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De La Salle University
lohernandezfjggkjfkdfjkjfkjdkjintallab
College of Law
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OBLIGATIONS AND
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CONTRACTS
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uyangbaluyutbatonghinogbongonbord
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quezmendozamilletemojicareonalricor
ubiosalassisonsucganguyangbaluyutba

OBLIGATIONS
AND
CONTRACTS

De La Salle University
TABLE OF CONTENTS
I.

OBLIGATIONS

page/s

Chapter 1: General Provisions of Obligations .................................................................1-3


Chapter 2: Nature and Effects of Obligations....... ........................................................3-12
Chapter 3: Different Kinds of Obligations......................................................12-34
Section 1: Pure and Conditional Obligations..................................................12-19
Section 2: Obligations with a Period....................................................19-23
Section 3: Alternative Obligation..........................................................23-24
Section 4: Joint and Solidary Obligations................................................24-30
Section 5: Divisible and Indivisible..................................................................30-32
Section 6: Obligations with a Penal Clause................................................... 32-34
Chapter 4: Modes of Extinguishing Obligations...........................................................34-58
Section 1: Payment or Performance........................................................38-45
Section 2: Loss of the Thing Due....................................................................46-48
Section 3: Condonation or Remission of Debt ...............................................48-50
Section 4: Confusion and Merger of Rights..................................................50
Section 5: Compensation................................................................................50-53
Section 6: Novation.................................................53-58
II.

Contracts
Chapter 1: General Provisions.....................................................................................58-67
Chapter 2: Essential Requisites...................................................................................67-78
Chapter 3: Formal Contracts..............................................................78-80
Chapter 4: Reformation of Instruments................................................................80-84
Chapter 5: Interpretation of Contracts..................................................................84-90
Chapter 6: Rescissible Contracts..............................................................90-97
Chapter 7: Voidable Contracts.............................................................97-111
Chapter 8: Unenforceable Contracts.......................................................................111-119
Chapter 9: Void and Inexistent Contracts................................................................119-126

III.

Natural Obligations....................................................................................127-128

IV.

Estoppel..................................................................................128-138

V.

Trusts
Chapter 1: General Provisions...........................................................138-140
Chapter 2: Express Trust.........................................................................................140-144
Chapter 3: Implied Trust.............................................................144-150

BAR EXAMINATION QUESTIONS......................................................................................151-153


BIBLIOGRAPHY

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

De La Salle University
ADVISER
Atty. Chato Olivas-Gallo
AUTHORS
Ang, Victor Reynaldo

De Leon, Dino

Marquez, Jerika Everly

Baluyut, Maria Corazon

Del Castillo, Jan


Emmanuel

Mendoza, Othello II

Batonghinog, Minrado, Jr.

Millete, Martin Angelo

Bongon, Danna Magnolia

Espinosa, Jose Joven


Paulo

Mojica, Ma. Cristina

Bordeos, James Aris

Gador, Ken

Reonal, Reannah

Caluag, Bon Jeffrey

Guinto, Aleli

Rico, Danilo II

Calugay, Katrina

Haulo, Oilie

Rubio, Darwin Perry

Celles, Leandro

Hernandez, Ana Victoria

Salas, Maria Patricia

Chavez, Marian Camille

Intal, Pauline Grace

Sison, Kimberly Rae

Chua, Chantal

Labares, Gallard Kevin

Sucgang, Justin

Cua, Bryan Oneal

Lucero, Paula Bettina

Uy, Michael Vincent

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

De La Salle University
Acknowledgment

The authors of this reviewer would like to thank, our professor in Obligations and
Contracts, Atty. Chato Olivas-Gallo, for her guidance and unending support in the making of this
reviewer. Her notes on the subject discussed in class are also part of this reviewer.
The authors would also like to acknowledge the book in Obligations and Contracts written
by Atty. Ernesto Pineda. Most of the information used in this reviewer was from Atty. Pinedas
book.
The authors would also like to thank De La Salle University- College of Law, for
challenging its students to be better and to pursue excellence.
Lastly, full credit goes to the thirty-one (31) students who did their part to make this
reviewer possible.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

De La Salle University

CHAPTER
1:
GENERAL
PROVISIONS OF OBLIGATIONS
Art. 1156. An obligation is a juridical
necessity to give to do or not to do. (n)
Art. 1157. Obligations arise from:
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law;
and
(5) Quasi-delicts. (1089a)
Art. 1158. Obligations derived from law
are not presumed. Only those expressly
determined in this Code or in special
laws are demandable
and shall be regulated by the precepts of
the law which establishes them; and as
to what has not been foreseen by the
provisions of this Book. (1090)
Art. 1159. Obligations arising from
contracts have the force of law between
the contracting parties and should be
complied with in good faith. (1091a)
Art. 1160. Obligations derived from
quasicontracts shall be subject to the
provisions of Chapter 1 Title XVII of this
Book. (n)
Art. 1161. Civil obligations arising from
criminal offenses shall be governed by
the penal laws subject to the provisions
of Article 2177 and of the pertinent
provisions of Chapter 2 Preliminary Title
on Human Relations and of Title XVIII of
this Book regulating damages. (1092a)
Art. 1162. Obligations derived from quasi
delicts shall be governed by the
provisions of Chapter 2 Title XVII of this
Book and by special laws. (1093a)
Elements of Obligation:
1) Active Subject the one who is
demanding the performance of
the obligation. Also called the
creditor or obligee.
2) Passive Subject the one
bound to perform the prestation

Atty. Chato Olivas-Gallo

to give, to do or not to do. Also


called as debtor or obligor.
3) Prestation or object the
subject matter of the obligation
which has an economic value or
susceptible
of
pecuniary
substitution
in
case
of
noncompliance.
It
is
the
particular conduct of the debtor
(Pineda).
4) Efficient cause the juridical tie
or vinculum by virtue of which
the debtor has become bound to
perform the prestation.
Kinds of Obligations:
(a) As to juridical enforceability
1. Civil obligation
2. Natural obligation
3. Moral obligation
(b) As to the Subject Matter
1. Real obligation
2. Personal obligation
(c) As to the number of persons
bound to perform
1. Unilateral obligation
2. Bilateral obligation
(d) As to the capability of fulfillment
1. Possible obligation
2. Impossible obligation
(e) As to the susceptibility of partial
fulfillment
1. Divisible obligation
2. Indivisible obligation
(f) As to their dependence upon
one another
1. Principal obligation
2. Accessory obligation
(g) As to the existence of a burden
or condition
1. Pure obligation
2. Conditional obligation
3. Obligation with a term
(h) As to the nature of performance
1. Positive obligation
2. Negative obligation

Page 1

OBLIGATIONS
AND
CONTRACTS

De La Salle University
(i) As
to the character
responsibility or liability
1. Joint obligation
2. Solidary obligation

of

(j) As to the nature of creation of


the obligation
1. Legal obligation
2. Conventional obligation
(k) As to the grant of right to
choose one prestation out of
several, or to substitute the first
one
1. Alternative obligation
2. Facultative obligation
(l) As to the imposition of penalty
1. Simple obligation
2. Obligation with penalty
Characteristics of a Quasi- Contract:
1. The acts executed must be
lawful to distinguish it from a
delict or crime where the acts
are unlawful.
2. The acts executed must be
voluntary to distinguish it from
quasi- delict where the acts
involved constitutes a fault,
negligence, or lack of foresight
(Art. 2176).
3. The acts executed must be
unilateral to distinguish it from
an ordinary contract where there
is meeting of the minds between
two parties (Art. 1305).
Principal Kinds of Quasi- Contract:
1. Negotiorium Gestio- A juridical
relation which takes place when
somebody takes charge of the
agency or management of the
business or property of another
without any power from the
latter (Art. 2150).
2. Solution Indebiti- A juridical
relation which takes place when
somebody received something
from another without any right to
demand for it, and the thing was
unduly delivered to him through
mistake. The obligation to return
the thing arises on the part of
the recipient (Art. 2154).

Atty. Chato Olivas-Gallo

Elements of a Quasi- Delict:


1. There is fault or negligent on the
part of the defendant resulting in
the wrongful act or omission,
whether voluntary or not, and
whether criminal or not;
2. There is damage and injury
suffered by another person;
3. There is a direct causal relation
between the fault or negligence
and the resulting damage and
injury. (proximate cause)
Doctrine of Proximate Cause:
- A proximate cause is such an
adequate and efficient cause as,
in the natural order of events,
and
under
the
particular
circumstances surrounding the
case,
would
necessarily
produce the event (Urbano vs.
IAC 157 SCRA 1).
___________________________________
Narciso Gutierrez v Bonifacio
Gutierrez, Maria De Gutierrez, Manuel
Gutierrez, Abelardo Velasco and
Saturnino Cortez
G.R. No. 34840 September 23, 1931
Digested by: Victor Reynaldo Ang
Facts: A collision between a passenger
truck driven by Abelardo Velasco and an
automobile driven by an 18 year-old
Bonifacio Gutierrez resulted to injuries to the
plaintiff, Narciso Gutierrez who suffered a
leg fracture which required medical attention
for a considerable amount of time.
Issue: (1) Is Manuel Gutierrez, being
not only the owner of the car but
the head of the house liable for
the damages caused by his
son?
(2)Are Abelardo Velasco and
Saturnino Cortez, the owner of the truck
also liable?
Held: Yes. They are jointly and
severally liable for the damages
because of their negligence.
Culpa
contractual for the owner of the bus for
breach of contract of carriage while
Culpa aquillana for the owner of the car.
It is uniformly held that the head of a
house, the owner of an automobile, who

Page 2

De La Salle University

OBLIGATIONS
AND
CONTRACTS

maintains it for the general use of his


family is liable for its negligent operation
by one of his children, whom he
designates or permits to run it, where
the car is occupied and being used at
the time of the injury for the pleasure of
other members of the owner's family
than the child driving it. The theory of
the law is that the running of the
machine by a child to carry other
members of the family is within the
scope of the owner's business, so that
he is liable for the negligence of the
child because of the relationship of
master and servant.

CHAPTER 2: NATURE AND EFFECTS OF


OBLIGATIONS

NATURE AND EFFECT OF OBLIGATIONS

Art. 1165. When what is to be delivered is


a determinate thing the creditor in
addition to the right granted him by
Article 1170 may compel the debtor to
make the delivery.

1) Obligor's duty to take care (Art.


1163)
2) Right to fruits (Art. 1164)
3) Right
to
demand
compliance (Art. 1165)
4) Obligor's
duty
to
deliver
accessions
and
accessories (Art. 1166)
5) Do it properly or pay the
price (Art. 1167)
6) Don't do or pay the price (Art.
1168)
7) No demand, no delay (Art.
1169)
8) FNDV (Art. 1170)
9) Fraud does not pay (Art. 1171)
10) Negligence (Art. 1172)
11) Diligence (Art. 1173)
12) Fortuitous Event (Art. 1174)
13) Usurious Transactions (Art.
1175)
14) Interest and installments (Art.
1176)
15) Accion subrogatoria (Art. 1177)
16) Transmissibility of rights (Art.
1178)

Art. 1163. Every person obliged to give


something is also obliged to take care of
it with the proper diligence of a good
father of a family unless the law or the
stipulation of the parties requires another
standard of care. (1094a)
Art. 1164. The creditor has a right to the
fruits of the thing from the time the
obligation to deliver it arises. However he
shall acquire no real right over it until the
same has been delivered to him. (1095)

If the thing is indeterminate or generic he


may ask that the obligation be complied
with at the expense of the debtor.
If the obligor delays or has promised to
deliver the same thing to two or more
persons who do not have the same
interest he shall be responsible for any
fortuitous event until he has effected the
delivery. (1096)
Art. 1166. The obligation to give a
determinate thing includes that of
delivering all its accessions and
accessories even though they may not
have been mentioned. (1097a)
Art. 1167. If a person obliged to do
something fails to do it the same shall be
executed at his cost.
This same rule shall be observed if he
does it in contravention of the tenor of
the obligation. Furthermore it may be
decreed that what has been poorly done
be undone. (1098)
Art. 1168. When the obligation consists
in not doing and the obligor does what
has been forbidden him it shall also be
undone at his expense. (1099a)

Atty. Chato Olivas-Gallo

Page 3

De La Salle University

Art. 1169. Those obliged to deliver or to


do something incur in delay from the
time
the
obligee
judicially
or
extrajudicially demands from them the
fulfillment of their obligation.
However, the demand by the creditor
shall not be necessary in order that delay
may exist:
(1) When the obligation or the law
expressly so declare; or
(2) When from the nature and the
circumstances of the obligation it
appears that the designation of the time
when the thing is to be delivered or the
service is to be rendered was a
controlling motive for the establishment
of the contract; or
(3) When demand would be useless, as
when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party
incurs in delay if the other does not
comply or is not ready to comply in a
proper manner with what is incumbent
upon him. From the moment one of the
parties fulfills his obligation, delay by the
other begins. (1100a)
Art. 1170. Those who in the performance
of their obligations are guilty of fraud
negligence or delay and those who in any
manner contravene the tenor thereof are
liable for damages. (1101)
Art. 1171. Responsibility arising from
fraud is demandable in all obligations.
Any waiver of an action for future fraud is
void. (1102a)
Art. 1172. Responsibility arising from
negligence in the performance of every
kind of obligation is also demandable but
such liability may be regulated by the
courts according to the circumstances.
(1103)

OBLIGATIONS
AND
CONTRACTS

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)
Art. 1174. Except in cases expressly
specified by the law or when it is
otherwise declared by stipulation or
when the nature of the obligation
requires the assumption of risk no
person shall be responsible for those
events which could not be foreseen or
which though foreseen were inevitable.
(1105a)
Art. 1175. Usurious transactions shall be
governed by special laws. (n)
Art. 1176. The receipt of the principal by
the creditor without reservation with
respect to the interest shall give rise to
the presumption that said interest has
been paid.
The receipt of a later installment of a debt
without
reservation
as
to
prior
instalments shall likewise raise the
presumption that such installments have
been paid. (1110a)
Art. 1177. The creditors after having
pursued the property in possession of
the debtor to satisfy their claims may
exercise all the rights and bring all the
actions of the latter for the same purpose
save those which are inherent in his
person; they may also impugn the acts
which the debtor may have done to
defraud them. (1111)
Art. 1178. Subject to the laws all rights
acquired in virtue of an obligation are
transmissible if there has been no
stipulation to the contrary. (1112)
Nature and Effects of Obligations

Art. 1173. The fault or negligence of the

Atty. Chato Olivas-Gallo

Page 4

De La Salle University

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Obligor's duty to take care (Art. 1163)


Right to fruits (Art. 1164)
Right to demand compliance (Art. 1165)
Obligor's duty to deliver accessions and
accessories (Art. 1166)
Do it properly or pay the price (Art. 1167)
Don't do or pay the price (Art. 1168)
No demand, no delay (Art. 1169)
FNDV (Art. 1170)
Fraud does not pay (Art. 1171)
Negligence (Art. 1172)
Diligence (Art. 1173)
Fortuitous Event (Art. 1174)
Usurious Transactions (Art. 1175)
Interest and installments (Art. 1176)
Accion subrogatoria (Art. 1177)
Transmissibility of rights (Art. 1178)
NATURE AND EFFECT OF OBLIGATIONS
Art. 1163 Obligor's duty to take care
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.
Art. 1164 Right to fruits
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.
Art. 1165 Right to demand compliance
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.

OBLIGATIONS
AND
CONTRACTS

Art. 1168 Don't do or pay the price


When the obligation consists in not doing,
and the obligor does what has been
forbidden him, it shall also be undone at his
expense.
Art. 1169 No demand, no delay
Those obliged to deliver or to do something
incur in delay from the time the obligee
judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall
not be necessary in order that delay may
exist:
(1) When the obligation or the law
expressly so declare; or
(2) When from the nature and the
circumstances of the obligation it
appears that the designation of the
time when the thing is to be
delivered or the service is to be
rendered was a controlling motive
for the establishment of the contract;
or
(3) When demand would be useless, as
when the obligor has rendered it beyond
his power to perform.
In reciprocal obligations, neither party
incurs in delay if the other does not
comply or is not ready to comply in a
proper manner with what is incumbent
upon him. From the moment one of the
parties fulfills his obligation, delay by the
other begins.
Art. 1170 FNDV fraud, negligence, delay,
violation of contract

Art. 1166 Obligor's duty to deliver


accessions and accessories
The obligation to give a determinate thing
includes that of delivering all its accessions
and accessories, even though they may not
have been mentioned.

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.

Art. 1167 Do it properly or pay the price


If a person obliged to do something fails to
do it, the same shall be executed at his cost.

Art. 1171 Fraud does not pay


Responsibility arising from fraud is
demandable in all obligations. Any waiver of
an action for future fraud is void.

This same rule shall be observed if he does


it in contravention of the tenor of the
obligation. Furthermore, it may be decreed
that what has been poorly done be undone.

Atty. Chato Olivas-Gallo

Art. 1172 Negligence


Responsibility arising from negligence in the
performance of every kind of obligation is
also demandable, but such liability may be

Page 5

De La Salle University
regulated by the courts, according to the
circumstances.
Art. 1173 Diligence
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.
Art. 1174 Fortuitous Event
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.
Art. 1175 Usurious Transactions
Usurious transactions shall be governed by
special laws.
Art. 1176 Interest and installments
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.
Art. 1177 Accion subrogatoria
The creditors, after having pursued the
property in possession of the debtor to
satisfy their claims, may exercise all the
rights and bring all the actions of the latter
for the same purpose, save those which are
inherent in his person; they may also
impugn the acts which the debtor may have
done to defraud them.
Art. 1178 Transmissibility of rights
Subject to the laws, all rights acquired in
virtue of an obligation are transmissible, if
there has been no stipulation to the contrary.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Diligence of a good father of a


family: The Civil Code explainsArt. 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.
Exception:
- If the law or by agreement
of the parties, extraordinary
diligence is required, then
the obligor shall exercise
extraordinary diligence.
The Roman Catholic Bishop of Jaro v
Gregorio de la Pena
G.R. No. 6913 November 21, 1913
Digested by: Vic Reynaldo Ang
Facts: In 1898 Father de la Pena, as trustee
of a charitable bequest made for the
construction of a leper hospital had in him
the funds collected for the said charitable
purposes amounting to P6,641. In the same
year he deposited in his personal account in
the Hongkong and Shanghai Bank the
amount of P19,000. He was then arrested
during the war as a political prisoner. While
he was detained, the authorities confiscated
the money in his account because they
believed that he was an insurgent and that
the funds were to be used for revolutionary
purposes.
Issue: Is he liable for the loss of the money
forcibly taken from him since he deposited it
in his personal account?
Held: No. Although the Civil Code states
that "a person obliged to give something is
also bound to preserve it with the diligence
pertaining to a good father of a family" (art.
1094), it also provides, following the
principle of the Roman law,major casus est,
cui humanainfirmitasresistere non potest,
that "no one shall be liable for events which
could not be foreseen, or which having been
foreseen were inevitable, with the exception

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De La Salle University
of the cases expressly mentioned in the law
or those in which the obligation so declares."
(Art. 1105.)
By placing the money in the bank and
mixing it with his personal funds De la Pea
did not thereby assume an obligation
different from that under which he would
have lain if such deposit had not been
made, nor did he thereby make himself
liable to repay the money at all hazards. If
the had been forcibly taken from his pocket
or from his house by the military forces of
one of the combatants during a state of war,
it is clear that under the provisions of the
Civil Code he would have been exempt from
responsibility. The fact that he placed the
trust fund in the bank in his personal
account does not add to his responsibility.
Such deposit did not make him a debtor who
must respond at all hazards.
Classes of Delivery or Tradition:
1. Real or Actual Traditioncontemplates the actual delivery
of the thing from the hand of the
grantor to the hand of the
grantee.
2. Constructive
Traditionthe
delivery of the thing is not actual
but representative or symbolical
in essence. Kindsa. TradicionSymbolicadelivery
of
certain
symbols
or
things
representing the thing
being delivered such as
keys or titles.
b. Tradicion Instrumentaldelivery
of
the
instrument
or
conveyance
to
the
grantee by the grantor.
c. Tradicion Longa Manupointing of the thing
(movable
property)
within sight.
d. TradicionBrevi
Manugrantees continuation
of his possession over
the thing delivered but
now under a title of
ownership.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

e. TradicionConstitutumPo
ssessorium- consists in
the owners continuous
possession
of
the
property he had sold to
another person.
f. Tradicion by Operation
of Law- delivery of the
thing by operation of
law.
g. QuasiTradiciondelivery of incorporeal
property.
Personal and Real Right: (Hector S. de
Leon, The Law on Obligations and
Contracts)
1. Personal Right- is the right or
power of a person (creditor) to
demand from another (debtor),
as a definite passive subject,
the fulfillment of the latters
obligation to give, to do, or not
to do.
2. Real Right- is the right or
interest of a person over a
specific thing, without a definite
passive subject against whom
the right may be personally
enforced.
Determinate or specific thing- something
which is susceptible of particular designation
or specification.
Indeterminate or generic thing- something
which is not particularized or specified but
has reference only to a class or genus.
Remedies of Creditor when Debtor fails
to deliver a determinate thing:
a) Complaint for specific performancean action to compel the fulfillment of
the
obligation.
This
action
presupposes that it is based on a
contractual relationship between
contracting parties.
b) Complaint for rescission of the
obligation- is an action to rescind
under Art. 1380.
c) Complaint for resolution- an action
for cancellation under Art. 1191.
d) Complaint for damages- an action to
claim for compensation of damages

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De La Salle University
suffered, either in addition to the first
three actions or independently.
Kinds of Delay:
(a) Ordinary Delay- the mere failure to
perform an obligation at the
appointed time.
(b) Extraordinary Delay or Legal Delaydelay which is tantamount to nonfulfillment of the obligation and
arises after an extrajudicial or
judicial demand had been made
upon the debtor. The debtor is said
to be in default now.
Remedies of the Creditor:
SITUATION
Failure of debtor to
fulfil the obligation

Obligation was done


in violation of the
agreement

Poor performance

REMEDY
The same be done
by
the
creditor
himself or by another
person but at the
expense
of
the
debtor
The
creditor
or
another may execute
the obligation at the
expense
of
the
debtor
Undo the act at the
expense
of
the
creditor

Legal Delay- For an obligor to be in default,


there must be a demand made upon him for
the performance of the obligation either
judicially or extrajudicially
Exceptions to the Rule: (ENU)
1. (Express declaration)When the
law or obligation Expressly
declares
2. (Nature of Contract) When from
the nature of the contract, it
appears that time is of the
essence and such is the
motivating
factor
in
the
establishment of the contract
3. (Useless
)
When
demand
becomes useless
4. (not in the Codal Provision)
Admission of the debtor that he is
in default
Classes of Default

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

1. Mora Solvendi- default on the part


of the Debtor
2. Mora Accipiendi- default on the
part of the Creditor/Obligee
3. CompensatioMorae- default on
the part of both debtor and
creditor which arises in reciprocal
obligation
Rufina Causing v. Alfonso Bencer
G. R. No. L-11328 January 15, 1918
Digested by: Maria Corazon Baluyut
Facts: Causing wants to annul a contract of
sale of a parcel of land and to recover the
property from Bencer. She along with her
minor nieces are the owners of the said
property. In 1909 Causing negotiated with
Bencer to sell the property for P1,200. She
went to an attorney; however when the
attorney learned that the minors had an
interest in the property he informed Causing
that there is a need for judicial sanction. This
caused the transfer of the title (to Bencer) to
be abandoned but nevertheless Bencer paid
P800 of the purchase price and took
possession o the land knowing that he was
to pay the balance later. Subsequently,
Causing took steps to acquire judicial
approval. In 1910 a new engagement was
made when Bencer was advised to pay an
additional P600 to what he already paid
(making the purchase price P1400 in all).
After some time neither party performed the
engagement.
When the minors were now of age Causing
became the possessor of their shares, the
property increased in value and she now
had the desire to rescind the contract and
recover the property from Bencer. The lower
court dismissed the action to recover the
property but ordered for the payment of the
P600 balance with interest.
Issue: Can Causing rescind the contract
because Bencer failed to pay the purchase
price?
Holding: No, the Supreme Court finds no
valid reason for them to permit a rescission
of the contract.
Ratio: It is evidently a case where the
contract entailed mutual obligation, and if
either party can be said to have been in

Page 8

OBLIGATIONS
AND
CONTRACTS

De La Salle University
default it was the plaintiff, Rufina Causing,
rather than the defendant, Bencer. In article
1100 of the Civil Code it is declared that in
mutual obligations neither party shall be
deemed to be in default if the other does not
fulfill, or offer to fulfill his own obligation, and
that from the time one person obligated
fulfills his obligation the default begins for
the other party. We find that the contract
contemplated a conveyance of the entire
interest in the land; and the plaintiff clearly
obligated herself to that extent. She was
therefore not in a position to compel the
defendant to pay until she could offer to him
a deed sufficient to pass the whole legal
estate; and for the same reason, she cannot
now be permitted to rescind the contract on
the ground that the defendant has
heretofore failed to pay the purchase price.
Fraud- Intentional evasion of the faithful
performance of the obligation
Negligence/Fault- omission of the diligence
required by the nature of obligation and
commensurate with the demands of the
subsisting circumstances of time, place,
condition of persons involved
Delay- this is the default or tardiness in the
performance of the obligation after it has
become due and demandable. Also called
mora
Violation of terms of contract- the act of
contravening the tenor or terms or
conditions of the contract; also called
volatio

Reference
Article
Time
of
existence

Effect

FRAUD IN
EXECUTION
1338

FRAUD
IN
PERFROMANCE
1170 and 1171

Exists ahead
of
the
contractual
obligation
between the
parties and
can only be
found
in
contracts
and wills
Nullity

Already
in
existence;
performance of
an
obligation
already
in
existence

Atty. Chato Olivas-Gallo

Gives rise to
damages
and
recission

Negligence v. Fraud: the former has no


deliberate intention to cause damage even
voluntarily done while the latter has a
deliberate intention or plan to cause
damage.
Due Diligence- measure of prudence,
activity or assiduity, as is properly to be
expected from, and ordinarily exercised by,
a reasonable and prudent man under the
particular circumstances
Test of Negligence: Would an prudent man
in the position of the person whom
negligence is attributed, foresee harm to the
person
injured
as
a
reasonable
consequence of the course to be pursued?
Fortuitous event- is an occurrence or
happening which could not be foreseen or
even if foreseen, is inevitable
Requisites to Exempt Obligor from
Liability By Reason of Fortuitous Event
C - "Cause" of the breach must be
independent of the debtor's will
U - "Unforseeable" or "Unavoidable"
event
P - debtor had no "Participation" in
the aggravation or injury of the
creditor
I - the event must be such as to
render it "Impossible" for
D - the "Debtor" to fulfill his
obligation in a normal manner.
Exceptions which make an Obligor Liable
for Fortuitous Events with examples
1)
When it is expressly stipulated that he
shall be liable even if the non-compliance is
due to a fortuitous event.
A and B entered into a contract where B
undertakes to deliver bundles of coupon
bond to As office on specific dates specified
in the contract, for a period of 6 months. The
contract clearly states the B shall incur
liability for... failure to deliver such items to
As office on any of the specific dates
stipulated in the contract, even if such failure
is due to a fortuitous event. On one of the
dates of delivery, as B just finished loading
the last bundle of paper inside the delivery

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De La Salle University
truck and to proceed to As office, a lightning
struck his vehicle. Within a matter of
seconds, the truck bursts into flames as the
gas tank exploded due to the heavy amount
of electricity caused by the lightning. B could
no longer save the vehicle nor the bundles
of paper inside, much less to deliver them to
A. B is still liable even if the nonperformance of the obligation was due to an
act of God, because of the express
stipulation found in his contract with A.
2)
When the nature of the obligation
requires the assumption of risk.
A and B entered into a contract where B
undertakes to deliver meat products, such
as poultry, pork, and beef, to As canteen. In
delivering such products, B uses his delivery
truck which was equipped with built in
freezer that is so cold that a bottle of water
placed inside would turn into ice with less
than a minute. Because of this, B is
confident that the meat products to be
delivered would not perish in transit. On the
date of one of his deliveries to A, it was
reported that the country would be
experiencing its hottest day of the year,
even to a point that people can cook a 2
inch thick steak under the heat of the sun.
Because of such, the built in freezer of the
delivery truck could not sustain the
necessary temperature to keep the meat
products from perishing. The result is that
the meat products reached As canteen with
a rotten state and no longer edible. B is
liable even if the cause of his failure to
comply with his obligation was due to
natures wrath because meet products are
perishable, and the nature of such obligation
requires the assumption of risks.
3)

When the obligor is in delay.

A and B are friends. A sold to B a brand


new cell phone for P 12,000.00 only, the
phone is to be delivered 3 days after full
payment by B. After 3 days, B texted A
asking for the delivery of the phone but A
said he could not do so on at the time and
said that hell give the phone the following
day. After their conversation, As house was
submerged into water because of a flash
flood due to typhoon Ondoy. The cell phone
was soaked and is now beyond repair. A
bears liability, regardless if the non-

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

performance of the obligation was due to a


fortuitous event, because he was in delay of
such performance.
4)
When the obligor has promised the
same thing to two or more persons who do
not have the same interest.
A promised to deliver a sala-set to B in
exchange for P 5,000.00. A also promised
the same thing to spouses C and D. The
sala-set perished when the bodega, where
the sala-set was stored, caught fire last New
Years Eve. Eventually, a stray quitis found
its way inside the bodega and caused the
fire. A bears the loss of the thing because he
promised the same sala-set to two or more
persons who do not have the same interest.
5) When the possessor is in bad faith and
the thing is lost or deteriorated due to
fortuitous event
On 21 January 2011, R sold his BMW car to
M for 5,000 Euros. After paying the agreed
amount, M demanded R to deliver the car to
his residence. However, instead of heeding
the demand, R, for sentimental reasons,
simply parked the car in his garage. ...On 25
January 2011, an earthquake occurred,
causing Rs garage to cave-in and ultimately
shredding the car into pieces.
R is liable despite the fortuitous event,
because he was a possessor in "bad faith"
after continuously possessing the car in
spite of Ms demand.
6) When the obligor contributed to the loss
of the thing
X gave Y company a package to be
delivered to Z via air mail. However, Y
Company placed the package on a ship.
While traversing the sea, the ship was
caught by a storm and sank. Y is liable
7) When the obligor is guilty of fraud,
negligence, or delay or if he contravened the
tenor of the obligation
A ordered 3 boxes of chocolates from B, to
be delivered at a certain date. On the day of
the delivery, B rode his old car and placed
the boxes on the passenger sit where he
knew that the door was broken. On his way
to A's house an earthquake occurred that

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De La Salle University
shook the broken car door open and thus
the 3 boxes of chocolates fell and was
destroyed.
B is liable for the destroyed chocolates
despite the fact that an earthquake
happened causing the boxes to fall, because
he acted negligently when he placed the
boxes in the passenger sit when he had full
knowledge that the car door on that side
was broken.
8) An act of God cannot be invoked to
protect a person who has failed to take
steps to forestall the possible adverse
consequence of that loss- when the effect is
found to be partly the result of the person's
participation, whether by active intervention,
neglect or failure to act, the whole
occurrence is humanized and removed from
the rules applicable to the acts of God.
On February 7, 2001, P and R had a verbal
agreement to lease to R the van of P for two
weeks in consideration of a P5,000
payment. R, while driving P's van on the
highway, noticed that the car's hood was
smoking but R still continued to drive to his
destination which was still 500 meters away.
Before he could even reach his destination
the engine exploded and caused a fire. R is
liable for the damage in the car because he
should have stopped when he saw the
smoke from the hood.

OBLIGATIONS
AND
CONTRACTS

additional amount equivalent to 1% per


month of the amount due and demandable,
as penalty; and another additional 25% in
full without deductions as Attorneys fees.
Upon maturity of the loan, petitioners
(borrowers) were unable to pay. Veronica
and her husband Danilo G. Gonzales filed a
complaint before the Regional Trial Court for
the collection of the full amount of the loan
including all interest and other charges as
stated in the promissory note. In his defense
Servando asserts that he did not obtain any
loan and that he was only signatory as one
of the witness to the promissory note. On
the other hand, Leticia and Rafael Medel
assert that (a) the interest rate is excessive
at 5.5% per month with additional service
charge of 2% per annum, and penalty
charge of 1% per month; (b) stipulation for
attorneys fees of 25% of the amount due is
unconscionable, illegal and excessive. The
trial court decided that although the Usury
Law had been repealed, the interest
charged by the plaintiffs on the loans was
revolting to the conscience. Thus it applied
the provision on the New Civil Code that
legal rate of interest for loan xxx of money
xxx is 12% per annum. However on appeal,
the Court of appeals reversed the decision
of the trial court by saying that the Usury
Law having become legally inexistent with
the promulgation by the Central Bank xxx
the lender and borrower could agree on any
interest that may be charged on the loan.

Medel vs. Court of Appeals


G.R. No. 131622 November 27, 1998
Digested by Maria Corazon Baluyut

Issue: Is the promissory note valid? Will it


be the basis for the payment of interest and
other charges?

Facts: Veronica R. Gonzales is engaged in


the money lending business under the name
Gonzales Credit Enterprises. Herein
petitioners Servando Franco and Leticia
Medel were able to obtain loans from
Veronica on three separate occasions. On
all occasions Servando and Leticia were
unable to pay the loan upon its maturity. Dr.
Rafael Medel consolidated all unpaid loans
coming to a total of P 440,000 and was able
to obtain another loan of P 60,000 bringing
their debt to a total of P 500,000. Petitioners
executed a promissory note stating that they
will pay the loan at a rate of 5.5% per month
plus 2% service charge per annum from the
date of execution of the promissory note.
Moreover, failure to pay will mean an

Held: No. The Supreme Court held that the


stipulated rate of interest at 5.5% per month
on the P 500,000 loan is excessive,
iniquitous, unconscionable and exorbitant.
However, the court did not consider the rate
as usurious because it has been
consistently held that the Central Bank
circular has removed the interest ceilings
prescribed by the Usury Law and that this
has become legally inexistent. Under the
circumstances the interest rate at 12% per
annum and an additional 1% per month
penalty charge as liquidated damages may
be more reasonable.

Atty. Chato Olivas-Gallo

Page 11

OBLIGATIONS
AND
CONTRACTS

De La Salle University
Actions or Remedies Available to the
Creditor for protection of interest:

happening of the event which constitutes


the condition. (1114)

1. Exhaustion of debtors properties still in


his possession. This is effected by a writ
of attachment before the judgment or
writ of execution if there is already a
final and executory judgement

Art. 1182. When the fulfillment of the


condition depends upon the sole will of
the debtor, the conditional obligation
shall be void. If it depends upon chance
or upon the will of a third person, the
obligation shall take effect in conformity
with the provisions of this Code. (1115)

2. Accion Subrogatoria- an action where


the creditor whose claims had not been
fully satisfied, may go the debtors (third
persons) of the defendant-debtor.
Limitation: Creditor is not allowed to
pursue actions on behalf of the debtor
which are personal to the latter (e.g.
right to revoke donation due to
ingratitude, right to exercise parental
authority etc.)
3. Accion Pauliana- where the creditor files
an action for the rescission of acts or
contracts entered into by the debtor
designated to defraud the former (See
1380, 1382[3] and 1389)

CHAPTER 3: DIFFERENT KINDS


OF OBLIGATIONS
Section
1:Pure
Obligations

and

The condition not to do an impossible


thing shall be considered as not having
been agreed upon. (1116a)
Art. 1184. The condition that some event
happen at a determinate time shall
extinguish the obligation as soon as the
time expires or if it has become
indubitable that the event will not take
place. (1117)

Conditional

Art. 1179. Every obligation whose


performance does not depend upon a
future or uncertain event, or upon a past
event unknown to the parties, is
demandable at once.
Every obligation which contains a
resolutory condition shall also be
demandable, without prejudice to the
effects of the happening of the event.
(1113)
Art. 1180. When the debtor binds himself
to pay when his means permit him to do
so, the obligation shall be deemed to be
one with a period, subject to the
provisions of Article 1197. (n)
Art. 1181. In conditional obligations, the
acquisition of rights, as well as the
extinguishment or loss of those already
acquired, shall depend upon the

Atty. Chato Olivas-Gallo

Art. 1183. Impossible conditions, those


contrary to good customs or public
policy and those prohibited by law shall
annul the obligation which depends upon
them. If the obligation is divisible, that
part thereof which is not affected by the
impossible or unlawful condition shall be
valid.

Art. 1185. The condition that some event


will not happen at a determinate time
shall render the obligation effective from
the moment the time indicated has
elapsed, or if it has become evident that
the event cannot occur.
If no time has been fixed, the condition
shall be deemed fulfilled at such time as
may have probably been contemplated,
bearing in mind the nature of the
obligation. (1118)
Art. 1186. The condition shall be deemed
fulfilled when the obligor voluntarily
prevents its fulfillment. (1119)
Art. 1187. The effects of a conditional
obligation to give, once the condition has
been fulfilled, shall retroact to the day of
the constitution of the obligation.
Nevertheless, when the obligation
imposes reciprocal prestations upon the
parties, the fruits and interests during the

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De La Salle University

pendency of the condition shall be


deemed
to
have
been
mutually
compensated. If the obligation is
unilateral, the debtor shall appropriate
the fruits and interests received, unless
from the nature and circumstances of the
obligation it should be inferred that the
intention of the person constituting the
same was different.
In obligations to do and not to do, the
courts shall determine, in each case, the
retroactive effect of the condition that
has been complied with. (1120)
Art. 1188. The creditor may, before the
fulfillment of the condition, bring the
appropriate actions for the preservation
of his right.
The debtor may recover what during the
same time he has paid by mistake in case
of a suspensive condition. (1121a)
Art. 1189. When the conditions have been
imposed with the intention of suspending
the efficacy of an obligation to give, the
following rules shall be observed in case
of the improvement, loss or deterioration
of the thing during the pendency of the
condition:
(1) If the thing is lost without the
fault of the debtor, the obligation
shall be extinguished;
(2) If the thing is lost through the
fault of the debtor, he shall be
obliged to pay damages; it is
understood that the thing is lost
when it perishes, or goes out of
commerce, or disappears in such
a way that its existence is
unknown or it cannot be
recovered;

OBLIGATIONS
AND
CONTRACTS

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)
Art. 1190. When the conditions have for
their purpose the extinguishment of an
obligation to give, the parties, upon the
fulfillment of said conditions, shall return
to each other what they have received.
In case of the loss, deterioration or
improvement of the thing, the provisions
which, with respect to the debtor, are laid
down in the preceding article shall be
applied to the party who is bound to
return.
As for the obligations to do and not to
do, the provisions of the second
paragraph of Article 1187 shall be
observed as regards the effect of the
extinguishment of the obligation. (1123)
Art. 1191. The power to rescind
obligations is implied in reciprocal ones,
in case one of the obligors should not
comply with what is incumbent upon
him.
The injured party may choose between
the fulfillment and the rescission of the
obligation, with the payment of damages
in either case. He may also seek
rescission, even after he has chosen
fulfillment, if the latter should become
impossible.

(3) When the thing deteriorates


without the fault of the debtor, the
impairment is to be borne by the
creditor;

The court shall decree the rescission


claimed, unless there be just cause
authorizing the fixing of a period.

(4) If it deteriorates through the


fault of the debtor, the creditor
may
choose
between
the

This is understood to be without


prejudice to the rights of third persons
who have acquired the thing, in

Atty. Chato Olivas-Gallo

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De La Salle University

accordance with Articles 1385 and 1388


and the Mortgage Law. (1124)
Art. 1192. In case both parties have
committed a breach of the obligation, the
liability of the first infractor shall be
equitably tempered by the courts. If it
cannot be determined which of the
parties first violated the contract, the
same shall be deemed extinguished, and
each shall bear his own damages. (n)
Pure Obligation
The effectivity or extinguishment does not
depend on the fulfillment or non-fulfillment of
a condition or on the expiration of a term or
period, and is immediately demandable.
Note:
The
quality
of
immediate
demandability is not violated when a
reasonable
period
is
granted
for
performance.
Conditional Obligation
Effectivity is subordinated to the fulfillment or
non-fulfillment of a future and uncertain act
or event.
Characteristics of a condition:
1)Future and uncertain
2) Past event but unknown to parties (the
knowledge to be acquired in the future of a
past event which at the moment is unknown
to parties interested. It is only in that sense
that the event is to be deemed uncertain).
3) Not impossible
Note: When the debtor binds himself to pay
when his means permit him to do so, the
oblication shall be deemed to be one with a
period (Article 1180).
Effects of failure to comply with
condition:
1) If condition is imposed on the
perfection of a contract results in the
failure of the contract
2) If condition is imposed on the
performance of the obligation: gives
other party an option either to refuse
to proceed with the compliance of
the obligation of to waive the
condition.
When obligation demandable at once:

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

1) When it is pure;
2) When it is subject to a resolutory
condition;
3) When it is subject to a resolutory
period.
Traditional Classifications of conditions:
1) Suspensive- fulfillment of condition
results in acquisition of rights arising
out of the obligation
2) Resolutoryfulfillment
of
the
condition results in extinguishment
of rights arising out of obligation
3) Potestative- fulfillment of the
condition depends on the will of a
party to the obligation
4) Casual- fulfillment of the condition
depends on chance and/or the will
of third person
5) Mixed- fulfillment of condition
depends partly on the will of a party
to the obligation and partly chance
and/or will of a third person
6) Possible- condition is capable of
real action according to nature, law,
public policy, or good customs
7) Impossible- condition is not capable
of realization according to nature,
law, public policy, or good customs
8) Positive- involves performance of an
act
9) Negative- involves the omission of
an act
10) Divisible- susceptible of a partial
performance or realization
11) Indivisible- not susceptible of partial
performance or realization
12) Conjunctive- There are several
conditions which must all be
realized
13) Alternative- there are several
conditions, but only one must be
realized
14) Expresscondition
is
sated
expressly
15) Implied- condition is tacit
Effects of suspensive, resolutory,
potestative, mixed, casual condition
(Article 1181-1182)
1) Suspensive Condition
Obligation shall only be effective
upon the fulfillment of the condition,
upon constitution of obligation,
before fulfillment, oblige acquired a

Page 14

De La Salle University
mere hope of expectancy, protected
by law.
a. Before
fulfillmentdemandability
and
the
acquisition of the rights
arising from the obligation is
suspended. Obligation of
obligor to comply with the
prestation
is
held
in
suspense until fulfillment of
condition. Anything paid by
mistake during such time
may be recovered.
b. After
the
fulfillment-the
obligation
arises
or
becomes effective; obligor
can be compelled to comply
with what is incumbent upon
him.
2) Resolutory condition
Obligation becomes demandable
immediately after its constitution and
rights are immediately vested in the
obligee, but such rights are always
subject to the threat or danger of
extinction. Principle of retroactivity
applies (Article 1190)
a. Before
fulfillment-right
recognized in Art. 1188. N
case of a suspensive
condition should likewise be
available in obligations with
a resolutory condition.
b. After
fulfillment-whatever
may have been paid or
delivered by one or both of
the
parties
upon
the
constitution of the obligation
shall have to be returned
upon the fulfillment of the
condition. There is a return
to the status quo. Aside
from the actual things
received, the fruits or the
interests thereon should
also be returned after
deducting the expenses
made for their production,
gathering and preservation.
When condition is not
fulfilled,
rights
are
consolidated
and
they
become absolute.
3) Potestative condition

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

a. When
it
depends
exclusively upon the will of
the creditor-condition and
obligation is valid
b. When
it
depends
exclusively upon the will of
debtor in case of a
suspensive condition, it is
void; illusory
c. When
it
depends
exclusively upon the will of
debtor in case of a
resolutory condition-it is
valid; not illusory
Noted: If the obligation is a preexisting one, and does not
depend for its existence upon
the fulfillment by the debtor of
the potestative condition, only
the condition is void leaving
unaffected the obligation itself.
(valid)
4) Both Mixed and Casual conditionthe obligation and condition shall
take effect
Effects of impossible conditions
(Art. 1183)
1) Voids both obligation and
condition
2) If condition is negative, it is
disregarded
and
obligation
becomes pure
3) Only affected obligation is void
4) Only the specific condition is
void
5) It is considered as not imposed
Effects of positive and negative
condition
In
positive
condition,
obligation is extinguished as
soon as the time expires or
it becomes obvious that the
event will not take place
In negative condition, the
obligation is effective from
the moment the time
indicated has lapsed or if it
has become evident that the
event
cannot
occur,
although indicated time has
not yet lapsed.

Page 15

De La Salle University

Intention of parties shall


govern if no time has been
fixed.

