for
such reformation.9
§360.00 Reformation and interpretation distinguished
The Court in a case distinguished reformation and interpretation as follows:
“‘Interpretation’ is the act of making intelligible
what was before not understood, ambiguous, or not obvious. It is a method by which the meaning of language is
ascertained. The ‘interpretation’ of a contract is the determination of the meaning attached to the words written
or spoken which make the contract. On the other hand,
‘reformation’ is that remedy in equity by means of which a
written instrument is made or construed so as to express
or conform to the real intention of the parties. In granting
reformation, therefore, equity is not really making a new
contract for the parties, but is confirming and perpetuating the real contract between the parties which, under the
technical rules of law, could not be enforced but for such
reformation. As aptly observed by the Code Commission,
the rationale of the doctrine is that it would be unjust and
inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of
the minds of the parties.”10
There is a distinction between interpretation and reformation
of contracts. Interpretation is the act of making intelligible what was
before not understood, ambiguous, or not obvious. It is a method by
which the meaning of language is ascertained. The interpretation of
a contract is the determination of the meaning attached to the words
written or spoken which make the contract. On the other hand,
reformation is that remedy in equity by means of which a written
instrument is made or construed so as to express or conform to the
real intention of the parties. In granting reformation, therefore,
equity is not really making a new contract for the parties, but is
confirming and perpetuating the real contract between the parties
9
NIA v. Gamit, 215 SCRA 436 [1992].
National Irrigation Administration v. Gamit, 215 SCRA 436, 453-454
10
[1982].
CHAPTER 4
REFORMATION OF INSTRUMENTS
373
which, under the technical rules of law, could not be enforced but
for such reformation. The rationale of the doctrine is that it would
be unjust and inequitable to allow the enforcement of a written
instrument which does not reflect or disclose the real meeting of the
minds of the parties.11
In reformation of instrument, what is reformed is not the
contract itself but the instrument embodying the contract.12
Reformation is a remedy in equity by means of which a written
instrument is made or construed so as to express or conform to the
real intention of the parties. It is an action in personam. It requires
the following requisites:
(1) there must have been a meeting of the minds of the parties
to the contract;
(2) the instrument does not express the true intention of the
parties; and
(3) the failure of the instrument to express the true intention
of the parties is due to mistake, fraud, inequitable conduct or
accident.13
Where, in a case, what was needed is one hectare, located
in a specified place, but without any description, the object of the
contract is determinable, and the remedy of the parties to express
the true intent of the parties, as to the specification of the land, is
reformation of the instrument.14
§361.00 Reformation refers to instrument; prescription of action
The Court in a case held:
“In reformation of contract, what is reformed is not the
contract itself, but the instrument embodying the contract.
It follows whether the contract is disadvantageous or not
is irrelevant in reformation and, therefore, cannot be an
element in the determination of the period of prescription
of the action to reform.” (Naga Telephone Co., Inc. v. CA,
250 SCRA 351, 368-369 [1994]).
Huibonhoa v. CA, 320 SCRA 625 [1999].
Naga Telephone Co., Inc. v. CA 230 SCRA 351 [1994].
13
Huibonhoa v. CA, Ibid.
14
Quiros v. Arjona, G.R. No. 158901, March 9, 2004.
11
12
374
OBLIGATIONS AND CONTRACTS
The Court in Pilipinas Shell Petroleum Corp. v. John Bordman
Ltd.,15 ruled when an action for reformation prescribes:
Naga Telephone Co. v. Court of Appeals involved the
reformation of a Contract. Among others, the grounds for
the action filed by the plaintiff included allegations that
the contract was too one-sided in favor of the defendant,
and that certain events had made the arrangement
inequitable. The Court ruled that the cause of action for a
reformation would arise only when the contract appeared
disadvantageous.
§362.00 When no reformation is allowed
Art. 1366. There shall be no reformation in the
following cases:
(1) Simple donations inter vivos wherein no
condition is imposed;
(2)
Wills;
(3)
When the real agreement is void.
Art. 1367. When one of the parties has brought
an action to enforce the instrument, he cannot subsequently ask for its reformation.
§363.00 Principles of general law on reformation adopted
Art. 1360. The principles of the general law
on the reformation of instruments are hereby
adopted insofar as they are not in conflict with the
provisions of this Code.
This provision is known as adopted statute.16 It makes principles
of reformation of instrument evolved in the United States, from
where the provision on reformation of instrument provided for in
the Civil Code is taken.17
15
16
17
G.R. No. 159831, Oct. 14, 2005.
RUBEN E. AGPALO, Statutory Construction, 2003 Ed., p. 106.
Toyota Motor Phil. Corp. v. CA, 416 SCRA 236 [1992].
CHAPTER 4
REFORMATION OF INSTRUMENTS
375
§364.00 Procedure for reformation
Art. 1369. The procedure for the reformation of
instrument shall be governed by Rules of Court to
be promulgated by the Supreme Court.
There is yet no specific provision of the Rules of Court on the
subject of procedure for reformation. An action for reformation is
usually included or pleaded in some specific actions, such as for
damages, ejectment, recovery of property, annulment or rescission
of contract, which sometimes involve interpretation of contracts or
reformation of instruments, in which it is alleged that the instrument
failed to express the real intent of the parties and the issue is pleaded
and proved to resolve the main action.
376
OBLIGATIONS AND CONTRACTS
CHAPTER 5
INTERPRETATION OF CONTRACTS
§365.00 Civil provisions on interpretation of contracts
Art. 1370. If the terms of a contract are clear
and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)
Art. 1371. In order to judge the intention of the
contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
(1282)
Art. 1372. However general the terms of a
contract may be, they shall not be understood to
comprehend things that are distinct and cases that
are different from those upon which the parties intended to agree. (1283)
Art. 1373. If some stipulation of any contract
should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284)
Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from
all of them taken jointly. (1285)
Art. 1375. Words which may have different
significations shall be understood in that which is
most in keeping with the nature and object of the
contract. (1286)
376
CHAPTER 5
INTERPRETATION OF CONTRACTS
377
Art. 1376. The usage or custom of the place
shall be borne in mind in the interpretation of the
ambiguities of a contract, and shall fill the omission
of stipulations which are ordinarily established.
(1287)
Art. 1377. The interpretation of obscure words
or stipulations in a contract shall not favor the party who caused the obscurity. (1288)
Art. 1378. When it is absolutely impossible to
settle doubts by the rules established in the preceding articles, and the doubts refer to incidental
circumstances of a gratuitous contract, the least
transmission of rights and interests shall prevail.
If the contract is onerous, the doubt shall be settled
in favor of the greatest reciprocity of interests.
If the doubts are cast upon the principal object of the contract in such a way that it cannot be
known what may have been the intention or will
of the parties, the contract shall be null and void.
(1289)
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise
be observed in the construction of contracts. (n)
§366.00 Interpretation is required where there is ambiguity
The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract before it is
ambiguous. A contract provision is ambiguous if it is susceptible
of two reasonable alternative interpretations. Where the written
terms of the contract are not ambiguous and can only be read one
way, the court will interpret the contract as a matter of law. If the
contract is determined to be ambiguous, then the interpretation of
the contract is left to the court, to resolve the ambiguity in the light
of the intrinsic evidence.1
1
Abad v. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007.
378
OBLIGATIONS AND CONTRACTS
§367.00 General rule in contract interpretation
Abad v. Goldloop Properties, Inc.,2 lays down the “plain meaning rule” and the “four corners rule” in contract interpretation, as
follows:
The cardinal rule in the interpretation of contracts
is embodied in the first paragraph of Article 1370 of the
Civil Code: “[i]f the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.” This
provision is akin to the “plain meaning rule” applied by
Pennsylvania courts, which assumes that the intent of
the parties to an instrument is “embodied in the writing
itself, and when the words are clear and unambiguous
the intent is to be discovered only from the express language of the agreement.” It also resembles the “four corners” rule, a principle which allow courts in some cases to
search beneath the semantic surface for clues to meaning.
A court’s purpose in examining a contract is to interpret
the intent of the contracting parties, as objectively manifested by them. The process of interpreting a contract
requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract
provision is ambiguous if it is susceptible of two reasonable alternative interpretations. Where the written terms
of the contract are not ambiguous and can only be read
one way, the court will interpret the contract as a matter of law. If the contract is determined to be ambiguous,
then the interpretation of the contract is left to the court,
to resolve the ambiguity in the light of the intrinsic evidence.
In our jurisdiction, the rule is thoroughly discussed
in Bautista v. Court of Appeals:
The rule is that where the language of a contract is
plain and unambiguous, its meaning should be determined
without reference to extrinsic facts or aids. The intention
of the parties must be gathered from that language, and
from that language alone. Stated differently, where the
language of a written contract is clear and unambiguous,
2
G.R. No. 168108, April 13, 2007.
CHAPTER 5
INTERPRETATION OF CONTRACTS
379
the contract must be taken to mean that which, on its
face, it purports to mean, unless some good reason can be
assigned to show that the words should be understood in a
different sense. Courts cannot make for the parties better
or more equitable agreements than they themselves have
been satisfied to make, or rewrite contracts because they
operate harshly or inequitably as to one of the parties, or
alter them for the benefit of one party and to the detriment
of the other, or by construction, relieve one of the parties
from the terms which he voluntarily consented to, or
impose on him those which he did not.
§368.00 Determination of nature of contract
In the determination of a contract’s real nature, courts are
not bound by the parties’ denomination of the same. The decisive
factor is the intention of the parties, as shown by the parties’
contemporaneous acts at the time of the execution of the contract
and their acts subsequent thereto. Thus, even though a contract is
denominated a pacto de retro sale, the owner of the property may
prove that it is otherwise by showing by means of parol evidence
that the contract is an equitable mortgage.3
Contracts are not what the parties may see fit to call them but
what they really are as determined by the principles of law.4
§369.00 Courts cannot alter nor make a contract by interpretation
It is not the province of the court to alter a contract by
construction or to make one contract for the parties; its duty is
confined to the interpretation of the one with they have made for
themselves, without regard to the wisdom or folly, as to the court
cannot supply material stipulation or read into a contract words
which it does not contain.5
“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 the
Ching Sen Ben v. CA, 314 SCRA 762 [1999].
Baluran v. Navarro, 79 SCRA 309 [1977].
5
Chua v. CA, 301 SCRA 356 [1999].
3
4
380
OBLIGATIONS AND CONTRACTS
wisdom or folly, as the court cannot supply material
stipulations or read into contracts words which it does not
contain.”6
Neither abstract justice nor the rule of liberal construction
justifies the creation of a contract for the parties which they did
make themselves or the imposition upon one party to a contract of
an obligation not assumed.7
The potestative authority of the courts to fix a longer term for
a lease under Art. 1687 of the Civil Code applies only to cases where
there is no period fixed by the parties.8
§370.00 Complementary contracts construed together
The Court held that complementary contracts must be construed together, thus:
The complementary contracts construed together
doctrine states that where there are two or more contracts or agreements, one complementing the other, all
the agreements must be construed together to arrive at
their true meaning. Certain stipulations cannot be segregated and then made to control. Thus, a surety contract,
being merely an accessory contract to the loan agreement,
must be interpreted with the principal contract, which is
the loan agreement. The complementary contracts construed together doctrine adheres to Article 1374 of the
Civil Code.9
For instance, where a buyer of a car had it financed by a financial institution and the car buyer executed a promissory note for
the loan used to buy the car, and the financial institution required
that the car be mortgaged to secure payment of said loan and that
the car buyer secure an insurance for the loss or theft of the car,
three contracts are interrelated: the promissory note, the chattel
mortgage and the car insurance policy. These three contracts are
Ibid.
Riviera Filipina, Inc. v. CA, 380 SCRA 245 [2002].
8
Chua v. CA, 301 SCRA 356 [1999]; Riviera Filipino, Inc. v. CA, 380 SCRA 245
[2002].
9
Velasquez v. CA, 309 SCRA 539 [1999]; Nazareno v. CA, 343 SCRA 637
[2000].
6
7
CHAPTER 5
INTERPRETATION OF CONTRACTS
381
interrelated and should be construed together, where the car was
stolen and the insurance company unreasonably denied the claim
for loss of the car. In this case, the Court held that the obligations
under the promissory note remained and the obligor still had to pay
the balance thereof even when the car was lost because the primary
obligation under the promissory note is not affected by what befell
the accessory contract of chattel mortgage; that the insurance company had to pay the insured for the loss of the car; and that the car
buyer was exonerated from paying the interest, liquidated damages
and attorney’s fees provided in the promissory note because had the
insurance company paid the insurance claim the financial institution which financed the purchase of the car would have been paid
from proceeds thereof as the chattel and the insurance policy were
assigned to the financial institution and that the insurance company
be held liable for moral and exemplary damages and to attorney’s
fees.10
§371.00 Other rules of Interpretation of contract
1.
Analysis and construction should not be limited to the
words used in the contract, as they may not accurately reflect the
parties’ true intent. The court must read a contract as the average
person would read it and should not give it a strained or forced
construction.11
2.
The cardinal rule is that the intention of the parties shall
be accorded primordial consideration and in case of doubt, their contemporaneous and subsequent acts shall be principally considered.
Where the parties in a contract have given it a practical construction
by their conduct as by acts in partial performance, such construction
may be considered by the court in construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the time for contracting. The parties’ practical construction
of their contract has been characterized as a clue or index to, or as
evidence of, their intention or meaning and as an important, significant, convincing, persuasive, or influential factor in determining the
proper construction of the contract.12
Perla Compania de Seguros, Inc. v. CA, 208 SCRA 487 [1992].
Riviera Filipino, Inc. v. CA, 380 SCRA 245 [2002].
12
Riviera Filipino, Inc. v. CA, Ibid.
10
11
382
OBLIGATIONS AND CONTRACTS
3.
The doctrine of noscitur a sociis, although a rule in the
construction of statutes, is equally applicable in the ascertainment of
the meaning and scope of vague contractual stipulations. According
to the maxim noscitur a sociis, where a particular word or phrase
is ambiguous in itself or is equally susceptible of various meanings,
its correct construction may be made clear and specific by rendering
the company of the words in which it is found or with which it
is associated, or stated differently, its obscurity or doubt may be
reviewed by reference to associated words.13
4.
The Court has held that as in statutes, the provisions
of a contract should not be read in isolation from the rest of the
instrument but, on the contrary, interpreted in the light of the other
related provisions. The whole and every part of a contract must be
considered in fixing the meaning of any of its parts and in order
to produce a harmonious whole. Equally applicable is the canon
of construction that in interpretation of a statute (or a contract)
that it was enacted as an integrated measure and no as it hodgepodge of conflicting provisions. The rule is that a construction that
would render a provision inoperative should be avoided, instead,
appropriately inconsistent provisions should be reconciled whenever
possible as parts of a coordinated and harmonious whole.14
5.
When the text of a contract is explicit and leaves no doubt
as to its intention, the court may not read into it any other intention
that would contrast its plain import. The rule on interpretation of
contracts gives primacy to the intention of the parties, which is the
law among them. Ultimately, their intention is to be deciphered
not from the unilateral de facto assertions of one of the parties,
but from the language used in the contract. And when the terms
of the agreement, as expressed in such language, are clear, they
are to be understood literally, just as they appear on the fact of the
contract.15
6.
The legal effects of a contract are determined by extracting
the intent of the parties from the language they used and from their
contemporaneous and subsequent acts. The principle gains more
force when third persons are concerned. To require such persons
to go beyond what is clearly written in the document is unfair and
unjust. They cannot possibly delve into the contracting parties’
Oil and Natural Gas Commission v. CA, 293 SCRA 26 [1998].
Central Bank v. CA, 139 SCRA 46 [1985].
15
Cruz v. CA, 293 SCRA 239 [1998].
13
14
CHAPTER 5
INTERPRETATION OF CONTRACTS
383
minds and suspect that something is amiss, when the language of
the instrument appears clear and unequivocal.16
7.
Employment contract should take in to account the applicable laws on the subject and should be liberally construed in favor
of the employee or worker, any contrary stipulation of the contract
notwithstanding. Thus, where the employment contract provides
that the employee will have a fixed term of one (1) year, he cannot be
dismissed upon expiration of the period, without cause as provided
by law, because he becomes a permanent employee pursuant to the
Labor Code which prescribes only six (6) months as a provisionary
period, after which, if he is allowed to continue work beyond said
period, he becomes a permanent or regular employee by operation
of law. Moreover, any ambiguity in the employment contract is construed against the employer.17
8.
Where both parties offer conflicting interpretations, the
court must make a determination of which interpretation is correct.
One of the means to determine the intention of the parties is
ascertaining the reason behind and the circumstances surrounding
the execution of the contract. They are of paramount importance
to place the interpreter in the situation occupied by the parties
concerned at the time the writing was executed.18
9.
It is a rule that construction of the terms of a contract
which would amount to impairment or loss of right is not favored;
conservation and preservation, not waiver, abandonment or forfeiture of a right, is the rule.19
10. The rule on interpretation of contract, such as the application of contemporaneous and subsequent acts of the parties to ascertain the true intent of the parties, is used in affirming, not negating, the validity of the contract. If the instrument is capable of two
or more interpretations, the interpretation which will make it valid
and effective should be adopted.20
11. An important task in contract interpretation is the ascertainment of the intention of the contracting parties which is accom-
Cruz v. CA, 293 SCRA 239 [1998].
Phil. Federation of Credit Cooperation, Inc. v. NLRC, 300 SCRA 72 [1998];
Salafranca v. Philamlife Village Homeowners Assn., 300 SCRA 469 [1998].
18
Ridjo Tape & Chemical Corp. v. CA, 286 SCRA 544 [1998].
19
Ibid.
20
Villaflor v. CA, 280 SCRA 297 [1997].
16
17
384
OBLIGATIONS AND CONTRACTS
plished by looking to the words they used to project that intention in
their contract, i.e., all the words, not just a particular word or two,
and words in context, not words standing alone. The various stipulations in a contract should be read together in order to give effect to
all.21
12. In resolving an issue based on contract, the Court must
first examine the contract itself, keeping in mind that when the
terms of the agreement are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall prevail. The intention of the contracting parties should
be ascertained by looking at the words used to project their intention, that is, all the words, not just a particular word or two or more
words standing alone. The various stipulations of a contract shall
be interpreted together, attributing to the doubtful ones that sense
which may result from all of them taken jointly. The parts and
clauses must be interpreted in relation to one another to give effect
to the whole. The legal effect of a contract is to be determined from
the whole read together.22
13. It is only in instances when the language of a contract is
ambiguous or obscure that courts ought to apply certain established
rules of construction in order to ascertain the supposed intent of
the parties. However, these rules will not be used to make a new
contract for the parties or to rewrite the old one, even if the contract is
inequitable or harsh. They are applied by the court merely to resolve
doubts and ambiguities within the framework of the agreement.23
14. The Court has consistently decreed that the nomenclature
used by the contracting parties to describe a contract does not
determine its nature. The decisive factor is their intention — as
shown by their conduct, words, actions and deeds — prior to, during,
and after executing the agreement.24
15. A contract may be embodied in two or more separate
writings, in which event the writings should be read and interpreted
together in such a way as to eliminate seeming inconsistencies and
render the parties’ intention effectual. In construing a written
contract, the reason behind and the circumstances surrounding its
21
22
Heirs of Severo Legaspi, Sr. v. Vda. De Dayot, 188 SCRA 508, 514 [1990].
Villamaria, Jr. v. CA, G.R. No. 165881, April 19, 2006, 487 SCRA 572
[2006].
23
24
First Filsin Lending Corp. v. Padilla, 448 SCRA 71 [2005].
Ramos v. Sarao, 451 SCRA 103, Feb. 11, 2005.
CHAPTER 5
INTERPRETATION OF CONTRACTS
385
execution are of paramount importance to place the interpreter in the
situation occupied by the parties concerned at the time the writing
was executed. Construction of the terms of a contract, which would
amount to impairment or loss of right, is not favored. Conservation
and preservation, not waiver, abandonment or forfeiture of a right, is
the rule. In case of doubts in contracts, the same should be settled in
favor of the greatest reciprocity of interests. Moreover, such doubts
must be resolved against the person who drafted the deed and who
is responsible for the ambiguities in the deed.25
16. Any ambiguity in the provisions of contract is construed
against the party who drafted it.26
17. Where there is doubt as to the real meaning of the
contract, the doubt must be resolved against the party who drafted
the instrument and is responsible for its ambiguity.27
18. A strained interpretation which is unnatural and forced,
as to lead to an absurd conclusion or to render the policy nonsensical,
should, by all means, be avoided. Any construction of marine
insurance policy rendering it void should be avoided. Such policies
will be construed strictly against the company in order to avoid
a forfeiture, unless no other result is possible from the language
used.28
19. As in statute no word, clause, sentence, provision or part of a
contract shall be considered surplusage or superfluous, meaningless,
void, insignificant or nugatory, if that can be reasonably avoided. To
this end, a construction which will render every word operative is
to be preferred over that which would make some words idle and
nugatory. Pursuant to this principle, a clause in a contract of lease
which provides that the lease “may be renewed for a like term at the
option of the lessee” means that the exercise of the option resulted
in the automatic extension of the contract under the same terms and
conditions and the same period as those of the subject contract.29
20. Where there is a controversy as to what the contracting
parties had intended to enter into, the way the contracting parties do
Agas v. Sabio, G.R. No. 156447, April 16, 2005.
Young v. Tiu, 375 SCRA 614 [2002]; Horrigan v. Troika Commercial, Inc.,
G.R. No. 1484111, Nov. 29, 2005.
27
Tuazon v. CA, 341 SCRA 707 [2000].
28
Malayan Ins. Corp. v. CA, 270 SCRA 242 [1997].
29
Allied Banking Corp. v. CA, 284 SCRA 357 [1998].
25
26
386
OBLIGATIONS AND CONTRACTS
or perform their respective obligations may be shown and inquired
into, and should such performance conflict with the name or title
given to the contract by the parties, the former must prevail over the
latter.30
§372.00 Article 1379 of Civil Code adopts principles of interpretation of documents
Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise
be observed in the construction of contracts. (n)
Rule 130, formerly Rule 123, Secs. 10 to 19, of the Rules of
Court, reads:
SEC. 10. Interpretation of a writing according to its
legal meaning. — The language of a writing is to be interpreted according to the legal meaning it bears in the
place of its execution, unless the parties intended otherwise. (8)
SEC. 11. Instrument construed so as to give effect
to all provisions. — In the construction of an instrument
where there are several provisions or particulars, such a
construction is, if possible, to be adopted as will give effect
to all. (9)
SEC. 12. Interpretation according to intention; general and particular provisions. — In the construction of
an instrument, the intention of the parties is to be pursued; and when a general and a particular provision are
inconsistent, the latter is paramount to the former. So a
particular intent will control a general one that is inconsistent with it. (10)
SEC. 13. Interpretation according to circumstances.
— For the proper construction of an instrument, the circumstances under which it was made, including the situation of the subject thereof and of the parties to it, may be
shown, so that the judge may be placed in the position of
those whose language is to interpret. (11)
30
Shell Co. of the Phil. v. Firemen’s Ins. Co., 100 Phil. 757 [1957].
CHAPTER 5
INTERPRETATION OF CONTRACTS
SEC. 14. Particular signification of terms. — The
terms of a writing are presumed to have been used in
their primary and general acceptation, but evidence is
admissible to show that they have a local, technical, or
otherwise peculiar signification, and were so used and
understood in the particular instance, in which case the
agreement must be construed accordingly. (12)
SEC. 15. Written words control printed. — When
an instrument consists of written words and partly of a
printed form, and the two are inconsistent, the former
controls the latter. (13)
SEC. 16. Experts and interpreters to be used in explaining certain writings. — When the characters in
which an instrument is written are difficult to be deciphered, or the language is not understood by the court,
the evidence of persons skilled in deciphering the characters, or who understand the language, is admissible to
declare the characters or the meaning of the language.
(14)
SEC. 17. Of two constructions, which preferred. —
When the terms of an agreement have been intended in a
different sense by the different parties to it, that sense is
to prevail against either party in which he supposed the
other understood it, and when different constructions of a
provision are otherwise equally proper, that is to be taken
which is the most favorable to the party in whose favor
the provision is made. (15)
SEC. 18. Construction in favor of natural right.
— When an instrument is equally susceptible of two interpretations, one in favor of natural right and the other
against it, the former is to be adopted. (16)
SEC. 19. Interpretation according to usage. — An instrument may be construed according to usage, in order
to determine its true character. (17).
387
388
OBLIGATIONS AND CONTRACTS
CHAPTER 6
RESCISSIBLE CONTRACTS
§373.00 What are rescissible contracts
Art. 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. (1290)
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of
the things which are the object thereof;
(2) Those agreed upon in representation of
absentees, if the latter suffer the lesion stated in
the preceding number;
(3) Those undertaken in fraud of creditors
when the latter cannot in any other manner collect
the claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the
litigants or of competent judicial authority;
(5) All other contracts specially declared by
law to be subject to rescission. (1291a)
Art. 1317. No one may contract in the name of
another without being authorized by the latter, or
unless he has by law a right to represent him.
A contract entered into in the name of another
by one who has no authority or legal representation, or who has acted beyond his powers, shall be
388
CHAPTER 6
RESCISSIBLE CONTRACTS
unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party. (1259a)
Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292)
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. (1294)
Art. 1384. Rescission shall be only to the extent
necessary to cover the damages caused. (n)
Art. 1385. Rescission creates the obligation to
return the things which were the object of the contract, together with their fruits, and the price with
its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the
things which are the object of the contract are legally in the possession of third persons who did not
act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss. (1295)
Art. 1386. Rescission referred to in Nos. 1 and
2 of Article 1381 shall not take place with respect to
contracts approved by the courts. (1296a)
Art. 1387. All contracts by virtue of which
the debtor alienates property by gratuitous title
are presumed to have been entered into in fraud
of creditors, when the donor did not reserve sufficient property to pay all debts contracted before
the donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been issued. The decision or at-
389
390
OBLIGATIONS AND CONTRACTS
tachment need not refer to the property alienated,
and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design
to defraud creditors may be proved in any other
manner recognized by the law of evidence. (1297a)
§374.00 Different kinds of rescissions
The rescission under Art. 1191 is on account of breach of
stipulations that violate the reciprocity between the parties. The
rescission under Arts. 1380 et seq. is predicated on injury to economic
interests of the party plaintiff, and is limited to cases specified in Art.
1381. It is different from rescission under 1592, which provides:
Art. 1392. In the sale of immovable property,
even though it may have been stipulated that failure to pay the price of the agreed upon he rescission shall of right take place, the vendee may pay
even after the stipulation of the period, as long as
no demand for rescission has been made upon him
either judicially or by a notarial act. After the demand, the court may not grant him a new term.
In the rescission of the sale of realty in installments, the
Maceda Law or RA No. 6552 applies. With respect to the sale of
personal property in installment, Art. 1593 will apply, which law is
so-called Recto Law or Art. 1484 applies.
See discussion on this topic in Art. 1191, supra.
§375.00 Rescission under Art. 1592
Article 1592 on rescission of contract of sale, requiring
rescission by judicial or notarized act in case the vendor wants to
rescind the sale of realty applies only to contract of sale but not to
contract to sell. In a contract of sale, ownership passes to the buyer,
even if there is failure to pay the purchase price. In such case, to
rescind the sale requires judicial or notarial act. In a contract to sell,
ownership is retained by the seller and is not to pass until the full
payment of the purchase price, such payment being a suspensive
condition, and failure to pay the agreed purchase within the agreed
CHAPTER 6
RESCISSIBLE CONTRACTS
391
period is simply an event that prevented the obligation of the vendor
to convey title from acquiring binding form.1
In Menchavez v. Teves, Jr.,2 the Court ruled that only those
specified in Art. 1381 of the Civil Code are rescissible under Art.
1383. These contracts are as follows:
(1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more than onefourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they
have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be
subject to rescission.
If the contract is in the nature of a contract to sell, as distinguished from a contract of sale, the question is whether said contract
may be rescinded under Art. 1191 of the Civil Code. The Court in
Menchavez v. Teves, Jr.,3 ruled in the negative and explained why:
A careful reading of the Kasunduan reveals that it
is in the nature of a contract to sell, as distinguished from
a contract of sale. In a contract of sale, the title to the
property passes to the vendee upon the delivery of the
thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to
the vendee until full payment of the purchase price. In
a contract to sell, the payment of the purchase price is a
positive suspensive condition, the failure of which is not
a breach, casual or serious, but a situation that prevents
the obligation of the vendor to convey title from acquiring
an obligatory force.
Pangilinan v. CA, 279 SCRA 590 [1997].
449 SCRA 380 [2005].
3
Menchavez v. Teves, Jr., 449 SCRA 380 [2005].
1
2
392
OBLIGATIONS AND CONTRACTS
Respondents in this case bound themselves to deliver
a deed of absolute sale and clean title covering Lot No.
1083-C after petitioners have made the second installment.
