OBLIGATIONS AND CONTRACTS
Text and Cases
By
MELENCIO S. STA. MARIA, JR.
Ll.B. with Honors Ateneo de Manila School of Law; Ll.M.
Boston University; Professor of Law in Obligations and
Contracts Law, Persons and Family Relations Law, and
Public International Law at the Ateneo De Manila School
of Law; Bar Reviewer at the Ateneo De Manila School of
Law; Holder: 1994, 1996, 1997, 1998, 1999, 2000 Ateneo
Law Alumni Foundation Professorial Chair in Civil Law
and the 1992 Sasakawa Professorial Chair in International
Law; 1993 United Nations Fellow at the United Nations
International Law Commission, Palais de Nation, Geneva,
Switzerland; Law Practitioner.
SECOND EDITION
2003
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i
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MELENCIO S. STA. MARIA, JR.
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OF THY STEADFAST LOVE AND THY
FAITHFULNESS!
PSALMS 115.1
THIS BOOK IS LOVINGLY DEDICATED TO MY MOTHER,
FLORENCIA STA. MARIA AND MY FAMILY: AMPARITA,
JOSEPH EMMANUEL, PATRICIA ANNE AND
THERESE MARIAN
iii
iv
ACKNOWLEDGMENT
This edition is my project for the Ateneo de Manila Law Alumni
Foundation Professorial Chair in Civil Law awarded to me for the
years 1999 and 2000. This second edition was indeed long in coming.
However, I have incorporated the significant jurisprudence in
Obligations and Contracts which have affected the laws on the subject
since 1997. I tried to maintain the simplicity of this book without
necessarily sacrificing its value as a research material. The style is
still the same as the first edition.
I wish to thank Fr. Joaquin G. Bernas of the Society of Jesus
(SJ) for his continued support of my professorship at the Ateneo de
Manila College of Law. Also, my gratitude goes to Dean Cynthia
Roxas-Del Castillo who was principally the one who encouraged me
to take a more serious and scholarly approach to this complex field
of law. I would not have even thought of coming out with the first
edition had it not for her confidence in making me teach Obligations
and Contracts in 1995. Likewise, to my former esteemed professor,
Dean Eduardo De Los Angeles, I extend my sincerest gratitude for
inviting me, way back in 1986, to teach at the Ateneo de Manila
College of Law. I did not realize then that his invitation would have
a profound effect on my life today. Aside from practicing law, teaching
the law has indeed become a vocation.
For volunteering to assist me, I am grateful also to a group of
talented law students, namely:
1)
Ribonnette Rodriguez and Maricris Ang, who, when I
learned of the unavailability of the encoded master file of
the first edition, painstakingly and continuously went over
the original unedited version of the first edition and made
the necessary encodings to tally with the finished version
of that first edition. Their assistance made the
incorporations of the new matters in this second edition
much easier;
2)
Evelyn Kho, Thelma Mundin, Eugene Kaw, Ma. Margarita
Mallari, Vanessa Valdez, and Cristina Salvatierra who
assisted me in the proofreading of this work.
v
Finally, last but not the least, to my wife, Professor Amparita
Sta. Maria also of the Ateneo De Manila College of Law, who has
continued to be my principal critic in all my works, Iextend my
dearest appreciation.
MELENCIO S. STA. MARIA, JR.
November 18, 2002
Quezon City
vi
PREFACE
For the First Edition
The objective of this volume is to give the reader a basic
understanding of the law on prescription, civil obligations, contracts,
natural obligations, estoppel, trusts, and quasi-contracts. In
explaining them, I heavily relied on the rulings of the Supreme Court.
I chose cases for their value in exemplifying the area of law under
discussion, citing verbatim the relevant portions clarifying particular
articles. For me, there can be no better source of enlightenment other
than the opinions of the Supreme Court deciding actual relevant
disputes on the said subject matters. Excerpts from the report of the
1947 Code Commission pointing out the reason for the modification
or incorporation of certain provisions have also been quoted. I also
relied on some treatises of foreign authorities as our law has been
generally adopted from both the American and Spanish systems.
Whenever necessary, I made hypothetical illustrations of the
application of the law. I believe that a better understanding of the
statute can be achieved by simple examples devoid of any legalistic
language.
The articles are discussed and explained continuously, whether
lengthily or briefly, without any heading and sub-heading. Thus,
the only guides in this book are the articles themselves. My purpose
in doing this is twofold: first, to provide the reader with an undivided
view of the explanation of the particular provision, and, second, for
him to remember an important principle or rule, not because of any
heading or sub-heading, but precisely on the basis of the particular
provision dealing with it. Certainly, I am critically aware of the
limitations of this approach. Thus, I have been very careful in
presenting the discussions in the simplest form possible without
sacrificing their exegetical content. Important rules requiring
important explanations have been given proper emphasis at suitable
length. I believe that this over-all style appropriately serves the
objective of this edition.
If there is any law designed to significantly unify and stabilize
business, commercial and legal concerns, it is the law on obligations
vii
and contracts. For if one is to transact business with other people,
he definitely has to make and observe binding promises, predictable
commitments, documentary formalities, important conditions,
limited periods and prompt payments. Breaches and defaults also
occur. All these entail legal consequences. There is, therefore, a need
for a basic understanding of the legal principles of obligations and
contracts. This work offers a helpful and fundamental starting point
in searching for the right solutions.
I wish to acknowledge, with my sincerest appreciation, the
following for the valuable assistance extended to me in the
preparation of this book:
1)
my alma mater, the ATENEO DE MANILA UNIVERSITY,
for awarding to me the Ateneo Law Alumni Foundation
Professorial Chair in Civil Law for school-years 1996-1997
and 1997-1998. This volume is my project for the
professorial chair;
2)
my talented student, DOMINIQUE P. GALLEGO (Ateneo
Law Class of ‘98), for patiently proofreading the part of
this text dealing with the law on obligations; and
3)
my secretary, MATILDE DOLINA, for partly assisting me
in the encoding and typing of this work.
Finally, I cannot end without expressing my profound gratitude
to my wife, ATTY. AMPARITA S. STA. MARIA, who is teaching
Legal Research and is currently the Thesis Director of the Juris
Doctor (JD) Program at the Ateneo de Manila University School of
Law. She assisted me in my research and patiently showed me
how to maximize the use of my computer. Moreover, her enduring
support and perceptive suggestions have always been a source of
encouragement.
MELENCIO S. STA. MARIA, JR.
August 23, 1997
Quezon City, Metro Manila
viii
CONTENTS
Title V. Prescription
Chapter 1. General Provisions ...........................................
Chapter 2. Prescription of Ownership and Other
Real Rights .......................................................
Chapter 3. Prescription of Actions .....................................
1
18
44
BOOK IV. OBLIGATIONS AND CONTRACTS
Title I. Obligations
Chapter 1. General Provisions ...........................................
Chapter 2. Nature and Effect of Obligations ....................
Chapter 3. Different Kinds of Obligations ........................
68
75
103
Section 1. Pure and Conditional Obligations .............
Section 2. Obligations with a Period ..........................
Section 3. Alternative Obligations ..............................
Section 4. Joint and Solidary Obligations ..................
Section 5. Divisible and Indivisible Obligations ........
Section 6. Obligations with a Penal Clause ...............
103
132
141
148
167
170
Chapter 4. Extinguishment of Obligations .......................
176
General Provisions ...........................................
176
Section 1. Payment or Performance ...........................
Subsection 1. Application of Payments ..........
Subsection 2. Payment By Cession .................
Subsection 3. Tender of Payment and
Consignation .............................
Section 2. Loss of the Thing Due ................................
Section 3. Condonation or Remission of the Debt .....
Section 4. Confusion or Merger of Rights ..................
Section 5. Compensation .............................................
Section 6. Novation ......................................................
179
207
212
ix
214
223
234
239
241
262
Title II. Contracts
Chapter 1. General Provisions ...........................................
Chapter 2. Essential Requisites of Contracts ...................
282
322
General Provisions ...........................................
322
Section 1. Consent .......................................................
Section 2. Object of Contracts .....................................
Section 3. Cause of Contracts .....................................
323
360
363
Chapter 3.
Chapter 4.
Chapter 5.
Chapter 6.
Chapter 7.
Chapter 8.
Chapter 9.
Forms of Contracts ..........................................
Reformation of Instruments ............................
Interpretation of Contracts .............................
Rescissible Contracts .......................................
Voidable Contracts ...........................................
Unenforceable Contracts .................................
Void and Inexistent Contracts ........................
372
379
388
417
432
448
471
Title III. Natural Obligations
Title IV. Estoppel
Title V. Trusts
Chapter 1. General Provisions ...........................................
Chapter 2. Express Trusts .................................................
Chapter 3. Implied Trusts ..................................................
501
505
507
Title XVII. Extra-Contractual Obligations
Chapter 1. Quasi-Contracts ...............................................
Section 1. Negotiorum Gestio .....................................
Section 2. Solutio Indebiti ...........................................
Section 3. Other Quasi-Contracts ...............................
x
515
517
527
539
xi
1
PRESCRIPTION
Chapter 1
GENERAL PROVISIONS
Article 1106. By prescription, one acquires ownership and
other real rights through the lapse of time in the manner and
under the conditions laid down by law.
In the same way, rights and actions are lost by prescription. (1930a)
In Sinaon vs. Sorongon1 where the Supreme Court ruled that,
in certain cases, an implied trust is subject to prescription, it stated
that:
prescription is rightly regarded as 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 or death or removal of
witnesses.
In Morales vs. Court of First Instance of Misamis Occidental2
where prescription was not allowed to apply to obtain ownership over
a particular property due to the fact that the statutory period was not
complied with, the Supreme Court discussed the difference between
acquisitive and extinctive prescriptions, thus:
There are two kinds of prescription provided in the Civil
Code. One is acquisitive, i.e., the acquisition of a right by the
lapse of time (Art. 1106, par. 1). Other names for acquisitive
prescription are adverse possession and usucapcion. The other
kind is extinctive prescription whereby rights and actions are
lost by the lapse of time (Arts. 1106, par. 2 and 1139). Another
name for extinctive prescription is limitation of action.
G.R. No. L-59879, May 13, 1985, 136 SCRA 407.
G.R. No. L-52278, May 29, 1980, 97 SCRA 872.
1
2
1
2
ObligatiOns and COntraCts
Text and Cases
art. 1106
The differences between acquisitive and extinctive prescriptions
are well-settled as follows:
“Prescription was a statute of limitations. Whereas,
usucapcion expressly ‘vests the property’ and raised a new title
in the occupant, prescription did nothing more than bar the
right of action. The concept most fundamental to a system of
title by possession is that the relationship between the occupant
and the land in terms of possession is capable of producing legal
consequences. In other words, it is the possessor who is the actor.
Under statute of limitations, however, one does not look at the act
of the possessor but at the neglect of the owner. In the former, the
important feature is the claimant in possession, and in the latter
it is the owner out of possession which controls.” (Mont-gomery,
Prescriptive Acquisition of Land Titles, XXVI, Philippine Law
Journal, 353, 356-357 [1951])
Prescription however must be differentiated from the concept
of laches which is known as the doctrine of stale demands which “is
based upon grounds of public policy which requires, for the peace of
society, and the discouragement of stale claims.”3 The following are
the requisites of laches:
(1) conduct on the part of the defendant, or of one under
whom he claims, giving rise to the situation of which com-plaint
is made and for which the complaint seeks a remedy; (2) delay in
asserting the complainant’s rights, the com-plainant having had
knowledge or notice of the defendant’s conduct and having been
afforded an opportunity to institute a suit; (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.4
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 is equity, whereas
prescription applies at law. Prescription is based on fixed time,
laches is not.5
Tijam vs. Sibonghanoy, G.R. No. L-21450, April 15, 1968, 32 SCRA 29.
Abraham vs. Recto-Kasten, G.R. No. L-16741, January 31, 1962, 4 SCRA 298;
Vergara vs. Vergara, G.R. No. L-17524, May 18, 1962, 5 SCRA 53; Custodio vs. Casiano,
G.R. No. L-18977, December 27, 1963, 9 SCRA 841; Go Chi Gun, et al. vs. Go Cho, et
al., 96 Phil. 622.
5
Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., G.R. No. L-21601,
3
4
art. 1106
PresCriPtiOn
General Provisions
3
Laches applies independently of prescription, “so that laches
has been successfully interposed even if a shorter time had elapsed”6
and the prescriptive period has not yet expired. Laches can also
bar the filing or prosecution of a suit. In Z.E. Lotho, Inc. vs. Ice and
Cold Storage,7 where plaintiff made no genuine efforts to stop the
defendant from selling ice within his (plaintiff’s) franchise-area
despite plaintiff’s knowledge since 1948 of the said violative practice,
and where all of plaintiff’s material records were already lost by the
time he filed the suit in 1957, thereby causing prejudice to the defendant as such loss made it more difficult for defendant to controvert
the correctness of the damages sought by plaintiff, and where delay
in the filing of the case only in 1957 and the failure of the plaintiff to
forewarn the defendant as early as 1948 prevented the defendant from
guarding against further liability for damages or at least minimize
the same. The Supreme Court allowed the dismissal of the case on
the ground of laches notwithstanding the fact that the practices of
the defendant might, if proven, have been an invasion of plaintiff’s
rights. The Supreme Court decided this case on the issue of laches,
despite complainant’s contention that the complaint was within the
prescriptive period of 10 years from 1948. The issue of prescription
was corollarily and independently touched by the Supreme Court
which also ruled that the action had prescribed as it should have been
brought within four years from 1948 as the cause of action dealt with
an “injury to the rights of the plaintiff.”
Likewise in the case of Catholic Bishop of Balanga vs. Court of
Appeals,8 where the alleged landowner questioned the donation of its
representative to the donee who, after such donation, possessed the
property peacefully and adversely for 49 years, the Supreme Court
ruled that, although prescription does not apply to registered property,
“a registered landowner may lose his right to recover the possession
of his registered property by reason of laches.”9
Article 1107. Persons who are capable of acquiring
property or rights by the other legal modes may acquire the
same
by means of prescription.
December 17, 1966, 18 SCRA 1040.
6
Z.E. Lotho, Inc. vs. Ice and Cold Storage Industries, G.R. No. L-16563, December
28, 1961, 3 SCRA 744.
7
Id.
8
G.R. No. 112549, November 14, 1996, 76 SCAD 148.
9
See also the following cases: Victoriano vs. Court of Appeals, 194 SCRA 19
(1991); Lola vs. Court of Appeals, 145 SCRA 439 (1986); Golloy vs. Court of Appeals,
173 SCRA 26; Bergado vs. Court of Appeals, 173 SCRA 500 (1989); Republic vs. Court
of Appeals, 204 SCRA 160 (1991); Marcelino vs. Court of Appeals, 210 SCRA 444
(1992); De La Calzada-Cierras vs. Court of Appeals, 212 SCRA 390 (1992); Claverias
vs. Quingco, 207 SCRA 66 (1992).
4
ObligatiOns and COntraCts
Text and Cases
arts. 1107-1108
Minors and other incapacitated persons may acquire
property or rights by prescription, either personally or through
their parents, guardians or legal representatives. (1931a)
Prescription is a mode of acquiring property or rights. A person
who is of majority age and who is qualified to do all acts of civil life
may acquire property by prescription. The acquisition of a minor who
personally acquires property or rights without the assistance of his
parents or guardian is annullable or voidable. However, when such
minor comes of age, he may ratify the acquisition. If the acquisition
of the minor is through his parents or guardian, the acquisition is
completely valid.
Emancipation takes place by the attainment of majority.
Majority age commences at the age of eighteen years.10 Emancipation
shall terminate parental authority over the person and property of
the child who shall then be qualified and responsible for all acts of
civil life, save the exceptions established by existing laws in special
cases.11
Article 1108. Prescription, both acquisitive and extinctive,
runs against:
(1) Minors and other incapacitated persons who have
parents, guardians or other legal representatives;
(2) Absentees who have administrators, either appointed
by them before their disappearance, or appointed by the courts;
(3) Persons living abroad, who have managers or
administrators;
(4)
Juridical persons, except the State and its subdivisions.
Persons who are disqualified from administering their
property have a right to claim damages from their legal
representatives whose negligence has been the cause of
prescription. (1932a)
Prescription may run against minors and incapacitated persons
who have parents, guardians or other legal representatives. Thus, if A
Family Code of the Philippines, Executive Order No. 209, August 3, 1988, as
amended by Republic Act 6809, Article 234.
11
Id., Article 236.
12
G.R. No. 29759, May 18, 1989, 173 SCRA 436.
13
Republic vs. Hernaez, G.R. No. L-24137, January 1970, 31 SCRA 219;
10
art. 1108
PresCriPtiOn
General Provisions
5
is insane, prescription does not run against him. However, if he has a
legal representative or a guardian who, under the law, is supposed to
take care of his affairs during his insanity, prescription will apply. In
Vda. De Alberto vs. Court of Appeals,12 an alleged illegitimate child,
represented by his natural mother, filed an action for acknowledgment
and partition more than four years after the agreement of partition
of the surviving legitimate heirs was duly approved by the court. The
Supreme Court ruled that the action filed by the illegitimate child
should be dismissed on the ground of prescription considering that
the prescriptive period for assailing a partition made by heirs of a
deceased prescribes after four years from the time the partition was
made. The Supreme Court likewise said that under Article 1108(1) of
the Civil Code, the illegitimate child can not claim exemption from the
effects of prescription. The illegitimate child still has a living parent,
his mother, who in fact filed the complaint in the lower court for him,
falls squarely under the said article.
Prescription does not run against absentees. A person who
is absent cannot manage his affairs as he can not go back to his
domicile. However, if he leaves an administrator or the court appoints
an administrator for him, prescription will run against him. If the
absentee can go back to his domicile but he intentionally does not want
to return, prescription will lie against him. Relevantly, according to
Article 381 of the Civil Code:
Article 381. When a person disappears from his domicile,
his whereabouts being unknown, and without leaving an agent to
administer his property, the judge, at the instance of an interested
party, a relative, or a friend, may appoint a person to represent
him in all that may be necessary.
This same rule shall be observed when under similar
circumstances the power conferred by the absentee has expired.
Prescription run against persons living abroad who have
managers or administrators. If they do not have any manager or
administrator, prescription will not run against them. However, it
must be shown that they can not return to their domicile within the
period when prescription should have run.
Juridical persons are those endowed by law of the attributes
of a natural person and hence can acquire and lose properties and
rights. The State and its subdivisions however, acting in their
sovereign capacity, cannot be the subject of prescription.13 Hence, in
Republic vs. Grijaldo, G.R. No. L-20240, December 31, 1965, 15 SCRA 681; Republic
6
ObligatiOns and COntraCts
Text and Cases
art. 1108
Republic vs. Philippine National Bank,14 where the Armed Forces of
the Philippines as plaintiff filed a case for recovery of a sum of money
which the defendant-bank negligently paid to unauthorized persons.
The lower court dismissed the suit on the ground that the action had
already prescribed. The Supreme Court ruled that:
since the statute of limitations does not run against the State
and it is neither alleged nor shown that plaintiff, in making the
deposit of its funds in question with the defendant, did so other
than an instrumentality of the Republic, the pleas of prescription
cannot be maintained.
However, if the political subdivision is acting in its proprietary
character, prescription will lie against it. Likewise, if the instrumentality of the government is not acting in a sovereign capacity,
prescription will apply to such entity. In National Development
Company vs. Tobia,15 where the plaintiff National Development
Corporation, a government-owned and controlled corporation, filed
a collection case which was dismissed on the ground that the claim
had prescribed, the Supreme Court upheld the applicability of the
rules on prescription by stating:
x x x Plaintiff herein is neither the Government of the
Republic nor a branch or subdivision thereof. It is true that the
plaintiff is an instrumentality of such Government, but as this
Court has held in the case of Associacion Cooperative de Credito
Agricola de Miagao vs. Monteclaro (74 Phil. 281), “even the
Agricultural and Industrial Bank, which is a government-owned
and controlled corporation and which has been created to promote
agriculture and industry on a larger scale than agricultural credit
cooperative associations, cannot be said to exercise a sovereign
function. It is, like all other corporations capitalized by the
Government, a business corporation,” and, as such, its causes of
action are subject to the statute of limitation. x x x
Article 1109. Prescription does not run between husband
and wife, even though there be a separation of property agreed
upon in the marriage settlements or by judicial decree.
Neither does prescription run between parents and
vs. Rodriguez, G.R. No. L-18967, January 31, 1966, 16 SCRA 53.
14
G.R. No. L-16485, January 30, 1965, 13 SCRA 24.
15
G.R. No. L-17467, April 23, 1963, 7 SCRA 692.
16
G.R. No. L-15088, January 31, 1961, 1 SCRA 384.
17
Executive Order No. 209 which took effect on August 3, 1988.
18
Id., Article 57.
art. 1109
PresCriPtiOn
General Provisions
7
children, during the minority or insanity of the latter, and
between guardian and ward during the continuance of the
guardianship. (n)
Marriage is a special contract of permanent union between a man
and a woman. Generally, prescription does not apply to husband and
wife unless the law otherwise provides. This is true even though there
be a separation of property agreed upon in the marriage settlement or
by judicial decree. Thus in Pacio vs. Billion,16 where a husband made
a donation to his first wife and that, in order to resist the claim of the
children of the said husband from his second wife, the children of the
first wife contended that, though the donation was invalid, the first
wife nevertheless acquired the same through acquisitive prescription
considering that the void donation constituted a title and that the first
wife possessed the property for about 29 years. The Supreme Court
rejected such contention on the ground that there was no proof of
an adverse possession on the part of the first wife. Moreover, under
Article 1109 of the 1950 Civil Code “prescription by adverse possession
cannot exist between husband and wife.”
However, notwithstanding the provisions of the Civil Code, a law
may validly provide that prescription applies between husband and
wife. Thus, the Family Code of the Philippines17 provides that a case
of legal separation between husband and wife must be filed within
5 years from the occurrence of the cause.18 For annulment,
it is
generally 5 years from the particular starting point provided
by
law, such as from the marriage ceremony if the ground is im-potency.19
No prescription lies between parent and child during the latter’s
insanity or minority. The natural bond of filiation is the basis of this
rule. Moreover, while the child is a minor, the parents are his natural
guardians without the need of a court appointment. If the daughter
or son has attained the age of majority and is not insane, prescription
will apply. However, in special cases, the law may provide for a
prescriptive period between parent and child. Thus, the Family Code
of the Philippines provides that a husband may impugn the legitimacy
of the child of her wife on grounds provided by law within one year,
two years or three years from his knowledge of the birth of the child
or its recording in the civil registry, depending on the residence of
the husband and the place of birth of the child.20
Id., Article 47(5).
Id., Article 170.
21
Article 484 of the 1950 Civil Code.
22
G.R. No. L-48889, May 11, 1989, 161 SCRA 307.
19
20
8
ObligatiOns and COntraCts
Text and Cases
arts. 1110-1112
Due to the fiduciary relationship between the guardian and the
ward, prescription will not lie during the period of guardianship. This
is to give adequate remedy to the ward for the abuses of the guardian.
Article 1110. Prescription, acquisitive and extinctive, runs
in favor of, or against a married woman. (n)
Whether married or unmarried, prescription runs in favor of or
against a married woman.
Article 1111. Prescription obtained by a co-proprietor or
a co-owner shall benefit the others. (1933)
There is co-ownership whenever the ownership of an undivided
thing or right belongs to different persons.21 Prescription obtained by
a co-proprietor or a co-owner shall benefit the others. For example, A,
B and C co-own a particular land and, by virtue of such co-ownership
they all reside in the same. If B occupies, as a co-owner with A and C,
a portion of land adjoining the co-owned property, and he adversely
and publicly holds such adjacent portion of land continuously to the
exclusion of all others who are not in the co-ownership for the required
period of time, there can be a valid acquisition not only in his favor
but also in favor of A and C even though they do not actually possess
the said portion.
Article 1112. Persons with capacity to alienate property
may renounce prescription already obtained, but not the right
to prescribe in the future.
Prescription is deemed to have been tacitly renounced
when the renunciation results from acts which imply the
abandonment of the right acquired. (1935)
The case of Development Bank of the Philippines vs. Adil22 is
an illustrative case where the Supreme Court based its decision on,
among others, Article 1112. The pertinent portions of the decision
are as follows:
On February 10, 1940 spouses Patricio Confesor and Jovita
Villafuerte obtained an agricultural loan from the Agricultural
and Industrial Bank (AIB), now the Development Bank of the
Philippines (DBP), in the sum of P2,000.00, Philippine Currency,
23
24
G.R. No. L-36827, December 10, 1990, 192 SCRA 121.
G.R. No. L-17821, November 29, 1963, 9 SCRA 557; Mateo vs. Moreno, G.R.
art. 1112
PresCriPtiOn
General Provisions
as evidenced by a promissory note of said date whereby they
bound themselves jointly and severally to pay the account in
ten (10) equal yearly amortizations. As the obligation remained
outstanding and unpaid even after the lapse of the aforesaid tenyear period, Confesor, who was by then a member of the Congress
of the Philippines, executed a second promissory note on April
11, 1961 expressly acknowledging said loan and promising to pay
the same on or before June 15, 1961. The new promissory note
reads as follows —
“I hereby promise to pay the amount covered by my
promissory note on or before June 15, 1961. Upon my failure
to do so, I hereby agree to the foreclosure of my mortgage. It is
understood that if I can secure a certificate of indebtedness from
the government of my back pay I will be allowed to pay the amount
out of it.”
Said spouses not having paid the obligation on the specified
date, the DBP filed a complaint dated September 11, 1970 in the
City Court of Iloilo City against the spouses for the payment of
the loan.
The right to prescription may be waived or renounced.
Article 1112 of Civil Code provides:
“Art. 1112. Persons with capacity to alienate property may
renounce prescription already obtained, but not the right to
prescribe in the future.
Prescription is deemed to have been tacitly renounced when
the renunciation results from acts which imply the abandonment
of the right acquired.”
There is no doubt that prescription has set in as to the first
promissory note of February 10, 1940. However, when respondent
Confesor executed the second promissory note on April 11, 1961
whereby he promised to pay the amount covered by the previous
promissory note on or before June 15, 1961, and upon failure to
do so, agreed to the foreclosure of the mortgage, said respondent
thereby effectively and expressly renounced and waived his right
to the prescription of the action covering the first promissory note.
This Court had ruled in a similar case that —
“x x x when a debt is already barred by prescription, it
cannot be enforced by the creditor. But a new contract recognizing
and assuming the prescribed debt would be valid and enforceable
x x x.”
No. L-21024, July 28, 1969, 28 SCRA 796.
9
10
ObligatiOns and COntraCts
Text and Cases
art. 1113
Thus, it has been held that —
“Where, therefore, a party acknowledges the correctness of
a debt and promises to pay it after the same has prescribed and
with full knowledge of the prescription he thereby waives the
benefit of prescription.”
This is not a mere case of acknowledgment of a debt that has
prescribed but a new promise to pay the debt. The consideration of
the new promissory note is the pre-existing obligation under the
first promissory note. The statutory limitation bars the remedy
but does not discharge the debt.
“A new express promise to pay a debt barred x x x take
the case from the operation of the statute of limitations as
this proceeds upon the ground that as a statutory limitation
merely bars the remedy and does not discharge the debt, there
is something more than a mere moral obligation to support
a promise, to wit — a pre-existing debt which is a sufficient
consideration constitutes, in fact, a new cause of action.”
“x x x It is this new promise, either made in express terms
or deduced from an acknowledgment as a legal implication,
which is to be regarded as reanimating the old promise, or as
imparting vitality to the remedy (which by lapse of time had
become extinct) and thus enabling the creditor to recover upon
his original contract.”
Article 1113. All things which are within the commerce of
men are susceptible of prescription, unless otherwise provided.
Property of the State or any of its subdivisions not patrimonial
in character shall not be the object of prescription. (1936a)
In Director of Forest Administration vs. Fernandez,23 where an
application was filed for the registration of a particular forest and
timber on the ground of prescription, the Supreme Court rejected
such claim and stated that:
it is axiomatic that forest lands of the public domain cannot be
acquired by prescription, its possession however long cannot ripen
into private ownership (Amunategui vs. Director of Forestry, 126
SCRA 69 [1983]; Bureau of Forestry vs. Court of Appeals, 153
SCRA 351 [1987]; Republic vs. Court of Appeals, 154 SCRA 476
[1987]). Forest land cannot be owned by private persons. It is not
registerable whether the title is a Spanish title or a torrens title
(Director of Lands vs. Court of Appeals, 133 SCRA 701 [1984];
Republic vs. Court of Appeals, 135 SCRA 156 [1985]; Vallanta
vs. IAC, 151 SCRA 679 [1987]). A tax declaration secured over
a land that is forested does not vest ownership to the declarant
(Republic vs. Court of Appeals, 116 SCRA 505 [1982]).
art. 1113
11
PresCriPtiOn
General Provisions
In Lovina vs. Moreno,24 it was likewise held that “the ownership
of a navigable stream or of its bed is not acquired by prescription.”
However in Republic vs. Court of Appeals,25 where a particular area
adjacent to a bay, was at times covered by water due to rain and not
due to the rising of the tide, the Supreme Court said that such area
can be registered and can be subject to prescription, thus:
Property, which includes parcels of land found in Philippine
territory, is either of public dominion or of private ownership.
Public lands, or those of public dominion, have been described
as those which, under existing legislation are not the subject of
private ownership, and are reserved for public purposes. The New
Civil Code enumerates properties of public dominion in Articles
420 and 502 thereof.
Article 240 provides:
“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.”
Article 502 adds to the above enumeration, the following:
“(1)
Rivers and their natural beds;
(2) Continuous or intermittent waters of springs and
brooks running in their natural beds and the beds themselves;
(3) Waters rising continuously or intermittently on lands
of public dominion;
(4) Lakes and lagoons formed by Nature on public lands
and their beds;
xxx
xxx
x x x”
The Director of Lands would like Us to believe that since a
portion of the land sought to be registered is covered with water
four to five months a year, the same is part of the lake bed of
Laguna de Bay, or is at least, a foreshore land, which brings it
within the enumeration in Art. 502 of the New Civil Code quoted
above and therefore it cannot be the subject of registration.
G.R. No. L-43105, August 31, 1984, 131 SCRA 532.
G.R. No. L-70615, October 28, 1986, 145 SCRA 268.
27
See Development Bank of the Philippines vs. Ozarraga, G.R. No. L-16631,
September 20, 1965.
28
See also Alvero vs. Reas, G.R. No. L-28337, September 30, 1970, 35 SCRA 210;
25
26
12
ObligatiOns and COntraCts
Text and Cases
art. 1113
The extent of a lake bed is defined in Art. 74 of the Law of
Waters of 1866, as follows:
“The natural bed or basin of lakes, ponds, or pools, is the
ground covered by their waters when at their highest ordinary
depth.”
The phrase “highest ordinary depth” in the above definition
has been interpreted in the case of Government of P.I. vs. Colegio
de San Jose, as the highest depth of the waters of Laguna de Bay
during the dry season, such depth being the “regular, common,
natural, which occurs always or most of the time during the year.”
The foregoing interpretation was the focal point in the Court
of Appeals decision sought to be reviewed. We see no reason to
disturb the same.
Laguna de Bay is a lake. While the waters of a lake are also
subject to the same gravitational forces that cause the formation
of tides in seas and oceans, this phenomenon is not a regular
daily occurrence in the case of lakes. Thus, the alternation of
high tides and low tides, which is an ordinary occurrence, could
hardly account for the rise in the water level of the Laguna de Bay
as observed four to five months a year during the rainy season.
Rather, it is the rains which bring about the inundation of a
portion of the land in question. Since the rise in the water level
which causes the submersion of the land occurs during a shorter
period (four to five months a year) than the level of the water at
which the land is completely dry, the latter should be considered
as the “highest ordinary depth” of Laguna de Bay. Therefore,
the land sought to be registered is not part of the bed or basin of
Laguna de Bay. Neither can it be considered as foreshore land.
The Brief for the Petitioner Director of Lands cites an accurate
definition of a foreshore land, to wit:
“. . . that part of (the land) which is between high and low
water and left dry by the flux and reflux of the tides x x x”
“The strip of land that lies between the high and low water
marks and that is alternately wet and dry according to the flow
of the tide.”
As aptly found by the Court a quo, the submersion in water
of a portion of the land in question is due to the rains “falling
directly on or flowing into Laguna de Bay from different sources.”
Since the inundation of a portion of the land is not due to “flux
and reflux of tides” it cannot be considered a foreshore land
within the meaning of the authorities cited by petitioner Director
of Lands. The land sought to be registered not being part of the
bed or basin of Laguna de Bay, nor a foreshore land as claimed
by the Director of Lands, is not a property of public dominion.
However, the applicant must prove that he has a registerable
art. 1113
PresCriPtiOn
General Provisions
title. This brings us to the second issue, which is whether or not
applicant-private respondent has registerable title to the land.
The purpose of land registration under the Torrens System
is not the acquisition of lands but only the registration of title
which applicant already possesses over the land. Registration
under the Torrens Law was never intended to be a means of
acquiring ownership. Applicant in this case asserts ownership
over the parcel of land he seeks to register and traces the roots
of his title to a public instrument of sale (Exh. G) in favor of his
father from whom he inherited said land. In addition to this
muniment of title, he presents a tax declaration (Exhs. F, G, H,
I) covering the land since 1918 and as well as tax receipts (Exhs.
J, J-1, J-2, J-3, J-4, K, K-1, K-2, K-3) dating back to 1948. While
it is true that tax receipts are declarations of ownership, they
become strong evidence of ownership acquired by prescription
when accompanied by proof of actual possession of the property.
The Court of Appeals found that the applicant and his father,
have been in open, continuous, public, peaceful, exclusive and
adverse possession of the disputed land for more than thirty (30)
years, which began on April 19, 1909, when the land was acquired
from a third person by purchase. The record does not show any
circumstance to note which is sufficient enough to overthrow said
findings of facts which is binding upon Us. Since applicant has
been in possession of the subject parcel of the land in the concept
of owner with just title and in good faith, his possession need only
last for ten years in order for ordinary acquisitive prescription to
set in. Applicant has more than satisfied this legal requirement.
Hence, even if the land sought to be registered is public land as
claimed by the petitioners, applicant remains to be entitled to
a judicial confirmation of his imperfect title, since he has also
satisfied the requirements of the Public Land Act (Commonwealth
Act No. 141 as amended by Republic Act No. 1942). Sec. 48 of
said Act enumerates as among the persons entitled to judicial
confirmation of imperfect title, the following:
“(a)
xxx
(b) Those who, by themselves or through their
predecessors-in-interest, have been in the open, continuous,
exclusive, and notorious possession and occupation of agricultural
lands of the public domain, under bona fide claim of ownership,
for at least thirty years immediately preceding the filing of the
application for confirmation of title. x x x”
The claim of private oppositors, petitioners in G.R. No.
L-43190, that they have reclaimed the land from the waters of
Laguna de Bay and that they have possessed the same for more
than twenty (20) years does not improve their position. In the
first place, private persons cannot, by themselves reclaim land
13
14
ObligatiOns and COntraCts
Text and Cases
art. 1113
from water bodies belonging to the public domain without proper
permission from government authorities. Moreover, even if such
reclamation had been authorized, the reclaimed land does not
automatically belong to the party reclaiming the same, as they
may still be subject to the terms of the authority earlier granted.
Private oppositors-petitioners failed to show proper authority
for the alleged reclamation, therefore their claimed title to
the litigated parcel must fail. In addition to that, their alleged
possession can never ripen into ownership. This is due to the
fact that only possession acquired and enjoyed in the concept of
owner can serve as the root of a title acquired by prescription.
As correctly found by the appellate court, the private oppositorspetitioners entered into possession of the land with the permission
of, and as tenants of, the applicant del Rio. The fact that some of
them at one time or another, did not pay rent cannot be considered
in their favor. Their use of the land and their non-payment of
rentals thereon, were merely tolerated by the applicant and they
cannot affect the character of the latter’s possession which has
already ripened into ownership at the time of the filing of this
application for registration.
The applicant private-respondent having satisfactorily
established his registerable title over the parcel of land described
in his application, he is clearly entitled to register the said land
in his favor.
Article 1114. Creditors and all other persons interested in
making the prescription effective may avail themselves thereof
notwithstanding the express or tacit renunciation by the debtor
or proprietor. (1937)
An illustration of this article is as follows: A is indebted to B
in the amount of P50,000. C guarantees the said indebtedness and
waives his benefit of excussion. This means that should A fail to pay
B, B need not exhaust all remedies against A for collection before he
could demand payment from C, the guarantor. In the event that the
time within which to pay has already prescribed but A nevertheless
waives the prescription such that B can still collect from him, and
should A again fail to pay, thereby prompting B to demand payment
from C, the guarantor, the latter can resist payment by invoking that
the collection of the debt of A has already prescribed. C will not be
prejudiced by the act of A in waiving the prescription.
Article 1115. The provisions of the present Title are
understood to be without prejudice to what in this Code or
in special laws is established with respect to specific cases of
prescription. (1938)
arts. 1114-115
PresCriPtiOn
General Provisions
15
There are other provisions in the Civil Code which provide
for prescriptive periods in specific cases. For example, Article 1391
provides that the prescriptive period for annulling a contract in case
it is defective due to fraud perpetuated by one of the parties is four
years from the time the fraud is discovered. This is true whether the
contract is written or oral. Chapter Three of the present Title however,
provides that an action on a written contract prescribes in 10 years
and on an oral contract in 6 years. In this case, the prescriptive period
in Article 1391 will apply. Article 1391 provides for a specific case
on fraud. Other statutes likewise provide for certain prescriptive
periods. In case of conflict between the period provided in this Title
and the period provided in another portion of the Civil Code, the
more specific provision will prevail. However, if different statutes
are involved providing for different prescriptive periods, as well as
the types of cause of action contemplated by them are apparently
conflicting, they do not exclude each other from being availed of by
the aggrieved parties. Thus, in Callanta vs. Carnation Philippines,
Inc.,26 the Supreme Court ruled that, while a claim for money in labor
cases prescribes in three years under the Labor Code, it will not bar
the aggrieved party from availing of the four-year prescriptive period
for “injury to the plaintiff” provided, under Article 1146 of the Civil
Code, that the claim also arises from illegal dismissal which results
to an injury to the plaintiff.
Article 1116. Prescription already running before the
effectivity of this Code shall be governed by laws previously
in force; but if since the time this Code took effect the entire
period herein required for prescription should elapse, the
present Code shall be applicable, even though by the former
laws a longer period might be required. (1939)
The 1950 Civil Code took effect on August 30, 1950. Article 1116
is a transitory provision and the rules are as follows:
1)
If the prescriptive period provided under the old law
has already lapsed before the effectivity of the 1950 Civil Code,
such prescriptive period shall apply;27
2)
If the prescriptive period under the old law is still
running upon the effectivity of the 1950 Civil Code which however
provides for a different period for the same situation, the 1950
Civil Code shall prevail provided that such period counted from
the effectivity of the 1950 Civil Code has already lapsed, although
Ongsiaco vs. Dallo, G.R. No. L-27451, February 28, 1969, 27 SCRA 161; Joaquin vs.
Cojuangco, G.R. No. L-18060, July 25, 1967, 20 SCRA 769; Laurel-Manila vs. Galvan,
16
ObligatiOns and COntraCts
Text and Cases
art. 1116
under the old law the period has not yet lapsed. Thus, if under
an old law previous to the effectivity of the Civil Code in 1950,
X has thirty years within which to file a particular suit and by
the time the 1950 Civil Code takes effect his remaining time,
pursuant to the period provided by the old law, is only 12 years,
he cannot file the case on the 12th or even on the 11th year if the
1950 Civil Code provides only 10 years as prescriptive period for
exactly the same kind of case. This is so because by the 11th year
or 12th year, the prescriptive period of 10 years counted from the
effectivity of the 1950 Civil Code has already lapsed;
3)
If the prescriptive period under the old law is still
running upon the effectivity of the 1950 Civil Code and the
remaining balance of such period since the effectivity of the 1950
Civil Code is shorter than that provided in the 1950 Civil Code
for exactly the same situation, the old prescriptive period will
apply. Thus, in the example given in No. 2, if the balance of the
period which started under the old law is 12 years counted from
the time of the effectivity of the 1950 Civil Code and the latter
provides for 15 years as the prescriptive period for exactly the
same case, the prescriptive period under the old law will prevail.28
G.R. No. L-23507, May 24, 1967, 20 SCRA 198; Carillo vs. De Paz, L-22601, October
28, 1966, 18 SCRA 467.
art. 1116
PresCriPtiOn
General Provisions
17
18
ObligatiOns and COntraCts
Text and Cases
Chapter 2
PRESCRIPTION OF OWNERSHIP AND
OTHER REAL RIGHTS
Article 1117. Acquisitive prescription of dominion and
other real rights may be ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of
things in good faith and with just title for the time fixed by
law. (1940a)
Acquisitive prescription may be ordinary or extraordinary.
Ordinary prescription requires uninterrupted possession for the
required statutory period of years in good faith and with a just
title. Extraordinary prescription likewise requires an uninterrupted
possession for the statutory period of years but without need of just
title and good faith on the part of the possessor. Godinez vs. Court of
Appeals1 is an example of the application of acquisitive prescription,
thus:
This case is about the acquisition of land by prescription.
Felix Bergado owned Lot 655 with an area of 11,001 square
meters. It is located in Punta Rizal, Barrio Gunob, Opon, now
Lapu-lapu City. It was inherited by his seven children named
Tomas, Teodora, Ambrosia, Florencia, Aniceto, Macario and
Vicente.
Cadastral Judge Guillermo F. Pablo on January 31, 1929
ordered the registration of Lot 655 in the names of the seven
sets of transferees, to each of whom he adjudicated a 1/6 share
instead of 1/7. Because of that error and other clerical errors, no
decree was issued nor did the adjudicatees obtain any Torrens
title. The land remained unregistered.
Two-sevenths of Lot 655, pertaining to Macario Bergado
and Vicente Bergado, were transferred to Maximo Patalinhug
G.R. No. L-46768, March 18, 1985, 135 SCRA 351.
1
18
art. 1117
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
while the 5/7 share of the other five children were transferred in
1929 and 1930 to the spouses Domingo Magsumbol and Susana
Magsumbol.
Lot 655 was subdivided on January 30, 1934 with the
approval of the Director of Lands, into Lot 655-A (5/7) and Lot
655-B (2/7). The Bergado heirs ceased to have possession of any
portion of Lot 655 which was occupied by the Magsumbol spouses
and Patalinhug.
In the guardianship proceeding for the children of Miguel
Magsumbol, who inherited Lot 655-A from Domingo, Sr., Judge
Jose M. Mendoza adjudicated to Domingo, Jr. on October 30, 1962
said lot with an area of 7,344 square meters. Domingo, Jr. then
sold Lot 655-A on November 2, 1962, to the brothers Mamerto
and Lorenzo Igot for P10,000 (Exh. D or 2). The Igots continued
the Magsumbols’ possession of Lot No. 655-A.
On May 10, 1967, or 38 years after Judge Pablo rendered his
decision, Judge Mendoza, the same judge who granted Lot 655A to Domingo Magsambol, Jr., at the instance of some Bergado
heirs, corrected the clerical errors in Judge Pablo’s decision. As
a result, a decree was issued regarding this matter. Finally on
December 19, 1967, OCT No. 8 was issued for Lot 655. The land
became registered land at last.
In 1970 the Igot brothers sued some Bergado heirs for
the reconveyance of Lot 655-A or 5/7 portion of Lot 655 which
is covered by OCT No. 8. The trial court upheld their claim.
The appellate Court, through Justice Gatmaitan, affirmed said
decision.
In its decision, the court ruled that the Magsumbols had
acquired Lot 655-A by prescription under section 41 of the Code of
Civil Procedure. The right was in turn, transmitted to the Igots.
The petitioners herein, or defendants Godinez and Jayme, had
only acquired a paper title in 1967 when they obtained OCT No.
8.
The petitioners filed an appeal contending that the Appellate
Court erred by not recognizing OCT No. 8 as indefeasible and by
not considering the action of the Igots as barred by res judicata.
The Supreme Court in its decision, held that the Appellate
Court did not err in dismissing the claim of the petitioners for Lot
655-A which has been in the adverse, continuous, uninterrupted
and notorious possession of the Magsumbols and the Igots, in the
concept of owner for more than half a century. The laws as well
as the canons of common sense favored the Igots.
Thus, OCT No. 8 did not nullify the sales made by the five
Bergado children to the Magsumbol spouses in 1929 and 1930.
19
20
ObligatiOns and COntraCts
Text and Cases
art. 1118
Article 1118. Possession has to be in the concept of an
owner, public, peaceful and uninterrupted. (1941)
Possession must be in the concept of an owner. This means that
the possessor asserts dominion on the property to the exclusion of
all others. It must be an adverse possession.2 Thus, a mere lessee
or a mere mortgagee does not hold the property in the concept of an
owner. Also, possession of cash dividends by an agent on behalf of the
owner, cannot be the subject of prescription, as there is no holding of
the property in concepto de dueño.3
Thus, mere possession with a juridical title, such as, to
exemplify, by a usufructuary, a trustee, a lessee, an agent or a
pledgee, not being in the concept of an owner, cannot ripen into
ownership by acquisitive prescription, unless the juridical relation
is first expressly repudiated and such repudiation has been
communicated to the other party. Acts of possessory character
executed due to license or by mere tolerance of the owner would
likewise be inadequate. Possession, to constitute a foundation
of a prescriptive right, must be en concepto dueno, or, to use the
common law equivalent of the term, that possession should be
adverse, if not, such possessory acts, no matter how long, do not
start the running of the period of prescription.4
In Ramirez vs. Court of Appeals5 where it was proven that the
possessor of the property held the property by virtue of a contract of
antichresis, the Supreme Court ruled thus:
This court has on several occasions held that the antichretic creditor cannot ordinarily acquire by prescription the
land surrendered to him by the debtor (Trillana vs. Manansala,
et al., 96 Phil. 865; Valencia vs. Acala, 42 Phil. 177; Barreto vs.
Barreto, 3 Phil. 234). The petitioners are not possessors in the
concept of owners. Thus, their possession cannot serve as a title
for acquiring dominion (See Art. 540, Civil Code).
In Republic vs. Court of Appeals,6 involving the possession of the
United States Navy of a particular property for recreational purposes
only, the Supreme Court rejected any contention for prescription to
Cuayong vs. Benedicto, G.R. No. 9989, March 13, 1918, 37 Phil. 781.
Harden vs. Harden, G.R. No. L-22174, July 21, 1967, 20 SCRA 706.
4
Marcelo, et al. vs. Court of Appeals, G.R. No. 131803, April 14, 1999, 105 SCAD
561, 305 SCRA 800.
5
G.R. No. L-38185, September 24, 1986, 144 SCRA 292.
2
3
art. 1118
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
21
apply. The pertinent portions of the decision are as follows:
The finding of respondent court revealed that, during the
interim of 57 years from November 26, 1902 to December 17,
1959 (when the U.S. Navy possessed the area), the possessory
rights of Baloy or his heirs were merely suspended and not lost
by prescription, is supported by Exhibit “U,” a communication
or letter No. 1108-63, dated June 24, 1963, which contains an
official statement regarding the position of the Republic of the
Philippines with regard to the status of the land in question.
Said letter recognizes the fact that Domingo Baloy and/or his
heirs, have been in continuous possession of said land since
1894 as attested by an “Informacion Possessoria” Title, which
was granted by the Spanish Government. Hence, the disputed
property is private land and this possession was only interrupted
only by the occupation of the land by the U.S. Navy in 1945
for recreational purposes. However, the U.S. Navy eventually
abandoned the premises. The heirs of the late Domingo P. Baloy,
are presently in actual possession, and has been in possession
since the abandonment by the U.S. Navy. A new recreation area
is presently being used by the U.S. Navy personnel and such place
is remote from the land in question.
Clearly, the occupancy of the U.S. Navy was not in the
concept of owner. It partakes of the character of commodatum.
It cannot therefore militate against the title of Domingo Baloy
and his successors-in-interest. One’s ownership of a thing may
be lost through prescription by reason of another’s possession,
provided that such possession is under a claim of ownership, and
not where the possession is only intended to be transient, as in
the case of the U.S. Navy’s occupation of the land concerned, in
which case the owner is not divested of his title, however, it cannot
be exercised in the meantime.
In Ramos vs. Court of Appeals,7 the Supreme Court likewise ruled
that acquisitive prescription has set in especially when the claimant
has undertaken acts clearly showing his claim of ownership, thus:
Even from the standpoint of acquisitive prescription, which
seems to be more decisive, it appears too clear that private
respondents have acquired title to the land in suit by virtue of
possession in the concept of an owner. It is of record that private
respondents have been in continuous possession of the litigated
parcel of land since they bought the same in 1934. In addition
to that they have been paying the real estate taxes due thereon
and have declared said property in their name for taxation
G.R. No. L-46145, November 26, 1986, 146 SCRA 15.
G.R. No. L-52741, March 15, 1982, 112 SCRA 542.
6
7
22
ObligatiOns and COntraCts
Text and Cases
art. 1118
purposes. As correctly ruled by the Appellate Court, that “while
tax declaration and tax receipts are not necessarily evidence of
title, they are considered as a strong evidence of possession for
no one in his right mind would be paying taxes year after year
for a property that is not in his actual possession.”
The records of the case further disclose that petitioner’s
complaint for reconveyance was filed in the lower court only on
March 13, 1973, 39 years after the registration of the deed of
absolute sale in favor of private respondents. The issuance of
a certificate of title in their name exclusively on May 12, 1934,
from which latter date petitioner’s cause of action, if any, is
deemed to have commenced, since the registration of the aforesaid
deed of sale in the Office of the Registry of Deeds constitutes a
constructive notice to the whole world of its contents and all
interests, legal and equitable, included therein.
Since the prescriptive period in this case had already run
since May 12, 1934 prior to the effectivity of the new Civil Code
on August 30, 1950, there can be no doubt that the former laws
on prescription applies, pursuant to Article 1116 of the Civil Code.
Under Section 40 of the Code of Civil Procedure formerly in force,
adverse possession ripened into ownership after the lapse of ten
(10) years, good or bad faith of the possessor being immaterial for
purposes of acquisitive prescription. In the like manner, an action
to recover title or the possession of immovable property, prescribe
in the same period of 10 years. The instant case, not having been
filed within 10 years from the time the cause of action accrued
on May 12, 1934, have already prescribed in 1944 because the
complaint was filed only on March 13, 1973, about 39 years later.
Consequently, the possession by the private respondents over the
litigated property ripened into full ownership in 1944, ten years
after May 12, 1934, when their possession which was actual,
open, public and continuous, under a claim of title exclusive of
any other right and adverse to all other claims, commenced.
Possession must be public. This means that there must be a
notorious holding of the property known to the community. It must
not be of a surreptitious character because it must be in the concept of
an owner. It must likewise be peaceful in that, for the period of years
required by law for acquisitive prescription to apply, there must be
no valid interference from others claiming or asserting their rights
to the property. It must likewise be uninterrupted. This is defined in
the subsequent sections.
Article 1119. Acts of possessory character executed in
virtue of license or by mere tolerance of the owner shall not be
art. 1119
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
23
available for the purposes of possession. (1942)
The fact that the possessor holds the property by virtue of the
consent of the owner shows that such possessor acknowledges that
somebody else owns the property. Possession by tolerance therefore
does not imply an assertion of ownership,8 and thus produces no
effect with respect to possession or prescription.9 In Coronado vs.
Court of Appeals,10 where the statutory period for ordinary acquisitive
prescription passed, the Supreme Court rejected the application of
prescription because the possession was merely one of tolerance.
Pertinently, the Supreme Court said:
As found by the respondent appellate court, Monterola never
claimed ownership over the property in question. As a matter of
fact, one of the deeds of donation executed by Monterola in favor
of Leonida Coronado acknowledged that the boundary owner of
the property conveyed to her is JUANA. This is precisely the
reason why during the lifetime of the late Dalmacio Monterola,
JUANA had always been allowed to enter and reap the benefits
or the produce of the said property. It was only after the death of
said Monterola in 1970 that Leonida Coronado prohibited JUANA
from entering it (Ibid., p. 18).
Even assuming arguendo that Monterola was indeed in
continuous possession of the said property for over ten years
since 1934, said possession is insufficient to constitute the
fundamental basis of the prescription. Possession, under the Civil
Code, to constitute the foundation of a prescriptive right, must be
possession under claim of title (en concepto de dueño), or through
the use of common law equivalent to the term, it must be adverse.
Acts of possessory character performed by one who holds by mere
tolerance of the owner are clearly not en concepto de dueño, and
such possessory acts, no matter how long so continued, do not
start the running of the period of pres-cription (Manila Electric
Company v. Intermediate Appellate Court, G.R. No. 71393, June
28, 1989).
In this case, Monterola, as found by the respondent
appellate court as well as the lower court, never categorically
claimed ownership over the property in question, much less his
possession thereof en concepto de dueño. Accordingly, he could
not have acquired said property by acquisitive prescription.
Article
1120. Possession is interrupted for the purposes of
8
Ordoñez vs. Court of Appeals, G.R. No. 84046, July 30, 1990, 188 SCRA 109.
Manila Electric Company vs. Intermediate Appellate Court, G.R. No. L-71393,
June 28, 1989, 174 SCRA 313.
10
G.R. No. L-78778, December 3, 1990, 191 SCRA 814.
9
24
ObligatiOns and COntraCts
Text and Cases
arts. 1120-1122
prescription, naturally or civilly. (1943)
Possession must be uninterrupted. This means that there
must be continuity in the holding of the property. An uninterrupted
possession strengthens the adverse right of the possessor. Possession
can however be interrupted naturally or civilly.
Article 1121. Possession is naturally interrupted when
through any cause it should cease for more than one year.
The old possession is not revived if a new possession should
be exercised by the same adverse claimant. (1944a)
Article 1122. If the natural interruption is for only one
year or less, the time elapsed shall be counted in favor of the
prescription. (n)
For example, A is in possession of an unregistered property in
the concept of an owner in good faith and with a just title. The land is
formerly owned by B. The property is sold in a public auction to satisfy
B’s indebtedness from the government. A is the successful bidder.
The document evidencing the title has not yet been finished and
registered with the Government. A however is already in possession
for a period of 4 years. Z appears and claims that the property is his.
Z requests A to vacate the premises so that he will not be entangled
in a possible suit. To avoid complications, A left the place. It turns out
however, that Z is a defrauder, and it is M who has previously bought
the property from B before A made his purchase. Upon learning that
Z is a defrauder, A returns to the property after two years. He stays
there for another 7 years. M now claims the property and requests A
to leave the place. A cannot invoke acquisitive prescription. While he
may have possession of the property for a total period of 11 years, it is
interrupted. When he left the property for two years, his subsequent
possession of seven years cannot be added to his previous four years.
In effect, the period which is material for purposes of prescription is
the subsequent 7 years. Obviously, said seven-year period have not
yet complied with the 10-year period required by law for ordinary
acquisitive prescription. However, if the interruption is not two years
but only one year or less, acquisitive prescription will have already set
in, in favor of A because the law clearly provides that if the natural
interruption is for only one year or less, the time elapsed shall be
counted in favor of the prescription.
Article 1123. Civil interruption is produced by judicial
arts. 1123-1124
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
25
summons to the possessor. (1945a)
Article 1124. Judicial summons shall be deemed not to
have been issued and shall not give rise to interruption:
(1)
If it should be void for lack of legal solemnities;
(2) If the plaintiff should desist from the complaint or
should allow the proceedings to lapse;
(3)
If the possessor should be absolved from the complaint.
In all these cases, the period of the interruption shall be
counted for the prescription. (1946a)
It is not the filing of the complaint in court which interrupts
the possession. It is interrupted upon receipt of the possessor of the
judicial summons after the filing of the complaint. When the possessor
receives the judicial summons and the copy of the complaint, it is
only during that time that jurisdiction is acquired by the court of
the person of the possessor and it is at that time that possession is
interrupted.
However there are instances provided by law that judicial
summons shall be deemed not to have been issued, thereby not giving
rise to interruption. The first case is when the judicial summons is
void for lack of legal solemnities. Hence, if the judicial summons as
well as the copy of the complaint have been served by a person not
authorized by the court, it shall be deemed as not issued, thereby
allowing the possession to run uninterrupted.
Second is when the plaintiff should desist from the complaint or
should allow the proceedings to lapse. Desistance from the complaint
by the plaintiff means voluntarily having the case dismissed, while
allowing the proceeding to lapse clearly manifests the lack of interest
to prosecute the case. In both cases, the possessor should not be
prejudiced. There will be no interruption.
Third is when the possessor is absolved from the complaint.
Absolution means that the complaint have not been fully substantiated
to support any adverse claim by the complainant and therefore this
should not prejudice the possessor who must always be presumed to
be in good faith.
Article 1125. Any express or tacit recognition which
the possessor may make of the owner’s right also interrupts
possession. (1948)
26
ObligatiOns and COntraCts
Text and Cases
art. 1125
Express or tacit recognition interrupts the possession because
possession must always be in the concept of an owner to the exclusion
of all others. Hence, one cannot consider himself possessing a property
adversely in the concept of an owner if he recognizes somebody else
as having a superior right as an owner. Thus in Corpus vs. Padilla,11
the Supreme Court ruled that
one cannot recognize the right of another and at the same time
claim adverse possession which can ripen to ownership, thru
acquisitive prescription. For prescription to set in, the possession
must be adverse, continuous, public and to the exclusion of all.
Similarly, in Diñoso vs. Court of Appeals,12 where the seller and
the buyer executed a contract of sale in April 6, 1940 giving the seller
the right to repurchase the property on or before April 6, 1950 and
where the buyer immediately took possession of the property, the
Supreme Court, in resolving the issue of whether or not acquisitive
prescription can be availed of by the buyer, agreed with the Court of
Appeals’ decision stating:
that the possession of petitioner Dinoso under the sale a retro did
not actually become hostile or adverse until the expiration of the
redemption period, since until then he recognized the superior
right of the vendor to oust him, and his claim of ownership was
not absolute. Authorities are to the effect
that —
“Where the sale is subject to the owner’s right
of redemption, the purchaser’s possession has been
held in subordination to the title of the owner prior
to the expiration of the redemption period, although
it may become hostile thereafter.” (2 C.J.S. P. 664,
Sec. 113; Morse vs. Seibold, 35 N.W. 471).
It was incumbent upon the petitioner to show when his
vendor’s right of redemption expired, and that he had held
adversely for ten years thereafter. In truth, his own deed (Exhibit
“1”) recites that Feria’s right of repurchase would expire only on
6 April 1950, so that the present suit for recovery have begun, in
1952, well within the prescriptive period.
Article 1126. Against a title recorded in the Registry of
Property, ordinary prescription of ownership or real rights
shall not take place to the prejudice of a third person, except in
virtue of another title also recorded; and the time shall begin
11
12
G.R. Nos. L-18099 and L-18136, July 31, 1962, 5 SCRA 814.
G.R. No. L-17738, April 22, 1963, 7 SCRA 666.
art. 1126
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
27
to run from the recording of the latter.
As to lands registered under the Land Registration Act,
the provisions of that special law shall govern. (1949a)
In Dimayuga vs. Court of Appeals,13 where the deceased spouses
acquired a thirteen-hectare homestead, registered under the Torrens
System in 1928. The illegitimate children claimed one-half of the
same on the ground that they acquired it by acquisitive prescription
having been in the property since 1948, the Supreme Court rejected
such contention by stating:
That contention is devoid of merit. It may be morally
plausible but it is legally indefensible. No portion of the
homestead, a registered land, may be acquired by prescription.
“No title to registered land in derogation to that of the registered
owner shall be acquired by prescription or adverse possession.”
(Sec. 46, Act No. 496; Sec. 47, Property Registration Decree, P.D.
No. 1529; Art. 1126, Civil Code)
In Reyes vs. Court of Appeals,14 where the registered property
was acquired through a forged document by the petitioner, and where
such petitioner claimed acquisitive prescription against the heirs of
the original owners, the Supreme Court said:
Moreover, this Court agrees with the private respondents
that there can be no acquisitive prescription considering that the
parcel of land in dispute is titled property, i.e., titled in the name
of the late Bernardino Reyes, the father of both the petitioner
Florentino and the private respondents. This fact, petitioners do
not deny. Hence, even if they allege adverse possession that would
ripen into ownership due to acquisitive prescription, their title
cannot defeat the real rights of private respondents who stepped
into the shoes, as it were, of their father as successors-in-interest.
As it is, petitioners cannot even claim adverse possession as they
admit that the private respondents likewise resided and continue
to reside on the subject property.
However, although prescription will not apply to registered
property, the doctrine of laches is applicable. Laches is the rule of in
effectivity of stale demands. In Catholic Bishop of Balanga vs. Court
of Appeals,15 where the petitioner donated registered property to a
person who, including his successors-in-interest, took possession of
the same adversely, continuously, publicly and peacefully for forty13
14
G.R. No. L-148433, April 30, 1984, 129 SCRA 110.
G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.
28
ObligatiOns and COntraCts
Text and Cases
art. 1126
nine (49) years, and where, thereafter, the petitioner filed a case to
recover the property contending that the donation is invalid, the
Supreme Court, despite the fact the property was registered, rejected
the assertion of imprescriptibility of registered property and decided
against the petitioner on the ground that it was guilty of laches. The
Supreme Court pertinently ruled:
The time honored rule (on laches) anchored on public policy
is that relief will be denied to a litigant whose claim or demand
has become “stale” or who has acquiesced for an unreasonable
length of time, or who has not been vigilant or who has slept on
his right either by negligence, folly or inattention. In other words,
public policy requires, for the peace of society, the discouragement of claims grown stale for non-assertion; thus laches is an
impediment to the assertion or enforcement of a right which has
become, under the circumstances, inequitable or unfair to permit.
xxx
xxx
xxx
In this case, the petitioner filed its complaint in court only
after forty-nine (49) years had lapsed since the donation in its
behalf of the subject property to private respondent’s predecessor-in-interest. There is nary an explanation for the long delay
in the filing by petitioner of the complaint in the case at bench,
and that inaction for an unreasonable and unexplained length of
time constitutes laches. As such, petitioner cannot claim nullity
of the donation as an excuse to avoid the consequences of its own
unjustified inaction and as a basis for the assertion of a right on
which they had slept for so long.
xxx
xxx
xxx
Finally, we agree with the respondent Court of Appeals
that, while petitioner is admittedly still the registered owner
of the donated property, and jurisprudence is settled as to the
imprescriptibility and indefeasibility of a Torrens Title, there is
equally an abundance of cases in the annals of our jurisprudence
where we categorically ruled that a registered landowner may
lose his right to recover the possession of his registered property
by reason of laches.
Article 1127. The good faith of the possessor consists in the
reasonable belief that the person from whom he received the
thing was the owner thereof, and could transmit his ownership.
(1950a)
15
G.R. No. 112549, November 14, 1996, 76 SCAD 148.
arts. 1127-1128
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
29
Article 1128. The conditions of good faith required for
possession in Articles 526, 527, 528 and 529 of this Code are
likewise necessary for the determination of good faith in the
prescription of ownership and other real rights. (1951)
The following provisions of the 1950 Civil Code on possession
shall likewise be necessary in determining good faith on matters of
prescription:
Article 526. He is deemed a possessor in good faith who is
not aware that there exists in his title or mode of acquisition any
flaw which invalidates it.
He is deemed a possessor in bad faith who possesses in any
case contrary to the foregoing.
Mistake upon a doubtful or difficult question of law may be
the basis of good faith.
Article 527. Good faith is always presumed, and upon him
who alleges bad faith on the part of a possessor rests the burden
of proof.
Article 528. Possession acquired in good faith does not lose
this character except in the case and from the moment facts exist
which show that the possessor is not unaware that he possesses
the thing improperly or wrongfully.
Article 529. It is presumed that possession continues to be
enjoyed in the same character in which it was acquired, until the
contrary is proved.
In Negrete vs. Court of First Instance of Marinduque,16 where a
person claimed a particular property by virtue of ordinary acquisitive
prescription of ten years based on a deed of sale which he knew
involved a different property, the Supreme Court rejected the same
on the ground that, aside from the period required by law, there
must also be good faith and just title in the possession which was not
present in the case, thus:
The crucial issue therefore is whether the deed of sale
executed by Tito Oriendo on August 30, 1954 in favor of the late
Igmedio Maderazo could be considered as a valid basis for good
faith and as a just title, in order to justify the acquisition of the
disputed parcel of about 9 hectares by ordinary prescription thru
adverse possession of only 10 years.
The law defines a possessor in good faith as one who is
16
G.R. No. L-31267, November 24, 1972, 48 SCRA 113.
30
ObligatiOns and COntraCts
Text and Cases
arts. 1127-1128
not aware of any flaw in his title or mode of acquisition; and
conversely, one who is aware of such flaw is a possessor in bad
faith (Art. 526, Civil Code of the Philippines).
WE ruled that “the essence of the bona fides or good
faith, therefore, lies in the honest belief in the validity of one’s
right, ignorance of a superior claim, and absence of intention to
overreach another.”
A deed of sale, to constitute a just title and to generate
good faith for the ordinary acquisitive prescription of ten (10)
years, should refer to the same parcel of land, which is adversely
possessed. In the case at bar, the deed of sale in favor of the
deceased Igmedio Maderazo covers a parcel of land patently
different from the disputed land owned by plaintiff-appellant as
to area, location, and boundary owners.
xxx
xxx
xxx
Hence, defendant-appellee Catalino Maderazo, along with
his late father Igmedio Maderazo, could not claim good faith in
occupying said land of plaintiff-appellant on the basis of the said
instrument of sale. If said appellee’s position were to be sustained,
it would be easy for anyone to acquire ownership of an untitled
land belonging to another person by adverse possession of only ten
(10) years on the basis of a document of sale covering a distinct
parcel executed by a person who is a stranger to the land. This
could not have been intended by the legislature; because forged
deeds of conveyance could be conveniently interposed to oust
the true owner from a land by adverse possession of only ten
(10) years. To spawn such a monstrosity in the law was never
contemplated by the statute, which is designed to engender social
quietude.
In Reyes vs. Court of Appeals (Ninth Division),17 the Supreme
Court ruled that knowingly using a forged document to base one’s just
title for purposes of acquisitive prescription is an act of bad faith, thus:
With respect to the second assignment of error, petitioners
contend that even assuming that there was forgery, they have
become absolute owners of the subject property by virtue of
acquisitive prescription citing Articles 1117 and 1134 of the Civil
Code as follows:
“Art. 1117. Acquisitive prescription of dominion and other
real rights may be ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of
things in good faith and with just title for the time fixed by law.
17
G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.
arts. 1127-1128
xxx
31
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
xxx
xxx
Art. 1134. Ownership and other real rights over immovable
property are acquired by ordinary prescription through possession
of ten years.
By virtue of said articles, they claim that they have been
possessors of the contested parcel of land in good faith, for ten
years and with a just title for the period required by law.
This Court is not impressed with this argument. Petitioners
cannot justify their ownership and possession of the subject parcel
of land since they could not meet the requisites provided by the
provisions they have cited. Regarding the requirement of good
faith, the first paragraph of Article 526 states, thus:
“He is deemed a possessor in good faith who is not aware
that there exists in his title or mode of acquisition any flaw which
invalidates it.”
From the above-cited provision, petitioners could not
have been possessors in good faith of the subject parcel of land
considering the finding that at the very inception they forged the
Deed of Extrajudicial Partition and Settlement which they claim
to be the basis for their just title.
Having forged the Deed and simulated the signatures of
private respondents, petitioners, in fact, are in bad faith. The
forged Deed containing private respondents’ simulated signatures
is a nullity and cannot serve as a just title.
Moreover, this Court agrees with the private respondents
that there can be no acquisitive prescription considering that the
parcel of land in dispute is titled property, i.e., titled in the name of
the late Bernardino Reyes, the father of both petitioner Florentino
and the private respondents. This fact, the petitioners do not deny.
Hence, even if they allege adverse possession that should ripen
into ownership due to acquisitive prescription, their title cannot
defeat the real rights of the private respondents who stepped into
the shoes, as it were, of their father as successors-in-interest. As
it is, petitioners cannot even claim adverse possession as they
have admitted that the private respondents likewise resided and
continue to reside on the subject property.
Good faith cannot likewise be invoked if the claimant has actual
or constructive notice of the legal and valid rights of possession of
another during the prescriptive period. Thus in Magtira vs. Court
of Appeals,18 the Supreme Court allowed prescription because the
claimant had constructive notice of the possession of another, thus:
Additionally, acquisitive prescription operates to bar any
32
ObligatiOns and COntraCts
Text and Cases
arts. 1129-1131
action by SOFIA. From the date of the filing of the Affidavit for
Consolidation of Ownership by ZACARIAS with the Register
of Deeds on August 23, 1945 up to the date of the filing of the
complaint by SOFIA on June 18, 1956, or for almost eleven (11)
years, ZACARIAS enjoyed an uninterrupted, adverse, public and
peaceful possession of the litigated property in the concept of
owner, which under Article 1134 of the Civil Code ripened into
ownership by ordinary prescription through possession of at least
ten years. Contrary to SOFIA’s claim, the period of prescription
should be reckoned not merely from the time when she allegedly
came to know of the claim of ownership of ZACARIAS during the
cadastral survey in 1955, but from the date of registration of the
Affidavit for Consolidation with the Register of Deeds because
registration of an instrument in the Office of the Register of Deeds
constitutes constructive notice to the whole world.
Article 1129. For the purposes of prescription, there is just
title when the adverse claimant came into possession of the
property through one of the modes recognized by law for the
acquisition of ownership or other real rights, but the grantor
was not the owner or could not transmit any right. (n)
Article 1130. The title for prescription must be true and
valid. (1953)
Article 1131. For the purposes of prescription, just title
must be proved; it is never presumed. (1954a)
In Doliendo vs. Biarnesa,19 where a person bought property in a
valid public auction , took and continued possession of the property
thereafter for more than ten years, and where, prior to the sale made
in the public auction, there was a first purchaser of the property
previous to the death of the original owner, the Supreme Court ruled
that the person who bought the property at the public auction already
acquired the property by acquisitive prescription as he was able to
show by concrete evidence the holding of such public auction from
which he based his just title. Pertinently, the Supreme Court said:
Counsel for the plaintiff contended that since he had
purchased the land in question prior to the alleged sale at public
auction, the commissioner had no lawful authority to include it
in the list of property of the vendor which could be subjected to
the payment of his debts, and that the sale, therefore, was invalid
and of no effect; also insisted that a prescriptive title could not
18
G.R. No. L-27547, March 31, 1980, 96 SCRA 680.
arts. 1129-1131
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
33
be based on such transaction because the title for prescription
must be valid and true.
We think that this contention is based on a misconception
of the scope and effect of the provisions of the code as applied to
“ordinary prescription.” It is evident that by a “true and valid title”
in this connection we are not to understand “a title which of itself
is sufficient to transfer the ownership without the neces-sity of
the lapse of the prescriptive period;” and we accept the opinion of
a learned Spanish law writer who holds that the “titulo verdadero
y valido” as used in this article of the code prescribes a “titulo
colorado” and not merely “putative,” a “titulo colorado” being one
“which a person has when he buys a thing, in good faith, from
one whom he believes to be the owner,” and a “titulo putativo”
being one “which is supposed to have preceded the acquisition of
a thing, although in fact it did not, as might happen when one is
in possession of a thing in the belief that it had been bequeathed
to him.” (Viso, Derecho Civil, Parte Segunda, page 541).
Hence, even should it be prove that the land in question
was not lawfully included in the list of property subject to the
payment of debts, x x x still the defendant’s title by prescription
must be sustained, since it is clear that the sale at public auction
did in fact take place, that the transaction was in good faith, and
that the defendant bought the land from one whom he believed
to have the right to sell.
In Solis vs. Court of Appeals,20 where the Supreme Court, in
rejecting the contention of the petitioners that a donacion propter
nuptias was not sufficient to create or establish the just title of the
possessors of the land as donees, ruled:
This contention of the petitioners is not meritorious.
Suffice it to state that even a void donation may be the basis of
a claim of ownership which may ripen into title by prescription
(Pensador vs. Pensador, 47 Phil. 959, 961). It is the essence of
the statute of limitations that, whether the party has a right to
the possession or not, if he entered under the claim of such right
and remained in possession for the period (ten years) named in
the statute of limitations, the right of action of the plaintiff who
has the better title is barred by that adverse possession. The
right given by the statute of limitations does not depend upon,
and has no necessary connection, (with) the validity of the claim
under which the possession is held. x x x. (Vda. De Lima vs. Tio,
L-27181, April 30, 1970, citing Conspecto vs. Fruto, 129 US 182
[1889]). The “just title” required for acquisitive prescription to set
in is not “titulo verdadero y valido” — or such title which by itself
is
19 sufficient to transfer ownership without necessity of letting the
G.R. No. L-2765, December 27, 1906, 7 Phil. 232.
20
21
G.R. Nos. 46753-54, August 25, 1989, 176 SCRA 678.
G.R. No. L-23232, June 17, 1970, 33 SCRA 479.
34
ObligatiOns and COntraCts
Text and Cases
art. 1132
prescriptive period elapse but only “titulo colorado” — or such
title where, although there was a mode of transferring ownership,
still something is wrong because the grantor is not the owner (See
Doliendo vs. Biarnesa, 7 Phil. 232).
Article 1132. The ownership of movables prescribes
through uninterrupted possession for four years in good faith.
The ownership of personal property also prescribes
through uninterrupted possession for eight years, without need
of any other condition.
With regard to the right of the owner to recover personal
property lost or of which he has been illegally deprived, as well
as with respect to movables acquired in a public sale, fair, or
market, or from a merchant’s store the provisions of Articles
559 and 1505 of this Code shall be observed. (1955a)
The period for ordinary acquisitive prescription for movables
is four years coupled with good faith. Possession must likewise be
in the concept of an owner, adverse, public and uninterrupted. For
extraordinary prescription, a period of eight years is required without
need of any other condition. In Dira vs. Tanega,21 where an active
partner conducted himself as the absolute owner of the printing
equipment of the partnership after the delinquent partner ignored
the demand to pay his obligations, and where such active partner also
assumed ownership of the shares of stock pledged by the delinquent
partner in connection with his obligations, and where such delinquent
partner filed a case for accounting of the partnership only after 14
years from the time the active partner conducted himself as owner
of the shares and equipment of the partnership, the Supreme Court
rejected the claim of the delinquent partner that a trust relationship
existed between him and the active partner by stating that the latter
had already acquired the movables by acquisitive prescription, to wit:
x x x In bad faith or in good faith, after eight years of
actual adverse possession, appellee acquired clear ownership of
appellant’s share by acquisitive prescription. According to Art.
1132 of the Civil Code, “The ownership of personal property also
prescribes through uninterrupted possession for eight years,
without need of any other condition.” So, appellee became the
undisputed owner of appellant’s share since 1955 or six years
before this action was filed and since said year, the allegation of
trusteeship had already lost any basis whatsoever. x x x
22
G.R. No. 90356, March 18, 1991, 195 SCRA 355.
art. 1132
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
35
The law likewise provides that, with regard to the right of the
owner to recover personal property lost or of which he has been
illegally deprived, as well as with respect to movables acquired in a
public sale, fair or market, or from a merchant’s store the provisions
of Articles 559 and 1505 of this Code shall be observed.
Article 559. The possession of movable property acquired
in good faith is equivalent to a title. Nevertheless, one who has
lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefor.
Article 1505. Subject to the provisions of this Title, where
goods are sold by a person who is not the owner thereof, and
who does not sell them under authority or with the consent of
the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1)
The provisions of any factors’ acts, recording laws, or any
other provisions of law enabling the apparent owner of goods
to dispose of them as if he were the true owner thereof;
(2)
The validity of any contract of sale under statutory power of
sale or under the order of a court of competent jurisdiction;
(3)
Purchases made in a merchant’s store, or in fairs, or
markets, in accordance with the Code of Commerce and
special laws.
Article 1133. Movables possessed through a crime can
never be acquired through prescription by the offender. (1956a)
No one must benefit from an evil act. Hence, if A stole B’s car, A
cannot acquire title to it even if the prescriptive period have already
lapsed and even if B did not make a demand for the return of the car.
This is true in ordinary and extraordinary prescriptions. In Tan vs.
Court of Appeals,22 where the petitioner claimed that, through bad
faith and fraud, he was led to assign his shares of stocks in 1977 to
three corporate entities, and where the case to reconvey the same
was filed only in 1987, the Supreme Court ruled that the action was
barred by prescription by stating, among others, that Article 1133
did not apply, thus:
x x x Where, however, the thing was acquired through a
36
ObligatiOns and COntraCts
Text and Cases
arts. 1133-1134
crime, the offender can not acquire ownership by prescription
under Article 1133, which we quote:
Art. 1133. Movables possessed through a crime can never
be acquired through prescription by the offender.
Please note that under the above Article, the benefits of
prescription are denied to the offender; nonetheless, if the thing
was in the meanwhile passed to a subsequent holder, pres-cription
begins to run (four or eight years, depending on the existence of
good faith) x x x.
It is difficult to say, in this regard, that the petitioners’
action is after all, imprescriptible pursuant to the provisions of
Article 1133 of the Civil Code, governing actions to recover loss by
means of a crime. For one thing, the complaint was not brought
upon this theory. For another, there is nothing there that suggests
that the loss of the shares was indeed made possible by a criminal
act, other than simple bad faith and probably abuse of right.
Article 1134. Ownership and other rights over immovable
property are acquired by ordinary prescription through
possession of ten years. (1957a)
Only 10 years of possession by the adverse claimant are needed
for ordinary acquisitive prescription. The possession, however, must
be by virtue of a just and valid title, in the concept of an owner,
uninterrupted, adverse, and public.
Article 1135. In case the adverse claimant possesses by
mistake an area greater, or less, than that expressed in his
title, prescription shall be based on the possession. (n)
The extent of property subject to the prescription shall be the
one actually possessed or held by the claimant regardless of the size
indicated or described in the title. For instance, it has been ruled that
when one sells or buys real property — a piece of land, for example
— one sells or buys the property as he sees it, in its actual setting
and in its physical metes and bounds, and not by the mere lot
number assigned to it in the certificate of title.23
Article 1136. Possession in wartime, when the civil courts
are not open, shall not be counted in favor of the adverse
claimant. (n)
23
Atilano vs.
Atilano, G.R.
No. the
L-22487,
21, 1969,
SCRA 231.
During
wartime
where
civilMay
courts
are 28
closed,
there is no
way by which any person claiming title over a certain property can
arts. 1135-1137
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
37
file a case to recover the same from the person in adverse possession
of the property. Hence, the possession of the adverse claimant during
that time shall not be counted. However, it must be observed that
the civil courts must be closed. Therefore, even if there is war but the
civil courts are functioning, the possession of the adverse claimant
may be counted in his favor.
Article 1137. Ownership and other real rights over
immovables also prescribe through uninterrupted adverse
possession thereof for thirty years, without need of title or of
good faith. (1959a)
In Parcotilo vs. Parcotilo24 where a person had adverse possession
of a particular land by virtue of an invalid will for thirty years, the
Supreme Court ruled that extraordinary prescription had set in thus:
We agree with the trial court that even if the document
Exh. “1-a” was not executed with all the requisites of a valid will
or of a valid donation mortis causa the said document supplied
the basis for the claim of ownership by the defendant Demetrio
Parcotilo of the two parcels of land in question after the death of
the spouses. The ownership by Demetrio Parcotilo, coupled with
his open, continuous and adverse possession for a period of thirtyeight years had ripened into a title by prescription (Pensader vs.
Pensader, 47 Phil. 959, 961) x x x.
Even the provisions of Article 1137 of the New Civil Code
on extraordinary prescription through uninterrupted adverse
possession for thirty years, regardless of whether there was title
or good faith, uphold the right of the defendant Pablo Parcotilo
as owner through adverse possession in this present case.
In the case of Heirs of Celso Amarante vs. Court of Appeals25
where it was shown that, even previous to the war, a person occupied
a particular alienable public land where he planted various coconut
trees, mango trees and bamboo trees and that his grandchildren
and descendants continued occupying the place until the trees were
already 70 years of age, the Supreme Court ruled that acquisitive
prescription had already set in, to wit:
We should consider next the character of the rights held
by petitioners in respect of Lot 1236. The testimony of Celso
Amarante showed that in 1974, the coconut trees planted by
petitioners and their predecessors-in-interest were already
24
25
G.R. No. L-17249, November 28, 1964, 12 SCRA 435.
G.R. No. L-76386, May 21, 1990, 185 SCRA 585.
38
ObligatiOns and COntraCts
Text and Cases
art. 1137
approximately seventy (70) years of age. The mango trees had
trunks with circumferences of about three (3) arm lengths;
indicating once more that those trees were old. Thus, it was clearly
shown that Malonis Infiel had begun occupying Lot No. 1236 a
very long time ago. When the possession of Malonis Infiel of the
land is tacked on to that of petitioners, there is no question that
that possession exceeded thirty (30) years which is the period
for extraordinary prescription provided for in Article 1137 of the
Civil Code.
More importantly, there is Section 48(b) of Commonwealth
Act No. 141, as amended by Republic Act No. 1942, otherwise
known as the Public Land Act, which provides as follows:
“Section 48. The following described citizens
of Philippines occupying lands of public domain or
claiming to own any such land or an interest therein,
but whose titles have not been perfected or completed,
may apply to the Court of First Instance of the
province where the land is located for con-firmation
of their claims and the issuance of a certi-ficate of title
thereof, under the Land Registration Act, to wit:
xxx
xxx
xxx
(b) Those who by themselves or through
their predecessors in interest have been in open,
continuous, exclusive and notorious possession and
occupation of agricultural lands of the public domain,
under a bona fide claim of acquisition of ownership, for
at least thirty years immediately preceding the filing
of the application for confirmation of the title except
when prevented by war or force majeure. These shall
be conclusively presumed to have per-formed all the
conditions essential to a Government grant, and shall
be entitled to a certificate of title under the provisions
of this Chapter.”
There is no question that petitioners, at the time they were
forcibly driven off the Sitio Campulay parcel of land, had through
their possession and that of their predecessors-in-interest have
complied with the requirements of long continued (at least 30
years), bona fide, open, exclusive and notorious possession and
occupation of Lot 1236 which was of course, originally agricultural land of the public domain. As such, they have become
owners of Lot 1236 even before formal confirmation of their title
under Section 48(b) of the Public Land Act. In Director of Lands
vs. Intermediate Appellate Court, et al., the Supreme Court, in
overruling the earlier case of Manila Electric Company vs. Castro
26
G.R. No. L-76564, May 25, 1990, 185 SCRA 693.
art. 1137
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
39
Bartolome, et al., said:
“Nothing can more clearly demonstrate the
logical inevitability of considering possession of public
land which is of the character and duration prescribed
by statute as the equivalent of an express grant from
the State than the dictum of the statute itself that
the possessor(s) ‘x x x shall be conclusively presumed
to have performed all the conditions essential to a
Government grant and shall be entitled to a certificate
of title x x x.’ No proof being admissible to overcome
a conclusive presumption, confirmation proceedings
would, in truth, be little more than a formality, at the
most limited to ascertaining whe-ther the possession
claimed is of the required character and length of
time; and registration there-under would not confer
title, but simply recognize a title already vested. The
proceedings would not originally convert the land
from public to private land, but only confirm such a
conversion already effected by operation of law from
the moment the required period of possession became
complete. As was so well put in Cariño, ‘x x x (T)here
are indi-cations that registration was expected from
all, but none sufficient to show that, for want of it,
ownership actually gained would be lost. The effect
of the proof, wherever made, was not to confer title,
but simply to establish it, as already conferred by the
decree, if not by earlier law.
xxx
xxx
xxx
The court, in the light of the foregoing, is of the
view, and so holds, that the majority ruling in Meralco
must be reconsidered and no longer deemed to be
binding precedent. The correct rule, as enunciated in
the line of cases already referred to, is that alienable
public land held by a possessor, personally or through
his predecessors-in-interest, openly continuously for
the prescribed statutory period (30 years under The
Public Land Act, as amended) is converted to private
property by the mere lapse or completion of said
period, ipso jure.”
Article 1138. In the computation of time necessary for
prescription the following rules shall be observed:
(1) The present possessor may complete the period
necessary for prescription by tacking his possession to that of
his grantor or predecessor in interest;
40
ObligatiOns and COntraCts
Text and Cases
art. 1138
(2) It is presumed that the present possessor who was
also the possessor at a previous time, has continued to be in
possession during the intervening time, unless there is proof
to the contrary;
(3) The first day shall be excluded and the last day
included. (1960a)
The first rule provides that the present possessor may complete
the period necessary for prescription by tacking his possession to that
of his grantor or predecessor in interest. The words “grantor” and
“predecessor in interest” connote a transfer in a manner provided by
law of property from one person to another. Thus, if A donated to B
a property which was previously in the possession of B for 8 years, A
can make use of the said 8 years for purposes of prescription. Hence,
if A already was in possession of the property for three years, the
period of his possession may be considered to have been for 11 years
already. For purposes of ordinary acquisitive prescription, he has
already complied with the statutory period. Also, in South City Homes,
Inc. vs. Republic,26 where a possessor of a strip of land designated as
Lot No. 5005 claimed the same despite the fact that such land was
not transferred to him when he bought two adjacent lands, Lot No.
2381 and Lot No. 2386-A, and where he claimed that his possession
should be tacked in with the possession of the previous possessors,
the Supreme Court rejected such contention and said:
But the more telling consideration, as the Court sees it,
is this. By the testimony of the two witnesses, the petitioner
obviously meant to tack the possession of the two lots by the
previous owners to its own possession. There was no need for
this because the petitioner acquired ownership of Lot No. 2381 by
assignment and Lot No. 2386-A by purchase; and such ownership
includes the right of possession. The petitioner is not claiming
prescriptive rights to these two lots, which have previously been
registered in the name of the transferors. The lot he is claiming
by prescription is Lot No. 5005, which he did not acquire from
the owner of the two other lots, or from any previous private
registered owner of the lot, as there was none.
Neither of the owners of Lots No. 2381 nor 2386-A, in their
respective deeds, transferred Lot No. 5005 to the petitioner; as
already explained, Lot No. 5005 was not part of either of the two
lots. The petitioner merely occupied the disputed strip of land
believing it to be included in the two lots it had acquired from Koo
Jun Eng and the Garcia spouses. However, even if it be conceded
that the previous owners of the other two lots possessed the
art. 1138
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
disputed lot, their possession cannot be tacked to the possession
of the petitioner. The simple reason is that the possession of
the said lot was not and could not have been transferred to the
petitioner when it acquired Lots Nos. 2381 and 2386-A because
these two lots did not include the third lot.
Article 1138 of the Civil Code provides that —
(1) The present possessor may complete
the period necessary for prescription by tacking his
possession to that of his grantor or predecessor-ininterest. x x x
However, tacking possession is allowed only when there
is a privity of contract or relationship between the previous and
present possessors. In the absence of such privity, the possession
of the new occupant should be counted only from the time it
actually began and cannot be lengthened by connecting it with
the possession of the former possessors. Thus, it has been held:
The deed, in itself, creates no privity as to land
outside it calls. Nor is privity created by the bare
taking of possession of land previously occupied by
the grantor. It is therefore the rule, although sharply
limited, that a deed does not of itself create privity
between the grantor and the grantee as to land not
described in the deed but occupied by the grantor in
connection therewith, although the grantee enters
into possession of the land not described and uses it
in connection with that conveyed.
Where a grantor conveys a specific piece of
property, the grantee may not tack onto the period
of his holding an additional piece of property the
period of his grantor’s occupancy thereof to make
up the statutory period. His grantor did not convey
such property or his interest therein, and there is no
privity.
It is said, in Hanlon vs. Ten Hove, supra, that
this rule is not harsh, the court using the following
language: “If A purchases and by adverse possession
obtains title to an adjoining 40 acres, it would hardly
be contended that a conveyance by him of the 40
acquired by deed, would carry with it the title to
the 40 acres acquired by adverse possession. So if A
acquires by deed 40 acres and obtains an adjoining
strip 2 rods wide or some interest in it, his conveyance
of the 40 acquired by deed does not carry with it his
41
42
ObligatiOns and COntraCts
Text and Cases
art. 1138
interest in the adjoining strip. If the sole defense here
was that of adverse possession, we would be obliged
to hold that it have not been made out.”
It should also be noted that, according to Article 1135 of
the Civil Code:
In case the adverse claimant possesses by
mistake an area greater or less, than that expressed
in this title, prescription shall be based on the
possession.
This possession, following the above-quoted rulings, should
be limited only to that of the successor-in-interest; and in the
case of the herein petitioner, it should begin from 1981 when
it acquired the two adjacent lots and occupied as well the lot in
question thinking it to be part of the other two.
It follows that when the application for registration of the
lot in the name of the petitioner was filed in 1983, the applicant
have been in the possession of the property for less than three
years. This was far too short of the prescriptive period required
for acquisition of immovable property, which is ten years if the
possession is in good faith and thirty years if in bad faith, or if
the land is public.
The second rule provides the presumption that the present
possessor who was also the possessor at a previous time, have
continued to be in possession during the intervening time, unless
there is proof to the contrary. A presumption proceeds from a set of
facts. For the presumption provided in this rule to exist, there must
be a prior showing of the fact that the person presently possessing the
property was also the one in possession of the same property before
the intervening time. Hence, if a person was in possession of the
property in 1997 and it was shown that he was also in possession of
the property in 1988, it shall be presumed that he was in possession
from 1989 to 1996. However, this presumption can be destroyed if
evidence can be adduced to show that he was not in possession during
the interval.
The third rule provides that the first day shall be excluded
and the last day included. For example, if a person possessed the
property on January 1, 1980 up to January 15, 1990, the counting of
the prescriptive period shall start on January 2, 1980 up to January
15, 1990.
art. 1138
PresCriPtiOn
Prescription of Ownership and Other
Real Rights
43
44
ObligatiOns and COntraCts
Text and Cases
Chapter 3
PRESCRIPTION OF ACTIONS
Article 1139. Actions prescribe by the mere lapse of time
fixed by law. (1961)
The law fixes the time within which an action may be filed. If the
period prescribed by law lapses, the action cannot be filed anymore.
The set of provisions dealing with prescription of actions is known
as the Statute of Limitations.
Article 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 Article 1132, and without prejudice
to the provisions of Articles 559, 1505, and 1133. (1962a)
For example, a person can recover lost personal or movable
property which he claims belong to him within a period of eight years.
However, if all the requisites of an ordinary acquisitive prescription
of movable property are present, the possessor of the same becomes
the owner of the movable property after only four years uninterrupted
possession in good faith. In Tan vs. Court of Appeals,1 where the
petitioner claimed that, through bad faith and fraud, he was led to
assign his shares of stocks in 1977 to three corporate entities and
where the case to reconvey the same was filed only in 1987, the
Supreme Court ruled that the action had already prescribed, thus:
The next question is whether or not any action for
reconveyance has nevertheless prescribed, on the bases of
provisions governing reconveyance.
The rule anent prescription on recovery of movables (shares
of stock in this case) is expressed in Article 1140 of the Civil Code,
which we quote:
G.R. No. 90356, March 18, 1991, 195 SCRA 355.
1
44
art. 1140
PresCriPtiOn
Prescription of Actions
“Art. 1140. Actions to recover movables shall prescribe
eight years from the time the possession thereof is lost, unless
the possessor had acquired the ownership by prescription for a
less period, according to Article 1132, and without prejudice to
the provisions of Articles 559, 1505 and 1133.”
As it provides, Article 1140 is subject to the provisions
of Articles 1132 and 1133 of the Code, governing acquisitive
prescription, in relation to Articles 559 and 1505 thereof. Under
Article 1132.
“Art. 1132. The ownership of movables prescribes through
uninterrupted possession for four years in good faith.
The ownership of personal property also prescribes through
uninterrupted possession for eight years, without need of any
other condition.
With regard to the right of the owner to recover personal
property lost or of which he has been illegally deprived, as well
as with respect to movables acquired in a public sale, fair, or
market, or from a merchant’s store the provisions of Articles 559
and 1505 of this Code shall be observed.”
Acquisitive prescription sets in after uninterrupted
possession of four years, provided there is good faith, and upon
the lapse of eight years, if bad faith is present. Where, however,
the thing was acquired through a crime, the offender cannot
acquire ownership by prescription under Article 1133, which we
quote:
“Art. 1133. Movables possessed through a crime can never
be acquired through prescription by the offender.”
Please note that under the above Article, the benefits of
prescription are denied to the offender; nonetheless, if the thing
has meanwhile passed to a subsequent holder, prescription begins
to run (four or eight years, depending on the existence of good
faith).
For purposes of extinctive prescription vis-a-vis movables,
we therefore understand the periods to be:
1.
Four years, if the possessor is in good faith;
2.
Eight years in all other cases, except where the loss
was due to a crime in which case, the offender cannot acquire the
movable by prescription, and an action to recover it from him is
imprescriptible.
It is evident, for purposes of the complaint in question, that
the petitioners had at most eight years within which to pursue a
45
46
ObligatiOns and COntraCts
Text and Cases
art. 1140
reconveyance, reckoned from the loss of the shares in 1977, when
the petitioner Vicente Tan executed the various agreements in
which he conveyed the same in favor of the Executive Consultants,
Inc., Orobel Property Management, Inc., and Antolum Trading
Corporation.
We are hard put to say, in this regard, that the petitioners’
action is after all, imprescriptible pursuant to the provisions of
Article 1133 of the Civil Code, governing actions to recover loss by
means of a crime. For one thing, the complaint was not brought
upon this theory. For another, there is nothing there that suggests
that the loss of the shares was indeed made possible by a criminal
act, other than simple bad faith and probably abuse of right.
In Dira vs. Tanega,2 where a partner took possession of the
shares of a co-partner who refused to pay his obligations and
participate in the partnership prompting the possessing-partner to
conduct himself publicly, openly, and adversely as the absolute owner
from 1947 up to 1961 of the shares pledged by the delinquent partner
and of the assets of the partnership, and where the delinquent partner
contended that a trust relationship was created between him and the
other partner, the Supreme Court ruled that such delinquent partner
can no longer file a case to claim the shares because such action had
already prescribed. The Supreme Court pertinently ruled:
x x x In bad faith or in good faith, after eight years of
actual adverse possession, appellee acquired clear ownership of
appellant’s share by acquisitive prescription. According to Article
1132 of the Civil Code, “the ownership of personal property also
prescribes through uninterrupted possession for eight years,
without need of any other condition.” So, appellee became undisputed owner of appellant’s share since 1955 or six years
before this action was filed and since said year the allegation
of trusteeship had already lost any basis whatsoever. Under
Article 1140 of the same Code, “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” or for an equal period, in which latter case, the
right to sue prescribes together with the title.
The action shall likewise be without prejudice to the provisions
of Articles 559, 1505, and 1133. These articles provide:
Article 559. The possession of movable property acquired
in good faith is equivalent to title. Nevertheless, one who has
G.R. No. L-23232, June 17, 1979, 33 SCRA 479.
2
art. 1141
PresCriPtiOn
Prescription of Actions
47
lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefor.
Article 1505. Subject to the provisions of this Title, where
goods are sold by a person who is not the owner thereof, and
who does not sell them under authority or with the consent of
the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1)
The provisions of any factors’ acts, recording laws, or any
other provisions of law enabling the apparent owner of goods
to dispose of them as if he were the true owner thereof;
(2)
The validity of any contract of sale under statutory power of
sale or under the order of a court of competent jurisdiction;
(3)
Purchases made in a merchant’s store, or in fairs, or
markets, in accordance with the Code of Commerce and
special laws.
Article 1133. Movables possessed through a crime can never
be acquired through prescription by the offender.