Doctrine of constructive fulfillment of


suspensive condition (Art. 1186)
1) Deemed fulfilled when obligor
prevented
the
obligee
from
complying. Prevention must be
willful
2) Only applies to suspensive condition
3) Mere intention to prevent is not
enough. There must be actual
prevention
Requisites:
a) Condition must be suspensive
b) Debtor actually prevents the
fulfillment of the condition
c) He acts voluntarily
Brigido Valencia v. RFC and CA
G.R. No. L-10749 April 25, 1958
Digest by: Minrado Batonghinog, Jr.
Facts: Respondent RFC
issued
and
advertised an invitation to bid for the
construction of a building in Davao City.
Petitioner Valencia submitted his bid in
accordance with the respondents invitation,
indicating 4 items: 1) complete construction
of the building including electrical and
plumbing installations for P 389,980.00; 2)
complete construction of the building only for
P 358,480.00; 3) electrical installations only
for P 18,900.00; 4) plumbing installations
only for P 12,600.00. The plumbing
installation was awarded to the petitioner
and he was notified through a letter dated
July 28, 1952. Petitioner replied to such
notice expressing his gratitude for the award
but indicated that it would be advantageous
for the respondent to have the plumbing
installation awarded to the contractor which
would undertake the construction of the
building as well. Petitioner failed to sign the
contract which led the respondent to award
the plumbing installation to the contractor
that would construct the building in the
amount of P 19,000. Respondent instituted
an action in the CFI of Manila for the
recovery of damages amounting to P 6,200
(difference from the amount awarded to the
petitioner and the amount of the same
undertaking awarded to the contractor for
building construction) and attorneys fees

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

amounting to P 1,000. CFI ruled in favor of


petitioner, but CA reversed the CFI ruling
and ordered the petitioner to pay P 6,200
representing damages and attorneys fee of
P 1,000 to the respondent.
Issue: Is the petitioner under obligation to
undertake the plumbing installation in favor
of the respondent, non compliance of which
resulted to the damages sought by the
respondent?
Held: YES. SC ruled that there already
exists a contractual obligation between the
petitioner and the respondent resulting from
the petitioners offer consisting of 4 items,
and the acceptance of one of the offers,
specifically item no. 4 (plumbing installation
only). The acceptance of such offer, which
was made by petitioner based on the
instructions given by the respondent,
perfected the contract which gave rise to
contractual obligations of the petitioner.
Contrary to the petitioners argument that
the acceptance was made after the lapse of
the duration of his bid and therefore the
contract was not perfected, was not
considered by the Court because in the first
place his bid did not specify its duration.
What lapsed was the bond that the petitioner
issued. In addition to such, the acts of the
petitioner at the time he was given notice of
the acceptance of his offer shows that he
knew that the contract was perfected.
By submitting his bid in accordance with the
conditions and requirements imposed by the
respondent, there was
already an
acceptance of the respondents terms and
condition by the petitioner, and because of
the un-qualified acceptance of his offer done
by the respondent, the contract was deemed
perfected. Petitioners failure to comply with
the notice sent to him regarding the signing
of the contract did not relieve him of his
obligation nor affect the existence of a
contract between him and the respondent.
Ratio: Each one of these items was
complete in itself, and, as such, it was
distinct, separate and independent from the
other items. The award in favor of petitioner
herein,
implied,
therefore,
neither
a modification of his offer nor a partial

Page 16

De La Salle University
acceptance
thereof.
It
was
an unqualified acceptance of the fourth item
of his bid, which item constituted a complete
offer or proposal on the part of petitioner
herein. The effect of said acceptance was to
perfect a contract, upon notice of the award
to petitioner herein.
As regards the second argument,
petitioner's bid did not specify its duration. It
enclosed therewith a bond for ten per
centum (10%) of the amount of said bid, in
compliance with paragraph 10 of the
instruction
to
bidders.
Although
the bond itself stated that it expired on June
15, 1952, this does not mean that
the bid lapsed on the same date. The bond
merely guaranteed the performance of
a principal obligation of petitioner herein.
Needless say, this principal obligation may
stand without said bond, which is
merely accessory thereto, although the latter
cannot exist without the former. Moreover,
the bond was given for the benefit, not of
petitioner, but of respondent, so that the
latter could legally waive said benefit.
Referring now to the third argument,
paragraph 10 of the aforementioned
instruction to bidders, imposed upon them
the obligation to execute the corresponding
documents "within five (5) days after notice
of the acceptance of his bid." Paragraph 15
of said instruction to bidders, further
provided:
The contract shall be made and executed in
quadruplicate and shall be accompanied by
a bond or bonds given by the contractor with
two or more good and sufficient sureties or
with a surety company, satisfactory to the
Manager, Industrial Department, RFC in a
penal sum equal to twenty (20) per cent of
the full contract price of the work,
conditioned for the faithful performance of
the contract according to its tenor and effect
and the satisfaction of obligation for
materials used and labor employed upon the
same.
The obligation to give the performance bond
mentioned in this paragraph, as well as to
execute the instrument incorporating the
construction contract, within five (5) days
from notice of acceptance of the bid, as

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

stated in paragraph 10 of the instruction to


bidders, were accepted by petitioner herein,
for he submitted his bid "subject to all
conditions
and
requirements"
of
respondent's invitation for bids. Hence, his
(petitioner's) bid explicitly says:
We (or I) make this proposal with a full
knowledge of the kind, quantity, and quality
of the articles and services required and
said proposal is accepted will, after receiving
written notice of such acceptance, enter into
contract within five (5) days, with good and
sufficient
securities
for
the
faithful
performance thereof.
Accordingly, respondent's communication of
June 16, 1952, advised petitioners that the
contract for plumbing installations was
awarded to him for P12,800 "with
performance bond of 20% thereof." Again,
the letter of respondent's manager in Davao,
dated July 28, 1952, in-formed petitioner
that the contract for the plumbing
installations had been received from the
head office and asked him to call at the
writer's office for the purpose of affixing his
signature on said contract, and requested
him to post said performance bond.
Petitioner's failure to do so did not relieve
him of the obligation arising from the unqualified acceptance of his offer. Much less
did it affect the existence of a contract
between him and respondent.
Petitioner insists that the giving of a
performance bond was a condition
precedent. But such condition presupposes
the existence of a contract, which is qualified
thereby. Compliance with said condition is
essential to the existence of petitioner's right
to undertake the plumbing installations and
collect the price thereof. But, he had
a contractual right to give the performance
bond, in the sense that respondent had
granted him by agreement the right to post
said bond, and, once this had been done, he
could invoke and enforce his other rights by
virtue of the award in his favor. At the same
time, respondent had a contractual right to
demand the posting of the performance
bond, and, upon failure of petitioner to do
so, respondent had a similar right to refuse
to allow petitioner to under-take the
plumbing installations and to demand
damages for breach of petitioner's

Page 17

OBLIGATIONS
AND
CONTRACTS

De La Salle University
obligations. In either case, the existence of
the contractual relation between the parties
did not depend upon the posting the
performance bond. Although, the latter was
essential to the birth of some of the rights
stipulated in favor of petitioner herein, those
of respondent were not conditioned upon the
giving of said performance bond.
Reynaldo Labayen, et. al. v. Talisay-Silay
Milling Co., Inc.
G.R. No. L-29298 December 15, 1928
Digest by: Minrado Batonghinog, Jr.
Facts: Labayen,
the
plaintiff,
owns
Hacienda Dos Hermanos. He entered into a
contract with the defendant, Talisay-Silay
Milling Co., Inc. for the grinding of the
plaintiffs sugar cane. The contract was
subject to a condition, that in order for the
defendant company to proceed with the
grinding of the sugar canes, it must first be
allowed to construct a permanent railroad for
the transportation of the sugar canes. The
railroad construction of the company did not
reach Hacienda Dos Hermanos. According
to the defendant, it could construct a railroad
to the plaintiffs hacienda but it would be
very dangerous. The plaintiff sued the
company for damages resulting from a
breach of their contract to grind the formers
sugar cane. After the re-hearing of the case,
the defendant company was absolved and
the plaintiff was condemned to pay damages
to the defendant.
Issue: Is the defendant company liable for
damages for non-compliance with his
obligation to grind sugar, if such obligation is
burdened with a condition performance of
which would result to undesirable harm?
Held: No. SC affirmed the decision of the
lower court.
Ratio: SC ruled that one cannot obligate
himself to do something which is dangerous
and harmful to life and property. The general
contract entered into by the plaintiff and
defendant was intended to be limited to
haciendas susceptible of having a
permanent railroad for the operation of the
defendant company. According to the Court,
not to allow an exception would be against
public policy by forcing the performance of

Atty. Chato Olivas-Gallo

such condition upon the defendant company


which is harmful and undesirable.
Another aspect of the case is the finding that
the railroad could have been made to reach
the plaintiffs hacienda, but it would have to
pass through the haciendas of Esteban de la
Rama, but the latter did not allow at that
time. This was a scenario contemplated by
the 10th paragraph of the Mutual Obligations
provision of the contract where the
defendant is absolved from any liability due
to non-compliance of the terms of the
contract grounded under reasonable
conditions.
The Court added that:
The foregoing points being admitted, it
logically follows that the defendant can
recover on its cross-complaint. The defense
to the cross-complaint is identical with the
theory of the complaint. For the same
reasons that the plaintiff cannot recover
must be make good for his debt to the
defendant.
Retroactivity in suspensive condition
Rationale: condition is only an accidental
element of the obligation. An obligation can
exist even without a condition
Retroactivity has not application to real
contracts and contracts which can only be
realized within successive intervals. In
reciprocal and unilateral obligations, theres
no retroactivity.
Rights pending fulfillment of suspensive
conditions
1) Creditor-bring
actions
for
preservation of his rights
2) Debtor-to recover what had been
paid by mistake. If payment is not
made by mistake, debtor is implied
to have waived the condition
Effects f loss, deterioration and
improvement in real obligations
a. Loss-with debtors fault,
obligation
is
not
extinguished;
without
debtors
fault,
it
is
extinguished.
b. Deterioration- with debtors
fault, creditor may choose
between bringing an action

Page 18

OBLIGATIONS
AND
CONTRACTS

De La Salle University
for rescission or specific
performance with damages;
without debtors fault, it is
extinguished;
without
debtors fault, impairment to
be borne by creditor.
c. Improvement-by nature or
time, inure to the benefit of
the creditor; at the debtors
expense, debtor shall have
no right other than that
granted to a usufructuary.
Rescission
of
obligations in general

reciprocal

Definition: right to cancel or resolve


the contract or reciprocal obligations
in case of non-fulfillment on the part
of one. It is not absolute as the court
is given discretionary power to fix
period within which defaulting party
may comply (art. 1191). Right to
rescind may be waived explicitly and
impliedly.
Section 2: Obligations with a Period
Art. 1193. Obligations for whose
fulfillment a day certain has been fixed,
shall be demandable only when that day
comes.
Obligations with a resolutory period take
effect at once, but terminate upon arrival
of the day certain.
A day certain is understood to be that
which must necessarily come, although it
may not be known when.
If the uncertainty consists in whether the
day will come or not, the obligation is
conditional, and it shall be regulated by
the rules of the preceding Section.
(1125a)
Art. 1194. In case of loss, deterioration or
improvement of the thing before the
arrival of the day certain, the rules in
Article 1189 shall be observed. (n)
Art. 1195. Anything paid or delivered
before the arrival of the period, the
obligor being unaware of the period or

Atty. Chato Olivas-Gallo

believing that the obligation has become


due and demandable, may be recovered,
with the fruits and interests. (1126a)
Art. 1196. Whenever in an obligation a
period is designated, it is presumed to
have been established for the benefit of
both the creditor and the debtor, unless
from the tenor of the same or other
circumstances it should appear that the
period has been established in favor of
one or of the other. (1127)
Art. 1197. If the obligation does not fix a
period, but from its nature and the
circumstances it can be inferred that a
period was intended, the courts may fix
the duration thereof.
The courts shall also fix the duration of
the period when it depends upon the will
of the debtor.
In every case, the courts shall determine
such period as may under the
circumstances have been probably
contemplated by the parties. Once fixed
by the courts, the period cannot be
changed by them. (1128a)
Art. 1198. The debtor shall lose every
right to make use of the period:
(1) When after the obligation has been
contracted, he becomes insolvent,
unless he gives a guaranty or security for
the debt;
(2) When he does not furnish to the
creditor the guaranties or securities
which he has promised;
(3) When by his own acts he has
impaired said guaranties or securities
after their establishment, and when
through a
fortuitous
event
they
disappear, unless he immediately gives
new ones equally satisfactory;
(4) When the debtor violates any
undertaking, in consideration of which
the creditor agreed to the period;
(5) When the debtor attempts to abscond.

Page 19

De La Salle University

(1129a)
Obligations with a term or period are
demandable only when the day fixed for
their performance arrives
Classifications of periods:
1. Ex die- with a suspensive effect; it
becomes effective only upon the
arrival of a certain day
2. In diem- with a resolutory effect;
obligation will subsist up to a certain
day
3. Legal - granted by law
4. Voluntary - stipulated by parties
5. Judicial - fixed by courts
6. Definite - date/time is known
beforehand
Requisites
1. It must be future,
2. Certain (sure to come but may be
extended)
3. Possible, legally and physically
Term/Period and Condition Distinguished
Basis
Period
Condition
Time
Always refers Can refer to
to the future
an unknown
past event
Fulfillment
Sure
to May or may
happen at an not happen
exact
date being
an
known
from uncertain
the start or at event
an
indefinite
time, but is
sure to arrive
Influence
Affects
only May cause
on
the the obligations the arising
obligation
demandability
or cessation
or
of
the
performance
obligation

Ernest Berg v. Magdalena Estate, inc.


G.R. No. L-3784
October 17, 1952
Digest by: James Aris Bordeos
Facts: This is an action for partition of the
property known as Crystal Arcade situated
in Manila. The plaintiff and defendant are coowners of said property, the former owning
1/3 and the latter 2/3.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Hemady claims that it sold to Berg 1/3 of the


property in litigation subject to the express
condition that should either one decide to
sell his undivided share, the party selling
would grant to the other part first an
irrevocable option to purchase it. Hemady
claims that Berg offered to sell his part for
P200k and it was accepted. But Berg
refused to accept the payment of the price,
and for this refusal Hemady suffered
damages in the amount of P100k, and asks
for specific performance. Berg claims that
his offer with Hemady was P350k, while
Hemady claims that Berg offered to sell it for
P200k subject to the condition that the
necessary permit be obtained from the
United States Treasury Department.
The lower court ruled in favor of the plaintiff
holding that no agreement has been
reached between the parties relative to the
purchase and sale of the property in
question, and, recognizing the right of
plaintiff to demand partition under the
provisions of Rule 71 of the Rules of Court,
it granted the relief prayed for in the
complaint. Hence this appeal.
Issue: 1. Whether an agreement to sell has
actually been reached between plaintiff and
defendant?
Held: No. SC found no error in the decision
appealed from and affirmed RTC decision.
"when the fulfillment of the condition
depends upon the exclusive will of the
debtor the conditional obligation shall be
void."
Ratio: Aside from the testimony of Berg and
Hemady, no document has been presented
evidencing that alleged agreement to sell.
Berg invoked the rule that such agreement
can only be established by a contract in
writing, or by a note or memorandum
subscribed by the party sought to be
charged, as prescribed by the statute of
frauds. So Hemady submitted in evidence
exhibits "3" (Berg's application) and "4"
(Hemady's application), contending that
these documents, read in connection with
exhibit "1"(deed of sale containing the
irrevocable option), constitute a written proof
contemplated by said statute. SC found the
evidence in the exhibits satisfactory, all the

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De La Salle University
requirements of the statute as to contents
and signature and, as such, they constitute
sufficient proof to evidence the agreement in
question.
[T]he clause on which defendant relies for
the enforcement of its right to buy the
property, is not a term, but a condition.
Considering the first alternative, that is, until
defendant shall have obtained a loan from
the National City Bank of New York, it is
clear that the granting of such loans is not
definite and cannot be held to come within
the terms "day certain" provided for in the
Civil code, for it may or it may not happen.
And if we consider that the period given was
until such time as defendant could raise
money from other sources, we also find it to
be indefinite and contingent and so it is also
a condition and not a term within the
meaning of the law. In any event it is
apparent that the fulfillment of the condition
contained in this second alternative is made
to depend upon the defendant's exclusive
will, and viewed in this light, we are of the
opinion that plaintiff's obligation to sell did
not arise, for, under Article 1115 of the old
Civil Code, "when the fulfillment of the
condition depends upon the exclusive will of
the debtor the conditional obligation shall be
void."
La Compaia General de Tabacos de
Filipina v. Vicente Araza
GR No. 3019-February 9, 1907
Digest by: Bon Jeffrey Caluag
Facts: Araza (the defendant) has a debt of
8000 pesos to Compania General which is
payable by installment (500 pesos on the
30th of June, 1901, and the remainder at the
rate of 100 pesos a month, payable on the
30th day of each month). Defendant failed
to pay the installment only paying 400
pesos. Thus, Compania General Instituted
this action seeking the foreclosure of the
mortgage for 8,000 pesos (the entire amount
of mortgage). The defendant alleges that the
document, which was the basis of the
plaintiff's claim was executed by error on his
part and through fraud on the part of the
plaintiff.

OBLIGATIONS
AND
CONTRACTS

on the ground that debtor failed to pay the


installment?
Held: NO. The case was instituted on the
trial court on June 12, 1901. Given that, the
only demandable payment is the 100 pesos
to complete the first agreed installment. The
court gave credit to the 400 pesos which
Arza admitted to have paid and was
received by the plaintiff. The Compania
General has no right to recover what is not
yet demandable nor due. Likewise, the
contract contains no provision that upon the
failure of the debtor to pay one of the
installment, the total amount of debt should
be paid at once.
Rationale: We are of the opinion that the
obligation can be enforced in this action for
only the amount due and payable on the
12th day of June, 1903.
The contract does not provide for the
payment of any interest. There is no
provision in it declaring expressly that the
failure to pay when due should put the
debtor in default. There was therefore no
default which would make him liable for
interest until a demand was made. (Civil
Code, Art. 1100; Manresa, Com. on Civil
Code, vol 8, p. 56.)
A Day Certain -understood to be that which
must necessarily come, although it may not
be known (Par. 3, Art. 1193, CC)
General Rule: anything paid in good faith
before the arrival of the period may be
recovered
Exceptions:
1. When obligation is reciprocal, and
there
has
been
premature
performance on both sides
2. Obligation is a loan on which the
debtor is bound to pay interest
3. Period is exclusively for the benefit
of the debtor
Consequences of Premature Payment or
Delivery
If debtor is in:
1. Good faith- he may recover
2. Bad faith- he cannot recover

Issue: Does the creditor hold a right to


recover the whole amount of the mortgage

Atty. Chato Olivas-Gallo

Page 21

De La Salle University
Benefit of the Period
As a general rule, it is for the benefit of both
the obligor and oblige, unless it can be
proved that it was established in favor of one
of tem
If the period was for the benefit of:
Creditor- may demand the fulfillment of the
obligation at any time but the obligor cannot
compel him to accept payment before the
expiration of period
Debtor- cannot be compelled to perform
obligation prematurely, but he can do so if
he desires
Instances when the court may fix the
period:
1. If the obligation does not fix a period,
but from its nature circumstances it can
be inferred that a period was intended;
2. If the duration of the period depends
upon the will of the debtor; and
3. Ife the debtor binds himself when his
means permit him to do so (Art. 1180)

Cosmic Lumber Company, Inc. V. Gapita


Manaois
GR No. L-12692-January 30, 1960
Digest by: Bon Jeffrey Caluag
Facts: Manaois (defendant- appellant) on
different dates (from November 10, 1952 to
June 30, 1953) bought and received various
construction materials and hardware goods
from Cosmic Lumber (plaintiff-appellee)
amounting to P12,127.57. She paid
P6,979.83 from November 04, 1952 to
March 10, 1954 and was credited to the
account of the appellant. After instituting the
original complaint on March 24, 1954,
Manaois paid Cosmic Lumber with 1,000
pesos reducing her debt to P4, 147.74.
Appellant argues that no stipulation of time
or fixed time of payment where in the nature
of the circumstances of the obligation, the
period was intended; and thus the Court is
tasked to fix the period of payment. The
parties in the case entered into a contract of
sale on credit which among others states
that hereby agreed that all may/or
purchases from this Company are payable
in the said City of Dagupan. It is agreed that
if this bill is not paid within... days from date
hereof I/we will pay interest at the rate of 10
per centum per annum on all overdue

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

accounts. The buyer hereby agrees to pay


and all attorney's fees and court costs
should the seller institute legal action.
Goods travel at buyer's risk.
Issue:
1. Was there an intended date?
2. Should the Court set the date?
Held: Yes on both issues. The nature and
circumstance of the contract shows that the
parties intended to have a date but failed to
do so. Note that in the contract it says bill is
not paid within . . . days. In such case
pursuant to Article 1197 of the Civil Code,
the Court may fix the date.
Rationale: The parties intended to fix a
period for payment of the appellant's
obligation but failed to do so. Under article
1197 of the new Civil Code, the Court may
fix it. Taking into consideration that from 10
November 1952, the first sale, and 30 June
1953, the last sale, to the present, more
than six and nearly seven years already
have elapsed, the appellant who does not
deny her obligation must be ordered to pay
the appellee the amount she still owes it
within fifteen (15) days from the date the
judgment shall have become final.
The debtor shall lose the right to make
use of the period if:
1. He becomes insolvent, unless he gives
a guaranty or security for the debt (the
insolvency need not be judicially
declared)
2. He does not furnish to the creditor the
guaranties or securities which he has
promised
3. By his own act he has impaired said
guaranties or securities after their
establishment , and when through
fortuitous event they disappear, unless
he immediately gives new ones equally
satisfactory
4. He violates any undertaking in
consideration of which the creditor
agreed to the period
5. He attempts to abscond

Page 22

De La Salle University
Section 3: Alternative Obligation
Art. 1199. A person alternatively bound
by different prestations shall completely
perform one of them.
The creditor cannot be compelled to
receive part of one and part of the other
undertaking. (1131)
Art. 1200. The right of choice belongs to
the debtor, unless it has been expressly
granted to the creditor.
The debtor shall have no right to choose
those prestations which are impossible,
unlawful or which could not have been
the object of the obligation. (1132)
Art. 1201. The choice shall produce no
effect except from the time it has been
communicated. (1133)
Art. 1202. The debtor shall lose the right
of choice when among the prestations
whereby he is alternatively bound, only
one is practicable. (1134)
Art. 1203. If through the creditor's acts
the debtor cannot make a choice
according to the terms of the obligation,
the latter may rescind the contract with
damages. (n)
Art. 1204. The creditor shall have a right
to indemnity for damages when, through
the fault of the debtor, all the things
which are alternatively the object of the
obligation have been lost, or the
compliance of the obligation has become
impossible.
The indemnity shall be fixed taking as a
basis the value of the last thing which
disappeared, or that of the service which
last became impossible.
Damages other than the value of the last
thing or service may also be awarded.
(1135a)
Art. 1205. When the choice has been
expressly given to the creditor, the
obligation shall cease to be alternative

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

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)
Art. 1206. When only one prestation has
been agreed upon, but the obligor may
render another in substitution, the
obligation is called facultative.
The loss or deterioration of the thing
intended as a substitute, through the
negligence of the obligor, does not
render him liable. But once the
substitution has been made, the obligor
is liable for the loss of the substitute on
account of his delay, negligence or fraud.
(n)
Conjunctive- debtor has to perform all the
several prestations in the contract in the
contract to extinguish the obligation
Alternative- alternatively bound by different
prestations but the complete performance of

Page 23

OBLIGATIONS
AND
CONTRACTS

De La Salle University
one of them is sufficient to extinguish the
obligation
Rights of Choice in belongs to the debtor,
except when it was expressly granted to
creditor.
Agoncillo and Mario v. Javier
G.R. No. L-12611, August 7, 1918
Digested by: Katrina Calugay
Facts: Anastasio, Jose and Florencio (all
surnamed Alano) executed a document in
favor of Da. Marcela Mario, containing
among others; a.) That as the testamentary
heirs, they will be the one to pay Rev.
Anastasio Cruz debt to Mario amounting to
P2,730.50. b.) A mortgage of the property
bequeathed to them by Cruz is entered to
secure the payment of the debt c.) In case of
insolvency, the right of ownership and
possession of the lot will be transferred to
Mario d.) If the value of the property is
insufficient to cover the total amount of
indebtedness, Anastasio shall mortgage his
four parcels of land to secure the balance.
Since then, no part of the debt was paid
except for the P200 paid by Anastasio.
Eventually, Anastasio died intestate. Notices
were published, informing the creditors to
present their claims against his estate. No
claims were presented until the period for
presentation expired.
A year after, Mario requested for the
proceedings reopening, claiming that she is
a creditor of Anastasio. She also claims that
the contract entered between them is that of
a loan with a stipulation that in case the
debtors fail to settle the debt, the properties
will be conveyed in her favor. The Alanos on
the other hand, contend that any cause of
action which Mario has against Anastasios
estate has been barred by her failure to
present her claim within the required period
and that the document does not constitute a
valid mortgage.
Issue: Can Mario
properties in dispute?

validly

claim

the

Held: No. The contract is not to permit


Mario to forfeit the security upon debtors
failure to pay the debt at maturity. The

Atty. Chato Olivas-Gallo

contract simply means that if the debt is not


paid in money it shall be paid in another
mode, which in this case is the transfer of
the property. It is incorrect to say that the
title to the house and lot shall automatically
be transferred upon mere failure to pay. The
obligations assumed by the Alanos were
alternative, giving them the right to elect
which obligation they would want to perform.
It is also wrong to say that the right to settle
the obligation by the payment of money was
lost because of the failure to pay the debt at
its maturity.
Since the action to recover the debt has
already prescribed, the liability of conveying
the properties has also prescribed, it being
dependent upon their failure to pay the debt
in money.
The court thus dismissed all the claims
against the Alanos.
Ratio:
The
contract
now
under
consideration is not susceptible of the
interpretation that the title to the house and
lot in question was to be transferred to the
creditor ipso facto upon the mere failure of
the debtors to pay the debt at its maturity.
The obligations assumed by the debtors
were alternative, and they had the right to
elect which they would perform (Civil Code,
art. 1132). The conduct of the parties (Civil
Code, art. 1782) shows that it was not their
understanding that the right to discharge the
obligation by the payment of money was lost
to the debtors by their failure to pay the debt
at its maturity. The plaintiff accepted a
partial payment from Anastasio Alano in
1908, several years after the debt matured.
The prayer of the complaint is that the
defendants be required to execute a
conveyance of the house and lot, after its
appraisal, "unless the defendants pay the
plaintiff the debt which is the subject of this
action."
The distinction is one which is wellestablished, although the authorities cited do
not fully support plaintiffs' contentions, but in
this particular case the question is
academic, for the undertaking is in the
alternative to pay a sum of money an
essentially divisible obligation or to
convey the house. As the alternative
indivisible obligation is imposed only in the

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De La Salle University
event that the debtors fail to pay the money,
it is subject to a suspensive condition, and
the prescription of the obligation whose nonperformance constitutes the condition
effectively prevents the condition from taking
place.
The choice shall produce effect only upon
communication of the choice of the other
party. There is no special form for the
communication notification.
Once
the
debtors
choice
is
communicated,
the
creditors
concurrence is not required.
Once choice is made it can no longer be
renounced and parties are bound by it
When choice is rendered impossible through
the creditors fault, the debtor MAY bring an
action to rescind the contract with damages
Alternative obligations are converted to
simple obligations when:
1. the person who has a right of choice has
communicated his choice.
2. only one prestation is practicable
Legarda v. Miailhe
G.R. No. L-3435, April 28, 1951
Digested by: Katrina Calugay
Facts: On February 17, 1926, William Burke
(original defendant-mortgagee who was later
substituted by Victoria Miailhe) and Clara
Tambunting de Legarda (plaintiff-mortgagor)
entered into a contract of mortgage
amounting to Php75,000.
Because of
Burkes liberality, the mortgage was
renewed from time to time until March 16,
1940. In this mortgage renewal, Burke was
given the option to demand the payment of
the Php70,000 balance either in Philippine
or English currency and that this option has
to be exercised on February 17, 1943.
However before the obligations
maturity, Legarda deposited in court a
certified check representing Japanese
Military notes worth Php75,920.83 to satisfy
the princial and the interests due her. Burke
refused to receive the payment because it is
not in the currency agreed upon by them.
Legarda filed a complaint alleging
Burkes unjustified refusal to accept her
payment. Burke in his answer said that the
obligation has not yet become due and that

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

it is contrary to their agreement. The Court


of First Instance dismissed the complaint
and ordered the satisfaction of the debt. To
this, Legarda appealed.
Issue: Can Burke validly refuse Legardas
payment?
Held: No. Although Burke has the right to
demand payment in the currency he may
elect, he cannot exercise the same as his
right of election ceased to exist.
It is settled in their mortgage renewal that
his option to elect is to be exercised upon
the obligations maturity, which is February
17, 1943, a date well within the Japanese
occupation. Because of the proclamation
issued
by
the
Japanese
Imperial
Commander, all other currencies, including
the English ceased to exist. This made
Burkes right of election legally impossible,
and Legardas payment in Japanese Military
notes valid. In an alternative obligation, ones
right to choose ceases when the
undertakings are impossible or illegal.
However despite this, the court declared that
the payment does not have any legal effect
because it was made in a certified check,
which is not considered as a legal tender.
The court then affirmed the lower courts
decision.
Ratio: As we have stated before, the option
to demand payment of the indebtedness has
to be exercised upon maturity of the
obligation, which is February 17, 1943. On
this date, the only currency available is the
Philippine currency, or the Japanese Military
notes, because all other currencies,
including the English, were outlawed by a
proclamation issued by the Japanese
Imperial Commander on January 3, 1942.
This means that the right of election ceased
to exist on that date because it had become
legally impossible. And this is so because in
alternative obligations there is no right to
choose undertakings that are impossible or
illegal (Civil Code, art. 1132, par. 2). In other
words, the obligation on the part of the
debtor to pay the mortgage indebtedness
has since then ceased to be alternative.
(Articles 1134 & 1136(1) of the Civil Code.)
It appears, therefore, that the tender of
payment made by the plaintiff in Japanese

Page 25

De La Salle University
Military notes was a valid tender because it
was the only currency permissible at the
time, and the same was made in
accordance with the agreement because
payment in Japanese Military notes during
the occupation is tantamount to payment in
the Philippine currency. (Haw Pia vs. China
Banking Corporation, 45 Off. Gaz., Supp.[9]
229; Phil. Trust vs. Araneta, 46 Off. Gaz.,
4254; Allison D. Gibbs vs. Eulogio
Rodriguez, 47 Off. Gaz., 186.) But the
consignation of the sum of P75,920.83 in
Japanese currency made by the plaintiffs
with clerk of court does not have any legal
effect because it was made in certified
check, "does not meet the requirements of a
legal tender."

OBLIGATIONS
AND
CONTRACTS

damages OR price/value of the


thing lost with right to damages
FACULTATIVE OBLIGATION
Kind of obligation where the obligor is
obliged to perform only one prestation, but
he is allowed to perform or deliver one in
substitution thereof
If the thing was lostbefore substitution
Obligor in bad faith- he is liable
Goodfaith/negligence - he is not
liable
If the thing was lost after the substitution
Due to obligors delay, negligence of
fraud he is liable; once substitution
is made, the obligation is converted
into a simple one

Loss of Objects
Section 4: Joint and Solidary Obligations
A. If the choice belongs to the debtor:
Through fortuitous Event
Total loss - debtor is released
from the obligation
Partial loss- deliver that which
he shall choose from among the
remainder
2. Through the debtors fault
Total loss - creditor shall have a
right to indemnity for damages
based on the value of the last
thing which disappeared or
service
which
become
impossible
Partial loss - deliver that which
he shall choose from among the
remainder without damages
1.

B. If the choice belongs to creditor


1. Through Fortuitous Event
Total loss- debtor is released from
the obligation
Partial loss - deliver that which he
shall choose from among the
remainder
2. Through the debtors fault

Total loss - creditor may claim the


price/value of any of them with
indernity for damages
Partial loss - creditor may claim any
of those subsisting without a right to

Atty. Chato Olivas-Gallo

Art. 1207. The concurrence of two or


more creditors or of two or more debtors
in one and the same obligation does not
imply that each one of the former has a
right to demand, or that each one of the
latter is bound to render, entire
compliance with the prestation. There is
a solidary liability only when the
obligation expressly so states, or when
the law or the nature of the obligation
requires solidarity. (1137a)
Art. 1208. If from the law, or the nature or
the wording of the obligations to which
the preceding article refers the contrary
does not appear, the credit or debt shall
be presumed to be divided into as many
shares as there are creditors or debtors,
the credits or debts being considered
distinct from one another, subject to the
Rules of Court governing the multiplicity
of suits. (1138a)
Art. 1209. If the division is impossible,
the right of the creditors may be
prejudiced only by their collective acts,
and the debt can be enforced only by
proceeding against all the debtors. If one
of the latter should be insolvent, the
others shall not be liable for his share.
(1139)
Art. 1210. The indivisibility of an
obligation does not necessarily give rise

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De La Salle University

to solidarity. Nor does solidarity of itself


imply indivisibility. (n)
Art. 1211. Solidarity may exist although
the creditors and the debtors may not be
bound in the same manner and by the
same periods and conditions. (1140)
Art. 1212. Each one of the solidary
creditors may do whatever may be useful
to the others, but not anything which
may be prejudicial to the latter. (1141a)
Art. 1213. A solidary creditor cannot
assign his rights without the consent of
the others. (n)
Art. 1214. The debtor may pay any one of
the solidary creditors; but if any demand,
judicial or extrajudicial, has been made
by one of them, payment should be made
to him. (1142a)
Art. 1215. Novation, compensation,
confusion or remission of the debt, made
by any of the solidary creditors or with
any of the solidary debtors, shall
extinguish
the
obligation,
without
prejudice to the provisions of Article
1219.
The creditor who may have executed any
of these acts, as well as he who collects
the debt, shall be liable to the others for
the share in the obligation corresponding
to them. (1143)
Art. 1216. The creditor may proceed
against any one of the solidary debtors
or some or all of them simultaneously.
The demand made against one of them
shall not be an obstacle to those which
may subsequently be directed against
the others, so long as the debt has not
been fully collected. (1144a)
Art. 1217. Payment made by one of the
solidary
debtors
extinguishes
the
obligation. If two or more solidary
debtors offer to pay, the creditor may
choose which offer to accept.
He who made the payment may claim
from his co-debtors only the share which
corresponds to each, with the interest for

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

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 codebtors, in proportion to the debt of
each. (1145a)
Art. 1218. Payment by a solidary debtor
shall not entitle him to reimbursement
from his co-debtors if such payment is
made after the obligation has prescribed
or become illegal. (n)
Art. 1219. The remission made by the
creditor of the share which affects one of
the solidary debtors does not release the
latter from his responsibility towards the
co-debtors, in case the debt had been
totally paid by anyone of them before the
remission was effected. (1146a)
Art. 1220. The remission of the whole
obligation, obtained by one of the
solidary debtors, does not entitle him to
reimbursement from his co-debtors. (n)
Art. 1221. If the thing has been lost or if
the prestation has become impossible
without the fault of the solidary debtors,
the obligation shall be extinguished.
If there was fault on the part of any one
of them, all shall be responsible to the
creditor, for the price and the payment of
damages and interest, without prejudice
to their action against the guilty or
negligent debtor.
If through a fortuitous event, the thing is
lost or the performance has become
impossible after one of the solidary
debtors has incurred in delay through the
judicial or extrajudicial demand upon him
by the creditor, the provisions of the
preceding paragraph shall apply. (1147a)
Art. 1222. A solidary debtor may, in
actions filed by the creditor, avail himself
of all defenses which are derived from
the nature of the obligation and of those

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OBLIGATIONS
AND
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De La Salle University

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)
Joint- each of the debtors is bound to fulfill
the obligation; on the other hand, each one
of the creditors has a right to demand full
compliance with the obligation
Solidary- each of the debtors is liable for
the entire obligation and each of the
creditors is entitled to demand the
satisfaction of the whole obligation from any
or all of the creditors
Presumption:
When there are a number of creditors and a
number of debtors, then the obligation is
presumed to be joint unless the contrary
appears from the law, nature of the
obligation, and stipulation of the parties.
Effects of Joint Obligation
1. each debtor is liable only for a
proportionate part of the debt
2. each creditor is entitled only to a
proportionate part of the credit
Kinds of Solidarity
Active - any one of the creditors can
demand the fulfillment of the entire
obligation.
Passive - any of the debtors can be
made liable for the fulfillment of the
entire obligation
As to creation
Legal- imposed by law
Conventionalestablished
by
voluntary agreement of the parties
Real-due to the nature of the
obligation

Joint Divisible Obligation


each debtor can be held liable only
for the payment of his proportionate
share of the debt.
breach of obligation by one of the
debtors- damages due must be
borne by him alone
Solidarity
exists although creditors and
debtors may not be bound in the
same manner and by the same
periods and conditions.
Forms of passive solidarity
a. Uniform- parties are bound by the
same stipulations.
b. Non-uniform or Varied - parties are
not subject to the same stipulations
Effects of Solidarity:
Each one of the solidary creditors
may do whatever may be useful or
beneficial to the others, but not
anything which may be prejudicial to
the latter
Creditor cannot assign his rights
without the consent of others
Debtor may pay any of the creditors,
but if one has demanded payment
already, the debtor should pay him
(creditor is obliged to reimburse the
other
creditors;
the
debtors
benefited by the payment of the
obligation are obliged to reimburse
the debtor who paid
Effect of Remission
obligation is totally extinguished but
the solidary debtor is not released
from his obligation to his co-debtors
in case the debt had been totally
made by one of them before the
remission

Joined Indivisible Obligation


compliance with the obligation
requires the concurrence of all the
debtors, although each for his part
insolvency of one of the debtors-the
others shall not be liable for his
shares

Atty. Chato Olivas-Gallo

If there is no previous payment, the


debtor who received the remission
cannot seek reimbursement from his
co-debtors

The demand made against one of the


solidary debtors 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.

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De La Salle University

Effect of the four modes of extinguishing


obligations (novation, compensation,
confusion or remission)
- acts prejudicial to the other solidary
co-creditors, because said acts
have the effect of extinguishing the
debt or obligation which is due to all
of them
- the one who had collected the debt
shall be liable for the shares
corresponding to all his co-creditors
Novation - when obligations are 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

If prejudicial, the solidary creditor


who effected the novation shall
reimburse the others for damages
incurred by them;
If beneficial and the creditor who
effected the novation is able to
secure
performance
of
the
obligation, such creditor shall be
liable to the others for the share
which corresponds to them, not only
in the obligation, but also in the
benefits;
If effected by substituting another
person in place of the debtor, the
solidary creditor who effected the
novation is liable for the acts of the
new debtor in case there is
deficiency in performance or in case
damages are incurred by the other
solidary creditors as a result of the
substitution;
If effected by subrogating a third
person in the rights of the solidary
creditor responsible for the novation,
the obligation of the debtor or
creditors
is
not
in
reality
extinguished; the relation between
the other creditors not substituted
and the debtor/s is maintained.

Compensation when two persons, in their


own right, become creditors and debtors of
each other

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Confusion or Merger of Rights when the


characters of creditor and debtor are
merged in the same person
Compensation and Confusion
1. PARTIAL: rules on application of
payment shall apply, without
prejudice to the right of other
creditors who have not caused the
confusion or compensation to be
reimbursed to the extent that their
rights are diminished or affected;
2. TOTAL: obligation extinguished,
what is left is the ensuing liability for
reimbursement within each group
the creditor causing the confusion or
compensation
is
obliged
to
reimburse the other creditors; the
debtors
benefited
by
the
extinguishment of the obligation are
obliged to reimburse the debtor who
made
the
confusion
or
compensation possible.
Remission or Condonation this is the
gratuitous abandonment by the creditor of
his right
1. ENTIRE OBLIGATION: obligation is
totally extinguished but the solidary
debtor who obtained it does not
entitle him to reimbursement from
his co-debtors;
2. For the benefit of one of the debtors
covering his entire share: he is
completely released from the
creditor/s;
3. For the benefit of one of the debtors
and it covers only part of his share:
his character as a solidary debtor is
not affected.
Against whom will the creditors action
be addressed (when there is passive
solidarity)?
(a) any of the solidary debtors;
(b) some of the solidary debtors; or
(c) all
of
the
solidary
debtors
simultaneously.
Effect of Demand upon a Solidary Debtor
The demand made against one of
them shall not be an obstacle to
those which may subsequently be
directed against the others so long

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OBLIGATIONS
AND
CONTRACTS

De La Salle University

as the debt has not been fully


collected.
The creditor may proceed against
any one of the solidary debtors or
against all of them simultaneously.
A creditors right to proceed against
the surety exists independently of
his right to proceed against the
principal.

Note: 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 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. (Inciong v. CA, G.R. No. 96405,
June 26, 1996)
Payment
- consists in the delivery of the thing
or the rendition of the service which
is the object of the obligation
- payment by one of the solidary
debtors extinguishes the obligation
- obligation of the co-debtors to
reimburse becomes a joint one
- If two or more solidary debtors offer
to pay, the creditor may choose
which offer to accept.
- Solidary debtor who made the
payment merely entitles him to claim
from his co-debtors the share which
corresponds to them with interest
from the time of payment; does not
create a real case of subrogation; if
payment was made before the debt
is due, no interest for the intervening
period may be demanded.
- Share of the insolvent solidary
debtor share shall be borne by all
his co-debtors, in proportion to the
debt of each.
Payor is not entitled to reimbursement when:
(a) obligation had already prescribed
due to lapse of time required by law;
or
(b) obligation or prestation has become
illegal before it could be performed.

Atty. Chato Olivas-Gallo

creditor cannot, by his act of belated


remission, exempt any debtor from
the latters obligation to his codebtors

this article applies only when


remission covers the whole or entire
obligation and the remission is
obtained by one of the solidary
debtors without spending anything
for its agent
in case the remission is only partial
solidary debtor who paid the
unremitted part of the obligation is
entitled to reimbursement with
respect only to the amount he
actually paid

Effect of
Prestation

Loss

or

Impossibility

of

1. If it is not due to the fault and before


delay of the solidary debtors, the
obligation is extinguished.
2. If the loss or impossibility is due to
the fault of one of the solidary
debtors or due to a fortuitous event
after one of the solidary debtors had
already incurred in delay, the
obligation is converted into an
obligation of indemnity for damages
but the solidary character of the
obligation remains.
Defenses a Solidary Debtor May Avail
1. Defenses arising from the nature of
the obligation
(examples: payment, prescription,
remission,
statute
of
frauds,
presence of vices of consent and
similar others)
2. Defenses personal to him
(examples: minority, insanity, and
others purely personal)
3. Defenses personal to the others, but
only as regards that part of the debt
for which the latter are liable
Section 5:
Obligations

Divisible

and

Indivisible

Art. 1223. The divisibility or indivisibility


of the things that are the object of
obligations in which there is only one
debtor and only one creditor does not

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OBLIGATIONS
AND
CONTRACTS

De La Salle University

2. Quantitative
division

depends on quantity; there


is homogeneity in the thing
3. Ideal division divisibility is
not material division of a
thing but only mental or
intellectual division

alter or modify the provisions of Chapter


2 of this Title. (1149)
Art. 1224. A joint indivisible obligation
gives rise to indemnity for damages from
the time anyone of the debtors does not
comply with his undertaking. The debtors
who may have been ready to fulfill their
promises shall not contribute to the
indemnity beyond the corresponding
portion of the price of the thing or of the
value of the service in which the
obligation consists. (1150)
Art. 1225. For the purposes of the
preceding articles, obligations to give
definite things and those which are not
susceptible of partial performance shall
be deemed to be indivisible.
When the obligation has for its object the
execution of a certain number of days of
work, the accomplishment of work by
metrical units, or analogous things which
by their nature are susceptible of partial
performance, it shall be divisible.
However, even though the object or
service may be physically divisible, an
obligation is indivisible if so provided by
law or intended by the parties.
In obligations not to do, divisibility or
indivisibility shall be determined by the
character of the prestation in each
particular case. (1151a)
Divisible Obligations
Susceptibility of an
performed partially

obligation

to

be

Indivisible Obligations
Non-susceptibility of an obligation to partial
performance
Test of Divisibility: Whether the prestation
is susceptible of partial compliance or not
Kinds of Division of Things
1. Qualitative
division

depends on the quality of


the
thing;
thing
not
homogenous

Atty. Chato Olivas-Gallo

Kinds of Indivisibility
1. Legal indivisibility provided by law
2. Conventional indivisibility agreed
upon by the contracting parties
3. Natural indivisibility nature of the
object or subject matter of the
obligation
-

applies to a joint indivisible


obligation action for enforcement
of the obligation must be pursued
against all the debtors
anyone of the debtors fails to
comply will be liable for damages
debtors who may have been ready
to comply with what is incumbent
upon them 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
the debtor who failed or refused to
comply with the prestation shall bear
the burden of paying all of the
damages to the creditor/s and shall
indemnify the other debtors for
damages suffered as a result of the
transformation of the obligation into
one of indemnity

In obligation to give, even though the object


may be physically divisible, the obligation is
still indivisible if it is provided by law or it is
so intended by the parties
In obligations to do, the obligation shall be
considered divisible when it has for its
object:
o the execution of a certain
number of days of work
o the accomplishment of work
by metrical units
o the
accomplishment
of
analogous things which by
their nature are susceptible
of partial performance

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OBLIGATIONS
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De La Salle University
In obligations not to do, it depends upon the
character of the prestation in each particular
case
General Rule: Creditor cannot be
compelled partially to receive the prestation
in which the obligation consists; neither may
the debtor be required to make partial
payments
Exceptions:
1. When the obligation expressly
stipulates the contrary
2. When the different prestations
constituting the objects of the
obligation are subject to different
terms and conditions
3. When the obligation is in part
liquidated and in part unliquidated
Note: When there is plurality of debtors and
creditors, the effect of divisible/indivisible
character of the obligation depends on
whether the obligation is joint or solidary.
If solidary Arts. 1211 to Art. 1222
appwwdsly
If joint divisible Art. 1208 is
applicable
If joint indivisible Art. 1209 and
1224 apply
Section 6: Obligations with a Penal
Clause
Art. 1226. In obligations with a penal
clause, the penalty shall substitute the
indemnity for damages and the payment
of interests in case of noncompliance, if
there is no stipulation to the contrary.
Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or
is guilty of fraud in the fulfillment of the
obligation.
The penalty may be enforced only when
it is demandable in accordance with the
provisions of this Code. (1152a)
Art. 1227. The debtor cannot exempt
himself from the performance of the
obligation by paying the penalty, save in
the case where this right has been
expressly reserved for him. Neither can
the creditor demand the fulfillment of the
obligation and the satisfaction of the

Atty. Chato Olivas-Gallo

penalty at the same time, unless this


right has been clearly granted him.
However, if after the creditor has decided
to require the fulfillment of the obligation,
the performance thereof should become
impossible without his fault, the penalty
may be enforced. (1153a)
Art. 1228. Proof of actual damages
suffered by the creditor is not necessary
in order that the penalty may be
demanded. (n)
Art. 1229. The judge shall equitably
reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if
there has been no performance, the
penalty may also be reduced by the
courts
if
it
is
iniquitous
or
unconscionable. (1154a)
Art. 1230. The nullity of the penal clause
does not carry with it that of the principal
obligation.
The nullity of the principal obligation
carries with it that of the penal clause.
(1155)
Penal Clause - an accessory undertaking to
assume greater liability in case of breach
and is attached for the purpose of insuring
its performance.
Penal
Clause
Distinguished

and

Penal Clause
Constitutes an obligation
May
become
demandable
upon
default
of
the
unperformed obligation
and sometimes jointly
with it

Condition

Condition
Does not constitute
an obligation
Never demandable

Purpose of Penalty:
1. Funcion coercitiva o de garantia to
insure the performance of the
obligation;

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De La Salle University
2. Funcion liquidatoria to liquidate
the amount of damages to be
awarded in case of breach of the
principal obligation (compensatory)
3. Funcion estrictamente penal in
certain exceptional cases, to punish
the obligor in case of breach of the
principal obligation (punitive). Does
not resolve the question of damages
Enforceability of Penalty
Penalty as a stipulation in a contract is
demandable only if there is a breach of the
obligation and it is not contrary to law,
morals, good customs, public order or public
policy.
Siy v CA
(138 SCRA 536)
Digested by: Leandro Celles
Facts: The spouse Valdez, the respondents,
owns a house and lot in Makati. They then
entered a contract of sale with Virgilio Siy,
the petitioner, the problem stemmed
from their subsequent agreements. Initially
they agreed that a contract of deed of sale
shall be executed upon the approval of their
SSS loan. It is also agreed that a payment of
P50 monthly for the rental of the property
and P30 per day of delay.
Since the property was mortgaged to the
GSIS they were asked to execute a Deed of
Sale with Assumption of Mortgage stating
that the petitioner has paid the for the
improvements incurred in the property and
the balance to be paid upon approval of the
SSS loan which they did.
The spouses Valdez then evidently chose to
rescind the contract because Ignacio was
unable to pay neither the initial payment nor
the balance to be paid from the SSS loan
within the period agreed upon.
Issues:
1. Is Ignacio liable to pay for damages for
the failure to fulfill payment of the land?
2. Did the court correctly impose the penalty
to be paid?
Held: 1. Yes. Ignacios failure to pay within
the period provided for in the contract is a
clear breach of contract and entitles the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Spouses the accessory damages as


stipulated.
2. No. The Court should not include the
penalty clause and the part of the purchase
price in the computation of damages. He is
only liable to pay for the use of the house
and lot until he vacates the premises. The
petitioner and his family have lived in the
respondents' house all these years without
paying either the price he obligated himself
to pay or the monthly rentals he agreed to
pay as early as 1963. At the very least, the
petitioner should pay P50.00 monthly rentals
with legal interest from March, 1963.
Rationale: "... The Breach of contract
committed by appellee gave appellant,
under the law and even under general
principles of fairness, the right to rescind the
contract or to ask for its specific
performance, in either case with right to
demand damages...
It is evident, in the case at bar, that the
respondents chose to rescind the contracts
after the petitioner repeatedly failed to pay
not only the balance but the initial amount as
downpayment in consideration of which the
contracts or agreements were executed. As
a matter of fact, the petitioner later asked
the SSS to cancel his loan application. He
thereby abandoned his own claim for
specific performance
"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.
Limitation upon the Right of the Debtor in
Obligations with a Penal Clause
General Rule: Debtor cannot exempt
himself from the performance of the principal
obligation by paying the stipulated penalty
Exception: Unless this right has been
expressly reserved for him.
Limitations on the Right of the Creditor in
Obligations with a Penal Clause
General Rule: Creditor cannot demand the
fulfilment of the principal obligation and
demand the satisfaction of the penalty at the
same time.

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Exception: Unless the right has been
clearly granted to him.
If creditor has chose fulfilment of the
principal obligation and performance
thereof became impossible without
his fault, he may still demand
satisfaction of the penalty.
If there was fault on the part of
debtor, creditor may demand not
only satisfaction of penalty but also
the payment of damages.
Proof of Actual Damages
The rule that proof of actual damages is not
necessary is applicable only to the general
rule stated in Art. 1226 and not to the
exceptions.
Penalty is exactly identical with what is
known as liquidated damages under Art.
2226.
When Penalty May Be Reduced
1. If the principal obligation has been
partly complied with;
2. If the principal obligation has been
irregularly complied with; and
3. If the penalty is iniquitous or
unconscionable even if there has
been no performance.
Effect of Nullity of Obligation or Penalty
- If principal obligation is void - penal
clause shall also be void because
the penalty is merely an accessory
obligation
- If penal clause is void, principal
obligation is not affected.

CHAPTER 4: Modes of
Extinguishing Obligations
Art. 1231. Obligations are extinguished:
(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation
remission of the debt;

or

(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)
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.

Payment/performance
Loss of the thing due
Condonation or remission of debt
Confusion or merger
Compensation
Novation
Annulment
Rescission
Fulfilment of a resolutory condition
Prescription

Section 1. Payment or Performance


Art. 1232. Payment means not only the
delivery of money but also the
performance, in any other manner, of an
obligation. (n)
Art. 1233. A debt shall not be understood
to have been paid unless the thing or
service in which the obligation consists
has been completely delivered or
rendered, as the case may be. (1157)
Art. 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)
Art. 1235. When the obligee accepts the
performance,
knowing
its
incompleteness or irregularity, and
without expressing any protest or
objection, the obligation is deemed fully
complied with. (n)
Art. 1236. The creditor is not bound to
accept payment or performance by a
third person who has no interest in the
fulfillment of the obligation, unless there
is a stipulation to the contrary.
Whoever pays for another may demand
from the debtor what he has paid, except

Atty. Chato Olivas-Gallo

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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)

the debtor has been led to believe


that the third person had
authority to receive the payment.
(1163a)

Art. 1237. Whoever pays on behalf of the


debtor without the knowledge or against
the will of the latter, cannot compel the
creditor to subrogate him in his rights,
such as those arising from a mortgage,
guaranty, or penalty. (1159a)

Art. 1242. Payment made in good faith to


any person in possession of the credit
shall release the debtor. (1164)

Art. 1238. Payment made by a third


person who does not intend to be
reimbursed by the debtor is deemed to
be a donation, which requires the
debtor's consent. But the payment is in
any case valid as to the creditor who has
accepted it. (n)
Art. 1239. In obligations to give, payment
made by one who does not have the free
disposal of the thing due and capacity to
alienate it shall not be valid, without
prejudice to the provisions of Article
1427 under the Title on "Natural
Obligations." (1160a)
Art. 1240. Payment shall be made to the
person in whose favor the obligation has
been constituted, or his successor in
interest, or any person authorized to
receive it. (1162a)
Art. 1241. Payment to a person who is
incapacitated to administer his property
shall be valid if he has kept the thing
delivered, or insofar as the payment has
been beneficial to him.
Payment made to a third person shall
also be valid insofar as it has redounded
to the benefit of the creditor. Such
benefit to the creditor need not be proved
in the following cases:
(1) If after the payment, the third
person acquires the creditor's
rights;
(2) If the creditor ratifies the
payment to the third person;
(3) If by the creditor's conduct,

Atty. Chato Olivas-Gallo

Art. 1243. Payment made to the creditor


by the debtor after the latter has been
judicially ordered to retain the debt shall
not be valid. (1165)
Art. 1244. The debtor of a thing cannot
compel the creditor to receive a different
one, although the latter may be of the
same value as, or more valuable than
that which is due.
Art. 1245. Dation in payment, whereby
property is alienated to the creditor in
satisfaction of a debt in money, shall be
governed by the law of sales. (n)
Art. 1246. When the obligation consists
in the delivery of an indeterminate or
generic thing, whose quality and
circumstances have not been stated, the
creditor cannot demand a thing of
superior quality. Neither can the debtor
deliver a thing of inferior quality. The
purpose of the obligation and other
circumstances shall be taken into
consideration. (1167a)
Art. 1247. Unless it is otherwise
stipulated, the extrajudicial expenses
required by the payment shall be for the
account of the debtor. With regard to
judicial costs, the Rules of Court shall
govern. (1168a)
Art. 1248. Unless there is an express
stipulation to that effect, the creditor
cannot be compelled partially to receive
the prestations in which the obligation
consists. Neither may the debtor be
required to make partial payments.
However, when the debt is in part
liquidated and in part unliquidated, the
creditor may demand and the debtor may
effect the payment of the former without
waiting for the liquidation of the latter.

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(1169a)
Art. 1249. The payment of debts in money
shall be made in the currency stipulated,
and if it is not possible to deliver such
currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable
to order, or bills of exchange or other
mercantile documents shall produce the
effect of payment only when they have
been cashed, or when through the fault
of the creditor they have been impaired.
In the meantime, the action derived from
the original obligation shall be held in the
abeyance. (1170)
Art. 1250. In case an extraordinary
inflation or deflation of the currency
stipulated should supervene, the value of
the currency at the time of the
establishment of the obligation shall be
the basis of payment, unless there is an
agreement to the contrary. (n)
Art. 1251. Payment shall be made in the
place designated in the obligation.
There being no express stipulation and if
the undertaking is to deliver a
determinate thing, the payment shall be
made wherever the thing might be at the
moment the obligation was constituted.
In any other case the place of payment
shall be the domicile of the debtor.
If the debtor changes his domicile in bad
faith or after he has incurred in delay, the
additional expenses shall be borne by
him.
These provisions are without prejudice to
venue under the Rules of Court. (1171a)

OBLIGATIONS
AND
CONTRACTS

same must be applied. Unless the parties


so stipulate or when the application of
payment is made by the party for whose
benefit the term has been constituted
application shall not be made as to debts
which are not yet due.
If the debtor accepts from the creditor a
receipt in which an application of the
payment is made the former cannot
complain of the same unless there is a
cause for invalidating the contract.
(1172a)
Art. 1253. If the debt produces interest
payment of the principal shall not be
deemed to have been made until the
interests have been covered. (1173)
Art. 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)
SUBSECTION 2. - Payment by Cession
Art. 1255. The debtor may cede or assign
his property to his creditors in payment
of his debts. This cession, unless there is
stipulation to the contrary, shall only
release the debtor from responsibility for
the net proceeds of the thing assigned.
The agreements which, on the effect of
the cession, are made between the
debtor and his creditors shall be
governed by special laws. (1175a)
SUBSECTION 3. - Tender of Payment and
Consignation

SUBSECTION 1. - Application of
Payments

Art. 1256. If the creditor to whom tender


of payment has been made refuses
without just cause to accept it, the debtor
shall be released from responsibility by
the consignation of the thing or sum due.