This promise to sell was subject to the fulfillment of the
suspensive condition that petitioners pay P750,000 on
August 31, 1987, and deposit a postdated check for the
third installment of P1,141,622.50. Petitioners, however,
failed to complete payment of the second installment. The
non-fulfillment of the condition rendered the contract to
sell ineffective and without force and effect. It must be
stressed that the breach contemplated in Article 1191 of
the New Civil Code is the obligor’s failure to comply with
an obligation already extant, not a failure of a condition
to render binding that obligation. Failure to pay, in this
instance, is not even a breach but an event that prevents
the vendor’s obligation to convey title from acquiring
binding force. Hence, the agreement of the parties in the
instant case may be set aside, but not because of a breach
on the part of petitioners for failure to complete payment
of the second installment. Rather, their failure to do so
prevented the obligation of respondents to convey title
from acquiring an obligatory force.
§376.00 Action in fraud of creditors
Art. 1313. Creditors are protected in cases of
contracts intended to defraud them. (n)
Art. 1387. All contracts by virtue of which the
debtor alienates property by gratuitous title are
presumed to have been entered into in fraud of
creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the
donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been issued. The decision or attachment need not refer to the property alienated,
and need not have been obtained by the party seeking the rescission.
CHAPTER 6
RESCISSIBLE CONTRACTS
393
In addition to these presumptions, the design
to defraud creditors may be proved in any other
manner recognized by the law of evidence. (1297a)
Accion pauliana is an action to rescind contracts in fraud of
creditors. For this action to prosper, the following requisites must
be present:
1)
the plaintiff asking for rescission has a credit prior
to the alienation, although demandable later;
2)
the debtor has made a subsequent contract conveying a patrimonial benefit to a third person;
3)
claim;
4)
the creditor has no other legal remedy to satisfy his
the act being impugned is fraudulent;
5)
the third party who received the property conveyed,
if it is by onerous title, has been an accomplice in the fraud.4
Regarding contracts undertaken in fraud of creditors, the existence of the intention to prejudice the same should be determined either by the presumption established by Article 1387, which reads:
Art. 1387. All contracts by virtue of which
the debtor alienates property by gratuitous title
are presumed to have been entered into in fraud
of creditors, when the donor did not reserve sufficient property to pay all debts contracted before
the donation.
Alienations by onerous title are also presumed
fraudulent when made by persons against whom
some judgment has been issued. The decision or attachment need not refer to the property alienated,
and need not have been obtained by the party seeking the rescission.
In addition to these presumptions, the design
to defraud creditors may be proved in any other
manner recognized by the law of evidence. (1297a)
4
Siguan v. Lim, 318 SCRA 725 [1999].
394
OBLIGATIONS AND CONTRACTS
or by the proofs presented in the trial of the case. In any case, the
presumption of fraud established by Article 1387 is not conclusive,
and may be rebutted by satisfactory and convincing evidence.
The independent action is necessary to prove that the contract is
rescissible.5
Art. 1388. Whoever acquires in bad faith the
things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause,
it should be impossible for him to return them.
If there are two or more alienations, the first
acquirer shall be liable first, and so on successively.
(1298a)
Art. 1389. The action to claim rescission must
be commenced within four years.
For persons under guardianship and for absentees, the period of four years shall not begin
until the termination of the former’s incapacity, or
until the domicile of the latter is known. (1299)
§377.00 Rescission of contract requires mutual restitution
Where one party agreed to sell certain items of equipment and
the other agreed to pay the same, and one item was not delivered,
their agreement to mutually rescind the sale extinguished the
contract of sale, and requires of them to each other to restitute what
each received under the contract. Articles 1381 and 1382 of the Civil
Code do not apply as these articles apply to rescissible contracts
therein enumerated, and not to dissolution by mutual consent of the
parties. Mutual restoration is in consonance with the basic principle
that when an obligation has been extinguished or resolved, it is the
duty of the court to require the parties to surrender whatever they
may have received from the other so that they be restored, as far as
practicable, to their original situation, taking into account the use
by the other of the items of equipment.6
5
6
Air France v. CA, 245 SCRA 485 [1995].
Floro Enterprises, Inc. v. CA, 249 SCRA 354 [1995].
CHAPTER 6
RESCISSIBLE CONTRACTS
395
Where a builder in good faith built a house in a conjugal property, thinking that it was conjugal property, his claim of re-emption
and right of retention rendered the conjugal property under litigation, and its sale by the owner without the knowledge of the builder
in good faith or of the court makes the sale rescissible under par. 4
of Art. 1381 of the Civil Code.7
Where the seller of real estate made no judicial demand or
notarial act for rescission of the contract after the buyer fails to pay
the price or installments due within the agreed period, the buyer can
still lawfully make payments even after the stipulated period and
the acceptance by the seller of the price or installments constitutes
waiver of the right to rescind and estops him from exercising the
right to rescind.8
Rescission of a contract will not be permitted for slight or casual
breach, but only such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement.9
§378.00 Subsidiary remedy
Article 1383 provides:
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. (1294)
Union Bank v. Ong10 explains the nature of a subsidiarily
action, which is the action to rescind the contract under Art. 1383.
The Court ruled:
Parenthetically, the rescissory action to set aside
contracts in fraud of creditors is accion pauliana, essentially a subsidiary remedy accorded under Article 1383
of the Civil Code which the party suffering damage can
avail of only when he has no other legal means to obtain
reparation for the same. In net effect, the provision applies only when the creditor cannot recover in any other
manner what is due him.
Santos v. IAC, 186 SCRA 694 [1990].
Heirs of Pedro Escanlar v. CA, 281 SCRA 177 [1997].
9
DBP v. Cam, 344 SCRA 492 [2000].
10
491 SCRA 581, June 21, 2006.
7
8
396
OBLIGATIONS AND CONTRACTS
It is true that respondent spouses, as surety for
BMC, bound themselves to answer for the latter’s debt.
Nonetheless, for purposes of recovering what the eventually insolvent BMC owed the bank, it behooved the petitioner to show that it had exhausted all the properties of
the spouses Ong. It does not appear in this case that the
petitioner sought other properties of the spouses other
than the subject Greenhills property. The CA categorically said so. Absent proof, therefore, that the spouses
Ong had no other property except their Greenhills home,
the sale thereof to respondent Lee cannot simplistically
be considered as one in fraud of creditors.
Neither was evidence adduced to show that the sale
in question peremptorily deprived the petitioner of means
to collect its claim against the Ongs. Where a creditor
fails to show that he has no other legal recourse to obtain
satisfaction for his claim, then he is not entitled to the
rescission asked.
For a contract to be rescinded for being in fraud
of creditors, both contracting parties must be shown to
have acted maliciously so as to prejudice the creditors
who were prevented from collecting their claims. Again,
in this case, there is no evidence tending to prove that
the spouses Ong and Lee were conniving cheats. In fact,
the petitioner did not even attempt to prove the existence
of personal closeness or business and professional interdependence between the spouses Ong and Lee as to cast
doubt on their true intent in executing the contract of
sale. With the view we take of the evidence on record,
their relationship vis-à-vis the subject Greenhills property was no more than one between vendor and vendee
dealing with each other for the first time. Any insinuation
that the two colluded to gyp petitioner bank is to read in
a relationship something which, from all indications, appears to be purely business.
It cannot be overemphasized that rescission is generally unavailing should a third person, acting in good
faith, is in lawful possession of the property, that is to
say, he is protected by law against a suit for rescission by
the registration of the transfer to him in the registry.
CHAPTER 6
RESCISSIBLE CONTRACTS
As recited earlier, Lee was — and may still be — in
lawful possession of the subject property as the transfer
to him was by virtue of a presumptively valid onerous
contract of sale. His possession is evidenced by no less
than a certificate of title issued him by the Registry of
Deeds of San Juan, Metro Manila, after the usual registration of the corresponding conveying deed of sale. On
the other hand, the bona fides of his acquisition can be
deduced from his conduct and outward acts previous to
the sale. As testified to by him and duly noted by the CA,
respondent Lee undertook what amounts to due diligence
on the possible defects in the title of the Ongs before proceeding with the sale. As it were, Lee decided to buy the
property only after being satisfied of the absence of such
defects.
Time and again, the Court has held that one dealing
with a registered parcel of land need not go beyond the
certificate of title as he is charged with notice only of burdens which are noted on the face of the register or on the
certificate of title. The Continuing Surety Agreement, it
ought to be particularly pointed out, was never recorded
nor annotated on the title of spouses Ong. There is no evidence extant in the records to show that Lee had knowledge, prior to the subject sale, of the surety agreement
adverted to. In fine, there is nothing to remotely suggest
that the purchase of the subject property was characterized by anything other than good faith.
Petitioner has made much of respondent Lee not
taking immediate possession of the property after the
sale, stating that such failure is an indication of his participation in the fraudulent scheme to prejudice petitioner
bank.
We are not persuaded.
Lee, it is true, allowed the respondent spouses to
continue occupying the premises even after the sale. This
development, however, is not without basis or practical
reason. The spouses’ continuous possession of the property was by virtue of a one-year lease they executed with
respondent Lee six days after the sale. As explained by
the respondent spouses, they insisted on the lease arrangement as a condition for the sale in question. And
397
398
OBLIGATIONS AND CONTRACTS
pursuant to the lease contract aforementioned, the respondent Ongs paid and Lee collected rentals at the rate
of P25,000.00 a month. Contrary thus to the petitioner’s
asseveration, respondent Lee, after the sale, exercised
acts of dominion over the said property and asserted his
rights as the new owner. So, when the respondent spouses continued to occupy the property after its sale, they
did so as mere tenants. While the failure of the vendee
to take exclusive possession of the property is generally
recognized as a badge of fraud, the same cannot be said
here in the light of the existence of what appears to be
a genuine lessor-lessee relationship between the spouses
Ong and Lee. To borrow from Reyes vs. Court of Appeals,
possession may be exercised in one’s own name or in the
name of another; an owner of a piece of land has possession, either when he himself physically occupies the same
or when another person who recognizes his right as owner
is in such occupancy.
Petitioner’s assertion regarding respondent Lee’s
lack of financial capacity to acquire the property in question since his income in 1990 was only P346,571.73 is
clearly untenable. Assuming for argument that petitioner
got its figure right, it is clearly incorrect to measure one’s
purchasing capacity with one’s income at a given period.
But the more important consideration in this regard is
the uncontroverted fact that respondent Lee paid the purchase price of said property. Where he sourced the needed
cash is, for the nonce, really of no moment.
The cited case of China Banking cannot plausibly
provide petitioner with a winning card. In that case, the
Court, applying Article 1381(3) of the Civil Code, rescinded an Assignment of Rights to Redeem owing to the failure of the assignee to overthrow the presumption that the
said conveyance/assignment is fraudulent. In turn, the
presumption was culled from Article 1387, par. 2, of the
Code pertinently providing that “[A]lienation by onerous
title are also presumed fraudulent when made by persons
against whom some judgment has been rendered in any
instance or some writ of attachment has been issued.”
Indeed, when the deed of assignment was executed in
China Banking, the assignor therein already faced at that
CHAPTER 6
RESCISSIBLE CONTRACTS
time an adverse judgment. In the same case, moreover,
the Court took stock of other signs of fraud which tainted
the transaction therein and which are, significantly, not
obtaining in the instant case. We refer, firstly, to the element of kinship, the assignor, Alfonso Roxas Chua, being the father of the assignee, Paulino. Secondly, Paulino
admitted knowing his father to be insolvent. Hence, the
Court, rationalizing the rescission of the assignment of
rights, made the following remarks:
The mere fact that the conveyance was founded on
valuable consideration does not necessarily negate the
presumption of fraud under Article 1387 of the Civil Code.
There has to be valuable consideration and the transaction must have been made bona fide.
There lies the glaring difference with the instant
case.
Here, the existence of fraud cannot be presumed,
or, at the very least, what were perceived to be badges of
fraud have been proven to be otherwise. And, unlike Alfonso Roxas Chua in China Banking, a judgment has not
been rendered against respondent spouses Ong or that a
writ of attachment has been issued against them at the
time of the disputed sale.
In a last-ditch attempt to resuscitate a feeble cause,
petitioner cites Section 70 of the Insolvency Law which,
unlike the invoked Article 1381 of the Civil Code that
deals with a valid but rescissible contract, treats of a contractual infirmity resulting in nullity no less of the transaction in question. Insofar as pertinent, Section 70 of the
Insolvency Law provides:
Sec. 70. If any debtor, being insolvent, or
in contemplation of insolvency, within thirty
days before the filing of a petition by or against
him, with a view to giving a preference to any
creditor or person having a claim against him
xxx makes any xxx sale or conveyance of any
part of his property, xxx such xxx sale, assignment or conveyance is void, and the assignee,
or the receiver, may recover the property or
the value thereof, as assets of such insolvent
399
400
OBLIGATIONS AND CONTRACTS
debtor. xxx. Any payment, pledge, mortgage,
conveyance, sale, assignment, or transfer of
property of whatever character made by the insolvent within one (1) month before the filing
of a petition in insolvency by or against him,
except for a valuable pecuniary consideration
made in good faith shall be void. xxx. (Emphasis added)
Petitioner avers that the Ong-Lee sales contract partakes of a fraudulent transfer and is null and void in contemplation of the afore-quoted provision, the sale having
occurred on October 22, 1991 or within thirty (30) days
before BMC filed a petition for suspension of payments on
November 22, 1991.
Petitioner’s reliance on the afore-quoted provision is
misplaced for the following reasons:
First, Section 70, supra, of the Insolvency Law specifically makes reference to conveyance of properties
made by a “debtor” or by an “insolvent” who filed a petition, or against whom a petition for insolvency has been
filed. Respondent spouses Ong have doubtlessly not filed
a petition for a declaration of their own insolvency. Neither has one been filed against them. And as the CA aptly
observed, it was never proven that respondent spouses
are likewise insolvent, petitioner having failed to show
that they were down to their Greenhills property as their
only asset.
It may be that BMC had filed a petition for rehabilitation and suspension of payments with the SEC. The
nagging fact, however is that BMC is a different juridical person from the respondent spouses. Their seventy
percent (70%) ownership of BMC’s capital stock does not
change the legal situation. Accordingly, the alleged insolvency of BMC cannot, as petitioner postulates, extend to
the respondent spouses such that transaction of the latter
comes within the purview of Section 70 of the Insolvency
Law.
Second, the real debtor of petitioner bank in this
case is BMC. The fact that the respondent spouses bound
themselves to answer for BMC’s indebtedness under the
CHAPTER 6
RESCISSIBLE CONTRACTS
401
surety agreement referred to at the outset is not reason
enough to conclude that the spouses are themselves debtors of petitioner bank. We have already passed upon the
simple reason for this proposition. We refer to the basic
precept in this jurisdiction that a corporation, upon coming into existence, is invested by law with a personality
separate and distinct from those of the persons composing
it. Mere ownership by a single or small group of stockholders of nearly all of the capital stock of the corporation
is not, without more, sufficient to disregard the fiction of
separate corporate personality.
Third, Section 70 of the Insolvency Law considers
transfers made within a month after the date of cleavage void, except those made in good faith and for valuable
pecuniary consideration. The twin elements of good faith
and valuable and sufficient consideration have been duly
established. Given the validity and the basic legitimacy of
the sale in question, there is simply no occasion to apply
Section 70 of the Insolvency Law to nullify the transaction subject of the instant case.
§379.00 Subsidiary character of action under Art. 1383
The subsidiary character of the action for rescission applies
to contracts enumerated in Articles 1383 of the Civil Code. Where
rescission does not involve contracts in Art. 1383, the provision that
applies is Art. 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal
Food Corp. v. Court of Appeals,11 on rescission, Justice J.B.L. Reyes
distinguished rescission under Article 1191 and that under Article
1381. Justice J.B.L. Reyes said:
The rescission on account of breach of stipulations
is not predicated on injury to economic interests of the
party plaintiff but on the breach of faith by the defendant,
that violates the reciprocity between the parties. It is not
a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
11
22 SCRA 1, pp. 23-24.
402
OBLIGATIONS AND CONTRACTS
culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character,
it being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the
old Latin aphorism: “Non servanti fidem, non est fides servanda.” Hence, the reparation of damages for the breach
is purely secondary.
On the contrary, in the rescission by reason of lesion
or economic prejudice, the cause of action is subordinated
to the existence of that prejudice, because it is the raison d
être as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the
action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation
of these two articles is limited to the cases of rescission
for lesion enumerated in Article 1381 of the Civil Code of
the Philippines, and does not apply to cases under Article
1191.
From the foregoing, it is clear that rescission (“resolution” in the Old Civil Code) under Article 1191 is a
principal action, while rescission under Article 1383 is a
subsidiary action. The former is based on breach by the
other party that violates the reciprocity between the parties, while the latter is not.
In the case at bar, the reciprocity between the parties was violated when petitioners failed to fully pay the
balance of P45,000.00 to respondents-spouses and their
failure to update their amortizations with the NHMFC.
Petitioners maintain that inasmuch as respondentsspouses Galang were not granted the right to unilaterally
rescind the sale under the Deed of Sale with Assumption
of Mortgage, they should have first asked the court for
the rescission thereof before they fully paid the outstanding balance of the mortgage loan with the NHMFC. They
claim that such payment is a unilateral act of rescission
which violates existing jurisprudence.
In Tan v. Court of Appeals, this court said:
[T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply
with what is incumbent upon him is clear from a reading
CHAPTER 6
RESCISSIBLE CONTRACTS
of the Civil Code provisions. However, it is equally settled
that, in the absence of a stipulation to the contrary, this
power must be invoked judicially; it cannot be exercised
solely on a party’s own judgment that the other has committed a breach of the obligation. Where there is nothing in the contract empowering the petitioner to rescind
it without resort to the courts, the petitioner’s action in
unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration
does not contain a provision authorizing its extrajudicial
rescission in case one of the parties fails to comply with
what is incumbent upon him. This being the case, respondents-spouses should have asked for judicial intervention
to obtain a judicial declaration of rescission. Be that as it
may, and considering that respondents-spouses’ Answer
(with affirmative defenses) with Counterclaim seeks for
the rescission of the Deed of Sale with Assumption of
Mortgage, it behooves the court to settle the matter once
and for all than to have the case re-litigated again on an
issue already heard on the merits and which this court has
already taken cognizance of. Having found that petitioners seriously breached the contract, we, therefore, declare
the same is rescinded in favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with Assumption of
Mortgage, it is the duty of the court to require the parties to surrender whatever they may have received from
the other. The parties should be restored to their original
situation.
The record shows petitioners paid respondentsspouses the amount of P75,000.00 out of the P120,000.00
agreed upon. They also made payments to NHMFC
amounting to P55,312.47. As to the petitioners’ alleged
payment to CERF Realty of P46,616.70, except for petitioner Leticia Cannu’s bare allegation, we find the same
not to be supported by competent evidence. As a general
rule, one who pleads payment has the burden of proving
it. However, since it has been admitted in respondentsspouses’ Answer that petitioners shall assume the second
mortgage with CERF Realty in the amount of P35,000.00,
403
404
OBLIGATIONS AND CONTRACTS
and that Adelina Timbang, respondents-spouses’ very
own witness, testified that same has been paid, it is but
proper to return this amount to petitioners. The three
amounts total P165,312.47 — the sum to be returned to
petitioners.
§380.00 Contract in fraud of creditor
The existence of fraud or intent to defraud creditors may either
be presumed in accordance with Art. 1387of the Civil Code or duly
proved in accordance with the ordinary rules of evidence.
The law presumes that there is fraud of creditors when:
(a) there is alienation of property by gratuitous title by the debtor who has not reserved sufficient property
to pay his debts contracted before such alienation, or
(b) There is alienation of property onerous title
made by a debtor against whom some judgment has been
rendered in any instance or some writ of attachment has
been issued. The decision or attachment need not refer to
the property alienated and need not have been obtained
by the party seeking rescission.12
In determining whether the conveyance is in fraud of creditor,
it is not sufficient that it is founded on good consideration or is made
with bona fide intent. Both elements must be present. The test is:
Does it prejudice the rights of creditors?13
A sale or transfer may be fraudulent if it shows any of the
following badges of fraud: (1) the fact that the consideration is
fictitious or inadequate; (2) the transfer is made during the pendency
of a suit; (3) the sale is upon credit of an insolvent; (4) evidence
of large indebtedness or complete insolvency; (5) transfer of all or
nearly all of his property, especially when he is insolvent or greatly
embarrassed financially; (6) the fact that transfer is between father
and son; and (7) failure of vendee to take exclusive possession of all
the property.14
China Banking Corp. v. CA, 327 SCRA 378, 386-387 [2000].
China Banking Corp. v. CA, Ibid.
14
Oria v. McMicking, 21 Phil. 243 [1912]; China Banking Corp. v. CA, 327
SCRA 378 [2000].
12
13
405
CHAPTER 7
VOIDABLE CONTRACT
§381.00 What are voidable or annullable contracts
Art. 1390. The following contracts are voidable
or annullable, even though there may have been no
damage to the contracting1 parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by
mistake, violence, intimidation, undue influence or
fraud.
These contracts are binding, unless they are
annulled by a proper action in court. They are susceptible of ratification. (n)
Art. 1391. The action for annulment shall be
brought within four years.
This period shall begin:
In cases of intimidation, violence or undue
influence, from the time the defect of the consent
ceases.
In case of mistake or fraud, from the time of
the discovery of the same.
And when the action refers to contracts entered into by minors or other incapacitated persons,
from the time the guardianship ceases. (1301a)
1
Menchavez v. Teves, Jr., G.R. No. 153201, Jan. 26, 2005, 449 SCRA 380
[2005].
405
406
OBLIGATIONS AND CONTRACTS
Art. 1392. Ratification extinguishes the action
to annul a voidable contract. (1309a)
Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ratification if, with knowledge of the reason which
renders the contract voidable and such reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an
intention to waive his right. (1311a)
Art. 1394. Ratification may be effected by the
guardian of the incapacitated person. (n)
Art. 1395. Ratification does not require the conformity of the contracting party who has no right
to bring the action for annulment. (1312)
Art. 1396. Ratification cleanses the contract
from all its defects from the moment it was constituted. (1313)
Art. 1397. The action for the annulment of
contracts may be instituted by all who are thereby
obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can
those who exerted intimidation, violence, or undue
influence, or employed fraud, or caused mistake
base their action upon these flaws of the contract.
(1302a)
Art. 1398. An obligation having been annulled,
the contracting parties shall restore to each other
the things which have been the subject matter of
the contract, with their fruits, and the price with
its interest, except in cases provided by law.
In obligations to render service, the value
thereof shall be the basis for damages. (1303a)
Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by
the thing or price received by him. (1304)
CHAPTER 7
VOIDABLE CONTRACT
407
Art. 1400. Whenever the person obliged by the
decree of annulment to return the thing can not
do so because it has been lost through his fault, he
shall return the fruits received and the value of the
thing at the time of the loss, with interest from the
same date. (1307a)
Art. 1401. The action for annulment of contracts shall be extinguished when the thing which
is the object thereof is lost through the fraud or
fault of the person who has a right to institute the
proceedings.
If the right of action is based upon the incapacity of any one of the contracting parties, the loss of
the thing shall not be an obstacle to the success of
the action, unless said loss took place through the
fraud or fault of the plaintiff. (1314a)
Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree
of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent
upon him. (1308)
§382.00 Voidable contracts
Contracts that are voidable or annullable even though there
may have been no damage to the contracting parties are (1) those
where one of the parties is incapable of giving consent to a contract,
and (2) those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.2
Article 1592 of the Civil Code neither contemplates a conditional
sale nor a contract to sell but an absolute sale.3
See discussion on consent being vitiated by defects, on subject,
Essential Requisites of Contract, supra.
§383.00 Effect of annulment of contract
The effect of annulment is to restore the parties to the status
quo ante insofar as legally and equitably possible, as provided in Art.
2
3
Fule v. CA, 286 SCRA 698 [1998].
Odyssey Park, Inc. v. CA, 280 SCRA 253 [1997].
408
OBLIGATIONS AND CONTRACTS
1398 of the Civil Code. As an exception to the principle of mutual
restitution, Art. 1399 provides that when the defect of the contract
consists in the incapacity of one of the parties, the incapacitated
person is not obliged to make any restitution, except when he has
been benefited by the things or price received by him.4
The foregoing rule should be read in relation to Art. 1415,
which reads:
Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the
interest of justice so demands allow recovery of money or
property delivered by the incapacitated person.
The effects of annulment of sale operate prospectively and do
not, as a rule, retroact to the time the sale was made.5
§384.00 Where consent is vitiated
Under the law, vitiated consent does not make a contract
unenforceable but merely voidable. If a party’s consent is vitiated,
his remedy would be to annul the contract for voidable contracts
produce legal effects until they are annulled.6
To invalidate a contract by reason of mistake, the mistake
must refer to the substance of the thing that is the object of the
contract, or to those conditions which have principally moved one
or both parties to enter into the contract. An example of mistake
as to the object of the contract is the substitution of a specific thing
contemplated by the parties with another. However, mistake caused
by manifest negligence cannot invalidate a juridical act. As the Civil
Code provides, “there is no mistake if the party alleging it knew the
doubt, contingency or risk affecting the object of the contract.’’7
See discussion on incapability of giving consent and on consent
being vitiated by mistake, violence, intimidation, undue influence or
fraud, under Chapter on essential requisites of contract, supra.
Kapunan v. Kapunan, Jr., 375 SCRA 199 [2002].
Lim Tay v. CA, 293 SCRA 634 [1998].
6
De Jesus v. IAC, 175 SCRA 559, 568 [1989].
7
Fule v. CA, 286 SCRA 698 [1998].
4
5
409
CHAPTER 8
UNENFORCEABLE CONTRACTS
§385.00 What are unenforceable contracts
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another
person by one who has been given no authority or
legal representation, or who has acted beyond his
powers;
(2) Those that do not comply with the Statute
of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum, thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not
to be performed within a year from the making thereof;
(b) A special promise to answer for the
debt, default, or miscarriage of another;
(c) An agreement made in consideration
of marriage, other than a mutual promise to
marry;
(d) An agreement for the sale of goods,
chattels or things in action, at a price not less
than five hundred pesos, unless the buyer accept and receive part of such goods and chat409
410
OBLIGATIONS AND CONTRACTS
tels, or the evidences, or some of them, of such
things in action or pay at the time some part of
the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of
the amount and kind of property sold, terms of
sale, price, names of the purchasers and person on whose account the sale is made, it is a
sufficient memorandum;
(e) An agreement of the leasing for a longer period than one year, or for the sale of real
property or of an interest therein;
(f) A representation as to the credit of a
third person.
(3) Those where both parties are incapable of
giving consent to a contract.
Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency
in Title X of this Book.
Art. 1405. Contracts infringing the Statute of
Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benefit under them.
Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document
is necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the right
under Article 1357.
Art. 1407. In a contract where both parties are
incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case
may be, of one of the contracting parties shall give
the contract the same effect as if only one of them
were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception.
CHAPTER 8
UNENFORCEABLE CONTRACTS
411
Art. 1408. Unenforceable contracts cannot be
assailed by third persons.
The provisions of Art. 1407 should be read in relation to Art.
1327 of the Civil Code and of the pertinent provisions of the Family
Code on guardianship of unemancipated minors.
Art. 1327. The following cannot give consent to
a contract:
(1)
Unemancipated minors;
(2) Insane or demented persons, and deafmutes who do not know how to write. (1263a)
Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state
of drunkenness or during a hypnotic spell are voidable. (n)
Art. 1329. The incapacity declared in Article
1327 is subject to the modifications determined by
law, and is understood to be without prejudice to
special disqualifications established in the laws.
(1264)
The following provisions of the Family Code
on guardianship of unemancipated minors are pertinent:
Art. 225. The father or, in his absence or incapacity, the mother, shall be the legal guardian of
the property of the unemancipated child without
the necessity of a court appointment.
Where the value of the property or the annual income of the child exceeds P50,000, the parent
concerned shall be required to furnish a bond in
such amount as the court may determine, but not
less than ten per centum (10%) of the value of the
property or annual income to guarantee the performance of the obligations prescribed for general
guardians.
A verified petition for approval of the bond
shall be filed in the proper court of the place where
the child resides, or if the child resides in a foreign
412
OBLIGATIONS AND CONTRACTS
country, in the proper court of the place where the
property or any part thereof is situated.
The petition shall be docketed as a summary
special proceeding in which all incidents and issues regarding the performance of the obligations
referred to in the second paragraph of this Article
shall be heard and resolved. All such incidents and
issues shall be decided in an expeditious and inexpensive manner without regard to technical rules.
The ordinary rules on guardianship shall be
merely suppletory except when the child is under
substitute parental authority, or the guardian is a
stranger, or a parent has remarried, in which case
the ordinary rules on guardianship shall apply.
Art. 226. The property of an unemancipated
child earned or acquired with his work industry or
by onerous or gratuitous title shall belong to the
child in ownership and shall be devoted exclusively to the latter’s support and education, unless the
title or transfer provides otherwise.
The right of the parents over the fruits and
income of the child’s property shall be limited primarily to the child’s support and secondarily to the
collective daily needs of the family.
Art. 227. If the parents entrust the management or administration of any of their properties to
an unemancipated child, the net proceeds of such
property shall belong to the owner. The child shall
be given a reasonable monthly allowance in an
amount not less than that which the owner would
have paid if the administrator were a stranger, unless the owner, grants the entire proceeds to the
child. In any case, the proceeds thus given in whole
or in part shall not be charged to the child’s legitime.