Article 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)
The prescriptive period in connection with immovables is thirty
years. However if within the thirty-year period, all the requisites for
ordinary acquisitive prescription are already present in favor of the
possessor, then the possessor shall be considered the owner of the
property after 10 years of uninterrupted, adverse, public possession of
the property in the concept of an owner in good faith. In extraordinary
acquisitive prescription, if the immovable property is adversely in the
possession of the possessor for thirty years, the right to sue prescribes
with the acquisition of the title.
48
ObligatiOns and COntraCts
Text and Cases
arts. 1142-1143
Article 1142. A mortgage action prescribes after ten years.
(1964a)
A mortgage is an accessory contract. It is constituted to secure
a debt so that if the debtor fails to pay the principal obligation,
the creditor can foreclose on the mortgage by selling the same in
a public sale or bidding and the proceeds thereof are used to pay
off the principal debt and interest if any. If there is any deficiency,
the creditor can still go against the principal debtor to collect such
deficiency. In Development Bank of the Philippines vs. Tomeldan3
where the creditor, after extra-judicially foreclosing the property of
the debtor on September 15, 1967, filed on March 14, 1977 a civil case
to claim the deficiency, the Supreme Court rejected the contention
that the action had prescribed considering that the prescriptive period
was 10 years from the time the cause of action accrued which was on
September 16, 1967, to wit:
A suit for the recovery of the deficiency after the foreclosure
of a mortgage is in the nature of a mortgage action because its
purpose is precisely to enforce the mortgage contract.
Such being the case, Article 1142 of the Civil Code is
likewise applicable to the instant case. Said provision reads: “Art.
1142. A mortgage action prescribes after ten years.”
Article 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)
Aside from the right to demand a right of way regulated in
Article 649 and the right to bring an action to abate a public or private
nuisance, there are certain actions which do not prescribe such as
an action to declare a contract null and void,4 an action to quiet title
initiated by the person having possession of the property,5 and an
action to partition a property among co-heirs.6 Prescription does not
supervene when the trust is merely an implied one7 unless expressly
3
G.R. No. 51269, November 17, 1980, 101 SCRA 741; See also Caltex vs.
Intermediate Appellate Court, G.R. No. 74730, August 25, 1989, 176 SCRA 741.
4
Bonanga vs. Soler, G.R. No. L-15717, June 30, 1961, 2 SCRA 755; Ras vs. Sua,
G.R. No. L-23303, September 25, 1968, 25 SCRA 153; Garanciang vs. Garanciang,
G.R. No. L-22351, May 21, 1969, 28 SCRA 229.
art. 1144
PresCriPtiOn
Prescription of Actions
49
repudiated by the trustee.
Article 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)
For a contract to fall under this article, the agreement must
be in writing. For example, a purchaser of a real estate evidenced by
a written contract of sale may file a case for delivery of the property to
him. Barring the applicability of laches, the purchaser has ten years
within which to file the case for delivery. The cause of action
on a
written contract accrues when a breach or violation thereof occurs.8
In Espanol vs. Philippine Veterans Administration9 where the
pension of a veteran’s widow, which was received by her pursuant
to Republic Act No. 65, was cancelled on November 1, 1951 by the
Philippine Veterans Administration (PVA) on the basis of a doubtful
administrative policy which however was struck down as invalid on
June 27, 1973 by the Supreme Court in another case, and where the
said widow, on February 25, 1974 filed a complaint against the PVA
for the collection of the said pension, the Supreme Court rejected the
contention of the PVA that the action had prescribed by thus ruling:
The contention of appellant PVA that the action of appellee
Maria U. Espanol to compel the restoration of her monthly pension
and that of her children, effective from the date of cancellation
on November 1, 1951, has already prescribed, inasmuch as the
same was filed more that 10 years from the date of cancellation,
is without merit.
Article 1144 of the New Civil Code provides that actions
based on an obligation created by law shall be brought within 10
years from the time the right of action accrues. It is important to
reckon the date, when the right of action accrues, as the same is
the beginning for counting the 10-year prescriptive period.
Gallar vs. Husain, G.R. No. L-20954, May 24 1967, 20 SCRA 186.
Gerona vs. De Guzman, G.R. No. L-19060, May 26, 1964, 11 SCRA 153.
7
Bueno vs. Reyes, G.R. No. L-22587, April 28, 1969, 27 SCRA 1179.
8
Lim Tay vs. Court of Appeals, G.R. No. 126891, August 5, 1998, 97 SCAD 103,
293 SCRA 634.
9
G.R. No. L-44616, June 29, 1985, 137 SCRA 314.
5
6
50
ObligatiOns and COntraCts
Text and Cases
art. 1144
The right of action accrues when there exists a cause of
action, which consists of three elements, namely: a) a right in
favor of the plaintiff by whatever means and under whatever
law it arises or is created; b) an obligation on the part of such
defendant to respect such right; and c) an act or omission on the
part of such defendant violative of the right of the plaintiff. x x x
It is only when the last element occurs or takes place that it can
be said in law that a cause of action has arisen. x x x
The appellee cannot be said to have a cause of action, in
compelling the appellant to continue paying her monthly pension
on November 1, 1951, because appellant’s act of cancellation,
being pursuant to an administrative policy, cannot be considered
a violation of appellee’s right to receive her monthly pension. x
xxx
It is only when this Court declared invalid the questioned
administrative policy in the Del Mar vs. Philippine Veterans
Administration, x x x, promulgated on June 27, 1973, can the
appellee be said to have a cause of action to compel appellant to
resume her monthly pension; because it is at that point in time,
when the presumption of legality of the questioned administrative policy had been rebutted and thus it can be said with
certainty that appellant’s act was in violation of appellee’s right
to receive her monthly pension.
The 10-year prescriptive period, therefore, should be
counted from June 27, 1973 when the case of Del Mar vs. The
Philippine Veterans Administration, x x x, was promulgated,
and not from November 1, 1951, the date of the cancellation by
appellant of appellee’s pension. The action of appellee, which
was brought on February 25, 1974, is therefore well within the
10-year prescriptive period.
In Huang vs. Court of Appeals,10 the Supreme Court ruled
that an implied trust, whether a constructive or resulting trust, is
normally not subject to prescription. However, if the trustee openly
and adversely repudiates the trust, it is only from that time when
prescription can set in. The Supreme Court said:
The prescriptive period is ten (10) years from the repudiation of the trust. It is ten (10) years because just as a resulting
trust is an offspring of the law, so is the corresponding obligation
to convey the property and the title thereto to the true owner.
In this context, and vis-a-vis prescription, Art. 1144 of the New
Civil Code, which is the law applicable provides: “The following
actions must be brought within 10 years from the time the right
of action accrues: (a) Upon a written contract; (b) Upon obligations
10
G.R. No. L-108525, September 13, 1994, 55 SCAD 289, 236 SCRA 420.
art. 1145
PresCriPtiOn
Prescription of Actions
51
created by law; (c) Upon a judgment.”
Thus, the reckoning point is repudiation of the trust by
the trustee because from that moment his possession becomes
adverse, which in the present case gave rise to a cause of action
by Dolores against the Huang spouses. However, before the period
of prescription may start, it must be shown that: (a) the trustee
has performed unequivocal acts of repudiation amounting to an
ouster of the cestui que trust; (b) such positive acts of repudiation
have been made known to the cestui que trust; and (c) the evidence
thereon is clear and conclusive.
Article 1145. The following actions must be commenced
within six years:
(1)
Upon an oral contract;
(2)
Upon a quasi-contract. (n)
An action based on an oral contract must be commenced within
six years from the time the cause of action accrues. For example, A
orally borrowed P2,000 from B to be paid on June 1, 1997 and B failed
to pay on such date despite demand from A. A has six years from June
1, 1997 to file the case for collection against B.
Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contracts to the end that no one shall be
unjustly enriched or benefited at the expense of another.11 Quasicontracts are governed by Book IV, Title XVII, Chapter 1 of the 1950
Civil Code. One quasi-contract provided in the Civil Code is solutio
indebiti. This occurs if something is received when there is no right to
demand it, and it has been unduly delivered through mistake, thereby
giving rise to the obligation to return what has been unduly received.12
In Municipality of Opon vs. Caltex,13 where a taxpayer mistakenly
paid an amount which is not due, the Supreme Court, citing Gonzalo
Puyat & Sons vs. City of Manila,14 ruled that the prescriptive period
was six years as it is a quasi-contract of solutio indebiti under the
Civil Code.
Article 1146. The following actions must be instituted
within four years:
Article 2142 of the 1950 Civil Code.
Article 2154 of the 1950 Civil Code.
13
G.R. No. L-21853, February 26, 1968, 22 SCRA 755.
14
G.R. No. L-17447, April 30, 1963, 7 Phil. 970.
11
12
52
ObligatiOns and COntraCts
Text and Cases
(1)
Upon an injury to the rights of the plaintiff;
(2)
Upon quasi-delict. (n)
art. 1146
In Virgilio Callanta vs. Carnation Phil., Inc.,15 an employee
was unjustly and illegally dismissed by his employer. He filed a case
with the National Labor Relations Commissions (NLRC) for illegal
dismissal, reinstatement and for back wages three years, one month
and five days from the time he was illegally dismissed. The NLRC
dismissed the case on the ground that it had prescribed pursuant
to the Labor Code which provided that such claim should be filed
within 3 years. The Supreme Court overruled the NLRC because the
prescriptive period is four years as the case involved “injury to the
rights of the plaintiff,” thus:
As this Court stated in Bondoc vs. People’s Bank and
Trust Co., when a person has no property, his job may possibly
be his only possession or means of livelihood, hence he should
be protected against any arbitrary and unjust deprivation of his
job. Unemployment, said the Court in Almira vs. B.F. Goodrich
Philippines, brings ‘untold hardships and sorrows on those
dependent on the wage earners.’ The misery and pain attendant
on the loss of jobs thus could be avoided if there be acceptance
of the view that under all circumstances of this case, petitioners
should not be deprived of their means of livelihood.
It is a principle in American jurisprudence, which
undoubtedly, is well-recognized in this jurisdiction that one’s
employment, profession, trade or calling is a “property right,”
and the wrongful interference therewith is an actionable wrong.
The right is considered to be property within the protection of
a constitutional guaranty of due process of law. Clearly then,
when one is arbitrarily and unjustly deprived of his job or
means of livelihood, the action instituted to contest the legality
of one’s dismissal from employment constitutes, in essence, an
action predicated “upon injury to the rights of the plaintiff,” as
contemplated under Art. 1146 of the New Civil Code, which must
be brought within four [4] years.
In the instant case, the action for illegal dismissal was filed
by petitioners on July 5, 1982, or three [3] years, one [1] month and
five [5] days after the alleged effectivity dated of his dismissal on
June 1, 1979 which is well-within the four [4]-year prescriptive
period under Article 1146 of the New Civil Code. x x x
More so, in the instant case, where the delay in filing the
G.R. No. L-70615, October 28, 1986, 145 SCRA 268; See also Nemenzo vs.
Sabillano, G.R. No. L-20977, September 7, 1968, 25 SCRA 1.
15
art. 1146
PresCriPtiOn
Prescription of Actions
53
case was with justifiable cause. The threat to petitioner that he
would be charged with estafa if he filed a complaint for illegal
dismissal, which private respondent did after all on June 22,
1981, justifies the delayed filing of the action for illegal dismissal
with the Regional Office No. X, MOLE on July 5, 1982. Laches
will not in that sense strengthen the cause of private respondent.
Besides, it is deemed waived as it was never alleged before the
Labor Arbiter nor the NLRC.
Article 2176 of the Civil Code provides that “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 quasi-delict.” Quasi-delict is governed by Book IV, Title XVII,
Chapter 2 of the 1950 Civil Code. An example of a quasi-delict is the
fault or negligence resulting in the liability of manufacturers and
processors of foodstuffs, drinks, toilet articles and similar goods. They
shall be liable for death or injuries caused by any noxious or harmful
substances used, although no contractual relations exists between
them and the consumer.16 In Coca-Cola Bottlers Philippines, Inc. vs.
Court of Appeals17 where a complaint filed on May 7, 1990 makes
reference to the reckless and negligent manufacture of “adulterated
food items intended to be sold for public consumption” in that the soft
drinks sold to the private respondent “contained fiber-like matter and
other foreign substances or particles” causing damage to the private
respondent’s business when he sold sometime in August 1989 the
soft drinks to students who suffered sickness, the Supreme Court
rejected the contention of the petitioner that the action had prescribed
on the ground that the prescriptive period to file such action was six
months from the delivery of the thing sold pursuant to Article 1571
of the Civil Code, and ruled that the allegations in the complaint
clearly established a quasi-delict which prescribes in four (4) years
pursuant to Article 1146 of the New Civil Code. In the case of Diocosa
vs. Sarabia,18 the Supreme Court held that:
an action based on quasi-delict is governed by Article 1150 of the
Civil Code as to the question of when the prescriptive period of
four years shall begin to run, that is, “from the day (the action)
may be brought,” which means from the day the quasi-delict
occurred or was committed.
In
Kramer, Jr. vs. Court of Appeals,19 it was held that an action
16
Article 2187 of the 1950 Civil Code.
G.R. No. L-110295, October 18, 1993, 45 SCAD 390, 227 SCRA 292.
18
G.R. No. L-10542, July 31, 1958, cited in Capuno vs. Pepsi Cola Bottling
Company, G.R. No. L-19331, April 30, 1965, 13 SCRA 658; See also Corpuz vs. Paje,
G.R. No. L-26737, July 31, 1969, 28 SCRA 1062.
17
54
ObligatiOns and COntraCts
Text and Cases
art. 1147
for damages based on quasi-delict resulting from the collision of two
vessels has a prescriptive period of four years from the day of the
collision and
the aggrieved party need not wait for a determination by an
administrative body like a Board of Marine Inquiry, that the
collision was caused by the fault or negligence of the other party
before he can file an action for damages. x x x Immediately after
the collision the aggrieved party can seek relief from the courts
by alleging such negligence or fault of the owners, agents or
personnel of the other vessel.
In Allied Banking Corporation vs. Court of Appeals,20 where in
his third-party complaint filed on June 17, 1987, the debtor alleged
that “by reason of the tortious interference by the Central Bank with
the affairs of GENBANK, private respondent was prevented from
performing his obligation under the loan such that he should not be
held liable,” and where the “tortious interference” referred to was
the Central Bank’s ordering GENBANK on March 25, 1980 to desist
from doing business, the Supreme Court ruled that such third party
complaint was barred by prescription, because quasi-delicts prescribe
after four years from the time the cause of action accrues, which in
this case was on March 25, 1980.
Article 1147. The following actions must be filed within
one year:
(1)
For forcible entry and detainer;
(2)
For defamation. (n)
In Vda. De Borromeo vs. Pogoy,21 the Supreme Court explained
that the prescriptive period for forcible entry and detainer is long
enough to comply with prerequisites provided by law for the filing of
such case, thus:
Unable to secure a reconsideration of said order, petitioner
came to this court through this petition for certiorari. In both his
comment and memorandum, private respondent admitted not
having availed himself of the barangay conciliation process, but
justified such omission by citing paragraph 4, Section 6 of PD
1508 which allows the direct filing of an action in court where
the same may otherwise be barred by the Statute of Limitations,
19
G.R. No. L-83542, October 13, 1989, 178 SCRA 518; see also Paulan vs. Sarabia,
G.R. No. L-10542, July 31, 1952.
20
G.R. No. 85868, October 13, 1989, 178 SCRA 526.
21
G.R. No. L-63277, November 29, 1983, 126 SCRA 217.
art. 1148
PresCriPtiOn
Prescription of Actions
55
as applying to the case at bar.
The excuse advanced by private respondent is unsatisfactory.
Under Article 1147 of the Civil Code, the period for filing actions
for forcible entry and detainer is one year, and this period is
counted from demand to vacate the premises.
In the case at bar, the letter-demand was dated August
28, 1982, while the complaint for ejectment was filed in court on
September 16, 1982. Between these two dates, less than a month
had elapsed, thereby leaving at least eleven (11) full months of
the prescriptive period provided for in Article 1147 of the Civil
Code. Under the procedure outlined in Section 4 of PD 1508, the
time needed for the conciliation proceeding before the Barangay
Chairman and the Pangkat should take no more than 60 days.
Giving private respondent nine (9) months ample time indeed
— within which to bring his case before the proper court should
conciliation efforts fail. Thus, it cannot be truthfully asserted, as
private respondent would want us to believe, that his case would
be barred by the Statute of Limitations if he had to course his
action to the Barangay Lupon.
Article 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)
The phrase “without prejudice” means that, in proper cases, the
prescriptive period in this chapter may be availed of notwithstanding
other special provisions in other parts of the Civil Code, in the Code of
Commerce and in special laws. Thus, in the case of Virgilio Callanta
vs. Carnation Phil., Inc.,22 the Supreme Court applied Article 1146
even though the claim falls under the prescriptive period provided for
in the Labor Code because the illegal and unlawful dismissal suffered
by the plaintiff in the said case falls within the ambit of “injury to
the rights of the plaintiff,” thus:
Even on the assumption that an action for illegal dismissal
falls under the category of “offense” or “money claims” under
Articles 291 and 292, Labor Code, which provide for a three-year
prescriptive period, still a strict application of said provisions
will not destroy the enforcement of fundamental rights of the
employees. As a statutory provision on limitation of actions,
Articles 291 and 292 go to matters of remedy and not to the
destruction of fundamental rights. As a general rule, a statute
of limitation extinguishes the remedy only. Although the remedy
22
G.R. No. L-70615, October 28, 1986, 145 SCRA 286.
56
ObligatiOns and COntraCts
Text and Cases
arts. 1149-1150
to enforce a right may be barred, that right may be enforced by
some other available remedy which is not barred.
Article 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)
Article 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)
In Tolentino vs. Court of Appeals,23 the present spouse of a
divorced man filed an action in 1971 against the former spouse to
prevent the latter from using the surname of the husband. The present
spouse knew since 1951 that the former spouse had been using the
surname of the husband. The lower court issued a decision in favor of
the present spouse but the Supreme Court reversed the decision on
the ground, among others, that the action had prescribed. Pertinently,
the Supreme Court said:
The petitioner’s contention that her cause of action is
imprescriptible is without merit. In fact, it is contradictory to
her own claim. The petitioner insists that the use by respondent
Consuelo David of the surname Tolentino is a continuing actionable wrong and states that every use of the surname constitutes
a new crime. The contention cannot be countenanced because the
use of a surname by a divorced wife for a purpose not criminal in
nature is certainly not a crime. The rule on prescription in civil
cases such as the case at bar is different. Art. 1150 of the Civil
Code provides: “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.”
All actions, unless an exception is provided, have a prescriptive period. Unless the law makes an action imprescriptible,
it is subject to bar by prescription and the period of prescription
is five (5) years from the time the right of action accrues when
no other period is prescribed by law (Civil Code, Art. 1149). The
Civil Code provides for some rights which are not extinguished
by prescription but an action as in the case before us is not
among them. Neither is there a special law providing for imprescriptibility.
Moreover, the mere fact that the supposed violation of the
petitioner’s right may be a continuous one does not change the
23
G.R. No. L-41427, June 10, 1988, 162 SCRA 66.
arts. 1151-1152
PresCriPtiOn
Prescription of Actions
57
principle that the moment the breach of right or duty occurs, the
right of action accrues and the action from that moment can be
legally instituted (Soriano vs. Sternberg, 41 Phil. 210).
The respondent Court of Appeals, on the other hand, is of
the opinion that the period of prescription should be four (4) years,
since it appears to be an action based on quasi-delict. Whatever
the period, it cannot be denied that the action has long prescribed
whether the cause accrued on April 21, 1945 when the petitioner
and Arturo Tolentino got married, or on August 30, 1950, when
the present Civil Code took effect, or in 1951 when Constancia
Tolentino came to know of the fact that Consuelo David was
still using the surname Tolentino. It is the legal possibility of
bringing the action which determines the starting point for
the computation of the period of prescription (Espanol v. Phil.
Veterans Administration, 137 SCRA 314).
The petitioner should have brought legal action immediately
against the private respondent after she gained knowledge of
the use by the private respondent of the surname of her former
husband. The action was brought only in November 23, 1971 with
only verbal demands in between and an action to reconstitute the
divorce case. The petitioner should have filed her complaint at
once when it became evident that the private respondent would
not accede to her demands instead of waiting for twenty (20)
years.
As aptly stated by the Court of Appeals, “where the plaintiff
fails to go to the court within the prescriptive period, he loses his
cause, but not because the defendant had acquired ownership by
adverse possession over his name but because the plaintiff’s cause
of action had lapsed thru the statute of limitations.”
Article 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)
Article 1152. The period for prescription of actions to
demand the fulfillment of obligations declared by a judgment
commences from the time the judgment became final. (1971)
It is only when the judgment becomes final that the same can
be effectively enforced. Hence, the prescriptive period is not counted
from the time the judgment was rendered but from the time it became
final.24 In Philippine National Bank vs. Bondoc,25 the Supreme Court
stated that “the purpose of the revival of judgment is to give a creditor
a new right of enforcement from the date of revival” and “the rule
seeks to protect judgment creditors from wily and unscrupulous
debtors who, in order to evade attachment and execution, cunningly
58
ObligatiOns and COntraCts
Text and Cases
art. 1153
conceal their assets and wait until the statute of limitations set in.”
Article 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)
In Dira vs. Tanega26 where one of the partners demanded
payment of the accountabilities of another partner who ignored
such demand, and where the demanding partner, since 1947 and
after having been ignored by the other partner, managed, operated
and administered the affairs and assets of the partnership not as a
partner but as absolute owner of the same without any participation
from the delinquent partner, the Supreme Court ruled that the
action filed on February 10, 1961 by the delinquent partner-appellant
against the other partner-appellee for an accounting of his share in
the partnership had already prescribed, thus:
Under these circumstances, it would be giving premium
to inaction and indifference to still hold that appellant could
sue appellee, almost fourteen years after the latter, with prior
notice to the former, had openly and publicly taken over exclusive
control of the partnership business as if it were his own and only
a little short of ten years after the expiration of the stipulated
term of the partnership. His claims for salaries accrued after each
month they were unpaid. Whether we assume that these claims
lost basis in 1947 when appellee took over the business of the
printing press and the newspaper or in 1951, upon the expiration
of the term of the agreements, by all standards, these claims
had already prescribed when the present suit was filed. On the
other hand, under Article 1153 of the Civil Code, a demand for
“accounting runs from the day the persons who should render the
same ceases in their functions,” which in this case was in 1947,
when the appellee began to operate the business as exclusively
his own. Again, inasmuch as the longest period in the chapter
on prescription of the Civil Code is ten years, it is evident that
appellant’s action for accounting is already barred. The same
is true with the claim for rentals and recovery of proportional
ownership of the printing equipment and accessories, as to which,
24
Philippine National Bank (PNB) vs. Monroy, G.R. No. L-19374, June 30, 1964,
11 SCRA 433.
25
G.R. No. L-20236, July 30, 1965, 14 SCRA 770.
26
G.R. No. L-23232, June 17, 1970, 33 SCRA 479.
art. 1154
PresCriPtiOn
Prescription of Actions
59
appellant’s period to bring his actions accrued also in 1947,
fourteen years before this suit was filed.
Article 1154. The period during which the obligee was
prevented by a fortuitous event from enforcing his right is not
reckoned against him. (n)
In Provident Savings Bank vs. Court of Appeals,27 a loan was
granted to debtors by a bank collateralized by their properties.
Thereafter the bank was placed under receivership in 1972 and prohibited by the Monetary Board from transacting business including
the foreclosure of properties. For failure of the debtors to pay, the
bank informed the debtors that the property might be sold at public
auction. This was not done because the debtors promised to pay.
However the debtors sold the property to a purchaser who assumed
the mortgage. In 1981, the receivership was lifted. Subsequently, the
purchaser informed the bank that he is a judgment creditor of the
original debtors, that the property was sold to him, and that he was
willing to pay the indebtedness to release the mortgage. In rejecting
the notion that the foreclosure of the mortgage might have already
prescribed, the Supreme Court ruled:
Having arrived at the conclusion that a foreclosure is part
of a bank’s business activity which could not have been pursued
by the receiver then because of the circumstances discussed
in the Central Bank case, we are thus convinced that the
prescriptive period was legally interrupted by fuerza mayor in
1972 on account of the prohibition imposed by the Monetary Board
against petitioner from transacting business, until the directive
of the Board against petitioner from transacting business was
nullified in 1981. Indeed, the period during which the obligee
was prevented by a caso fortuito from enforcing his right is not
reckoned against him (Article 1154, New Civil Code). When
prescription is interrupted, all the benefits acquired so far from
the possession cease and when prescription starts anew, it will
be entirely a new one. This concept should not be equated with
suspension where the past period after prescription is resumed
(4 Tolentino, Commentaries and Jurisprudence on the Civil Code
of the Philippines, 1991 ed., pp. 18-19). Consequently, when the
closure of petitioner was set aside in 1981, the period of ten
years within which to foreclose under Article 1142 of the New
Civil Code began to run again and, therefore, the action filed on
August 21, 1986 to compel petitioner to release the mortgage
27
G.R. No. L-97218, May 17, 1993, 222 SCRA 125.
60
ObligatiOns and COntraCts
Text and Cases
art. 1154
carried with it the mistaken notion that petitioner’s own suit
for foreclosure had prescribed. What exacerbates the situation
is the letter of private respondent requesting the petitioner on
August 6, 1986 that private respondent be allowed to pay the loan
secured by the mortgage as a result of the Deed of Sale executed
by the Guarins in his favor on July 10, 1986 (pp. 36-37, Rollo).
In point of law, this written communication is synonymous to an
express acknowledgment of the obligation and had the effect of
interrupting the period of prescription for the second time (Article
1155, New Civil Code; Osmeña vs. Rama, 14 Phil. 99 [1909]; 4
Tolentino, supra at p. 50). And this piece of document necessarily
estops private respondent from setting up prescription vis-a-vis
his unfounded supposition that acknowledgment of the debt is of
no moment because the right of petitioner to foreclose had long
prescribed in 1977 (p. 13, Petition; p. 7, Comment; pp. 19 and 58,
Rollo).
In Tan vs. Court of Appeals28 where, during the Marcos Regime,
the petitioner was arrested and detained for various offenses, and
where he sold his shares in a particular bank in 1977 and sought
to recover them by filing a suit for reconveyance only in 1987, the
Supreme Court ruled that the action had already prescribed and
rejected his claim of legal standing based on fortuitous event, thus:
We cannot 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 over. It is true that
under Article 1154:
“Article 1154. The period during which the obligee was
prevented by fortuitous event from enforcing his right is not
reckoned against him.”
Fortuitous events have the effect of tolling the period
of prescription. However, we can not say, as a universal rule,
that the period from September 21, 1972 through February
25, 1986 involves a force majeure. Plainly, we can not 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 its minions, the Court is not inclined to make quite a
28
G.R. No. 90365, March 18, 1991, 195 SCRA 355.
art. 1154
PresCriPtiOn
Prescription of Actions
sweeping pronouncement, considering especially the unsettling
effects such a pronouncement is likely to bring about. It is our
opinion that claims should be taken on a case-to-case basis. This
selective rule is compelled, among others, by 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.
The petitioner Vicente Tan claims that from June 1974
through December, 1977, he was under detention; that sometime
in August, 1977, the Central Bank lodged six criminal cases
against him, along with several others, with Military Commission No. 5 in connection with alleged violation of the Central
Bank Act, falsification of documents, and estafa, that while in
detention, he was made to execute various agreements in which
he conveyed the shares of stock in question; and that “[u]nder the
foregoing factual setting . . . it would be foolhardy on the part of
petitioners to institute . . . [any] action for reconveyance . . .”
The records show, however, that although under detention,
Vicente Tan:
1.
Commenced, in July, 1976, Civil Case No. 103359
of the defunct Court of First Instance of Manila, to
mandatorily enjoin the Central Bank as receiver of
Continental Bank, to takeover from ‘NISA’ the control
and management and assets of Vicente Tan and his
affiliate corporations;
2.
Was ably represented by competent counsel, Atty.
Norberto Quisimbing, throughout;
3.
Filed with this Court a petition to stop the trial of the
criminal cases pending against him with the Military
Commission No. 5 and succeeded in obtaining a
temporary restraining order.
On top of those facts above-mentioned, he:
1.
Asked the Court of First Instance to order the Central
Bank to proceed to rehabilitate Continental Bank by
extending to it such emergency loans and advances
as may be needed for its rehabilitation . . .
2.
Wrote, on July 15, 1977, the Central Bank expressing
his approval in the reopening and rehabilitation of
Continental Bank.
We are, therefore, convinced, from Vicente Tan’s very
behavior, that detention was not an impediment to a judicial
challenge, and the fact of the matter was that he was successful
61
62
ObligatiOns and COntraCts
Text and Cases
art. 1155
in obtaining judicial assistance. Under these circumstances, we
can not declare detention, or authoritarian rule for that matter, as
a fortuitous event insofar as he was concerned, that interrupted
prescription.
To be sure, there is nothing in the petition which would
remotely suggest, assuming that Vicente Tan could not have freely
and intelligently acted during the period of martial rule, that his
co-petitioners Victan & Company, Inc., Transworld Investment
Corporation, First International Investment Company, Inc.,
Far East Petroleum & Minerals Corporation, and Philcontrust
International Corporation, could not have similarly acted during
the martial law regime and shortly thereafter. As far as they are
therefore concerned, the Court has even better reason to invoke
prescription because none of them acted and none now claims
that it could not have acted.
Article 1155. The prescription of actions is interrupted
when they are filed before the court, when there is a written
extra-judicial demand by the creditors, and when there is any
written acknowledgment of the debt by the debtor. (1973a)
In Ledesma vs. Court of Appeals,29 the Supreme Court had
occasion to explain the effect on the prescriptive period of an extrajudicial demand, an acknowledgment of a debt by the debtor, and the
filing of a case in court. The case is as follows:
Petitioner had filed a motion for reconsideration of the
Court’s resolution of March 24, 1993 which denied his petition
for review on certiorari for failure to sufficiently show that
respondent Court of Appeals had committed any reversible error
in its questioned judgment.
On August 21, 1980, private respondent Rizal Commercial
Banking Corporation filed Civil Case No. 38287 in the then
Court of First Instance of Rizal against petitioner to enforce the
terms of Trust Receipt Agreement No. 7389 executed by them
on April 1, 1974 but which petitioner had failed to comply with.
As summons could not be served on the latter, said case was
dismissed without prejudice on March 3, 1981. On December 2,
1988, private respondent bank instituted Civil Case No. 88-2572
in the Regional Trial Court of Makati, Metro Manila, Branch 133,
against petitioner on the same cause of action and subject matter.
Petitioner’s motion to dismiss on the ground of prescription
was denied and judgment was rendered in favor of private
29
G.R. No. L-106646, June 30, 1993, 42 SCAD 975, 224 SCRA 175.
art. 1155
PresCriPtiOn
Prescription of Actions
respondent by the court a quo ordering petitioner to pay private
respondent P168,000.00 with interest thereon at 12% per annum
from December 2, 1988 until full payment of the obligation,
P16,800.00 as attorney’s fees, and costs of suit. Said judgment
was affirmed by respondent Court in CA-G.R. CV No. 2906 in
its decision promulgated on January 7, 1992, and petitioner’s
motion for reconsideration thereof was denied in a resolution
dated August 6, 1992.
Petitioner’s petition for review on certiorari of the said
judgment was denied in our aforesaid resolution, hence its present
motion for reconsideration, dated May 5, 1993. Contending that
the second action filed by private respondent bank had already
prescribed, petitioner invokes the rulings in Vda. de Nator, et al.
vs. Court of Industrial Relations, et al. and Fulton Insurance Co.
vs. Manila Railroad Co., et al., and invites us “to give a second
look at the apparently conflicting or divergent jurisprudence.”
Article 1155 of the Civil Code provides that the prescription
of an action, involving in the present case the 10-year prescriptive period for filing an action on a written contract under
Article 1144(1) of the Code, is interrupted by: (a) the filing of an
action, (b) a written extrajudicial demand by the creditor, and (c)
a written acknowledgment of the debt by the debtor. The effects
of the last two instances have already been decided by this Court,
the rationale therein should necessarily apply to the first.
The matter of the interruption of the prescriptive period
by reason of a written extra-judicial demand by the creditor was
decided in Overseas of Manila vs. Geraldez, et al., in this wise:
“x x x. The interruption of the prescriptive period by
written extra-judicial demand means that the said period would
commence anew from the receipt of the demand. That is the
correct meaning of interruption as distinguished from mere
suspension or tolling of the prescriptive period.
xxx
“A written extrajudicial demand wipes out the period that
has already elapsed and starts anew the prescriptive period.
x x x.
xxx
“That the same view to the meaning of interruption was
adopted in Florendo vs. Organo, 90 Phil. 483, where it was ruled
that the interruption of the ten-year prescriptive period through
a judicial demand means that the full period of prescription
commenced to run anew upon the cessation of the suspension.
When prescription is interrupted by a judicial demand, the full
time for the prescription must be reckoned from the cessation of
63
64
ObligatiOns and COntraCts
Text and Cases
art. 1155
the interruption. x x x.”
The interruption of the prescriptive period by reason of a
written acknowledgment of the debt by the debtor was dealt with
in Philippine National Railways vs. National Labor Relations
Commission, et al., thus:
“Article 1155 of the Civil Code provides that the prescription of actions is interrupted inter alia, when there is any
written acknowledgment of the debt by the debtor.” This simply
means that the period of prescription, when interrupted by such a
written acknowledgment, begins to run anew; and whatever time
of limitation might have already elapsed from the accrual of the
cause of action is thereby negated and rendered inefficacious. x
xx
“x x x. The effect of the interruption spoken of in Article
1155 is to renew the obligation, to make prescription run again
from the date of the interruption. x x x”
Based on the aforecited cases, Article 1155 has twice been
interpreted to mean that upon the cessation of the suspension of
the prescriptive period, the full period of prescription commences
to run again. Petitioner, on the other hand, insists that in case of
the filing of an action the prescriptive period is merely tolled and
continues to run again, with only the balance of the remaining
period available for the filing of another action. This postulation
of petitioner, if we are to adopt it, would result in an absurdity
wherein Article 1155 would be interrupted in two different ways,
i.e., the prescriptive period interrupted in case of an extrajudicial
demand and a written acknowledgment of a debt, but it is
merely tolled where an action is filed in court.
In Vda. de Nator, it was held that:
“x x x The filing of the case with the CFI arrested the
period of prescription (Art. 1155, NCC), and the interruption
of said period lasted until the time that the dismissal for lack
of jurisdiction became final. When prescription is interrupted
by a judicial demand, the full time for the prescription must
be reckoned from the cessation of the interruption’ x x x. The
whole period during which the case had been pending cannot be
counted for arriving at the prescriptive period. In other words,
the running of the period of prescription in this particular case
was interrupted on August 6, 1953, when the case in the CFI was
filed and began to run again on August 30, 1958, when the same
Court had dismissed the case. As the complaint was filed with
the CIR on December 5, 1959, the action had not yet prescribed.”
This case obviously appears to have made conflicting
statements since it proceeds upon a certain premise but arrives at
a different conclusion. Hence, we cannot agree that the statements
art. 1155
PresCriPtiOn
Prescription of Actions
65
therein sufficiently support the thesis of petitioner.
The case of Fulton Insurance Company is not clear either
on the matter of the interruption of the prescriptive period where
an action is filed in court. It was there held that:
“There are two school(s) of thought as to the legal effect of
the cessation of the interruption by an intervening action upon the
period of prescription. There is the view expressed and perhaps,
not without reasons, that the full period of prescription should
start to run anew, reckoned from the date of the cessation of
the interruption. The contrary view is, that the cessation of the
interruption merely tolls the running of the remaining period of
prescription, deducting from the full period thereof the time that
has already elapsed prior to the filing of the intervening action.
Nevertheless, all discussion on this point is academic; considered
in the light of either view, We find that the second action is not
barred.”
In the aforesaid case, the defendant therein moved for
the dismissal of the second case alleging that the filing of the
first case neither tolled nor interrupted the running of the
pres-criptive period. This Court ruled that the filing of the first
action interrupted the running of the period, and then declared
that at any rate, the second action was filed within the balance
of the period remaining. It concluded that the issue of whether
the filing of the action merely tolled or it actually interrupted
the running of the prescriptive period was moot and academic
because, in either case, the second action was still filed within
the prescriptive period. Consequently, the Fulton case cannot
also sustain the thesis of petitioner.
On the foregoing considerations, we are convinced and so
hold that the correct interpretations of Article 1155 of the Civil
Code are reflected in and furnished by the doctrinal pronouncements in Overseas Bank of Manila and Philippine National
Railways Company, not only because they are later in point of
time but because the issue is squarely resolved in a decisive and
logical manner therein. Petitioner’s submission would result in a
bifurcated interpretation of Article 1155, aside from the irrational
conclusion that a judicial action itself cannot produce the same
result on the prescriptive period as a mere extra-judicial demand
or an acknowledgment of the debt.
Accordingly, petitioner having failed to adduce any cogent
reason or substantial argument to warrant a reconsideration of
our resolution of March 24, 1993, the present motion is hereby
DENIED with FINALITY.
In Cabrera vs. Tiano30 where the sale of the real property was
made on July 2, 1947 and where the action was filed on June 20, 1957
66
ObligatiOns and COntraCts
Text and Cases
art. 1155
but the summons to the defendant was only served to him on July 2,
1957, the Supreme Court rejected the contention that the action had
already prescribed to wit:
When the sale of the property took place on July 2, 1947,
the ten (10)-year period within which to file the action had not
yet elapsed on June 20, 1957, when the complaint was presented.
While it is true that the sale in question had taken place before
the effectivity of the new Civil Code and the law then on matter
of prescription was Act No. 190, said law, however, contained no
specific provision on the interruption of the prescriptive period;
and the established rule then, as it is the rule now, is that the
commencement of the suit prior to the expiration of the applicable limitation period, interrupts the running of the statute, as
to all parties to the action (34 Am. Jur., Sec. 247, pp. 202-203;
Peralta, et al. vs. Alipio, G.R. No. L-8273, Oct. 24, 1955). The fact
that summons was only served on defendant on July 2, 1957,
which incidentally and/or coincidentally was the end of the ten
(10)-year period, is of no moment, since civil actions are deemed
commenced from the date of the filing and docketing of the
complaint with the Clerk of Court, without taking into account
the issuance and service of summons (Sotelo vs. Dizon, et al., 67
Phil. 573). The contention that the period was not interrupted
until after defendant received the summons is, therefore, without
legal basis.
In the case of Olympia International, Inc. vs. Court of Appeals,31
the Supreme Court pertinently ruled that:
it is equally important to note that the right to file a new action
in this case has long prescribed, for while a civil action stops the
running of the statute of prescription or limitation, its dismissal
or voluntary abandonment by the plaintiff leaves the parties
in exactly the same position as though no action had been
commenced at all. The commencement of an action, by reason
of its dismissal or abandonment, takes no time out of the period
of prescription.
In Philippine National Bank vs. Osete,32 the Supreme Court
ruled that under Article 1155
not all acts of acknowledgment of a debt interrupt prescription.
To produce such effect, the acknowledgment must be “written”
so that payment, if not coupled with a communication signed
by the payor, would not interrupt the running of the period of
30
G.R. No. L-17299, July 31, 1963, 8 SCRA 542.
art. 1155
PresCriPtiOn
Prescription of Actions
67
prescription.
In Ramos vs. Condez,33 where the defendant on June 25, 1952
sold to the plaintiff a particular land and where the same defendant
on November 10, 1956, upon demand by the plaintiff, recognized the
sale and promised to deliver the property, the Supreme Court rejected
the contention that the filing of the case had already prescribed by
ruling:
Under Article 1144 of the Civil Code (new), an action upon
a written contract “x x x must be brought within 10 years from
the time the cause of action accrues.” There is no denying that, in
the instant case, the plaintiffs’ cause of action, under the deed of
absolute sale, Annex A, has accrued on June 25, 1952, but in view
of defendants’ letter, dated November 10, 1956, acknowledging
the validity of the deed of absolute sale and promising to comply
with their commitments as embodied in the deed of sale that
they will deliver the land which they have sold to the plaintiffs,
the running of the period of limitation of action was interrupted
on that date, November 10, 1956. Considering that the action
was filed on May 22, 1963, evidently, the cause of action has not
prescribed, because it was filed within the period of limitation of
actions (Article 1155, New Civil Code).
G.R. No. L-43235, December 20, 1989, 180 SCRA 353.
G.R. No. L-24997, July 18, 1968, 24 SCRA 63.
33
G.R. No. L-22072, August 30, 1967, 20 SCRA 1146.
31
32
68
ObligatiOns and COntraCts
Text and Cases
BOOK IV
OBLIGATIONS AND CONTRACTS
Title I. — OBLIGATIONS
Chapter 1
GENERAL PROVISIONS
Article 1156. An obligation is a juridical necessity to give,
to do or not to do. (n)
An obligation is a “legal bond whereby constraint is laid upon a
person or group of persons to act or forbear on behalf of another person
or group of persons.”1 In Ang Yu Asuncion vs. Court of Appeals,2 the
Supreme Court spelled out the requirements for the existence of an
obligation, thus:
The obligation is constituted upon the concurrence of the
essential elements thereof, viz.: (a) The vinculum juris or juridical tie which is the efficient cause established by the various
sources of obligations (law, contracts, quasi-contracts, delicts and
quasi-delicts); (b) the object which is the prestation or con-duct,
required to be observed (to give, to do or not to do); and (c) subjectpersons who, viewed from the demandability of the obligation,
are the active (obligee) and the passive (obligor) subjects.
The word “persons” in this sense is understood as comprehending both natural and juridical persons. The prestations are to
give, to do and not to do.
Article 1157. Obligations arise from:
(1)
Law;
William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobbs-Merrill Company, page 6, citing Anson Cont. 5, 23.
2
G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602.
1
68
art. 1158
ObligatiOns
General Provisions
(2)
Contracts;
(3)
Quasi-Contracts;
(4)
Acts or omissions punished by law; and
(5)
Quasi-delicts. (1089a)
69
The enumeration of the sources of obligation under this
particular article is exclusive3 which means that there can be no other
sources of obligations other than those enumerated in the article.
Obligations are civil or natural. Civil obligations give a
right of action to compel their performance. Natural obligations,
not being based on positive law but on equity and natural law, do
not grant a right of action to enforce their performance, but after
voluntary fulfillment by the obligor, they authorize the retention
of what has been delivered or rendered by reason thereof. x x x 4
Article 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)
Among the sources of obligation, the law is the most important
one. It does not depend upon the will of the parties. It is imposed
by the state and is generally imbued with some public policy considerations. Being thus imposed, the basis of the obligation must be
clear. It cannot be presumed. Hence, the payment of taxes must be
specifically directed by our tax statutes. Also, parents and children
are obliged to support each other as mandated by the provisions of
the Family Code of the Philippines.5
The importance of law as a source of obligation is highlighted by
the legal principle that existing law enters into and forms part of a
valid contract without need for the parties expressly making reference
thereto.6 A contract is understood to incorporate therein the provision
or provisions of law specifying the obligations of the parties under
the contract.7
3
Sagrado Orden vs. Nacoco, G.R. No. L-3756, June 30, 1952, 91 Phil. 503; Navales
vs. Rios, G.R. No. 3489, September 7, 1907, 8 Phil. 508.
4
Article 1423 of the 1950 Civil Code.
5
Article 195 of Executive Order No. 209 which took effect on August 3, 1988.
6
Lakas ng Manggagawang Makabayan (LMM) vs. Abiera, G.R. No. L-29474,
70
ObligatiOns and COntraCts
Text and Cases
art. 1159
Article 1159. Obligations arising from contracts have the
force of law between the contracting parties and should be
complied with in good faith. (1091a)
Contracts are another source of obligations. As defined in our
law, 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.8 The statutory definition is not really accurate
as contracts may likewise involve more than two persons “whereby
a right is acquired by at least one of them to an act or acts, or to
forbearance, on the part of other or others.”9 A contract may likewise
involve mutual and reciprocal obligations and duties between and
among the parties.
In characterizing the contract as having the force of law between
the parties,10 the law stresses the obligatory nature of a binding
and valid agreement. Like the law, the wilfull non-fulfillment of the
provisions of a contract may involve sanctions. The parties voluntarily
impose upon themselves the performance of certain duties and
obligations which, in the event of breach or wilfull non-performance,
can prejudice the other party or parties. Whatever stipulations,
clauses, terms and conditions are included in a contract, as long as
they are not contrary to law, morals, good customs, public policy or
public order, such contract is the law between the parties.11 In Perla
Compania de Seguros, Inc. vs. Court of Appeals,12 the insurance
contract between the parties stipulated that the insurer’s liability
for all damages arising out of death or bodily injury sustained by one
person was limited to Twelve Thousand Pesos (P12,000); and it was
likewise stipulated that before the insured enters into a contract with
December 19, 1970, 31 SCRA 329; Boman Environmental Development Corporation
vs. Court of Appeals, G.R. No. L-77860, November 22, 1988, 167 SCRA 540.
7
Commissioner of Internal Revenue vs. United Lines Company, G.R. No. L-16850,
May 20, 1962, 5 SCRA 175.
8
Article 1305 of the New Civil Code.
9
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobbs-Merrill Company, page 2, citing Anson Cont. 9.
10
Lazo vs. Republic Surety & Insurance Co., G.R. No. L-27365, January 30, 1970,
31 SCRA 329; Herrera vs. Petrophil Corporation, G.R. L-48349, December 29, 1986,
146 SCRA 385; Chua Peng Hian vs. Court of Appeals, G.R. No. L-60015, December
19, 1984, 133 SCRA 572.
11
Gaw vs. Intermediate Appellate Court, G.R. No. 70451, March 24, 1993, 220
SCRA 405; Pe vs. Court of Appeals, G.R. No. 74781, March 13, 1991, 195 SCRA 137;
Intestate Estate of Ricardo P. Presbitero, Sr. vs. Court of Appeals, G.R. No. 102432,
January 21, 1993, 217 SCRA 372.
12
G.R. No. 78860, May 28, 1990, 185 SCRA 741.
13
Romero vs. Court of Appeals, G.R. No. 107207, November 23, 1995, 65 SCAD
art. 1160
ObligatiOns
General Provisions
71
the injured party, the written express consent of the insurer was first
to be obtained. The Supreme Court, in ruling that the lower court
could not change the import or extent of the liability of the insurer
as indicated in the insurance contract, stated, thus:
Clearly, the fundamental principle that contracts are
respected as the law between the contracting parties finds
application in this case. Thus, it was error on the part of the trial
and appellate courts to have disregarded the stipulations of the
parties and to have substituted their own interpretation of the
insurance policy. In Philippine American and General Insurance
Co., Inc. vs. Mutuc, we ruled that contracts which are the private
laws of the contracting parties should be fulfilled according to
the literal sense of their stipulations, if their terms are clear and
leave no room for doubt as to the intention of the contracting
parties, for contracts are obligatory, no matter what form they
may be, whenever the essential requirements for their validity
are present.
From the moment the contract is perfected, the parties are
bound not only to fulfill 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 the law.13
Article 1160. Obligations derived from quasi-contracts
shall be subject to the provisions of Chapter 1, Title XVII, of
this Book. (n)
Certain lawful, voluntary and unilateral acts give rise to the
juridical relation of quasi-contract to the end that no one shall be
unjustly enriched or benefited at the expense of the other.14 A good
example of an obligation arising from a quasi-contract is the obligation
to return what has been obtained by mistake (solutio indebiti). Among
others, the Civil Code provides that if something is received when
there is no right to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.15 There are other instances
of quasi-contract provided for in Chapter 1, Title XVII of the Civil
Code, specifically from Article 2144 up to Article 2175.
Article 1161. Civil Obligations arising from criminal
offenses shall be governed by the penal laws, subject to the
621, 250 SCRA 223.
14
Article 2142 of the 1950 Civil Code.
15
Article 2154 of the 1950 Civil Code.
16
Article 100 of the Revised Penal Code.
72
ObligatiOns and COntraCts
Text and Cases
art. 1161
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)
Civil liability attaches to any individual who is found to be
criminally liable.16 A person who commits a crime may be penalized
by incarceration or payment of a fine or both. The punishment is
meted out because such person has conceptually offended the State
— a criminal offense of whatever nature constructively disturbs the
peace and order of society. However, it cannot be denied that the
victim of a crime is usually an individual, a natural person who must
be compensated for his injury. For this purpose, civil damages may
be awarded to him. Article 1161 subjects the awarding of damages
to the following:
1)
Article 2176 of the Civil Code provides that “whoever
by act or omission causes damage to another, there being fault
or negligence, is obliged to pay for the damage done.” However,
under Article 2177, the plaintiff shall not be entitled to recover
damages twice for the same act or omission of the defendant
even if the negligence may constitute an entirely different cause
of action.
2)
Articles 19 to 36 of the New Civil Code are the
provisions on Human Relations. Generally, these are the
provisions which give a person or persons causes of action for
filing damage suits. The relevant provisions are as follows:
Article 29. When the accused in a criminal prosecution
is acquitted on the ground that his guilt has not been proved
beyond reasonable doubt, a civil action for damages for the same
act or omission may be instituted. Such action requires only a
preponderance of evidence. Upon motion of the defendant, the
court may require the plaintiff to file a bond to answer for damages
in case the complaint should be found to be malicious.
If in a criminal case the judgment of acquittal is based upon
reasonable doubt, the court shall so declare. In the absence of any
declaration to that effect, it may be inferred from the text of the
decision whether or not the acquittal is due to that ground.
Article 30. When a separate civil action is brought to demand
civil liability arising from a criminal offense, and no criminal
proceedings are instituted during the pendency of the civil case,
a preponderance of evidence shall likewise be sufficient to prove
the act complained of.
1
Article
33. June
In cases
of defamation,
G.R. No.
L-29900,
28, 1974,
57 SCRA 618. fraud, and physical
injuries, a civil action for damages, entirely separate and distinct
art. 1162
ObligatiOns
General Provisions
73
from the criminal action, may be brought by the injured party.
Such civil action shall proceed independently of the criminal
prosecution, and shall require only a preponderance of evidence.
Article 34. When a member of a city or municipal police
force refuses or fails to render aid or protection to any person
in case of danger to life or property, such peace officer shall be
primarily liable for damages, and the city or municipality shall
be subsidiarily responsible therefor. The civil action herein
recognized shall be independent of any criminal proceedings, and
a preponderance of evidence shall suffice to support such action.
Aside from the above provisions, Article 32 likewise
provides, in substance, that whoever violates the enumerated
constitutional rights of an individual enumerated in the said
article shall be liable for damages. It likewise provides
that:
“x x x whether or not the defendant’s act or omission
constitute a criminal offense, the aggrieved party has a right
to commence an entirely separate and distinct civil action for
damages, and for other relief. Such civil action shall proceed
independently of any criminal prosecution (if the latter
be
instituted), and may be proved by preponderance of evi-dence.
The indemnity shall include moral damages. Exemplary
damages may also be adjudicated.
The responsibility herein set forth is not demandable from
a judge unless his act or omission constitutes a violation of the
Penal Code or other penal statute.”
3)
Title XVIII of the Civil Code refers to the rules
governing damages. However other rules laid down in other laws
shall likewise apply insofar as they are not inconsistent with the
Civil Code.
Article 1162. Obligations derived from quasi-delicts shall
be governed by the provisions of Chapter 2, Title XVII of this
Book, and by special laws. (1093a)
Quasi-delict has a statutory definition in the 1950 Civil Code.
Article 2176 of Chapter 2, Title XVII provides that:
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.
74
ObligatiOns and COntraCts
Text and Cases
art. 1162
75
Chapter 2
NATURE AND EFFECT OF OBLIGATIONS
Article 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)
This article involves the prestation “to give.” The word “something” connotes a determinate object which is definite, known, and
has already been distinctly decided and particularly specified as the
matter to be given from among the same things belonging to the
same kind. Hence, for example, if the object is a computer, it does not
involve any kind of computer but a very particular computer such as
the computer with serial number 7777. Once the determinate thing
becomes the specified object of the prestation, the person who has the
duty to give, must take care of it in order that it can be delivered to
the recipient in good condition. The phrase characterising the kind of
diligence required in the situation is “the proper diligence of a good
father of a family.” The reference point is “the father” because it is
a commonly-accepted notion that a father will always do everything
to take care of his concerns. If the law or contract does not state
the diligence which is supposed to be observed in the performance
of an obligation, that which is expected of a good father of a family
is required.1 The law, however, states that the kind of diligence
required can vary if either “the law or the stipulation of the parties
requires another standard of care.” In case of a contrary stipulation
of the parties, such stipulation should not be one contemplating a
relinquishment or waiver of the most ordinary diligence.
An example where the law requires another standard of care is
that which involves common carriers. 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,
for compensation, offering their services to the public.2 Common
Article 1173 of the 1950 Civil Code.
1
75
76
ObligatiOns and COntraCts
Text and Cases
art. 1164
carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance
over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.3
Article 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)
This article involves the prestation “to give.” After the right to
deliver the object of the prestation has arisen in favor of the creditor
but prior to the delivery of the same, there is no real right enforceable
or binding against the whole world over the object and its fruits in
favor of the person to whom the same should be given. The acquisition
of a real right means that such right can be enforceable against the
whole world and will prejudice anybody claiming the same object of
the prestation. The real right only accrues when the thing or object
of the prestation is delivered to the creditor.
He only has a personal right over the same if it is enforceable
only against the debtor who is under an obligation to give. This means
that the personal right of the creditor can be defeated by a third person
in good faith who has innocently acquired the property prior to the
scheduled delivery regardless of whether or not such third person
acquired the property after the right to the delivery of the thing has
accrued in favor of the creditor. In this case, however, the aggrieved
creditor can go against the debtor for damages as the debtor should
have known that the fruits should have been delivered to the creditor
alone.
A personal right is the power of one person to demand
of another, as a definite passive subject, the fulfillment of a
prestation to give, to do, or not to do. On the other hand, a real
right is the power belonging to a person over a specific thing,
without a passive subject individually determined, against whom
such right may be personally exercised.4
For example, on February 1, 1990, A buys a mango orchard from
X to be delivered on March 1, 1990. On the latter date, A shall have
the right to the fruits of the mango orchard. If the property is delivered
Article 1732 of the 1950 Civil Code.
Article 1733 of the 1950 Civil Code.
4
Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD
189, 319 SCRA 200.
5
Article 1170 of the 1950 Civil Code.
2
3
art. 1165
ObligatiOns
Nature and Effect of Obligations
77
only on April 1, 1990, A can nevertheless ask that the fruits accruing
since March 1, 1990 be likewise delivered to him. X cannot resist by
saying that he is entitled to the fruits before the actual delivery on
April 1, 1990. If, however, X sells the fruits on March 20, 1990 to
B who does not know the previous sale to A and who immediately
takes possession of the fruits, B shall have a better right over the
said fruits. Considering that there is no delivery of the property to A
on March 20, 1990, A has no real right over the said property at that
time binding upon the whole world. A’s remedy is to seek damages
from X in connection with the fruits. If however, the mango orchard
has already been delivered, A already has a real right binding upon
the whole world. If X sells to B the fruits after delivery to A, A can
recover from B who in turn can seek damages from X.
Article 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)
This provision involves the prestation “to give.” The object of the
prestation can either be determinate or generic. A generic object can
be any object belonging to the same kind. In the event that there is
non-delivery of a generic thing, the creditor may have it accomplished
or delivered in any reasonable and legal way charging all expenses in
connection with such fulfillment to the debtor. The creditor can ask
a third party to deliver the same thing of the same kind with all the
expenses charged to the debtor.
In case of non-delivery of a determinate thing, the remedy is to
file an action to compel the debtor to make the delivery. This
action
is called specific performance. If the debtor is guilty of
fraud,
negligence, delay or contravention in the performance of
the
obligation, the creditor can likewise seek damages against the debtor.5
A fortuitous event is an event which “could not be foreseen, or
which though foreseen, were inevitable.”6 As a general rule, a debtor
is relieved from his obligation “to give” if the object of such prestation
is lost through a fortuitous event. The last paragraph of Article 1165
78
ObligatiOns and COntraCts
Text and Cases
arts. 1166-1168
however provides that a fortuitous event will not excuse the obligor
from his obligation in two cases namely: 1) if the obligor delays; and
2) if he has promised to deliver the same thing to two or more persons
who do not have the same interest. In both cases, the obligor will be
liable for damages or will be bound to replace the lost object of the
prestation in cases when the obligee agrees to the replacement.
Article 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)
This article still deals with the prestation “to give.” The principal
always includes it accessories and accessions which the law likewise
gives to the creditor as part of what he should receive.
Article 1167. If the 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 obligations. Furthermore, it may
be decreed that what has been poorly done be undone. (1098)
Article 1168. When the obligation consists in not doing
and the obligor does what has been forbidden, it shall also be
undone at his expense. (1099a)
The articles deal with the obligations “to do” and “not to do.”
The creditor can ask any third person to perform the obligation due
from the debtor should the latter fail to do the same. The debtor
will be liable for all expenses in connection with the performance or
fulfillment of the obligation undertaken by the third person. The words
“at his cost” imply both the right to have somebody else perform the
obligation and the right to charge the expenses thereof to the debtor.
With respect to the situation wherein the debtor poorly
undertook the obligation, the creditor has the right to have everything
be undone at the expense of the debtor. The reason for this rule is
to prevent the debtor from taking his obligation lightly. He must
exercise due diligence and prudence to see to it that the prestation
is properly performed. In case the prestation is for the debtor not to
do a particular act or service and he nevertheless performs it, it shall
likewise be undone at his own expense.
Article 1174 of the 1950 Civil Code.
G.R. No. 27454, April 30, 1970, 32 SCRA 547.
6
7
arts. 1167-1168
ObligatiOns
Nature and Effect of Obligations
79
In Chaves vs. Gonzales7 where the repairer of a typewriter, upon
demand of the owner, returned the typewriter with missing parts
and without having it repaired, and where the owner had another
company fix the typewriter, the Supreme Court ruled that the original
repairer can be held liable not only for the missing parts but also for
the cost of the execution of the obligation of repairing the typewriter
by another company, thus:
Because the plaintiff appealed directly to the Supreme
Court and the appellee did not interpose any appeal, the facts, as
found by the trial court, are now conclusive and non-reviewable.
The appealed judgment states that the plaintiff delivered
to the defendant x x x a portable typewriter for routine cleaning
and servicing; that the defendant was not able to finish the
job after some time despite repeated reminders made by the
plaintiff; that the defendant merely gave assurances, but failed
to comply with the same; and that after getting exasperated
with the delay of the repair of the typewriter, the plaintiff went
to the house of the defendant and asked for its return, which
was done. The inferences derivable from these findings of fact
are that the appellant and the appellee had a perfected contract
for cleaning and servicing a typewriter; that they intended that
the defendant was to finish it at some future time although such
time was not specified; and that such time had passed without the
work having been accomplished for the defendant returned the
typewriter cannibalized and unrepaired, which itself is a breach
of his obligation, without demanding that he be given more time
to finish the job, or compensation for the work he had already
done. The time for compliance having evidently expired, and there
being a breach of contract by non-perfor-mance, it was academic
for the plaintiff to have first petitioned the court to fix a period
for the performance of the contract before filing his complaint
in this case. Defendant cannot invoke Article 1197 of the Civil
Code for he virtually admitted non-performance of the contract
by returning the typewriter that he was obliged to repair in a
non-working condition, with essential parts missing. The fixing
of a period would thus be a mere formality and would serve no
purpose than to delay (Cf. Tigla, et al. vs. Manila Railroad Co.,
98 Phil. 181).
It is clear that the defendant-appellee contravened the tenor
of his obligation because he not only did not repair the typewriter
but returned it “in shambles,” according to the appealed decision.
For such contravention, as appellant contends, he is liable
under Article 1167 of the Civil Code, jam quot, for the cost of
Rizal Commercial Banking Corporation vs. Court of Appeals, G.R. No. 133107,
8
80
ObligatiOns and COntraCts
Text and Cases
art. 1169
the execution of the obligation in a poor manner. The cost of the
execution of the obligation in this case should be the cost of the
labor or service expended in the repair of the typewriter, which
is in the amount of P58.75 because the obligation or contract was
to repair it.
In addition, the defendant-appellee is likewise liable, under
Article 1170 of the Code, for the cost of the missing parts, in the
amount of P31.10, for in his obligation to repair the typewriter
he was bound, but failed or neglected to return it in the same
condition it was when he received it.
Article 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 de- clares;
(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)
Delay or default can be committed by the debtor in which case
it is known as mora solvendi. If it is committed by the creditor,
it is known as mora accipiendi. In the latter case, the debtor can
consign whatever is due to the creditor in court if the circumstances
warrant. Delay in the performance of the obligation, however, must
be either malicious or negligent.8 Hence, if the delay was only due to
inadvertence without any malice or negligent, the obligor will not be
held liable under Article 1170.9
For an obligation to become due, there must generally be a
demand. Default generally begins from the moment the creditor
demands the performance of the obligation. Without such demand,
art. 1169
ObligatiOns
Nature and Effect of Obligations
81
judicial or extra-judicial, the effects of default will not arise. 10
Commencement of a suit is a sufficient demand.11 Consequently, an
obligor is liable for damages for the delay not from the time the object
of the prestation is to be delivered but from the time of extra-judicial
or judicial demand.12 Also, Article 1169 is applicable only when the
obligation is to do something other than the payment of money.13
In obligations for the payment of money, Article 2209 shall apply
which provides that
if the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there
being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal
interest, which is six percent per annum.
Hence, in case of obligation for the payment of sum of money,
the interest replaces the damages. However, the rule is still the same
in that default occurs only after judicial or extra-judicial demand. If
the contract stipulates from what time interest will be counted, said
stipulated time controls, and, therefore interest is payable from such
time and not from the date of filing of the complaint.14 If the contract
involving a sum of money does not stipulate any interest and/or the
time when it will be counted, interest will run only from the time of
judicial or extra-judicial demand.
It must be noted however that, for a party to be able to file a suit
to compel the other party to perform his obligation, the law does not
make, as a prerequisite, that extra-judicial demand must be made
first on such other party prior to the filing of the suit.15 An action
or suit can be filed at anytime after the non-compliance of the other
party of his obligation because the cause of action of the aggrieved
party will always start from such time. However, damages or interest
shall start to run only after judicial or extra-judicial demand. Hence,
if the obligation were due on March 1, 1998, the aggrieved party can
March 25, 1999, 105 SCAD 233, 305 SCRA 449.
9
Ibid.
10
Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. L-33084, November
14, 1988, 167 SCRA 309.
11
Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD
209, 288 SCRA 422.
12
National Marketing Corporation vs. Federation of United Namarco
Distributors, Inc., G.R. No. L-22578, 49 SCRA 238.
13
Picson vs. Picson, G.R. No. L-29139, November 15, 1974, 61 SCRA 67.
14
Firestone Tire & Rubber Co. (P.I.) vs. Delgado, G.R. No. L-11162, December
4, 1958, 104 Phil. 920.
15
See Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD
209, 288 SCRA 422.
82
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Text and Cases
art. 1169
file suit for specific performance immediately after March 1, 1998.
If, without any extra-judicial demand on the obligor, the action or
suit against the obligor was filed on April 15, 1998, damages will be
counted or reckoned not from March 1, 1998 but from April 15, 1998,
which was the time when judicial demand was made. If extra-judicial
demand however was made on March 15, 1998, damages shall be
counted not from March 1, 1998 but from March 15, 1998.
There are two cases where an extra-judicial demand should first
be made prior to the filing of a civil suit. These are in ejectment cases
and in consignment cases. Hence, before a lessor can eject a lessee,
the lessor must first make an extra-judicial demand for the lessee to
vacate before filing the suit for ejectment. If there is no extra-judicial
demand, the ejectment suit will be dismissed. In consignment cases,
the debtor must first make an extra-judicial demand for the creditor
to accept payment of the obligation. If the creditor unjustifiably
refuses to accept payment, the debtor can now consign the amount
in court for purposes of extinguishing the obligation. If there is no
extra-judicial demand, the consignment case will be dismissed unless
tender of payment prior to consignment need not be made pursuant
to law.
When the law uses the phrase “in delay” what it really means
is “in default.” In SSS vs. Moonwalk Development and Housing
Corporation,16 the Supreme Court had occasion to explain the concept
of default, to wit:
But mere delinquency in payment does not necessarily
mean delay in the legal concept. To be in default “x x x is different
from mere delay in the grammatical sense, because it involves
the beginning of a special condition or status which has its own
peculiar effects or results.” In order that the debtor may be in
default it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that
the debtor delays performance; and (3) that the creditor requires
the performance judicially and extrajudicially. Default generally
begins from the moment the creditor demands the performance
of the obligation.
Demand however is not necessary in three cases provided in
Article 1169. The first case is when the obligation or the law expressly
so declares. Hence, a promissory note providing that payment shall be
made on a particular date without the necessity of demand makes the
16
17
G.R. No. 73345, April 7, 1993, 221 SCRA 119.
Collector of Internal Revenue vs. Yuseco, L-12518, October 28, 1961, 3 SCRA
313.
18
E.E.E., Inc. vs. Hanson, 318 N.W. 2d 101 (N.D. 1982).
art. 1169
ObligatiOns
Nature and Effect of Obligations
83
debtor in default upon his failure to pay on the particular date. Also,
the law expressly declares that taxes to be paid to the government
should be paid on a particular date. Taxes, being the chief source
of revenue for the Government to keep it running, must be paid
immediately and without delay.17
The second case when demand is not necessary is when time is
of the essence in a particular contract. Delay constitutes a material
breach of the contract where time is of the essence.18 In stock market
transactions made in the stock exchange, time is of the essence such
that there is no need of demand before the delivery of the shares of
stock ought to be made by the seller. Also, if a contract stipulates that
a particular and special car is to be delivered to the obligee to be used
specially and solely for a particular parade at a particular time, such
as an exhibit in a one-day car fair to be held on a particular date,
there is no need for demand because the manufacturer of the said
car knows that had it not been for the time when the car would be
exhibited, the obligee would not have ordered the special car. In the
case of Barzaga vs. Court of Appeals19 where a contract was entered
into for the delivery of materials on December 22, 1990 in time for
the construction of a niche of the aggrieved party’s wife who expressly
wished that she be buried before Christmas day, and where, despite
knowing this timetable and having been paid for the materials,
the supplier failed to make the delivery despite pleas and earnest
follow-ups by the widower, the Supreme Court ruled that time is of
the essence of such contract and the supplier should be liable for the
delay and the breach, thus:
The appellate court appears to have belittled petitioner’s
submission that under the prevailing circumstances time was
of the essence in the delivery of the materials to the grave site.
However, we find petitioner’s assertion to be anchored on solid
ground. The niche had to be constructed at the very least on the
twenty-second of December considering that it would take about
two (2) days to finish the job if the interment was to take place
on the twenty-fourth of the month. Respondent’s delay in the
delivery of the construction materials wasted so much time that
construction of the tomb could start only on the twenty-third. It
could not be ready for the scheduled burial of petitioner’s wife.
This undoubtedly prolonged the wake, in addition to the fact that
work at the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal
G.R. No. 115129, February 12, 1997, 79 SCAD 378.
Article 1198 of the 1950 Civil Code.
21
Vermen Realty Development vs. Court of Appeals, G.R. No. 101762, July 6,
1993, 43 SCAD 369, 224 SCRA 549.
19
20
84
ObligatiOns and COntraCts
Text and Cases
art. 1169
obligation. In their contract of purchase and sale, petitioner
had already complied fully with what was required of him as
purchaser, i.e., the payment of the purchase price of P2,110.00.
It was incumbent upon respondent to immediately fulfill his
obligation to deliver the goods otherwise delay would attach.
The third case when demand is unnecessary is when it would
be useless, as when the obligor has rendered it beyond his power to
perform. For example, a debtor promised to constitute his house as a
collateral for a particular loan which is payable at a particular date but
before he can make the mortgage, he donates the house to his friend,
demand from the creditor to constitute the house as a collateral is
useless. In this case, his obligation becomes immediately demandable
considering that he loses his right to the period within which to pay
the loan.20
Reciprocal obligations are those created and established
at the same time, out of the same cause and which results in a
mutual relationship of creditor and debtor between the parties.21 In
reciprocal obligations, the performance of one is conditioned upon the
simultaneous fulfillment of the other.22 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.23 A contract of loan, for example, is not a unilateral contract
but one which involves reciprocal obligations — the obli-gation or
promise of each party is the consideration for that of the other. The
promise of the borrower to pay is the consideration for the obligation
of the bank to furnish the loan.24 A contract of lease and a contract of
sale are likewise agreements involving reciprocal obligations.
In reciprocal obligations, where one of the parties to a contract
does not perform the undertaking which he is bound by the terms
of the agreement to perform, he is not entitled to insist upon the
performance of the other party. For failure of the other party to
assume and perform the obligation imposed upon him, the other
party does not incur in delay.25 In Binalbagan Tech., Inc. vs. Court
of Appeals26 where the buyer was not able to take possession of the
property, which he bought from the seller, for eight years because,
22
Abaya vs. Standard Vacuum Oil Co., G.R. No. L-9511, August 30, 1957, 101
Phil. 1262.
23
Songcua vs. Intermediate Appellate Court, G.R. No. 75096, October 23, 1990,
191 SCRA 28.
24
Rose Packing Company, Inc. vs. Court of Appeals, G.R. No. 33084, November
14, 1988, 167 SCRA 309; Penacio vs. Ruaya, G.R. No. L-28102, December 14, 1981,
110 SCRA 46.
art. 1169
ObligatiOns
Nature and Effect of Obligations
85
through no fault of the seller, a third party-claimant, through a court
order, evicted the buyer from the said place but which judicial decree
of eviction was later reversed by the court allowing the buyer to retake
possession of the property, the Supreme Court held that the seller
cannot rescind the contract for failure of the buyer to pay the balance
of the purchase price during the said eight-year period, thus:
x x x petitioner was evicted from the subject subdivision
lots in 1974 by virtue of a court order in Civil Case No. 293 and
reinstated to the possession thereof only in 1982. During the
period, therefore, from 1974 to 1982, seller private respondent
Angelina Echaus’ warranty against eviction given to buyer
petitioner was breached though, admittedly, through no fault
of her own. It follows that during the period, 1974 to 1982,
private respondent Echaus was not in a legal position to demand
compliance of the prestation of petitioner to pay the price of said
subdivision lots. In short, her right to demand payment was
suspended during that period, 1974-1982.
In Agcaoili vs. Government Service Insurance System,27 the GSIS
and Agcaoili entered into a contract of sale of a government housing
unit on the condition that Agcaoili should occupy the same within
three days from receipt of the notice. Failure to immediately occupy
contractually allowed the GSIS to terminate the contract. Agcaoili,
upon receipt of the notice, immediately went to the place and found
a house in a state of incompleteness that civilized occupation was
not possible; ceiling, stairs, double walling, lighting facilities, water
connection, bathroom, toilet, kitchen, drainage, were inexistent.
The buyer paid the first monthly installment but refused to make
further payments until and unless the GSIS completed the housing
unit. GSIS cancelled the award and required Agcaoili to vacate the
premises. The Supreme Court, in ruling that the GSIS had no right
to rescind the sale ruled, thus:
x x x It was, to be sure, the duty of the GSIS, as seller, to
deliver the thing sold in a condition suitable for its enjoyment
by the buyer for the purpose contemplated, in other words, to
deliver the house subject of the contract in a reasonably livable
25
Agustin vs. Court of Appeals, G.R. No. 84751, June 6, 1990, 186 SCRA 375;
Boysaw, et al. vs. Interphil Promoters, Inc., G.R. No. L-22590, March 20, 1987, 148
SCRA 635; Abaya vs. Standard Vacuum Oil, 101 Phil. 1262.
26
G.R. No. L-100594, March 10, 1993, 219 SCRA 777
27
G.R. No. L-30056, August 30, 1988, 165 SCRA 1.
28
G.R. No. 117190, January 2, 1997, 77 SCAD 647.
29
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24; South
Eastern College, Inc. vs. Court of Appeals, G.R. No. 126389, July 10, 1998, 96 SCAD
86
ObligatiOns and COntraCts
Text and Cases
art. 1169
state. This it failed to do.
It sold a house to Agcaoili, and required him to immediately
occupy it under pain of cancellation of the sale. Under the
circumstance there can hardly be any doubt that the house
contemplated was one that could be occupied for purposes of
residence in reasonable comfort and convenience. There would be
no sense to require the awardee to immediately occupy and live
in a shell of a house, a structure consisting only of four walls with
openings, and a roof, and to theorize, as the GSIS does, that this
was what was intended by the parties, since the contract did not
clearly impose upon it the obligation to deliver a habitable house,
is to advocate an absurdity, the creation of an unfair situation.
By any objective interpretation of its terms, the contract can
only be understood as imposing on the GSIS an obligation to
deliver to Agcaoili a reasonably habitable dwelling in return for
his undertaking to pay the stipulated price. Since the GSIS did
not fulfill that obligation, and was not willing to put the house in
habitable state, it cannot invoke Agcaoili’s suspension of payment
of amortizations as cause to cancel the contract between them.
It is axiomatic “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.”
In Tanguilig vs. Court of Appeals28 where the petitioner and the
respondent entered into a contract for the construction of a windmill
for a consideration of P60,000 with a one-year guaranty, and where,
after completion, the petitioner sued the respondent for non-payment
of the balance of the construction price but the respondent did not pay
because the windmill collapsed due to the defects in the construction,
the Supreme Court ruled:
Finally, petitioner’s argument that private respondent was
already in default in the payment of his outstanding balance of
P15,000.00 and hence should bear his own loss, is untenable. 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 (Article 1169). When the windmill
failed to function properly it became incumbent upon petitioner
to institute the proper repairs in accordance with the guaranty
stated in the contract. Thus, respondent cannot be said to have
incurred in delay; instead, it is petitioner who should bear the
expenses for the reconstruction of the windmill. Article 1167 of
the Civil Code is explicit on this point that if a person obliged to
do something fails to do it, the same shall be executed at his cost.
WHEREFORE, the appealed decision is MODIFIED.
1136, 292 SCRA 422.
art. 1170
ObligatiOns
Nature and Effect of Obligations
87
Respondent VICENTE HERCE, JR. is directed to pay petitioner
JACINTO M. TANGUILIG the balance of P15,000.00 with interest
at the legal rate from the date of the filing of the complaint. In
return, petitioner is ordered to “reconstruct subject defective
windmill system, in accordance with the one-year guaranty” and
to complete the same within three (3) months from the finality of
this decision.
Article 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. (1100a)
Obligations must be complied with so as not to prejudice persons
who are directly interested therein. The law specifically provides that
damages can be awarded to any person who may have been prejudiced
in the performance of the obligation as a result of fraud, negligence,
delay or contravention of the tenor of the obligation. Significantly, if
any of these four bases of liability co-exist with a fortuitous event or
aggravates the loss caused by a fortuitous event, the obligor cannot
be excused from being liable on his obligation.29 In Barzaga vs. Court
of Appeals,30 where before dying, the wife of the petitioner (husband)
specifically requested the latter that she be buried before Christmas
day, and where the said husband, complying with the said request
after the wife’s death, went to the hardware of the respondent to
order the materials to build the niche and told the latter that the
same should arrive by eight o’clock on December 22, 1990 since his
hired workers were already at the burial site and time was of the
essence, and where the respondent, after having received payment
of the materials from the petitioner, did not deliver the materials
for two-and-a-half days despite repeated and earnest pleas from the
petitioner prompting the latter to just order from another supplier
the materials, the Supreme Court sustained the award of damages
in favor of the petitioner specially when, as in this case, time is of the
essence of the contract, to wit:
We sustain the trial court. An assiduous scrutiny of the
record convinces us that respondent Angelito Alviar was negligent
and incurred in delay in the performance of his contractual
obligation. This sufficiently entitles petitioner Ignacio Barzaga
G.R. No. 115129, February 12, 1997, 79 SCAD 378.
Corliss vs. Manila Railroad Company, G.R. No. L-21291, March 28, 1969, 27
SCRA 674.
32
Id.
30
31
88
ObligatiOns and COntraCts
Text and Cases
art. 1170
to be indemnified for the damage he suffered as a consequence
of delay or a contractual breach. The law expressly provides
that those who in the performance of their obligation are guilty
of fraud, negligence, or delay and those who in any manner
contravene the tenor thereof, are liable for damages.
xxx
xxx
xxx
We therefore sustain the award of moral damages. It
cannot be denied that petitioner and his family suffered wounded
feelings, mental anguish and serious anxiety while keeping watch
on Christmas day over the remains of their loved one who could
not be laid to rest on the date she herself had chosen. There is no
gainsaying the inexpressible pain and sorrow Ignacio Barzaga and
his family bore at that moment caused no less by the ineptitude,
cavalier behavior and bad faith of respondent and his employees
in the performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The
lackadaisical and feckless attitude of the employees of respondent
over which he exercised supervisory authority indicates
gross negligence in the fulfillment of his business obligations.
Respondent Alviar and his employees should have exercised
fairness and good judgment in dealing with peti- tioner who was
then grieving over the loss of his wife. Instead of commiserating
with him, respondent and his employees contributed to petitioner’s
anguish by causing him to bear
the agony resulting from
his inability to fulfill his wife’s dying wish.
Article 1171. Responsibility arising from fraud is
demandable in all obligations. Any waiver of an action for
future fraud is void. (1102a)
When a party complies with or performs his obligation
fraudulently, he is liable for damages. Thus, if A bought a car from B
worth P50,000 and, after delivery of the car by B, A paid B counterfeit
money on due date, A shall be liable for damages. If, in the contract
of sale, A and B stipulated that any fraudulent act by another in the
performance of his obligation shall not be a ground for the aggrieved
party to file a suit against the other for fraud is a void stipulation. By
express provision of law, such waiver is void. The dolo or fraud which
is committed to induce a party to enter into a contract, thereby making
the agreement annullable is not the one contemplated by Article 1171.
The dolo or fraud under Article 1171 necessarily involves a valid
agreement but, in the performance of the same, fraud is committed.
Article 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
arts. 1171-1173
ObligatiOns
Nature and Effect of Obligations
89
the circumstances. (1103)
Article 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 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)
Article 1173 gives a statutory definition of negligence. In essence,
negligence is the want of care required by the circum-stances.31 It is
a relative or comparative, not an absolute term and its application
depends upon the situation of the parties and the degree of care and
vigilance which the circumstances reasonably require.32 Pursuant
to Article 1172 therefore, liability can be regu-lated by the courts
depending on the circumstances. As a general rule, negligence
must always be proven. In Syquia vs. Court of Appeals,33 where the
personnel of the memorial park company, with the consent of the
latter, bore a hole on the grave of the deceased during a rainy day to
prevent the vault from falling, consequently preventing the earth from
caving in and filling-up the grave, and where such hole made possible
the entry of more water and soil than was natural had there been
no hole, the Supreme Court, taking into consideration the attendant
circumstances, ruled that the memorial company was not negligent
and said:
The law defines negligence as the “omission of that diligence
which is required by the nature of the obligation and corresponds
with the circumstances of the persons, of the time and of the
place.” In the absence of stipulation or legal provision providing
the contrary, the diligence to be observed in the performance of
the obligation is that which is expected of a good father of a family.
The circumstances surrounding the commission of the
assailed act — boring of the hole — negate the allegation of
negligence. The reason for the hole was explained by Henry
Flores, Interment Foreman, who said that:
Q.
It has been established in this particular case
G.R. No. 98695, January 27, 1993, 217 SCRA 624.
G.R. No. 126152, September 28, 1999, 113 SCAD 115, 315 SCRA 309.
35
G.R. No. L-25414, July 30, 1971, 40 SCRA 144.
33
34
90
ObligatiOns and COntraCts
Text and Cases
arts. 1172-1173
that a certain Vicente Juan Syquia was interred
on July 25, 1978 at the Parañaque Cemetery of
the Manila Memorial Park Cemetery, Inc., will you
please tell the Hon. Court what or whether you have
participation in connection with said internment (sic)?
A.
A day before Juan (sic) Syquia was buried our
personnel dug a grave. After digging the next morning
a vault was taken and placed in the grave and when
the vault was placed on the grave a hole was placed
on the vault so that water could come into the vault
because it was raining heavily then because the vault
has no hole the vault will float and the grave would
be filled with water and the digging it was raining
heavily then because the vault has no hole the vault
would caved (sic) in and fill up the grave.
Except for the foreman’s opinion that the concrete vault may
float should there be a heavy rainfall, from the above-mentioned
explanation, private respondent has exercised the diligence of a
good father of a family in preventing the accumu-lation of water
inside the vault which would have resulted in the caving in of
earth around the grave filling the same with earth.
In Philippine National Bank vs. Court of Appeals34 where the
bank negligently dishonoured the check of its depositor, the Supreme
Court said:
This Court has ruled that a bank is under obligation
to treat the accounts of its depositors with meticulous care
whether such account consists only of a few hundred pesos or of
millions of pesos. Responsibility arising from negligence in the
per-formance of every kind of obligation is demandable. While
petitioner’s negligence in this case may not have been attended
with malice and bad faith, nevertheless, it caused serious anxiety,
embarrassment and humiliation to private respondent Lily
S. Pujol for which she is entitled to recover reasonable moral
damages. In the case of Leopoldo Araneta vs. Bank of America35
held that it can hardly be possible that a customer’s check can
be wrongfully refused payment without some impeachment of
his credit which must in fact be an actual injury, although he
cannot, from the nature of the case, furnish independent and
distinct proof thereof.
Damages are not intended to enrich the complainant at
the expense of the defendant, and there is no hard-and-fast
rule in the determination of what would be a fair amount of
moral damages since each case must be governed by its own
36
G.R. No. 108245, November 25, 1994, 56 SCAD 812, 238 SCRA 397.
art. 1173
ObligatiOns
Nature and Effect of Obligations
91
peculiar facts. The yardstick should be that it is not palpably and
scandalously excessive. In this case, the award of P100,000.00
is reasonable considering the reputation and social standing of
private respondent Pujol and applying our rulings in similar
cases involving banks’ negligence with regard to the accounts of
their depositors. The award of attorney’s fees in the amount of
P20,000 is proper for respondent Pujol was compelled to litigate
to protect her interest.
The law likewise provides that when negligence shows bad faith,
the provisions of Articles 1171 and 2201, paragraph 2, shall apply.
In Samson vs. Court of Appeals,36 the Supreme Court, in discussing
bad faith, said:
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.
Hence, considering that bad faith is synonymous with fraud,
Article 1171 shall apply if negligence concurs with bad faith. Accordingly, pursuant to Article 2201, second paragraph, the obligor shall
be responsible for all damages which may be reasonably attributed
to the non-performance of the obligation.
Article 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)
The general rule is that “no one should be held to account for
fortuitous cases”37 which are those situations that could not be foreseen, or which though foreseen, were inevitable. 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.38 In Nakpil vs. Court of Appeals,39 the Supreme Court again
reiterated the elements for an event to be considered fortuitous, to
37
Lawyers Cooperative Publishing Company vs. Tabora, G.R. No. L-21263, 13
SCRA 762; Dioquino vs. Laureano, G.R. No. L-25906, May 28, 1970; Crame Sy Panco
vs. Gonzaga, 10 Phil. 646; Keep vs. Chan Gioco, 14 Phil. 5 (1909); Novo & Co. vs.
92
ObligatiOns and COntraCts
Text and Cases
art. 1174
wit:
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 either be 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.40
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 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.41
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.42
In Tanguilig vs. Court of Appeals43 where the contractor resisted
liability in connection with the destruction of a windmill which he built
by invoking that the collapse of the windmill was due to a typhoon
which is a fortuitous event, the Supreme Court rejected such defense
by ruling that the elements in the Nakpil case were not present and
stated:
Ainsworth, 26 Phil. 380 (1913).
1 Corpus Juris 1174.
Nakpil vs. Court of Appeals, October 3, 1986, 144 SCRA 596; Sia vs. Court of
Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24.
40
Vasquez vs. Court of Appeals, G.R. No. L-42926, September 1985, 138 SCRA
553; Estrada vs. Consolacion, G.R. No. L-40948, June 29, 1976, 71 SCRA 523; Austria
vs. Court of Appeals, 39 SCRA 527; Republic vs. Luzon Stevedoring, G.R. No. L-21749,
September 29, 1967, 21 SCRA 279; Lasam vs. Smith, G.R. No. L-21749, September
29, 1967, 45 Phil. 657.
38
39
art. 1174
ObligatiOns
Nature and Effect of Obligations
93
Petitioner failed to show that the collapse of the windmill
was due solely to a fortuitous event. Interestingly, the evidence
does not disclose that there was actually a typhoon on the day
the windmill collapsed. Petitioner merely stated that there was a
“strong wind.” But a strong wind in this case cannot be fortuitous
— unforeseeable nor unavoidable. On the contrary, a strong wind
should be present in places where windmills are constructed,
otherwise the windmills will not turn.
The appellate court correctly observed that “given the
newly constructed windmill system, the same would not have
collapsed had there been no inherent defect in it which could only
be attributable to the appellee.” It emphasized that respondent
had in his favor the presumption that “things have happened
according to the ordinary course of nature and the ordinary habits
of life.” This presumption has not been rebutted by petitioner.
In Sia vs. Court of Appeals44 where the bank failed to notify
its client of the flooding of its safety deposit box containing the said
client’s valuable stamp collection resulting in the destruction of the
said collection, and where the said bank already had two previous
experiences of the flooding of the said safety deposit box located inside
the bank that was guarded twenty-four hours a day, the Supreme
Court reversed the ruling of the Court of Appeals in not holding the
bank for damages on the basis of fortuitous event and held that the
bank was negligent, to wit:
SBTC’s negligence aggravated the injury or damage to the
petitioner which resulted from the loss or destruction of the stamp
collection. SBTC was aware of the floods of 1985 and 1986; it also
knew that the floodwaters inundated the room where Safe Deposit
Box No. 54 was located. In view thereof, it should have lost no
time in notifying the petitioner in order that the box could have
been opened to retrieve the stamps, thus saving the same from
further deterioration and loss. In this respect, it failed to exercise
the reasonable care and prudence expected of a good father of a
family, thereby becoming a party to the aggravation of the injury
or loss. Accordingly, the aforemen-tioned fourth characteristic of
a fortuitous event is absent and Article 1170 of the Civil Code
thus comes to the succor of the petitioner. The destruction or loss
1 Corpus Juris 1174-1175.
Fish & Elective Co. vs. Phil. Motors, G.R. No. L-32611, November 3, 1930, 55
Phil. 129; Tucker vs. Milan, 49 O.G. 4379; Limpangco & Sons vs. Yangco Steamship
Co., 34 Phil. 594; Lasam vs. Smith, 45 Phil. 657.
43
G.R. No. 117190, January 2, 1997, 77 SCAD 647.
44
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993, 222 SCRA 24.
45
G.R. No. L-25906, May 28, 1970, 33 SCRA 65; Roman Catholic Bishop of Jaro
vs. De la Peña, 26 Phil. 144 (1913); Lasam vs. Smith, 445 Phil. 657 (1924); Yap Kim
41
42
94
ObligatiOns and COntraCts
Text and Cases
art. 1174
of the stamp collection which was, in the language of the trial
court, the “product of 27 years of patience and diligence caused
the petitioner pecuniary loss;” hence, he must be compensated.
In Dioquino vs. Laureano45 where the sudden and unexpected
throwing of stone directed at the car of the plaintiff causing damage
to the said car was considered a fortuitous event, the Supreme Court
explained the concept of this exculpating occurrence, thus:
Its basis, as Justice Moreland stressed, is the Roman
law principle major casus est, cui humna infirmis reistere no
potest. Authorites of repute are in agreement, more specifically
con-cerning an obligation arising from contract that some extraordinary circumstance independent of the will of the obligor, or
of his employees, is an essential element of a caso fortuito. If it
could be shown that such indeed was the case, liability is ruled
out. There is no requirement of diligence beyond what human
care and foresight can provide.
In Victorias Planters Association, Inc. vs. Victorias Milling Co.46
where the contract between the parties stipulated that, in the event
of a fortuitous event, the period provided in the contract for the delivery of certain products shall be suspended, the Supreme Court ruled
that the period of time (6 years) when the contract was suspended
can not be deducted from the term of the contract because, to add the
said years upon the resumption of the contract would in effect be an
extension of the contract. More particularly, the Supreme Court said:
Fortuitous event relieves the obligor from fulfilling a
contractual obligation. x x x The seventh paragraph of Annex
“C” x x x where the parties stipulated that in the event of flood,
typhoon, earthquake, or other force majeure, war, insurrection,
civil commotion, organized strike, etc., the contract shall be
deemed suspended during said period, does not mean that the
happening of those events stops the running of the period agreed
upon. It only relieves the parties from the fulfillment of their
respective obligations during that time — the planters from
delivering sugar cane and the central from milling it. In order
that the central, herein appellant, may be entitled to demand from
the other parties the fulfillment of their part in the contracts, the
latter must have been able to perform it but failed or refused to
Chuan vs. Tiaoqui, 31 Phil. 433 (1655); University of Sto. Tomas vs. Descals, 38 Phil.
267 (1918); Lizares vs. Hernaez, 40 Phil. 981 (1920); Garcia vs. Escudero, 43 Phil. 437
(1922); Milan vs. Rio y Olabarrieta, 45 Phil. 718 (1924); Obejara vs. Iga Sy, 76 Phil.
580 (1946); Gillaco vs. Manila Railroad Co., 97 Phil. 884.
46
G.R. No. L-6648, July 25, 1955, 97 Phil. 318.
47
G.R. No. 119729, January 21, 1997, 71 SCAD 146.
48
Ponce de Leon vs. Rehabilitation Finance Corporation, G.R. No. L-24571,
art. 1174
ObligatiOns
Nature and Effect of Obligations
95
do so and not when they were prevented by force majeure such as
war. To require the planters to deliver the sugar cane which they
failed to deliver during the four years of the Japanese occupation
and the two years after liberation when the mill was being rebuilt
is to demand from the obligors the fulfillment of an obligation
which was impossible of performance at the time it became due.
Nemo tenetur ad impossibilia. The obligee not being entitled to
demand from the obligors the performance of the latter’s part of
the contracts under those circumstances cannot later on demand
its fulfillment. The performance of what the law has written off
cannot be demanded and required. The prayer that the plaintiffs
be compelled to deliver sugar cane to the appellant for six more
years to make up for what they failed to deliver during those
trying years, the fulfillment of which was impossible, if granted,
would in effect be an extension of the term of the contracts entered
into by and between the parties.
In Ace-Agro Development Corporation vs. Court of Appeals,47
where the petitioner was engaged by the private respondent to clean
its bottles and repair wooden shells inside its plant from January 1,
1990 up to December 31, 1990, and where, because of the burning
on April 25, 1990 of the said plant, the work of the petitioner was
suspended for a certain period of time, thereby prompting the
petitioner to seek an extension of the contract period to compensate for
the suspension and refusing to work without such extension despite
notification from the private respondent for the resumption of the
contract on November 7, 1990, the Supreme Court ruled against such
extension and said:
Nor was petitioner justified in refusing to resume work on
November 7 when it was again notified by petitioner to work.
Although it cited the pending labor case as reason for turning
down private respondent’s offer, it would appear that the real
reason for petitioner’s refusal was the fact that the term of
the contract was expiring in two months and its request for an
extension was not granted. But as the appellate court correctly
ruled, the suspension of work under the contract was brought
about by force majeure. Therefore, the period during which
work was suspended did not justify an extension of the term of
the contract. For the fact is that the contract was subject to a
resolutory period which relieved the parties of their respective
obligations but did not stop the running of the period of their
contract.
When the object of the prestation is generic, like the payment of
December 18, 1970, 36 SCRA 289.
96
ObligatiOns and COntraCts
Text and Cases
art. 1174
a sum of money as a consequence of a loan contract, the debtor cannot
avail of the benefit of a fortuitous event even if the object for which the
loaned money is used, such as the construction of a factory, is wiped
out by a typhoon.48 Also, even if there is a fortuitous event, a person
can still be held responsible for the performance of his obligation if
the law, or the stipulation of the parties, or when the nature of the
obligation so requires.
The law can provide that, even if there is a fortuitous event, the
obligor can still be liable. An example of this is the third para-graph of
Article 1165 which provides that 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 delivery. Also, Article 1268 provides that 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. Article 552 of Book II on property
of the Civil Code pertinently provides that a possessor in bad faith
shall be liable for deterioration or loss in every case, even if caused
by a fortuitous event. In the liquidation of the conjugal partnership of
gains, Article 129(6) of the Family Code of the Philippines49 likewise
provides that, unless the owner had been indemnified from whatever
source, the loss or deterioration of movables used for the benefit of
the family, belonging to either spouse, even due to fortuitous event,
shall be paid to said spouse from the conjugal funds, if any.
In the same vein, the bailee in commodatum50 is liable for the
loss of the thing, even if it should be through a fortuitous event in
the following cases: a) if he devotes the thing to any purpose different
from that for which it was loaned; b) if he keeps it longer than the
period stipulated, or after the accomplishment of the use for which
the commodatum has been constituted; c) if the thing loaned has
been delivered with appraisal of its value unless there is a stipulation
exempting the bailee from responsibility in case of a fortuitous event;
d) if he lends or leases the thing to a third person who is not a member
of his household; or e) if, being able to save either the thing borrowed
or his own thing, he chose to save the latter. Interestingly also, Article
1919 of the Civil Code on deposits provides that if the depositary by
Executive Order No. 209 as amended. This law took effect on August 3, 1988.
Article 1935 of the 1950 Civil Code provides that a bailee in commodatum is
one who acquires the use of the thing loaned but not its fruits; if any compensation is
49
50
art. 1174
ObligatiOns
Nature and Effect of Obligations
97
force majeure or government order loses the thing and receives money
or another thing in its place, he shall deliver the sum or other thing
to the depositor.
When the parties declare that they shall be liable even for loss
due to a fortuitous event, they shall be so liable. An example would
be a contract providing that the obligor shall, within 10 days, deliver
a particular transistor with serial number 1234 and shall be liable
even if the transistor shall be destroyed by an Act of God for the value
of the same.
When the nature of the obligation requires the assumption of
risk, the person obliged to perform the obligation shall likewise not
be excused should a fortuitous event occur. In Republic vs. Luzon
Stevedoring,51 by a towed barge, which usually traversed the Pasig
river passing the Nagtahan bridge, rammed against one of the wooden
piles of the bridge, smashing the posts and causing the bridge to list.
The accident occurred at a time when the river was swollen and the
current swift on account of heavy downpour in Manila. The barge
owner contended that it should not be held liable for the damage on
the bridge as such damage was caused by fortuitous event or force
majeure. The Supreme Court rejected such contention by ruling, thus:
The appellant stresses the precautions taken by it on the
day in question: that it assigned two of its most powerful tugboats to tow down river its barge L-1892; that it assigned to the
task the more competent and experienced among its patrons,
had the towlines, engines and equipment double-checked and
inspected; that it instructed its patrons to take extra precautions;
and concludes that it had done all it was called to do, and that
the accident, therefore, should be held due to force majeure or
fortuitous event.
These very precautions, however, completely destroy the
appellant’s defense. For caso fortuito or force majeure (which in
law are identical in so far as they exempt an obligor from liability) by definition, are extraordinary events not foreseeable or
avoidable, events that could not be foreseen, or which, though
foreseen, were inevitable (Article 1174, Civil Code of the Philippines). It is therefore not enough that the event should not have
been foreseen or anticipated, as is commonly believed, but it must
be one impossible to foresee or to avoid. The mere difficulty to
to be paid by him who acquires the use, the contract ceases to be a commodatum.
51
G.R. No. L-21749, September 29, 1967, 21 SCRA 279.