Art. 1252. He who has various debts of


the same kind in favor of one and the
same creditor may declare at the time of
making the payment to which of them the

Consignation alone shall produce the


same effect in the following cases:

Atty. Chato Olivas-Gallo

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(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 receipt;
(4) When two or more persons claim the
same right to collect;
(5) When the title of the obligation has
been lost. (1176a)
Art. 1257. In order that the consignation
of the thing due may release the obligor,
it must first be announced to the persons
interested in the fulfillment of the
obligation.
The consignation shall be ineffectual if it
is not made strictly in consonance with
the provisions which regulate payment.
(1177)
Art. 1258. Consignation shall be made by
depositing the things due at the disposal
of judicial authority, before whom the
tender of payment shall be proved, in a
proper case, and the announcement of
the consignation in other cases.
The consignation having been made, the
interested parties shall also be notified
thereof. (1178)
Art. 1259. The expenses of consignation,
when properly made, shall be charged
against the creditor. (1178)
Art. 1260. Once the consignation has
been duly made, the debtor may ask the
judge to order the cancellation of the
obligation.
Before the creditor has accepted the
consignation, or before a judicial
declaration that the consignation has
been properly made, the debtor may
withdraw the thing or the sum deposited,
allowing the obligation to remain in force.
(1180)

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Art. 1261. If, the consignation having


been made, the creditor should authorize
the debtor to withdraw the same, he shall
lose every preference which he may have
over the thing. The co-debtors,
guarantors and sureties shall be
released. (1181a)
SECTION 2. - Loss of the Thing Due
Art. 1262. An obligation which consists in
the delivery of a determinate thing shall
be extinguished if it should be lost or
destroyed without the fault of the debtor,
and before he has incurred in delay.
When by law or stipulation, the obligor is
liable even for fortuitous events, the loss
of the thing does not extinguish the
obligation, and he shall be responsible
for damages. The same rule applies when
the nature of the obligation requires the
assumption of risk. (1182a)
Art. 1263. In an obligation to deliver a
generic thing, the loss or destruction of
anything of the same kind does not
extinguish the obligation. (n)
Art. 1264. The courts shall determine
whether, under the circumstances, the
partial loss of the object of the obligation
is so important as to extinguish the
obligation. (n)
Art. 1265. Whenever the thing is lost in
the possession of the debtor, it shall be
presumed that the loss was due to his
fault, unless there is proof to the
contrary, and without prejudice to the
provisions
of
article
1165.
This
presumption does not apply in case of
earthquake, flood, storm, or other natural
calamity. (1183a)
Art. 1266. The debtor in obligations to do
shall also be released when the
prestation becomes legally or physically
impossible without the fault of the
obligor. (1184a)
Art. 1267. When the service has become
so difficult as to be manifestly beyond
the contemplation of the parties, the
obligor may also be released therefrom,

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OBLIGATIONS
AND
CONTRACTS

in whole or in part. (n)


Art. 1268. When the debt of a thing
certain and determinate proceeds from a
criminal offense, the debtor shall not be
exempted from the payment of its price,
whatever may be the cause for the loss,
unless the thing having been offered by
him to the person who should receive it,
the latter refused without justification to
accept it. (1185)
Art. 1269. The obligation having been
extinguished by the loss of the thing, the
creditor shall have all the rights of action
which the debtor may have against third
persons by reason of the loss. (1186)
Payment or Performance
Means delivery of money and the
performance in any other manner, of
an obligation
Also means non-performance
Requisites of a Valid Payment
1. capacity of the person paying
2. capacity of the person receiving the
payment
3. delivery of the full amount or the full
performance of the prestation
4. propriety of the time, place and
manner of payment
5. acceptance of the payment by the
creditor
Indebtedness Deemed Paid
- when full amount has been
delivered, or
- service has been rendered
- payment must be in full or the
performance be complete unless
otherwise stipulated to extinguish
the indebtedness or prestation
Substantial compliance
When in good faith has attempted to
perform the contract or prestation, but
failed to make a full and complete
performance
Obligation deemed fully complied -when the
oblige accepts performance, knowing its
incompleteness or irregularity and without
expressing any protest or objection
- based on the principle of estoppel

Atty. Chato Olivas-Gallo

Persons from whom the creditor must


accept payment
1. Debtor himself or his legal
representative
2. Any person who has an interest in
the obligation (like a guarantor)
3. A 3rd person who has no interest in
the obligation when there is
stipulation that he can make
payment
o Person who pays the
obligation should have the
necessary legal capacity to
effect such payment (Art.
1239)
Note: Creditor may refuse payment by 3 rd
person
Effect of payment by 3rd person
Without knowledge or against the
will recovery is only up to the
extent or the amount of the debt at
the time of the payment; defense
that may be availed only by the
debtor
With knowledge rights of
reimbursement and subrogation
Subrogation juridical act of putting
somebody into the place of the creditor by
virtue of which the former is enabled to
exercise all the rights and actions pertaining
to the creditor
If third person does not intend to be
reimbursed by the debtor, the presumption
arises that such payment is a donation.
Therefore, the debtors consent is
necessary.
If consent is not secured, rules stated in
Arts. 1236 and 1237 shall apply but as far as
the creditor who accepted it, payment is
valid.
Payor must have the free disposal of the
thing paid. If not, payment is not valid.
To Whom Payment Must Be Made
1. The person in whose favour the
obligation has been constituted
2. His successor in interest
3. Any person authorized to receive it
by law or by the creditor at the

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time when payment is due and not
when the obligation was constituted
Effect of payment to unauthorized
persons in obligation to give:
General Rule: Not valid, even though made
in good faith.
Payment made to the
Creditor and Third Person

Incapacitated

Exception to the general rule that payment


to unauthorized persons not valid though
made in good faith:
Payment made to a third person,
provided that it has redounded to the
benefit of the creditor.
Benefit to the creditor is presumed in the
following cases:
a. If after the payment, the third
person acquires the creditors
rights (Subrogation)
b. If the creditor ratifies the
payment to the third persons
(Ratification)
c. If by the creditors conduct, the
debtor has been led to believe
that the third person had
authority to receive the payment
(Estoppel)
Payment to the possessor of the credit,
made in good faith will release the debtor
In obligations to give, payment to
incapacitated person is valid when:
a. The incapacitated has kept the
amount or thing paid or
delivered.
b. Payment has been beneficial to
the incapacitated person (Art.
1241)
Panganiban v Cuevas
(7 Phil 477)
Digested by: Marian Camille Chavez
Facts: Salvador Panganiban owns a
camarin, divided into 5 apartments, and a
lot.
On December 10, 1897, he sold and
transferred it to Francisco Gonzales for
P1,300. On the deed of sale, it was

Atty. Chato Olivas-Gallo

stipulated that the vendor receives the right


to repurchase it within 6 months. Failure to
do so will make the vendee the absolute
owner after the payment of an additional
P200.
On May 1898, Panganiban attempted to
effect the repurchase; however, he was not
able to do so as the revolution broke out.
Eventually, the revolutionary government
seized the property and re-sold it to
Panganiban for the same price.
Meanwhile, on August 13, 1900, Gonzales
disposed the said property to Agustin
Cuevas, for the same price and the same
stipulation. Cuevas was given judicial
possession of the property in an ex-parte
proceedings, Panganiban being absent
when the notice of ejectment was served.
On October 12, 1900, Panganiban filed a
complaint for recovery of the said property.
Cuevas contended that: (1) both parties
were bound by the terms of the contract, (2)
no deposit has been made, (3) the fact that
Panganiban was absent from the town, that
the property was resold by the revolutionary
government would not change the essence
of the question.
Issue: Was Panganiban able to successfully
repurchase the property?
Held: No, he was not able to. However, he
may repurchase the property from Cuevas.
The payment made by Panganiban to the
revolutionary government of P1,300 pesos
should have been paid to Gonzalez to
redeem the property. The revolutionary
government may have seized the property,
but it did not acquire the title to it.
Therefore, Article 1164 of the Civil Code, "a
payment made in good faith to the person
who is in possession of the credit shall
release the debtor," is not applicable in this
case.
Ratio: The supreme court of Spain, in a
judgment rendered on the 28th of February,
1896, said: "The payment of the debt in
order to extinguish the obligation must be
made to the person or persons in whose
favor it was incurred or to his or their duly
authorized agent. It follows, therefore, that

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the 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 to the contrary or unless the
creditor himself is responsible for the
wrongful payment."
Payment made to the creditor by the
debtor after the latter has been judicially
ordered to retain the debt
- not valid
- unless
otherwise
stipulated,
extrajudicial expenses required by
the payment shall be for the account
of the debtor (Art. 1247).
General rule: creditor shall be paid only what
has been stipulated
Dation in payment
- alieanation by the debtor of a
particular property in favour of his
creditor, with the latters consent, for
the satisfaction of the formers
money obligation to the latter, with
the effect of extinguishing the said
money obligation
- form of novation
- shall be govered by law of sales
- elements of dation in payment
1) existence of a money
obligation
2) alienation to the creditor of
a property by the debtor
with the consent of the
former
3) satisfaction of the money
obligation of the debtor
When obligation is to deliver an
indetereminate or generic thing, the quality
is not stated
- only the ordinary kind or category of
said thing should be delivered
Extrajudicial expenses for payment
account of debtor
Judicial cost rules of court shall govern

Atty. Chato Olivas-Gallo

Partial performance of obligation can be


refused by creditor, unless there is an
express agreement
Rule in monetary obligations
1. Must be made in the currency
stipulated; if it is not possible to
deliver such currency, then in the
currency which is legal tender in the
Philippines.
2. Delivery of promissory notes
payable to order or bills of exchange
or other mercantile documents shall
not produce the effect of payment
except:
a. When they have been cashed or
credited; or
b. When through the fault of the
creditor
they
have
been
impaired.
Note: The impairment of the negotiable
instrument through the fault of the creditor
contemplated by Art. 1249 is applicable
ONLY to a document executed by a THIRD
PERSON and delivered by the debtor to the
creditor and does not apply to instruments
executed by debtor himself and delivered to
the creditor.
Legal Tender: Such currency which may be
used for the payment of all debts, whether
private or public.
Legal tender in the Philippines would be all
notes and coins issued by the Bangko
Sentral Circular No. 537:
1. 1-Peso, 5-Peso and 10-Peso coins:
in
amounts
not
exceeding
P1,000.00
2. 25 centavo coin or less: in amounts
not exceeding P100.00
RA 8183 provides that all monetary
obligations shall be settled in the Philippine
currency which is legal tender in the
Philippines. The parties may agree that the
obligation or transaction be settled in other
currency at the time of payment.
CF Sharp v. Northwest
(381 SCRA 314)
Digested by: Marian Camille Chavez

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Facts: Northwest Airlines, through its Japan


Branch, authorized C.F. Sharp and Co., Inc
to sell its transport tickets by virtue of an
International
Passenger
Sales
Agency Agreement. For failure to remit the
proceeds of the ticket sales, Northwest
Airlines filed a collection suit against C.F.
Sharp before the Tokyo District Court. On
January 29, 1981, C.F. Sharp was ordered
to pay 83, 158, 195 and damages for the
delay at 6% per annum from August 28,
1980 (the filing of the complaint) until
payment is completed.
Northwest Airlines sought to enforce the
said decision with the Regional Trial Court of
Manila. The case was dismissed, but on
review, the petition was partly granted as
C.F. Sharp was only relieved from the
claims for attorneys fees, litigation
expenses, and exemplary damage.
The trial court then modified its order of a
writ of execution as the payment had to be
at the exchange rate prevailing on January
29, 1981, plus 6% per annum until May 19,
1983; and from said date until full payment,
12% per annum (6% by way of damages
and 6% interest) until the satisfaction of the
entire obligation.
On certiorari, the Court of Appeals found
C.F. Sharp still liable to pay additional
interest aside from the 6% interest, although
such was lowered from 12% to 6% per
annum. Also, it ruled that the amounts peso
equivalent should not be the rate on the date
of the foreign judgment, but the prevailing
rate at the time of payment.
Issue: Should the conversion rate of C.F.
Sharps liability be the prevailing rate at the
time of payment in its peso equivalent?
Held: Yes, it should be.
First, Art. 1250 of the Civil Code is not
applicable in this case because it is only
when there is an official declaration of the
existence of an extraordinary inflation or
deflation that the rule on the value of the
currency during the establishment of the
obligation as the basis of payment becomes
applicable.

Atty. Chato Olivas-Gallo

Second, R.A. 529 (An Act to Assure Uniform


Value to Philippine Coin and Currency)
provides that stipulations on the satisfaction
of obligations in foreign currency are void.
This does not provide for the rate of
exchange for the payment of foreign
currency obligations acquired after its
enactment, but in a number of cases, the
court held that the rate of exchange for the
conversion in peso equivalent should be the
prevailing rate at the time of payment.
Ratio: The repeal of R.A. No. 529 by R.A.
No. 8183 has the effect of removing the
prohibition on the stipulation of currency
other than Philippine currency, such that
obligations or transactions may now be paid
in the currency agreed upon by the parties.
Just like R.A. No. 529, however, the new law
does not provide for the applicable rate of
exchange for the conversion of foreign
currency-incurred obligations in their peso
equivalent. It follows, therefore, that the
jurisprudence established in R.A. No. 529
regarding the rate of conversion remains
applicable. Thus, in Asia World Recruitment,
Inc.
v.
National
Labor
Relations
Commission, the Court, applying R.A. No.
8183, sustained the ruling of the NLRC that
obligations in foreign currency may be
discharged in Philippine currency based on
the prevailing rate at the time of payment.
The wisdom on which the jurisprudence
interpreting R.A. No. 529 is based equally
holds true with R.A. No. 8183. Verily, it is
just and fair to preserve the real value of the
foreign exchange- incurred obligation to the
date of its payment.
Extraordinary inflation or deflation
Requisites:
1. There must be
a decrease or
increase in the purchasing power of
the currency which is unusual or
beyond the common fluctuation in
the value of the currency;
2. Such decrease or increase could
not have been reasonably foreseen
or which was manifestly beyond the
contemplation of the parties at the
time the obligation was established.

Applies ONLY
obligations

to

contractual

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There must be a declaration of such
extraordinary inflation or deflation by the
Bangko Sentral. Without such declaration,
the creditors cannot demand an increase,
and debtors a decrease, of what is due to or
from them (Ramos v. CA, GR No. 119872,
July 7, 1997 and Mobil Oil Phils. V. CA, GR
No. 103072, August 20, 1993).
Place of Payment
1. Place stipulated by the parties.
2. If there is no stipulation and the
obligation is to deliver a determinate
thing, payment shall be made at the
place where the thing might be at
the time the obligation was
constituted.
3. In any other case, the payment shall
be made at the domicile of the
debtor.
Note: If the debtor changes his domicile in
bad faith or after he has incurred in delay,
the additional expenses shall be borne by
him.
Art. 1251 governs unilateral obligations.
Reciprocal obligations are governed by
special rules.
Application of Payment Designation of
the debt to which the payment must be
applied when the debtor has several
obligations of the same kind in favour of the
same creditor.
Requisites:
1. There must be only one debtor
and only one creditor;
2. There must be two or more
debts of the same kind;
3. All the debts must be due
except if there is stipulation to
the contrary OR application of
payment is made by the party
for whose benefit the term has
been constituted (Art. 1196 and
Art. 1792); and
4. Amount paid by the debtor is
insufficient to cover the total
amount of all the debts.
-

If the debt produces interests,


payment of the principal shall not be
deemed to have been made until
the interests have been covered

Atty. Chato Olivas-Gallo

applies only in the absence of an


agreement to the contrary
merely directory and not mandatory
Magdalena Estates v Rodriguez
(18 SCRA 967)
Digested by: James Aris Bordeos

Facts: Antonio A. Rodriguez and Herminia


C. Rodriguez, appellants, bought from
Magdalena Estates, Inc., the appellee, a
parcel of land in Quezon. The appellants
had an unpaid balance of P5,000.00 for the
purchase of the said parcel of land. In line
with this, the appellants executed a
promissory note. In the said instrument, the
appellants jointly and severally promised to
pay the appellee sum of FIVE THOUSAND
PESOS, with interest at the rate of 9% per
annum, within sixty (60) days from January
7, 1957. On the same day, the appellants
executed with the Luzon Surety Co., Inc. a
bond in the favour of the appellee
The obligation of the appellants became due
and demandable on June 20, 1958.
Pursuant to the bond executed, the Luzon
Surety Co., Inc. paid to the appellee the sum
of P5,000.00. However, the appellee
subsequently demanded from the appellants
the amount of P655.89, the alleged
accumulated interests on the principal of
P5,000.00. When the appellants refused to
pay, the appellee started suit in the
Municipal Court of Manila. It ruled in their
favour. The appellants appealed to the Court
of First Instance of Manila. It affirmed the
lower court decision.
Issues:1. Was there a waiver
condonation on the interest due?

or

2. Was there novation?


Held: 1. No. Articles 1252 to 1254 of the
Civil Code do not apply to a person whose
obligation as a mere surety is both
contingent and singular.
2. No. Novation by presumption has never
been favored.
Ratio: "It is very clear in the promissory note
that the principal obligation is the balance of

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the purchase price of the parcel of land,
which is the sum of P5,000.00, and in the
surety bond, the Luzon Surety Co., Inc.
undertook "to pay the amount of P5,000.00
representing balance of the purchase price
of a parcel of land. . . ." The appellee did not
protest nor object when it accepted the
payment of P5,000.00 because it knew that
that was the complete amount undertaken
by the surety as appearing in the contract.
The liability of a surety is not extended, by
implication, beyond the terms of his contract.
It is for the same reason that the appellee
cannot apply a part of the P5,000.00 as
payment for the accrued interest."
"Appellants are relying on Article 1253 of the
Civil Code, but the rules contained in
Articles 1252 to 1254 of the Civil Code apply
to a person owing several debts of the same
kind of a single creditor. They cannot be
made applicable to a person whose
obligation as a mere surety is both
contingent and singular; his liability is
confined to such obligation, and he is
entitled to have all payments made applied
exclusively to said application and to no
other. Besides, Article 1253 of the Civil
Code is merely directory, and not
mandatory. We cannot now say that there
was a waiver or condonation on the interest
due."
2.
"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 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 payments
from a third person who has agreed to
assume the obligation, when there is no
agreement that the first debtor shall be
released from responsibility does not
constitute a novation, and the creditor can
still enforce the obligation against the

Atty. Chato Olivas-Gallo

original debtor. In the instant case, the


surety bond is not a new and separate
contract but an accessory of the promissory
note.
Rules on Application of Payment
o Debtor has a choice;
indicated at the time of
making the payment
o If the debtor does not apply,
the creditor may designate
which debt is paid by
specifying in the receipt
o If the creditor did not apply
or if application is void, debt
which is the most onerous,
is the one satisfied
o Debts due of the same
nature, payment shall be
applied proportionately
o Must conform to the general
rules on payment (Arts
1232-1251)
Payment by Cession - special form of
payment
whereby
the
debtor
assigns/abandons ALL of his property for
the benefit of his creditors in order that from
the proceeds thereof the latter may obtain
payment of their credits.
Requisites:
1. Plurality of debts;
2. Partial or relative insolvency of
the debtor; and
3. Acceptance of the cession by
the creditors.
Kinds of Payment by Cession:
1. Contractual
2. Judicial
(governed
Insolvency Law)
a. Voluntary
b. Involuntary
Dation
Payment
One creditor

in

Debtor
not
necessarily
in
state of financial
difficulty
Thing delivered is
considered
as

by

Payment
by
Cession
Plurality
of
creditors
Debtor must be
partially
or
relatively
insolvent
Universality
of
property of debtor

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equivalent
performance.

of

Extinguishes
obligation to the
extent of the value
of
the
thing
delivered
as
agreed
upon,
proved or implied
from the conduct
of the creditor
Does not involve
all properties of
debtor
Creditor becomes
owner of property
of debtor

is what is ceded.
Merely releases
debtor for net
proceeds
of
things ceded or
assigned, unless
there is contrary
intention

Involves all
properties of
debtor
Creditor does
become
owner

the
the

It would be unjust to make


the creditor suffer the risk of
deterioration, depreciation
or loss of such goods or
money by reason of lack of
knowledge
of
the
consignation

Consignation must be first announced to the


creditor to give the creditor the opportunity
to accept the tender of payment and avoid
unnecessary litigation

not
the

Tender of Payment voluntary act of the


debtor whereby he offers to the creditor for
acceptance the immediate performance of
the formers obligation to the latter

Tender of Payment: Manifestation of the


debtor to the creditor of his decision to
comply immediately with his obligation;
preparatory act and extrajudicial in
character.

Consignation act of depositing the object


of the obligation with the court or competent
authority after the creditor has unjustifiably
refused to accept the same
- to avoid the performance of an
obligation becoming more onerous
to the debtor by reason of causes
not imputable to him

Tender of Payment and Consignation

Consignation: Deposit of the object of the


obligation in a competent court in
accordance with the rules prescribed by law,
after refusal or inability of the creditor to
accept the tender of payment; principal act
and judicial in character.
Special Requisites of Consignation:
1. Existence of a valid debt which
is due
2. Tender of payment by the
debtor; creditors refusal without
just cause to accept it
3. Previous notice of consignation
to person interested in the
fulfilment of the obligation, in
order to give the creditor the
opportunity to reconsider his
unjustified refusal and to accept
payment to avoid consignation
and the subsequent litigation.
4. Consignation amount due
placed at the disposal of the
court
5. Subsequent
notice
of
consignation to enable the
creditor to withdraw the goods
or money deposited;

Atty. Chato Olivas-Gallo

Tender of payment is an antecedent of


consignation; act preparatory to the
consignation
Instances where consignation shall produce
the effects of payment without prior tender of
payment:
1. Creditor is absent or unknown,
or does not appear at the place
of payment
2. Creditor is incapacitated to
receive the payment at the time
it is due
3. When without just cause, the
creditor refuses to give a receipt
4. When two or more persons
claim the right to collect
5. When the title of the obligation
has been lost
Effects of consignation
1. If the creditor accepts the thing
or amount deposited without
contesting the validity or efficacy
of
the
consignation,
the
obligation
is
cancelled/extinguished.
2. If the creditor contests the
validity of the consignation or if

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the creditor is not interested or
unknown or is not absent, the
result is a litigation. If during the
trial, the plaintiff-debtor is able
to establish that all the
requisites of consignation has
been
complied
with,
the
obligation is extinguished.
Torcuator v Bernabe
(459 SCRA 439)
Digested by: Chantal Chua
Facts: Spouses Salvador bought a parcel of
land in Ayala Alabang Village, Muntinlupa,
Metro Manila. The sale is subject to the
following conditions: (a) that the lot-buyer
shall deposit with Ayala Corporation a cash
bond (about P17,000.00 for the Salvadors)
which shall be refunded to him if he builds a
residence thereon within two (2) years of
purchase, otherwise the deposit shall be
forfeited; (b) architectural plans for any
improvement shall be approved by Ayala
Corporation; and (c) no lot may be resold by
the buyer unless a residential house has
been
constructed
thereon
(Ayala
Corporation keeps the Torrens title in their
(sic) possession.)"
The Salvadors soon sold the parcel of land
to the Bernabes. They also executed a
special power of attorney authorizing the
Bernabes to construct a residential house on
the said land and to transfer the title of said
property in their names. The Bernabes,
however, contracted to sell the same parcel
of land to the Torcuators. In view of the third
condition of the Ayala Alabang, the parties
agreed to cause the sale between the
Salvadors and the Bernabes cancelled, (in
favor of (a) a new deed of sale from the
Salvadors directly to the Torcuators; (b) a
new Irrevocable Special Power of Attorney
executed by the Salvadors to the Torcuators
in order for the latter to build a house on the
land in question; and (c) an Irrevocable
Special Power of Attorney from the
Salvadors to the Bernabes authorizing the
latter to sell, transfer and convey, with power
of substitution, the subject lot. However, the
deed of sale was never consummated nor
was payment ever effected. Thus, the
Torcuators commenced the instant action
against the Bernabes and Salvadors for
Specific Performance or Rescission with
Damages.

Atty. Chato Olivas-Gallo

Issue: Does sending of letter expressing


intention to pay a valid tender of payment?
Held: No. For there to be a valid payment,
there must be an actual offer of the amount
or actual delivery of the thing.
Ratio: "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.
Consignation of the amount due in court is
essential in order to extinguish the obligation
to pay and oblige the vendor to convey title.
Even assuming that the agreement was a
contract of sale, respondents may not be
compelled to deliver the property and
execute the deed of absolute sale. In cases
such as the one before us, which involve the
performance of an obligation and not merely
the exercise of a privilege or right, payment
may be effected not by mere tender alone
but by both tender and consignation. Hence,
absent a valid tender of payment and
consignation, petitioners are deemed to
have failed to discharge their obligation to
pay."
When consignation is properly made,
creditor bears the expenses
Effect of valid consignation court will
order the cancellation of obligation upon
motion duly filed by the debtor
Effect of improper
obligation stays

consignation

Effect of dismissal of the consignation


case attempted consignation will have not
favourable effect upon the debtor
Effect of withdrawal of thing or sum
deposited after acceptance or judicial
approval of consignation
a. Creditor
loses
every
preference which he may
have over the thing
b. Solidary
co-debtors,
guarantors and sureties are
released
c. Solidary
debtors
are
released only from their
solidary liability but not from

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their
shares
obligation

of

their

Section 2: Loss of the Thing Due


Total loss of a determinate obligation to
give (NCC 1262)- Obligation is extinguished
if the thing is lost or destroyed without the
fault of the debtor and before he has
incurred in delay.
Loss of the thing
- When it perishes or goes out of
commerce, or disappears in such a
way that its existence is unknown or
it cannot be recovered.
- According to Tolentino, it extends to
causes which render impossible the
performance of the prestation
If the debtor is at fault, the obligation to
deliver the lost determinate thing is
converted into an obligation to indemnify for
damages. If the thing is generic, even if it is
lost or destroyed, the obligation is not
extinguished.
Republic vs. Grijaldo
G.R. No. L-20240, December 31, 1965
Digested by: Bryan Oneal Cua
Facts: Accused in this case, Jose Grijaldo,
obtained 5 loans from the Bank of Taiwan in
Bacolod city with the following amounts on
the following dates on June 1, 1943,
P600.00; on June 3, 1943, P159.11; on
June 18, 1943, P22.86; on August 9, 1943,
P300.00; on August 13, 1943, P200.00, with
all of them not bearing any due dates. To
secure the payment of the loans the
appellant executed a chattel mortgage on
the standing crops on his land, Lot No. 1494
known as Hacienda Campugas in Hinigiran,
Negros Occidental. By virtue of vesting
order P-4 dated 1-21-46 and under the
trading with the enemy act, the US got the
assets of the Bank of Taiwan Ltd., which
was then given to the Philippines by the
effect of the transfer agreement between the
2 countries dated 7-20-54. On 9-29-54, the
Republic, as represented by the head of the
Board of Liquidators made a written
extrajudicial demand to Grijaldo for the
payment of the 5 loans he took out with the
aggregate amount of P889.64 and a 6% per
annum interest of P2377.23 as of 12-31-59.

Atty. Chato Olivas-Gallo

The lower court decided against Grijaldo


and during the appeal to the SC he died. His
heirs Manuel, Jacinto and Ruben all
surnamed Lagtapon as well as Anita Aguilar
were made to substitute in the proceedings,
they contend the following: That the republic
has no cause of action against Jose
Grijaldo, that the action has already
prescribed and that the court a quo erred in
saying the appellant needed to pay
P2377.23.
Held: They also maintain that since the
chattel mortgage was for the crops growing
on the land, its destruction during the war
extinguishes their obligation to pay such. SC
said: The obligation of the appellant under
the five promissory notes was not to deliver
a determinate thing namely, the crops to be
harvested from his land, or the value of the
crops that would be harvested from his land.
Rather, his obligation was to pay a generic
thing - the amount of money representing
the total sum of the five loans, with interest.
The transaction between the appellant and
the Bank of Taiwan, Ltd. was a series of five
contracts of simple loan of sums of money.
"By a contract of (simple) loan, one of the
parties delivers to another ... money or other
consumable thing upon the condition that
the same amount of the same kind and
quality shall be paid." (Article 1933, Civil
Code) The obligation of the appellant under
the five promissory notes evidencing the
loans in questions is to pay the value
thereof; that is, to deliver a sum of money - a
clear case of an obligation to deliver, a
generic thing. Article 1263 of the Civil Code
provides:
In an obligation to deliver a generic thing,
the loss or destruction of anything of the
same kind does not extinguish the
obligation.
The chattel mortgage on the crops growing
on appellant's land simply stood as a
security for the fulfillment of appellant's
obligation covered by the five promissory
notes, and the loss of the crops did not
extinguish his obligation to pay, because the
account could still be paid from other
sources aside from the mortgaged crops.
General rule: Loss of a determinate thing
through fortuitous event shall extinguish the
obligation.
Exceptions:

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De La Salle University
1. Law provides otherwise
2. Stipulation
3. Nature of the obligation requires
assumption of risk
4. Obligation to deliver a specific thing
arises from a crime
5. Loss is partly due to the fault of the
debtor
6. Occurs after the debtor incurred in
delay
7. Debt proceeds from a criminal
offense
8. Liability of a bailee, depositary,
officious manager
9. Acceptance in bad faith of undue
payment
10. Obligor to deliver the same thing to
two or more persons with different
interest
11. Obligation to deliver a generic thing
Partial loss
General rule: Partial loss does not
extinguish the obligation.
Exception: It is of great importance that is
almost equivalent to a total loss or
destruction.
Rule if the thing is in debtors
possession (NCC 1265)
General rule: Presumption of fault of debtor,
unless there is a proof to the contrary.
Exception: Earthquake, flood, storm or other
natural calamity.
Impossibility
of
performance
in
obligation to do (NCC 1266)- When the
obligation becomes legally or physically
impossible without the fault of the debtor,
obligor is released from the obligation.
Natural
Impossibility
Consist of the nature
of the thing to be
done and not the
inability of the party
to do so.

Impossibility
in
Fact
In the absence of the
objects
inherent
impossibility,
improbable or out of
the power of the
obligor.
Does not render the
contract void.

OBLIGATIONS
AND
CONTRACTS

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 the intention to hold the
obligor still responsible.
- It is not a requirement under NCC
1267 that the contract be for future
service with future unusual change.
Principle of Subjective Impossibility- When
there is no physical or legal loss but the
object of the obligation belongs to another,
the performance by the debtor of the
obligation undoubtedly becomes impossible.
Failure of the performance is imputable to
the debtor. Thus, the debtor must indemnify
the creditor for the damages suffered by the
latter (Tolentino).
Loss on Reciprocal Obligations
First view: If an obligation is extinguished by
the loss of the thing or impossibility of
performance through fortuitous events, the
counter-prestation is also extinguished. The
debtor is released from liability but he
cannot demand the prestation which has
been stipulated for his benefit. He who gives
nothing has no reason to demand anything
(Tolentino).
Second view: The loss or impossibility of
performance must be due to the fault of the
debtor. In this case, the injured party may
ask for rescission under NCC 1191 plus
damages. If the loss or impossibility was due
to a fortuitous event, the other party is still
obliged to give the prestation due to the
other (J.B.L. Reyes).

Relative impossibility

Rule if obligation arises from criminal


offense (NCC 1268)
General rule: Debtor shall not be exempted
from payment of the price whatever may be
the cause for the loss.
Exception: When the thing having been
offered by the debtor to the person who
should receive it, the latter refused without
justification.

Doctrine of Unforeseen Events (NCC 1267)When the service has become so difficult as

Note: The offer referred in NCC 1268


(extinguishment of the obligation through

Contract is void

Atty. Chato Olivas-Gallo

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loss by fortuitous event) should not be
confused with consignation (payment of the
obligation).

Condonation or Remission of the Debt


-

Section 3: Condonation or Remission of


the Debt
Art. 1270. Condonation or remission is
essentially gratuitous, and requires the
acceptance by the obligor. It may be
made expressly or impliedly.
One and the other kind shall be subject
to the rules which govern inofficious
donations. Express condonation shall,
furthermore, comply with the forms of
donation. (1187)
Art. 1271. The delivery of a private
document evidencing a credit, made
voluntarily by the creditor to the debtor,
implies the renunciation of the action
which the former had against the latter.
If in order to nullify this waiver it should
be claimed to be inofficious, the debtor
and his heirs may uphold it by proving
that the delivery of the document was
made in virtue of payment of the debt.
(1188)
Art. 1272. Whenever the private
document in which the debt appears is
found in the possession of the debtor, it
shall be presumed that the creditor
delivered it voluntarily, unless the
contrary is proved. (1189)
Art. 1273. The renunciation of the
principal debt shall extinguish the
accessory obligations; but the waiver of
the latter shall leave the former in force.
(1190)
Art. 1274. It is presumed that the
accessory obligation of pledge has been
remitted when the thing pledged, after its
delivery to the creditor, is found in the
possession of the debtor, or of a third
person who owns the thing. (1191a)

Atty. Chato Olivas-Gallo

An act of liberality by virtue of which


the oblige, without receiving any
price or equivalent, renounces the
enforcement of the obligation, as a
result of which it is extinguished in
its entirety or in that part of aspect of
the same to which the remission
refers.
It is the gratuitous abandonment by
the creditor of his right; a form of
donation.
Acceptance by the debtor is
required because liberality of a
person cannot be imposed upon
another.

Requisites:
1. Gratuitous
2. Accepted by the obligor
3. Obligation is demandable
4. Parties have the legal capacity
5. Not inofficious
6. Must comply with the forms of
donation (NCC 748-749)
Note: Whether express or implied, the extent
of remission or condonation shall be
governed by the rules regarding inofficious
donation.
Abandonment of a credit- If the debtor
does not accept the remission but does not
pay, and the creditor does not enforce the
payment, the abandonment will result in the
prescription of the credit. The debtor
received the gain not by remission but by
prescription.
Note: Remission is never presumed, it must
be established by clear, strong, and
convincing evidence.
Dismissal of complaint against one, in case
of several debtors, has the effect of
condonation to that person.
Delivery of a private document- If the
creditor voluntarily delivers the private
document evidencing the credit to the
debtor, there is a presumption that he
renounces the right of action against the
latter for the collection of the said credit
(NCC 1271). When such private document

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De La Salle University
is found in possession of the debtor, it shall
be presumed that the creditor delivered it
voluntarily, unless the contrary is proved
(NCC 1272).
Note: Limited only to private documents
(promissory note), and not to public
documents evidencing credits because a
Notary Public also has a copy of that.
Velasco vs. Masa
G.R. No. L-3717 March 5, 1908
Digested by: Bryan Oneal Cua
Facts: On December 2, 1902, Felix Velasco
filed a complaint to have Martin Masa pay
the amount of P2,804 that the latter owed
him with interest of 12% per annum from 71-1899 until such has been paid. Petitioner
says that it was agreed upon by him and
Masa that the said loan was to be paid on
the same date of the following year and that
such was put into a private instrument that
was duly signed by the debtor. Now,
Velasco claims that Masa taking advantage
of the prevailing situation of the revolution in
their area coerced and tricked Velascos
wife into giving him possession of the said
private instrument while he was in jail in
Antique. He later filed his claim before the
provost court for the robbery of the said
document, but, as said court considered that
it had no jurisdiction in the premises, the
plaintiff presented an information to the
Court of First Instance, a certified copy of
whose decision is annexed; and that
between the plaintiff and the defendant
interest at the rate of 12 per cent had been
agreed upon, which was to be added to the
principal at the end of the year if the
defendant was unable to pay the same. For
his defense, Masa claims that such an
instrument was not for the said amount but
for only P1,000, also he says that the
instrument bearing the agreement was
voluntarily given to him by Velascos wife
through a certain Luis Ocsea and that such
was done as per the instructions of Felix
himself. The Lower court rendered the
decision favouring Masa, hence the current
appeal.
Issue: Given that the return of the Private
Instrument bearing the agreement between
the two parties was voluntary; does this
extinguish the obligation to pay by the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

debtor? Was the return of such


instrument voluntary in the first place?

an

Held: Yes on both questions. The SC held


that there was no showing that the
possession of Masa of the disputed
document was done through coercion and
trickery, in fact the court finds no reason to
discredit the testimony of the witnesses for
the defense, and in the same light the
arguments presented by the prosecution
finds no support as to proof. As such the
obligation to pay by Masa is thereby also
extinguished. The Court goes further by
stating relevant portions of the law:
remission may be made either expressly or
by implication.
ART. 1188. The surrender, made voluntarily
by a creditor to his debtor, of a private
instrument proving a credit, implies the
renunciation of the action which the
former had against the latter.
ART. 1189. Whenever the private instrument
from which the debt appears should be in
the possession of the debtor, it shall be
presumed that the creditor delivered it of his
own will, unless the contrary is proven.
The doctrine established by the supreme
court of Spain, when applying the abovementioned articles of the Civil Code,
confirms the rule laid down. Among others,
the court in the decision of the 19th of
October, 1897, states that -In order that the
presumption juris tantum established by this
article (1189) may be applicable, it is
necessary as the preceding one (1188)
provides, that the delivery of the private
document proving the credit, made by
the creditor to the debtor, be a voluntarily
act of the former. The SC further states
that: Article 1250 of the Civil Code provides:
Presumptions established by law exempt
those favored thereby from producing any
further proof. And article 1251 of the same
code reads: Presumptions established by
law may be destroyed by proof to the
contrary, except in the cases in which it is
expressly prohibited.
If the remission refers to the principal
obligation, all the accessory obligations are
extinguished. However, if remission refers

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De La Salle University
only to the accessory obligation, the
principal obligation subsists (NCC 1273).
Section 4. - Confusion or Merger of
Rights
Art. 1275. The obligation is extinguished
from the time the characters of creditor
and debtor are merged in the same
person. (1192a)
Art. 1276. Merger which takes place in
the person of the principal debtor or
creditor
benefits
the
guarantors.
Confusion which takes place in the
person of any of the latter does not
extinguish the obligation. (1193)

or subsidiary debtor
(i.e. guarantor)

In one of the joint


debtors

In one of the solidary


debtors

of
principal
obligation,
only
substitution
of
creditor or debtor
Principal obligation
is extinguished up to
the share which
corresponds to him
Entire obligation is
extinguished. But the
debtor
in
whom
confusion took place
may
claim
reimbursement from
co-debtors for their
corresponding
shares.

Art. 1277. Confusion does not extinguish


a joint obligation except as regards the
share corresponding to the creditor or
debtor in whom the two characters
concur.
(1194)

Section 5. Compensation
Art. 1278. Compensation shall take place
when two persons, in their own right, are
creditors and debtors of each other.
(1195)

CONFUSION
- The merger of the characters of the
creditor and the debtor in one and
the same person by virtue of which
the obligation is extinguished.
- This is because the person
becomes both a creditor and debtor
to himself, and it is nonsensical for a
person to push and pursue a claim
against his own self.

Art. 1279. In order that compensation


may be proper, it is necessary:

Requisites:
1. Merger in the same person
2. Who is also the principal debtor and
creditor
3. Complete and definite meeting of all
qualities of creditor and debtor in the
obligation or in the part affected by
the merger
Effects of confusion/merger (NCC 12761277)
Instance
Takes place in the
person of either the
principal creditor or
debtor
Subsidiary creditor

Extent
of
Extinguishment
Entire obligation

No

Atty. Chato Olivas-Gallo

extinguishment

(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)
Art. 1280. Notwithstanding the provisions
of the preceding article, the guarantor
may set up compensation as regards

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De La Salle University

OBLIGATIONS
AND
CONTRACTS

what the creditor may owe the principal


debtor. (1197)

a depositum or from the obligations of a


depositary or of a bailee in commodatum.

Art. 1281. Compensation may be total or


partial. When the two debts are of the
same amount, there is a total
compensation. (n)

Neither can compensation be set up


against a creditor who has a claim for
support due by gratuitous title, without
prejudice to the provisions of paragraph
2 of Article 301. (1200a)

Art. 1282. The parties may agree upon


the compensation of debts which are not
yet due. (n)
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. (n)
Art. 1284. When one or both debts are
rescissible or voidable, they may be
compensated against each other before
they are judicially rescinded or avoided.
(n)
Art. 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)
Art. 1286. Compensation takes place by
operation of law, even though the debts
may be payable at different places, but
there shall be an indemnity for expenses
of exchange or transportation to the
place of payment. (1199a)
Art. 1287. Compensation shall not be
proper when one of the debts arises from

Atty. Chato Olivas-Gallo

Art. 1288. Neither shall there be


compensation if one of the debts
consists in civil liability arising from a
penal offense. (n)
Art. 1289. If a person should have against
him several debts which are susceptible
of compensation, the rules on the
application of payments shall apply to
the order of the compensation. (1201)
Art. 1290. When all the requisites
mentioned in Article 1279 are present,
compensation takes effect by operation
of law, and extinguishes both debts to
the concurrent amount, even though the
creditors and debtors are not aware of
the compensation. (1202a)
COMPENSATION
- Mode of extinguishing in the
concurrent amount of the obligation
of
those
persons who
are
reciprocally debtors and creditors of
each other.
Requisites:
1. Two parties are principal creditors
and debtors of each other except in
cases of a guarantor (NCC 1280)
2. Both debts must consist in some
sum of money, or if the things due
are fungibles (consumables), they
must be of the same kind and
quality
3. Both debts must be due, except if
there is voluntary compensation
(NCC 1282) or the parties have
agreed to compensate even if not
yet due (NCC 1280)
4. Both debts must be liquidated and
demandable
5. No
retention
or
controversy
rd
commenced by 3 persons over
either
of
the
debts
and

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De La Salle University
communicated in due time to the
debtor
6. Must not be prohibited by law
Kinds of obligations:
A. As to cause
1. Legal- by operation of law (NCC
1286/1289)
2. Conventional or Voluntary- the
parties are mutual debtors and
creditors (NCC 1282)
3. Judicial- takes place by a
judgment of the court when
there is a counterclaim (NCC
1283)
4. Facultative- when it is claimed
by one of the parties who has
the right to object to it but
waives his objection
B. As to effect
1. Total- debts to be compensated
are equal in amount
2. Partial- debts are not equal in
amount
Compensation
Two persons, who in
their own right, are
creditors
and
debtors of each
other
There must be at
least two obligations

Confusion
Only one person in
whom the qualities
of
debtor
and
creditor are merged

Compensation
Takes
effect
by
operation of law
Capacity to give and
acquire
is
not
necessary
Permits
partial
extinguishment
of
obligation

Payment
Takes effect by act
of the parties
Capacity to give and
act is essential

Compensation
Two debts must
consist in money or
if fungibles, same
kind and quality
Both debts must be
liquidated
Need not be pleaded
since it takes effect
by operation of law

Counterclaim
Not necessary

There is only one


obligation

Complete
and
indivisible
extinguishment only

Not necessary
Must be pleaded to
be effective

Atty. Chato Olivas-Gallo

Rights
of
guarantor
to
set-up
compensation (NCC 1280)- The guarantor,
in case of payment of debt is demanded
from him, may set up compensation, not
only from what the creditor owes him, but
also for what the creditor owes the principal
debtor.
Rules in case of rescissible or voidable
debts (NCC 1284)- These may be
compensated against each other before they
are judicially rescinded or avoided.
Effects of assignment of rights (NCC
1285):
Consent/Knowledge
of Debtor
With
consent
of
debtor

With knowledge but


without consent of
debtor

Without knowledge

Effects
Debtor cannot setup
compensation
unless he reserved
his
right
to
compensation
Debtor may set-up
compensation prior
to the assignment
but
not
subsequently ones
May
set-up
compensation of all
credits which he
may have against
the assignor and
which may have
become
demandable, before
he was notified of
the assignment

Reason: After compensation has taken


place and one of the extinguished debts is
assigned, the assignment is ineffective
because there is nothing more to assign
unless there is an excess, which, if there is
consent from the debtor, constitutes
subrogation of a third person in the rights of
creditor.
Debts which cannot be compensated
(NCC 1286-1287):
1. Arising from contracts of depositum
2. Arising
from
contracts
of
commodatum
3. Claims for support due by gratuitous
title

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De La Salle University
4. Arising from criminal offenses
5. Obligations in favour of the
government (e.g. taxes, fees, duties,
etc.)
Facultative compensation- that which can
be set up only at the option of the creditor
when legal compensation cannot take place
because of want of some legal requisites for
the benefit of the creditor. The latter can
renounce his right to oppose the
compensation and he himself can set it up. It
differs from conventional compensation
because it is unilateral while the latter
depends upon the agreement of both parties
(Tolentino).
SECTION 6. Novation
Art. 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)
Art. 1292. In order that an obligation may
be extinguished by another which
substitute the same, it is imperative that
it be so declared in unequivocal terms, or
that the old and the new obligations be
on every point incompatible with each
other. (1204)
Art. 1293. Novation which consists in
substituting a new debtor in the place of
the original one, may be made even
without the knowledge or against the will
of the latter, but not without the consent
of the creditor. Payment by the new
debtor gives him the rights mentioned in
Articles 1236 and 1237. (1205a)
Art. 1294. If the substitution is without
the knowledge or against the will of the
debtor, the new debtor's insolvency or
non-fulfillment of the obligations shall
not give rise to any liability on the part of
the original debtor. (n)
Art. 1295. The insolvency of the new
debtor, who has been proposed by the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

original debtor and accepted by the


creditor, shall not revive the action of the
latter against the original obligor, except
when said insolvency was already
existing and of public knowledge, or
known to the debtor, when the delegated
his debt. (1206a)
Art. 1296. When the principal obligation
is extinguished in consequence of a
novation, accessory obligations may
subsist only insofar as they may benefit
third persons who did not give their
consent. (1207)
Art. 1297. If the new obligation is void,
the original one shall subsist, unless the
parties intended that the former relation
should be extinguished in any event. (n)
Art. 1298. The novation is void if the
original obligation was void, except when
annulment may be claimed only by the
debtor or when ratification validates acts
which are voidable. (1208a)
Art. 1299. If the original obligation was
subject to a suspensive or resolutory
condition, the new obligation shall be
under the same condition, unless it is
otherwise stipulated. (n)
Art. 1300. Subrogation of a third person
in the rights of the creditor is either legal
or conventional. The former is not
presumed, except in cases expressly
mentioned in this Code; the latter must
be clearly established in order that it may
take effect. (1209a)
Art. 1301. Conventional subrogation of a
third person requires the consent of the
original parties and of the third person.
(n)
Art. 1302. It is presumed that there is
legal subrogation:
(1) When a creditor pays another
creditor who is preferred, even
without the debtor's knowledge;
(2) When a third person, not
interested in the obligation, pays
with the express or tacit approval

Page 53

De La Salle University

of the debtor;
(3) When, even without the
knowledge of the debtor, a
person
interested
in
the
fulfillment of the obligation pays,
without prejudice to the effects of
confusion as to the latter's share.
(1210a)
Art. 1303. Subrogation transfers to the
persons subrogated the credit with all
the rights thereto appertaining, either
against the debtor or against third
person,
be
they
guarantors
or
possessors of mortgages, subject to
stipulation
in
a
conventional
subrogation. (1212a)
Art. 1304. A creditor, to whom partial
payment has been made, may exercise
his right for the remainder, and he shall
be preferred to the person who has been
subrogated in his place in virtue of the
partial payment of the same credit.
(1213)
NOVATION
- It is the substitution or change of an
obligation by another, resulting in its
extinguishment or modification,
either by changing its object or
principal
conditions,
or
by
substituting another in place of the
debtor, or by subrogating a third
person in the rights of the creditor.
- 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 (NCC 1291)
Requisites:
1. Previous valid obligation
2. Capacity of the contracting parties
to the new contract
3. Intent to novate (animus novandi)
4. Substantial difference between the
old and new obligation (especially
for implied novation)
5. Validity of the new obligation
Two-fold purpose:
1. Extinguish original obligation

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

2. Creation of a new obligation


Kinds of novation:
A. As to its essence
1. Objective/Real- changing the
object or principal conditions
2. Subjective/Personalsubstitution of debtor or by
subrogation of the rights of a
creditor
3. Mixed- combination
B. As to its form/constitution
1. Express- when it is declared in
unequivocal terms that the old
obligation is extinguished by a
new one which substitutes the
same
2. Implied- when the old and new
are incompatible with each other
on every point
C. As to their origin
1. Legal- by operation of law
2. Conventional- by agreement of
the parties
D. As to the presence or absence of
condition
1. Pure- creation of a new
obligation is not subject to any
condition
2. Conditionalsubject to a
condition
Note: Novation is never presumed, it must
be clearly proved. Novation by presumption
is not favoured.
Test of incompatibility- Whether or not the
old and new obligations can stand together,
each having its own independent existence.
If they can stand together, there is no
incompatibility, hence, no novation. If they
cannot
stand
together,
there
is
incompatibility; consequently, there is
novation.
Changes
that
breed
in
incompatibility must be essential in nature
and not merely incidental (NCC 1292).
But if it is an express novation, formalities
are required (i.e. that it be declared in
unequivocal terms).
California Bus Line Inc v. State
Investment House, Inc.
G.R. No. 147950. December 11, 2003
Digested by: Dino De Leon

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De La Salle University
Facts: There were two deals: (1) In 1979,
Delta Motors Corporation applied for a loan
from respondent State Investment House
Inc. SIHI agreed, and Delta eventually owed
SIHI P24,010,269.32, (2) Meanwhile, CBLI
bought 35 buses from Delta and issued 16
promissory notes. CBLI defaulted, there
was a need to restructure payment
schemes. There was a new agreement (1st
compromise) entered into: (1) daily
remittance instead of monthly remittance, (2)
In case of default of CBLI, Delta Motors will
take over management and operation of
CBLI, (3) Increased the interest rate and
added
a
documentation
fee
and
restructuring fee. CBLI continued having
trouble meeting its obligations to Delta. This
prompted Delta to threaten CBLI with the
enforcement of the management takeover
clause. Court granted the petition on
account of the fraudulent disposition of CBLI
of its assets. Because CBLI defaulted on its
payments, Delta also had difficulty paying
SIHI. Eventually, Delta assigned 5 of the 15
promissory notes of CBLI to SIHI which had
a total value of P16,152,819.80 inclusive of
interest at 14% per annum. SIHI demanded
CBLI to remit the payments due on the five
promissory notes directly to it. Thereafter,
Delta and CBLI entered into a compromise
agreement (2nd Compromise) wherein CBLI
agreed that Delta would exercise its right to
extrajudicially foreclose on the chattel
mortgages over the 35 bus units. Following
this, CBLI vehemently refused to pay SIHI
the value of the five promissory notes,
contending that the 1st and 2nd compromise
agreements were in full settlement of all its
obligations to Delta including its obligations
under
the
promissory
notes.
SIHI
subsequently filed a case to collect the
amount of the 5 promissory notes.
Issues:
(1) Did the 1st Compromise novate the five
promissory notes Delta assigned to SIHI?
(2) Did the 2nd compromise agreement
supersede and/or discharge the subject five
promissory notes?
Held: No. Novation which may be effected
either expressly or impliedly. Obviously,
theres no express novation:
In this case, the attendant facts do not
make out a case of novation. The
compromise Delta and CBLI executed,

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

shows that the parties did not expressly


stipulate that the restructuring agreement
novated the promissory notes Is there
implied novation? The test of incompatibility
is whether the two obligations can stand
together, each one having its independent
existence. 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.
It is clear from the foregoing that the
restructuring
agreement,
instead
of
containing
provisions
absolutely
incompatible with the obligations of the
judgment, expressly ratifies such obligations
in paragraph 8 and contains provisions for
satisfying them. There was no change in
the object of the prior obligations. The
restructuring agreement merely provided for
a new schedule of payments and additional
security giving Delta authority to take over
the management and operations of CBLI in
case CBLI fails to pay installments
equivalent to 60 days. Where the parties to
the new obligation expressly recognize the
continuing existence and validity of the old
one, there can be no novation
Having previously assigned the five
promissory notes to SIHI, Delta had no more
right to compromise the same. As a result
of the assignment, Delta relinquished all its
rights to the subject promissory notes in
favor of SIHI. This had the effect of
separating the five promissory notes from
the 16 promissory notes.
From that time, CBLIs obligations to SIHI
embodied in the five promissory notes
became separate and distinct from CBLIs
obligations in eleven (11) other promissory
notes that remained with Delta. So the 2nd
agreement only settles CBLIs obligations
insofar as the 11 promissory notes are
concerned.
Moral: An agreement to extend payment
schemes and add new obligations dont
necessarily novate the earlier obligations.