Pursuant to Section 225 of the Family Code, regardless of the
value of the unemancipated common child’s property, the father or,
in his absence or incapacity, the mother ipso jure becomes the legal
guardian of the child’s property. However, if the market value of
CHAPTER 8
UNENFORCEABLE CONTRACTS
413
the property or the annual income of the child exceeds P50,000.00,
a bond has to be posted by the parents concerned to guarantee the
performance of the obligations of a general guardian.1
The power or authority of the parents as legal guardians extends
only to the power of possession and management. The power to sell,
mortgage, encumber or otherwise dispose the property of the minor
child must proceed from the court, which requires court authority
and approval,2 regardless of the value of the child’s property.3
The foregoing provisions do not preclude the court from
appointing a guardian of the child’s property when the best interests of the child so require. Thus, Article 222 of the Family Code
provides —
Art. 222. The courts may appoint a guardian of
the child’s property, or a guardian ad litem when
the best interests of the child so require.
§386.00 Contract by agent on behalf of principal
Art. 1404. Unauthorized contracts are governed
by Article 1317 and the principles of agency in Title
X of this Book.
Article 1317 provides:
Art. 1317. No one may contract in the name of
another without being authorized by the latter, or
unless he has by law a right to represent him.
A contract entered into in the name of another
by one who has no authority or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been
executed, before it is revoked by the other contracting party. (1259a)
By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another,
Pineda v. CA, 226 SCRA 754 [1993].
Lindain v. CA, 212 SCRA 725 [1992].
3
Nario v. Phil. American Life Ins. Co., 20 SCRA 434 [1967].
1
2
414
OBLIGATIONS AND CONTRACTS
with the consent or authority of the latter. Contracts entered into in
the name of another person by one who has been given no authority
or legal representation or who has acted beyond his powers are
classified as unauthorized contracts and are declared unenforceable,
unless they are ratified.4
§387.00 Statute of frauds, generally
Art. 1403. The following contracts are unenforceable, unless they are ratified:
xxx
(b) Those that do not comply with the Statute
of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same or some
note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, thereof, therefore, of the agreement cannot be received without the writing, or a secondary
evidence of its contents:
(a) An agreement that by its terms is not to be
performed within a year from the making thereof;
(b) A special promise to answer for the debt,
default, or miscarriage of another;
(c) An agreement made in consideration of
marriage, other than a mutual promise to marry;
(d) An agreement for the sale of goods, chattels or things in action, at a price not less than five
hundred pesos, unless the buyer accept and receive
part of such goods and chattels, or the evidence, or
some of them, of such things in action, or pay at the
time some part of the purchase money; but when a
sale is made by auction and entry is made by the
auctioneer in his sales book, at the time of the sale,
of the amount and kind of property sold, terms of
sale, price, names of the purchasers and person on
4
Gozun v. Mercado, G.R. No. 167812, Dec. 19, 2006.
CHAPTER 8
UNENFORCEABLE CONTRACTS
415
whose account the sale is made, it is a sufficient
memorandum;
(e) An agreement for the leasing for a longer
period than one year, or for the sale of real property or of an interest therein;
(f) A representation as to the credit of a third
person.
The term “Statute of Frauds” is descriptive of statutes which
require certain classes of contracts to be in writing. The Statute
of Fraud does not deprive the parties of the right to contract with
respect the matters involved, but merely regulates the formalities of
the contract necessary to render it enforceable.5
The application of the Statute of Fraud presupposes the existence of a perfected contract and requires only that a note or memorandum be executed in order to compel judicial enforcement thereof.
Hence, where there is no perfected contract, the Statute of Frauds
does not apply.6
§388.00 Statute of Fraud applies only to specific transactions
The Statute of Frauds refers to specific kinds of transactions
and cannot apply to any other transaction that is not enumerated
therein. Thus, it has been held that the Statute of Frauds does
not apply to the setting up of boundaries, the oral partition of real
property and the agreement creating a right of way, these not
being enumerated in the Statute of Frauds. Similarly, a right of
first refusal is not covered by the Statute of Frauds, as it is not a
perfected contract of sale of real property; it is at best a contractual
grant, not of the sale of property, but of the right of first refusal over
the property sought to be sold.7
§389.00 Purpose of Statute of Frauds
The purpose of the Statute of Frauds is to prevent fraud
and perjury in the enforcement of obligations depending for their
evidence on unassisted memory of witnesses by requiring certain
Rosencor Dev. Corp. v. Inquing, 354 SCRA 119 [2001].
Villanueva v. CA, 267 SCRA 89 [1997].
7
Rosencor Dev. Corp. v. Inquing, Ibid.
5
6
416
OBLIGATIONS AND CONTRACTS
enumerated contracts and transactions to be evidenced by a writing
signed by the party to be charged. It was not designed to further or
perpetuate fraud. Accordingly, its application is limited. It makes
only ineffective actions for specific performance of the contracts
covered by it. Partial execution or part performance of the contract is
enough to bar the application of the rule. It applies only to executory
contracts and in actions for their specific performance. It does not
apply to actions which are neither for violation of a contract nor for
the performance thereof.8
§390.00 Statute of Frauds applies only to executory contract
The Statute of Frauds is applicable only to executory contract,
not to contracts that are totally or partially performed. The reason
is implied. In executory contracts, unless they be in writing, there
is no palpable evidence of the intention of the contracting parties.
The statute has precisely been enacted to prevent fraud. However,
if the contract has been totally or partially performed, the exclusion
of parol evidence would promote fraud or bad faith, for it would
enable the defendant to keep the benefits already derived from the
transaction in litigation, and, at the same time, evade the obligations,
responsibilities or liabilities assumed or contracted by him thereby.9
The partial performance may be established by parol evidence and
need not necessarily be established by documentary proof.10 Once a
party has shown total or partial performance by him of his obligation,
he is permitted to prove the agreement by testimonial evidence, and
to require the other contracting party performance his part of the
contractual obligation.11
The Statute of Frauds applies only to executory contracts and
not to those which are totally or partially performed. Performance,
which must be proved, takes the contract out of the operation of the
principle.12
8
9
Asia Production Co., Inc. v. Pano, 205 SCRA 458 [1992].
Carbonel v. Poncio, 103 Phil. 655 [1958]; Ortega v. Leonardo, 103 Phil. 870
[1958].
Carbonnel v. Poncio, 103 Phil. 655 [1958].
Cordial v. Miranda, 348 SCRA 158 [2000].
12
Victoriano v. CA, 194 SCRA 19 [1991].
10
11
CHAPTER 8
UNENFORCEABLE CONTRACTS
417
§391.00 Ratification or wavier of Statute of Fraud
Art. 1405. Contracts infringing the Statute of
Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benefit under them.
In Torcuador v. Bernabe,13 the Court ruled that while the requirements of the Statute of Frauds have not been met, the acceptance of the agreement and the failure to object to the testimony on
the matter constituted a waiver of the statute as a defense. Thus:
Conformably with Article 1405 of the Civil Code,
however, respondents’ acceptance of the agreement foisted by petitioners on them is deemed to have arisen from
their failure to object to the testimony of petitioner Mario
Torcuator on the matters.
The cross-examination on the contract is deemed a waiver
of the defense of the Statute of Frauds.14 Similarly, the Statute of
Frauds is deemed waived by the failure to object to the presentation
of oral evidence to prove the contract.15
§392.00 Note or memorandum required to prove oral contract
The note or memorandum required to prove or determine the
existence of oral contract under the Statute of Frauds is any document
or writing, formal or informal, contained in a single document or in
two or more papers, which taken together will meet the requirements
of the Statute of Frauds as to signature.16 The contents of the note
or memorandum, whether in one writing or in separate ones, are
merely indicative for an adequate understanding of all the essential
elements of the entire agreement, and the agreement may be said to
be the contract itself, except as to the form.17
Where the note or memorandum does not show the elements of
a contract, the note or memorandum does not meet the requirements
459 SCRA 439 [2005].
Limketkai Sons Milling, Inc. v. CA, 255 SCRA 626 [1996].
15
Phil. Commercial International Bank v. CA, 252 SCRA 259 [1996].
16
Ber v. Magdalena Estate, Inc., 92 Phil. 110 [1952].
17
Yuvienco v. Dacuycuy, 104 SCRA 668 [1981].
13
14
418
OBLIGATIONS AND CONTRACTS
of said note or memorandum, and no oral testimony may be presented
to prove the contract, except when the Statute of Frauds is waived.
In Torcuator v. Bernabe,18 the Court explained what is meant by
note or memorandum, as evidence of the oral contract:
This brings us to the application of the Statute of
Frauds. x x x
In the instant case, petitioners present as written
evidence of the agreement the special power of attorney
executed in their favor by the Salvadors and the summary of agreement allegedly initialed by respondent Remigio Bernabe. These documents do not suffice as notes or
memoranda as contemplated by Article 1403 of the Civil
Code.
The special power of attorney does not contain the
essential elements of the purported contract and, more
tellingly, does not even refer to any agreement for the
sale of the property. In any case, it was rendered virtually
inoperable as a consequence of the Salvadors’ adamant
refusal to part with their title to the property.
The summary of agreement, on the other hand, is
fatally deficient in the fundamentals and ambiguous in
the rest of its terms. For one, it does not mention when
the alleged consideration should be paid and transfer of
ownership effected. The document does not even refer to a
particular property as the object thereof. For another, it is
unclear whether the supposed purchase price is P600.00,
P590.00 or P570.00/square meter. The other conditions,
such as payment of documentary stamp taxes, capital
gains tax and other registration expenses, are likewise
uncertain.
Conformably with Article 1405 of the Civil Code,
however, respondents’ acceptance of the agreement foisted by petitioners on them is deemed to have arisen from
their failure to object to the testimony of petitioner Mario
Torcuator on the matter and their cross-examination of
said petitioner thereon.
18
G.R. No. 134219, June 8, 2005.
CHAPTER 8
UNENFORCEABLE CONTRACTS
419
A contract of sale of realty cannot be proven by means of witnesses, but must necessarily be evidenced by a written instrument
duly subscribed by the party charged, or by his agent, or by secondary evidence of its contents where applicable. No other evidence can
be received except said documentary evidence, except when there
has been a waiver of the Statute of Fraud.19
19
Alba Vda. de Raz v. CA, 314 SCRA 36 [1999].
420
OBLIGATIONS AND CONTRACTS
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
§393.00 What are Void and Inexistent Contracts
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs, public order
or public policy;
(2) Those which are absolutely simulated or
fictitious;
(3) Those whose cause or object did not exist
at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible
service;
(6) Those where the intention of the parties
relative to the principal object of the contract cannot be ascertained;
(7) Those expressly prohibited or declared
void by law.
These contracts cannot be ratified. Neither
can the right to set up the defense of illegality be
waived.
Art. 1410. The action or defense for the
declaration of the inexistence of a contract does
not prescribe.
Art. 1411. When the nullity proceeds from the
illegality of the cause or object of the contract, and
420
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action
against each other, and both shall be prosecuted.
Moreover, the provisions of the Penal Code relative
to the disposal of effects or instruments of a crime
shall be applicable to the things or the price of the
contract.
This rule shall be applicable when only one
of the parties is guilty; but the innocent one may
claim what he has given, and shall not be bound to
comply with his promise. (1305)
Art. 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other’s undertaking;
(2) When only one of the contracting parties
is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is not
at fault, may demand the return of what he has given without any obligation to comply his promise.
(1306)
Art. 1413. Interest paid in excess of the interest
allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of the
payment.
Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose
has been accomplished, or before any damage has
been caused to a third person. In such case, the
courts may, if the public interest will thus be subserved, allow the party repudiating the contract to
recover the money or property.
Art. 1415. Where one of the parties to an illegal
contract is incapable of giving consent, the courts
may, if the interest of justice so demands allow re-
421
422
OBLIGATIONS AND CONTRACTS
covery of money or property delivered by the incapacitated person.
Art. 1416. When the agreement is not illegal
per se but is merely prohibited, and the prohibition by the law is designated for the protection of
the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
Art. 1417. When the price of any article or commodity is determined by statute, or by authority of
law, any person paying any amount in excess of the
maximum price allowed may recover such excess.
Art. 1418. When the law fixes, or authorizes the
fixing of the maximum number of hours of labor,
and a contract is entered into whereby a laborer
undertakes to work longer than the maximum thus
fixed, he may demand additional compensation for
service rendered beyond the time limit.
Art. 1419. When the law sets, or authorizes the
setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a
lower wage, he shall be entitled to recover the deficiency.
Art. 1420. In case of a divisible contract, if the
illegal terms can be separated from the legal ones,
the latter may be enforced.
Art. 1421. The defense of illegality of contract
is not available to third persons whose interests
are not directly affected.
Art. 1422. A contract which is the direct result
of a previous illegal contract, is also void and inexistent.
§394.00 Void contract
A void or inexistent contract is one which has no force and
effect from the beginning, as if it had never been entered into, and
which cannot be validated either by time or by ratification.1
1
Palmera v. 235 SCRA 87, 93 [1994].
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
423
A void or inexistent contract produces no effect whatsoever
either against or in favor of anyone; hence, it does not create, modify
or extinguish the juridical relation to which it refers. The action or
defense for its declaration as a nullity does not prescribe.2
§395.00 Contract illegal per se
A contract or act illegal per se is one that by universally recognized standards is inherently or by its very nature bad, improper,
immoral or contrary to good conscience.3
Parties who voluntarily entered into a contract which is void for
being prohibited by law may no longer recall, withdraw or otherwise
render ineffective what they have already done in the performance
of their part in the illegal contract.4
§396.00 Declaration of nullity of contract; prescription
An action for declaration of nullity of contract is imprescriptible.
An action for reconveyance on the ground that the certificate of title
was obtained by means of a fictitious deed of sale is virtually an
action for declaration of its nullity.5
Where a contract is null and void, the action to recover its subject matter does not prescribe because mere lapse of time cannot
give efficacy to inexistent or void contracts.6
§397.00 Restoration of what has been given in case contract is
voided
If a void contract has been performed, the restoration of what
has been given is in order. The relationship between the parties in any
contract even if subsequently voided must always be characterized
and punctuated by good faith and fair dealing. Hence, for the sake
of justice and equity, and in consonance with the salutary principle
of non-enrichment at another’s expenses, the seller must refund to
the buyer the price paid therefor.7
Tongoy v. CA, 23 SCRA 99 [1983].
Giang v. Kintanar, 106 SCRA 49 [1981].
4
Castellvi v. Castellvi, 77 SCRA 88 [1977].
5
Santos v. Santos, 366 SCRA 395 [2001].
6
PNB v. CA, 98 SCRA 207 [1980].
7
Delos Reyes v. CA, 313 SCRA 632 [1999].
2
3
424
OBLIGATIONS AND CONTRACTS
§398.00 Pari delicto
Pari delicto means in equal fault; in a similar offense or crime;
equal in guilt or in fault.8
The rule that where both parties are at fault there should be
no action by one against the other applies only when the fault on
both side is, more or less, equivalent. The principle of pari delicto
does not apply where one is less guilty than the other or where his
transgression has been due to undue influence of the other or one
party is literate or intelligent and the other is not.9
The rule that parties to an illegal contract, if equally guilty,
will not be aided by the law but will be both left where it finds them,
bars the party from pleading the illegality of the bargain either as a
cause of action or as a defense. Meno auditor proprian turpitudiner
allegans.10
§399.00 Pari delicto grounded on two principles
In Acabal v. Acabal,11 the Court ruled that pari delicto is
grounded on two premises:
The principle of pari delicto is grounded on two
premises: first, that courts should not lend their good offices
to mediating disputes among wrongdoers; and second,
that denying judicial relief to an admitted wrongdoer is
an effective means of deterring illegality. This doctrine
of ancient vintage is not a principle of justice but one of
policy as articulated in 1775 by Lord Mansfield in Holman
v. Johnson:
The objection, that a contract is immoral or illegal
as between the plaintiff and defendant, sounds at all
times very ill in the mouth of the defendant. It is not
for his sake, however, that the objection is ever allowed;
but it is founded in general principles of policy, which
the defendant has the advantage of, contrary to the real
justice, as between him and the plaintiff, by accident if I
may so say. The principle of public policy is this; ex dolo
Gashem Shookat Baksh v. CA, 219 SCRA 115 [1993].
Gashem Shookat Baksh v. CA, Ibid.
10
Liguez v. CA, 102 Phil. 577 [1957].
11
454 SCRA 555 [2005].
8
9
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
425
malo non oritur actio. No court will lend its aid to a man
who founds his cause of action upon an immoral or an
illegal act. If, from the plaintiff’s own stating or otherwise,
the cause of action appears to arise ex turpi causa, or the
transgression of a positive law of this country, there the
court says he has no right to be assisted. It is upon that
ground the court goes; not for the sake of the defendant,
but because they will not lend their aid to such a plaintiff.
So if the plaintiff and the defendant were to change sides,
and the defendant was to bring his action against the
plaintiff, the latter would then have the advantage of
it; for where both are equally in fault potior est conditio
defendentis.
Thus, to serve as both a sanction and as a deterrent,
the law will not aid either party to an illegal agreement
and will leave them where it finds them.
§400.00 Pari delicto, when not applicable
The principle of pari delicto does not apply to criminal prosecutions, but only to contracts with illegal consideration.12
The doctrine applies only in a civil action and not in a criminal
case as to which, if the act constitutes a criminal offense, both parties
shall be prosecuted.13
The principle is not applicable to simulated or fictitious contracts nor to those that are inexistent for lack of an essential requisite, even where the purpose of the contract is illegal.14
Courts may intervene and grant relief in favor of a party,
although the parties are in pari delicto when public policy requires
it.15
§401.00 Exceptions to pari delicto
The principle of pari delicto, however, is not absolute, admitting
an exception under Article 1416 of the Civil Code.
Arroyo v. CA, 203 SCRA 750 [1991].
Ubarra v. Mapalad, 220 SCRA 224 [1993].
14
Vasquez v. Porta, 98 Phil. 490 [1956].
15
San Diego v. Municipality of Naujan, 107 Phil. 118 [1960]; Torres v. Ventura,
187 SCRA 96 [1990].
12
13
426
OBLIGATIONS AND CONTRACTS
ART. 1416. When the agreement is not illegal
per se but is merely prohibited, and the prohibition by the law is designed for the protection of
the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.
Under this article, recovery for what has been paid or delivered
pursuant to an inexistent contract is allowed only when the following requisites are met: (1) the contract is not illegal per se but merely
prohibited; (2) the prohibition is for the protection of the plaintiffs;
and (3) if public policy is enhanced thereby. Thus, in the sale of agricultural land in violation of the Land Reform Law, The exception
is unavailing in the instant case, however, recovery may not be allowed because the prohibition is not for the protection of the plaintiff-landowner but for the beneficiary farmers.16
One exception to the application of the rule on pari delicto is
where public policy requires the courts’ intervention, even though
the result may be that a benefit will be derived by a plaintiff who is
in equal guilt with the defendant.17
The rule of in pari delicto to the effect that the parties will be
left where they are without relief is subject to an exception, which is
when the agreement is not illegal per se but is merely prohibited, and
the prohibition by law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover what he had
paid or delivered.18
It has been held that Art. 1414 is also an exception to the pari
delicto doctrine.19 This article reads:
Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be
repudiated by one of the parties before the purpose
has been accomplished, or before any damage has
been caused to a third person. In such case, the
courts may, if the public interest will thus be subserved, allow the party repudiating the contract to
recover the money or property.
Acabal v. Acabal, 454 SCRA 555 [2005].
Enrique T. Yuchengco, Inc. v. Velayo, 115 SCRA 307 [1982].
18
Phil. Banking Corp. v. Lui She, 21 SCRA 52 [1967].
19
De Leon v. CA, 186 SCRA 345, 358 [1990].
16
17
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
427
For instance, the Constitution prohibits the sale or transfer of
private lands by the citizen-vendor to alien-vendee, Where such sale
is entered into and implemented, the courts will, as a general rule,
leave the parties where they are, the alien retaining the land and the
seller retaining the price. However, pursuant to Art. 1416, the court
will, in an appropriate action, require that the land be returned to
the vendor-citizen, and the latter required to return the purchase
price to the vendee.20 If in the meanwhile, the alien buyer sells the
land to a citizen, or becomes a naturalized citizen, the constitutional
prohibition no longer applies.21
Where a government contract in which the requirements of the
law were violated or not complied with, the contractor may recover
the value of his construction on quantum meruit basis.22
§402.00 Summary of effects of void contract, rule of pari delicto,
the exceptions thereto, and principles which underly the
exceptions
In the 2007 case of Hulst v. RP Builders, Inc., G.R. No. 156364,
Sept. 3, 2007, the Court summarized the effects of a void contract,
the exceptions to the rule of pari delicto, the exceptions thereto, and
the principles which underly the exceptions, as follows:
Since petitioner and his wife, being Dutch nationals,
are proscribed under the Constitution from acquiring and
owning real property, it is unequivocal that the Contract
to Sell entered into by petitioner together with his wife
and respondent is void. Under Article 1409(1) and (7) of
the Civil Code, all contracts whose cause, object or purpose
is contrary to law or public policy and those expressly
prohibited or declared void by law are inexistent and
void from the beginning. Article 1410 of the same Code
provides that the action or defense for the declaration of
the inexistence of a contract does not prescribe. A void
contract is equivalent to nothing; it produces no civil
effect. It does not create, modify or extinguish a juridical
relation.
Cf. Phil. Packing Corp. v. Lui She, 21 SCRA 52 [1967].
Sarsosa Vda. Barsobia v. Cuenco, 113 SCRA 547 [1982]; Varquez v. Giap, 96
Phil. 447 [1855].
22
Department of Health v. C.V. Cancela & Associates, G.R. No. 151373, Nov.
17, 2005.
20
21
428
OBLIGATIONS AND CONTRACTS
Generally, parties to a void agreement cannot expect
the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or “in equal fault.’’
In pari delicto is “a universal doctrine which holds that no
action arises, in equity or at law, from an illegal contract;
no suit can be maintained for its specific performance, or
to recover the property agreed to be sold or delivered, or
the money agreed to be paid, or damages for its violation;
and where the parties are in pari delicto, no affirmative
relief of any kind will be given to one against the other.’’
This rule, however, is subject to exceptions that
permit the return of that which may have been given
under a void contract to: (a) the innocent party (Arts.
1411-1412, Civil Code); (b) the debtor who pays usurious
interest (Art. 1413, Civil Code); (c) the party repudiating
the void contract before the illegal purpose is accomplished
or before damage is caused to a third person and if public
interest is subserved by allowing recovery (Art. 1414,
Civil Code); (d) the incapacitated party if the interest of
justice so demands (Art. 1415, Civil Code); (e) the party for
whose protection the prohibition by law is intended if the
agreement is not illegal per se but merely prohibited and
if public policy would be enhanced by permitting recovery
(Art. 1416, Civil Code); and (f) the party for whose benefit
the law has been intended such as in price ceiling laws
(Art. 1417, Civil Code) and labor laws (Arts. 1418-1419,
Civil Code).
Article 22 of the Civil Code which embodies the
maxim, nemo ex alterius incommode debet lecupletari
(no man ought to be made rich out of another’s injury),
states:
Art. 22. Every person who through an act of
performance by another, or any other means, acquires or
comes into possession of something at the expense of the
latter without just or legal ground, shall return the same
to him.
The above-quoted article is part of the chapter of
the Civil Code on Human Relations, the provisions of
which were formulated as basic principles to be observed
for the rightful relationship between human beings and
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
429
for the stability of the social order; designed to indicate
certain norms that spring from the fountain of good
conscience; guides for human conduct that should run
as golden threads through society to the end that law
may approach its supreme ideal which is the sway and
dominance of justice. There is unjust enrichment when
a person unjustly retains a benefit at the loss of another,
or when a person retains money or property of another
against the fundamental principles of justice, equity and
good conscience.
A sense of justice and fairness demands that petitioner should not be allowed to benefit from his act of
entering into a contract to sell that violates the constitutional proscription.
§403.00 Natural resources are not within commerce of men
It is settled that natural resources of the State, such as rights
to fishpond applications, and any disposition of natural resources
is void, they being owned by the State and beyond the commerce of
men. In Menchavez v. Teves, Jr.,23 the Court ruled:
The parties do not dispute the finding of the trial
and the appellate courts that the Contract of Lease was
void. Indeed, the RTC correctly held that it was the State,
not petitioners, that owned the fishpond. The 1987 Constitution specifically declares that all lands of the public
domain, waters, fisheries and other natural resources belong to the State. Included here are fishponds, which may
not be alienated but only leased. Possession thereof, no
matter how long, cannot ripen into ownership.
Being merely applicants for the lease of the fishponds,
petitioners had no transferable right over them. And
even if the State were to grant their application, the
law expressly disallowed sublease of the fishponds to
respondent. Void are all contracts in which the cause,
object or purpose is contrary to law, public order or public
policy.
23
449 SCRA 380 [2005].
430
OBLIGATIONS AND CONTRACTS
A void contract is equivalent to nothing; it produces
no civil effect. It does not create, modify or extinguish a
juridical relation. Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or “in equal fault.”
To this rule, however, there are exceptions that permit
the return of that which may have been given under a
void contract. One of the exceptions is found in Article
1412 of the Civil Code, which states:
“Art. 1412. If the act in which the unlawful or
forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:
“(1) When the fault is on the part of both contracting parties, neither may recover what he has
given by virtue of the contract, or demand the performance of the other’s undertaking;
“(2) When only one of the contracting parties
is at fault, he cannot recover what he has given by
reason of the contract, or ask for the fulfillment of
what has been promised him. The other, who is not
at fault, may demand the return of what he has given without any obligation to comply with his promise.”
On this premise, respondent contends that he
can recover from petitioners, because he is an innocent party to the Contract of Lease. Petitioners allegedly induced him to enter into it through serious
misrepresentation.
xxx
Respondent himself admitted that he was
aware that the petitioners’ lease application for the
fishpond had not yet been approved. Thus, he knowingly entered into the Contract with the risk that
the application might be disapproved. Noteworthy is
the fact that the existence of a fishpond lease application necessarily contradicts a claim of ownership.
That respondent did not know of petitioners’ lack of
ownership is therefore incredible.
xxx
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
431
The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract
of Lease was void. Even if it was assumed that respondent was entitled to reimbursement as provided
under paragraph 1 of Article 1412 of the Civil Code,
the award of liquidated damages was contrary to established legal principles.
Liquidated damages are those agreed upon by
the parties to a contract, to be paid in case of a breach
thereof. Liquidated damages are identical to penalty
insofar as legal results are concerned. Intended to
ensure the performance of the principal obligation,
such damages are accessory and subsidiary obligations. In the present case, it was stipulated that the
party responsible for the violation of the terms, conditions and warranties of the Contract would pay
not less than P50,000 as liquidated damages. Since
the principal obligation was void, there was no contract that could have been breached by petitioners;
thus, the stipulation on liquidated damages was inexistent. The nullity of the principal obligation carried with it the nullity of the accessory obligation of
liquidated damages.
As explained earlier, the applicable law in the
present factual milieu is Article 1412 of the Civil
Code. This law merely allows innocent parties to recover what they have given without any obligation
to comply with their prestation. No damages may
be recovered on the basis of a void contract; being
non-existent, the agreement produces no juridical
tie between the parties involved. Since there is no
contract, the injured party may only recover through
other sources of obligations such as a law or a quasi-contract. A party recovering through these other
sources of obligations may not claim liquidated damages, which is an obligation arising from a contract.
§404.00 Absolute simulation of contract is void
Simulation is a declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for purposes
432
OBLIGATIONS AND CONTRACTS
of deception, the appearance of a juridical act which does not exist or
is different from that which was really executed. Its requisites are: a)
an outward declaration of will of the parties; b) the false appearance
must have been intended by mutual agreement; and c) the purpose
is to deceive third persons.24
Simulation is defined as the declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce,
for the purposes of deception, the appearance of a judicial act which
does not exist or is different from what that which was really executed. The requisites of simulation are:
(a)
parties;
outlawed declaration of will different from the will of the
(b) the false appearance must have been intended by mutual
agreement; and
(c)
the purpose is to deceive third persons.25
Where the deed of absolute sale was duly notarized and the
usual procedure for the issuance of a transfer certificate of title
based thereon went in the usual procedure, the burden of proof to
show that the deed was simulated was on the party impugning the
same by evidence that is clear, convincing and more than merely
preponderant.26
The basic characteristic of an absolutely simulated or fictitious
contract is that the apparent contract is not really denied or intended
to produce legal effects or alter the juridical situation of the parties
in any way. Where the parties undertook certain acts which were
directed towards fulfillment of their respective covenants under the
contract, these indicate that they intended to give effect to their
agreement, negating the claim of simulation of contract.27
§405.00 Indicia of absolutely simulated contract
In Manila Banking Corp. v. Silverio,28 the Court explained
what are the indicia of absolutely simulated contract, and what are
its consequences or effects:
Peñalosa v. Santos, 363 SCRA 545, 556 [2001].
Mendezona v. Ozamis, 376 SCRA 482 [2000].
26
Ibid.
27
Peñalosa v. Santos, Ibid.