52
G.R. No. L-16477, May 31, 1961, 2 SCRA 549.
53
Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD
98
ObligatiOns and COntraCts
Text and Cases
art. 1174
foresee the happening is not impossiblity to foresee the same:
“un hecho no constituye caso fortuito por la sola circumstancia
de que su existencia haga mas dificil o mas onerosa la accion
diligente del presento ofensor” (Peirano Facio, Responsabilidad
Extra-contractual, p. 465; Mazeaud, Trait de la Responsibilite
Civil, Vol. 2, sec. 1569). The very measure adopted by appellant
prove that the possibility of danger was not only foreseeable, but
actually foreseen, and was not caso fortuito.
Otherwise stated, the appellant, Luzon Stevedoring
Corporation, knowing and appreciating the perils posed by the
swollen stream and its swift current, voluntarily entered into a
situation involving obvious danger; it therefore assumed the risk,
and cannot shed responsibility merely because the precautions
it adopted turned out to be insufficient. Hence, the lower court
committed no error in holding it negligent in not suspending
operations and in holding it liable for the damages caused.
It avails the appellant naught to argue that the dolphins,
like the bridge, were improperly located. Even if true, these
circumstances would merely emphasize the need of even higher
degree of care on appellant’s part in the situation involved in
the present case. The appellant whose barge and tugs travel up
and down the river everyday, could not safely ignore the danger
posed by these allegedly improper constructions that had been
erected and, in place, for years.
Article 1175. Usurious transactions shall be governed by
special laws.
Article 1175 in itself does not prohibit usurious contracts.
However, it specifically provides that it shall be governed by special
laws. A special law may either prohibit usurious interest, allow it, or
merely put a ceiling as to what can be the highest interest that can
be legally imposed.
Article 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)
A presumption must always arise from a fact or a set of facts.
189, 319 SCRA 200.
arts. 1175-1176
ObligatiOns
Nature and Effect of Obligations
99
To have probative value, the creation of the presumption must be
provided by law. If the facts are proven, then the presumption as a
matter of law will attach and will hold as true unless and until it is
rebutted. Thus, if an obligation consists in the payment of principal
and interest, the payment of the principal without reservation is
the fact that will give rise to the presumption that the interest on
the principal has already been paid. This is so because, in ordinary
business transactions, interest is normally paid first. The burden of
proof to show that the interest has not been paid shifts to the creditor.
Consequently, the presumption can be rebutted by strong evidence
to the contrary. For instance, it can be shown that the payment of
the principal was made because the debtor requested the creditor to
apply the payment to the principal first.
Another presumption created by law is in connection with a sale
in installment. The payment of the later installment shall give rise
to the presumption that prior installments have already been paid.
The later installment however must clearly indicate that indeed it is
the latest installment. In Manila Trading & Supply Co. vs. Medina52
where, in a purchase by installment, the obligor presented numerous
receipts which were found by the court as partly spurious and partly
genuine, and where the obligor maintained that, even if some receipts
were found to be spurious, the receipts found to be genuine were
allegedly made in January, 1957 after the issuance of the spurious
receipts and therefore the presumption that the prior installments
were already paid should be considered, the Supreme Court rejected
this contention by ruling:
Appellant avers that the genuine receipts dated January,
1957 raise the presumption that prior installments were paid.
This might be true if such receipts recited that they were issued
for the installments corresponding to the month of January, 1957;
but nowhere does that fact appear. And even if such recital had
been made, the resulting presumption would only be prima facie,
and the evidence before us is clear that the payments made do
not correspond to the installments falling due on the dates of the
genuine receipts.
Article 1177. The creditors, after having pursued the
property in the 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 may also impugn the acts which the debtor
may have done to defraud them. (1111)
100
ObligatiOns and COntraCts
Text and Cases
art. 1177
The law protects the creditors. The nature of a civil obligation
is that it is demandable and enforceable in a court of law. Since an
obligor is either bound by the prestation to give or to do, the creditor is
given by law all possible remedies to enforce such obligations. Hence,
the creditor, after exhausting all means to satisfy his claim, is given
the opportunity to bring all actions which the obligor can institute
against his own debtors to protect and satisfy his claims against the
said obligor.
Thus the following successive measures must be taken
by a creditor before he may bering an action for rescission of
an allegedly fraudulent sale: (1) exhaust the properties of the
debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt by law from
execution; (2) exercise all the rights and actions of the debtor,
save those personal to him (accion subrogatoria); and (3) seek
rescission of the contracts executed by the debtor in fraud of their
rights (accion pauliana).53
However, this right is not absolute as the creditor cannot bring
those which are inherent in the person of the obligor. Hence, the
creditor cannot file an action on behalf of the obligor to claim support
from the latter’s parents and to satisfy the indebtedness from the
money obtained by way of support from the parents. This claim
for support is very personal to the obligor which therefore cannot
be brought by the creditor. Article 1381(1) which provides that a
contract entered into by the debtor is rescissible if it were made in
fraud of creditors when the latter cannot in any other manner collect
the claim due them is another remedy.
It has also been held in Adorable vs. Court of Appeals54 that
unless a debtor acted in fraud of his creditor, the creditor has no
right to rescind a sale made by the debtor to someone on the mere
ground that such sale will prejudice the creditor’s rights in collecting
later on from the debtor. The creditor’s right against the debtor is
only a personal right to receive payment for the loan; it is not a real
right over the lot subject of the deed of sale transferring the debtor’s
property.
Article 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)
Generally, rights growing out of an obligation are transmissible.
54
G.R. No. 119466, November 25, 1999, 116 SCAD 189, 319 SCRA 200.
art. 1178
ObligatiOns
Nature and Effect of Obligations
101
Thus, the transferee of a Children’s Educational Insurance Plan,
originally obtained by the transferor, acquires all the rights of the
said transferor under the said plan. Hence, the transferee can avail of
the various financial bonuses provided by the plan in the event that
the child of the transferee graduates with distinction if such right is
provided for in the contract.
However, the person who transmits the right cannot transfer
greater rights than he himself has by virtue of the obligation.
Conversely, the person to whom the rights are transmitted can
have no greater interest than that possessed by the transmitter at
the time of transmission of the rights. The rights of the transferee
do not rise higher than the transferor. Hence, if the transferor has
no right to encumber a property within a certain period of time, the
transferee has no such right as well. If the transferor has no right to
earn interest from money he is keeping for a principal, a transferee
obtains no such right.
The transmissibility of rights may be limited, or altogether
prohibited by stipulation of the parties. Thus, it can be stipulated in
a contract that the assignment of any or all the rights provided by
such contract is prohibited. A less prohibitive provision is one which
disallows such transfer of rights unless with the express consent of one
of the parties to the contract. Likewise, no transmission can be made
of a particular right if the personal qualifications or circumstances of
the transferor is a material ingredient attendant in the obligation.
Hence, an author who specializes in horror stories written in a very
distinct and peculiar style and who has been engaged by a publisher
to write his (the author’s) kind of horror stories for his magazine
cannot transmit his rights arising from such obligation to anybody
else.
Transmission must likewise be subject to pertinent laws. Hence
if the law prohibits the alienation of homesteads within five years from
the issuance by the government of the patent,55 any transmission of
rights of dominion over the same within the prohibitory period shall
be void.
55
Artales vs. Urbi, G.R. No. L-29421, January 30, 1971, 37 SCRA 395.
102
ObligatiOns and COntraCts
Text and Cases
art. 1178
103
Chapter 3
DIFFERENT KINDS OF OBLIGATIONS
SECTION 1. — Pure and Conditional Obligations
Article 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 an unqualified obligation which is
demandable immediately. It is an obligation whose performance does
not depend upon a future or uncertain event, or past event unknown
to the parties. In Pay vs. Vda. De Palanca1 where the debtor issued a
promissory note to the creditor to pay a sum of money payable upon
receipt of a particular sum of money from the estate of a certain
deceased person or upon demand, and where the case for collection
on the basis of said note was filed 15 years after the execution of the
promissory note, the Supreme Court ruled that, since the prescriptive
period for filing the action based on a written document was 10 years
and considering that the promissory note’s payment constituted a
pure obligation and therefore demandable at once, the action to collect
could no longer prosper. The Supreme Court pertinently stated:
From the manner in which the promissory note was
executed, it would appear that petitioner was hopeful that the
satisfaction of his credit could be realized either through the
debtor sued receiving cash payment from the estate of the late
Carlos Palanca presumptively as one of the heirs, or, as expressed
therein, “upon demand.” There is nothing in the record that would
indicate whether or not the first alternative was fulfilled. What
is undeniable is that on August 26, 1967, more than fifteen years
after the execution of the promissory note on January 30, 1952,
2
John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition
1987, Page 438, West Publishing Co. St. Paul, Minnesota.
3
Gaite vs. Fonacier, G.R. No. L-11827, 2 SCRA 831.
103
104
ObligatiOns and COntraCts
Text and Cases
art. 1179
this petition was filed. The defense interposed was prescription.
Its merit is rather obvious. Article 1179 of the Civil Code provides:
“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.” This used to be Article 1113 of the
Spanish Civil Code of 1889. As far back as Floriano vs. Delgado,
a 1908 decision, it has been applied according to its express
language. The well-known Spanish commentator, Manresa, on
this point, states: “Dejando, con acierto, el caracter mas teorico y
grafico del acto, o sea la perfeccion de este, see fija, para determinar
el concepto de la obigacion pura, en el distintivo de esta, y que es
consecuencia de aquel: la exigibilidad immediata.
The obligation being due and demandable, it would appear
that the filing of the suit after fifteen years was much too late.
x x x.
A conditional obligation is exactly the reverse of a pure obligation. A condition is an act or event, other than a lapse of time, which,
unless the condition is excused, must occur before a duty to perform
a promise in the agreement arises or which discharges a duty of
performance that has already arisen.2 In conditional obligations,
the performance depends upon a future or uncertain event or upon a
past event unknown to the parties. What characterizes a conditional
obligation is the fact that its efficacy or obligatory force is subordinated to the happening of a future or uncertain event.3
A resolutory condition is also demandable at once. This is
because once the condition is established and acknowledged, the right
immediately exists and therefore the obligation concomitant to the
right can be demanded at once. However, once the future or uncertain
event happens which constitutes the condition, it operates to discharge
the obligation. The obligation is resolved or extinguished by operation
of law but such resolution can be made effective at some later date
if the parties so stipulate in their contract, such as when the parties
stipulate that resolution becomes effective only from the date written
notice thereof is sent.4 An example of a contract with a resolutory
condition is when the contract provides that a purchaser can obtain
a refund of their money for as long as the government continues to
allow refunds of such a character. In such case, the purchaser can
immediately demand the performance of the obligation for the seller to
Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA
4
15.
5
Songcuan vs. Intermediate Appellate Court, G.R. No. L-75096, October 23,
1990, 191 SCRA 28.
6
Central Philippine University vs. Court of Appeals, G.R. No. 112127, July 17,
art. 1179
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
105
refund the money. However, if the purchaser does not do anything and
once the government comes up with a law disallowing such a refund,
then the obligation to refund on the part of the seller is extinguished.
Also, it has been likewise held by the Supreme Court that, in case a
contract involves a reciprocal obliga-tion, 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.5 Likewise,
when a person donates land to another on the condition that the
latter would build upon the land a school, the condition im-posed
was not a condition precedent or a suspensive condition but a
resolutory one. It is not correct to say that the schoolhouse had
to be constructed before the donation became effective, that is,
before the donee could become the owner of the land, other-wise, it
would be invading the property rights of the donor. The donation
had to be valid before the fulfillment of the condition. If there
was no fulfillment or compliance with the condition, x x x the
donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.6
A suspensive condition is not demandable at once. It can be
demanded only upon the happening of the future or unknown event
or a past event unknown to the parties, which constitutes the condition. A suspensive condition gives rise to the performance of the
obligation. If the condition does not take place, the parties would
stand as if the conditional obligation had never existed.7 An example
of a contract which provides a positive suspensive condition is a
“contract to sell” where, in a purchase of property in installment, it
is expressly provided in the contract that title remains vested on the
seller until after the last payment of the installment is made by the
buyer.8 Prior to the last payment, the purchaser has yet no title to
the property. However, once the future event, which is the payment
of the last installment, occurs, the obligation of the seller to execute
the final deed of sale and to transfer title to the property, arises.9 It
is from that time that the purchaser can demand transfer of the title.
In a contract to sell
where the ownership or title is retained by the seller and is not
to SCAD
pass until
theSCRA
full payment
the
price, such
payment
being
1995, 63
72, 246
511; Parksofvs.
Province
of Tarlac,
G.R. No.
L-24190,
July 13, 1926, 49 Phil. 142.
7
Gaite vs. Fonacier, G.R. No. L-11827, 2 SCRA 831.
8
Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141.
9
Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., G.R. No. L-25885,
46 SCRA 381, 43 SCRA 93.
10
Roque vs. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741.
11
Coronel vs. Court of Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141.
12
Id., Page 10.
106
ObligatiOns and COntraCts
Text and Cases
art. 1179
a positive suspensive condition and 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.10
A “contract to sell” and a “conditional contract of sale,” though
both involving a suspensive condition, are different from each other.
In Coronel vs. Court of Appeals,11 the Supreme Court said that, in a
contract to sell, the consent or meeting of the minds relative to the
transfer of ownership in exchange for the price is not present because
the seller expressly reserves the transfer of title to the prospective
buyer until the happening of the suspensive condition. There is only
a promise to sell upon the happening of the suspensive condition.
While in a conditional contract of sale, “where the seller may likewise
reserve title to the property subject of the sale until the fulfillment
of a suspensive condition,”12 there is already consent, “although it
is conditioned upon the happening of a contingent event which may
or may not occur. If the suspensive condition is not fulfilled, the
perfection of the contract is abated.”13
However, if the suspensive condition is fulfilled, the contract
of sale is thereby perfected, such that if there had already been
previous delivery of the property subject of the sale to the buyer,
ownership thereto automatically transfers to the buyer by
operation of law without any further act having to be performed
by the seller.
In a contract to sell, upon fulfillment of the suspensive
condition which is the full payment of the purchase price,
ownership will not automatically transfer to the buyer although
the property may have been previously delivered to him. The
prospective seller still has to convey title to the prospective buyer
by entering into a contract of sale. x x x
x x x It is essential to distinguish between a contract to sell
and a conditional contract of sale specially in cases where the
subject property is sold by the owner not to the party the seller
contracted with, but to a third person, as in the case at bench. In
a contract to sell, there being no previous sale of the property, a
third person buying such property despite the fulfill-ment of the
suspensive condition such as the full payment of the purchase
price, for instance, cannot be deemed a buyer in bad faith and
13
Id.
Id., Pages 10-11.
15
G.R. No. 48194, March 15, 1990, 183 SCRA 171.
16
John D. Calamari and Joseph M. Perillo, The Law of Contracts, Third Edition
1987, Page 439, West Publishing Company, St. Paul Minnesota, citing Internatio14
art. 1179
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
107
the prospective buyer cannot seek the relief of re-conveyance of
the property. There is no double sale in such case. Title to the
property will transfer to the buyer after registration because
there is no defect on the ownership title per se, but the latter, of
course, may be sued for damages by the intending buyer.
In a contract of sale, however, upon the fulfillment of the
suspensive condition, the sale becomes absolute and this will
definitely affect the seller’s title thereto. In fact, if there had been
previous delivery of the subject property, the seller’s ownership
or title to the property is automatically transferred to the buyer
such that the seller will no longer have any title to transfer to any
third person. Applying Article 1544 of the Civil Code, such second
buyer of the property who may have had actual or constructive
knowledge of such defect in the seller’s title, or at least was
charged with the obligation to discover such defect, cannot be
a registrant in good faith. Such second buyer cannot defeat the
first buyer’s title. In case a title is issued to the second buyer, the
first buyer may seek reconveyance of the property subject of the
sale.14
Another example of an obligation with a suspensive condition
is when an obligor promises to give an obligee a book if it rains the
next day which is uncertain event. The obligor’s obligation arises
once it really rains the next day as the happening of the condition
gives rise to the obligation to give the book. In Javier vs. Court of
Appeals15 where, in consideration of certain rights to a timber license,
the obligor undertook to pay the sum of P30,000 to the obligee as soon
as the additional area for forest concession has been obtained by the
obligee and approved by the government, the Supreme Court said
that the obligor was not liable under the said deed of assignment as
it involves the non-happening of a suspensive condition, to wit:
As to the alleged nullity of the agreement dated February
28, 1966, we agree with petitioner that they cannot be held
liable therein. The efficacy of said deed of assignment is subject
to the condition that the application of private respondent for an
additional area for forest concession be approved by the Bureau of
Forestry. Since private respondent did not obtain that approval,
said deed produces no effect. 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.
Rotterdam, Inc. vs. River Brand Ice Mills, Inc., 259 F.2d 137 (2nd Cir. 1958), certiorari
denied 358 U.S. 946, 79 S.Ct. 352, 3 L. Ed.2d 352 (1959); Ross vs. Harding, 64 Wn.2d
108
ObligatiOns and COntraCts
Text and Cases
arts. 1180-1181
Article 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)
The debtor is usually the passive subject of the prestation
because he is the one who can be compelled to give or do the prestation.
The creditor is the active subject because he is the one who can
compel performance. When the debtor binds himself to pay when
his means permit him to do so, the law presumes that the debtor
really intends to satisfy his obligation. The only problem is that the
creditor is left to speculate when the satisfaction of the obligation or,
more particularly, the payment will occur as the payment depends
principally on the debtor. Hence, payment, in so far as the creditor
is concerned, could be an uncertain event. By way of balancing the
presumed intention of the debtor to really make payment and the
interest of the creditor to be paid, the law classifies this condition as
a period which is presumed to have been established for the benefit
of both the creditor and the debtor. To achieve this balance, Article
1197 is made to apply. It provides that the parties may ask the court
to fix the duration of the period within which the payment is to be
made especially when the period depends upon the will of the debtor.
Article 1181. In conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which
constitutes the condition. (1114)
This particular provision merely generally provides what a
condition, whether suspensive or resolutory, can do to the existence
or extinguishment of a right. A suspensive condition is also called a
condition precedent while a resolutory condition is also known as a
condition subsequent. A condition precedent is an act or event, other
than a lapse of time, which must exist or occur before a duty to perform
a promised performance arises.16 If the condition does not occur and
is not excused, the promised performance need not be rendered.17 A
condition subsequent is an event, the existence of which, by agreement
of the parties, operates to discharge a duty of performance that has
arisen.18
231, 391 P.2d 398, 261 P.2d 394 (1953); Restatement, Contracts 250(a).
17
Id., Page 439.
art. 1182
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
109
Article 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)
The phrase “when fulfillment of a condition” connotes a
suspensive character of the prestation. There is the expectation of
the existence or accomplishment of a duty to give or to render some
service in the future. If this fulfillment depends upon the sole will
of the debtor, then it is essentially a condition because whether the
debtor will or will not fulfill the obligation is a future and uncertain
event. This condition is known as a potestative suspensive condition,
which is void. In Lao Lim vs. Court of Appeals,19 the Supreme Court
considers as void a stipulation providing that the lease contract shall
subsist “for as long as the defendant needed the premises and can
meet and pay said increases” considering that such provision
x x x is a purely potestative condition because it leaves
the effectivity and enjoyment of leasehold rights to the sole and
exclusive will of the lessee. It is likewise a suspensive condition
because the renewal of the said lease, which gives rise to a new
lease depends upon said condition. It should be noted that a
renewal constitutes a new contract of lease although with the
same terms and conditions as those in the expired lease. It should
also not be overlooked that the said condition is not resolutory
in nature because it is not a condition that terminates the lease
contract. The lease contract is for a definite period of three (3)
years upon the expiration of which the lease automatically
terminates.
The invalidity of a condition in a lease contract similar to
the one at bar has been resolved in Encarnacion vs. Baldomar,
et al. (77 Phil. 470 [1946]), where we ruled that in an action for
ejectment, the defense interposed by the lessees that the contract
of lease authorized them to continue occupying the premises as
long as they paid the rents is untenable, because it would give to
the lessees the sole power to determine whether the lease should
continue or not. As stated therein, “if this defense were to be
allowed, so long as the defendants elected to continue the lease
Id., Page 441.
G.R. No. 87047, October 31, 1990, 191 SCRA 150.
20
Id., Pages 234-235; Osmeña vs. Rama, G.R. No. L-4437, September 9, 1909,
14 Phil. 99.
21
G.R. No. L-5003, June 27, 1953, 93 Phil. 383.
22
Taylor vs. Uy Tieng Piao, G.R. No. 16109, October 2, 1922, 43 Phil. 873.
23
Id.; Rustan Pulp & Paper Mills, Inc. vs. IAC, G.R. No. 70789, October 19, 1992,
18
19
110
ObligatiOns and COntraCts
Text and Cases
art. 1182
by continuing the payment of rentals, the owner would never
be able to discontinue it; conversely, although the owner should
desire the lease to continue, the lessees would effectively thwart
his purpose if they should prefer to terminate the contract by the
simple expedient of stopping payment of rentals. This of course is
prohibited by the aforesaid article of the Civil Code. (8 Manresa,
3rd ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil. 100).”
In this Lao Lim case, it must be observed that the birth of the
new lease contract (the renewed lease) also depends upon the sole
will of the lessee. Hence, according to Article 1308, this is likewise
prohibited and may make the whole contract invalid. However, if the
potestative condition is imposed not on the birth of the obligation but
on its fulfillment, only the condition is avoided, leaving unaffected the
obligation itself.20 Thus, in Trillana vs. Quezon College,21 where the full
payment of the shares in a certain school was to be made only after
the obligor had harvested fish (“babayaran kong lahat pagkatapos na
ako ay makapaghuli ng isda”), the Supreme Court likewise held that
the condition was solely dependent on obligor
and therefore void.
Moreover, it was a condition imposed upon the birth or creation of
the obligation, in that the obligation to pay would only arise or exist
after harvesting of fish, thereby voiding not only the condition but
also the whole obligation. This was a suspensive condition facultative
as to the debtor22 contemplated in Article 1182.
However, a condition at once facultative and resolutory may be
valid even though the condition is made to depend upon the will of the
obligor.23 For example, if a person promises to put in the possession
of his friend a house while he (the giver) is abroad but requires that
the house be returned to his possession in the event that he returns
to the Philippines, the condition is valid as it is resolutory in nature.
When the potestative condition is imposed on the fulfillment of
the obligation, the condition alone is voided but not the obligation. This
can be seen in the case of Osmeña vs. Ramos,24 where the Supreme
Court held that, in the following provision of a promissory note, the
potestative condition is void but the whole obligation to pay still
subsists:25
On this date, I hereby promise, in the presence of two
214 SCRA 665.
24
G.R. No. 4437, September 9, 1909, 14 Phil. 99.
25
This was the explanation given when this case was compared by the Supreme
Court with the case of Trillana vs. Quezon Colleges, 93 Phil. 383 in the latter case.
26
G.R. No. 117009, October 11, 1995, 64 SCAD 962.
27
G.R. No. L-4433, May 29, 1953, 93 Phil. 218; See also Angeles vs. Court of
art. 1182
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
111
witnesses that, if the house of strong material in which I live in
Paguing is sold, I will pay my indebtedness to Don Tomas Osmeña
as set forth in this document.
In Security Bank and Trust Company vs. Court of Appeals,26
where a contractor spent more than the cost construction as
contemplated in the contract and whose application for the adjustment
of the contract price was not acted upon by the owner on the ground
that there was no “mutual agreement of both parties” pursuant to
the contractual provision which stated:
“If, at anytime prior to the completion of the work to
be performed hereunder, increase in prices of construction
materials and/or labor supervene through no fault on the part of
the contractor whatsoever, or any act of the government and its
instrumentalities which directly or indirectly affects the increase
of the cost of the project, OWNER shall equitably make the
appropriate adjustment on mutual agreement of both parties.”
The Supreme Court ruled against Security Bank and Trust
Company and required it to pay and fulfill its obligation to the
contractor on the ground, among others, that the above-mentioned
provision violates Article 1182. The Supreme Court said:
“In the present case, the mutual agreement, the absence of
which petitioner bank relies upon to support its non-liability for
the increased construction cost, is in effect a condition dependent
on the petitioner bank’s will, since respondent would naturally
and logically give consent to such an agreement which would
allow him recovery of the increased cost.”
In the event that the condition is declared void but the obligation
is still valid, should the obligation be declared pure and unconditional? This is the exact query answered in the negative by the
Supreme Court in Patente vs. Omega.27 In the said case, the Supreme
Court ruled that, in converting it into a pure and demandable
obligation, an arrangement might be enforced which is not within
the contemplation of the parties. Hence, according to the Supreme
Court, the best solution is to consider the parties as having intended
a period within which the valid obligation is to be complied such that
the creditor should ask the court to fix a period for compliance.
Appeals, G.R. No. 111821, November 8, 1993.
28
Hermosa vs. Longara, 49 Official Gazette 4287, October 1953.
29
G.R. No. 107207, November 23, 1995, 65 SCAD 621, 250 SCRA 223.
30
G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351.
112
ObligatiOns and COntraCts
Text and Cases
art. 1182
Mixed obligations are those which depend not only upon the
will of the debtor but also upon chance and some other factors.28 In
Romero vs. Court of Appeals29 where the contract stipulates that the
downpayment made by the buyer to the seller regarding the sale of
a property shall be returned in the event that the seller “shall not
be able to remove the squatters from the property” within 60 days
from the execution of the contract, the Supreme Court held that such
provision is not a potestative void condition
but a “mixed” condition dependent not on the will of the vendor
alone but also of third persons like the squatters and government
agencies and personnel concerned.
In Naga Telephone Co., Inc. vs. Court of Appeals30 where the
petitioner and the respondent stipulated that the petitioner can use
the electrical posts of the respondent for as long as it needed the post
but the contract can nevertheless be terminated should the respondent
stop operations, the Supreme Court, on the issue of whether the
condition is potestative or casual, ruled:
x x x A potestative condition is a condition, the fulfillment of
which depends upon the sole will of the debtor, in which case, the
conditional obligation is void. Based on this definition, respondent
court’s finding that the provision in the contract, to wit:
“(a) That the term or period of this contract
shall be as long as the party of the first part
(petitioner) has need for the electric light posts of the
party of the second part (private respondent)
x
x x”
is a potestative condition, is correct. However, it must have
overlooked the other conditions in the same provision, to wit:
“x x x it being understood that this contract shall
terminate when for any reason whatsoever, the party
of the second part (private respondent) is forced to
stop, abandoned (sic) its operation as a public service
and it becomes necessary to remove the electric light
post (sic);”
G.R. No. L-58286, May 16, 1983, 122 SCRA 280.
Taylor vs. Uy Tieng Piao and Tan Liuan, 43 Phil. 873.
33
Ibid.
34
G.R. No. 96053, March 3, 1993, 219 SCRA 480; see also Coronel vs. Court of
Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141.
31
32
art. 1183
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
113
which are casual conditions since they depend on chance, hazard,
or the will of a third person. In sum, the contract is subject to
mixed conditions, that is, they depend partly on the will of the
debtor and partly on chance, hazard, or the will of a third person,
which do not invalidate the aforementioned provision. x x x
A resolutory condition that depends upon the will of a third
person is not void. Thus in Ducusin vs. Court of Appeals31 where
the lease contract provides that “the term of the contract shall be
on a month-to-month basis commencing on February 19, 1975 until
terminated by mutual agreement or terminated by the lessor on the
ground that his children need the premises for their own use,” the
Supreme ruled in favor of the validity of such resolutory condition
stating that the lease will terminate when the lessor’s children need
the premises for their own use considering that the happening of the
condition is not dependent solely on the will of the lessor but rather
the happening of the condition depended upon the will of third persons
— the lessor’s children.
Article 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)
Conditions, which are impossible, render the obligation
dependent upon them legally ineffective. It is very clear from the
law that it is not only the condition which is annulled but the whole
obligation itself. Thus, an obligation to give money as a loan only if it
snows in the Philippines destroys the efficacy of the prestation. The
condition annuls the prestation. This is also true in case the condition
is against good customs, public policy or is prohibited by law.
Also, an impossible thing can never be done. Hence, to make as
a condition the doing of an impossible thing is a useless stipulation
which should be considered as not having been agreed upon. The whole
obligation which involves an impossible condition can be annulled.
Article 1184. The condition that some event happen at a
determinate time shall extinguish the obligation as soon as
35
Article 1187 of the 1950 Civil Code.
114
ObligatiOns and COntraCts
Text and Cases
arts. 1184-1185
the time expires or if it has become indubitable that the event
will not take place. (1117)
This article deals with the existence of an obligation as soon
as the condition happens at a particular time and it is extinguished
should the condition not happen within the said period. Hence, if the
condition is the election of Mr. X as president on or before 1998 and
the prestation is the giving of a particular car and the effect is the
extinguishment of the obligation when the time expire, then once
Mr. X becomes the president prior to 1998 or on 1998, the obligor
has to give the car. If Mr. X does become president on or before 1998,
then the car should be given. The same situation applies if there is
doubt that the event will occur in the given time. Hence, in the same
example, if Mr. X dies before he even files his candidacy, it is clear
that his becoming president will not happen anymore on or before
1988. This will immediately extinguish the obligation to give the car.
Article 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)
This article deals with the effectivity of an obligation in case
the condition does not happen at a particular time. Again, if the
condition is the election of Mr. X as president on or before 1998 and
the prestation is the giving of a particular car and the effect is the
effectivity of the obligation when the condition does not happen, then
once Mr. X does not become the president prior to 1998 or on 1998,
the obligor has to give the car. If Mr. X becomes president on or before
1998, then the car should not be given. The same situation applies if
the event will not occur in the given time. Hence, in the same example,
if Mr. X dies before he even files his candidacy, it is clear that his
becoming president will not happen anymore on or before 1998. This
will immediately give rise to the obligation to give the car.
The second paragraph talks of a condition which has no time
fixed. For example, the condition is simply the non-election of Mr.
X. If the law provides that elections are to be held on August 1998
and August 1998 passes without Mr. X being elected, the condition
is deemed fulfilled.
art. 1186
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
115
Article 1186. The condition shall be deemed fulfilled when
the obligor voluntarily prevents its fulfillment. (1119)
The good faith-obligation of the parties includes an implied term
on the part of the said parties not to impede, hinder, obtruct or prevent
the fulfillment of the obligation.32 In the event that these preventive
acts are undertaken, they constitute a breach of the contract and
therefore are unwarranted and unlawful.33 If the obligor voluntarily
prevents the fulfillment of the condition in an obligation, the law
states that the obligation shall be deemed fulfilled. This is known as
constructive fulfillment.
A conditional obligation states that the obligor will give to a
school a brand new computer if the school will donate its old computer
to charity. In the event that the obligor destroys the old computer,
the condition will be considered as having been fulfilled and he is
now bound to deliver the new computer to the school. In Tayag vs.
Court of Appeals34 where, as a condition of a contract of sale of real
property, the buyer was required to pay the balance of a particular
loan which was collateralized by the property subject of the sale so
that the said property can be delivered to him and where the vendors
prematurely paid the loan, thereby preventing the buyer to fulfill the
condition, the Supreme Court upheld the ruling of the lower court
when the latter applied Article 1186, to wit:
Insofar as the third item of the contract is concerned, it may
be recalled that respondent court applied Article 1186 of the Civil
Code on constructive fulfillment which petitioners claim should
not have been appreciated because they are the obligees while
the proviso in point speaks of the obligor. But, petitioner must
concede that in a reciprocal obligation like a contract of purchase
(Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra,
at p. 201), both parties are mutually obligors and also obligees
(4 Padilla, supra, at p. 197), and any of the contracting parties
may, upon non-fulfillment by the other privy of his part of the
prestation, rescind the contract or seek fulfillment (Article 1191,
Civil Code). In short, it is puerile for petitioners to say that they
are the only obligees under the contract since they are also bound
as obligors to respect the stipulation in permitting the private
respondent to assume the loan with the Philippine Veterans Bank
Article 562 of the 1950 Civil Code.
G.R. No. 7506, October 23, 1990, 191 SCRA 28.
38
G.R. No. 95641, September 22, 1994, 55 SCAD 478, 236 SCRA 643.
39
Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001.
40
Spouses Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001; Ocampo
36
37
116
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Text and Cases
art. 1187
which petitioners impeded when they paid the balance of said
loan. As vendors, they are supposed to execute the final deed of
sale upon full payment of the balance x x x.
Article 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 the 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)
In resolutory conditions, the fulfillment of the event extinguishes the obligation. Hence, retroactivity in this case is not relevant. However, in suspensive conditions, the efficacy of the obligation
is merely suspended or held in abeyance until the condition is
fulfilled. Article 1187 therefore applies only to obligations subject
to a suspensive condition. When the suspensive condition occurs,
the effect of a conditional obligation “to give” retroacts to the day of
the constitution of the obligation. Hence, if, on February 1996, an
obligor promises to give an obligee a specific car in the event it rains
on the first Saturday of June 1996 and it does rain on the said day,
the obligee is entitled to the accessories of the said car as of February
1996, the day the obligation has been constituted. Hence, the obligor
is duty bound to take care not only of the car but also its accessories
from the time the obligation has been constituted. In the event that
the car is chosen as a special car in a competition and wins a prize
sometime during the period beginning from the time the obligation
has been constituted up to the time the condition is fulfilled, the prize
obtained by the obligor shall belong to the said obligor. This is so
because the law also provides that, if the obligation is unilateral, the
debtor or obligor 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 is
different.
When the obligation imposes reciprocal prestations upon the
art. 1188
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
117
parties, the fruits and interests during the pendency of the condition
shall be deemed to have been mutually compensated. Hence, if Juan
promises to give a mango orchard to Pedro, on the one hand, and Pedro
promises to give Juan P50,000 and both obligations shall take effect
only if it rains on the first Saturday of June, any fruit of the mango
orchard and any interest on the money shall mutually compensate
each other. Hence, Juan will not get the interest on the money, and
Pedro will not get the fruits of the orchard once the condition is
fulfilled, even though technically their right to the fruits and interest
retroacts to the date the obligation has been constituted.
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.
Article 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)
It is always in the interest of the creditor to have the prestation
complied with for his benefit. Non-compliance may cause him serious
damage. Hence, to prevent this eventuality, the law allows the creditor
to protect his interest even if the condition in a conditional obligation
has not yet been fulfilled. Thus, a creditor can file an injunction suit
to stop the debtor from alienating his property which is supposed to
be given to the creditor once a particular condition is fulfilled. On
the other hand, if, prior to the happening of the event constituting
the suspensive condition, the debtor, by mistake, pays the creditor,
the debtor can recover because the obligation is not yet due and
demandable. Indeed, the condition may never even be fulfilled and
the debtor would never have been liable after all.
Article 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,
118
ObligatiOns and COntraCts
Text and Cases
art. 1189
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)
Prior to the fulfillment of the suspensive condition, anything
could happen to the object of the prestation. For example, the object
may be lost. The law importantly provides 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. Hence, if during
the pendency of the suspensive condition, the car which is the object
of the prestation is hit by a bomb and gets totally destroyed, it can
be considered as having perished. If the car has been discovered to
have historical value and has been retrieved by the government as
a national treasure and the government has prohibited the sale of
the car, then it goes out of commerce. If the car is transported from
Mindanao to Luzon by ship, and the ship has been lost at sea and it
cannot be found, it may be said to have disappeared in such a way
that its existence is unknown or it cannot be recovered.
If the thing is lost, the existence or extinguishment of the
obligation depends on whether or not the loss occurred due to the
fault of the debtor. If the thing is lost without the fault of the debtor,
the obligation is extinguished unless of course the thing to be given is
not determinate but generic. If the determinate thing is lost through
the fault of the debtor, he shall be liable for damages.
While the suspensive condition is yet unfulfilled, the obligation
has not yet arisen and the determinate thing is usually still in the
possession or control of the debtor. While in the possession of the
debtor, the thing may deteriorate. If it deteriorates without the fault
art. 1189
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
119
of the debtor, any impairment is to be borne by the creditor.
If the deterioration is caused by the debtor, the creditor can
choose between rescission of the obligation and its fulfillment, with
damages in either case. The option is given to the creditor because,
while the object might have deteriorated, it might still be useful to
the creditor and therefore there is no need to rescind the contract. The
creditor could still ask for fulfillment but he should be paid damages
on account of the deterioration caused by the debtor. However, if the
object has deteriorated so badly that the creditor does not see any
more use for the object, he could choose to rescind the obligation plus
damages. Hence, if during the pendency of the suspensive condition,
the debtor uses the car, which he is supposed to give to the creditor
upon the happening of a certain condition, in a car-racing event
seriously causing its deterioration, the creditor can seek rescission
of the obligation and damages in the amount equivalent to the
deterioration of the car. If, however, the creditor believes that he
can still make use of the car, the creditor can seek fulfillment with
damages.
It must be emphasized, however, that the choice of the remedies
to be pursued, whether rescission plus damages or fulfillment
plus damages, belongs to the creditor regardless of the degree of
deterioration caused by the debtor. Thus even if the object, through
the fault of the debtor, deteriorated but the same can still be used,
the creditor can still choose rescission plus damages. The debtor
cannot say that the remedy chosen by the creditor should have been
fulfillment plus damages because the deterioration did not fully
diminish the usefulness of the object. The reverse situation is also
true, if the object deteriorated so badly seriously diminishing the
usefulness of the car, the creditor can still choose fulfillment plus
damages and not rescission plus damages.
However, if the deterioration caused by the debtor is so grave
that the object goes out of commerce, it can be considered lost and
the creditor can seek damages from the debtor.
If the thing is improved by its nature, or by time, the improvement
shall inure to the benefit of the creditor. This is so because once the
condition is fulfilled, the effects of the conditional obligation shall
retroact to the day of the constitution of the obligation.35 If it is
improved at the expense of the debtor, his only right would be that
of a usufructuary. A usufruct gives a right to enjoy the property of
another with the obligation of preserving its form and substance
unless the title constituting it or the law otherwise provides.36
120
ObligatiOns and COntraCts
Text and Cases
art. 1190
Article 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 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 extinguishment of the obligation. (1123)
Once a resolutory condition is fulfilled, the obligation is
extinguished. There must be restitution of what has been obtained.
Hence, if the conditional obligation states that the obligor shall
continue having possession over a particular car provided that he will
not bet in the lottery and the obligor bets in the lottery, the right of
the obligor to the possession of the car is extinguished. At the same
time the obligation of the obligee to allow the obligor the possession
of the car is extinguished also. The obligor should return the car.
While the resolutory condition has not yet been fulfilled and the car
is destroyed without the fault of the obligor, the obligation to return
is extinguished. If the car is lost through the fault of the debtor, he
shall be liable for damages. If the car deteriorates without the fault
of the obligor, the impairment is to be borne by the creditor. If the
car deteriorates through the fault of the obligor, the obligee may
choose between the rescission of the obligation and its ful-fillment,
with indemnity for damages in either case. If the car is im-proved by
its nature, or by time, the improvement shall inure to the benefit of
the obligee. Lastly, if the car improves at the expense of the debtor,
he shall have no other right than that granted to the usufructuary.
In obligations to do and not to do, the court shall determine the
effect of the extinguishment of the obligation.
Article 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.
vs. Court of Appeals, 52 SCAD 610, 233 SCRA 551.
41
Deiparine, Jr. vs. Court of Appeals, G.R. No. 96643, April 23, 1993, 221 SCRA
art. 1191
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
121
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. (1124)
In Songcua vs. IAC, the Supreme Court37 said that, 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 to
rescind the contract. In the case of Areola vs. Court of Appeals,38 the
Supreme Court described the nature of a reciprocal obligation to wit:
Reciprocal obligations are those which arise from the same
cause and in which each party is both a debtor and a creditor of
the other, such that the obligation of one is dependent upon the
obligation of the other.
Hence, in a contract of sale for example, the non-payment of the
balance of the purchase price by the buyer violates the very essence
of reciprocity in the contract of sale, a violation that conse-quently
gives rise to the seller’s right to rescind the contract in accordance
with law.39
Under Article 1191, in case of non-compliance, the aggrieved
party has an implied power to rescind or, more properly, to resolve the
contract. More appropriately, the termination of the obligation under
Article 1191 is resolution and not rescission. Nevertheless, resolution
and rescission under this article have been used inter-changeably.
To rescind does not merely mean to terminate a contract and to
release the parties from further obligations to each other, but, more
importantly, it means to abrogate the contract from the beginning
and to restore the parties to their relative positions as if no contract
has been made. As such, to rescind in a significant sense “is to declare
the contract void at its inception and to put an end to it as though it
never was.”40
Rescission or resolution under Article 1191 is predicated on the
breach of faith by any of the parties to a contract that violates the
503; Universal Food Corporation vs. Court of Appeals, G.R. No. L-29155, May 13, 1970,
33 SCRA 1.
122
ObligatiOns and COntraCts
Text and Cases
art. 1191
reciprocity between them.41 There could be no rescission if there is no
breach of faith. Thus, if, after the properties subject of the contract
were already transferred to the buyer, the said buyer cancelled the
deeds of sale on the valid ground that there was a negation of the
cause of the contract as the properties purchased turned out to be
unsuitable for the purpose for which they were acquired without
the fault of the seller, the cancellation made by the buyer was not
rescission or resolution under Article 1191 as there was clearly no
breach of faith on the part of any party. The seller dutifully complied
with his obligation to deliver the properties. Neither did the buyer
suffer injury directly as a result of such delivery by the seller. It was
simply the negation of the cause of the contract that prompted the
cancellation of the same.42
The power to rescind however is not absolute and must be
based on a serious or substantial breach of an obligation as to defeat
the object of the parties in making the agreement.43 A mere casual
breach does not justify rescission of the contract.44 Thus in Philippine
Amusement Enterprises, Inc. vs. Natividad45 where the lessee of an
automatic phonograph, known as jukebox, sought the rescission of
the contract of lease of the said machine on the ground, among others,
that “there were times” when the machine did not work, the Supreme
Court rejected the rescission stating:
Rescission will be ordered only where the breach complained
of is substantial as to defeat the object of the parties in entering
into the agreement. It will not be granted where the breach is
slight or casual. The defendants asked the plaintiff to retrieve
its phonograph, claiming that there were times when the coins
dropped into the slot would get stuck, resulting in its failure to
play the desired music. But apart from this bare statement, there
is nothing in the evidence which shows the frequency with which
the jukebox failed to function properly. The expression “there are
times” connotes occasional failure of the phonograph to operate,
not frequent enough to render it unsuitable and unserviceable.
As a matter of fact, there is not even a claim that, as a result
of unsatisfactory performance thereof, the income therefrom
dropped to such a level that the defendants could not even pay
the plaintiff its guaranteed share of P50 a week. On the contrary,
42
Uy vs. Court of Appeals, G.R. No. 120465, September 9, 1999, 112 SCAD 63,
314 SCRA 69.
43
Massive Construction, Inc., et al. vs. Intermediate Appellate Court, G.R. Nos.
70310-11, June 1, 1993, 223 SCRA 1; Philippine Amusement Enterprises, Inc. vs.
Natividad, 21 SCRA 284 (1967); Tan vs. Court of Appeals, 175 SCRA 656 (1989).
44
Franco-Jacinto vs. Kaparaz, G.R. No. L-81158, May 22, 1992, 209 SCRA 246.
45
G.R. No. L-21876, September 29, 1967, 21 SCRA 284.
46
G.R. No. 80479, July 28, 1989, 175 SCRA 656.
47
Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001.
art. 1191
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
123
the evidence (Stipulation of Facts, Annexes, J, K, L, M, N and O)
shows that, during the period complained of, the operation of the
jukebox was quite profitable to both parties.
In Tan vs. Court of Appeals,46 where the seller failed to clear the
lot for a few days and failed to cause the cancellation of the mortgage
lien on the property on the date set for the execution of the deed of
sale, despite having already done everything to effect the cancellation,
and where it was the bank which delayed the cancel-lation (which
cancellation nevertheless was effected 12 days after the supposed
date of execution), and where there was also a failure to obtain the
approval of the Secretary of Natural Resources on time, the Supreme
Court rejected the prayer for rescission based on the said failures by
stating:
A thorough review of the records clearly indicates that
private respondents had substantially complied with their
undertaking of clearing the title to the property which has a total
land area of 886 square meters. It must be pointed out that the
subject lot consists of private land, with an area of 548 square
meters, covered by TCT No. T-13826 and of a portion of the public
land which has been awarded to the private respondents under
Townsite Sales Application No. 7-676-A. While TCT No. T-13826
was subject to a mortgage in favor of DBP. Private respondents,
upon receipt of the earnest money paid by petitioner, utilized the
same to settle its obligations with DBP thus enabling them to
secure a cancellation of the existing mortgage, which was duly
noted in the title to the property [See Original Records, p. 94].
It is a settled principle of law that rescission will not be
permitted for a slight or casual breach of the contract but only
for such breaches as are so substantial and fundamental as to
defeat the object of the parties in making the agreement [Universal Food Corporation vs. Court of Appeals, G.R. No. L-29155,
May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises,
Inc. vs. Natividad, supra; Roque vs. Lapuz, G.R. No. L-32811,
March 31, 1990, 96 SCRA 741]. A court, in determining whether
rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is
substantial depends upon the attendant circumstances [Corpus
vs. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January 17,
1968, 22 SCRA 104].
Sonf Fo & Co. vs. Hawaiian-Philippines Co., 47 Phil. 821.
Zepeda vs. Court of Appeals, 216 SCRA 293.
50
Tan vs. Court of Appeals, G.R. No. L-80479, July 28, 1989, 175 SCRA 656.
51
Froilan vs. Pan Oriental Shipping Co., G.R. No. L-11897, October 31, 1964.
52
Areola vs. Court of Appeals, G.R. No. 95641, September 22, 1994, 55 SCAD
478, 236 SCRA 643.
48
49
124
ObligatiOns and COntraCts
Text and Cases
art. 1191
In this case, as to the lot covered by TCT No. T-13826, it is
true that as of June 25, 1984, the date set for the execution of the
final deed of sale, the mortgage lien in favor of DBP annotated in
the title has not yet been cancelled as it took DBP some time in
processing the papers relative thereto. However, just a few days
after, or on July 12, 1984, the cancellation of the DBP mortgage
was entered by the Register of Deeds and duly noted on the
title. Time not being of the essence in the agreement, a slight
delay on the part of the private respondents in the performance
of their obligation, is not sufficient ground for the resolution of
the agreement [Biando and Espanto vs. Embestro and Bardaje,
105 Phil. 1164 (1959)], more so when the delay was not totally
attributable to them.
As to the notice of levy and execution annotated on TCT No.
T-13826, a request to lift the same had already been filed with the
Register of Deeds and duly noted on the title [Original Records,
p. 95]. The fact that said notice had not yet been cancelled by
the Register of Deeds as of June 25, 1984 cannot prejudice the
sellers who must be deemed to have substantially complied with
their obligation. The rule in this jurisdiction is that where the
fulfillment of the condition (in a conditional obligation) does not
depend on the will of the obligor, but on that of a third person,
the obligor’s part of the contract is com-plied with if he does all
that is in his power and it then becomes incumbent upon the
other contracting party to comply with the terms of the contract
[Article 1182, Civil Code; Smith Bell and Co. vs. Sotelo Matti, 44
Phil. 874 (1922)].
On the other hand, private respondents’ interest in the
public land used as a driveway can likewise be conveyed to
petitioner although no title has yet been issued in the name of
Visitacion Singson. Such portion of the public land has long been
awarded to Singson in 1972 and payment of the purchase price
thereof has already been completed as of July 17, 1984. The fact
that the consent of the Secretary of Agriculture and Natural
Resources to the sale of the property to petitioner has not yet
been secured cannot be considered a substantial breach of private
respondents’ obligation under the contract of sale.
In Juanico and Barredo vs. American Land Commercial
Co., Inc., et al. [97 Phil. 221 (1955)], this Court had ruled that
the prior approval of the Secretary of Agriculture and Natural
Resources is required only in cases of sale and encumbrance of
the public land during the pendency of the application by the
purchaser and before his compliance with the requirements of
the law. x x x
Since, the land in question had already been awarded to
art. 1191
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
125
private respondents since 1972 and all the requirements of the law
for the purchase of public land were subsequently complied with,
private respondents, as owners of said property, can properly
convey title thereto to petitioner.
In Velarde vs. Court of Appeals,47 the Supreme Court rejected the
contention of the debtor that his slight delay of one month in paying
the obligation was merely a casual breach. The Supreme Court said
that while a delay of 20 days,48 one week49 or even a month may indeed
be casual provided that time was not of the essence, the totality of the
whole case showed that, aside from the delay, the debtor, in showing
his willingness to pay the obligation, imposed upon the creditor preconditions for the payment. The Supreme Court said that, in effect,
the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale.
These pre-conditions left the creditor with no other legal option but
to validly have the contract rescinded. The rescission therefore was
proper.
This implied power to rescind can only be enforced through court
action,50 in the absence of stipulation to the contrary.51 The decision
of the court is the revocatory act of rescission.
The remedy in case of non-compliance with the obligation is
either fulfillment or rescission, with the payment of damages in
either case. In Areola vs. Court of Appeals52 where the insurance
company contended that the insured, in successfully seeking the
enforcement of an erroneously canceled insurance policy by seeking
the rein-statement of the same, in effect chose the fulfillment of the
obligation, thereby barring him from further seeking damages, the
Supreme Court ruled thus:
Under the law governing reciprocal obligations, particularly the second paragraph of Article 1191, the injured
party, petitioner-insured in this case, is given a choice between
fulfillment or rescission of the obligation in case one of the
obligors, such as respondent insurance company, fails to comply
with what is incumbent upon him. However, said article entitles
the injured party to payment of damages, regardless of whether
he demands fulfillment or rescission of the obligation. Untenable
then is respondent insurance company’s argument, namely that
reinstatement being equivalent to fulfillment of its obligation
divests petitioner-insured of a rightful claim for payment of
G.R. No. L-39378, August 28, 1984, 131 SCRA 439.
G.R. No. L-39778, September 13, 1985, 138 SCRA 536.
55
De Luna vs. Abrigo, G.R. No. 57455, January 18, 1990, 181 SCRA 150; Froilan
53
54
126
ObligatiOns and COntraCts
Text and Cases
art. 1191
damages. Such a claim finds no support in our laws on obligations and contracts.
The injured party may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible. In Ayson
Simon vs. Adamos,53 the buyer of certain lots filed a case against
the seller for delivery of the same. However, a case was previously
filed by the heirs of the deceased original owner against the seller
for delivery of the same properties to them. The heirs won and the
properties were reconveyed to them. In the other case, the buyer also
won against the seller. However, the delivery of the properties to the
winning buyer had become impossible considering that the properties
were already validly in the possession of the heirs who won in the
previous case. Hence, the buyer filed another suit for rescission and
damages against the seller. The Supreme Court held that the course
of action undertaken by the buyer in filing a rescission case with
damages against the seller was correct as fulfillment of the contract
had become an impossibility in accordance with Article 1191 of the
Civil Code. In Siy vs. Court of Appeals,54 the Supreme Court said that
the law however does not authorize the injured party to rescind the
obligation and at the same time seek its partial fulfillment under
the guise of recovering damages. Thus, in the Siy case, the Supreme
Court disallowed the recovery of penalty charges stipulated in the
contract which was sought to be rescinded.
The power to rescind need not be implied in all cases. It can be
expressly stipulated in the contract. The law does not prohibit parties
from entering into an agreement providing that the violation of the
terms of the contract shall cause the cancellation, termination or
rescission thereof even without court intervention.55 The stipulation
is in the nature of a facultative resolutory condition which in many
cases has been upheld by the courts.56 Also, notice must always be
given to the defaulter before rescission can take effect.57
Also in University of the Philippines vs. De Los Angeles,58 the
Supreme Court made a further explanation of the consequences of
this express unilateral extra-judicial stipulation to rescind, to wit:
Of course, it must be understood that the act of a party
in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known
vs. Pan Oriental Shipping, et al., L-11879, October 31, 1964, 12 SCRA 276; Torralba
vs. De los Angeles, 96 SCRA 69; Luzon Brokerage Co., Inc. vs. Maritime Building Co.,
43 SCRA 93, 86 SCRA 305; Lopez vs. Commissioner of Customs, 37 SCRA 327; UP
vs. De los Angeles, 35 SCRA 102; Ponce Enrile vs. Court of Appeals, 29 SCRA 504;
Taylor vs. Uy Tieng Piao, 43 Phil. 873.
art. 1191
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
127
to the other and is always provisional, being ever subject to
scrutiny and review by the proper court. If the other party denies
that rescission is justified, it is free to resort to judicial action in
its own behalf, and bring the matter to court. Then, should the
court, after due hearing, decide that the resolution of the contract
was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed,
and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated
may consider it resolved or rescinded, and act accordingly,
without previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding court that
will conclusively and finally settle whether the action taken was
or was not correct in law. But the law definitely does not require
that the contracting party who believes itself injured must first
file suit and wait for a judgment before taking extra-judicial
steps to protect its interest. Otherwise, the party injured by the
other’s breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final
judgment of rescission is rendered when the law itself requires
that he should exercise due diligence to minimize its own damages
(Civil Code, Article 2203).
In De Luna vs. Abrigo,59 the Supreme Court further said that
judicial intervention is necessary not for purposes of obtaining a
judicial determination rescinding a contract already deemed rescinded
by virtue of an agreement providing for rescission even without
judicial intervention, but in order to determine whether or not the
rescission was proper. Otherwise stated, if there is a stipulation
granting the right of rescission on the part of the aggrieved party
and he or she validly rescinds the contract pursuant to such express
grant, any court decision adjudging the propriety
of the rescission
extra-judicially made is not the revocatory act
of rescission
but merely declaratory or an affirmation of the revoca-tion.
In case of an implied power of rescission which has been
Ponce Enrile vs. Court of Appeals, 29 SCRA 504.
Jison vs. Court of Appeals, G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
58
G.R. No. L-28602, September 29, 1970, 35 SCRA 102.
59
G.R. No. 57455, January 18, 1990, 181 SCRA 150.
60
G.R. No. L-37976, July 16, 1985, 137 SCRA 563.
61
G.R. No. L-112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511.
62
Co vs. Court of Appeals, G.R. No. 112330, August 17, 1999, 110 SCAD 886,
312 SCRA 528.
63
G.R. No. 120820, August 1, 2000, 131 SCAD 68, 337 SCRA 67.
64
Palay, Inc. vs. Clave, G.R. No. L-56076, September 21, 1983, 124 SCRA 638.
65
G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
56
57
128
ObligatiOns and COntraCts
Text and Cases
art. 1191
exercised, the court shall decree the rescission claimed, unless there
be just cause authorizing the fixing of a period. In Roman vs. Court
of Appeals,60 the contract stipulated that the buyer shall pay the
purchase price within 60 days from receipt of the notice that the
properties have already been titled. Notice was accordingly sent on
October 11, 1958. Payment however was not made. An action was
filed for rescission. The buyer claimed that he was not given notice
and prayed for a period within which to pay. The Supreme Court did
not allow the granting of the period by saying thus:
Moreover, there would be no “just cause,” a requirement
in Article 1191, for fixing a period. After institution of the action
against him, what Roman should have done, which he did not do,
was to pay Sarangaya within 60 days after service of summons.
It would not have been just to grant him an extension of more
than six (6) years, from October 11, 1958 to January 9, 1965, to
comply with his 60-day obligation.
Also in Central Philippine University vs. Court of Appeals61 where
the donee failed to comply with the resolutory conditions provided
in the deed of donation, the Supreme Court ruled that there was
no just cause for the fixing of a period considering that more than
a reasonable period of fifty (50) years had already been allowed the
donee to avail of the opportunity to comply with the condition even
if the conditions were burdensome. According to the Supreme Court,
the fixing of a period would be a mere technicality and formality and
would serve no purpose than to delay or lead to an unnecessary and
expensive multiplication of suits.
In case a valid rescission is made, it creates an obligation
to return the things which were the object of the contract. Thus,
rescission can only be made when the one who demands rescission
can return whatever he or she may be obliged to restore. Rescission is
designed to restore the parties in their former situations. If however,
one of the parties has already paid the price pursuant to the contract
but has not yet received what should be delivered to him under the
contract, he has nothing to restore but is entitled to the return of what
he or she has paid, for such is the consequence of rescission which is
to restore the parties to their former position.62
If the contract involved is a contract to sell and not a contract
of sale and the seller is given the unilateral right to terminate
the contract in case of non-payment of the purchase price, the
66
G.R. Nos. L-17859-9, July 18, 1962, 5 SCRA 581; Price, Inc. vs. Court of Appeals,
G.R. Nos. L-17865-6, July 18, 1962.
art. 1191
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
129
termination is not a rescission under Article 1191 but an enforcement
of the contract. In Santos vs. Court of Appeals,63 the Supreme Court
explained the difference thus,
In a contract to sell, title remains with the vendor and does
not pass on to the vendee until the purchase price is paid in full.
Thus, in a contract to sell, the payment of the purchase price is
a positive suspensive condition. Failure to pay the price agreed
upon is not a mere breach, casual or serious, but a situation that
prevents the obligation of the vendor to convey title from acquiring
an obligatory force. This is entirely different from the situation in
a contract of sale, where non-payment of the price is a negative
resolutory condition. The effects in law are not identical. In a
contract of sale, the vendor had lost ownership of the thing sold
and cannot recover it, unless the contract of sale is rescinded
and set aside. In a contract to sell, however, the vendor remains
the owner for as long as the vendee has not complied fully with
the condition of paying the purchase price. If the vendor, should
eject the vendee for failure to meet the condition precedent, he
is enforcing the contract and not rescinding it.
Also, in the case of Palay, Inc. vs. Clave64 where the parties
entered into a contract to sell a parcel of land where it was expressly
stipulated that the seller “shall have the right to declare this contract
canceled and of no effect without notice” to the buyer in case the
latter fails to pay his installment, and where the seller did indeed
cancel the contract without notice upon failure of the buyer to pay
the installment, the Supreme Court invalidated the cancellation on
the ground that there was no notice sent to the defaulter informing
him of the termination. Hence, the provision allowing cancellation
“without notice” was disregarded by the Supreme Court. With respect
to the importance of making a notice of cancellation regarding real
estate sold in installment, the Supreme Court in Jison vs. Court of
Appeals65 said:
The indispensability of notice of cancellation to the buyer
was to be later underscored in Republic Act No. 6552 entitled “An
Act to Provide Protection to Buyers of Real Estate on Installment
Payments” which took effect on September 14, 1972, when it
specifically provided:
Sec. 3(b) x x x the actual cancellation of the contract shall
130
ObligatiOns and COntraCts
Text and Cases
art. 1192
take place thirty days from receipt by 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 surrender value
to the buyer.
Article 1192. In case both parties have committed a breach
of the obligation, the liability of the first 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)
If the violation can be traced to the parties and both of them
committed the breach, this article penalizes the first violator only
if, in fact or by evidence, such first violator can be determined. The
subsequent violator will not be held liable. However the liability
of the first violator shall be equitably tempered by the court as the
injury to the other party-violator might not have been so great had
it not for the subsequent infraction of such other party-violator.
The law however states that if it cannot be determined which of the
parties first violated the contract, the obligation shall be deemed
extinguished, and each shall bear his own damages. In Camus vs.
Price, Inc.66 where, on the one hand, the lessor did not comply with
his obligation to increase the elevation of the low portion of the lot
and erect thereon a concrete wall topped with barbed wire and, on
the other hand, the lessee did not comply with his obligation to cover
the building with insurance, and where it cannot be determined with
definiteness who of the parties committed the first infraction of the
terms of the contract, the Supreme Court said:
x x x Under the circumstances, the conclusion of the Court
of Appeals, that the parties are actually in pari delicto, must be
sustained, and the contract deemed extinguished, with the parties
suffering their respective losses.
art. 1192
ObligatiOns
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
131
132
ObligatiOns and COntraCts
Text and Cases
SECTION 2. — Obligations with a Period
Article 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)
A period designates a particular time which is certain to happen
as the moment when the obligation will either be effective or be
extinguished. If it gives rise to the effectivity of the obligation, it
is a suspensive period. If it extinguishes, it is a resolutory one. An
example of an obligation with a suspensive period is, if on December
1, 1997, one promises to sing at another’s nightclub starting March
1, 1998. While the obligation is constituted at a much earlier date, its
effectivity only commences on a certain future period of time, namely
on March 1, 1998. In Gaite vs. Fonacier,1 where the contract provided
that the balance of the purchase price “will be paid from and out of
the first letter of credit covering the first shipment of iron ores and/
or the first amount derived from the local sale of iron ore made by
the Larap Mines & Smelting Co., Inc., its assigns, administrators, or
successors-in-interest,” the Supreme Court ruled that the stipulation
is not a suspensive condition but a suspensive period by saying:
The words of the contract express no contingency in the
buyer’s obligation to pay: “The balance of Sixty-Five Thousand
Pesos (P65,000) will be paid out of the first letter of credit covering
the first shipment of iron ore x x x etc. There is no uncertainty
that the payment will have to be made sooner or later; what is
G.R. No. L-11827, July 31, 1961, 2 SCRA 831.
1
132
arts. 1194-1195
ObligatiOns
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
133
undetermined is merely the exact date at which it will be made.
By the very terms of the contract, therefore, the existence of the
obligation to pay is recognized; only its maturity or demandability
is deferred.
On the other hand if one promises to sing at another’s nightclub
as soon as the contract is signed on December 1, 1997 up to March
1, 1998, a resolutory period exists because the obligation to sing
can be demanded at once by the obligee but the obligation shall be
extinguished on a day certain which is on March 1, 1998.
A period may refer to a 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,
it is a condition. Thus, if an obligor commits to deliver imme-diately
a particular special candy to his sister’s 6-year-old son when the said
son’s temporary front tooth naturally falls off, it is not
known
when the temporary tooth will fall-off or be removed but it is certain
to happen. In this case, the “condition” refers to a period. However,
if the stipulation is that the candy will be given when he passes the
entrance examination at the Ateneo Grade School, a condition exists
because the event is not certain to happen, hence, it is to be governed
by the rules on conditional obligations provided by the Civil Code.
Article 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)
Article 1189 provides the rules in case there is loss, deterioration
or improvement of the thing which is the object of the prestation
during the pendency of the condition suspending the efficacy of an
obligation to give. The said rules apply also to obligations subject to
a suspensive period and to a resolutory period.
Article 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)
In a suspensive period, the obligation to give or to pay will not
take effect upon the arrival of the period. Hence, the creditor has no
right to obtain the thing or to be paid until the arrival of the period
unless the debtor and the creditor, with full knowledge of the period,
decide to give and accept the thing to be delivered or the payment.
134
ObligatiOns and COntraCts
Text and Cases
art. 1196
Otherwise, the debtor has the right to recover what he has given or
paid with fruits and interest. Hence, if John, on October 1, 1997,
promises to deliver to Jane a Mango orchard on December 1, 1997,
and, on November 1, 1997, John delivers the Mango orchard believing
that it is due and demandable on that date, he can recover what he
has delivered together with fruits and interest. Prior to December
1, 1997, Jane obviously has no right to possess the Mango orchard.
However, if Jane is in the possession of the mango orchard by December 1, 1997, John can only recover the fruits and interest accruing
from the time he delivered the property up to December 1, 1997.
Article 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)
In Fernandez vs. Court of Appeals2 involving a contract of lease
which was clearly a reciprocal contract, the Supreme Court said:
the period of the lease must be deemed to have been agreed upon
for the benefit of both parties, absent any language showing that
the term was deliberately set for the benefit of the lessee or lessor
alone. We are not aware of any presumption in law that the term
of the lease is designed for the benefit of the lessee alone.
In Abesamis vs. Woodcraft Works, Inc.3 where the contract
provided that the appellant shall make the shipment “before the
end of July, but will not commence earlier than April with the option
to make partial shipment depending on the availability of logs and
vessels,” the Supreme Court, in deciding who was to bear the loss
as a result of the typhoon in a contract for the delivery of logs, ruled
that the quoted provision provides a period and stated:
appellee maintains that due to the failure of appellant to send a
vessel to Dolores, Samar, the storm on May 5, 1951 swept away
almost all the logs then awaiting shipment, amounting to 410,000
board feet, valued at P73,537.77. On this point it should be noted
that under the contract, shipment was to be made before the end
of July 1951, but not to commence earlier than April of the same
year. The obligation between the parties was a reciprocal one,
appellant to furnish the vessel and appellee to furnish the logs. It
G.R. No. 80231, October 18, 1988, 166 SCRA 577.
G.R. No. 18916, November 28, 1969, 30 SCRA 372.
2
3
art. 1197
ObligatiOns
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
135
was also an obligation with a term, which obviously was intended
for the benefit of both parties, the period having been agreed upon
in order to avoid the stormy weather in Dolores, Samar, during
the months of January to March. The obligation being reciprocal
and with a period, neither party could demand performance nor
incur in delay before the expiration of the period. Consequently,
when the typhoon struck on May 5, 1951 there was yet no delay
on the part of appellant, and the corresponding loss must be
shouldered by the appellee.
However, the benefit of the period may be waived by the person
in whose favor it was constituted. Hence, in the Abesamis case where
delivery of some portions of the shipment was promised to be made
on July 31, 1951, the obligor informed the obligee that he will make
an earlier delivery of these subject portions of the shipment on July
25, 1951. The obligor failed to make the delivery on the said earlier
date and he was made to bear the loss for the portion of the shipment
to be made on the said date.4
Article 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)
In Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development
Co., Ltd.5 where a two-year period fixed by the lower court for the
obligor to fulfill its obligation was struck down as arbitrary, the
Supreme Court said:
It must be recalled that Article 1197 of the Civil Code
involves a two-step process. The Court must first determine that
“the obligation does not fix a period” (or that the period is made
to depend upon the will of the debtor),” but from the nature and
the circumstances it can be inferred that a period was intended”
(Article 1197, pars. 1 and 2). This preliminary point settled, the
Court must then proceed to the second step, and decide what
Id., Pages 378-379.
G.R. No. L-22558, May 31, 1967, 20 SCRA 330.
4
5
136
ObligatiOns and COntraCts
Text and Cases
art. 1197
period was “probably contemplated by the parties (Do., par. 3).
So that, ultimately the Court can not fix a period merely because
in its opinion it is or should be reasonable, but must set the time
that the parties are shown to have intended. As the record stands,
the trial court appears to have pulled the two-year period set in
its decision out of thin air, since no circumstances are mentioned
to support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract
shows that the parties were fully aware that the land described
therein was occupied by squatters, because the fact is expressly
mentioned therein (Rec. on Appeals, Petitioner’s Appendix B,
pp. 12-13). As the parties must have known that they could
not take the law into their own hands, but must resort to legal
processes in evicting the squatters, they must have realized
that the duration of the suits to be brought would not be under
their control nor could the same be determined in advance. The
conclusion is thus forced that the parties must have intended to
defer the performance of the obligations under the contract until
the squatters were duly evicted, as contended by the petitioner
Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that
it would render the date of performance indefinite. Yet, the
circumstances admit no other reasonable view; and this very
indefiniteness is what explains why the agreement did not specify
any exact periods or dates of performance.
It follows that there is no justification in law for setting the
date of performance at any other time than that of the eviction
of the squatters occupying the land in question; and in not so
doing, both the trial court and the Court of Appeals committed
reversible error. It is not denied that the case against one of the
squatters, Abundo, was still pending in the Court of Appeals
when its decision in this case was rendered.
In Radiowealth Finance Company vs. Del Rosario,6 it was
contended by the debtors-respondents that, since the creditorpetitioner allowed them to apply their promotion services for its
financing business as payment of the promissory note, the date for
the payment of installment in the promissory note was left in blank,
thereby signifying that, before their debt was to become due, the court
should first fix a period of payment considering that the pay-ment
was dependent upon the sole will of the debtors-respondents. The
Supreme Court rejected this contention and said:
G.R. No. 138739, July 6, 2000, 129 SCAD 527, 335 SCRA 288.
6
art. 1197
ObligatiOns
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
137
This contention is untenable. The act of leaving blank the
due date of the first installment did not necessarily mean that the
debtors were allowed to pay as and when they could. If this was
the intention of the parties, they should have so indicated in the
Promissory Note. However, it did not reflect any such intention.
On the contrary, the Note expressly stipulated that the
debt should be amortized monthly in installments of P11,579 for
twelve consecutive months. While the specific date on
which
each installment would be due was left blank, the Note clearly
provided that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause
and a late payment penalty, both of which showed the intention
of the parties that the installments would be paid at a definite
date. Had they intended that the debtors could pay as and
when they could, there would have been no need for these two
clauses. Verily, the contemporaneous and subsequent acts of the
parties manifest their intention and knowledge that the monthly
installments would be due and demandable each month. In this
case, the conclusion that the installments had already become due
and demandable is bolstered by the fact that respondent started
paying installments on the Promissory Note even if the checks
were dishonored by their drawee bank. We are convinced neither
by their avowals that the obligation had not yet matured nor by
their claim that a period for payment should be fixed by a court.
Convincingly, the petitioner has established not only a cause
of action against the respondents, but also a due and demandable
obligation. The obligation of the respondents had matured and
they clearly defaulted when their checks bounced. Per acceleration
clause, the whole debt became due one month (April 2, 1991)
after the date of the Note because the check representing their
installment bounced.
The very last sentence of Article 1197 states that “once fixed by
the courts, the period cannot be changed by them.” The objective of
this is precisely to put a sense of definiteness in an otherwise highly
ambiguous situation and to finally put the parties in a position where
their obligations are predictable.
Article 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;
138
ObligatiOns and COntraCts
Text and Cases
art. 1198
(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;
(4)
When the debtor violates any undertaking, in
consideration of which the creditor agreed to the
period;
(5)
When the debtor attempts to abscond. (1129a)
The law provides five instances when the debtor loses every
right to the period whether the period has been contracted for the
benefit of the debtor alone or of both the debtor and the creditor. The
first one is when after the obligation has been contracted, he becomes
insolvent, unless he gives a guaranty or security for the debt. Hence,
if a debtor has been given up to January 8, 1996 to pay his obligation
and he becomes insolvent, the creditor need not wait up to January
8, 1996 to demand payment. However, if the debtor has asked a third
person to guarantee his debt or if the debtor puts up his house as
collateral for the debt, he will again have the benefit of the period.
Insolvency here need not be judicially declared. By putting up the
guarantee or the collateral, the interest of the creditor is safeguarded
as he will have other means to satisfy his claim.
The second instance is when he does not furnish the creditor
the guaranties or securities which he has promised. The guaranties
and securities will further protect the interest of the creditor. Usually,
in the event the debtor fails to pay the creditor and the latter has
exhausted all avenues to satisfy his claim against the debtor without
any favorable result, the creditor can turn to the guarantor for
payment. If the guarantor has committed himself solidarily, the
creditor can even go against the guarantor immediately without
need of going against the principal debtor. Securities can take
the form of real-estate mortgages or pledges. Hence, if the loan is
collateralized through the mortgage of a house and the debtor does
not pay, the mortgage will be foreclosed, and the house will be sold
in a public bidding and a sufficient amount of the proceeds to satisfy
the indebtedness of the debtor will go to the creditor.
The third instance is when, by his own acts, the debtor impairs
said guaranties or securities after their establishment, and when
through a fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory. In Gaite vs. Fonacier7 where
the payment of the obligation was secured by two surety bonds:
art. 1198
ObligatiOns
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
139
one coming from a mining company and some of its stockholders as
sureties and the other one from a bonding company, and where the
obligor was obliged to pay the indebtedness from the time it received
the proceeds of the sale of iron ore, the Supreme Court ruled that the
obligor in this case lost its right to the period by saying:
We agree with the court below that the appellants have
forfeited the right to compel Gaite to wait for the sale of the ore
before receiving payment of the balance of P65,000.00, because
of their failure to renew the bond of the Far Eastern Surety
Company or else replace it with an equivalent guarantee. The
expiration of the bonding company’s undertaking on December
8, 1955 substantially reduced the security of the vendor’s rights
as creditor for the unpaid P65,000.00, a security that Gaite
considered essential and upon which he had insisted when he
executed the deed of sale of the ore to Fonacier (Exhibit “A”).
xxx
Appellants’ failure to renew or extend the surety company’s
bond upon its expiration plainly impaired the securities given
to the creditor (appellee Gaite), unless immediately renewed or
replaced.
There is no merit in appellants’ argument that Gaite’s
acceptance of the surety company’s bond with full knowledge
that on its face it would automatically expire within one year
was a waiver of the renewal after the expiration date. No such
waiver could have been intended, for Gaite stood to lose and had
nothing to gain barely; and if there was any, it could be rationally
explained only if the appellants had agreed to sell the ore and pay
Gaite before the surety company’s bond expired on December 8,
1955. But in the latter case the defendants-appellants’ obligation
to pay became absolute after one year from the transfer of the
ore to Fonacier by virtue of the deed Exhibit “A.”
It must be noted that, in this third instance, the debtor loses the
benefit of the period even if the guaranties or securities disappear
through a fortuitous event unless new ones equally satisfactory are
immediately given. Hence, if the house used as collateral is hit by
lightning, the debtor will still lose the right to the period unless he
gives another house of the same quality as collateral.
The fourth instance is when the debtor violates any
undertaking, in consideration of which the creditor agreed to the
period. Thus, if the debtor persuaded the creditor to allow him to pay
his indebtedness
on March 7, 1998 instead of on January 30, 1998
7
G.R. No. L-11827, July 31, 1961, 2 SCRA 830.
and the creditor agrees because the debtor, who is a singer, promises
140
ObligatiOns and COntraCts
Text and Cases
art. 1198
the creditor that he (the debtor) will sing in his nightclub for three
consecutive nights for only half his talent fee, and the debtor fails to
sing as promised, the debtor loses his right to the period. The creditor
can immediately demand payment of the obligation.
In Allen vs. Province of Albay,8 the Supreme Court ruled that,
if through the act of the owner in a construction contract, the contractor has been or will be prevented from finishing the works on
the contractual completion date, the owner shall be deemed to have
waived the time limit or the period and the contractor is bound only
to finish the construction within a reasonable time, and if there are
liquidated damages provided for in the contract in case of delay,
a claim for such damages cannot be sustained; and neither could
the liquidated damages be restored to be made applicable to an
unreasonable length of time.
The fifth instance is when the debtor attempts to abscond. If
the debtor attempts to flee from his obligations, or to move away to
evade payment of his indebtedness, the debt can be demanded from
him immediately. Otherwise, if the debtor absconds, he may not be
heard of again and the creditor cannot effectively collect his credit.
8
G.R. No. 11433, December 20, 1916, 35 Phil. 826.
141
SECTION 3. — Alternative Obligations
Article 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)
Under the Civil Code, there are only three prestations namely:
to give, to do and not to do. Strictly speaking therefore, when the
Code speaks of different prestations, it refers only to these three
prestations. Hence, technically speaking, a person who is bound to
give either a house, a car or a truck has only one prestation which
is “to give.” But a person who is obliged to either deliver a house or
to paint a picture has two prestations, namely: “to give” and “to do.”
It appears however that the phrase “different prestations” in the
law refers to both the strict sense and the loose sense of the word
“prestation.”
Partial performance of the different prestations cannot be
considered fulfillment of the obligation and therefore cannot be done
unless the creditor accepts such partial performance as complete
performance. Hence, if the obligor or debtor can either give a house
and a car or paint two murals for the satisfaction of his obligation,
he cannot give the car and one mural. The creditor cannot even be
compelled to accept such kind of satisfaction. It will be considered
an incomplete satisfaction which is not acceptable. The debtor must
make a choice and when he does, it should either be the delivery of
the house and car or the painting of two murals. The obligation will
not be satisfied through partial fulfillment of several prestations.
If all but one of the alternatives become legally impossible to
fulfill, the obligation will cease to be alternative. Thus, in a case where
a loan was payable in Philippine Peso or in United States Dollars, the
alternative obligation ceased to exist when, at the time the amount
became due during the Japanese Occupation, payment in United
States Dollars was prohibited.1
Article 1200. The right of choice belongs to the debtor,
1
Legardo vs. Miailhe, 88 Phil. 637.
141
142
ObligatiOns and COntraCts
Text and Cases
arts. 1200-1201
unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those prestations
which are impossible, unlawful or which could not have been
the object of the obligation. (1132)
The debtor or the obligor is the passive subject in an obligation.
He, not the creditor, is the one obliged to give, to do or not to do. Hence,
the choice is given to him by law. Any doubt as to whom the choice is
given must always be interpreted in favor of the debtor. Only by an
express grant of choice can a creditor have the right to choose which
prestation is to be performed.
The debtor shall have no right to choose those prestations which
are impossible, unlawful or which could not have been the object of
the obligation. Hence, if for the accomplishment of the obligation, the
debtor can either give a car, fly to the moon, or not join the army, he
has all the three prestations as alternatives, namely: to give, to do
and not to do. The first and the last alter-natives are possible and
lawful while the second, which is to fly to the moon, is impossible.
The debtor therefore has no right to choose this second alternative.
If he is allowed to do so, then the obligation can never be fulfilled. If
the alternatives are: to give opium, to sing a song or not to join the
navy, the first alternative is clearly unlawful and therefore the debtor
has no right to choose this prestation. If the alternative prestations
in a modeling contract are: to deliver the dresses, to act as model or
to engage in prostitution, not only is the last alternative illegal but
it could not have been the object of the prestation.
Article 1201. The choice shall produce no effect except
from the time it has been communicated. (1133)
The creditor is always entitled to be notified of the choice.
Communication to the creditor gives effect to the choice. The manner
by which the communication is made can vary provided that it clearly
conveys the unmistakable choice of the debtor. When the alternatives
are all possible, lawful or consistent with the object of the obligation,
the creditor has no right to oppose the choice. He must accept the
chosen alternative. However, if some of the prestations are impossible,
unlawful or which could not have been the object of the obligation,
the creditor can relay his objection to the same so that the debtor
will know, but, in any event, the debtor has no right to choose such
proscribed alterna-tives.2
Article 1202. The debtor shall lose the right of choice when
among the prestations whereby he is alternatively bound, only
arts. 1202-1203
ObligatiOns
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
143
one is practicable. (1134)
Majority of the choices must be practicable. Otherwise, there will
be no use to the various alternative prestations given. It must be noted
however that whether only one, some, or a majority are practicable
is generally irrelevant to the rights of the creditor. It is generally the
debtor’s choice which prevails. If only one is practicable, the creditor
has no right to complain about such situation because such affects
only the debtor who will lose his right of choice. The creditor has no
choice but to accept this single practicable choice provided that it is
not unlawful or inconsistent with the object of the obligation.
It must be noted that the law uses the word “practicable.”
Practicable means capable of being done, or simply feasible.3 If the
choices are either impossible, unlawful or which could not have been
the object of the obligation, not only does the debtor have no right
to choose them but it is also not practicable to undertake them.
However, prestations that are not “practicable” may also include
lawful and possible prestations but, because of some special attendant
circumstances which do not necessarily make them unlawful or
impossible, they cannot be done. Hence, if the debtor has the following
alternatives: to kiss a highly contagious leper, to sing a song, or not to
pay taxes, it is clear that the last alternative is not only impracticable
but also unlawful. The first alternative, although not unlawful and
not impossible, is nevertheless not practicable because to do so will
endanger the debtor’s health. In this case therefore, the debtor loses
his right of choice because only one prestation is practicable which
is to sing.
Article 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)
A debtor cannot perpetually be held liable for obligations the
satisfaction or compliance of which the creditor himself prevents the
debtor from fulfilling. If the debtor has three alternatives namely: to
give a particular car, to sing at a particular night club, or not to resign
from his job, and the creditor burns the particular nightclub where he
should sing, the debtor has effectively been prevented from making
a choice from the three alternatives, due to the fault of the creditor.
See Ong Guan Can vs. Century Insurance Company, 46 Phil. 492.
The New Lexicon Webster’s Dictionary of the English Language, 1987 edition,
Page 787.
2
3
144
ObligatiOns and COntraCts
Text and Cases
art. 1204
In this case, the debtor can ask for the rescission of the contract with
damages. If, despite, the act of the creditor, the debtor still wants to
maintain the contract, said debtor can make his selection from the
remaining choices.
Article 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)
It must be pointed out that the debtor will not be liable in any way
for reducing the alternatives from three to two alternatives, provided
what remains are lawful, practicable, possible or consistent with the
object of the obligation. Likewise, the debtor will not
even be
liable for converting his alternative obligation to a simple
one where there is only one lawful and possible prestation. The debtor
may even cause the loss of the thing, or render the service impossible.
When the debtor is responsible for losing or rendering impossible
all his alternative prestations, the creditor is entitled to damages.
Hence, if the debtor has the following alternative prestations: to
give a car worth P50,000 or to paint a portrait in a special canvass
worth P25,000, he will be liable for damages to the creditor if he (the
debtor) willfully destroys the car and willfully destroys the special
canvass where the portrait is to be painted, thereby rendering both
alternatives impossible. If the special canvass were first destroyed
and thereafter the car, the damages to be paid to the creditor will be
the value of said car which is P50,000. This is so because, had the car
not been destroyed, the debtor could have delivered the car, being the
only remaining choice. This is pursuant to the law which provides
that the indemnity shall be fixed, taking as a basis the value of the
last thing which disappeared, or that of the service which last become
impossible. Also damages other than the value of the last thing or
service may also be awarded.
Article 1205. When the choice has been expressly given to
art. 1205
ObligatiOns
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
145
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;
(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)
When the choice is given to the creditor, the conferment of such
right must always be express. Once the choice of the creditor has been
communicated to the debtor, the obligation ceases to be alternative.
Thus, if the debtor has three alternative prestations: to give a car,
to give a truck or to give a boat, once he receives the selection of the
creditor, he (the debtor) is bound to deliver the choice properly. He
is 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.
Prior to the selection of the creditor, the law provides three
rules governing the responsibility of the debtor. First, if one of the
things is lost through a fortuitous event, the debtor shall perform the
obligation by delivering that which the creditor should choose from
among the remainder, or that which remains if only one subsists.
If the car, the truck and the boat were lost because of a fortuitous
event, the obligation is extinguished. If only the car were lost, then
the creditor has a choice between the truck and the boat. If only
the boat remains, then the obligation becomes a simple one and the
146
ObligatiOns and COntraCts
Text and Cases
art. 1206
creditor can demand the delivery of the same.
Second, 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. If the debtor destroys the car, the creditor
still has three choices, the truck, the boat or the price of the car. In
addition, the creditor shall be entitled to damages regardless of which
alternative he chooses.
Third, if all the things are lost through the fault of the debtor,
the choice of the creditor shall fall upon the price of any one of them,
also with indemnity for damages. If the car, the truck and the boat
were all lost through the fault of the debtor, the creditor still has
three choices namely: the price of the car, the price of the truck or
the price of the boat. No matter what he chooses, the creditor shall
be entitled to 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.
Article 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)
This particular provision deals with a facultative-alternative
obligation. For example, if the debtor is obliged to give a car, such
prestation is the principal obligation. It becomes facultative if, in
lieu of the car, he can undertake another prestation like the painting
of a mural. Undertaking the substitute prestation however is not
mandatory in the event that the principal prestation is not performed
as the creditor only agrees that it may be given as a substitute. If
the substitute however is given, the creditor cannot refuse it unless
it is unlawful. However, there is nothing to prevent the parties from
agreeing that the giving of the substitute prestation is mandatory in
the event the principal obligation cannot be performed.
In the event that the substitute is lost through the negligence
of the debtor, it does not affect the principal obligation and hence
the debtor will not be liable. If there is bad faith on the part of the
art. 1206
ObligatiOns
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
147
debtor, it will depend on the situation. If the substitute prestation
was one of the main reasons which induced the creditor to enter into
the contract with the debtor, but the latter did not really intend to
constitute it as a substitute, this could be an act of fraud on the part
of the debtor, which could make the whole contract voidable. For
example, a debtor negotiates with a creditor in order to let him (the
debtor) pay the obligation by giving a boat to the creditor instead of a
particular car which is preferred by the creditor. The creditor resists
but, eventually, he agrees on the promise of the debtor to give not
only one but two cars of the same type, which the debtor represents as
owned by him, as substitute prestation in the event that the principal
prestation is not performed. Here, the creditor would not have agreed
to the contract without this substitute prestation. After the signing
of the contract and before the fulfillment of the main prestation, the
creditor learns that the debtor does not own the cars. The act of the
debtor may constitute fraud and the whole contract may be annulled.
If the creditor does not make any move to annul the contract and
accepts the giving of the boat as satisfaction of the obligation, he can
no longer assail the contract as his acceptance cured the defect of said
voidable contract. However, if the promise to the creditor relative to
the two substitute cars does not constitute the reason for which the
creditor entered into the contract, the debtor would not be liable for
his bad faith if the principal obligation can still be performed.
Once the substitution has been made, the obligor is liable for
the loss of the substitute on account of his delay, negligence or fraud.
148
ObligatiOns and COntraCts
Text and Cases
SECTION 4. — Joint and Solidary Obligations
Article 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 solidary liability only when the
obligation expressly so states, or when the law or the nature
of the obligation requires solidarity. (1137a)
A solidary obligation implies a situation where there are debts
or obligations incurred by two or more debtors in favor of two or more
creditors, and giving anyone, some or all of the creditors the right to
demand from anyone, some or all of the debtors the satisfaction of the
total obligation and not merely the share of each debtor in the debts
or obligations. A solidary obligation exists only when the obligation
expressly so states, or when the law or the nature of the obligation
requires solidarity. A surety for example binds himself to pay the
obligation of the debtor when it becomes due. He becomes a solidary
debtor in that the creditor need not go against the principal debtor
first before he (the creditor) can collect from the surety. The creditor
can immediately go against the surety for the whole amount of the
indebtedness or for such amount as the surety was made liable by
contract.1 A surety, who is solidarily liable, is therefore an insurer of
the debt.2 A surety is different from a guarantor who can be required
to pay the indebtedness of the principal debtor only after the creditor
has unsuccessfully exhausted all means to collect from the debtor. A
guarantor therefore is subsidiarily liable for the debt of the debtor.
He is not even jointly liable. A guarantor insures the solvency of the
debtor.3 However, by stipulation of the parties, the guarantor can
make himself solidarily liable for the indebtedness.
In Sesbreño vs. Court of Appeals,4 Delta Motors Promissory
Republic of the Philippines vs. Court of Appeals, G.R. No. 103073, March 13,
1
2001.
2
Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD
209, 288 SCRA 422.
3
Ibid.
148
art. 1207
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
149
Note No. 2731 in the amount of P307,933.33 issued in favor of
Philfinance by Delta was assigned to Sesbreño as security for the
payment of the indebtedness of Philfinance to Sesbreño. The said
note was placed in the custody of Pilipinas Bank which informed
Sesbreño via a “Denominated Custodian Receipt” (DCR) No. 10805
that it had possession of the promissory note and that “upon your
written instructions we shall undertake physical delivery of the
above securities fully assigned to you.” The Supreme Court rejected
the claim that the said statement implied that the bank became a
solidary debtor with Philfinance and Delta. The Supreme Court said
that:
we found nothing written in printers ink on the DCR which could
reasonably be read as converting Pilipinas into an obligor under
the terms of DMC PN No. 2731 assigned to petitioner, either upon
maturity thereof or at any other time. x x x The solidary liability
that petitioner seeks to impute to Pilipinas cannot, however, 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.”
The record exhibits no express assumption of solidary liability visa-vis petitioner, on the part of Pilipinas. Petitioner has not pointed
us to any law which imposed such liability upon Pilipinas nor
has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies
solidary liability under the securities, custody of which was
taken by Pilipinas. Accordingly, we are unable to hold Pilipinas
solidarily liable with Philfinance and private respondent Delta
under DMC PN No. 2731.
Also in the case of Philippine National Bank vs. Sta. Maria5
where the principal, in a special power of attorney, merely empowered
his agent to borrow money and to deliver mortgages of real estate to
the creditor and where the said agent indeed borrowed money but
executed a mortgage not on the account of his principal but in his
own name, the Supreme Court, applying Article 1207 of the Civil
Code, rejected the lower court’s decision stating that the liability of
the principal and the agent on the mortgage was joint and several
because in the special power of attorney the principal did not grant
the agent the authority to bind her solidarily with him on any loan
he might secure thereunder.
The stipulation of the parties can expressly provide for solidary
G.R. No. 89252, May 24, 1993, 222 SCRA 466.
G.R. No. L-24765, August 29, 1969, 29 SCRA 303.
4
5
150
ObligatiOns and COntraCts
Text and Cases
art. 1207
liability. In Pacific Banking Corp. vs. Intermediate Appellate Court,6
the document was denominated as a “Guarantor’s Undertaking” but
the provision therein stated that the guarantor jointly and severally
shall pay the bank any and all indebtedness of the principal debtor.
The Supreme Court stated that since the undertaking expressly
stipulated the joint and several obligation of the debtor, the nature of
the obligation was clearly solidary. In Ronquillo vs. Court of Appeals,7
the Supreme Court said that an agreement to be “individually and
jointly liable” indicates solidary liability and it further made the
following explanation:
The term “individually” has the same meaning as “collectively,” “separately,” “distinctly,” “respectively” or “severally.”
An agreement to be “individually liable” undoubtedly creates a
several obligation and a “several obligation” is one by which one
individual binds himself to perform the whole obligation.
The phrases “juntos o separadamente” and “mancomun o
insolidum” likewise denote a solidary obligation.8 Also the phrase
“jointly and severally guaranteed,” though using the word “guaranteed,” nevertheless indicates a solidary obligation.9 Also,
where the contract reads “I promise.” Or “I hereby bind myself,”
and is signed by two or more promisors, it has been held to impose
a joint and several liability. The same has been held true of a
promissory note which read “I promise to pay” and signed by
one person at the bottom, and by another on the back thereof.
An agreement between three creditors of a bankrupt, that it
should have a third of any dividend paid on a claim filed by two
of the debtors, has been held joint and several contract. Such
expressions as “we or either of us,” or “we jointly and severally
promise” usually give rise to a joint and several obligation.10
It must be noted that, in the aforequoted wordings of the above
promissory notes, the debtors who were referred merely as “I” were
not identified in the body or content of the document itself. Hence, the
signatories must be considered to have acknowledged that the “I” in
the document was referring to each of them individually. Hence, the
obligation is solidary. However, if the phrase “I promise to pay” were
G.R. No. 72275, November 13, 1991, 203 SCRA 496.
G.R. No. L-55138, September 28, 1984, 132 SCRA 274.
8
Parot vs. Gemora, 7 Phil. 94.
9
Rubio vs. Court of Appeals, G.R. No. L-50911, March 12, 1986, 141 SCRA 488.
10
William F. Elliott, Commentaries on the Law on Contracts, Volume II, 1913
edition, The Bobbs-Merrill Company, Indianapolis, pages 747-748.
11
Article 1370 of the 1950 Civil Code.
6
7
art. 1207
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
151
worded differently in that it identified the particular person referred
to as “I,” then, for obvious reasons, even if there were a number of
signatures in the promissory note, it is clear that the others cannot
be held liable as joint and solidary debtors because only one person
as identified expressly in the promissory note made the promise to
pay. They cannot even be held liable as joint debtors. It is only the
person identified as the “I” who will be liable and the others should
and must only be treated as witnesses. Hence, if the promissory note
reads “I, Mr. X, of legal age and residing in Quezon City promises to
pay Mr. J the amount of P1,000 on or before January 1, 2003” and if
in this promissory note the signatures of Mr. X (the debtor) and Mr.
J (the creditor) appear, and, at the lower portion of this document,
the signatures of Mr. M and Mr. N appear, it can never be presumed
that Mr. M and Mr. N also signed as solidary debtor or creditor.
This is so because, First, the law does not make such a presumption.
Second, there is no fact in the wording of the document from where
such a presumption could arise. Third, which is the most obvious and
important reason, the names of the only debtor and the only creditor
were exactly identified in the body of the document. The promissory
note is indeed very clear and leaves no doubt that only Mr. X is the
debtor and Mr. J the creditor. As Mr. X was identified in the body of
the document immediately preceding the word “I” and he signed it,
then the promise to pay contained in the document must mean his
promise alone and nobody else’s. The law provides that if the terms
of the contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulations shall
control.11 Fourth, it would have been so easy to expressly identify and
indicate in writing Mr. M and Mr. N as either debtor or creditor also,
whether joint or solidary, in the body of the promissory note if that
were the intention of the parties. The absence of any reference to Mr.
M and Mr. N as debtor or creditor also negates any obligation on their
part. Indeed, if at all, the intent of the parties was to be detected from
the document itself. The naming of Mr. X as the sole debtor and Mr. J
as the sole creditor in the body of the promissory note leaves no doubt
that it is only Mr. X who was intended to be the only debtor and Mr.
J as the only creditor. Fifth, even the nature of the obligation which
is a simple loan does not give rise to a solidary obligation. Sixth, in
affixing their signatures, Mr. X, Mr. J, Mr. M and Mr. N must have
read the clear and express written content of the contract that Mr. X
is liable as debtor and only Mr. J is the creditor and therefore they
12
Section 9, Rule 130 of the Rules of Court; Gaw vs. IAC, G.R. No. 70451, March
152
ObligatiOns and COntraCts
Text and Cases
art. 1207
are now estopped from claiming any other debtor or creditor. Once the
terms of an agreement have been reduced into writing, it is deemed
to contain all the terms agreed upon by the parties and no evidence
of such terms other than the contents of the written agreement shall
be admissible.12 Accordingly, Mr. M and Mr. N should be treated as
mere witnesses in the promissory note especially because to have
witnesses in a promissory note is usually done in ordinary business
transactions particularly where the creditors are banking institutions
and professional lenders.
However, even if the parties stipulated in their contract that
the obligation of the obligor is joint and solidary but such contract
was superseded by a judicial decision arising from the said contract
between the parties judicially declaring the obligation to be merely
joint, the said decision must be enforced in a joint manner.13 Also, if
a decision does not state that the obligation of the judgment debtors
is solidary, the writ of execution enforcing such a decision cannot be
implemented in a solidary manner among the judgment debtors.14
The law can likewise provide for a solidary nature of the
obligation. Thus, the last paragraphs of Articles 94 and 121 of the
Family Code of the Philippines15 provide that, except for certain
specified exceptions, if the absolute community or conjugal property
is insufficient to cover the liabilities for which the absolute community
of property or the conjugal partnership of gains is liable, the spouses
shall generally be solidarily liable for the unpaid balance with their
separate properties. If the property arrangement of the spouses is the
separation of property regime, Article 145 of the Family Code provides
that the liability of the spouses to creditors for family expenses shall
be solidary. In case of inheritance, Article 927 of the Civil Code
provides that if two or more heirs take possession of the estate (of the
deceased), they shall be solidarily liable for the loss or destruction of
a thing devised or bequeathed, even though only one of them should
have been negligent. Article 1824 of the Civil Code also provides that
all partners are solidarily liable with the partnership for everything
chargeable to the partnership in cases provided in Articles 1822
and 1823 of the Civil Code.16 In Article 1894 of the Civil Code, two
or more agents may agree to bind themselves solidarily and, under
24, 1993, 220 SCRA 405.
13
Oriental Philippines Company vs. Abeto, 60 Phil. 723.
14
Industrial Management International Development Corporation vs. National
Labor Relations Commission, G.R. No. 101723, May 11, 2000, 126 SCAD 283, 331
SCRA 640.
15
Executive Order No. 209 as amended which took effect on August 3, 1988.
16
Article 1822. Where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority of his co-
art. 1207
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
153
Article 1895, if solidarity has been agreed upon, each of the agents
is responsible for the non-fulfillment of the agency, and for the fault
or negligence of his fellow agents, except in the latter case when the
fellow agents acted beyond the scope of their authority. With respect
to bailees in commodatum, Article 1945 provides that when there are
two or more bailees to whom a thing is loaned in the same contract,
they are liable solidarily. In the quasi-contract known as negotiorum
gestio, Article 2146 pertinently provides that the responsibility of two
or more officious managers shall be solidary, unless the management
was assumed to save the thing or business from imminent danger.