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De La Salle University
Novation of a criminal liability:
- Novation may be allowed to avoid
criminal liability as long as it occurs
prior to the filing of a criminal action.
- But it is not a ground prescribed by
the Revised Penal Code for the
extinguishment of a criminal liability.
Objective Novation (NCC 1291, par. 1)According to Castan, objective novation is
effected by:
1. Changing the cause
2. Changing the object
3. Changing the principal or essential
conditions
Requisites of objective novation:
1. New obligation expressly declared
that the old is extinguished, or
2. New obligation is on every point
incompatible with the old one
Note: A change in the interest rate is merely
collateral agreement between the creditor
and principal debtor that did not affect the
surety. The agreement to pay the additional
interest was an additional burden upon the
debtor only. It did not, in anyway, affect the
original contract. Thus, despite the
compounding of the interest, the liability of
the surety remains only up to the original
compounded interest.
The grant of a 45-day credit extension does
not novate the contract as it merely modifies
the contract by extending the time for
payment.
The obligation to pay a sum of money is not
novated by an instrument that expressly
recognizes the old changes only the terms
of the payment, adds other obligations not
incompatible with the old ones or the new
contract merely supplements the old
contract.
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.
Novation by substitution of debtors (NCC
1293)- A subjective/personal novation
consists in the substitution of a new debtor
in place of the original debtor.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Forms of novation by substitution of debtors:


1. Expromision- effected with the
consent of the creditor at the
instance of the new debtor even
without the consent or even against
the will of the old debtor (beneficial
reimbursement)
Requisites:
a. Initiative for substitution
must emanate from the new
debtor
b. Consent of the creditor to
the substitution
c. Old
debtor
must
be
released from the obligation
2. Delegacion- effected with the
consent of the creditor at the
instance of
the old
debtor
(delegante), with the concurrence of
the
new
debtor
(delegado)
(reimbursement and subrogation)
Requisites:
a. Initiative for substitution must
emanate from the old debtor
b. Consent of the new debtor
c. Acceptance by the creditor
d. Old debtor must be released
from his obligation
Rights of new debtor:
1. Expromision
a. Substitution with the new
knowledge and consent of
the original debtor and
payment made by the new
debtor with or without
knowledge and consent of
original debtor
i. Reimbursement
from the original
debtor of the entire
amount paid
ii. Subrogation in all
the rights of the
creditor
b. Substitution without the
knowledge and consent of
the original debtor and
payment is made by the
new debtor without the
knowledge and consent of
the original debtor.

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i. Reimbursement
from the original
debtor only insofar
as the payment has
been beneficial to
such debtor
ii. No subrogation
2. Delegacion- Since substitution was
effected with the consent of all
parties, the new debtor can demand
reimbursement from the original
debtor of the entire amount which
he has paid as well as compel the
creditor to subrogate him to all of his
rights

obligation, unless otherwise expressed by


the parties, will not result in its
extinguishment

Note: The mere fact that the creditor


receives a guaranty or accepts payment
from a 3rd person who agrees to assume the
obligation, when there is no agreement that
the first debtor shall be released from
responsibility, does not constitute novation,
and the creditor can still enforce the
obligation against the original debtor. If the
older debtor is not released, there is no
novation; the 3rd person becomes merely a
co-debtor, surety or co-surety.

Effect of invalidity of the old obligation (NCC


1298)- The novation is void if the original
obligation was void, except:
1. When the annulment may be
claimed only by the debtor
2. When the ratification validates the
act which are voidable

Effect of insolvency or non-fulfillment by new


debtor (NCC 1294-1295)
1. Expromision
a. Tolentino- it shall not revive the
original debtors liability to the
creditor whether the substitution
is effected with or without the
knowledge or against the will of
the original debtor.
b. Jurado- if the substitution was
effected with the knowledge
and consent of the original
debtor, it shall revive the
original debtors liability to the
creditor
2. Delegacion- the right of the creditor can
no longer be revived except in the
following cases:
a. Insolvency already existing and
of the public knowledge at the
time when the original debtor
delegated his debt
b. Insolvency was already existing
and known to the original debtor
when he delegated his debt
Note: A change in the incidental elements
of, or an addition of such elements to an

Atty. Chato Olivas-Gallo

Effects of novation upon accessory


obligations (NCC 1296)- When the principal
obligation is extinguished in consequence of
a novation, accessory obligation may subsist
only insofar as they may benefit third
persons who did not give consent.
Effect if the new obligation is void (NCC
1297)- The original one shall subsist, unless
the parties intended that the former relation
is also extinguished in any event.

NCC 1296 has no application to novation


effected by subrogating a third person to the
rights of the creditor. Such is regulated by
NCC 1303-1304.
Effects of condition in novation:
1. If the original obligation was subject
to suspensive/resolutory condition,
the new obligation shall be under
the
same
condition,
unless
otherwise stipulated (NCC 1299)
2. If the old and new obligation are
subject to different conditions:
a. If the conditions can stand
together:
i. Both are fulfillednew
obligation
becomes
demandable
ii. Only the condition
affecting the old
obligation
is
fulfilledold
obligation is revived
while the new loses
its force
iii. Only the condition
affecting the new
obligation
is
fulfilled- there is no
novation since the
requisite
of
a

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previous valid and
effective obligation
would be lacking
b. If
the
conditions
are
incompatible- the effect is to
extinguish the old obligation
so that the new obligation
remains
and
whose
demandability/effectivity
depend
upon
the
fulfilment/non-fulfillment of
the condition affecting it
Novation by subrogation
- A personal novation effected by
rd
subrogating a 3 person in the
rights of the creditor
Forms of novation by subrogation:
1. Conventional- takes place by
agreement of the original creditor,
the third person substituting the
original creditor, and the debtor
(NCC 1301)
2. Legal- takes place by operation of
law
Conventional
Subrogation
Governed by NCC
1300-1304
Debtors consent is
required
Has the effect of
extinguishing
the
obligation
and
giving rise to a new
one

Defects/vices in the
old obligation are
cured
Effects arises from
the moment of
novation/subrogatio
n

Assignment
Rights
Governed by
1624-1627
Not required

of
NCC

Has the effect of


transmitting the rights
of the creditor to
another
person
without
modifying/extinguishin
g the obligation
Not cured

As far as the debtor is


concerned,
arises
from the moment of
notification

Legal subrogation (NCC 1302)


General rule: Not presumed
Exceptions:
1. When a creditor pays another
creditor who is preferred, without
debtors knowledge

Atty. Chato Olivas-Gallo

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 fulfilment of the obligation pays,
without prejudice to the effects of
confusion as to the latters share
Effects of subrogation (NCC 1303-1304)
1. Total subrogation- transfer to the
person subrogated the credit with all
the rights the original creditor has
against the debtor or 3rd persons
a. Accessory obligations are
not extinguished; the person
subrogated acquires all the
rights the original creditor
had against third person
and the rule is absolute with
respect to legal subrogation.
In conventional subrogation,
accessory obligations may
be increased or reduced
upon the agreement of the
parties
2. Partial subrogation- A creditor, to
whom partial payment has been
made, may exercise his right for the
remained, and he shall be preferred
to the person who has been
subrogated in his place.

TITLE II CONTRACTS
CHAPTER 1
GENERAL PROVISIONS
Art. 1305. A contract is a meeting of
minds between two persons whereby one
binds himself, with respect to the other,
to give something or to render some
service. (1254a)
Art. 1306. The contracting parties may
establish such stipulations, clauses,
terms and conditions as they may deem
convenient, provided they are not
contrary to law, morals, good customs,
public order, or public policy. (1255a)
Art. 1307. Innominate contracts shall be
regulated by the stipulations of the
parties, by the provisions of Titles I and II
of this Book, by the rules governing the

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most analogous nominate contracts, and


by the customs of the place. (n)
Art. 1308. The contract must bind both
contracting parties; its validity or
compliance cannot be left to the will of
one of them. (1256a)

Art. 1315. Contracts are perfected by


mere consent, and from that moment the
parties are bound not only to the
fulfillment of what has been expressly
stipulated
but
also
to
all
the
consequences which, according to their
nature, may be in keeping with good
faith, usage and law. (1258)

Art. 1309. The determination of the


performance may be left to a third
person, whose decision shall not be
binding until it has been made known to
both contracting parties. (n)

Art. 1316. Real contracts, such as


deposit, pledge and Commodatum, are
not perfected until the delivery of the
object of the obligation. (n)

Art. 1310. The determination shall not be


obligatory if it is evidently inequitable. In
such case, the courts shall decide what
is equitable under the circumstances. (n)

Art. 1317. No one may contract in the


name
of
another
without
being
authorized by the latter, or unless he has
by law a right to represent him.

Art. 1311. Contracts take effect only


between the parties, their assigns and
heirs, except in case where the rights
and obligations arising from the contract
are not transmissible by their nature, or
by stipulation or by provision of law. The
heir is not liable beyond the value of the
property he received from the decedent.

A contract entered into in the name of


another by one who has no authority or
legal representation, or who has acted
beyond
his
powers,
shall
be
unenforceable, unless it is ratified,
expressly or impliedly, by the person on
whose behalf it has been executed,
before it is revoked by the other
contracting party. (1259a)

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)
Art. 1312. In contracts creating real
rights, third persons who come into
possession of the object of the contract
are bound thereby, subject to the
provisions of the Mortgage Law and the
Land Registration Laws. (n)
Art. 1313. Creditors are protected in
cases of contracts intended to defraud
them. (n)
Art. 1314. Any third person who induces
another to violate his contract shall be
liable for damages to the other
contracting party. (n)

I.
Meaning
A. The definition given by the article is
inaccurate. (1) a contract cannot be
confined to only two persons
because a party to a contract may
be more than two, as when there
are five sellers and five buyers; (2)
the definition only partakes of one of
the parties performing an obligation
in a contract, but there are contracts
requiring the fulfillment of reciprocal
obligations, such as contracts of
sale; (3) the definition only pertains
to the object of a contract as to
give and to do, it failed to include
a negative prestation which is not
to do.
B. The suggested definition a
contract is a meeting of the minds
between two or more parties, where
one party binds himself with respect
to the other, or where both binds
themselves reciprocally in favor of
one another, to fulfill a prestation to
give, to do, or not to do.
II.

Atty. Chato Olivas-Gallo

Stages in Making a Contract

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De La Salle University
A. There are 3 stages in a contract:
a. Conception or Generation
this is where the parties
being their initial negotiation
for the formation of a
contract
b. Perfection or Birth here is
where the meeting of the
minds of the parties occur,
with respect to the object,
cause or consideration and
other terms and conditions
of the contract
c. Consummation
or
Fulfillment this is the last
stage, where the parties
perform their obligations
under
the
perfected
contract, which has the
effect of terminating the
contract
III. Classification of Contracts
A. According to their names
a. Nominate a contract given
a particular name or
denomination by law
b. Innominate not given a
particular name and not
regulated
by
special
provisions of law; discussed
fully under Art. 1307
B. According to their subject matter
a. Contracts covering things
contracts like sale, pledge,
deposit
b. Contracts covering services
contract such as that of
carriage, agency, deposit
c. Contracts
covering
transmissible
rights
or
credits contracts such as
usufruct and assignment of
credit
C. According to their formation or
perfection
a. Consensual perfected by
mere consent
b. Real contracts which
require delivery to be
perfected
c. Formal contracts which
require compliance with
formalities required by law
to be perfected
D. According to their cause

Atty. Chato Olivas-Gallo

E.

F.

G.

H.

I.

a. Onerous

contracts
providing
exchange
of
valuable considerations
b. Gratuitouscontracts where
one receives something
without
giving
any
equivalent of compensation
c. Remunerative where one
party gives something in
consideration of a previous
or past deed.
According to the viniculum produced
of the party or parties obligated
a. Unilateral only one party
is bound to fulfill an
obligation
b. Bilateral both parties have
bound
themselves
reciprocally
According to the certainty of
fulfillment
a. Commutative contracts
where
the
parties
contemplate the assured
fulfillment of the terms and
conditions of the contract
b. Aleatory fulfillment of the
contracts depends on the
happening of an event,
which may or may not
come.
According
to
completion
of
performance
a. Executed those already
completed when entered
into
b. Executor the prestations
promised by the parties are
yet to be fulfilled at some
future time
According to the dependence of one
contract to another
a. Principal those that can
exist themselves alone
b. Accessory those which
cannot exist without a
principal contract
c. Preparatory those entered
into for the creation of
another contract
According to the number of persons
actually participating in the contract
a. Ordinary those where two
or
more
parties
are
represented by different
persons

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J.

K.

L.

M.

N.

b. Auto-contracts

those
where two opposite parties
are represented by one and
the same person
According to the dignity accorded by
law
a. Institutional

those
contracts
given special
dignity by law
b. Ordinary those which are
not institutional
According to the freedom of bargain
a. Ordinary where both
parties are placed on equal
footing in negotiating
b. Contracts of adhesion
where a contract has
already
been
drafted
already by one of the
parties and the other is left
with only the choice whether
to accept or not to accept
According to the evidence need to
prove their existence
a. Contracts covered by the
Statute of Frauds those
which are required to be
written
b. Contracts which can be
proved by oral or parol
evidence those contracts
such as a lease for a period
of less than one year, or of
a sale where there was
already full or partial
payment
According to the personalities of the
parties
a. Personal those contracts
where the person of the
parties is essential
b. Impersonal

those
contracts where the person
of the parties are not
essential
According to the manner the
consent is given
a. Express where the
consent of the parties are
expressly given in writing or
verbally
b. Implied opposite of
express; deducible from the
acts of the parties
c. Presumed

contracts
where consent was not

Atty. Chato Olivas-Gallo

given by the parties but are


presumed by law
IV.

Basic
Legal
Principles
Governing Contracts
Freedom to stipulate this will be
explained thoroughly in Art. 1306
Obligatory force of contracts
obligations arising from contracts
have the force of law between the
parties and should be complied with
in good faith
Mutuality of contracts this will be
explained thoroughly in Art. 1308
Relativity of contracts this will be
explained thoroughly in Art. 1311
Perfection by mere consent of
contracts this will be explained
thoroughly in Art. 1315

Principle of Free Stipulation parties


have the right to negotiate and agree on any
stipulations, clauses, terms and conditions
as they deem convenient; this right is both
statutory and constitutional
Limitations on the Principle of Free
Stipulation stipulations established by the
parties must not be contrary to: 1) law; 2)
morals; 3) good customs; 4) public order;
5) public policy.
Innominate contracts are those not given
any names or designations.
Under the Roman law, innominate contracts
are given the classification as follows: 1) Do
ut des (I give that you may give); 2) Do
utfacio(I give that you may do); 3) Faciout
des (I do that you may give); 4)
Facioutfacias(I do that you may do).
Innominate contracts are governed by the
following: 1) Stipulations of the parties;2)
Provisions of Title 1 (Obligations) and Title II
(Contracts) of the Civil Code;3) Rules
governing the most analogous nominate
contracts;4) Customs of the place
Principle of Mutuality of ContractsThe
contract binds both the contracting parties.
This I based on the essential equality of the
parties.

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UCPB v. Spouses Beluso
G.R. No. 159912, August 17, 2007
Digested by: Dino De Leon
Facts: The UCPB granted the spouses
Beluso a Promissory Note Line under a
Credit Agreement. The spouses Beluso
constituted other than their promissory
notes, a real estate mortgage over parcels
of land as additional security for the
obligation. In any case, UCPB applied
interest rates on the different promissory
notes ranging from 18% to 34%. The
spouses, however, failed to make any
payment of their obligations with the bank.
Spouses Beluso filed a petition for the
annulment, accounting and damages
against UCPB.
Issue: Is UCPB authorized to unilaterally fix
the interest rates?
Held:No. A promissory note which grants
the creditor the power to unilaterally fix the
interest rate means that the promissory note
does not contain a clear statement in writing
of the finance charge. Such provision is
illegal not only because it violates
the provisions of the Civil Code on mutuality
of contracts but also because it violates the
Truth in Lending Law.
Ratio: Art. 1308. The contract must bind
both contracting parties; its validity or
compliance cannot be left to the will of one
of them.
We applied this provision in Philippine
National Bank v. Court of Appeals, where
we held:
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 exclusively
upon the uncontrolled will of 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

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

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 "to take it or
leave it" (Qua vs. Law Union & Rock
Insurance Co., 95 Phil. 85). Such a contract
is a veritable trap for the weaker party whom
the courts of justice must protect against
abuse and imposition.
Rule on Validity or Compliance The
validity or compliance with the contract
cannot be left to the will of one of the
contracting parties.
Contract cannot have any stipulation
authorizing one of the contracting parties: 1)
to determine whether the contract shall be
valid; 2) to determine whether the contract
shall be fulfilled.
3rd person may, however, be authorized to
determine the performance or fulfillment of
the contract (Art. 1309), but not of its
validity.
When the contract expressly provides that
one of the contracting parties is authorized
to cancel the same and the party given this
right subsequently cancelled the contract,
the agreement is just being fulfilled, and the
mutuality of the contract is not violated.
Performance here pertains to the fulfillment
of the obligation and not the execution of the
contract, in the latter, only the contracting
parties may have direct participation.
This is also the same when the parties opt to
submit themselves to arbitration, with
respect to differences in the performance of
the contract, which is valid.
Principle of Relativity of Contracts
contracts are only binding only upon the
parties, their assigns, or heirs (P-A-H)
What is involved here are only transmissible
rights
Test whether a right is transmissible is
whether acts stipulated in a contract require
the exercise of special knowledge, genius,

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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.
EXCEPTIONS:
1) Parties only (by stipulation);
2) Affects/ involves/ binds third persons
Second
exception
is
further
subdivided into: (D-A-R-D-I)
Stipulation Pour Autrui
Requisites are (S-I-P-A-C)

(Art.

1311);

Stipulation
Incidental NOT!
Part
Agent NOT!
Conferred clearly

Induces a person to violate a creditor (Art.


1314); Also referred to as interference in
contractual relations requisites are (M-I-KE-V)
I. Malice
II. Interference
III. Knowledge
IV. Existence of contract
V. Valid

Everett Steamship Corporation vs. CA


G.R. No.122494, October 8, 1998
Digested by: Jan Emmanuel del Castillo
Facts: Respondent Hernandez Trading Co.
Inc. imported from Maruman Trading
Company, Ltd., its supplier based Inazawa,
Aichi, Japan, 3 crates consisting of bus
spare parts. These crates were shipped to
Manila
on
board
the
vessel
ADELFAEVERETTE owned by Everett
Orient Lines. On arrival at Manila, one of the
crates
was
declared
to
be
missing. Respondent Hernandez Trading
then asked Petitioner Everett Co. to pay for
the value of the lost cargo amounting to Y1,
552,500.00 (yen), as shown in the Invoice
No. MTM-941. Everett Co. refused to pay
the whole amount and instead offered to pay
the amount stipulated under Clause 18 of
the bill of lading which is limited only to
Y100,000.00 (yen) as payment for the

Atty. Chato Olivas-Gallo

liability of petitioner. Private respondent


Hernandez Trading rejected the offer.
Private Respondent Hernandez Trading
then filed a case for collection of the amount
lost. The trial court rendered a decision in
favour of the private respondents and this
was affirmed by the Court of Appeals. Thus,
this instant petition.
Issues: Is the petitioner liable for the actual
value and not the maximum value
recoverable under the bill of lading? Is
private respondent, as consignee, who is not
a signatory to the bill of lading bound by the
stipulations thereof?
Held:
1. YES. The Petitioner is only liable for the
maximum value recoverable under the bill of
lading.
2. YES. Private Respondents are still bound by
the stipulations of the bill of lading
The decision of the Court of Appeals is
hereby REVERSED and SET ASIDE.In fine,
the liability of petitioner for the loss of the
cargo is limited to One Hundred Thousand
(Y100,000.00) Yen, pursuant to Clause 18
of the bill of lading..
Ratio:
1. Clause 18 of the covering bill of lading:
18. All claims for which the carrier may be
liable shall be adjusted and settled on the
basis of the shipper's net invoice cost plus
freight and insurance premiums, if paid, and
in no event shall the carrier be liable for any
loss of possible profits or any consequential
loss.
The carrier shall not be liable for any loss of
or any damage to or in any connection with,
goods in an amount exceeding One
Hundred thousand Yen in Japanese
Currency (Y100,000.00) or its equivalent in
any other currency per package or
customary freight unit (whichever is
least) unless the value of the goods higher
than this amount is declared in writing by the
shipper before receipt of the goods by the
carrier and inserted in the Bill of Lading and
extra freight is paid as required. (Emphasis
supplied)

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De La Salle University
Pertinent provisions that is applicable as to
this case:
Art. 1749. A stipulation that the common
carrier's liability is limited to the value of the
goods appearing in the bill of lading, unless
the shipper or owner declares a greater
value, is binding.
Art. 1750. A contract fixing the sum that may
be recovered by the owner or shipper for the
loss, destruction, or deterioration of the
goods is valid, if it is reasonable and just
under the circumstances, and has been
freely and fairly agreed upon.
Pursuant to the afore-quoted provisions of
law, it is required that the stipulation limiting
the common carrier's liability for loss must
be "reasonable and just under the
circumstances, and has been freely and
fairly agreed upon."
The above stipulations are reasonable and
just. In the bill of lading, the carrier made it
clear that its liability would only be up to One
Hundred Thousand (Y100,000.00) Yen.
However, the shipper, Maruman Trading,
had the option to declare a higher valuation
if the value of its cargo was higher than the
limited liability of the carrier. Considering
that the shipper did not declare a higher
valuation, it had itself to blame for not
complying with the stipulations.
2. In Sea-Land Service, Inc. vs. Intermediate
Appellate Court (supra), it was held that
even if the consignee was not a signatory to
the contract of carriage between the shipper
and the carrier, the consignee can still be
bound by the contract.

Kauffman vs. PNB


42 Phil 182 September 29, 1921
Digested by: Jan Emmanuel del Castillo
Facts: George A. Kauffman, was the
president of Philippine Fiber and Produce
Company engaged in the exportation of
hemp from the Philippines. He was also
holding majority of the capital stock.
Kauffman was based in New York and was
entitled to receive dividends. He then
instructed Wicks, the treasurer of the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

company, to go to the exchange department


of PNB where he requested a telegraphic
transfer of the money to Kauffman.
PNB agreed with such request and asked
for additional charges for the transaction.
Wicks then issued a check to PNB and
when
accepted,
informed
their
representative
in
New
York.
The
representative of then sent a message
suggesting the possibility of withholding
Kauffmans money in view of his reluctance
to accept certain bills of the company. PNB
then agreed with this and sent another
message to its agency in New York to
withhold the payment as suggested. In the
meantime, Wicks notified Kauffman that the
money has been wired to his account so
upon arrival, however, he was refused to
receive the payment. Hence, petition.
Issue: Whether or not Kauffman has a right
of action against PNB?
Held: YES. It is a stipulation pour autrui .
Ratio: Should the contract contain any
stipulation in favor of a third person, he may
demand its fulfilment, provided he has given
notice of his acceptance to the person
bound before the stipulation has been
revoked. (Art. 1257, par. 2, Civ. Code.) In
the light of the conclusion thus stated, the
right of the plaintiff to maintain the present
action is clear enough; for it is undeniable
that the bank's promise to cause a definite
sum of money to be paid to the plaintiff in
New York City is a stipulation in his favor
within the meaning of the paragraph above
quoted; and the circumstances under which
that promise was given disclose an evident
intention on the part of the contracting
parties that the plaintiff should have the
money upon demand in NYC. The
recognition of this unqualified right in the
plaintiff to receive the money implies in our
opinion the right in him to maintain an action
to recover it.
It will be noted that under the paragraph
cited a third person seeking to enforce
compliance with a stipulation in his favor
must signify his acceptance before it has
been revoked. In this case the plaintiff
clearly signified his acceptance to the bank
by demanding payment; and although PNB

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had already directed its NY agency to


withhold payment when this demand was
made, the rights of the plaintiff cannot be
considered to as there used, must be
understood to imply revocation by the
mutual consent of the contracting parties, or
at least by direction of the party purchasing
he exchange.

defendant, to date, still owes plaintiff bank


the amount of P2,250,000.00 exclusive of
interest and other charges. Despite repeated
demands the defendant failed to pay the
amount due.
In his defense Sarmiento is saying, the
promissory note was executed in favor of
Citizens Bank and Trust Company.

Legniti vs. Mechanics, etc. Bank (130 N.E.


Rep., 597), decided by CA of NYC on March
1, 1921, it was held that, by selling a cable
transfer of funds on a foreign country in
ordinary course, a bank incurs a simple
contractual obligation, and cannot be
considered as holding the money which was
paid for the transfer in the character of a
specific trust. Thus, it was said, "Cable
transfers, therefore, mean a method of
transmitting money by cable wherein the
seller engages that he has the balance at
the point on which the payment is ordered
and that on receipt of the cable directing the
transfer his correspondent at such point will
make payment to the beneficiary described
in the cable. All these transactions are
matters of purchase and sale create no trust
relationship."

The Court of Appeals held that the


Associated Bank had no cause of action
against Lorenzo Sarmiento Jr., since said
bank was not privy to the promissory note
executed by Sarmiento in favor of Citizens
Bank and Trust Company (CBTC). The court
ruled that the earlier merger between the
two banks could not have vested Associated
Bank with any interest arising from the
promissory note executed in favor of
CBTC after such merger.

ASSOCIATED BANK vs. COURT OF


APPEALS and LORENZO SARMIENTO .
G.R. No. 123793 June 29, 1998
Digested by: Jose Joven Paulo Espinosa
Facts: Associated Banking Corporation and
Citizens Bank and Trust Company merged
to form just one banking corporation known
as Associated Citizens Bank, the surviving
bank. On or about March 10, 1981, the
Associated Citizens Bank changed its
corporate name to Associated Bank by
virtue of the Amended Articles of
Incorporation.
On September 7, 1977, the Sarmiento
executed in favor of Associated Bank a
promissory note whereby the former
undertook to pay the latter the sum of
P2,500,000.00 payable on or before March
6, 1978. As per said promissory note, the
defendant agreed to pay interest at 14% per
annum, 3% per annum in the form of
liquidated damages, compounded interests,
and attorney's fees, in case of litigation
equivalent to 10% of the amount due. The

Atty. Chato Olivas-Gallo

Issues:
1. In a merger, does the surviving corporation
have a right to enforce a contract entered
into
by
the
absorbed
company subsequent to the date of the
merger agreement, but prior to the issuance
of a certificate of merger by the Securities
and Exchange Commission?
2. Is the promissory note a contract pouratrui?
Held: 1. The fact that the promissory note
was executed after the effectivity date of the
merger does not militate against petitioner.
The agreement itself clearly provides
that all contracts irrespective of the date
of execution entered into in the name of
CBTC shall be understood as pertaining to
the surviving bank, herein petitioner. Since,
in contrast to the earlier aforequoted
provision, the latter clause no longer
specifically refers only to contracts existing
at the time of the merger, no distinction
should be made. The clause must have
been deliberately included in the agreement
in order to protect the interests of the
combining banks; specifically, to avoid
giving the merger agreement a farcical
interpretation aimed at evading fulfillment of
a due obligation. Thus, although the subject
promissory note names CBTC as the payee,
the reference to CBTC in the note shall be
construed, under the very provisions of the
merger agreement, as a reference to
petitioner bank, "as if such reference [was a]

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direct reference to" the latter "for all intents
and purposes."
Stipulation Pour Autrui is one in favor of a
third person who may demand its fulfillment,
provided he communicated his acceptance
to the obligor before its revocation. An
incidental benefit or interest, which another
person gains, is not sufficient. The
contracting parties must have clearly and
deliberately conferred a favor upon a third
person.
The following
contract:

are requisites

for

such

(1) the stipulation in favor of a third person


must be a part of the contract, and not the
contract itself;
(2) the favorable stipulation should not be
conditioned or compensated by any kind of
obligation; and
(3) neither of the contracting parties bears
the legal representation or authorization of
the third party. The "fairest test" in
determining whether the third person's
interest
in
a
contract
is
a
stipulation pourautrui or merely an incidental
interest is to examine the intention of the
parties as disclosed by their contract.
The promissory note had no stipulation at all
that would even resemble a provision in
consideration of a third person. The
instrument itself does not disclose the
purpose of the loan contract. It merely lays
down the terms of payment and the
penalties incurred for failure to pay upon
maturity. It is patently devoid of any
indication that a benefit or interest was
thereby created in favor of a person other
than the contracting parties.
Article 1312 is one of the exceptions to the
general rule of Relativity
Concept of Real Right one which binds
the property over which it is created or
exercised
Examples are mortgage constituted on a
titled property and duly registered, lease of a
parcel of land for more than one year which
is also duly registered.

Atty. Chato Olivas-Gallo

Real rights, if recorded, are binding against


third persons even if they did not participate
in the said contracts.
Article 1313 is also an exception to the
principle of relativity.
When a debtor is found to have alienated his
property to defraud his creditors, his
creditors may file an action for rescission of
the said contracts.
o Action is known as accion
pauliana
Such acts of a debtor may constitute a crime
punished under the Revised Penal Code,
namely, Fraudulent Insolvency.
Art. 1314. Any third person who induces
another to violate his contract shall be liable
for damages to the other contracting party.
(n)
Article 1314 is also one of the exceptions to
the principle of relativity, referred to as,
interference with contractual relations
Third party who caused the interference may
be liable for damages, but only to the same
extent as to the liability of the person he
induced.
Both inducer and the party induced are
solidarily liable to the injured party.
Malice is an essential requisite to hold the
intermeddler liable.
The requisites for interference with
contractual relations are (M-I-K-E-V) as
stated above.
Article 1315 refers to consensual contracts
which are perfected by mere consent of the
parties this signifies that there has already
been a meeting of the minds between the
parties with respect to the terms and
conditions agreed upon.
A contract is the law between the parties, as
such, parties are bound by its stipulations,
the parties would then be responsible for all
the consequences of the contract, and since
it has been perfected, it cannot simply be
disregarded.

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Article 1316 refers to the perfection of real
contracts, which has the same requisites as
that of a consensual contract, only, it is
necessary for the object of the obligation to
be delivered in order for the contract to be
perfected.
The enumeration in the article is not
complete as it failed to include contract of
carriage and loans or mutuum which are
also real contracts, and therefore require
delivery in order to be perfected.
Delivery is required in order for the other
party to exercise his duties under the
contract.

Art. 1319. Consent is manifested by the


meeting of the offer and the acceptance
upon the thing and the cause which are
to constitute the contract. The offer must
be certain and the acceptance absolute.
A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram
does not bind the offerer except from the
time it came to his knowledge. The
contract, in such a case, is presumed to
have been entered into in the place
where the offer was made. (1262a)
Art. 1320. An acceptance may be express
or implied. (n)

In order for a person to contract in the name


of another, such person must comply with
any of the following: 1) authority to contract
in the name of another; or 2) has the right or
duty to represent another.

Art. 1321. The person making the offer


may fix the time, place, and manner of
acceptance, all of which must be
complied with. (n)

Non-compliance renders the


entered into as unenforceable.

Art. 1322. An offer made through an


agent is accepted from the time
acceptance is communicated to him. (n)

contract

Can be ratified expressly or impliedly by the


person being represented.
Ratification validates the contracts
contract is no longer defective from the
moment it was constituted.
Ratification may only be done before the
contract is revoked.
Person who contracted without authority
would be liable to the person he contracted
with, representing another.

CHAPTER 2
ESSENTIAL REQUISITES

Art. 1323. An offer becomes ineffective


upon the death, civil interdiction,
insanity, or insolvency of either party
before acceptance is conveyed. (n)
Art. 1324. When the offerer has allowed
the offeree a certain period to accept, the
offer may be withdrawn at any time
before acceptance by communicating
such withdrawal, except when the option
is founded upon a consideration, as
something paid or promised. (n)
Art. 1325. Unless it appears otherwise,
business advertisements of things for
sale are not definite offers, but mere
invitations to make an offer. (n)

GENERAL PROVISIONS
Art. 1318. There is no contract unless the
following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the
subject matter of the contract;
(3) Cause of the obligation
which is established. (1261)

SECTION 1. - Consent

Atty. Chato Olivas-Gallo

Art. 1326. Advertisements for bidders are


simply invitations to make proposals,
and the advertiser is not bound to accept
the highest or lowest bidder, unless the
contrary appears. (n)
Art. 1327. The following cannot give
consent to a contract:
(1) Unemancipated minors; (2) Insane
or demented persons, and deaf-

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mutes who do not know how to


write. (1263a)
Art. 1328. Contracts entered into during a
lucid interval are valid. Contracts agreed
to in a state of drunkenness or during a
hypnotic spell are voidable. (n)
Art. 1329. The incapacity declared in
Article
1327
is
subject
to
the
modifications determined by law, and is
understood to be without prejudice to
special disqualifications established in
the laws. (1264)
Art. 1330. A contract where consent is
given
through
mistake,
violence,
intimidation, undue influence, or fraud is
voidable. (1265a)
Art. 1331. In order that mistake may
invalidate consent, it should refer to the
substance of the thing which is the
object of the contract, or to those
conditions which have principally moved
one or both parties to enter into the
contract.
Mistake
as
to
the
identity
or
qualifications of one of the parties will
vitiate consent only when such identity
or qualifications have been the principal
cause of the contract.
A simple mistake of account shall give
rise to its correction. (1266a)
Art. 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)
Art. 1333. There is no mistake if the party
alleging it knew the doubt, contingency
or risk affecting the object of the
contract. (n)
Art. 1334. Mutual error as to the legal
effect of an agreement when the real
purpose of the parties is frustrated, may
vitiate consent. (n)
Art. 1335. There is violence when in order
to wrest consent, serious or irresistible

Atty. Chato Olivas-Gallo

force is employed.
There is intimidation when one of the
contracting parties is compelled by a
reasonable and well-grounded fear of an
imminent and grave evil upon his person
or property, or upon the person or
property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation,
the age, sex and condition of the person
shall be borne in mind.
A threat to enforce one's claim through
competent authority, if the claim is just
or legal, does not vitiate consent. (1267a)
Art. 1336. Violence or intimidation shall
annul the obligation, although it may
have been employed by a third person
who did not take part in the contract.
(1268)
Art. 1337. There is undue influence when
a person takes improper advantage of his
power over the will of another, depriving
the latter of a reasonable freedom of
choice. The following circumstances
shall be considered: the confidential,
family, 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)
Art. 1338. There is fraud when, through
insidious words or machinations of one
of the contracting parties, the other is
induced to enter into a contract which,
without them, he would not have agreed
to. (1269)
Art. 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)
Art. 1340. The usual exaggerations in
trade, when the other party had an
opportunity to know the facts, are not in
themselves fraudulent. (n)
Art. 1341. A mere expression of an

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De La Salle University

opinion does not signify fraud, unless


made by an expert and the other party
has relied on the former's special
knowledge. (n)
Art. 1342. Misrepresentation by a third
person does not vitiate consent, unless
such misrepresentation has created
substantial mistake and the same is
mutual. (n)
Art. 1343. Misrepresentation made in
good faith is not fraudulent but may
constitute error. (n)
Art. 1344. In order that fraud may make a
contract voidable, it should be serious
and should not have been employed by
both contracting parties.
Incidental fraud only obliges the person
employing it to pay damages. (1270)
Art. 1345. Simulation of a contract may
be absolute or relative. The former takes
place when the parties do not intend to
be bound at all; the latter, when the
parties conceal their true agreement. (n)
Art. 1346. An absolutely simulated or
fictitious contract is void. A relative
simulation, when it does not prejudice a
third person and is not intended for any
purpose contrary to law, morals, good
customs, public order or public policy
binds the parties to their real agreement.
(n)
SECTION 2. - Object of Contracts
Art. 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. (1271a)

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Art. 1348. Impossible things or services


cannot be the object of contracts. (1272)
Art. 1349. The object of every contract
must be determinate as to its kind. The
fact that the quantity is not determinate
shall not be an obstacle to the existence
of the contract, provided it is possible to
determine the same, without the need of
a new contract between the parties.
(1273)
SECTION 3. - Cause of Contracts
Art. 1350. In onerous contracts the cause
is understood to be, for each contracting
party, the prestation or promise of a
thing or service by the other; in
remuneratory ones, the service or benefit
which is remunerated; and in contracts
of pure beneficence, the mere liberality of
the benefactor. (1274)
Art. 1351. The particular motives of the
parties in entering into a contract are
different from the cause thereof. (n)
Art. 1352. Contracts without cause, or
with unlawful cause, produce no effect
whatever. The cause is unlawful if it is
contrary to law, morals, good customs,
public order or public policy. (1275a)
Art. 1353. The statement of a false cause
in contracts shall render them void, if it
should not be proved that they were
founded upon another cause which is
true and lawful. (1276)
Art. 1354. Although the cause is not
stated in the contract, it is presumed that
it exists and is lawful, unless the debtor
proves the contrary. (1277)
Art. 1355. Except in cases specified by
law, lesion or inadequacy of cause shall
not invalidate a contract, unless there
has been fraud, mistake or undue
influence. (n)

Article 1318 applies only to consensual


contractswhich require only the three
elements namely:
A. Consent

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De La Salle University
B. Object
C. Cause
C. W. ROSENSTOCK, as administrator of
the estate of H. W. ELSER v.,EDWIN
BURKE.
G.R. No. 20732
Digested by: Jose Joven Paulo Espinosa
Facts: The defendant Edwin Burke owned a
motor yacht, known as Bronzewing. H. W.
Elser, at the beginning of the year 1922,
began negotiations with the defendant for
the purchase thereof. The plaintiff proposed
to the defendant to make a voyage on board
the yacht to make an advantageous sale.
But as the yacht needed some repairs to
make it seaworthy for this voyage, and as,
on the other hand, the defendant said that
he had no funds to make said repairs, the
plaintiff paid almost all their amount. It has
been stipulated that the plaintiff was not to
pay anything for the use of the yacht. The
cost of those repairs was P6,972.21, which
was already paid by the plaintiff, plus
P1,730.84 due to the Cooper Company
which still remains unpaid, plus P832.93,
due to the plaintiff, which also remains
unpaid.
The plaintiff never accepted the offer of the
defendant for the purchase of the yacht
contained in the letter of option of February
12, 1922. The defendant, after an interview
with Mr. Avery held on the same day,
answered the plaintiff that he had arrived at
an agreement with Mr. Avery about the sale
of the yacht to the plaintiff for P80,000
payable as follows: P5,000 each month
during the first six months and P10,000
thereafter until full payment of the price, the
yacht to be mortgaged to secure payment
thereof.
On the 5th of the same month of April the
plaintiff sent the defendant another letter,
telling him that in view of the attitude of Mr.
Avery as to the loan of P20,000 in
connection with the installation of a new
engine in the yacht, it was impossible for
him to take charge of the boat and he made
delivery thereof to the defendant. On the 8th
of the same month of April the defendant
answered the plaintiff that as he had
accepted, with the consent of the Asia
Banking Corporation, through Mr. Avery, the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

offer for the purchase of the yacht made by


the plaintiff in his letter of the 3d of April, he
made demand on him for the performance
thereof. The plaintiff brings this action
against the defendant to recover the sum
of P6,139.28, the value of the repairs
made on the yacht which he had paid
for. The Cooper Company was admitted to
intervene in this action and claims in turn its
credit of P1,730.84 for the repairs made on
the yacht, the amount of which has not as
yet been paid.
Issue: Whether or not it is a contract of sale
valid and binding against the plaintiff?
Held: NO, Our conclusion is that the letter of
the plaintiff of April 3, 1922, was not a
definite offer and that the plaintiff is bound to
pay the amount of the repairs of the yacht in
exchange for the use thereof.
Ratio: As was seen, this letter begins as
follows: "In connection with the yacht
Bronzewing, I am in position and am willing
to entertain the purchase of it under the
following terms . . . ." The whole question is
reduced to determining what the intention of
the plaintiff was in using that language. The
word "entertain" applied to an act does
not mean the resolution to perform said
act, but simply a position to deliberate for
deciding to perform or not to perform
said act.Taking into account only the literal
and technical meaning of the word
"entertain," it seems to us clear that the
letter of the plaintiff cannot be interpreted as
a definite offer to purchase the yacht, but
simply a position to deliberate whether or
not he would purchase the yacht. It was but
a mere invitation to a proposal being made
to him, which might be accepted by him or
not. The only thing the plaintiff wanted in
connection with this yacht was that the
defendant should procure its sale, naturally
with some profit for himself.
The appeal of the defendant raises the
question as to who must pay the repairs
made on the yacht. But it having been the
plaintiff who ordered and made these
repairs, and in view of the fact that he was
not obliged to pay anything for the use of the
yacht. It seems strange that the defendant
should accept liability for the amount of

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these repairs, leaving their extent entirely to
the discretion of the plaintiff.

Batagan v. Cojuangco
GR No.: L-224 May 31, 1974
Digested by: Ken Gador
Facts: Cojuangco bought the property of
Batagan and she is willing to resell it to
Batagan for the same amount in which it
was purchased at the auction sale, that is,
for P1,508.28, provided that it be on cash.
Subsequently, Batagan lawyer sent
Cojuangco a letter with three postal money
orders for P800, stating that he was
remitting that amount in behalf of his client.
Cojuangco rejected the amount given by
Batagans lawyer. She said that she had
not had any agreement. Batagans lawyer
then sent to Cojuangcos lawyer the same
money orders, but it was also rejected.
Issue: Is there a concurrence of the minds
of the parties on the object and cause, which
will constitute a contract?
Held: No. There is a difference between the
amount agreed by the parties and the
amount actually paid. If there is a reduction
of the price agreed upon, the offeror must
first assent to the modification. In this case
Rationale:
The
substantial
variance
between the amount in the offer and the
amount tendered not only made the
purported acceptance inoperative but "put
an end to the negotiations without forming a
contract unless the party making the offer
agreed to the suggested modification." (17
C.J.S., 383.) Otherwise, as the trial judge
aptly observed, "promisors would be tied to
their promises indefinitely and would not be
able to dispose of the property involved" in
the promise or offer. In addition, the
promisor would be placed in a position
where he would always lose without
anything to gain. The promisee could wait
until judgment is rendered and accepted the
offer of compromise if the judgment
happened to be more onerous to him.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Laudico v. Arias
GR No. 16530 March 31, 1922
Digested by: Ken Gador
Facts: Arias on his behalf and of his coowners wrote a letter to Laudico offering to
lease their building to Arias. Subsequently,
Laudico sent a letter to Arias stating that he
accepts the offer. One of the agreements
agreed upon by the parties is that Arias can
withdraw the offer any time before the
acceptance. The moment that Laudico sent
the acceptance letter, Arias already sent his
letter of withdrawal. When Arias sent the
letter of withdrawal, he had not yet received
the letter of acceptance.
Issue: Whether or not the contract of lease
was perfected?
Held: No, Acceptance made by letter or
telegram does not bind the offerer except
from the time it came to his knowledge.
Rationale: Under article 1262, paragraph 2,
of the Civil Code, an acceptance by letter
does not have any effect until it comes to the
knowledge of the offerer. Therefore, before
he learns of the acceptance, the latter is not
yet bound by it and can still withdraw the
offer. Consequently, when Mr. Arias wrote
Mr. Laudico, withdrawing the offer, he had
the right to do so, inasmuch as he had not
yet receive notice of the acceptance. And
when the notice of the acceptance was
received by Mr. Arias, it no longer had any
effect, as the offer was not then in existence,
the same having already been withdrawn.
There was no meeting of the minds, through
offer and acceptance, which is the essence
of the contract. While there was an offer,
there was no acceptance, and when the
latter was made and could have a binding
effect, the offer was then lacking. Though
both the offer and the acceptance existed,
they did not meet to give birth to a contract.
II. Consent (Art. 1319)
A. Offer
a.
Offeror can control offer
Place, Manner, Time of
acceptance (Art. 1321)
b.
Offer through agent is
valid (Art. 1322)

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c.

d.

Death, Civil Interdiction,


Insanity,
Insolvency
(DCII) renders offer
ineffective (Art. 1323)
Withdrawal of offer (Art.
1324)

Sanchez v. Rigos
No. L-25494, June 14, 1972
Digested by: Aleli Guinto
Facts: Nicolas Sanchez and SeverinaRigos
executed an instrument entitled Option to
Purchase wherein Mrs. Rigos agreed,
promised and committed to sell to Mr.
Sanchez a parcel of land for the amount of
P1,510 within two years from the date of the
instrument, with the understanding that the
said option shall be deemed terminated and
elapsed if Mr. Sanchez shall fail to exercise
his right to buy the property within the
stipulated period.
Mrs. Rigos agreed and committed to sell
and Mr. Sanchez agreed and committed to
buy. But there is nothing in the contract to
indicate that her agreement, promise and
undertaking is supported by a consideration
distinct from the price stipulated for the sale
of the land.
Mr. Sanchez has made several tenders of
payment in the said amount within the
period before any withdrawal from the
contract has been made by Mrs. Rigos, but
were rejected nevertheless.
Issue: Can an accepted unilateral promise
to sell without consideration distinct from the
price be withdrawn arbitrarily?
Held: No. An accepted promise to sell is an
offer to sell when accepted becomes a
contract of sale.
Ratio: "Since there may be no valid contract
without a cause or consideration, the
promisor is not bound by his promise and
may, accordingly, withdraw it. Pending
notice of its withdrawal, his accepted
promise partakes, however, of the nature of
an offer to sell which, if accepted, results in
a perfected contract of sale."

Atty. Chato Olivas-Gallo

"This view has the advantage of avoiding a


conflict between Articles 1324 on the
general principles on contracts and 1479
on sales of the Civil Code.
Article 1324. When the offeror 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 consideration, as something
paid or promised.
Article 1479. A promise to buy and sell a
determinate thing for a price certain is
reciprocally demandable."
"An accepted unilateral promise to buy or to
sell a determinate thing for a price certain is
binding upon the promissory if the promise
is supported by a consideration distinct from
the price."
"The Court is of the considered opinion that
it should, as it hereby reiterates the doctrine
laid down in the Atkins, Kroll and Co. case,
and that, insofar as inconsistent therewith,
the view adhered to in the Southwestern
Sugar & Molasses Co. case should be
deemed abandoned or modified."
J. Antonio concurring
"I fully agree with the abandonment of the
view previously adhered to in Southwestern
Sugar & Molasses Co. vs. Atlantic Gulf and
Pacific Co. (97 Phil 249) which hold that an
option to sell can still be withdrawn, even if
accepted, if the same is not supported by
any consideration, and the reaffirmance of
the doctrine in Atkins, Kroll & Co., Inc. v.
CuaHianTek (102 Phil 948), holding that an
option implies xxx the legal obligation to
keep the offer (to sell) open for the time
specified; that it could be withdrawn before
acceptance, if there was no consideration
for the option, but once the offer to sell is
accepted, a bilateral promise to sell and to
buy
ensues,
and
the
offeree ipso
facto assumes the obligations of a
purchaser. In other words, if the option is
given without a consideration, it is a mere
offer to sell, which is not binding until
accepted. If, however, acceptance is made
before a withdrawal, it constitutes a binding
contract of sale. The concurrence of both

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acts the offer and the acceptance could
in such event generate a contract."

"While the law permits the offerror to


withdraw the offer at any time before
acceptance even before the period has
expired, some writers hold the view, that the
offeror cannot exercise this right in an
arbitrary or capricious manner. This is upon
the principle that an offer implies an
obligation on the part of the offeror to
maintain it for such length of time as to
permit the offeree to decide whether to
accept or not, and therefore cannot
arbitrarily revoke the offer without being
liable for damages which the offeree may
suffer. A contrary view would remove the
stability
and
security
of
business
transactions."

Business ads are mere invitations (Art.


1325)
A. Ads for bidders are simply invitation
to make proposals. (Art. 1326)
B.

Acceptance (Art. 1319, 1320)


a.
Absolute
b.
Known
c.
Express/ Implied

C.

Incapacity to give consent to


contracts -> VOIDABLE
Mere restriction upon the exercise of the
right to enter into a contract.
1. Unemancipated minors (Art. 1327)
2. Insane/ demented (Art. 1329),
except lucid interval (Art. 1328)
3. Deaf mutes- illiterate (Art. 1327)
4. Drunk/ hypnotized (Art. 1328) ->
Voidable
Special Disqualification Restricted to
contract by law
Restriction on the right itself. -> VOID
C. Vices of Consent
a. Mistake (Art. 1330-1334)
b. Mistake of Fact:
incurred because of :

Nature of contract
Object

Atty. Chato Olivas-Gallo

Mistake

Substance of the thing


quality of the conditions
of the thing
Identity and the qualification
of the person
The quantity of the thing
where quantity is the main
reason of the contract.

c. Mistake of Law: Mistake


incurred in regards to the legal
effect of the contract.