28
466 SCRA 458 [2005].
24
25
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
An absolutely simulated contract, under Article
1346 of the Civil Code, is void. It takes place when the
parties do not intend to be bound at all. The characteristic
of simulation is the fact that the apparent contract is not
really desired or intended to produce legal effects or in
any way alter the juridical situation of the parties. Thus,
where a person, in order to place his property beyond
the reach of his creditors, simulates a transfer of it to
another, he does not really intend to divest himself of
his title and control of the property; hence, the deed of
transfer is but a sham. Lacking, therefore, in a fictitious
and simulated contract is consent which is essential to a
valid and enforceable contract.
In herein case, badges of fraud and simulation permeate the whole transaction, thus, we cannot but refuse
to give the sale validity and legitimacy. Consider the following circumstances:
1)
There is no proof that the said sale took place
prior to the date of the attachment. The notarized deed
of sale, which would have served as the best evidence of
the transaction, did not materialize until 22 July 1993, or
three (3) years after TMBC caused the annotation of its
lien on the titles subject matter of the alleged sale. Mr.
Jerry Tanchuan, Archivist 1 of the Records Management
of the Archives Office (RMAO), testified that the procedure being followed with respect to notarized documents
is that the Records Section of the RTC will transmit to the
RMAO copies in its possession of the original documents
notarized by a notary public together with the Notarial
Registry Book. In herein case, the RTC did not transmit
any book of Atty. Anacleto T. Lacanilao, Jr., the notary
public who allegedly notarized the deed of sale between
Ricardo, Sr. and Edmundo for the year 1989. Instead, what
the RMAO was in possession of was only a loose leaf entry
form for “Document No. 444, Page 90, Book No. 17, Series
of 1989” which is an affidavit of one Maria J. Segismundo
dated 11 September 1989. The RMAO did not have available in its file the particular deed of sale acknowledged by
Atty. Lacanilao as Document No. 444, Page 90, Book No.
17, Series of 1989. In Tala Realty Services Corporation
v. Banco Filipino Savings and Mortgage Bank, as reiter-
433
434
OBLIGATIONS AND CONTRACTS
ated in two other Tala cases, the Court rejected a notarized deed that was not reported to the Clerk of Court of
the RTC by the notary public who notarized it. The Court
held that this fact militates against the use of the document as basis to uphold the petitioner’s claim. The same
is true in this case. The fact that the assailed deed of sale
is not one of those submitted by Atty. Lacanilao to the
Clerk of Court of the RTC of Makati City renders it virtually worthless in the absence of corroboration as to its due
execution other than petitioner (now private respondent)
Edmundo’s self-serving statements. This being the case,
Edmundo could simply have presented the witnesses to
the transaction (his wife and his lawyer), Atty. Lacanilao
or the seller himself, Ricardo Sr., to testify as to the execution of the contract of sale on 11 September 1989. This
he did not do, thus lending more credence to the theory
of TMBC that the sale was entered into only as an afterthought, hatched to prevent the transfer of the properties
to TMBC after the latter had already annotated its lien
thereon.
2)
Edmundo, to say the least, was very evasive
when questioned regarding details of the alleged sale.
The deed of sale mentioned Three Million One Hundred
Nine Thousand and Four Hundred Twenty-Five pesos
(P3,109,425.00) as the contract price paid by hand during
the execution of the contract, yet, when asked on crossexamination, Edmundo could not remember if he paid
directly to Ricardo, Sr. Worse, he could not remember
where Ricardo, Sr. was at the time of the sale. Thus:
xxx
If it were true that money indeed changed hands
on 11 September 1989 as evidenced by the assailed
deed of sale, then, at the very least, Edmundo, as buyer,
would definitely not have forgotten personally handing
P3,109,425.00 to the seller, Ricardo, Sr. It goes against ordinary human experience for a person to simply forget the
details of the day when he became poorer by P3,109,425.00
cash. The only logical conclusion is that there was actually no consideration for the said sale. Verily, a deed of
sale in which the stated consideration has not in fact been
paid is a false contract that is void ab initio. Likewise, “a
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
contract of purchase and sale is null and void and produces no effect whatsoever where it appears that [the] same
is without cause or consideration which should have been
the motive thereof, or the purchase price appears thereon
as paid but which in fact has never been paid by the purchaser to the vendor.”
3)
As correctly pointed out by TMBC, an indication of simulation of contract is the complete absence of
an attempt in any manner on the part of the ostensible
buyer to assert rights of ownership over the subject properties. In herein case, Edmundo did not attempt to have
the 1989 deed of sale registered until 1993. He was not
in possession of the properties. He did not have a contract of lease with the actual occupant of the properties.
As late as 1991, it was Ricardo, Sr. who was claiming to
be the rightful owner of the properties in connection with
an ejectment case he filed against third persons. When
asked to explain why it was Ricardo, Sr. who was asserting ownership over the properties, Edmundo lamely replied “because I am asking him so.’’
Taken together with the other circumstances surrounding the sale, Edmundo’s failure to exercise acts of
dominion over the subject properties buttresses TMBC’s
position that the former did not at all intend to be bound
by the contract of sale. In Suntay, as reiterated in such
cases as Santiago v. Court of Appeals, Cruz v. Bancom
Finance Corporation and Ramos v. Heirs of Ramos, Sr.,
we held that “the most protuberant index of simulation is
the complete absence of an attempt in any manner on the
part of the [ostensible buyer] to assert his rights of ownership over the [properties] in question.” The supposed
buyer’s failure to take exclusive possession of the property allegedly sold or, in the alternative, to collect rentals,
is contrary to the principle of ownership. Such failure is a
clear badge of simulation that renders the whole transaction void pursuant to Article 1409 of the Civil Code.
When a contract is void, the right to set-up its nullity
or non-existence is available to third persons whose
interests are directly affected thereby. The material
interest of TMBC need not be belabored. Suffice it to say
that as judgment creditor of Ricardo, Sr., it has the right
435
436
OBLIGATIONS AND CONTRACTS
to protect its lien acquired through a writ of preliminary
attachment as security for the satisfaction of any judgment
in its favor.
§406.00 Effect of simulated contract
In Manila Banking Corp. v. Silverio,29 the Court also held what
the legal effects of simulated contract:
The remedy of accion pauliana is available when
the subject matter is a conveyance, otherwise valid¸
undertaken in fraud of creditors. Such a contract is
governed by the rules on rescission which prescribe,
under Art. 1383 of the Civil Code, that such action can
be instituted only when the party suffering damage has
no other legal means to obtain reparation for the same.
The contract of sale before us, albeit undertaken as well
in fraud of creditors, is not merely rescissible but is void
ab initio for lack of consent of the parties to be bound
thereby. A void or inexistent contract is one which has no
force and effect from the very beginning, as if it had never
been entered into; it produces no effect whatsoever either
against or in favor of anyone. Rescissible contracts, on
the other hand, are not void ab initio, and the principle,
“quod nullum est nullum producit effectum,” in void and
inexistent contracts is inapplicable. Until set aside in an
appropriate action, rescissible contracts are respected as
being legally valid, binding and in force. x x x
In sum, considering that an absolutely simulated
contract is not a recognized mode of acquiring ownership,
the levy of the subject properties on 02 July 1990 pursuant to a writ of preliminary attachment duly issued by the
RTC in favor of TMBC and against its debtor, Ricardo,
Sr., was validly made as the properties were invariably
his. Consequently, Edmundo, who has no legal interest
in these properties, cannot cause the cancellation of the
annotation of such lien for the reasons stated in his petition.
29
Ibid.
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
437
§407.00 Mutual restitution, where contract is declared void
The rule is that if both parties have no fault or are not guilty
and the contract is voided, 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.
Thus, where the sale was declared void because the property was
found to be part of the forest or timber land, which was not alienable,
the purchaser who paid for the land is entitled to recover what he
has paid.30
§408.00 Contract in violation of Anti-Graft Act
The Court held in La’O v. Republic,31 that a contract in violation
of Secs. 3(e) and 3(g) of RA 3019 (Anti-Graft Act) is null and void,
and the purchaser of the property could not recover what he had
paid the government, as owner of the property.
The second contract was null and void ab initio for being in
contravention of Section 3(e) and (g) of RA 3019, otherwise known
as the “Anti-Graft and Corrupt Practices Act.” Both the trial and
appellate courts found that the second contract gave petitioner
unwarranted benefits and was grossly disadvantageous to the
government. Under Article 1409(7) of the Civil Code, the contract
was null and void from the beginning.
We quote the discussion of the CA with approval:
The inquiry that must be settled is — Whether or
not the subject Agreement had been grossly disadvantageous to the economic interests of the Republic.
xxx
x x x prior to the subject Agreement, there was a subsisting lease-purchase Agreement between GSIS and the Republic, thru the OGCC, whereby the latter undertakes to
pay the former the total amount of [P1,500,000], payable
within [15] years and the payment of the yearly amortization of [P100,000] shall be made in equal quarterly installments of [P25,000]. Under the same Agreement, the
30
31
Dev. Bank of the Phil. v. CA, 249 SCRA 331 [1995].
G.R. No. 160719, Jan. 23, 2006.
438
OBLIGATIONS AND CONTRACTS
Republic, thru the OGCC shall manage and administer
the leased premises as if it were the absolute owner thereof. As of August 1982, the Republic, thru the OGCC had
been collecting an average monthly rental of [P10,000]
from [various tenants of the premises].
The foregoing figures [leads] to the conclusion that
the Republic, thru the OGCC, had been earning an average annual rental income of [P120,000], an amount which
is more than enough to cover its yearly amortization-rental to the GSIS which is only [P100,000].
The economic benefit which the Republic, thru the
OGCC, enjoys during the subsistence of the prior Agreement is shown by its being able to liquidate its yearly
amortization-rental from the rental income of the subject
property without any need for the Republic to appropriate
additional funds for such disbursement and further, by
the transfer of absolute ownership of the subject property
to the Republic, thru the OGCC, at the termination of the
[15] year lease-purchase Agreement.
In the subject Agreement with [petitioner], the consideration was increased to [P2,000,000] with a down
payment of [P200,000] and the balance payable within a
period of [15] years at [12%] per annum interest thereon, compounded yearly, with a yearly amortization of
[P264,278.37], including principal and interest. Under
the same Agreement, the OGCC was likewise allowed to
continue occupying its offices from the second to the fifth
floors of the premises, at the rental rate of [P100,000] annually.
The Agreement between [petitioner] and the GSIS
which is the subject of the instant case had in fact transferred the economic benefits which the Republic used to
enjoy to [petitioner]. At the end of [15] years, [petitioner]
shall become the absolute owner of the subject property
upon full payment of the [15] yearly amortizations. At
bottom, however, is the fact that, at least for the first
[five] years of the [Agreement], [petitioner] shall not be
shelling out of his own pocket the yearly amortization
since the same shall be covered by the annual rental coming from the OGCC and the other tenants thereof. In the
meantime, the Republic, thru the OGCC, shall not only be
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
appropriating additional funds for its annual rental but
worse, it was stripped of the opportunity to become the
absolute owner of the subject property.
The Court cannot also ignore the marked differences between the consideration of TWO MILLION PESOS
(P2,000,000.00) and the valuations of the subject property in 1982 as appraised by Mr. Narlito Mariño to the
effect that the fair market value of the subject property
from FIVE MILLION FIVE HUNDRED SEVENTY-FIVE
THOUSAND PESOS (P5,575,000.00) as the minimum
and SEVEN MILLION EIGHTY THREE THOUSAND
THREE HUNDRED PESOS (P7,083,300.00) as the
maximum and Cuervo Appraisers, Inc. to the effect that
the fair market value of the subject property is EIGHT
MILLION FIVE THOUSAND FIVE HUNDRED PESOS
(P8,005,500.00). While concededly the foregoing property
appraisal was conducted in 1989 and 1996 respectively,
the Court is not unmindful of the fact that the valuations
were arrived at by taking into consideration all the parameters that, by practice, could provide reasonable statistical indication of the value of the subject property in
1982.
On this respect, [respondents’] assertion that the
subject Agreement is at the behest of [petitioner] and
is grossly disadvantageous to the Republic had become
self-evident since it certainly bewilders the mind why the
GSIS would enter into an Agreement which smacks of
disturbing economic implications, i.e., the Republic would
need to appropriate additional funds to pay for its rentals and abandon the chance of becoming the owner of the
subject property which it uses for governmental purposes
and the fact that the subject property was negotiated by
the government via a losing proposition.
xxx
[I]n view of GSIS’ undertaking to construct another
building for the OGCC . . . what was revealed is the fact
that if only to accommodate the subject Agreement with
the [petitioner], the GSIS had undertaken to build another building for the OGCC or to make available for OGCC’s
use any other acquired property and to grant the same
439
440
OBLIGATIONS AND CONTRACTS
terms and conditions as that of the previous agreement.
Necessarily so, the GSIS had imposed additional economic burden upon itself, at the expense of government funds,
in order to meet the terms and conditions of the subject
Agreement when the same was not necessary during the
subsistence of the prior agreement.
The foregoing clearly shows that the second contract
caused undue injury to the government, gave petitioner
unwarranted benefits and was grossly disadvantageous to
the government. The disquisition of the CA is sufficiently
exhaustive and convincing considering that in civil cases
like this one, the party with the burden of proof (in this
case, the respondents) needs only to establish its case by
a preponderance of evidence.
The act of entering into the second contract was a
corrupt practice and was therefore unlawful. It was a contract expressly prohibited by RA 3019. As a result, it was
null and void from the beginning under Art. 1409(7) of the
Civil Code.
As for the forfeiture of the payments made by petitioner, the latter did not raise any substantial argument against it. He merely stated that “there should be
no reason why the amounts paid by petitioner should be
forfeited in favor of the Republic” since the property was
owned by GSIS and the Republic, through the OGCC, was
merely a lessee.
The RTC decision was clear. The amount forfeited
was in favor of GSIS as owner of the property.
Having disposed of the main issue and ruling that
the second contract was void ab initio for being prohibited
by law, a discussion of the other ancillary issues raised by
petitioner is no longer necessary.
§409.00 Illegal and immoral arrangements are not enforceable
Kickback arrangements in the purchase of raw materials,
equipment, supplies and other needs of offices, private or governmental, are illegal and immoral, and the agent’s seeking recovery
thereof as provided in a contract must be denied, as the parties can-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
441
not expect positive relief from courts of justice in the interpretation
and enforcement of such kind of contracts.32
§410.00 Contract contrary to good customs and morals
The Court in Paderes v. CA,33 explained when a contract
is contrary to good customs and morals, as to render it void, as
follows:
In order to declare the agreement void for being contrary to good customs and morals, it must first be shown
that the object, cause or purpose thereof contravenes the
generally accepted principles of morality which have received some kind of social and practical confirmation.
We are not inclined to rule that the transaction in
this case offended good customs and morals. It should be
emphasized that the proscription imposed by Ayala Corporation was on the resale of the property without a residential house having been constructed thereon. The condition
did not require that the original lot buyer should himself
construct a residential house on the property, only that
the original buyer may not resell a vacant lot. In view of
our finding that the agreement between the parties was a
mere contract to sell, no violation of the condition may be
inferred from the transaction as no transfer of ownership
was made. In fact, the agreement in this case that petitioners will construct a residential house on the property
in the name of the Salvadors (who retained ownership of
the property until the fulfillment of the twin conditions of
payment and construction of a residence) was actually in
compliance with or obeisance to the condition.
Finally, the issue of whether the agreement violated
the law as it deprived the government of capital gains
tax is wholly irrelevant. Capital gains taxes, after all, are
only imposed on gains presumed to have been realized
from sales, exchanges or dispositions of property. Having
declared that the contract to sell in this case was aborted
by petitioners’ failure to comply with the twin suspensive
32
33
Packaging Products Corp. v. NLRC, 152 SCRA 210 [1987].
463 SCRA 505 [2005].
442
OBLIGATIONS AND CONTRACTS
conditions of full payment and construction of a residence,
the obligation to pay taxes never arose. Hence, any error
the appellate court may have committed when it passed
upon the issue of taxes despite the fact that no evidence
on the matter was pleaded, adduced or proved is rather
innocuous and does not warrant reversal of the decisions
under review.
§411.00 Contract against public policy
Any agreement entered into because of the actual or supposed
influence which the party has, engaging him to influence executive
officials in the discharge of their duties, which contemplates the use
of personal influence and solicitation rather than an appeal to the
judgment of the official on the merits of the object sought is contrary
to public policy. Consequently, the agreement, assuming that the
parties agreed to the consultancy, is null and void as against public
policy. Therefore, it is unenforceable before a court of justice.34
§412.00 No action can arise from an illegal contract
The proposition is universal that no action arises, in equity
or law, from an illegal contract; no suit can be maintained for its
specific performance, or to recover the property agreed to be sold or
delivered, or damages for its violation. The rule has sometimes been
laid down as though it was equally universal, that where the parties
are in pari delicto, no affirmative relief of any kind will be given to
one against the other.35
The Court in Acabal v. Acabal,36 ruled:
Even assuming that the disposition of the property
by Villaner was contrary to law, he would still have no
remedy under the law as he and Leonardo were in pari
delicto, hence, he is not entitled to affirmative relief — one
who seeks equity and justice must come to court with clean
hands. In pari delicto potior est conditio defendentis.
The proposition is universal that no action arises, in equity
or at law, from an illegal contract; no suit can be maintained for
Marubeni Corp. v. Lirag, 362 SCRA 620 [2001].
Lita Enterprises, Inc. v. IAC, 129 SCRA 79 [1984].
36
454 SCRA 555 [2005].
34
35
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
443
its specific performance, or to recover the property agreed to be
sold or delivered, or the money agreed to be paid, or damages for
its violation. The rule has sometimes been laid down as though it
were equally universal, that where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other.
§413.00 Void contract cannot give rise to cause of action
No action arises, in equity or at law, from an illegal contract;
no suit can be maintained for this specific performance, or to recover
the property agreed to be sold or delivered, or the money agreed to
be paid, or damages for its violation. Where the parties are in pari
delicto, no affirmative relief of any kind will be given to one against
the other.37
Where a contract was entered into with a government agency,
which showed that it was grossly disadvantageous to the government, the contract is violative of the Anti-Graft and Corrupt Practices Law, and is void. The effect of such void contract is that no right
of action can be anchored, which for all legal intents and purposes
has no legal existence and effect from the start. The Supreme Court
ruled:
“In net effect, the underlying ejectment suit filed by
the respondent can no longer prosper, his right of action
being anchored on a contract which, for all intents and
purposes, has no legal existence and effect from the start.
A void or inexistent contract is equivalent to nothing; it is
absolutely wanting in civil effects; it cannot be the basis
of actions to enforce compliance.”38
In Bercaro v. Capitol Dev. Corp.,39 the Court held that a void
contract cannot be the basis of an action for its enforcement.
It is well-settled that parties to a void agreement
cannot expect the aid of the law; the courts leave them as
they are, because they are deemed in pari delicto or “in
equal fault.” No suit can be maintained for its specific performance, or to recover the property agreed to be sold or
delivered, or the money agreed to be paid, or damages for
Silagan v. IAC, 196 SCRA 774 [1991].
Republic v. La’O, 489 SCRA 425 [2006].
39
G.R. No. 154765, March 29, 2007.
37
38
444
OBLIGATIONS AND CONTRACTS
its violation, and no affirmative relief of any kind will be
given to one against the other. Each must bear the consequences of his own acts. They will be left where they have
placed themselves since they did not come into court with
clean hands.
In sum, the underlying case for sum of money filed
by petitioner against respondent cannot prosper, his right
of action being anchored on a contract which, for all intents and purposes, has no legal existence and effect from
the start. A void or inexistent contract is equivalent to
nothing; it is absolutely wanting in civil effects; it cannot
be the basis of actions to enforce compliance.
§414.00 Contract in restraint of trade
In Tiu v. Platinum Plans Phil.,40 the Court ruled when a contact
is in restraint of trade or when it is not. The contract in this case is
known as non-involvement clause of a contract, which states:
8.
NON INVOLVEMENT PROVISION — The
EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation
from the Company, whether voluntary or for cause, he/she
shall not, for the next TWO (2) years thereafter, engage in
or be involved with any corporation, association or entity,
whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the
EMPLOYER. Any breach of the foregoing provision shall
render the EMPLOYEE liable to the EMPLOYER in the
amount of One Hundred Thousand Pesos (P100,000.00)
for and as liquidated damages.
Respondent contends that the inclusion of the two-year noninvolvement clause in petitioner’s contract of employment was
reasonable and needed since her job gave her access to the company’s
confidential marketing strategies. Respondent adds that the noninvolvement clause merely enjoined her from engaging in pre-need
business akin to respondent’s within two years from petitioner’s
separation from respondent. She had not been prohibited from
marketing other service plans.
40
G.R. No. 163512, Feb. 26, 2007.
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
445
In resolving the issue in favor of the validity of the non-involvement cause, the Court enumerated the cases in which such issue
was raised and the Court’s rulings therein:
“As early as 1916, we already had the occasion to
discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell, we said that such clause was unreasonable restraint of trade and therefore against public policy.
In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for
a period of five years after the termination of his employment contract and must first get the written permission
of his employer if he were to do so. The Court ruled that
while the stipulation was indeed limited as to time and
space, it was not limited as to trade. Such prohibition, in
effect, forces an employee to leave the Philippines to work
should his employer refuse to give a written permission.
In G. Martini, Ltd. v. Glaiserman, we also declared
a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was prohibited from
engaging in any business similar to that of his employer
for a period of one year. Since the employee was employed
only in connection with the purchase and export of abaca,
among the many businesses of the employer, the Court
considered the restraint too broad since it effectively prevented the employee from working in any other business
similar to his employer even if his employment was limited only to one of its multifarious business activities.
However, in Del Castillo v. Richmond, we upheld a
similar stipulation as legal, reasonable, and not contrary
to public policy. In the said case, the employee was restricted from opening, owning or having any connection
with any other drugstore within a radius of four miles
from the employer’s place of business during the time
the employer was operating his drugstore. We said that
a contract in restraint of trade is valid provided there is
a limitation upon either time or place and the restraint
upon one party is not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals, we considered a non-involvement clause in accordance with Article
446
OBLIGATIONS AND CONTRACTS
1306 of the Civil Code. While the complainant in that
case was an independent agent and not an employee,
she was prohibited for one year from engaging directly or
indirectly in activities of other companies that compete
with the business of her principal. We noted therein that
the restriction did not prohibit the agent from engaging
in any other business, or from being connected with any
other company, for as long as the business or company did
not compete with the principal’s business. Further, the
prohibition applied only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the
employer.
Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place.
In this case, the non-involvement clause has a time
limit: two years from the time petitioner’s employment
with respondent ends. It is also limited as to trade, since
it only prohibits petitioner from engaging in any pre-need
business akin to respondent’s.
More significantly, since petitioner was the Senior
Assistant Vice-President and Territorial Operations
Head in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and highly
sensitive marketing strategies of respondent’s business.
To allow her to engage in a rival business soon after she
leaves would make respondent’s trade secrets vulnerable
especially in a highly competitive marketing environment.
In sum, we find the non-involvement clause not contrary
to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.
In any event, Article 1306 of the Civil Code provides
that parties to a contract may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order, or public policy.
Article 1159 of the same Code also provides that
obligations arising from contracts have the force of law
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
447
between the contracting parties and should be complied
with in good faith. Courts cannot stipulate for the parties
nor amend their agreement where the same does not
contravene law, morals, good customs, public order or
public policy, for to do so would be to alter the real intent
of the parties, and would run contrary to the function
of the courts to give force and effect thereto. Not being
contrary to public policy, the non-involvement clause,
which petitioner and respondent freely agreed upon,
has the force of law between them, and thus, should be
complied with in good faith.
In another case, Avon Cosmetics, Inc. v. Luna,41 involving the
validity of the exclusivity clause of a contract, the Court explained
public policy and when a contract in restraint of trade violates public
policy.
At the crux of the first issue is the validity of paragraph 5 of the Supervisor’s Agreement, viz.:
The Company and the Supervisor mutually agree:
xxx
5)
That the Supervisor shall sell or offer to sell,
display or promote only and exclusively products sold by
the Company.
In business parlance, this is commonly termed as
the “exclusivity clause.” This is defined as agreements
which prohibit the obligor from engaging in “business” in
competition with the obligee.
This exclusivity clause is more often the subject of
critical scrutiny when it is perceived to collide with the
Constitutional proscription against “reasonable restraint
of trade or occupation.” The pertinent provision of the
Constitution is quoted hereunder. Section 19 of Article
XII of the 1987 Constitution on the National Economy
and Patrimony states that:
SEC. 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combi-
41
G.R. No. 153674, Dec. 20, 2006.
448
OBLIGATIONS AND CONTRACTS
nations in restraint of trade or unfair competition shall be
allowed.
First off, restraint of trade or occupation embraces
acts, contracts, agreements or combinations which restrict competition or obstruct due course of trade.
Now to the basics. From the wordings of the Constitution, truly then, what is brought about to lay the
test on whether a given agreement constitutes an unlawful machination or combination in restraint of trade is
whether under the particular circumstances of the case
and the nature of the particular contract involved, such
contract is, or is not, against public interest.
Thus, restrictions upon trade may be upheld when
not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to the
party in whose favor it is imposed. Even contracts which
prohibit an employee from engaging in business in competition with the employer are not necessarily void for being in restraint of trade.
In sum, contracts requiring exclusivity are not per
se void. Each contract must be viewed vis-á-vis all the
circumstances surrounding such agreement in deciding
whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.
The question that now crops up is this, when is a
restraint in trade unreasonable? Authorities are one in
declaring that a restraint in trade is unreasonable when
it is contrary to public policy or public welfare. As far back
as 1916, in the case of Ferrazzini v. Gsell, this Court has
had the occasion to declare that:
[T]here is no difference in principle between the
public policy (orden público) in the in the two jurisdictions
(United States and the Philippine Islands) as determined
by the Constitution, laws, and judicial decisions.
In the United States it is well settled that contracts
in undue or unreasonable restraint of trade are unenforceable because they are repugnant to the established
public policy in that country. Such contracts are illegal
in the sense that the law will not enforce them. The Su-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
preme Court in the United States, in Oregon Steam Navigation Co. vs. Winsor (20 Will., 64), quoted with approval
in Gibbs v. Consolidated Gas Co. of Baltimore (130 U.S.,
396), said:
‘Cases must be judged according to their circumstances, and can only be rightly judged when reason and
grounds of the rule are carefully considered. There are
two principal grounds on which the doctrine is founded
that a contract in restraint of trade is void as against
public policy. One is, the injury to the public by being deprived of the restricted party’s industry; and the other is,
the injury to the party himself by being precluded from
pursuing his occupation, and thus being prevented from
supporting himself and his family.’
And what is public policy? In the words of the eminent Spanish jurist, Don Jose Maria Manresa, in his commentaries of the Codigo Civil, public policy (orden público):
[R]epresents in the law of persons the public, social
and legal interest, that which is permanent and essential
of the institutions, that which, even if favoring an individual in whom the right lies, cannot be left to his own will.
It is an idea which, in cases of the waiver of any right, is
manifested with clearness and force.
As applied to agreements, Quintus Mucius Scaevola,
another distinguished civilist gives the term “public policy” a more defined meaning:
Agreements in violation of orden público must be
considered as those which conflict with law, whether properly, strictly and wholly a public law (derecho) or whether
a law of the person, but law which in certain respects affects the interest of society.
Plainly put, public policy is that principle of the law
which holds that no subject or citizen can lawfully do
that which has a tendency to be injurious to the public or
against the public good. As applied to contracts, in the absence of express legislation or constitutional prohibition, a
court, in order to declare a contract void as against public
policy, must find that the contract as to the consideration
449
450
OBLIGATIONS AND CONTRACTS
or thing to be done, has a tendency to injure the public, is
against the public good, or contravenes some established
interests of society, or is inconsistent with sound policy
and good morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of
private property.
From another perspective, the main objection to exclusive dealing is its tendency to foreclose existing competitors or new entrants from competition in the covered
portion of the relevant market during the term of the
agreement. Only those arrangements whose probable effect is to foreclose competition in a substantial share of
the line of commerce affected can be considered as void
for being against public policy. The foreclosure effect, if
any, depends on the market share involved. The relevant
market for this purpose includes the full range of selling
opportunities reasonably open to rivals, namely, all the
product and geographic sales they may readily compete
for, using easily convertible plants and marketing organizations.
Applying the preceding principles to the case at bar,
there is nothing invalid or contrary to public policy either in the objectives sought to be attained by paragraph
5, i.e., the exclusivity clause, in prohibiting respondent
Luna, and all other Avon supervisors, from selling products other than those manufactured by petitioner Avon.
We quote with approval the determination of the U.S. Supreme Court in the case of Board of Trade of Chicago v.
U.S. that “the question to be determined is whether the
restraint imposed is such as merely regulates and perhaps thereby promotes competition, or whether it is such
as may suppress or even destroy competition.”
Such prohibition is neither directed to eliminate the
competition like Sandré Phils., Inc. nor foreclose new entrants to the market. In its Memorandum, it admits that
the reason for such exclusion is to safeguard the network
that it has cultivated through the years. Admittedly, both
companies employ the direct selling method in order to
peddle their products. By direct selling, petitioner Avon
and Sandre, the manufacturer, forego the use of a middle-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
451
man in selling their products, thus, controlling the price
by which they are to be sold. The limitation does not affect
the public at all. It is only a means by which petitioner
Avon is able to protect its investment.