Article 2157 provides that the responsibilities of two or more payees,
when there is payment of what is not due, is solidary. Article 2194
provides that the responsibility of two or more persons who are liable
for quasi-delict is solidary.
Solidary obligations shall likewise exist if the nature of the
obligation requires it. It has been opined that some provisions in the
Preliminary Title, Chapter 2 on Human Relations of the Civil Code,
particularly Articles 19 to 22,17 though not expressly providing for
solidary liability, nevertheless should give rise to solidary obligations
if violated by two or more persons.18
Article 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
partners, loss or injury is caused to any person, not being a partner in the partnership,
or any penalty is incurred, the partnership is liable therefor to the same extent as the
partner so acting or omitting to act. (n)
Article 1823. The partnership is bound to make good the loss:
(1)
Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and
(2)
Where the partnership in the course of its business receives money
or property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership.
(n)
17
Article 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.
Article 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for the same.
Article 21. Any person who wilfully causes loss or injury to another in a manner
that is contrary to morals, good customs or public policy shall compensate the latter
for damages.
Article 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 cause or legal ground, shall return the same to him.
18
Civil Code of the Philippines, Volume IV by Tolentino, 1991 edition, Pages 221
to 222.
154
ObligatiOns and COntraCts
Text and Cases
art. 1208
to be divided into as many equal 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)
The presumption of the law is that an obligation is always joint.
Thus, in Un Pak Leung vs. Negorra,19 the Supreme Court said that in
the absence of a finding of facts that the defendants made themselves
individually liable for the debt incurred, they were each liable only
for one-half of said amount. The joint debtors are obliged to pay only
their share in the indebtedness while the creditors can only claim
their share in the credit. It is only when the law or the nature or the
wording of the obligation clearly provides for solidary liability will
the obligation be such. Hence, unless there is no specification as to
their proportionate share in the credit or in the debt, the creditors and
debtors in a joint obligation shall be entitled or shall make payment
in equal proportions. Hence, if A and B are indebted to C and D for
P1,000, C can collect from A and B P250 each. D can likewise collect
from A and B P250 each. However, if, in the said P1,000 obligation,
A owes only 1/3 of such indebtedness and B owes 2/3 of the same
while creditor C owns 1/5 of the credit and D owns 4/5 of the same,
the creditors and the debtors shall collect and pay only in proportion
to what they own and owe, as the case may be. Thus A is obliged to
pay C only P66.67 and D only P266.67. This is so because A owes
only 1/3 of P1,000 which is P333.33. C and D can collect only from
that share of A. Considering that the obligation is joint and since C
only owns 1/5 of P333.33, he can only collect P66.67 from A and since
D owns 4/5 of P333.33, he can only collect P266.67 from A. On the
other hand, B is obliged to pay P133.33 to C and to D only P533.33.
Following the same principle, B only owes
2/3 of the P1,000
indebtedness which is P666.67. C and D can collect only from that
share of B. Considering that the obligation is joint and since C only
owns 1/5 of P666.67, he can only collect P133.33 from B. In the same
vein, since D owns 4/5 of P666.67, he can only collect P533.33 from
B.
Article 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
G.R. No. 3128, December 19, 1907, 9 Phil. 381.
Article 1224 of the Civil Code.
21
Id.
19
20
arts. 1209-1210
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
155
debtors. If one of the latter should be insolvent, the others shall
not be liable for his share. (1139)
If the division of the obligation is impossible and the obligation
is joint, the creditors must act collectively. Thus, if the joint obligation
is to give a house to 3 creditors, one of the creditors cannot undertake
an act which will prejudice the others. For example, a waiver of the
obligation cannot be made by anyone of the creditors unless such
waiving-creditor has been authorized by the others to undertake such
act. If there is no such authority and a waiver is to be made, all the
creditors must waive the obligation.
If there are three debtors obliged to give a single house, all of
the debtors must be sued if they renege on their obligation. If one of
the three debtors refuses to deliver the house, the obligation will be
converted into a claim for damages. A joint indivisible obligation gives
rise to indemnity for damages from the time anyone of the debtors does
not comply with the undertaking.20 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 the value
of the service in which the obligation consists.21 Thus, if the house is
worth P150,000, the creditors can file a case for damages against the
three debtors in the amount of P150,000. Each of the debtors will be
liable for P50,000. However, the debtor who refuses to deliver or who
is, in effect, responsible for the suit by the creditor may be liable for
additional damages. Those who did not refuse or who were willing
shall not contribute to the indemnity beyond the corresponding portion
of the price of the thing. Considering that the obligation is joint and
each debtor is responsible to pay only such amount corresponding
to his share, the debtors shall not be responsible for the share of a
debtor who is insolvent.
Article 1210. The indivisibility of an obligation does not
necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility. (n)
Solidarity and indivisibility of an obligation are not synonymous. Solidary obligation refers to the nature of the obligation
attaching to the obligor and obligee while indivisibility refers to the
nature of the object of the prestation.
Article 1211. Solidarity may exist although the creditors
22
23
G.R. No. 93010, August 30, 1990, 189 SCRA 325.
Guerrero vs. Court of Appeals, G.R. No. L-22366, October 30, 1969, 29 SCRA
156
ObligatiOns and COntraCts
Text and Cases
arts. 1211-1212
and the debtors may not be bound in the same manner and by
the same periods and conditions. (1140)
Since a solidary obligation refers to the nature of the obligation
attached to the parties themselves, it can exist even if the creditors
and debtors may not be bound in the same manner and by the same
periods and conditions. Hence, if A, B and C are solidarily indebted to
D in the amount of P15,000, D can collect from anyone of the debtors
the whole amount of the indebtedness. If A is required to pay only on
August 1, 1997, B only on May 1, 1998 and C immediately, the creditor
D can collect from anyone of them the whole amount of P15,000 at
the time when the periods imposed on the particular debtors have
been fulfilled. However, if D demands payment from C on January 6,
1997, he can pay only P5,000 which pertains to his share considering
that the liability of A and B has not yet matured. On August 2, 1997,
creditor D can still demand payment of the balance from C who can
legally pay only P5,000 representing A’s share considering that B’s
liability has not yet matured.
Article 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. (114a)
In Quiombing vs. Court of Appeals,22 only one of the solidary
creditors filed a suit for collection against the solidary debtors. The
debtors moved for the dismissal of the suit on the ground that the
other solidary creditor should have been included in the case. The
Supreme Court rejected the dismissal of the suit invoking Article
1212 and stated that recovery of the contract price was surely a
useful act and can be done even by one solidary creditor. Moreover,
the Supreme Court also said that the question as to who should sue
on a solidary obligation for the collection of the price was a personal
issue between the solidary creditors, and it did not matter who as
between them filed the complaint because the solidary debtors were
liable to either of the two as solidary creditors, for the full amount of
the debt. The satisfaction of a judgment obtained against them by one
solidary creditor will discharge their obligation to the other solidary
creditor and vice versa. Inclusion therefore in the case of the other
solidary creditor would have been a useless formality.
Also, if one of the solidary creditors makes an extra-judicial
demand for the debtor to pay, this will benefit also the other creditors
791.
arts. 1213-1214
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
157
as the demand will effectively make the prescriptive period for the
fulfillment of the obligation run anew.
The solidary creditor however should not do anything which
may be prejudicial to the other solidary creditors. For example, if the
solidary obligation has become due and the debtor decides to make
complete payment to one of the solidary creditors, such solidary
creditor must accept payment. Non-acceptance is clearly prejudicial
to the other solidary creditors, as it would lead to a delay or default
on the part of the creditors for which said creditors may be liable.
Also, if one of the solidary creditors remits the obligation in favor of
one of the solidary debtors, the whole obligation is extinguished. This
is prejudicial to the other solidary creditors because they could not
anymore collect from any of the solidary debtors what should be due
them. The fact that these other solidary creditors were prejudiced will
not invalidate the extinguishment of the obligation. Their remedy is
to collect their share of the indebtedness from the solidary creditor
who made the remission. They can likewise ask for damages for what
ever they may have lost as a result of the remission, such as interest
which should have been earned had it not for the remission.
Article 1213. A solidary creditor cannot assign his rights
without the consent of the others. (n)
Ideally, the relationship between and among solidary creditors
is one of mutual trust. With this trust, each solidary creditor will be
confident that his solidary co-creditors will only act for the good of all
the solidary creditors, and that they will not act to prejudice others.
Hence, to preserve as much as possible this confidence, a solidary
creditor cannot assign his rights without the consent of the others.
Article 1214. The debtors may pay any one of the solidary
creditors; but if any demand, judicial or extra-judicial, has
been made by one of them, payment should be made to him.
(1142a)
Anyone of the solidary creditors may accept full performance
of the obligation. However, if one of the solidary creditors makes the
demand, whether judicially or extra-judicially, payment must be
made to such solidary creditor. Consequently, once a court case has
been filed by one solidary creditor, the debtor cannot pay the other
solidary creditor who is not included in the case. There are authorities
to the effect that, if payment is made to the other creditors who are
not included in the suit or who did not make a demand, the payment
158
ObligatiOns and COntraCts
Text and Cases
art. 1214
shall not be considered as valid. This is based on the conceptual view
that, as soon as one of the creditors make the demand, the mutual
representation of the creditors with respect to each other, which is the
basis of a solidary obligation, momentarily ceases, and therefore the
debtor must only pay the one who, at the moment of demand, seeks the
full payment of the obligation. If the judicial case is terminated with
the demanding-creditor accepting partial payment with a reservation
as to the balance or, if after extra-judicial demand, the demandingcreditor accepts partial payment with reservation as to the balance,
the other creditors can now again seek payment from the debtor. The
creditors’ mutual representation will again exist.
The interpretation or application of the law making invalid the
payment to the non-demanding creditors should be abandoned. The
better rule is to make payment to the other non-demanding creditors
valid. It must be noted that Article 1214 does not by itself expressly
make invalid or void payment to the other non-demanding creditors.
It is remarkably silent on this point. Accordingly, the provision must
be interpreted in the light of what would be most beneficial to all the
solidary creditors pursuant to Article 1212 which states that any of the
solidary creditors can do whatever is beneficial to the others. Hence,
while the law states “payment should be made to him” referring to
the demanding creditor, this must not be applied in a mandatory and
narrow manner but, rather, it must be inter-preted merely as giving
a preference to the demanding-creditor without necessarily curtailing
the rights of the other creditors to be paid or the right of the debtor
to pay the other creditors their rightful due. By allowing the debtor
to pay the other creditors, it will better serve the purpose of the law
as to the solidarity and fulfillment of the obligation. If payment is
made in full to the non-demanding creditors, then the share of the
demanding-creditor will be given to him. If payment is made to fulfill
the obligation of the non-demanding creditors only, then the claim of
the demanding-creditor as to the whole obligation must necessarily
be adjusted to reflect only his remaining share. In both cases, the
other non-demanding creditors, in accepting the payment, clearly
did something beneficial to all creditors including the demanding
creditor. The demanding creditor will not be prejudiced because the
case for collection pending in court will not necessarily be dismissed
as it will still go on for purposes of satisfying any interest, damages or
attorney’s fees also being claimed by the demanding-creditor, unless
he waives all of them. Also, if what the demanding creditor undertook
is an extra-judicial demand, payment to the non-demanding creditors
will even facilitate the fulfillment of the obligation and ultimately the
art. 1215
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
159
satisfaction of his share. Applying Article 1214 in this manner will
also be consistent with Article 1222 which provides that a solidary
debtor may, in actions filed by the creditor, avail himself of all defenses
which are derived from the nature of the obligation and of those
which are personal to him, or pertain to his own share. With respect
to those which personally belong to the others, he may avail himself
thereof only as regards that part of the debt for which the latter are
responsible.
Article 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)
Novation is basically the change of creditors, debtors or the
principal condition of the contract. The novation must however be
clear to release the solidary obligation of the debtors.23 Compensation
takes place when two persons, in their own right, are creditors and
debtors of each other. Confusion is the merger of the characters of
creditor and debtor in the same person. Remission is the condonation
of an obligation. Novation, compensation, confusion and remission
are modes of extinguishing an obligation. If A, B and C are solidary
debtors of D, E and F in the amount of P1,500 and thereafter A informs
D that he is recommending X to pay the debt provided that A is
released from the obligation, and X and D agrees to the change, there
is a novation in the person of A, one of the debtors. Because of this
novation, not only A’s obligation, but also B’s and C’s are extinguished.
In the same example, if instead of novation, A becomes the creditor
of D also in the amount of P1,500, and said amount is also due, there
is compensation between A and D. The compensation extinguishes
not only the obligation of A but also that of B and C. Likewise, in
the same example, if D issues a promissory note to X in the amount
of P1,500 and X endorses it to A who endorses it to D, there is a
merger of the persons of the creditor and the debtor. Consequently,
the debt of is extinguished. The debt has been extinguished because
of creditor D without creditors E and F being benefited. So as not to
24
25
G.R. No. L-32425, November 21, 1984, 133 SCRA 317.
G.R. No. L-22366, October 30, 1969, 29 SCRA 791.
160
ObligatiOns and COntraCts
Text and Cases
art. 1216
prejudice the other solidary creditors (namely: E and F), D must pay
each of them P500. This should be the case because the law clearly
provides that the creditor who may have executed any of these acts
of novation, compensation, merger or confusion, as well as he who
collects the debt, shall be liable to the others for the share in the
obligation corresponding to them.
Article 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)
In Imperial Insurance, Inc. vs. David,24 the husband and the
wife bound themselves jointly and severally in favor of the obligee for
a sum of money and when the husband died, the obligee demanded
payment from the wife who resisted payment, claiming that the
obligee’s claim is barred by its failure to file a claim in the intestate
proceeding of the deceased husband. The Supreme Court ruled that
the obligee can properly claim from the wife as the nature of the
obligation is solidary and further said:
x x x Under the law and well settled jurisprudence, when
the obligation is a solidary one, the creditor may bring his action
in toto against any of the debtors obligated in solidum. Thus, if
husband and wife bound themselves jointly and severally, in case
of his death her liability is independent of and separate from
her husband’s; she may be sued for the whole debt and it would
be error to hold that the claim against her as well as the claim
against her husband should be made in the decedent’s estate
(Agcaoili vs. Vda. De Agcaoili, 90 Phil. 97).
In the case at bar, appellant signed a joint and several
obligation with her husband in favor of herein appellee; as a
consequence, the latter may demand from either of them the
whole obligation. As distinguished from a joint obligation where
each of the debtor 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.
“Where the obligation assumed by several persons is joint
and several, each of the debtors is answerable for the whole
obligation with the right to seek contribution from his co-debtors.”
(Philippine International Surety Co. vs. Gonzales, 3 SCRA 391)
26
G.R. No. 96405, June 26, 1996, 71 SCAD 287, 257 SCRA 578.
art. 1216
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
161
And, in Manila Surety and Fidelity Co., Inc. vs. Villarama,
et al., 107 Phil. 891, this Court ruled that the Rules of Court
provide the procedure should the creditor desire to go against
the deceased debtor, “but there is nothing in the said provision
making compliance with such procedure a condition precedent
before an ordinary action against the surviving solidary debtors,
should the creditor choose to demand payment from the latter,
could be entertained to the extent that failure to observe the same
would deprive the court jurisdiction to take cognizance of the
action against the surviving debtors. Upon the other hand, the
Civil Code expressly allows the creditor to proceed against any
one of the solidary debtors or some or all of them simultaneously.
Hence, there is nothing improper in the creditor’s filing of an
action against the surviving solidary debtors alone, instead of
instituting a proceeding for the settlement of the estate of the
deceased debtor wherein his claim could be filed.”
In Guerrero vs. Court of Appeals,25 the creditor filed a suit
against one of the solidary debtors. The suit was compromised without
novating the solidary debt. The said solidary debtor defaulted in
making payment, resulting in the creditor demanding payment from
the other solidary debtor. The Supreme Court rejected the contention
of the other solidary debtor that there was already a waiver by the
creditor to go against him considering that he already compromised
the case with his other solidary debtor, to wit:
We fail to see any incompatibility between the two
obligations that would sustain the defense of novation. The
fact that in the compromise agreement and subsequently in the
execution sale, ALTO chose first to realize its credit from Robles,
did not imply waiver of its right to proceed against any of the
solidary debtors or some or all of them simultaneously, and the
demand made against one of them is not an obstacle to demands
which may subsequently be directed against the others so long
as the debt or any part of it remains outstanding and unpaid.
The solidary creditor has a right not to accept partial payment
from the solidary debtors. However, if he does accept partial payment
from some of them, this will not prevent him from demanding or
claiming from the others who have not actually paid. In Inciong, Jr.
vs. Court of Appeals,26 the Supreme Court ruled that if a claim from
one of the solidary debtors has been dismissed by a court on grounds
other than the extinguishment of the whole obligation or that the
claim has prescribed, it does not necessarily mean that the solidary
Dimayuga vs. Philippine Commercial Bank, G.R. No. 42542, August 5, 1991,
200 SCRA 143; Philippine National Bank vs. Independent Planters Association, Inc.,
27
162
ObligatiOns and COntraCts
Text and Cases
art. 1217
indebtedness cannot be claimed against the other solidary debtors who
were not impleaded in the case or against those who were impleaded
but whose liability was found by the court as proper.
Article 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)
The choice is left to the solidary creditor to determine against
whom he will enforce payment.27 If two or more solidary debtors offer
to pay, the creditor may choose which offer to accept. Thus, if A, B
and C are solidarily indebted to D for P1,500 to be paid on March 1,
1997 and A, B and C offer to pay D on the due date, D may choose
from whom to accept. If D accepts payment from one of the solidary
debtors, let’s say A, the obligation shall be completely extinguished.
Having paid the whole P1,500, A has the right to claim P500 from
B and another P500 C, which are their respective shares in the
indebtedness. If A paid interest on the indebtedness, B and C must
likewise share in the payment of the interest. However, the law
also says that if payment is made before the debt is due, no interest
for the intervening period may be demanded. Hence, if A pays the
indebtedness on February 1, 1997, no interest can be claimed by A
for the period beginning February 1, 1997 up to March 1, 1997, the
due date of the obligation.
In the event that C cannot pay his share because he is insolvent,
his share shall be borne by A and B in proportion to the debt of each.
Hence, A and B share shall share in C’s obligation of P500. A shall be
G.R. No. L-28046, May 16, 1983, 122 SCRA 113.
28
Article 1106 of the 1950 Civil Code.
29
Article 1139 of the 1950 Civil Code.
30
Article 1144 of the 1950 Civil Code.
art. 1218
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
163
liable for P250 and B shall also be liable for P250. Considering that
A, in effect, initially shouldered C’s obligation of P500 when A paid
the whole obligation in full in favor of D, A can ask reimbursement
of P250 from B.
Article 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)
By prescription, one acquires ownership and other real rights
through the lapse of time in the manner and under the conditions
laid down by law. In the same way, rights and actions are lost by
prescription.28 Actions prescribe by mere lapse of time fixed by the
law.29 The prescriptive periods for filing an action for different causes
of action are contained in different parts of the Civil Code but the
main provisions are from Article 1139 up to Article 1155. For example,
an action based on a written agreement must be brought within 10
years from the time the cause of action accrues.30 Hence, if A and B,
solidary debtors pursuant to a written loan agreement, are bound
to pay the creditor on May 2, 1997 and on the said date the creditor
makes a demand on them, but does not collect until after 12 years
from the demand, the claim clearly has prescribed. However, if A
pays the creditor despite prescription of the claim, B can refuse to pay
A his share in the indebtedness because technically the debt
has
prescribed.
Article 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 been totally paid by anyone of them before
the remission was effected. (1146a)
Article 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)
The consequences of remission in favor of anyone of the solidary
debtors depend upon the time when the remission was in fact given by
the creditor. For example, A, B and C are solidary debtors of D in the
amount of P1,500. A persuades D to condone the debt. This remission
164
ObligatiOns and COntraCts
Text and Cases
arts. 1219-1221
extinguishes the whole obligation and benefits not only A but also B
and C. A therefore cannot collect P500 each from B and C as he (A)
never paid anything to D. However, if C, after the debt becomes due,
pays the whole indebtedness and A, after such payment made by C,
convinces D to condone the debt, the said condonation or remission
has no effect because by the time the remission was made, D’s credit
has already been extinguished. C can still claim from A, the latter’s
share of the indebtedness.
It must be pointed out that, in so far as Article 1219 is concerned,
it is applicable only when there is one creditor. If there are many
solidary creditors involved, remission of the debt by one of the said
creditors without the consent of the others will constitute an act which
is prejudicial to the other solidary creditors and therefore, according
to Article 1212, cannot be done. If the remission is done, the solidary
creditor who made the remission shall be liable for the share which
the other creditors should receive and also for damages which the
other solidary creditors may suffer as a result of the remission. For
example, if A, B and C are solidary creditors of X in the amount of
P1,500 payable on December 30, 2001 with an interest of 15% per
annum, and B remitted or condoned the debt on April 1, 2001 just
one day after it was incurred, B shall be liable to A in the amount of
P500 and to C in the amount of P500 also plus damages equivalent
to the interest which A and C would have gotten had the obligation
not been condoned and had it been paid on December 30, 2001.
Article 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)
The solidary debtors will be relieved from their obligation if
the thing is lost or the prestation becomes impossible without their
fault. However, if anyone of them is at fault or if there is previous
delay on the part of anyone of the solidary debtors before the loss or
art. 1222
ObligatiOns
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
165
impossibility of the prestation due to fortuitous event, all the solidary
debtors will still be held liable. If A, B, and C are solidarily bound to
deliver to G a computer with serial number 7777 on January 3, 1997
and before such date arrives, the said computer is hit by lightning
without the negligence or fault on the part of the solidary debtors,
the obligation is extinguished. If on January 3, 1997, G demands
delivery from A and the computer is not delivered and the computer
is subsequently hit by lightning, all of them shall be solidarily liable
to pay the price, damages and interest. B and C however have the
right to claim against A for the damages they have suffered since A
should have delivered the computer, or at least informed B and C of
the demand.
Article 1222. A solidary debtor may, in actions filed by the
creditor, avail himself of all defenses which are derived from
the nature of the obligation and of those which are personal to
him, or pertain to his own share. With respect to those which
personally belong to the others, he may avail himself thereof
only as regards that part of the debt for which the latter are
responsible. (1148a)
While the whole debt may be collected from one of the solidary
debtors, he can nevertheless pay less than the whole amount of
indebtedness to the creditor in the event that there are defenses he
can set up. He may set up defenses personal to him or to his co-debtor
with respect to the whole obligation or to only a part thereof which
pertains to the respective share(s) of the co-debtor(s) in the obligation.
Also, defenses relative to the nature of the obligation can be set up.
Thus if A, B, and C are indebted to G in the amount of P1,500 but B
shall only pay if he passes the bar examination for lawyers in 1996
and C shall pay only on January 2, 1997, and A when he reaches the
age of 18, and if G sues B in 1996 after he passes the bar, B can set
up the defense that C’s obligation is subject to a period which has
not yet arrived, and also the defense that A’s contract is voidable
considering that he was a minor at the time he (A) contracted the
solidary obligation. If B is successful in claiming said defenses, he
will nevertheless pay the amount of P500 which pertains to his share
because there is no impediment in collecting the same from him.
166
ObligatiOns and COntraCts
Text and Cases
art. 1222
167
SECTION 5. — Divisible and Indivisible
Obligations
Article 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)
The nature and effect of obligations are very much different
from and do not affect the divisibility or indivisibility of the things
that are the object of obligations in which there is only one debtor
and only one creditor.
Article 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)
Joint debtors are only bound to perform their respective portion
in a particular indebtedness. Their obligation can be divisible, in
which case it is so easy to demand from each joint obligor payment
of his respective share of the obligation. However, if the obligation is
indivisible, each debtor must coordinate with the rest of the debtors
for the fulfillment of the obligation. Thus, if A, B and C are jointly
bound to deliver a computer worth P30,000 to D and the latter, on
due date, demands payment from them, all of them must fulfill the
obligation. If A and B are ready to deliver but C, for no justifiable
reason, refuses to deliver, said debtors’ joint obligation is converted
into a claim for damages on the part of the aggrieved creditor. The
creditor can file a case against all the debtors for the amount of the
computer which is P30,000. He can likewise demand for damages he
suffered due to the non-delivery of the computer, such as exemplary
damages, moral damages, or attorney’s fees. A and B however should
not be held liable for these other damages as they were willing to
167
168
ObligatiOns and COntraCts
Text and Cases
art. 1225
deliver the computer. It will only be C who should shoulder these
other damages.
Article 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.
In obligations not to do, divisibility or indivisibility
shall be determined by the character of the prestation in each
particular case. (1151a)
An obligation which is not susceptible of partial performance is
generally an indivisible obligation. Thus, an obligation to give a house
or a car is an indivisible obligation. A contract stipulating that an
actor has to sing and dance simultaneously, is also 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, the parties themselves
may stipulate whether or not the object or service shall, for purposes
of their contract, divisible or indivisible. The wording of the contract
therefore will be very material to show the characterization of the
obligation. In the case of Government vs. CFI1 where the compromise
agreement stated, among others, that the work was to be done in
stages to be determined by the City Engineer, that the contractor
was to advance the necessary amount needed for each stage of the
work to be reimbursed by the Pasay City Government, and that the
contractor was to furnish in favor of the Pasay City Government a
new performance bond in the amount required by law and regulations
in proportion to the remaining value or cost of the unfinished work of
the construction per approved plans and specifications, the Supreme
Court said that the provisions in the compromise agreement read
G.R. No. L-32162, September 28, 1984, 132 SCRA 156.
1
art. 1225
ObligatiOns
Different Kinds of Obligations
Sec. 5 — Divisible and Indivisible Obligations
169
together clearly show a divisible obligation. The Supreme Court
further said that:
What is crucial in sub-paragraph B of paragraph 1 of
the compromise agreement are the words “in proportion.” If
the parties really intended the legal rate of 20% performance
bond to refer to the whole unfinished work, then the provisions
should have required the plaintiff contractor to submit and file
a new performance bond to cover the remaining value/cost of the
unfinished work of the construction. Using the words in proportion
then significantly changed the meaning of the paragraph to
ultimately mean a performance bond equal to 20% of the next
stage of the work to be done.
The law also provides that, in obligations not to do, divisibility
or indivisibility shall be determined by the character of the prestation
in each particular case.
170
ObligatiOns and COntraCts
Text and Cases
SECTION 6. — Obligations with a
Penal Clause
Article 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. (1152a)
In SSS vs. Moonwalk,1 the Supreme Court upheld the decision
of the Court of Appeals in stating that, if the principal obligation
has been complied with, the penal clause has lost its efficacy or
applicability, and the Supreme Court adopted the Court of Appeal’s
explanation including the definition quoted by the latter from Spanish
authorities that 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 (3 Castan,
Eighth Edition, Page 118).
The application of the penal clause may be governed by the
stipulation of the parties. Hence, if there is nothing stipulated as to
how it shall be applied, then the law will come in: the penalty shall
substitute the indemnity for damages and the payment of interest
in case of non-compliance. However, in certain foreign jurisdictions
(United Kingdom, Australia, New Zealand and some states in the
United States), a penalty is different from liquidated damages in that,
in the former, there is need of proof of loss, but in the latter, payment
may be made without proof of loss. In the Philippines however, the
G.R. No. L-73345, April 7, 1993, 221 SCRA 119.
1
170
art. 1227
ObligatiOns
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
171
Supreme Court, in Lambert vs. Fox,2 stated that:
there is no difference between a penalty and liquidated damages,
so far as legal results are concerned. Whatever difference exist
between them as a matter of language, they are treated the same
legally. In either case, the party to whom payment is to be made
is entitled to recover the sum stipulated without the necessity of
proving damages. Indeed one of the primary purposes in fixing
a penalty or in liquidating damages, is to avoid such necessity.
Imposition of the liquidated for breach of contract, such as in
a building contract, bars any award for additional damages at large
for the same breach.3
If the parties stipulate that the award of the penalty pursuant
to the penalty clause shall not constitute a bar to the recovery of
other damages, and in the payment of interest, then it shall be so.
The penalty is clearly an onerous and harsh stipulation providing for
increased liability for the purpose of highlighting the mandatory and
important character of an obligation which should be fulfilled. The
penalty clause may be in any form which is determined or liquidated.
In any event however, 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 the Civil Code. An obligor is in delay
only upon judicial or extra-judicial demand unless legally excused
as provided by law.4 Hence, the penalty may be claimed only when
there is demand, whether judicial or extra-judicial, unless the law,
the stipulation of the parties or the nature of the contract (time is of
the essence) otherwise demands.
Article 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
26 Phil. 588.
Navarro vs. Mallari, 45 Phil 242.
4
Article 1169 of the Civil Code; SSS vs. Moonwalk, G.R. No. L-73345, April 7,
1993, 221 SCRA 119.
5
Id., Page 127.
2
3
172
ObligatiOns and COntraCts
Text and Cases
art. 1228
without his fault, the penalty may be enforced. (1153a)
The payment of the penalty is merely an accessory obligation.
It is not the principal obligation. Hence, the debtor cannot merely
substitute the performance of the principal obligation by the mere
payment of the penalty. However, the parties can stipulate otherwise.
Likewise the creditor cannot demand fulfillment of the obligation and
payment of the penalty at the same time. Once the obligation has
been complied with and extinguished, the penal clause has lost its
raison d’etre.5 Nevertheless, the parties can stipulate in their contract
that payment of the penalty, and satisfaction of the obligation can be
demanded at the same time.
In the event that the creditor demands fulfillment of the
obligation and the same has become impossible without his fault, the
penalty may be enforced. For example, A is to deliver a particular
computer to B on March 7, 1997. It was stipulated that in the event he
fails to deliver on time, he shall be liable for liquidated damages in the
amount of P200,000. B demands delivery of the particular computer
on the due date but A fails to deliver. Thereafter, the computer is hit
by lightning after his default. B can demand payment of the P200,000
penalty.
Article 1228. Proof of actual damages suffered by the
creditor is not necessary in order that the penalty may be
demanded. (n)
Normally, because the particular penalty in the penalty clause is
already specified and hence liquidated, there is no need to prove actual
damages. The person is mandated to pay the amount or perform the
penalty specified in the agreement of the parties for as long as there
is irregular or no compliance with the principal obliga-tion regardless
of whether or not the person seeking it suffers damages.6
In Allen vs. Province of Albay,7 the Supreme Court ruled
that, if through the act of the owner in a construction contract, the
contractor has been or will be prevented from finishing the works
on the contractual completion date, the owner shall be deemed to
have waived the time limit or the period and the contractor is bound
6
Lambert vs. Fox, G.R. No. L-7991, January 29, 1914, 26 Phil. 588; Manila
Racing Club vs. Manila Jockey Club, G.R. No. L-46533, October 28, 1939, 69 Phil. 55;
Palacios vs. Municipality, G.R. No. 1598, November 30, 1908, 12 Phil. 140.
7
G.R. No. 11433, December 20, 1916, 35 Phil. 826.
8
State Investment House vs. Court of Appeals, G.R. No. 112590, July 12, 2001,
art. 1229
ObligatiOns
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
173
only to finish the construction within a reasonable time, and if there
are liquidated damages provided for in the contract in case of delay,
a claim for such damages cannot be sustained; and neither could
the liquidated damages be restored to be made applicable to an
unreasonable length of time.
Article 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)
A contract is a source of obligation. It is the law between the
parties. Hence, “neither the law nor the courts will extricate a party
from an unwise or undesirable contract he or she entered into with all
the required formalities and with full awareness of its consequences.”8
One exception to this rule however is the matter of penalties. If the
penalty provision is unconscionable, the court may temper, reduce
or, in some cases, delete it.9
In Barons Marketing Corp. vs. Court of Appeals,10 the Court
reduced the 25% penalty charge to cover the attorney’s fees and
collection fees, which was in addition to the 12% annual interest,
to 10% for being manifestly exorbitant. Likewise in Palmares vs.
Court of Appeals,11 the Court eliminated altogether the payment
of the penalty charge of 3% per month for being excessive and
unwarranted under the circumstances. It ruled in that case:
Upon the matter of penalty interest, we agree
with the Court of Appeals that the economic impact of
the penalty interest of three percent (3%) per month
on total amount due but unpaid should be equitably
reduced. The purpose for which the penalty interest is
intended — that is, to punish the obligor — will have
been sufficiently served by the effects of compounded
interest. Under the exceptional cir-cumstances in the
case at bar, e.g., the original amount loaned was only
P15,000; partial payment of P8,600.00 was made on
due date; and the heavy (albeit still lawful) regular
151 SCAD 411; Development Bank of the Philippines vs. Court of Appeals, G.R. No.
137557, October 30, 2000, 137 SCAD 361, 344 SCRA 492; Opulencia vs. Court of
Appeals, 96 SCAD 793, 293 SCRA 385.
9
Spouses Solangon vs. Salazar, G.R. No. 125944, June 29, 2001.
10
91 SCAD 509, 286 SCRA 96.
11
93 SCAD 209, 288 SCRA 422.
12
G.R. No. L-45349, August 15, 1988, 164 SCRA 339.
174
ObligatiOns and COntraCts
Text and Cases
art. 1229
compensatory interest, the penalty interest stipulated
in the parties’ promissory note is iniquitous and
unconscionable and may be equitably reduced further
by eliminating such penalty interest altogether.
In Jison vs. Court of Appeals,12 the obligor, in a sale of land, was
clearly liable to pay penalty charges. The Supreme Court reduced
from P47,312.64 to P23,656.32 the penalty imposed by the Court of
Appeals. The Supreme Court said:
While the resolution of the contract and the forfeiture of the
amounts already paid are valid and binding upon petitioners, the
Court is convinced that the forfeiture of the amount of P47,312.64,
although it includes the accumulated fines for petitioners’ failure
to construct a house as required by the contract, it is clearly
iniquitous considering that the contract price is only P55,000.00.
The forfeiture of fifty percent (50%) of the amount already paid,
or P23,656.32, appears to be a fair settlement. In arriving at
this amount the Court gives weight to the fact that although
petitioners have been delinquent in paying their amortizations
several times to the prejudice of private respondent, with the
cancellation of the contract, the possession of the lot reverts to
private respondent who is free to resell it to another. x x x
The Court’s decision to reduce the amount forfeited finds
support in the Civil Code. As stated in paragraph 3 of the contract,
in case the contract is cancelled, the amounts already paid shall
be forfeited in favor of the vendor as liquidated damages. The
Code provides that liquidated damages, whether intended as an
indemnity or a penalty, shall be equitably reduced if they are
iniquitous or unconscionable [Art. 2227].
Further, in obligations with a penal clause, the judge shall
equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor [Art. 1229;
Hodges vs. Javellana, G.R. No. L-17247, April 28, 1962, 4 SCRA
1228]. In this connection, the Court said:
It follows that, in 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, the courts will rigidly apply the doctrine of strict
construction and 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,
13
Pamintuan vs. Court of Appeals, 94 SCRA 556.
art. 1230
ObligatiOns
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
175
where the indemnity provided for is essentially a mere penalty
having for its principal object the enforcement of compliance with
the contract . . . [Laureano v. Kilayco, 32 Phil. 194 (1915)].
This principle was reiterated in Makati Development Corp.
vs. Empire Insurance Co. [G.R. No. L-21780, June 30, 1967, 20
SCRA 557], where the Court affirmed the judgment of the Court
of First Instance reducing the subdivision lot buyer’s liability
from the stipulated P12,000.00 to P1,500.00 after finding that he
had partially performed his obligation to complete at least fifty
percent (50%) of his house within two (2) years from March 31,
1961, fifty percent (50%) of the house having been completed by
the end of April 1961.
If the penalty clause, which is construed against the one enforcing it,13 is so unconscionable that its enforcement, in effect,
constitutes an undue deprivation or confiscation of the property of
the obligor, the courts can strike it down as an invalid one.14
Article 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.
The penal clause, being merely an accessory obligation, does not
invalidate the principal obligation in the event that such penal clause
is void or without effect. Being merely accessory to enforce the main
obligation, such penal clause could never exist if the main obligation
does not exist.15 Hence, the nullity of the principal obligation carries
with it that of the penal clause.
14
15
Ibarra vs. Aveyro, 37 Phil. 273.
SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993, 221 SCRA 119.
176
ObligatiOns and COntraCts
Text and Cases
Chapter 4
EXTINGUISHMENT OF OBLIGATIONS
General Provisions
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(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)
Obligations are extinguished through a number of ways. The
above provision enumerates the modes provided in the Civil Code.
As to the fulfillment of a resolutory condition and rescission based
on breach of trust, these have been taken up in Chapter 3, Book
IV, Title I of the Civil Code. Prescription is generally provided for
from Articles 1106 up to 1155 of the Civil Code but there are other
provisions on prescription spread out in other parts of the Civil Code
such as in Persons and Family Relations, Donations, Property, and
Wills and Succession. Annulment of Contracts is principally discussed
in Chapter 7, Title II, Book IV of the Civil Code.
Death of a party, however, does not extinguish an obligation
unless the obligation is personal in nature or intransmissible. Hence,
the lessor’s heirs who inherit the leased property from the deceased
lessor cannot set up the claim that the obligation to allow the property
under the lease contract in the possession of the lessee has been
176
art. 1231
ObligatiOns
Extinguishment of Obligations
177
extinguished by the death of the lessor, and therefore, being the new
owners of the property, they can now eject the lessee. In such a case,
death of a party does not excuse non-performance of a contract
which involves a property right, and the rights and obligations
thereunder pass to the personal representatives of the deceased.
Similarly, nonperformance is not excused by the death of the
party when the other party has a property interest in the subject
matter of the contract.1
When a person commits a crime and when civil liability arises
from the commission of the said crime as its only basis, the death of the
offender generally extinguishes the crime which, in turn, extinguishes
the civil liability.
Stated differently, where the civil liability does not exist
independently of the criminal responsibility, the extinction of the
latter by death ipso facto extinguishes the former, provided, of
course, that death supervenes before final judgment.2
Thus, in People vs. Jose,3 the accused forcibly abducted and
thereafter raped the victim and was properly convicted in the trial
court of the complex crime of forcible abduction with rape and was
ordered to pay moral and exemplary damages to the victim. He
appealed the decision and therefore the judgment of conviction did
not become final. While the case was pending appeal, the accused
died. The Supreme Court dismissed the case against him and he
was relieved of all personal and pecuniary penalties attendant to his
crime.
However, if the civil liability neither solely nor originally springs
from the crime, the civil liability shall persist despite the extinction
of the criminal liability. Hence, in Torrijos vs. Court of Appeals4
where a person bought a property from the accused, and thereafter
the accused again sold the property to another person, the accused
was charged and convicted of the crime of estafa. He was likewise
ordered to pay back as indemnity the amount paid to him by the first
buyer plus damages. The accused appealed but died while the case
was pending appeal. The Supreme Court said that while his criminal
1
DKC Holdings Corporation vs. Court of Appeals, G.R. No. 118248, April 5,
2002, 329 SCRA 666; Torrijos vs. Court of Appeals, G.R. No. 40336, October 24, 1975,
67 SCRA 394.
2
Torrijos vs. Court of Appeals, G.R. No. L-40336, October 24, 1975, 67 SCRA
394.
3
G.R. No. 28397, June 17, 1976, 71 SCRA 273.
4
G.R. No. L-40336, October 24, 1975, 67 SCRA 394.
178
ObligatiOns and COntraCts
Text and Cases
art. 1231
liability was extinguished, his civil liability was not extinguished. In
this case, the civil liability did not arise solely or originally from the
crime itself but also from the contract of sale of the property which
was not implemented and also from his deceitful acts which violated
the provisions of the Civil Code on Human Relations, namely Articles
19, 20 and 21. The appeal as to the civil liability therefore should be
allowed to proceed subject to the pertinent provision of the Rules of
Court on substitution of parties.
179
SECTION 1. — Payment or Performance
Article 1232. Payment means not only the delivery of
money but also the performance, in any other manner, of an
obligation. (n)
Obligation to pay by the delivery of money means obligation to
pay by delivering that which the law recognizes as money at the time
of payment.1 Under the Civil Code, payment is not exclusively limited
to the giving of money. It also includes any manner of performing
the obligation with the end in view of extinguishing it. Hence, if A
purchases a car from seller B, the former can pay not only in money
but also in services provided that B agrees. Also, it must be noted
that there are certain presumptions made by law in favor of payment.
Thus, 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.2 Also, the receipt of a later installment
of a debt, without reservation as to prior installments, shall likewise
give rise to the presumption that such installments have been paid.3
These presumptions however can be rebutted by evidence. If the
presumption is successfully overturned, the burden of proving that
there has been payment rests on the obligor. Hence, it has also been
consistently held that the burden of proof to show payment once the
debt has been fully established by evidence is on the debtor. Thus in
Biala vs. Court of Appeals4 where the plaintiff presented promissory
notes which were not fully rebutted, the Supreme Court upheld the
indebtedness of the obligor by saying:
x x x When the existence of a debt is fully established by
the evidence contained in the record, the burden of proving that it
has been extinguished by payment devolves upon the debtor who
offers such a defense to the claim of the creditor (Chua Chienco vs.
Vargas, 11 Phil. 219, cited in Servicewide Specialists, Inc. vs. Hon.
Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80 Phil.
1
604.
Article 1176 of the 1950 Civil Code.
Id.
4
G.R. No. 43503, October 31, 1990, 191 SCRA 50.
2
3
179
180
ObligatiOns and COntraCts
Text and Cases
arts. 1233-1234
Intermediate Appellate Court, et al., G.R. No. 74553, June 8, 1989,
174 SCRA 80). In the case at bar, all the documents evidencing
petitioner’s debts are still in the possession of respondent Lee.
No receipt or other satisfactory evidence was presented by the
petitioner to prove the alleged payment to respondent. Promissory
notes in the hands of the creditor are proofs of indebtedness rather
than proofs of payment (First Integrated Bonding and Insurance
Company vs. Isnani, G.R. No. 70246, July 31, 1989, 175 SCRA
753). x x x
Article 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)
Payment contemplates full satisfaction of the debt or the
obligation. Complete delivery or service must comprise everything
that is necessary to satisfy the obligation consistent with the object of
the same. Hence, the obligation to give a determinate thing includes
the delivery of all its accessions and accessories, even though they
may not have been mentioned.5 Payment of a loan with stipulated
interest is complete only upon payment of the principal and the
interest. Anything less than a complete performance may essentially
be considered a breach of the obligation. In Philippine National Bank
vs. Court of Appeals6 where the PNB paid an alleged attorney-in-fact
of the creditor and where there was no proof that the alleged attorneyin-fact was the representative of the creditor, the Supreme Court
considered the payment to such person as not effective and further
stated:
There is no question that no payment had ever been made
to private respondent as the check was never delivered to him.
When the court ordered petitioner to pay private respondent the
amount of P32,480.00, it had the obligation to deliver the same
to him. Under Article 1233 of the Civil Code, a debt shall not be
understood to have been paid unless the thing or service in which
the obligation consists had been completely delivered or rendered,
as the case may be.
Article 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)
Article 1169 of the 1950 Civil Code.
G.R. No. 108630, April 2, 1996, 78 SCAD 37, 256 SCRA 44.
5
6
art. 1234
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
181
Substantial performance of the obligation is not complete
performance. It constitutes a breach of the obligation if not for the
legal treatment that when such performance occurs, the obligor may
recover as though there had been strict and complete fulfillment, less
damages suffered by the obligee. In giving the obligee the right to be
given damages, the law recognizes the fact that the obligee has been
injured and damaged, and that there has been no waiver of such
injury or damage by the said obligee. However, the breach in this
case is not a material one enough to compel the obligor to rescind the
whole obligation. Hence, for the doctrine of substantial per-formance
to apply, the part unperformed must not destroy the value or purpose
of the contract.7 The substantial performance however must have
been done in good faith and, in this regard, it has been opined that
the contemporary view, however, is that even a conscious and
intentional departure from the contract specifications will not
necessarily defeat recovery, but may be considered as one of the
several factors involved in deciding whether there has been full
performance. The pertinent inquiry is not simply whether the
breach was wilfull but whether the behavior of the party in default
comports with the standards of good faith and fair dealing. Even
an adverse conclusion on this point is not decisive but is to be
weighed by other factors, such as the extent to which the owner
will be deprived of a reasonably expected benefit and the extent
to which the builder may suffer forfeiture, in deciding whether
there has been substantial performance.8
In Pagsibigan vs. Court of Appeals9 where the debtor had, in
effect, paid the creditor already more than the original amount of
the loan (which was secured by a mortgage) due to the imposition of
a high interest rate plus penalty charges and where the debtor, as
payment of the remaining balance of P3,558.20, had in effect paid
P8,650.00 in addition to the P1,000 it also paid, the Supreme Court
ruled that there was substantial compliance on the basis of Article
1234 warranting the cancellation and release of the mortgage. It
7
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition,
1987, West Publishing Company, St. Paul Minn., Page 462, citing Mac Pon Co. vs.
Vinsoni Painting & Decorating Co., 423 So.2d 216 (Ala. 1982); E. Martin Schaeffer
vs. Kelton, 95 N.M. 182, 619 P.2d 1226 (1980); Klug & Smith Co. vs. William Sommer
and Richard Gebhardt, 83 Wis. 2d 378, 265 N.W. 2d 269 (1978).
8
Id., Page 463, citing Vencenzi vs. Cerro, 186 Conn. 612, 442 A.2d. 1352, 1354
(1982).
9
G.R. No. 90169, April 7, 1993, 221 SCRA 202.
182
ObligatiOns and COntraCts
Text and Cases
art. 1234
likewise quoted the ruling in Angeles vs. Calasanz10 where rescission
was not allowed due to substantial compliance by the debtor on the
basis again of Article 1234, thus:
The breach of the contract adverted to by the defendantsappellants is so slight and casual when we consider that apart
from the initial downpayment of P392.00 the plaintiff-appellees
had already paid the monthly installments for a period of almost
nine (9) years. In other words, in only a short time, the entire
obligation would have been paid. Furthermore, although the
principal obligation was only P3,920.00 excluding the 7 percent
interest, the plaintiffs-appellees had already paid an aggregate
amount of P4,533.38. To sanction the rescission made by the
defendants-appellants will work injustice to the plaintiffsappellees. It would unjustly enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that 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, also
militates against the unilateral act of the defendants-appellants
in cancelling the contract.
The obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee. Thus in
the Pagsibigan11 case, the substantial compliance in the payment of
the loan warranted the cancellation and release of his mortgaged
properties after he was still required to pay some penalties. Also, it has
been held that the difference between the value of the house
as
built and the value it would have had had it been constructed strictly
according to the contract was the measure of damages.12 Other cases
state that the defaulting party will be allowed to recover the contract
price less the cost of correction of the defects of the unfinished work.13
In J.M. Tuason & Co., Inc. vs. Javier,14 the Supreme Court upheld
the decision of the lower court in giving the defaulting-purchaser an
extension of time to pay all his obligations to the seller-plaintiff by
applying Article 1234 to the situation of the defaulting purchaser, to
wit:
G.R. No. L-42283, March 18, 1985, 135 SCRA 323.
G.R No. 90169, April 7, 1993, 221 SCRA 202.
12
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition,
1987, West Publishing Company, St. Paul, Minn., Page 463 in footnote 75, citing White
vs. Mitchell, 123 Wash. 630, 213 P. 10 (1923); Venzke vs. Magdanz, 243 Wis. 155, 9
N.W.2d 604 (1943).
13
Id., Page 464 in footnote 75, citing Bellizzini vs. Huntley Estates, Inc., N.Y.2d
112, 164 N.Y.S.2d 395, 143 N.E.2d 802 (1957).
10
11
art. 1235
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
183
In this connection, it should be noted that, apart from the
initial installment of P396.12, paid upon the execution of the
contract, on September 7, 1954, the defendant religiously satisfied
the monthly installments accruing thereafter, for a period of
almost eight (8) years, or up to January 5, 1962; that, although
the principal obligation under the contract was P3,691.20, the
total payments made by the defendant up to January 5, 1962,
including stipulated interest, aggregated P4,134.08; that the
defendant has offered to pay all of the installments overdue
including the stipulated interest, apart from reasonable attorney’s
fees and the costs; and that, accordingly, the trial court sentenced
the defendant to pay all such installments, interest, fees and
costs. Thus, plaintiff will thereby recover everything due thereto,
pursuant to its contract with the defendant, including such
damages as the former may have suffered in consequence of the
latter’s default. Under the circumstances, We feel that, in the
interest of justice and equity, the decision appealed from may be
upheld upon the authority of Article 1234 of the Civil Code.
Article 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)
Unlike in Article 1234, the substantial compliance contemplated
in Article 1235 connotes the waiver of the obligee of damages arising
from the breach of contract which resulted in the incompleteness
or irregularity of the obligation. By not expressing any protest or
objection, the obligee accepts the performance of the obligation as
fully complied with despite his knowledge of such irregularity or
incompleteness.
In Esguerra vs. Villanueva15 where the debtor claimed that,
because the creditor received his partial payments, the creditor was
to be considered to have accepted the incompleteness of the performance, and therefore the obligation should have been considered
complied with pursuant to Article 1235, the Supreme Court said that
such interpretation was wrong and explained:
Respondents maintain, and the lower court held, that the
“receipt” of said sums of P800.00 and P1,400.00 by the Esguerras
constituted “acceptance” of the incomplete and irregular
14
G.R. No. L-28569, February 27, 1970, 31 SCRA 829; See also Legarda Hermanos
vs. Saldana, G.R. No. L-26578, January 28, 1974, 55 SCRA 324.
15
G.R. No. L-23191, December 19, 1967, 21 SCRA 1314.
184
ObligatiOns and COntraCts
Text and Cases
art. 1235
performance of respondents’ obligation under the judgment in
cases Nos. 1074 and 1075, and that this “acceptance” having
been made without any “protest or objection” on the part of the
Esguerras, said obligation must be “deemed fully complied with,”
pursuant to Article 1235 of the Civil Code of the Philippines.
This theory is based upon the premise that “receipt” of a
partial payment is necessarily an “acceptance” therefor, within
the purview of said provision, and that the Esguerras had not
protested or objected to said payment. Such premise is untenable.
The verb “accept,” as used in Article 1235, means to take as
“satisfactory or sufficient,” or to “give assent to,” or to “agree”
or “accede” to an incomplete or irregular performance. The
circumstances obtaining in the case at bar clearly show that the
Esguerras had neither acceded or assented to said payment, nor
taken the same as satisfactory or sufficient compliance with the
judgment aforementioned.
Indeed, the day immediately following that of the first
payment of P800.00 or on December 13, 1962, the Esguerras asked
Judge Villanueva to issue the corresponding writs of execution in
the two (2) cases. Thus, the Esguerras patently manifested their
dissatisfaction with — which necessarily implied an objection or
protest to — said partial payment. Moreover, Judge Villanueva
must have so understood the reaction of the Esguerras to the same
payment, for he was present when it was made, and still he caused
the writs to be issued. What is more, the respondents evidently
had the same impression, for, otherwise, they would not have
paid the additional sum of P1,460.00 on January 5, 1963. Then,
again, the insistence of the Esguerras in causing the attached
properties of respondents herein to be disposed of, pursuant to
the writs of execution, despite said additional payments, leave
no room for doubt that the former had never regarded the partial
payment as satisfactory compliance with the latter’s obligation
under said judgment.
After all, the law does not require the protest or objection
of the creditor to be made in a particular manner or at a
particular time. So long as the acts of the creditor, at the time of
the incomplete or irregular payment by the debtor, or within a
reasonable time thereafter, evince that the former is not satisfied
with or agreeable to said payment or performance, the obligation
shall not be deemed fully extinguished. In the case at bar, the
Esguerras had performed said acts within such time.
In Tayag vs. Court of Appeals16 where the sellers accepted from
the purchaser numerous payments in installment of the purchase
price of a particular piece of land after the due date and posterior to
arts. 1236-1238
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
185
the grace periods provided in the contract without any protest as to
the delayed payments and where it was even the purchaser who filed
a case for specific performance relative to the sale, and who consigned
at the same time the balance of the purchase price, the Supreme Court
said that the actuation of the sellers was clearly a waiver of his right
to rescind the contract and that, on the basis of Article 1235 of the
Civil Code, he was likewise estopped from reneging their commitment
on account of acceptance of benefits arising from overdue accounts of
the purchaser.
Pertinently, if a party fails to interpose any objection to the
entries or conditions in an invoice furnished to him by the other party,
such failure can be considered as implied acceptance and therefore
he will be liable to pay the amount stated therein.17
Article 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)
Article 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)
Article 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)
Payment made by a third person and accepted by the creditor
can extinguish an indebtedness or an obligation. The good faith or
the bad faith of the third person is immaterial. However, whether or
not the one who paid completely acquires the rights of the creditor as
against the debtor depends on whether or not the payment has been
G.R. No. 96053, March 3, 1993, 219 SCRA 480.
Naga Development Corporation vs. Court of Appeals, G.R. No. L-28173,
September 30, 1971, 41 SCRA 105; Pan Pacific Company vs. Philippine Advertising
Corporation, G.R. No. L-22050, June 13, 1968; Brillo Handicrafts, Inc. vs. Court of
Appeals, 73 SCAD 122, 260 SCRA 383.
16
17
186
ObligatiOns and COntraCts
Text and Cases
arts. 1236-1238
made without knowledge or against the will of the debtor. Hence, the
following situations can arise:
1)
If a third person pays the creditor without the
knowledge or against the will of the debtor, the third person
can only recover from the debtor to the extent that the debtor
has been benefited. As to what is beneficial to the debtor can be
invoked only by such debtor and not the creditor. Whether or not
it is beneficial to the debtor is determined by the law and not the
will of the debtor. The beneficial effects must be determined at the
time the payment was made.18 The third person cannot compel
the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty or penalty. Hence, if A is indebted to
B in the amount of P500,000 secured by a real estate mortgage
on the house of A, and X pays B the said indebtedness in the
amount of P500,000 without the knowledge or against the will
of A, X can only recover the amount of P500,000 but he cannot
compel the creditor to transfer the mortgage to him. Hence, in case
A does not pay X, X cannot fore-close on the mortgage to satisfy
his claim. However, if the third party who paid is interested in
the obligation, such as a gua-rantor, surety, or co-debtor, legal
subrogation is presumed19 and therefore such interested third
party-payor can have the right even as to the accessory obligations
such as a mortgage. However, the presumption is rebuttable.
Legal subrogation transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor
or against third persons, be they guarantors, or possessors of
mortgages.20
2)
If a third person pays the creditor with the know-ledge
of the debtor, but over the latter’s objection, then the effect is the
same as in No. 1 because the situation is clearly against the will
of the debtor.
3)
If the third person pays the creditor with the knowledge and consent of the debtor, the third person can recover from
the debtor the amount he paid to the creditor. He can likewise
compel the creditor to transfer to him any mortgage, guaranty or
penalty. In this case there is legal subrogation which transfers
to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third persons,
be they guarantors, or possessors of mortgages.21 In the example
given in No. 1, X can recover P500,000. X can likewise compel
the creditor to transfer to him the real estate mortgage of A so
that, if the latter does not pay, X can foreclose on the mortgage
RFC vs. Court of Appeals, 94 Phil. 984.
Article 1302(3) of the 1950 Civil Code.
20
Article 1303 of the 1950 Civil Code.
18
19
arts. 1236-1238
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
187
to satisfy his claim.
4)
If the creditor accepts payment from a third person
because this has been allowed in his contract with the debtor,
then clearly the debtor agrees with such payment beforehand,
and therefore the effect is the same as in No. 3.
5)
If the third person pays the creditor without
inten-ding to be reimbursed by the debtor, the obligation is extinguished whether or not the consent of the debtor is obtained.
The payment will be treated as a donation which requires the
debtor’s consent. A is indebted to B. X pays B the said indebtedness without intending to be paid back by A. This will be
treated as a donation and hence A should accept the payment
made by X. If A does not consent or accept the payment made by
X, the obligation nevertheless will be extinguished in so far as B
is concerned.
In Tanguilig vs. Court of Appeals22 where respondent was sued by
the petitioner for non-payment of the windmill the latter constructed
for the former, and where the respondent claimed that he made
payment to another contractor who built the deep well to which the
windmill system was connected and therefore such pay-ment must
be credited as payment to the petitioner, the Supreme Court ruled
that the only contract that existed between the res-pondent and
the petitioner was the construction of a windmill and therefore any
payment to the contractor of the deep well was ineffective. Moreover,
the Supreme Court said that any notion of payment pursuant to
Articles 1236 and 1237 cannot be accepted, thus:
Respondent cannot claim the benefit of the law concerning
“payments made by a third person.” The Civil Code provisions
do not apply in the instant case because no creditor-debtor
relationship between petitioner and Guillermo Pili and/or SPGMI
has been established regarding the construction of the deep well.
Specifically, witness Pili did not testify that he entered into a
contract with petitioner for the construction of res-pondent’s
deep well. If SPGMI was really commissioned by petitioner to
construct the deep well, an agreement particularly to this effect
should have been entered into.
Article 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
21
22
Article 1303 of the 1950 Civil Code.
G.R. No. 117190, January 2, 1997, 77 SCAD 647.
188
ObligatiOns and COntraCts
Text and Cases
art. 1239
to the provisions of Article 1427 under the Title on “Natural
Obligations.” (1160a)
Normally, one has the free disposal of the thing due and capacity
to alienate it only if he is the owner of the thing or at least he has
been given authority by the owner to use the property as payment
for the obligation “to give.” Article 1239 contains a clause which says
“without prejudice to the provisions of Article 1427 under the Title
on “Natural Obligations.” This article provides that
when a minor between eighteen and twenty-one years of age, who
has entered into a contract without the consent of the parent or
guardian, voluntarily pays a sum of money or delivers a fungible
thing in fulfillment of the obligation, there shall be no right to
recover the same from the obligee who has spent or consumed
it in good faith.
Even if a minor owns something, especially those which have
significant value, he does not, on his own, have the free disposal of it
without the consent of his parents and the courts. As a general rule,
any contract entered into by a minor with respect to the alienation of
something which he owns is annullable. Article 1427 however states
that “a minor between the ages of 18 and 21 years of age” has no right
to recover any fungible thing used as payment for an obligation from
the creditor who has spent or consumed it in good faith. Under Article
1427 therefore, payment is legally effected even if the said minor has
no free disposal of the thing. Article 1427 must be considered repealed
by Articles 234 and 236 of the Family Code of the Philippines,23 as
amended by Republic Act No. 6809, which lowered the age of majority
and emancipation to 18 years of age and which likewise provide that
emancipation shall terminate parental authority over the person and
property of the child who shall then be qualified and responsible for
all acts of civil life, save the exceptions established by existing laws
in special cases. Accordingly, a minor must necessarily be 17 years
of age or below. There is no more “minor between the ages of 18 and
21 years of age.” If ever the effects of Article 1427 is still to apply, it
shall apply only to those 17 years of age and below.
Article 1240. Payment shall be made to the person in whose
favor the obligation has been constituted, or his successors-ininterest, or any person authorized to receive it. (1162a)
23
Executive Order No. 209 which took effect on August 3, 1988.
art. 1240
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
189
Payment should only be paid to the creditor or the obligee, or
his successors-in-interest, or any person authorized to receive it. The
phrase “any person authorized to receive it”
means not only a person authorized by the same creditor, but
also a person authorized by law to do so, such as a guardian,
executor or administrator of estate of a deceased, and assignee
or liquidator of a partnership or corporation, as well as any other
who may be authorized to do so by law.24
In Panganiban vs. Cuevas,25 the Supreme Court said that
payment made to a third person, even through error and in good faith,
shall not release the debtor of the obligation to pay and will not deprive
the creditor of his right to demand payment. If it becomes impossible
to recover what was unduly paid, any loss resulting therefrom shall
be borne by the deceived debtor, who is the only one responsible for
his own acts unless there is a stipulation for the wrongful payment.
In Philippine National Bank vs. Court of Appeals26 where
payment was made to a person claiming to be the attorney-in-fact of
the creditor but no evidence of his authority was ever presented, the
Supreme Court ruled that payment was not effected. Also in Bank
of the Philippine Islands vs. Court of Appeals27 where the bank, as
debtor and despite knowledge of a dispute involving the ownership
of the subject deposit, allowed the withdrawal of the said deposit
by the heirs of the deceased, who claimed that the money was the
deposit of their deceased father and who successfully obtained a
judicial resolution from the probate court allowing the withdrawal
of the said money, although said resolution did not specifically order
the bank to release the money, and where the bank, relying on the
judicial resolution, released in good faith the money which turned
out as belonging to another, the Supreme Court, in considering that
any determination by a probate court that a property was included
in the deceased’s estate was only provisional in character and cannot
be subject to execution, and that the relationship between a bank and
its depositor was one of creditor and debtor (the depositor being the
creditor and the bank being the debtor), and hence any with-drawal
by the depositor was in effect payment of a debt by a bank, and that
the ownership of the subject money was in dispute, and that the debt
24
Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80
Phil. 605, citing Manresa, Civil Code, 4th ed., p. 254.
25
7 Phil 477.
26
G.R. No. L-108630, April 2, 1996, 70 SCAD 37, 256 SCRA 44.
27
G.R. No. 104612, May 10, 1994, 51 SCAD 188, 232 SCRA 302.
190
ObligatiOns and COntraCts
Text and Cases
art. 1241
herein was paid to persons who were not the creditors or at least
successors-in-interest of the same, ruled that there was therefore no
payment effected to extinguish the obligation as the withdrawal was
not proper. Specifically, the Supreme Court said:
Because the ownership of the deposit remained
undetermined, BPI, as the debtor with respect thereto had no
right to pay persons other than those in whose favor the obligation
was constituted or whose right or authority to receive payment is
indisputable. The payment of the money deposited with BPI that
will extinguish its obligation to the creditor-depositor is payment
to the person of the creditor or to one authorized by him or by
the law to receive it. Payment made by the creditor to the wrong
party does not extinguish the obligation as to the creditor who
is without fault or negligence, even if the debtor acted in utmost
good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person. The payment
then by BPI to the heirs of Velasco, even if done in good faith,
did not extinguish its obligation to the true depositor, Eastern.
Article 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
payment. (1163a)
For an incapacitated person, such as a minor or an insane, to be
able to administer his property and to be able to transact business,
there must be a guardian appointed by the courts to handle his affairs.
However, the father and the mother shall be the legal guardian of the
property of the unemancipated common child without the necessity
of a court appointment.28 In the event that payment is made to an
incapacitated person who cannot administer his property, the law
says that such payment is effective in two situations: first, when he
has kept the thing delivered, and, second, in so far as the payment
is beneficial to him. Hence, if a minor receives payment from a debtor
art. 1241
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
191
arising from a contract, payment should be made to his guardians.
If the payment is made directly to the minor, such payment shall be
voidable. However if the minor, by the time he reaches the age of
majority, still has in his possession the thing delivered for payment,
then such payment will become valid. This act of still holding on
to the thing delivered as payment at the time when the person is
already capacitated can be considered as ratification of the payment
which cures the irregularity of the same. Also, if the minor uses the
payment for activities beneficial to him, such as making use of the
money to pay his school tuition fees, then the payment is valid to the
extent that he has been benefited. It must be noted that, in paying to
an incapacitated person under a voidable contract, the capacitated
person, who may have even acted in good faith, is at a disadvantage in
that, generally, the capacitated person cannot ask for the annulment
of the contract on the basis of the incapacity of the other party29 and,
in the event that the contract is annulled, the incapacitated person
is not obliged to make restitution except in so far as he has been
benefited by the thing or price received by him.30
Payment made to a person who is not the creditor, his successorin-interest, or a person who is authorized to receive payment is not
effective payment which will bind the creditor.31 However, if such
payment to a third person nevertheless benefits the creditor, such
payment shall be effective in so far as it has redounded to the benefit
of the creditor. Hence, if A is the debtor of Mr. B, and A, instead of
paying B directly, pays half of the indebtedness to B’s brother who is
not authorized by B to receive payment, such payment is not valid.
However, if the brother of B uses the money to pay B’s indebtedness
to somebody, then the payment will become valid because it benefits
B. It will extinguish A’s indebtedness in so far as the payment has
redounded to the benefit of B which, in this case, is half of the indebtedness.
The benefit to the creditor for payment made by the debtor to
a third person must always be proven except in three cases. First,
if after the payment, the third person acquires the creditor’s rights.
Hence, if A is indebted to B for P1,000, and A does not pay B on due
date despite proper demand, such that the stipulated interest on
the indebtedness accrues in the amount of P100, and A (the debtor)
28
Article 225 of Executive Order No. 209 which took effect on August 3, 1988,
otherwise known as the Family Code of the Philippines.
29
Article 1387 of the 1950 Civil Code.
30
Article 1399 of the 1950 Civil Code.
192
ObligatiOns and COntraCts
Text and Cases
art. 1241
pays X (a third person) the principal amount, such payment is not
effective. However, if there is concrete proof that interest has not yet
been paid, and later B (the real creditor) empowers X to also collect
the interest of P100 for himself (X) and not for B, then the benefit
to the creditor need not be proven. The fact that X acquires the
creditor’s right to collect the interest is enough to show that payment
to the third person X benefited the creditor B. The P1,000 principal
indebtedness therefore must be considered extinguished. If A pays
the interest to X, the totality of the obligation is extin-guished. The
second instance when benefit to the creditor need not be proven is
when the creditor ratifies the payment to the originally unauthorized
third person. If, in the same example, B, after learning that payment
was made to X (a third person) approves of the payment to the latter,
the debt is extinguished. The third instance when benefit to the
creditor need not be proven is when, by the creditor’s conduct, the
debtor has been led to believe that the third person has authority to
receive the payment. Hence, in the same example, if B tells A that
he can transact any business or any of his concerns with X, including
the P1,000 indebtedness, and later A pays X the indeb-tedness, the
obligation is extinguished, as B cannot disclaim the payment to X.
By his representation to A, B is estopped from claiming that X had
no authority to accept payment.
Article 1242. Payment made in good faith to any person
in possession of the credit shall release the debtor. (1164)
A person in possession of the credit is presumed to own the
credit and hence, a debtor who pays such person in good faith shall be
released from the debt. Whether the creditor willfully, unintentionally
or negligently allowed a third person to possess the credit does not
matter in so far as the debtor who paid in good faith is concerned.
The risk is always on the creditor provided payment is made by
the debtor in good faith. If payment is made to a person who is not
in possession of the credit, the debtor will not be released from his
obligation regardless of whether or not payment was made in good
faith.
Article 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)
31
Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May 10,
1994, 51 SCAD 188, 232 SCRA 302.
arts. 1242-1244
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
193
In order to protect other creditors of the debtor and to prevent
any transaction which might be intended to defraud said creditors,
the debtor is prohibited from paying a particular creditor during the
effectivity of a court order prohibiting him to make such payment
to that particular creditor. In the event that the debtor makes such
payment, it shall not extinguish the obligation as the law considers
such payment as invalid.
Article 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, as act or forbearance
cannot be substituted by another act or forbearance against
the obligee’s will. (1166a)
Unless the prestation is subject to an alternative or facultative
condition, a debtor has no choice in the payment of his obligation
except by giving what has been agreed upon by the parties. Hence
he cannot pay by giving a particular car if the agreement is to give
a particular jeep even if the car is more expensive than the jeep.
Likewise, if one has been engaged to sing for one night in exchange for
an airplane ticket, the obligor cannot fulfill the obligation by dancing
for one week even if such dancing is worth more than the singing.
Article 1245. Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales. (n)
Dation in payment or Dacion en Pago is the delivery and
transmission of ownership of a thing by the debtor to creditor as
an accepted equivalent of the performance of an obligation.32 Thus
in Philippine National Bank vs. Pineda,33 the Supreme Court ruled
that the mere repossession of the machinery and equipment for
purposes of securing payment of an obligation and not for the purpose
of transferring ownership is not dation in payment.34 In Caltex vs.
Intermediate Appellate Court,35 the Supreme Court also noted the
requisites for a valid dation in payment, thus:
In order that there be a valid dation in payment, the
following are the requisites: (1) There must be the 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
194
ObligatiOns and COntraCts
Text and Cases
art. 1245
in sub-stitution (aliud pro alio); (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. (3 Castan, Vol. I, 8th Ed., page 283, cited in IV
Caguioa, ‘Comments and Cases in Civil Law’ s/s263, page 325;
italics supplied)
Also, in the Caltex case36 where the debtor assigned to the
creditor its receivables or refunds from the Special Fund Import
Payments due from the National Treasury of the Philippines to be
applied as payment of the amount of P4,072,683.13 it owed to the
creditor and where the amount actually received from the Special
Fund by the debtor was more than P4,072,683.13 and where, after the
creditor sought the excess of the amount obtained, the debtor released
some of the excess minus P510,550.63 which the debtor claimed as
interest on the indebtedness, the Supreme Court, in overturning the
decision of the Court of Appeals to the effect that the dacion en pago
completely extinguished the obligation of the debtor and therefore
the amount of P510,550.63 should be returned to the creditor, ruled:
The then Intermediate Appellate Court ruled that the three
(3) requisites of dacion en pago are all present in the instant case,
and concluded that the Deed of Assignment of July 31, 1980 x x
x constitutes a dacion in payment provided for in Article 1245 of
the Civil Code which has the effect of extinguishing the obligation,
thus supporting the claim of private respondent for the return of
the amount retained by petitioner.
This Court, speaking of the concept of dation in payment in
the case of Lopez vs. Court of Appeals (114 SCRA 671, 685 [1982]),
among others, stated:
“The dation in payment 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.” (8 Manresa 324; 3 Valerde 174 fn.)
From the above, it is clear that a dation in payment does
not necessarily mean total extinguishment of the obligation.
32
Philippine National Bank vs. Pineda, G.R. No. L-46658, May 13, 1991, 197
SCRA 1.
33
Id.
34
See also Development Bank of the Philippines vs. Court of Appeals, G.R. No.
118342, January 5, 1998, 90 SCAD 12.
35
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
36
Id.
art. 1245
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
The obligation is totally extinguished only when the parties, by
agreement, express or implied, or by their silence, consider the
thing as equivalent to the obligation.
In the instant case, the then Intermediate Appellate Court
failed to take into account the following express recitals of the
Deed of Assignment —
“That Whereas, ASSIGNOR has an outstanding obliga-tion
with ASSIGNEE in the amount of P4,072,682.13 as of June 30,
1980, plus any applicable interest on overdue account. (p. 2, Deed
of Assignment)
“Now therefore in consideration of the foregoing premises,
ASSIGNOR by virtue of these presents, does hereby irrevocably
assign and transfer unto ASSIGNEE any and all fund and/or
Refund of Special Fund Payments, including all its rights and
benefits accruing out of the same, That ASSIGNOR might be
entitled to, by virtue of and pursuant to the decision in BOR Case
No. 80-123, in payment of ASSIGNOR’s outstanding obligation
plus any applicable interest charges on overdue account and
other avturbo fuel lifting and deliveries that ASSIGNOR may
from time to time receive from the ASSIGNEE, and ASSIGNEE
does hereby accepts such assignment its favor.” (p. 2, Deed of
Assignment) (Italics supplied)
Hence, it could easily be seen that the Deed of Assignment
speaks of three (3) obligations — (1) the outstanding obligation
of P4,072,682.13 as of June 30, 1980; (2) the applicable interest
charges on overdue accounts; and (3) the other avturbo fuel lifting
and deliveries that assignor (private respondent) may from time
to time receive from assignee (Petitioner). As aptly argued by
petitioner, if it were the intention of the parties to limit or fix
respondent’s obligation to P4,072,682.13; they should have so
stated and there would have been no need for them to qualify
the statement of said amount with the clause “as of June 30,
1980 plus any applicable interest charges on overdue account”
and the clause “and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE.”
The terms of the Deed of Assignment being clear, the literal
meaning of its stipulations should control (Article 1370, Civil
Code). 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. (Rule 130, Sec. 9,
Rules of Court)
Likewise, the then Intermediate Appellate Court failed to
take into consideration the subsequent acts of the parties which
clearly show that they did not intend the Deed of Assignment
to totally extinguish the obligation — (1) After the execution of
195
196
ObligatiOns and COntraCts
Text and Cases
art. 1245
the Deed of Assignment on July 31, 1980, petitioner continued
to charge respondent with interest on its overdue account up to
January 31, 1981. This was pursuant to the Deed of Assignment
which provides for respondent’s obligation for “applicable interest
charges on overdue account.” The charges for interest were
made every month and not once did respondent question or take
exception to the interest; and (2) In its letter of February 16, 1981,
respondent addressed the following request to the petitioner:
“Moreover, we would also like to request for a consideration
in the following:
1)
Interest charges be limited to December 31, 1980 only;
and
2)
Reduction of 2% on 18% interest rate p.a.
“We are hoping for your usual kind consideration on this
matter.”
In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally
considered (Art. 1253, Civil Code). The foregoing subsequent
acts of the parties clearly show that they did not intend the
Deed of Assignment to have the effect of totally extinguishing
the obligations of private respondent without payment of the
applicable interest charges on the overdue account.
Dacion en pago is different from pactum commisorium. In
dacion en pago, before the creditor becomes the owner of the
property collateralized to secure the debt, an intervening agreement
subsequent and independent from the original contract is entered
into by the creditor and the debtor to have the property collateralized
in the original agreement as payment of the debt, thereby extinguishing the obligation. In pactum commisorium, the parties agree,
generally in one single contract, that, in the event that the debtor
fails to pay the debt, the mortgaged or pledged property of the debtor
shall automatically be appropriated or owned by the creditor. Pactum
commisorium is void in accordance with Article 2088 of the Civil
Code which provides: “The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.” This is in accordance with the
rule that any property made as security for a loan must always be
foreclosed or subjected to a sale by public bidding in case it shall be
used to satisfy the debt wholly or partially of the debtor. The elements
of pactum commissorium are: 1) there must be a creditor-debtor
relationship between the parites; 2) the property of the debtor was
used as security for the loan, either as a mortgage or a pledge; and
art. 1245
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
197
3) there was automatic appropriation of the property upon failure of
the debtor to pay the obligation as provided in their agreement.37
In Bustamante vs. Rosel,38 the debtor and the creditor entered
into a loan agreement where it was stipulated that, in case of the
default of the debtor, the creditor has the option to buy the collateral
for a total consideration of P200,000 inclusive of the borrowed amount
and interest thereon. The Supreme Court said that the stipulation is
void and said:
In this case, the intent of the creditor appears to be evident,
for the debtor is obliged to dispose of the collateral at the preagreed consideration amounting to practically the same amount
as the loan. In effect, the creditor acquires the collateral in the
event of non-payment of the loan. This is within the concept of
pactum commissorium. Such stipulation is void.
In Development Bank of the Philippines vs. Court of Appeals39
where the debtor executed deeds of assignment of leasehold rights
on certain properties, the Supreme Court said that such assignments
were not dacion en pago because they were not designed to directly
extinguish an obligation but was furnished to constitute as a security.
Neither were the assignments pactum commissorium as they did
not provide for the automatic ownership of the properties in case of
non-payment. They were likewise not payment by cession because
there was only one creditor. The Supreme Court ruled that such
assignments were in effect mortgages.
Article 1246. When the obligation consists in the delivery
of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot
demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation
and other circumstances shall be taken in consideration.
(1167a)
Obligations must be complied with in good faith and any act
which tends to implement an obligation in a manner which is not
consistent with its goals or purposes should always be discouraged.
Hence, if an obligor, who is not rich, is bound to deliver any rented car
37
Bustamante vs. Rosel, G.R. No. 126800, November 29, 1999, 116 SCAD 390,
319 SCRA 413; Nakpil vs. Intermediate Appellate Court, 44 SCAD 71, 225 SCRA 456;
Development Bank of the Philippines vs. Court of Appeals, 90 SCAD 12, 284 SCRA
14; Uy Tong vs. Court of Appeals, 161 SCRA 383.
38
G.R. No. 126800, November 29, 1999, 116 SCAD 390, 319 SCRA 413.
198
ObligatiOns and COntraCts
Text and Cases
arts. 1246-1247
to be used at a very simple wedding ceremony and the obligee knows
the financial capacity of the obligor, such obligee cannot demand that
the obligor comply with his obligation by delivering a multi-million
Rolls Royce which could only be rented at such amount which the
obligor cannot afford. On the other hand, the obligor cannot deliver
a car which is so old that it would not start unless it is pushed.
Article 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. (1168)
The creditor usually benefits from the obligation. It is always
in his favor that the debtor gives, does some service or not do some
service. As such, the creditor must, as much as possible, fully take
the benefit by not spending in the extra-judicial expenses for the
payment or performance of the obligation. With respect to judicial
cost, the Rules of Court shall apply.
Article 1248. Unless there is an express stipulation to that
effect, the creditor cannot be compelled partially to receive the
prestation 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)
In the case of Nasser vs. Cuevas40 where, on the basis of a
compromise agreement, a number of obligors agreed to pay a lawyer
his legal fees by way of real property and cash and for this purpose,
it was expressly stipulated that a charging lien for attorney’s fees
would be established on the properties to secure payment of the legal
fees “provided that upon full payment of the corresponding liability
of a party, the lien on his/her share is extinguished” and where, upon
demand of the lawyer for payment, the obligors contended that the
aforequoted clause gave them the right to pay in installment, the
Supreme Court rejected this interpretation and ruled that the said
clause
evidently contemplates the probability that the heirs obliged to
pay Canlas’ fees, the lien on his share of the estate is thereby
extinguished — a quite obvious proposition, to be sure. The
39
G.R. No. 118342, January 5, 1998, 90 SCAD 12, 284 SCRA 14.
art. 1248
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
199
clause cannot be construed as granting to any of the obligors,
by implication, the option to pay in installments, or as impliedly
binding the obligee to accept payment by parts.
The legal principle, in any event, is that “the creditor cannot
be compelled partially to receive the prestations in which the
obligation consists” unless “there is an express stipulation to
that effect,” in much the same way that the debtor may not “be
required to make partial payments.”
Partial payment however can be made if there is an express
stipulation by the parties allowing the same or if the debt is partially
liquidated and partially unliquidated. For example, a debtor is bound
to perform an obligation by making payment in the amount of P1,000
and by also delivering whatever money he will get from the estate of
his already deceased father, the creditor may demand and the debtor
may pay the P1,000 without waiting for the determination of the
amount of money the debtor will get from the deceased father’s estate.
Even if there is no express stipulation, partial payment can likewise
be effective if the creditor accepts such partial payment and benefits
from it. In Barons Marketing vs. Court of Appeals,41 the Supreme
Court said that a creditor cannot be considered in delay if he refuses to
accept partial performance because, unless otherwise provided by law
or stipulated by the parties, a creditor cannot be compelled to accept
partial performance; however, if good faith necessitates acceptance
or if the creditor abuses his right in not accepting, the creditor will
incur in delay if he does not accept such partial perfor-mance.
Article 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. (1170)
Under the old Republic Act 529, otherwise known as the Uniform Currency Act, it was prohibited to use foreign currency in connection with certain contracts in the Philippines. In General Insurance
40
G.R. No. L-41607, August 21, 1990, 188 SCRA 812.
200
ObligatiOns and COntraCts
Text and Cases
art. 1249
& Surety Corporation vs. Union Insurance Society of Canton, Ltd.,42
it was held that though the stipulation for the use of foreign currency
was void, the contract or transaction was nevertheless valid. Republic
Act No. 529 has already been repealed by Republic Act Number 8183
which took effect on July 6, 1996. This law specifically provides that
all monetary obligations shall be settled in 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.
A promissory note is a document where a promise to pay is
made by the debtor to the creditor. Under the Negotiable Instruments
Law, a promissory note is an unconditional promise in writing made
by one person to another, signed by the maker, engaging to pay on
demand or at a fixed or determinable future time, a sum certain in
money to order or to bearer.43 A bill of exchange is an unconditional
order in writing addressed by one person to another signed by the
person giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum certain in
money to order to bearer.44 A check is a bill of exchange drawn on a
bank payable on demand.45 The law is very specific that, in fulfillment
of an obligation by payment of money, only payment in cash will
extinguish the obligation. If promissory notes, bills of exchange or
checks are given to pay a debt, such debt will not be extinguished
unless these mercantile documents are encashed.
Since a negotiable instrument is only a substitute for money
and not money, the delivery of such an instrument does not, by
itself, operate as payment (Citing Sec. 189, Act 2031 on Neg.
Insts.; Art. 1249, Civil Code; Bryan London Co. vs. American
Bank, 7 Phil. 225; Tan Sunco vs. Santos, 9 Phil 44; 21 R.C.L. 60,
61). A check, whether a 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.46
However, in Far East Bank and Trust Company vs. Diaz Realty
Inc.,47 the Supreme Court said that, if payment by way of a fullyfunded check were offered or tendered and the obligee accepts the
check as payment after the obligor’s manifestation that it had been
given to settle an obligation, such obligee shall be estopped from later
on denouncing the efficacy of such tender of payment. This is especially
41
42
G.R. No. 126486, February 9, 1998, 91 SCAD 509, 286 SCRA 96.
G.R. Nos. 30475-76, November 22, 1989, 179 SCRA 530.
art. 1249
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
201
true when the said check was in fact deposited by the obligee and was
converted in cash.
In National Marketing Corporation vs. Federation of United
Namarco Distributors, Inc.,48 the phrase “when through the fault of
the creditor they have been impaired” was explained by the Supreme
Court, thus
x x x 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.
Also, 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.49 Under normal
banking practice, a check becomes stale if it has not been presented
to the bank for a period of six months from the date of the said check.
However, if a creditor allows his checks to become stale, it does
not mean that the debtor who drew the check will necessarily be
discharged from his debt, or that his obligation will be extinguished. It
is only when the creditor does not present the check for payment and
thereafter the bank upon which the check has been drawn collapses
or fails to the point that it cannot meet demands for payment, will
the debtor be discharged.
“If a bank or banker still remains in good credit and is able
to pay the check, the drawer will still remain liable to pay the
same, notwithstanding many months may have elapsed since
the date of the check and before the presentment for payment
and notice of the dishonor. So, if the drawer, at the date of the
check or at the time of the presentment of it for payment, had
no funds in the bank or banker’s hands, or if, after drawing the
check and before its presentment for payment and dishonor, he
had withdrawn his funds, the drawer would remain liable to pay
the
check, notwithstanding the lapse of time.”50
43
Section 184, Act No. 2031 otherwise known as the Negotiable Instruments
Law.
Id., Section 126.
Id., Section 185.
46
Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court,
G.R. No. 72110, November 16, 1990, 191 SCRA 411; Philippine Airlines vs. Court of
Appeals, G.R. No. L-49188, January 30, 1990.
47
G.R. No. 138588, August 23, 2001; see also Gutierrez vs. Carpio, 53 Phil. 334.
48
G.R. No. L-22578, January 31, 1973, 49 SCRA 238.
49
Section 186, Act No. 2301 otherwise known as the Negotiable Instruments
Law.
44
45
202
ObligatiOns and COntraCts
Text and Cases
art. 1250
Article 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)
In Filipino Pipe and Foundry Corp. vs. NAWASA,51 the Supreme
Court explained the application of Article 1250, to wit:
The only issue before Us is whether, on the basis of the
continuously spiraling price index indisputably shown by the
plaintiff, there exists an extraordinary inflation of the currency
justifying an adjustment of defendant appellee’s unpaid judgment
obligation to the plaintiff-appellant.
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.
(Tolentino, Commentaries and Jurisprudence on the Civil Code,
Vol. IV, P. 284)
An example of extraordinary inflation is the following
description of what happened to the Deutschmark in 1920:
“More recently, in the 1920’s Germany experienced a case
of hyperinflation. In early 1921, the value of the German mark
was 4.2 to the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. Dollar. And as prices went up rapidly,
so that by October 1923, it had reached 4.2 trillion to the U.S.
Dollar!” (Bernardo M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).
As reported, “prices were going up every week, then every
day, then every hour. Women were paid several times a day so
that they could rush out and exchange their money for something
of value before what little purchasing power was left dissolved
in their hands. Some workers tried to beat the constantly rising
prices by throwing their money out of the windows to their waiting
50
Story on Promissory Notes, Sec. 498, cited in Aguedo F. Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Volume 1,
1978 edition, Philippine Graphic Arts, Inc., Caloocan City, page 425.
51
G.R. No. L-43446, May 3, 1988, 161 SCRA 32; Serra vs. Court of Appeals, G.R.
No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60.
52
Singson vs. Caltex, G.R. No. 137798, October 4, 2000, 134 SCAD 219, 342 SCRA
91; Lantion vs. National Labor Relations Commission, 181 SCRA 513; Commissioner
of Public Highways vs. Burgos, 96 SCRA 831.
art. 1250
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
203
wives, who would rush to unload the nearly worthless paper. A
postage stamp cost millions of marks and a loaf of bread, billion.”
(Sidney Rutberg, “The Money Balloon,” New York: Simon and
Schuster, 1975, p. 19, cited in Economics, An Introduction by
Villegas & Abola, 3rd ed.)
While appellant’s voluminous records and statistics proved
that there has been a decline in the purchasing power of the
Philippine peso, this downward fall of the currency cannot be
considered “extraordinary.” It is simply a universal trend that
has not spared our country.
The effects of extraordinary inflation or deflation cannot be applied
without an official declaration thereof by competent authorities,52
such as the Central Bank53 or Bangko Sentral. The Department of
Finance may likewise make the declaration. Without such declaration, creditors cannot demand an increase of what is due them.54
In Velasco vs. Manila Electric Co.55 where the appellant claimed
that the damages awarded to him arising from tort was inadequate
considering the present high cost of living and therefore should be
adjusted in accordance with Article 1250, the Supreme Court rejected
the applicability of the said Article ruling thus:
It can be seen from the employment of the words “extraordinary inflation and deflation of the currency stipulated” that
the legal rule envisages contractual obligations where a specific
currency is selected by the parties as the medium of payment;
hence it is inapplicable to the obligations arising from tort and
not from contract, as in the case at bar, besides there being no
showing that the factual assumption of the article has come into
existence. x x x.
In Commissioner of Public Highways vs. Burgos,56 the Supreme
Court, in ruling that Article 1250 did not apply to expropriations by
the government of property in the exercise of its eminent domain
powers explained:
It is clear that the foregoing provision applies only to cases
where a contract or agreement is involved. It does not apply where
the obligation to pay arises from law, independent of contract.
The taking of private property by the Government in the exercise
of its power of eminent domain does not give rise to a contractual
obligation. x x x
53
Ramos vs. Court of Appeals, G.R. No. 119872, July 7, 1997, 84 SCAD 280, 275
SCRA 167.
54
Mobil Oil Philippines, Inc. vs. Court of Appeals, 180 SCRA 651.
204
ObligatiOns and COntraCts
Text and Cases
art. 1250
Moreover, the law as quoted, clearly provides that the value
of the currency at the time of the establishment of the obligation
shall be the basis of payment which, in cases of expropriation,
would be the value of the peso at the time of the taking of the
property when the obligation of the Government to pay arises.
It is only when there is an “agreement to the contrary” that the
extraordinary inflation will make the value of the currency at
the time of payment, not at the time of the establishment of the
obligation, the basis for payment. In other words, an agreement
is needed for the effect of an extraordinary inflation to be taken
into account to alter the value of the currency at the time of the
establishment of the obligation which, as a rule, is always the
determinative element, to be varied by agreement that would
find reason only in the supervention of extraordinary inflation
or deflation.
The phrase “value of the currency” refers to the purchasing
power of the currency. It is often referred to as “par value,” “legal
exchange rate,” or “par of exchange.” In Gonzalo L. Manuel Co. vs.
Central Bank,57 the Supreme Court discussed the significance and
meaning of the “par value” of a currency, to wit:
x x x It signifies “the amount it takes one currency (for
example, based on gold) to buy a unit in another currency (also
based on gold) that is, how pieces of the one unit (or their gold
content) are necessary to equal the gold content of the other unit.”
“The par value of a currency is the value as officially defined in
terms of gold or, under the silver standard, where there was such
a standard, in terms of silver. The ‘par of exchange’ therefore
applies only between countries having a fixed metallic content for
their currency unit. It would be possible to define a currency’s par
value in terms of another currency such as the dollar or pound
sterling, but usage confines the meaning of par to the official
value in terms of gold.”58
Article 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.
G.R. No. L-18390, December 20, 1971, 42 SCRA 556.
G.R. No. L-36706, March 31, 1980, 96 SCRA 831.
57
G.R. No. L-21789, April 30, 1971, 38 SCRA 533.
58
See also Del Rosario vs. Shell, G.R. No. L-28776, August 19, 1988, 164 SCRA
55
56
556.
art. 1251
ObligatiOns
Extinguishment of Obligations
Sec. 1 — Payment or Performance
205
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)
To further ensure certainty in the fulfillment of an obligation by
way of payment, the law provides for the place where payment is to be
made. The parties can agree as to where the payment shall be made.
If there is no stipulation and the obligation is to give a determinate
thing, payment shall be made in the place where the thing is located
at the time of the constitution of the obligation. In any other case, the
place of payment is the domicile of the debtor. For the exercise of civil
rights and the fulfillment of civil obligations, the domicile of natural
persons is the place of their habitual residence.59 The additional
expenses attendant in making payment shall be borne by the debtor
in the event that he changes his domicile in bad faith, such as if the
change was made precisely for the creditor not to locate him, or after
he has incurred in delay.
Subsection 1. — Application of Payments
Article 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 payment is made, the former cannot
complain of the same, unless there is a cause for invalidating
the contract. (1172a)
The rules contained in Articles 1252 to 1254 of the Civil Code
Article 49 of the 1950 Civil Code.
Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966,
18 SCRA 967.
59
60
206
ObligatiOns and COntraCts
Text and Cases
art. 1251
apply to a person owing several debts of the same kind to a single
creditor.60 Similar to a case where the obligation is subject to an
alternative obligation or prestation, the choice as to which debt the
payment is to be applied is given to the debtor. For this purpose, the
debtor must make a declaration as to which debt should the payment
be applied.
It must be pointed out that the rule on application of payment by
the debtor must conform to the general rules on payment provided for
from Articles 1232 up to 1251. Thus, if the debtor makes a declaration
as to the particular debt (from among a number of debts) to which
his payment is to be applied, the creditor can validly refuse such
declaration or application if the payment is to be applied to a debt
61
Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966,
207
which will only partially pay the particular indebtedness. This is
so because, according to Article 1233, payment must, as a general
rule, be always completely delivered or rendered, and, according to
Article 1248, the creditor cannot be compelled partially to receive the
prestation in which the obligation consists. The debtor must apply the
payment to an indebtedness which, through such application, shall
be completely extinguished.
Application of payment cannot be made on debts which are not
yet due, unless the parties agree or when the application of payment
is made by the party, which may either be the debtor or the creditor,
for whose benefit the term has been constituted. For example, A is
indebted to B in the amount of P1,000, P2,000 and P900 which will
not earn interest if paid on January 2, 1997 but will earn interest
from February 2, 1997, the latter date being the second due date if
the debtor chooses not to pay on January 2, 1997. Clearly the period
prior to January 2, 1997 is for the benefit of the debtor, and therefore,
if he decides to give B P500 before January 2, 1997, the choice of
application belongs to him. If the creditor is agreeable to be partially
paid, the debtor can apply the P500 to the P1,000, P2,000 or P900
depending on his choice even if the indebtedness is not yet due. It is
clear that in such a case, whether he pays it on or before January 2,
1997 will not make any difference in so far as the debtor or creditor
is concerned because no interest is imposed.
The law likewise provides that if the debtor accepts from the
creditor a receipt in which an application of payment is made, the
former cannot complain of the same, unless there is a cause for invalidating the contract. It must be noted that the debtor must not only
merely receive the receipt but he must accept the receipt. Thus, if
A is indebted to B for P1,000, P2,000, and P900, and A pays B P500
without mentioning as to which debt the P500 will be applied and
if B, the creditor, is agreeable to any partial payment, and issues
a receipt indicating therein that the P500 shall be applied to the
P1,000 debt, and A readily accepts the said receipt, A cannot later
complain that the P500 should have been applied to the P2,000 debt
unless there exists a cause to invalidate the contract in connection
18 SCRA 967, citing Baltazar vs. Lingayen Gulf Electric Co., G.R. Nos. L-16236-38,
June 30, 1965.
207
208
ObligatiOns and COntraCts
Text and Cases
art. 1253
with the indebtedness in the amount of P1,000. This is based on the
doctrine of estoppel. However, if the indebtedness has been obtained
through fraud or intimidation which is a cause to annul the contract,
the debtor is not estopped from questioning the application.
Article 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)
Article 1253 of the Civil Code is merely directory, and not
mandatory.61 Although interest only attaches to the principal, the
payment of both principal and interest, in effect, constitutes two
payments by the debtor. In fact according to the law, the receipt of
the principal by the creditor without reservation with respect to the
interest, shall give rise to the presumption that the interest has been
paid.62 Such is the presumption because it is a rule that payment
of the principal shall not be deemed to have been made until the
interests have been covered. However, the presumption is rebuttable.
Also the right to apply payment to the interest first can be waived as
in the case of Pagsibigan vs. Court Appeals63 where the creditor, in
receiving numerous partial payments from the debtor, applied the
said payments to the principal, interest and the penalties with the
principal getting the bulk of the application and where, even in some
of the recent partial payments, the said payments were applied to the
principal despite the fact that the creditor knew that interest was
still due, the Supreme Court said that such action of the creditor is
a waiver of his rights under Article 1253. Also, in Rapanut vs. Court
of Appeals,64 the Supreme Court said:
After pondering on the meaning of Article 1253, we reach
the conclusion that 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 non-payment of installments on the
principal.
In Magdalena Estates, Inc. vs. Rodriguez65 where a surety only
bound himself solidarily liable to the extent of P5,000 only and paid
such an amount to the creditor when the debtor defaulted, and where
Article 1176 of the 1950 Civil Code.
G.R. No. 90169, April 7, 1993, 221 SCRA 202.
64
G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323.
65
G.R. No. L-18411, December 17, 1966, 18 SCRA 967.
62
63
art. 1253
ObligatiOns
Extinguishment of Obligations
Subsec. 1 — Application of Payment
209
the creditor still claimed interest from the debtor who resisted paying
such interest on the ground that, in accepting payment of the principal
from the surety in the amount only of P5,000, the creditor waived his
right to Article 1253, the Supreme Court allowed the claim of interest
by the creditor and stated that Article 1253 is not applicable in the
case as the liability of the surety does not extend beyond the terms
of the agreement and that the provision on application of payment
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. Besides,
Article 1253 of the Civil Code is merely directory, and not
mandatory. Inasmuch as the appellee (creditor) cannot protest
for non-payment of the interest when it accepted the amount of
P5,000.00 from the Luzon Surety Co., nor apply a part of that
amount for the interest, we cannot now say that there was a
waiver or condonation on the interest due.
Article 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application can
not 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)
If there is no indication as to which debt the payment is to be
applied, it shall be applied to the most onerous debt provided that it
is due. The “most onerous” debt means the indebtedness which exacts
the heavier burden from among many. Thus, a debt with interest is
more onerous than a simple debt without interest. A debt with an
acceleration clause enabling the creditor to demand payment of the
whole obligation if the debtor defaults in even one amortization or
installment is more onerous than a debt payable in installment but
without an acceleration clause. A debt secured by a mortgage is more
onerous than one which is not. For example, A owes G a due debt of
P30,000 with an interest rate of 12% per annum, another due debt
of P22,000 without interest but secured by his silver watch, and
G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186.
Lopez vs. Court of Appeals, G.R. No. L-33157, June 29, 1982, 114 SCRA 671.