Tan v. Mandap
GR No. 150925, May 27, 2004
Digested by: Aleli Guinto
Facts: Dioniso Mandap, Sr., 64 years old
and has long been suffering from diabetes,
was legally separated with his wife and lived
with DioritaDojoles. He was totally blind and
crippled when he sold his properties to
Dojoles sister Elenita and her husband
Crispulo Vasquez, which later on were sold
to spouses James and Florence Tan. The
children of Dionisio with his legal wife filed
an action for nullification of sale and
cancellation of titles, alleging that the sale by
their father was fictitious, without any
consideration and the consent of their father
was vitiated due to his physical infirmities.
Issues: 1. Was the sale
DionisioMandap, Sr. and the
spouses valid?
5. Was the sale between the
spouses and the Tan
valid?

between
Vasquez
Vasquez
spouses

Held: No. When one of the parties is unable


to read and fraud and undue influence are
alleged, the person enforcing the contract
must show that the terms have been fully
explained to the former. Nothing on record
shows that this was complied with. Hence,
the presumption of fraud and undue
influence was not rebutted.
No. Since the sale to the Vasquez spouses
is void, they hold no valid title of the parcels
of land to sell to the Tan spouses.
Rationale: "At the time DionisionMandap,
Sr., purportedly sold the lots in question to

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OBLIGATIONS
AND
CONTRACTS

the Vasquez spouses, he was already totally


blind and paralyzed. He could not possibly
have read the contents of the deeds of sale.
He could not have consented to a contract
whose terms he never knew nor understood.
It cannot be presumed Mandap, Sr. knew
the contents of the deeds of sale disposing
of his properties. Article 1332 of the Civil
Code is applicable in these circumstances,
to wit:

Halili. The partnership has the following


provisions: (1) Organize a partnership for
the bottling and distribution of Mission soft
drinks; (2) Woodhouse will act as industrial
partner or manager and Halili will act as
capitalist; (3) Woodhouse was to secure the
Mission Soft Drinks franchise for and in
behalf of the proposed partnership; and
lastly, (4) Woodhouse was to receive 30 per
cent of the net profits of the business.

Art. 1332. When one of the parties is unable


to read, or if the contract is in a language not
understood by him, and mistake or fraud is
alleged, the person enforcing the contract
must show that the terms thereof have been
fully explained to the former."

The contract which was originally should


have been a corporation, was finally signed
by Woodhouse on December 3, 1947. Prior
to the partnership agreement, Woodhouse
was given a thirty days option on exclusive
franchise from Mission Dry Corporation. On
December 10, 1947 a franchise agreement
between the Mission Dry Corporation and
Halili and/or Woodhouse was entered
granting Halili of the exclusive right, license
and authority to produce, bottle, distribute
and sell Mission beverages in the
Philippines. On the first week of February
1948 operations begun.

"As the party seeking to enforce the


contract, the petitioners should have
presented evidence showing that the terms
of the deeds of sale to the Vasquez spouses
were fully explained to Mandap, Sr., But the
petitioners failed to comply with the strict
requirements of Article 1332, thereby
casting doubt on the alleged consent of the
vendor."
"It is true that he who alleges a fact bears
the burden of proving it. However, since
fraud and undue influence are alleged by
respondents, the burden shifts to petitioners
to prove that the contents of the contract
were fully explained to Mandap, Sr. Nothing,
however, appears on record to show that
this requirement was complied with. Thus,
the presumption of fraud and undue
influence was not rebutted."
2. "The sale in favor of the Vasquez
spouses is void. Hence, it follows that the
sale to petitioners is also void, because
petitioners merely stepped into the shoes of
the Vasquez spouses. Since the Vasquezes
as sellers had no valid title over the parcel of
land they sold, petitioners as buyers thereof
could not claim that the contract of sale is
valid."

Woodhouse vs. Halili


G.R. No. L-4811 - July 31, 1953
Digested by: Oilie Haulo

When the plant was already in operation


Woodhouse demanded Halili to execute the
partnership papers. Since Halili has
continuously made delays, Woodhouse then
filed a compliant for the execution of the
contract of partnership, an accounting of the
profits and a share of 30 per cent and
damages amounting to P200,000. As a
counter argument, Halili answered that his
consent to the agreement was secured by
the false representation of Woodhouse that
he was the owner, or was about to become
owner of an exclusive bottling franchise.
Moreover, the franchise was secured and
given to him and not to Woodhouse. He
further asserted that it was Woodhouse who
failed to carry out the undertakings of the
contract. Woodhouse also failed to
contribute to the exclusive franchise to the
partnership. In return, he asked for a
counterclaim for P200,000 as damages.
Issues: Did Woodhouse falsely represent
himself to have the exclusive franchise for
bottling of Mission Soft drinks in the
Philippines? Can the parties annul the
agreement to form a partnership, if such
false representation exists?

Facts: On November 29, 1947, Woodhouse


entered into a partnership agreement with

Atty. Chato Olivas-Gallo

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De La Salle University
Held:
1. Yes, there is false representation. The
acts and statements prior to the agreement
are essential and relevant to the case. His
own letter and testimonies showed that he
Woodhouse made the representation. The
first draft of the agreement that the counsel
of Woodhouse prepared expressly states
that Woodhouse had the exclusive
franchise. From the statements and the
manager is ready and willing to allow the
capitalist to use the exclusive franchise
and In the event of the dissolution or
termination of the partnership the
franchise from Mission Dry Corporation shall
be reassigned to the Manager , it can be
seen that the conclusion that Halili believed
or was made to believe that Woodhouse
was the grantee of an exclusive franchise.
2.
No, because the false representation
was only an incidental fraud (doloincidente)
distinguished
to
causal
fraud
(dolocausante). The Court has held that in
order that fraud may vitiate consent, it must
be the causal (dolocausante), not merely the
incidental (doloincidente), inducement to the
making of the contract. By pretending that
he had the exclusive franchise and
promising to transfer it to defendant, he
obtained the consent of Halili to give the 30
per cent profit. This is the doloincidente
because it was used to get the Halilis
consent to a bigger share in the profits, an
incidental matter in the agreement.
Ratio: We now come to the legal aspect of
the false representation. Does it amount to a
fraud that would vitiate the contract? It must
be noted that fraud is manifested in
illimitable number of degrees or gradations,
from the innocent praises of a salesman
about the excellence of his wares to those
malicious machinations and representations
that the law punishes as a crime. In
consequence, article 1270 of the Spanish
Civil Code distinguishes two kinds of (civil)
fraud, the causal fraud, which may be a
ground for the annulment of a contract, and
the incidental deceit, which only renders the
party who employs it liable for damages.
This Court had held that in order that fraud
may vitiate consent, it must be the causal
(dolocausante), not merely the incidental
(dolocausante), inducement to the making of

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

the contract. (Article 1270, Spanish Civil


Code; Hill vs. Veloso, 31 Phil. 160.) The
record
abounds
with
circumstances
indicative that the fact that the principal
consideration, the main cause that induced
defendant to enter into the partnership
agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to
bottle and distribute for the defendant or for
the partnership. The original draft prepared
by defendant's counsel was to the effect that
plaintiff obligated himself to secure a
franchise for the defendant. Correction
appears in this same original draft, but the
change is made not as to the said obligation
but as to the grantee. In the corrected draft
the word "capitalist"(grantee) is changed to
"partnership." The contract in its final form
retains the substituted term "partnership."
The defendant was, therefore, led to the
belief that plaintiff had the exclusive
franchise, but that the same was to be
secured for or transferred to the partnership.
The plaintiff no longer had the exclusive
franchise, or the option thereto, at the time
the contract was perfected. But while he had
already lost his option thereto (when the
contract was entered into), the principal
obligation that he assumed or undertook
was to secure said franchise for the
partnership, as the bottler and distributor for
the Mission Dry Corporation. We declare,
therefore, that if he was guilty of a false
representation, this was not the causal
consideration, or the principal inducement,
that led plaintiff to enter into the partnership
agreement.

Azarraga vs. Gay


G.R. No. L-29449- December 29, 1928
Digested by: Oilie Haulo
Facts: On January 17, 1921, Azarraga sold
two parcels of land to Gay for the lump sum
of P47,000, payable in installments. The
agreement showed that a payment of
P5,000 upon signing the contract; P20,000
upon delivery of the Torrens title to the first
parcel by the vendor to the purchaser,
P10,000 upon delivery of Torrens title to the
second parcel by the vendor to the
purchaser; and lastly the sum of P12,000
one year after the delivery of the Torrens
title to the second parcel.

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OBLIGATIONS
AND
CONTRACTS

On March 1921, Torrens title to the second


parcel was delivered to Gay, however, she
failed to pay both the P10,000 as agreed
and the P12,000 one year after having
received the Torrens title to the second
parcel. As a defense, Gay admits that she
bought the two parcels of land but alleges
that the Azarrage misrepresented leading
her to believe that the second parcel of land
contained 98 hectares but in fact it was only
60 hectares thus induced her to pay the
price of P47,000 for the two parcels of land.
Now she avers that she is entitled to a
reduction in the price of the two parcels in
proportion to the area lacking which ought to
be reduced to P38,000.

actionable, where a correct description of


the property was given in the deed and
recorded chain of title, which the purchaser's
agent undertook to investigate and report
upon, and the vendor made on effort to
prevent a full investigation." (Shappirio vs.
Goldberg, 48 Law. ed., 419.) "One who
contracts for the purchase of real estate in
reliance on the representations and
statements of the vendor as to its character
and value, but after he has visited and
examined it for himself, and has had the
means and opportunity of verifying such
statements, cannot avoid the contract on the
ground that they were false or exaggerated."
(Brown vs. Smith, 109 Fed., 26.)

Issue: Was there any fraud in the


circumstances leading Gay to agree on the
contract?

Songco v. Sellner
G.R. No. 11513
December 4, 1917
Digested by: Ana Victoria Hernandez

Held: No because Gay had the ample time


and opportunity to verify the condition of the
land which she purchased. Azarrage did not
prevent her from investigating. The facts
showed that Gay knew that area was only
about 70 hectares because she received the
deed by which Azurraga acquired the land
from the original owner, CrispuloBeramo
which states that fact. Even if he did make
such false representations, she still
accepted such representations at her own
risk and she is the only one responsible for
the consequences of her inexcusable
credulousness.

Facts: In December, 1915, Sellner was the


owner of a farm in Pampanga which is
contiguous to the farm of Songco. Both
farms had sugar cane ready to be cut.
Sellner wanted to mill his cane in
Dinalupijan, but the owners of it were not
sure if they can mill his cane. Sellner got
an information that the said central will mill
Songcos cane and so he bought the latters
sugar cane for the agreed sum of 12,000.
He then executed three promissory notes of
4,000 each; two of which were paid. Songco
instituted an action to recover upon the third
promissory note, a judgment was rendered
in favour of Songco. Sellner appealed
saying that the promissory note was
obtained through false and fraudulent
representation. According to Sellner,
Songco estimated that his cane would
produce 3,000 piculs when it should only be
2,017 piculs.

Ratio:
The defendant had
ample
opportunity to appraise herself of the
condition of the land which she purchased,
and the plaintiff did nothing to prevent her
from making such investigation as she
deemed fit, and as was said in Songco vs.
Sellner, supra, when the purchaser
proceeds to make investigations by himself,
and the vendor does nothing to prevent such
investigation from being as complete as the
former might wish, the purchaser cannot
later allege that the vendor made false
representations to him. (National Cash
Register Co. vs. Townsend, 137 N. C., 652;
70 L. R. A., 349; Williamson vs. Holt, 147 N.
C., 515.) The same doctrine has been
sustained by the courts of the United States
in the following cases, among others:
Misrepresentation by a vendor of real
property with reference to its area are not

Atty. Chato Olivas-Gallo

Issue: Should Sellner still pay the remaining


4,000?
Holding: Yes, Sellner was bound to pay the
price
stipulated.
He
should
have
investigated on his own.
Ratio: It is not every false representation
relating to the subject matter of a contract
which will render it void. It must be as to
matters of fact substantially affecting the
buyers interest, not as to matters of opinion,
judgment, probability, or expectation. When

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De La Salle University
the purchaser undertakes to make an
investigation of his own, and the seller does
nothing to prevent his investigation from
being as full as he chooses to make it, the
purchaser cannot afterwards allege that the
seller made misrepresentations.
We think the court below committed no
error in refusing to award damages upon
this ground, as such damages were remote
and speculative.

Hill v. Veloso
G.R. No. 9421
July 24, 1915
Digested by: Ana Victoria Hernandez
Facts:
On
December
30,
1910,
MaximinaVeloso, wife of Manuel TioCuana,
and Domingo Franco executed and signed a
document which stated that they are
acknowledging that they have received
goods from La Cooperative Filipino. They
promised to pay jointly and severally to
Michael & Co., S. en C. the sum of 6,319
with interest on such part of said principal as
may remain unpaid at the end of each
month at the rate of 1 and per cent until
the principal have been completely paid.
A promissory note was then indorsed to L.L
Hill on January 1911. 2,000 have been paid
already and Hill brought an action to recover
the remaining 4,319.33. Defendants answer
alleged that Franco (deceased) suggested
to them the necessity to execute in Atty.
Leverings behalf a document in which it
should be set forth that the defendants
would pay the said lawyer in his capacity as
guardian to the minor children of a certain
Ricablanca. They also said that sometime in
1910 Franco made them sign a blank paper
and they complied with the belief that it was
for their obligation to pay Atty. Levering.
They also alleged that they never had any
transaction with Michael & Co., S. en C and
did not receive any kind of goods. The CFI
Cebu absolved Velasco, thus Hill appealed.
Issue: Should Velasco pay what was stated
in the promissory note?

unless there is proof of some exception


permitted by law.
Ratio: If she said this in 1912, it cannot be
maintained that in 1910, on being required
to recognize and pay the debt of 8,000 she
consented to sign a document in blank
recognizing the debt and binding herself to
pay it to Levering as the then guardian of the
minor children of Rica Blanca. What would
have been natural and logical in that then,
as in 1912, she would have refused to
execute said obligation in writing in favour of
Levering as she did reject it on January 18,
1912.
Domingo Franco is not one of the
contracting parties who may have deceitfully
induced the other contracting party Michael
& Co to execute the contract The active
subject and party of the first part of the
promissory note in question is Michael & Co
and the passive subject and party of the
second part are Veloso and Franco They
are both but one single contracting party in
contractual relation with or against Michael
& Co.
Simulation (Art. 1345- 1346)
Absolute contract is void
Relative not void as long as it is not
contrary to Laws, morals, good customs,
public order or public policy.
Object (Art. 1347)
Allowed:
a) Within the commerce of man (Art.
1347)
b) Transmissible rights (Art. 1347)
c) Services (Art. 1347)
d) Exceptional- future inheritance (Art.
1347)
Not allowed
a) Future inheritance- except those
authorized by law (Art. 1347)
b) Impossible things (Art. 1348)
c) Impossible services (Art. 1348)
d) Indeterminate thing (Art. 1349)
Cause

Holding: Yes, assuming that the defense


given be true, by the recognition of the
signature of the promissory note, the
document became completely effective,

Atty. Chato Olivas-Gallo

Kinds
a) Onerous (Art. 1350) - the prestation
or promise of a thing or service by
the other

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De La Salle University
b) Remunerative (Art. 1350) - the
service or benefit which is
remunerated
c) Gratuitous (Art. 1350) - the mere
liberality of the benefactor
Motives not equal to cause (Art. 1351)
Ineffective (Art. 1352)
False cause (Art. 1353) if the statement is
false, its void
Presumption (Art. 1354)
a) Lawful
b) Existing
Lesion/ inadequacy (Art. 1355)
a) Not invalid
b) Unless FMU (fraud, mistake, undue
influence)

OBLIGATIONS
AND
CONTRACTS

immovable property; sales of real


property or of an interest therein
a 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)

CHAPTER 3
FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory,
in whatever form they may have been
entered into, provided all the essential
requisites for their validity are present.
However, when the law requires that a
contract be in some form in order that it
may be valid or enforceable, or that a
contract be proved in a certain way, that
requirement
is
absolute
and
indispensable. In such cases, the right of
the parties stated in the following article
cannot be exercised. (1278a)
Art. 1357. If the law requires a document
or other special form, as in the acts and
contracts enumerated in the following
article, the contracting parties may
compel each other to observe that form,
once the contract has been perfected.
This
right
may
be
exercised
simultaneously with the action upon the
contract. (1279a)
Art. 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

Atty. Chato Olivas-Gallo

Vda. De Espiritu vs. CFI Of Cavite


G.R. No. L-30486 October 31, 1972
Digested by: Pauline Grace Intal
Facts: On October 20, 1964, Maria San
Miguel Vda. de Espiritu (petitioner) filed a
complaint against Anastacia Topacio et al.
(respondents) alleging that in 1948, the
latter had verbally sold to her two parcels of
land for P3,000. Such was thereafter
delivered to her along with the titles;
however, no deed of sale was executed.
Topacio et al. promised to do so after the
titles were transferred to their names by their
predecessors in interest. But even after
repeated demands from the petitioner, the
defendants failed to comply with what was
required of them. In their answer, Topacio et
al. said that the transaction was not a sale
but merely a contract of antichresis wherein
the petitioner had loaned an amount of
P1,500 to them; in exchange, they had to
deliver to her the lands in question and their
corresponding titles as security plus the right
to collect the income from such properties.
Aside from this, Topacio et al. also said that
the action of the petitioner had prescribed,
the same having accrued in 1948. The lower
court ruled for the respondents.

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Issue: Has the action to compel the private
respondents to execute the deed of sale
prescribed?

right in maintaining that the applicable


provision here is Article 1145 which reads
thus:

Held: Yes, it has. Contrary to petitioners


contention that the action is imprescriptible
under Section 38 of Act 190 or the Code of
Civil Procedure, such action has indeed
prescribed because the Civil Code has
repealed such provision. Under the Civil
Code, only the following actions do not
prescribe: (1) to demand a right of way,
regulated in Article 649 and (2) to bring an
action to abate a public or private nuisance",
which are actions involving public policy.

ART. 1145. The following actions must be


commenced within six years:

At any rate, the contract entered into by the


parties in this case takes the form of an oral
contract, which cannot be considered
unenforceable by the Statute of Frauds
because such contract has already been
consummated by the delivery of the lands
and the titles to her. Article 1145 of the civil
code enumerates the actions that must be
commenced within 6 years, and an action
upon an oral contract is one of them. And
since the cause of action occurred in 1948,
and the case was filed in 1964, the action
has indeed prescribed.
Contracts under the Statute of Frauds
cannot be proved without the presentation of
a written agreement, unless one of the
parties waived the need for that by not
objecting to the presentation of oral
evidence OR has already received any
benefits from such contract (in this case, the
lands and the titles had already been
delivered to the petitioner- hence, the
contract is not considered unenforceable
under the Statute of Frauds even though it
takes the form of an oral contract). Contracts
may be of any form, provided that the
essential requisites for their validity are
present.
Ratio: In a broad sense, at least, the nature
of petitioner's action may be said to be one
founded on an oral contract, which, to be
sure, cannot be considered as among those
rendered unenforceable by the statute of
frauds, for the simple reason that it has
already been, from petitioner's own point of
view, almost fully consummated by the
delivery of the lands and the corresponding
titles to her. Consequently, respondents are

Atty. Chato Olivas-Gallo

(1) Upon an oral contract; In either case,


since the cause of action of petitioner
accrued in 1948 and the present suit was
instituted in 1964 or sixteen years later, and
none of the interrupting circumstances
enumerated in Article 1155 has been shown
to have intervened, it is unquestionable that
petitioner's action filed in the court below
has already prescribed.

General rule: Contracts shall be obligatory


in whatever form they may have been
entered into, provided all essential requisites
for their validity are present.
Exceptions:
A. When the law requires that the
contract be in a certain form to be
valid (1357-1358)
B. When the law requires that the
contract be in a certain form to be
enforceable (See Statue of Frauds).
The contract if valid but the right to
enforce cannot be exercises; need
ratification to be enforceable.
C. When the law requires that a
contract be in some form for
convenience of the parties; needed
only to bind third parties (1356).
ex:
public
documents
needed for the ff:
a.

contracts w/c object is


creation, transmission
or reformation of real
rights over immovable

b.

cession,
repudiation,
renunciation
of
hereditary rights/CPG

c. power to administer property for


another
d. cession of action of rights
proceeding from an act appearing in
a public inst.

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De La Salle University
e. all other documents where
amount involved is in excess of 500
( must be written even private
documents).
Kinds of formalities required by law:
A. Those required for the validity of
contracts:
a. Contracts which must appear in
writing

Art 748
Donation of
movable or personal property
whose value exceeds 500 pesos

Art 1874
Sale
of
piece of land through an agent

Art 1956
Agreements
regarding payment of interest in
contracts of loan

Art 2134
Contract of
antichresis amount of principal of
the interest
b.

Contracts which must appear in


a public document

c.

Art 749
Donation of
immovable
Art 1771 and 1773 Partnership
where immovable property or
real rights are contributed to the
common funds
Art 1358
See nos. 1, 3 , 4 of
the said article
Contracts
which
must
registered
Art 2140: Chattel Mortgage
Cattle Registration act sale or
transfer of large cattel

B. Those required not for the validity, but to


make the contracts effective as against
third persons such as those covered by
Article 1357 and 1358.
C. Those required for the purpose of
proving existence of the contract, such
as those under the Statute of Frauds in
Article 1403.
Articles 1357-1358 do not require
the execution of the contracts
either in a public or private
document in order to validate it but
only to insure efficacy, so that after

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

its existence has been admitted,


the party bound may be compelled
to
execute
the
necessary
document.

CHAPTER 4:
REFORMATION OF
INSTRUMENTS
Art. 1359. When, there having been a
meeting of the minds of the parties to a
contract, their true intention is not
expressed in the instrument purporting
to embody the agreement, by reason of
mistake, fraud, inequitable conduct or
accident, one of the parties may ask for
the reformation of the instrument to the
end that such true intention may be
expressed.
If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the
minds of the parties, the proper remedy
is not reformation of the instrument but
annulment of the contract.
Art. 1360. The principles of the general
law on the reformation of instruments are
hereby adopted insofar as they are not in
conflict with the provisions of this Code.
Art. 1361. When a mutual mistake of the
parties causes the failure of the
instrument to disclose their real
agreement, said instrument may be
reformed.
Art. 1362. If one party was mistaken and
the
other
acted
fraudulently
or
inequitably in such a way that the
instrument does not show their true
intention, the former may ask for the
reformation of the instrument.
Art. 1363. When one party was mistaken
and the other knew or believed that the
instrument did not state their real
agreement, but concealed that fact from
the former, the instrument may be
reformed.
Art. 1364. When through the ignorance,
lack of skill, negligence or bad faith on
the part of the person drafting the
instrument or of the clerk or typist, the
instrument does not express the true

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De La Salle University

intention of the parties, the courts may


order that the instrument be reformed.
Art. 1365. If two parties agree upon the
mortgage or pledge of real or personal
property, but the instrument states that
the property is sold absolutely or with a
right of repurchase, reformation of the
instrument is proper.
Art. 1366. There shall be no reformation
in the following cases:
Simple donations inter vivos
wherein no condition is imposed;
(2) Wills;
(3) When the real
agreement is void.
Art. 1367. When one of the parties has
brought an action to enforce the
instrument, he cannot subsequently ask
for its reformation.
Art. 1368. Reformation may be ordered at
the instance of either party or his
successors in interest, if the mistake was
mutual; otherwise, upon petition of the
injured party, or his heirs and assigns.

OBLIGATIONS
AND
CONTRACTS

payment. Ong now raises the defense of


prescription saying that their time to act has
already passed, the trial courts dismissed
the couples claim hence this appeal. This
complaint was filed on November 29, 1972.
Issue: Is the couple entitled to a reformation
of the contract of sale? Has their time of
action already prescribed?
Held: They are entitled to the reformation
and recovery of the title and their time of
action has not prescribed.

(1)

Art. 1369. The procedure for the


reformation of instrument shall be
governed by rules of court to be
promulgated by the Supreme Court.

Jayme vs. Alampay


G.R. No. L-39592 January 28, 1975
Digested by: Gallard Kevin Labares
Facts: The spouses loaned from their family
friend, Ong the sum of P16,500 on and as a
security, they mortgaged the land that they
have in Bacolod City, Lot 270-A for their
loan. However they did not know that the
stipulations of the contract were different
from that of the couples understanding. The
contract apparently was a deed of sale and
not of mortgage. The reason was that they
trusted Ong, who was a family friend and
because they were in dire need of money,
they did not expect that they are actually
entering into a deed of absolute sale. The
couples now pray for a reformation of the
contract since the amount of P16500 was
undervalued for them to sell their property.
The couple has also offered to pay their
balance to Ong but he has refused to accept

Atty. Chato Olivas-Gallo

Ratio: Petitioners' action for reformation


and recovery of title was brought on
November 29, 1972 less than eight years
after execution of the questioned deed on
December 24, 1964 and had therefore not
prescribed.
Respondent's counter-theory that the
questioned contract was in truth and reality
a bona fide sale is clearly a matter of
defense, which was yet to be established at
the trial and could not be availed of at the
pre-trial stage to dismiss the case as if it
were already a proven fact, contrary to the
very allegations of fact of the complaint
which petitioners must be given an
opportunity and their day in court to
establish.
Respondent court's other ground for
dismissal, to wit, that the existing P100.00mortgage of the property in favor of Jose del
Castillo (whom the parties have conceded to
be a mortgagee in good faith) constitutes an
impediment to petitioners' action as an
innocent party's "undisputed rights ... would
be impaired and prejudiced" is clear error.
It is obvious that the mortgagee's rights over
the property are recognized but that would in
no way defeat petitioners' action for
reformation and recovery of title to the
property. If petitioners prevail, they simply
would recover the title to the property,
subject to the mortgage thereon in favor of
del Castillo or as prayed for by them,
respondent may be duly sentenced "to
deliver title to the plaintiffs free from any
encumbrances including the mortgage to
defendant del Castillo" which merely means
that respondent would in such case be
obliged and sentenced to discharge del
Castillo's mortgage credit (which mortgage

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De La Salle University
loan he obtained after all for his own
exclusive benefit).
ACCORDINGLY, judgment is hereby
rendered setting aside the dismissal order of
June 10, 1974 and remanding the case to
respondent court for trial and adjudication on
the merits. Without pronouncement as to
costs. SO ORDERED.

SMB vs. Law Union


G.R. No. L-14300 January 19, 1920
Digested by: Kevin Gallard Labares
Facts: Properties of Henry Harding was
destroyed by fire, thus the insurance policies
are now being collected from Law Union and
Rock Insurance Company and Filipinas
Compania de Seguros, in the amount of
7500 php each. The party that was insured
is the San Miguel Brewery and not the
defendants. D. P. Dunn mortgaged the said
properties to secure the amount of 10,000
php and in this contract he assured that the
properties will be fully insured and the
contract allowed him to collect some of the
proceeds from the insurance policy to pay
for the remaining balance in case an
incident may occur against the property.
Antonio Brias then secured another 15,000
php worth of insurance and when the agent
inquired to who the property belonged to, no
answer was given. Harding, the new owner
now claims proceeds from the insurance
policies to be used as fulfillment of the
mortgaged property. When Dunn sold the
property to Harding, it was only the property
that was sold and not the insurance policies.
Issue: Can reformation be granted so that
the one who contracted the mortgaged may
also receive proceeds from the insurance
policy?
Held: No, Harding is not entitled to any
proceeds from the policy, the contract
cannot be reformed.
Ratio: We have before us a contract from
which by mistake, material stipulations have
been omitted, whereby the true intent and
meaning of the parties are not fully or
accurately expressed. There was a definite
concluded agreement as to insurance,
which, in point of time, preceded the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

preparation and delivery of the policy, and


this is demonstrated by legal and exact
evidence, which removes all doubt as to the
sense and undertaking of the parties. In the
agreement there has been a mutual
mistake, caused chiefly by that contracting
party who now seeks to limit the insurance
to an interest in the property less than that
agreed to be insured. The written agreement
did not effect that which the parties
intended. That a court of equity can afford
relief in such a case, is, we think, well
settled by the authorities. (Smell vs. Atlantic,
etc., Ins. Co., 98 U.S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract,
the proof must be of the most satisfactory
character, and it must clearly appear that the
contract failed to express the real agreement
between the parties. (Philippine Sugar
Estates
Development
Company vs. Government of the Philippine
Islands,
62
L.
ed.,
1177, reversing Government of Philippine
Island vs. Philippine
Sugar
Estates
Development Co., 30 Phil. Rep., 27.)
In the case now before us the proof is
entirely insufficient to authorize the
application of the doctrine state in the
foregoing cases, for it is by means clear
from the testimony of Brias and none
other was offered that the parties
intended for the policy to cover the risk of
the owner in addition to that of the
mortgagee. It results that the defendant
Harding is not entitled to relief in any aspect
of the case.

Ong Chua v Carr


G.R. No. L-29512 January 17, 1929
Digested by: Paula Betina Lucero
Facts: Henry Teck owned Lots Nos. 136
and 137 and the house on lot No. 132. His
wife, Magdalena Lim, owned lot No. 135. the
spouses sold the property in question to the
plaintiff, Ong Chua around June 20, 1923.
On June 17, 1923, Ong Chua executed a
public document granting to Magdalena Lim
the right to repurchase lot 135 for the sum of
P6,500 within four years from that date.
On June 20, 1923, he executed another
public document in which he agreed to sell

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OBLIGATIONS
AND
CONTRACTS

De La Salle University
lots Nos. 136, 137, and the house on lot 132
to Henry E. Teck for the sum of P13,500 at
any time within four years from date. Note
that neither one of the documents was
placed on record with the register of deeds.
July, 1925- Edward Carr was referred to
Ong Chua by a certain Atty. Moore to
purchase the lots in question since he is
interested in acquiring coconut lands. Ong
Chua stated to Moore that he consented to
sell the properties to Carr on the condition
that the sale should be subject to the rights
and for the reconveyance to the Teck
spouses and that said rights were to be
respected by the vendee.
July, 1926- Teck offered to repurchase the
property in question thereupon demanded of
Carr the reconveyance of the property. Carr,
however, refused to do so, claiming that he
had an absolute title to said property. It was
then that Ong Chua learned that no rights of
the spouses were mentioned in the deed.
Issue: Is Ong Chua entitled to the property,
which in turn will be reconveyed to Teck and
Lim?
Held: Yes. Reformation will be given "where
there is a mistake on one side and fraud or
unfair dealing on the other" (Devlin)
Ratio: Ong Chua was unfamiliar with the
English language in which the deed was
written, and it was natural for him to believe
in the actions of Carr, with whom he has
previous business relations with. Carrs
conduct constitutes fraud and was
calculated to obtain an unfair advantage
over the plaintiff when he harassed Moore to
give him the deed prematurely.

Reformation- a remedy by means of which a


written instrument is made or construed so
as to express or conform to the real intention
of parties when some error or mistake has
been committed.
I.

Reasons for
instruments:

reformation

of

A. Equity dictates the reformation of


instrument in order that the true

Atty. Chato Olivas-Gallo

intention of the contracting parties


may be expressed. 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.
B. Court does not attempt to make a
new contract for the parties, but only
to make the instrument express their
real agreement
C. Statute of Frauds is no impediment
to the reformation of the instrument
II.

Requisites:

A. Meeting of the mind of the parties


B. Their true intention is not
expressed in the instrument
C. Failure to express true intention is
due to mistake, fraud, inequitable
conduct or accident
D. Clear and convincing proof of
mistake,
accident,
relative
simulation, fraud or inequitable
conduct
In reformation the action presupposes a
valid and existing contract between the
parties and the document or instrument
did not correctly express the terms of the
agreement. On the other hand, in
annulment the contract was not validly
entered into as when their minds did not
meet or if the consent was vitiated.
Reformation gives life to the contract by
making the instrument conform to the
true intention of the parties while
annulment involves complete nullification
of the contract.
III.

Causes for reformation:

A. Mutual- instrument includes something


which should not be there or omit what
should be there.
Requirements:
a.
b.
c.
d.

Mutual mistake of the


parties (Art. 1361)
Mistake of fact (Art. 1363)
Clear and convincing
Causes
failure
of
instrument to express true
intention

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De La Salle University
B. Unilateral
Requirements:
a. One party was mistaken
b. One party acted fraudulently or
inequitably
c. Concealment of the knowledge
that the agreement did not state
their real intention
d. Party in good faith may ask for
reformation
C. Mistake of third persons due to
negligence, ignorance, lack of skill, bad
faith of drafter, clerk or typist.
D. Those specified by law in order to avoid
frustration of true intent (see articles
1361, 1363 and 1364).
IV.

Instances when there can be no


reformation
A. Oral contracts
B. Article 1366- there shall be no
reformation in the following cases
a. Simple donations inter vivos
wherein no condition is
imposed
b. Wills
c. When the real agreement is
void

Implied ratification (Art. 1367)- when one of


the parties has brought an action to enforce
an instrument, he cannot subsequently ask
for its reformation
V.

OBLIGATIONS
AND
CONTRACTS

control.
If the words appear to be contrary to the
evident intention of the parties, the latter
shall prevail over the former. (1281)
Art. 1371. In order to judge the intention
of
the
contracting
parties,
their
contemporaneous and subsequent acts
shall be principally considered. (1282)
Art. 1372. However general the terms of a
contract may be, they shall not be
understood to comprehend things that
are distinct and cases that are different
from those upon which the parties
intended to agree. (1283)
Art. 1373. If some stipulation of any
contract should admit of several
meanings, it shall be understood as
bearing that import which is most
adequate to render it effectual. (1284)
Art. 1374. The various stipulations of a
contract shall be interpreted together,
attributing to the doubtful ones that
sense which may result from all of them
taken jointly. (1285)
Art. 1375. Words which may have
different
significations
shall
be
understood in that which is most in
keeping with the nature and object of the
contract. (1286)

Who may ask for reformation

Art. 1376. The usage or custom of the


place shall be borne in mind in the
interpretation of the ambiguities of a
contract, and shall fill the omission of
stipulations
which
are
ordinarily
established. (1287)

A. Mutual mistake (Article 1368)- either


party or successor in interest
B. Mistake by one (Article 1362)injured party, heirs or assigns.

Art. 1377. The interpretation of obscure


words or stipulations in a contract shall
not favor the party who caused the
obscurity. (1288)

CHAPTER 5
INTERPRETATION OF
CONTRACTS
Art. 1370. If the terms of a contract are
clear and leave no doubt upon the
intention of the contracting parties, the
literal meaning of its stipulations shall

Atty. Chato Olivas-Gallo

Art. 1378. When it is absolutely


impossible to settle doubts by the rules
established in the preceding articles, and
the
doubts
refer
to
incidental
circumstances of a gratuitous contract,
the least transmission of rights and
interests shall prevail. If the contract is
onerous, the doubt shall be settled in

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favor of the greatest reciprocity of


interests.
If the doubts are cast upon the principal
object of the contract in such a way that
it cannot be known what may have been
the intention or will of the parties, the
contract shall be null and void. (1289)
Art. 1379. The principles of interpretation
stated in Rule 123 of the Rules of Court
shall likewise be observed in the
construction of contracts. (n)
I.

Primacy of Intention

I.

The literal meaning of the words used in


a written contract controls when the
terms used are clear and leave no doubt
upon the real intention of the parties.
II. Courts may not read into it any other
intention that would contradict its plain
import.
III. What is not found in the writing is
considered waived and abandoned.
IV. If alleged and proved that the intention
is another, there can be no other
evidence of the terms of the contract
other than the contents in the writing.
V. When doubt exists in the execution of
the contract, the least transmission of
rights and interest shall prevail if the
contract is gratuitous, and if onerous,
the doubt is to be settled in favor of the
greatest reciprocity of interest.
VI. When words used appear to contradict
the intentions, the intention prevails.
VII. The real agreement of the parties may
be proved as against the terms of the
written agreement, pursuant to the Parol
Evidence.
VIII. Mutual intent- in determining the
intention of the parties, it is the mutual
intent and not only the intent of one of
the parties which the court should look
into. Contemporaneous and subsequent
acts will also be considered.
In determining the intention of the parties,
the language used is primordial.
Conduct of the parties before and after will
be considered by the judge.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

In order to judge the intention of the


contracting parties, their contemporaneous
and subsequent acts shall be principally
considered.
Also take note of the usage and customs of
the place
General terms are not necessarily
comprehensive or distinct/different from
those agreed on
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.
When a stipulation may be interpreted in
several ways, the meaning most adequate
to make it legally effectual should be
followed.
If in 2 interpretations, one is valid and the
other is not, the valid one will be adopted.
Literal meaning is the most adequate
interpretation to render the contract effectual
When general and specific provisions are
inconsistent, the specific should govern

Bundalian vs. CA
G.R. No. L-55739 June 22, 1984
Digested by: Paula Betina Lucero
Facts: July 1, 1975- petitioners purchased 3
parcels of land (3,328 sq.m) for P499,200.00
located at San Juan, Rizal from Deceased
Agapita Sarao Vda. de Virata
July 2, 1975- the petitioners sold to the
private respondents the said parcels of land
for the same amount of P499,200.00,
subject to terms and conditions. The said
contract was denominated as Deed of Sale
with Right to Repurchase. One of the terms
and conditions was that the repurchase
price would escalate month after month,
depending on when repurchase would be
effected.

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De La Salle University
It was also stipulated in the same contract
that the vendor shall have the right to
possess, use, and build on, the property
during the period pending redemption.
August 26, 1976- the petitioners filed in a
petition before the CFI of Rizal to declare
the Deed of Sale with Right to Repurchase
and the portion in the deed regarding
accelerated repurchase price be declared
null and void for being usurious.
August 27, 1976- the private respondents, in
turn, filed a petition for the consolidation of
ownership on the ground that "more than a
year has elapsed since the execution of the
Deed of Sale with Right to Repurchase by
the vendor.Respondents argue that the
vendor has lost all his rights to avail himself
of the right to consolidate ownership of the
property subject of the Deed of Sale.
(Art.1607 in relation to Art. 1616, NCC)
Issue: May the deed of sale with right to
repurchase be counted as equitable
mortgage?
Held: Yes, it is considered as equitable
mortgage. Its purpose is to secure the return
of the money invested with substantial profit
or interest, a common characteristic of
loans.
Ratio: The contract was one of "loan
guaranteed by a mortgage" rather than a
conditional
sale
because
of
the
acknowledgement of the vendor to retain
possession of the land. Indeed, there can be
no question that petitioner Jose R.
Bundalian remained legally in possession of
the subject property. The increase per
month in the alleged redemption price is
shows that the transaction was really
intended by the parties to be a mortgage.

German and Co v Donaldson, Sim and


Co.
L-439 November 11, 1901
Digested by: Jerika Everly Marquez
Facts: Max Leonard Tornow is the sole
owner of a business running in Berlin and
Manila named German & Co. He appointed
Fernando Kammerzell as the manager of

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

the business through an instrument


executed
in Berlin, Germany. The
instrument was then authenticated by a
notary with the required formalities by the
domestic laws. It conferred the authority to
exact payment of sums of money due for
freight under a charter party by legal
means.
On the other hand, the defendants
claim that the power vested upon
Kammerzell was invalid since the power for
suits must be contained in a public
instrument. They also argue that it only
includes acts of administration and that in
order to execute any other acts, an express
commission is required.
Issue: Does the power vested on
Kammerzell include the power to recover a
sum of money?
Held: Yes, Kammerzell has the power to
recover the sum of money by filing a suit. It
cannot be interpreted that the principal
intended to withhold from his agent a power
necessary for effective management in the
absence of a clear language.
Ratio: But whether regarded as an act of
strict ownership or not, it appears to be
expressly and specially authorized by the
clause conferring the power to "exact the
payment" of sums of money "by legal
means." This must mean the power to exact
the payment of debts due the concern by
means of the institution of suits for their
recovery. If there could be any doubt as to
the meaning of this language taken by itself,
it would be removed by a consideration of
the general scope and purpose of the
instrument in which it occurs. (See Civil
Code, art. 1286.) The main object of the
instrument is clearly to make Kammerzell
the manager of the Manila branch of the
plaintiff's business, with the same general
authority with reference to its conduct which
his principal would himself possess if he
were personally directing it. It can not be
reasonably supposed, in the absence of
very clear language to that effect, that it was
the intention of the principal to withhold from
his agent a power so essential to the
efficient management of the business
entrusted to his control as that to sue for the
collection of debts.

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De La Salle University

In interpretation of ambiguities in a contract,


the usage or custom of the place where the
contract was executed will be considered.
The usage and custom may be used to fill
the omission of such stipulations.
I. Usage- repetition of acts
II. Custom- law or general rule which
arises from such repetition
III. Must be proved as a fact according to
the rules of evidence
A. Must be alleged in pleadings
B. Must be proved by evidence
either by testimony or by
documents of its existence
C. EXCEPTION- court may take
judicial notice of a custom if
there is already a decision
rendered by the same court and
had been affirmed on appeal
and is final and executor
IV. If the evidence is insufficient to establish
the existence of the custom, the alleged
custom is considered non-existent
V. If it is proved, it is presumed that the
person whose acts are the subject of the
controversy acted in accordance with
the custom of the place where the acts
were performed and not with the
customs of the place where the court is
located
A. Applies if there are different
customs in said places.
Kinds of Customs:
A. General Customs- customs which
prevail throughout the country and
become the law of the country, their
existence to be determined by the court.
a. in trade and business, one
which has long been followed in
all cases by all in the same
business and same territory,
and has been long established
B. Local Customs- prevail only in some
particular district or locality or in some
city, country or town
C. Particular Customs- nearly the same,
being such as affects only the
inhabitants of some particular district

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

a. If the customs and usages are


general, they may be proved
even if not specifically pleaded.
If it is a local one, they must be
pleaded.

Andreas vs. Bank of the Philippine


Islands
GR No. 23836 September 9, 1925
Digested by; Jerika Everly Marquez
Facts: H. R. Andreas, plaintiff, applied to the
Bank of Philippine Islands, defendant for a
foreign credit amounting to any sums not
exceeding five thousand and fifty pounds.
This is to enable him to purchase coal in
Sydney, Australia for the purpose of
shipping to Manila. The plaintiff wrote a
request for foreign credit which was
addressed to the defendant. The request
included the provisions of negotiating the
draft.
The drafts were promptly paid by the plaintiff
to the defendant. It also included the of
the one per cent commission specified in the
contract. However, the defendant also
charged the plaintiff an interest rate of nine
per cent per annum on the amount of each
draft negotiated. In the Australian custom,
the interest was already added in the price
of the coal and was made part of the amount
of the drafts the plaintiff is paying the
defendant. Hence, there is no need for the
Bank of New Whales to require or exact
another 9 percent interest.
The plaintiff argues that at the time of the
payment of such interest, he did not know or
understand the banking arrangements. He
was then informed that the Bank of New
Whales never received any portion of the
said interest. Hence, the plaintiff is
demanding for refund. The lower court
favoured the plaintiff asking the defendant to
give the amount being claimed with legal
interest from the date of filing of the
complaint.
Issue: Is the defendant entitle to the interest
of the money being paid by the plaintiff?
Held: No, such interest charges should have
been specified and provided for in the

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contract. Also, making interest charges
relied upon established custom and usage
should be alleged as a separate defense.
Ratio: If a custom be general in character,
and therefore presumed to be known by the
parties, the rule is that such custom may be
proved without being specially pleaded. This
is particularly true when a general custom is
offered in evidence to throw light upon a
contract, the terms of which are obscure,
and which is dependent upon evidence of
such general custom to make it plain. If, on
the other hand, the custom be local in
character, the party who proposes to rely
upon it should aver it in his pleadings, and a
local custom or usage applying to a special
or particular class of business may not be
proven to explain even the ambiguous terms
of a contract, unless the existence of such
custom or usage is pleaded. . . .
The application which the plaintiff signed in
the nature of a "request for foreign credit"
was accepted by the defendant, and in legal
effect it became the written contract
between the parties, and it is in writing, and
nothing whatever is said about the payment
of interest to the defendant. If it had been
the purpose and intent of the defendant to
collect and receive the interest in question, it
should have been specified and provided for
in the contract, and if in the making of such
interest charges the defendant relied upon
an established usage and custom, it should
have alleged that fact as a further and
separate defense, and the existence of them
would then become a question of fact.
It is contended that the plaintiff, having paid
the interest charges to the defendant, has
ratified the payment, and for such reason he
is now estopped to recover the money. That
would be true if he had paid such charges
with a full knowledge of all the facts.
Party who draws up a contract where there
are obscure terms shall not be favored in the
interpretation
Drafters must take extra care with the choice
of words or terms.

OBLIGATIONS
AND
CONTRACTS

the other party merely affixes his signature


signifying his admission thereto.
A. not invalid per se and not
entirely prohibited
B. binding
as
ordinary
contracts as being a take it
or leave it contract
C. prohibited when other party
is completely deprived of
the opportunity to bargain
on equal footing
D. any obscurity should be
construed
against
the
drafter
Government of the Philippine Islands vs.
Derham Brothers
G.R. No. 11904. October 9, 1917
Digested by: Othello Mendoza, II
Facts: Derham Brothers negotiated with the
Director of Lands to secure from the
Government a lease covering the Luneta
Fill. Derham Brothers addressed to the
Director the terms under which Derham
would take the property. Paragraph 4 of the
terms provides: "The rental and taxes to
commence upon the grading to the official
line and grade and metalling thereof of the
roadway of the streets of the three blocks on
the south, east and the west, contiguous to
said property, and the grading to the official
line and grade and metalling the roadway
thereof of the street on the north of said
property to its entire length. This provision is
made as it is absolutely necessary that we
have a direct outlet for our proposed
building." The contract called for the
metalling of the roadway of some streets but
the width of the roadway was not specified.
Derham took possession of the premises
and executed an assignment to the
International Banking Corporation wherein
they transferred their right to receive from
the Government the lease to the premises
when it should be formally executed. The
Government instituted an action to recover a
judgment against Derham for the use and
occupation of the premises since July 31,
1912 and to compel the bank to execute the
premises' lease.

Contract of Adhesion- document where the


terms are prepared by only one party while

Atty. Chato Olivas-Gallo

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Issue: How should paragraph 4 of the terms
be construed?
Held: The expression "roadway of the
street" does not contemplate that the
roadway should cover the width of the entire
street. It does not take into account the part
of the street which is or might be assigned
for pedestrian use. It cannot be insisted that
the street is incomplete within the meaning
of the contract. Derham Brothers is bound
by the qualifications of their offer.
Ratio: A contracting party is bound by that
interpretation of an ambiguous provision
which he knows the other party has
adopted; and on the other hand, if it was a
counterproposal, Derham Brothers accepted
it by taking possession of the property in
pursuance of said proposal.

Fieldmen's Insurance Co.. Inc. v. Vda. de


Songco
G.R. No. L-24833. September 23, 1968.
Digested by: Othello Mendoza, II
FACTS: Federico, a private jeepney owner,
paid a premium to Fieldmen's Insurance and
was issued a Common Carriers Accident
Insurance Policy covering his vehicle. Upon
payment of the corresponding premium, the
company extended its coverage. During the
effectivity of the policy, the vehicle while
being driven by Federico's son collided with
a car. Federico and his son died as a result
while the other passengers sustained
physical injuries of varying degrees.

rule on ambiguities has become necessary


in view of current business practices. The
courts cannot ignore that nowadays
monopolies, cartels and concentration of
capital,
endowed
with
overwhelming
economic power, manage to impose upon
parties dealing with them cunningly
prepared 'agreements' that the weaker party
may not change one whit, his participation in
the 'agreement' being reduced to the
alternative to 'take it or leave it' labeled since
Raymond
Saleilees
'contracts
by
adherence', in contrast to those entered into
by parties bargaining on an equal footing,
such contracts call for greater strictness and
vigilance on the part of the court of justice
with a view to protecting the weaker party
from abuses and imposition, and prevent
their becoming traps for the unwary. (Citing
Qua Chee Gan v. Law Union and Rock
Insurance Co., Ltd.).

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)
Applies to 2 kinds of doubts:
I.

On the incidental circumstances


under the first paragraph
II. Doubts on the principal object of the
contract
under
the
second
paragraph
Rules on doubts on incidental circumstances

Issue: Did the insurance company incur any


legal liability under the Common Carriers
Accident Insurance Policy issued to
Federico?
Held: Yes. Fieldmen's Insurance is not
allowed to escape liability under a common
carrier insurance policy under the pretext
that what was insured was a private vehicle
and not a common carrier, issued upon the
agent's
insistence
who
discounted
Federico's fears that his private vehicle
might not fall within its terms.
Ratio: Ambiguities or obscurities must be
strictly interpreted against the party that
caused them. This rigid application of the

Atty. Chato Olivas-Gallo

If gratuitous, the least transmission


of rights and interest shall prevail
If onerous, doubt shall be construed
in favor of the greatest reciprocity of
interests
Doubts on the principal object of the
contract which cannot be determine
the intentions makes the contract
void.

Language of a writing is to be interpreted


according to its legal meaning it bears in the
place of execution, unless parties intend
otherwise.

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De La Salle University
In construction of an instrument,
intention of the parties is to be pursued

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
instace, in which case the agreement must
be construed accordingly.
When the instrument partly written and other
is in a printed form, and are inconsistent, the
written one is controlling.