It was not by chance that Sandré Philippines, Inc.
made respondent Luna one of its Group Franchise Directors. It doesn’t take a genius to realize that by making
her an important part of its distribution arm, Sandré
Philippines, Inc., a newly formed direct-selling business,
would be saving time, effort and money as it will no longer have to recruit, train and motivate supervisors and
dealers. Respondent Luna, who learned the tricks of the
trade from petitioner Avon, will do it for them. This is
tantamount to unjust enrichment. Worse, the goodwill
established by petitioner Avon among its loyal customers
will be taken advantaged of by Sandre Philippines, Inc. It
is not so hard to imagine the scenario wherein the sale of
Sandré products by Avon dealers will engender a belief in
the minds of loyal Avon customers that the product that
they are buying had been manufactured by Avon. In other
words, they will be misled into thinking that the Sandré
products are in fact Avon products. From the foregoing, it
cannot be said that the purpose of the subject exclusivity
clause is to foreclose the competition, that is, the entrance
of Sandré products in to the market. Therefore, it cannot
be considered void for being against public policy. How
can the protection of one’s property be violative of public
policy? Sandré Philippines, Inc. is still very much free to
distribute its products in the market but it must do so at
its own expense. The exclusivity clause does not in any
way limit its selling opportunities, just the undue use of
the resources of petitioner Avon.
Avon Cosmetics, Inc. v. Luna,42 illustrates the validity of the
exclusivity clause of a contract. In his case, one of the issues raised
is whether or not the exclusivity clause is null and void for being
against public policy or in restraint of trade. The exclusively clause
states in part:
42
G.R. No. 153674, Dec. 20, 2006.
452
OBLIGATIONS AND CONTRACTS
The Company and the Supervisor mutually agree:
xxx
5)
That the Supervisor shall sell or offer to sell,
display or promote only and exclusively products sold by
the Company.
The trial court and the Court of Appeals ruled that the exclusivity clause should be interpreted to apply solely to those products
directly in competition with those of petitioner Avon’s, i.e., cosmetics and/or beauty supplies and lingerie products and not to other
products which are not competing, otherwise the agreement would
constitute an unreasonable restraint of trade, and it is thus void as
against public policy.
The Supreme Court reversed the trial court and the
Court of Appeals, and ruled that the exclusivity clause is
valid under the facts obtaining.
In business parlance, the agreement is commonly termed as the
“exclusivity clause.” This is defined as agreements which prohibit the
obligor from engaging in “business” in competition with the obligee.
The Court ruled that the exclusivity clause is valid, and explains
why:
“This exclusivity clause is more often the subject of
critical scrutiny when it is perceived to collide with the
Constitutional proscription against “reasonable restraint
of trade or occupation.” The pertinent provision of the
Constitution is quoted hereunder. Section 19 of Article
XII of the 1987 Constitution on the National Economy
and Patrimony states that:
SEC. 19. The State shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade
or unfair competition shall be allowed.
First off, restraint of trade or occupation embraces
acts, contracts, agreements or combinations which restrict competition or obstruct due course of trade.
Now to the basics. From the wordings of the Constitution, truly then, what is brought about to lay the test
on whether a given agreement constitutes an unlaw-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
ful machination or combination in restraint of trade is
whether under the particular circumstances of the case
and the nature of the particular contract involved, such
contract is, or is not, against public interest.
Thus, restrictions upon trade may be upheld when
not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to the
party in whose favor it is imposed.43 Even contracts which
prohibit an employee from engaging in business in competition with the employer are not necessarily void for being in restraint of trade.
In sum, contracts requiring exclusivity are not per
se void. Each contract must be viewed vis-á-vis all the
circumstances surrounding such agreement in deciding
whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.
The question that now crops up is this, when is a
restraint in trade unreasonable? Authorities are one in
declaring that a restraint in trade is unreasonable when
it is contrary to public policy or public welfare. As far back
as 1916, in the case of Ferrazzini v. Gsell, this Court has
had the occasion to declare that:
[T]here is no difference in principle between the
public policy (orden público) in the in the two jurisdictions
(United States and the Philippine Islands) as determined
by the Constitution, laws, and judicial decisions.
In the United States it is well settled that contracts
in undue or unreasonable restraint of trade are unenforceable because they are repugnant to the established
public policy in that country. Such contracts are illegal
in the sense that the law will not enforce them. The Supreme Court in the United States, in Oregon Steam Navigation Co. vs. Winsor (20 Will., 64), quoted with approval
in Gibbs v. Consolidated Gas Co. of Baltimore (130 U.S.,
396), said:
‘Cases must be judged according to their circumstances, and can only be rightly judged when reason and
grounds of the rule are carefully considered. There are
43
Ollendorf v. Abrahamson, 38 Phil. 585, 592 [1918].
453
454
OBLIGATIONS AND CONTRACTS
two principle grounds on which the doctrine is founded
that a contract in restraint of trade is void as against
public policy. One is, the injury to the public by being deprived of the restricted party’s industry; and the other is,
the injury to the party himself by being precluded from
pursuing his occupation, and thus being prevented from
supporting himself and his family.’
And what is public policy? In the words of the eminent Spanish jurist, Don Jose Maria Manresa, in his commentaries of the Codigo Civil, public policy (orden público):
[R]epresents in the law of persons the public, social
and legal interest, that which is permanent and essential
of the institutions, that which, even if favoring an individual in whom the right lies, cannot be left to his own will.
It is an idea which, in cases of the waiver of any right, is
manifested with clearness and force.
As applied to agreements, Quintus Mucius Scaevola,
another distinguished civilist gives the term “public policy” a more defined meaning:
Agreements in violation of orden público must be considered as
those which conflict with law, whether properly, strictly and wholly
a public law (derecho) or whether a law of the person, but law which
in certain respects affects the interest of society.
§415.00 Government contract; requirements
No contracts involving the expenditure of public funds shall
be entered unless there is an appropriation therefor and the proper
accounting officer of the agency concerned shall have certified to
the officer entering into the obligation that funds have been duly
appropriated for the purpose and the amount necessary to cover
the proposed contract for the current fiscal year is available for
expenditure on account thereof. And any contract entered into
contrary to the foregoing requirements shall be void. As such, it is not
capable of ratification. And a compromise judgment rendered by a
trial court based on such void contract is similarly void. The liability
arising from said void contract becomes the personal liability of the
officer who entered into said contract.44
44
Osmeña v. Commission on Audit, 230 SCRA 585 [1994].
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
455
In Department of Health v. C.V. Cancela & Associates,45 elaborated on the requirements of government contracts involving expenditure of public funds and the consequences of non-compliance
therewith, thus:
The Agreements, it bears noting, expressly stated
that payments arising therefrom shall be “subject to the
usual accounting and auditing rules and regulations.”
Being government contracts, they are governed and
regulated by special laws, failure to comply with which
renders them void.
xxx
The formalities expressly required by the Auditing
Code of the Philippines and The Administrative Code of
1987 not having been complied with, the subject three
Agreements are null and void from the very beginning.
The signatures of the chief accountants as instrumental
witnesses do not constitute substantial compliance with
the explicit requirements of said Codes. As Melchor v.
Commission on Audit teaches, the certification, not the
accountant’s signature as contract witness, is “the basic
and more important validating document,” and “the more
reliable indicium of fund availability,” notwithstanding
paragraph 2 of Letter of Instruction No. 968 (LOI No. 968)
which considers the signature of the chief accountant as
itself constituting a certification that funds are indeed
available. For LOI No. 968, being an administrative issuance, must yield to the explicit provisions of The Auditing
Code of the Philippines and Revised Administrative Code
of 1987.
Even if each of the Agreements did not incorporate
the provision calling for compliance with the above-said
Codes, the provisions thereof, as well as those of the 1987
Constitution and LOI No. 968, must be deemed to form
part of, and co-exist with, the Agreements. Applicable
peremptory provisions of law of this nature, affecting as
they do public policy or impressed as they are with public
interest, are held to be written into the contract.
45
G.R. No. 151373, Nov. 17, 2005.
456
OBLIGATIONS AND CONTRACTS
The illegality of the subject Agreements proceeds, it
bears emphasis, from an express declaration or prohibition by law, not from any intrinsic illegality. As such, the
Agreements are not illegal per se and the party claiming
thereunder may recover what had been paid or delivered.
The Court thus finds that private respondents are
entitled to be compensated for the services they actually
performed for the benefit of petitioner, as shown by petitioner’s acceptance and use of the complete Contract or
Bid Documents including the A & E Design Plans and
Technical Specifications and the Detailed Cost Estimates
for each project that private respondents promptly submitted, as in fact petitioner itself recommends that private respondents be paid therefor.
The compensation must, however, exclude services
for “periodic visits” which the records irrefutably show
not to have been rendered.
With respect to the stipulation in each of the Agreements that private respondents’ professional fees would
be 7.5% of the project fund allocation, which was amended to 6% of the project contract cost, the same patently
contravenes Section 525 of the Government Accounting
and Auditing (GAA) Manual directing that fees for architectural, engineering design, and similar professional services should be fixed in monetary or peso amounts, instead
of as percentage of the project cost.
xxx
Thus, on top of the chief accountants’ unexplained
failure to issue the requisite certificates of availability of
funds and the unjustified omission of the chiefs of hospital to secure such certification before even entering into
the Agreements with private respondents, these officers
failed to heed the guidelines embodied in above-quoted
Section 525 of the GAA Manual. The records do not show
any explanation for these lapses.
xxx
As the immediately-quoted provisions of law mandate, the issuance of a certification that funds are avail-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
457
able is a legal duty imposed on the chief accountant or the
head of the accounting unit. And ascertainment that such
certification exists prior to entering into any government
contract or incurring any obligation chargeable against
public funds is a responsibility which devolves on the officer concerned.
For their failure to discharge their duties under the
law, The Revised Administrative Code of 1987 provides
that the officer or officers entering into the contract shall
be liable to the Government or other contracting party
for any consequent damage to the same extent as if the
transaction had been wholly between private parties.
§416.00 When recovery may be allowed even where government
contract requirements were violated
On the issue of whether or not a contractor which undertook
government contract in violation of its requirements may still recover
on the basis of quantum meruit, the Court in Department of Health
v. C.V. Cancela & Associates,46 answered the issue in the affirmative
and explained the reasons therefor, as follows:
On the other hand, COA Circular No. 76-34 directs
the COA to call the attention of management, within five
days from receipt of a copy of the contract, any defects
or deficiencies therein and to suggest corrective measures
as appropriate and warranted to facilitate the processing
of the claim upon presentation. The records do not show
that COA complied with said directive. It was thus negligent.
The Court believes, however, that declaring the individual officers of petitioner who entered into the Agreements personally liable for the unpaid professional fees
due to private respondents would be highly unjust, the
government having already received and accepted the
benefits of the services rendered. En passant, it is, however, non sequitur to let these officers go scot-free from
their negligence.
46
Ibid.
458
OBLIGATIONS AND CONTRACTS
Since the questioned Agreements are null and void
for want of the requisite covering certificates of appropriation, the teachings in Eslao v. Commission on Audit and
in Royal Trust Construction v. Commission on Audit must
be heeded.
In Eslao, this Court, directed payment to the contractor on a quantum meruit basis despite the failure
to undertake a public bidding, it holding that “to deny
payment to the contractor of the two buildings which are
almost fully completed and presently occupied by the university would be to allow the government to unjustly enrich itself at the expense of another.”
In Royal Trust, this Court, in the interest of substantial justice and equity, allowed payment to the contractor on a quantum meruit basis despite the absence of
a written contract and a covering appropriation.
In the case at bar then, the nullity of the herein
Agreements notwithstanding, the ends of substantial justice and equity will be better served if payment to private
respondents for their consultancy services is allowed on a
quantum meruit basis.
The measure of recovery under the principle of quantum meruit should relate to the reasonable value of the
services performed, taking into account the standard of
practice in the profession, the architectural and engineering skills of private respondents, and their professional
expertise and standing.
Respecting petitioner’s argument that the State is
immune from suit, the same deserves scant consideration. To sustain the argument would not only perpetuate
a grave injustice on private respondents who performed
their services in good faith and were given the run-around
for over eight years, but would sanction as well unjust enrichment on the part of the State.
Such conduct by petitioner and its officers, in addition, derogates against the salutary policies enunciated
in Presidential Decree No. 1746 “CREATING THE CONSTRUCTION INDUSTRY AUTHORITY OF THE PHILIPPINES (CIAP)” and E.O. 1008 “CONSTRUCTION IN-
CHAPTER 9
VOID AND INEXISTENT CONTRACTS
DUSTRY ARBITRATION LAW.” As expressed therein,
these statutes contain provisions for the promotion of the
healthy partnership between the government and the private sector and encourage the optimum development and
growth of the local construction industry.
As EPG Construction Company v. Vigilar holds,
“this Court — as the staunch guardian of the citizens’
rights and welfare — cannot sanction an injustice so
patent on its face, and allow itself to be an instrument
in the perpetration thereof. Justice and equity sternly
demand that the State’s cloak of invincibility against suit
be shred in this particular instance, and that petitionerscontractors be duly compensated — on the basis of
quantum meruit — for construction done on the public
works housing project.”
459
460
OBLIGATIONS AND CONTRACTS
CHAPTER 10
CONFLICT OF LAWS
ON CONTRACT
(This Chapter on Conflict of Laws on Contract is taken from
the author’s book, Chapter V of CONFLICT OF LAWS, Private
International Law, 2004 Edition).
§417.00 Law on contract; lex loci contractus
Questions regarding the form and solemnities of contract and
their validity, as well as liabilities for breach thereof may require
application of conflict of laws rules.
The parties in a contract are charged with knowledge of the
existing and applicable law at the time they enter into the contract
and at the time it is to become operative; and a person is presumed
to be more knowledgeable about his own State law than his alien
or foreign contemporary.1 If the contract is entered into in the
Philippines, pertinent applicable laws on the subject are deemed
read into the contract, to govern the solemnities required by law
and its validity, as well as to fix the obligations of the parties and
their liability in case of non-performance thereof.
“The principle is well settled that an existing law
enters and forms part of a valid contract without need
for the parties expressly making reference to it. (Boman
Environmental Dev. Corp. v. CA, 167 SCRA 540 [1988]).
It is firmly settled that provisions of applicable laws are
deemed written into contracts. Private parties cannot
constitutionally contract away the otherwise applicable
1
Communication Materials and Design, Inc. v. Court of Appeals, 260 SCRA
673 [1996].
460
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
461
provisions of law. (Gen. Milling Co., Inc. v. Torres, 196
SCRA 215 [1991]).
Existing laws are deemed read into contracts in
order to fix the obligation as between the parties, as well
as the reservation of the essential attributes of sovereign
power as a postulate of the legal order. All contracts made
with reference to any matter that is subject to regulation
under the police power must be understood as made in
reference to the possible exercise of that power. Otherwise,
important and valuable reforms may be precluded by the
simple device of entering into contracts for the purpose of
doing that which otherwise may be prohibited. (Basa v.
Federacion Obrera de la Industria Tabaquera, 61 SCRA
93 [1974]).”2
In our country and in the absence of a valid agreement as to
the choice of law by the parties, Article 17 of the Civil Code will
apply:
“Art. 17. The forms and solemnities of contracts,
wills, and other public instruments shall be governed by
the laws of the country in which they are executed.
When the acts referred to are executed before the
diplomatic or consular officials of the Republic of the Philippines in a foreign country, the solemnities established
by Philippine laws shall be observed in their execution.”
Article 17 of the Civil Code is silent as to the intrinsic validity
of the documents. However, Article 16 provides that the intrinsic
validity of a will is governed by the national law of the decedent.
Moreover, in Government v. Frank,3 our Court, in rejecting Frank’s
contention that the contract of employment which he entered in
the United States could not be enforced against him, being a minor
under Philippine law, although already of age in the country where
the contract was executed, held that “Matters bearing upon the
execution, the interpretation, and the validity of a contract are
determined by the law where the contract is made.” This ruling
would imply that the law of the place where the contract is executed
also governs its intrinsic validity. This traditional rule of the lex loci
2
3
AGPALO’S Legal Words and Phrases, 1997 ed., p. 163.
13 Phil. 236.
462
OBLIGATIONS AND CONTRACTS
contractus, which states that the proper law applicable in deciding
upon the rights and liabilities of the contracting parties is that of the
place of contracting. This law would also decide such matters as the
essential validity of the contract. The test to determine the proper
law of the contract would appear to be the system of law with which
the transaction has the closest and most real connection.4
The doctrine of lex loci contractus states that, as a general rule,
the law of the place where a contract is made or entered into governs
with respect to its nature and validity, obligation and interpretation.
This is particularly so, if the place of making and the place of
performance are the same. The rule has been said to be applicable
even though the place where the contract was made is different from
the place where it is to be performed.5 The exception to the lex loci
contractus is the case of a contract affecting property, where the
test is the lex rei sitae which governs the forms, formalities, and
validity of the contract, including the capacity of the person to take
real property, which obtains in the Philippines.6
The reason for the rule is that in entering into a contract in a
particular country, the parties have in the mind the law of such place
that will govern in case issues as to its validity and interpretation
will arise. Moreover, the principle is well settled that an existing
contract enters and forms part of a valid contract without need for
the parties expressly making reference to it.7 Not only are existing
laws deemed read into contracts in order to fix the obligations of
the parties, but the essential attributes of sovereign power is also
read into the contracts as a basic postulate of the legal order.8
Private parties cannot constitutionally contract away the otherwise
applicable provisions of law.9
Where all the stages of a contract take place in one country,
a conflict of laws problem may not arise. However, a contract undergoes various stages that include its negotiation or preparation,
its perfection and, finally its consummation and performance. Negotiation covers the period from the time the prospective contract-
4
16 Am Jur 2d, p. 75; Law and Business Publications (Canada), Inc., 1980,
p. 132.
United Airlines, Inc. v. Court of Appeals, 357 SCRA 99 [2001].
See discussion on the subject, on Chapter on Property.
7
Boman Environmental Dev. v. Court of Appeals, 167 SCRA 540 [1988].
8
Tolentino v. Secretary of Finance, 235 SCRA 630 [1994].
9
General Milling Co., Inc. v. Torres, 196 SCRA 215 [1991].
5
6
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
463
ing parties indicate interest in the contract to the time the contract
is concluded (perfected). The perfection of the contract takes place
upon the concurrence of the essential elements thereof. A contract
which is consensual as to perfection is established upon the meeting
of the minds, i.e., the concurrence of offer and acceptance, on the
object and on the cause thereof. A contract which requires, in addition, the delivery of the object of the agreement, as in a pledge or
commodatum, is referred to as a real contract. In a solemn contract,
compliance with certain formalities prescribed by law, such as in a
donation of real property, is essential in order to make the act valid,
the prescribed form being thereby an essential element thereof. The
stage of consummation begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof.10 The law of the country, where the last stage in
the perfection of the contract took place, is the place of execution.
In the absence of a contrary intention, the general rule is that
the law of the place of performance of the contract governs issues
as whether the contract has been breached, rescinded, or otherwise
terminated or repudiated; whether there is an excuse for nonperformance, like illegality or impossibility of performance; whether
a party to a contract has forfeited contractual rights by conduct
such as failure to give notice or make payments to the other party,
and whether there was a valid discharge from the obligations of the
contract.11
§418.00 Changes in lex loci contractus to most significant relationship
It has been held, however, that the term lex loci contractus
has undergone changes from the time that substantive questions
of law were decided by the law of the place of the making while
procedural questions were decided by the law of the forum.12 Sections
187 and 188 of the U.S. Restatement of Law, Second, Conflict of
Laws 2d seem to reflect the changes which the traditional doctrine
of lex loci contractus has undergone, in favor of the most significant
relationship to the transaction and the parties.
Sections 187 and 188 of the Restatement of Law, Second,
Conflict of Laws 2d read:
Ang Yu Asuncion v. CA, 238 SCRA 602 [1994].
16 Am Jur 2d, pp. 76-77.
12
BLACK’S Law Dictionary, Fifth Ed., p. 818.
10
11
464
OBLIGATIONS AND CONTRACTS
§187. Law of the State Chosen by the Parties
(1) The law of the State chosen by the parties to
govern their contractual rights and duties will be applied
if the particular issue is one which the parties could have
resolved by an explicit provision in their agreement directed to that issue.
(2) The law of the State chosen by the parties to
govern their contractual rights and duties will be applied,
even if the particular issue is one which the parties could
not have resolved by an explicit provision in their agreement directed to that issue, either.
(a) the chosen State has no substantial relationship to the parties or the transaction and there
is no other reasonable basis for the parties’ choice;
or
(b) application of the law of the chosen State
would be contrary to a fundamental policy of a State
which has a materially greater interest than the
chosen State in the determination of the particular
issue and which, under the rule of §188, would be
the state of the applicable law in the absence of an
effective choice of law by the parties.
(3) In the absence of a contrary indication of intention, the reference is to the local law of the State of the
chosen law.
§188. Law Governing in Absence of Effective Choice
by the Parties
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local
law of the state which, with respect to that issue, has the
most significant relationship to the transaction and the
parties under the principles stated in §6.
(2) In the absence of an effective choice of law by
the parties (see 187), the contacts to be taken into account
in applying the principles of §6 to determine the law applicable to an issue include:
(a)
the place of contracting,
(b)
the place of negotiation of the contract,
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
(c)
465
the place of performance,
(d) the location of the subject matter of the
contract, and
(e) the domicile, residence, nationality, place
of incorporation and place of business of the parties.
These contracts are to be evaluated according to
their relative importance with respect to the particular
issue.
(3) If the place of negotiating the contract and the
place of performance are in the same state, the local law
of this state will usually be applied, except as otherwise
provided in §§189-203.
§419.00 Choice of law by the parties in a contract
The parties to a contract may select the law by which it is to
be governed. In such a case, the foreign law is adopted as a “system”
to regulate relations of the parties, including questions of their
capacity to enter into the contract, the formalities to be observed by
them, matters of performance and so forth.13
Instead of adopting the entire mass of the foreign law, the
parties may just agree that specific provisions of a foreign statute
shall be deemed incorporated into their contract “as a set of terms.”
By such reference to the provisions of the foreign law, the contract
does not become a foreign contract to be governed by the foreign law.
The said law does not operate as a statute but as a set of contractual
terms deemed written in the contract, such that if the foreign law so
incorporated in the contract provides for greater benefits than those
in the contract, the former shall govern. Thus, in Cadalin v. POEA’s
Administrator,14 the Court ruled:
NLRC applied the Amari Decree No. 23 of 1976,
which provides for greater benefits than those stipulated
in the overseas-employment contracts of the claimants. It
was of the belief that “where the laws of the host country
are more favorable and beneficial to the workers, then the
13
14
Cadalin v. POEA’s Administrator, 238 SCRA 721, 774 [1994].
Ibid.
466
OBLIGATIONS AND CONTRACTS
laws of the host country shall form part of the overseas
employment contract.” It quoted with approval the observation of the POEA Administrator that “. . . in labor proceedings, all doubts in the implementation of the provisions of the Labor Code and its implementing regulations
shall be resolved in favor of labor.”
AIBC and BRII claim that NLRC acted capriciously
and whimsically when it refused to enforce the overseasemployment contracts, which became the law of the parties. They contend that the principle that a law is deemed
to be a part of a contract applies only to provisions of Philippine law in relation to contracts executed in the Philippines.
The overseas-employment contracts, which were
prepared by AIBC and BRII themselves, provided that
the laws of the host country became applicable to said
contracts if they offer terms and conditions more favorable that those stipulated therein. It was stipulated in
said contracts that:
“The Employee agrees that while in the employ of
the Employer, he will not engage in any other business
or occupation, nor seek employment with anyone other
than the Employer; that he shall devote his entire time
and attention and his best energies, and abilities to the
performance of such duties as may be assigned to him by
the Employer; that he shall at all times be subject to the
direction and control of the employer; and that the benefits provided to Employee hereunder are substituted for
and in lieu of all other benefits provided by any applicable law, provided of course, that total remuneration and
benefits do not fall below that of the host country regulation or custom, it being understood that should applicable
laws establish that fringe benefits, or other such benefits
additional to the compensation herein agreed cannot be
waived, Employee agrees that such compensation will be
adjusted downward so that the total compensation hereunder, plus the non-waivable benefits shall be equivalent
to the compensation herein agreed.”
The overseas-employment contracts could have been
drafted more felicitously. While a part thereof provides
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
that the compensation to the employee may be “adjusted
downward so that the total computation (thereunder)
plus the non-waivable benefits shall be equivalent to the
compensation” therein agreed, another part of the same
provision categorically states “that total remuneration
and benefits do not fall below that of the host country
regulation and custom.’’
Any ambiguity in the overseas-employment contracts should be interpreted against AIBC and BRII, the
parties that drafted it (Eastern Shipping Lines, Inc. v.
Margarine-Verkaufs-Union, 93 SCRA 257 [1979]).
Article 1377 of the Civil Code of the Philippines provides:
“The interpretation of obscure words or
stipulations in a contract shall not favor the
party who caused the obscurity.’’
Said rule of interpretation is applicable to contracts
of adhesion where there is already a prepared form containing the stipulations of the employment contract and
the employees merely “take it or leave it.’’ The presumption is that there was an imposition by one party against
the other and that the employees signed the contracts out
of necessity that reduced their bargaining power (Fieldmen’s Insurance Co., Inc. v. Songco, 25 SCRA 70 [1968]).
Applying the said legal precepts, we read the overseas-employment contracts in question as adopting the
provisions of the Amari Decree No. 23 of 1976 as part and
parcel thereof.
The parties to a contract may select the law by which
it is to be governed (Cheshire, Private International Law,
187 [7th ed].). In such a case, the foreign law is adopted as
a “system” to regulate the relations of the parties, including questions of their capacity to enter into the contract,
the formalities to be observed by them, matters of performance, and so forth (16 Am Jur 2d, 150-161).
Instead of adopting the entire mass of the foreign
law, the parties may just agree that specific provisions of
a foreign statute shall be deemed incorporated into their
contract “as a set of terms.” By such reference to the pro-
467
468
OBLIGATIONS AND CONTRACTS
visions of the foreign law, the contract does not become
a foreign contract to be governed by the foreign law. The
said law does not operate as a statute but as a set of contractual terms deemed written in the contract (Anton,
Private International Law 197 [1967]; Dicey and Morris,
The Conflict of Laws 702-703, [8th ed.]).
A basic policy of contract is to protect the expectation of the parties (Reese, Choice of Law in Torts and Contracts, 16 Columbia Journal of Transnational Law 1, 21
[1977]). Such party expectation is protected by giving effect to the parties’ own choice of the applicable law (Fricke
v. Isbrandtsen Co., Inc., 151 F. Supp. 465, 467 [1957]).
The choice of law must, however, bear some relationship
to the parties or their transaction (Scoles and Hayes, conflict of Law 644-647 [1982]). there is no question that the
contracts sought to be enforced by claimants have a direct
connection with the Bahrain Law because the services
were rendered in that country.15
The general rule is that, in transactions to be done or services
to be performed, which are reduced to writing or agreement, the
parties may stipulate that any disputes or differences arising from
the agreement be governed by the laws of a particular country, i.e.,
Japan, and subject exclusively to the jurisdiction of another country,
such as the jurisdiction of the District Court of Japan. This is known
as the choice-of-law and forum clause and may bar the party, in case
of dispute, from filing a suit in the country other than as stipulated
in the agreement, i.e., the Philippines.16
In Norse Management Co. v. National Seamen Board,17 Napoleon Abordo was hired by petitioner as Second Engineer of “Cherry
Earl,” a vessel of Singaporean Registry. Their employment agreement provided that in the event of illness or injury to the employee
arising out of and in the course of his employment and not due to
his own misconduct, “compensation shall be paid to employee in accordance with and subject to the limitation of the Workmen’s Compensation Act of the Republic of the Philippines or the Worker’s
Insurance Act of registry of the vessel whichever is greater.” The
employer claimed that Philippine law should apply and its liability
Ibid., pp. 772-775.
K.K. Shell Sekiyu Osaka Hatsubaisho v. CA, 188 SCRA 145 [1990].
17
117 SCRA 486 [1982].
15
16
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
469
reduced “in accordance with respondent NSB’s Standard Formal of
a Service Agreement,” which provided for a much lower amount of
liability of the employer than that provided under Singaporean law.
The Court ruled that since the laws of Singapore, the place of registry of the vessel in which the late husband of private Abordo served
at the time of his death, granted a better compensation package,
the Singaporean law should be applied. Thus, in Norse Management
Co., the Court applied the law chosen by the parties in their contract
as the applicable law governing the amount of compensation the
claimant therein should receive.
In Bagong Filipinas Overseas Corporation v. National Labor
Relations Commission,18 the issue was whether the amount of the
death compensation of a Filipino seaman should be determined under
the shipboard employment contract executed in the Philippines or
the Hongkong law. Holding that the shipboard employment contract
was controlling, the court differentiated said case from Norse
Management Co. in that in the latter case there was an express
stipulation in the employment contract that the foreign law would
be applicable if it afforded greater compensation. There was no such
agreement in Bagong Filipinas Overseas v. NLRC.
§420.00 Exceptions to law chosen by the parties
There are exceptions to the rule that the parties may stipulate
as to the applicable law which will govern in case of dispute arising
from their agreement. Some of these are:
1.