68
Article 155 of Executive Order No. 209 which took effect on August 3, 1988,
otherwise known as the Family Code of the Philippines.
66
67
210
ObligatiOns and COntraCts
Text and Cases
art. 1254
lastly P24,000 collateralized by the house of the debtor and payable
in equal installment with the first installment already due and with
an acceleration clause. If A makes a payment of P600 without any
indication where the latter amount should be applied and the creditor
agrees to any partial payment, it will be applied to the most onerous
debt which in this case is the P24,000 because, aside from the imposition of an interest rate it has an acceleration clause which will make
the whole amount due.
In Espina vs. Court of Appeals,66 where a debtor paid an amount
without particularly declaring as to whether it should be applied to an
indebtedness resulting from unpaid back rentals for the condominium
unit he was occupying, or to his obligation arising from his contract
to pay the purchase price of such condominium unit which he decided
to buy, the Supreme Court ruled that the payment should be applied
to the unpaid back rentals as the same were more onerous.
The law also provides that if the debts due are of the same
nature and burden, the payment shall be applied to all of them
proportionately. Thus, if A owes B three due debts each of which
amounts to P30,000, a payment of P9,000.00 by A, without any
indication as to where it is to be applied and where the creditor agrees
to partial payment, shall be equally applied to each of the debts.
Hence, each debt will be reduced by P3,000 each. But if A owes B
three due debts of different amounts of P10,000.00, P20,000.00 and
P30,000 and the creditor agrees to partial payment, a payment of
P6,000 will be applied in the proportion of 1:2:3. Thus, P1,000 will be
applied to the P10,000 debt; P2,000 to the P20,000 debt; and P3,000
to the P30,000 debt.
Subsection 2. — Payment by Cession
Article 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)
Cession is another mode of extinguishing a debt. It is also a
form 69ofArticle
payment.
Cession under Article 1255 presupposes financial
158 of Executive Order No. 209 which took effect on August 3, 1988,
art. 1254
ObligatiOns
Extinguishment of Obligations
Subsec. 1 — Application of Payment
211
difficulties on the part of the debtor67 and refers to a situation where
the debtor owes two or more creditors. At the least, there are as many
debts as there are creditors. It is possible however that from among
the many creditors, the debtor may owe any of them two or more
debts. Hence, there can be situations when the debts are more than
the number of creditors. When the law states that the debtor may
cede or assign his property, it refers not only to the cession of one or
a number of properties of the debtor but to all of the properties of the
debtor which are susceptible of and not exempted by law from being
alienated. An example of a property which is generally exempted by
law from being executed or sold is the family home.68 However, it may
be sold provided that it strictly follows the requirements of law, such
as the procurement of the written consent to the sale of the person
who constituted the home as a family home and the latter’s spouse
and a majority of the beneficiaries of legal age of the family home.69
Just like in any contract, the creditors must agree to the cession
under Article 1255. Among the creditors, they must likewise agree
as to which debt will be paid first or as to the proportioning of the
payment of the money obtained through cession for the payment of
debt. If there is no agreement, the applicable law on preference of
212
ObligatiOns and COntraCts
Text and Cases
credit will apply.70 The creditors then will administer the totality of
the ceded property without the ownership being transferred to them.
They will be authorized to sell or alienate the property for purpose
of obtaining enough resources or money to pay off their respective
debts. Once cession is made, the obligation of the debtor shall only be
extinguished up to the extent that the proceeds are able to satisfy the
claims of the creditors. Hence, it is possible that the money obtained
from the alienation of the property is not enough to satisfy the claims
of the creditors. In such case, the creditors can still demand payment
for the deficiency. The agreements on the effect of the cession made
between the debtor and his creditors shall be governed by special laws.
One of the special laws is the Insolvency Law which, if applicable,
shall place the assets of the debtor for judicial liquidation for the
purpose of paying off his obligations.
Subsection 3. — Tender of Payment and
Consignation
Article 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 consig-nation 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;
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 re- ceipt;
otherwise known as the Family Code of the Philippines.
70
See Title XIX, Chapters 1 to 3, Articles 2236 up to 2251 of the 1950 Civil Code
of the Philippines.
71
G.R. No. 111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
72
G.R. No. L-28269, August 15, 1969, 29 SCRA 1.
73
G.R. No. 57630, March 13, 1992.
212
art. 1255
ObligatiOns
Extinguishment of Obligations
Subsec. 2 — Payment by Cession
213
4)
When two or more persons claim the same right to
collect;
5)
When the title of the obligation has been lost. (1176a)
Article 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)
Article 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
74
75
G.R. No. 138588, August 23, 2001.
G.R. No. L-58961, June 28, 1983, 123 SCRA 160.
214
ObligatiOns and COntraCts
Text and Cases
shall also be notified thereof. (1178)
Tender of payment and consignation apply in any contract
where there is an obligation to pay. Thus, in Adelfa Properties, Inc.
vs. Court of Appeals71 where it was ruled that in a contract to sell,
the requisites of a valid tender must be complied with, the Supreme
Court said:
The mere sending of a letter by the vendee expressing the
intention to pay, without the accompanying payment, is not
considered a valid tender of payment. Besides, a mere tender
of payment is not sufficient to compel private respondents to
deliver the property and execute the deed of absolute sale. It is
consignation which is essential in order to extinguish petitioner’s
obligation to pay the balance of the purchase price. The rule is
different in case of an option contract or in legal redemption or
in a sale with right to repurchase, wherein consignation is not
necessary because these cases involve an exercise of a right or
privilege (to buy, redeem, or repurchase) rather than the discharge
of an obligation, hence tender of payment would be sufficient to
preserve the right or privilege. This is because the provisions
on consignation are not applicable when there is no obligation
to pay. A contract to sell, as in the case before us, involves the
performance of an obligation, not merely the exercise of a right
or a privilege. Consequently, performance may be effected not by
tender of payment alone but by both tender and consignation.
In Vda. De Quirino vs. Palarca72 where the lessee was given
“the right and option to buy the leased premises for P12,000,” the
Supreme Court ruled that consignation cannot apply in such a case
and stated:
x x x the consignation referred to in Article 1256 of our Civil
Code is inapplicable to the present case, because said provision
refers to consignation as one of the means for the payment or
discharge of a “debt,” whereas the lessee was not indebted to
the lessor for the price of the leased premises. The lessee merely
exercised a right of option and had no obligation to pay said price
until the execution of the deed of sale in his favor, which the lessor
refused to do.
In Badayos vs. Court of Appeals73 where the exercise of a right
214
arts. 1256-1258
ObligatiOns
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
215
of redemption is involved, the Supreme Court said:
In the exercise of the right of redemption, consignation is
not necessary for the reason that the relationship that existed
between vendor and vendee a retro, was not one of debtorcreditor. The vendor a retro is exercising a right, not discharging
an obligation, hence a mere tender of payment is sufficient to
preserve the right of a vendor.
In Far East Bank & Trust Company vs. Diaz Realty, Inc.74 where
the issue was whether or not the tender of a check is a valid tender
of payment, the Supreme Court ruled:
For a valid tender of payment, it is necessary that there be
a fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due. 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.
In the case of Soco vs. Militante,75 the Supreme Court had the
opportunity to discuss the requirements of law for an effective tender
and consignation, thus:
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. (Limkako vs. Teodoro, 74 Phil. 313).
In order that consignation may be effective, the debtor
must first comply with certain requirements prescribed by law.
The debtor must show: (1) that there was a debt due; (2) that
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 (Article
1176, Civil Code); (3) that previous notice of the consignation had
been given to the person interested in the performance of the
obligation (Art. 1177, Civil Code); (4) that the amount due was
placed at the disposal of the court (Art. 1178, Civil Code); and (5)
Id., Page 178.
Id., Page 181.
78
G.R. Nos. 106467-68, October 19, 1999, 114 SCAD 475, 317 SCRA 24.
76
77
215
216
ObligatiOns and COntraCts
Text and Cases
arts. 1256-1258
that after the consignation had been made the person interested
was notified thereof (Art. 1178, Civil Code). Failure in any of these
requirements is enough to render a consignation ineffective. (Jose
Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).
Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a
payment is void. (Limkako vs. Teodoro, 74 Phil. 313)
In order to be valid, the tender of payment must be made
in lawful currency. While payment in check by the debtor may
be acceptable as valid, if no prompt objection to said payment is
made (Desbarats vs. Vda. De Mortera, L-4915, May 25, 1956),
the fact that in previous years payment in check was accepted
does not place its creditor in estoppel from requiring the debtor
to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30,
1958). Thus, tender of a check to pay for an obligation is not a
valid tender of payment thereof (Desbarats vs. Vda. De Mortera,
supra). See Annotation, The Mechanics of Consignation by Atty.
S. Tabios, 104 SCRA 174-179.
Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an
act preparatory to the consignation, which is the principal, and
from which are derived the immediate consequences which the
debtor desires or seeks to obtain. Tender of payment may be
extra-judicial, 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. (8 Manresa
325)
In the same Soco case, the Supreme Court likewise stated the
reason for giving the first notice and the second notice, to wit:
In this connection, the purpose of the notice is in order to
give the creditor the opportunity to reconsider his unjustified
refusal and to accept payment thereby avoiding consignation and
the subsequent litigation. This previous notice is essential to the
validity of the consignation and its lack invalidates the same.
(Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil.
313)76
The reason for the notification to the persons interested
in the fulfillment of the obligation after consignation had been
made, which is separate and distinct from the notification which
is made prior to the consignation is stated in Cabanos vs. Calo,
G.R. No. L-10927, October 30, 1958, 104 Phil. 1058, thus: “There
79
80
G.R. No. L-24791, August 29, 1969, 29 SCRA 160.
Riesenbeck vs. Court of Appeals, G.R. No. 90359, June 9, 1992.
arts. 1256-1258
ObligatiOns
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
217
should be notice to the creditor prior and after the consignation
as required by the Civil Code. The reason for this is obvious,
namely, to enable the creditor to withdraw the goods or money
deposited. Indeed, it would be unjust to make him suffer the risk
for any deterioration, depreciation or loss of such goods or money
by reason of lack of knowledge of the consignation.”77
In De Mesa vs. Court of Appeals,78 where the debtor in the trial
court filed a motion to allow it to just consign all future quarterly
installments without need of formal tender of payment and service
of notices to the creditor who was duly notified of such motion, the
Supreme Court ruled that the circumstances of the case and the
order of the court granting the motion can be considered substantial
compliance with the requirement of notice to the creditor. The
Supreme Court said:
Petitioner next argues that there was no notice to her
regarding OSSA’s consignation of the amounts corresponding
to the 12th up to the 20th quarterly installments. The records,
however, show that several tenders of payment were consistently
turned down by the petitioner, so much so that respondent OSSA
found it pointless to keep on making formal tenders of payment
and serving notices of consignation to petitioner. Moreover, in
a motion dated May 7, 1987, OSSA prayed before the lower
court that it be allowed to deposit by way of consignation all
the quarterly installments, without making formal tenders of
payment and serving notice of consignation, which prayer was
granted by the trial court in the Order dated July 3, 1982. The
motion and the subsequent court order served on the petitioner
in the consignation proceedings sufficiently served as notice to
petitioner of OSSA’s willingness to pay the quarterly installments and the consignation of such payments with the court. For
reasons of equity, the procedural requirements of consig-nation
are deemed substantially complied with in the present case.
The law likewise states that consignation alone shall produce
the same effect in five cases. The first case is when the creditor is
absent or unknown, or does not appear at the place of payment. Hence,
if A is indebted to B in the amount of P1,000 payable on April 11,
1997 at the Manila Hotel, and on the said date, A is ready to pay, but
B is not at the Manila Hotel, then consignation can immediately be
made in court without need of looking for B and tendering payment.
The second case is when the creditor is incapacitated to receive
the payment at the time it is due. Hence, if A is indebted to B who
81
G.R. No. L-17076, January 29, 1962, 4 SCRA 40.
218
ObligatiOns and COntraCts
Text and Cases
arts. 1256-1258
later on becomes insane, tender of payment need not be made as the
said insane creditor might not even understand what the debtor is
doing. A can immediately consign the money in court so that he will
be relieved of any responsibility such as the running of interest. The
third case is when, without just cause, the creditor refuses to give
a receipt. A receipt is a proof of payment. It is under-standable that
a debtor must protect himself by all means possible and one of these
protections is the receipt which he can demand from the creditor
upon payment precisely to evidence the fact of payment. However, if
there is just cause for the creditor not to issue the receipt, tender of
payment must still be made. For instance, if the debtor insists from
the creditor that the latter issue a receipt for the full amount of the
indebtedness and the creditor refuses to issue such a receipt because
there has been no full payment, there is justifiable ground for the
creditor not to issue the receipt and therefore tender of payment is
still necessary. The fourth case is when two or more persons claim
the same right to collect. There is no use tendering payment to any
of the two or more persons who claim the right to collect because it
may turn out that the person to whom payment is given might not
be lawfully entitled to the payment. The fifth case is when the title
of the obligation has been lost. For the protection of the debtor, he
may immediately go to court if title is lost because, it is better for
the court to declare that the obligation has been extinguished than
just pay the creditor without recovering the title to the debt or at
least without declaring or annotating in the said title that the debt
is already ineffective because of the payment.
Article 1259. The expenses of consignation, when properly
made, shall be charged against the creditor. (1179)
The creditor shall be responsible for the expenses of consignation because it was his failure to accept payment that led to the
consignation. In Miranda vs. Reyes79 where the obligee or debtor
tendered payment of the price for redeeming the property to the
creditor-defendant a few days before the period of redemption was
to expire and the latter immediately accepted the tender and sent
his letter of acceptance by mail and where the creditor-defendant,
still waiting for the reply, filed a case for consignation, and where
the obligor, instead of just withdrawing the money deposited in court,
filed an answer claiming that there was no need of consignation as he
art. 1259
ObligatiOns
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
219
accepted the tender and consequently litigated the case, the Supreme
Court ruled on the validity of the consignation and said:
The law must be reasonably interpreted and the realities of
the situation in each case taken into account so that the purpose
of the law may not be defeated. It is true the defendant sent
his letter of acceptance on September 24, 1964, but it was not
received by the plaintiffs until September 29. In the meantime the
redemption period of one year was about to expire. The plaintiffs,
therefore, did the most prudent thing under the circumstances by
filing the action and depositing the redemption money in court.
The defendant bewails this step as “unduly dragging x x x (him)
to an expensive and protracted litigation.” This is a pharisaical
attitude to adopt. If the litigation has become expensive and
protracted the defendant has nobody to blame but himself, for
the consignation was no less an effective and timely tender of
payment than the one which had been extrajudicially made, and
all that the defendant had to do was to withdraw the amount
deposited, without going through the rigmarole of filing an answer
and contesting the validity of the deposit just because there had
been no unjustified refusal to accept the said tender.
Article 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)
Once there is already a finding that the consignation is proper,
the debtor should be released from the obligation. He can ask the court
to order the cancellation of the obligation. Consequently, the court
will order that the creditor accepts the money or thing consigned as
payment. The consignation has a retroactive effect. The payment is
deemed to have been made at the time of the deposit of the money in
court or when it was placed at the disposal of the judicial autho-rity.80
In Gamboa vs. Tan 81 where the debtor filed a case for
consignation and deposited the amount of money offered as payment
to the creditor who previously refused to accept, and where the court
granted the withdrawal of the amount deposited upon motion of the
debtor, and where the creditor, aware of the said withdrawal, filed
220
ObligatiOns and COntraCts
Text and Cases
art. 1260
an answer stating that the money was not enough, and that he was
willing to accept the money as partial payment and likewise sought
the nullification of the withdrawal as he was not given notice of the
motion regarding the same, the Supreme Court ruled that the withdrawal was proper as it was pursuant to the second paragraph of
Article 1260 and said:
We think the above article gives the depositor the right to
withdraw the amount deposited at any time before the creditor
accepts it (not to speak of the court’s order declaring it to be
proper). Such right is clear in this case, because the statement
of the creditor came late, and, what is more, the acceptance was
partial. This last consideration renders unnecessary to discuss
the effect of failure to give the creditor any notice of withdrawal,
since Cancio’s statement was practically a rejection of the offer
of payment.
Prior to any withdrawal of the debtor of the amount, the
creditor may accept the amount consigned either unconditionally
or with reservation. An acceptance with reservation is valid. Thus
in Riesenbeck vs. Court of Appeals,82 the Supreme Court ruled that,
in a consignation case, the creditor’s acceptance of the consigned
amount but with an express reservation that he is not admitting the
correct-ness of the obligation and therefore he is also reserving his
right to claim the balance in accordance with what is prayed for in his
answer and counterclaims is valid. The reservation did not completely
extinguish the obligation. If there is no reservation made, it means
that the creditor waives his other claims under the contract. Upon
the declaration of the court that the consignation is valid, the debtor
cannot anymore claim that he is the owner of the said amount, and
hence he cannot withdraw it anymore.
Article 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)
When there is already a finding by the court that there has
been proper consignation and consequently the obligation has been
cancelled, it is incumbent upon the creditor to obtain from the court
art. 1261
ObligatiOns
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
221
the money deposited as payment. However, if the obligation having
been extinguished, the debtor decides to withdraw the thing deposited
with the creditor’s consent, there is therefore nothing which the
creditor can obtain from the court. In this case, both the debtor and
the creditor, in effect, agreed to revive the indebtedness. However,
the creditor, because of his consent to the withdrawal, will lose
preference to the thing previously deposited to specifically pay-off
his debt. Anybody who has an interest in it can also go after it and
the creditor cannot anymore say that it has been precisely consigned
to answer for the credit in his favor. Moreover, his solidary debtors,
guarantors and sureties shall be released as they likewise benefit
from the extinguishment of the obligation and the debtor cannot
unilaterally revive the obligation without their consent.
82
G.R. No. 90359, June 9, 1992.
222
ObligatiOns and COntraCts
Text and Cases
art. 1261
223
SECTION 2. — Loss of the Thing Due
Article 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)
When the object of the prestation is a determinate thing, the
debtor shall be excused from performing his obligation if such thing
is lost without his fault. However, if it is his fault or if it has been lost
after the debtor has incurred in delay, the debtor shall answer for the
resulting damages. In Federation of United Namarco Distributors, Inc.
vs. National Marketing Corporation (NAMARCO)1 where the debtorappellant NAMARCO refused to deliver the goods to the creditorfederation after due demand, and, as a result, some of the goods were
destroyed, the Supreme Court said that the debtor-appellant had to
bear the risk of loss and said:
Appellant also claims that the trial court erred in allowing
the appellee to take delivery of 445 cases of oranges only, instead
of 2,400 cases, in effect charging it (appellant) the loss of 1,955
cases.
The claim is unmeritorious. Let it be remembered that
as early as January 25, 1960, appellant had refused to deliver
the imported commodities to appellee. It is true that on March
2, 1960, the FEDERATION, upon filing its complaint, obtained
a writ of preliminary injunction to prevent NAMARCO from
disposing of these goods through other distributors or retailers,
but the FEDERATION was willing to accept, and in fact had been
requesting the delivery of the same to it or its members for sale to
G.R. No. L-17819, March 31, 1962, 4 SCRA 867.
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
1
2
223
224
ObligatiOns and COntraCts
Text and Cases
art. 1263
the general public, but NAMARCO refused to make such delivery.
It was only on March 26, 1960 that the trial court upon appellee’s
motion, ordered the release to it of, among others, “2,400 cases
of mandarin oranges provided they are in good condition, or only
so much thereof that are in good condition.” Consequently, the
FEDERATION could not be blamed for refusing to take delivery
of the oranges that had in the meantime become spoiled during
the period from January 25 to March 26. In the circumstances,
it is but proper that appellant must bear the loss (the rotting of
1,955 cases of oranges) occasioned by its own fault.
Appellant asserts that the trial court likewise erred in
holding it liable for storage charges from March 2, 1960 (date of
filing of appellee’s complaint in the lower court) of the commodities covered by the contract of sale in question.
The argument merits no serious consideration. It is true
that under the contract of sale the handling and storage charges
of the commodities covered thereby are for the account of appellee
FEDERATION. However, the storage charges that became
due from the date the goods had to remain in the warehouse
because of the refusal of NAMARCO to deliver the same to the
FEDERATION which had been demanding the surrender thereof
to it, can not be charged to the FEDERATION, but to NAMARCO
as the one who, in the performance of its obligation under the
contract, has been guilty of delay in the delivery of the goods
subject matter thereof.
With respect to liability even for fortuitous event, or when the
nature of the obligation requires an assumption of risk, this has been
fully discussed under Article 1174. In these cases, because the thing
is lost already, damages can be obtained from the debtor. Thus, if
the specific and particular car to be delivered by the debtor is worth
P500,000, and it is lost through a fortuitous event, but the parties
stipulate that the debtor, even under such circumstances, will still
be liable, the creditor cannot insist on the delivery of the specific car
because it has already been lost, but he can seek damages in the
amount of P500,000 which is the value of the car.
Article 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)
A generic thing is not a determinate thing. A generic thing,
which is the object of the prestation cannot really be lost or destroyed
unless the whole class of said thing is destroyed, hence the obligation
subsists despite the loss or destruction of one thing in the said class.
arts. 1264-1265
ObligatiOns
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
225
For example, if the debtor is bound to deliver a ball without any
specification, he may deliver any kind of ball. If he buys one and
subsequently loses it through a fortuitous event, his obligation is not
extinguished. The debtor simply has to buy another ball.
Article 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)
A loss may be complete or partial. If the loss is complete, Articles
1262 and 1263 will apply. If the loss is partial and the circumstances
so warrant, the court may consider it as a complete loss which
extinguishes the obligation. This can only happen if the partial loss is
so important so as to totally affect the whole object of the obligation.
However, if it is considered as a complete loss, then the rules under
Articles 1262 and 1263 must apply. For example, if the debtor is
under an obligation to deliver a specific computer consisting of the
CPU with specific drives and particular hard disks together with a
very specialized screen peculiarly made for the said computer, with
a special keyboard made to respond only to said screen, and the said
screen is lost through a fortuitous event before the debtor has incurred
in delay, there is clearly a partial loss which renders the computer
system totally useless. In this case, the debtor can go to court and
declare that the partial loss has extinguished his obligation to deliver
the computer.
Article 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)
As a general rule, it is presumed that the loss of the thing is
due to the fault of the debtor who possesses it. The presumption
arises from the fact that it was lost while it is in the possession of the
debtor. If the debtor is not in the possession of the thing when it is
lost, the presumption does not arise. If the presumption applies, it is
incumbent upon the debtor to prove that the loss is not through his
fault or it has been caused by a fortuitous event. However, he will still
be responsible for a fortuitous event if it has been so stipulated by the
parties, if the law so states, or if the nature of the obligation involves
an assumption of risk, and if the obligor delays or has promised the
226
ObligatiOns and COntraCts
Text and Cases
art. 1266
same thing to two or more persons who do not have the same interest.
In any event, the presumption does not apply even if the loss happens
at the time the thing is in the possession of the debtor if, at the time
of the loss, an earthquake, storm, or other natural calamity exists.
Article 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 refers to the prestation “to do.” In Philippine
National Construction Corporation vs. Court of Appeals2 where the
lessee in a lease contract sought its release from paying the rentals
and from the said contract itself invoking Article 1266 and claiming
that, due to the change in political climate after the EDSA revolution
and change in financial condition, it was not able to use the property
for the purpose for which it intended to utilize it, i.e., to use the leased
premises as a site of a rock crushing plant, the Supreme Court rejected
such prayer for the lessee’s release by stating:
It is a fundamental rule that contracts, once perfected, bind
both contracting parties, and obligations arising therefrom have
the force of law between the parties and should be complied with
in good faith. But the law recognizes exceptions to the principle
of the obligatory force of contracts. One exception is laid down
in Article 1266 of the Civil Code, which reads: “The debtor in
obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the
obligor.”
Petitioner cannot, however, successfully take refuge in the
said article, since it is applicable only to obligations “to do,” and
not to obligations “to give.” An obligation “to do” includes all kinds
of work or service; while an obligation “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 for the use of the recipient, or for
its simple possession, or in order to return it to its owner.
The obligation to pay rentals or deliver the thing in a
contract of lease falls within the prestation “to give;” hence,
it is not covered within the scope of Article 1266. At any rate,
the unforeseen event and causes mentioned by the petitioner
are not the legal or physical impossibilities contemplated in
the said article. Besides, petitioner failed to state specifically
the circumstances brought about by the “abrupt change in the
political climate” except the alleged prevailing uncertainties in
Taylor vs. Caldwell, King’s Bench, 1863, 3 B. & S., 122 Eng. Rep. 309, cited in
3
art. 1267
ObligatiOns
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
227
government policies on infrastructure projects.
When the prestation becomes legally or physically impossible
without the fault of the obligor, it shall be considered a loss which
extinguishes the obligation. Thus, if the obligor is bound to build
a fence along the property of the obligor and the said property is
expropriated by the government which bars everybody from entering
the same, the obligation has become legally impossible to do and hence
it is extinguished. Also, in a case3 where a debtor was bound to do a
concert and to provide musical bands and other entertainment only
and exclusively in a particular Music Hall and the parties contracted
on the basis of the continued existence of the said Music Hall, which
however burned down without the fault of either the debtor or the
creditor, before the concert can begin, the obligation of the debtor to
render a concert has become physically impossible to perform and
therefore the same was extinguished.
Article 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)
Difficulty alone does not excuse the debtor from fulfilling his
prestation. This has been referred to as “subjective impossibility”
which means that “a promissor’s duty is never discharged by the mere
fact that the supervening events deprive him of the ability to perform,
if they are not such as to deprive other persons, likewise, of ability
to render such a performance.”4 However, Article 1267 creates a new
norm by providing that 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. This is still within
the penumbra of the rule on impossibility of performance although
the obligation may not technically and necessarily be impossible. The
law lays down the requisite for this article to apply and they are the
following: a) the prestation has become so difficult to render, and b)
the service has become manifestly beyond the contemplation of the
parties. These requirements must exist together. This is an innovation
under the 1950 Civil Code and its rationale has been aptly stated as
follows:
Cases and Materials on Contracts, by E. Allan Farnsworth and William F. Young, 3rd
edition, Mineola New York, The Foundation Press, Inc., 1980, Page 953.
4
United States vs. Wegematic Corp., 360 F.2d 674, cited in Cases and Materials
on Contracts, by E. Allan Farnsworth and William F. Young, 3rd edition, Mineola New
York, The Foundation Press, Inc., 1980, Page 972.
5
Naga Telephone Co. vs. Court of Appeals, G.R. No. L-107112, February 24,
1994, 48 SCAD 539, 230 SCRA 351.
6
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
228
ObligatiOns and COntraCts
Text and Cases
art. 1267
The general rule is that impossibility of performance
releases the obligor. However, it is submitted that when the
service has become so difficult 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 to have been beyond their contemplation, it
would be doing violence to that intention to hold the obligor still
responsible.5
For example, if an obligor is bound to deliver 40 cases of mangoes
from the Philippines to South Africa by ship at the cost of $30,000
on or before April 11, 1997 and the usual route known to the parties
in going to South Africa has been suddenly closed prompting the
obligor to look and eventually pass through another route, which is
likewise closed, again leaving the obligor with no other choice but to
attempt passing through another alternative route four times longer
than the usual route, and which route could be traversed by its vessel
without damaging itself and without entailing enormous additional
and unreasonable cost (i.e., the obligor would have to charter other
vessels for the continuing voyage), and also without subjecting the
fruits to possible harm as they would most likely spoil along such a
long trip, the obligation in this case has clearly become so difficult
to do and is manifestly beyond their contemplation. The obligation
should be deemed extinguished.
In Philippine National Construction Corporation vs. Court of
Appeals6 where the lessee in a lease contract sought its release from
paying the rentals and from the said contract itself invoking Article
1266 and the theory of rebus sic stantibus from where Article 1267
was based, claiming that, due to the change in political climate after
the EDSA revolution and change in financial condition, it was not able
to use the property for the purpose for which it intended to utilize it,
i.e., to use the leased premises as a site of a rock crushing plant, the
Supreme Court rejected the application of the concept of rebus sic
stantibus by stating:
The principle of rebus sic stantibus neither fits in with the
facts of the case. Under this theory, the parties stipulate in the
light of certain prevailing conditions, and once these conditions
cease to exist, the contract also ceases to exist. This theory is said
to be the basis of Article 1267 of the Civil Code, which provides:
7
ART. 1267. When the service has become difficult as to be
Id.
G.R. No. L-44349, October 29, 1976, 73 SCRA 637.
9
G.R. No. 124221, August 4, 2000, 131 SCAD 303, 337 SCRA 298.
8
art. 1267
ObligatiOns
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
229
manifestly beyond the contemplation of the parties, the obligor
may also be released therefrom, in whole and in part.
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 to the contract must be presumed to have assumed the risks of unfavorable developments.
It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
In this case, petitioner wants this Court to
believe that the abrupt change in the political climate
of the country after the EDSA Revolution and its
poor financial condition “rendered the performance
of the lease contract impractical and inimical to the
corporate survival of the petitioner.”
This Court cannot subscribe to this argument.
As pointed out by the private respondents:
It is a matter of record that petitioner PNCC
entered into a contract with private respondents on
November 18, 1985. Prior thereto, it is of judicial
notice that after the assassination of Senator
Benigno Aquino on August 21, 1983, the country has
experienced political upheavals, turmoils, almost
daily mass demonstrations, unprecedented inflation,
peace and order deterioration, the Aquino trial and
many other things that brought about the hatred of
people even against crony corporations. On November 3, 1985, Pres. Marcos, being interviewed live on
U.S. television announced that there would be a snap
election scheduled for February 7, 1986.
On November 18, 1985, notwithstanding the
above, petitioner PNCC entered into the contract of
lease with private respondents with open eyes of the
deteriorating conditions of the country.
Anent petitioner’s alleged poor financial condition, the
same will neither release petitioner from the binding effect of the
contract of lease. As held in Central Bank vs. Court of Appeals (139
SCRA 46, citing Repide vs. Afzelius, 39 Phil. 190), cited by private
respondents, mere pecuniary inability to fulfill an engagement
does not discharge a contractual obligation, nor does it constitute
a defense to an action for specific performance.
In the case of Naga Telephone Co., Inc. vs. Court of Appeals,7 a
230
ObligatiOns and COntraCts
Text and Cases
art. 1267
contract was entered into between the petitioner and the respondent
where they agreed that the petitioner shall use the electrical posts
of the respondent in Naga City free of charge, but the contract
can be terminated if the respondent is forced to stop its business.
As consideration, the petitioner agreed to install free of charge 10
telephone connections to the respondent. At the time of the execution
of the contract, it was the contemplation of the parties that the posts
were only to be used in Naga City because, at that time the capability
of respondent was very limited. This was so even if at that time there
were many subscribers in Naga City for telephone lines, who cannot
be served because of this contemplated limited capability. After
11 years of the effectivity of the contract, the contract became so
burdensome to the petitioner. This fact was shown by the following:
the telephone cables strung by the respondent had become heavier
with the increase in the volume of their subscribers, worsened by
the fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons, and that a post costs
as much as P2,630. While there was an increased use of the posts,
there was no corresponding increase in the telephone connections to
the respondent. Petitioners also began using respondent’s telephone
posts outside Naga City. The contract became so one-sided to the
prejudice of the respondent. The Supreme Court agreed with the
lower court and the Court of Appeals, that Article 1267 was applicable
under the situation as the continued enforcement of the contract had
manifestly gone beyond the contemplation of the parties so much so
that the respondent should be released from the contract to avoid
petitioner’s unjust enrichment at respondent’s expense. With respect
to petitioner’s contention that, because the contract did not involve
the rendition of service or a personal prestation and it was not for
future service with future unusual change, Article 1267 should not
apply and therefore the ruling in the Occena vs. Jabson8 case should
be followed, the Supreme Court said:
Article 1267 speaks of “service” which has become
difficult. Taking into consideration the rationale behind this
provision, the term “service” should be understood as referring
to the “performance” of the obligation. In the present case, the
obligation of private respondent consists in allowing petitioners
to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals
that it is not a requirement thereunder that the contract be for
art. 1267
ObligatiOns
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
231
future service with future unusual change. x x x Considering the
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.
In a nutshell, private respondent in the Occena case filed
a complaint against petitioner before the trial court praying for
modification of the terms and conditions of the contract that they
entered into by fixing the proper shares that should pertain to
them out of the gross proceeds from the sales of subdivided lots.
We ordered the dismissal of the complaint therein for failure to
state a sufficient cause of action. We rationalized that the Court
of Appeals misapplied Article 1267 because:
“x x x respondent’s complaint seeks not release
from the subdivision contract but that the court
‘render judgment modifying the terms and conditions
of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross
proceeds from the sale of subdivided lots of subject
subdivision.’ The cited article (Article 1267) does not
grant the courts (the) authority to remake, modify
or revise the contract or to fix the division of shares
between the parties, so as to substitute its own terms
for those covenanted by the parties themselves.
Res-pondent’s complaint for modification of contract
manifestly has no basis in law and therefore states
no cause of action. Under the particular allegations of
respondent’s complaint and the circumstances therein
arrived, the courts cannot even in equity grant the
relief sought.”
The ruling in the Occena case is not applicable because
we agree with respondent court that the allegations in private
respondent’s complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. We,
therefore, release the parties from their correlative obligations
under the contract. x x x
In Magat, Jr. vs. Court of Appeals,9 respondent won a bidding
to operate a fleet taxi cabs with radio transceivers. For this
purpose, respondent ordered certain radio transceivers through the
petitioner. The petitioner ordered from Japan. It was agreed that
the radio transceivers will be delivered within 60 to 90 days notice
from the respondent of the assigned radio frequency taking note of
government regulations. The radio frequency was assigned but later
the government, because of the imposition of martial law, denied the
application for a permit to import the radio transceivers. Due to this
232
ObligatiOns and COntraCts
Text and Cases
art. 1268
denial, the respondent was likewise unable to obtain the necessary
letter of credit. Respondent did not continue with the contract. The
Supreme Court rejected the case of petitioner for breach of contract
by thus ruling:
Guerrero (respondent) testified that a permit to import the
transceivers from Japan was denied by the Radio Control Board.
He stated that he, together with Aligada, Victorino (petitioner),
and a certain John Dauden personally went to the Radio Control
Office, and were denied a permit to import. They also went to
the Office of the President, where Secretary Ronaldo B. Zamora
explained that radios were “banned like guns because of martial
law.” Guerrero testified that this prevented him from securing
a letter of credit from the Central Bank. This testimony was not
rebutted.
The law provides that “when the service (required by the
contract) has become so manifestly beyond the contemplation of
the parites, the obligor may also be released therefrom, in whole
or in part. Here, Guerrero’s inability to secure a letter of credit
and to comply with his obligation was a direct consequence of the
denial of the permit to import. For this he cannot be faulted.
Article 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)
If A stole a watch from B and was criminally charged for such
an offense, and the watch was lost through a fortuitous event, the
debtor-accused must still pay the price of the watch. The loss will
not excuse him from being responsible as he did not have the right
to possess the same in the first place. If A however offered back the
watch to B, and the latter refused to accept, the risk of loss of the
watch would be on B except if there was justifiable reason not to
accept it as, for example, it had already been severely damaged.
Article 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)
art. 1269
ObligatiOns
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
233
This is another provision designed to protect the interest of
the creditor. Hence, if A buys a house from G, and the house, which
is insured, is accidentally burned by a fortuitous event prior to the
demand for its delivery by A, the obligation of G to deliver the house is
extinguished. However, in the event that A has already paid the price
of the house, he can seek reimbursement of the insurance proceeds
due from the insurance company.
234
ObligatiOns and COntraCts
Text and Cases
SECTION 3. — Condonation or Remission
of the Debt
Article 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)
Condonation is an act of liberality. It connotes that there is a
previous demandable obligation but the obligee or the creditor decides
not to enforce the debtor’s prestation anymore. It requires however
the implied or express consent of the obligor. In effect, condonation
or remission of a debt is a donation of the obligee’s credit in favor of
the debtor.
The remission or condonation is governed by the rules on
inofficious donation. A donation is inofficious if it turns out that
the thing or amount donated (remitted or condoned) encroaches or
infringes on the legitime or successional rights of the heirs of the
condoning creditor. Thus, if a creditor condones the debt of a debtor
in the amount of P50,000, and later on, the creditor gives birth to a
child at a time when her properties are worth only P10,000, her overall estate (including the remitted P50,000) at the time of the birth of
the child is therefore P60,000. The legitime of the child as provided in
the Civil Code is one-half (1/2) of the estate1 which, in this example,
is P30,000. Hence, technically the free portion which can be given to
any person not necessarily an heir is also P30,000. Thus, since the
child will only get P10,000 because this is the only existing property
out of an estate of P60,000, the remission in favor of the debtor is
inofficious to the extent of P20,000. The remission clearly infringes
on the legitime of the child. The debtor must therefore be made to pay
P20,000 out of the P50,000 remitted debt. Hence, the child shall get
P20,000 in addition to his P10,000 which will complete his legitime.
Article 888 of the 1950 Civil Code.
Biala vs. Court of Appeals, G.R. No. 43503, October 31, 1990, 191 SCRA 51;
First Integrated Bonding and Insurance234
Company vs. Isnani, G.R. No. 70246, July
1
2
art. 1270
ObligatiOns
Extinguishment of Obligations
Sec. 3 — Condonation or Remission of the Debt
235
The rules on the reduction of inofficious donations are provided
in the Civil Code thus:
Article 750.The donation may comprehend all the present
property of the donor, or part thereof, provided he reserves, in
full ownership or in usufruct, sufficient means for the support of
himself, and of all relatives who, at the time of the acceptance of
the donation, are by law entitled to be supported by the donor.
Without such reservation, the donation shall be reduced on
petition of any person affected.
Article 771. Donations which in accordance with the
provisions of Article 752, are inofficious, bearing in mind the
estimated net value of the donor’s property at the time of his
death, shall be reduced with regard to the excess; but this
reduction shall not prevent the donations from taking effect
during the life of the donor, nor shall it bar the donee from
appropriating the fruits.
For the reduction of donations the provisions of this chapter
and of Articles 911 and 912 of this Code shall govern.
Article 772. Only those who at the time of the donor’s death
have a right to the legitime and their heirs and successors in
interest may ask for the reduction of inofficious donations.
Those referred to in the preceding paragraph cannot
renounce their right during the lifetime of the donor, either by
express declaration, or by consenting to the donation.
The donees, devisees and legatees, who are not entitled to
the legitime and the creditors of the deceased can neither ask for
the reduction nor avail themselves thereof.
Article 773. If, there being two or more donations, the
disposable portion is not sufficient to cover all of them, those of
the more recent date shall be suppressed or reduced with regard
to the excess.
Article 760. Every donation inter vivos, made by a person
having no children or descendants, legitimate or legitimated by
subsequent marriage, or illegitimate, may be revoked or reduced
as provided in the next article, by the happening of any of these
events:
(1)
If the donor, after the donation, should have legitimate
or legitimated or illegitimate children, even though
they be posthumous;
(2)
If the child of the donor, whom the latter believed to
be dead when he made the donation, should turn out
to be living;
236
ObligatiOns and COntraCts
Text and Cases
(3)
art. 1270
If the donor should subsequently adopt a minor child.
Article 761. In cases referred to in the preceding article,
the donation shall be revoked or reduced insofar as it exceeds the
portion that may be freely disposed of by will, taking into account
the whole estate of the donor at the time of the birth, appearance
or adoption of a child.
Article 762. Upon the revocation or reduction of the donation by the birth, appearance or adoption of a child, the property
affected shall be returned, or its value if the donee has sold the
same.
If the property is mortgaged, the donor may redeem the
mortgage, by paying the amount guaranteed, with a right to
recover the same from the donee.
When the property cannot be returned, it shall be esti-mated
at what it was worth at the time of the donation.
Article 763. The action for revocation or reduction on the
grounds set forth in Article 760 shall prescribe after four years
from the birth of the first child, or from his legitimation, recognition or adoption or from the judicial declaration of filiation, or
from the time information was received regarding the existence
of the child believed dead.
This action cannot be renounced, and is transmitted, upon
the death of the donor, to his legitimate and illegitimate children
and descendants.
The law likewise provides that express condonation shall,
furthermore, comply with the forms of donation. Title III, Chapter 2
of the Civil Code on Donations pertinently provides:
Article 748. The donation of a movable may be made orally
or in writing.
An oral donation requires the simultaneous delivery of the
thing or of the document representing the right donated.
If the value of the personal property donated exceeds five
thousand pesos, the donation and the acceptance shall be made
in writing. Otherwise, the donation shall be void.
Article 749. In order that the donation of an immovable
may be valid, it must be made in a public document, specifying
therein the property donated and the value of the charges which
the donee must satisfy.
The acceptance may be made in the same deed of donation
arts. 1271-1272
ObligatiOns
Extinguishment of Obligations
Sec. 3 — Condonation or Remission of the Debt
237
or in a separate public document, but it shall not take effect unless
it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the
donor shall be notified thereof in an authentic form, and this step
shall be noted in both instruments.
Article 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)
The most common private document evidencing a credit is a
promissory note. A promissory note in the hands of the creditor is proof
of indebtedness rather than proof of payment.2 If a creditor delivers
a promissory note to the debtor, the former, in effect, furnishes the
debtor the evidence which could prove the indebtedness of such debtor
in his favor. It therefore implies that he is no longer interested in the
debt. The law provides that such act will be considered a renunciation.
Thus, if A is indebted to B in the amount of P1,000.00 evidenced by
a promissory note executed by A, which is in the possession of B who
later voluntarily gives it to A, such delivery implies a renunciation
of the debt. However, in the event that the remission of the P1,000
is claimed to be void because it is inofficious, the heirs of A can show
that A’s possession of the promissory note is not a result of a remission
made by A but a result of A’s payment of the obligation. In case of
payment, the promissory note is always taken by the debtor.
Article 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)
The fact that the document evidencing the debt is in the
possession of the debtor gives rise to the refutable presumption
that such document has been delivered by the creditor voluntarily.
However, this presumption can be overturned by clear evidence to
the contrary.
31, 1989, 175 SCRA 753.
3
Article 2085 of the 1950 Civil Code.
4
Articles 1316 and 2093 of the 1950 Civil Code.
238
ObligatiOns and COntraCts
Text and Cases
arts. 1273-1274
Article 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)
The existence of the accessory obligation depends on the
existence of the principal obligation. But the existence of the principal
obligation does not depend on the accessory obligation. If the principal
obligation is extinguished, it carries with it the extinguishment of
the accessory obligation but not vice-versa. If A is indebted to B, and
the indebtedness is guaranteed by X, and B told X that he will not
anymore claim on X’s guarantee as the said creditor is renouncing
the same, X is released but the principal obligation of A still subsists.
B can still collect from A. However, if B renounces the indebtedness
of A, B cannot go against X because the latter’s guarantee, being
an accessory obligation, is extinguished with that of the principal
obligation.
Article 1274. It is presumed that the necessary 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)
A pledge involves a movable property constituted by the owner
of such property who has free disposal of it, to secure the fulfillment
of a principal obligation3 and such contract is perfected only upon the
delivery of the thing pledged to the creditor.4 A pledge is an accessory
contract. A person may even pledge his property not for his own
indebtedness but for the indebtedness of another person. Hence, in
a contract of pledge, the creditor or the obligee must be in possession
of the thing pledged. If it is in the possession of the debtor or of the
third person who owns it, there is a presumption that the accessory
obligation has been condoned or remitted. However, this is a refutable
presumption.
239
SECTION 4. — Confusion or Merger
of Rights
Article 1275. The obligation is extinguished from the time
the characters of creditor and debtor are merged in the same
person. (1192a)
A creditor cannot collect a debt from himself. A debtor cannot
pay a debt to himself. Thus, according to the law, the obligation is
extinguished from the time the characters of creditor and debtor
are merged in the same person. Thus, if the son owes his father
P10,000.00, and the father dies leaving as part of his estate, inherited
by the son, the amount of P10,000 owed by the son to his father.
There is a merger of creditor and debtor. The son cannot collect his
indebtedness from himself as there is confusion which extinguishes
the obligation. In Chittick vs. Court of Appeals1 where the former wife
filed a complaint against her father for support in arrears and for
her share in the conjugal partnership, and where, after the former
wife was substituted in the case by her children upon her death, the
father likewise died, the Supreme Court dismissed the complaint
stating that
since the Chittick children as heirs of respondent creditor are also
the heirs of the petitioner-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.
Article 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)
An indebtedness by a debtor and guaranteed by a third person
is extinguished if there is a merger of the characters of the debtor
and creditor. In this case, the guarantor is clearly benefited because
G.R. No. L-25350, October 4, 1988, 166 SCRA 219.
1
239
240
ObligatiOns and COntraCts
Text and Cases
art. 1277
the extinguishment of the principal obligation extinguishes the
accessory obligation of guarantee. Indeed, the debtor, in whose person
the character of the creditor has merged, cannot collect from the
guarantor claiming that he (the debtor) is now at the same time the
creditor because it is legally quite absurd to tell the guarantor that,
after exhausting all available remedies to collect the indebtedness
from himself, he failed to collect it, and thus, he is now going against
the guarantor for collection of the amount owed. However, the merger
of the persons of the guarantor and the creditor does not extinguish
the obligation. It merely extinguishes the accessory obligation. Also, a
merger of the characters of the debtor and the guarantor extinguishes
the accessory obligation, but not the principal obligation.
Article 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)
Joint debtors owe the creditor only their share in the whole
indebtedness and the creditor can only collect from a joint debtor
his share in the total indebtedness. Thus, if A, B and C jointly owe
X P3,000 and there is a merger of the characters of X and C, the
obligation is extinguished in so far as the P1,000 share of C in the
indebtedness is concerned but not as to the rest. X can still collect
P1,000 each from A and B. If the obligation of the debtors is solidary
and there is merger of the characters of C and X, the obligation is
extinguished.2 However, if A pays the whole indebtedness to X prior
to the merger of the characters of C and X, A can still collect from X
and likewise from B their respective shares in the indebtedness which
is P1,000 each.3
Article 1215 of the 1950 Civil Code.
Article 1215 in relation to Article 1219 of the 1950 Civil Code.
2
3
241
SECTION 5. — Compensation
Article 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of each
other. (1195)
Article 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)
Compensation is a mode of extinguishing an obligation whereby
the parties are mutually debtors and creditors of each other such
that if they exactly owe each other the same amount and the
requisites under Article 1279 are present, they do not have to make
actual payment to each other in the sense that they do not have to
hand money or the things due to each other, as payment is made
by operation of law. Hence, if A is indebted to B in the amount of
P2,000, and B is, in turn, indebted to A in the amount of P2,000, and
both indebtedness are due without any third person claiming the
same, the obligation is extinguished as there is legal compensation.
If they mutually owe each other the unequal amounts, then there is
compensation up to the extent that the amounts are covered by their
mutual outstanding obligations.
241
242
ObligatiOns and COntraCts
Text and Cases
arts. 1278-1279
The first requisite for legal compensation is that each one of the
obligors be bound principally and that each of them be at the same
time a principal creditor of the other. The parties must be mutual
creditors and debtors of each other. Thus in Soriano vs. Compana
General de Tabacos de Filipinas1 where the defendant extended a
crop loan to the plaintiff who secured payment of the loan by, among
others, the sugarcane crops that would be planted and harvested,
and where the defendant, after receipt of some export sugar from the
plaintiff, shipped the same to the United States for it’s (defendant’s)
own account and benefit, and where, later on, the defendant resisted
the claim of the plaintiff to be credited an amount of P51,528.01
representing the amount of the sugar it delivered to the defendant,
by invoking automatic compensation because the plaintiff was its
debtor due to his crop loan account, and at the same time a creditor
of the defendant for the proceeds of the sale of plaintiff’s sugar. The
Supreme Court rejected the theory of legal compensation because
the parties were not mutual debtors and creditors of each other
considering the fact that, by its own admission, the sugar was sold
not for the account of the plaintiff but for the account of the defendant
and therefore defendant could not have been a debtor of the plaintiff.
Also in Republic vs. Mambulao Lumber Company,2 where the said
company contended that the reforestation charges collected under
Republic Act No. 115 and not used in the area subject of its timber
license, could be applied in compensation of the sum due from it as
forest charges, the Supreme Court ruled that the reforestation charges
were in the nature of taxes and therefore can never be refunded even
if the reforestation charges were not actually used in the area subject
of its timber license, and, because they were taxes, the reforestation
charges were not debts for purposes of legal compensation to make
the parties therein mutual creditors and debtors of each other. The
Supreme Court even quoted tax authorities to prove its point, thus:
“A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality
for taxes. Neither are they proper subject of recoupment since
they do not arise out of contract or transaction sued on x x x.” (80
C.J.S. 73-74)
“The general rule, based on grounds of public policy is wellG.R. No. L-17392, December 17, 1966, 18 SCRA 999.
G.R. No. L-17725, February 28, 1962, 4 SCRA 622.
1
2
arts. 1278-1279
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
243
settled that no set-off is admissible against demands for taxes
levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature
of contracts between the parties but grow out of a duty to, and are
the positive acts of the government, to the making and enforcing
of which, the personal consent of individual taxpayers is not
required. x x x If the taxpayer can properly refuse to pay his tax
when called upon by the Collector, because he has claim against
the governmental body which is not included in the tax levy, it
is plain that some legitimate and necessary expenditure must be
curtailed. If the taxpayer’s claim is disputed, the collection of the
tax must await and abide the result of a lawsuit, and meanwhile
the financial affairs of the government will be thrown into great
confusion.” (47 Am. Jur. 766-767)
The second requisite for legal compensation is 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. Clearly, there can be no compensation if one debt involves
the payment of money and the other the delivery of a particular
thing. However, there can be compensation involving things which
are determined such as any computer but not a specific determinate
thing such as a computer with serial number 10325. In this sense,
“consumable” used by the law must be interpreted as “fungible” which
is susceptible of substitution. In Ong vs. Court of Appeals,3 where
compensation is sought for an obligation of a debtor to deliver a sum
of money to a creditor and another obligation of the latter to deliver
zippers to the former, the Supreme Court said that there can be no
compensation, thus:
Now, to the only legal question raised, to wit, the alleged
compensation between the reciprocal obligations of the parties.
Fermin claims the balance of his debt is deemed set off by
the price of the zippers in the possession of Mariano, who had
the obligation to return them to him. The flaw in this argument
is the assumption that Mariano had such an obligation, which
has not been proved by Fermin. It has already been found that
Mariano has not retained them nor did he have any need for
them as he was in a different business. He had not bought them
or otherwise owed their value to Fermin, who was in fact the
obligor. Fermin does not deny that he deposited the zippers in
Mariano’s warehouse without paying storage fees or any other
consideration.
G.R. No. 75819, September 8, 1989, 177 SCRA 402.
3
244
ObligatiOns and COntraCts
Text and Cases
arts. 1278-1279
This being so, Fermin obviously cannot take refuge in
Article 1279 of the Civil Code, providing as follows: x x x
As the respondent Court correctly observed in holding that
the above provision was not applicable:
The instant case does not certainly satisfy the above
because: (1) appellant is not a debtor of appellee, it is only the
latter who is indebted to appellant; (2) the debts, even admitting
that the delivery of the zippers to plaintiff is a debt, do not both
consist in a sum of money nor are they of the same quality and
kind x x x.
The third requisite is that the two debts be due. However, the
debts need not be contracted or incurred at the same time.4 A debt
cannot be demanded if it is not yet due. Hence, this requisite is very
important. However, the parties can agree that compensation can be
made even as to the debts which are not yet due. In Perez vs. Court of
Appeals,5 where a finance company was indebted to an investor with
respect to two debts due originally on August 6, 1974 and August
13, 1974 respectively and which debts were rolled-over so that their
maturity dates were extended to October 4, 1974 and October 11,
1974, respectively, and where the finance company was the creditor
with respect to a certain obligation to mature on August 5, 1994 as
against a certain company to whom the two credits of the investor,
which were to mature on October 4 and 11, 1974 respectively, were
assigned on September 9, 1974, the Supreme Court said that:
Since, on the respective dates of maturity, specifically,
August 6, 1974 and August 13, 1974, respectively, Ramon C.
Mojica was still the holder of those bills, it can be safely assumed
that it was he who had asked for the roll-overs on the said dates.
MEVER was bound by the roll-overs since the assignment to it
was made only on September 9, 1974. The inevitable result of
the roll-overs of the principals was that Bill No. 1298 and Bill
No. 14129 were not yet due and demandable as of the date of
their assignment by MOJICA to MEVER on September 9, 1974,
nor as of October 3, 1974 when MEVER surrendered the Bills to
CONGENERIC. As a consequence, no legal compensation could
have taken place because, for it to exist, the two debts, among
other requisites, must be due and demandable.
Also, in PNB Madecor vs. Uy6 where one of the debts was payable
only upon demand and there was no demand made, the Supreme
Court ruled that there can be no compensation because such debt is
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
G.R. No. L-56101, February 20, 1984, 127 SCRA 636.
4
5
arts. 1278-1279
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
245
not yet due.
The fourth requisite is that they be liquidated and demandable. The debt must be determined and certain. Thus compensation
cannot take place where one of the debts is not liquidated as when
there is a running interest still to be paid thereon. Thus, in Compania
Maritima vs. Court of Appeals,7 the Supreme Court, in disallowing
compensation because the amount is not liquidated, said
More, the legal interest payable from February 3, 1951 on
the sum of P40,797.54, representing useful expenses incurred by
PAN-ORIENTAL, is also still unliquidated since interest does not
stop accruing “until the expenses are fully paid.” Thus, we find
without basis REPUBLIC’s allegation that PAN-ORIENTAL’s
claim in the amount of P40,797.54 was extin-guished by
compensation since the rentals payable by PAN-ORIENTAL
amount to P59,500.00 while the expenses reach
only
P40,797.54. Deducting the latter amount from the former,
REPUBLIC claims that P18,702.46 would still be owing by PANORIENTAL to REPUBLIC. That argument loses sight of the fact
that to the sum of P40,797.54 will still have to be added the legal
rate of interest “from February 3, 1951 until fully paid.”
In Miailhe vs. Halili8 where the Supreme Court reduced the
liability in favor of the petitioner resulting, among others, in an
excess amount of P2,004.28, which consequently became payable to
the respondent, and where the petitioner did not want to return the
said amount on the ground that he had the right to retain the same
considering that, in another case, which was on appeal, the lower court
had rendered judgment against the respondent and in favor of the
petitioner for the sum of P2,004.28, and hence, compensation should
apply, the Supreme Court said that there can be no com-pensation
because the amount of P2,004.28 awarded to the petitioner in another
case was still under litigation and therefore still being disputed, and
that it was a requirement for compensation to take place that the
amount involved be certain and liquidated.
The fifth requisite is that over neither of them there be
any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
By “due time” should be meant the period before legal
compensation was supposed to take place, considering that
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
G.R. No. L-50900, April 9, 1985, 135 SCRA 593.
8
G.R. No. L-16587, October 31, 1962, 6 SCRA 453.
6
7
246
ObligatiOns and COntraCts
Text and Cases
art. 1280
legal compensation operates so long as the requisites concur,
even without any conscious intent on the part of the parties. A
controversy that is communicated to the parties after that time
may no longer undo the compensation that had taken place by
force of law, lest the law concerning legal compensation be for
naught.9
Hence, for example: A is indebted to B in the amount of P1,000,
due on May 3, 1999 and B is likewise indebted to A in the same
amount due on May 23, 1999. Legal compensation therefore could
set in on May 23, 1999. However, D filed suit against A and was able
to obtain a favorable resolution from the court garnishing all money
and credits of A. One of the garnished credits belonging to A was the
indebtedness of B in his (A’s) favor. If it were only on June 1, 1999
that B was able to know of the garnishment, legal compensation has
already set in by May 23, 1999. Hence, D cannot anymore make use
of the credits of A against B to satisfy A’s obligation in his (D’s) favor.
However, if B were notified of the garnishment on May 20, 1999, there
can be no compensation of the mutual debts of A and B against each
other as the controversy commenced by D, a third person, was duly
communicated at a time before legal compensation could set in.10
Article 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)
A guarantor is a person who promises to pay the creditor in the
event that the principal debtor fails to pay the indebtedness. But
before the creditor can go against a guarantor, the creditor must
first exhaust all possible ways to collect the debt from the principal
debtor unless the guarantor binds himself solidarily with the principal
debtor. If the creditor goes against the guarantor, the latter can resist
payment by invoking compensation between the creditor and the
principal debtor. The phrase “notwithstanding the provisions of the
preceding article” refers to the fact that, even if the guarantor and
the principal creditor are not mutual debtors and creditors of each
other, the obligation of the guarantor can be extinguished
by
invoking compensation in so far as the principal debtor is con-cerned.
Article 1281. Compensation may be total or partial. When
the two debts are of the same amount, there is a total comPNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
See PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
9
10
arts. 1281-1283
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
247
pensation. (n)
Total compensation arises when the mutual debts of the parties
to each other are equal. There is partial compensation when the
debts are not equal, in which case, the debts are extinguished to the
concurrent amount. Hence, if A owes Z P2,000 and Z owes A P500,
compensation can occur but only on a partial basis. Z’s indebtedness
will be extinguished, but A’s indebtedness will subsist but partially
extinguished to the extent of P500, reducing liability to the amount
of P1,500.
Article 1282. The parties may agree upon the compensation of debts which are not yet due. (n)
As a general rule, compensation can only occur when the
debts are due and demandable. However, the parties may agree
upon the compensation of debts which are not yet due. This type of
compensation is not legal compensation but contractual compensation.
Hence, if A is indebted to Z in the amount of P1,000 due on April 11,
1997 and Z is indebted to A in the same amount but due on May 7,
1997, there can be no compensation on April 11, 1997. However, Z
and A can agree that, even if May 7, 1997 has not yet arrived, their
mutual indebtedness compensate each other so that their respective
obligations are extinguished.
Article 1283. If one of the parties to a suit over an obligation
has a claim for damages against the other, the former may set
it off by proving his right to said damages and the amount
thereof. (n)
This is judicial set-off. Thus, if A files a collection case against B
in the amount of P1,000, B can file a counterclaim in the same amount
claiming damages arising from the same or different transaction and
requesting the court to just set-off the damages. If the court agrees,
then there can be compensation. In Ong vs. Court of Appeals,11 the
Supreme Court ruled that for judicial set-off to apply, the amount of
damages or the claim sought to be compensated must be duly proven,
thus:
The petitioner says, however, that there was a judicial setoff under Article 1283 of the Civil Code, reading as follows:
ART. 1283. If one of the parties to a suit over an obligation
has a claim for damages against the other, the former may set it
off by proving his right to said damages and the amount thereof.
248
ObligatiOns and COntraCts
Text and Cases
arts. 1284-1285
The trouble is that Fermin has not proved the right to any
damage as a result of the claimed retention of the zippers by
Mariano. There was also no proof of the amount of such damages
as he could not even say how many of the zippers had been earlier
withdrawn by him.
Article 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)
A rescissible or voidable debt is valid up to the time it is rescinded
or annulled. Hence, if all the requisites for a valid compensation are
present before a contract is rescinded or annulled, the compensation
can occur by operation of law. Hence, if A is in-debted to B for P1,000
and the latter is likewise indebted to A for the same amount which are
both due and demandable, compensation will occur even if the loan
obtained by B from A was procured through force and intimidation,
therefore making the same voidable, for as long as such debt has not
yet been annulled.
Article 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)
Article 1285 provides three cases when one of the creditors
assigns his credit to a third person. The first case is when 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
11
G.R. No. 75819, September 8, 1989, 177 SCRA 402.
art. 1285
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
249
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. Thus, as an
example: X owes Y P1,000 due on April 12, 1997. Y is likewise indebted
to X in the same amount due on May 6, 1997. On April 14, 1997, Y
assigned his credit to O with the consent of X who does not make any
reservation as to his right of compensation which could occur on May
6, 1997. On May 7, 1997, O demands payment from X the amount of
P1,000 which has been assigned to him by Y. X cannot resist payment
by invoking that the amount of indebtedness of Y in his favor may be
applied in compensation of the said amount of P1,000 assigned by Y
to O. However, if at the time X gives his consent to the assignment,
he reserves his right to the compensation, he can validly invoke that
the obligation has been extinguished through com-pensation. In Perez
vs. Court of Appeals,12 the Supreme Court took special consideration
of the nature of money market transactions with respect to the issue
of assignment in compensation. In this case, a finance company issued
to an investor two promissory notes to mature originally on August
6, 1974 and August 13, 1974, res-pectively, and which commercial
papers were rolled-over so that their maturity dates were extended to
October 4, 1974 and October 11, 1974 respectively. The same finance
corporation was the creditor with respect to a certain obligation to
mature on August 5, 1994 as against a certain company to whom
the two credits of the investor, which were to mature on October
4 and 11, 1974, respectively, were assigned on September 9, 1974.
Compensation was claimed in this case on the basis of the third
paragraph of Article 1285. The Supreme Court rejected the same and
instead applied the first paragraph because the debtor cannot claim
that he had no knowledge of the assignment in view of the special
nature of money market tran-sactions, thus:
The impersonal character of the money market device
overlooks the individuals or entities concerned. The issuer of
a commercial paper in the money market necessarily knows in
advance that it would be expeditiously transacted and transferred
to any investor/lender without need of notice to said issuer. In
practice, non-notification is given to the borrower or issuer of
commercial paper of the sale or transfer to the investor.
Accordingly, we find no applicability herein of Article 1285,
3rd paragraph of the Civil Code. Rather, it is the first paragraph
of the same legal provision that is applicable:
12
G.R. No. L-56101, February 20, 1984, 127 SCRA 636.
250
ObligatiOns and COntraCts
Text and Cases
art. 1285
“Article 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.” x x x
The second case is when the creditor communicated the cession
to the debtor 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. Thus, as an example: X owes Y P1,000 due on
April 12, 1997 and another P2,000 due on May 10, 1997. Y is likewise
indebted to X in the amount of P1,000 due on May 6, 1997 and another
P2,000 due on May 9, 1997. On May 7, 1997, Y assigns all his credits
to O but X does not consent to the assignment. On June 1, 1997, O
demands payment from X of the first P1,000 and the second P2,000
assigned to him by Y. X can resist payment of the P1,000 on the
ground that compensation has taken place because both have become
due before the cession, but he cannot set up compensation as to the
P2,000 which has become due after the cession.
The third case is when 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 has knowledge of the
assignment. In the example given in the second case, if X is informed
by Y only on May 15, 1997 that he has assigned all his credits to O,
and the latter demands payment of the first P1,000 and the second
P2,000 on June 1, 1997, X can invoke that all the indebtedness have
been extinguished because compensation has set in. In Sesbreño vs.
Court of Appeals13 where Philfinance was indebted to Delta evidenced
by PN No. 143-A and the latter was likewise indebted to the former
evidenced by DMC PN No. 2731, and where Philfinance assigned its
credit against Delta, evidenced by DMC PN No. 2731, to Sesbreno
(one of Philfinance’s creditors) who only notified Delta of such assignment after the indebtedness of Delta in favor of Philfinance and the
indebtedness of Philfinance in favor of Delta both became mutually
due, and where, despite the said maturities of said debts, Sesbreño
decided to claim from Delta on the basis of the assigned credit made to
him by Philfinance, the Supreme Court, citing Article 1285 especially
the last paragraph thereof, ruled that Sesbreno could no longer claim
from Delta because he notified Delta of his rights as assignee after
compensation had taken place by operation of law between Philfinance
13
14
G.R. No. L-89252, May 24, 1993, 222 SCRA 466.
Articles 1962 and 1972 of the 1950 Civil Code.
art. 1285
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
and Delta. The Supreme Court pertinently ruled as follows:
We turn to Delta’s arguments concerning the alleged
compensation or off-setting between DMC PN No. 2731 and
Philfinance PN No. 143-A. It is important to note that at the
time Philfinance sold part of its rights under DMC PN No. 2731
to petitioner on 9 February 1981, no compensation had as yet
taken place and indeed none could have taken place. The essential
requisites of compensation are listed in the Civil Code as follows:
“Article 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
controversy, commenced by third persons and communicated in
due time to the debtor.” (Italics supplied)
On 9 February 1981, neither DMC PN No. 2731 nor
Philfinance PN No. 143-A was due. This was explicitly
recognized by Delta in its 10 April 1980 “Letter of Agreement”
with Philfinance, where Delta acknowledged that the relevant
promissory notes were “to be offsetted (sic) against [Philfinance]
PN No. 143-A upon co-terminal maturity.”
As noted, the assignment to petitioner was made on 9
February 1981 or forty-nine (49) days before the “co-terminal
maturity” date, that is to say, before any compensation had
taken place. Further, the assignment to petitioner would have
prevented compensation from taking place between Philfinance
and Delta, to the extent of P304,533.33, because upon execution of
the assignment in favor of petitioner, Philfinance and Delta, would
have ceased to be creditors and debtors of each other in their
own right to the extent of the amount assigned by Philfinance
to petitioner. Thus, we conclude that the assignment effected
by Philfinance in favor of petitioner was a valid one and that
petitioner accordingly became owner of DMC PN No. 2731 to the
extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta
of the fact of the assignment to him only on 14 July 1981, that is
after the maturity not only of the money market placement made
251
252
ObligatiOns and COntraCts
Text and Cases
art. 1285
by petitioner but also of both DMC PN No. 2731 and Philfinance
PN No. 143-A. In other words, petitioner notified Delta of his rights
as assignee after compensation had taken place by ope-ration of
law because the offsetting instruments had both reached maturity.
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 the equities — i.e., the
defenses— which the debtor could have set up against the original
assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:
“Article 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.” (Italics supplied)
Article 1626 of the same Code states that: “The debtor who,
before having knowledge of the assignment, pays his creditor
shall be released from the obligation. In Sison vs. Yap-Tico, the
Court explained:
“No man is bound to remain a debtor: he may pay to him
with whom he contracted to pay; and if he pays before notice that
his debt has been assigned, the law holds him exonerated, for the
reason that it is the duty of the person who has acquired a title
by transfer to demand payment of the debt, to give his debtor
notice.”
At the time that Delta was put to notice of the assignment
in petitioner’s favor on 14 July 1981, DMC PN No. 2731 had
already been discharged by compensation. Since the assignor
Philfinance could not have been then compelled payment anew by
Delta of DMC PN No. 2731, petitioner, as assignee of Philfinance,
is similarly disabled from collecting from Delta the portion of the
Note assigned to him.
It bears some emphasis that petitioner could have notified
Delta of the assignment in his favor as soon as that assignment or
art. 1286
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
253
sale was effected on 9 February 1981. He could have also notified
Delta as soon as his money market placement matured on 13
March 1981 without payment thereof being made by Philfinance;
at that time, compensation had yet to set in and discharge DMC
PN No. 2731. Again petitioner could have notified Delta on
26 March 1981 when petitioner received from Philfinance the
Denominated Custodianship Receipt (“DCR”) No. 10805 issued by
private respondent Philfinance in favor of petitioner. Petitioner
could, in fine, have notified Delta at any time before the maturity
date of DMC PN No. 2731. Because petitioner failed to do so, and
because the record is bare of any indication that Philfinance had
itself notified Delta of the assignment to petitioner, the Court is
compelled to uphold the defense of compensation raised by private
respondent Delta.
xxx
Article 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)
If all the requisites under Article 1279 are present, compensation takes place by operation of law. The parties need not
notify each other that they intend to have their debts compensated.
Indemnity for expenses of exchange or transportation to the place
of payment can arise only if there is partial compensation. If there
is complete compensation, the parties need not do anything as the
obligations are completely extinguished. Hence, if A owes B P1,000
payable in Davao and B owes A the same amount payable in Marikina
and both are due, A and B do not have to go to the places of payment
as the compensation here is complete and therefore both obligations
are totally extinguished. But if B owes A P500, then there is only
partial compensation, and A has to go to Marikina for him to receive
the payment of B for the balance of P500. A, the creditor, should be
reimbursed by the debtor the amount of transportation expenses A
has incurred in going to Marikina because, under Article 1247, the
extrajudicial expenses required for payment shall be for the account
of the debtor, unless it is otherwise stipulated.
Article 1287. Compensation shall not be proper when one
of the debts arises from a depositum or from the obligations
of a depository 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
254
ObligatiOns and COntraCts
Text and Cases
arts. 1287-1288
prejudice to the provisions of paragraph 2 of Article 301.
(1200a)
Article 1288. Neither shall there be compensation if one of
the debts consists in civil liability arising from a penal offense.
(n)
Compensation will not occur in the following situations even if
there is technically a loan or an indebtedness existing:
1)
Debts arising from a depositum or from the obligations of
a depository. A deposit is constituted from the moment
a person receives a thing belonging to another, with
the obligation of safely keeping it and of returning the
same.14 Thus, if A owes B P1,000 due on April 11, 1997,
and A deposited with B an amount of P1,000 only for
safekeeping to be returned on April 11, 1977, there can
be no compensation come April 11, 1997 as the obligation
of B to return the P1,000 arises from the obligations of a
depository.
2)
Debts arising from the obligations of a bailee in commodatum.
The bailee in commodatum acquires the use of the thing
loaned but not its fruits.15 The bailee is obliged to pay the
ordinary expenses for the use and preservation of the thing
loaned.16 The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even though it
may be by reason of expenses. However, the bailee has the
right of retention for damages mentioned in Article 1951.17
3)
Debts arising from duty to support. Compensation cannot
likewise apply if the other obligation is one of support to
the other party. Thus, a father, who is required to give
support to his son, cannot claim that he need not give the
support considering that his son owes him the same amount
of money. The law provides that this rule on gratuitous
support shall be “without prejudice to the provisions to
paragraph 2 of Article 301” of the Civil Code which provides
that support in arrears can be compensated or renounced.
Hence if the father has not given his son the amount of
P4,000 which is equivalent to the previous four months of
unremitted financial support, but the same son owes the
father P4,000, there can be compensation in his case. The
application of paragraph 2 of Article 301 of the Civil Code
Article 1395 of the 1950 Civil Code.
Article 1941 of the 1950 Civil Code.
17
Article 1944 of the 1950 Civil Code.
15
16
art. 1289
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
255
is of doubtful applicability in view of the fact that the said
Article 301 of the Civil Code has already been deleted by
the New Family Code.18
4)
Debts consisting of a civil liability arising from a penal
offense. If A is indebted to B by virtue of a contract of loan
and B is indebted to A by virtue of an award of civil damages in favor of A as a result of B’s conviction in inflicting
physical injuries on A, there can be no compensation. Also,
a criminal violation of the Trust Receipt Law which makes
the obligor financially and civilly liable to the contracting
bank to the extent indicated in the Trust Receipt contract
cannot be extinguished by a claim of compensation of the
amount of deposit which the obligor has with the bank even
if, under the law, a person who opens a deposit account in
a bank is technically a creditor of that bank.19
Article 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)
The rules on application of payments are provided for in
Subsection 1, Chapter 4, Book IV, Title I of the Civil Code covering
Articles 1252 up to 1254. Hence, if A owes X P3,000 due on April 11,
1997, and X owes A P3,000 without interest, and another P3,000
with interest at 12% per annum in case of non-payment, all due on
April 11, 1997, there can be compensation. If X does not designate the
indebtedness to which compensation will apply, it will be applied to
the most onerous debt which is the interest-bearing P3,000 debt. This
is the most onerous because the payment of the interest is necessarily
most burdensome.
Article 1290. When all the requisites mentioned in article
1279 are present, compensation takes effect by operation of law,
and extinguishes both to the concurrent amount, even though
the creditors and debtors are not aware of the compensation.
(1202a)
Compensation is the most expedient way of extinguishing an
Executive Order No. 209 as amended which took effect on August 3, 1988.
Metropolitan Bank and Trust Company vs. Tonda, G.R. No. 134436, August
16, 2000, 132 SCAD 111, 338 SCRA 254.
20
G.R. No. L-62169, February 20, 1983, 120 SCRA 930.
18
19
256
ObligatiOns and COntraCts
Text and Cases
art. 1290
obligation. It is automatic and occurs even though the creditors
and debtors are not aware of the compensation. Thus in Mindanao
Portland Cement vs. Court of Appeals20 where a creditor was able to
obtain in a civil case an award of attorney’s fees in the amount of
P10,000.00 from the debtor, and the latter was also able to obtain a
judgment in another civil case for attorney’s fees in the same amount
from the former, the Supreme Court said there was compensation,
thus:
It is clear from the record that both corporations, petitioner
Mindanao Portland Cement Corporation (appellant) and
respondent Pacweld Steel Corporation (appellee), were creditors
and debtors of each other, their debts to each other consisting
in final and executory judgments of the Court of First Instance
in two (2) separate cases, ordering the payment to each other
of the sum of P10,000.00 by way of attorney’s fees. The two (2)
obligations, therefore respectively offset each other, compensation having taken effect by operation of law and extinguished
both debts to the concurrent amount of P10,000.00 pursuant to
the provisions of Arts. 1278, 1279 and 1290 of the Civil Code,
since all the requisites provided in Article 1279 of the Code for
automatic compensation “even though the creditors and debtors
are not aware of the compensation” were duly present.
In Pioneer Insurance & Surety Corporation vs. Court of Appeals,21
an interesting case of compensation was likewise decided, thus:
In September, 1978, petitioner Pioneer Insurance and
Surety Corporation issued general warehousing bonds in favor
of the Bureau of Customs for importation of raw materials in
the total amount of P6,500.00. The bonds were issued on behalf
of the private respondents Wearever Textile Mills, Inc., and its
president, Vicente T. Lim.
To secure the petitioner from and against any and all harm,
damages and losses of whatever kind and nature which it may
incur as a consequence of its becoming a surety upon the bonds,
the respondents executed jointly and severally in favor of the
petitioner indemnity agreements for said bonds each of which
contains the following stipulations:
“INDEMNITY — The undersigned, jointly and severally,
agree and bind themselves to indemnify and hold and save
harmless the Corporation from and against any and all damages,
losses, costs, stamps, taxes, penalties, charges and expenses of
whatsoever kind and nature which the Corporation shall or may
21
G.R. No. 76509, December 15, 1989, 180 SCRA 156.
at any time incur in consequence of having become surety upon
art. 1290
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
the bond/note or any extension, renewal, substitution or alteration
thereof made at the instance of the undersigned or executed on
behalf of the undersigned or any of them; and to pay, reimburse
and make good to the Corporation, its successors and assigns, all
sums and amounts of money which it or its representatives shall
or may pay or cause to be paid or become liable to pay, on account
of the undersigned or any of them, of whatsoever kind and nature
including 20% of the amount involved in the litigation or other
matters growing out or connected therewith for attorney’s fees but
in no case to be less than P200.00. The undersigned further agree,
jointly and severally, that in case of any extension or renewal of
the bond/note, to bind ourselves for the payment thereof under
the same terms and conditions, as above mentioned, without
the necessity of executing another Indemnity Agreement for the
purpose and we hereby equally waive our right to be notified of
any renewal or extension of the bond/note which may be granted
under this Indemnity Agreement.
“MATURITY OF OUR OBLIGATIONS CONTRACTED
HEREWITH — The above indemnities shall be paid to the
corporation as soon as demand is received from the creditor or as
soon as it becomes liable to make payment of any sum under the
terms of the above-mentioned bond/note, its renewal, extensions
or substitutions whether the said sum or sums or part thereof
have been actually paid or not.” (pp. 29-30, Rollo)
The private respondents failed to comply with their
commitment under the warehousing bonds by reason whereof
the Bureau of Customs demanded from the petitioner payment
of the value of the said bonds in the amount of P6,390,259.00.
This amount eventually reached P9,031,000.00 in 1983.
In the meantime, in response to the petitioner’s demand
letter, the private respondents wrote petitioner promising that
they will settle their obligations with the Bureau of Customs.
On representations by private respondents to the Bureau
of Customs, the latter granted the request of respondents for
staggered monthly installment payments of their obligation on
condition that the respondents will make an initial payment
of P500,000.00 and thereafter shall amortize the balance of
P400,000.00 monthly until fully paid pursuant to the first
endorsement by the Bureau of Customs dated September 22,
1976. Other than the initial payment of P500,000.00, however,
respondents have not made any other payments thereby violating
the terms of the said agreement.
As a result of the foregoing, the Bureau of Customs again
demanded from the petitioner payment of its bonds. No payment,
however, has been made as yet.
257
258
ObligatiOns and COntraCts
Text and Cases
art. 1290
Sometime in 1979, a fire gutted the respondent’s factory
destroying materials insured with the petitioner in the amount
of P1,144,744.49. Respondents demanded from the petitioner
payment of the proceeds of the insurance policy but the latter
refused to pay claiming that said proceeds must be applied
by way of partial compensation or set-off against its liability with the Bureau of Customs arising from the warehousing
bonds.
The petitioner’s efforts to protect itself from total loss in
the much bigger amount of P6,390,259.00 which as of April 19,
1983 had already reached P9,031,000.00 having proved fruitless,
the complaint for compensation was filed below.
The trial court rendered judgment in favor of the private
respondents and ordered the petitioner to pay, among others, the
insurance proceeds in the amount of P1,144,744.49 plus legal
interest from November 19, 1979 until the whole amount is fully
paid.
On appeal, the Court of Appeals affirmed the trial court’s
decision, holding that legal compensation cannot take place
because the requisites thereof are not present, namely: that
petitioner is not the creditor of private respondents; and that
the former’s claim against the latter is not due, demandable and
liquidated because its liability on the warehousing bonds was
extinguished when the textile goods covered by the same were
destroyed by the fire. Therefore, according to the appellate court
since the petitioner and private respondents are not mutually
creditors to each other, the law on compensation is inapplicable.
In this petition, Pioneer Insurance alleges that legal
compensation or set-off under Articles 1278 and 1279 can
take place because there is due to private respondents from
the petitioner the amount of P1,144,744.49 as proceeds of the
fire insurance policy in the same manner that the private respondents are bound, jointly and severally, to reimburse petitioner
what the latter is liable to pay the Bureau of Customs in the
total amount of P6,390,259.00 and which, as of the date of the
filing of the complaint, had already reached P9,031,000.00. The
petitioner also stresses that even if it has not yet paid the Bureau
of Customs any amount, the private respondents have already
become indebted to the petitioner pursuant to the indemnity
agreement which stands as the law between the parties.
On the other hand, the private respondents argue that the
demands to pay made by the Bureau of Customs did not prove
nor create any liability and even if they did, the liability under
the warehousing bonds in favor of the Bureau of Customs was
the liability of the petitioner, that petitioner did not pay and has
art. 1290
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
never paid the Bureau of Customs under the warehousing bonds
and, therefore, the private respondents have nothing to reimburse
the petitioner for and that the approved staggered payment
arrangement of the respondents with the Bureau of Customs
released petitioner from liability under the warehousing bonds.
We rule for the petitioner.
In the case of the International Corporate Bank, Inc. vs.
The Intermediate Appellate Court, et al. (G.R. No. 69560, June
30, 1988), we reiterated the requisites of legal compensation. We
said:
“Compensation shall take place when two persons, in
their own right, are creditors and debtors of each other. (Art.
1278, Civil Code). When all the requisites mentioned in Art.
1279 of the Civil Code are present, compensation takes effect
by operation of law, even without the consent or knowledge of
the debtors.’ (Art. 1290, Civil Code). Art. 1279 of the Civil Code
requires among others, that in order that legal compensation
shall take place, the two debts be ‘due and they be liquidated
and demandable.’ Compensation is not proper where the claim of
the person asserting the set-off against the other is not clear nor
liquidated; compensation cannot extend to unliquidated, disputed
claim arising from breach of contract. (Compania General de
Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez
vs. Hererro, 17 Phil. 29)
“There can be no doubt that petitioner is indebted to private
respondent in the amount of P1,062,063.83 representing the
proceeds of her money market investment. This is admitted.
But whether private respondent is indebted to petitioner in the
amount of P6.81 million representing the deficiency balance
after the foreclosure of the mortgage executed to secure the
loan extended to her, is vigorously disputed. This circumstance
prevents legal compensation from taking place. (CA Decision,
Rollo, pp. 112-113)
There is no dispute that the petitioner owes the private
respondents the amount representing the proceeds of the
insurance policy. The private respondents, however, try to negate
their liability by questioning the veracity and accuracy of the
Bureau of Customs’ demand letters to the petitioner and by
claiming that they have no more liability because of the fortuitous
event. At the same time however, they admit liability when they
argued that the petitioner was released from the same upon
their agreement with the Bureau of Customs to make staggered
payments. Finally, the private respondent argue that since the
petitioner has not made any payment yet regarding the amount
demanded by the Bureau of Customs, there is nothing for which
259
260
ObligatiOns and COntraCts
Text and Cases
art. 1290
the petitioner should be reimbursed.
It is needless to emphasize that at the time the fire occurred,
the private respondents together with the petitioner had already
incurred liability on the warehousing bonds with the Bureau of
Customs because of the respondents’ inability to comply with the
provisions of their undertaking. It is therefore, clear that as far as
the amount of P9,031,000.00 is concerned, both the petitioner and
respondents were already liable for said amount to the Bureau of
Customs when the contingency for which compensation is sought,
happened. Neither can the respondents claim that the petitioner
was released from liability when they made arrangements
with the Bureau of Customs for staggered payments since the
facts will bear out that other than the P500,000.00 payment by
respondents, no further payment was made by them thus leading
the Bureau of Customs to go after the petitioner again. The
private respondents, contend, however, that since the petitioner
has not made any payment with the Bureau of Customs, it cannot
demand reimbursement and, thus, petitioner cannot apply legal
compensation or set-off against them because their liability has
not yet become due and demandable.
In the recent case of Mercantile Insurance Co., Inc. vs. Felipe
Ysmael, Jr. & Co., Inc. (G.R. No. L-43962, January 13, 1989), we
ruled:
“The question as to whether or not under the Indemnity
Agreement of the parties, the Surety can demand indemni-fication
from the principal, upon the latter’s default, even before it has
paid to the creditor, has long been settled by this Court in the
affirmative.
It has been held that:
“The stipulation in the indemnity agreement allowing the
surety to recover even before it paid the creditor is enforceable.
In accordance therewith, the surety may demand from the
indemnitors even before paying the creditors. (Cosmopolitan Ins.
Co., Inc. vs. Reyes, 15 SCRA 528 [1965], citing Security Bank vs.
Globe Assurance, 58 Off. Gaz. 3709 [April 30, 1962]; also Surety
and Ins. Co., Inc. vs. Aguilar, et al., G.R. No. L-5625, March 16,
1954).”
Clearly, the petitioner can demand reimbursement from
the respondents even before it has actually paid its obligation
to the Bureau of Customs. It can, in principle, be held liable
under the warehouse bonds even before actual payment to the
Bureau of Customs. The liability has been fixed. What remains
is simply its liquidation. The respondents who defaulted on the
agreement to make staggered payments thereby causing the
art. 1290
ObligatiOns
Extinguishment of Obligations
Sec. 5 — Compensation
petitioner’s liability to the Bureau of Customs cannot refuse the
set-off. Consequently, legal compensation can take place between
the petitioner and the private respondents, that is, the petitioner
can partially set-off the insurance proceeds in the amount of
P1,144,744.49 against its liability under the warehousing bonds
which has been computed in the amount of P9,031,000.00 as of
1983.
From the records, it is seen that the last demand letter of
the Bureau of Customs asking the petitioner to pay the value
of the bonds was on March 27, 1981. The records are silent on
whether or not the Bureau of Customs sued either of the parties
to enforce liability under the warehousing bonds. It may be noted
that the petitioner admits its liability under the warehousing
bonds. Since the issue is legal compensation and in order to
avoid any miscarriage of justice, the Court refers the issue on
the enforcement of liability under the bonds to the Bureau of
Customs.
261
262
ObligatiOns and COntraCts
Text and Cases
SECTION 6. — Novation
Article 1291. Obligations may be modified by:
(1)
Changing their object or principal conditions;
(2)
Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the
creditor. (1203)
Novation is another way of extinguishing an obligation. Novation
under the provisions of the Civil Code refers to extinctive novation
and not modificatory novation. In Ajax Marketing & Development
Corporation vs. Court of Appeals1 where petitioners’ three debts
(secured by continuing real estate mortgages also intended to secure
future indebtedness, including renewals and extensions) were
consolidated into one debt with the original debtors incorporating
themselves into a corporation for purposes of the consolidated debt,
and where the original debtors claimed that there was novation
considering the resulting consolidation, and the change in the person
of the debtor, the Supreme Court ruled that there was no subjective
or objective novation and explained that:
Novation, unlike other modes of extinction of obligations,
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
the person of the debtor or creditor, a mixed novation occurs.
x x x Thus to effect an objective novation it is imperative
that the new obligation expressly declare that the old obligation
is thereby extinguished, or that the new obligation be on every
point incompatible with the new one. In the same vein, to effect
G.R. No. 118585, September 14, 1995, 64 SCAD 311, 248 SCRA 222.
Garcia, Jr. vs. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA
262
1
2
art. 1291
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
a subjective novation by a change in the person of the debtor it
is necessary that the old debtor be released expressly from the
obligation, and the third person or new debtor assumes his place
in the relation. There is no novation without such release as the
third person who has assumed the debtor’s obligation becomes
merely a co-debtor or surety.
“The attendant facts herein do not make a case of novation.
There is nothing in the records to show the unequivocal intent
of the parties to novate the three loan agreements through
the execution of PN No. BDS-3065. The provisions of PN No.
BDS 3065 yield no indication of the extinguishment of, or an
incompatibility with, the three loan agreements secured by the
real estate mortgages over TCT No. 105233. On its face, PN No.
BDS-3065 has these words typewritten: “secured by REM” and
“9. COLLATERAL. This is wholly/partly secured by: (x) real
estate,” which strongly negate petitioners’ asseveration that
the consolidation of the three loans effected the discharge of the
mortgaged real estate property. Otherwise there would be no
sense placing these material provisions. x x x
The foregoing shows that petitioners agreed to apply the
real estate property to secure obligations that they may thereafter
obtain including their renewals or extensions with the principals
fixed at “P600,000.00, P150,000.00, and P250,000.00 which when
added have an aggregate sum of P1.0 million. PN No. BDS-3605
merely restructured and renewed the three previous loans to
expediently make the loans current. There was no change in
the object of the prior obligations. The consolidation of the three
loans, contrary to petitioner’s contention, did not release the
mortgaged real estate property from any liability because the
mortgage annotations at the back of TCT No. 105233, in fact, all
remained uncancelled, thus indicating the continuing subsistence
of the real estate mortgages.
“Neither can it be validly contended that there was a
change or substitution in the persons of either the creditor
(Metrobank) or more specifically the debtors (petitioners) upon
the consolidation of the loans in PN No. BDS 3605. The bare fact
of petitioners’ conversion from a partnership to a corporation,
without sufficient evidence, either testimonial or documentary,
that they were expressly released from their obligations, did
not make petitioner AJAX, with its new corporate personality,
a third person or new debtor within the context of a subjective
novation. If at all, petitioner AJAX only became a co-debtor or
surety. Without express release of the debtor from the obligation,
any third party who may thereafter assume the obligation shall
be considered merely as co-debtor or surety. Novation arising
from a purported change in the person of the debtor must be clear
and express because, to repeat, it is never presumed. Clearly
263
264
ObligatiOns and COntraCts
Text and Cases
art. 1292
then, from the aforesaid points, neither objective nor subjective
novation occurred.”
It is a general rule that no form of words or writing is necessary
to give effect to a novation.2 Thus, in Goni vs. Court of Appeals,3 the
Supreme Court upheld that an oral lease agreement can validly
novate a contract to sell provided that it can be shown that the intent
to novate was present and that the terms are truly incompatible in
every respect.
Article 1292. In order that an obligation may be
extinguished by another which substitute the same, it is
imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible
with each other. (1204)
There can be no novation unless two distinct and successive
binding contracts take place, with the later one designed to replace
the preceding convention.4 Also, if a subsequent contract is designed to
novate a previous contract and not all parties to the original contract
consented to or are made parties in the subsequent contract, there can
be no novation.5 Modifications introduced before a bargain becomes
obligatory can in no sense constitute novation in law.6 An obligation
which intends to substitute another obligation extinguishes the latter
obligation only if it so expressly declares in certain terms or when
the old obligation is completely incompatible with the new obligation
in every aspect7 that there can be no other import but to wipe out
the old obligation by the new one. Novation therefore can never be
presumed.
The extinguishments of the old obligation by the new one
is a necessary element of novation which may be effected either
expressly or impliedly. The term “expressly” means that the
contracting parties incontrovertibly disclose that their object in
executing the new contract is to extinguish the old one. Upon the
493. other hand, no specific form is required for an implied novation,
G.R. No. L-27434, September 23, 1986, 144 SCRA 222.
Evadel Realty and Development Corporation vs. Spouses Antero, G.R. No.
144291, April 20, 2001.
5
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD
281, 320 SCRA 625.
6
Montelibano vs. Bacolod-Murcia Milling Co., G.R. No. L-15092, May 18, 1962,
5 SCRA 36.
7
National Power Corporation vs. Dayrit, G.R. Nos. L-62845-46, November 25,
1983, 125 SCRA 849.
8
Quinto vs. People, G.R. No. 126712, April 14, 1999, 105 SCAD 473, 305 SCRA
3
4
art. 1292
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
265
and all that is prescribed by law would be an incompatibility
between the two contracts. While there is really no hard and fast
rule to determine what might constitute to be a sufficient change
that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incom-patibility between
the old and the new obligations.
There are two ways which could indicate, in fine,
the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the
same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and
the new obligations are 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. Corollarily, changes that breed incompatibility
must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements
of the obligation, such as its object, cause or principal conditions
thereof; otherwise the change would be merely modificatory in
nature and insufficient to extinguish the original obligation.8
Hence, if an obligation evidenced by a promissory note was
superseded by another obligation evidenced by a new promissory
note which expressly provided that the old promissory note was
cancelled, there is novation as the phrase “to cancel” means to strike
out, revoke, rescind, abandon, or terminate.9 However, a contract to
sell of a condominium unit was executed after the lessor and the lessee
executed their lease contract, the former does not necessarily novate
the latter absent any clear expression of the intention to novate.10 In
Garcia, Jr. vs. Court of Appeals,11 the Supreme Court, quoting the
Court of Appeals, said:
x x x In every novation there are four essential requisites:
(1) a previous valid obligation; (2) the agreement of all the parties
to the new contract; (3) the extinguishment of the old contract;
and (4) validity of the new one. There must be consent of all the
parties to the substitution, resulting in the extinction of the old
obligation and the creation of a valid new one (Tiu Siuco vs.
708.
9
Bautista vs. Pilar Development Corporation, G.R. No. 135046, August 17, 1999,
110 SCAD 964, 312 SCRA 611.
10
Espina vs. Court of Appeals, G.R. No. 116805, June 22, 2000, 128 SCAD 312,
334 SCRA 186.
11
G.R. No. L-80201, November 20, 1990, 191 SCRA 493.
12
G.R. No. L-22366, October 30, 1969, 29 SCRA 791, citing Martinez vs. Cavives,
266
ObligatiOns and COntraCts
Text and Cases
art. 1292
Habana, 45 Phil. 707). The acceptance of the promissory note by
the plaintiff is not novation of the contract. The legal doctrine is
that an obligation to pay a sum of money is not novated in a new
instrument by changing the term of payment and adding other
obligations not incompatible with the old one (Inchausti & Co.
vs. Yulo, 34 Phil. 978). It is not proper to consider an obligation
novated as in the case at bar by the mere granting of extension of
payment which did not even alter its essence. To sustain novation
necessitates that the same be declared in unequivocal terms or
that there is complete and substantial incompatibility between
the two obligations (Sandico vs. Pacquing, 42 SCRA 322). An
obligation to pay a sum of money
is not novated in a new
instrument wherein the old is ratified by changing only the terms
of payment and adding other obligations not incompatible with
the old one or wherein the old contract is merely supplementing
the new one (Dungo vs. Lopena, L-19377, Dec. 29, 1962, 6 SCRA
1007; Magdalena Estates, Inc. vs. Rodriguez, 18 SCRA 967; Rizal
Commercial Banking Corp. vs. Militante, AC GR CV 04077, Sept.
20, 1985; Investors Finance Corp. vs. Cruz, AC GR CV 047190,
Nov. 27, 1985)
Thus, in Guerrero vs. Court of Appeals12 where the petitioner
together with two other persons executed an agreement of counterguaranty in favor of a surety corporation binding themselves solidarily
for whatever claim the surety corporation may have against them,
and where, upon default in the payment of the subject solidary
obligation, the surety corporation sued one of the solidary debtors
and consequently obtained a favorable judgment on the basis of a
compromise agreement directing the sued solidary debtor to pay the
whole obligation, and where, upon failure to satisfy the judgment,
the surety corporation filed a case against the petitioner for the
collection of the same amount of money, and where the petitioner
resisted such claim on the ground that the previous judgment in the
civil case against one of the solidary debtors novated the contract of
indemnity and therefore released the petitioner from its obligation,
the Supreme Court rejected such contention on the ground that there
was no novation, to wit:
There being no modicum of doubt, in this case before us,
that the obligation of the petitioner has matured, the release
of his obligation by virtue of novation must be proved by clear
and convincing evidence, in the absence of an express release,
nothing less than a showing of complete incompatibility between
25 Phil. 581; Young vs. Villa, 93 Phil. 21.
13
G.R. No. L-18411, December 17, 1966, 18 SCRA 967.
art. 1292
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
267
the two obligations — the “agreement of counter-guaranty” and
the compromise agreement — would justify a finding of novation
by implication. The express mandate of the law that for an
obligation to be extinguished by another “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,” blazes
the direction to be taken by courts in appraising the defense of
novation. This Court has held time and time again that novation
is never presumed. The necessity to prove the same by clear and
convincing evidence is accentuated where, as in this case, the
obligation of the debtor has already matured.
We fail to see any incompatibility between the two obligation
that would sustain the defense of novation. The fact that in the
compromise agreement and subsequently in the execution sale,
ALTO chose first to realize its credit from Robles, did not imply a
waiver of its right to proceed against any of the solidary debtors or
some of all of them simultaneously, and the demand made against
one of them is no obstacle to demands which may subsequently
be directed against the others so long as the debt or any part of
it remains outstanding and unpaid.
Upon all the foregoing, the inescapable conclusion is that
the compromise agreement on the basis of which judgment
was rendered in Civil Case 29357, did not serve to release the
petitioner from his obligation of indemnity to ALTO.
In Magdalena Estates, Inc. vs. Rodriguez13 where the appellants,
in buying a property from the appellee, issued a promissory note with
interest, and where they also procured a bond from a surety company
for the payment of the principal, and where the appellee accepted
without reservation the agreement set forth in the surety bond
which however did not make provisions on the interest, and where
appellant contended that the surety bond novated the obligation of
the appellant with respect to the interest, the Supreme Court rejected
such a contention by stating:
The rule is settled that novation by presumption has never
been favored. To be sustained, it needs to be established that the
old and new contracts are incompatible in all points, or that the
will to novate appears by express agreement of the parties or in
acts of similar import.
An obligation to pay a sum of money is not novated, in a new
instrument wherein the old is ratified, by changing only the terms
of payment and adding other obligations not incompatible with
14
G.R. No. L-47369, June 30, 1987, 151 SCRA 339.
268
ObligatiOns and COntraCts
Text and Cases
art. 1292
the old one, or wherein the old contract is merely supplemented by
the new one. The mere fact that the creditor receives a guaranty
or accepts the payments from a third person who has agreed to
assume the obligation, when there is no agreement that the first
debtor shall be released form responsibility, does not constitute a
novation, and the creditor can still enforce the obligation against
the original debtor. (Straight vs. Haskel, 49 Phil. 614; Pacific
Commercial Co. vs. Sotto, 34 Phil. 237; Estate of Mota vs. Serra,
47 Phil. 464; Dungo vs. Lopena, G.R. No. L-18377, December 29,
1962, 6 SCRA 1007). In the instant case, the surety bond is not
a new and separate contract but an accessory of the promissory
note.