CHAPTER 6
RESCISSIBLE CONTRACTS
Art. 1380. Contracts validly agreed upon
may be rescinded in the cases
established by law. (1290)
Art. 1381. The following contracts are
rescissible:
(1) Those which are entered into by
guardians whenever the wards
whom they represent suffer
lesion by more than one-fourth of
the value of the things which are
the object thereof; (2) Those
agreed upon in representation of
absentees, if the latter suffer the
lesion stated in the preceding
number; (3) Those undertaken
in fraud of creditors when the
latter cannot in any other manner
collect the claims due them; (4)
Those which refer to things under
litigation if they have been
entered into by the defendant
without the knowledge and
approval of the litigants or of
competent judicial authority; (5)
All other contracts specially
declared by law to be subject to
rescission. (1291a)
Art. 1382. Payments made in a state of
insolvency for obligations to whose
fulfillment the debtor could not be
compelled at the time they were effected,
are also rescissible. (1292)

Atty. Chato Olivas-Gallo

Art. 1383. The action for rescission is


subsidiary; it cannot be instituted except
when the party suffering damage has no
other legal means to obtain reparation for
the same. (1294)
Art. 1384. Rescission shall be only to the
extent necessary to cover the damages
caused. (n)
Art. 1385. Rescission creates the
obligation to return the things which
were the object of the contract, together
with their fruits, and the price with its
interest; consequently, it can be carried
out only when he who demands
rescission can return whatever he may
be obliged to restore.
Neither shall rescission take place when
the things which are the object of the
contract are legally in the possession of
third persons who did not act in bad
faith.
In this case, indemnity for damages may
be demanded from the person causing
the loss. (1295)
Art. 1386. Rescission referred to in Nos. 1
and 2 of Article 1381 shall not take place
with respect to contracts approved by
the courts. (1296a)
Art. 1387. All contracts by virtue of which
the debtor alienates property by
gratuitous title are presumed to have
been entered into in fraud of creditors,
when the donor did not reserve sufficient
property to pay all debts contracted
before the donation.
Alienations by onerous title are also
presumed fraudulent when made by
persons against whom some judgment
has been issued. The decision or
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

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De La Salle University

by the law of evidence. (1297a)


Art. 1388. Whoever acquires in bad faith
the things alienated in fraud of creditors,
shall indemnify the latter for damages
suffered by them on account of the
alienation, whenever, due to any cause, it
should be impossible for him to return
them.
If there are two or more alienations, the
first acquirer shall be liable first, and so
on successively. (1298a)
Art. 1389. The action to claim rescission
must be commenced within four years.
For persons under guardianship and for
absentees, the period of four years shall
not begin until the termination of the
former's incapacity, or until the domicile
of the latter is known.
Rescissible Contracts
Definition
A. One which contains all the
essential requisites of a contract
which makes it valid, but by
reason of injury or damage to
either of the contracting parties
or to third persons, such as
creditors may be rescinded.
B. An action to rescind or an
accion pauliana must be of last
resort, availed only after all
other legal remedies gave been
exhausted
II.
Characteristics
A. It has all the elements of a valid
contract
B. It has a defect consisting in an
injury to one of the contracting
parties or third person, generally
in the form of economic damage
or lesions, fraud, and alienation
of property subject of case in
tort without the consent of the
litigants or of the court
C. It is valid and effective until
rescinded
D. It can be attacked only directly,
either by one of the contracting
parties or by an affected third
person, who is injured or
defrauded by the contract
I.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

E. It is susceptible of convalidation
only by prescription. Ratification
proper does not apply.
Distinction between Rescission in Article
1191 and Rescission Proper in Article
1381
Basis
Rescission
Rescission
in Art. 1191
Proper in Art.
1381
1. Nature
It
is
a It
is
a
principal
subsidiary
action
remedy.
retaliatory in
character
2.
The
only There are five
Ground/s
ground
is grounds
to
for
nonrescind
a
rescission performance rescissible
of
ones contract
obligation/s
enumerated in
or what is Art.
1381.
incumbent
Nonperformanc
upon him.
e by the other
party is not
important.
3.
It
applies It appeals to
Applicabilt only
to both unilateral
y
reciprocal
and reciprocal
obligations.
obligations.
4. Person Only a party Even
third
who can to
the person who is
institute
contract
prejudiced by
the action
may
the
contract
demand
may
demand
fulfilment or the rescission
seek
the of the contract.
rescission
(cancellation
)
of
the
contract.
5. Fixing Court may Court
cannot
of a period fix a period grant extension
or
grant of
time
for
extension of fulfilment of the
time for the obligation.
fulfilment of
the
obligation.
6.
Its purpose Its purpose is to
Purpose
it to cancel seek reparation
the contract. for the damage
or
injury
caused,
thus
allowing partial
rescission of a

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De La Salle University

contract.
Rescission by Mutual Consent is
rescission proper Art. 1381

not

This mutual backing out from the contract


is loosely referred to as mutual rescission.
However, it is not a rescission proper
because it is not based on any of the
grounds of rescission stated in Art. 1381 and
1382 but based on the will of the parties who
are withdrawing from their contract.
Requisites For An Action For Rescission
The contract subject of the action must
be a rescissible one, that is, it must be
one of those mentioned in Arts. 1381
and 1382.
The plaintiff must have no other
recourse to obtain reparation for the
damages he suffered except the
rescission of the contract (Art. 1383). It
must be noted, the actions is only
subsidiary.
The plaintiff must be able to return
whatever he is obliged to restore, if the
action would be sustained (Art.1385)
The object/s of the contract must not
have legally passed unto the ownership
or possession of a third person who is
acting in good faith (Art. 1385).
The action must be brought within the
prescription period, that is within (4)
years from the accrual of the cause of
the action (Art. 1389).
Right to rescind may be noted in the
Certificate of Title
Direct action is needed to attack a
rescissible contract, indirect attack is not
allowed.
Term Rescission under 1381 is
different from rescission under Art. 1191
and 1592
A. In Articles 1191 and 1592,
the rescission is a principal
action
which seeks the
resolution or cancellation of
the contract while in Art.
1381, the action is a
subsidiary one limited to
cases or rescission for
lesion as enumerated in

Atty. Chato Olivas-Gallo

said article. (Iringan v. CA


366 SCRA 41)
B. Rescission in 1191 and
1592 is ten years from the
time the right of action
accrues,
whereas,
the
action for rescission under
1381 is four years.
Rescissible Contracts Due to Economic
Lesion or Damage of More than 25% of
the value of the thing
C. Contracts
entered
by
guardians whenever the
wards whom they represent
suffer a lesion by more than
of the value of the thing
disposed can be rescinded.
D. If
guardian
alienates
properties of the ward
without judicial approval the
contract is unenforceable
for lack of authority.
Contracts Undertaken Deliberatley in
Fraud of Creditors
E. The fraudulent intent must
be proved. Without the
needed proof establishing
the fraudulent intent the
contract
cannot
be
rescinded.
Badges of Fraud
F. In determining whether or
not a certain conveyance is
fraudulent, the question is
whether the conveyance
was a bona fide transaction
or merely a trick or
contrivance
to
defeat
creditors.
Accion Pauliana Requisites
G. The plaintiff asking for
rescission has a credit prior
to the alienation.
H. The debtor has made a
subsequent
contract
conveying a patrimonial
benefit to a third person
I. The creditor has no other
legal remedy to satisfy his
claim
J. The act being impugned is
fraudulent

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De La Salle University
K. The third person who
received
the
property
conveyed, if it is by onerous
title, has been accomplice in
the fraud.
Accion Pauliana is incapable of
pecuniary
estimation,
Jurisdiction is with the Regional
Trial Court the court of general
jurisdiction.
Basis

1. Nature

2. Purpose

3. Possibility
of
satisfaction
of claim

4. Creditors
who
can
pursue the
case

Accion
Pauliana

There is a
true alteration
of property

To set aside
a
contract
validly
entered into

Satisfaction
of plaintiffs
claim is not
possible
except
through the
rescission.
Only
creditors prior
to
the
alienation
may file the
case

Action
to
Declare Nullity
of Absolutely
Simulated
Contract
There is
no
alienation
of
property but only
pretension
of
alienation
To declare the
inexistence
of
the
absolutely
simulated
contract which
prejudices
the
rights of a third
person and/or is
intended
contrary to law,
morals,
good
customs, public
order or public
policy.
Non-satisfaction
of
plaintiffs
claim
is
not
required

C. If the property is personal, the creditor


may apply for issuance of Writ of
Attachment.
Violation of Right of First Refusal
A. A contract of sale entered
into in violation of right of
first refusal if another
person
is
rescissible
(Conculada v. CA, 367
SCRA 164)
Applicability; Payments:
What is
rescissible are the payments for obligation
which are not yet due.
State of Insolvency understood in its
vulgar and not technical sense; a person is
considered insolvent when it is impossible
for him to fulfill his obligations because of
financial constraints.
Requisites of Action for Rescission
Under Article 1382
A. Payment or payments were
made by the debtor to a
creditor
B. Payment or payments were
made while the debtor is in
state of insolvency
C. Obligations paid were not
yet due and demadable
Nature of Action For Rescission, Only
Subsidiary

All
creditors,
whether before
or
after
the
simulation may
file the action.

Alienation of Thing/s Under Litigation


A. It is said to be under litigation when
summons and complaint seeking
rescission of the contract involving
property had been received by
debtor who alienates it.

Atty. Chato Olivas-Gallo

B. For the protection of the rights of the


complaining creditor, he should cause
the registration f a Notice of Lis
Pendens if real property is inovolved.

the
the
the
the

It is necessary to exhaust all other legal


means to obtain reparation. Otherwise, the
action will not prosper. This is a condition
precedent.
Persons Allowed to Institute the Action
A. Parties who suffered economic lesion
B. The affected creditor
C. Others authorized by law

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De La Salle University
Extent of Rescission
I.
The primary purpose of rescission is
reparation for the damage or injury
suffered either by a contracting
party or by a third person.
II.
Partial Rescission is allowed
Applicability of Mutual Restitution
I.
It can be carried out only when he
who demands rescission can return
whatever he may be obliged to
restore.
II.
Not applicable in cases where
creditors
are
rescinding
the
fraudulent contracts executed by
their debtors in favour of other
persons.
III.
In case the complaining party
cannot return whatever he may
have obliged to restore his case
may be dismissed.
IV.
If the property has already been
alienated in favour of a third person,
such as by way of sale, and he is in
good faith, the transfer of property to
him shall be respected.
V.
But if the transferee in good faith
received the thing gratuitously from
the debtor he is obliged to return it
VI.
Only the particular creditor/s who
instituted the action shall will be
benefited by the rescission allowed
by the court.

Goldenrod v. Court of Appeals


G.R. No. 126812. November 24, 1998
Digested by: Ma. Cristina Mojica
Facts: Barretto & Sons (later known as
Barretto Realty) owned 43 parcels of land in
Quiapo, Manila. These properties were
mortgaged to UCPB to pay a loan. But since
Barretto failed to pay, the properties were
foreclosed. Goldenrod, on seeing Barrettos
dilemma, made an offer to Barretto that it
would buy the properties. It also offered to
pay off the remaining balance of Barretto's
loan with UCPB and it paid Barretto PHP
1million as part of the purchase price. The
remaining balance would be paid once
Barretto had consolidated the titles of the
lots.

OBLIGATIONS
AND
CONTRACTS

Goldenrod asked for an extension. UCPB


agreed. However, when the extension date
arrived, Goldenrod asked for another
extension and this time, UCPB refused.
Meanwhile, Barretto had successfully
consolidated the lot titles incurring expenses
in the process of doing so.
Goldenrod informed Barretto & Sons (later
known as Barretto Realty), that it would not
be able to push through with their
agreement. It asked Barretto to return the
PHP 1 Million. However, Barretto, although
he received the message, did not give in to
Goldenro's rescission. Instead, it sold the
property that was part of their agreement to
Asiaworld. In Court, Barretto Realty argued
that the amount should be forfeited in their
favor because it was Goldenrod that did not
comply with the terms of their contract.
Issue: Should Goldenrod be paid back the
PHP 1 Million?
Held: Yes. Barretto was ordered by the
Court to pay Goldenrod the P1 million back
because 1) Goldenrod has decided to
rescind the sale, 2) the transaction was
called off and 3) the property was sold to a
third person.
Ratio: According to Article 1385 of the Civil
Code, rescission creates the obligation to
return the things which were the object of
the contract together with the FRUITS and
INTEREST.
By virtue of the extrajudicial rescission of the
contract to sell by petitioner (Goldenrod),
without opposition from the respondent
(Barretto), who in turn, sold it to a 3rd
person, as the vendor, Barretto had the
obligation to return the earnest money of
PHP 1 million plus legal interest from the
date it received notice of rescission from
Goldenrod. Not to do so would be unjust
enrichment to the prejudice of Goldenrod.
Rescission will not prosper when
property had already been legally
transferred to a third person. The
transfer will be respected if it is
acquired in good faith. However,
transferee in good faith who
acquired the property gratuitously is
not fully protected.

However, on the date that Goldenrod was


supposed to pay UCPB for the loan,

Atty. Chato Olivas-Gallo

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De La Salle University

Persons who caused the loss are


persons liable for indemnity for
damages.
Only the particular creditor or
creditors who instituted the action
will be benefited.:
Contracts entered into by guardians
and representatives which have
been approved by the court, cannot
be the subject of rescission.
Lack of opposition is deemed waiver
of the right to rescind.

to his son-in-law, Soterro Sadorra (the


husband of his daughter from his 1st
marriage). The transaction was done without
Isidora's consent. Prior to the sale to
Soterro, Soterro already knew that there
was a judgment rendered against his fatherin-law but proceeded to buy the property
anyway. When Isidora found out, she
instituted an action in Court (along with her
daughter) to recover the properties.

Fraud
A. Is deception.
B. It consists of any means or ways,
usually through insidious words or
machinations perpetrated by one of
the contracting parties, by reason
which , the other party is persuaded
to enter into a contract.

Held: Yes. Benigno alienated his property


despite there being a court judgment against
him. The court ordered a partition of the
remaining unsold lands between Isidora,
Sotero and the children of Benigno from his
first marriage.

I.

OBLIGATIONS
AND
CONTRACTS

Note: When a person acts, he is presumed


to be acting in good faith
Certain
Alienations
of
Property
Considered Fraudulent
A. Alienation by gratuitous titlea debtor donating his
property without reserving
sufficient property to pay all
his pre-existing debts.
B. Alienation by onerous titlewhen made by persons
against
whom
some
judgement
has
been
rendered in any instance or
some writ of attachment has
been issued.
Cabaliw v. Sadorra
G.R. No. L-25650, June 11 1975
Digested by: Ma. Cristina Mojica
Facts: Isidora Cabaliw was the 2nd wife of
Benigno Sadorra. The two got married on
March 15 1915 and during their marriage,
the bought 2 parcels of land in Nueva Ecija.
They also had a daughter- Soledad
Sadorra. Years later, the marriage turned
sour and Benigno Sadorra ABANDONED
his wife Isidora. This led to the latter filing an
action in court for SUPPORT. The Court
ruled in her favor, and Benigno was ordered
to pay her P75 a month. However, Benigno
did not pay and instead SOLD their property

Atty. Chato Olivas-Gallo

Issue: Is there a presumption of fraud?

Ratio: (Article 1387) Alienations by onerous


title are presumed fraudulent when made by
persons against whom some judgment has
been rendered or some writ of attachment
has been issued. Benigno was ordered by
the Court to pay Isidora support and he
failed to do so. Instead, he sold his
properties to his son-in-law.
The close relationship between Benigno and
his son-in-law, Soterro, is a BADGE of
FRAUD.
Soterro knew about the judgment against
Benigno but proceeded to purchase the
properties anyway. He cannot be said to be
a purchaser in good faith.
The presumption of fraud is not overcome
by the fact that the transactions were all
made in the nature of public instruments (the
deeds of sale) between Soterro and
Benigno.
Finally,
the
properties
sold
were
CONJUGAL PROPERTY. Thus, they cannot
be sold without Isidora's consent.
Requisites To Overcome Statutory
Presumption of Fraud
A. Conveyance in good faith
must be proven
B. Conveyance
must
be
sufficient
and
valuable
consideration

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De La Salle University
Note: The design to defraud creditors may
be proved in any other manner recognized
by law on evidence.
Alpuerto v. Perez Pastor and Roa
GR NO. 12794, October 14, 1918
Digested by: Reannah Reonal
Facts: Three parcels of property formerly
belonged to Juan Llenos and two of the
parties in this case are interested with such
property. The plaintiff, Alpuerto, is the one in
possession of the properties under a
contract of sale with pacto de recto. The
defendant, Perez, on the other hand, is the
purchaser at a public sale under an
execution directed at Llenos.
The plaintiff asks the court to make a
declaration that the plaintiff is the owner of
the land in full and absolute dominion and
prays that the sale of property to defendant
be declared null and void. As for the
defendant, he claims that the transaction by
which the plaintiff claims to have acquired
title is simulated and that the supposed
conveyance was effected for the purpose of
defrauding the defendant as the creditor.
The plaintiff then submitted a document
which purports to be a contract of sale with
the privilege of repurchase. It has been
executed on July 3, 1912 but it was not
acknowledge under a notary until December
3, 1914. However, it was noted by the court
that at the time of the said sale there was
already a long litigation being made
(pending for two years) regarding the action
of defendant to sought or recover money
from Juan Llenos and that Alpuerto being
the son in law have knowledge of it from the
beginning
Issue: Who is the rightful owner of the land?
Held: the defendant Perez. The sale to the
plaintiff is considered void because of the
suspicious circumstances attending the
alleged transaction which raised the
presumption of fraud, even part from the
presumption expressed in Article 1297 of the
Civil Code and that the purchaser did not
satisfactorily proved that he was a purchaser
in good faith. The secrecy of the purported
sale and the relationship of kinship existing

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

between the parties are noted


circumstances indicative of collusion

as

Ratio: The coexistence of numerous badges


of fraud in the conveyance of property,
made by a person against whom an action is
pending, is held as to create a presumption
of fraud sufficiently strong enough to justify
declaring the sale void.
Article 1291 subsection 3 states that
generally a contract executed in fraud of
creditors are subject to rescission, the
burden of proof is upon the person who
assails the transaction to show that the
transfer was fraudulent; though it should
here be remembered that proof on this point
may be accomplished by the aid of
presumptions, as in other cases.
Pascuala Abaya v. Roberto Enriquez Jr.,
Gliciera Enriquez, Artemio P. Jongco and
Nera Jongco
L-8988, May 17, 195
Digested by: Reannah Reonal
Facts: This is an appeal from the decision of
the court which found that the sale of the
parcel of land in question to have been
made in good faith and dismissing,
therefore, the complaint, as well as the
counterclaims.
Issue: Whether or not the sale should be
rescinded against the defendants?
Held: No, since there is no evidence that the
Jongcos acted in bad faith.
Ratio: where the judgment rendered against
the defendant, in an action in personam, has
not been entered into the records of the
register of deeds, relative to an immovable
belonging to the judgment debtor, the
subsequent sale of the property, by the latter
should not be rescinded upon the ground of
fraud, unless the complicity of the buyer in
fraud imputed to said vendor is established
by other means than the presumption of
fraud in Article 1297 of the Spanish Civil
Code.
Note: A rescissible contract, until finally
rescinded, is a valid contract. It cannot be
attacked collaterally.

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Badges of Fraud
To determine whether or not a
certain conveyance is fraudulent, it
must be proven that it prejudiced the
right of creditors.
Circumstances showing badges or marks
of fraud:
I.
Consideration
paid
for
the
conveyance is inadequate.
II.
Transfer made by a debtor after suit
has been filed and while it is
pending against him
III.
Sale on credit made by an insolvent
debtor
IV.
The presence of evidence of large
indebtedness
or
complete
insolvency of the debtor
V.
Transfer of all or nearly all of the
debtors property especially when
insolvent or financially embarrassed
VI.
Transfer is made between father
and son and any of the above
circumstances is present.
VII.
The failure of the buyer to take
exclusive possession of all the
property he had purchased from the
seller.
A transferee in bad faith will be liable to
return the property to the creditor who had
successfully institute a complaint for
rescission.
If restitution is not possible, the transferee in
bad faith will be liable to pay indemnity to
the suing creditor for damages the latter
suffered by reason of alienation.
If the first transferee is in bad faith, the
liability of the second transferee will now
depend upon his good faith or bad faith.
Prescriptive Period
Prescriptive period within to file
rescissory action is four years.
Notes:
A. The liability of the transferee in bad
faith is solidary with that of the
transferring debtor as both of them
are guilty of fraud.
B. They may also be criminally liable
for fraudulent insolvencyany
person who shall abscond with his
property to the prejudice of his
creditors.

Atty. Chato Olivas-Gallo

CHAPTER 7
VOIDABLE CONTRACTS
Art. 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)
Art. 1391. The action for annulment shall
be brought within four years.
This period shall begin:
In cases of intimidation, violence or
undue influence, from the time
the defect of the consent ceases.
In case of mistake or fraud, from
the time of the discovery of the
same.
And when the action refers to contracts
entered into by minors or other
incapacitated persons, from the time the
guardianship ceases. (1301a)
Art. 1392. Ratification extinguishes the
action to annul a voidable contract.
(1309a)
Art. 1393. Ratification may be effected
expressly or tacitly. It is understood that
there is a tacit ratification if, with
knowledge of the reason which renders
the contract voidable and such reason
having ceased, the person who has a
right to invoke it should execute an act
which necessarily implies an intention to
waive his right. (1311a)
Art. 1394. Ratification may be effected by
the guardian of the incapacitated person.
(n)
Art. 1395. Ratification does not require
the conformity of the contracting party
who has no right to bring the action for
annulment. (1312)

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Art. 1396. Ratification cleanses the


contract from all its defects from the
moment it was constituted. (1313)
Art. 1397. The action for the annulment of
contracts may be instituted by all who
are thereby obliged principally or
subsidiarily. However, persons who are
capable cannot allege the incapacity of
those with whom they contracted; nor
can those who exerted intimidation,
violence, or undue influence, or
employed fraud, or caused mistake base
their action upon these flaws of the
contract. (1302a)
Art. 1398. An obligation having been
annulled, the contracting parties shall
restore to each other the things which
have been the subject matter of the
contract, with their fruits, and the price
with its interest, except in cases provided
by law.
In obligations to render service, the value
thereof shall be the basis for damages.
(1303a)
Art. 1399. When the defect of the contract
consists in the incapacity of one of the
parties, the incapacitated person is not
obliged to make any restitution except
insofar as he has been benefited by the
thing or price received by him. (1304)
Art. 1400. Whenever the person obliged
by the decree of annulment to return the
thing can not do so because it has been
lost through his fault, he shall return the
fruits received and the value of the thing
at the time of the loss, with interest from
the same date. (1307a)
Art. 1401. The action for annulment of
contracts shall be extinguished when the
thing which is the object thereof is lost
through the fraud or fault of the person
who has a right to institute the
proceedings.
If the right of action is based upon the
incapacity of any one of the contracting
parties, the loss of the thing shall not be
an obstacle to the success of the action,
unless said loss took place through the

Atty. Chato Olivas-Gallo

fraud or fault of the plaintiff. (1314a)


Art. 1402. As long as one of the
contracting parties does not restore what
in virtue of the decree of annulment he is
bound to return, the other cannot be
compelled to comply with what is
incumbent upon him.
Voidable Contract
Definition
One which has all the essential
elements of a valid contract, except
that the element of consent is
vitiated or weakened either by the
incapacity of one of the contracting
parties, or by mistake, violence,
intimidation, undue influence or
fraud
One in which the essential
requisites for validity under Article
1318 of the Civil Code are vitiated
by want of capacity, error, violence,
intimidation, undue influence, or
deceit (Francisco vs. Herrera, 392
SCRA 317)
Status of Voidable Contract
Valid and obligatory between the
parties before its final annulment
May only be attacked directly ,
either by an action for that purpose
(annulment) or by seeking its
annulment in a counterclaim and not
merely by way of special or
affirmative defense
Binding unless annulled by a proper
action in court
Ratification
An act by virtue of which efficacy is
given to a contract or obligation
which suffers from a vice of curable
nullity
Voidable contracts are susceptible
of ratification
If not assailed within four years from
the time the cause of action for
annulment has accrued, the contract
is said to have been convalidated by
prescription.
o Therefore, it is no longer
subject to attack

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Voidable Contracts Distinguished from
Void Contracts
Basis
Voidable
Void
Contracts
Contracts
1. Nature of Consent of Consent
is
defect
one of the absent or is
parties
is lacking.
vitiated.
Presence of
other defects
will
also
render
a
contract void
(Art. 1409).
2. Effectivity
Effective
Ineffective
and binding because
it
until
does
not
annulled.
exist
in
contemplatio
n of the law.
3.
Susceptible
Not
Susceptibility of
susceptible
to
consolidatio to
consolidation n
by consolidation
ratification
by ratification
or
by or
by
prescription. prescription
(Art. 1409).
4.
Action
for Action
or
Prescriptibilit annulment
defense
y of action prescribes.
based on its
for its
inexistence
or absolute
nullity does
not prescribe
(Art. 1410).
5. Waiver of Defect may Right to set
defect
be waived.
up
the
defense
of
illegality
cannot
be
waived (Art.
1409,
last
par.).

Basis

Damage Not Essential To Render A


Contract Voidable
The contracts enumerated in Article
1390 are voidable even if no
damage is suffered by any of the
contracting parties. The same could
be annulled just the same (Fule vs.
CA, 286 SCRA 698 [1998])

Remedy of Annulment Distinguished


from Other Remedies in Attacking
Defective Contracts
The remedy of annulment applies to
voidable contracts (Art. 1390);
The remedy of rescission applies to
rescissible contracts (Art. 1380);
The remedy of declaration of nullity
applies to void or inexistent
contracts (Art. 1409).

Voidable Contract Distinguished From


Rescissible Contract

Atty. Chato Olivas-Gallo

1. Nature of
defect

Voidable
Contract
Defect
is
intrinsic.
There is a
vice
of
consent
which
vitiates
consent.

2. Effect of
damage or
prejudice

Whether
there
is
damage or
not, contract
is voidable.

3. Basis of
defect

Annulability
of
the
contract
is
based
on
law.
Public
interest
predominate
s.
It
is
susceptible
to
ratification.
It
is
a
sanction.

4.
Predominanc
e of public
interest
5.
Susceptibility
to ratification
6. Sanction

7. Persons
who
can
assail
contract
8. Nature of
action
pursuable

Only parties
to
the
contract can
assail it.
Action is a
principal
action.

Rescissible
Contract
Defect
is
external. It
consists in
damage or
prejudice
suffered by
one of the
contracting
parties or a
third person
like
a
creditor.
If there is no
damage or
prejudice,
contract
cannot
be
rescissible.
Rescissibility
of
the
contract
is
based
on
equity.
Private
interest
predominate
s.
Not
susceptible
to
ratification.
It is not a
sanction but
a remedy.
Third
persons who
are affected
my assail it.
Action
is
subsidiary.

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For an accurate denomination of the
complaint and proper allegations of ultimate
facts therein, the differences of the avoid
remedies or actions must be strictly
considered.
Defenses
The defendant may put up the
defense of annulability or relative
nullity of a voidable contract and the
absolute nullity of a void or
inexistent contracts.
In the better case, the action or
defense for the declaration of the
inexistence of the contract does not
prescribe (Art. 1410).
Applicability of Article 1391
L. Applies only to the parties in
the contract
M. It does not apply to third
persons when the law
allows them to question the
validity
of
a
contract
(Guinoo vs. CA, 97 Phil,
235).
Prescription of Action for Annulment
Actions prescribe by the mere lapse
of time fixed by law (Art. 1139).
One of the grounds for extinguishing
obligations (Art. 1231).
Failure to pursue an action within
the period prescribed by law will
have the effect of extinguishing the
action.
After the action has prescribed, the
contract could no longer be set
aside
When the contract is voidable at
most, the four-year prescriptive
period under Article 1391 applies
Time of Reckoning of the Four-Year
Period
Depends on the kind of defect vitiating the
consent:
If the vice consists in (a)
intimidation, (b) violence or (c)
undue influence, the reckoning
begins from the cessation of such
vice.
If it consists in (a) mistake or (b)
fraud, the reckoning beings from the
discovery thereof.
If it consists in the incapacity of the
contracting party (like minority or

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

insanity) who is under guardianship,


the reckoning beings from the
cessation of the guardianship.

Fraud Thru Public Instruments Involving


Lands Registered Under the Torrens
System; Special Reckoning Period
With
regard
to
fraudulent
conveyances
registered
with
Registry of Property, the prescriptive
period is counted not from the actual
knowledge of the fraud by the
plaintiff but the from the registration
of the public document with the said
Registry
The act of registration is a notice to
the whole world
o It is the operative act which
binds
registered
lands
under the Torrens System
Hence the period of prescription
begins not from the discovery of the
fraud bt from the registration of the
fraudulent instrument
Confirmation,
Ratification
And
Recognition,
(Or
Acknowledgment);
Concepts; Distinctions
Confirmation previously used to
refer to the act of curing a voidable
contract of its vice or defects
Ratification originally used
exclusively to refer to the act by
which a contract entered into by
someone in behalf of another
without authority or in excess of
authority is cured of its vice or
defect by the subsequent act or
conduct of the latter.
Recognition or acknowledgment
used to refer to an act whereby a
defect of proof in the contract is
cured no more distinction between
the three terms
o all referred to as ratification
Concept of Ratification
An act or means by virtue of which
efficacy is given to a contract which
suffers from a vice of curable nullity
(8 Manresa 665)
o Concept covers voidable
contracts
Act of curing the defect of lack of
authority or defect due to excess of
authority of the party who entered

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into the contract in the name of
another
without
the
latters
authorization
o The concept specifically
refers
to
unforceable
contracts (Arts. 1405 and
1407).
Coverage of the Term Ratification Made
Broader
Ratification now covers both the
ideas
of
confirmation
and
acknowledgment
It may be defined as the validation
of a transaction otherwise without
validity or partly valid
Requisites of Ratification
The contract is a voidable one (Art.
1390)
The confirmation is made by the
injured contracting party.
The confirming party has full
knowledge of the vice or defect of
the contract.
The cause of voidability should have
already ceased or disappeared at
the time of the ratification
o Otherwise, if the cause of
voidability is still present,
the act of confirmation
would also suffer from the
very vice or defect it is
attempting to cure
Note: These requisites will be applicable to
the ratification of unenforceable contracts
except that the ratifying person need not be
the one who had directly participated in the
act which is the object of the ratification.
Forms of Ratification
Express takes place when the
desire of the innocent party to
convalidate the contract, or his
waiver or renunciation of his right to
annul the contract is clearly
manifested verbally or formally in
writing.
Tacit or Implied takes places
when the innocent party will full
knowledge of the vice which renders
the contract voidable, and the same
having ceased already, he executed
act/s or displayed a conduct which
necessarily implies his intention to

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

waive his right to annul the contract


(Art. 1393).
Effect of Lapse of Time
an injured party in a contract who
remained silent for a certain period
of time is deemed to have ratified
such a contract a contract
a voidable contract if not questioned
within the prescriptive period of the
action for annulment remains valid
and effective
Effects of Ratification
The contract is purged or cleansed
of its defects from the moment of its
constitution or establishment. The
validation is retroactive to the day of
its creation.
Corrolarily,
there
being
a
convalidated contract which is
clean, any action for its annulment is
extinguished
An annullable contract may be
rendered
perfectly
valid
by
ratification, which can be express or
implied
Right to Ratify is a Transmissible Right
The right to ratify, if not exercised by the
proper party during his lifetime, may be
exercised by his heirs it being a
transmissible right
Effect of Lack of Ratification
A defective contract like a voidable
one, if not ratified, remains valid
until annulled
Within the prescriptive period for the
filing of an action for annulment, the
contract is open to assailment
An unenforceable contract if not
ratified remains ineffective and
cannot be enforced
Void Contracts, Not Ratifiable
Void contracts cannot be ratified
because in the contemplation of the
law, they do not exist (Art. 1410)
Only existing contracts, though
defective, may be ratified.
Contracts Entered into by Incapacitated
Persons May be Ratified by their
Guardians

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The guardian of those incapacitated


to consent to a contract may effect
the ratification of the defective
contract (Art. 1394 and 1407)
If the incapacitated persons become
capacitated or regained their
capacity, they may themselves ratify
their defective contracts

In case of doubt in the interpretation of


laws it is presumed that the lawmaking
body intended right and justice to prevail
(Art. 10).

Persons Who Can Institute Action For


Annulment

Conformity of the Party Who Has No


Right to Bring an Action for Annulment,
Not Needed
It is the innocent party who has the
prerogative to annul or not a
voidable contract
The one who caused the vice of
consent personally or through a
third person is not allowed to file a
case of annulment because of the
principle that he who comes to
court, must come with clean hands,
and a guilty party is not allowed to
benefit from his own wrong
Thus, no need to require the
conformity of the said contracting
guilty party before the innocent party
may ratify the defective contract
o To require such conformity
as a condition precedent,
the guilty party can scheme
a way to back out of the
contract by just refusing to
give his conformity
o Absurdity will then result
which cannot be
the
contemplation of the law
Consequences Of Ratification. Oneof the conse-quences of ratification
of the contract is its legal purifica- tion
and its being made as a regular and
untainted contract.
The cleansing of the voidable contract
retroacts to the time of its constitution
(Art. 1396).
Action for annulment of the contract
based on its original curable defects can
no longer prosper after its due
ratification or confirmation (Tang Ah
Chan vs. Gonzalez, 52 Phil. 180).
Exception ToThe Effect Of Retroactivity. The rule of retroactivity shall not
prejudice the rights of innocent third
persons for that will result in injustice
which is not the intention of the law.

Atty. Chato Olivas-Gallo

Only by persons who are parties


bound
either
principally
or
subsidiarily by the contract and who
are innocent of the act or acts
constituting the reason for the
voidability or annullability of the
contract.
The plaintiff must be persons with
interest in the contract

JOSEPH N. WOLFSON vs. THE ESTATE


OF FRANCISCO MARTINEZ, deceased
G.R. No. L-5970; October 13, 1911
Digested by: Danilo Rico, Jr.
Facts: There was a contract agreement
between Mariano Yap-Tuangco and Attys.
Joseph N. Wolfson and BasilioRegalado y
Mapa where their service fees for
prosecuting the case of Mariano is 50% of
whatever amount might be obtained in the
judgment. When Judge Sweeney decided
the case, he ordered the deceased
Francisco Martinez to pay P12, 000 in favor
of Mariano. BasilioMapa assigned his
interest in said contract to Wolfson so,
Mariano in fulfillment of the cotract for value
received, sold and transferred and delivered
to Wolfson all his right, title and interest in
the saidjudgment. The estate of the Martinez
filed a case invoking that the contract
between Maraiano and Wolfson was null
and void because lawyers are prohibited
from purchasing the property and rights of
their clients which may be the object of the
litigation under Art. 1459 of the Civil Code.
Issue: Could a contract be attacked for
being null and void by a third person?
Held: No, the estate of Martinez cannot
attack the contract between Mariano and
Wolfson because he is a third party to the
contract and was not bound by the said
instrument either principally or subsidiarily in
accordance with Art. 1302 (now Art. 1397) of
the Civil Code. Action for annulment may be

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instituted only be persons who are parties
bound either principally or subsidiarilly by
the contract. The petitioners must be
persons with interest in the contract.
Ratio: "Considering the question from the
point of view of the civil law, the view taken
by the code, we must limit ourselves to
classifiying as void all acts done contrary to
the express prohibition of the statute. Now
then: As the code does not recognize such
nullity by the mere operation of law, the
nullity of the acts hereinbefore referred to
must be asserted by the person having the
necessary legal capacity to do so and
decreed by a competent court." (Manresa,
Spanish Civil Code, vol. 10, p. 108.)
Manresa, Spanish Civil Code, vol. 8, p. 737
commenting on Art. Art. 1302 (now Art.
1397) of the Civil Code: "Two different
requisites are required to confer the
necessary capacity for the exercise of such
action. With each of the said requisites the
two paragraphs of this section deal
separately. The first requisite is that the
plaintiff must have an interest in the
contract. The second is that the victim and
not the party responsible for the defect is the
person who must assert the same."
Meaning Of Principal and Subsidiary
Liability
A. The liability of the principal party is
principal liability and that of a
subsidiary party is subsidiary liability.
B. Illustration: The principal debtor is
principally bound to the creditor while
the guarantor is only subsidiarily
bound.
C. The guarantor becomes liable only if
the debtor has no property to answer
for his obligation and only after all
proper remedies against the debtor had
been resorted to but failed (See Art.
2058).
Contract Between Capacitated And
Incapacitated Persons.A. Where the contract is between a
person who has full civil capacity
and one who has no capacity to give
consent to a contract such as a
minor or an insane per- son, the
former cannot invoke the incapacity
of the latter to set aside the contract

Atty. Chato Olivas-Gallo

OBLIGATIONS
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B. He who comes to court must come


with clean hands.
Effect if Minor Is The One Guilty Of Vices
Of Consent.A. If it is the minor who is guilty of the
vices of consent, can he invoke his
minority to set aside the contract?
a. According to Gasperi (1 Gasperi
686), for having employed illicit
means to make or induce the
other party to enter into the
contract with him, the reason for
conferring
him
the privilege of annulling the
contract ceases.
b. Hence, he must not be allowed
to employ his own fault or wrong
as the very basis to set aside
the contract.
c. Thus, in the case of Mercado
vs. Espiritu, 37 Phil. 215,
the Supreme Court held
that the sale of land
effected by minors who
have passed the age of
puberty
and
adolescence
and
nearing the adult age,
and pretending actively
in the contract, that they
are of age when in truth
they are not, were not
permitted to excuse
themselves
from
complying with their
obligations under the
contract.
They cannot seek the
annulment
of
the
contract based on the
rules of estoppel (Rule
131, Section 2 [a],
RRC).
d. Subsequently, in the case of
Young vs. Tecson, the Supreme
Court held that
a minor can never be
guilty
of
estoppel
because he is not liable
for his conduct or act.
e. But in 1950, in the cases of Sian
Suan and Chiao vs. Alcantara,
85 Phil. 669 and Hermosa, Jr.

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vs. Zobel (104 Phil. 769) the
Supreme Court changed its
stand and reiterated its ruling in
the Mercado case (37 Phil.
215).
f.

More recently, however, in the


case of Braganza vs. Villa
Abrille, 105 Phil. 456, the
Supreme Court held that
if the misrepresentation
as to the age of the
minors
is
active
meaning, the minors
specifically stated in the
deed that they were of
legal age, they will be
estopped from annulling
their contract based on
their minority.
But,
if
the
misrepresentation as to
the minors' age is just
passive
meaning,
there is failure to
disclose their minority,
they may be allowed to
annul the contract.

ROSARIO L. DE BRAGANZA, ET AL., vs.


FERNANDO F. DE VILLA ABRILLE
G.R. No. L-12471; April 13, 1959
Digested by: Danilo Rico, Jr.
Facts: Rosario L. de Braganza and her sons
Rodolfo (18yrs old) and Guillermo (16yrs
old) borrowed from the defendant Fernando
Villa Abrille P70,000 in the form of Japanese
military notes. They promised in writing to
pay him P10, 000 in legal currency of the
Philippine Island 2 years after the war plus
2% per annum. Since payment has not been
made, Villa Abrille sued them but the
petitioners invoked the defense of minority
of Rodolfo and Guillermo when they signed
the promissory note.
Issue: Can Rodolfo and Guillermo be held
liable?
Held: No, if the misrepresentation as to the
age of the minors is active or they
specifically stated in the deed that they were
of legal age, they will be estopped from
annulling the contract. But if the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

misrepresentation is passive or 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 or minority. However, they may not
be entirely absolved from monetary
responsibility. In accordance with the
provisions of Civil Code, even if their written
contact is unenforceable because of
minority, they shall make restitution if they
have profited by the money they received.
(Art. 1340) There is testimony that the funds
delivered to them by Villa Abrille were used
for their support during the Japanese
occupation.
Ratio: According to CorpuzJurisSecundum,
43 p. 206: "...Some authorities consider that
a false representation as to age including a
contract as 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 misrepresentation is not a part of, and
does not grow out of, the contract, or that
the enforcement of liability for such
misrepresentation as tort does not constitute
an indirect of enforcing liability on the
contract. In order to hold infant liable,
however, the fraud must be actual and not
constructure. It has been held that his mere
silence when making a contract as to age
does not constitute a fraud which can be
made the basis of an action of decit.
Also, in 27 American Jurisprudence, p. 819:
"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."
Development Bank of the Philippines v.
Court of Appeals
No. L-28774, February 28, 1980
Digested by: Darwin Perry Rubio
Facts: On October 20, 1955, the
Development Bank of the Philippines (DBP)
bought 91,188.30 square meters of land,
consisting of 159 lots, in the proposed
Diliman Estate Subdivision, West Triangle,
Quezon City, of the Peoples Homesite and
Housing Corporation (PHHC). However,

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De La Salle University
notwithstanding the sale of the lots to DBP,
Lots 2 and 4, which form part of said 159
lots, were still sold by PHHC to the spouses
Honesto and Elisa Nicandro, for which, on
November 6, 1958, 2 deeds of sale were
issued to them by PHHC. Upon learning of
PHHCs previous transaction with DBP, the
spouses filed a complaint against DBP and
the PHHC before the Court of First Instance
Rizal (CFI), to rescind the sale of Lots 2
and 4 by PHHC in favor of DBP. After trial,
the CFI held that the sale of Lots 2 and 4, to
DBP is null and void, for being in violation of
Section 13 of the DBP Charter. On appeal
by DBP, the Court of Appeals (CA) affirmed
the decision of the CFI. Still not contented,
DBP appealed the decision of the CA before
the Supreme Court.
Issue: Do the spouses possess the legal
personality to question the legality of the
sale?
Held: Yes. It cannot be denied that the
spouses stand to be prejudiced by reason of
their payment in full of the purchase price for
the same lots which had been sold to DBP
by virtue of the transaction in question.
Ratio: The general rule is that the action for
the annulment of contracts can only be
maintained by those who are bound either
principally or subsidiarily by virtue thereof.
There is, however, an exception to the rule.
The (Supreme) Court in Teves v. People's
Homesite and Housing Corporation (23
SCRA 1141) held that "a person who is not
obliged principally or subsidiarily in a
contract may exercise an action for nullity of
the contract if he is prejudiced in his rights
with respect to one of the contracting
parties, and can show the detriment which
could positively result to him from the
contract in which he had no intervention."
I.
Applicability
A. The Article applies only if the contract had been consummated.
B. If the contract has not been
performed yet, it is understood,
there
is
no
obligation
to
restore as nothing had been
received by the parties.
II.

Duty Of Mutual Restitution


A. If the obligation has been annulled,
the contracting parties shall restore

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

to one another what they have


received by virtue of the contract.
This duty of mutual restitution
covers:
a. The return of things received
together with the fruits or the
value thereof.
b. The return of the subject
matter with interest at the legal
rate (Art. 2209).

Municipality of Cavite v. Hilaria Rojas and


TiungSiuko
No. 9069, March 31, 1915
Digested by: Darwin Perry Rubio
Facts: The municipal council of Cavite by
resolution No. 10, dated July 3, 1907, leased
to the Hilaria Rojas some 70 or 80 square
meters of Plaza Soledad, on condition that
she pay rent quarterly in advance according
to the schedule fixed in Ordinance No. 43,
series of 1903 and that she obligate herself
to vacate said land within sixty days
subsequent to notification to that effect.
Upon such notification, however, she
refused to vacate the land, thus forcing the
municipality to file a complaint before the
Court of First Instance Cavite (CFI) to
order her to vacate the land. After a hearing
of the case, wherein both parties submitted
parol and documentary evidence, the CFI
dismissed the complaint. Aggrieved, the
municipality appealed the decision before
the Supreme Court.
Issues: (1) Is the contract valid?
(2) What are the obligations of the
parties?
Held: (1) No. Article 1271 of the Old Civil
Code, prescribes that everything which is
not outside the commerce of man may be
the object of a contract, and plazas and
streets are outside of this commerce.
(2) Hilaria Rojas must restore and
deliver possession of the land described in
the complaint to the municipality of Cavite,
which in its turn must restore to her all the
sums it may have received from her in the
nature of rentals just as soon as she
restores the land improperly leased.

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Ratio: Communal things that cannot be
sold because they are by their very nature
outside of commerce are those for public
use, such as the plazas, streets, common
lands, rivers, fountains, etc.
ANDREA DUMASUG, plaintiff -appellee, vs.
FELIX MODELO, defendant-appellant.
G.R. No. L-10462 March 16, 1916
Digested by: Maria Patricia Salas
Facts: Dumusug filed a complaint to CFI
praying that the sale sale of her carabao and
2 parcels of land to defendant Modelo be
nullified because her consent was obtained
in fraud. Modelo made her believe that the
document was only an acknowledgment of
Dumusug's loan from Modelo for P101 for
the work Modelo had done in connection
with 2 actions brought by Dumusug to
recover her land. Dumusug found out that
she was defrauded 3 months after she
signed such document when Modelo,
against her will got her properties by
intimidation and force. She also stated that
she
only
signed
one
contract.
Modelo'sdefense is that Dumusug owed her
P333 because he was the one who paid for
the expense of Dumusug's travel to Cebu
twice as well as the witness brought by
Dumusug to Cebu.
Issue: Is the document presented by
Modelo showing the sale of Dumusug's
carabao and parcels of land valid?
Held: No, because the statements of
MOdelo are incredible. First, Modelo said he
also paid for the travel expenses of the
witness of Dumusug but this is not possible
since the case where he helped Dumusug
reached only at the filing of the demurer,
meaning the suit was scarcely commenced.
The only expense she could have incurred
were attorney's fees of P80 and her travel to
Cebu twice for one day each.
Ratio: It is, then, perfectly evident that the
document Exhibit 1, by means of which
defendant made himself the owner of the
properties in question is not the instrument
of debt which Andrea Dumasug had signed,
and if it is the same one its contents were
not duly and faithfully explained to plaintiff in
the act of its execution. In either case, the
consent said to have been given by Andrea
Dumasug in said document Exhibit 1 is null

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

and void, as it was given by mistake (arts.


1265 and 1266, Civil Code). This error
invalidates the contract, because it goes to
the very substance of the thing which was
the subject matter of said contract, for, had
the maker thereof truly understood the
contents of said document, she would
neither have accepted nor authenticated it
by her mark.
The consent given by plaintiff being null and
void, the document Exhibit 1 is consequently
also null, void, and of no value or effect.
Article 1303 of the Civil Code is therefore,
applicable, which prescribes that: "When the
nullity of an obligation has been declared,
the contracting parties shall restore to each
other the things which have been the object
of the contract with their fruits, and the value
with its interest."
THE PHILIPPINE TRUST COMPANY, as
Guardian of the Property of the minor,
MARIANO L. BERNARDO, Petitioner, vs.
SOCORRO ROLDAN, FRANCISCO
HERMOSO, FIDEL C. RAMOS and EMILIO
CRUZ, Respondents.
G.R. No. L-8477. May 31, 1956
Digested by: Maria Patricia Salas
Facts: 17 parcels of land was inherited by
Mariano Bernardo from his deceased father.
Being a minor, he is under his step mother,
Socorro Roldan who is his legal guardian.
Socorro, in a motion asked from the court
the authority to sell the 17 parcels of land for
the sum of 14,700 to Dr. Fidel Ramos who is
her brother in law. The purpose of the sale is
to invest the money in a residential house
which the minor desired to have. The motion
of Socorro was eventually granted by the
court. A day after the sale to Ramos, he
executed in favor of Socorro a deed of
conveyance covering the same 17 parcels
for the sum of 15,000 and Socorro sold 4
parcels to Cruz. Subsequently, Philippine
Trust Company replaced Socorro as
guardian and now PTC wants nullify the
previous sale. CFI upheld the sale saying
that there was no proof that Ramos was a
mere intermediary as prohibited by Article
1459 of the Civil Code. The Court of
Appeals affirmed the judgment adding that
the minor knew of the particulars of the
transaction.
Issue: Should the sale be nullified for being
against the law?

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Held: Yes
Ratio: General doctrine that guardianship is
a trust of the highest order, and the trustee
cannot be allowed to have any inducement
to neglect his wards interest and in line with
the courts suspicion whenever the guardian
acquires the wards property 1 we have no
hesitation to declare that in this case, in the
eyes of the law, Socorro Roldan took by
purchase her wards parcels thru Dr.
Ramos, and that Article 1459 of the Civil
Code applies.
She acted it may be true without malice;
there may have been no previous
agreement between her and Dr. Ramos to
the effect that the latter would buy the lands
for her.
The temptation which naturally besets a
guardian so circumstanced, necessitates the
annulment of the transaction, even if no
actual collusion is proved (so hard to prove)
between such guardian and the intermediate
purchaser. This would uphold a sound
principle of equity and justice from both the
legal and equitable standpoints these three
sales should not be sustained: the first two
for violation of article 1459 of the Civil
Code; and the third because Socorro
Roldan could pass no title to Emilio Cruz.
The annulment carries with is (Article 1303
Civil Code) the obligation of Socorro Roldan
to return the 17 parcels together with their
fruits and the duty of the minor, through his
guardian to repay P14,700 with legal
interest.
Strangers Are Not Covered By The
Article.A. Strangers to the contract cannot
avail themselves of the benefit of
mutual restitution under the Article
(Govern- ment of P.l. vs. Wagner,
54 Phil. 132).
B. Innocent third parties, who are not
privies to the con- tract cannot be
obliged to restore (Cagayan Valley
Tobacco Co. vs. Molina Martell, 41
Phil. 294).
Article Speaks Of Annulment
"Obligation" And Not Of "Contract."-

Atty. Chato Olivas-Gallo

Of

A. The Article uses the phrase


"annulment of obligation" instead of
annulment of contract because of
the possibility that a contract may
cover several prestations which are
divisible.
B. Some may be voided, but others
may be retained.
Obligations To Render Service.A. If services had already been
rendered, and the obligation was
annulled, damages, if suffered, may
be recovered using as basis of
estimation, the value of the services
rendered
(Art.
1398,
last par.).
B. The last paragraph of the Article
refers to obligation "to do" or "not to
do" while the first paragraph refers
to "obligation to give."
Rule Of Mutual Restitution Is Not
Absolute.A. Because of the recognized principle
of unjust enrichment in our legal
system, if and when the application
of mutual restitution will result in an
unjust enrichment of one party at
the expense of another, the rule of
mutual restitution must give way.
B. Illustration:
a. If a piece of land is leased for
one year, with the land delivered
and rent paid in advance for the
full period, and then the contract
is annulled after four months,
the
mutual
restitution
cannot be total.
b. The lessee has to return the
land, but the lessor should not
be obliged to return the full
amount of rent received by him
but only the rent corresponding
to the unexpired eight months.
c. To make the lessor return the
rent (assuming it to be
reasonable in amount) for the
four months during which the
lessee was in the possession
and enjoyment of the land,
would
constitute unjust enrichment on
the part of the lessee and undue
prejudice to the lessor.
d. Rationale:

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a. The rent is not a consideration
for the land. but for the use
and
enjoyment
thereof;
hence, even if the land is
restored to the lessor, the
lessee had already received
the benefit from the past use
and enjoyment thereof
C. Damages May Be Imposed Upon
The Party Guilty Of The Act/ s
Which Constitute The Reason And
Cause For The Annulment Of The
Contract.a. It is but just and fair that the
party guilty of the vices of
consent like fraud (which is
presumed to be deliberate)
which constitute the reasons for
the void ability of the contract,
be penalizedwith damages as
indemnity for the injuries
suffered
by
the
innocent party.
b. Articles 19, 20 and 21 of the
Code justify the imposition of
reasonable damages
Meaning Of "Except In Cases Provided
By Law."_
A. With the annulment of the contract,
there must be restoration of things
received with their fruits, and the
price with interest-except in cases
provided by law.
B. Insofar as fruits are concerned, the
rules on possession must be
applied, particularly, Articles 544
and 549.
Rule Of Compensation Is Applicable.
If the contracting parties have
reciprocal prestations which consist
of sum of money or fungible thing of
same kind compensation will take
place by operation of law to the
concurrent amount (Art. 1290).
Incapacitated OrDisadvantaged Person Is
Generally
Favored
By
Law;
No
Restoration
Is
Required
Of
Him; Exclusive Exception.A. Article24 of the Code provides: Art.
24. In all contractual, property or
other relations, when one of the
parties is at a disadvantage on
account of his moral dependence,

Atty. Chato Olivas-Gallo

B.