Where the foreign law chosen is contrary to peremptory
provisions dealing with matters impressed with public interest, the
chosen law cannot be applied. For the parties may not contract away
applicable provisions dealing with matters heavily impressed with
public interest. The law relating to labor and employment is one such
an area and the parties are not at liberty to insulate themselves and
their relationships from the impact of labor laws and regulations by
simply contracting with each other, in which case the labor law of
the forum applies.19
2.
Where the relationship of the contracting parties affects
public interest in the country of one of the parties, or the substantial
contacts arising therefrom point to the law of another country as
18
19
135 SCRA 278 [1985].
Pakistan International Airlines Corp. v. Ople, 190 SCRA 90 [1990].
470
OBLIGATIONS AND CONTRACTS
applicable law, such law will be applied, notwithstanding the fact
that the parties have agreed that a specific foreign law as the
applicable law. This is illustrated in Pakistan International Airlines
Corporation v. Ople.20
In Pakistan International Airlines Corporation, it appears that
the Pakistan International Airlines Corporation (PIA), a foreign
corporation licensed to business in the Philippines, entered into
separate employment contracts with two Philippine nationals, as
flight attendants. The contracts provided in pertinent portions as
follows:
“5.
ALTY
DURATION OF EMPLOYMENT AND PEN-
This agreement is for a period of three (3) years, but
can be extended by the mutual consent of the parties.
xxx
6.
xxx
xxx
TERMINATION
xxx
xxx
xxx
Notwithstanding anything to contrary as herein provided, PIA reserves the right to terminate this agreement
at any time by giving the EMPLOYEE notice in writing in
advance one month before the intended termination or in
lieu thereof, by paying the EMPLOYEE wages equivalent
to one month’s salary.
xxx
10.
xxx
xxx
APPLICABLE LAW:
This agreement shall be construed and governed under and by the laws of Pakistan, and only the Courts of
Karachi, Pakistan shall have the jurisdiction to consider
any matter arising out of or under this agreement.” (190
SCRA p. 94).
After one year and four months from the execution of the
employment contract, PIA sent a letter to the flight attendants
informing them that their services would be terminated conformably
with clause 6 of the contract. Thereafter, the flight attendants filed
20
190 SCRA 90 [1990].
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
471
a complaint against PIA for illegal dismissal and damages arising
therefrom with the then Ministry of Labor and Employment. As
a defense, PIA invoked its agreement with the flight attendants,
portions of which are quoted above. The Ministry of Labor and
Employment ruled in favor of the flight attendants and awarded
them damages. In a petition filed with the Supreme Court, to set
aside the MOLE decision, the Court sustained the MOLE decision,
as follows:
In its third contention, petitioner PIA invokes paragraphs 5 and 6 of its contract of employment with private
respondents Farrales and Mamasig, arguing that its relationship with them was governed by the provisions of
its contract rather than by the general provisions of the
Labor Code.
Paragraph 5 of that contract set a term of three (3)
years for that relationship, extendible by agreement between the parties; while paragraph 6 provided that, notwithstanding any other provision in the contract, PIA had
the right to terminate the employment agreement at any
time by giving one-month’s notice to the employee or, in
lieu of such notice, one-month’s salary.
A contract freely entered into should, of course, be
respected, as PIA argues, since a contract is the law between the parties. The principle of party autonomy in
contracts is not, however, an absolute principle. The rule
in Article 1306, of our Civil Code is that the contracting
parties may establish such stipulations as they may deem
convenient, “provided they are not contrary to law, morals, good customs, public order or public policy.” Thus,
counter-balancing the principle of autonomy of contracting parties is the equally general rule that provisions of
applicable law, especially provisions relating to matters
affected with public policy, are deemed written into the
contract. Put a little differently, the governing principle
is that parties may not contract away applicable provisions of law especially peremptory provisions dealing
with matters heavily impressed with public interest. The
law relating to labor and employment is clearly such an
area and parties are not at liberty to insulate themselves
and their relationships from the impact of labor laws and
regulations by simply contracting with each other. It is
472
OBLIGATIONS AND CONTRACTS
thus necessary to appraise the contractual provisions invoked by petitioner PIA in terms of their consistency with
applicable Philippine law and regulations.
As noted earlier, both the Labor Arbiter and the
Deputy Minister, MOLE, in effect held that paragraph 5 of
that employment contract was inconsistent with Articles
280 and 281 of the Labor Code as they existed at the time
the contract of employment was entered into, and hence
refused to give effect to said paragraph 5. These Articles
read as follows:
“Art. 280. Security of Tenure. — In cases of regular
employment, the employer shall not terminate the services of an employee except for a just cause or when authorized by this Title. An employee who is unjustly dismissed
from work shall be entitled to reinstatement without loss
of seniority rights and to his backwages computed from
the time his compensation was withheld from him up to
the time his reinstatement.
Article 281. Regular and Casual Employment. — The
provisions of written agreement to the contrary notwithstanding and regardless of the oral agreements of the parties, an employment shall be deemed to be regular where
the employee has been engaged to perform activities which
are usually necessary or desirable in the usual business
or trade of the employer, except where the employment
has been fixed for a specific project or undertaking the
completion or termination of which has been determined
at the time of the engagement of the employee or where
the work or services to be performed is seasonal in nature
and the employment is for the duration of the season.
An employment shall be deemed to be casual if it
is not covered by the preceding paragraph: provided,
that, any employee who has rendered at least one year
of service, whether such service is continuous or broken,
shall be considered as regular employee with respect to
the activity in which he is employed and his employment
shall continue while such actually exists.” (Emphasis
supplied)
In Brent School, Inc., et al. v. Ronaldo Zamora, etc.,
et al., the Court had occasion to examine in detail the
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
question of whether employment for a fixed term has been
outlawed under the above-quoted provisions of the Labor
Code. After an extensive examination of the history and
development of Articles 280 and 281, the Court reached
the conclusion that a contract providing for employment
with a fixed period was not necessarily unlawful:
“There can of course be no quarrel with the proposition that where from the circumstances it is apparent
that periods have been imposed to preclude acquisition of
tenurial security by the employee, they should be struck
down or disregarded as contrary to public policy, morals, etc. But where no such intent to circumvent the law
is shown, or stated otherwise, where the reason for the
law does not exist, e.g., where it is indeed the employee
himself who insists upon a period or where the nature of
the engagement is such that, without being seasonal or
for a specific project, a definite date of termination is a
sine qua non, would an agreement fixing a period be essentially evil or illicit, therefore anathema? Would such
an agreement come within the scope of Article 280 which
admittedly was enacted ‘to prevent the circumvention of
the right of the employee to be secured in ... (his) employment?’
As it is evident from even only the three examples
already given that Article 280 of the Labor Code, under a
narrow and literal interpretation, not only fails to exhaust
the gamut of employment contracts to which the lack of a
fixed period would be an anomaly, but would also appear
to restrict, without reasonable distinctions, the right of
an employee to freely stipulate with his employer the
duration of his engagement, it logically follows that such a
literal interpretation should be eschewed or avoided. The
law must be given reasonable interpretation, to preclude
absurdity in its application. Outlawing the whole concept
of term employment and subverting to boot the principle of
freedom of contract to remedy the evil of employers’ using
it as a means to prevent their employees from obtaining
security of tenure is like cutting off the nose to spite the
face or, more relevantly, curing a headache by lopping off
the head.
xxx
xxx
xxx
473
474
OBLIGATIONS AND CONTRACTS
Accordingly, and since the entire purpose behind
the development of legislation culminating in the present Article 280 of the Labor Code clearly appears to have
been, as already observed, to prevent circumvention of
the employee’s right to be secure in his tenure, the clause
in said article indiscriminately and completely ruling out
all written or oral agreements conflicting with the concept of regular employment as defined therein should be
construed to refer to the substantive evil that the Code
itself has singled out: agreements entered into precisely
to circumvent security of tenure. It should have no application to instances where a fixed period of employment
was agreed upon knowingly and voluntarily by the parties, without any force, duress or improper pressure being
brought to bear upon the employee and absent any other
circumstances vitiating his consent, or where it satisfactorily appears that the employer and employee dealt with
each other on more or less equal terms with no moral dominance whatever being exercised by the former over the
latter. Unless thus limited in its purview, the law would
be made to apply to purposes other than those explicitly
stated by its framers; it thus becomes pointless and arbitrary, unjust in its effects and apt to lead to absurd and
unintended consequences.” (Emphasis supplied)
It is apparent from Brent School that the critical
consideration is the presence or absence of a substantial indication that the period specified in an employment agreement was designed to circumvent the security
of tenure of regular employees which is provided for in
Articles 280 and 281 of the Labor Code. This indication
must ordinarily rest upon some aspect of the agreement
other than the mere specification of a fixed term of the
employment agreement, or upon evidence aliunde of the
intent to evade.
Examining the provisions of paragraphs 5 and 6 of
the employment agreement between petitioner PIA and
private respondents, we consider that those provisions
must be read together and when so read, the fixed period
of three (3) years specified in paragraph 5 will be seen
to have been effectively neutralized by the provisions of
paragraph 6 of that agreement. Paragraph 6 in effect
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
took back from the employee the fixed three (3)-year
period ostensibly granted by paragraph 5 by rendering
such period in effect a facultative one at the option of the
employer PIA. For petitioner PIA claims to be authorized
to shorten that term, at any time and for any cause
satisfactory to itself, to a one-month period, or even less
by simply paying the employee a month’s salary. Because
the net effect of paragraphs 5 and 6 of the agreement
here involved is to render the employment of private
respondents Farrales and Mamasig basically employment
at the pleasure of petitioner PIA, the Court considers that
paragraphs 5 and 6 were intended to prevent any security
of tenure from accruing in favor of private respondents
even during the limited period of three (3) years, 13 and
thus to escape completely the thrust of Articles 280 and
281 of the Labor Code.
Petitioner PIA cannot take refuge in paragraph 10
of its employment agreement which specifies, firstly, the
law of Pakistan as the applicable law of the agreement
and, secondly, lays the venue for settlement of any dispute arising out of or in connection with the agreement
“only [in] courts of Karachi, Pakistan.” The first clause of
paragraph 10 cannot be invoked to prevent the application of Philippine labor laws and regulations to the subject matter of this case, i.e., the employer-employee relationship between petitioner PIA and private respondents.
We have already pointed out that relationship is much
affected with public interest and that the otherwise applicable Philippine laws and regulations cannot be rendered
illusory by the parties agreeing upon some other law to
govern their relationship. Neither may petitioner invoke
the second clause of paragraph 10, specifying the Karachi courts as the sole venue for the settlement of disputes
between the contracting parties. Even a cursory scrutiny
of the relevant circumstances of this case will show the
multiple and substantive contacts between Philippine
law and Philippine courts, on the one hand, and the relationship between the parties, upon the other: the contract was not only executed in the Philippines, it was also
performed here, at least partially; private respondents
are Philippine citizens and residents, while petitioner,
although a foreign corporation, is licensed to do business
475
476
OBLIGATIONS AND CONTRACTS
(and actually doing business) and hence resident in the
Philippines; lastly, private respondents were based in the
Philippines in between their assigned flights to the Middle East and Europe. All the above contacts point to the
Philippine courts and administrative agencies as a proper
forum for the resolution of contractual disputes between
the parties. Under these circumstances, paragraph 10 of
the employment agreement cannot be given effect so as
to oust Philippine agencies and courts of the jurisdiction
vested upon them by Philippine law. Finally, and in any
event, the petitioner PIA did not undertake to plead and
prove the contents of Pakistan law on the matter; it must
therefore be presumed that the applicable provisions of
the law of Pakistan are the same as the applicable provisions of Philippine law.21
The Pakistan International Airlines Corporation case highlights
the rule that any agreement on the choice of foreign law and venue
of action must yield to the public policy of the country on the subject
as enshrined in the Constitution and the laws. In other words, while
the parties may stipulate on the foreign law and place of action that
will apply in case of dispute, the agreement cannot be given effect
if it violates local laws or public policy. Article 17 of the Civil Code
makes it emphatic that “Prohibitive laws concerning persons, their
acts or property, and those which have for the object public order,
public policy and good customs shall not be rendered ineffective by
laws or judgments promulgated or by determinations or conventions
agreed upon in a foreign country.”
The ruling in Pakistan International Airlines Corporation
was reiterated in Manila Resources Dev. Corporation v. NLRC,22 in
which the argument that the labor laws of Saudi Arabia should have
primacy over Philippine laws was rejected. The Court ruled that
Philippine laws and regulations cannot be rendered illusory by the
parties agreeing on some other laws to govern their relationship.
§421.00 Where there is no agreement as to choice of law
Where the parties have not stipulated in their contract which
law should be made applicable in case of breach thereof, the courts
21
22
Ibid., pp. 99-193.
213 SCRA 296.
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
477
of the forum apply the different rules determinative of the applicable
law. One of such rules is the application of the law where the contract
was executed, or the lex loci celebrationis rule. In Bagong Filipino
Overseas Corp. v. NLRC,23 the shipboard employment agreement
was between Golden Star Shipping, a Hongkong based firm, and
Guillermo Pacho, and the contract was executed in the country and
said contract was approved by the National Seamen Board. Pacho
having died during his employment, claim for compensation was
filed against the employer. The issue was, which law should apply
— the Hongkong law or the Philippine law — on the amount of
compensation. The Court ruled that Philippine law applies, there
being no express contract that Hongkong law should apply.
However, in cases involving claims of Filipino workers on account of injury or death during employment or in the course of services in a vessel owned by the foreign employer, the law of registry
of the vessel, if favorable to the worker, is applied.24
§422.00 Where there is neither agreement nor treaty
The plaintiff makes the choice of the forum, or the court where
the action or complaint is filed. If plaintiff chooses the Philippines
to file the action, whether his choice will be sustained by the court
depends upon a number of considerations, such as his cause of action
and the law upon which it is based, the venue and jurisdiction of the
court, and private interests of the litigants.
In Saudi Arabian Airlines v. CA,25 plaintiff Morada’s cause
of action for damages under Articles 19 and 21 of the Civil Code
was filed in the Regional Trial Court of Quezon City, against Saudi
Arabian Airlines doing business in the Philippines. Petitioner SAUDI
maintains that plaintiff’s claim for abuse of rights occurred in the
Kingdom of Saudi Arabia and the existence of a foreign element
qualifies the case for the application of the law of the Kingdom
of Saudi Arabia, by virtue of the lex loci delicti commissi rule. In
sustaining plaintiff’s choice of the forum, the Court found that the
over-all harm or the totality of the injury to plaintiff occurred in the
Philippines and ruled:
135 SCRA 278 [1985].
Norse Management Co. v. National Seamen Board, 117 SCRA 486 [1982].
25
297 SCRA 469 [1998].
23
24
478
OBLIGATIONS AND CONTRACTS
“Pragmatic considerations, including the convenience of the parties, also weigh heavily in favor of the
RTC Quezon City assuming jurisdiction. Paramount is the
private interest of the litigant. Enforceability of a judgment if one is obtained is quite obvious. Relative advantages and obstacles to a fair trial are equally important.
Plaintiff may not, by choice of an inconvenient forum, vex,
harass, or oppress the defendant, e.g., by inflicting upon
him needless expenses or disturbance. But unless the balance is strongly in favor of the defendant, the plaintiff’s
choice of forum should rarely be disturbed.
Weighing the relative claims or the parties, the court
a quo found it best to hear the case in the Philippines.
Had it refused to take cognizance of the case, it would be
forcing plaintiff (private respondent now) to seek remedial action elsewhere, i.e., the Kingdom of Saudi Arabia
where she no longer maintains substantial connections.
That would have caused a fundamental unfairness to
her.
Moreover, by hearing the case in the Philippines
no unnecessary difficulties and inconvenience have been
shown by either of the parties. The choice of forum of the
plaintiff (now private respondent) should be upheld.”26
The Court in Saudi Arabian Airlines apparently gave much
consideration in upholding plaintiff’s choice of the forum in that he is
a Filipino citizen and resident in the country, whose cause of action,
while consisting of series of acts that mostly took place abroad, also
constituted a valid cause of action under Philippine laws against a
foreign corporation with branches in the country.
§423.00 Place of where contract is entered into or place of performance
The law of the country where the contract is to be performed
generally governs the liability for breach of contract by the obligor
to perform his part of the obligation. Thus, where the contract of
sale of equipment was perfected in Canada to be paid by means of
letter of credit, with the seller agreeing to ship the equipment to
26
Ibid., pp. 487-488.
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
479
the Philippines. F.O.B. Vancouver or CIF Negros, Occidental; where
the buyer failed to open the letter of credit due to the failure of
Import Control Commission to issue an import license to the buyer;
and where, as a result, the seller cancelled the contract and, as a
consequence, incurred expenses thereby, would the buyer be held
liable for such expenses?
The Court answered the question in the affirmative and held
that the contract of sale was F.O.B. Vancouver, Canada. Hence, it
was the seller’s obligation to the load the cargo on the board the ship
at its expense at Vancouver, whether it provided F.O.B. or C.F.I.
Hence, from the seller’s point of the view, the place of performance
was in Canada. From the point of view of the buyer, the place of
performance was also in Canada because he was to open a letter
of credit payable to the seller through a bank in Vancouver, which
would confirm it. The buyer could not be excused for not opening
the letter of credit because due to the failure to the Import Control
Commission to issue the license as it was not a condition imposed
in the contract. The Court held that the place of performance was in
Canada and following the rule of lex loci solutionis, to the effect that
the place where the contract was to be performed would determine
the validity, nature, obligation and effect of the contract, the law of
Canada should apply, pursuant to which the buyer should be liable
for the expenses incurred by the seller, and the failure of the Import
Control Commission to act on the buyer’s application for import
license did not constitute a valid excuse for his failure to perform his
obligations under the contract.27
In Triple Eight Integrated Services, Inc. v. NLRC,28 the employment contract was perfected in the Philippines, but the place of
performance was in Saudi Arabia. While in Saudi Arabia, the employee got sick, and having been dismissed on the ground of illness,
without the employer securing a health certificate to support such
ground, the employee sued for payment of unpaid salaries and the
salaries for the unexpired portion of the employment contract. The
Labor Arbiter and the NLRC awarded the complainant the amounts
due under the employment contract, and the Court sustained the
award. With respect to the employer’s claim that the law of Saudi
Arabia should apply, which required no medical certificate before
an employee could be dismissed on the ground of illness, because it
27
28
Macmillan and Bloedel v. T. H. Valderama & Sons, 61 O.G. 1696.
299 SCRA 608 [1998].
480
OBLIGATIONS AND CONTRACTS
is the place of performance of the contract, the Court rejected such
claim and instead applied the rule of lex loci contractus, which was
perfected in the Philippines, as follows:
“The requirement for a medical certificate under
Article 284 of the Labor Code cannot be dispensed with;
otherwise, it would sanction the unilateral and arbitrary
determination by the employer of the gravity or extent of
the employee’s illness and thus defeat the public policy
on the protection of labor. As the Court observed in Prieto
v. NLRC, the Court is not unaware of the many abuses
suffered by our overseas workers in the foreign land
where they have ventured, usually with heavy hearts,
in pursuit of a more fulfilling future. Breach of contract,
maltreatment, rape, insufficient nourishment, subhuman lodgings, insults and other forms of debasement,
are only a few of the inhumane acts to which they are
subjected by their foreign employers, who probably feel
they can do as they please in their country. While these
workers may indeed have relatively little defense against
exploitation while they are abroad, that disadvantage
must not continue to burden them when they return to
their own territory to voice their muted complaint. There
is no reason why, in their own land, the protection of our
own laws cannot be extended to them in full measure for
the redress of their grievances.”
Petitioner likewise attempts to sidestep the medical
certificate requirement by contending that since Osdana
was working in Saudi Arabia, her employment was subject to the laws of the host country. Apparently, petitioner
hopes to make it appear that the labor laws of Saudi Arabia do not require any certification by a competent public
health authority in the dismissal of employees due to illness.
Again, petitioner’s argument is without merit.
First, established is the rule that lex loci contractus (the law of the place where the contract is made) governs in this jurisdiction. There is no question that the
contract of employment in this case was perfected here
in the Philippines. Therefore, the Labor Code, its implementing rules and regulations, and other laws affecting
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
481
labor apply in this case. Furthermore, settled is the rule
that the courts of the forum will not enforce any foreign
claim obnoxious to the forum’s public policy. Here in the
Philippines, employment agreements are more than contractual in nature. The Constitution itself, in Article XIII
Section 3, guarantees the special protection of workers, to
wit:
“The State shall afford full protection to labor, local
and overseas, organized and unorganized, and promote
full employment and equality of employment opportunities
for all.
It shall guarantee the rights of all workers to selforganization, collective bargaining and negotiations, and
peaceful concerted activities, including the right to strike
in accordance with law. They shall be entitled to security
of tenure, humane conditions of work, and a living wage.
They shall also participate in policy and decision-making
processes affecting their rights and benefits as may be
provided by law.
xxx
xxx
xxx
This public policy should be borne in mind in this case
because to allow foreign employers to determine for and by
themselves whether an overseas contract worker may be
dismissed on the ground of illness would encourage illegal
or arbitrary pre-termination of employment contracts.29
§424.00 Air transportation under the Warsaw Convention
Where there is a treaty or convention to which the Philippines
is a signatory on where an action coming within the purview of such
treaty or convention may be filed, the plaintiff must follow the provisions thereof on the matter. An example of such convention is the
Warsaw Convention which applies to all international transportation of persons, baggage or goods performed by an aircraft gratuitously or for hire.
The Republic of the Philippines is a party to the Convention
for the Unification of Certain Rules Relating to International
Transportation by Air, otherwise known as the Warsaw Convention.
29
Ibid., pp. 618-619.
482
OBLIGATIONS AND CONTRACTS
It took effect on February 13, 1933. The Convention was concurred
in by the Senate, through its Resolution No. 19, on May 16, 1950.
The Philippine instrument of accession was signed by President
Elpidio Quirino on October 13, 1950, and was deposited with the
Polish government on November 9, 1950. The Convention became
applicable to the Philippines on February 9, 1951. On September 23,
1955, President Ramon Magsaysay issued Proclamation No. 201,
declaring our formal adherence thereto, “to the end that the same
and every article and clause thereof may be observed and fulfilled
in good faith by the Republic of the Philippines and the citizens
thereof.” The Convention is thus a treaty commitment voluntarily
assumed by the Philippine government and, as such, has the force
and effect of law in this country.30 Article 28(1) of the Convention
reads:
“Art. 28(1). An action for damages must be brought
at the option of the plaintiff, in the territory of one of the
High Contracting Parties, either before the court of the
domicile of the carrier or of his principal place of business
or where he has a place of business through which the
contract has been made, or before the court at the place of
destination.”
In Santos III v. Northwest Orient Airlines,31 the Court ruled
that Article 28(1) of the Warsaw Convention refers to jurisdiction
rather than to venue. It explained:
By its own terms, the Convention applies to all international transportation of persons performed by aircraft for hire.
International transportation is defined in paragraph
(2) of Article 1 as follows:
(2) For the purposes of this convention, the expression “international transportation” shall mean any transportation in which, according to the contract made by the
parties, the place of departure and the place of destination, whether or not there be a break in the transportation or a transshipment, are situated [either] within the
territories of two High Contracting Parties.
30
31
Santos III v. Northwest Orient Airlines, 210 SCRA 256 [1992].
Ibid.
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
Whether the transportation is “international” is determined by the contract of the parties, which in the case
of passengers is the ticket. When the contract of carriage
provides for the transportation of the passenger between
certain designated terminals “within the territories of
two High Contracting Parties,” the provisions of the Convention automatically apply and exclusively govern the
rights and liabilities of the airline and its passenger.
Since the flight involved in the case at bar is international, the same being from the United States to the
Philippines and back to the United States, it is subject to
the provisions of the Warsaw Convention, including Article 28(1), which enumerates the four places where an
action for damages may be brought.
Whether Article 28(1) refers to jurisdiction or only
to venue is a question over which authorities are sharply
divided. While the petitioner cites several cases holding
that Article 28(1) refers to venue rather than jurisdiction,
there are later cases cited by the private respondent supporting the conclusion that the provision is jurisdictional.
Venue and jurisdiction are entirely distinct matters.
Jurisdiction may not be conferred by consent or waiver
upon a court which otherwise would have no jurisdiction
over the subject-matter of an action; but the venue of an
action as fixed by statute may be changed by the consent
of the parties and an objection that the plaintiff brought
his suit in the wrong country may be waived by the failure of the defendant to make a timely objection. In either
case, the court may render a valid judgment. Rules as to
jurisdiction can never be left to the consent or agreement
of the parties, whether or not a prohibition exists against
their alteration.
A number of reasons tend to support the characterization of Article 28(1) as a jurisdiction and not a venue
provision. First, the wording of Article 32, which indicates
the places where the action for damage “must’’ be brought,
underscores the mandatory nature of Article 28(1). Second, this characterization is consistent with one of the
objectives of the Convention, which is to “regulate in a
uniform manner the conditions of international trans-
483
484
OBLIGATIONS AND CONTRACTS
portation by air.” Third, the Convention does not contain
any provision prescribing rules of jurisdiction other than
Article 28(1), which means that the phrase “rules as to
jurisdiction” used in Article 32 must refer only to Article
28(1). In fact, the last sentence of Article 32 specifically
deals with the exclusive enumeration in Article 28(1) as
“jurisdictions,’’ which, as such, cannot be left to the will
of the parties regardless of the time when the damage occurred.” (210 SCRA, pp. 264-265).
In American Airlines v. Court of Appeals,32 the issue is
whether the contract of transportation, which is the ticket issued
by the airline in Geneva, between petitioner airline and the private
respondent would be considered as a single operation and part of the
contract of transportation entered into by the latter with Singapore
Airlines in Manila. The Court resolved the issue in the affirmative
and held that the Philippines is the correct place where the action
for damages is filed, thus:
The above quoted provision of the Warsaw Convention Art. 1(3) clearly states that a contract of air transportation is taken as a single operation whether it is founded
on a single contract or series of contracts. The number
of tickets issued does not detract from the oneness of
the contract of carriage as long as the parties regard the
contract as a single operation. The evident purpose underlying this Article is to promote internal air travel by
facilitating the procurement of a series of contracts for air
transportation through a single principal and obligating
different airlines to be bound by one contract of transportation. Petitioner’s acquiescence to take the place of the
original designated carrier binds it under the contract of
carriage entered into by the private respondent and Singapore Airline in Manila.
The third option of the plaintiff under Art. 28(1)
of the Warsaw Convention, e.g., to sue in the place of
business of the carrier wherein the contract was made, is
therefore, Manila, and Philippine courts are clothed with
jurisdiction over this case.33
32
33
327 SCRA 482 [2000].
Ibid., p. 493.
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
485
§425.00 When liability under Warsaw Convention does not apply
The Warsaw Convention sets a limit of liability. However, such
limit of liabilities does not apply where the airline is at fault.
Sabena Belgian World Airlines v. Court of Appeals,34 involves
the issue of the airline’s liability for lost luggage. It is undisputed
that the passenger’s luggage was lost while it was in the custody of
the airline. The trial court found the airline negligent and at fault;
and the trial court awarded damages in favor of the passenger which
the Court of Appeals sustained. The airline, however, claimed that
pursuant to the Warsaw Convention, its liability was limited to
US$20.00 per kilo unless a higher value is declared in advance and
corresponding additional charges are paid. The Court rejected such
claim because the airline was found grossly negligent, and held that
the Warsaw Convention limiting the liability of the airline does not
apply where the latter is guilty of willful misconduct or gross negligence.
The limit of liability as provided for in the Warsaw Convention
cannot be used as an excuse for the airline or its personnel to
commit wrongful acts and claim that it cannot be held liable beyond
what has been prescribed under the Convention. The court of the
forum has the discretion of applying or ignoring the provisions of the
Convention depending on the peculiar facts presented by the case,
as when there is gross negligence on the part of the airline. For as
the Court in Alitalia v. IAC,35 reiterated in Sabena Belgian World
Airlines v. Court of Appeals,36 ruled:
It remained undisputed that private respondent’s
luggage was lost while it was in the custody of petitioner.
It was supposed to arrive on the same flight that private
respondent took in returning to Manila on 02 September
1987. When she discovered that the luggage was missing,
she promptly accomplished and filed a Property Irregularity Report. She followed up her claim on 14 September 1987, and filed, on the following day, a formal letter-complaint with petitioner. She felt relieved when, on
23 October 1987, she was advised that her luggage had
finally been found, with its contents intact when waited
255 SCRA 38 [1996].
192 SCRA 9.
36
255 SCRA 38 [1996].
34
35
486
OBLIGATIONS AND CONTRACTS
anxiously only to be told later that her luggage had been
lost for the second time. Thus, the appellate court, given
all the facts before it, sustained the trial court in finding petitioner ultimately guilty of “gross negligence” in
the handling of private respondent’s luggage. The “loss of
said baggage not only once but twice,” said the appellate
court, “underscore the wanton negligence and lack of care
on the part of the carrier.’’