In Cochingyan vs. R & B Surety and Insurance Co.14 where, in
a trust agreement, the trustor bound itself to pay to the creditorbeneficiary whatever amount the debtors have to pay to the creditorbeneficiary, and where the said principal loan was previously secured
by a bond issued by a surety company, the Supreme Court ruled that
the trust agreement did not novate the surety agreement by stating:
x x x it is at once evident that the Trust Agreement does
not expressly terminate the obligation of R & B Surety under the
Surety Bond. On the contrary, the Trust Agreement expressly
provides for the continuing subsistence of that obligation by
stipulating that “[the Trust Agreement] shall not in any manner
release” R & B Surety from its obligation under the Surety Bond.
Neither can the petitioners anchor their defense on implied
novation. Absent an unequivocal declaration of extinguishment of
a pre-existing obligation, a showing of complete incom-patibility
between the old and the new obligation (and nothing else) would
sustain a finding of novation by implication. But where, as in
this case the parties to the new obligation expressly recognize
the continuing existence and validity of the old one, where, in
other words, the parties expressly negated the lapsing of the old
obligation, there can be no novation. The issue of implied novation
is not reached at all.
What the trust agreement did was, at most, merely to bring
in another person or persons — the Trust[s] — to assume the
same obligation that R & B Surety was bound to perform under
the Surety Bond. It is not unusual in business for a stranger
to a contract to assume obligations thereunder; a contract of
suretyship or guarantee is the classical example. The precise
legal effect is the increase of the number of persons liable to the
obligee, and not the extinguishment of the liability of the first
debtor. x x x In the present case, we note that the Trustor under
15
G.R. No. 112191, February 7, 1997, 79 SCAD 149.
art. 1292
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
269
the Trust Agreement, the CCM, was already previously bound to
R & B Surety under its Indemnity Agreement. Under the Trust
Agreement, the Trustor also became directly liable to the PNB. So
far as the PNB was concerned, the effect of the Trust Agreement
was that where there had been only two, there would now be three
obligors directly and solidarily bound in favor of the PNB could
proceed against any of the three, in any order or sequence. Clearly,
PNB never intended to release, and never did release, any of its
own indemnitors simply because one of those indemnitors, the
Trustor under the Trust Agreement, became also directly liable
to the PNB.
In Fortune Motors (Phils.) Corporation vs. Court of Appeals15
where a financing agreement merely detailed the obligations of one
of the parties without changing the nature of the previous agreement,
the Supreme Court said:
Neither do we find merit in the averment of petitioners
that the Financing Agreement contained onerous obligations
not contemplated in the surety undertakings, thus changing the
principal term thereof and effecting a novation.
We have ruled previously that there are only two ways
to effect novation and thereby extinguish an obligation. First,
novation must be explicitly stated and declared in unequivocal
terms. Novation is never presumed. Second, the old and new
obligations must be incompatible on every point. 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 and unequivocal to be mistaken.
Under the surety undertakings however, the obligation of
the sureties referred to absolutely, unconditionally and solidarily
guaranteeing the full, faithful and prompt performance, payment
and discharge of all obligations of Petitioner Fortune with respect
to any and all contracts and other agreements with Respondent
Filinvest in force at that time or thereafter made. There were
no qualifications, conditions or reservations stated therein as to
the extent of the suretyship. The Financing Agreement, on the
other hand, merely detailed the obligations of Fortune to CARCO
16
G.R. No. 138544, October 3, 2000, 135 SCAD 98, 341 SCRA 781.
270
ObligatiOns and COntraCts
Text and Cases
art. 1292
(succeeded by Filinvest as assignee). There is no incompatibility
to speak of in the two contracts. They can stand together without
conflict.
Furthermore, the parties have not performed any explicit
and unequivocal act to manifest their agreement or intention
to novate their contract. Neither did the sureties object to the
Financing Agreement nor try to avoid liability thereunder at the
time of its execution. x x x
In Security Bank and Trust Company, Inc. vs. Cuenca,16 the
Supreme Court ruled that the original loan agreement was novated
by a new one and stated some indicators of the incompatibility of the
two contracts, thus:
x x x Clearly, the requisite of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation
obtained under the 1980 credit accommodation. This is evident
from its explicit provision to “liquidate” the principal and the
interest of the earlier indebtedness, as the following shows:
1.02 Purpose. The First Loan shall be applied to
liquidate the principal portion of the Borrower’s
present total outstanding indebtedness in the Lender
(the “Indebtedness”) while the Second Loan shall be
applied to liquidate the past due interest and penalty
portion of the indebtedness.
The testimony of an officer of the bank that the proceeds
of the 1989 Loan Agreement were used “to pay-off” the original
indebtedness serves to strengthen this ruling.
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 and upon request by the Lender,
(to) perform such further acts and/or execute 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
17
G.R. No. 126891, August 5, 1998, 97 SCAD 103, 293 SCRA 634.
arts. 1293-1294
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
271
acquired, nor would it participate in any merger or consolidation.
In Lim Tay vs. Court of Appeals17 the Supreme Court held that
a dacion en pago is a form of novation in which a change takes place
in the object involved in the original contract.
Article 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)
Article 1294. If the substitution is without the knowledge
or against the will of the debtor, the new debtor’s insolvency
or non-fulfillment of the obligation shall not give rise to any
liability on the part of the original debtor. (n)
In Bangayan vs. Court of Appeals,18 it has been held that an
assignment of a lease contract by the lessee must get the consent of
the lessor because such assignment would involve the transfer, not
only of rights but also of obligations. It constitutes novation by substitution of the person of one of the parties namely the lessee-debtor.
In Gaw vs. IAC,19 where the petitioner entered into an exclusive
dealership agreement with a certain company to sell the latter’s
product, and where the petitioner entered into a co-terminous
marketing agreement with another person for the latter to market
the products and for the purpose of obtaining funds to fulfill the
deposit required by the company, and where such deposit, upon
being tendered by the said person, was refused by the company for
fear that it might violate the exclusive dealership agreement with
the petitioner, and where the said company said that it would accept
provided it be made under the name of the petitioner, the Supreme
Court ruled that in such a case the co-terminous marketing agreement
did not novate the dealership agreement by stating:
While in a sense, the marketing agreement between
Gaw and Tan is related to the original dealership agreement
between the former and PWCC, as the term of the former is
co-terminous with that of the latter, we cannot subscribe to
petitioner’s contention that the marketing agreement was “an
G.R. No. 123581, August 29, 1997, 86 SCAD 447, 278 SCRA 379.
G.R. No. L-70451, March 24, 1993, 220 SCRA 405.
20
Article 1347 of the 1950 Civil Code.
18
19
272
ObligatiOns and COntraCts
Text and Cases
arts. 1293-1294
attempted novation” of the dealership agreement. Arguing that
“Tan intended to step into the shoes of petitioner Gaw as a debtor
of Prime White in respect to the additional deposit of P250,000,”
Gaw cites Article 1293 of the Civil Code which provides that
“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.” Yet Gaw fails to prove that PWCC, the creditor, knew
all about the so-called substitution.
It is axiomatic that novation is never presumed. It must
be explicitly stated in the contract and there must be a manifest
incompatibility between the old and the new obligation in every
aspect. The fact that the two agreements are co-terminous with
each other does not imply that a new obligation had arisen
when the marketing agreement was signed, thus displacing
the dealership contract. Not only was Gaw not released from
complying with the terms and conditions of the dealership
agreement but he was, in a sense, already implementing the
latter.
Hence, the change in the principal object or conditions, the
substitution of the person of the debtor, the subrogation of a third
person in the rights of the creditor must all involve a clear and
manifest intent to extinguish the old obligation and to release
the debtor from such old obligation. Novation therefore creates
a new obligation.
Novation through the replacement of the old debtor by a new
debtor may either be with or without the initiative of the old debtor.
If the old debtor, to extinguish his obligation, suggests to the creditor
that he be substituted by a new debtor of his choice and the creditor
agrees, there will be a novation called delegacion. If the old debtor
is substituted without the knowledge or consent of the old debtor
and the obligation is extinguished, there is also a novation called
expromission. In both delegacion and expromission, the consent of
the creditor is indispensable.
For example, Y is indebted to Z in the amount of P1,000 and,
without the knowledge or consent of Y, O commits to pay Z the
indebtedness of Y should it become due, Z can still claim from Y the
said indebtedness on due date, despite O’s commitment, because there
is no novation. There is nothing in the commitment of O that clearly
shows the intention of O to release Y from his obligation. O only
became an additional debtor. However, if Z agrees that the obligation
of Y is to be extinguished upon O’s making the commitment to pay
the indebtedness of Y, there is a novation. If O later on makes a
art. 1295
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
273
partial payment of P500, Z cannot go against Y for the balance, as his
obligation has already been extinguished in so far as Z is concerned. O
can demand reimbursement from Y, not of the whole P1,000, but only
P500 because this is the amount which benefited Y. This is pursuant
to the second paragraph of Article 1236 of the Civil Code. If O pays the
whole amount, then he can recover the full amount from Y. However,
in all these cases, if the original indebtedness of Y to Z is secured by
a mortgage on the house of Y and the payment of the indebtedness
of Y is made by O, he cannot compel Z to subrogate him in his rights,
such as those arising from mortgage, guaranty or penalty. Hence, if
Y fails to reimburse O, the latter cannot make use of the mortgage
which has been constituted on the indebtedness. This is pursuant to
Article 1237 of the Civil Code.
In the event that after O commits to pay the indebtedness of Y
which, upon agreement with Z releases Y from his obligation with Z,
O becomes insolvent or does not pay Z the indebtedness upon demand
by Z on due date, Z can no longer go against the original debtor, Y, to
claim the debt, as the latter’s obligation has already been extinguished
through novation.
Article 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
he delegated his debt. (1206a)
If the old debtor proposes to the creditor that he be substituted
by a new debtor, with the understanding that he (the old debtor) will
be released from the obligation, and the creditor accepts the proposal,
and the new debtor assumes the indebtedness, there is a novation that
occurs and it extinguishes the obligation of the old debtor to make
payment. In the event that the new debtor is insolvent, the creditor
cannot go against the old debtor to collect the indebtedness as the
latter’s obligation has already been extinguished.
However, the creditor can go against the old debtor in two
cases. The first case is when the insolvency of the new debtor has
already been existing and of public knowledge when the old debtor
delegated the debt. It is enough that the insolvency has been existing
and of public knowledge at the time of the delegation. The second
case is when the insolvency of the new debtor is known to the old
debtor when he delegates his debt. In both cases, the creditor must
274
ObligatiOns and COntraCts
Text and Cases
art. 1296
not have knowledge of the insolvency of the new debtor. Otherwise, he
cannot claim the benefit of the exceptions as he would be considered
in estoppel. In both cases also, the insolvency must have existed at
the time the old debtor delegated his debt. While it may seem that
the “already-existing” requirement applies only to the first case, this
is not so as it should likewise apply to the second case. In fact, an
already-existing insolvency is necessarily implied in the second case.
Otherwise, the old debtor would not have known such insolvency.
Article 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)
The accessory always follows the principal. If the principal
is extinguished, the accessory goes with it. Hence, all accessory
obligations such as those arising from a contract of mortgage,
guarantee, and pledge are likewise extinguished. However, the law
likewise says that the accessory obligation may subsist only insofar
as they may benefit third persons who do not give their consent. For
example, X borrows P100,000 from Y to be paid after 12 months. The
loan is secured by a real estate mortgage of Z’s house. The mortgage is
to be effective only for 12 months. In constituting his house as security
for the loan of X, Z agrees to be paid by X the amount of P1,000 for as
long as the loan secured by the mortgage exists. However, instead of
paying Z the said amount, X will just apply the P1,000 to the P12,000
indebtedness of Z in his favor such that by the time the 12-month
loan matures, the indebtedness of Z would have already been paid.
This is made because Z has no cash to pay the P12,000 obligation to
X. On the eleventh month, X and Y decide to consolidate the P100,000
loan with the other P700,000 loan which X owes in favor of Y and, in
so doing, they expressly agreed in the consolidation-document that
the loan of P100,000 shall in effect cease and be integrated in the
P700,000 with a lower interest rate and payable for a longer period
of time without any collateral. Z did not consent to this arrangement
as it would clearly prejudice him. His mortgage therefore may subsist
for the remaining month attached to the principal new obligation.
Article 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)
A subsequent void obligation intended to novate an old one has
arts. 1297-1298
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
275
no legal effect and will be considered as not having been agreed upon
in the first place. Hence, the original obligation shall subsist. However,
if in coming up with the new but void obligation, the parties agree
that it shall in any event extinguish the old obligation, then such old
obligation will not be revived. Hence, if X is bound to give Y a car and
this is novated by binding X to give instead his future inheritance
to Y, which he will get upon the death of his father, the latter new
obligation is void because, according to the law, future inheritance
cannot be the object of a contract.20 This new void obligation will not
be deemed to have been entered into and the old obligation will be
revived. However, if the parties agree that the act of entering into
the new but void obligation will in any event extinguish the old one,
then the latter will not be revived.
Article 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)
Novation of a principal obligation definitely presupposes a
previously existing obligation which is valid. If the previously existing
obligation is void, a subsequent obligation intending to novate it shall
likewise be void unless it is clear that such subsequent one can stand
on itself and without any reference to the old one. If the original
obligation is merely annulable or voidable, it means that it is valid up
to the time it is annulled. Hence, it can be novated before it is annulled.
For example, if, through force and intimidation, X was obliged to give
Y a car and later the prestation was novated, again through force
and intimidation, in such a way that X is now obliged to give Y not a
car but a house, it is only X who can file a case for annulment of the
obligation, and if he does not do so, then the new obligation may be
given effect. Also, if, after the obligation was novated, X asks for an
increase in the price of the house and Y agrees, then the obligation
is ratified because of the act of X.
Article 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)
If, for example X is bound to give Y a house only if he passes
21
Sesbreño vs. Court of Appeals, G.R. No. 89252, May 24, 1993, 41 SCAD 633,
276
ObligatiOns and COntraCts
Text and Cases
arts. 1299-1300
his law course and thereafter the obligation is novated such that
X instead is bound to give Y a car without any statement as to the
suspensive condition, it shall be deemed that the giving of the car is
likewise subject to Y passing his law course. In order not to subject
the obligation to the previous suspensive condition, there must be an
express statement to that effect in the new obligation as novated.
Article 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)
Legal subrogation is that which takes effect by mandate of
law and does not proceed from an agreement of the parties. Hence,
the law which forms the basis of the subrogation must be clearly
identified and invoked to enforce the rights pertinent thereto.
Conventional subrogation, which in the first place is never lightly
inferred, must be clearly established by the unequivocal terms of
the substituting obligation or by the evident incompatibility of the
new and old obligations on every point.21 Both kinds of subrogation
principally involve the change in the person of the creditor. Thus, if
X is indebted to B for P10,000.00 secured by a mortgage on X’s house
and, for consideration, Y, with the consent of X, assumes the credit
with the stipulation that X’s obligation against B is extinguished
such that B can no longer collect from X, Y becomes the new creditor
who can enforce the claim, and if X cannot pay, Y can foreclose on
the mortgage.
Article 1301. Conventional subrogation of a third person
requires the consent of the original parties and of the third
person. (n)
Conventional subrogation must be agreed upon by the debtor,
new creditor and the old creditor. It is therefore contractual. For the
replacement or substitution of the creditor to be legally complete in
all aspects, all parties must agree to the same. Hence, if the debtor
does not agree and the third-party makes payment to the creditor,
such third party can demand payment from the debtor up to the
extent the latter has been benefited,22 but cannot compel the creditor
222 SCRA 466.
22
Article 1236 of the 1950 Civil Code.
arts. 1301-1302
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
277
to subrogate him (third party) in his rights, such as those arising from
mortgage, guaranty, or penalty.23
Article 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)
There are three cases when legal subrogation is presumed. The
first case is when a creditor pays another creditor who is preferred,
even without the debtor’s knowledge. Under our law,24 claims for
the unpaid price of movables sold, on said movables, so long as they
are in the possession of the debtor, up to the value of the same is
a preferred credit. Hence, any creditor who owns such credit is a
preferred creditor and if another creditor pays off the unpaid purchase
price of the movable, such paying creditor will be presumed to have
been subrogated to the rights of the creditor who originally owned the
credit. Title XIX, Book IV of the Civil Code contains all the provisions
on concurrence and preference of credits.
The second case is when a third person, not interested in the
obligation, pays with the express or tacit approval of the debtor. In this
case, the debtor, in effect, agrees to the payment and hence there exists
something similar to a conventional subrogation. The presumption of
legal subrogation will arise from this situation. In Chempil vs. Court
of Appeals,25 where the petitioner claimed that he was subrogated to
the rights of the creditor when it paid its indebtedness to the bank
but where the money used for payment belonged to the debtor, the
Supreme Court ruled that there was no subrogation under Article
1302(2), thus:
CEIC traces its claim over the disputed shares to the
Article 1237 of the 1950 Civil Code.
Article 2241(3) of the 1950 Civil Code.
25
G.R. Nos. 112438-39, December 12, 1995, 66 SCAD 557, 251 SCRA 257.
23
24
278
ObligatiOns and COntraCts
Text and Cases
art. 1302
attachment lien obtained by SBTC on 2 July 1985 against Antonio
Garcia in Civil Case No. 10398. It avers that when FCI, CEIC’s
predecessor-in-interest, paid SBTC the due obligations of Garcia
to the said bank pursuant to the Deed of Absolute Sale and
Purchase of Shares of Stock, FCI and later CEIC, was subrogated
to the rights of SBTC, particularly to the latter’s aforementioned
attachment lien over the disputed shares.
CEIC argues that SBTC’s attachment lien is superior as it
was obtained on 2 July 1985, ahead of the consortium’s purported
attachment on 19 July 1985. More importantly, said CEIC lien
was duly recorded in the stock and transfer books of Chempil.
CEIC’s subrogation theory is unavailing.
By definition, subrogation is “the transfer of all the rights
of the creditor to a third person, who substitutes him in all his
rights. It may either be legal or conventional. Legal subrogation
is that which takes place without agreement but by operation of
law because of certain acts; this is the subrogation referred to in
Article 1302. Conventional subrogation is that which takes place
by agreement of the parties . . .”
CEIC’s theory is premised on Article 1302(2) of the Civil
Code which states: x x x
Despite, however its multitudinous arguments, CEIC
presents an erroneous interpretation of the concept of subrogation.
An analysis of the situations involved would reveal the clear
inapplicability of Art. 1302(2).
Antonio Garcia sold the disputed shares to FCI for a
consideration of P79,207,331.28. FCI, however, did not pay the
entire amount to Garcia as it was obligated to deliver part of
the purchase price directly to SBTC pursuant to the following
stipulations in the Deed of Sale:
“Manner of Payment
Payment of the Purchase Price
shall be made in accordance with the following order of preference
provided that in no instance shall the total amount paid by the
Buyer exceed the Purchase Price:
a.
Buyer shall pay directly to the Security Bank and
Trust Co. the amount determined by the Supreme
Court as due and owing in favor of the said bank by
the Seller.
art. 1302
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
279
The foregoing amount shall be paid within fifteen (15) days
from the date of the decision of the Supreme Court in the case
entitled ‘Antonio M. Garcia, et al. vs. Court of Appeals, et al.’ G.R.
Nos. 82282-83 becomes final and executory.” (Italics
ours)
Hence, when FCI issued the BA check to SBTC in the
amount of P35,462,869.62 to pay Garcia’s indebtedness to the
said bank, it was in effect paying with Garcia’s money, no longer
with its own, because said amount was part of the purchase price
which FCI owed Garcia in payment for the sale of the disputed
shares by the latter to the former. The money “paid” by FCI to
SBTC, thus properly belonged to Garcia. It is as if Garcia himself
paid his own debt to SBTC but through a third party — FCI.
The aforequoted contractual stipulation in the Deed of Sale
dated 15 July 1988 between Antonio Garcia and FCI is nothing
more but an arrangement for the sake of convenience. Payment
was to be effected in the aforesaid manner so as to prevent money
form changing hands needlessly. Besides, the very purpose of
Garcia in selling the disputed shares and his other properties
was to “settle certain civil suits filed against him.”
Since the money used to discharge Garcia’s debt rightfully
belonged to him, FCI cannot be considered a third party payor
under Article 1302(2). It was a conduit, or aptly categorized by
respondents, merely an agent as defined in Article 1868 of the
Civil Code: x x x
FCI was merely fulfilling its obligation under the aforementioned Deed of Sale.
Additionally, FCI is not a disinterested party as required
by Art. 1302(2) since the benefits of the extinguishment of the
obligation would redound to none other but himself. Payment
of the judgment debt to SBTC resulted in the discharge of the
attachment lien on the disputed shares by FCI. The latter would
then have a free and “clean” title to said shares.
In sum, CEIC, for its failure to fulfill the requirement of
Art. 1302(2), was not subrogated to the rights of SBTC against
Antonio Garcia and did not acquire SBTC’s attachment lien over
the disputed shares which, in turn, had already been lifted or
discharged upon satisfaction by Garcia, through FCI, of his debt
to the said bank.
The third case is 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.
A person interested in the fulfillment of the obligation is one who
will be affected by payment of the debtor. Thus, a guarantor will
be released if the principal obligation of the debtor is paid. This is
280
ObligatiOns and COntraCts
Text and Cases
arts. 1303-1304
also true with respect to a surety or a solidary debtor. For example,
A is indebted to M. The loan was secured by a real estate mortgage
constituted by X on his own property for the benefit of A’s debt. In
the event X pays M, the presumption of legal subrogation will arise
in favor of X even if such payment was made without the consent of
A. Since there is merger or confusion of the characters of the creditor
and the mortgagor, the real estate mortgage is extinguished.
Article 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining,
either against the debtor or against third persons, be they
guarantors or possessors of mortgages, subject to stipulation
in a conventional subrogation. (1212a)
This provision states the general effect of subrogation. Euphemistically speaking, the third person “steps into the shoes” of the
creditor and becomes the new creditor. However, in conventional
subrogation, the parties may stipulate the nature, limits, extent
and scope of the subrogation provided these are not contrary to law,
morals, good customs, public order, or public policy.
Article 1304. A creditor, to whom partial payment has been
made, may exercise his right for the remainder, and he shall
be preferred to the person who has subrogated in his place in
virtue of the partial payment of the same credit. (1213)
This provision contemplates a situation where a debt has been
partially paid by a third person, with the consent of the debtor. If
there is no consent of the debtor, the only right of the third party who
made the payment is to be reimbursed of the amount he has partially
paid pursuant to Article 1236. Article 1237 states that whoever pays
on behalf of the debtor without the knowledge or against the will of
the latter, cannot compel the creditor to subrogate him his rights,
such as those arising from mortgage, guaranty, or penalty.
In the event partial payment is made by a third person which
extinguishes the debtor’s obligation to pay the creditor up to the
extent of said partial payment, the creditor can still demand from
the debtor the balance of the obligation. In the meantime, the third
party who made the partial payment can likewise demand from the
debtor what he has paid to the creditor. In the event that the creditor
and the third party demands from the debtor at the same time the
payment of what is due them, the creditor will be preferred. He will
be paid first as the law states that he is preferred.
art. 1304
ObligatiOns
Extinguishment of Obligations
Sec. 6 — Novation
281
282
ObligatiOns and COntraCts
Text and Cases
TITLE II. — CONTRACTS
Chapter 1
GENERAL PROVISIONS
Article 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)
This particular provision states the statutory definition of
contracts. Contract is a source of obligation and therefore, in this
sense, it can be defined also as a legally enforceable agreement. A
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.1 However, there are cases where, although
there is a meeting of the minds between or among the parties, the
contract still cannot be legally enforced because it lacks some of
the required formalities mandated by law for enforceability. This is
particularly true in the case of agreements falling under the Statute
of Frauds. With certain exceptions, the latter agreements are useless
contracts for they cannot be implemented which, in effect, negates the
existence of a contract. In its broadest sense, a contract has likewise
been defined as an agreement whereby at least one of the parties
acquires a right, either in rem or in personam, in relation to some
person, thing, act or forbearance.2
Among the sources of an obligation is a contract (Article
1157, Civil Code), which 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 (Art. 1305, Civil Code).
1
Jardine Davies vs. Court of Appeals, G.R. No. 128066, June 19, 2000, 128 SCAD
20, 333 SCRA 684, citing Sanchez Roman, 148-149.
2
William F. Elliott, Commentaries on the Law of Contracts, Volume I, Indianapolis
The Bobbs-Merrill Company, 1913 Edition, Page 2.
282
art. 1306
COntraCts
General Provisions
283
A contract undergoes various stages that include its negotiation
or preparation, its perfection and, finally, its consummation.
Negotiation covers the period from the time the 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 a mere 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 to the above, the delivery of the object
of the agreement, as in a pledge or commodatum, is commonly
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.3
Article 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)
This provision states the autonomous nature of contracts.
Freedom to stipulate terms and conditions is the essence of the
contractual system4 provided such stipulations are not contrary to law,
morals, good customs, public order, or public policy. This freedom also
prohibits a party from coercing or intimidating or unduly influencing
another to enter into a contract.5
In Azcuna, Jr. vs. Court of Appeals,6 the Supreme Court, in
commenting on the legality of a provision in a lease contract to the
effect that, if the lessee does not vacate the premises on due date,
the lessee shall be charged P1,000.00 per day as damages without
prejudice to other remedies which the lessor is entitled to, ruled:
x x x The freedom of the contracting parties to make
stipulations in their contract provided they are not contrary to
law, morals, good customs, public order or public policy is so
settled and the Court finds nothing immoral or illegal with the
3
Ang vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57 SCAD 163,
238 SCRA 602; Soler vs. Court of Appeals, G.R. No. 123892, May 21, 2001.
4
Republic vs. PLDT, G.R No. L-18841, January 27, 1969, 26 SCRA 620.
5
Id.
6
G.R. No. 116665, March 20, 1996, 69 SCAD 643, 255 SCRA 215.
284
ObligatiOns and COntraCts
Text and Cases
art. 1306
indemnity/penalty clause of the lease contract (paragraph 10)
which does not appear to have been forced upon or fraudulently
foisted on petitioner. Petitioner cannot now evade further liability
for liquidated damages, for “after entering into such an agreement,
petitioner cannot thereafter turn his back on his word with a plea
that on him was inflicted a penalty shocking to the conscience and
impressed with inequity as to call for the relief sought on the part
of a judicial tribunal.”
In Pakistan International Airlines vs. Ople7 where the airline
company and the employees entered into a contract providing
stipulations regarding employment calculated to evade the provision
of the Labor Code, the Supreme Court ruled that contractual stipulations contravening provisions of law designed to protect laborers
and employees were not valid. Particularly, the Supreme Court ruled:
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 notices, 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
G.R. No. 61594, September 28, 1990, 190 SCRA 90.
7
art. 1306
COntraCts
General Provisions
by simply contracting with each other. It is 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. This article reads 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 of his reinstatement.
Art. 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.”
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
285
286
ObligatiOns and COntraCts
Text and Cases
art. 1306
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 took back from the employee the fixed
three (3)-year period ostensibly granted by paragraph 5 by
rendering such period in effect as 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 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, and thus to escape completely the thrust
of Articles 280 and 281 of the Labor Code.
In Manila Bay Club Corporation vs. Court of Appeals8 where,
because of the failure of the petitioner to comply with the insurance
clause of the lease contract, the lessor terminated the lease pursuant
to a provision in the same lease contract stipulating that failure to
comply with any provision of the contract shall allow the lessor to
rescind the same, the Supreme Court ruled on the validity of the
termination and said:
We do not agree with petitioner. Under paragraph 19 of the
lease contract, the lessee’s (petitioner) failure or neglect to perform
or comply with any of the covenants, conditions, agreements or
restrictions stipulated shall result in the automatic termination
and cancellation of the lease. It can be fairly judged from the
tenor of paragraph 19 that the parties intended mandatory
compliance with all the provisions of the contract. Among such
provisions requiring strict observance is the “insurance clause”
(paragraph 22) which expressly provides that “the building must
be insured and the insurance premium must be for the account
of the LESSEE. x x x” (italics supplied). Thus, upon petitioner’s
failure to comply with the mandatory requirement of paragraph
22, private respondents were well within their right to rescind the
lease contract by express grant of paragraph 19. Certainly, there
is nothing wrong if the parties to the lease contract agreed on
certain mandatory provisions concerning their respective rights
and obligations, such as the procurement of the insurance and
the rescission clause. For it is well to recall that contracts are
respected as the law between the contracting parties, and they
may establish such stipulations, clauses, terms and conditions
G.R. No. 110015, July 11, 1995, 62 SCAD 485, 245 SCRA 715.
8
art. 1306
COntraCts
General Provisions
287
as they may want to include. As long as such agreements are
not contrary to law, morals, good customs, public policy or public
order, they shall have the force of law between them.
In Philippine American General Insurance Co. vs. Mutuc 9
where the appellant, after agreeing that his bond may be renewed or
extended without notification, claimed that such provision was null
and void, and where the lower court, despite such claim, held him
liable for the bond, the Supreme Court affirmed the decision of the
lower court and ruled:
There was no other valid conclusion that could be reached
by the lower court. Even appellant must have seen that so it
ought to be. That would account for the contention in his brief
that the stipulation as to “any extension” without the need for his
being notified was “null and void being contrary to law, morals,
good customs, public order or public policy.” That is a pretty
tall order. There is more than just a hint of hyperbole in such a
sweeping allegation. Appellant though ought to have realized that
assertion is not the equivalent of proof. A little more objectivity
on his part should bring the realization that no offense to law or
morals could be imputed to such a contractual provision. As to
good customs, that category requires something to substantiate
it. A mere denunciatory characterization certainly cannot
suffice. That leaves public order or public policy. It is difficult to
follow appellant’s train of reasoning. He would premise it on the
indemnity agreement being a contract of adhesion. He was not
at all compelled to agree to it. He was free to act either way. He
had a choice. It may be more offensive to public policy, let alone
morals or good customs, if thereafter he would be allowed to go
back on his word. Besides the policy underlying such a stipulation
in this litigation is clear. What was guaranteed was the faithful
performance of defendant Mutuc of his employment as a member
of the crew of a vessel plying overseas. That was more logical
considering the difficulty of contracting him then for the extension
without the need for notification. So the parties agreed. There
could be thus nothing that did offend public policy or public order
when such an arrangement was explicitly provided for. Appellant
has not made out a case for reversal.
In Teves vs. People’s Homesite and Housing Corporation,10 the
Supreme Court pertinently said:
In the absence of express legislation or constitutional
G.R. No. L-19632, November 13, 1974, 61 SCRA 22.
9
288
ObligatiOns and COntraCts
Text and Cases
art. 1306
prohibition, a court, in order to declare 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 contravene some established interest of society, or
is inconsistent with sound policy and good morals which tends to
undermine the security of individual rights, whether of personal
liability or of private property.
In De Leon vs. Court of Appeals11 where the parties stipulated that
“in consideration for a peaceful and amicable termination of relations
between the undersigned and her lawful husband,” the parties agreed
to give some properties to the wife and a monthly support for the
children, and for the wife to agree to a judicial sepa-ration of property
plus the amendment to the divorce proceedings initiated by the wife
in the United States to conform to the agreement, the Supreme Court
sustained the lower court’s ruling that the agreement is contrary to
law, Filipino morals and public policy because the consideration of
the agreement is the termination of the marriage by the parties which
they cannot do on their own and without any legal basis.
It is a rule that only laws existing at the time of the execution
of a contract are applicable thereto and that later statutes do not
govern said contract unless the latter is specifically intended to have
a retroactive effect. A later 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 contracts. However, while the legal system upholds the sanctity
of a contract so that a contract is deemed to be the law between the
contracting parties, non-impairment of contracts or vested rights
clauses will have to yield to the superior and legitimate exercise by the
State of police power to promote the health, morals, peace, education,
good order, safety and general welfare of the people. Moreover,
statutes promulgated in exercise of a valid police power must be read
into every contract.12 Thus, in Ortigas vs. Court of Appeals13 where
the contract of sale provided that the property shall only be used
for residential purposes but where the buyer sub-sequently built
a commercial edifice in consonance with a later zoning ordinance
classifying the area as a commercial zone, the Supreme Court ruled
that the construction was proper because the restric-tions in the
10
G.R. No. L-21498, June 27, 1968, 23 SCRA 1141; Gabriel vs. Monte de Piedad,
71 Phil. 479.
11
G.R. No. 80965, June 6, 1990, 186 SCRA 345.
12
Ortigas & Company., Ltd. vs. Court of Appeals, G.R. No. 126102, December
4, 2000, 139 SCAD 158, 346 SCRA 748.
art. 1307
COntraCts
General Provisions
289
contract of sale were deemed extinguished by the retroactive operation
of the zoning ordinance and could no longer be enforced.14
Article 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 contracts under the Civil Code are those which are
not specifically governed by any provision in the Civil Code or special
law but which likewise involve the fulfillment or accomplishment of
some prestations. They are governed by the following:
1)
Stipulation of the parties. The parties may have some
arrangements which they feel should bind them but which
nevertheless do not have any exact legal provisions in the
Civil Code to govern the nature of the obligation appertaining to it. Following the general rule on contracts, they
can therefore stipulate any provision, term and condition
that will govern the enforceability of their agreement
provided they are not contrary to law, morals, good customs,
public order, or public policy;
2)
Provisions in the law of obligations and contracts under
Title I and II of the Civil Code. Innominate contracts still
involve prestations which are to be accomplished by the
parties. Though they may be innominate, they are still
contracts which are sources of obligations. Hence, they
should likewise follow the general rule on obligations and
contracts;
3)
Rules governing the most analogous nominate contracts.
The Civil Code provides for various types of nominate
contracts, namely: sale,15 barter or exchange,16 lease,17
partnership,18 agency,19 loan,20 deposit,21 aleatory contracts,22
compromises, 23 guaranty, 24 pledge, 25 mortgage, 26 and
antichresis.27 Other special laws govern some other types of
contracts like insurance, real estate mortgage, and charter
party;
4)
Customs of the place. Custom is a rule of conduct formed
13
Ibid.
Ibid.
15
Book IV Title VI of the 1950 Civil Code, Articles 1458 to 1637.
16
Book IV Title VII of the 1950 Civil Code, Articles 1638 to 1641.
17
Book IV Title VIII of the 1950 Civil Code, Articles 1642 to 1766.
14
290
ObligatiOns and COntraCts
Text and Cases
art. 1307
by repetition of acts uniformly observed as a social rule,
legally binding and obligatory and it must be proved as a
fact according to the rules of evidence.28
Innominate contracts may be divided into the kind of prestation
it obligates the parties to do. It can involve a prestation where the
parties mutually give each other a certain thing (do ut des) or mutually
render a service (facio ut facias). It may likewise involve a mixed
prestation such that one party gives something and the other party
does something (do ut facias; facias ut des).
In Dizon vs. Gaborro29 where a contract was entered into whereby
the respondent assumed to pay the indebtedness of petitioner to
certain banks, and in consideration therefor, respondent was given
the possession, the enjoyment and use of certain lands until petitioner
can reimburse fully the respondents the amounts paid by the latter
to the banks, to accomplish the following ends: (a) payment of the
bank obligations; (b) make the lands productive for the benefit of
the possessor; (c) assure the return of the land to the petitioner thus
rendering equity and fairness to all parties concerned, the Supreme
Court said:
In view of all these considerations, the law and jurisprudence,
and the facts established, We find that the agreement between
petitioner Dizon and respondent Gaborro is one of those
innominate contracts under Art. 1302 of the New Civil Code
whereby the petitioner and respondent agreed “to give and to do”
certain rights and obligations respecting the lands and mortgage
debts of petitioner which would be acceptable to the bank, but
partaking of the nature of an antichresis insofar as the principal
parties, petitioner Dizon and respondent Gaborro, are concerned.
In Corpus vs. Court of Appeals30 where the agreement as to legal
fees between a lawyer and his client was not reduced into writing but
Book IV, Title IX of the 1950 Civil Code, Articles 1767 to 1867.
Book IV, Title X of the 1950 Civil Code, Articles 1868 to 1932.
20
Book IV, Title XI of the 1950 Civil Code, Articles 1933 to 1961.
21
Book IV, Title XII of the 1950 Civil Code, Articles 1962 to 2009.
22
Book IV, Title XIII of the 1950 Civil Code, Articles 2010 to 2027.
23
Book IV, Title XIV of the 1950 Civil Code, Articles 2028 to 2046.
24
Book IV, Title XV of the 1950 Civil Code, Articles 2047 to 2084.
25
Book IV, Title XVI, Chapter 2 of the Civil Code, Articles 2085-2123.
26
Id., Chapter 3, Articles 2085-2092, Articles 2124 to 2131.
27
Id., Chapter 4 of the Civil Code, Articles 2132 to 2139.
28
Yao Kee vs. Sy-Gonzales, G.R. No. L-55960, November 24, 1988, 167 SCRA
18
19
736.
29
G.R. No. L-36821, June 22, 1978, 83 SCRA 688.
art. 1307
COntraCts
General Provisions
291
there were indicators that payment of the same was contemplated by
the parties, the Supreme Court said:
Moreover, the payment of attorney’s fees to respondent
David may also be justified by virtue of the innominate contract of
facio ut des (I do and you give) which is based on the principle that
“no one shall unjustly enrich himself at the expense of another.”
Innominate contracts have been elevated to a codal provision in
the New Civil Code by providing under Article 1307 that such
contracts shall be regulated by the stipulations of the parties, by
the general provisions or principles of obligations and contracts,
and by the customs of the people. The rationale of this article was
stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that
case, the Court sustained the claim of plaintiff Perez for payment
of services rendered against defendant Pomar despite the absence
of an express contract to that effect, thus:
“It does not appear that any written contract was entered
into between the parties for the employment of the plaintiff as
interpreter, or that any other innominate contract was entered
into; but whether the plaintiff’s services were solicited or whether
they were offered to the defendant for his assistance, inasmuch
as these services were accepted and made use of by the latter, we
must consider that there was a tacit and mutual consent as to the
rendition of the services. This gives rise to the obligation upon the
person benefited by the services to make compensation therefor,
since the bilateral obligation to render service as interpreter, on
the one hand and on the other to pay for the service rendered, is
thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code).
xxx
x x x Whether the service was solicited or offered, the
fact remains that Perez rendered to Pomar services as interpreter.
As it does not appear that he did this gratuitously, the duty is
imposed upon defendant, he having accepted the benefit of the
service, to pay a just compensation therefor, by virtue of the
innominate contract of facio ut des implicitly established. x x x”
Article 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will of
one of them. (1256a)
This provision expresses the concept of mutuality of contracts.31
In Garcia vs. Rita Legarda, Inc.32 where a contract to sell a real
property stipulated that the vendor was given the right to unilaterally
rescind
or terminate the contract in the event the other party failed
30
G.R. No. L-40424, June 30, 1980, 98 SCRA 424.
to pay any of the required installments of the purchase price, the
292
ObligatiOns and COntraCts
Text and Cases
art. 1308
Supreme Court ruled that such provision did not violate Article 1308
and explained:
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
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 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. x x x
The above stipulation, to our mind, merely gives the vendor
“the right to declare this contract cancelled and of no effect” upon
fulfillment of the conditions therein set forth. It does not leave
the validity or compliance of the contract “entirely to the will
of one of the contracting parties;” the stipulation or agreement
simply says that in case of default in the payment of installments
by the vendee, he shall have (1) “a month of grace,” and that (2)
should said month of grace expire without the vendee paying
his arrears, he shall have another “period of 90 days” to pay “all
the amounts he should have paid,” etc., then the vendor “has the
right to declare this contract cancelled and of no effect.” We have
heretofore upheld the validity of similar stipulations. In Taylor vs.
Ty Tieng Piao, etc. (43 Phil. 873, 876-878) the ruling was that a
contract expressly giving to one party the right to cancel the same
if a resolutory condition therefor agreed upon — similar to the one
under consideration — is not fulfilled, is valid, the reason being
that when the contract is thus cancelled, the agreement of the
parties is in reality being fulfilled. Indeed, the power thus granted
can not be said to be immoral, much less unlawful, for it could be
exercised — not arbitrarily — but only upon the other contracting
party committing the breach of contract of non-payment of the
installments agreed upon. Obviously, all that said party had to
do to prevent the other from exercising the power to cancel the
contract was for him to comply with his part of the contract. And
in this case, after the maturity of any particular installment and
its non-payment, the contract gave him not only a month of grace
but an additional period of 90 days.
Mendoza vs. Court of Appeals, G.R. No. 116710, June 25, 2001.
G.R. No. L-20175, October 30, 1967, 21 SCRA 555; See also Philippine Banking
Corporation vs. Lui She, G.R. No. L-17587, September 12, 1967, 21 SCRA 52.
33
G.R. No. 124290, January 16, 1998, 90 SCAD 325, 284 SCRA 357.
31
32
art. 1308
COntraCts
General Provisions
293
In Allied Banking Corporation vs. Court of Appeals,33 the
Supreme Court ruled that a stipulation in a lease contract to the
effect that the contract “may be renewed for a like term at the
option of the lessee” is valid. It does not go against the attribute of
mutuality of contracts. Such right on the part of the lessee is part of
the consideration in the contract. The clause likewise means that, once
the lessee exercises the option to renew, all the terms and conditions
of the old contract are renewed and not only the period.
In Philippine National Bank vs. Court of Appeals34 where PNB
and the debtor entered into a loan agreement stipulating, among
others, that PNB was authorized to increase the stipulated 18%
interest per annum within the limits prescribed by law at any time
depending on whatever policy it [PNB] may adopt in the future
provided that the interest rate on the note shall be correspondingly
decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board, and where the PNB indeed
increased the rates to 32%, then subsequently to 41% and then finally
to 48% within the year over the objection of the debtor, the Supreme
Court declared null and void such increases on the ground that, at
that time, Presidential Decree No. 116 specifically provides that
increases in interest rates shall be made “once every twelve months”
and furthermore such increases violated the mutuality of contracts
enunciated in Article 1308 of the Civil Code, thus:
In order that obligations arising from contracts 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
upon the exclusive will of the one of the contracting parties is
void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even
assuming that the P1.8 million loan agreement between the PNB
and the private respondent gave the PNB a license (although in
fact there was none) to increase the interest rate at will during the
term of the loan, that license would have been null and void for
being violative of the principle of mutuality essential in contracts.
It would have invested the loan agreement with the character
of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker party’s (the debtor) participation being
reduced to the alternative “take it or leave it” (Qua vs. Law Union
& Rock Insurance Co., 95 Phil. 85). Such contract is a veritable
trap for the weaker party whom the courts of justice must protect
against abuse and imposition.
G.R. No. 88880, April 30, 1991, 196 SCRA 536.
G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60.
36
See Villalon vs. Court of Appeals, G.R. No. 116996, December 2, 1999, 116 SCAD
34
35
294
ObligatiOns and COntraCts
Text and Cases
arts. 1309-1310
However, contracts of adhesion are not per se void. There must
be a showing that it is highly inequitable for such contract to be
invalidated. Thus in Serra vs. Court of Appeals35 where the contract
was assailed by one party who was a lawyer-CPA as invalid for being
a contract of adhesion, the Supreme Court said:
A contract of adhesion is one wherein a party, usually a
corporation, prepares the stipulations in the contract, while the
other party merely affixes his signature or his “adhesion” thereto.
These types of contracts are as binding as ordinary contracts.
Because in reality, the party who adheres to the contract is free
to reject it entirely. Although, this Court will not hesitate to rule
out blind adherence to terms where facts and circumstances will
show that it is basically one-sided.
We do not find the situation in the present case to be
inequitable. Petitioner is a highly educated man, who, at the time
of the trial was already a CPA-Lawyer, and when he entered into
the contract, was already a CPA, holding a respectable position
with the Metropolitan Manila Commission. It is evident that a
man of his stature should have been more cautious in transactions
he enters into, particularly where it concerns valuable properties.
He is amply equipped to drive a hard bargain if he would be so
minded.
Article 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)
Article 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)
The parties may constitute a third party to determine the
performance of the contract. The decision shall become effective
when both of the contracting parties already have knowledge of
the decision. It will not be binding if only one of the parties knows
of the decision. This determination must however not destroy the
nature of mutuality of the contract between the principal parties
based on their essential equality. Hence, the law requires that the
determination must not be evidently inequitable. Otherwise the
court shall decide what is equitable under the circumstances. For
example, A and B enter into a contract whereby A will sing in the
nightclub of B for 2 days. The contract stipulates that, for two days,
A is to be paid P5,000 for such number of songs to be determined by
499, 319 SCRA 530; Garcia vs. Court of Appeals, 258 SCRA 446; Capitol Insurance &
Surety Co., Inc. vs. Central Azucarera del Danao, 221 SCRA 98.
37
G.R. No. 115117, June 8, 2000, 127 SCAD 395, 333 SCRA 170.
art. 1311
COntraCts
General Provisions
295
X two days before the performance, and any violation renders the
contract ineffectual entitling B not to pay A any consideration as
a penalty. They sign the contract. Later, X makes a determination
that A is to sing 20 songs, selected by X continually without a break
starting from 6:00 in the evening to 2:00 the next morning; and, if
the nightclub is filled with people, A will give an encore three times
divided into 30 minutes each time. A shall only sing those specifically
requested by the audience, and in case he does not know the song,
his fee is to be reduced. X notified A two days before the performance
that the latter will sing 15 English rock songs and 5 Norwegian songs
which obviously A does not know. This is clearly a situation where
the performance is so inequitable. In fact the contract itself and not
merely the determination of its performance is almost left to the will
of the third party and it greatly favors the nightclub owner. Also, it
tends to destroy the basic equality of the contracting parties. A can go
to court which will decide what is equitable under the circumstances.
Court intervention is necessary in order that the intent of the parties
will not be rendered nugatory by the inequitable terms and conditions
of a third party.
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.
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 nature of relativity of contracts is enunciated in Article
1311. Generally, contracts take effect only between the immediate
parties to the same. Hence, as a general rule, a stranger cannot
invoke the contract of another for his own interest or for a source
of an alleged prejudice. A party to a contract cannot impose any
obligation or liability to one who, under its terms, is a stranger to
the said contract.36 Thus, in Integrated Packaging Corporation vs.
Court of Appeals37 where the company-petitioner, which was itself
defaulting in paying its supplier, sued the said supplier-private
296
ObligatiOns and COntraCts
Text and Cases
art. 1311
respondent allegedly for causing damage to it in that it was not able to
comply with its contract with another corporation (Philacor) because
the supplier-private respondent failed to deliver the materials which
were supposed to be used by the company-petitioner for the orders
of the said corporation, the Supreme Court rejected any claim of
damages in favor of the company-petitioner, not only because it was
shown that the non-delivery of the materials by the supplier-private
respondent was justified in view of the non-payment by the company
of the deliveries, but also because the supplier-private respondent
has absolutely nothing to do with the contract between the companypetitioner and his client-corporation (Philacor). The Supreme Court
said:
As correctly held by the appellate court, private respondent
cannot be held liable under the contracts entered into by
petitioner with Philacor. Private respondent is not a party to
said agreements. It is also not a contract pour autrui. Aforesaid
contracts could not affect third persons like private respondents
because of the basic civil law principle of relativity of contracts
which provides that contracts can only bind the parties who
entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge
thereof.
Indeed, the order agreement entered into by petitioner
and private respondent has not been shown as having a direct
bearing on the contracts of petitioner with Philacor. As pointed
out by private respondent and not refuted by petitioner, the paper
specified in the order agreement between petitioner and private
respondent are markedly different from the paper involved in the
contracts of petitioner with Philacor. Further-more, the demand
made by Philacor upon petitioner for the latter to comply with
its printing contract is dated February 15, 1984, which is clearly
made long after private respondent had filed its complaint on
August 14, 1981. This demand relates to contracts with Philacor
dated April 12, 1983 and May 13, 1983, which were entered into
by petitioner after private respondent filed the instant case.
To recapitulate, private respondent did not violate the order
agreement it had with petitioner. Likewise, private respondent
could not be held liable for petitioner’s breach of contract
with Philacor. It follows that there is no basis to hold private
respondent liable for damages. Accordingly, the appellate court
38
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Page 717.
39
Id.
40
Id.
41
G.R. No. 118248, April 5, 2000, 124 SCAD 464, 329 SCRA 666.
art. 1311
COntraCts
General Provisions
297
did not err in deleting the damages awarded by the trial court to
petitioner.
The basic principle of relativity of contracts extends to the
principal parties’ assigns and heirs. Under certain conditions, the
law operates to effect the transfer of a chose of action from one person
to another without any concurring act on the part of the parties or
indeed without their assent.38 The usual ways by which such transfers
are brought to pass are by the transfer of an interest in land, by
marriage, and by death.39 Hence, the period of a contract of lease is
binding upon the heirs of the lessor. Likewise, a sublessee is bound
by the terms of the principal contract of the lessor and the lessee.
Indeed, real property is peculiar in that, upon its transfer, covenants
may be annexed to the contract which run with the land and one
who subsequently acquires an interest therein takes it subject to the
benefits and obligations of such covenants.40
In DKH Holdings Corporation vs. Court of Appeals41 where the
sole heir of the lessor refused to honor the lease contract entered
into by the deceased lessor contending that, though he inherited the
property from the deceased lessor, he was not a party to the lease
contract, the Supreme Court said that the sole heir must honor the
contract because in inheriting the property, he acquired all the rights
and obligations of the deceased lessor with respect to the property.
Pertinently, the Supreme Court based its decision on Article 1311
and stated:
As early as 1903, it was held that “He who contracts does
so for himself and his heirs.”42 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
consequences of a transaction entered into by their predecessorin-interest because they have inherited the property subject to
the liability affecting their common ancestor.43
It is futile for Victor to insist that he is not a party to the
contract because of the clear provision of Article 1311 of the Civil
Code. Indeed, being an heir of Encarnacion, there is privity of
interest between him and his deceased mother. He only succeeds
to what rights his mother had and what is valid and binding
Eleizeguii vs. Lawn Tennis Club, G.R. No. 967, 2 Phil. 309.
Carillo vs. Salak de Paz, G.R. No. L-4133, 91 Phil. 82.
44
DKC Holdings Corporation vs. Court of Appeals, G.R. No. 118248, April 5,
2000, 124 SCAD 464, 329 SCRA 666.
45
Article 1973 of the 1950 Civil Code.
46
Coquia vs. Fieldman’s Insurance Co., Inc., G.R. No. L-23276, November 29,
42
43
298
ObligatiOns and COntraCts
Text and Cases
art. 1311
against her is also valid and binding as against him. x x x
In the case at bar, the subject matter of the contract is
likewise a lease, which is a property right. The death of a party
does not excuse non-performance of a contract which involves a
property right, and the rights and obligations thereunder pass
to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the
other party has a property interest in the subject matter of the
contract.
Under both Article 1311 of the Civil Code and jurisprudence, Victor is bound by the subject Contract of Lease with
Option to Buy.
Transmission of rights and obligations in a contract may likewise
be agreed upon by the parties. Thus, a contract may provide that,
in the event a contractor fails to finish the house on time, another
contractor may assume his place in the contract subject to the same
terms and conditions.
If the transferee is the heir of the decedent, he shall not be held
liable beyond the value of the property he received from the decedent.
Hence, if the deceased left the heir a property which, however, was a
collateral for a debt which the deceased incurred during his lifetime,
the creditor can go against the property to pay off the indebtedness
of the deceased. If the property is not sufficient to satisfy the debt, the
creditor cannot personally go against the heir to collect the deficiency.
However, the law likewise provides that contracts cannot
take effect with respect to the heirs or assigns in three (3) cases.
The first case is when the nature of the contract does not allow
transmission. Hence, a contract which binds a person to sing in a
particular nightclub because of the special way he sings his songs is
not transmissible because the hiring of the singer is quite personal
and his abilities cannot be exactly duplicated by any person. Moreover, the audience may have bought the tickets to the show precisely
because that particular singer, and nobody else, will sing.
In American Jurisprudence, “Where 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.”
1968, 26 SCRA 178; Florentino vs. Encarnacion, 79 SCRA 193 (1977).
47
Kauffman vs. Philippine National Bank, 42 Phil. 182; Bank of the Philippine
Islands vs. V. Concepcion Hijos, Inc., 50 Phil. 806; Uy Tam vs. Leonard, 30 Phil. 471.
art. 1311
COntraCts
General Provisions
299
It has also been held that a good measure of 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 performed by others are
discharged by the death of the promissory. 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.44
The second instance is when the parties stipulate that no
transmission of rights shall be allowed. For example, the parties to
a contract of lease can provide a stipulation that the lease contract
cannot be subleased and a sublease without the consent of the lessor
shall allow the lessor to terminate the lease. The third case is when
the law provides non-transmission. Thus, in a contract of voluntary
deposit, the depositary cannot deposit the thing with a third person,
unless there is a stipulation to the contrary.45 Also, in lease, Article
1649 of the Civil Code provides that “the lessee cannot assign the
lease without the consent of the lessor, unless there is a stipulation
to the contrary.”
The second paragraph of Article 1311 is but a restatement
of the well-known principle concerning contracts pour autrui, the
enforcement of which may be demanded by a third party for whose
benefit it has been made, although not a party to the contract, before
the stipulation in his favor has been revoked by the contracting
parties.46 There must be a clear intent to benefit the third party. It
is insufficient that the third party be merely incidentally benefited.47
The requisites of a stipulation pour autrui are the following:
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.
Neither of the contracting parties bears the legal representation or authorization of the third party;48
5.
The favored party must have communicated his acceptance
Young vs. Court of Appeals, G.R. No. 79518, January 13, 1989, 169 SCRA 213.
G.R. No. L-79734, December 8, 1988, 168 SCRA 373.
50
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
48
49
300
ObligatiOns and COntraCts
Text and Cases
art. 1311
of the stipulation to the obligor before its revocation.
In Marmont Resort Hotel vs. Guiang49 where a memorandum
of agreement was entered into between Marmont Hotel and Maris
Trading for the installation of a complete water supply facility, and
where the installation encroached on the property of the respondentspouses with the latter’s permission and which encroachment
eventually prompted Maris Trading and the respondent spouses to
enter into a second memorandum of agreement stipulating that, for
valuable monetary consideration and the fact that the installation and
the drilling of the water facility for the benefit of Marmont Hotel were
made in the property of the respondent spouses with their consent,
the latter shall cede their possessory rights over the property to Maris
Trading, the Supreme Court ruled that the respondent spouses can
be held liable for not allowing Marmont Hotel from inspecting the
water facility in their property, thus:
It is clear from the foregoing stipulations that petitioner
Marmont was to benefit from the second Memorandum of
Agreement. In fact, said stipulations appear to have been designed
precisely to benefit petitioner and, thus, partake of the nature
of stipulations pour autrui, contemplated in Article 1311 of the
Civil Code.
A stipulation pour autrui is a stipulation in favor of a
third person conferring a clear and deliberate favor upon him,
which stipulation is found in a contract entered into by parties
neither of whom acted as agent of the beneficiary. We believe
and so hold that the purpose and intent of the stipulating parties
(Maris Trading and respondent spouses) to benefit the third
person (Petitioner Marmont) is sufficiently clear in the second
Memorandum of Agreement. Marmont was not of course a party
to that second Agreement, but as correctly pointed out by the
Trial Court and the appellate court, the respondent spouses
could not have prevented Maris Trading from entering the
property possessory rights over which had thus been acquired by
Maris Trading. That respondent spouses remained in physical
possession of that particular bit of lane, is of no moment: they
did so simply upon the sufferance of Maris Trading. Had Maris
Trading, and not the respondent spouses, been in physical
Edition, Indianapolis, The Bobbs-Merrill Company, Page 671, citing Chung Kee vs.
Davidson, 73 Cal. 522, 15 Pac. 100; Bacon vs. Davis, 9 Cal. App. 83, 98 Pac. 71; Bristow
vs. Lane, 21 Ill. 194; Livingstone vs. Chicago & N.W.R. Co., 142 Iowa 404, 120 N.W.
1040; Knott vs. Dudubque & S.C. Ry. Co., 84 Iowa 462, 51 N.W. 57; Burton vs. Larkin,
36 Kans, 246, 13 Pac. 398, 59 Am. Rep. 541; Duchamp vs. Nicholson, 2 Mart. (La.)
(N.S.) 151; Maxfield vs. Schwartz, 43 Minn, 221, 45 N.W. 429.
51
Bank of America NT & SA vs. Intermediate Appellate Court, G.R. No. L-74521,
art. 1311
COntraCts
General Provisions
301
possession, we believe that Marmont would have been similarly
entitled to compel Maris Trading to give it (Marmont) access to
the site involved. The two (2) courts below failed to take adequate
account of the fact that the sole purpose of Maris Trading in
acquiring possessory rights over that specific portion of the land
where well and pump and piping had been installed, was to supply
the water requirements of petitioner’s hotel. That said purpose
was known by respondent spouses, is made explicit in the second
Memorandum of Agreement. Maris Trading itself had no need
for a water supply facility; neither did the respondent spouses.
The water facility was intended solely for Marmont Resort Hotel.
The interest of Marmont cannot therefore be regarded as merely
“incidental.”
However, it is unnecessary that such third person be always
named in the contract.50 The benefit must only be a part of the contract
contained in one of its stipulations and should not constitute the whole
contract. Thus, a letter of credit in commercial transactions in favor
of the exporter becomes ultimately but the result of a stipulation
pour autrui.51 In a letter of credit transaction, the importer and a
bank enters into an agreement where the bank pays an exporter
in another country of goods ordered and delivered to the importer.
The exporter-beneficiary therefore benefits from the stipulation in
a contract between the importer and the bank. Also in Coquia vs.
Fieldman’s Insurance Co., Inc.,52 the Supreme Court considered a
particular insurance contract as a contract pour autrui and narrated
thus:
It appears that on December 1, 1961, appellant Fieldman’s
Insurance Company, Inc. — hereinafter referred to as the
Company — issued, in favor of the Manila Yellow Taxicab Co.,
Inc. — hereinafter referred to as the Insured — a common carrier
accident insurance policy, covering the period from December 1,
1961 to December 1, 1962. It was stipulated in said policy that:
“The Company will, subject to the Limits of Liability
and under the Terms of this Policy, indemnify the Insured
in the event of accident caused by or arising out of the use
November 11, 1986, 145 SCRA 419; Vargas Plow Factory, Inc. vs. Central Bank, G.R.
No. L-25732, February 27, 1969, 27 SCRA 84.
52
G.R. No. L-23276, November 29, 1968, 26 SCRA 178.
53
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Page 672, citing Bay vs. Williams,
112 Ill 91, 1 N.E. 340, 54 Am. Rep. 209; Seaman Hasbrouck, 35 Barb (N.Y.) 151; Smith
vs. Pfluger, 126 Wis. 253, 105 N.W. 476, 110 Am. St. 911.
54
Id., citing Rogers vs. Gosnell, 58 Mo. 589; Lawrence vs. Fox, 20 N.Y. 268; Baker
vs. Elgin, 11 Ore. 333, 8 Pac. 280; Brown vs. Markland, 16 Utah 360, 52 Pac. 597, 67
Am. St. 629; Tweeddale vs. Tweeddale, 116 Wis. 517, 93 N.W. 440, 61 L.R.A. 509, 96
302
ObligatiOns and COntraCts
Text and Cases
art. 1311
of Motor Vehicle against all sums which the Insured will
become legally liable to pay in respect of: Death or bodily
injury to any fare-paying passenger including the Driver,
Conductor and/or Inspector who is riding in the Motor
Vehicle insured at the time of accident or injury.”
While the policy was in force, or on February 10, 1962, a
taxicab of the Insured, driven by Carlito Coquia, met a vehicular
accident at Mangaldan, Pangasinan, in consequence of which
Carlito died. The Insured filed therefore a claim for P5,000.00 to
which the Company replied with an offer to pay P2,000.00, by
way of compromise. The Insured rejected the same and made a
counter-offer for P4,000.00, but the Company did not accept it.
Hence, on September 18, 1962 the Insured and Carlito’s parents,
namely, Melecio Coquia and Maria Espanueva — hereinafter
referred to as the Coquias — filed a complaint against the
Company to collect the proceeds of the afore-mentioned policy.
In its answer, the Company admitted the existence thereof, but
pleaded lack of cause of action on the part of the plaintiffs.
After appropriate proceedings, the trial court rendered a
decision sentencing the Company to pay to the plaintiffs the sum
of P4,000.00 and the costs. Hence, this appeal by the Company,
which contends that plaintiffs have no cause of action because:
1) the Coquias have no contractual relation with the Company;
and 2) the Insured has not complied with the provisions of the
policy concerning arbitration.
As regards the first defense, it should be noted that,
although, in general, only parties to a contract may bring an action
based thereon, this rule is subject to exceptions, one of which is
found in the second paragraph of Article 1311 of the Civil Code
of the Philippines, reading:
“If a contract should contain some stipulation in favor
of a third person, he may demand its fufillment 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.”
This is but the restatement of a well-known principle
concerning contract pour autrui, the enforcement of which may
be demanded by a third party for whose benefit it was made,
although not a party to the contract, before the stipulation in his
favor has been revoked by the contracting parties. Does
the
policy in question belong to such class of contracts pour autrui?
Am. St. 1003.
art. 1311
303
COntraCts
General Provisions
In connection, said policy provides, inter alia:
“Section I — Liability to Passengers. 1. The Company will,
subject to the Limits of Liability and under the Terms of this
Policy, indemnify the Insured in the event of accident caused by
or arising out of the use of Motor Vehicle against all sums which
the Insured will become legally liable to pay in respect of: Death
or bodily injury to any fare-paying passenger including the Driver
x x x who is riding in the Motor Vehicle insured at the time of
accident or injury.
“Section II — Liability to the Public
xxx
xxx
xxx
“3. In terms of and subject to the limitations of and for
the purposes of this Section, the Company will indemnify any
authorized Driver who is driving the Motor Vehicle x x x.”
“Conditions
xxx
xxx
xxx
“7. In the event of death of any person entitled to
indemnity under this Policy, the Company will in respect of
the liability incurred by such person, indemnify his personal
representatives in terms of and subject to the limitations of this
Policy, provided, that such representative shall, as though they
were the Insured, observe, fulfill and be subject to the Terms of
this Policy insofar as they can apply.
“8. The Company may, at its option, make indemnity
payable directly to the claimants or heirs of claimants, with
or without securing the consent of or prior notification to the
Insured, it being the true intention of this Policy, the liabilities
of the Insured towards the passengers of the Motor Vehicle and
the Public.”
Pursuant to these stipulations, the Company “will indemnify any authorized Driver who is driving the Motor Vehicle” of
the Insured and, in the event of death of said driver, the Company
shall, likewise, “indemnify his personal representatives.” In
fact, the Company “may, at its option, make indemnity payable
directly to the claimants or heirs of claimants x x x it being the
true intention of this Policy to protect x x x the liabilities of the
Insured towards the passengers of the Motor Vehicle and the
Public” — in other words, third parties.
Thus, the policy under consideration is typical of contracts
pour autrui, this character being made more manifest by the
fact that the deceased driver paid fifty percent (50%) of the
corresponding premiums, which were deducted from his weekly
commissions. Under these conditions, it is clear that the Coquias
304
ObligatiOns and COntraCts
Text and Cases
art. 1311
— who, admittedly, are the sole heirs of the deceased — have
a direct cause of action against the Company, and, since they
could have maintained this action by themselves, without the
assistance of the Insured, it goes without saying that they could
and did properly join the latter in filing the complaint herein.
The law likewise requires that, in stipulations pour autrui, the
third party communicates his acceptance to the obligor before its
revocation. It is not necessary as a general rule for the third party to
make a formal acceptance prior to bringing of the suit.53 The assent of
the beneficiary will be presumed.54 The commencement of an action to
enforce a promise is sufficient as an acceptance.55 In Mandarin Villa,
Inc. vs. Court of Appeals56 where the owner of a restaurant refused
to honor a credit card for the purpose of payment from a customer
on the ground that its machine validating such credit card indicated
that the latter had expired, when in fact it had not expired as clearly
indicated in the card itself, and where the owner would have known
such fact had it merely followed the rules it agreed upon with the
credit card company providing that, in cases of expiration of the
credit card as indicated in the machine, the restaurant owner-obligor
should examine the card itself and follow certain other procedures,
the Supreme Court found the restaurant-owner liable for damages
anchoring its decision on the latter’s negligence and on Article 1311
of the Civil Code on pour autrui stipulations, thus:
We note that Mandarin Villa Seafood Village is affiliated
with BANKARD. In fact, an “Agreement” entered into by petitioner and BANKARD dated June 23, 1989, provides inter alia:
“The MERCHANT shall honor validly issued PCCCI credit
cards presented by their corresponding holders in the purchase
of goods and/or services supplied by it provided that the card
expiration date has not elapsed and the card number does not
55
Id., citing North Alabama Development Co. vs. Orman, 55 Fed. 18, 5 C.C.A. 22;
McCoy vs. McCoy, 32 Ind. App. 38, 69 N.E. 193, 102 Am. St. 223; Coppage vs. Gregg,
127 Ind. 359, 26 N.E. 903; Copeland vs. Summers, 138 Ind. 219, 35 N.E. 514, 37 N.E.
971; Motley vs. Manufacturers’ Ins. Co., 29 Maine 337, 50 Am. Dec. 591; Stariha vs.
Greenwood, 28 Minn 521, 11 N.W. 76; Campbell vs. Smith, 71 N.Y. 26, 27 Am. Rep.,
5; Blake vs. Atlantic Nat. Bank, 33 R.I. 464, 82 Atl. 225.
56
G.R. No. 119850, June 20, 1996, 71 SCAD 255, 257 SCRA 538.
57
G.R. No. 79518, January 13, 1989, 169 SCRA 213.
58
Equitable PCI Bank vs. Rosita Ku, G.R. No. 142950, March 26, 2001; Oro Cam
Enterprises, Inc. vs. Court of Appeals, 116 SCAD 419, 319 SCRA 444.
59
Asuncion vs. Evangelista, G.R. No. 133491, October 13, 1999, 316 SCRA 848.
60
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Pages 663-665.
61
G.R. No. 120554, September 21, 1999, 314 SCRA 751.
art. 1311
COntraCts
General Provisions
305
appear on the latest cancellation bulletin of lost, suspended
and canceled PCCCI credit cards and, no signs of tampering,
alterations or irregularities appear on the face of the credit card.”
While private respondent may not be 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 only an acceptance of the said stipulation but also an
explicit communication of his acceptance to the obligor.
In Young vs. Court of Appeals,57 the Supreme Court also had the
opportunity to decide on the matter of “communication of acceptance.”
The pertinent portions of the case are as follows:
Defendant Philippine Holding, Inc. is the former owner of
a piece of land located at Soler St., Sta. Cruz, Manila, and a two
storey building erected thereon, consisting of six units; Unit 1350
which is vacant, Unit 1352 occupied by Antonio Young, Unit 1354
by Rebecca C. Young, Unit 1356 by Chui Wan and Felisa Tan Yu,
Unit 1358 by Fong Yook Lu and Ellen Yee Fong and Unit 1360
by the Guan Heng Hardware (Rollo, pp. 14-15).
The owner Philippine Holding, Inc. secured an order from
the City Engineer of Manila to demolish the building. Antonio
Young, then a tenant of said Unit 1352, filed an action to annul the
city Engineer’s demolition Order (Civil Case No. 123883) entitled
Antonio S. Young vs. Philippine Holding, Inc. before the then
Court of First Instance of Manila, Branch XXX. As an incident
in said case, the parties submitted a Compromise Agreement to
the Court on September 24, 1981. Paragraph 3 of said agreement
provides that plaintiff (Antonio S. Young) and Rebecca Young
and all persons claiming rights under them bind themselves to
voluntarily and peacefully vacate the premises which they are
occupying as lessees (Units 1352 and 1354, respectively) which
are the subject of the condemnation and demolition order and to
surrender possession thereof to the defendant Philippine Holding,
Inc. within sixty (60) days from written notice, subject to the
proviso that should defendant decide to sell the subject property
or portion thereof, “plaintiff and Rebecca C. Young have the right
of first refusal thereof.” (Rollo, p. 49).
62
63
29 Phil. 542.
Article 1163 of the 1950 Civil Code.
306
ObligatiOns and COntraCts
Text and Cases
art. 1311
On September 17, 1981, Philippine Holding, Inc. had
previously sold the above said property described in the
compromise agreement by way of dacion in payment to PH Credit
Corporation (Rollo, p. 49).
On November 9, 1982, the property was subdivided into
two parcels, one 244.09 sq.m. in area covering Units 1350, 1352
and 1354 (TCT No. 152439) and the other 241.71 sq.m. in area
covering Units 1356, 1358 and 1360 (TCT No. 152440) and both
titles were placed in the name of PH Credit Corporation.
On December 8, 1982, PH Credit Corporation sold the
property covered by TCT 152439 to the Blessed Land Development Corporation represented by its President Antonio T.S.
Young and on September 16, 1983, PH Credit Corporation sold
the property covered by TCT 152440 embracing Units 1356, 1358
and 1360 to spouses Fong Yook Lu and Ellen Yee Fong (Rollo, p.
15).
Thereafter, petitioner Rebecca C. Young and her coplaintiffs, the spouses Chi Wan and Felisa Tan Yu filed in the
Regional Trial Court of Manila, Civil Case No. 84-22676 for the
annulment of the sale in favor of herein respondent spouses,
Fong Yook Lu and Ellen Yee Fong and for specific performance
and damages against the PH Credit Corporation and Philippine
Holding, Incorporated.
Plaintiff spouses Chui and Felisa Tan Yu alleged that
defendant corporation and Francisco Villaroman, sold the
property without affording them (the plaintiffs-spouses) the right
of first refusal to purchase that portion of the property which they
are renting.
Plaintiff Rebecca C. Young, now petitioner, also claimed
the right of the first refusal purportedly granted to her under
the aforestated proviso of the abovesaid compromise agreement
and prayed that the sale be annulled and that they be allowed
to exercise her right of first refusal to purchase subject property
(Rollo, p. 50).
The lower court decided in favor of the defendants and
against the plaintiffs, thus dismissing the complaint together
with defendants’ counterclaims (Rollo, p. 15).
On the other hand, the claim of Rebecca C. Young was
similarly rejected by the trial court on the following grounds: (1)
that she was not a party in the Civil Case No. 123883, wherein
subject compromise agreement was submitted and approved by
the trial court apart from the fact that she did not even affix her
signature to the said compromise agreement; (2) that Rebecca
Young had failed to present any evidence to show that she had
art. 1311
307
COntraCts
General Provisions
demanded from the defendants-owners, observance of her right
of first refusal before the said owners sold units 1356, 1358 and
1360; (3) that even assuming that her supposed right of first
refusal is a stipulation for the benefit of a third person, she did
not inform the obligor of her acceptance as required by the second
paragraph of Article 1311 of the Civil Code.
Chui Wan and Felisa Tan Yu and Rebecca C. Young,
assisted by her husband, appealed to the Court of Appeals which
dismissed the same on August 7, 1987, for lack of merit.
The petition is devoid of merit.
xxx
xxx
xxx
Petitioner further argued that the stipulation giving her the
right of first refusal is a stipulation pour autrui or a stipulation
in favor of a third person under Article 1311 of the Civil Code.
xxx
xxx
xxx
Assuming that petitioner is correct in claiming that this
is a stipulation pour autrui, it is unrebutted that she did not
communicate her acceptance whether expressly or impliedly. She
insists however, that the stipulation has not yet been revoked,
so that her present claim or demand is still timely.
As correctly observed by the Court of Appeals, the above
argument is pointless, considering that the sale of subject
property to some other person or entity constitutes in effect a
revocation of the grant of the right of first refusal to Rebecca C.
Young.
Article 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 Law. (n)
The article provides another example when a third person not a
party to a contract is affected or may be subject to its provisions. Thus,
a lease of real estate recorded in the Registry of Property between
a lessor and a lessee shall bind a subsequent buyer who purchases
and comes into the possession of the contract’s object which is the
property leased. The latter is bound to honor the contract entered
into by the former lessor. Likewise, a sublessee is bound by the
contract of the lessor and the lessee. Hence, if the lessor terminates
the lease contract for a valid cause, the sublessee can be ejected from
the leased premises even if he is not a party to the lease contract.
Likewise, if the lessor was successful in judicially ejecting the lessee,
308
ObligatiOns and COntraCts
Text and Cases
arts. 1312-1313
the following can likewise be ejected despite the fact that they were
not made parties to the ejectment suit: a) trespassers, squatters, or
agents of the defendant-lessee fraudulently occupying the property
to frustrate the judgment; b) guest or other occupants of the premises
with the permission of the defendant-lessee; c) transferees pendente
lite; d) sub-lessees; e) co-lessees; f) members of the family, relatives
and other privies of the defendant-lessee.58
Also, a property mortgaged as a collateral of a debt and recorded
in the Registry of Property shall bind any subsequent possessor-owner
of the same.59
Article 1313. Creditors are protected in cases of contracts
intended to defraud them. (n)
The articles provides another example when a third person
not a party to a contract is affected by such contract. The objective
of a contract is to be able to bind the parties to perform a particular
obligation consistent with the provisions and the spirit of the contract.
For this purpose, creditors are protected with respect to contracts
intended to defraud them. Hence, Article 1381(3) provides that a
contract shall be rescissible if it is undertaken in fraud of creditors
when the latter cannot in any other manner collect the claim due
them. In such a case, even if the creditor is not a party to the contract
intended to defraud him, he is given legal personality by law to
terminate the contract.
Article 1314. Any third person who induces another to
violate his contract shall be liable for damages to the other
contracting party. (n)
Contracts are binding between and among the parties who
entered into the same. The parties therefore are expected to comply
with the contract in keeping with good faith, usage and law. Contract
is a source of obligation and has the force of law between the
contracting parties.
But while a contract between two parties cannot impose
on a stranger, without his assent, a liability in accordance with
the terms of the contract, it is nevertheless true that a stranger
does owe to the parties to the agreement a duty not to interfere
64
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Page 659.
65
Article 1166 of the 1950 Civil Code.
66
Article 1165 of the 1950 Civil Code.
67
EDCA Publishing vs. Santos, G.R. No. L-80298, April 26, 1990, 184 SCRA 614;
art. 1314
COntraCts
General Provisions
309
with its performance. All persons are under a duty to respect
the rights of others. The law recognizes that a contract confers
certain rights on the person with whom it is made, and not
only binds the parties to it by the obligation entered into, but
also imposes on all the world, in a sense at least, the duty of
respecting the contractual obligation. x x x This doctrine is not
confined to contract of services. It covers every case where one
person maliciously persuades another to break any contract with a
third person. When loss ensues, malice is the gist of the action for
wantonly or maliciously inducing one to break his contract with
intent to injure another. This does not mean that acts done under
the right of competition or under cover of friendly neighborly
counsel or mere persuasion are, generally speaking, wrongful
in law or in fact. Still if the persuasion be used for the indirect
purpose of injuring the plaintiff, or benefiting the defendant, at
the expense of the plaintiff, it is a malicious act, which, in law
and in fact, is a wrongful act and therefore an actionable act of
injury issued from it. But with this explanation it may be said
that in order to recover in such an action malice must be shown to
exist. It is also true that no liability ordinarily attaches where the
party sought to be charged in damages was acting in the lawful
exercise of some distinct right. Moreover, if none of the legal
rights of the plaintiff are interfered with, an action for damages
cannot be maintained, An action for damages is not, however, the
sole remedy. In a proper case one may properly be enjoined from
in any way procuring the violation of lawful and valid contract.
While the one who violates his contract may be personally liable
to the other party thereto for its breach, the party guilty of such
breach may, nevertheless, recover against the one who induces
him to violate his contract when the latter, by such acts and
persuasion, intended to injure the other contracting party or to
coerce him into adopting a line of business against his will and
judgment.60
Hence, if for example, A was contracted by B to be the resident
painter in his studio for one year and C maliciously induces B to
dishonor the contract so that he can go to C’s studio, C can be liable
for damages under Article 1314.
In Song Pin Bun vs. Court of Appeals,61 a company (Tek Hua
Enterprises) leased property from the lessor DCCSI. After the lease
expired, the company still occupied the premises. When the managing
partner of Tek Hua Enterprises died, the son, So Ping Bun, of the
said managing partner took possession of the premises for his own
company, Trendsetter Marketing, using the leased premises as
warehouse for his textile business. Hence, Tek Hua asked So Ping
Bun and Trendsetter Marketing to vacate the premises. They refused
310
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Text and Cases
art. 1314
and instead asked the lessor for the execution of formal contracts of
lease with his own corporation. The lessor agreed. The lease contracts
were executed. Tek Hua Enterprises sued for the nullification of
the lease contracts on the ground of contractual interference under
Article 1314 of the Civil Code. Tek Hua Enterprises won but did not
order So Ping Bun and his company to pay damages. They were only
ordered to pay attorney’s fees. Trendsetter Marketing and the son
of the deceased managing partner of Tek Hua Enterprises contend
that since no award of damages were imposed, they were not liable
for attorneys fees. The Supreme Court rejected this contention by
explaining the concept of tort interference, thus:
The foregoing issues involve, essentially, the correct
interpretation of the applicable law on tortuous conduct,
particularly unlawful interference with contract. We have to
begin, obviously, with certain fundamental principles on torts
and damages.
Damage is the loss, hurt, or harm which results from in-jury,
and damages are the recompense or compensation awarded for
the damage suffered. One becomes liable in an action for damages
for a non-trespassory invasion of another’s interest in the private
use and enjoyment of asset if: (a) the other has property rights
and privileges with respect to the use or enjoyment interfered
with, (b) the invasion is substantial, (c) the defendant’s conduct
is a legal cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and actionable
under general negligence rules.
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 undertaking under a contract. In the case before
us, petitioner’s Trendsetter Marketing asked DCCSI to execute
lease contracts in its favor, and as a result petitioner deprived
respondent corporation of the latter’s property right. Clearly, and
as correctly viewed by the appellate court, the three elements of
tort interference above-mentioned are present in the instant case.
Article 1475 of the New Civil Code.
68
Heirs of Quirico Seraspi vs. Court of Appeals, G.R. No. 135602, April 28, 2000,
125 SCAD 749.
69
Articles 1868 to 1932 of the 1950 Civil Code.
art. 1314
COntraCts
General Provisions
Authorities debate whether interference may be justified
where the defendant acts for the sole purpose of furthering his
own financial or economic interest. One view is that, 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 his sole 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 nega-tived, for he
acts in self-protection. 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 others. It
is sufficient if the impetus of his conduct lies in a proper business
interest than in wrongful motives.
As early as Gilchirst vs. Cuddy,62 we held that where there
was no malice in the interference of a contract, and the impulse
behind one’s conduct lies in a proper business interest rather than
in wrongful motives, a party cannot be a malicious interferer.
Where the alleged interferer is financially interested, and such
interest motivates his conduct, it cannot be said that he is an
officious or malicious intermeddler.
In the instant case, it is clear that petitioner So Ping Bun
prevailed upon DCCSI to lease the warehouse to his enterprise
at the expense of respondent corporation. Though petitioner took
interest in the property of respondent corporation and benefited
from it, nothing on record imputes deliberate wrongful motives
or malice on him.
Section 1314 of the Civil Code categorically provides also
that, “any third person who induces another to violate his contract
shall be liable for damages to the other contracting party.”
Petitioner argues that damage is an essential element of tort
interference, and since the trial court and the appellate court
ruled that private respondents were not entitled to actual, moral
or exemplary damages, it follows that he ought to be absolved of
any liability, including attorney’s fees.
It is true that the lower courts did not award damages, but
this was only because the extent of damages was not quantifiable.
We had a similar situation in Gilchrist, where it was difficult
or impossible to determine the extent of damage and there
was nothing on record to serve as basis thereof. In that case,
We refrained from awarding damages. We believe the same
70
Article 1868 of the 1950 Civil Code.
311
312
ObligatiOns and COntraCts
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art. 1315
conclusion applies in this case.
While we do not encourage tort interferers seeking their
economic interest to intrude into existing contracts at the expense
of others, however, we find that the conduct herein complained of
did not transcend the limits forbidding an obligatory award for
damages in the absence of any malice. The business desire is there
to make some gain to the detriment of the contracting parties.
Lack of malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into contracts
and causing breach of existing ones. The respondent court
correctly confirmed the permanent injunction and nullification of
the lease contracts between DCCSI and Trendsetter Marketing,
without awarding damages. The injunction saved the respondents
from further damage or injury caused by petitioner’s interference.
Article 1315. Contracts are perfected by mere consent,
and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to
all the consequences which, according to their nature, may be
in keeping with good faith, usage and law. (1258)
Article 1316. Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of the object
of the obligation. (n)
A contract is the law between the parties. Any non-fulfillment of
the contract will make the violator liable. The law likewise states that
the parties are bound to fulfill all the consequences which, according
to their nature, may be in keeping with good faith, usage and the
law. Thus the parties are bound to exercise the diligence of a good
father of a family with respect to the thing sought to be delivered
unless there is another standard of care stipulated by the parties or
required by a law.63 There is an implied obligation or duty to do the
act contracted to be performed with reasonable care in order that the
person or property of others may not be injured by any force which he
sets in motion or by any agent or agency for which he is responsible.64
They are likewise obliged to deliver with the determinate thing which
is the object of the contract all its accessions and accessories even
though they may not have been mentioned.65 They shall be liable for
fortuitous event in case of delay.66
Generally, a contract is perfected by mere consent of the parties.
For example, a contract of sale is consensual and is perfected once
agreement is reached between the parties on the subject matter and
arts. 1315-1316
COntraCts
General Provisions
313
the consideration.67 However, ownership over the object of the contract
of sale is transferred only upon actual or constructive delivery.68
There are also contracts which are perfected, not by mere consent
alone, but by the delivery of the object of the contract. These are real
contracts such as deposit, pledge and commodatum.
An accepted promise to deliver something by way of commodatum
is binding upon the parties, but the commodatum itself shall be
perfected upon the delivery of the object of the contract (Article 1934).
Delivery is essential in commodatum because, in such a contract, the
bailee in commodatum acquires the use of the thing loaned but not
its fruits. Hence, if he does not have the object which he is entitled
to make use, there can never be perfection. The contract can not be
implemented.
A contract of pledge is constituted by the owner of the object
to be pledged to secure a loan. In a pledge, it is indispensable that
the thing pledged be placed in the possession of the creditor, or of a
third person by common agreement. This transfer of possession is a
requirement of law under Article 2093. Hence, before a contract of
pledge can be perfected, the object pledged must first be delivered.
Delivery is also required before a contract of deposit is perfected
because, under Article 1962, a deposit is constituted from the moment
a person receives a thing belonging to another, with the obligation and principal purpose of safely keeping it and of returning the
same.
Article 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
Article 1910 of the 1950 Civil Code.
Article 1911 of the 1950 Civil Code.
73
Article 1887 of the 1950 Civil Code.
74
Article 1874 of the 1950 Civil Code.
75
Executive Order No. 209 which took effect on August 3, 1988.
76
Article 220(6) of the Family Code of the Philippines.
77
Article 225 of the Family Code of the Philippines.
78
Id.
79
Id.
71
72
314
ObligatiOns and COntraCts
Text and Cases
art. 1317
executed, before it is revoked by the other contracting party.
(1259a)
Normally, a person can contract in the name of another if such
person has been validly constituted as an agent of the latter. The
laws on agency will apply.69 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.70 The
principal of the agent must comply with all the obligations which the
agent may have contracted within the scope of his authority. As for
obligation wherein the agent has exceeded his power, the principal is
not bound except when he ratifies it expressly or tacitly.71 Even when
the agent exceeded his authority, the principal is solidarily liable with
the agent if the former allowed the latter to act as though he had
full powers.72 In the execution of the agency, the agent shall act in
accordance with the instructions of the principal. In default thereof,
he shall do all that a good father of a family would do, as required
by the nature of the business.73 When a sale of a piece of land or any
interest therein is through an agent, the authority of the latter shall
be in writing; otherwise, the sale shall be void.74
An example of a law which gives a right to certain persons to
represent another is the Family Code of the Philippines.75 Specifically,
the parents and those exercising parental authority have the right
and duty to represent their unemancipated children in all matters
affecting their interests.76 The father and the mother shall be the legal
guardian of the property of the unemancipated common child without
the necessity of a court appointment.77 In case of disagree-ment, the
father’s decision shall prevail unless there is a judicial order to the
contrary.78 Parents can enter into contract with respect to properties
of their children even without court approval if this will involve only
simple acts of administration like repairs of properties owned by
the children. However, with respect to acts of dominion like selling,
encumbering or alienating the properties of their children, court
authority is needed; otherwise the contract shall be considered void.
To protect the interest of the children, the law requires that where
the value of the property or the annual income of the child exceeds
P50,000.00, 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
Regal Films, Inc. vs. Concepcion, G.R. No. 139532, August 9, 2001.
G.R. No. L-53820, June 15, 1992, 209 SCRA 763.
82
G.R. No. 139532, August 9, 2001, 152 SCAD 547.
80
81
art. 1317
COntraCts
General Provisions
315
guarantee the performance of the obligations prescribed for general
guardians.79
However, a contract entered into in the name of another by one
who ostensibly might have but who, in reality, had no real authority
or legal representation, or who, having such authority, acted beyond
his powers, would be unenforceable80 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. In Yao Ka Sin vs. Court of
Appeals,81 where the president and chairman of a corporation entered
into a contract with another corporation, but where such president
and chairman had no authority under the law or the corporate bylaws to enter into such agreement, the Supreme Court ruled that the
contract entered into by such corporate official was unenforceable
under Article 1317. The Supreme Court reached this conclusion in
the following manner:
The respondent Court correctly ruled that Exhibit “A” is not
binding upon the private respondent. Mr. Maglana, its President
and Chairman, was not empowered to execute it. Petitioner, on
the other hand maintains that it is a valid contract because Mr.
Maglana has the power to enter into contracts for the corporation
as implied from the following provisions of the By-Laws of private
respondent:
a)
The power of the Board of Directors to “. . . enter
into (sic) agreement or contract of any kind with any person in
the name and for and in behalf of the corporation through its
President, subject only to the declared objects and purpose of the
corporation and the existing provisions of law” (Exhibit “8-A”);
and
b)
The power of the Chairman of the Board of Directors
to “execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may enter into
(Exhibit “I-1”).
And even admitting, for the sake of argument, that Mr.
316
ObligatiOns and COntraCts
Text and Cases
art. 1317
Maglana was not so authorized under the By-Laws, the private
respondent, pursuant to the doctrine laid down by this Court in
Francisco vs. Government Service Insurance System and Board of
Liquidators vs. Kalaw, is still bound by his act for clothing him
with apparent authority.
We are not persuaded.
Since a corporation, such as the private respondent, can act
only through its officers and agents, “all acts within the powers
of said corporation may be performed by agents of its selection;
and, except so far as limitations or restrictions may be imposed by
special charter, by-laws, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural
person govern the officer or agent of a corporation, of whatever
status or rank, in respect to his power to act for the corporation;
and agents when once appointed, or members acting in their
stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons. Moreover, “x x x a
corporate officer or agent may represent and bind the corporation
in transactions with third persons to the extent that authority
to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers
as, in the usual course of the particular business, are incidental
to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to
the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent
to believe that it has conferred.”
While there can be no question that Mr. Maglana was an
officer — the President and Chairman — of private respondent
corporation at the time he signed Exhibit “A,” the above provisions
of said private respondent’s By-Laws do not in any way confer
upon the President the authority to enter into contracts for the
corporation independently of the Board of Directors. That power
is exclusively lodged in the latter. Nevertheless, to expedite or
facilitate the execution of the contract, only the President — and
not all the members of the Board, or so much thereof as a required
for the act — shall sign it for the corporation. This is the import
of the words through the president in Exhibit “8-A” and the clear
intent of the power of the chairman “to execute and sign for and
in behalf of the corporation all contracts and agreements which
the corporation may enter into” in Exhibit “I-1.” Both powers
presuppose a prior act of the corporation exercised through
the Board of Directors. No greater power can be implied from
such express, but limited, delegated authority. Neither can it
art. 1317
COntraCts
General Provisions
be logically claimed that any power greater than that expressly
conferred is inherent in Mr. Maglana’s position as president and
chairman of the corporation.
Although there is authority “that if the president is given
general control and supervision over the affairs of the corporation,
it will be presumed that he has authority to make contracts and
do acts within the course of its ordinary business,” We find such
inapplicable in this case. We note that the private corporation has
a general manager who, under its By-Laws has, inter alia, the
following powers: “(a) to have the active and direct management
of the business and operation of the corporation, conducting the
same according to the order, directives or resolutions of the Board
of Directors or of the president.” It goes without saying then
that Mr. Maglana did not have a direct and active hand in the
management of the business and operations of the corporation.
Besides, no evidence was adduced to show that Mr. Maglana had,
in the past, entered into contracts similar to that of Exhibit “A”
either with the petitioner or with other parties.
Petitioner’s last refuge then is his alternative proposition,
namely, that private respondent had clothed Mr. Maglana with
the apparent power to act for it and had caused persons dealing
with it to believe that he was conferred with such power. The
rule is of course settled that “[a]lthough an officer or agent acts
without, or in excess of, his actual authority if he acts within the
scope of an apparent authority with which the corporation has
clothed him by holding him out or permitting him to appear as
having such authority, the corporation is bound thereby in favor
of a person who deals with him in good faith in reliance on such
apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a parti-cular
branch of it, continuously and publicly, for a considerable time.”
Also, “if a private corporation intentionally or negligently clothes
its officers or agents with apparent power to perform acts for
it, the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good faith
with such officers or agents.” This “apparent authority may result
from (1) the general manner by which the corporation holds out
an officer or agent as having power to act or, in other words, the
apparent authority with which it clothes him to act in general, or
(2) the acquiescence in his acts of a particular nature, with actual
or constructive knowledge thereof, whether within or without the
scope of his ordinary powers.”
It was incumbent upon the petitioner to prove that indeed
the private respondent had clothed Mr. Maglana with the
apparent power to execute Exhibit “A” or any similar contract.
This could have been easily done by evidence of similar acts
317
318
ObligatiOns and COntraCts
Text and Cases
art. 1317
executed either in its favor or in favor of other parties. Petitioner
miserably failed to do that. Upon the other hand, private
respondent’s evidence overwhelmingly shows that no contract
can be signed by the president without first being approved by
the Board of Directors; such approval may only be given after
the contract passes through, at least, the comptroller, who is the
NIDC representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of
Liquidators vs. Kalaw are hopelessly unavailing to the petitioner.
In said cases, this Court found sufficient evidence, based on the
conduct and actuations of the corporations concerned, of apparent
authority conferred upon the officer involved which bound the
corporations on the basis of ratification. In the first case, it was
established that the offer of compromise made by plaintiff in the
letter, Exhibit “A,” was validly accepted by the GSIS. The terms
of the offer were clear, and over the signature of defendant’s
general manager, Rodolfo Andal, plaintiff was informed
telegraphically that her proposal had been accepted. It was sent
by the GSIS Board Secretary and defendant did not disown the
same. Moreover, in a letter remitting the payment of P30,000
advanced by her father, plaintiff quoted verbatim the telegram
of acceptance. This was in itself notice to the corporation of the
terms of the allegedly unauthorized telegram. Notwithstanding
this notice, GSIS pocketed the amount and kept silent about the
telegram. This Court then ruled that:
“This silence, taken together with the unconditional
acceptance of three other subsequent remittances from plaintiff,
constitutes in itself a binding ratification of the original agreement
(Civil Code, Art. 1393).
‘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.’ ”
In the second case, this Court found:
“In the case at bar, the practice of the corporation has been
to allow its general manager to negotiate and execute contracts
in its copra trading activities for and in NACOCO’s behalf
without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all
corporate contacts, but that board itself, by its acts and through
acquiescence, practically laid aside the by-law require-ment of
prior approval.
art. 1317
COntraCts
General Provisions
319
Under the given circumstances, the Kalaw contracts are
valid corporate acts.”
The inevitable conclusion then is that Exhibit “A” is an
unenforceable contract under Article 1317 of the Civil Code which
provides as follows:
ARTICLE 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.”
The unenforceable contract however can be ratified expressly
or impliedly by the person on whose behalf it has been executed,
before it is revoked by the other contracting party. In Regal Films
vs. Concepcion,82 the agent of a certain movie actor entered into an
agreement with Regal Films designed to constitute as an addendum
to the original agreements between the movie actor and Regal Films
so that the lawsuit between the movie actor and Regal Films will
finally be settled. The movie actor however disavowed the agreement
entered into by the agent contending that, by the time the agent
transacted the addendum, she was not anymore his agent. Hence
in the preliminary conference in court, Regal Films intimated to
the movie actor that it was willing to release him from the original
contracts instead of pursuing the addendum. Thereupon, the movie
actor surprisingly manifested to the court that he was accepting the
addendum. On the basis of this acceptance, a decision by way of a
compromise agreement was entered by the court. On appeal to the
Supreme Court by Regal Films, the Supreme Court ruled that the
compromise agreement which was the basis of the decision cannot
be enforced. The Supreme Court said:
A compromise is an agreement between two or more persons
who, for preventing or putting an end to a lawsuit, adjust their
respective positions by mutual consent in the way they feel they
can live with. Reciprocal concessions are the very heart and life
of every compromise agreement, where each party approximates
and concedes in the hope of gaining balanced by the danger of
losing. It is, in essence, a contract. Law and jurisprudence recite
three minimum elements for any valid contact — (a) consent; (b)
object certain which is the subject matter of the contract; and (c)
cause of the obligation which is established. Consent is manifested
by the meeting of the offer and the acceptance upon the thing
320
ObligatiOns and COntraCts
Text and Cases
art. 1317
and the cause which are to constitute the agreement. The offer,
however, must be certain and the acceptance seasonable and
absolute; if qualified, the acceptance would merely constitute a
counter-offer.
In this instance, the addendum was flatly rejected by the
respondent on the theses (a) that he did not give his consent
thereto nor authorized anyone to enter into the agreement, and
(b) that it contained provisions grossly disadvantageous to him.
The outright rejection of the addendum made known to the other
ended the offer. When respondent later filed his Manifestation,
stating that he was, after all, willing to honor the addendum,
there was nothing to still accept.
Verily, consent could be given not only by the party himself
but by anyone duly authorized and acting for and in his behalf.
But by respondent’s own admission, the addendum was entered
into without his knowledge and consent. A contract entered into
in the name of another by one who ostensibly might have but
who, in reality, had no real authority or legal representation,
or who, having such authority, acted beyond his powers, would
be unenforceable. The addendum, let us then assume resulted
in an unenforceable contract, might it not then be susceptible
to ratification by the person on whose behalf it was executed?
The answer would obviously be in the affirmative; however, that
ratification should be made before its revocation by the other
contracting party. The adamant refusal of respondent to accept
the terms of the addendum constrained petitioner, during the
preliminary conference held on 23 June 1996, to instead express
its willingness to release respondent from his contracts prayed
for in his complaint and to thereby forego the rejected addendum.
Respondent’s subsequent attempt to ratify the addendum came
much too late for, by then, the addendum had already been
deemed revoked by petitioner.
art. 1317
COntraCts
General Provisions
321
322
ObligatiOns and COntraCts
Text and Cases
Chapter 2
ESSENTIAL REQUISITES OF CONTRACTS
General Provisions
Article 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)
When the law uses the word “concur,” it means that all the
three (3) requisites must be present. The absence of one requisite
negates the existence of a contract. The requisites are discussed in
more detail in the next sections. Absence of any one of the requisites
creates an inexistent contract. It produces no effect.