C.

D.

E.

ignorance,
indigence,
mental
weakness, tender age or other
handicap, the courts must be
vigilant for his protection (New Civil
Code).
This is anchored on the doctrine of
parenspatriae:
'The doctrine refers to the
inherent power and authority of
the state to provide protection of
the person and property of a
sovereign
power
of
guardianship
over
persons
under disability.
Thus, the state is considered the
parenspatliae of minors
Exception: However, to balance
things, where the minor had
received something by virtue of
a contract, which is voidable
solely and exclusively because
of his incapacity, he must make
a restoration insofar as he has
been benefited by the thing or
price received by him. If he did
not benefit, he has no duty to
make restoration.
The observation of the Supreme
Court in UySoo Urn vs. Tan
Unchuan, 38 Phil. 552, stressed the
strong
tendency
of
modern
decisions regarding the limit on the
ex-emption of infancy to the
principle upon which the disability
proceeds.
If the nullity of the contract,
however, is due to other reasons the
general rule of mutual restitution in
Article 1398 shall apply.
Illustrations:
1. Two minors, together with
their
mother.
borrowed
money during the Japanese
occupation
from
Villa
Abrille.
The money was
used for the support
of the minors.
While the promissory
note signed by the
minors promising to
pay P10,000.00 in
Philippine currency 2
years
after
the

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De La Salle University
cessation of
the
hostilities x xx.
is
voidable
and
annulled
by
the
Court. the minors
were required to
return the money
they received from
the Villa Abrille as
they profited by the
use thereof.
2. If the incapacitated person
has still in his possession
the property he received by
itself is a benefit, which
obliges him to return the
same and not squander it.
If he does not return
or he squanders,
that is tantamount to
implied ratification of
the
defective
contract.
In which case, the
contract will then be
cleansed of all its
defects from the
moment
of
its
constitution (UySoo
Lim
vs.
Tan
Unchuan, 38 Phil.
552).
Rule With Respect To The Capacitated
Party.A. Whether or not the capacitated party
has benefited from what he received
from a minor, he must return the
same
B. Except:
a. when he received the thing from
the minor in the performance of
the latter's natural obligation,
and what had been received
had been spent or consumed in
good faith (Art. 1427).112
b. The reason is that the minor
cannot recover what he had
paid in fulfillment of a natural
obligation (Art. 1423).
Effect When Thing Was Lost Through
The Fault Of Defendant-Obligor.A. The Article will not apply if the thing
ordered to be returned which is
determinatewas

Atty. Chato Olivas-Gallo

destroyed or got lost without the


fault of the debtor.
B. Example: A determinate thing
supposed to be re-turned got lost
due to a fortuitous event. The debtor
should not be made liable for the
loss of the thing.
A.
I.

Consequences:
If the thing is lost due to a
fortuitous event, the debtor is not
liable
to
make
restitution
because he cannot restore the
thing which no longer exists.
II. Neither can he be compelled to
substitute the lost thing with its
value because he is not liable for
the loss.
III. To compel him to do so will be
unfair.
IV. Since the party debtor was still
legally considered as the owner of
the thing at the time of the loss, he
must suffer the consequences but
he will not be required to make
restitution.
V. Corollarily, the creditor cannot be
compelled to make restitution
because the debtor could not fulfill
what is incumbent upon him.
VI. Ultimately, Art. 1402 shall apply.
VII. There is no other way of
reconciling the different related
Articles.
a. The rule is different if the thing
was lost through the fault of
the obligor.
b. In which case, he is obliged to
return the fruits received;
return the value of the
thing at the time of loss;
and
to pay 6% interest per
annum on the value of
the thing (Art. 2209).
B.
Illustration:
c. A contract was entered into
between Dumasug and Modelo.
d. The contract was annulled.
e. The subject matter or object of
the contract is a plow carabao
which died while in the
possession of Modelo.
f. The Court held: "With respect to
the plow carabao that died while
in defendant's possession, the

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De La Salle University
value of which is P120.00,
defendant is obliged pursuant to
the provision of Art. 1307 (now
Art. 1400) to pay and deliver to
plaintiff the value of said animal,
with interest as an indemnity for
the detriment caused to its
owner."
Article 1401. The action for annulment of
contracts shall be extinguished when the
thing which is the object thereof is lost
through the fraud or fault of the person who
has a right to institute the proceedings.
If the right of action is based upon the
incapacity of any one of the contracting
parties, the loss of the thing shall not be an
obstacle to the success of the action, unless
said loss took place through the fraud or
fault of the plaintiff. (1314a)
I.
A.

B.
C.
D.

E.

Applicability.The Article applies when the


object of the contract is lost due
to the fraud or fault of the
creditor himself.
Accordingly his complaint must
be dis- missed.
The creditor has no cause of
action because he himself
caused the loss of the thing.
It is absurd to require the debtor
to return a thing which got lost
due to the fault of the creditor
himself.
Even without the Article, this
principle in Art. 1401 is
understood and universally
recognized because of the
maxim "he who comes to court
must come with clean hands."

II. Action For Annulment Can


Prosper Despite The Loss Of
The Thing if Plaintiff Is Not At
Fault.A. The action for annulment of the
contract can prosper even if the
object of the contract had been lost
as long as the loss is not attributable
to the plaintiff.
B. After all, if the case is won, the thing
will be substituted by its value in
money with legal interest.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

C. However, the law says, the ground


for annulment must be the
incapacity of anyone of the
contracting parties."
D. There seems to be no difference, if
the ground would be any of the
vices of consent committed by the
defendant. T
E. he reason and principle involved are
the same.
F. Naturally, however, if the loss is due
to the "fraud or fault" of the plaintiff
himself the loss of the thing will bar
the complaint because the plaintiff
cannot benefit from his fault or
wrong.
G. Further, if the thing was destroyed
due to fortuitouSevent, the action is
extinguished unless the defendant
has incurred in delay (Art. 1262) or
is a possessor in bad faith (Art.
552).
H. Whether the loss of the thing
happened during the incapacity of
the plaintiff or "after he acquired
capacity,":"just the same, the action
for annulment will be extinguished
under the first paragraph of the
article because he was at fault.
Other Causes For Extinguishment Of The
Action For Annulment.The
action
may
also
be
extinguished by prescription of the
action
or
by
ratification
(confirmation).
I. Duty Of Restitution Is Mutual.A. After the case had been decided
and the court has required the
parties to restore what they received
from each other
a. No one can file a Motion for
Execution to implement the
decision unless he himself has
first restored what he is bound
to return.
b. In case neither party takes the
initiative the best solution is to
make a simultaneous delivery in
court of what is incumbent upon
them.
c. The inability to make restitution
may apply to both parties.
B. If one cannot restore what he is
bound to return, he cannot compel

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De La Salle University
the other to comply what is
incumbent upon the latter.
To require so is obviously unfair.

CHAPTER 8
UNEFORCEABLE CONTRACTS
Art. 1403. The following contracts are
unenforceable, unless they are ratified:
1. Those entered into in the name of
another person by one who has
been given no authority or legal
representation, or who has acted
beyond his powers;
2. Those that do not comply with
the Statute of Frauds as set forth
in this number. In the following
cases an agreement hereafter
made shall be unenforceable by
action, unless the same, or some
note or memorandum, thereof, be
in writing, and subscribed by the
party charged, or by his agent;
evidence,
therefore,
of
the
agreement cannot be received
without
the writing, or a
secondary
evidence
of
its
contents:
a. An agreement that by its
terms is not to be
performed within a year
from the making thereof;
b. A special promise to
answer for the debt,
default, or miscarriage of
another;
c. An agreement made in
consideration of marriage,
other than a mutual
promise to marry;
d. An agreement for the sale
of goods, chattels or
things in action, at a price
not less than five hundred
pesos, unless the buyer
accept and receive part of
such goods and chattels,
or the evidences, or some
of them, of such things in
action or pay at the time
some part of the purchase
money; but when a sale is
made by auction and
entry is made by the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

auctioneer in his sales


book, at the time of the
sale, of the amount and
kind of property sold,
terms of sale, price,
names of the purchasers
and person on whose
account the sale is made,
it
is
a
sufficient
memorandum;
e. An agreement of the
leasing for a longer period
than one year, or for the
sale of real property or of
an interest therein;
f. A representation as to the
credit of a third person.
3. Those where both parties are
incapable of giving consent to a
contract.
Art. 1404. Unauthorized contracts are
governed by Article 1317 and the
principles of agency in Title X of this
Book.
Art. 1405. Contracts infringing the Statute
of Frauds, referred to in No. 2 of Article
1403, are ratified by the failure to object
to the presentation of oral evidence to
prove the same, or by the acceptance of
benefit under them.
Art. 1406. When a contract is enforceable
under the Statute of Frauds, and a public
document
is
necessary
for
its
registration in the Registry of Deeds, the
parties may avail themselves of the right
under Article 1357.
Art. 1407. In a contract where both
parties are incapable of giving consent,
express or implied ratification by the
parent, or guardian, as the case may be,
of one of the contracting parties shall
give the contract the same effect as if
only one of them were incapacitated.
If ratification is made by the parents or
guardians, as the case may be, of both
contracting parties, the contract shall be
validated from the inception.
Art. 1408. Unenforceable contracts
cannot be assailed by third persons.

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from the void and


inexistent contracts
which
are
not
susceptible
to
ratification.

---------Introduction
---------Unenforceable
Contracts
are
those
contracts which cannot be enforced by
action or complaint in court, unless they
have been ratified by the party or parties
who did not give their consent thereto. They
are midway between void and voidable
contracts.
Kinds of Unenforceable Contracts:
(1) Those entered into in the name
of another person by one who
has no authority or who acted
beyond his powers;
(2) Those who do not comply with
the Statute of Frauds; and
(3) Those where both parties are
incapable of giving consent to a
contract.
Distinctions/Differences
In the first kind, there is
lack of consent on the
part of the person in
whose name the contract
was entered into;
In the second kind, there
is
no
written
proof
whatever by which the
contract may be proved;
and
In the third kind, while
there is consent, the
same
is
absolutely
vitiated because both
parties are incapable of
giving their consent to the
contract.

Similarities
They cannot be
enforced
or
pursued in court;
They
can
be
ratified,
which
means, they can
be
convalidated
and
become
enforceable
in
court; and
They cannot be
attacked
or
assailed by third
persons.
The
remedy of the third
person is against
the agent who
acted
without
authority or acted
beyond
his
authority.

Unauthorized Contracts
Old Civil Code
New Civil Code
They
were They
are
now
considered special grouped
together
void contracts which with those contracts
could be ratified. that do not comply
They are different with the Statute of

Atty. Chato Olivas-Gallo

Frauds. They are


now
subject
to
voluntary ratification.

Statute of Frauds is descriptive of those


statutes which require certain classes of
contracts to be in writing.
It does not deprive the parties of the right to
contract with respect to the matters therein
involved, but merely regulates the formalities
of the contract necessary to render it
enforceable.
Its basic purpose is to prevent fraud and not
to encourage its commission.
It applies only to executor (not executed)
contracts It cannot be invoked in contracts
which had been already executed whether
partially or completely.
If a contract is among those covered by the
Statute but not done in writing, such
deficiency does not make the oral contract
invalid or void it merely renders the action
for specific performance ineffective.
It can be invoke in two kinds of cases:
(1) In
complaints
for
specific
performance
where the defendants
may
frustrate
the
actions by showing that
the contracts in issue
are
among
those
covered
by
Article
1403(2) and are not
evidenced
by
any
written agreement, note
or memorandum; and
(2) In
complaints
for
damages for violation of
the contract.
If there is no enforceable contract, naturally,
there can be no basis for damages
grounded on violation thereof.
In proving total or partial payment or
performance of the contract itself, the
plaintiff is allowed to present oral evidence

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to prove the total or partial payment or
performance.
It is a rule of exclusion it is not concerned
with the weight of the evidence but only with
its admissibility.
Rosencor Dev. Corp. v. Inquing
G.R. No. 140479 March 8, 2001
Digested by: Kimberly Rae Sison
Facts: Paterno Inquing, Irene Guillermo and
Frederico Bantugan are the lessees since
1971 of a two-story residential apartment
owned by spouses Faustino and Cresencia
Tiangco. The lease was not covered by any
contract. The lessees were verbally granted
by the lessors the pre-emptive right to
purchase the property if ever they decide to
sell the same. Upon the death of the
spouses Tiangcos, the heirs also verbally
promised to the lessees the same preemptive right. In June 1990, the lessees
received a letter from Atty. Aguila
demanding that they vacate the premises so
that the demolition of the building be
undertaken. They also received from
Eufrocina de Leon, representative of the
heirs, a letter offering to sell them the
property
they
were
leasing
for
P2,000,000.00. The lessees offered to buy
the property for P1,000,000.00, however, no
answer was given. In November 1990, Rene
Joaquin (Rosencor) came to the leased
apartment introducing himself as the new
owner. The lessees then asked De Leon
why she had disregarded the pre-emptive
right she and the late Tiangco spouses
promised to them. They also learned that
the property was sold to Joaquin/Rosencor
for only P726,000, and that the offer of De
Leon to sell them the property came only
after the sale with Rosencor has been
consummated. They then offered to
reimburse De Leon of the P726,000.00 and
an additional P274,000.00 to complete their
P1,000,000.00 offer. When the offer was
refused, they filed the present action.
Issue: Does a right of first refusal have to
be in writing in accordance with the Statute
of Frauds in order to be enforceable?
Held: No. A right of first refusal is not among
those which are enumerated in the list of
contracts covered by the Statute of Frauds.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Ratio: A right of first refusal is not among


those listed as unenforceable under the
Statute of Frauds. Furthermore, the
application of Article 1403, par. 2(e) of the
New Civil Code presupposes the existence
of a perfected, albeit unwritten, contract of
sale. A right of first refusal, such as the one
involved in the instant case, is not by any
means a perfected contract of sale of real
property. At best, it is a contractual grant,
not of the sale of the real property involved,
but of the right of first refusal over the
property sought to be sold.
It is thus evident that the statute of frauds
does not contemplate cases involving a right
of first refusal. As such, a right of first refusal
need not be written to be enforceable and
may be proven by oral evidence.

The note, memorandum, or writing as a


required in Article 1403(2) may consist of
any kind of writing showing the intention of
the parties.
It should contain the following details:
(1) Names of the parties;
(2) Terms and conditions of
the agreement;
(3) Description
of
the
subject matter for the
proper
identification
thereof;
(4) Place and date of the
making
of
the
agreement; and
(5) Signature/s
of
the
parties
who
are
assuming the obligation.
The Six Contracts Mentioned in Article
1403(2):
(1) An agreement not to be
performed within one year.
To
be
enforceable,
contracts which by their
terms are not to be
performed within one year
from the execution thereof,
must be in writing.

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The one year period is


counted from the perfection
of the contract and not from
the day the performance of
the contract is to begin.
If the contract is silent as to
its period of performance,
the same is not covered by
the Statute of Frauds.
(2) A special promise to answer for
the debt, default, or miscarriage
of another.
Special promise does
not refer to the original
or independent promise
of the debtor to his own
creditor it refers rather
to a collateral promise
such as a contract of
guaranty where the
guarantor answers for
the liability of the
principal debtor if the
latter fails to comply
with his obligation.
At least three parties
are involved: the debtor,
the creditor and the
promisor.
(3) An
agreement
made
in
consideration of marriage other
than a mutual promise to marry.
The agreement may be
one entered into by
reason of marriage such
as
a
marriage
settlement
and
donations
propter
nuptias.
The
term
in
consideration
of
marriage should read
by reason of marriage
because the cause of a
donation propter nuptias
is not the marriage but
the liberality of the
giver.

Atty. Chato Olivas-Gallo

Testimonial evidence is
admissible to prove a
mutual
promise
to
marry in an action for
actual damages based
on the breach of the
promise.
(4) An agreement for the sale of
goods, chattels, or things in
action, at a price less than
P500.00.
The writing, note or
memorandum must be
signed by the person
charged or by his
representative.
The signature of the
seller is dispensed with,
if the sale was effected
at an auction sale.
The law did not say
public
auction

hence, private auctions


are included as the law
made no distinction.
(5) An agreement for leasing for a
period of more than one year, or
for the sale of real property or of
an interest therein.
If the lease is exactly for
one
year,
it
is
enforceable even if not
in writing it must be
for more than one year
to require its reduction
to writing.
An oral agreement to
sell a parcel of land is
unenforceable

however, if there has


been already a payment
made or delivery, it is
taken
out
of
the
coverage of the Stature
of Frauds.
The partition of inherited
property need not be
embodied in a public
document so as to be

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effective as regards the


heirs that participated
therein, because it is
not legally deemed a
conveyance of real
property.
Interest in real property
refers to any claim or
right on a real property
such
as
voluntary
easement,
usufruct,
right of a mortgage of
real estate, right of a
transferee of a coowners share over real
property.
(6) A representation as to the credit
of a third person.
Representation is an
assurance given by a
person as to the good of
a third person In
effect, a contractual
relation is established
between two persons
because
of
the
representation.
In guaranty, there is a
promise to answer for
the debt of another,
whereas,
in
representation there is
merely an assurance
that somebody has a
certain amount of credit
to
influence
the
supposed creditor to
give or grant a favour to
the supposed debtor.
In
guaranty,
the
guarantor participates
directly in the contract,
whereas,
in
representation the one
making
the
representation does not
take part in the contract
proper.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Cruz v. JM Tuason and Co., Inc


G.R. No L-23749 April 29, 1977
Digested by: Kimberly Rae Sison
Facts:
In 1952 the defendants JM Tuason and Co.,
Inc and Gregorio Araneta, Inc. availed of
Faustino Cruzs services as intermediary in
a civil case between the defendants and the
Deudors to work for the amicable settlement
of a civil case. The civil case involved 50
quinones of land of which 3,000 square
meters of land was occupied by Cruz and
was promised to him by the defendants
"within ten years from and after date of
signing of the compromise agreement", as
consideration for his services.
However, 10 years after the amicable
settlement has been
reached, the
defendants refused to convey to Cruz the
3,000 square meters of land promised to
him.
Issue: Is the claim of Faustino Cruz over the
3,000 square meters of land unenforceable
under the statute of frauds?
Held: No. The statute of frauds does not
apply to an alleged contract whereby one
party agreed to deliver a parcel of land to
another in consideration of the latters acting
as intermediary to effect a compromise
agreement in a civil action.
Ratio: It is elementary that the Statute refers
to specific kinds of transactions and that it
cannot apply to any that is not enumerated
therein. And the only agreements or
contracts covered thereby are the following:
(1) Those entered into in the name of
another person by one who has been given
no authority or legal representation, or who
has acted beyond his powers;
(2) Those do not comply with the Statute of
Frauds as set forth in this number, In the
following cases an agreement hereafter
made shall be unenforceable by action,
unless the same, or some note or
memorandum thereof, be in writing, and
subscribed by the party charged, or by his
agent; evidence, therefore, of the agreement
cannot be received without the writing, or a
secondary evidence of its contents:

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(a) An agreement that by its terms is


not to be performed within a year
from the making thereof;
(b) A special promise to answer for
the debt, default, or miscarriage of
another;
(c) An agreement made in
consideration of marriage, other
than a mutual promise to marry;
(d) An agreement for the sale of
goods, chattels or things in action,
at a price not less than five hundred
pesos, unless the buyer accept and
receive part of such goods and
chattels, or the evidences, or some
of them of such things in action, or
pay at the time some part of the
purchase money; but when a sale is
made by auction and entry is made
by the auctioneer in his sales book,
at the time of the sale, of the
amount and kind of property sold,
terms of sale, price, names of the
purchasers and person on whose
account the sale is made, it is a
sufficient memorandum:
(e) An agreement for the leasing for
a longer period than one year, or for
the sale of real property or of an
interest therein:
(f) a representation as to the credit
of a third person.

through
his efforts, a
compromise
agreement between these parties was
approved by the court. In other words, the
agreement in question has already been
partially consummated, and is no longer
merely executory. And it is likewise a
fundamental
principle
governing
the
application of the Statute that the contract in
dispute should be purely executory on the
part of both parties thereto.

(3) Those where both parties are incapable


of giving consent to a contract. (Art. 1403,
civil Code.)

If the oral contract was reduced into writing


by the party charged, such exercise is called
recognition it is an express ratification of
the contract.

In the instant case, what appellant is trying


to enforce is the delivery to him of 3,000
square meters of land which he claims
defendants promised to do in consideration
of his services as mediator or intermediary
in effecting a compromise of the civil action,
Civil Case No. 135, between the defendants
and the Deudors. In no sense may such
alleged contract be considered as being a
"sale of real property or of any interest
therein." Indeed, not all dealings involving
interest in real property come under the
Statute.
Moreover, appellant's complaint clearly
alleges that he has already fulfilled his part
of the bargains to induce the Deudors to
amicably settle their differences with
defendants as, in fact, on March 16, 1963,

Atty. Chato Olivas-Gallo

Laws that govern unauthorized contracts:


Article 1317; and
Articles 1868 to 1932.
The ratification of an unauthorized contract
has the effect of cleansing the contract from
all its defects from the moment it was
constituted.
Unenforceable contracts may be ratified in
two ways:
(1) Failure to object to the
presentation of oral evidence
this is tantamount to a waiver;
and
(2) Acceptance of benefits under
these contracts this is
equivalent
to
waiver
or
estoppels.

If the contract is enforceable under the


Statute of Frauds because it is duly
evidenced by a
writing, note
or
memorandum, but it cannot be registered
because it is not in a public instrument, the
party concerned may compel the opposite
party to formalize it in the proper form
required by law.
If the latter refuses, the court will issue the
necessary order to that effect.
If despite the order, the concerned party
continues to refuse to execute the contract,
the Court may authorize the Deputy Clerk of
Court to execute the document in behalf of
the refusing party.

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De La Salle University
The article applies only when the contract
involved is both valid and enforceable.
When both contracting parties to the
purported contract are not capacitated to
give consent, the contract is unenforceable
however, it may be ratified:
(1) If ratification is only on the side
of one of the contracting parties,
that is, by the parent or
guardian, the contract is
transformed into a voidable
contract on the part of the party
who did not ratify.
(2) If ratification is made by both
sides, that is, by the parents or
guardians, the contract is
validated from its inception.
As the defense of the Statute of Frauds is
personal to the availing party in the contract,
it cannot be set up as a defense by
strangers to the transaction.

CHAPTER 9
VOID AND INEXISTENT
CONTRACTS
Art. 1409. The following contracts are
inexistent and void from the beginning:
1. Those whose cause, object or
purpose is contrary to law,
morals, good customs, public
order or public policy;
2. Those which are absolutely
simulated or fictitious;
3. Those whose cause or object did
not exist at the time of the
transaction;
4. Those whose object is outside
the commerce of men;
5. Those which contemplate an
impossible service;
6. Those where the intention of the
parties relative to the principal
object of the contract cannot be
ascertained;
7. Those expressly prohibited or
declared void by law.
These contracts cannot be ratified.
Neither can the right to set up the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

defense of illegality be waived.


Art. 1410. The action or defense for the
declaration of the inexistence of a
contract does not prescribe.
Art. 1411. When the nullity proceeds from
the illegality of the cause or object of the
contract, and the act constitutes a
criminal offense, both parties being in
pari delicto, they shall have no action
against each other, and both shall be
prosecuted. Moreover, the provisions of
the Penal Code relative to the disposal of
effects or instruments of a crime shall be
applicable to the things or the price of
the contract.
This rule shall be applicable when only
one of the parties is guilty; but the
innocent one may claim what he has
given, and shall not be bound to comply
with his promise. (1305)
Art. 1412. If the act in which the unlawful
or forbidden cause consists does not
constitute a criminal offense, the
following rules shall be observed:
1. When the fault is on the part of
both contracting parties, neither
may recover what he has given
by virtue of the contract, or
demand the performance of the
other's undertaking;
2. When only one of the contracting
parties is at fault, he cannot
recover what he has given by
reason of the contract, or ask for
the fulfillment of what has been
promised him. The other, who is
not at fault, may demand the
return of what he has given
without any obligation to comply
his promise. (1306)
Art. 1413. Interest paid in excess of the
interest allowed by the usury laws may
be recovered by the debtor, with interest
thereon from the date of the payment.
Art. 1414. When money is paid or
property delivered for an illegal purpose,
the contract may be repudiated by one of
the parties before the purpose has been
accomplished, or before any damage has

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been caused to a third person. In such


case, the courts may, if the public
interest will thus be subserved, allow the
party repudiating the contract to recover
the money or property.
Art. 1415. Where one of the parties to an
illegal contract is incapable of giving
consent, the courts may, if the interest of
justice so demands allow recovery of
money or property delivered by the
incapacitated person.
Art. 1416. When the agreement is not
illegal per se but is merely prohibited,
and the prohibition by the law is
designated for the protection of the
plaintiff, he may, if public policy is
thereby enhanced, recover what he has
paid or delivered.
Art. 1417. When the price of any article or
commodity is determined by statute, or
by authority of law, any person paying
any amount in excess of the maximum
price allowed may recover such excess.
Art. 1418. When the law fixes, or
authorizes the fixing of the maximum
number of hours of labor, and a contract
is entered into whereby a laborer
undertakes to work longer than the
maximum thus fixed, he may demand
additional compensation for service
rendered beyond the time limit.
Art. 1419. When the law sets, or
authorizes the setting of a minimum
wage for laborers, and a contract is
agreed upon by which a laborer accepts
a lower wage, he shall be entitled to
recover the deficiency.
Art. 1420. In case of a divisible contract,
if the illegal terms can be separated from
the legal ones, the latter may be
enforced.
Art. 1421. The defense of illegality of
contract is not available to third persons
whose interests are not directly affected.
Art. 1422. A contract which is the direct
result of a previous illegal contract, is
also void and inexistent.

Atty. Chato Olivas-Gallo

Article 1409 provides for the second


type of void contracts. The first type
of void contracts refer to Article
1318
An inexistent contract is one, which
lacks one or more of the essential
elements of a contract, that is, it
lacks any, some or all of the
following elements: consent, object
or cause.

Salient Characteristics of Void or Inexistent


Contracts:
1. Generally, they produce no civil
effects either in favor of or against
anyone
2. They are not susceptible to
ratification
3. The right to set up the defense of
their inexistence or absolute nullity
cannot be waived
4. The action or defense for the
declaration of the inexistence of the
contract does not prescribe
5. The defense of illegality of contracts
cannot be invoked by 3rd persons
whose interest are not directly
affected
6. No action is needed to set them
aside because their nullity exist ipso
jure. However, if there has been
performance
already,
the
intervention of the court is
necessary to declare its nullity and
decree the restitution of what has
been given by virtue thereof.
7. Parties to a void agreement cannot
expect the aid of the law- the courts
leave them as they are, because
they are deemed in pari delicto or in
equal fault
8. They cannot give rise directly to
another contract
Spouses Rongavilla v. CA
G.R. No. 83974 | August 17, 1998
Digested by: Justin Sucgang
Facts: Private respondents Dela Cruz
sisters were the aunts of the petitioner
Dolores Rongavilla. They borrowed P2,000
from the Rongavillas to have their
dilapidated rooftop repaired.

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-A month later, the petitioners went back to
their aunts to have them sign a contract.
Taking advantage of their lack of education
(the Dela Cruz sisters were spinsters and
just earned their livelihood as embroiderers),
they were made to believe that such
document, typewritten in english, was just
for the acknowledgment of their debt.
-After the lapse of four years, petitioners
asked their aunts to vacate the land subject
to litigation (located in Manuyo, Las Pinas)
claiming that she and her husband were the
new owners. After verifying with the Registry
of Deeds, the aunts were surprised that
what they have signed was actually a deed
of sale.

Their
land
title
was
cancelled and the ownership was
transferred to their nephews.

The land was mortgaged


with the Cavite Development Bank.
-Both the trial court and the Court of Appeals
ruled in favour of the aunts and had the
contract declared void and inexistent for:

Lack of consent. A careful


analysis and meticulous evaluation
of the evidence on record has
convinced the Court that the sale of
their property to the defendants was
farthest from the plaintiffs' minds.
The Court believes that when
plaintiffs voluntarily signed the
document which turned out to be a
deed of sale, they were misled by
defendant Dolores Rongavilla and
her sister Juanita Jimenez into
believing that what they signed was
a document acknowledging the loan
of P2,000.00 extended them by said
defendant.

Want of consideration.
The Deed of Absolute Sale (Exh.
"1") mentions a consideration of
P2,000.00. Three years after the
alleged sale, the same property was
mortgaged by defendant spouses
with the Cavite Development Bank
for P40,000.00. Clearly enough, the
gross
inadequacy
and
unconsciounableness [sic] of the
consideration deters the Court from
subscribing to defendants' theory
that plaintiffs sold the property to
them. It is more reasonable to
assume that the amount of

Atty. Chato Olivas-Gallo

P2,000.00 mentioned in the deed


refers to the loan defendants
extended to plaintiffs for the same
amount.
Issue: Was the deed of sale void and
inexistent?
Held: Yes. The whole question would boil
down to one of credibility between two
camps.
Ratio: Despite the petitioners' insistence
that the deed of sale is presumed valid and,
being registered, could not be disturbed
anymore, we however find their arguments
and ratiocination less than persuasive. While
petitioners would not want the deed of sale
to be impugned, they themselves contradict
the recitals therein. On the vital point
of consideration, they and their witnesses,
namely Juanita Jimenez and Atty. Arcadio
Espiritu repeatedly declared that the true
consideration paid for the sale of the land
was not P2,000 as stated in their own
Exhibit "1", the Deed of Sale, but in fact
P7,800.00.
By their own testimony, the petitioners are
pictured as not exactly averse to bending
the truth, particularly the purported
consideration. Sadly, the irony of it is that
while they claimed they were regularly
paying taxes on the land in question they
had no second thoughts stating at the trial
and later on appeal that they had resorted to
doctoring the price stated in the disputed
Deed of Sale, allegedly "to save on taxes".
That admission surely opens the door to
questions on the integrity, genuineness and
veracity of said public instrument.Thus, the
trial court could not be said to err in
asserting that "while it is true that public
documents are presumed genuine and
regular under the provisions of the Rules of
Court, this presumption is a rebuttable
presumption which may be overcome by
clear, strong and convincing evidence."

The nullity of void or inexistent


contract is permanent and fixed and
the same cannot be cured by
ratification
A contract, which does not exist in
the eyes of the law cannot be
confirmed or ratified

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If a new contract had been entered


into, and at the time of its execution
the cause of the nullity of the first
contract had already ceased, the
new and second contract is valid,
although its effect will not retroact to
the date of the first contract.
A void of contract is inexistent from
the beginning and the right to set up
the defense of its illegality cannot be
waived.
If the contract is absolutely
simulated, it is void for absolute lack
of consent. If the contract is merely
relatively simulated, the inteded
rd
contract is binding provided no 3
person is prejudiced and is not
intended for any purpose contrary to
law, morals, good customs, public
order or public policy.
Not all contracts between family
members are fictitious because, by
itself, consangunity is not proof of
simulation.
Marin v. Adil
G.R. No. L-47986 | July 16, 1984
Digested by: Justin Sucgang

Facts: The parties were first cousins. The


private respondent brothers Armadas,
residing in Janiuay, Iloilo were expecting to
inherit some lots in General Santos,
Cotabato from their uncle. Meanwhile,
Marin, who resided in Koronadal, Cotabato
had hereditary rights in the estates of her
parents in Janiuay, Iloilo.
-The executed a deed of exchange: That
both parties hereto hereby acknowledge that
the exchange contained herein operates to
their individual and mutual benefit and
advantage, for the reason that the property
being ceded, transferred, conveyed and
unclaimed by one party to the other is
situated in the place where either is a
resident resulting in better administration of
the aforementioned properties.
-But the expected land in Gen. Santos City
was adjudicated to Soledad, sister of Marin.
So, the Armadas and other heirs sued
Soledad for claiming to be the sole heir of
their uncle, but ended in a compromise
where the Armadas were awarded two lots.
-The problem arose because Marin waived,
renounced and quitclaimed her share in her

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

parents estate in favour of her another


sister Aurora. Hence, she cannot anymore
fulfil her obligations in her signed deed of
exchange with the Armadas. The Armadas
then filed an instant rescisorry action against
Marin.
Issue: Did Armadas action prescribe?
Held: No. The action to declare contracts
void and inexistent does not prescribe (NCC
1410).
Ratio: Marin never inherited from her
parents.

Her conduct showed that


she considered herself not bound by
it. Five years after that deed, or on
November 14, 1968, she agreed
to convey to her sister, Aurora
Provido-Collado, her interest in two
lots in January in payment of her
obligation amounting to P1,700.

Then, in the extra-judicial


partition of her parents' estate
on June 25, 1977 (where the instant
case for rescission was already
pending), her share with a total area
of 9,010 square meters, was
formally adjudicated to Aurora. It
was stated therein that Mrs. Marin
"has waived, renounced and quitclaimed her share" in favor of
Aurora. As already stated, that
share was supposed to be
exchanged for the two lots in
General Santos City which the
Armadas received in 1976 after a
pestiferous litigation.
-It is evident from the deed of exchange that
the intention of the parties relative to the
lots, which are the objects of the exchange,
cannot be definitely ascertained. We hold
that this circumstance renders the exchange
void or inexistent (Art. 1378, 2nd par. and
Art. 1409 [6], Civil Code).
-It should be noted that in paragraph 7 of
Mrs. Marin's answer with affirmative defense
she avers therein that her 1968 agreement
with her sister means that she would convey
her properties to the latter (Aurora) when the
Armadas should be "adjudged to be without
rights or interests to any properties in
General Santos City" (p. 47, Rollo of L-

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49018). Such a qualification is not found in
her agreement with her sister.
-Because of that impossibility, the Armadas
could rescind extrajudicially the deed of
exchange (Art. 1191 Civil Code; 4 Tolentino,
civil Code, 1973 Ed., pp. 171-172). If Mrs.
Marin should sue the Armadas, her action
would be barred under the rule of exceptio
non adimpleti contractus (plaintiff is not
entitled to sue because he has not
performed his part of the agreement).
Distinctions
Between
Rescissible Contracts

Void

Basis

Rescissible
Contracts
The defect is
in its effects,
which
is
either
against one
of
the
parties or a
3 rd person
It is based
on
equity
and is more
a matter of
private
interest
Contracts
remains
valid if no
action
is
filed.
It
produces
legal effects
Action
to
rescind
contract
prescribes
within
4
years

1. Nature
defect

of

2.
Interest
served

3.
Consequences
when
no
action is filed

4. Prescription

Void
Contracts
The defect
is inherent
in
the
contract
itself

Nullity is a
matter of
law
and
public
interest
There are
no
legal
effects
even if no
actiion
is
filed to set
it aside
Action
to
declare its
nullity does
not
prescribe

1. Cause of
defect

Void
Contracts
Absence of
essential
element/s of
a contract

Atty. Chato Olivas-Gallo

3.
Ratification
4.
Against
whom
can
nullity be set
up

and

Distinction Between Void and Voidable


Contracts
Basis

2. Effect

Voidable
Contracts
Consent is
vitiated
or
there
is
incapacity to
give consent

5.
Prescription

It has no
effect even if
not set aside
because it is
non-existent
It cannot be
ratified
Its nullity can
be set up
against any
person
asserting
right arising
from it, and
his
successors
in
interest
not protected
by law
Action
to
declare
nullity
of
contract
does
not
prescribe

Distinctions
Between
Unenforceable Contracts
Basis
1. Status

2.
Ratification
3.
Attack
rd
by
3
persons

4. Causes

Void
Contracts
There is no
contact at
all
It is not
subject to
ratification
It can be
assailed by
3rd persons
whose
interests
are directly
affected
Causes of
nullity are
those
enumerated
in
article
1409

It is a valid
contract until
it
is
set
aside
It can be
ratified
Its
nullity
can be set
up
only
against
a
party thereto

Action
to
annul
contract
prescribes
within
4
years.
Void

and

Unenforceable
Contracts
There
is
a
contract
but
which cannot
be enforced
It is subject to
ratification
It cannot be
rd
assailed by 3
persons

Cause
of
unenforceability
are
enumerated in
Article 1403

Action to declare the inexistence of a


contract is imprescriptible

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De La Salle University
Defense that a contract is null and void can
be put up anytime
A void contract remains void when even if
no court has declared its inecxistentce or
illegality. However, there are certain
contracts the nullity of which is apparent on
their faces. And considering that there is a
presumption of regularity of contracts, it is
the better part of prudence that the
interested party should go to court first to
avoid inconvenience or to avoid taking the
law into his own hands when the other party
refuses to restore what he had received out
of the void contract.
Laches is the failure or neglect, for an
unreasonable length of time, to do that
which by exercising due diligence could or
should have been done earlier; it is
negligence or omission to assert a right
within a reasonable time, waranting a
presumption that the party entitled to assert
it either has abandoned it or declined to
assert it.
The prevailing doctrine that the right to have
declared void ab initio may be barred by
laches although not barred by prescription is
MWSS v. CA
Mertopolitan Waterworks and Sewerage
System (MWSS) vs CA
G.R. No. 126000 Oct 7 1998
Digested by: Michael Vincent Uy
Facts: Petitioner MWSS leased around 128
hectares of its land to respondent CHGCCI
for 25 years and renewable for another 15
years and allowing the latter to exercise a
right of first refusal should the subject
property be made open for sale.
Pursuant to Letter of Instruction No. 440
issued on July 29 1976 by then Pres.
Marcos directed petitioner MWSS to
negotiate the cancellation of the MWSSCHGCCI lease agreement for the disposition
of the subject property. Upon being informed
that petitioner MWSS and respondent
CHGCCI had already agreed in principle on
the purchase of the subject property,
President expressed his approval of the
sale. The Board of Trustees of petitioner
MWSS then passed a Resolution 36-83
,approving the sale of the subject propert in
favor of respondent SILHOUETTE, as
assignee of respondent CHGCCI at the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

appraised value given by Asian Appraisal


Co.
The MWSS- SILHOUTTE sales agreement
eventually pushed through. Afterwards,
respondent SILHOUTTE sold to Ayala 67
hectares
Almost a decade later , petitioner MWSS on
March 26 1993 filed an action against all
respondents seeking the declaration of
nullity of the MWSS- SILHOUTTE sales
agreement and all subsequent conveyance.
On the other hand, respondent Ayala
defenses were (1) prescription,(2) laches (3)
waiver/estoppels/ratification (4) no cause of
action (5) non-joinder of indispensible
parties.
The trial court dismisses the complaint on
grounds of prescription, laches, estoppels
and non-joinder of indispensable parties and
was affirmed by the CA.
Issue: Is the contract of sale void or
voidable
Held: Yes, the contract was not void but
only voidable. The petitioner admits that it
consented to the sale of the property with
the qualification that such consent was
allegedly unduly influenced by then
President Marcos. The vitiation of MWSSs
consent does not make the sale null and
void ab initio. A contract where consent is
given
through
mistake,
violence,
intimidation, undue influence or fraud is
voidable. If the contract is voidable, the
prescription period is 4 years under Art
1391 of the New Civil Code. In cases of
intimidation, violence or undue influence,
from the time the defect of the consent
ceases and in case of mistake or fraud, from
the time of the discovery of the same time.
Ratio: As noted by both lower courts,
petitioner MWSS admits that it consented to
the sale of the property, with the qualification
that such consent was allegedly unduly
influenced by the President Marcos. Taking
such allegation to be hypothetically true,
such would have resulted in only voidable
contracts because all three elements of a
contract, still obtained nonetheless. The
alleged vitiation of MWSS' consent did not
make the sale null and void ab initio. Thus,
"a contract where consent is given through
mistake, violence, intimidation, undue
influence or fraud, is voidable" . Contracts
"where consent is vitiated by mistake,
violence, intimidation, undue influence or

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De La Salle University
fraud" are voidable or annullable . These are
not void as
Concepts of Voidable Contracts. Voidable
or anullable contracts are existent, valid, and
binding, although they can be annulled
because of want of capacity or vitiated
consent of the one of the parties, but before
annulment, they are effective and obligatory
between parties. Hence, it is valid until it is
set aside and its validity may be assailed
only in an action for that purpose. They can
be confirmed or ratified.
As the contracts were voidable at the most,
the four year prescriptive period under Art.
1391 of the New Civil Code will apply. This
article provides that the prescriptive period
shall begin in the cases of intimidation,
violence or undue influence, from the time
the defect of the consent ceases", and "in
case of mistake or fraud, from the time of
the discovery of the same time".
Hypothetically admitting that President
Marcos unduly influenced the sale, the
prescriptive period to annul the same would
have begun on February 26, 1986 which this
Court takes judicial notice of as the date
President Marcos was deposed. Prescription
would have set in by February 26, 1990 or
more than three years before petitioner
MWSS' complaint was failed.
However, if petitioner MWSS' consent was
vitiated by fraud, then the prescriptive period
commenced upon discovery. Discovery
commenced from the date of the execution
of the sale documents as petitioner was
party thereto. At the least, discovery is
deemed to have taken place on the date of
registration of the deeds with the register of
Deeds as registration is constructive notice
to the world. Given these two principles on
discovery,
the
prescriptive
period
commenced in 1983 as petitioner MWSS
actually knew of the sale, or, in 1984 when
the agreements were registered and titles
thereafter were issued to respondent
SILHOUTTE. At the latest, the action would
have prescribed by 1988, or about five years
before the complaint was instituted.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

Elements of Laches:
1. Conduct on the part of the
defendant or one under whom he
claims, giving rise to the situation
complained of
2. Delay in aserting complaints right
after he had knowledge of the
defendants conduct and after he
has an opportunity to sue
3. Lack of knowledge or notice on the
part of the defendant that the
complaint would assert the right on
which he bases his suit
4. Injury or prejudiced to the defendant
in the event relief is accorded to the
complainant.
Unlike
estoppel,
laches as an equitable defense
usually bars only the equitbale
enforcement of a right but not the
right itself. It is an affirmative
defense and the burden of proving it
rests on the defendant.
The doctrine of laches is inapplicable when
the claim was filed within the prescriptive
period set forth under the law.
If a contract is void because of the nullity of
the cause or object and it happens that the
transaction constitutes a criminal offense,
both parties are in pari delicto, they shall
have no cause of action against each other.
To make Article 1411 applicable the
following requisites must be present:
1. The contract entered into by the
contracting parties is null and void
and nullity arises from the illegality
of the cause or object of the
contract. Illegality of motives is
different
2. The transaction agreed in the
contract constitutes a crime
3. The contracting parties are in part
delicto, that is, the fault of one party
is more or less equal or equivalent
to the fault of the other party.
The consequences of pari delicto in Article
1411:
1. The parties shall have no action
against each other
2. Both parties shall be prosecuted
criminally for their crime
3. The things or price of the contract
may be confiscated by the State in

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De La Salle University

OBLIGATIONS
AND
CONTRACTS

accordance with Article 45 of the


RPC, which is made applicable.

parties will face the consequences of their


act.

Article 1411 will apply even if there is no in


pari delicto situation provided one of the
contracting parties is guilty of the act, which
made the ocntract unlawful. The innocent
party may claim what he has given to the
party and is not bound to comply with his
promise.

The party who entered into an illegal


contract is not capacitated to give his
consent, he may be allowed to recover the
money or property he had delivered by
reason thereof. The recovery, however, will
be allowed only if the interest of justice so
demands.

In Article 1411, the nullity of contract arises


from the illegality of the cause or object. In
Article 1412, the act does not constitute a
criminal offense.

When a law is merely prohibitive, and


designed to protect the plaintiff, the latter
may be allowed, if public policy is enhanced,
to recover what he has paid or delivered to
the other party.

The rules to follow under article 1412:


1. If both parties are in pari delicto,
they cannot recover what they had
given under the contract; moreover,
they
cannot
demand
the
performance of the undertaking or
promise of the other party.
2. If only one of the contracting parties
is at fault, the one at fault cannot
recover what he has given under the
contract; further, he cannot demand
the fulfillment of the promise of the
other. On the other hand , the one
who is not at fault, may demand the
return of what he has given without
any obligation to comply with his
promise or undertaking to the other.
The priciple of pari delicto non oritur acto is
not absolute. The excetion, is that if the
parties are not equally gulity. In this case the
principle will not apply. The law will give
relief to the party who is the more excusable
than the other.
With regards to Article 1413 it should be
noted that the usury law was suspended by
Circular No. 905, series of 1982 of the
Central Bank.
A party in an unlawful contract may
repudiate the contract provided the
purpose/s for which the contract was
constituted had not yet been accomplished,
or before any damage has been caused to a
rd
3 person. After the accomplishment of the
purpose/s of the illegal contract, the parties
could not longer repudiate the act already
performed. It is just too late to invoke the
benefits accorded under the article. The

Atty. Chato Olivas-Gallo

When by universally recgnized standards,


an act or contract is by its very nature bad,
improper, immoral or contrary to conscience,
said act or contract is set to be illegal per se.
Illegal per se contracts are forbidden
because of public interest.
Ras v Sua
G.R. No. L-23302 Sept 25 1968
Digested by: Michael Vincent Uy
Facts: Alejandro Ras filed a complaint to
secure recovery of possession of a parcel of
land which he leased to the spouses Ramon
and Estela Sua. He alleged that on Feb 25
1958, he leased the land which he acquired
from National Abaca and Other Fibers
Corporation to the defendants because he
was in need of money. He was unaware of
the provisions of RA 477. He leased it for 3
years for a consideration of P2500; that
under the contract, the lessees assumed the
obligation to pay the government the yearly
installments when they fall due as well for
the taxes for the duration of lease which was
later on extended for 10 yrs; that the lessees
failed to pay the taxes on the land and the
installments duet to NAFCO and when the
defendant refused to pay the said dues.
The defendant spouses denied the
allegation move for the dismissal of the case
on the ground that the cause of action has
prescribed and that plaintiff was not able to
prove his case. They contend that since the
plaintiffs action which is for rescission of
contract under art 1191 of the civil code,
prescribed in 4 years; that since the contract
of lease was entered into on Feb 25 1958,

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De La Salle University
the present action commenced on May 6
1963 was already barred by prescription
The lower court ruled in favor of the plaintiff
that not only there had been a violation of
the court by defendants failure to pay the
taxes on the land but also the lease of the
property was prohibited under Sec. 8 of RA
477.
Defendants instituted an appeal reiterating
the claim that the cause of action in this
case is barred by prescription.
Issue: Has the plaintiffs cause of action
already prescribed?
Held:
No,
the
cause
of
action
imprescriptible because it violates the law
which is RA 477.
Ratio: For the purpose of resolving this
issue of prescription raised by appellants,
there is no need for the distinction. Whether
the case was filed to rescind or to annul the
lease would not improve appellants'
position, which we find to be untenable. For
while it is true that the original lease
agreement (Exhibit C) was executed on 25
February 1958, whereas the case was
instituted on 6 May 1963, or more than 4
years thereafter, yet it also appears that the
contracts of lease (Exhibits D, E, F and G)
subsequently entered into by the parties
uniformly contain the following provisions, to
wit:
NOW, THEREFORE, in consideration of the
herein premises and the amount of ONE
THOUSAND PESOS, Philippine Currency,
paid by the Lessee to the Lessor, the Lessor
extends and grants in favor of the lessee
extension of two (2) more years of the lease
contract they entered which extension shall
take effect on 2 April 1961 and terminates
on 2 April 1963;
The parties also agree to incorporate as part
of this amended and extended lease
contract all the stipulations, namely,
numbers 1 to 5 of the contract of lease they
entered in 25 February 1958. (Exhibit D);
with the only difference that in Exhibit E, the
consideration was P400.00 and the contract
(to extend the lease period) was to "take
effect on 2 April 1963 and terminates on 2
April 1964"; Exhibit F, executed on 29 July
1960, was for P600.00, to "take effect on 2

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

April 1964 and terminates on 2 April 1966;


and Exhibit G, executed on 26 January
1962, was for P600.00, to "take effect on 2
April 1966 and terminates on 2 April 1968."
In other words, these contracts Exhibits D,
E, F and G did not just modify the original
lease by extending the period originally
agreed upon. By themselves, they constitute
individual contracts, distinct from the
agreement of 25 February 1958, each to be
effective within the period specifically
mentioned therein. Thus, the lifetime of
Exhibit D was only from 2 April 1961 to 2
April 1963; Exhibit E, from 2 April 1963 to 2
April 1964; Exhibit F, from 2 April 1964 to 2
April 1966; and Exhibit G, from 2 April 1966
to 2 April 1968. It follows, therefore, that
even were the actions filed on 6 May 1963
be treated as one for rescission, insofar as
Exhibits F and G are concerned, the cause
of action still subsists. It is for this reason
that the lower court annulled only these two
contracts yet unenforced. Of course, there is
stronger ground for affirming the ruling of the
court below if the action were considered as
one for annulment of the agreement as one
prohibited by law. The right to seek the
declaration of the inexistence of a contract,
for being in violation of law, is
imprescriptible.
Article 1417 applies only if there is a law or
regulation issued by competent authority
fixing the maximum price for the sale of any
article or commodity. The aim of the law is to
prevent profiteering, which is inimical to the
interest of the people. Any payment made in
excess of the maximum limit is recoverable.
Employees are required to observe not more
than eight-hour labor work each day of
employment under the eight-hour labor law.
They are entitled to additional compensation
for services rendered beyond the time limit.
If laborer has agreed to receive a wage
lower than the minimum wage fixed by law,
he is not barred from recovering the
deficiency. Such contract or agreement is
void under the minimum wage law.
Article 1420 applies only if there are several
stipulations, terms, or conditions in the
contract. If some of the stipulations are
illegal and others are valid, the latter if
seperable from the former shall be effective
and enforceable.

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De La Salle University
The rule of divisibility or seperability cant
apply in 2 situations:
1. When the contract by its nature
requires indivisibility
2. When the parties intended the
contract to be entire or indivisible.
In cae of doubt on whether the terms of a
contract are indivisible or divisible, the same
will be presumed as divisible.
Under the principle of relativity of contracts
only the parties, their assigns and heirs are
bound. The reason is that such contracts do
not determine the rights and obligations of
rd
3 persons who are not privies thereto.
rd
They cant produce any effects insofar as 3
persons are conscerned. However, there are
exceptions to the rule. Article 1421 clearly
rd
implies that 3 persons may be allowed to
put up the defense of illegality of contracts if
their interests are directly affected. If not,
they cannot invoke the illegality of a
contract.
Article 1422 speaks of 2 contracts. The first
one is illegal or unlawful. This illegal contract
is superseded by another contract between
the same parties. As the latter contract is the
direct result of the illegal contract, it is also
void and inexistent.
Spouses ANTONIO and LUZVIMINDA
GUIANG v Court of Appeals and Gilda
Corpuz
G.R. No. 125172 June 26, 1998
Digested by: Victor Reynaldo Ang
Facts: Judie and Gilda Corpuz were legally
married on December 24, 1968. While his
wife was away and without her consent,
Judie Corpuz sold half of their conjugal
peoperty specifically their residence and the
lot on which it stood. The Guiangs who
bought the property from Judie Corpuz then
entered into a compromise agreement with
Gilda Corpuz with the help of the Barangay
office.
Issue: Is the sale merely voidable? If so, is
the compromise valid?