The above findings, which certainly cannot be said
to be without basis, foreclose whatever rights petitioner
might have had to the possible limitation of liabilities
enjoyed by international air carriers under the Warsaw
Convention (Convention for the Unification of Certain
Rules Relating to International Carriage by Air, as
amended by the Hague Protocol of 1955, the Montreal
Agreement of 1966, the Guatemala Protocol of 1971
and the Montreal Protocols of 1975). In Alitalia vs.
Intermediate Appellate Court, now Chief Justice Andres
R. Narvasa, speaking for the Court, has explained it well;
he said:
“The Warsaw Convention however denies to the carrier availment of the provisions which exclude or limit
his liability if the damage is caused by his willful misconduct or by such default on his part as, in accordance
with the law of the court seized of the case, is considered
to be equivalent to ‘willful misconduct,’ or ‘if the damage is (similarly) caused . . . by any agent of the carrier
acting within the scope of his employment.’ The Hague
Protocol amended the Warsaw Convention by removing
the provision that if the airline took all necessary steps
to avoid the damage, it could exculpate itself completely,
and declaring the stated limits of liability not applicable
‘if it is proved that the damage resulted from an act or
omission of the carrier, its servants or agents, done with
intent to cause damage or recklessly and with knowledge
that damage would probably result.’ The same deletion
was effected by the Montreal Agreement of 1966, with the
result that a passenger could recover unlimited damages
upon proof of willful misconduct.
“The Convention does not thus operate as an exclusive enumeration of the instances of an airline’s liability,
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
487
or as an absolute limit of the extent of that liability. Such
a proposition is not borne out by the language of the Convention, as this Court has now, and at an earlier time,
pointed out. Moreover, slight reflection readily leads to
the conclusion that it should be deemed a limit of liability
only in those cases where the cause of the death or injury
to person, or destruction, loss or damage to property or
delay in its transport is not attributable to or attended by
any willful misconduct, bad faith, recklessness or otherwise improper conduct on the part of any official or employee for which the carrier is responsible, and the carrier or misconduct of its employees, or for some Particular
or exceptional type of damage. Otherwise, an air carrier
would be exempt from any liability for damages in the
event of its absolute refusal, in bad faith, to comply with a
contract of carriage, which is absurd. No may it for a moment be supposed that if a member of the aircraft complement should inflict some physical injury on a passenger,
or maliciously destroy or damage the latter’s property,
the Convention might successfully be pleaded as the sole
gauge to determine the carrier’s liability to the passenger.
Neither may the Convention be invoke to justify the disregard of some extraordinary sort of damage resulting to
a passenger and preclude recovery therefore beyond the
limits set by said Convention. It is in this sense that the
Convention has been applied, or ignored, depending on
the peculiar facts presented by each case.’’
The Court thus sees no error in the preponderant
application to the instant case by the appellate court, as
well as by the trial court, of the usual rules on the extent
of recoverable damages beyond the Warsaw limitations.
Under domestic law and jurisprudence (the Philippines
being the country of destination), the attendance of gross
negligence (given the equivalent of fraud or bad faith)
holds the common carrier liable for all damages which
can be reasonably attributed, although unforeseen, to the
non-performance of the obligation, including moral and
exemplary damages. (255 SCRA pp. 45-47).
An airline’s contract of carriage partakes of two types, namely:
a contract to deliver a cargo or merchandise to its destination, and a
contract to transport passengers to their destination. In the absence
488
OBLIGATIONS AND CONTRACTS
of willful misconduct, bad faith, recklessness or otherwise improper
conduct on the part of any official or employee of the carrier, the carrier is not liable due loss or destruction of the cargo in excess of what
the passenger has declared in the tariff filed with airline authorities
in accordance with Article 22(1) of the Warsaw Convention, which
reads:
“In the transportation of checked baggage and goods,
the liability of the carrier shall be limited to a sum of 250
francs per kilogram, unless the consignor has made, at
the time the package was handed over to the carrier, a
special declaration of the value at delivery and has paid
a supplementary sum if the case so requires. In that case
the carrier will be liable to pay a sum not exceeding the
declared sum, unless he proves that the sum is greater
than the actual value to the consignor at delivery.’’
However, the airline may waive the above provision by failure
to raise the liability limit as a defense in the action filed against the
airline or, having raised it as a defense, by failure to object to any
evidence of the plaintiff of more than what has been declared, in
any of which case the airline may be held liable for more than the
amount so declared.37
“American jurisprudence provides that an air carrier is not liable for the loss of baggage in an amount in
excess of the limits specified in the tariff which was filed
with the proper authorities, such tariff being binding on
the passenger regardless of the passenger’s lack of knowledge thereof or assent thereto. This doctrine is recognized
in this jurisdiction.
Notwithstanding the foregoing, we have, nevertheless, ruled against blind reliance on adhesion contracts
where the facts and circumstances justify that they should
be disregarded. In addition, we have held that benefits of
limited liability are subject to waiver such as when the
air carrier failed to raise timely objections during the trial
when questions and answers regarding the actual claims
and damages sustained by the passenger were asked.
37
British Airways v. Court of Appeals, 285 SCRA 450 [1998].
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
489
Given the foregoing postulates, the inescapable conclusion is that BA had waived the defense of limited liability when it allowed Mahtani to testify as to the actual
damages he incurred due to the misplacement of his luggage, without any objection.”38
There is another exception to the liability limit under the Warsaw Convention. The rule is that the limit of liability of the carrier
applies only when the death or injury to person or destruction, loss
or damage to property or delay in its transport is not attributable
to or the willful misconduct, bad faith, recklessness or otherwise
improper conduct on the part of any official or employee of the carrier. In other words, an airline passenger or his heir in case of death
of the passenger, may recover more than what is provided in the
Warsaw Convention where he can show that the airline official or
employee has been guilty of willful misconduct, bad faith, recklessness or otherwise improper conduct.39
As an international airline is not liable for force majeure, except
when such force majeure is accompanied by neglect or malfeasance
by the airline’s employees; and even in the absence of such neglect or
malfeasance, the airline is still liable for failure to extend courtesies
to the passengers or to provide them assistance when stranded by
the cancellation of the flights due to act of God. The case of Japan
Airlines v. Court of Appeals,40 illustrates this rule. The Court ruled:
“(T)here was indeed a fortuitous event resulting in
the diversion of the PAL flight. However, the unforeseen
diversion was worsened when ‘private respondents (passenger) was left at the airport and could not even hitch
a ride in a Ford Fiera loaded with PAL personnel,’ not
to mention the apparent apathy of the PAL station manager as to the predicament of the stranded passengers.
In light of these circumstances, we held that if the fortuitous event was accompanied by neglect and malfeasance
by the carrier’s employees, an action for damages against
the carrier is permissible. x x x
We are not prepared, however, to completely absolve
petitioner JAL from any liability. It must be noted that
Ibid., pp. 459-460.
Northwest Airlines, Inc. v. Court of Appeals, 284 SCRA 408 [1998].
40
294 SCRA 19 [1998].
38
39
490
OBLIGATIONS AND CONTRACTS
private respondents bought tickets from the United States
with Manila as their final destination. While JAL was
no longer required to defray private respondents’ living
expenses during their stay in Narita on account of the
fortuitous event, JAL had the duty to make the necessary
arrangements to transport private respondents on the
first available connecting flight to Manila. Petitioner
JAL reneged on its obligation to look after the comfort
and convenience of its passengers when it declassified
private respondents from “transit passengers’’ to “new
passengers’’ as a result of which private respondents were
obliged to make the necessary arrangements themselves
for the next flight to Manila. Private respondents were
placed on the waiting list from June 20 to June 24. To
assure themselves of a seat on an available flight, they
were compelled to stay in the airport the whole day of June
22, 1991 and it was only at 8:00 p.m. of the aforesaid date
that they were advised that they could be accommodated
in said flight which flew at about 9:00 a.m. the next day.
We are not oblivious to the fact that the cancellation
of JAL flights to Manila from June 15 to June 21, 1991
caused considerable disruption in passenger booking and
reservation. In fact, it would be unreasonable to expect,
considering NAIA’s closure, that JAL flight operations
would be normal on the days affected. Nevertheless,
this does not excuse JAL from its obligation to make the
necessary arrangements to transport private respondents
on its first available flight to Manila. After all, it had a
contract to transport private respondents from the United
States to Manila as their final destination.
Consequently, the award of nominal damages is in
order. Nominal damages are adjudicated in order that a
right of a plaintiff, which has been violated or invaded
by the defendant, may be vindicated or recognized and
not for the purpose of indemnifying any loss suffered by
him. The court may award nominal damages in every
obligation arising from any source enumerated in Article
1157, or in every case where any property right has been
invaded.”41
41
Ibid., pp. 23-26.
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
491
In United Airlines v. Uy,42 the Court summarized the instances
when the Warsaw Convention applies or when it does not apply,
thus:
“Within our jurisdiction we have held that the Warsaw Convention can be applied, or ignored, depending on
the peculiar facts presented by each case. Thus, we have
ruled that the Convention’s provisions do not regulate
or exclude liability for other breaches of contract by the
carrier or misconduct of its officers and employees, or for
some particular or exceptional type of damage. Neither
may the Convention be invoked to justify the disregard
of some extraordinary sort of damage resulting to a passenger and preclude recovery therefor beyond the limits
set by said Convention. Likewise, we have held that the
Convention does not preclude the operation of the Civil
Code and other pertinent laws. It does not regulate, much
less exempt, the carrier from liability for damages for violating the rights of its passengers under the contract of
carriage, especially if willful misconduct on the part of the
carrier’s employees is found or established.”43
§426.00 Prescription of action under Warsaw Convention
When there is a conflict on the prescriptive period of action
under the Warsaw Convention and under Philippine law, which
should apply?
The Warsaw Convention on the 2-year prescriptive period
reads:
“Art. 29. (1) The right to damages shall be extinguished
if an action is not brought within two (2) years, reckoned
from the date of arrival at the destination, or from the
date on which the aircraft ought to have arrived, or from
the date on which the transportation stopped.
(2) The method of calculating the period of limitation shall be determined by the law of the court to which
the case is submitted.”
42
43
318 SCRA 576 [1999].
Ibid., p. 585.
492
OBLIGATIONS AND CONTRACTS
In United Airlines v. Uy,44 the issue raised is whether or not
the 2-year prescriptive period prescribed in the Warsaw Convention
within which an airline passenger should file an action for damages
for loss of his baggage has been interrupted by any of the acts
recognized by Philippine laws, such as the filing of action in court,
the sending of written demand by the creditor, or the written
acknowledgement of debt by the debtor.
The Court ruled that while ordinarily the 2-year prescriptive
period bars the filing of actions for damages under the Warsaw
Convention, the plaintiff was forestalled from immediately filing the
action because the airline gave him the runaround, which rendered
the 2-year prescriptive period not applicable. Ruled the Court:
Petitioner likewise contends that the appellate court
erred in ruling that respondent’s cause of action has not
prescribed since delegates to the Warsaw Convention
clearly intended the two (2)-year limitation incorporated
in Art. 29 as an absolute bar to suit and not to be made
subject to the various tolling provisions of the laws of the
forum. Petitioner argues that in construing the second
paragraph of Art. 29 private respondent cannot read into
it Philippine rules on interruption of prescriptive periods
and state that his extrajudicial demand has interrupted
the period of prescription. American jurisprudence has
declared that “Art. 29(2) was not intended to permit
forums to consider local limitation tolling provisions but
only to let local law determine whether an action had been
commenced within the two-year period, since the method
of commencing a suit varies from country to country.”
xxx
Respondent’s complaint reveals that he is suing on
two (2) causes of action: (a) the shabby and humiliating
treatment he received from petitioner’s employees at the
San Francisco Airport which caused him extreme embarrassment and social humiliation; and (b) the slashing of
his luggage and the loss of his personal effects amounting
to US$5,310.00.
While his second cause of action — an action for
damages arising from theft or damage to property or goods
44
318 SCRA 576 [1999].
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
— is well within the bounds of the Warsaw Convention,
his first cause of action — an action for damages arising
from the misconduct of the airline employees and the
violation of respondent’s rights as passenger — clearly is
not.
Consequently, insofar as the first cause of action
is concerned, respondent’s failure to file his complaint
within the two (2)-year limitation of the Warsaw Convention does not bar his action since petitioner airline may
still be held liable for breach of other provisions of the
Civil Code which prescribe a different period or procedure
for instituting the action, specifically, Art. 1146 thereof
which prescribes four (4) years for filing an action based
on torts.
As for respondent’s second cause of action, indeed
the travaux preparatories of the Warsaw Convention reveal that the delegates thereto intended the two (2)-year
limitation incorporated in Art. 29 as an absolute bar to
suit and not to be made subject to the various tolling provisions of the laws of the forum. This therefore forecloses
the application of our own rules on interruption of prescriptive periods. Article 29, par. (2), was intended only to
let local laws determine whether an action had been commenced within the two (2)-year period, and within our jurisdiction an action shall be deemed commenced upon the
filing of a complaint. Since it is indisputable that respondent filed the present action beyond the two (2)-year time
frame his second cause of action must be barred. Nonetheless, it cannot be doubted that respondent exerted efforts to immediately convey his loss to petitioner, even
employed the services of two (2) lawyers to follow up his
claims, and that the filing of the action itself was delayed
because of petitioner’s evasion.
In this regard, Philippine Airlines, Inc. v. Court
of Appeals is instructive. In this case of PAL, private
respondent filed an action for damages against petitioner
airline for the breakage of the front glass of the microwave
oven which she shipped under PAL Air Waybill No.
0-79-1013008-3. Petitioner averred that, the action having
been filed seven (7) months after her arrival at her port
of destination, she failed to comply with par. 12, subpar.
493
494
OBLIGATIONS AND CONTRACTS
(a) (1), of the Air Waybill which expressly provided that
the person entitled to delivery must make a complaint
to the carrier in writing in case of visible damage to the
goods, immediately after discovery of the damage and
at the latest within 14 days from receipt of the goods.
Despite non-compliance therewith the Court held that by
private respondent’s immediate submission of a formal
claim to petitioner, which however was not immediately
entertained as it was referred from one employee to
another, she was deemed to have substantially complied
with the requirement. The Court noted that with private
respondent’s own zealous efforts in pursuing her claim it
was clearly not her fault that the letter of demand for
damages could only be filed, after months of exasperating
follow-up of the claim, on 13 August 1990, and that if
there was any failure at all to file the formal claim within
the prescriptive period contemplated in the Air Waybill,
this was largely because of the carrier’s own doing,
the consequences of which could not in all fairness be
attributed to private respondent.
In the same vein must we rule upon the circumstances
brought before us. Verily, respondent filed his complaint
more than two (2) years later, beyond the period of
limitation prescribed by the Warsaw Convention for filing
a claim for damages. However, it is obvious that respondent
was forestalled from immediately filing an action because
petitioner airline gave him the runaround, answering his
letters but not giving in to his demands. True, respondent
should have already filed an action at the first instance
when his claims were denied by petitioner but the same
could only be due to his desire to make an out-of-court
settlement for which he cannot be faulted. Hence, despite
the express mandate of Art. 29 of the Warsaw Convention
that an action for damages should be filed within two (2)
years from the arrival at the place of destination, such
rule shall not be applied in the instant case because of
the delaying tactics employed by petitioner airline itself.
Thus, private respondent’s second cause of action cannot
be considered as time-barred under Art. 29 of the Warsaw
Convention. (318 SCRA, pp. 584-588)
It is to be noted that the Court held that while as a rule the
2-year provision on prescription of the Warsaw Convention prevails
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
495
over our law on prescription as provided for in the Civil Code, the
exception thereto is when failure to file within the period was due to
the fault of the airline or its delaying tactics.
§427.00 Illustrations of liability under a contract
An airline ticket is a contract of transportation. Where the
passenger is a resident and national of the forum and the ticket is
issued in said place, the law of the place where the airline ticket was
issued governs. Thus, Philippine laws apply where the ticket was
issued in the Philippines to its citizens and residents in the country.
With respect to overbooking, preventing a passenger from boarding
even though he has a confirmed ticket and has complied with the
airline’s check-in and reconfirmation procedure, the airline may be
held liable for damages, where it acted in bad faith, as the Court
held in Zalamea v. Court of Appeals,45 the Court held:
Existing jurisprudence explicitly states that overbooking amounts to bad faith, entitling the passengers
concerned to an award of moral damages. In Alitalia
Airways v. Court of Appeals, where passengers with confirmed bookings were refused carriage on the last minute,
this Court held that when an airline issues a ticket to a
passenger confirmed on a particular flight, on a certain
date, a contract of carriage arises, and the passenger has
every right to expect that he would fly on that flight and
on that date. If he does not, then the carrier opens itself to
a suit for breach of contract of carriage. Where an airline
had deliberately overbooked, it took the risk of having to
deprive some passengers of their seats in case all of them
would show up for check in. For the indignity and inconvenience of being refused a confirmed seat on the last
minute, said passenger is entitled to an award of moral
damages.
Similarly, in Korean Airlines Co., Ltd. v. Court of
Appeals, where private respondent was not allowed to
board the plane because her seat had already been given
to another passenger even before the allowable period for
passengers to check in had lapsed despite the fact that
she had a confirmed ticket and she had arrived on time,
45
228 SCRA 23 [1993].
496
OBLIGATIONS AND CONTRACTS
this Court held that petitioner airline acted in bad faith
in violating private respondent’s rights under their contract of carriage and is therefore liable for the injuries she
has sustained as a result.
In fact, existing jurisprudence abounds with rulings
where the breach of contract of carriage amounts to bad
faith. In Pan American World Airways, Inc. v. Intermediate Appellate Court, where a would-be passenger had the
necessary ticket, baggage claim and clearance from immigration all clearly and unmistakably showing that she
was indeed a confirmed passenger and that she was, in
fact, included in the passenger manifest of said flight, and
yet was denied accommodation in said flight, this Court
did not hesitate to affirm the lower court’s finding awarding her damages.
A contract to transport passengers is quite different
in kind and degree from any other contractual relation. So
ruled this Court in Zulueta v. Pan American World Airways, Inc. This is so, for a contract of carriage generates
a relation attended with public duty — a duty to provide
public service and convenience to its passengers which
must be paramount to self-interest or enrichment. Thus,
it was also held that the switch of planes from Lockheed
1011 to a smaller Boeing 707 because there were only 138
confirmed economy class passengers who could very well
be accommodated in the smaller plane, thereby sacrificing the comfort of its first class passengers for the sake of
economy, amounts to bad faith. Such inattention and lack
of care for the interest of its passengers who are entitled
to its utmost consideration entitles the passenger to an
award of moral damages.
Even on the assumption that overbooking is allowed,
respondent TWA is still guilty of bad faith in not informing its passengers beforehand that it could breach the
contract of carriage even if they have confirmed tickets
if there was overbooking. Respondent TWA should have
incorporated stipulations on overbooking on the tickets
issued or to properly inform its passengers about these
policies so that the latter would be prepared for such
eventuality or would have the choice to ride with another
airline. (228 SCRA, pp. 31-33).
CHAPTER 10
CONFLICT OF LAWS ON CONTRACT
497
The law of the forum may provide when overbooking may render
the airline in bad faith, as to hold the airline liable for damages.
For instance, Economic Regulations No. 7, as amended, of the Civil
Aeronautics Board, provides:
Sec. 3. Scope. — This regulation shall apply to every
Philippine and foreign air carrier with respect to its operation of flights or portions of flights originating from or
terminating at, or serving a point within the territory of
the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or portion of a flight inside
or outside the Philippines, for which he holds confirmed
reserved space. Furthermore, this Regulation is designed
to cover only honest mistakes on the part of the carriers
and excludes deliberate and willful acts of non-accommodation. Provided, however, That overbooking not exceeding 10% of the seating capacity of the aircraft shall not be
considered as a deliberate and willful act of non-accommodation.
In United Airlines, Inc. v. Court of Appeals,46 the Court applied
the foregoing provision to exculpate the airline from liability because
the overbooking did not exceed 10 of the seating capacity of the
aircraft, thus:
“What this Court considers as bad faith is the willful
and deliberate overbooking on the part of the airline
carrier. The above-mentioned law clearly states that when
the overbooking does not exceed ten percent (10%), it is not
considered as deliberate and therefore does not amount to
bad faith. While there may have been overbooking in this
case, private respondents were not able to prove that the
overbooking on United Airlines Flight 1108 exceeded ten
percent.”47
46
47
357 SCRA 99 [2001].
Ibid., pp. 110-111.
498
OBLIGATIONS AND CONTRACTS
CHAPTER 11
IMPAIRMENT OF CONTRACT
(Note: This Chapter on Impairment of Contract is taken from
the Author’s Book on Philippine Constitutional Law, Chapter XV
thereof.)
§428.00 Non-impairment clause
Article III, Sec. 10 of the Constitution provides:
“SEC. 10. No law impairing the obligation of contracts
shall be passed.’’
The questions that arise from the non-impairment clause are:
first, what is meant by “law” which may impair the obligation of
contract; second, what does “contract” cover; third, what is meant by
“impairing the obligation,” and fourth, what law may validly impair
the obligation of contracts.
§429.00 What law means
“Law” includes not only statutes enacted by Congress but also
ordinances passed by the legislative bodies of local government units,
as well executive orders issued by the President1 and administrative
rules and regulations implementing existing rules and having the
force and effect of laws.2 “Law” does not include decisions of the
Supreme Court, for while rulings construing the laws form part
of such laws, the law contemplated is one issued in the exercise of
legislative or quasi-legislative power. While in one case the Court
ruled that the trial court’s order substituting a real estate mortgage
1
2
Lim v. Secretary of Agriculture, 34 SCRA 751 [1970].
Cf. Tanada v. Tuvera, 146 SCRA 446 [1986].
498
CHAPTER 11
IMPAIRMENT OF CONTRACT
499
with a surety bond over the objection of the mortgagee impaired the
obligation of contract and was accordingly invalid, implying thereby
that a court decision comes within the term “law,”3 the legal basis
of such ruling is that courts have no power to make contract for
the parties, nor can they construe contracts in such a manner as to
change the terms thereof not contemplated by the parties.4
Existing laws having a bearing on the subject matter of the
contract at the time the contract was entered into by the parties, are
deemed embodied therein.5 The reservation of police power is also
deemed read into any contract with a subject matter affecting the
public welfare.6 The Supreme Court, in an appropriate case, may
nullify such laws or construe them as to adversely affect the rights
and obligations of the contract to which the law is deemed read into,
without the non-impairment clause being violated. However, such
decision may only be applied prospectively, and rights that have
become vested under the contract and the then existing laws may
not be affected thereby.
§430.00 Contract embraced in contract clause
The obligation of contract, whose impairment is proscribed,
refers to the law or duty which binds the parties to their agreement.
It is coeval with the undertaking to perform and consists in the means
which, at the time of the creation of the contract, the law affords for
its enforcement, or in the effective force of the law which applies
to, and compels performance of, the contract, or a compensatory
equivalent in damages for non-performance.7
The term “contract”, against which no law should be passed
impairing its obligation, must be a valid contract, which may be executed or entered into lawfully by the contracting parties under existing laws, such as between private individuals or between private
persons and the government or any government entity authorized
to execute the contract. The term “contract” refers to purely private
transactions.8
Ganzon v. Inserto, 123 SCRA 713 [1983].
New Life Enterprises v. CA, 207 SCRA 669 [1992].
5
Maritime Co. of the Phil. v. Reparations Commission, 40 SCRA 70 [1971].
6
PNB v. Office of the President, 252 SCRA 5 [1996].
7
16 Am Jur 2d, 780-781.
8
NDC v. Phil. Veterans Bank, 192 SCRA 257 [1990].
3
4
500
OBLIGATIONS AND CONTRACTS
Contracts which cover matters that may be the subject of the
exercise of police power, or of eminent domain, or of taxation are excluded from the scope of the non-impairment clause. The obligations
arising from such contracts may validly be impaired by the exercise
of police power for the common good or general welfare.9
“The impairment clause is now no longer inviolate;
in fact, there are many who now believe it is an anachronism in the present-day society. It was quite useful before
in protecting the integrity of private agreements from
government meddling, but that was when such agreements did not affect the community in general. They were
indeed purely private agreements then. Any interference
with them at that time was really an unwarranted intrusion that could properly be struck down.
“But things are different now. More and more, the
interests of the public have become involved in what are
supposed to be still private agreements, which have as a
result been removed from the protection of the impairment clause. These agreements have come within the embrace of the police power, that obtrusive protector of the
public interest. It is a ubiquitous policeman indeed. As
long as the contract affects the public welfare one way or
another so as to require the interference of the State, then
must the police power be asserted, and prevail, over the
impairment clause.”10
§431.00 Non-impairment, eminent domain and taxation
A contract is a property right, and such property right or the
subject matter thereof may be expropriated by the government,
subject to due process and payment of just compensation. The issue
in Long Island Water-Supply Co. v. City of Brooklyn,11 was whether
a municipality was prevented from taking by condemnation a water
company with which the municipality had contracted. The Court
noted that the issue was whether “the prohibition against a law
impairing the obligation of contracts stays the power of eminent
Illusorio v. Court of Agrarian Relations, 17 SCRA 25 [1966].
PNB v. Office of the President, 252 SCRA 5, 14 [1996].
11
166 U.S. 685 [1897].
9
10
CHAPTER 11
IMPAIRMENT OF CONTRACT
501
domain in respect to property which otherwise could be taken.”12 The
Court answered that question in the negative, noting that the water
company’s contract was not impaired but taken and that it would
receive compensation for the taking.13
The legislature may tax any matter, subject to constitutional
due process and limitations prescribed therein. The non-impairment
of contract is not a limitation on taxation, even if it would mean
adding financial burdens to the parties not stipulated by them.
The non-impairment clause cannot limit the power of taxation.
Moreover, the power of taxation is deemed read into every contract,
and the possibility that their contractual rights and obligation may
be affected by the exercise of the power of taxation forms part of
such contract; hence, they cannot be heard to complain.14
§432.00 Non-impairment and police power
In Illusorio v. Court of Agrarian Relations,15 the Court, quoting
Ongsiako v. Gomboa,16 the Court held:
“The prohibition contained in constitutional provisions against impairing the obligation of contracts is not
an absolute one and is not to be read with literal exactness like a mathematical formula. Such provisions are
restricted to contracts with respect to property, or some
object of value, and confer rights which may be asserted
in a court of justice, and have no application to statute relating to public subjects within the domain of the general
legislative powers of the State, and involving the public
right and public welfare of the entire community affected
by it. They do not prevent proper exercise by the State
of its police powers. By enacting regulations reasonably
necessary to secure the health, safety, morals, comfort,
or general welfare of the community, even the contracts
may thereby be affected; for such matter cannot be placed
by contract beyond the power of the State to regulate and
control them.”17
166 U.S. at 689.
Cited in Chavez v. Comelec, 437 SCRA 413 [2004].
14
Read La Insular v. Machura, 39 Phil. 567.
15
17 SCRA 15 [1966].
16
86 Phil. 50.
17
Illusorio v. Court of Agrarian Relations, 17 SCRA 29.
12
13
502
OBLIGATIONS AND CONTRACTS
The “provision prohibiting the States from passing laws
impairing the obligation of contracts has never been understood
to embrace contracts other than those which respect property or
some other object of value and confer rights which may be asserted
in courts of justice. Constitutional protection does not extend to
contracts which relate to rights which are not rights of property,
as, for example, a grant of a public right or privilege or franchise or
permit the exploit natural resources of the country. And only those
contracts in which the parties have a vested beneficial interest are
the objects afforded protection by the impairment clause.”18
Thus, the non-impairment clause does not embrace contracts
which are so related to the public welfare or interest that it will be
considered congenitally susceptible to change by the legislature in
the interest of the greater number. Conversely, the extinguishment
by law of the obligations of the parties in a private contract, which is
without any demonstrated connection with the public interest, is an
impairment of the obligation of contract which is proscribed.19
The grant of public right or privilege by the government in
favor of a private person or corporate entity is not embraced in the
non-impairment clause. A permit or license to exploit any of the
natural resources or a legislative franchise to operate public utilities,
though it may partake of the nature of a contract, is not a contract
in contemplation of the non-impairment clause. For this reason, it
may be impaired or cancelled, without violating the non-impairment
clause.20
§433.00 When there is impairment
Impairment is anything that diminishes the efficacy of the
contract. There is impairment if a subsequent law changes the
terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties. Impairment of contract is
proscribed by the non-impairment clause of the Constitution, the
purpose of which is to safeguard the integrity of contracts against
unwarranted interference by the State.21
16 Am Jur 2d, p. 785.
NDC v. Phil. Veterans Bank, 192 SCRA 257 [1990].
20
Republic v. Rosemoor Mining and Dev. Corp., G.R. No. 149927, March 30,
18
19
2004.
21
Siska Dev. Corp. v. Office of the President, 231 SCRA 674 [1994].