So also, inexistent contracts can be invoked by any person
whenever juridical effects founded thereon are asserted against
him. A transferor can recover the object of such contract by accion
reinvidicatoria and any possessor may refuse to deliver it to the
transferee, who cannot enforce the transfer.1
The rule on pari delicto as between the parties does not apply
in cases of inexistent contracts.2
1
Modina vs. Court of Appeals, G.R. No. 109355, October 29, 1999, 115 SCAD
130, 317 SCRA 696.
2
Ibid.
322
323
SECTION 1. — Consent
Article 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)
Article 1320. An acceptance may be express or implied. (n)
Consent is the concurrence of the wills of the offerer and the
acceptor as to the thing and the cause which constitute a contract.
An offer is a manifestation of a willingness to enter into a bargain so
made as to justify another person in understanding that his assent
to that bargain is invited and will conclude it.1
But even though the offer is made with the intention that its
acceptance will create mutual obligations, it will not accomplish
this purpose unless its terms are sufficiently complete. It must
be so complete that its acceptance will form an agreement
containing all the terms necessary and intended by the parties,
for it is obvious that there can be no agreement until its terms
are settled, and that an offer which is not complete is merely a
step in the negotiations.2
Making an offer means inviting an acceptance which, if given,
will finally create a contract. The offer therefore empowers the person
offered to create a contract.
A negotiation is formally initiated by an offer. An imperfect
promise
(policitacion)
is merely
an offer.
Public
advertisements
John D. Calamari
and Joseph
M. Perillo,
The Law
of Contracts,
Third edition,
1
West Publishing Co., St. Paul., Minn., 1987, page 32, citing Restatement, Second,
Contracts, 39.
2
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
Indianapolis, The Bobbs-Merrill Company, 1913, Page 30.
323
324
ObligatiOns and COntraCts
Text and Cases
arts. 1319-1320
or solicitations and the like are ordinarily construed as mere
invitations to make offers or only as 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).3
If there is no acceptance, there can be no concurrence of will
and therefore no consent to form a contract. In Salonga vs. Farrales4
where, by way of compromise, the defendant merely offered the
property but which offer was not accepted, the Supreme Court ruled
that it is quite obvious that there was no consent and stated:
It is elementary that consent is an essential element of
the existence of a contract, and when it is wanting, the contract
is non-existent. The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by one, of
the offers made by the other. The contract to sell is a bilateral
contract. Where there is merely an offer by one party, without
the acceptance of the other, there is no consent.
It appears in this case that the offeree, the defendantappellee Julita B. Farrales not only did not accept, but rejected
the offer of the plaintiffs-appellants, spouses Salonga, to buy the
land in question. There being no consent, there is, therefore, no
contract to sell to speak of.
Once there is acceptance, it must be absolute. It may be express
or implied.5 In Adelfa Properties, Inc. vs. Court of Appeals,6 the
Supreme Court had the occasion to explain how acceptance can be
made particularly in a contract of sale, to wit:
The rule is that except where a formal acceptance is so
required, although the acceptance must be affirmatively and
clearly made and must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or
an informal manner, and may be shown by acts, conduct, or words
of the accepting party that clearly manifest a present intention or
determination to accept the offer to buy or sell. Thus, acceptance
3
Ang Yu Asuncion vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57
SCAD 163, 238 SCRA 602.
4
G.R. No. L-47088, July 10, 1981, 105 SCRA 359.
5
Limson vs. Court of Appeals, G.R. No. 135929, April 20, 2001, 147 SCAD 887.
6
G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
7
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
arts. 1319-1320
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
325
may be shown by the acts, conduct or words of a party recognizing
the existence of the contract of sale.
Acceptance must be unconditional. It must be identical to the
terms of the offer. It must not vary from the proposal either by way
of omission, addition or alteration.7 If it does, neither party is bound8
as the acceptance is qualified. But an acceptance is not conditional
because the acceptor expresses dissatisfaction with the offer, yet
nevertheless gives his unqualified assent, nor because he adds immaterial words.9 If the acceptance is qualified, it is considered by the law
as a counter-offer and, space between “s” and “in” in this regard,
both the modified acceptance and an unconditional assent after
such modified acceptance are in effect nothing more than counter
propositions that must be assented to by the original offerer
before any binding obligation is fastened on the parties. In case
the original proponent accedes to the modification imposed and
gives notice to that effect, the contract is concluded. It is not
necessary in every instance that an express assent to the modified
acceptance be shown. If the parties proceed with their contract
as if the condition of the acceptance were a part of it, this is as
effectual as an acceptance as if the changes had been formally
assented to.10
In Jardine Davies vs. Court of Appeals11 where the company
accepted the bid or offer of a particular supplier based on the latter’s
proposals and stated in its letter of acceptance that the awarding of
the project to the said supplier was subject to certain basic terms and
conditions such as: 1) payment shall be on a progress billing basis
with a guarantee bond; 2) the project shall be undertaken pursuant
to the attached specifications; 3) all materials that will be used in the
project shall be brand new; 4) the project must commence immediately
and completed within 20 working days; 5) the supplier must submit a
performance bond and a contractor’s all-risk insu-rance; 6) there is a
warranty of one year against defective material and/or workmanship,
the Supreme Court said that the “terms and conditions” stated in the
letter of acceptance were not tantamount to a qualified acceptance,
thus:
While the same letter enumerated certain “basic terms and
conditions,” these conditions were imposed on the performance of
the obligation
rather than
on the perfection
the contract. Thus
Indianapolis,
The Bobbs-Merrill
Company,
1913, Page of46.
8
Id.
Id., Pages 44-45.
10
Id., Pages 50-51.
11
G.R. No. 128066, June 19, 2000, 128 SCAD 20, 333 SCRA 684.
12
G.R. No. 124045, May 21, 1998, 94 SCAD 679, 290 SCRA 532; Romero vs. Court
9
326
ObligatiOns and COntraCts
Text and Cases
arts. 1319-1320
the first “condition” was merely a reiteration of the contract price
and billing scheme based on the Terms and Conditions of Bidding
and the bid or previous offer of respondent FEMSCO. The second
and third “conditions” were nothing more than general statements
that all items and materials including those excluded in the list
but necessary to complete the project shall be deemed included
and should be brand new. The fourth “condition” concerned the
completion of the work to be done, i.e., within twenty (20) days
from the delivery of the generator set, the purchase of which
was part of the contract. The fifth “condition” had to do with
putting up of a perfomance bond and an all risk insurance, both
of which should be given upon commencement of the project.
The sixth “condition” related to the standard warranty of one (1)
year. In fine, the enumerated “basic terms and conditions” were
prescriptions on how the obli-gation was to be performed and
implemented. They were far from being conditions imposed on
the perfection of the contract.
In Babasa vs. Court of Appeals,12 we distinguished between
a condition imposed on the perfection of a contract and a condition
imposed merely on the performance of an obligation. While
failure to comply with the first condition results in the failure
of a contract, failure to comply with the second merely gives the
other party options and/or remedies to protect interests.
xxx
xxx
xxx
But even granting arguendo that the 12 December 1992
letter of petitioner PUREFOODS constituted a “conditional
counter-offer,” respondent FEMCO’s submission of the
performance bond and contractor’s all-risk insurance was an
implied acceptance, if not a clear indication of its acquiescence
to, the “conditional counter-offer,” which expressly stated that
the performance bond and contractor’s all-risk insurance should
be given upon the commencement of the contract. Corollarily,
the acknowledgment thereof by petitioner PUREFOOD, not to
mention its return of FEMSCO’S bidder’s bond, was a concrete
manifestation of its knowledge that respondent FEMSCO indeed
consented to the “conditional counter-offer.” After all, as earlier
adverted to, an acceptance may be express or implied, and this
can be inferred from the contemporaneous and subsequent acts
of the contracting parties.
The law likewise provides that acceptance made by letter or
telegram does not bind the offerer except from the time it came to his
of
Appeals, G.R.
No.requirement
107207, November
23, 1995,
65 SCAD
621, 250the
SCRA
223;
Lim
knowledge.
The
is that
the person
making
offer
must
vs. Court of Appeals, G.R. No. 118347, October 24, 1996, 75 SCAD 574.
13
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
art. 1321
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
327
have actual knowledge of the acceptance. Hence, if A offered to B his
property and B, through telegram, sent his acceptance but, before A
actually received the telegram, he informs B of the revo-cation of his
offer, no contract can be perfected.
Article 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be complied
with. (n)
The offerer can indicate the manner of acceptance and the time
when and the place where it should be made. The offerer will not be
bound by an acceptance made by the acceptor in any other manner
than that specified by the offerer unless the latter acquiesces in the
change.13 In Matias vs. Court of Appeals14 where a subsequent new
owner of a leased property offered to sell to the lessee the property
subject of the lease but which offer was ignored by the lessee who
instead filed a suit to compel the new subsequent owner to sell
the property in an amount and in a manner which the lessee feels
reasonable, the Supreme Court rejected the appeal of the lessee after
he lost in the lower court by stating:
During the early stages of the negotiations, petitioners
have already been in arrears in the payment of rentals, which
delinquency lasted up to the time of the consummation of the sale
of the Hacienda. In spite of such failure, the new owner of the
Hacienda gave them top priority to purchase their respective lots.
This is a clear indication that the partnership complied with the
conditions attached to the sale; otherwise, it could have right then
and there demanded the ejectment of petitioners as delinquent
tenants. Instead of discussing with the new owner the terms and
conditions they wish to impose on the projected sale, petitioners
insist on their claim that the price of the lots are exorbitant; and
that their right to purchase the lot at a price fixed in the complaint
was disregarded. Petitioners’ insistence as to the price of the lot
rests on the false assumption that the fixing of the price of the
lot they wanted to purchase is one of the rights granted to them
by law. To sustain such idea would run counter to the provision
of Article 1321 of the New Civil Code which states that
“The person making the offer may fix the time,
place and manner of acceptance, all of which must be
complied with.”
In a contract of sale, the manner of payment of the purchase
Indianapolis, The Bobbs-Merrill Company, 1913, Page 32.
14
G.R. No. L-48436, January 30, 1986, 141 SCRA 217.
15
San Miguel Properties, Inc. vs. Huang, G.R. No. 137290, July 31, 2000, 130
328
ObligatiOns and COntraCts
Text and Cases
arts. 1322-1323
price is an essential element before a valid and binding contract of
sale can exist.15 The parties must also meet on the terms or manner
of payment of the price, otherwise there is no sale. An agreement on
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.16 Hence, even if the parties have agreed as to the object of the
sale and the purchase price but still has to agree on the manner of
how and when the downpayment and the installments are to be paid,
the contract is not perfected and there is no contract of sale.17
Article 1322. An offer made through an agent is accepted
from the time acceptance is communicated to him. (n)
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.18 The principal must comply
with all the obligations which the agent may have contracted within
the scope of his authority.19 As for any obligation wherein the agent
has exceeded his power, the principal is not bound except when he
ratifies it expressly or tacitly.20 If the offer is made through an agent,
acceptance of the offer can be made to such an agent. However, when
a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing, otherwise the sale shall
be void.21
Article 1323. An offer becomes ineffective upon the death,
civil interdiction, insanity, or insolvency of either party before
acceptance is conveyed. (n)
If either party dies, suffers civil interdiction, or becomes insane
or insolvent before acceptance is conveyed, there can be no contract
not simply because there is no acceptance but, more importantly,
because the offer has become ineffective. When an offer becomes
ineffective, nothing can be accepted. The phrase “before acceptance is
conveyed” means before acceptance has come to the actual knowledge
of the offeror. Hence, a letter of acceptance may be sent by mail but
SCAD 713; Navarro vs. Sugar Producers Cooperative Marketing Association, Inc., 1
SCRA 1161.
16
Toyota Shaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320.
17
Velasco vs. Court of Appeals, 51 SCRA 439; Uraca vs. Court of Appeals, G.R.
No. 115158, September 5, 1997, 86 SCAD 734, 278 SCRA 702.
18
Article 1868 of the 1950 Civil Code.
19
Article 1910 of the 1950 Civil Code.
20
Id.
21
Article 1874 of the 1950 Civil Code.
22
G.R. No. L-114870, May 26, 1995, 61 SCAD 373.
art. 1323
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
329
if, before such mail is received and actually read by the offeror, either
the offeror or the acceptor died, there is still no contract because the
offer has become ineffective.
In Villanueva vs. Court of Appeals22 where a person offered to
a particular bank the purchase of a certain foreclosed property, and
where such offer was accepted by the bank through a board resolution
which however was not relayed to the person making the offer, and
which the latter was able to know after the bank was placed under
receivership by the Central Bank as said bank became insolvent, the
Supreme Court ruled that, in this particular case the offer became
ineffective and therefore there was no contract created. Pertinently,
the Supreme Court said:
There is no doubt that the approval of Ong’s offer constitutes
an acceptance, the effect of which is to perfect the contract of sale
upon notice thereof to Ong. The peculiar circumstances in this
case, however, pose a legal obstacle to his claim of a better right
and deny support to the conclusion of the Court of Appeals.
Ong did not receive any notice of the approval of his offer.
It was only sometime in mid-April 1985 when he returned from
the United States and inquired about the status of his bid that
he came to know of the approval.
It must be recalled that the PVB was placed under
receivership pursuant to the MB Resolution of 3 April 1985 after
a finding that it was insolvent, illiquid, and could not operate
profitably, and its continuance in business would involve probable
loss to its depositors and creditors. x x x
Under Article 1323 of the Civil Code, an offer becomes
ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed. The
reason for this 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 acceptance is
conveyed; hence, the disappearance of either party
or his loss of capacity before perfection prevents the
contractual tie from being formed. x x x
In a nutshell, the insolvency of a bank and the consequent
appointment of a receiver restrict the bank’s capacity to act
especially in relation to its property. Applying Article 1323 of
23
Spouses Buot vs. Court of Appeals, G.R. No. 119679, May 18, 2001; Laforteza
330
ObligatiOns and COntraCts
Text and Cases
art. 1324
the Civil Code, Ong’s offer to purchase the subject lots became
ineffective because the PVB became insolvent before the Bank’s
acceptance of the offer came to his knowledge. Hence, the
purported contract of sale between them did not reach the stage
of perfection. Corollarily, he cannot invoke the resolution of the
bank approving his bid as basis for his alleged right to buy the
disputed properties.
Article 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)
An option is a contract granting a privilege to buy or sell at a
determined price within an agreed time.23 In Ang Yu Asuncion vs.
Court of Appeals,24 the Supreme Court summarized the rules in case
the offerer has allowed the offeree a certain period, otherwise known
as an option period, to accept the offer, to wit:
(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, 132 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
vs. Machuca, G.R. No. 137552, June 16, 2000, 127 SCAD 798.
24
G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602.
25
G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60; See also Adelfa
art. 1324
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
331
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. In these cases, care should
be taken of the real nature of the consideration given, for
if, in fact, it has been intended as part of the consideration
for the main contract with a right of withdrawal on the
part of the optionee, the main contract could be deemed
perfected; a similar instance would be an earnest money
in a contract of sale that can evidence its perfection (Art.
1482, Civil Code).
In Serra vs. Court of Appeals,25 the Supreme Court had the
occasion to briefly discuss what an “option” contract founded on a
separate consideration involves, thus:
Jurisprudence has taught us that an optional contract is a
privilege existing only in 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.
On the other hand, what may be regarded as a consideration separate from the price is discussed in the case of Vda.
de Quirino vs. Palarca wherein the facts are almost on all fours
with the case at bar. The said case also involved a lease contract
with the option to buy where we had the occasion to say that “the
consideration for the lessor’s obligation to sell the leased premises
to the lessee, should he choose to exercise his option to purchase
the same, is the obligation of the lessee to sell to the lessor the
building and/or improvements constructed and/or made by the
former, if he fails to exercise his option to buy said premises.”
In the present case, the consideration is even more onerous
on the part of the lessee since it entails, transferring of the
building and/or improvements on the property to petitioner,
should respondent bank fail to exercise its option within the
Properties, Inc. vs. Court of Appeals, G.R. No. 111238, January 25, 1995, 58 SCAD
462, 240 SCRA 565.
26
San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31,
2000, 130 SCAD 713, 336 SCRA 737.
332
ObligatiOns and COntraCts
Text and Cases
art. 1325
period stipulated.
Consideration in an option contract may be anything of value,
unlike in sale where it must be the price certain in money or its
equivalent.26
An option money in an option contract must be differentiated
from an earnest money. Earnest money is considered part of the price
in a contract of sale and can be a proof of the perfection of the contract
of sale.27 However, it is not the giving of the earnest money per se,
but the proof of the concurrence of all the essential elements of the
contract of sale which establishes the existence of a perfected sale.28
Likewise, if the buyer and the seller agreed that an “earnest deposit”
should be made by the seller merely to guarantee that the buyer will
not back out from the sale, such earnest deposit is not earnest money
that can be considered as proof of the perfection of the contract.29
Upon the expiration of the option period and the person given
such option does not manifest his or her acceptance, the offeror may
offer the intended contract to somebody else. Any contract perfected
with such other person shall be considered to have been done in good
faith.30
Article 1325. Unless it appears otherwise, business advertisement of things for sale are not definite offers, but mere
invitations to make an offer. (n)
Generally, advertisement of things for sale are mere invitations
to make an offer. Thus, if a seller advertises that he intends to sell his
house to any willing purchaser, it is an invitation for the purchaser
to make an offer or to negotiate as to how he intends to buy the
house. The offer of the purchaser should of course include all the
essential requirements to make a valid contract such as the price of
the house. The phrase “unless it appears otherwise” connotes that
the advertisement may constitute an offer which is certain.
Article 1326. Advertisements for bidders are simply
Article 1482 of the Civil Code.
San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31,
2000, 130 SCAD 713, 336 SCRA 737.
29
San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31,
2000, 130 SCAD 713, 336 SCRA 737.
30
Limson vs. Court of Appeals, G.R. No. 135929, April 20, 2001, 147 SCAD 887.
31
G.R. No. 128066, June 19, 2000, 120 SCAD 20, 333 SCRA 684.
32
Executive Order No. 209 as amended which took effect on August 3, 1988.
33
Id., Article 234.
27
28
arts. 1326-1327
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
333
invitations to make proposals, and the advertiser is not bound
to accept the highest or lowest bidder, unless the contrary
appears. (n)
A person who entertains an advertisement to bid does not
automatically become the other party to a contract. He is only allowed
to make his proposals or his offer. If he makes his bid, he thereby
makes an offer which is not binding unless it is accepted. In Jardine
Davies, Inc. vs. Court of Appeals,31 the Supreme Court said that
when a company starts the process of a bidding and disseminates
the document denominated the “Terms Conditions of the Bidding” to
the bidders, the dissemination of the said documents constitutes an
“advertisement” to bid in the project. The bid proposals or quotations
submitted by the prospective suppliers are the offers. The favorable
reply of the company to one of the prospective suppliers is the
acceptance.
Article 1327. The following cannot give consent to a
contract:
(1)
Unemancipated minors;
(2)
Insane or demented persons, and deaf-mutes who do
not know how to write. (1263a)
Under the Family Code of the Philippines,32 emancipation takes
place by the attainment of majority age33 and, unless otherwise
provided, majority commences at the age of eighteen years. 34
Emancipation shall terminate parental authority over the person and
property of the child who shall be qualified and responsible for all
acts of civil life, save the exceptions established by existing laws in
special cases.35 Any contract entered into by an unemancipated person
is annulable or voidable. However, it must be important to point out
that persons who are capable cannot allege the incapacity of those
with whom they contracted36 to annul the contract. For instance, only
the minor can invoke the ground that a contract is annulable because,
at the time it was entered into, he was still a minor. Also, 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
34
Id.
Id., Article 236.
36
Article 1397 of the 1950 Civil Code.
37
Article 1399 of the 1950 Civil Code.
35
334
ObligatiOns and COntraCts
Text and Cases
art. 1327
insofar as he has been benefited by the thing or price received by
him.37 Accordingly, if a person of age bought property from a minor
and the latter received the purchase price, the person of age cannot
file a case to annul the contract on the ground that the other party is
a minor. If the minor, upon coming of age, timely files a case to annul
the contract, he is not obliged to return that part of the purchase price
which he had spent which did not redound to his benefit, such as
losses from gambling, but he is obliged to pay or reimburse the other
party for amounts which he has spent for his benefit like payment of
tuition fees in school.
In Braganza vs. De Villa Abrille38 where two minors signed a
promissory note, without telling the creditor their ages, and where
the debtor sought to enforce the promissory note against them,
the Supreme Court ruled that the minors can set up the defense of
minority to resist the claim, thereby overruling the decision of the
Court of Appeals which based its decision on the case of Mercado vs.
Espiritu39 holding that minors who misrepresent their ages cannot
be absolved from the contract they entered into. Pertinently, the
Supreme Court said in the Braganza case:
x x x From the minors, ‘failure to disclose their minority
in the same promissory note they signed, it does not follow as a
legal proposition, that they will not be permitted thereafter to
assert it. They had no juridical duty to disclose their inability.
In fact, according to Corpus Juris Secundum, 43, p. 206;
“* * *. Some authorities consider that a false representation
as to age inducing a contract is a part of the contract and
accordingly hold that it cannot be the basis of an action in tort.
Other authorities hold that such misrepresentation may be the
basis of such an action, on the theory that such misrepre-sentation
is not a part of, and does not grow out of, the contract, or that
the enforcement of liability for such misrepresentation as a tort
does not constitute an indirect method of enforcing liability on
the contract. In order to hold the infant liable, however, the
fraud must be actual and not constructive. It has been held that
his mere silence when making a contract as to his age does not
constitute a fraud which can be made the basis of an action of
deceit.” (Italics Ours)
G.R. No. L-12471, April 13, 1959, 105 Phil. 456.
G.R. No. 11872, December 1, 1917, 37 Phil. 215.
40
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobb-Merrill Company, Pages 469-470.
41
Id., Page 575.
38
39
art. 1327
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
“The fraud of which an infant may be held liable to one
who contracts with him in the belief that he is of full age must be
actual not constructive, and mere failure of the infant to disclose
his age is not sufficient.” (27 American Jurisprudence, p. 819)
The Mercado case cited in the decision under review is
different because the document signed therein by the minor
specifically stated he was of age; here Exhibit A contained no
such statement. In other words, in the Mercado case, the minor
was guilty of active misrepresentation; whereas in this case, if
the minors were guilty at all, which we doubt, it is of passive
(or constructive) misrepresentation. Indeed there is a growing
sentiment in favor of limiting the scope of the application of
the Mercado ruling, what with the consideration that the very
minority which incapacitated minors from contracting should
likewise exempt them from the results of misrepresentation.
We hold, at this point, that being minors, Rodolfo and
Guillermo Branganza could not be legally bound by their
signatures in Exhibit A.
It is argued, nevertheless, by respondent that inasmuch
as this defense was interposed only in 1951, and inasmuch as
Rodolfo reached the age of majority in 1947, it was too late to
invoke it because more than 4 years had elapsed after he had
become emancipated upon reaching the age of majority. The
provisions of Article 1301 of the Civil Code are quoted to the
effect that “an action to annul a contract by reason of minority
must be filed within 4 years” after the minor reached majority
age. The parties do not specify the exact date of Rodolfo’s birth.
It is undenied, however, that in October 1944, he was 18 years
old. On the basis of such datum, it should be held that in October
1947, he was 21 years old, and in October 1951, he was 25 years
old. So that when this defense was interposed in June 1951, four
years had not yet completely elapsed from October 1947.
Furthermore, there is reason to doubt the pertinency of
the 4-year period fixed by Article 1301 of the Civil Code where
minority is set up only as a defense to an action, without the
minors asking for any positive relief from the contract. For one
thing, they have not filed in this case an action for annulment.
They interposed an excuse from liability.
Upon the other hand, these minors may not be entirely
absolved from monetary responsibility. In accordance with the
provisons of the Civil Code, even if their written contract is
unenforceable because of non-age, they shall make restitution
to the extent that they may have profited by the money they
received. (Art. 1340) There is testimony that the funds delivered
335
336
ObligatiOns and COntraCts
Text and Cases
art. 1327
to them by Villa Abrille were used for their support during the
Japanese occupation. Such being the case, it is but fair to hold
that they had profited to the extent of the value of such money,
which value has been authoritatively established in the so-called
Ballantine Schedule: in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine money. Wherefore, as the
shares of these minors was 2/3 of P70,000 or P46,666.66, they
should now return P1,166.67. Their promise to pay P10,000 in
Philippine currency (Exhibit A), can not be enforced, as already
stated, since they were minors incapable of binding themselves.
Their liability, to repeat, is presently declared without regard of
said Exhibit A, but solely in pursuance of Article 1304 of the Civil
Code.
Contracts entered into by insane or demented persons are
likewise annullable. Such contracts are valid up to the time they are
rendered ineffective by the courts. They are not void ab initio. The
law therefore clearly presumes that the contract has been entered into
by competent persons. To annul a contract, it is always important to
prove the insanity of the other party at the time of the perfection of
the contract.
Persons suffering from a mental incapacity to a greater or
less degree may be divided into three classes. They are: idiots,
lunatics, and those who are not legally totally incapacitated, but
are mentally weak. An idiot is one who has been insane from birth.
A lunatic is one who was at one time sane, but who from some
cause or other has lost use of his reason. The third class includes
all forms of mental weakness which do not render the person
affected totally incapable of transacting business or managing
his affairs.
The contract of one who is insane as to be unable to
understand its nature and effect is voidable at his option, except
for necessaries. This is a privilege personal to the insane party
and the agreement cannot be avoided by the other party or a third
person. However, it is generally true that when the insane person
is not under a guardian or conservator and the other contracting
party has no reasonable cause to believe him otherwise insane,
the agreement is valid if equitable and beneficial to such insane
person, and it has been so far executed that the other party cannot
be placed in status quo. A person of unsound mind is liable on
his contract for necessities. Nor does mere mental weakness
from whatever cause, which does not totally destroy the ability
to comprehend the nature and effect of the transaction, furnish
ground for the avoidance of a contract entered into by such
persons in the absence of evidence showing fraud, duress or undue
art. 1328
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
337
influence.40
Moreover, the insanity alleged must have a direct bearing
on the agreement. A monomania or delusion unconnected with
the subject-matter of the contract or which does not prompt the
agreement does not destroy its binding force. On the other hand,
if the insane delusion is so connected with the subject-matter of
the agreement as to render one of the parties thereto incapable
of understanding the nature or effect of the contract, it is thereby
rendered voidable at the option of the party so afflicted.41
Contracts entered into by deaf-mutes who do not know how
to write is also annullable. The law is clear that being a deaf-mute
alone is not enough to make the contract voidable. This is so because
the success accomplished by modern methods in instructing those
who are deaf-mute to understand what they are doing has enabled
these persons to act reasonably with discernment in entering into
transaction. For the contract to be annullable, the deaf-mute must
likewise not know how to write. The provision is clearly designed to
prevent fraud for the protection of handicapped people.
Article 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)
Lucid interval is that period of time when an insane person acts
with reasonable understanding, comprehension and discernment with
respect to what he is doing. Hence,
lunacy may be intermittent in character; if so, a valid contract
may be entered into during a lucid interval. However, where one is
shown to have been mentally deranged at a recent period anterior
to the execution of the contract, that condition is presumed to
continue and the burden is on the other party to show that the
agreement was entered into during a lucid interval or after
recovery, provided the derangement is not caused by a temporary
or transient ailment, such as fever, fits or the like.42
Contracts entered into in a state of drunkenness may likewise be annulled. However, the intoxication must be of such a character as to perpetuate an undue advantage over the drunken person.
Also,
Id., Pages 575-576.
Id., Pages 650-651.
44
Id., Pages 651-652.
42
43
338
ObligatiOns and COntraCts
Text and Cases
art. 1328
it is now well settled that an agreement other than for
necessities, made by a person when so drunk as to be incapable of
understanding its nature and effect, is voidable at the intoxicated
person’s option. The contracts of an intoxicated person may be
voidable under any one of the following:
first, when it
appears that the drunkenness was brought about by the opposite
party; second, that a fraudulent advantage was taken of it; and
third, that the drunkenness was so complete as to deprive the
party of his reason of an agreeing mind.43
The mere fact that one of the parties is drunk at the time
the agreement is entered into is no ground for setting it aside
unless one or more of the above-mentioned influences was or
were operative at the time the minds of the parties met on the
terms of the contract. Drunkenness which only clouds or darkens
the reason does not render a contract entered into while in such
a condition voidable unless procured under such circumstances
as to justify the inference that it was obtained by fraud or
circumvention. Intoxication which merely prevents the party from
giving proper attention to what he is doing or from fully realizing
the nature of his acts is insufficient to invalidate a contract. Mere
intoxication unmixed with any inequitable conduct on the part
of the other party to the agreement is insufficient to invalidate
a contract entered into while in such condition unless the party
so situated is so drunk as to be incapable of understanding the
nature and effect of the agreement, or its consequences, that is
to say, he must be rendered incapable of intelligent assent and
deprived of the power to know what he is doing.44
It is well settled that if one party to a transaction procures
the intoxication of the other and then takes advantage of his
condition to obtain the contract or conveyance it will be voidable
at the intoxicated person’s option, notwithstanding the degree of
drunkenness may not have been excessive.45
A contract entered into during a hypnotic spell is likewise
voidable. Hypnosis is an artificially induced state, resembling sleep,
but characterized by exaggerated suggestibility and continued
responsiveness to the voice of the hypnotist.46
Article 1329. The incapacity declared in Article 1327 is
subject to the modifications determined by law, and is understood to be without prejudice to special disqualification
established in the laws. (1264)
Id., Pages 654-655.
The New Lexicon: Webster’s Dictionary, 1991 Edition, Lexicon Publishing,
Inc., New York, Page 477.
47
17 Am Jur 2d 504, citing Klussman vs. Day, 107 Or 109, 213, P 787, 214 P
45
46
arts. 1329-1331
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
339
Article 1330. A contract where consent is given through
mistake, violence, intimidation, undue influence, or fraud is
voidable. (1265a)
To create a contract, the meeting of the mind must be free,
voluntary, willful and with a reasonable understanding of the
various obligations the parties intend to be bound. Mistake, violence,
intimidation, undue influence and fraud as grounds to annul a
contract have one thing in common: there is no real assent to the
contract. Intimidation, violence and undue influence can be classified
as acts of duress where, as a result of which, the coerced party is
compelled to execute the contract against his will.
Freedom of will is essential to the validity of an agreement.
Where duress is exerted on one of the parties of such a kind as to
overcome his will and compel a formal assent to an undertaking
when he does not really agree to it, and so as to make that appear
to be his act which is not his, but another’s, imposed on him
through fear which deprives him of self-control, the agreement
is not binding unless the other deals with him in good faith, in
ignorance of the improper influence and in the belief that the
party is acting voluntarily.47
A contract obtained through duress or mistake is voidable or
annullable under Article 1390.
Article 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.
Mistakes 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)
For mistake to make a contract voidable or annullable, the
law states that the consent must either refer to the substance of the
thing which is the object of the contract, or to those conditions which
principally induced the parties to enter into a contract. The said
conditions
must not be mere incidents to the consideration.48
348; Gorringe vs. Reed, 116 Kans 374, 226 P 714.
De Leon vs. Court of Appeals, G.R. No. 80965, June 6, 1990, 186 SCRA 345.
Sherwood vs. Walker, 66 Mich. 568, 33 N.W. 919, 11 Am. St. 531 cited in
Commentaries on the Law of Contracts by William F. Elliott, Volume 1, 1913 edition,
48
49
340
ObligatiOns and COntraCts
Text and Cases
art. 1331
Thus, where the contract for the sale of a cow was entered
into, both parties believing her to be barren, which supposition
proved to be untrue, it was held that mistake was not as to the
mere quality of the animal sold, but went to the very nature of the
thing and that the vendor had a right to rescind the agreement.49
It is also clear in the law of contracts that
a unilateral mistake in the making of an agreement, of which
the other party is entirely ignorant and to which he in no way
contributes, will not affect the agreement or afford ground for its
avoidance or rescission, unless it is such a mistake as goes to the
substance of the agreement itself.50
In Spouses Heinzrich Theis and Betty Theis vs. Court of Appeals51
where the seller, via a deed of sale, sold to the buyer a pro-perty which
was however not the one appearing in the deed of sale, and where the
mistake was not the fault of the parties but was due to mistake in
the survey made on the property, and where the seller, upon learning
of this, immediately offered the buyer another property instead or a
refund of money double the amount paid for the property, but which
offer was unreasonably refused by the buyers prompting the seller
to file for annulment of the contract based on mistake, the Supreme
Court ruled that the contract can be invalidated on the basis of Article
1331 as it involved mistake as to the substance of the thing and
the seller was in good faith. The Supreme Court, citing Tolentino,52
likewise stated that:
mistake as contemplated under Article 1331 involved either
ignorance which is the absence of knowledge with respect
to a thing and mistake properly speaking, which is a wrong
conception about said thing, or a belief in the existence of some
circumstance, fact, or event, which in reality does not exist. The
mistake committed by the private respondent in selling parcel
No. 4 to the petitioner falls within the second type. Verily, such
mistake invalidated its consent and as such, annulment of the
deed of sale is proper.
Mistake can also refer to those conditions which have principally
moved one or both parties to enter into the contract. Thus, if A lent
Indianapolis, the Bobbs-Merill Company, Page 179.
50
17 Am Jur 2d 493.
51
G.R. No. L-126013, February 12, 1997, 79 SCAD 434.
52
Tolentino, Civil Code of the Philippines, p. 476, Vol. 4 (1992 ed.).
53
William F. Elliott, Commentaries on the Law of Contracts by Volume 1, 1913
edition, Indianapolis, The Bobbs-Merill Company, Page 172.
art. 1331
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
341
money to X only because he was informed that it was the special
request of Z to A, who owed Z a favor which A wanted to reciprocate,
and only because there was an apparent assurance from Z that he
will be a solidary debtor; and X knew that, had it not been for the
request of A and his engagement as a solidary debtor, the loan would
not have been consummated; and it eventually turned out that there
was no request and no assurance coming from Z who, in reality merely
vouched for the credit worthiness of X, the said loan agreement can
be annulled by A on the ground that there was an invalid consent as
the condition which principally moved both parties to enter into the
contract was a mistake.
The law also provides that mistakes 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.
When the identity of one of the parties is a material element
of the contract, a mistake in respect thereto invalidates the
agreement. Mistakes as to the identity of the person with whom
the contract is made arise where A contracts with X believing him
to be M; that is, where the offerer has in contemplation a definite
person with whom he intends to contract. One has the right to
select the person with whom he wishes to contract, especially
where the nature of the transaction is such that it is important
that performance be had by a particular individual, as agreements
with a painter, writer, or which call for the performance of any
act requiring skill such as the one sought to be contracted with
is supposed to possess. In such cases one may contract with
whomever he may choose and the sufficiency of his reasons for
so doing is immaterial. Thus, where one sends an order for goods
or other proposal to another, a third person cannot without the
knowledge of the one sending the order or making the proposal
become a party to the agreement by accepting such proposal.53
A simple mistake of account shall give rise to its correction. A
simple accounting error does not go into the essentials of a contract.
Article 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 the terms thereof have been fully explained to
the former. (n)
54
Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD
342
ObligatiOns and COntraCts
Text and Cases
art. 1332
In entering into a contract, the parties are presumed to have
understood the terms of the contract they voluntarily signed especially
when there is proof that they are educated.54
Courts are not authorized to extricate parties from
the necessary consequences of their acts, and the fact that
the contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their
obligations. They cannot now disavow the relationship formed
from such agreement due to their supposed misundertanding of
its terms.55
However, the Article 1332 provides that, 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 the terms thereof have been fully explained
to the former.
Before the benefits of Article 1332 can be availed of, the person
invoking the same must first prove that he has the conditions
described in Article 1332. Thus, if he is unable to read or he does not
understand the language of the contract, he must first prove such fact
or circumstance. Only after sufficiently adducing evidence proving the
fact that he cannot read or that he does not understand the language
of the contract will the burden of proof shift to the one enforcing the
contract to show that the terms thereof have been explained to the
person who is unable to read or who does not understand the language
of the contract.56
In Lustan vs. Court of Appeals,57 where the dispute was whether
or not the Deed of Definite Sale was in reality an equitable mortgage
wherein the subject property was merely intended to secure an
existing debt by way of mortgage, the Supreme Court ruled that the
document was an equitable mortgage based on the clear evidence
supporting such contract and based on the finding that the illiterate
owner of the same was made to understand that the deed of sale
signed by her merely evidenced an indebtedness to the creditor, to
wit:
Petitioner had no knowledge that the contract she signed
94, 320 SCRA 428.
55
Ibid.
56
Sales vs. Court of Appeals, G.R. No. 40145, July 29, 1992.
57
G.R. No. 111924, January 27, 1997, 78 SCAD 351.
58
G.R. No. 55201, February 3, 1994, 48 SCAD 28, 229 SCRA 616.
art. 1332
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
343
is a deed of sale. The contents of the same were not read nor
explained to her so that she may intelligently formulate in her
mind the consequences of her conduct and the nature of the
rights she was ceding in favor of Parangan. Petitioner is illiterate
and her condition constrained her to merely rely on Parangan’s
assurance that the contract only evidenced her indebtedness to
the latter. When 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 prove that the terms thereof are fully
explained to the former in a language understood by him. To our
mind, this burden has not been satisfactorily discharged.
In Lim vs. Court of Appeals58 where a Deed of Confirmation
of Extrajudicial Partition written in English allegedly executed by
an elderly woman, who did not even know English, was upheld by
the lower court because fraud was not proven, the Supreme Court
reversed the decision of the lower court and upheld the ruling of the
Court of Appeals by explaining thus:
We now determine the next crucial issue of fact, i.e.,
whether or not the above mentioned Deed of Confirmation of
Extra Judicial Settlement of the Estate of Tan Quico and Josefa
Oraa (Exhibit “E” or “1”) is valid. The respondent court, reversing
the trial court, held that the evidence failed to establish that it
was signed by the late Cresencia as a result of fraud, mistake or
undue influence. We hold this ruling erroneous. In calibrating the
credibility of the witnesses on this issue, we take our mandate
from Article 1332 of the Civil Code which provides:
x
x x. This substantial law came into being due to the finding of
the Code Commission that there is still a fairly large number of
illiterates in this country, and documents are usually drawn up
in English or Spanish. It is also in accord with our state policy
of promoting social justice. It also supplements Article 24 of the
Civil Code which calls on court to be vigilant in the protection of
the rights of those who are disadvantaged in life. In the petition at
bench, the questioned Deed is written in English, a language not
understood by the late Crescencia, an illiterate. It was prepared
by Lorenzo, a lawyer and CPA. For reasons difficult to divine,
respondent Lorenzo did not cause the notarization of the Deed.
G.R. No. 123490, August 9, 2000, 131 SCAD 463, 337 SCRA 464.
17 Am Jur 2d 492.
61
25 N.W. 42; 64 Wis. 265.
62
17 Am Jur 2d 505.
59
60
344
ObligatiOns and COntraCts
Text and Cases
art. 1332
Petitioners alleged that the Deed was signed by the late Cresencia
due to mistake, fraud or undue influence. They postulated that
respondent Lorenzo took advantage of the late Cresencia’s trust
and confidence. Testifying on the trust of the late Cresencia on
respondent Lorenzo, petitioner Jose Lim declared:
xxx
“Q. Now, will you tell the Court how the relation between your
mother and your uncle Lorenzo Tan before September 1967?
A.
My mother was so close to this brother, Lorenzo Tan. My
mother always asked him advice because he is considered by my
mother as God to her. x x x.”
Considering the circumstance, the burden was on private
respondents to prove that the content of the Deed was explained
to the illiterate Crescencia before she signed it. In this regard,
the evidence adduced by the respondents failed to discharge this
burden.
In Arriola vs. Mahilum,59 a sister of an illiterate was able to
have a document signed by the latter on the misrepresentation that
properties other than his property awarded by a cadastral court to
him will be partitioned among the heirs of their parent. It turned out
however that the document included such property. The property was
therefore fraudulently distributed to the other heirs. The illiterate
filed suit to recover his property alleging fraud and misrepresentation.
The Supreme Court sustained the cause of the illiterate and said:
We agree with the Court of Appeals that the partition of
the same lot was fraudulent. Rosario knew that there was no
other way to obtain the partition of the subject property than
having her brother Simeon sign a deed of partition, making the
latter believe that the deed pertained to the three other lots.
The scheme was simple enough considering that Simeon was
illiterate. The law however requires that in case one of the parties
to a contract is unable to read and fraud is alleged, the person
enforcing the contract must show that the terms thereof have
been fully explained to the former.
We are not persuaded that Rosario clearly and fully
explained the contents of the deed of partition to her brother
Simeon. Petitioners’ allegations are negated by the fact that
Simeon not only strongly opposed the survey of the land in
1970 but also filed a complaint for annulment of reconstituted
title in 1973. Consent, having been obtained by fraud, the deed
63
G.R. No. L-12035, March 29, 1961, 1 SCRA 876.
art. 1333
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
345
entered into could be annulled. Hence, if the deed was null, the
reconstituted title and transfer titles arising therefrom were also
void.
Article 1333. There is no mistake if the party alleging it
knew the doubt, contingency or risk affecting the object of the
contract. (n)
If the parties indicate an intention not to be bound unless
certain facts exist, the performance of such facts prevents any
contractual duty, such being intended to operate, and operating,
as a condition precedent to the obligation. But where the parties to
an agreement indicate an intention to be bound irrespective of the
existence of certain facts and take the risk of their non-existence,
the validity of their agreement is not at all dependent upon the
existence of such facts. Where the parties are conscious that the
existence of particular facts is doubtful and make their agreement
on this assumption, the non-existence of such facts does not affect
the validity of the agreement, the risk of their existence being
taken by the parties. Where all the parties voluntarily enter
into an agreement in the fact of their conscious, present want
of knowledge of facts, which they all then manifestly concluded
would not influence their action or induce them to refrain from
entering into the agreement, whatever the facts might be, there
is no such a mistake as affects the validity of the agreement. The
view is taken that if the parties are conscious of their ignorance
as to the existence of some facts, the non-existence of such facts
is of no consequence; this is said to be predicated upon common
experience that if people contract under such circumstances, they
usually intend to abide by the resolution either way of the known
uncertainty, and have insisted on, and received, consideration for
taking that chance. There seems, however, to be some authority
to the effect that where, although the parties must know that the
existence of a fact is at least somewhat doubtful, they nevertheless
make an agreement on the assumption that it exists, its nonexistence affects the validity of the agreement.60
An illustrative case is Wood vs. Boynton61 where a seller not
knowing the nature of the stone he found sold it to a purchaser for only
one dollar after they discussed their ignorance as to the quality and
nature of the stone which they surmised to be probably a Topaz, but
which eventually turned out to be a Diamond worth about US $1,000,
the court ruled that the contract cannot be annulled or rescinded as
there was legally no mistake as to the nature of the stone because
when they transacted the purchase, there was conscious uncertainty
and that the parties took the risk that it could have been some other
346
ObligatiOns and COntraCts
Text and Cases
arts. 1334-1335
valuable object capable of being sold at a higher price.
Article 1334. Mutual error as to the legal effect of an
agreement when the real purpose of the parties is frustrated,
may vitiate consent. (n)
A unilateral mistake of law as to the legal effect of an agreement
is generally not a ground to annul a contract. This is so because, in
such a situation, the document embodying the agreement is drafted
the way the parties have intended it to be such that only its legal
effect is different from what the parties have assumed. However, a
mistake of law may vitiate consent if the following requisites are
present: first, the mistake as to the legal effect of the agreement
must be mutual and, second, such mutual mistake frustrates the real
purpose of the parties. Hence, if A leases to B a property where the
latter will construct a four-story building but it turned out that such
building cannot be erected in the said city because of an ordinance
prohibiting the same, the contract can be annulled.
Article 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 the 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)
There is total absence of free will in case a person is compelled
to enter into a contract through violence. The violence must however
be serious and irresistible. Thus, if A coerces B into a contract by
continually beating him until he signs the contract, A, in effect,
imposes his will on B and therefore, no valid consent is obtained from
B. The contract is clearly annullable.
As to intimidation, the law states that there must be a reasonable
64
65
G.R. No. L-16590, January 30, 1965, 13 SCRA 27.
William F. Elliot, Commentaries on the Law of Contracts, Volume 1, 1913
art. 1335
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
347
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 the
intimidation, the age, sex and condition of the person shall be borne
in mind. It is necessary that the threats and circum-stances be of a
character as to excite the reasonable apprehensions of a person of
ordinary courage, and that the agreement be made under the influence
of such threats or menace; the threat must be tangible and direct.62
Thus in Vda. De Lacson vs. Granada63 where it was contended that
a contract entered into during the Japanese occupation should be
nullified because one of the parties was constrained to enter the
contract and to accept Japanese currency for fear that, if he would not
do so, he might endanger his life and the life of his family, the Supreme
Court rejected the notion that there was legally an intimidation
enough to annul the contract because
the duress or intimidation must be more than the “general feeling
of fear” on the part of the occupied over the show of might by the
occupant. In other words, aside from such “general” or “collective
apprehension,” there must be specific acts or instances of such
nature and magnitude as to have, of themselves, inflicted fear or
terror upon the subject thereof that his execution of the questioned
deed or act can not be considered voluntary. No such specific act of
duress was cited — and none could be found — in the case at bar.
In the case of Laperal vs. Rogers64 where, during the Japanese
occupation, a person was directly told by the Japanese military
authorities that he should sell his house and warned him that his
refusal to sell was bad because it will be considered as a sign of
hostility to the Japanese, and where, fearing for his life and that of his
family, he sold the house, the Supreme Court ruled that the contract
can be annulled as the consent was coerced by direct intimidation and
does not fall within the purview of “collective” or “general” duress.
The law likewise provides that a threat to enforce one’s claim
through competent authority, if the claim is just or legal, does not
vitiate consent. In this regard, it is well-settled that
ordinarily the institution or threatened institution of a civil suit,
or ordinary legal proceedings to enforce a legal demand does not
constitute duress, even though it may be made in a period of
business depression. Thus, an agreement or settlement in-duced
edition, Indianapolis, the Bobbs-Merill Company, Pages 257-259.
66
G.R. No. 80965, June 6, 1990, 186 SCRA 345.
348
ObligatiOns and COntraCts
Text and Cases
art. 1335
by a threat to commence legal proceedings for the removal of a
dam, or for the collection of a debt contracted during infancy, to
foreclose a chattel, or mortgage, to sue out a writ of attachment
or levy executions, or a threat by an officer to arrest an execution
debtor and take him to jail unless he secures the debt, the officer
having in his possession at the time legal process requiring him to
take the debtor into custody, has in each of the foregoing instances
been held not to have been procured through duress. The mere
threat to bring a good faith action, maintainable at law, does not
amount to duress. If the party threatened would rather pay than
resort to litigation he is remediless. However, if a civil proceeding
actually begun or threatened is wrongful and oppressive in its
nature and brought or threatened with the intention of coercing
the adverse party and does in fact coerce such party into the
payment of money or the formation of a contract, such payment or
contract is made under duress and may be avoided. Thus a threat
to institute receivership proceedings against a certain company
at a time when it would ruin the company’s business and affect
the reputation of the defendant, constitutes such duress as will
avoid the defendant’s contract to pay a specified sum of money in
order to save the business of the company and his own reputation.
Likewise, it has been held that a bond given, or money paid from
being falsely attached to release property seized in attachment
proceedings oppressively instituted or conducted may be cancelled
or recovered. It has also been held that when an invalid and
unfounded claim for a lien upon real property is filed and the
necessities of the defendant’s business require that this lien be
immediately discharged, payment under such circumstances was
made under duress and that it might be recovered. A threatened
civil action may also amount to duress where the parties are
not on an equal footing. Thus, threats made against a person
of inferior intellect, or an aged weakened in body and mind to
the effect that certain civil proceedings will be instituted, have
been held such duress as will avoid a contract induced thereby.
Threatening litigation while the defendant is ill, or to continue
litigation when the circumstances are oppressive has been held
to amount to duress.65
In De Leon vs. Court of Appeals66 where the mother claims that
she was intimidated into entering a letter agreement by the estranged
wife of her son because the said wife threatened to bring her son to
court for support, to scandalize their family by filing baseless suits
and, by agreeing to the agreement, the wife would pardon the said
mother’s son for possible crimes of adultery and/or concubinage subject
to the transfer of certain properties, the Supreme Court said that such
67
Parkers Admr. v. Parker, N.J. Eg. 224, 126 Atl. 537 cited in Commentaries on
art. 1336
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
349
so-called threat did not fulfill the legal requirements to constitute
intimidation, to wit:
In order that the 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 must 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 contract as 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.
Article 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)
The violence or intimidation may emanate not only from any
of the contracting parties but also from third persons not a party to
the contract. Indeed, the contracting party who is not the subject of
the violence or the intimidation may not even know that the other
party has been coerced. Thus, if A is coerced to enter into a contract
with X because G threatens to kill all the children of A if he does not
do so, such contract may be annulled whether or not X knew of the
intimidation.
Article 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, 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. (n)
The law provides that 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. Annulling
a contract based on undue influence “is based upon principles of
highest morality, it reaches every case and grants relief where
the Law of Contracts by William F. Elliott, Volume 1, 1913 edition, Page 241.
68
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobbs-Merill Company, Page 241.
69
G.R. No. L-30351, September 11, 1974, 59 SCRA 15.
350
ObligatiOns and COntraCts
Text and Cases
art. 1337
influence is acquired and abused, or where confidence is reposed and
betrayed.”67 Hence, 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. However, not all influence is prohibited by law.
The influence which the law not only refuses to recognize,
but repudiates, is undue influence, denominated “undue”
because it is unrighteous, illegal and designed to perpetrate a
wrong. It must amount to fraud or coercion. The grantor must
be overreached and deceived by some false representation,
stratagem or by coercion, physical or moral. It is generally held
that solicitations and entreaties, fair argument and persuasion,
or appeals to the emotions or affections will not amount to undue
influence unless they overcome the will of the person and take
away his ability to act as a free agent.68
In Bañez vs. Court of Appeals69 where the respondent contended
that the letter of a senator unduly influenced the People’s Homesite
and Housing Corporation (PHHC) to approve the transfer of rights
of a certain property not to him but to another person, the Supreme
Court held that there was no undue influence enough to annul the
contract, to wit:
assuming that the letter was written by Senator Fernandez, it
cannot be implied from the facts of the case that the transfer of
rights from Basilio Laquihon to petitioners herein was approved
solely on the strength of such letter, for the approval of the
transfer was recommended as “extremely meritorious” by the
Head Executive Assistant (Exh. “2”) and by the Homesite Sales
Supervisor (Exh. F). Neither can it be said that the approval of
the transfer by the Board of Directors was vitiated by undue
influence or that it was illegal. That letter, even if it was written
really by Senator Fernandez, could not destroy the free agency
of the PHHC Board of Directors, and it could not have interfered
with the exercise of the Board’s independent discretion. This
Court has already said that solicitation, importunity, argument
and persuasion are not undue influence, and a contract is not
to be set aside merely because one party used these means to
the consent of the others. Influence obtained by persuasion or
argument or by appeals to the affections is not prohibited either
in law or morals and is not obnoxious even in courts of equity.
Such may be termed “due influence.” (Martinez vs. Hongkong and
70
G.R. No. 130998, August 10, 2001.
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Page 135.
72
G.R. No. 37159, November 29, 1977, 80 SCRA 411.
71
art. 1338
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
351
Shanghai Bank, 15 Phil. 252, 270).
In Marubeni Corporation vs. Lirag,70 where a consultancy
agreement was obtained from a government agency because of the
use of influence of executive officials, the Supreme Court declared the
contract not only voidable but null and void, thus:
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.
Article 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)
Generally, fraud, either at law or in equity, is a false representation of a material fact made by word or conduct with knowledge
of its falsehood or in reckless disregard of its truth, in order to induce
and actually inducing another to act thereon to his injury.71 There
must always be damage or injury in cases of fraud. For example, if
A, an expert jeweler and in order to be able to sell his glass figurine,
told X that such figurine is made of Diamond from South Africa and,
on such false representation, X bought the figurine, the contract of
sale can be annulled by X.
In Rivero vs. Court of Appeals72 where a nephew of an old
illiterate sickly woman took advantage of her predicament by making
her believe that the “Kasulatan Sa Ganap na Bilihan” was a contract
of mortgage, and where, knowing that the old woman merely wanted
to borrow money secured by the mortgage of the property, again
took advantage of the desperate condition of the illiterate woman
by making her sign the Kasulatan where it appeared thereon that
he was the buyer of the property, the Supreme Court ruled that the
contract was annullable because the consent of the old woman was
obtained thru fraudulent misrepresentation of the nephew that the
contract she was signing was one of mortgage.
73
The Principles of the American Law of Contracts at Law and in Equity by John
D. Lawson, Ll.D., 1905, 2nd Edition, Pages 291-292.
74
G.R. No. L-32116, April 21, 1981, 104 SCRA 151.
352
ObligatiOns and COntraCts
Text and Cases
art. 1339
Article 1339. Failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by confidential
relations, constitutes fraud. (n)
Each party is bound to be as diligent and circumspect as possible
in entering into a contract and therefore each party is not dutybound to make known to each other any fact which is both within
their knowledge or within their opportunity to know. Also, the mere
fact that one of the parties has superior knowledge of the value of
the property subject of the transaction than the other party does not
per se constitute fraud. There is only fraud when, under the special
and peculiar circumstances of each case, a legal or equitable duty is
imposed upon the dominant party to reveal certain facts material to
the transaction or when there is a confidential relationship between
the parties. Hence, an animal breeder has a duty to disclose to an
ordinary buyer that the particular cow the buyer wants to buy is
suffering from a disease not detectable to the naked eye. Also, a lawyer
or an agent, because of his confidential and trust relation-ship with
his principal or client, is duty bound to reveal facts impor-tant to the
transaction; otherwise, non-disclosure will constitute fraud.
Article 1340. The usual exaggerations in trade, when the
other party had an opportunity to know the facts, are not in
themselves fraudulent. (n)
The law recognizes the practice in trade that there are usual
exaggerations employed by the parties to consummate a particular
transaction. If a party is induced by such usual exaggerations, there
may be fraud amounting to active misrepresentation. If it is within
the means of the other party to investigate the truthfulness of such
exaggeration and he does not do so, there will be no fraud despite the
exaggerations.
Article 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)
Opinions are generally not regarded as representation of facts.
Hence, if the opinion turns out to be wrong, it is not considered legally
Elliott, supra, Page 135.
Id.
77
Id.
75
76
arts. 1340-1341
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
353
deceitful insidiously inducing a party to enter into a contract. There
are times when, without really having any special knowledge as to
the object of the contract, a person expresses an opinion about the
same. At the same time, the other party to whom the opinion was
relayed may equally have his own thoughts and observation that
would affect his judgment. In such cases, the expression of an opinion
will not vitiate consent.
An illustration of the difference between opinion and
representation is found in the difference between the vendor of
property saying that it is worth so much, and his saying that he
gave so much for it. The first is an opinion which the buyer may
adopt if he will, the second is an assertion of fact which, if false
to the knowledge of the seller, is fraudulent. Thus to say that the
subject matter of the sale was “good oil land” or that a patent
was a valuable or useful improvement, or that a certain land was
suitable for building purposes, is not fraudulent; while to say that
business is profitable, or that a building is “fire proof” or that a
furnace will heat a house, or that a rival seller will sell for less,
is.73
Under Article 1341, if the opinion is given by one who is
thoroughly knowledgeable or is an expert in the field such that he
knows for a fact that his opinion will turn out to be false and still
induces the other party to enter into the contract on the basis of such
false opinion, fraud can be invoked to annul the contract. In such a
case, the opinion will be considered as a fact.
Article 1342. Misrepresentation by a third person does
not vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (n)
Misrepresentation by a third person vitiates consent only if it
created substantial mistake and the same is mutual. In Rural Bank
of Caloocan vs. Court of Appeals74 where a person induced an elderly
woman to co-sign a promissory note as debtor and to mortgage her
property, without said woman knowing the nature of the contract,
and where the same person successfully misrepresented to the bank
the qualification of the elderly woman to induce the bank to grant
the loan, the Supreme Court said that the loan agreement signed by
the elderly woman can be annulled on the ground of mistake in the
giving of consent by the parties. Pertinently, the Supreme Court said:
“Thus, as a result of the fraud upon Castro and the
misrepresentation to the bank inflicted by the Valencias, both
Castro and the bank committed mistake in giving their consents
354
ObligatiOns and COntraCts
Text and Cases
art. 1342
to the contracts. In other words, substantial mistake vitiated their
consents given. For if Castro had been aware of what she signed
and the bank of the true qualifications of the loan applicant, it
is evident that they would not have given their consents to the
contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Article 1342. Misrepresentation by a third
person does not vitiate consent, unless such
misrepresentation has created substantial mistake
and the same is mutual.
we cannot declare the promissory note (Exhibit 2) valid between
the bank and Castro and the mortgage contract (Exhibit 6)
binding on Castro beyond the amount of P3,000.00 for while
the contracts may not be invalidated insofar as they affect the
bank and Castro on the ground of fraud because the bank was
not a participant thereto, such may however be invalidated on
the ground of substantial mistake mutually committed by them
as a consequence of the fraud and misrepresentation inflicted
by the Valencias. Thus, in the case of Hill vs. Velosos (31 Phil.
160), this Court declared that a contract may be annulled on the
ground of vitiated consent if deceit by a third person, even without
connivance or complicity with one of the contracting parties,
resulted in mutual error on the part of the parties to the contract.
Article 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error. (n)
Misrepresentation is, in the main, inclusive of the term fraud.
Practically every fraud is a misrepresentation, but every misrepresentation is not fraudulent.75 Thus a misrepresentation as to the
subject-matter of or parties to a contract may be innocently made,
and, if so, it does not amount to fraud, but is a misrepresentation.76
Misrepresentations may be made without the knowledge of its falsity77
and therefore completely done in good faith. In such a case it may
constitute merely an error.
Article 1344. In order that fraud may make a contract
voidable, it should be serious and should not have been
employed by both contracting parties.
G.R. No. 89561, September 13, 1990, 189 SCRA 529.
G.R. No. 48194, March 15, 1990, 183 SCRA 1990.
80
See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115
SCAD 522, 318 SCRA 373.
78
79
arts. 1343-1344
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
355
Incidental fraud only obliges the person employing it to
pay damages. (1270)
The fraudulent act must be serious. There must be an intention
to injure and that damage or injury in fact resulted. The parties must
not be in pari delicto. They must not have been mutually guilty of
fraud. It must not be dolo incidente which is accidental and collateral
fraud which does not necessarily bear on the decision of the party
defrauded to enter into the contract. It must be dolo causante which
refers to the very cause why the other party entered into the contract.
Article 1345. Simulations 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)
In Umali vs. Court of Appeals78 where it was contended that the
failure of one of the parties to pay the consideration proved that the
contract was absolutely simulated and therefore null and void, the
Supreme Court rejected such contention, to wit:
The evidence of record, on an overall calibration, does not
convince us of the validity of the petitioners’ contention that
the contracts entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the contract
null and void, when the parties do not intend to be bound at all
by the same. The basic characteristic of this type of simulation of
contract is the fact that the apparent contract is not really desired
or intended to either produce legal effects or in any way alter the
juridical situation of the parties. The subsequent act of Rivera
in receiving and making use of the tractor, subject matter of the
Sales Agreement and Chattel Mortgage, and the simultaneous
issuance of a surety bond in favor of Bormaheco, concomitant
with the execution of the Agreement of Counter Guaranty with
the Chattel/Real Estate Mortgage, lead to the conclusion that
petitioners had every intention to be bound by these contracts.
The occurrence of these series of transactions between petitioners
and private respondents is a strong indication that the parties
actually intended, or at least expected, to exact fulfillment of their
respective obligations from one another.
81
Ibid.
Tongoy vs. Court of Appeals, 123 SCRA 99.
83
See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115
82
356
ObligatiOns and COntraCts
Text and Cases
arts. 1345-1346
Article 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)
In Javier vs. Court of Appeals79 where a party assigned his
timber license to another for a consideration of P120,000 but the
Deed of Assignment dated February 15, 1966 stated that, for such
amount of money, the assignee shall transfer his shares of stock in
a corporation to be known as Timberwealth Corporation, and where
the assignment was eventually implemented but the assignee did not
fully pay the consideration, and where finally, to claim the balance, the
assignor sued the assignee who contended that the contract was null
and void because the corporation was never set up and there was no
transfer to him of the shares of stock, the Supreme Court ruled that
the assignee should be held liable considering that the assignment
was a relatively simulated contract which, though containing a false
consideration, was not null and void per se. It cited Article 1346 which
pertinently provides that a relatively simulated contract, 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 agree-ment.80
In J.R. Blanco vs. Quasha,81 the owner of the property entered
into a contract of sale of her property with a company payable in
equal annual installments of P25,000 per year. Simultaneously, the
company and the said owner entered into a contract of lease of the
same property whereby the owner would lease the property from the
company for 25 years for a monthly rental of P2,083.34 or P25,000.08
per year. The totality of the agreement was called a Sale-Lease-Back
Agreement. It is contended that the sale-lease-back agreement was
simulated and therefore void because no actual consideration passed
from the buyer to the seller. The Supreme Court rejected this claim.
It reasoned that although no actual exchange of money was made,
yet the payment was effected between the vendee and the vendor
by mutual agreement whereby the montly rental which was due the
vendor was paid from the annual installment of P25,000 due from the
vendee pursuant to the lease contract executed between them. The
court found nothing wrong with this arrangement for the same is not
contrary to law, morals, good customs, or public policy, but rather for
SCAD 522, 318 SCRA 373.
84
G.R. No. 134992, November 30, 2000, 137 SCAD 932, 345 SCRA 233.
85
G.R. No. 136857, November 22, 2000, 138 SCAD 171, 345 SCRA 468.
art. 1346
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
357
the convenience of both parties.
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.
An absolutely simulated or fictitious contract is void. A relatively
simulated contract, 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.82
The characteristic of simulation is the fact that the apparent
contract is not really desired nor intended to produce legal effects
nor in any way alter the juridical situation of the parties. Thus,
a person, in order to place his property beyond the reach of his
creditors, simulated 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.83
In Pua vs. Court of Appeals84 where it was proven that the person
who allegedly entered into the contract was not even conceived at
the time the contract was executed, the Supreme Court said that the
contract was definitely absolutely simulated.
In Velasquez vs. Court of Appeals,85 a debtor was lured by the
creditor to make it appear that the debtor sold to the creditor the
collateralized property of the debtor. The creditor told the debtor that
this scheme was necessary so that the creditor can borrow money
from a certain bank and make use of the property as collateral.
After the loan was obtained, the creditor was supposed to execute a
reconveyance of the property to the debtor who would then assume
the loan from the bank and use the proceeds of the loan to pay off
his loan to the creditor. In the implementation of the scheme, three
documents were executed on the same day namely: 1) a deed of
cancellation of the mortgage made by the debtor to the creditor; 2)
a deed of sale of the property from the debtor to the creditor; and 3)
a document purporting to re-sell the property to the debtor. It was
contended by the creditors that the sale of the property was authentic
after the debtor filed a case to annul all the said documents. The
Supreme Court rejected the said contention of the creditor and stated
the contract of sale was clearly simulated to facilitate the transaction
with the bank as there was absolutely no consideration at all and the
parties clearly did not intend to be bound by the deed of sale and its
86
G.R. No. 138774, March 8, 2001.
358
ObligatiOns and COntraCts
Text and Cases
art. 1346
accompanying documents.
In Francisco vs. Francisco-Alfonso86 where the two illegitimate
daughters claimed that they bought the two properties in 1983 from
their deceased father via a “Kasulatan sa Ganap na Bilihan” in the
total amount of P25,000 but evidence showed that, even with what
they claimed as their respective jobs at that time, they could not
possibly have any income to be able to have such amount of money
at the time of the sale, the Supreme Court declared the contract as
void for being simulated because there was no consideration for the
same. In concluding that the sale was void, the Supreme Court said
that it was impossible for one of the illegitimate daughters to have
money on hand in the amount of P15,000 just selling goto or lugaw
at the time of the sale. Likewise, the Supreme Court said that it was
incredible for the other illegitimate daughter, who was engaged in
the buying and selling of RTW, to have money on hand in the amount
of P10,000 at the time of the sale. Aside from the fact that a family
friend testified that the illegitimate daughters had no source of income
at the time of the sale, they likewise did not even present any single
witness to prove that the seller received the purchase price.
art. 1346
COntraCts
Essential Requisites of Contracts
Sec. 1 — Consent
359
360
ObligatiOns and COntraCts
Text and Cases
SECTION 2. — Object of Contracts
Article 1347. All things which are not outside the commerce
of men, including future things, may be 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. (1271)
Any property or service can be the object of a contract provided
that it is within the commerce of man. Hence, one cannot sell the
Luneta or a public sidewalk as they are not within the commerce of
man. In Maneclang vs. IAC,1 the Supreme Court ruled that:
The stipulation contained in the Compromise Agreement
partakes of the nature of an adjudication of ownership in favor
of herein petitioners of the fishpond in dispute, which, as clearly
found by the lower and appellate courts, was originally a creek
forming a tributary of the Agno River. Considering that as held
in the case of Mercado vs. Municipal President of Macabebe, 59
Phil. 592 [1934], a creek, defined as a recess or arm extending
from a river and participating in the ebb and flow of the sea, is a
property belonging to the public domain which is not susceptible
to private appropriation and acquisitive prescription, and as a
public water, it cannot be registered under the Torrens System
in the name of any individual [Diego vs. Court of Appeals, 102
Phil. 494; Mangaldan vs. Manaog, 38 Phil. 455]; and considering
further that neither the mere construction of irrigation dikes by
the National Irrigation Administration which prevented the water
from flowing in and out of the subject fishpond, nor its conversion
into a fishpond, alter or change the nature of the creek as a
property of the public domain, the Court finds the Compromise
Agreement null and void, and of no legal effect, the same being
G.R. No. L-66575, September 30, 1986, 144 SCRA 553.
1
360
art. 1347
COntraCts
Essential Requisites of Contracts
Sec. 2 — Object of Contracts
361
contrary to law and public policy.
An undertaking or service to assassinate a particular dignitary
cannot be the object of a contract because it is contrary to law and
public order. Future things that can be reasonably ascertained can be
the object of a contract. In a contract of sale, things having a potential
existence may be the object of such contract;2 and the efficacy of the
sale of a mere hope or expectancy is deemed subject to the condition
that the thing will come to existence.3 Hence, all future puppies of
a particular pregnant dog can be the object of a contract although
the puppies are not yet born. However, the sale of a vain hope or
expectancy is void.4
Rights may likewise be the object of contracts provided they are
transmissible. Hence, one can sell leasehold rights over a property
provided that there is no contractual and legal stipulation prohibiting
its transmissibility.
Except in cases authorized by law, future inheritance cannot
be the object of a contract because its extent, amount or quantity is
not determinable. Future inheritance “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.”5 Indeed one
cannot determine with certainty how much inheritance one would
get from his father, mother, or any person from whom he is called
upon to succeed or to inherit. This is so because, it may happen that
the father, at the time of his death, may have some debts to pay and,
under the rules of succession, these obligations have to be paid first
to the creditors before the exact amount of the inheritance can be
determined and distributed. Also, it may happen that, at the time
of the death of the father or mother, there are no more properties to
inherit. In Blas vs. Santos6 where the wife agreed to give whatever
her share in the conjugal partnership property to her heirs once the
husband dies, the Supreme Court said that such agreement does not
involve future inheritance, to wit:
It is not an obligation or promise made by the maker to
transmit one-half of her share in the conjugal properties acquired
with her husband, which properties are stated or declared to be
conjugal properties in the will of the husband. x x x The promise
does not refer to any properties that the maker would inherit
Article 1461 of the 1950 Civil Code.
Id.
4
Id.
5
Blas vs. Santos, G.R. No. L-14070, March 29, 1961, 1 SCRA 899.
6
Id., Pages 906-907.
2
3
362
ObligatiOns and COntraCts
Text and Cases
arts. 1348-1349
upon the death of the husband. The document refers to existing
properties which she will receive by operation of law on the death
of her husband, because it is her share in the conjugal assets.
Article 1348. Impossible things or services cannot be the
object of contracts. (1272)
One cannot be bound to do the impossible. Hence, a contract
requiring a person to become a monkey on a particular date is
impossible. It cannot be the object of a contract.
Article 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. (1273)
The object must be one that can be ascertained with reasonable
certainty as to its kind. Hence, a contract engaging a certain person to
perform a deed, without specifying what deed it is, does not make the
service determinable and is therefore void. But a contract engaging a
person to sing in his nightclub identifies the kind of deed which is to
be performed and therefore valid. Likewise a contract requiring an
obligor to deliver a fruit is so general but, if the contract is to deliver
a kind of fruit such as a mango or guava, the contract is valid.
The law likewise states that 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. Hence, a contract which engages a
person to supply all the ice which a restaurant needs is valid because
the quantity of ice is easily ascertainable without the need for a new
contract.
363
SECTION 3. — Cause of Contracts
Article 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; 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 one of the essential requisites for a contract to validly
exist. “The cause of a contract is the essential or more proximate
purpose which the contracting parties have in view at the time of
entering into the contract” (8 Manresa, 697).1 It may or may not be
tangible. It can take different forms, such as a prestation or promise
of a thing or service by another.2 It can be the giving of a sum of
money, an object or even an expectation of profits from a subdivision
project.3 In Dihiansan vs. Court of Appeals,4 a corporation decided to
sell its property along an avenue and gave the persons living near
the said property a preferential right to buy the same. One of the
persons given such right was approached by a certain individual who
requested that he be allowed to buy the property with a commitment
to re-sell the same to the said person who was originally given the
preferential right. The latter agreed and an agreement was signed
embodying this commitment. This scheme was done because, clearly,
the corporation will not sell the property to any other person except
those given a preferential right. Instead of re-selling to the person
given that preferential right, the purchaser sold it to another. It was
contended that the contract between the person given preferential
right and the individual who requested to buy the property was
without consideration and therefore null and void. The Supreme
Court rejected this position by stating:
Petitioner’s allegation that Exhibit “A” is null and void for
Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534.
Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD
94, 320 SCRA 428.
3
Ibid.
4
G.R. No. L-49539, September 14, 1987, 153 SCRA 712.
1
2
363
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ObligatiOns and COntraCts
Text and Cases
art. 1351
lack of cause or consideration is untenable. The consideration as
found by the lower court and affirmed by the Court of Appeals
is private respondent’s preferential right to buy the property
from the owner. The contract Exhibit “A” clearly stipulates that
petitioner Dihiansan shall re-sell the disputed property to private
respondent. The contract is the law between the parties. When
the words of a contract are plain and readily under-standable
there is no room for construction.
In an onerous contract, the cause is understood to be, for each
contracting party, the prestation or promise of a thing or service by
the other. In Republic vs. Cloribel5 where a compromise agreement
designed to terminate the case between litigating parties to a suit
was entered into, the cause of the compromise was the mutual waiver
and abandonment of the parties of their claims against each other.
In reciprocal contracts, the obligation or promise of each party is the
consideration for that of the other.6
In remuneratory contracts, the cause is the service or benefit
which is remunerated. Thus, when a doctor agreed to diagnose a
patient, the cause for engaging the doctor is for him to look at the
patient and diagnose him. The fee to be received by the doctor for his
diagnosis is the cause of the contract as far as the doctor is concerned.
In contracts of pure beneficence, the mere liberality of the benefactor
is the cause of the contract. It does not involve any material thing
but rather it involves only the generosity of the benefactor. Thus,
a scholarship contract given by a school where an indigent will not
pay anything for his education in the said school has for its cause the
liberality and generosity of the benefactor-school.
Article 1351. The particular motives of the parties in
entering into a contract are different from the cause thereof.
(n)
Motive is different from cause. “Cause is the essential reason for
the contract, while motive is the particular reason for a contracting
party which does not affect the other party and which does not
preclude the existence of a different consideration.”7 Hence, a contract
of sale of a valuable relic has for its cause the payment of the purchase
price on the part of the seller and the delivery of the thing sold on
the part of the buyer. The seller may have been motivated by some
Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534.
Penaco vs. Ruaya, G.R. No. L-28102, December 14, 1981, 110 SCRA 46.
7
Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534.
5
6
art. 1351
COntraCts
Essential Requisites of Contracts
Sec. 3 — Cause of Contracts
365
expectation of profit while the buyer might have been motivated to
purchase the relic by the beauty and rarity of the relic. Clearly, the
motivation of the parties is independent from the cause of the contract
and therefore does not form an essential part of it. In Philippine
National Construction Corporation vs. Court of Appeals8 where the
lessee sought to release itself from paying rentals and from the
whole contract itself contended that the purpose for which it entered
the contract did not materialize, the Supreme Court rejected such
contention by stating:
With regard to the non-materialization of the petitioner’s
particular purpose in entering into the contract of lease, i.e., to
use the leased premises as a site of a rock crushing plant, the
same will not invalidate the contract. The cause or essential
purpose in a contract of lease is the use or enjoyment of a thing.
As a general principle, motive or particular purpose of a party in
entering into a contract does not affect the validity nor existence
of the contract: an exception is when the realization of such motive
or particular purpose has been made a condition upon which the
contract is made to depend. The exception does not apply here.
There are certain cases however where the cause is equated
to the motive when it is clear that the motive predetermines the
cause. This is exemplified in the case of E. Razon vs. Philippine Ports
Authority9 involving a void contract because of an illegal cause. The
pertinent portions of the decision are as follows:
The Management Contract under consideration was
executed by and between petitioner E. Razon, Inc. represented
by its President, herein co-petitioner Enrique Razon, and
respondent PPA, represented by its then General Manager, E.S.
Baclig, Jr. on June 27, 1980 (Annex “A,” Petition, p. 18, Rollo).
By petitioners’ own admission, at the time of the execution of
the Management Contract, petitioner E. Razon, Inc. later known
as Metro Port Services, Inc. was controlled by Alfredo “Bejo”
Romualdez, brother-in-law of deposed President Marcos. Under
Section 5 of the Anti-Graft and Corrupt Practices Act (R.A. No.
3019) Romualdez, by reason of his relationship with the then
President of the Philippines, was prohibited from intervening,
directly or indirectly, in any transaction or business with the
government. Thus, the Management Contract, entered into by
E. Razon, Inc., ostensibly owned by petitioner Enrique Razon,
but in fact controlled by Alfredo Romualdez as 60% equity owner
thereof, is null and void and of no effect, being one expressly
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
G.R. No. L-75197, June 22, 1987, 151 SCRA 233.
8
9
366
ObligatiOns and COntraCts
Text and Cases
art. 1351
prohibited by law (par. [7], Art. 1409, Civil Code of the Philippines). Furthermore, as will be shown later, the Management
contract is the direct result of a previous illegal contract and,
therefore, is itself null and void under Article 1422 of the Civil
Code.
Petitioners attempt to evade the consequences of the
Romualdez connection by alleging that the 60% equity of
petitioner E. Razon, Inc. was obtained thru force and duress
and without any monetary consideration whatsoever. Otherwise
stated, the transfer of the shares of stock to persons close to
President Marcos, later disclosed to be Alfredo “Bejo” Romualdez
was, at the very least, voidable for lack of consent, or altogether
void for being absolutely fictitious or simulated.
Verily, the transfer of the shares of stocks of petitioner
E. Razon, Inc. representing 60% equity to persons fronting for
Alfredo “Bejo” Romualdez was null and void. The invalidity
springs not from vitiated consent nor absolute want of monetary
consideration, but for its having had an unlawful cause-that of
obtaining a government contract in violation of law. While the
general rule is that the causa of the contract must not be confused
with the motives of the parties, this case squarely fits into the
exception that the motives may be regarded as causa when it
predetermines the purpose of the contract. (Liguez vs. Court of
Appeals, 102 Phil. 577). On the part of Romualdez, the motive
was to be able to contract with the government which he was then
prohibited by law from doing, and on petitioner Razon’s part,
to be able to renew his management contract. For it is scarcely
disputable that Enrique Razon would not have transferred said
shares of stock to Romualdez without an assurance from the
latter that he would be unduly favored with a renewal of the
Management Contract. Thus, it came to pass that by transferring
60% of the shares in his company to Romualdez, petitioner
Enrique Razon was able to secure an eight-year contract with
respondent PPA and for six years before its cancellation benefit
from the proceeds thereof.
Petitioners’ attempt to dissociate or divorce themselves
from the illegality of the transfer and, consequently, of the management contract, as well as their claim of innocence or being a
victim of the Marcos regime must fail for the “view has been
taken x x x that a party is a participant in the unlawful intention
where he knows and intends that the subject matter will be used
for an illegal purpose and there would seem to be no doubt that
one may be deemed to be a participant in the other’s unlawful
design if he shares in the benefits of the violation of law. However,
whether he is to derive any benefit from the unlawful use of the
subject matter is not the sole test. A test which has been said to
art. 1351
COntraCts
Essential Requisites of Contracts
Sec. 3 — Cause of Contracts
367
be more comfortable to sound morality is whether he intends to
aid the other in the unlawful object. He may be deemed to be a
participant in the unlawful purpose if, with knowledge thereof, he
does anything which facilitates the carrying out of such purpose.”
(17 Am Jur 2d 515-516).
The transfer of the control of petitioner E. Razon, Inc. from
petitioner Enrique Razon to Alfredo “Bejo” Romualdez, which
we have resolved to be null and void, served as the direct link to
petitioner company’s obtaining the Management Contract. Being
the direct consequence and result of a previous illegal contract,
the Management Contract itself is null and void as provided in
Article 1422 of the Civil Code.
Elementary in the law of contracts is the principle that no
judicial action is necessary for the annulment of a void contract.
Any such action would be merely declaratory. (Tolentino, Civil
Code of the Philippines, Vol. IV, 1973 ed., p. 594). Thus, it was well
within the rights of respondent PPA to unilaterally cancel and
treat as avoided the Management Contract and no arbitrariness
may be attached to its exercise of this right.
In Uy vs. Court of Appeals 10 where the National Housing
authority purchased certain lots and thereafter cancelled the Deeds
of Sale relative thereto considering that the lots turned out to be
unsuitable for its housing project, the Supreme Court sustained
the dismissal of the case for damages filed by the vendors. As to the
claim of the vendors that NHA rescinded the contract without legal
basis, the Supreme Court said that the NHA did not rescind the sale
pursuant to Article 1191 of the Civil Code considering that there was
no breach of trust committed by the sellers themselves who merely
complied with their obligation to deliver the properties. Neither did
NHA suffer any injury by the performance by the vendors of their
obligation. The Supreme Court ruled that the cancellation was valid as
it was based on the negation of the cause arising from the realization
that the lands, which were the object of the sale, were not suitable for
housing. The Supreme Court said that for the vendee, NHA, the cause
was the acquisition of the land. For the seller, the cause was to obtain
the price. The motive of the NHA, which was known to the seller, was
to use said lands for housing. The Supreme Court thereafter stated
that
it is clear, and petitioners do not dispute, that NHA would not
have entered into the contract were the lands not suitable for
housing. In other words, the quality of the land was an implied
10
G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.
368
ObligatiOns and COntraCts
Text and Cases
arts. 1352-1354
condition for the NHA to enter into the contract. On the part
of the NHA, therefore, the motive was the cause for its being a
party to the sale.11
Article 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)
Since cause is one of the essential elements of a contract, its
absence does not create a contract as there can be no meeting of the
minds. This is also true if the cause is unlawful. Hence a contract to
engage a party to steal is unlawful as it is against the law. Likewise
a contract between a husband and wife to have their respective
paramours is contrary to morals. A contract to foment riots is contrary
to public order and a contract waiving the right of an employee to
receive what is due him under the law is contrary to public policy.
Article 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)
The general rule provided by the law is that a false cause stated
in a contract makes the contract void. Thus, a contract of sale, which
states that the price of the object for sale is P500 when in fact no such
price has been paid at all, is void.12 However, when a contract, though
stating a false consideration, has in fact a real consideration, the
contract is not void. Thus, when a contract stating the consideration
of a ball pen is P1,000 but it is only sold for P500 which the seller
accepted, the contract is valid. At the least, the contract is a relatively
simulated one.
Article 1354. Although the cause is not stated in the
contracts, it is presumed that it exists and is lawful, unless
the debtor proves the contrary. (1277)
In Liam vs. Olympic Sawmill Co.,13 a loan of P10,000 was
entered into and, subsequently, another loan agreement was executed
increasing the original amount of the previous loan by P6,000 “to
answer for attorney’s fees, legal interest and other cost incident
11
12
G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.
See Mapalo vs. Mapalo, G.R. No. L-21489, May 19, 1966, 17 SCRA 114.
art. 1355
COntraCts
Essential Requisites of Contracts
Sec. 3 — Cause of Contracts
369
thereto to be paid unto the creditor” upon the termination of the
agreement. The debtor failed to pay and a case was filed. By way of
summary judgment, decision was rendered ordering the defendantdebtor to pay the principal amount of P10,000 and the additional
amount of P6,000. The latter amount was contested as being usurious.
The Supreme Court ruled that, at the time of the tran-saction, the
usury law was suspended and, moreover, it said:
Under Article 1354 of the Civil Code, in regards to the
agreement of the parties relative to the P6,000.00 obligation, “it
is presumed that it exists and is lawful, unless the debtor proves
the contrary.” No evidentiary hearing having been held, it has to
be concluded that defendants had not proven that the P6,000.00
obligation was illegal. Confirming the Trial Court’s finding, we
view the P6,000.00 obligation as liquidated damages suffered
by plaintiff, as of March 17, 1960, representing loss of interest
income, attorney’s fee and incidentals.
Article 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. (n)
In Auyong Hian vs. Court of Tax Appeals14 where the contract
involving tobacco was assailed as invalid due to inadequacy of price,
the Supreme Court said,
Neither can the inadequate consideration, even if true,
invalidate the sale to the CTIP.
The other factor which, according to petitioner, militates
against the validity of the sale is the measly sum of P1,500,000
paid by the CTIP for the tobacco which had a value, according to
petitioner, of P7,000,000. What is really the value of the imported
tobacco? According to the Tax Court, the records show that when
the tobacco arrived in the Philippines, petitioner filed an Affidavit
and Pro Forma Invoice giving the invoice value of the tobacco
as US$103,453 and an appraised value, for tax purposes, of
P227,675. Petitioner contends that this declaration is merely its
invoice value and does not include the other expenses incurred
in the importation. Because of these different declarations, the
Tax Court confessed it was at a loss as to which of petitioner’s
declaration was to be believed. When it suits petitioner’s purpose
he claims that the tobacco was worth P227,675.00. For other
purposes the value was P7,000,000. If the claim of petitioner
13
14
G.R. No. L-30771, May 28, 1984, 129 SCRA 439.
G.R. No. L-28782, September 12, 1974, 59 SCRA 110.
370
ObligatiOns and COntraCts
Text and Cases
art. 1355
that the tobacco was really worth P7,000,000, then there will be
another cause for forfeiture which would be petitioner’s filing a
false declaration under Section 2530(m) of the Tariff and Customs
Code.
We cannot say that the appraisal of the value of the tobacco
was incorrect. According to the Tax Court, the Collector of Customs
took precautionary measures to insure a correct appraisal of the
tobacco. The appraisal was made by a competent appraiser of
the Bureau of Customs, and both the Commissioner of Customs
and the Secretary of Finance, who exercise supervisory authority
over the Collector of Customs and who were consulted on the
matter, approved the sale, or at least, interposed no objection to
the sale. Anent this matter it has been said that an appraisal
made by the Commissioner of Customs under Section 1377 of the
Revised Administrative Code is presumed to be correct, unless
the contrary is proven by the importer. (Lazaro vs. Commissioner
of Customs, L-22511 and L-22343, May 16, 1966, 17 SCRA 36,
41 and cases cited there-in.)
But, assuming arguendo, that the consideration paid for the
forfeited tobacco was inadequate, such inadequate consideration
is not a ground for the invalidity of a contract. Anent this matter
Article 1355 of the Civil Code provides:
“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.”
Petitioner has not shown that the instant sale is a case
exempted by law from the operation of Art. 1355; neither has
petitioner shown that there was fraud, mistake or undue influence
in the sale. Hence, this Court cannot but conclude with the Court
of Tax Appeals that “in these circumstances, we find no reason
to invalidate the sale of said tobacco to Consolidated Tobacco
Industries of the Philippines.”
In Penaco vs. Ruava15 where the inadequacy of cause was again
invoked to invalidate the sale of a house, the Supreme Court said,
The appellants, nevertheless, contend that the consideration is for the house only since the lot on which it is
constructed is public land which they cannot sell, and in view of
the inadequacy of the price, the building alone having an assessed
value of P1,500.00 and the land is too cheap for P5,000.00.
Indeed, the lot on which the building sold a retro is
constructed is public land and the appellants have no right to sell
15
G.R. No. L-28102, December 14, 1981, 110 SCRA 46.
art. 1355
COntraCts
Essential Requisites of Contracts
Sec. 3. — Cause of Contracts
it. What is sought to be transferred and ceded, however, is not the
ownership of the land, but the rights, interests and participation
of the appellants “as public land claimants thereof by virtue of the
decision of the Bureau of Lands,” which rights could be waived,
transferred or alienated. By their contract, the appellants have
undertaken to effect legal transfer of all their rights over the lot
to the vendee a retro and his assigns upon the consolidation of the
title over the building in the vendee, and whether or not the herein
appellee is qualified to acquire that land of the public domain
claimed by the appellants depends upon the Director of Lands
who has executive control over the concession and disposition of
the lands of the public domain. For this reason the land should
be raised in the administrative proceedings.
The inadequacy of the price is not sufficient proof that the
consideration of P1,000.00 was for the house alone. The vendee
a retro could not have possibly bought the house alone without
securing from the vendors a retro a specific and fixed arrangement
regarding the lot on which the house is built, otherwise, he could
be ejected therefrom at the will of the vendors a retro. Besides,
“a valuable consideration, however small or nominal, if given or
stipulated in good faith is, in the absence of fraud, sufficient. A
stipulation in consideration of one dollar is just as effectual and
valuable a consideration as a larger sum stipulated for or paid.”
371
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ObligatiOns and COntraCts
Text and Cases
Chapter 3
FORMS OF CONTRACTS
Article 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 indis-pensable.
In such cases, the right of the parties stated in the following
article cannot be exercised. (1278a)
In Dauden-Hernaez vs. De Los Angeles1 where a movie actress
filed a suit to recover her compensation for her services as a leading
lady in two motion pictures and where the producers resisted such
claim on the ground that the contract was void or invalid as there
was no written agreement to the same, the Supreme Court ruled in
favor of the movie actress by upholding the contract, to wit:
In the matter of formalities, the contractual system of our
Civil Code still follows that of the Spanish Civil Code of 1889
and of the “Ordamiento de Alcala” of upholding the spirit and
intent of the parties over formalities: hence, in general, contracts
are valid and binding from their perfection regardless of form,
whether they be oral or written. This is plain from Articles 1315
and 1356 of the present Civil Code. Thus, the first cited provision
prescribes:
“Art. 315 Contracts are perfected by mere consent,
and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all
the consequences which, according to their nature, may be in
keeping with good faith, usage and law.”
Concordantly, the first part of Article 1356 of the Code
provides:
G.R. No. L-27010, April 30, 1969, 27 SCRA 1276.
G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688.
372
1
2
art. 1356
COntraCts
Forms of Contracts
373
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. x x x.”
These essential requisites last mentioned are normally: (1)
consent, (2) proper subject matter, and (3) consideration or causa
for the obligation assumed (Article 1318). So that once the three
elements exist, the contract is generally valid and obligatory,
regardless of the form, oral or written, in which they are couched.
To this general rule, the Code admits exceptions, set forth
in the second portion of Article 1356:
“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. x x x.”
It is thus seen that to the general rule that the form (oral
or written) is irrelevant to the binding effect inter partes of a
contract that possesses the three validating elements of consent,
subject matter, and causa, Article 1356 of the Code establishes
only two exceptions, to wit:
a)
Contracts for which the law itself requires that they
be in some particular form (writing) in order to make them valid
and enforceable (the so-called solemn contracts). Of these the
typical example is the donation of immovable property that the
law (Article 749) requires to be embodied in a public instrument
in order “that the donation may be valid,” i.e., existing or binding.
Other instances are the donation of movables worth more than
P5,000.00 which must be in writing, “otherwise the donation shall
be void” (Article 748); contracts to pay interest on loans (mutuum)
that must be “expressly stipulated in writing” (Article 1956); and
the agreements contemplated by Articles 1744, 1773, 1847 and
2134 of the present Civil Code.
b)
Contracts that the law requires to be proved by some
writing (memorandum) of its terms, as in those covered by the old
Statute of Frauds, now Article 1403(2) of the Civil Code. Their
existence not being provable by mere oral testimony (unless
wholly or partly executed), these contracts are excep-tional
in requiring a writing embodying the terms thereof for their
enforceability by action in court.
The contract sued upon by petitioner herein (compensation
for services) does not come under the exception. x x x.
In Cenido vs. Apacionado,2 the Supreme Court upheld the validity of a written contract of sale of real property even if it were not
3
G.R. Nos.
104805-07, January
13, 1993,
127essential
SCRA 49. requisites of the
in a public
instrument
because
all the
374
ObligatiOns and COntraCts
Text and Cases
art. 1356
contract were proven. In addition, the Supreme Court made the
following elucidation:
Generally contacts are obligatory in whatever form such
contracts may have been entered into, provided all the essential
requisites for their validity are present. When however, the
law requires that a contract be in some form for it to be valid or
enforceable, that requirement must be complied with.
A certain form may be prescribed by law for any of the
following purposes: for validity, enforceability, or greater efficacy
of the contract. When the form required is for validity, its nonobservance renders the contract void and of no effect. When the
required form is for enforceability, non-compliance therewith will
not permit, upon the objection of a party, the contract, although
otherwise valid, to be proved or enforced by action. Formalities
intended for greater efficacy or convenience or to bind third
persons, if not done, would not adversely affect the validity or
enforceability of the contract between the contracting parties
themselves.
In Deloso vs. Sandiganbayan3 where the contract was assailed as
anomalous on the ground that it was originally made orally and then
later reduced into writing, the Supreme Court ruled that contracts
can generally be made in whatever form, thus:
It is not true that as the information state, said tractors were
delivered to the lessees “without any agreement as to the payment
of rentals for the use of said tractor” or that, as the Sandiganbayan
avers, “the tractors were given out to these beneficiaries without
thought of compensation for their use.” For all the witnesses of
the defense as well as of the Government uniformly attested to
the reality of verbal agreements between the Municipality and
the tractor’s lessees, i.e., that all said lessees were made aware
of the obligations they were assuming prior to the delivery
thereof, they all bound themselves in writing “to all the terms
and conditions which the Municipality of Botolan, Zambales may
impose.” And the fact that the lease agreements were not initially
reduced to writing, this having been done only some time later
by the Sangguniang Bayan through a resolution adopted for that
purpose, certainly does not make the transactions anomalous or
felonious, nor preclude the generation of the contractual relation
of lessor and lessee between the Municipality and the farmers.
It is axiomatic that contracts may be entered into in any form,
orally or in writing, or parol in part and written in part, it being
needful merely that the essential requisites for their validity
G.R. Nos. L-46715-16, July 29, 1988, 163 SCRA 705.
G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688.
4
5
art. 1357
COntraCts
Forms of Contracts
375
be present — a precept of general application unless “the law
requires that a contract be in some form in order that it may be
valid or enforceable.” Quite obviously, the lease of the tractors
in this case is not one of those required by law to be in writing or
other particular form in order that it may be valid or enforceable.
Article 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)
A party, who desires to have his contract reduced in the particular
form required by law, can file an action to compel the other party to
comply with such form. If the requirement of law is directory only
and has no bearing on the validity or enforceability of the contract,
the parties can enforce the contract and, at the same time, demand
that it be reduced in the form required by law. In Zaide vs. Court
of Appeals4 where an unregistered contract of sale was assailed as
invalid, the Supreme Court ruled in favor of the validity of the sale
by stating:
However, although the first deed of sale (Exh. 1) was
genuine, it was so far defective as to render it unregistrable
in the Registry of Property. As already pointed out, it did not
set forth the name of the vendee’s husband and was for this
reason refused registration by the Register of Deeds. The
defect was unsubstantial. It did not invalidate the deed. The
legal dispositions are clear. Though defective in form, the sale
was valid; and the parties could compel each other to do what
was needful to make the document of sale registrable. The law
generally allows a contract of sale to be entered into in any form,
whether “in writing, or by word of mouth, or partly in writing and
partly by word of mouth, or (even) inferred from the conduct of
the parties,” but if the agreement concerns “the sale of land or of
an interest therein,” the law requires not only that “the same, or
some note or memorandum thereof, be in writing, and subscribed
by the party charged” in order that it may be enforceable by action,
but also that the writing be in the form of a “public document.”
The law finally provides that “if the law requires a document or
other special form, as in the acts and contracts enumerated in x
x x (Article 1358), the contracting parties may compel each other
to observe that form, once the contract has been perfected x x x
Tapec vs. Court of Appeals, G.R. No. 111952, October 26, 1994, 56 SCAD 356,
6
376
ObligatiOns and COntraCts
Text and Cases
art. 1358
(and such) right may be exercised simultaneously with the action
upon the contract.
Also in Cenido vs. Apacianado,5 the Supreme Court ruled in favor
of the validity of a private conveyance of real property denominated
as “Pagpapatunay” as between the parties, but said:
The question as to whether the “Pagpapatunay” is suffi-cient
to transfer and convey title to the land for purposes of original
registration or the issuance of a real estate tax decla-ration in
respondent spouses’ names, as prayed for by the respondent
spouses, is another matter altogether. For greater efficacy of the
contract, convenience of the parties and to bind third persons,
respondent spouse have the right to compel vendor or his heirs to
execute the necessary document to properly convey the property.
Article 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their object the
creation, transmission, modification or extinguishment of real rights over immovable property; sales of
real property or of an interest therein are 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)
The failure to put in a public or private document or writing the
transactions or matters enumerated in Article 1358 will not render
the agreement void or invalid.6 They shall still be effective as between
the parties. The requirement to put the agreement referred under
237 SCRA 749.
Article 1358 in a public instrument is only for the purpose of greater
art. 1358
COntraCts
Forms of Contracts
377
efficacy, of convenience or of binding third persons. Thus in the case
of Dauden-Hernaez vs. De Los Santos,7 the Supreme Court ruled that
Article 1358 nowhere provides that the absence of
written form in this case will make the agreement invalid or
unenforceable. On the contrary, Article 1357 clearly indicates that
contracts covered by Article 1358 are binding and enforceable by
action or suit despite the absence of writing.
In Dalion vs. Court of Appeals,8 the Supreme Court reiterated
the jurisprudence laid down in previous cases that the requirement
under Article 1358 is merely for convenience, thus:
Assuming authenticity of his signature and the genuineness
of the document, Dalion nonetheless still impugns the validity
of the sale on the ground that the same is embodied in a private
document, and did not thus convey title or right to the lot in
question since “acts and contracts which have for their object the
creation, transmission, modification or extinction of real rights
over immovable property must appear in a public instrument.”
(Art. 1358, par. 1, NCC)
This argument is misplaced. The provision of Art. 1358 on
the necessity of a public document is only for convenience, not for
validity or enforceability. It is not a requirement for the validity
of a contract of sale of a parcel of land that this be embodied in
a public instrument.
A contract of sale is a consensual contract, which means
that the sale is perfected by mere consent. No particular form
is required for its validity. Upon perfection of the contract the
parties may reciprocally demand performance (Art. 1475, NCC),
i.e., the vendee may compel transfer of ownership of the object of
the sale, and the vendor may require the vendee to pay the thing
sold. (Art. 1458, NCC)
The trial court thus rightly and legally ordered Dalion
to deliver to Sabesaje the parcel of land and to execute the
corresponding formal deed of conveyance in a public document.
Under Art. 1498, NCC, when the sale is made through a public
instrument, the execution thereof is equivalent to the delivery
of the thing. Delivery may either be actual (real) or constructive.
Thus, delivery of a parcel of land may be done by placing the
vendee in control and possession of the land (real) or by embodying the sale in a public instrument (constructive).
G.R. No. L-27010, April 30, 1969, 27 SCRA 1276.
G.R. No. 78903, February 28, 1990, 182 SCRA 872.
7
8
378
ObligatiOns and COntraCts
Text and Cases
art. 1358
379
Chapter 4
REFORMATION OF INSTRUMENTS (n)
Article 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 applies only to written contracts contained in an
instrument or series of instrument.
And, when the terms of an agreement have been reduced
to writing, it is considered to be containing all the terms agreed
upon and there can be, between the parties and their successorsin-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 thereto, in which case, one
of the parties may bring an action for the reformation of the
instrument to the end that such true intention may be expressed.1
Reformation connotes a valid contract. The parties are able
to have a meeting of the minds but the instrument supposed to
embody the contract does not conform to such contract. In actions
for reformation what is reformed is the instrument embodying the
contract and not the contract itself. Two fundamental matters
therefore must be shown before reformation can be availed: first,
that the instrument embodying the contract does not reveal the
true intention of the parties and, second, the existence of a real and
1
Tuason vs. Court of Appeals, G.R. No. 119794, October 3, 2000, 135 SCAD 28,
341 SCRA 707, citing National Irrigation Administration vs. Gamit, 215 SCRA 436.
379
380
ObligatiOns and COntraCts
Text and Cases
art. 1359
actual contract entered into by the parties. Failure to prove these
two matters may lead to the creation of an entirely new contract not
within the contemplation of the parties.
Equity dictates that 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 agreement. 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 legalistic rule that a
written instrument should be the final and inflexible criterion
and measure of the rights and obligations of the contracting
parties is thus tempered to forestall the effect of mistake, fraud,
inequitable conduct, or accident.2
Reformation may be caused by mistake, fraud, inequitable
conduct or accident of the parties. In actions for reformation, the onus
probandi is upon the party who insists that the contract should be
reformed.3 However, if these factors prevent a meeting of the minds,
annulment and not reformation is the remedy.
An action for reformation is in personam, not in rem, x x x
even when real estate is involved. x x x It is merely an equitable
relief granted to the parties where 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 the 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. x x x Courts are bound by rules of law and have
no arbitrary discretion to disregard them. x x x Courts of equity
must proceed with outmost caution especially when rights of third
parties may intervene.4
An action for reformation can be filed within ten (10) years
from the time the cause of action accrues, since the suit is based on
a written document.5 The cause of action accrues upon the knowledge
2
Report of the Code Commission, Pages 55-56 cited in Naga Telephone Company
vs. Court of Appeals, G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA
351.
3
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD
281, 320 SCRA 625.
4
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD
281, 320 SCRA 625; Toyota Motor Philippines Corporation vs. Court of Appeals, G.R.
No. 102881, December 7, 1992, 216 SCRA 248.
art. 1360
COntraCts
Reformation of Instruments (n)
381
of the ground for reformation,6 or from the date of the execution of
the instrument embodying the contract if the cause or causes for
reformation were already known at the time of the execution of the
said instrument embodying the contract. Thus, in Rosello-Bentir vs.
Leanda7 where it was contended that, at the time of the execution of
the contract on May 5, 1968, there was a verbal agreement between
the lessor and the lessee that the lessee will be given the right of first
refusal should the lessor decide to sell his property, and where the
lessee only filed the case for reformation on May 15, 1992 to reflect
such intention of the parties, the Supreme Court ruled that the action
for reformation has already prescribed. The 10-year period started
from May 5, 1968.
Also, the action may be barred by laches.8
An action for reformation of instrument is instituted as a special
civil action for declaratory relief under the Rules of Court.9
Since the purpose of an action for declaratory relief is to
secure an authoritative statement of the rights and obligations
of the parties for their guidance in the enforcement thereof, or
compliance therewith, and not to settle issues arising from an
alleged breach thereof, it may be entertained only before the
breach or violation of the law or contract to which it refers.10
Thus, an action for reformation instituted after the lessor allegedly
breached the contract with the lessee giving the lessee a right of first
refusal to buy the leased premises, and which right of first refusal was
the subject of the action for reformation, cannot prosper.11
Article 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.
Article 1361. When a mutual mistake of the parties causes
the failure of the instrument to disclose their real agreement,
Article 1144 of the 1950 Civil Code.
Naga Telephone Company, Inc. vs. Court of Appeals, G.R. No. 107112, February 24, 1994, 48 SCAD 539, 230 SCRA 351.
7
G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330 SCRA 591.
8
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322, 330
SCRA 591.
9
Section 1, Rule 63 of the 1997 New Rules of Civil Procedure.
10
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322,
330 SCRA 591.
11
Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322,
330 SCRA 591.
5
6
382
ObligatiOns and COntraCts
Text and Cases
arts. 1360-1361
said instrument may be reformed.
For mistake to be a cause for reformation, the mistake must be
mutual and must generally involve factual matters. This is consistent
with the essential requisite in reformation that there must be a prior
meeting of the minds between the parties. There must have been a
valid existing agreement to which the erroneous document can be
made to match or harmonize. In Gonzalez Mondragon vs. Santos12
where one of the parties to a contract contended that there was a
mistake relative to the documentation of the contract because the
real intent of the parties was for the sale by the hectare and not for
a sum in gross as stated in the document of sale, but where there was
no convincing evidence that the mistake was mutual, the Supreme
Court denied the reformation of the contract of sale and stated:
The plaintiff’s evidence being as it is, the integrity of the
document Exhibit A will, of necessity, have to be maintained and
equitable relief denied. This would be true even if there were
doubts. Decisions of this court and of American courts abound
in favor of the salutary doctrine that contracts solemnly and
deliberately entered into may not be overturned by inconclusive
proof or by reason of mistake of one of the parties to which the
other in no way has contributed.
Moran’s Comments on the Rules of Court, Vol. III, p. 195,
summing up the rulings laid down in various decisions of this
court and one of the United States Supreme Court, says: “Relief
by way of reformation of a written agreement will not be granted
unless the proof of mutual mistake is of the clearest and most
satisfactory character. The amount of evidence necessary to
sustain a prayer for relief where it is sought to impugn a fact in a
document is always more than a mere preponderance of evidence.”
In the case of Joaquin vs. Mitsumine (34 Phil. 858), this
court held that “An alleged defect in a contract perfectly valid
and binding on its face, must be conclusively proved. The validity
and fulfillment of contracts can not be left to the will of one of the
parties.”
In Atilano vs. Atilano13 where there was a mutual mistake in
the designation of the particular lands owned by two brothers, the
Supreme Court said that the remedy was reformation. However, if
the correct properties were already in the possession of the persons
to whom they should rightfully belong, there was no more need
12
13
G.R. No. L-1724, October 12, 1950, 87 Phil. 471.
G.R. No. L-22487, May 21, 1969, 28 SCRA 231.
arts. 1360-1361
COntraCts
Reformation of Instruments (n)
383
for reformation because the parties actually already implemented
the true intention of the contract. Particularly, the Supreme Court
said:
The logic and common sense of the situation lean heavily in
favor of the defendants’ contention. When one sells or buys real
property — a piece of land, for example — one sells or buys the
property as he sees it, in its actual setting and by its physical
metes and bounds, and not by the mere lot number assigned to
it in the certificate of title. In the particular case before us, the
portion correctly referred to as Lot No. 535-A was already in the
possession of the vendee, Eulogio Atilano II, who had constructed
the residence therein, even before the sale in his favor; indeed,
even before the subdivision of the entire Lot No. 535 at the
instance of the owner, Eulogio Atilano I. In like manner, the
latter had his house on the portion correctly identified, after the
subdivision, as Lot No. 535-E, even adding to the area thereof
by purchasing a portion of an adjoining property belonging to a
different owner. The two brothers continued in the possession
of the respective portions for the rest of their lives, obviously
ignorant of the mistake in the designation of the lot subject of
the 1920 sale until 1959, when the mistake was discovered for
the first time.
The real issue here is not possession, but the real intention
of the parties to that sale. From all the facts and circumstances we
are convinced that the object thereof, as intended and understood
by the parties, was that specific portion where the vendee was
already residing, where he reconstructed his house at the end of
the war, and where his heirs, the plaintiffs herein, continued to
reside thereafter; namely, Lot No. 535-A; and that its designation
as Lot No. 535-E in the deed of sale was a simple mistake in the
drafting of the document. The mistake did not vitiate the consent
of the parties, or affect the validity and binding effect of the
contract between them. The new Civil Code provides a remedy
for such a situation by means of reformation of the instrument.
This remedy is available 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 (Art.
1359, et seq.) In this case, the deed of sale executed in 1920 need
no longer be reformed. The parties have retained possession of
their respective properties conformably to the real intention of the
parties to that sale, and all they should do is to execute mutual
deeds of conveyance.
Article 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.
384
ObligatiOns and COntraCts
Text and Cases
arts. 1362-1364
If the mistake is unilateral and reformation is sought, it must
be shown that the other party has acted fraudulently or inequitably
resulting in the drafting of a document which does not correspond to
the actual contract agreed upon by the parties.
Also, a party may have known the facts of the case but is ignorant of or has been mistaken as to the legal consequences of the same.
Generally, mistake of law or ignorance of the law is not a ground
for reformation because parties must, as a rule, submit to the legal
ramifications of their written contracts clearly pursuant to their true
intent and meaning. But while mistake of law or ignorance of the law
will not ordinarily relieve a party from the performance of his
written contract where he executed the same with full knowledge
of all the facts, yet, where, on account of misplaced confidence,
and because of some artifice or deception fraudulently practiced
upon him by the other party, a material part of the contract was
omitted from the writing, or he was otherwise misled, equity will
decree a reformation.14
Article 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.
Knowledge by one party of the other’s mistake regarding the
expression of the agreement is equivalent to mutual mistake.15 Hence,
reformation of the contract can be sought by the injured party.
Article 1364. When through the ignorance, lack of skill,
negligence or bad faith on the part of the 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.
If the person drafting or typing the instrument is not able to
come up with a correct written document embodying the contract
of the parties because of failure to follow instructions or because of
ignorance, lack of skill, negligence or bad faith, the mistake will be
deemed to be mutual,16 and therefore reformation can be availed of.
Hence, if the typist wrongly types the amount of consideration in a
written instrument embodying the contract of sale, the instrument
14
William F. Elliot, Commentaries on the Law of Contracts, Volume 3, 1913
edition, Indianapolis, The Bobbs-Merrill Company, Page 543.
15
12 Am Jur 631, citing Columbian Nat. L. Ins. Co. vs. Black (C.C.A. 10th) 35
F. (2d) 571, 71 A.L.R. 128, quoting 3 Willston, Contracts, p. 2745.
arts. 1365-1366
COntraCts
Reformation of Instruments (n)
385
may be reformed to conform to the real consideration agreed upon by
the parties.
In Huibonhoa vs. Court of Appeals17 where there was a failure to
prove what costly mistake allegedly suppressed the intention of the
parties prompting the petitioner to admit that there was an oversight
in the drafting of the contract by her counsel, the Supreme Court
rejected the propriety of reformation because, by such admission of
the petitioner, oversight may not be attributed to all the parties to
the contract and therefore, it cannot be considered a valid reason for
the reformation of the same contract.
Article 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.
In Palileo vs. Cosio18 where the parties to a contract intended
that the house subject of the agreement was to be a collateral for
a particular loan but the agreement apparently states that the
house was the subject of a conditional sale of residential building,
the Supreme Court allowed the reformation of the agreement. In a
subsequent case by the same parties, the Supreme Court said:
In reforming instruments, courts do not make another
contract for the parties (See Civil Code, Arts. 1359-1369 and
the Report of the Code Commission, p. 56). They merely inquire
into the intention of the parties and, having found it, reform the
written instrument (not the contract) in order that it may express
the real intention of the parties.
Article 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.
Any disposition in a will or an unconditional donation be16
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobbs-Merrill Company, Page 188.
17
G.R. No. 95897, December 14, 1999, 117 SCAD 281, 320 SCRA 625.
18
51 O.G. 6181 at 6184; also see Cosio vs. Palileo, G.R. No. L-18452, May 31,
1965, 14 SCRA 170.
19
See Second Paragraph of Section 1, Rule 63 of the 1997 New Rules of Civil
386
ObligatiOns and COntraCts
Text and Cases
arts. 1367-1369
queathing or donating something is an act of liberality. They are not
cases where, prior to the drafting of the instrument embodying the
will or the donation, there has been a prior negotiation where both
parties mutually agree on the object of the contract. Wills and donations are gratuitous. They do not involve any meeting of the minds
of the parties before the document is even drafted.
Reformation implies that there must be a prior agreement
between the parties. If such prior agreement is void, it cannot be
given legal effect. Hence, the instrument embodying the void agreement cannot be made to conform to such void agreement which is
non-existent as to its legal effect.
Article 1367. When one of the parties has brought an action
to enforce the instrument, he cannot subsequently ask for its
reformation.
A party seeking to enforce an agreement necessarily acknowledges that the instrument embodies the contract intended by the
parties and therefore, he is estopped from filing a case for reformation
alleging that the contract does not contain the true intent of the
parties.
Article 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.
This particular article provides the persons who are given
legal standing to initiate an action for reformation. If the mistake is
mutual, either party or his successor-in-interest may file the action.
If the cause for reformation is on some other grounds, such as fraud
or vitiated consent, the injured party or his heirs and assigns are the
only persons given legal standing to sue.
Article 1369. The procedure for the reformation of instruments shall be governed by rules of court to be promulgated
by the Supreme Court.
An action for reformation of instrument may be brought in
accordance with the rules on filing a special civil action for declaratory
relief.19 This is in accordance with Rule 63 of the 1997 New Rules
of Civil Procedure specifically promulgated by the Supreme Court
art. 1369
COntraCts
Reformation of Instruments (n)
387
which provides that, in an action for declaratory relief, any person
interested under a deed, will, contract or other written instrument, or
whose rights are affected by a statute, executive order or regulation,
ordinance or any other governmental regulation may, before breach
or violation thereof, bring an action in the appropriate Regional Trial
Court to determine any question of construction or validity arising,
and for the declaration of his rights and duties, thereunder.20 If
before the final termination of the case, a breach or violation of an
instrument should take place, the action may thereupon be converted
into an ordinary action, and the parties shall be allowed to file such
pleadings as may be necessary or proper.21
Procedure; Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322,
330 SCRA 591.
20
Section 1, Rule 63 of the 1997 New Rules of Civil Procedure.
21
Section 6, Rule 63 of the 1997 New Rules of Civil Procedure.
388
ObligatiOns and COntraCts
Text and Cases
Chapter 5
INTERPRETATION OF CONTRACTS
Article 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)
The purpose of interpretation is to be able to know the intent
of the parties so that the contract can be properly implemented. It is
the agreement of the parties which must be enforced.
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.1
The rules in statutory construction can likewise be applied as
a guide in interpreting ambiguous provisions in a contract.2 Thus, in
Finman General Assurance Corporation vs. Court of Appeals3 where
the insurance policy procured by the insured did not include murder
and assault as incidents exempting the insurance company from
liability in case of the death of the inured, the Supreme Court applied
the statutory construction rule of “expresso unius exclusio alterius” —
the mention of one thing implies the exclusion of another thing — to
make the insurance company pay the beneficiaries arising from the
1
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD
281, 320 SCRA 625; National Irrigation Administration vs. Gamit, G.R. No. 85869,
November 6, 1992, 215 SCRA 436.
2
Oil & Natural Gas Commission vs. CA, G.R. No. 114323, July 23, 1998, 96
SCAD 480, 293 SCRA 26.
3
G.R. No. 100970, September 2, 1992.
4
Hanil Development Company vs. Court of Appeals, G.R. No. 113176, July 30,
388
art. 1370
COntraCts
Interpretation of Contracts
389
death of the insured from stab wounds inflicted by unidentified men.
Generally, the intention of the parties is reflected from the
wordings of the contract and therefore as a general rule, the literal
meaning of its stipulations shall control.4 In Adelfa Properties, Inc. vs.
Court of Appeals5 where, from the various provisions of the contract,
it can be clearly determined that what was entered into by the parties
was not an option to purchase but a contract to sell, the Supreme
Court pertinently stated:
The important task in contract interpretation is always
the ascertainment of the intention of the contracting parties
and that task, is, of course, to be discharged by looking to the
words they used to project that intention in their contract, all the
words not just a particular word or two, and words in context not
words in isolation. x x x In addition, the title of a contract does
not necessarily determine its true nature. Hence, the fact that
the document under discussion is entitled “Exclusive Option to
Purchase” is not controlling where the text thereof shows that it
is a contract to sell.
In Gaw vs. Intermediate Appellate Court,6 the Supreme Court
pertinently stated that parties to a contract must be careful in
examining the language or the wordings of their contract, and they
must be diligent enough to read the same before entering into it so
that no complications can arise in the future, to wit:
Thus, in the interpretation of the provisions of a written
contract, the literal meaning of its stipulations must prevail. It,
therefore, behooves the parties to examine the terms of a contract
thoroughly before signing the same, particularly a businessman
like Gaw who may not, by any stretch of imagination, be
considered a tyro in these matters. Had he given even an iota’s
attention and care to scrutinize the subject contract, he would not
have failed to detect that some provisions thereof contravened
the terms and conditions of his exclusive dealership agreement
with PWCC.
In Conde vs. Court of Appeals7 where the contract was written
in the dialect known to the respondent, and where the encumbrance
of the property subject of the contract was inscribed in the title, the
2001, 152 SCAD 47; Capital Insurance vs. Central Azucarera, G.R. No. 30770, April
7, 1993, 221 SCRA 98; Gonzales vs. Court of Appeals, 124 SCRA 630.
5
G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
6
G.R. No. 70451, March 24, 1993, 220 SCRA 405.
7
G.R. No. L-40242, December 15, 1982, 119 SCRA 245.
8
G.R. No. 93625, November 8, 1993, 227 SCRA 541.
390
ObligatiOns and COntraCts
Text and Cases
art. 1370
Supreme Court, in rejecting the positions of the respondent that he
signed the contract merely to show his non-objection to the repurchase
constituting the lien and that he never received the amount of P165.00
from the petitioner, ruled:
Private respondent must be held bound by the clear terms
of the Memorandum of Repurchase that he had signed wherein he
acknowledged the receipt of P165.00 and assumed the obligation
to maintain the repurchasers in peaceful possession should they
be “disturbed by other persons.” It was executed in the Visayan
language which he understood. He cannot now be allowed to
dispute the same. “x x x If the contract is plain and unequivocal
in its terms, he is ordinarily bound thereby. It is the duty of every
contracting party to learn and know its contents before he signs
and delivers it.”
In Santi vs. Court of Appeals8 where the lease contract provided
that the “20-year period of lease being extendable for another period
of 20 years” was interpreted by the lower court as giving the lessee
an automatic renewal of the lease period, the Supreme Court said:
In a wealth of cases and as provided for in Articles 1370 and
1372 of the Civil Code, we have ruled that when the terms and
stipulations embodied in a contract are clear and leave no room
for doubt, such should be read in this literal sense and that there
is absolutely no reason to construe the same in another meaning
xxx xxx
To our mind, the stipulation “said period of lease being
extendable for another period of twenty (20) years x x x” is clear
that the lessor’s intention is not to automatically extend the
lease contract but to give her time to ponder and think whether
to extend the lease. If she decides to do so, then a new contract
shall be entered into between the lessor and lessee for a term of
another twenty years and a monthly rental of P220.00 This must
be so, for twenty (20) years is rather a long period of time and the
lessor may have other plans for her property.
If the intention of the parties were to provide for an automatic extension of the lease contract, then they could have easily
provided for a straight forty years contract instead of twenty.
In Fernandez vs. Court of Appeals,9 the Supreme Court likewise
interpreted the provision as to the extension of the period of lease
in accordance with the clear wordings of the contractual provision,
thus:
G.R. No. L-80231, October 18, 1990, 166 SCRA 577.
G.R. No. 136913, May 12, 2000, 126 SCAD 492, 332 SCRA 151.
9
10
art. 1370
391
COntraCts
Interpretation of Contracts
On 31 July 1973, respondent Miguel Tanjuanco, as lessor,
and petitioner Celso A. Fernandez, as lessee, entered into a tenyear Contract of Lease over a piece of land situated along Kahilum
Street, Pandacan, Manila, where petitioner would put up the then
proposed New Zamora Market. The parties agreed that the lease,
which was scheduled to end on 1 July 1983, would be “renewable
for another ten (10) years at the option of both parties under such
terms, conditions and rental reasonable at that time” and that,
upon expiration of the lease, whatever improvements were then
existing thereon should automatically belong to the lessor without
having to pay the lessee.
Before the agreed term ended, or on 19 April 1983, respondent wrote petitioner about the former’s intention not to
extend further or renew the lease. Petitioner replied, through a
letter dated 6 June 1983, that he had opted to renew the contract
for another ten (10) years so that he could recover all the ex-penses
he had incurred in the construction of the market.
In another letter to petitioner dated 1 June 1983, respondent, through his lawyer, advised that respondent could not
accept petitioner’s unilateral action to renew the lease because,
under the contract, any renewal or extension thereof was possible
only “at the option of both parties.”
On 23 June 1983, petitioner commenced an action against
respondent before the Regional Trial Court of Quezon City,
Branch 84, alleging that petitioner was entitled to renew the lease
contract, under paragraph 3, Section 2 thereof, for another ten
(10) years, which paragraph in the contract should be construed
in a liberal manner and with justice. In his prayer, he sought to
compel respondent to renew the lease agreement for another term,
or asked the court to consider the original contract renewed for
another ten (10) years or to fix another period for the renewal of
contract.
xxx
xxx
xxx
The only issue here relates to the interpretation of the
phrase “renewable for another ten (10) years at the option of both
parties under such terms, conditions and rental reasonable at that
time,” set out in paragraph (2) of the lease contract in question.
The Court of Appeals read the above contract language as
comprising, not technical terms or terms of legal art, but rather
just plain and ordinary words. As such, the Court of Appeals
understood the above language as requiring —
“that the parties should mutually agree on a new contract
which may not be the same as the original, under terms, conditions
and rental reasonable at that time. It follows therefore that the
plaintiff [petitioner] cannot renew the lease by his unilateral
act of exercising his option. Simply stated, the option must be
392
ObligatiOns and COntraCts
Text and Cases
art. 1370
mutually and consen[s]ually exercised, and not unilaterally as
was erroneously done by the plaintiff.
Applied to the lease contract under consideration, it
appears that the lease has expressed in clear, unmistakable and
unambiguous terms the intention of the parties that if the lease
contract was to be renewed, the option to renew should be made
by both parties.”
We agree with the respondent appellate court’s reading:
the intention of the parties to the lease agreement is clearly
discernible in the words of the agreement. The assent of both
lessor and lessee is essential for another contract to spring
into juridical existence upon expiration of the original one. The
contract clause may be seen to consist of two (2) parts: first, the
contract is stipulated to be “renewable” for another ten years “at
the option of both parties”; second, the contract is specified to be
“renewable under such terms, conditions and rental reasonable
at that time.” The first part of the clause stresses that the option
or faculty to renew was given, not to the lessee alone nor to the
lessor by himself, but to the two (2) simulta-neously who hence
must both exercise the option to renew if a new contract is to
come about. The second portion of the contract clause addresses
the future and directs the parties to negotiate and reach mutual
agreement on the terms and conditions of the new contract,
including the new rental rate, which terms and conditions must
be reasonable under such situation as may be extent when the
time for renewal arrives. The only term on which there has been
some pre-agreement is the period of the new contract: “another
ten years.” Clearly, the requirement of future mutual agreement
as to renewal, has here been specified with adequate precision.
In Buce vs. Court of Appeals,10 the controversy centered on the
interpretation of the provision stating: “This lease shall be for a
period of fifteen (15) years effective June 1, 1979, subject to renewal
for another ten (10) years, under the same terms and conditions.”
One party interpreted the provision as allowing automatic renewal
while the other party contended that there was an option to renew. In
deciding the case, the Supreme Court said that “renewal of a contract”
connotes the death of the old one and the birth or emergence of a
new one. In such a case, there is an obligation to execute a new lease
contract for the additional term. A clause providing for “extension
of the period of lease,” on the other hand, operated of its own force
to create an additional term. The Supreme Court said that there
was nothing in the contract to show that automatic renewal was the
11
G.R. No. L-87245, April 6, 1990, 184 SCRA 273.
art. 1370
COntraCts
Interpretation of Contracts
393
intention of the parties. The fact that the lessee was allowed to make
improvements on the property was not indicative of the intention to
automatically renew the lease. Since the contract was also unclear
as to who may exercise the option to renew, the Supreme Court said
that the period of the lease must be construed to be for the benefit of
both parties and further stated:
Renewal of the contract may be had only upon their mutual
agreement or at the will of both of them. Since the private
respondents were not amenable to a renewal, they cannot be
compelled to execute a new contract when the old contract
terminated on 1 June 1994. It is the owner-lessor’s prerogative to
terminate the lease at its expiration. The continuance, effectivity,
and fulfillment of a contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice of the lessee
between continuing the payment of the rentals or not, completely
depriving the owner of any say in the matter. Mutuality does not
obtain in such a contract of lease and no equality exists between
the lessor and the lessee since the life of the contract would be
dictated solely by the lessee.
In Universal Textile Mills, Inc. vs. National Labor Relations
Commission11 where a quasi-judicial body, namely the National Labor
Relations Commission (NLRC) misread and therefore misapplied
the provisions of a collective bargaining agreement, the Supreme
Court said that “the NLRC, however cannot remake a contract by
eviscerating it, by deleting from it words placed there by the parties.
No court, no interpreter and applier of a contract, has such a prerogative.”
It is a fundamental principle that a court may not make
a new contract for the parties or rewrite their contract under
the guise of construction. In other words, the interpretation or
construction of a contract does not include its modification or
the creation of a new or different one. It must be construed and
enforced according to the terms employed, and a court has no
right to interpret the agreement as meaning something different
from what the parties intended as expressed by the language
they saw fit to employ. A court is not at liberty to revise, modify,
or distort an agreement while professing to construe it, and has
no right to make a different contract from that actually entered
into by the parties. 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
12
17 Am Jur 2d 627-629.
394
ObligatiOns and COntraCts
Text and Cases
art. 1371
harshly or inequitably as to one of the parties, or to alter them
for the benefit of one party and to the detriment of the other, or,
by construction, relieve one of the parties from terms which he
voluntarily consented to, or impose on him those which he did
not.12
Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered. (1282)
The reasons and surrounding circumstances behind a contract’s
execution are of paramount importance to place the interpreter in
the situation occupied by the parties concerned at the time of the
writing.13 In Pingol vs. Court of Appeals14 where there was a dispute
as to whether the purchase agreement was a contract to sell or an
absolute sale, the Supreme Court had to look at the contemporaneous
and subsequent acts of the parties. Pertinently, the Supreme Court
explained:
In Dignos vs. Court of Appeals, we held that a deed of
sale is absolute in nature although denominated as a “Deed of
Conditional Sale” where there is no stipulation in the deed that
title to the property sold is reserved in the seller until the full
payment of the price, nor is there a stipulation giving the vendor
the right to unilaterally resolve the contract the moment the buyer
fails to pay within a fixed period. Exhibit “A” contains neither
stipulation. What is merely stated therein is that “the VENDEE
agrees that in case of default in the payment of the installments
due the same shall earn a legal rate of interest, and to which the
VENDOR likewise agrees.”
Furthermore, as found by the Court of Appeals, the acts
of the parties, contemporaneous and subsequent to the contract,
clearly show that an absolute deed of sale was intended, by the
parties and not a contract to sell:
Pursuant to the deed, the vendor delivered actual and
constructive possession of the property to the vendee, who
occupied and took such possession, constructed a building thereon,
had the property surveyed and subdivided and a plan of the
property was prepared and submitted to the Land Registration
13
Gonzales vs. Court of Appeals, G.R. No. 122611, March 8, 2001, 145 SCAD
384; Ridjo Tape & Chemical Corp. vs. Court of Appeals, 91 SCAD 892, 286 SCRA 544.
14
G.R. No. 102909, September 6, 1993, 44 SCAD 498, 226 SCRA 118.
15
G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323.
16
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
art. 1371
COntraCts
Interpretation of Contracts
395
Commission which approved it preparatory to segregating the
same and obtaining the corresponding TCT in his name. Since the
sale, appellee continuously possessed and occupied the property
as owner up to his death on July 13, 1984 and his heirs, after his
death, continued the occupancy and possession of the property up
to the present. Those contem-poraneous and subsequent events
are demonstrative acts that the vendor since the sale recognized
the vendee as the absolute owner of the property sold. All those
attributes of ownership are admitted by defendants in their
answer, specially in paragraphs 7 and 9 of their special and
affirmative defenses.
The contract here being one of absolute sale, the ownership
of the subject lot was transferred to the buyer upon the actual
and constructive delivery thereof. The constructive delivery of the
subject lot was made upon the execution of the deed of sale while
the actual delivery was effected when the private respondents
took possession of and constructed a house on Lot No. 3223-A.
In Rapanut vs. Court of Appeals15 where the controversy involved the interpretation of a contractual provision on the application
of interest, the Supreme Court again looked at the contemporaneous
and subsequent acts of the parties, thus:
The controversial provision in the Supplemental Agreement
reads: “x x x the VENDOR/MORTGAGEE is willing to sell said
portion of her lot to the VENDEE/MORTGAGOR for a total price
of P37,485.00 payable in monthly installments of P500.00 with
an interest of 10% per annum on the remaining balance until the
full amount is paid” (Rollo, pp. 25-26; Italics supplied).
Private respondent’s view is that the 10% interest must
be paid every year. Petitioner posits that the P500.00 monthly
installments include the 10% interest.
The interpretation of the provision in question having
been put in issue, the Court is constrained to determine which
interpretation is more in accord with the intent of the parties
(cf. Capital Insurance & Surety Co., Inc. vs. Central Azucarera
del Danao, 221 SCRA 98 [1993]). To ascertain the intent of the
parties, the Court shall look at their contemporaneous and
subsequent acts (Civil Code of the Philippines, Art. 1371).
The Deed of Conditional Sale with Mortgage categorically
provides for the date of payment of the P500.00 monthly installments, that is, not later than the fifth of every month, and of
the P1,000.00 semi-annual installment, that is, on June 30
and December 31. The Supplemental Agreement was likewise
17
G.R. No. 48194, March 5, 1990, 183 SCRA 171.
396
ObligatiOns and COntraCts
Text and Cases
art. 1371
specific that petitioner shall pay private respondent “monthly
install-ments, of P500.00 with an interest of 10% per annum on
the remaining balance until the full amount is paid.” (Rollo, p.
26)
A liberal interpretation of the contract in question is that
at the end of each year, all the installment payments made shall
be deducted from the principal obligation. The 10% interest on
the balance is then added to whatever remains of the principal.
Thereafter, petitioner shall pay the monthly installments on the
stipulated dates. In other words, the interests due are added
to and paid like the remaining balance of the principal. Thus,
we must rule that the parties intended that petitioner pay the
monthly installments at predetermined dates, until the full
amount, consisting of the purchase price and the interests on the
balance, is paid.
Significant is the fact that private respondent accepted
the payments petitioner religiously made for four years. Private
respondents cannot rely on the clause in the contract stating that
no demand is necessary to explain her silence for four years as to
the 10% interest, as such clause refers to the P500.00 monthly
installments.
Even granting as acceptable private respondent’s theory
that the monthly amortizations shall first be applied to the
payment of the interests, we must still rule for petitioner.
The contracts provided for private respondent’s right of
rescission which may be exercised upon petitioner’s failure to
pay installments for three months. Private respondent’s failure
to exercise her right of rescission after petitioner’s alleged default
constitutes a waiver of such right. Her continued acceptance of
the installment payments places her in estoppel.
In Caltex vs. Intermediate Appellate Court16 where one of
the parties to a deed of assignment contended that the obligation
was limited only to the particular amount indicated in the deed of
assignment notwithstanding the fact that said deed provided that
the assignee shall be entitled to all funds which the assignor may
be entitled from a certain administrative decision in payment of
assignor’s outstanding obligation plus any applicable interest charges
on overdue account, the Supreme Court ruled:
Likewise, the then Intermediate Appellate Court failed to
take into consideration the subsequent acts of the parties which
clearly show that they did not intend the Deed of Assignment
18
G.R. No. 124791, February 10, 1999, 103 SCAD 258.
art. 1371
COntraCts
Interpretation of Contracts
397
to totally extinguish the obligation — (1) After the execution of
the Deed of Assignment on July 31, 1980, petitioner continued
to charge respondent with interest on its overdue account up
to January 31, 1981. x x x This was pursuant to the Deed of
Assignment which provides for respondent’s obligation for
“applicable interest charges on overdue account.” The charges for
interest were made every month and not once did respon-dent
question or take exception to the interest; and (2) In its letter
of February 16, 1981 (Annex “J,” Partial Stipulation of Facts),
respondent addressed the following request to peti- tioner:
“Moreover, we would like to request for a
consideration in the following:
1.
Interest charges be limited up to December 31, 1980 only; and
2.
Reduction of 2% on 18% interest rate p.a.
We are hoping for your usual consideration on
this matter.”
In order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally
considered (Art. 1253, Civil Code). The foregoing subsequent
acts of the parties clearly show that they did not intend the
Deed of Assignment to have the effect of totally extinguishing
the obligation of private respondent without payment of the
applicable interest charges on the overdue account.
In Javier vs. Court of Appeals,17 the Supreme Court, in stating
that the contemporaneous and subsequent acts of the parties clearly
indicated the intention of the parties, ruled:
Petitioners contend that the deed of assignment conveyed to
them the shares of stocks of private respondent in Timber-wealth
Corporation, as stated in the deed itself. Since said corporation
never came into existence, no share of stocks was ever transferred
to them hence the said deed is null and void for lack of cause or
consideration.
We do not agree. As found by the Court of Appeals, the true
cause or consideration of said deed was the transfer of the forest
concession of private respondent to petitioners for P120,000.00.
This finding is supported by the following consi-derations, viz.:
1.
Both parties at the time of the execution of the deed
of assignment knew that the Timberwealth Corporation stated
19
Gonzales vs. Previsora Filipina, 74 Phil. 165.
398
ObligatiOns and COntraCts
Text and Cases
art. 1371
therein was non-existent.
2.
In their subsequent agreement, private respondent
conveyed to petitioners his inchoate right over a forest concession
covering an additional area for his existing forest concession,
which area he had applied for, and his application was then
pending in the Bureau of Forestry for approval.
3.
Petitioners, after the execution of the deed of assignment, assumed the operation of the logging concession of private
respondent.
4.
The statement of advances to respondent pre- pared
by petitioners stated: “P55,186.39 advances to L.A. Tiro be applied
to succeeding shipments. Based on the agreement, we pay
P10,000.00 every after (sic) shipment. We had only 2 shipments.”
5.
Petitioners entered into a Forest Consolidation
Agreement with other holders of forest concessions on the strength
of the questioned deed of assignment.
The aforesaid contemporaneous and subsequent acts of
petitioners and private respondent reveal that the cause stated
in the questioned deed of assignment is false. It is settled that
the previous and simultaneous and subsequent acts of the parties
are properly cognizable indicia of their true intention. Where the
parties to a contract have given it a practical construction by their
conduct as by acts in partial performance, such cons-truction
may be considered by the court in construing the con-tract,
determining its meaning and ascertaining the mutual intention
of the parties at the time of 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 agreement.
In Carceller vs. Court of Appeals,18 the Supreme Court, as a
rule of interpretation, said that analysis and construction, however,
should not be limited to the words used in the contact, as they may
not accurately reflect the parties’ true intent. The reasonableness of
the result obtained, after said analysis, ought likewise to be carefully
considered. In the same case, the Supreme Court also said that, in
contractual relations, the law allows the parties reasonable leeway
on the terms of their agreement, which is the law between them, and
that contracts should not be interpreted in a harsh and in-equituous
way.
The import of the word ultimately depends upon a consideration
of the entire provision, its nature, object and the consequences that
would follow from construing it one way or the other. Thus, if a
art. 1372
COntraCts
Interpretation of Contracts
399
provision demands a mandatory application, the word “may” can be
construed as “shall.”19 Conversely, the word “shall” can be construed
as “may” if the application demands a directory application.
Article 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)
Within the purview of this article are the maxims noscitur a
sociis and ejusdem generis. Noscitur a sociis means that general and
unlimited terms are restrained and limited by particular terms that
follow.20 Ejusdem generis means that “a general term joined with a
specific one will be deemed to include only things that are like, of the
same genus as, the specific one.”21
However broad may be the terms of a contract, it extends
only to those things concerning which it appears the parties
intended to contract. The terms employed are servants, and not
masters, of an intent; they are to be interpreted so as to subserve,
and not to subvert, such intent. Words which admit of a more
extensive or more restrictive signification must be taken in that
sense which will best effectuate what it is reasonable to suppose
was the real intention of the parties. Words are not to be taken
in their broadest sense if they are equally appropriate in a sense
limited to the object and the intent of the contract. The courts are
sometimes required to restrict the meaning of the words, and to
that end a word in the plural may be restricted to the singular.22
Article 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)
In Lao Lim vs. Court of Appeals23 where the contract of lease
specifically provided
that the term of the lease shall be renewed every three years
retroacting from October 1979 to October 1982; after which the
20
Cebu Institute of Technology, et al. vs. Ople, G.R. No. L-58870, December 18,
1987.
21
John H. Jackson and Lee C. Bollinger, Contract Law in Modern Society, 1980
edition, St. Paul Minn., West Publishing Company, Page 1025; See also Go Tiaco vs.
Hermanos vs. Union Insurance Society of Canton, 40 Phil. 40.
22
17 Am Jur 2d 639.
23
G.R. No. 87047, October 31, 1990, 191 SCRA 150.
400
ObligatiOns and COntraCts
Text and Cases
art. 1373
above-named rental shall be raised automatically by 20% every
three years for as long as defendant needed the premises and can
meet and pay the said increases, the defendant to give notice of his
intent to renew sixty (60) days before the expiration of the term,
the Supreme Court ruled that the said provision can be interpreted
as involving a potestative suspensive condition making the defendant
stay in the premises for as long as he needed the same, but examining
the provision in its entirety, the said provision
is actually to the effect that the last portion thereof, which gives
the private respondent sixty (60) days before the expiration of
the term the right to give notice of his intent to renew, is subject
to the first portion of said paragraph that “the term of the lease
shall be renewed every three (3) years,” thereby requiring the
mutual agreement of the parties. The use of the word “renew”
and the designation of the period of three (3) years clearly confirm
that the contract of lease is limited to a specific period and that it
is not a continuing lease. The stipulation provides for a renewal
of the lease every three (3) years; there could not be a renewal
if said lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby
construed as providing for a definite period of three (3) years and
that the automatic increase of rentals by twenty percent (20%) will
take effect only if the parties decide to renew the lease. A contrary
interpretation will result in a situation where the continuation
and effectivity of the contract will depend only upon the will of
the lessee, in violation of Article 1308 of the Civil Code x x x. The
compromise agreement should be understood as bearing that
import which is most adequate to render it effectual. Where the
instrument is susceptible of two interpretations, one which will
make it invalid and illegal and another which will make it valid
and legal, the latter inter-pretation should be interpreted.
In Caltex vs. Intermediate Appellate Court24 where the only issue
was whether or not the deed of assignment entered into by the parties
completely extinguished the obligation stated therein, the Supreme
Court by applying one of the basic rule that provisions in the contract
must be given a construction as will give effect to them, stated:
In the instant case, the then Intermediate Appellate Court
failed to take into account the following express recitals of the
Deed of Assignment —
24
25
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
G.R. No. 126074, February 24, 1998, 91 SCAD 892, 286 SCRA 544.
art. 1373
COntraCts
Interpretation of Contracts
401
“That Whereas, ASSIGNOR has an outstanding obligation with ASSIGNEE in the amount of
P4,072,682.13 as of June 30, 1980, plus any applicable interest on overdue account (p. 2, Deed of Assignment)
“Now therefore in consideration of the fore-going
premises, ASSIGNOR by virtue of these presents,
does hereby irrevocably assign and transfer unto
ASSIGNEE any and all funds and/or Refund of Special
Fund Payments, including all its rights and benefits
accruing out of the same, that ASSIGNOR might be
entitled to, by virtue of and pursuant to the decision
in BOE Case No. 80-123, in payment of ASSIGNOR’s
outstanding obligation plus any applicable interest
charges on overdue account and other avturbo fuel
lifting and deliveries that ASSIGNOR may from time
to time receive from the ASSIGNEE, and ASSIGNEE
does hereby accepts such assignment in its favor.” (p.
2, Deed of Assign-ment) (Italics supplied)
Hence, it could easily be seen that the Deed of Assignment
speaks of three (3) obligations — (1) the outstanding obligation
of P4,072,682.13 as of June 30, 1980; (2) the applicable interest
charges on overdue accounts; and (3) the other avturbo fuel lifting
and deliveries that the Assignor (private respondent) may from
time to time receive from the assignee (Petitioner). As aptly
argued by petitioner, if it were the intention of the parties to
limit or fix respondent’s obligation to P4,072,682.13, they should
have so stated and there would have been no need for them to
qualify the statement of said amount with the clause “as of June
30, 1980 plus any applicable interest charges on overdue account”
and the clause “and other avturbo fuel lifting and deliveries that
ASSIGNOR may from time to time receive from the ASSIGNEE.”
The terms of the Deed of Assignment being clear, the literal
meaning of its stipulations should control. 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. (Rule 130, Sec. 9, Rules of Court).
In Ridjo Tape & Chemical Corporation vs. Court of Appeals,25
it was held 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.
26
De Leon vs. Court of Appeals, G.R. No. 95511, January 30, 1992.
402
ObligatiOns and COntraCts
Text and Cases
art. 1374
Article 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)
Just like in statutory construction, the various provisions of a
contract must be read as a whole and not in isolation. Each provision
must be related to each other in order to clearly know the total import
and application of the law and so that a harmonious whole will be
attained.26
In Ruiz vs. Sheriff of Manila,27 the mortgage contract provides:
“WHEREAS, the parties of the FIRST PART, jointly
and severally, has/have applied for and jointly and severally
obtained from the party of the SECOND PART, a loan in the
sum of FIFTEEN THOUSAND PESOS (P15,000.00), Philippine
currency, to be amortized at the rate of not less than P300.00
including interest on unpaid balance, at the rate of 8% per annum,
said interest and capital amortization to be effected at the end of
each month. Failure to pay two successive monthly amortizations
will cause this loan to be automatically due and payable in its
entirety. Notwithstanding the foregoing, this loan shall not run
for more than 5 years.”
For failure to pay their indebtedness, appellants’ property was
foreclosed. They filed a suit in the lower court to annul the foreclosure
but failed. Hence, they went up to the Supreme Court which affirmed
the decision of the lower court. Pertinently, the Supreme Court said:
x x x appellant lay stress on the following last two sentences
of the provision of the mortgage contract quoted above, to wit:
“x x x Failure to pay two successive monthly amortizations
will cause this loan to be automatically due and payable in its
entirety. Notwithstanding the foregoing, this loan shall not run
for more than 5 years.”
Interpreting the above stipulation, the appellants claim that
despite the acceleration clause, they had five years from January
18, 1961 within which to pay their mortgage debt because of the
phrase “notwithstanding the foregoing” in the last sentence. Since
the five-year period had not yet expired when the mortgage was
foreclosed, said foreclosure, they point out, was premature.
G.R. No. L-24016, July 31, 1960, 34 SCRA 83.
G.R. No. L-10231, October 18, 1988, 166 SCRA 577.
29
G.R. No. 121158, December 5, 1996, 77 SCAD 125.
27
28
art. 1374
COntraCts
Interpretation of Contracts
403
The appellants’ interpretation is totally without merit. To
ascertain the meaning of the provision of the mortgage contract
relied upon by the appellants, its entirety must be taken into
account and not merely its last two sentences. A reading of the
entire provision will readily show that while the appellants
were allowed to amortize their loan at the rate of not less than
P300.00 a month, they were under obligation to liquidate the same
within a period of not more than five (5) years from the date of
the execution of the contract; but if they should fail to pay two
successive monthly amortizations, then the entire loan would be
due and payable. It is obvious that the phrase “notwith-standing
the foregoing” does not refer to the acceleration clause but to the
stipulation that the loan had to be “amortized at the rate of not
less than P300.00, including interest on unpaid balance, at the
rate of 8% per annum, said interest and capital amortization to be
effected at the end of each month.” There is nothing inconsistent
between the acceleration clause and the last sentence. All that
the parties meant is that while monthly amortizations could be
as little as P300.00 the loan should anyway be paid within 5
years; and that failure to pay two successive amortizations would
render the entire loan due and payable. Consequently, default
having been committed for twelve months, the foreclosure of the
mortgage was not premature.
In Fernandez vs. Court of Appeals28 where the only issue involved
the interpretation of the phrase “renewable for another ten (10)
years at the option of both parties under such terms and condi-tions
and rental reasonable at that time,” the Supreme Court rejected
the position that the word “renewable” means that the lessee can
unilaterally renew the contract and that therefore the phrase “at the
option of the parties” was just a superfluity. Pertinently, the Supreme
Court said:
x x x the intention of the parties to the lease agreement is
clearly discernible in the words of that agreement. The assent
of both the lessor and lessee is essential for another contract to
spring into juridical existence upon expiration of the original one.
xxx
We do not believe that the use of either “extendible”
or “renewable” should be given sacramental significance.
The important task in contract interpretation is always the
ascertainment of the intention of the contracting parties and that
task is of course to be discharged by looking to the words they used
to project that intention in their contract, all the words not just a
particular word or two, and words in context not words standing
alone. In the case at bar, the intent of the parties is observable
with sufficient clarity and specificity in the language used.
404
ObligatiOns and COntraCts
Text and Cases
art. 1374
In China Banking Corp. vs. Court of Appeals,29 the Supreme
Court, using Article 1374, interpreted the import and application of
a mortgage, thus:
Petitioners aver that the additional loans extended in
favor of private respondents in excess of P6,500,000.00 and
P3,500,000.00 — amounts respectively stipulated in the July
1989 and August 10, 1989 mortgage contracts — are also secured
by the same collaterals or real estate properties, citing as bases
the introductory paragraph (“whereas clause”) of the mortgage
contracts, as well as the stipulations stated therein under the first
and second paragraphs. Private respondents for their part argue
that the additional loans are clean loans, relying on some isolated
parts of the same introductory paragraph and first paragraph of
the contracts, and also of the third paragraph.
As both parties offered a conflicting interpretation of the
contract, then judicial determination of the parties’ intention is
thus, inevitable. Hereunder are the pertinent identical introductory paragraphs and 1 to 3 of the July 27, 1989 and August
10, 1989 mortgage contracts:
“WHEREAS, the MORTGAGEE has granted,
and may from time to time hereafter grant to the
MORTGAGOR(S)/either of them/and/or NATIVE
WEST INTERNATIONAL TRADING CORP. —
hereinafter called the DEBTOR(S) credit facilities
not exceeding SIX MILLION FIVE HUNDRED
THOUSAND PESOS ONLY (P6,500,000.00) Philippine Currency, and the MORTGAGEE had required
the MORTGAGOR(S) to give collateral security for
the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be
contracted/incurred by the MORTGAGOR(S) and/
or DEBTOR(S), or any one of them, in favor of the
MORTGAGEE;
“NOW, THEREFORE, as collateral security
for the payment of the principal and interest of the
indebtedness/obligations herein referred to and
the faithful performance by the MORTGAGOR(S)
of
his (her, its) obligations hereunder, the MORTGAGOR(S) hereby execute(s) a FIRST MORTGAGE,
in favor of the MORTGAGEE, free from all liens
and encumbrances of any kind, that (those) certain
parcel(s) of land, together with all the buildings/
31
32
G.R. No. L-32162, September 28, 1984, 132 SCRA 156.
William F. Elliott, Commentaries on the Law of Contracts, Volume 2, 1913
art. 1374
COntraCts
Interpretation of Contracts
machineries/equipment/improvements now existing
thereon, and which may hereafter be placed thereon,
described in the Schedule of mortgaged properties
described hereunder and/or which is hereto attached,
marked Exhibit “A” and made a part thereof.
“1. It is agreed that this mortgage shall
respond for all the obligations contracted/incurred by
the MORTGAGOR(S) and/or DEBTOR(S) or any one
of them, in favor of the MORTGAGEE up to the said
sum of SIX MILLION FIVE HUNDRED THOUSAND
PESOS ONLY (P6,500,000.00) regard-less of the
manner in which the said obligations may have been
contracted/incurred by the MORT-GAGOR(S) and/
or DEBTOR(S) — whether by ad-vances or loans
made to him (her, it) by the MORT-GAGEE, by the
negotiation of mercantile documents, including trust
receipts, by the execution by the MORTGAGOR(S)
and/or DEBTOR(S) of money market instruments/
commercial papers, under-takings of guaranty
of suretyship, or by endorsement of negotiable
instrument, or otherwise, the idea being to make this
deed a comprehensive and all embracing security that
it is.
“2. Payments on account of the principal and
interest of the credit granted by the MORTGAGEE
to the MORTGAGOR(S) and/or DEBTOR(S) may
be made from time to time, and as often as the
MORTGAGOR(S) may elect; provided, however, that
in the event of such payments being so made that the
indebtedness to the MORTGAGEE may from time to
time be reduced the MORTGAGEE may make further
advances and all sums whatsoever advanced by the
MORTGAGEE shall be secured by this mortgage,
and partial payments of said indebtedness from time
to time shall not thereby be taken to reduce by the
amount of such payments the credit hereby secured.
The said credit shall extend to any account, which
shall, within the said limit of P6,500,000.00* exclusive
of interest, be fluctuating and subject to increase or
decrease from time to time as the MORTGAGEE may
approve, and this mortgage shall stand as security
for all indebtedness of the MORTGAGOR(S) and/or
DEBTOR(S), or any one of them, at any and all times
outstanding, regardless of partial or full payments at
any time
or times made by the MORTGAGOR(S)
and/or DEBTOR(S).
“3.
It is hereby agreed that the MORTGA-
405
406
ObligatiOns and COntraCts
Text and Cases
art. 1374
GEE may from time to time grant the MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the
amount secured by this mortgage, without affecting
the liability of the MORTGAGOR(S) under this
mortgage up to the amount stipulated.”
An important task in contract interpretation is the
ascertainment of the intention of the contracting parties which
is accomplished by looking at 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. Indeed, Article 1374 of the Civil Code, states that “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.” Applying the rule, we find that
the parties’ intent is to constitute the real estate properties as
continuing securities liable for future obligations beyond the
amounts of P6.5 million and P3.5 million respectively stipulated
in the July 27, 1989 and August 10, 1989 mortgage contracts.
Thus, while the “whereas” clause initially provides that “the
mortgagee has granted, and may from time to time hereafter
grant to the mortgagors x x x credit facilities not exceeding six
million five hundred thousand pesos only (P6,500,000.00)**” yet
in the same clause it provides that “the mortgagee had required
the mortgagor(s) to give collateral security for the payment of
any and all obligations theretofore contracted/incurred and which
may thereafter be contracted/incurred by the mortgagor(s) and/
or debtor(s), or any one of them, in favor of the mortgagee” which
qualifies the initial part and shows that the collaterals or real
estate properties serve as securities for future obligations. The
first paragraph which ends with the clause, “the idea being to
make this deed a comprehensive and all embracing security that
it is” supports this qualification.
Similarly, the second paragraph provides that “the
mortgagee may take further advances and all sums whatsoever
advanced by the mortgagee shall be secured by this mortgagee x x
x.” And although it was stated that “[t]he said credit shall extend
to any account which shall, within the said limit of P6,500,000.00
exclusive of interest,” this part of the second sentence is again
qualified by its succeeding portion which provides that “this
mortgage shall stand as security for all indebtedness of the
mortgagor(s) and/or debtor(s), or any one of them, at any and all
times outstanding . . .” Again, under the third paragraph, it is
provided that “the mortgagee may from time to time grant the
mortgagor(s)/debtor(s) credit facilities exceeding the amount
secured by this mortgage x x x.” The fourth paragraph, in addition,
art. 1374
COntraCts
Interpretation of Contracts
407
states that “x x x all such withdrawals, and payments, whether
evidenced by promissory notes or otherwise, shall be secured
by this mortgage” which manifestly shows that the parties
principally intended to constitute the real estate properties
as continuing securities for additional advancements which
the mortgagee may, upon application, extend. It is well settled
that mortgages given to secure future advancements or loans
are valid and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for which
the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness
can be gathered.
In Home Development Mutual Fund vs. Court of Appeals,30 the
consultancy agreement particularly reads:
“That this agreement takes effect on January 1, 1985 to
December 31, 1985: Provided, however, That either party who
desires to terminate the contract may serve the other party a
written notice at least thirty (30) days in advance.”
It was the contention of the petitioner in the said case that the
first clause was independent from the second clause such that after
December 31, 1985, the contract is deemed terminated. Hence, the
notice of termination given to the respondent nine days after December 31, 1985 was a compliance in good faith of the above-mentioned
agreement. Petitioner likewise contended that, even before the
expiration of the contract, it had served the respondent notice on
December 26, 1985. It was shown however by concrete evidence that,
since 1981, the practice of the petitioner and the respondent was that,
without renegotiation, the consultancy contract was con-tinuously
renewed so that the respondent continued to serve the petitioner even
after the expiry date with the renewal-contract signed in the first few
months of the year. Accordingly, applying Article 1374 of the Civil
Code and the rule in contract interpretation that several provisions
in a contract must be given a construction that will give effect to
all, the Supreme Court ruled that the petitioner failed to comply
with the 30-day notice requirement for terminating the contract
and therefore, also considering the yearly practice of the petitioner
and the respondent in the implementation and the renewal of their
consultancy agreement, the said agreement must be deemed renewed.
The Supreme Court said that the first clause relating to the term of
the contract must be construed together with the second clause on
the 30-day notice-requirement. The 30-day notice therefore should be
30
G.R. No. 118972, April 3, 1998, 93 SCAD 378, 288 SCRA 617.
408
ObligatiOns and COntraCts
Text and Cases
art. 1375
given prior to the expiration date of the contract which was December
31, 1985. This becomes more imperative especially considering that
the notice relates to the termination of the contract. “Thus, the
requirements of contract as to notice — as to the time of giving, form
and manner of service thereof — must be strictly observed because
in an obligation where a period is designated, it is presumed to have
been established for the benefit of both the contracting parties. Thus,
the unilateral termination of the contract in question by the herein
petitioners is violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.”
Article 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)
In Pasay City Government vs. Court of First Instance of Manila,31
where a compromise agreement provided that the project was to
be done in stages and that, in accordance with sub-paragraph B
paragraph 1 of the agreement, the contractor was to submit “a new
performance bond in the amount required by pertinent law, rules
and regulations, in proportion to the remaining value or cost of the
unfinished work of the construction as per approved plans and specifications,” and where there was a dispute as to whether the amount
of the performance bond covered the whole unfinished project or only
the next stage of work to be done, the Supreme Court ruled that the
provision on the new performance bond
read together with the stage-by-stage construction and payment
approach, would inevitably lead to the conclusion that the parties
to the compromise contemplated a divisible obligation necessitating therefore a performance bond “in proportion” to the
uncompleted work.
What is crucial in sub-paragraph B of paragraph 1 of
the compromise agreement are the words, “in proportion.” If
the parties really intended the legal rate of 20% performance
bond to refer to the whole unfinished work, then the provision
should have required the plaintiff contractor to submit and file
a new performance bond to cover the remaining value/cost of the
unfinished work of the construction. Using the words in proportion
then significantly changed the meaning of the paragraph to
ultimately mean a performance bond equal to 20% of the next
stage of work to be done.
Edition, Indianapolis, The Bobbs-Merrill Company, Pages 1055-1059.
art. 1376
COntraCts
Interpretation of Contracts
409
Article 1376. The usage or customs 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)
No principle of the law is better settled than the one that
an express contract embodying in clear and positive terms the
intention of the parties cannot be varied nor contradicted by
evidence of usage or custom. The usage must be consistent with
the contract. The office of the custom or usage is to explain the
meaning of words and phrases used in a written contract and to
annex thereto certain incidents which circumstances indicate the
parties intended when the words used do not necessarily exclude
the operation of such custom or usage but they may not be used to
contradict nor vary the plain meaning of the contract. “Usage may
be admissible to explain what is doubtful; it is never admissible
to contradict what is plain.” “This rule,” says Mr. Justice Harlan,
“is based upon the theory that the parties, if aware of any usage
or custom relating to the subject-matter of their negotiations,
have so expressed their intention as to take the contract out of
the operation of any rules established by mere usage or custom.”
“The proper office of a custom or usage in trade,” says Mr. Justice
Davis, “is to ascertain and explain the meaning and intention of
the parties to a contract, whether written or in parol, which could
not be done without the aid of this extrinsic evidence. It does not
go beyond this, and is used as a mode of interpretation on the
theory that the parties knew of its existence, and contracted with
reference to it. It is often employed to explain words or phrases in
a contract of doubtful signification, or which may be understood
in different senses, according to the subject-matter to which they
are applied. But if it is inconsistent with the contract, or expressly
or by necessary implication contradicts it, it cannot be received in
evidence to affect it.” On the question of the right of one to invoke
a custom or usage to vary or contradict an express contract it
was said by Mr. Justice Story: “The true and appropriate office
of usage or custom is to interpret the otherwise indeterminate
intentions of the parties and to ascertain the nature and extent
of their contracts, arising not from express stipulations, but from
mere implications and presumptions, and acts of a doubtful or
equivocal character. * * * But I apprehend, that it can never be
proper to resort to any usage or custom to control or vary the
positive stipulations in a written contract, and, a fortiori not in
order to contradict them. An express contract of the parties is
always admissible to supersede or vary, or control, a usage or
custom; for the latter may always be waived at the will of the
parties. But a written and express contract cannot be controlled,
or varied, or contradicted by a usage or custom; for that would
410
ObligatiOns and COntraCts
Text and Cases
art. 1377
not only be to admit parol evidence to control, vary, or contradict
written contracts; but it would be to allow mere presumptions
and implications, properly arising in the absence of any positive
expressions of intention, to control, vary or contradict the most
formal and deliberate declarations of the parties.32
Article 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who caused
the obscurity. (1288)
Words or stipulations that are susceptible to different interpretations causing ambiguity in their application shall be construed
against the person who chose to use such ambiguous words or
phrases.33 This is based on the maxim verba accipiuntur fortius contra
proferentem. The rule is called the contra proferentem rule.
The expression means “against the profferer,” i.e., against
the person who drafted or tendered the documents. If there
is an ambiguity in a document which all the other methods
of construction have failed to resolve so that there are two
alternative meanings to certain words, the court may construe
the words against the party who put forward the document and
give effect to the meaning more favourable to the other party.34
Thus, in Capitol Insurance vs. Sadang,35 where an ambiguity
as to the scope of the mortgage contract drafted by the lawyer of the
insurance company led to a corresponding ambiguity in its application, the Supreme Court ruled against the liability of the mortgagor
on the contract by stating that
if the mortgage contract as actually drafted seems to be vague or
ambiguous, the doubt must be resolved against appellant, whose
lawyer prepared the document, and in accordance with the real
intention of the parties as explained by defendant-appellees.
In Nacu vs. Court of Appeals36 where the dispute involved the
application of a real estate mortgage to another loan, the Supreme
Court, applying basic rules on the interpretation of contract said:
Finally, if the parties intended the 1982 real estate
mortgage to apply to the 1983 loan transaction, respondent Bank
should have required petitioners spouses to execute the proper
loan documents clearly and categorically constituting upon the
same property a real estate mortgage. The respondent Bank
failed in this regard and must therefore suffer the consequences.
33
Tuason vs. Court of Appeals, G.R. No. 119794, October 3, 2000, 135 SCAD 28,
341 SCRA 707; Villamil vs. Court of Appeals, 208 SCRA 643.
art. 1377
COntraCts
Interpretation of Contracts
411
In Orient Air Services and Hotel Representatives vs. Court of
Appeals, this Court upheld the doctrine that any ambiguity in a
contract whose terms are susceptible of different interpretation,
must be read against the party who drafted it.
Article 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)
In Central Philippine University vs. Court of Appeals37 where
the deed of donation to the donee required as a condition that the
donee was to construct a medical school on the property donated, and
where the donee did not comply with the condition but contended
that the donation should nevertheless be made effective considering
the length of time the donor did not seek the enforcement of the
condition, the Supreme Court ruled in favor of the donor by decreeing
the revocation of the donation for non-compliance with the condition,
and stated: “Finally, since the questioned deed of donation herein
is basically a gratuitous one, doubts referring to incidental circumstances of a gratuitous contract should be resolved in favor of the
least transmission of rights and interests.”
In Castelo vs. Court of Appeals38 where the application of a
provision relative to the payment of interest was interpreted by the
Supreme Court, the latter applied the rule that, if the contract is
onerous, the doubt shall be settled in favor of the greatest reciprocity
of interests. The Supreme Court pertinently ruled, thus:
Keating on Building Contracts, by The Hon. Sir Anthony May, M.A., Sweet
and Maxwell, London, 1995 Page 47.
35
G.R. No. L-18857, December 11, 1967, 21 SCRA 1183; see also Nacu vs. Court of
Appeals, G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 237; Coscolluela
vs. Valderrama, L-13757, August 31, 1961, 2 SCRA 1095; Solis vs. Salvador, G.R. No.
L-17022, August 14, 1965; Halili vs. Lloret, 95 Phil. 78.
36
G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 1994.
37
G.R. No. 112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511.
38
G.R. No. 96372, May 22, 1995, 61 SCAD 175, 244 SCRA 180.
34
412
ObligatiOns and COntraCts
Text and Cases
art. 1378
The stipulation in the “Deed of Conditional Sale” requiring
the payment of interest is not unlawful. The validity of the
contract of conditional sale itself has not been put to question by
private respondent dela Rosa and there is nothing in the record
to suggest that the same may be contrary to law, morals, good
custom, public order or public policy. Accordingly, the contractual
stipulation must be regarded as binding and enforceable as the
law between the parties.
We turn, therefore, to the examination of the contractual
stipulation on interest which we quoted in full earlier. Under
the terms of the stipulation, private respondent was bound,
and entitled, to pay the balance of P163,408.00 on or before 31
December 1982 without incurring any liability for any interest
and penalty charges. During the grace period of six (6) months,
that is, from 1 January 1983 to 30 June 1983, private respondent
vendee was given the right to pay the said balance or any portion
that had remained unpaid provided that “interest at the rate of
12% per annum shall be charged and 1% penalty charge shall
be imposed on the remaining diminishing balance.” We observe
that residual ambiguity infects this particular portion of the
stipulation on payment of interest. The question is whether,
during the period of 1 January 1983 up to 30 June 1983, 12%
interest per annum plus 1% penalty charge a month was payable
“on the remaining diminishing balance,” or whether during the
period from 1 January 1983 to 30 June 1983, only 12% per annum
interest was payable while the 1% per month penalty charge
would in addition begin to accrue on any balance remaining
unpaid as of 1 July 1983.
We believe that the contracting parties intended the latter
view of their stipulation on interest; for if the parties had intended
that during the grace period from 1 January 1983 to 30 June
1983, interest consisting of 12% per annum plus another 12%
per annum (equivalent to 1% per month), or a total of 24% per
annum, was payable, then they could have simply said so. Instead,
the parties distinguished between interest at the rate of 12% per
annum and the 1% a month penalty charge. The interpretation we
adopt is also supported by the principle that in case of ambiguity
in contract language, that interpretation which establishes a less
onerous transmission of rights or imposition of lesser burdens
which permits greater reciprocity between the parties, is to be
adopted.
In Gaite vs. Fonacier39 where Gaite transferred to Fonacier all
39
40
G.R. No. L-11827, July 31, 1961, 2 SCRA 830.
G.R. No. L-60174, February 16, 1983, 120 SCRA 628.
art. 1378
COntraCts
Interpretation of Contracts
413
his goodwill, rights and interest on the improvements he made on the
area subject of the mining claim and the 24,000 tons of iron already
extracted, all for a consideration of P75,000, P10,000 of which was
paid upon the signing of the agreement, and where, according to
paragraph (b) of the agreement,
the balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will
be paid from and out of the first letter of credit covering the first
shipment of iron ores and of the first amount derived from the
local sale of iron ore made by the Larap Mines & Smelting Co.,
Inc. its assigns, administrators, or successors-in-interest,
and where there was a dispute as to whether paragraph b provides
a suspensive period or a suspensive condition, the Supreme Court
ruled that since the rules of interpretation would incline the scales
in favor of “the greater reciprocity of interest” in onerous contract,
paragraph b must be interpreted as providing a suspensive period and
not a suspensive condition. The Supreme Court pertinently stated:
x x x there can be no question that greater reciprocity obtains
if the buyer’s obligation is deemed to be actually existing, with
only its maturity (due date) postponed or deferred, that if such
obligation were viewed as non-existent or not binding until the
ore was sold.
The only rational view that can be taken is that the sale
of the ore to Fonacier was a sale on credit, and not an aleatory
contract where the transferor, Gaite, would assume the risk of
not being paid at all; and that the previous sale or shipment of
the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the
future date of the payment.
The law likewise provides that 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. Hence, if the object of the contract
is a particular house of the seller in Quezon City and he owns two
houses in the said locality, the contract will be considered void if it
cannot be determined which house is the object of the contract.
Article 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 123 of the Rules of Court is now Rule 130 of the New Rules
414
ObligatiOns and COntraCts
Text and Cases
art. 1379
of Court. Relevantly, the latter provides the following provisions:
Section 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)
Section 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)
Section 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)
Section 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 he is to
interpret. (11)
Section 14. Peculiar 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
the agreement must be construed accordingly. (12)
Section 15. Written words control printed. — When an
instrument consists partly of written words and partly of a printed
form, and the two are inconsistent, the former controls the latter.
(13)
Section 16. Experts and interpreters to be used in explain-ing
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)
Section 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 construction of a provision are otherwise equally proper,
that is to be taken which is the most favorable to the party in
art. 1379
COntraCts
Interpretation of Contracts
415
whose favor the provision was made. (15)
Section 18. Construction in favor of natural right. — When
an instrument is equally susceptible of two interpretation, one
in favor of natural right and the other against it, the former is
to be adopted. (16)
Section 19. Interpretation according to usage. — An
instrument may be construed according to usage, in order to
determine its true character. (17)
In Felipe vs. Heirs of Maximo Aldon,40 the Supreme Court had
occasion to say that the description that a contact is “invalid”
is imprecise when used in relation to contracts because the Civil
Code uses specific names in designating defective contracts,
namely: rescissible (Art. 1380, et seq.), voidable (Art. 1390, et
seq.), unenforceable (Art. 1403, et seq.), and void or inexistent
(Art. 1409, et seq.).
416
ObligatiOns and COntraCts
Text and Cases
art. 1379
417
Chapter 6
RESCISSIBLE CONTRACTS
Article 1380. Contracts validly agreed upon may be
rescinded in the cases established by law. (1290)
The rescissible contracts under Article 1380 are valid, but may
subsequently be terminated on legal grounds. Their being rescissible
is not principally premised on a breach of trust by the other party,
but on some economic damage as a result of inequitable conduct by
one party. If the contract is in fraud of creditors, which is a ground
for rescission, but it is likewise simulated in that there is absolutely
no consideration, the contract is not rescissible under this chapter
but clearly void ab initio. In Dilag vs. Court of Appeals,1 a contract
in fraud of creditors but completely simulated was considered void
and not merely rescissible, thus:
The appellate court ruled that the deed of sale was simulated
since it was executed in fraud of creditors having been entered into
during the pendency of Civil Case No. 8714. Said contract, being
fictitious, is according to the appellate tribunal, inexistent and
necessarily the adverse claim of private respondents is likewise a
nullity because an inexistent contract cannot give life to anything
at all. Hence, the filing of the present petition for certiorari by
the Dilag children with the following issues:
1.
Whether or not petitioners as plaintiffs below, are the
owners of Lots 288 and 1927, of the Dumangas Cadastre at the
time of the levy on execution in Civil Case No. 8714.
2.
Whether or not the decision and the consequent writ of
execution in Civil Case No. 8714 of the court below are operative
against petitioners who admittedly were not parties to said civil
case.
Petitioners’ contentions do not hold water.
It is not disputed that, at the time of the levy on execution
G.R. No. L-72727, July 30, 1987, 152 SCRA 459.
1
417
418
ObligatiOns and COntraCts
Text and Cases
art. 1380
in Civil Case No. 8714, the Dilag spouses were still the registered
owners of Lot 288 as shown in TCT No. 30137 and they were also
the declared owners of Lot 1827 as shown in Tax Declaration
No. 411900-3039. On the other hand, it is alleged by private
respondent herein and not refuted by petitioners herein that the
title in the name of herein petitioners was issued on August 14,
1981, several days ahead of the deed of sale, dated August 26,
1981 on which the new title in the name of the petitioners was
based, and inscribed on August 27, 1981. Clearly, the Deed of
Absolute Sale in favor of petitioners herein executed in 1974 after
the filing of Civil Case No. 8714 was a simulated and fictitious
transaction to defraud Arellano who obtained a money judgment
against the parents of petitioners.
The supposed sellers, spouses Pablo and Socorro Dilag who
sold the lot in question to their children (petitioners herein) for an
insufficient consideration continued exercising acts of ownership
over Lot No. 288 by leasing the same to David Diancin and
turning over material possession thereof to the latter as lessee.
In fact, when the deed of sale in favor of Arellano was executed
on August 30, 1982, by virtue of the failure of the former owners
to redeem the property within the period prescribed by law, the
actual possessor was David Diancin. He, however, recognized
Arellano’s right of ownership when he was notified of the delivery
of possession to Arellano by the Provincial Sheriff as evidenced
by a signed delivery receipt, dated December 12, 1983. Diancin
ceased performing acts of cultivation on the fishpond situated
within the lot in question and he merely requested for an
extension of his stay while he looked for another place to stay.
Subsequently, Arellano sold the lot to Marcelino Florete and Leon
Coo. When Diancin was paid the value of the fish fry he placed
in the fishpond, he executed a Discharge and Release Claim in
favor of Florete, one of the vendees, on July 2, 1983. When the
Dilag children (petitioners herein) filed Civil Case No. 15085
on July 5, 1983, they were not in possession of the property in
question. There was therefore no factual and legal basis for the
restraining order dated July 8, 1983 of the lower court ordering
Arellano and/or his agents to desist from entering Lot No. 288.
Thus Rule 39, Sec. 13 relied upon by petitioners will not apply
in the case at bar.
Likewise it cannot be denied that in securing the cancellation of TCT No. 30137 covering Lot No. 288 in the names
of Pablo and Socorro Dilag, petitioners had to rely on an another
deed of absolute sale supposedly executed by their parents in their
favor in 1981, instead of relying on the first deed of sale executed
in 1974, an indication that petitioners do not really consider the
1974 Deed of Sale valid and legal.
The records of the case do not support petitioners’ contention
art. 1381
COntraCts
Rescissible Contracts
419
that the obligation of spouses Pablo and Socorro Dilag was already
extinguished when Arellano acknowledged the receipt of payment
of the money judgment, by virtue of their own admission thru
counsel in Civil Case No. 12832 that payment was only partial
and did not cover the whole amount of the money judgment
in Civil Case No. 8714. It is also an indisputable fact that the
compromise agreement in Civil Case No. 8714 was denied by the
trial court in its order of October 24, 1979. This order of denial
had become final and executory because no appeal was taken by
petitioners’ predecessors-interest. Furthermore, even assuming
that petitioners became the valid and legal owners of the lot in
question by virtue of the deed of sale executed in their favor in
1981, they nonetheless failed to avail themselves of their right
as registered owners to redeem the property from the private
respondent herein (buyer in the sale by public auction) within
the period provided for by law.
Article 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 claim
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)
Lesion implies an economic damage. In case of a guardian
with respect to the properties of his ward, any act of ownership or
disposition undertaken by the guardian on behalf of his ward without
court approval is void. If there is court approval, the transaction is
valid whether or not there is lesion. If the guardian, however, performs
acts of administration, such as buying materials to repair the roof of
the ward’s house, and the ward suffers economic loss because there
420
ObligatiOns and COntraCts
Text and Cases
art. 1381
was, in fact, no need to make a useless purchase, then the contract
entered into by the guardian is rescissible provided that the ward
suffers lesion by more than one-fourth of the value of the things which
are the object of the contract.
When a person disappears from his domicile, his whereabouts
being unknown, and without leaving an agent to administer his
property, the judge, at the instance of an interested party, a relative,
or a friend, may appoint a person to represent him in all that may be
necessary.2 This is a case of provisional absence. Two years having
elapsed without any news about the absentee or since the receipt of
the last news, and five years in case the absentee has left a person
in charge of the administration of his property, his absence may be
declared by the court. The court may appoint an administrator or a
representative to manage the properties of the absentee.3 The same
rule governing rescission of contract entered into by a guardian shall
apply to administrators or representatives of absentees.
A contract entered into in bad faith by the parties to the said
contract, which was purposely designed to evade the due obligations
in favor of creditors who have no other way to collect their debts, is
considered done in fraud of creditors and therefore rescissible. In
Bobis vs. Provincial Sheriff of Camarines Norte,4 the Supreme Court,
in finding that there was no fraud, ruled as follows:
In dismissing the complaint filed in the instant case, the
trial court found that the sale of the land to Fermin Bobis and
Emilia Guadalupe was tainted with fraud since the said sale was
made during the pendency of Civil Case No. 273, and that the
price was inadequate.
The rule, however, is that fraud is not presumed. As fraud
is criminal in nature, it must be proved by clear preponderance
of evidence. In order that a contract may be rescinded as in fraud
of creditors, it is essential that it be shown that both contracting
parties have acted maliciously and with fraud and for the purpose
of prejudicing said creditors, and that the latter are deprived by
the transaction of all means by which they may effect collection
of their claims. All these circumstances must concur in a given
case. The presence of only one of them is not enough. In this
particular case, there is no evidence that the spouses Rufina
Camino and Pastor Eco connived with the spouses Fermin Bobis
Article 381 of the 1950 Civil Code.
Articles 383 and 387 of the 1950 Civil Code.
4
G.R. No. L-29838, March 18, 1983, 121 SCRA 28.
5
G.R. No. L-19160, December 26, 1963, 9 SCRA 783.
2
3
art. 1381
COntraCts
Rescissible Contracts
421
and Emilia Guadalupe to defraud Alfonso Ortega. Nor is there
evidence to show that the sale of the land to Fermin Bobis and
Emilia Guadalupe tended to deprive Alfonso Ortega of means
to collect his claim from the spouses Rufina Camino and Pastor
Eco. As a matter of fact, no oral or docu-mentary evidence was
presented by the parties, and the trial court merely assumed that
the sale to Fermin Bobis and Emilia Guadalupe was fraudulent
because of the inadequacy of the price, and that the sale was
executed during the pendency of Civil Case No. 273. While
these circumstances may be considered badges of fraud, the sale
cannot be considered in fraud of creditors in the absence of proof
that the vendors Rufina Camino and Pastor Eco, had no other
property except that parcel of land they sold to the spouses Fermin
Bobis and Emilia Guadalupe. Besides, Alfonso Ortega knew
of such sale and did nothing to have it annulled as in fraud of
creditors. Nor did he cause a cautionary notice to be inscribed in
the certificate of title to protect his interests. Moreover, the sale
was not fictitious, designed to escape payment of the obligation
to Alfonso Ortega. The tenacity by which Emilia Guadalupe had
clung to her property to the extent of undergoing imprisonment
is indicative of their good faith.
Also, the phrase “in fraud of creditors” necessarily refers to actual
creditors of the debtor or obligee. In Marsman Investment Ltd. vs.
Philippine Abaca Development Company,5 the Supreme Court, in
disallowing the assertion that there was fraud of creditors, ruled:
Nevertheless, the duly accredited waiver and release in
1959 (two years before the present action was filed by Marsman
Investments Ltd. and Marsman & Co., Inc.) of the credits they
held against defendant PADCO, and the absence of any allegation
or evidence of invalidity of the corporate release, operate to
deprive the rescissory action of any legal basis. Until and unless
those releases are set aside, the plaintiff corporations ceased to be
creditors of the transferor PADCO as of 1959, and were thereafter
deprived of any interest in assailing the validity of the transfer
of its properties to appellee Mary A. Marsman; for under the
Civil Code, only actual creditors can ask for the rescission of the
conveyance made by their debtors in favor of strangers. So that
with the proof of the release executed by the creditors, plaintiffs
appear to have no cause of action against defendants-appellees.
Another contract which is rescissible is that which refers to
things under litigation, if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent
6
judicial
authority.
example,
in117
a suit
the
G.R.
No. 130722,For
December
9, 1999,
SCADfor
74, replevin
320 SCRA wherein
405.
422
ObligatiOns and COntraCts
Text and Cases
art. 1382
plaintiff seeks to recover personal property from the defendant,
the latter, during the pendency of the suit, cannot sell in bad faith
the property being litigated to any third person. If he does and the
transferee also acts in bad faith, the contract is rescissible.
In Litonjua vs. L.R. Corporation6 where the creditor lent the
money to the debtor who, in turn, collateralized his property to secure
the loan, the Supreme Court said that the failure of the debtor to
recognize or implement the stipulated right of first refusal contained
in the loan-mortgage agreement in favor of the creditor makes any
sale of the property to a third person rescissible at the instance of
the creditor. The right of first refusal means that, in the event debtor
decides to sell his property, he must first offer the same to the creditor.
The consideration for the loan-mortgage includes the consideration for
the right of first refusal. To deprive the creditor of this right of first
refusal will surely prejudice the creditor in his substantial interests
to be able to own the property. A contract of sale therefore, entered
into in violation of a right of first refusal of another person, while
valid, is rescissible.7
Article 1382. Payments made in a state of insolvency
for obligations to whose fulfillment the debtor could not be
compelled at the time they were affected, are also rescissible.
(1292)
A debtor whose liabilities already exceed his assets and who can
barely pay off his debts is considered in a state of insolvency. If he pays
off a creditor whose credit has not yet become due, that payment can
be rescinded. It is not necessary here that a prior judicial declaration
of insolvency of the debtor is obtained. In De La Paz vs. Garcia8 where
the transfer of property was made after an insolvency proceeding
was filed with the competent court, and where such transfer was
also claimed as in fraud of creditors, the Supreme Court held that
the transfer was not rescissible under the Civil Code but void under
the Insolvency Law.
Article 1383. The action for rescission is subsidiary; it
cannot be instituted except when the party suffering damage
Rosencor Development Corporation vs. Inquing, G.R. No. 140479, 76 SCAD
467, March 8, 2001, 145 SCAD 484; Guzman vs. Bonnevie, 206 SCRA 668; Equatorial
Realty vs. Mayfair, 76 SCAD 407, 264 SCRA 483; Parañaque Kings Enterprises vs.
Court of Appeals, 79 SCAD 936, 268 SCRA 727.
8
G.R. No. L-18500, November 24, 1966, 18 SCRA 779.
9
G.R. No. L-104234, June 30, 1995, 62 SCAD 228, 245 SCRA 485.
7
art. 1383
COntraCts
Rescissible Contracts
423
has no other legal means to obtain reparation for the same.
(1294)
A cause of action for rescission under this chapter can only be
made in a proper and direct action filed for that purpose and not on
a mere motion incidental to another case. In Air France vs. Court of
Appeals,9 the Supreme Court pertinently ruled:
Multinational Food and Iolani Dionisio, not being parties
to the case, the property covered by TCT No. 353935 may not
be levied upon to satisfy the obligations of private respondent
spouses and the Multinational Travel Corporation.
Petitioner’s contrary claim that the property belongs to
private respondent spouses, if true, requires a rescissory action
which cannot be done in the same case, but through the filing of
a separate action.
Recission 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.
Under Art. 1381 of the Civil Code, the following contracts
are rescissible: x x x
Rescissible contracts, not being void, they remain legally
effective until set aside in a rescissory action and may convey
title. Nor can they be attacked collaterally upon the grounds for
rescission in a land registration proceeding.
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. As Article 1383 of
the Civil Code 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.”
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 or by the proofs presented in the trial of the case. In any
case, the presumption of fraud established by this article is not
conclusive, and may be rebutted by satisfactory and convincing
evidence. To repeat, an independent action is necessary to prove
that the contract is rescissible.
10
Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146
424
ObligatiOns and COntraCts
Text and Cases
art. 1383
Under Article 1389 of the Civil Code, an “accion pauliana,”
the action to rescind contracts made in favor of creditors, must
be commenced within four years.
Clearly, the rights and defenses which the parties in
a rescissible contract may raise or set up cannot be properly
ventilated in a motion but only in a full trial.
The appellate court did not err in holding that the trial court
acted with grave abuse of discretion in resolving these matters
through mere motion of petitioner.
It is likewise subsidiary in that it must be the last remedy. If
there are other means to claim reparation, such other means must
be availed of before filing a case for rescission. An action to rescind
or an accion pauliana must be of last resort.10 All possible ways to
enforce the obligation, including the filing of a court case, must first
be undertaken. And when the implementation of the decision of this
court case fails, then a subsequent court case for rescission of the
contract can be filed.
An accion pauliana thus presupposes the following: 1) a
judgment; 2) the issuance by the trial court of a writ of execution
for the satisfaction of the judgment; and 3) the failure of the sheriff
to enforce and satisfy the judgment of the court. It requires that
the creditor has exhausted the property of the debtor. The date
of the decision of the trial court is immaterial. What is important
is that the credit of the plaintiff antedates that of the fraudulent
alienation by the debtor of his property. After all, the decision of
the trial court against the debtor will retroact to the time when
the debtor became indebted to the creditor.11
In Goquiolay vs. Sycip,12 the Supreme Court said:
A final and conclusive consideration: The fraud charged not
being one used to obtain a party’s consent to a contract (i.e., not
being deceit or dolus in contrahendo), if there is fraud at all, it
can only be a fraud of creditors that gives rise to a rescission of
the offending contract. But by express provision of law (Article
1294, Civil Code of 1889; Article 1383, New Civil Code), “the
action for rescission is subsidiary; it can not be instituted except
when the party suffering damage has no other legal means to
obtain reparation for the same.” Since there is no allegation, or
evidence, that Goquiolay cannot obtain reparation from the widow
SCAD 587.
11
Ibid.
12
G.R. No. L-11840, December 10, 1963, 9 SCRA 663.
13
17 Am Jur 2d 995.
arts. 1384-1385
COntraCts
Rescissible Contracts
425
and heirs of Tan Sin An, the present suit to rescind the sale in
question is not maintainable, even if the fraud charged actually
did exist.
Article 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)
Since rescission presupposes a valid contract, it need not be
rescinded totally considering the law provides that such remedy shall
be only up to the extent necessary to cover the damages caused. For
example, A is indebted to X for P5,000 and, to defraud X, A transfers
his two houses each worth P5,000 to B who is also in bad faith.
Rescission can be had only with respect to one house worth P5,000
because it is only up to this amount that X has been damaged.
Article 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)
In restitution, the parties shall be placed in the same position
where they were before they entered into the assailed contract. The
objective is to restore the parties to their original position. Not only
should the parties return the object subject of the rescissible contract
but also the fruits or interest, if any. If the object of the contract cannot
be restored because of loss, damages may be claimed from the person
responsible for the loss.
An attempted restoration of the status quo is an essential part of
the rescission of a contract, and in accordance with the general
rule requiring restoration, a party cannot rescind and at the
same time retain the consideration, or a part of the consideration,
received under the contract. One cannot have the benefits of
rescission without assuming its burdens.13
It must be noted, however, that rescission cannot 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. Hence, even
426
ObligatiOns and COntraCts
Text and Cases
arts. 1386-1387
if a father, with the intention to put beyond reach, his properties from
his creditors, sold the property to his son for a valuable consi-deration
but below the fair market value of the same, such a sale is valid and
not even rescissible if the son was without any knowledge of the
ulterior motive of his father to defraud his creditors. Mere inadequacy
of price does not invalidate a contract. For the son therefore the
consideration can still be considered a fair price. In short, the son
was clearly in good faith and therefore the contract of sale cannot be
rescinded.
It is axiomatic that good faith is always presumed unless
contrary evidence is adduced. A purchaser in good faith is one
who buys the property of another without notice that some other
person has a right or interest in such a property and pays a full
and fair price at the time of the purchase or before he has notice
of the claim or interest of some other person in the property.14
Article 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)
Approval by the courts implies that the parties were given their
day in court to justify to the court the necessity and reasonableness
of the contract to be entered into. Hence, once judicially approved,
such contract cannot anymore be the subject of rescission.
Article 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 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 the rescission.
In addition to these presumptions, the design to defraud
creditors may be proved in any other manner recognized by
14
Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8,
2001, 145 SCAD 484.
15
G.R. No. L- 25152, February 26, 1968, 22 SCRA 798.
16
Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146
art. 1387
COntraCts
Rescissible Contracts
427
the law of evidence. (1297a)
Article 1387 provides rebuttable presumptions. Presumptions
can only exist from facts or a set of facts. For example, B is indebted
to D for P10,000, E for P7,000, and F for P13,000. All of the debts are
due. B has money in the bank in the amount of P60,000. B donates
P55,000 to X. The donation is presumed to be fraudulent as he has
not reserved sufficient property to pay all debts contracted before the
donation. If the debts are not yet due, it shall likewise be presumed
fraudulent because the only requirements of the law are that the debts
are contracted prior to the donation, and that there is no reservation
of sufficient property to pay all debts contract before the donation.
The maturity of the debts is not a requirement. The presumption,
however, can be controverted by convincing evidence that the donation
was not in fraud of creditors.
Another set of facts which gives rise to a presumption of a
fraudulent transaction is when alienation by onerous title has been
made “by persons against whom some judgment has been rendered
in any instance or some writ of attachment has been issued.” The
presumption, however, can be rebutted by convincing evidence to
the contrary. It must be observed that an alienation made during the
pendency of a suit is not enough. There must already be a decision
or a writ of attachment. For example, A is able to obtain a writ of
attachment against debtor B. The attachment effectively places his
property in Mandaluyong under the custody of the court so that, in
the event A wins the case, such property, if necessary, can be sold to
pay the judgment debt. Subsequently B sells his property in Laguna
to Z. There is a presumption here of a fraudulent alienation even if
the Laguna property is not the subject of the attachment. This is so
because the attachment need not refer to the property alienated. A
can seek the rescission of the sale by B to Z of the property in Laguna.
Likewise, if a decision has been rendered against B in favor of another
creditor X, and B sells the property in Laguna to M, there is also a
presumption of fraudulent transaction, and A can file a case to rescind
the sale even if the decision has not been obtained by him but by X.
The case of Provincial Sheriff of Pampanga vs. Court of Appeals15
is an illustrative case where Article 1387 has been put in issue. The
facts and the ruling of the Supreme Court are as follows:
An action for recovery of a sum of money was filed on June
4, 1960, by Cirilo D. Cabral and Zacarias Perez against Elpidio
Agustin and Manuel Flores in the Court of First Instance of
Bulacan.
428
ObligatiOns and COntraCts
Text and Cases
art. 1387
At said time, Elpidio Agustin was then a furniture dealer
under the business name and style “Modern Furniture Store” in
Masantol, Pampanga. A big fire, however, broke out on January
9, 1961, and totally burned said furniture store of Elpidio Agustin
and its contents of several pieces of furniture. As a result, Elpidio
Agustin, on January 12, 1961, surrendered to the Municipal
Treasurer his license to operate the store.
Not long thereafter, said defendant’s brother, Marciano
Agustin, put on the same site a new furniture store, adopting
the name and style “Modern Furniture Store.” On February 20,
1961, for business purposes, Marciano Agustin secured a new
license and privilege tax to operate the store. And on the same
date, Elpidio Agustin verbally transferred “Modern Furniture
Store” to his brother Marciano Agustin.
Subsequently, on July 13, 1961, the Court of First Instance
of Bulacan, in the aforementioned case, rendered judgment
against Elpidio Agustin (who had confessed judgment) and
Manuel Flores, jointly and severally, for P10,685.15 plus interest
and P500.00 attorney’s fees.
Subsequently, the Court of Appeals affirmed the decision
and it became final and executory. A writ of execution was
issued on April 20, 1963. Acting thereon, the Provincial Sheriff
of Pampanga, on May 3, 1963, levied on the pieces of furniture
found in “Modern Furniture Store.” Stating that said properties
do not belong to judgment debtor Elpidio Agustin but to him,
Marciano Agustin filed a third-party claim with the sheriff. An
indemnity bond, however, was posted by the judgment creditors
in the sheriff’s favor, so he issued notice that the properties levied
upon will be sold at public auction on May 18, 1963.
A day before that, on May 17, 1963, Marciano Agustin filed
in the Court of First Instance of Pampanga the present action,
against judgment creditors Cabral and Perez and the sheriff, to
be declared owner of the pieces of furniture levied upon, with
preliminary injunction and damages. A writ of preliminary
injunction was issued enjoining the sheriff from proceeding with
the sale.
After the defendants answered and trial, the Court of
First Instance rendered a decision that dismissed the complaint.
Plaintiff appealed to the Court of Appeals. On July 29, 1965, the
Appellate Court rendered a decision reversing the lower court,
and declaring Marciano Agustin owner of the pieces of furniture
listed in the complaint, ordering defendants to pay him jointly
and severally P2,000.00 moral and actual damages, and P500.00
SCAD 887.
art. 1388
429
COntraCts
Rescissible Contracts
attorney’s fees, and rendering permanent the injunction issued.
Appeal therefrom was taken to Us by defendants. At issue
here is: Does Article 1387 of the Civil Code on presumption of
fraud apply?
xxx
xxx
xxx
The provision in question applies only when there has in
fact been an alienation or transfer, whether gratuitously or by
onerous title. In the present case, the finding of the Court of
Appeals, which is factual and therefore not proper for Us to alter
in this appeal, is that the store of Marciano Agustin is a new
and different one from that of Elpidio Agustin. True, Marciano
Agustin testified that “Modern Furniture Store” was transferred,
verbally, to him by Elpidio Agustin on February 20, 1961. As the
Court of Appeals found, however, this referred to the business
name and style, not to the store or its contents, as the store
and contents were completely new, coming from the capital of
Marciano Agustin, whereas Elpidio’s store and its contents of
furniture were destroyed totally by the fire of January 9, 1961.
Since there was in fact no transfer of the store or its
furniture, Article 1387 aforementioned finds no application. And
appellants do not contend that the transfer merely of the name
and style “Modern Furniture Store” would be fraudulent. Such
transfer has in the circumstances no effect on Marciano Agustin’s
ownership of the pieces of furniture in question.
Article 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)
A transferee or buyer of a debtor’s property, who knows that
the conveyance has been principally made to remove the property
from the reach of the creditor in satisfaction of the debtor’s liability,
shall be liable to the creditor for damages if it should be impossible
for the transferee to return the subject property. The knowledge of
the transferee of the evasive and fraudulent designs of the debtor
makes the said transferee’s acquisition tainted with bad faith. He
should have desisted from perfecting the fraudulent contract with
the debtor when he learned of the purpose of the transaction. In the
event that the transferee in bad faith transfers the property to a
430
ObligatiOns and COntraCts
Text and Cases
art. 1389
subsequent buyer who is likewise in bad faith, the latter shall have
the obligation to return said property if it is still possible to do so. If
not, he shall be liable for damages. However, if such buyer is in good
faith, his purchase of the property is perfectly valid, thereby making
it impossible for the first transferee to return the property, in which
case such first transferee shall be liable for damages.
Article 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)
The prescriptive period within which to file a case for rescis-sion
is four years. The situations depend on the ground invoked
but,
in all these cases, the prescriptive period begins to run after
the
aggrieved party has unsuccessfully exhausted all possible remedies
to enforce the obligation or to recover what has been lost,16 thus:
1)
For persons under guardianship, the period begins from
the time the incapacity terminates and the aggrieved party
has unsuccessfully exhausted all other legal remedies to be
able to enforce his or her rights or recover what has been
lost. Hence, if the person is a minor, the period begins from
the time he reaches the age of majority which is 18 years of
age17 and has unsuccessfully exhausted all legal remedies;
2)
For absentees, the period begins from the time learns of the
contract and has unsuccessfully exhausted all other legal
remedies to be able to enforce his rights or recover what has
been lost. For the exercise of civil rights and the fulfillment
of civil obligations, the domicile of natural persons is the
place of their habitual residence.18 When the law creating or
recognizing them, or any provision does not fix the domicile
of juridical persons, the same shall be understood to be the
place where their legal representative is established or
where they exercise their principal function;19
3)
For contracts entered into in fraud of creditors, the period
begins from the time of the discovery of the fraud and after
he or she has unsuccessfully exhausted all other legal
17
Article 234 of the Family Code of the Philippines, Executive Order No. 209 as
amended by Republic Act 6809.
18
Article 50 of the 1950 Civil Code.
art. 1389
COntraCts
Rescissible Contracts
remedies to be able to enforce his or her rights or recover
what has been lost; and
4)
19
For contracts entered into with respect to things under
litigation without the knowledge and approval of the
litigants or of competent judicial authority, the period
begins from the time of knowledge of the transaction and
unsuccessful exhaustion of all other legal remedies to be
able to enforce his rights or recover what has been lost.
Article 51 of the 1950 Civil Code.
431
432
ObligatiOns and COntraCts
Text and Cases
Chapter 7
VOIDABLE CONTRACTS
Article 1390. The following contracts are voidable or
annullable, even though there may have been no damage to
the contracting 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)
Voidable contracts are the same as annullable contracts. They
are valid until annulled. They are not invalid from the beginning
unlike a void contract. Hence any defect or infirmity causing its
annullable nature can be cured by the party aggrieved or injured.
This process of curing the defect is called ratification.
In Lim Tay vs. Court of Appeals,1 the Supreme Court ruled that
the effects of an annulment operate prospectively and do not, as a
rule, retroact to the time the contract, such as a sale, was made.
The grounds enumerated in Article 1390 have already been
explained in this book under Articles 1327 to 1344.
Significantly, damage need not exist in case of annulment.
Article 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
fraud,
from103,
the298
time
of 634.
the discovery
G.R.
No. 126891,
Augustor
5, 1998,
97 SCAD
SCRA
1
432
art. 1391
COntraCts
Voidable Contracts
433
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)
A prescriptive period is the time within which an aggrieved
party can file a case in court to make a claim or to assert a right or
to correct a wrong. In annulling a contract, the prescriptive period is
four years. The starting point of this period depends on the ground
invoked as follows:
1)
In case of intimidation, violence or undue influence,
from the time the defect of the consent ceases. Hence if, to be
able to lease his property to A, B coerces A to enter into the said
lease contract by continually threatening A with serious bodily
injury if he does not do so, A is excused from not filing a case for
the annulment of the contract while the threat and intimidation
are still existing. However, if B finally reforms and tells A that
he apologizes for such threats and stops the same, the fouryear period for A to annul the contract will commence from the
cessation of the threat and not from the time the contract was
entered into. In Rodriguez vs. Rodriguez,2 where an annulment
of contract was filed on the ground of duress, the Supreme Court,
after resolving that there was no duress, ruled that even if there
were duress, the circumstances of the case showed that the filing
of the case had already prescribed, thus:
What is more decisive is that duress being
merely a vice or defect of consent, an action based
upon it must be brought within four years after it has
ceased; and the present action was instituted only in
1962, twenty-eigh