CHAPTER 11
IMPAIRMENT OF CONTRACT
503
The constitutional prohibition against the impairment of
obligations of contract refers only to unreasonable impairment. The
State continues to possess authority to safeguard the vital interests
of its people. Legislation impairing the obligation of contracts can
be sustained when it is enacted for the promotion of the general
good of the people, and when the means adopted to secure that ends
are reasonable. But the end sought and the means adopted must be
legitimate, i.e., within the scope of the reserved power of the State
construed in harmony with the constitutional limitation of that
power.22
A statute is said to impair the obligations of contract which
attempts to take away from a party a right to which he is entitled
by its terms, or which deprives him of the means of enforcing such a
rights. If either party is absolved from performing anything of which
he has obligated himself to do, such obligation is impaired. However,
a law which does not strike at the validity of a contract either by
altering its terms or preventing its preservation and enforcement
does not impair its obligation.23
A law which change the terms of the contract between
parties, either in the time or mode of performance, or imposes new
conditions, or dispenses with those expressed, or authorizes for its
satisfaction something different from that provided in its terms, is a
law which impairs the obligations of a contract and is therefore null
and void.24
A law which enlarges, abridges or in any manner changes the
intent of the parties to the contract necessarily impairs the contract
itself and cannot be given retroactive effect without violating the
constitutional prohibition against impairment of contract, except a
law enacted in the exercise of police power.25
Under R.A. No. 6552, entitled “An Act to Provide Protection to
Buyers of Real Estate on Installment Payments,” (the Maceda Law)
which took effect on September 14, 1972,26 “the actual cancellation
of the contract shall take place thirty days from receipt of the
buyer of the notice of cancellation or the demand for rescission of
the contract by a notarial act and upon full payment of the cash
Basa v. Federacion de la Industria Tabaquera, 61 SCRA 93 [1974].
Government v. Visayan Surety & Ins. Corp., 66 Phil. 326 [1938].
24
Clemons v. Noting, 42 Phil. 702 [1922]; U.S. v. Diaz, 42 Phil. 766 [1922].
25
Ortigas & Co., Ltd. v. CA, 346 SCRA 748 [2000].
26
Jison v. Court of Appeals, 164 SCRA 339 [1988].
22
23
504
OBLIGATIONS AND CONTRACTS
surrender value to the buyer.” Where the contract was entered
into before the effectivity of the Maceda Law, but the rescission
took place when the said law was in full force and effect, the
notice and requirements of cancellation as mandated by said law
have to be complied with, without impairing the obligation of said
contract. Impairment is anything that diminishes the efficacy of the
contract. There is an impairment if a subsequent law changes the
terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties.27 The requirement of notice
of the rescission under the Maceda Law does not change the time
or mode of performance or impose new conditions or dispense with
the stipulations regarding the binding effect of the contract. Neither
does it withdraw the remedy for its enforcement. At most, it merely
provides for a procedure in aid of the remedy of rescission.28
§434.00 Exceptions to impairment
Police power is superior to the non-impairment clause.29 Where
the subject matter of a contract is one of the matters subject to the
exercise of police power, the exercise of police power may impair
the obligation of contract without violating the non-impairment
clause.30
Legislation impairing the obligation of contracts can be
sustained when it is enacted for the promotion of the general good
of the people, and when the means adopted to secure that ends are
reasonable. But the end sought and the means adopted must be
legitimate, i.e., within the scope of the reserved power of the State
construed in harmony with the constitutional limitation of that
power.31
In Victoriano v. Elizalde Rope Workers Union,32 the issue raised
was whether or not Republic Act No. 3350, which exempts members
of any religious sects, i.e., Iglesia ni Cristo, which prohibit affiliation
of their members in any such labor organization from coverage of
Clemons v. Nolting, 42 Phil. 702 [1922].
Siska Dev. Corp. v. Office of the President, 231 SCRA 674, 679-689 [1994].
29
NDC v. Phil. Veterans Bank, 192 SCRA 257 [1990].
30
Illusorio v. Court of Agrarian Relations, 17 SCRA 25 [1966]; NDC v. Phil.
Veterans Bank, 192 SCRA 257 [1990].
31
Basa v. Federacion de la Industria Tabaquera, 61 SCRA 93 [1974].
32
59 SCRA 54 [1974].
27
28
CHAPTER 11
IMPAIRMENT OF CONTRACT
505
a union security clause, providing that membership in the union is
required as a condition for employment for all permanent employees
workers, unconstitutionally impaired the obligation of contract
under said union security clause of the collective bargaining
agreement, executed prior to the effectivity of said law. The Court
held that there was indeed impairment of such contract because the
company was absolved from liability under said law from dismissing
members of the Iglesia ni Cristo, whose members are prohibited by
their religion from joining labor unions, thereby changing the terms
the union security clause. But the Court ruled that the impairment
was a valid exercise of police power:
This agreement was already in existence at the time
Republic Act No. 3350 was enacted on June 18, 1961, and
it cannot, therefore, be deemed to have been incorporated
into the agreement. But by reason of this amendment,
Appellee, as well as others similarly situated, could no
longer be dismissed from his job even if he should cease
to be a member, or disaffiliate from the Union, and the
Company could continue employing him notwithstanding
his disaffiliation from the Union. The Act, therefore,
introduced a change into the express terms of the union
security clause; the Company was partly absolved by law
from the contractual obligation it had with the Union of
employing only Union members in permanent positions.
It cannot be denied, therefore, that there was indeed an
impairment of said union security clause.
According to Black, any statute which introduces a
change into the express terms of the contract, or its legal
construction, or its validity, or its discharge, or the remedy
for its enforcement, impairs the contract. The extent of
the change is not material. It is not a question of degree
or manner or cause, but of encroaching in any respect
on its obligation or dispensing with any part of its force.
There is an impairment of the contract if either party is
absolved by law from its performance. Impairment has
also been predicated on laws which, without destroying
contracts, derogate from substantial contractual rights.
It should not be overlooked, however, that the prohibition to impair the obligation of contracts is not absolute and unqualified. The prohibition is general, affording
a broad outline and requiring construction to fill in the
506
OBLIGATIONS AND CONTRACTS
details. The prohibition is not to be read with literal exactness like a mathematical formula, for it prohibits unreasonable impairment only. Inspite of the constitutional
prohibition, the State continues to possess authority to
safeguard the vital interests of its people. Legislation appropriate to safeguarding said interests may modify or abrogate contracts already in effect. For not only are existing laws read into contracts in order to fix the obligations
as between the parties, but the reservation of essential
attributes of sovereign power is also read into contracts
as a postulate of the legal order. All contracts made with
reference to any matter that is subject to regulation under the police power must be understood as made in reference to the possible exercise of that power. Otherwise,
important and valuable reforms may be precluded by the
simple device of entering into contracts for the purpose of
doing that which otherwise may be prohibited. The policy
of protecting contracts against impairment presupposes
the maintenance of a government by virtue of which contractual relations are worthwhile — a government which
retains adequate authority to secure the peace and good
order of society. The contract clause of the Constitution
must, therefore, be not only in harmony with, but also in
subordination to, in appropriate instances, the reserved
power of the state to safeguard the vital interests of the
people. It follows that not all legislations, which have
the effect of impairing a contract, are obnoxious to the
constitutional prohibition as to impairment, and a statute passed in the legitimate exercise of police power, although it incidentally destroys existing contract rights,
must be upheld by the courts. This has special application to contracts regulating relations between capital and
labor which are not merely contractual, and said labor
contracts, for being impressed with public interest, must
yield to the common good.
In several occasions this Court declared that the
prohibition against impairing the obligations of contracts
has no application to statutes relating to public subjects
within the domain of the general legislative powers of the
state involving public welfare. Thus, this Court also held
that the Blue Sunday Law was not an infringement of
the obligation of a contract that required the employer to
CHAPTER 11
IMPAIRMENT OF CONTRACT
furnish work on Sundays to his employees, the law having
been enacted to secure the well-being and happiness of
the laboring class, and being, furthermore, a legitimate
exercise of the police power.
In order to determine whether legislation unconstitutionally impairs contract obligations, no unchanging
yardstick, applicable at all times and under all circumstances, by which the validity of each statute may be measured or determined, has been fashioned, but every case
must be determined upon its own circumstances. Legislation impairing the obligation of contracts can be sustained
when it is enacted for the promotion of the general good
of the people, and when the means adopted to secure that
end are reasonable. Both the end sought and the means
adopted must be legitimate, i.e., within the scope of the
reserved power of the state construed in harmony with
the constitutional limitation of that power.33
What then was the purpose sought to be achieved by
Republic Act No. 3350? Its purpose was to insure freedom
of belief and religion, and to promote the general welfare
by preventing discrimination against those members of
religious sects which prohibit their members from joining
labor unions, confirming thereby their natural, statutory
and constitutional right to work, the fruits of which work
are usually the only means whereby they can maintain
their own life and the life of their dependents. It cannot
be gainsaid that said purpose is legitimate.
The questioned Act also provides protection to members of said religious sects against two aggregates of group
strength from which the individual needs protection. The
individual employee, at various times in his working life,
is confronted by two aggregates of power — collective labor, directed by a union, and collective capital, directed
by management. The union, an institution developed to
organize labor into a collective force and thus protect the
individual employee from the power of collective capital,
is, paradoxically, both the champion of employee rights,
and a new source of their frustration. Moreover, when
33
Ibid., pp. 68-71.
507
508
OBLIGATIONS AND CONTRACTS
the Union interacts with management, it produces yet a
third aggregate of group strength from which the individual also needs protection — the collective bargaining
relationship.
The aforementioned purpose of the amendatory
law is clearly seen in the Explanatory Note to House Bill
No. 5859, which later became Republic Act No. 3350, as
follows:
“It would be unthinkable indeed to refuse employing
a person who, on account of his religious beliefs and
convictions, cannot accept membership in a labor
organization although he possesses all the qualifications
for the job. This is tantamount to punishing such person
for believing in a doctrine he has a right under the law
to believe in. The law would not allow discrimination to
flourish to the detriment of those whose religion discards
membership in any labor organization. Likewise, the law
would not commend the deprivation of their right to work
and pursue a modest means of livelihood, without in any
manner violating their religious faith and/or belief.’’
It cannot be denied, furthermore, that the means
adopted by the Act to achieve that purpose — exempting
the members of said religious sects from coverage of union
security agreements — is reasonable.
It may not be amiss to point out here that the
free exercise of religious profession or belief is superior
to contract rights. In case of conflict, the latter must,
therefore, yield to the former. The Supreme Court of
the United States has also declared on several occasions
that the rights in the First Amendment, which include
freedom of religion, enjoy a preferred position in the
constitutional system. Religious freedom, although not
unlimited, is a fundamental personal right and liberty,
and has a preferred position in the hierarchy of values.
Contractual rights, therefore, must yield to freedom of
religion. It is only where unavoidably necessary to prevent
an immediate and grave danger to the security and
welfare of the community that infringement of religious
freedom may be justified, and only to the smallest extent
necessary to avoid the danger.
CHAPTER 11
IMPAIRMENT OF CONTRACT
509
A law which change the terms of the contract between
parties, either in the time or mode of performance, or
imposes new conditions, or dispenses with those expressed,
or authorizes for its satisfaction something different from
that provided in its terms, is a law which impairs the
obligations of a contract and is therefore null and void.34
In another case, the Court ruled:
A law which enlarges, abridges or in any manner
changes the intent of the parties to the contract necessarily
impairs the contract itself and cannot be given retroactive
effect without violating the constitutional prohibition
against impairment of contract, except a law enacted in
the exercise of police power.35
In National Development Company v. Philippine Veterans
Bank,36 P.D. No. 1717 ordered the rehabilitation of the Agrix Group
of Companies by the National Development Company, outlined the
procedure for the filing claims by creditors, and extinguished all
mortgages and other liens attaching to the dissolved corporations.
Thus, the Veterans Bank, as mortgagee, lost its liens on the mortgaged property. In declaring the Decree invalid, as impairing the
obligations of contract, the Court held:
“The Court also feels that the decree impairs the
obligation of the contract between AGRIX and the private
respondent without justification. While it is true that the
police power is superior to the impairment clause, the
principle will apply only where the contract is so related
to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest
of the greater number. Most present-day contracts are
of that nature. But as already observed, the contracts of
loan and mortgage executed by AGRIX are purely private
transactions and have not been shown to be affected with
public interest. There was therefore no warrant to amend
their provisions and deprive the private respondent of its
vested property rights.
xxx
Clemons v. Noting, 42 Phil. 702 [1922]; U.S. v. Diaz, 42 Phil. 766 [1922].
Ortigas & Co., Ltd. v. CA, 346 SCRA 748 [2000].
36
192 SCRA 257 [1990].
34
35
510
OBLIGATIONS AND CONTRACTS
x x x And insofar as the decree also interferes with
purely private agreements without any demonstrated
connection with the public interest, there is likewise an
impairment of the obligation of the contract.”
§435.00 Government franchise is not a contract
A government license or franchise issued in favor of person or
entity is not a contract within the meaning of the non-impairment
clause. In fact, existing laws and police power are deemed read into
such license or franchise. Hence, its modification or even cancellation
by the government of the license or franchise does not impair the
obligations of contract.
In Republic v. Rosemoor Mining and Dev. Corp.,37 one of the
issues raised is whether or not the revocation of the quarry permit
by the Secretary of Natural Resources impairs the obligation of
contract. The Court answered the issue in the negative:
“Moreover, granting that respondents’ license is
valid, it can still be validly revoked by the State in the
exercise of police power. The exercise of such power
through Proclamation No. 84 is clearly in accord with
jura regalia, which reserves to the State ownership of all
natural resources. This Regalian doctrine is an exercise of
its sovereign power as owner of lands of the public domain
and of the patrimony of the nation, the mineral deposits
of which are a valuable asset.
Proclamation No. 84 cannot be stigmatized as a violation of the non-impairment clause. As pointed out earlier, respondents’ license is not a contract to which the
protection accorded by the non-impairment clause may
extend. Even if the license were, it is settled that provisions of existing laws and a reservation of police power
are deemed read into it, because it concerns a subject impressed with public welfare. As it is, the non-impairment
clause must yield to the police power of the State.”
The ruling in above-cited case was a reiteration of an earlier
decision on the same issue, in Oposa v. Factoran, Jr.,38 where the
37
38
G.R. No. 149927, March 30, 2004.
224 SCRA 792 [1993].
CHAPTER 11
IMPAIRMENT OF CONTRACT
511
Court ruled that every license or permit to operate natural resources
embodies therein the reservation of the State that it is subject to
revocation in the public interest. The Court ruled:
Needless to say, all licenses may thus be revoked or
rescinded by executive action. It is not a contract, property
or a property right protected by the due process clause
of the Constitution. In Tan vs. Director of Forestry, this
Court held:
“. . . A timber license is an instrument by which the
State regulates the utilization and disposition of forest
resources to the end that public welfare is promoted. A
timber license is not a contract within the purview of the
due process clause; it is only a license or privilege, which
can be validly withdrawn whenever dictated by public
interest or public welfare as in this case.
‘A license is merely a permit or privilege to do what
otherwise would be unlawful, and is not a contract between
the authority, federal, State, or municipal, granting it and
the person to whom it is granted; neither is it property
or a property right, nor does it create a vested right; nor
is it taxation’ (37 C.J. 168). Thus, this Court held that
the granting of license does not create irrevocable rights,
neither is it property or property rights (People vs. Ong
Tin, 54 O.G. 7576) . . .’’
Since timber licenses are not contracts, the nonimpairment clause, which reads:
“SEC. 10. No law impairing the obligation of contracts
shall be passed.’’ cannot be invoked.
In the second place, even if it is to be assumed that
the same are contracts, the instant case does not involve
a law or even an executive issuance declaring the cancellation or modification of existing timber licenses. Hence,
the non-impairment clause cannot as yet be invoked. Nevertheless, granting further that a law has actually been
passed mandating cancellations or modifications, the
same cannot still be stigmatized as a violation of the nonimpairment clause. This is because by its very nature and
purpose, such a law could have only been passed in the
exercise of the police power of the state for the purpose
512
OBLIGATIONS AND CONTRACTS
of advancing the right of the people to a balanced and
healthful ecology, promoting their health and enhancing
the general welfare. In Abe v. Foster Wheeler Corp., 28
this Court stated:
“The freedom of contract, under our system of government, is not meant to be absolute. The same is understood to be subject to reasonable legislative regulation
aimed at the promotion of public health, moral, safety
and welfare. In other words, the constitutional guaranty
of non-impairment of obligations of contract is limited by
the exercise of the police power of the State, in the interest of public health, safety, moral and general welfare.’’
The reason for this is emphatically set forth in
Nebia vs. New York, quoted in Philippine American Life
Insurance Co. vs. Auditor General, 30 to wit:
‘Under our form of government the use of property
and the making of contracts are normally matters of
private and not of public concern. The general rule is
that both shall be free of governmental interference. But
neither property rights nor contract rights are absolute;
for government cannot exist if the citizen may at will use
his property to the detriment of his fellows, or exercise
his freedom of contract to work them harm. Equally
fundamental with the private right is that of the public to
regulate it in the common interest.’
In short, the non-impairment clause must yield to
the police power of the State.39
39
Ibid., pp. 810-814.
obligations
and
contracts
By
RUBEN E. AGPALO
A.B.; B.S.J.; LL.B. (U.P.)
Formerly Assistant Solicitor General and
Commissioner of the Commission on Elections;
Bar Examiner in Criminal Law (1987);
Author: Legal and Judicial Ethics, Seventh Edition (2002);
Statutory Construction, Fifth Edition (2003 Revised Ed.);
Legal Forms (2006 Ed.);
The Law on Natural Resources (2006 Ed.);
Conflict of Laws (2004 Ed.);
Public International Law (2006 Ed.);
Comments on the Corporation Code (Revised 2000 Ed.);
Handbook on Civil Procedure (2001 Ed.);
Handbook on Criminal Procedure (Revised 2003 Ed.);
Handbook on Evidence (2003 Ed.);
Handbook on Special Proceedings (2003 Ed.);
Philippine Administrative Law (Revised 2004 Ed.);
Administrative Law, Law on Public Officers and
Election Law (2005 Ed.);
Philippine Constitutional Law (2006 Ed.);
Philippine Political Law (2005 Ed.);
Negotiable Instruments Law (2005 Ed.);
Agpalo’s Legal Words and Phrases (1997 Ed.);
Comments on the Omnibus Election Code (Revised 2004 Ed.);
The Law of Public Officers (1998 Ed.);
The Law on Trademarks, Infringement
and Unfair Competition (1999 Ed.);
Comments on the Code of Professional Responsibility
and Code of Judicial Conduct (2004 Ed.);
The Code of Professional Responsibility for Lawyers (1991 Ed.);
Trademark Law and Practice (1990 Ed.); and
The Law on Elections (1987 Ed.)
2008 Edition
Published & Distributed by
856 Nicanor Reyes, Sr. St.
Tel. Nos. 736-05-67 • 735-13-64
1977 C.M. Recto Avenue
Tel. Nos. 735-55-27 • 735-55-34
Manila, Philippines
www.rexpublishing.com.ph
i
Philippine Copyright, 2008
by
RUBEN E. AGPALO
ISBN 978-971-23-5125-9
No portion of this book may be copied or
reproduced in books, pamphlets, outlines or notes,
whether printed, mimeographed, typewritten, copied
in different electronic devices or in any other form, for
distribution or sale, without the written permission
of the author except brief passages in books, articles,
reviews, legal papers, and judicial or other official
proceedings with proper citation.
Any copy of this book without the corresponding
number and the signature of the author on this page
either proceeds from an illegitimate source or is in
possession of one who has no authority to dispose of
the same.
ALL RIGHTS RESERVED
BY THE AUTHOR
No. ____________
ISBN 978-971-23-5125-9
9
789712 351259
Printed by
rex printing company, inc.
typography & creative lithography
84 P. Florentino St., Quezon City
Tel. Nos. 712-41-01
ii • 712-41-08
CONTENTS
Part I – OBLIGATIONS
Chapter 1
GENERAL PROVISION
§1.00
§2.00
§3.00
§4.00
§5.00
§6.00
§7.00
§8.00
§9.00
§10.00
§11.00
§12.00
§13.00
§14.00
§15.00
§16.00
§17.00
Generally .....................................................................
Obligation defined .......................................................
Essential elements of obligation ................................
Sources of obligations .................................................
Obligations arising from law ......................................
Meaning of “law” .........................................................
Obligations derived from law are not presumed .......
Obligations arising from contracts ............................
Obligations from quasi-contract.................................
Requisites of quasi-contract .......................................
Obligations arising from crimes .................................
Civil liability arising from crimes, generally ............
Obligations arising from quasi-delicts .......................
Quasi-contract .............................................................
Elements of quasi-delict .............................................
No existing contract in quasi delict; exceptions ........
Quasi-contractual relation .........................................
1
2
3
3
4
4
5
8
9
10
10
11
12
13
13
15
15
Chapter 2
NATURE AND EFFECT OF OBLIGATIONS
§18.00
§19.00
§20.00
§21.00
§22.00
Duty to take care of thing diligently ..........................
Ordinary diligence ......................................................
When diligence of more than good father
is required ...........................................................
Obligation to give generic or determinate thing .......
Creditor entitled rights from time obligation
to deliver arises ..................................................
iii
16
16
17
17
18
§23.00
§24.00
§25.00
§26.00
§27.00
§28.00
§29.00
§30.00
§31.00
§32.00
§33.00
§34.00
§35.00
§36.00
§37.00
§38.00
§39.00
§40.00
§41.00
§42.00
§43.00
§44.00
§45.00
§46.00
§47.00
§48.00
§49.00
§50.00
§51.00
§52.00
What consists of obligation to deliver
determinate thing...............................................
When obligation is executed at obligor’s expense .....
Delay in performance of obligations ..........................
Meaning of delay .........................................................
Delay in reciprocal obligations ...................................
Grounds for damages for non-performance
of obligations.......................................................
Fraud defined ..............................................................
Presumption of fault in breach of contract ................
Fraud as basis of liability ...........................................
Negligence defined ......................................................
Where both parties are mutually negligent ..............
Those negligent may be held liable therefor .............
Liability arising from negligence ...............................
Illustrative cases of liability arising
from negligence ..................................................
Doctrine of imputed negligence ..................................
Common carriers’ negligence and liability ................
When force majeure or caso fortuito
exempts liability .................................................
Kinds of fortuitous events ..........................................
Elements of force majeure ..........................................
Fortuitous event does not suspend prescription .......
Illustrative cases on fortuitous events.......................
Exceptions from fortuitous events .............................
Those who contravene in any manner tenor
of performance of contract are liable
for damages.........................................................
Usurious transactions.................................................
Presumptions ..............................................................
Rights of creditors .......................................................
Subsidiary remedy ......................................................
Exemptions from execution, etc. ................................
Transmissible rights ...................................................
Obligations are transmissible; exceptions .................
19
19
20
21
21
22
23
23
23
24
25
25
25
26
33
35
36
36
37
38
39
48
50
51
52
52
53
54
60
63
Chapter 3
DIFFERENT KINDS OF OBLIGATIONS
Section 1. — Pure and Conditional Obligations
§53.00
§54.00
Different kinds of obligations .....................................
Pure obligation ............................................................
iv
64
64
§55.00
§56.00
§57.00
§58.00
§59.00
§60.00
§61.00
§62.00
§63.00
§64.00
§65.00
§66.00
§67.00
§68.00
§69.00
§70.00
§71.00
§72.00
§73.00
§74.00
§75.00
§76.00
§77.00
§78.00
§79.00
§80.00
§81.00
§82.00
§83.00
§84.00
§85.00
§86.00
§87.00
§88.00
§89.00
§90.00
§91.00
§92.00
§93.00
§94.00
§95.00
Demand necessary; exceptions ...................................
Obligation with a period .............................................
Conditional obligation ................................................
Condition defined ........................................................
What constitutes condition .........................................
Conditional obligations ...............................................
Conditional contract and conditional obligation .......
Condition in perfected contract ..................................
Suspensive and resolutory conditions........................
Suspensive condition ..................................................
Resolutory condition ...................................................
Potestative condition ..................................................
Kinds of potestative conditions ..................................
Purely potestative condition.......................................
Mixed potestative condition .......................................
Where condition is on fulfillment only .......................
Impossible conditions .................................................
Impossibility of performance ......................................
Constructive fulfillment of condition .........................
Effects of conditional obligation to give .....................
Conditional obligations ...............................................
Suspensive condition ..................................................
Rescission in reciprocal obligations ...........................
Rescission defined .......................................................
Rescission implied in reciprocal obligations ..............
Instances of rescission ................................................
Rescission presupposes extant obligation .................
Rescission requires material breach ..........................
Where there is substantial breach .............................
Only injured party is entitled to rescind ...................
Rescission must be effected judicially; exceptions ....
Requirement of extrajudicial rescission ....................
Unopposed rescission produces effect ........................
Mutual restitution in case of rescission .....................
Exception to mutual rescission ..................................
Specific performance may be asked by
injured party .......................................................
Waiver of right or option to rescind ...........................
Rescission under Art. 1191 and Art. 1381
distinguished ......................................................
Rescission and termination distinguished ................
Remedies of reformation or of rescission ...................
Mandamus does not lie to enforce contract ...............
v
65
65
65
68
69
69
69
70
71
72
72
73
74
74
75
75
76
76
77
77
79
80
82
83
84
84
86
86
87
88
91
92
92
92
95
95
97
98
99
101
102
§96.00
§97.00
§98.00
Recto Law applicable to sale of personal
property in installment ......................................
Rescission under Maceda law of reality
in installment .....................................................
Where both parties breach their obligations .............
102
103
110
Section 2. — Obligations with a period
§99.00
§100.00
§101.00
§102.00
Period defined .............................................................
Period to accept offer ..................................................
Day certain ..................................................................
Obligations with a period ...........................................
112
112
113
113
Section 3. — Alternative obligations
§103.00 Alternative obligation defined ....................................
§104.00 Facultative obligation .................................................
§105.00 Illustration of alternative obligations ........................
115
116
116
Section 4. — Joint and Solidary Obligations
§106.00
§107.00
§108.00
§109.00
§110.00
§111.00
§112.00
§113.00
§114.00
§115.00
§116.00
§117.00
§118.00
§119.00
§120.00
Joint obligation, defined .............................................
Solidary obligation, defined ........................................
Solidary obligation may not be lightly inferred ........
Joint and several liability; husband and wife ...........
Joint liability cannot be converted into solidary
by admission .......................................................
Principles of joint and several liability ......................
The general rule and exception in joint
or solidary obligations ........................................
Defenses available to one inures to benefit
of other solidary debtors ....................................
Secondary and subsidiary liability ............................
Liability of business partnership and partners ........
Liability of professional or law partnership ..............
Effects of other acts or omissions of solidary
creditors or solidary debtors ..............................
Instances of solidary obligation..................................
Surety’s liability is solidary ........................................
Mortgagor not solidarily liable with borrower ..........
119
119
121
122
123
123
125
126
127
128
128
130
132
133
134
Section 5. — Divisible and Indivisible Obligations
§121.00 General rule on divisibllity and indivisibility ...........
vi
136
§122.00 Where obligation is divisible, nullity of one
prestation does no nullify the whole
obligation ............................................................
§123.00 Where obligation is indivisible, nullity of one
prestation extends to the other prestations ......
137
137
Section 6. — Obligations with a Penal Clause
§124.00
§125.00
§126.00
§127.00
§128.00
§129.00
§130.00
§131.00
§132.00
§133.00
§134.00
§135.00
Penalty clause defined ................................................
Functions and purposes of penalty clause .................
Penalty has to be expressly provided.........................
Kinds of penalty clauses .............................................
Reduction of Penalty ...................................................
Proof of damages not necessary .................................
Factors taken into account to reduce penalty ...........
Penalty and interests may be stipulated ...................
Recovery of other damages .........................................
Reduction of interest...................................................
Reduction of interest when same is excessive ...........
Other consequences of accessory clauses...................
138
139
140
141
144
144
145
151
152
153
153
155
Chapter 4
EXTINGUISHMENT OF OBLIGATIONS
General Provisions
§136.00 Generally .....................................................................
156
Section 1. — Payment or Performance
§137.00
§138.00
§139.00
§140.00
§141.00
§142.00
§143.00
§144.00
§145.00
Payment defined .........................................................
Payment of debt ..........................................................
Debt, meaning of .........................................................
Debt and claim distinguished ....................................
Payment by means of legal tender .............................
Evidence of payment ...................................................
Burden of proving payment ........................................
Evidence of payment ...................................................
Value of currency at time of establishment
of obligation in case of extraordinary
inflation or deflation ...........................................
§146.00 Existence of extraordinary inflation requires
Central Bank declaration ..................................
§147.00 Payment in foreign currency is allowed,
if so stipulated ....................................................
vii
156
157
158
158
159
160
160
161
162
162
163
§148.00
§149.00
§150.00
§151.00
§152.00
§153.00
§154.00
§155.00
§156.00
§157.00
Requisites of payment ................................................
Where payment may be made ....................................
Waiver of incomplete or irregular performance ........
Payment by third person ............................................
Guarantor cannot be required to pay
principal’s debt ...................................................
Payment by assignment .............................................
Dacion en pago as form of extinguishing
obligation ............................................................
Dacion requires elements of sale ...............................
Requisies of dacion en pago .......................................
Illustrative case regarding discharge of obligation
by novatio, dacion en pago and assignment......
164
164
165
165
167
169
169
170
170
171
Subsection 1 — Application of Payments
§158.00 Application defined .....................................................
§159.00 Application presupposes person owning
several debts .......................................................
§160.00 Right to make application of payment .......................
§161.00 Rule on application of payment..................................
§162.00 When creditor may make application ........................
§163.00 Application of installment payments
with interest ....................................