OBLIGATIONS
AND
CONTRACTS

Transfer of Rights (Exh. "A") cannot be


ratified, even by an "amicable settlement".
The participation by some barangay
authorities in the "amicable settlement"
cannot otherwise validate an invalid act.
Moreover, it cannot be denied that the
"amicable settlement (Exh. "B") entered into
by plaintiff Gilda Corpuz and defendent
spouses Guiang is a contract. It is a direct
offshoot of the Deed of Transfer of Rights
(Exh. "A").
By express provision of law, such a contract
is also void. Thus, the legal provision, to wit:
Art. 1422. A contract which is the direct
result of a previous illegal contract, is also
void and inexistent. (Civil Code of the
Philippines).
Neither can the "amicable settlement" be
considered a continuing offer that was
accepted and perfected by the parties,
following the last sentence of Article 124.
The order of the pertinent events is clear:
after the sale, petitioners filed a complaint
for trespassing against private respondent,
after which the barangay authorities secured
an "amicable settlement" and petitioners
filed before the MTC a motion for its
execution. The settlement, however, does
not mention a continuing offer to sell the
property or an acceptance of such a
continuing offer. Its tenor was to the effect
that private respondent would vacate the
property. By no stretch of the imagination,
can the Court interpret this document as the
acceptance mentioned in Article 124.
Simply put, the sale of a conjugal property
requires the consent of both the husband
and the wife. The absence of the consent of
one renders the sale null and void, while the
vitiation thereof makes it merely voidable.
The nullity of the contract of sale is premised
on the absence of Gilda Corpuzs consent.
To constitute a valid contract, the Civil Code
requires the concurrence of the following
elements: (1) cause, (2) object, and (3)
consent

Held: No. Both the contract of sale and the


amicable settlement (compromise) are void.
Ratio: By the specific provision of the law
[Art. 1390, Civil Code] therefore, the Deed to

Atty. Chato Olivas-Gallo

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OBLIGATIONS
AND
CONTRACTS

De La Salle University

TITLE III
NATURAL OBLIGATIONS
Art. 1423. 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. Some
natural obligations are set forth in the
following articles.
Art. 1424. When a right to sue upon a
civil obligation has lapsed by extinctive
prescription, the obligor who voluntarily
performs the contract cannot recover
what he has delivered or the value of the
service he has rendered.
Art. 1425. When without the knowledge
or against the will of the debtor, a third
person pays a debt which the obligor is
not legally bound to pay because the
action thereon has prescribed, but the
debtor later voluntarily reimburses the
third person, the obligor cannot recover
what he has paid.
Art. 1426. 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,
after the annulment of the contract
voluntarily returns the whole thing or
price received, notwithstanding the fact
the he has not been benefited thereby,
there is no right to demand the thing or
price thus returned.
Art. 1427. 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.
(1160A)
Art. 1428. When, after an action to

Atty. Chato Olivas-Gallo

enforce a civil obligation has failed the


defendant voluntarily performs the
obligation, he cannot demand the return
of what he has delivered or the payment
of the value of the service he has
rendered.
Art. 1429. When a testate or intestate heir
voluntarily pays a debt of the decedent
exceeding the value of the property
which he received by will or by the law of
intestacy from the estate of the
deceased, the payment is valid and
cannot be rescinded by the payer.
Art. 1430. When a will is declared void
because it has not been executed in
accordance with the formalities required
by law, but one of the intestate heirs,
after the settlement of the debts of the
deceased, pays a legacy in compliance
with a clause in the defective will, the
payment is effective and irrevocable.
Article 1423 Obligations may be:
Civil
Natural
Give a right of action
to
compel
their
performance

Do not grant a right


of action to enforce
their
performance,
BUT
if
fulfilled
spontaneously, one
cannot recover what
he had delivered
(Art. 1424).

Basis:
-

Not based on positive law but


derived from reason and nature
equity and natural law
good conscience and its
compliance depends on the
morality of a person

Requisites of Natural Obligations


A.) Judicial tie between two parties
B.) Tie is not based on law but on the
conscience of man
Natural Obligations vs Moral Obligations
Natural Obligations Moral Obligations
Juridical
tie
previously
existed
between the parties
but due to certain

No juridical tie

Page 127

OBLIGATIONS
AND
CONTRACTS

De La Salle University

intervening
causes
they
are
unenforceable
in
courts

Voluntary fulfillment
by the debtor is legal
fulfillment
with legal effect

Performance is pure
act
of
liberality
which comes from
blood, affection or
benevolence

Within the domain of


law

Within the domain


of morals

Produces legal effect


when fulfilled

Does not produce


legal effect

Natural Obligations vs Civil Obligations


Natural Obligations Civil Obligations
Not
based
on
positive law but on
equity and natural
law

Arise
from
law,
contracts,
quasicontracts,
delicts
and quasi-delicts

Cannot be enforced
in court because
obligee has no right
of action to compel
its performance

Enforceable
in
courts
because
oblige has right of
action to compel
performance

Conversion of natural obligation to civil


obligation
1.) Novation
2.) Confirmation or ratification
Other natural obligations:
a.) Support given to unrecognized
illegitimate children
b.) Interest voluntarily paid for the use
of money even if not agreed upon
c.) Support given to relatives which are
not made by law
d.) Indemnification given to a woman
who was seduced, although the
accused was not convicted

Atty. Chato Olivas-Gallo

Effects of payment by third party (Article


1425)
a.) If with consent, the third party must
be reimbursed for what he had paid
in addition to what they agreed upon
b.) If without consent or against the will,
third person can only recover insofar
as the payment has been beneficial
to the debtor, if there is not benefit,
third person must suffer the loss.
RA 6809 modified Art. 1426 and 1427
from between18-21 years, legal age had
been reduced to 18 years
Effect of partial performance (Article
1428)
a.) If legally susceptible of confirmation
or ratification:
It is converted into civil obligation
hence what has been paid cannot be
recovered.
b.) If not legally susceptible of
confirmation or ratification:
Can be the basis of a cause of
action for recovery of what has been
delivered since it was not converted
into a legal obligation.

TITLE IV
ESTOPPEL
Art.
1431.
Through
estoppel
an
admission or representation is rendered
conclusive upon the person making it,
and cannot be denied or disproved as
against the person relying thereon.
Art. 1432. The principles of estoppel are
hereby adopted insofar as they are not in
conflict with the provisions of this Code,
the Code of Commerce, the Rules of
Court and special laws.
Art. 1433. Estoppel may be in pais or by
deed.
Art. 1434. When a person who is not the
owner of a thing sells or alienates and
delivers it, and later the seller or grantor
acquires title thereto, such title passes
by operation of law to the buyer or
grantee.

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OBLIGATIONS
AND
CONTRACTS

De La Salle University

Art. 1435. If a person in representation of


another sells or alienates a thing, the
former cannot subsequently set up his
own title as against the buyer or grantee.

Art. 1436. A lessee or a bailee is


estopped from asserting title to the thing
leased or received, as against the lessor
or bailor.

Art. 1437. When in a contract between


third persons concerning immovable
property, one of them is misled by a
person with respect to the ownership or
real right over the real estate, the latter is
precluded from asserting his legal title or
interest therein, provided all these
requisites are present:
There
must
be
fraudulent
representation
or
wrongful
concealment of facts known to
the party estopped; (2) The party
precluded must intend that the
other should act upon the facts
as misrepresented; (3) The party
misled must have been unaware
of the true facts; and (4) The
party defrauded must have acted
in
accordance
with
the
misrepresentation.
Art. 1438. One who has allowed another
to assume apparent ownership of
personal property for the purpose of
making any transfer of it, cannot, if he
received the sum for which a pledge has
been constituted, set up his own title to
defeat the pledge of the property, made
by the other to a pledgee who received
the same in good faith and for value.
Art. 1439. Estoppel is effective only as
between the parties thereto or their
successors in interest.

(1)

A legal concept that precludes a


person from denying or asserting
anything to the contrary to that
which has been, in contemplation of
law, established as the truth either
by acts of judicial or legislative
officers, or by his own deed or
representations either express of
implied (19 Am. Jur. 601)

Atty. Chato Olivas-Gallo

Applies only to questions of fact and


not of law
Based on moral rights and natural
justice
Elements of Estoppel (FIK):
1. There is false representation or
concealment of material facts
2. Intent to influence another
person
3. Knowledge,
actual
or
constructive, of the real facts
Representation must be plain and
clear. It cannot be based on mere
doubtful inferences.
Promissory Estoppel
o Definition
o Essential Elements(PID):
1. Presence of a promise
2. Said promise induced
another person to do an
action
3. Presence
of
a
detrimental result
When estoppels cannot apply:
1. When it is against the
government
2. When it is against a Municipality
or City
3. When it validates unlawful acts
4. When it is raised on the ground
of ignorance of the law
5. In probate proceedings
A person who sells and delivers a
thing that is not his thereafter the
buyer acquires thing, the former
cant deny the validity of the sale.

TERMINAL FACILITIES AND SERVICES


CORPORATION v. PHILIPPINE PORTS
AUTHORITY and PORT MANAGER, and
PORT DISTRICT OFFICER OF DAVAO
CITY
GR. NOS. 135639 and 135826- February
27, 2002
Digested by: Bon Jeffrey Caluag

Facts:
TEFASCO,
a
domestic
corporation, engaged in the business of
providing port and terminal facilities,

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arrastre, stevedoring and other portrelated services. Around 1975, TEFASCO


submitted a proposal to the Philippine
Ports Authority to construct a specialized
terminal complex with port facilities and
provide port services in Davao City. PPA
accepted the proposal which was
approved by the committee it created to
study it. Resolution No. 7 was passed
accepting the project proposal. Through a
letter dated 7 May 1976, PPA stipulated
the Terms and Conditions of PPA Board
Approval of the Project Proposal. Long
after TEFASCO have gone to the
infrastructure work, the PPA passed
Resolution No. 50 requiring TEFASCO,
without asking for one, to submit an
application for construction permit and
thus imposing significant changes in the
contract. This was complied with by
TEFASCO. Two years after the facilities
completed and the operation started, PPA
again issued another permit, which
includes the provisions for ten percent
(10%) government share out of arrastre
and stevedoring gross income and one
hundred percent (100%) wharfage and
berthing charges. TEFASCO repeatedly
asked PPA for extensions to pay these
additional obligations and for reduction in
the rates. But the PPA's response was
final and non-negotiable statements of
arrears and current accounts and threats
of business closure in case of failure to
pay them. After which, the parties
executed
a Memorandum
of
Agreement (MOA) which provides the
acknowledgement of TEFASCO on the
share of the government on arrastre and
stevedoring income and the reduction of
which from 10% to 6%. PPA on the other
hand, promised to issue the necessary
permits for TEFASCOs port activities.

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

TEFASCO complied with the MOA and


paid the accrued and current government
share. However, TEFASCO later sued
PPA seeking for refund of the government
shares and payment of damages. RTC
ruled in favor of TEFASCO but was later
modified by the Court of Appeals.
TEFASCO prays for the reinstatement of
the Trial Courts order while PPA seeks to
set aside the award of actual damages.
Issue: Should PPA be held liable for the
payment of damages and reimburse the
collected government share and be
estopped from creating changes to terms
and conditions of the contract?
Held: YES. The Court finds the additional
terms and conditions passed by PPA
besides those stated in Resolution no.7
and the letter on May 7, 1976 is
unreasonable and the said resolution and
letter should be the only source of
obligation between the parties. Such
conditions were already followed by
TEFASCO thus making it late for PPA to
change rules of engagement. Likewise the
collection of wharfage dues and berthing
charges are void for failure to comply with
Sec. 19, P.D. No. 857 as amended. Also,
the collection of government share is not
valid as such exaction does not exist in
the contract and hence is not a binding
prestation between TEFASCO and PPA.
Lastly, the Memorandum of agreement is
invalid for want of consent and
consideration. Thus, PPA should be
estopped from making changes and
breaking the stipulated terms and
conditions exclusively contained in their
committee report, resolution, letter and its
enclosure.

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De La Salle University

Rationale: The record shows that PPA


made
express
representations
to
TEFASCO that it would authorize and
support its port project under clear and
categorical terms and conditions of an
envisioned contract. TEFASCO complied
with its obligation which ultimately resulted
to the benefit of PPA. And the PPA
accepted the project as completed and
authorized TEFASCO to operate the
same. Under these circumstances, PPA
is estopped from reneging on its
commitments
and
covenants
as
exclusively contained in the inter-agency
committee report, PPA Resolution No. 7
and PPA letter dated May 7, 1976 and its
enclosure.
PPA has not cited - nor have we found any law creating the TEFASCO Port as a
national port or converting it into one.
Hence, following case law, we rule that
PPA erred in collecting berthing fees from
vessels that berthed at the privately
funded port of petitioner TEFASCO.
We stress that the cause of the contract
between TEFASCO and PPA was, on the
part of the former, to engage in the
business of operating its privately owned
port facilities, and for the latter, to
decongest port traffic in Davao City and
concomitantly to enhance regional trade.
The records of the project acceptance
made by PPA indicate that the contract
was executed not to earn income for PPA
or the government as justification for the
subsequent and unfair imposition of
government share in the arrastre and
stevedoring gross income of TEFASCO.
Hence this charge was obviously an afterthought conceived by PPA only after the
TEFASCO port had already begun its

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

operations. The sharing scheme only


meant that PPA would piggy back
unreasonably
on
the
substantial
investment and labor of TEFASCO. As
the scheme was subsequently stipulated
on percentage of gross income, it actually
penalized TEFASCO for its hand work and
substantial capital expenditures in the
TEFASCO port and terminal.
What was clearly stated in the terms and
conditions appended to PPA Resolution
No. 7 was for TEFASCO to pay and/or
secure from the proper authorities "all fees
and/or
permits
pertinent
to
the
construction and operation of the
proposed project."
The government
share demanded and collected from the
gross income of TEFASCO from its
arrastre and stevedoring activities in
TEFASCO's wholly owned port is
certainly not a fee or in any event a
proper condition in a regulatory
permit.
Rather it is an onerous
"contractual stipulation" which finds no
root or basis or reference even in the
contract aforementioned.
FRANCEL REALTY CORPORATION v.
COURT OF APPEALS AND FRANCISCO
T. SYCIP
G.R. No. 117051 January 22, 1996
Digested by: Pauline Grace Intal

Facts: Francel Realty


Corporation
executed a Contract to Sell to Francisco
Sycip a property (townhouse) in Bacoor,
Cavite. The Contract states that: in case
Sycip fails to pay two or more instalments,
the obligation will become due and
demandable; Francel Realty would be
able to take possession of the property
again; Sycip would vacate the property

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De La Salle University

without need for a judicial order; and that


the payments made would be considered
as rentals for use of the property in
question. Sycip was not able to pay since
October 30, 1990 despite demands made
until September 26, 1992; he also refused
to vacate the premises. Consequently,
Francel Realty filed an action in the MTC
of Bacoor to compel Sycip to vacate the
premises, pay the monthly rental from the
time he failed to do so, and pay attorneys
fees and expenses of litigation. In his
answer, Sycip claims that he stopped
paying the monthly dues because the
townhouse sold to him was in a defective
condition. He also claims that he had filed
a complaint for unsound real estate
business practice in the Housing and
Land Use Regulatory Board (HLURB). He
prayed for payment of moral and
exemplary damages.
The MTC ruled that the answer was filed
beyond 10 days after the service of
summons. Later on, however, it dismissed
the complaint for lack of jurisdiction,
saying that it was the HLURB who had
jurisdiction over it. It also ordered Francel
Realty to pay Sycip moral and exemplary
damages, attorneys fees and other costs.
Issue: Does the MTC have jurisdiction
over the complaint? Is the award of
damages justified?
Held: No, it does not have jurisdiction
over the complaint. This case is not a
simple one which arose from the failure of
a lessee to pay the rents or comply with
the conditions of the lease agreement.
Sycip has a right to stop paying monthly
amortizations IF it was proven that Francel
Realty had, indeed, failed to develop the

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

property according to the approved plans.


Hence, the case essentially involves the
question of whether or not Francel Realty
had developed the property properly and
consequently, has a right to claim
payment from Sycip. Since the latter had
already filed a case with HLURB, the
petitioners recourse should have been to
file a counterclaim in the HLURB.
The award of damages was erroneous.
According to the rules of procedure, a
party may only file a counterclaim if the
court has jurisdiction to entertain the
claim. Hence, Sycips counterclaim for
damages should not have been awarded,
given that the court never had jurisdiction
over Francel Realtys claim from the
beginning.
Ratio: Petitioner's complaint is for
unlawful
detainer.
While
generally
speaking such action falls within the
original and exclusive jurisdiction of the
MTC, the determination of the ground for
ejectment requires a consideration of the
rights of a buyer on installment basis of
real property. Indeed private respondent
claims that he has a right under P.D. No.
957, 23 to stop paying monthly
amortizations after giving due notice to the
owner or developer of his decision to do
so because of petitioner's alleged failure
to
develop
the
subdivision
or
condominium project according to the
approved plans and within the time for
complying with the same. The case thus
involves a determination of the rights and
obligations of parties in a sale of real
estate under P.D. No. 957, Private
respondent has in fact filed a complaint
against petitioner for unsound real estate
business practice with the HLURB.

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De La Salle University

This is, therefore, not a simple case for


unlawful detainer arising from the failure of
the lessee to pay the rents, comply with
the conditions of a lease agreement or
vacate the premises after the expiration of
the lease. Since the determinative
question is exclusively cognizable by the
HLURB, the question of the right of
petitioner must be determined by the
agency.
Accordingly, we hold that the MTC
correctly held itself to be without
jurisdiction over petitioner's complaint. But
it was error for the MTC to grant private
respondent's counterclaim for damages
for expenses incurred and inconveniences
allegedly suffered by him as a result of the
filing of the ejectment case.
Pursuant to Rule 6, 8 a party may file a
counterclaim only if the court has
jurisdiction to entertain the claim.
Otherwise the counterclaim cannot be
filed.
________________________________
METROMEDIA TIMES CORPORATION
and/or ROBINA GOKONGWIEPE, Petitioner, vs. JOHNNY
PASTORIN, respondent.
G.R. No. 154295. July 29, 2005
Digested by: Maria Patricia Salas
Facts: Pastorin was employed by
Metormedia to collect receivables from
dealers of petitioners newspapers. He
received a termination letter due to his
tardiness but he was not dismissed die to
the intervention of the labor union which he
was a member. Subsequently, he obtained a
loan from one of the dealers, De Manuel,
whom he dealt with. Of the 9,000 load he

Atty. Chato Olivas-Gallo

got, Pastorin only paid 1,125. De manuel


wrote a letter to Metromedia asking for help
to collect the remainder of his loan from
Pastorin. De Manuel said that Pastorin has
stopped collecting his dues from him when
failed to pay his loan.
Metromedia suspended Pastorin for 4 days
for violating company policy and ordered his
transfer to Traffic and Order Department of
Metromedia. After the Pastroin stopped
reporting for work and sent a letter to the
company stating his refusal to accept the
transfer. Pastorin filed for constructive
dismissal which was decided in his favor.
Metromedia appealed with the NLRC raising
as a ground the lack of jurisdiction of the
Labor Arbiter over the complaint. The NLRC
reversed the labor arbiter on the ground that
the latter had no jurisdiction over the case.
The Court of Appeals reversed the NLRC on
the ground that active participation of
Metromedia and with his failure to object to
the jurisdiction of the court is tantamount to
an invocation of that jurisdiction and a
willingness to abide by the resolution of the
case and will bar Metromedia from later on
impugning the court or body's jurisdiction.
Issue: Is Metromedia stopped from
questioning the jurisdiction of the labor
arbiter first time in the appeal before the
NLRC?
Held: No because a jurisdiction is conferred
by law and lack of jurisdiction may be
questioned at any time even on appeal
especially in this where jurisdiction of the
labor arbiter was questioned as early as
during appeal before the NLRC

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De La Salle University

OBLIGATIONS
AND
CONTRACTS

Ratio: Estoppel cannot be invoked to


prevent this Court from taking up the
question of jurisdiction, which has been
apparent on the face of the pleadings since
the start of litigation before the Labor Arbiter.
It is well settled that the decision of a

the Luneta extension and "Shall be the


property of the City of Manila". It was later
amended by Act No. 1657 which authorize
the City of' Manila either to lease or to sell
the portion set aside as a hotel site. Some
portion of the reclaimed area was sold to to

tribunal not vested with appropriate


jurisdiction is null and void
That the jurisdiction of a court over the

the Manila Lodge No. 761, Benevolent and


Protective Order of Elks of the U.S.A.
(BPOE). Later on, the BPOE sold the land

subject matter of the action is a matter of


law and may not be conferred by consent or
agreement of the parties. The lack of
jurisdiction of a court may be raised at any
stage of the proceedings, even on appeal
If any fault is to be imputed to a party taking
such course of action, part of the blame
should be placed on the court which shall
entertain the suit, thereby lulling the parties
into believing that they pursued their
remedies in the correct forum. Under the
rules, it is the duty of the court to dismiss an
action `whenever it appears that court has
no jurisdiction over the subject matter.'
Estoppel does not apply to confer
jurisdiction to a tribunal that has none over a
cause of action. Where it appears that the
court or tribunal has no jurisdiction, then the
defense may be interposed at any time,
even on appeal or even after final judgment.
Moreover, the principle of estoppel cannot

together with all the improvements to the


Tarlac Development Corporation (TDC) on
installment basis. A year after, the City of
Manila was favored by the court of Manila
on its petition for the reannotation of its right
to repurchase the property after fifty years.
From this order TDC and BPOE appealed to
the Supreme Court.

be invoked to prevent this court from taking


up the question of jurisdiction

area is an extension to the Luneta in the City


of Manila and was formerly a part of the
Manila Bay open for public use; 3) Act 1360

MANILA LODGE NO. 761, BENEVOLENT


AND PROTECTIVE ORDER OF THE
ELKS, INC vs. THE HONORABLE COURT
OF APPEALS, CITY OF MANILA, and
TARLAC DEVELOPMENT
CORPORATION,
G. R. No. L-41001; September 30, 1976
Digested by: Danilo Rico, Jr.

authorized the lease or sale is only the


northern portion of the reclaimed area but
the subject property is the southern portion;
5) Article 344 of the Civil Code of Spain
provides that property of public use includes
park or plaza.

Facts: Act No. l360 which authorized the


City of Manila to reclaim a portion of Manila
Bay. The reclaimed area was to form part of

2) No, the sale of July 13, 1911 executed by


the City of Manila to Manila Lodge was
certainly a contract prohibited by law.

Atty. Chato Olivas-Gallo

Issues: 1) Is the reclaimed area a


patrimonial property of the City of Manila
and not a park or plaza?
2) Is the City of Manila estopped from
questioning the validity of the sale it
executed conveying the subject property to
the BPOE?
Held: 1) The legislative intent is that it is of
public dominion and so intended for public
use for the following reasons: 1) it was
granted by the legislature; 2) the reclaimed

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OBLIGATIONS
AND
CONTRACTS

De La Salle University

Moreover, estoppel cannot be urged even if


the City of Manila accepted the benefits of
such contract of sale and the Manila Lodge
No. 761 had performed its part of the
agreement. Estoppel cannot be applied to
validate a contract entered into by a
Municipality over which it has no power to
make. To apply estopel though the
Municipality has accepted the benefits of the
contract would enable the Municipality to do
indirectly what it cannot do directly.
Ratio: "...the Government is never estopped
by mistakes or errors on the pan of its
agents, and estoppel does not apply to a
municipal corporation to validate a contract
that is prohibited by law or its against
Republic policy."
"The sale of the subject property executed
by the City of Manila to the Manila Lodge
No. 761, BPOE, was void and inexistent for
lack of subject matter. It suffered from an
incurable defect that could not be ratified
either by lapse of time or by express
ratification. The Manila Lodge No. 761
therefore acquired no right by virtue of the
said sale. Hence to consider now the
contract inexistent as it always has seen,
cannot be, as claimed by the Manila Lodge
No. 761, an impairment of the obligations of
contracts, for there was it, contemplation of
law, no contract at all.
The principles of estoppel are grounded in
American jurisprudence. It is incorporated in
this Code for the purpose of enhancing the
Philippine laws.
Estoppel applies as suppletory to the Civil
Code, Code of Commerce & Rules of Court.
Kinds of Estoppel:
I. Estoppel
by
estoppel)

deed

Atty. Chato Olivas-Gallo

(technical

2 Kinds of Estoppel by Deed


a. Estoppel by Deed Proper
This bars an individual from denying
the facts in written in a contract
which he signed.
b. Estoppel by Record
This bars an individual from denying
the facts in a record, may it be
judicial or legislative
E.g. decisions made by a
competent court cannot be
denied. It is already final
and executory.
c. Estoppel by Court Record
This bars an individual from raising
questions regarding issues wherein
already resolved (res judicata)

Called estoppel by judgment or


direct estoppels by judgment.

This also bars an individual from


raising questions regarding issues
that are not yet resolved but have
been decided in another case
because of their relation to the
matter at hand.

Called
collateral estoppels by
judgment
1. Estoppel in pais (equitable
estoppel)

Arises from ones acts, representations or


admissions or by ones own silence.
Includes all forms of estoppel not arising
from record, deed, or written instrument.
Requisites of a party stopped-FAR (Kalalo v.
Luz 34 SCRA 337):
1. Presence of a false representation/
concealment of facts
2. Such conduct was acted upon by the
other party
3. Knowledge of the real facts
Requisites of a party invoking estoppel-PUG
(Kalalo v. Luz 34 SCRA 337):
1. No knowledge/unaware of real facts
2. Believed in good faith

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De La Salle University

3. Action or inaction based thereon of such


character as to change the position or
status of the party claiming estoppel, to
his injury, detriment or prejudice.

LUIS LLACER v.FRANCISCO MUOZ DE


BUSTILLO and MARTIN ACHAVAL
G.R. No. L-3677 December 23, 1908
Digested by: Jan Emmanuel del Castillo
Facts: A certain parcel of land and house
standing on the same used to be owned by
Faustino Llacer and Maria Prollamante up
until their death which ownership were then
passed on to the children. A claim of
ownership was then raised by Francisco
Muoz de Bustillo and on the other portion
of the land, Martin Achaval was alleged to
have been illegally occupying that area. Luis
Llacer then filed a complaint against them.
Francisco Muoz de Bustillo then stated that
he had acquired the land from Faustino
Llacer and Pio Balana. Luis Llacer alleged
that the defendant could not have acquired
title over the disputed property at the time he
allegedly bought the same from plaintiffs
father in 1877, as the latter had obtained his
title to it only in 1881. Maxima Narito then
intervened saying she also has interest in
the land. Lower court ruled in favour of Luis
Llacer, the heir.
Issue: WON Luis Llacer is estopped to claim
ownership on the said land?
Held: YES. Estoppel by deed, that "when a
person who is not the owner of a thing sells
or alienates and delivers it and later the
seller or grantor acquires title thereto, such
title passes by operation of law to the buyer
or grantee" (Art. 1435, Civil Code)
The judgment of the lower court by which
the plaintiff, Luis Llacer, is declared to be the
owner of the land in question, is hereby
reversed.
Ratio: The plaintiff in his brief undertakes to
show that the defendant had not obtained
title to the land in question, by virtue of
Exhibits 7 and 8, by the fact that his father
had not obtained title to a portion of the said

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

land until 1881, or some years after the


alleged deed of Antonio Muoz. Exhibit F
and the note to Exhibit B seem to support
this contention.
Granting, however, that he did not obtain a
portion of the land until some years after he
had sold such land to Antonio Mu oz, this
subsequent acquisition of the land would
have the effect of making his conveyance of
the same to Muoz valid
No question was raised with reference to the
claim that the land which Antonio Muoz
originally acquired in the manner above
indicated, and which subsequently became
the property of Francisco Muoz de Bustillo,
now belongs to Francisco Muoz hijos.
With reference to the house claimed by
Maxima Narito situated upon said land, the
lower court found that said house belonged
to the said Maxima Narito.
HERNAEZ v.HERNAEZ
GR 10027 November 13, 1915
Digested by: Danna Magnolia Bongon
Facts: Through a sale in November 6, 1901,
Domingo Hernaez y Espinosa conveyed all
his hereditary rights to his son Vicente
Hernaez y Tuazon. Consequently, Domingo
once again sold his hereditary rights to the
Montelibanos in February 27, 1907. Such
transaction was done with the knowledge
and in connivance of Vicente. The
Montelibanos were directed to believe that
the owner of the hereditary rights was
Domingo when in fact it was already owned
by Vicente.
Issue: Is Vicente entitled to assert his right
over the property?
Held: No. He is estopped from claiming his
right over the property. The law protects
third persons who are buyers in good faith.

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De La Salle University

Rationale: Bigelow on Estoppel (p. 607)


says: . . . it is now a well-established
principle that where the true owner of
property, for however short a time, holds out
another, or, with knowledge of his own right,
allows another to appear as the owner of or
as having full power of disposition over the
property, the same being in the
latter's actual possession, and innocent third
parties are thus led into dealing with such
apparent owner, they will be protected.
Cristobal v. Gomez
G.R. No. L-27014
October 5, 1927
Digested by: Chantal Chua
Facts: Epifanio Gomez sold the property
with pacto de retro to Yangco. It was
stipulated that the property is redeemable
within five years. When the period to redeem
expired, Yangco extended it. In order to
redeem the land, Epifanio asked Banas for a
loan. Banas agreed, with the condition that
Epifanios brother, Marcelino, and sister,
Telesfora, be responsible for the loan. As
such, Marcelino and Telesfora entered into a
private partnership in participation. The
said agreement stipulated that the property
redeemed will be placed in the name of
Marcelino and Telesfora, the income, rent,
and produce of the property would go to the
two and that the property shall be returned
to their brother as soon as the capital
employed have been covered.

OBLIGATIONS
AND
CONTRACTS

lower court granted the petition and this is


Marcelinos appeal.
Marcelino submitted a notarial document
emitted on December 31, 1904, by Epifanio.
Therein, Epifanio certifies that Marcelino had
requested him to draw up a notarial act
showing the properties of which Marcelino
was known to be the true owner: including
the lot in Bacoor, being the parcel C
described in the complaint. Marcelino relies
upon this instrument as proving title in him,
contendeding that Epifanio and his
successors are estopped from claiming said
lot.
Issue: Are the heirs of Epifanio estopped
from claiming the property?
Held: No. Estoppel may not be invoked by a
person party to the collusion, by reason that
he could not have been misled.
Ratio: It is true that we have here the written
admission of Epifanio Gomez would have
been estopped from asserting ownership in
himself. Nevertheless, it is clear enough this
document executed by Epifanio, in
conclusion with his brother Marcelino, was
merely laying the basis of a scheme to
defeat Yangco's rights under his contract of
purchase of 1891, or perhaps to defeat other
creditors of Epifanio, a plot which, in view
of subsequent occurrences, they did not
attempt to carry into effect. No estoppel can
be invoked by Marcelino or his successors,
based upon this document, for the reason
that he was not misled by the false
statement contained therein.

A year or so later, Epifanio died. He left


Paulina Cristobal and their four children.
Marcelino continued to have possession
over the property. He improved on it and
earned from it. He had acquired exclusive
rights over the property when Telefesfora
conveyed her interest to him. Marcelino sold
said property to Banas, with pacto de
retro, redeemable within five years. He
redeemed it from Banas.

ANUNCIACION NARABAL DE NILO,


GIL NILO, FELICISIMO NILO, FILEMON
NILO, ET AL., petitioners,
vs.
HON. HONORIO ROMERO, Judge of the
Court of First Instance of Davao, Br. Ill
and the CITY of DAVAO,respondents.
G.R. No. L-15195
March 29, 1961
Digested by: Jose Joven Paulo Espinosa

Paulina and the heirs instituted this action to


recover the property from Marcelino. They
contend that the capital had already been
paid by the fruits he had earned from it.
Thus, it should be returned to them. The

Facts: On September 7, 1955, Fausto Nilo,


filed with the CFI of Davao, Civil Case No.
1708, against the City of Davao,
represented by the City Engineer, to recover

Atty. Chato Olivas-Gallo

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payment for the use as road way, of a part
of his land by the defendant City.
The City of Davao, thru its Special Counsel,
answering the complaint interposed the
affirmative defense of prescription of action,
pursuant to See. 43, No. 3, of Act No. 190,
limiting the filing of the action to four (4)
years.
On same date, plaintiff filed a motion to
declare defendant in default and that the
period to file answer expired on October 3,
1955, whereas the same was actually filed
on October 7, 1955.
The defendant City of Davao, thru the City
Attorney A. L. Noel, filed a "Petition for
Relief from Judgment", alleging for the first
time, that the trial court acquired no
jurisdiction over the defendant City of
Davao, because it was not the City
Engineer, but the City Mayor, who is under
the law (Charter of the City of Davao), the
right official to represent the City, and who
should have been served with summons
(Comm. Act No. 51); that after defendant
was declared in default, the plaintiffs filed an
Amended Complaint, without serving copy
thereof to the defendant; and that the
Republic of the Philippines should have
been included as a party, the subject matter
of the complaint being a national highway.
The petition was opposed by plaintiffs,
claiming that the court validly acquired
jurisdiction over the defendant City of
Davao, the City Engineer being an alter
ego of the City Mayor and that Special
Counsel Medialdea of the defendant entered
his appearance
On December 16, 1958, the lower court
entered an Order believing that it has not
acquired jurisdiction since it was the City
Mayor who must duly served with summons
not the City Engineer.
Issues: Whether or not the court has lost
jurisdiction because the defendant has been
erroneously represented?
Held:NO, The appearance of the City
Attorney for and in behalf of the City of
Davao constituted a voluntary appearance,

Atty. Chato Olivas-Gallo

sufficient in law to confer upon the court


jurisdiction over it. If defendant City believed
that it was wrongly represented, its City
Attorney should have filed a motion to
dismiss,
base
on
such
ground.
Unfortunately, however, he did not. The
doctrine of estoppel now operates against
respondent City of Davao. The erroneous
designation of representative, when the
defendant itself is named, to our belief, not
sufficient to set aside the proceedings had in
the case. Taking into account the actuation
of the defendant City of Davao, assisted by
its Special Counsel and/or City Attorney,
and the judicial pronouncements on the
subject, we see no reason why the technical
error in procedure obtaining in the present,
can be a sufficient ground to invalidate the
default proceedings. No serious arguments
can be offered to debut the fact that the
default judgment had already become final
and executory.

TITLE V
TRUSTS
CHAPTER 1
GENERAL PROVISIONS
Art. 1440. A person who establishes a
trust is called the trustor; one in whom
confidence is reposed as regards
property for the benefit of another person
is known as the trustee; and the person
for whose benefit the trust has been
created is referred to as the beneficiary.
Art. 1441. Trusts are either express or
implied. Express trusts are created by
the intention of the trustor or of the
parties. Implied trusts come into being by
operation of law.
Art. 1442. The principles of the general
law of trusts, insofar as they are not in
conflict with this Code, the Code of
Commerce, the Rules of Court and
special laws are hereby adopted.
Trust is a fiduciary relationship created by
agreement or by law where the trustor of the
property has the equitable title while the
legal title is vested in another (trustee)

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repudiated
Trust is the legal relationship between one
having an equitable ownership in property
and another person owning the legal title to
such property, the equitable ownership of
the former entitling him to the performance
of certain duties and the exercise of certain
powers by the latter. Trust relationship may
be express or implied.
The legal title is usually in the name of the
trustee while the equitable title is in the
name of the beneficiary.
The parties in a trust are:
1. trustor who establishes the trust
2. trustee the one in whom the
confidence is reposed as regards
the property for the benefit of
another person
3. beneficiary is the person for whose
benefit the trust is created
*the beneficiary may be the trustor himself,
in which case, only two persons will be
involved.

Distinctions Between Express Trust and


Implied Trust
Basis
1. Creation

2. Manner
of Creation

Trust Compared with Stipulaiton Pour


Autrui
Basis

Trust

1. Origin

It can arise
either
by
virtue of a
contract
or
by
legal
provision
The object of
a trust is
always
a
specific
property,
whether real
or personal,
including an
undivided
interest
therein as in
co-ownership
or choses in
action
It is either
express
or
implied.
It
continues to
exist unless

2. Object

3. Form

Atty. Chato Olivas-Gallo

Stipulation
Pour Autrui
It can arise
only by virtue
of a contract
and never by
operation of
law
The object of
a stipulation
pour
atrui
could either
be
specific
property
or
other things

It is always
express, and
must
be
accepted by
rd
the
3

person
before
the
grant
stipulated in
his favor is
mutually
revoked by
the parties

3.
Proof
needed
when
immovable
or interest
therein is
involved

4.
Prescriptio
n of action

Express
Trust
Created by
the intention
of the trustor
or of the
parties
Created by
the
direct
and positive
acts of the
parties,
by
some writing,
deed, or by
words, either
expressly or
impliedly,
envincing an
intention to
create a trust
If
the
express trust
involves an
immovable
property,
it
cannot
be
proved
by
parol
evidence
It
is
impresciptibl
e unless the
trust
has
been
repudiated

Implied Trust
Created
arises
operation
law

or
by
of

It is merely
deducible
from
the
nature of the
transaction

It
can
be
proved
by
parol evidence

It
is
prescriptable.
After 10 years
from
registration of
the title, the
action
is
barred.
Exception:
When
the
plaintiff
or
person
enforcing the
trust
is
in
possession of

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5.
Acquisition
by
prescriptio
n

Property
cannot
be
acquired by
prescription
because the
possession
of the trustee
is
not
adverse

the property,
action
is
imprescriptible
.
Property can
be
acquired
by
prescription.

to establish a trust is to be taken from


circumstances or other matters indicative of
such intent, then the trust is implied. From
these and from the provisions of paragraph
8 of the complaint itself, We find it clear that
the plaintiffs alleged an express trust over
an immovable, especially since it is alleged
that the trustor expressly told the defendants
of his intention to establish the trust. Such a
situation definitely falls under Article 1443 of
the Civil Code. (Cuaycong v. Cuaycong,
G.R. No. L-21616, December 11, 1967)
Parol Evidence oral or verbal evidence

CHAPTER 2
EXPRESS TRUST
Art. 1443. No express trusts concerning
an immovable or any interest therein may
be proved by parol evidence.
Art. 1444. No particular words are
required for the creation of an express
trust, it being sufficient that a trust is
clearly intended.
Art. 1445. No trust shall fail because the
trustee
appointed
declines
the
designation, unless the contrary should
appear in the instrument constituting the
trust.
Art. 1446. Acceptance by the beneficiary
is necessary. Nevertheless, if the trust
imposes no onerous condition upon the
beneficiary, his acceptance shall be
presumed, if there is no proof to the
contrary.
Definition: Our Civil Code defines an
express trust as one created by the intention
of the trustor or of the parties, and an
implied trust as one that comes into being by
operation of law. Express trusts are those
created by the direct and positive acts of the
parties, by some writing or deed or will or by
words evidencing an intention to create a
trust. On the other hand, implied trusts are
those which, without being expressed, are
deducible from the nature of the transaction
by operation of law as matters of equity, in
dependently of the particular intention of the
parties. Thus, if the intention to establish a
trust is clear, the trust is express; if the intent

Atty. Chato Olivas-Gallo

"To create a trust by will the testator must


indicate in the will his intention so to do by
using language sufficient to separate the
legal from the equitable estate, and with
sufficient
certainty
designate
the
beneficiaries, their interest in the trust, the
purpose or object of the trust, and the
property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary
trust there must be a concurrence of three
circumstances: (1) Sufficient words to raise
a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in
some
jurisdictions expressly or in effect so
providing." (Lorenzo v. Posadas, G.R. No. L43082, June 18, 1937)
Philippine Air Lines, Inc. v. Heald Lumber
Company
No. L-11497, August 16, 1957
Digested by: Darwin Perry Rubio
Facts:
Lepanto
Consolidated
Mines
chartered a helicopter belonging to
Philippine Air Lines, Inc. (PAL) to make a
flight from Nichols Field Airport to the
former's camp at Mankayan, Mountain
Province. The helicopter, however, failed to
reach its destination for the reason that, it
collided with Heald Lumbers tramway steel
cables
somewhere
in
Ampusungan,
Mankayan, Mt. Province, resulting in its
destruction and the death of Capt. Gabriel
Hernandez, the pilot, and Lt. Rex Imperial,
the first officer. As a result of the crash, the
insurance companies paid PAL a total
indemnity of P120,000. Nevertheless, it
sustained additional damages totalling
P103,347.82 which were not recovered by
the insurance. Thereafter, PAL commenced
an action before the Court of First Instance
Baguio (CFI) to recover from Heald Lumber:

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De La Salle University
(a) the sum of P120,000 paid by the
insurance companies as indemnity for the
loss of the helicopter and the death of Capt.
Hernandez and Lt. Imperial; and (b) the sum
of P103,347.82 representing consequential
and moral damages which it had incurred as
a result of the loss of the helicopter and the
death of the officers. The CFI, acting on a
Motion to Dismiss submitted by Heald
Lumber, ordered PAL to amend its
complaint on the ground that in its first
cause of action, the real parties in interest
are the insurance companies concerned so
that PAL should either delete this allegation
or bring in the insurance companies as
parties plaintiff. Aggrieved, PAL appealed
the decision before the Supreme Court.
Issue: Is PAL the real party in interest with
respect to the claim for P120,000.00?
Held: No. Under Article 2207 of the Civil
Code, if a property is insured and the owner
receives the indemnity from the insurer, the
insurer is deemed subrogated to the rights
of the insured against the wrongdoer and if
the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is
the one entitled to recover the deficiency.
Ratio: It is insisted that despite the
subrogation of the insurer to the rights of the
insured, the latter can still bring the action in
its name because the subrogation vests in
the latter the character of a trustee charged
with the duty to pay to the insurer so much
of the recovery as corresponds to the
amount it had received as a partial
indemnity. This cannot be true in this
jurisdiction, for before a person can sue for
the benefit of another under a trusteeship,
he must be "a trustee of an express trust"
(Section 3, Rule 3, Rules of Court). Thus,
under this provision, "in order that a trustee
may sue or be sued alone, it is essential that
his trust should be express, that is, a trust
created by the direct and positive acts of the
parties, by some writing, deed, or will or by
proceedings in court. The provision does not
apply in cases of implied trust, that is, a trust
which may be inferred merely from the acts
of the parties or from other circumstances"
(Moran, Comments on the Rules of Court,
Vol. I, 1952 Ed., p. 35).
Extinguishment of an Express Trust

Atty. Chato Olivas-Gallo

1.
2.
3.
4.
5.
6.
7.
8.
9.

Accomplishment of its aims


Expiration of the term
Mutual agreement of all parties
Happening
of
the
resolutory
condition, if applicable
Total loss of the object
Annulment or Rescission
Court declaration
Merger of the rights of the trustor
and the trustee
Prescription

Amerol v. Bagumbaran
No. L-33261, September 30, 1987
Digested by: Katrina Calugay
Facts: Liwalug Datomanong (erroneously
surnamed Amerol in this case) seeks to
recover possession or reconveyance of the
land known as Lot No. 524, alleging that
Molok Bagumbaran obtained his free patent
through fraud. According to him, he was the
one who first filed an application for free
patent (September 1953) and despite
Bagumbarans knowledge of his application,
he later applied for the same on December
1954. It was Bagumbarans application that
was given due course thus Free Patent No.
V-19050 was issued to him on August 1955
by
authority
of
President
Ramon
Magsaysay.
Bagumbaran answered by alleging that he
has been in good faith in applying for the
free patent. He also said that even if
Datomanongs claims are true, his action to
order the reconveyance of the land has
already prescribed, the prescription being
four years from the time of the issuance of
the Original Certificate of Title in
Bagumbarans name.
The lower court found fraud on the part of
Bagumbaran. However, it still ruled in his
favor on the ground of prescription.
Issue: Can Datomanong have the land
reconveyed to his favor?
Held: Yes. From the facts presented by the
parties, the court found out that indeed,
Bagumbaran obtained the patent and the
Original Certificate of Title through fraud. He
misrepresented himself to be the actual
possessor of the property when in fact he is

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De La Salle University
fully aware that Datomanong is in actual
possession of the property and has been
introducting several improvements when he
filed his application.
An implied trust is created whenever a
property is acquired through mistake or
fraud, as in this case. By the fraudulent act
of Bagumbaran, he is deemed to hold the
title of the property in trust and for the
benefit of Datomanong.
Also, despite the issuance of a Torrens
Certificate of Title to Bagumbaran, the same
can still be cancelled and the property can
still be reconveyed to the rightful owner. The
prescription period is not four years, but ten
years as provided in the law. Since the
period between 1955 (the date of iissucance
of the Original Certificate of title) and 1964
(the date when an action for reconveyance
was filed) is less than ten years, the action
has not prescribed yet.
The court ordered the reconveyance of the
Original Certificate of Title in favor of
Datomanong.
Ratio: In this case, the land in question was
patented and titled in respondent's name by
and through his false pretenses. Molok
Bagumbaran fraudulently misrepresented
that he was the occupant and actual
possessor of the land in question when he
was not because it was Liwalug
Datomanong.
Bagumbaran
falsely
pretended that there was no prior applicant
for a free patent over the land but there was
Liwalug Datomanong. By such fraudulent
acts, Molok Bagumbaran is deemed to hold
the title of the property in trust and for the
benefit of petitioner Liwalug Datomanong.
Notwithstanding the irrevocability of the
Torrens title already issued in the name of
respondent, he, even being already the
registered owner under the Torrens system,
may still be compelled under the law to
reconvey the subject property to Liwalug
Datomanong. After all, the Torrens system
was not designed to shield and protect one
who
had
committed
fraud
or
misrepresentation and thus holds title in bad
faith. Further, contrary to the erroneous
claim of the respondent, 9 reconveyance
does not work to set aside and put under

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

review anew the findings of facts of the


Bureau of Lands. In an action for
reconveyance, the decree of registration is
respected as incontrovertible. What is
sought instead is the transfer of the
property, in this case the title thereof, which
has been wrongfully or erroneously
registered in another person's name, to its
rightful and legal owner, 10 or to one with a
better right. That is what reconveyance is all
about.
Marquez vs Court of Appeals
GR No. 125715 December 29, 1998
Digested by: Jerika Everly Marquez
Facts: Rafael Marquez, Sr. and Felicidad
Marquez acquired a parcel of land located at
San Juan Del Monte, Rizal wherein they had
their conjugal home built. 30 years after
Felicidad died intestate, Rafael executed an
Affidavit of Adjudication for the sole
ownership of the property in question.
Rafael Marquez, Sr. then executed a Deed
of Donation Inter Vivos of the property to
three of his children.
The petitioners, in this case, then
demanded for their shares over the property.
Efforts to settle the dispute were unavailing
since the defendants ignored the demands
of the petitioners. A complaint for
Reconveyance and Partition with Damages
was filed by the petitioners. They claim that
the respondents only took advantage of the
current condition and age of their father. The
petitioners further argue that the documents
were executed with fraud. On the other
hand, private respondents claim that the
petitioners action has already prescribed. IT
should have been filed four years from the
date of the discovery of fraud.
The trial court rendered a decision in favour
of the petitioners. On the other hand, Court
of Appeals reversed the decision of the trial
court.
The
petitioners
Motion
for
Reconsideration was denied. Hence, this
petition.
Issue: Has the action for reconveyance
already prescribed?
Held: No, an action for reconveyance based
on implied or constructive trust prescribes in
10 years.

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Ratio: In this regard, it is settled that an


action for reconveyance based on an
implied or constructive trust prescribes in ten
years from the isuance of the Torrens title
over the property. For the purpose of this
case, the prescriptive period shall start to
run when TCT No. 33350 was issued, which
was on June 16, 1982. Thus, considering
that the action for reconveyance was filed on
May 31, 1991, or approximately nine years
later, it is evident that prescription had not
yet barred the action.
To bolster the foregoing position, the Court
of Appeal's reliance on Gerona v. de
Guzman, is
misplaced.
InAmerol
v.
Bagumbaran, we ruled that the doctrine laid
down in the earlier Gerona case was based
on the old Code of Civil Procedure which
provided that an action based on fraud
prescribes within four years from the date of
discovery. However, with the effectivity of
the present Civil Code on August 30, 1950,
the provisions on prescriptive periods are
now governed by Articles 1139 to 1155.
Since implied or constructive trusts are
obligations created by law then the
prescriptive period to enforce the same
prescribes in ten years.
Pedrano v. Heirs of Benedicto Pedrano
G.R. No. 159666 December 4, 2007
Digested by: Gallard Kevin Labares
Facts: This is a case of a family feud over a
lot, Lot 6416 and Lot 6409-A. The lot was
previously owned by a Dr. Isidro Hynson
before it was sold to the mother of the
complainant, Romana Pedrano. The son
says that he bought the lot for 30,000 php
from his mother payable on December 1982.
Since the land had no titles, they were
subject to cadastral proceedings which then
allocated Lot 6416 to the mother and lot
6409 to the son. The heirs of Benedicto
Pedrano say that the sale was never
complied with and that the 30,00 php was
never paid for the lot and in the deed of sale
from Dr. Hynson his name was replaced by
Romanas name but still she allowed her
son to occupy the said lot and they were
unaware that he asked for a cadastral
proceeding to entitle the land to himself and
insists that he did pay the balance for the
land and as a defense he says that the
action was already 14 years prescribed. The

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

RTC ruled in favour of the son but was


overturned by the CA because it was not
Art. 1146 that should be applied but rather
Art. 1456 of the civil code, the CA also said
that he did not have enough evidences to
prove that he did purchase the land because
the deed of sale explicitly states that it was
Romana who purchased it. The CA also
stated that implied trust has already ceased
and now he is under obligation to return the
property to defendats.
Issue: Was there implied trust of the
property to Romanas son in this case?
Held: Yes, there was implied trust.
Ratio: What is clear in the aforecited deed
of sale is that the late Romana was the
buyer of Lot No. 6416 from Dr. Hynson; that
petitioner was to pay Romana PhP 30,000
for it; and that he had until December 31,
1982 to do so. Petitioner claims he did but
offers no proof of payment although he
occupied the land. While it is incumbent for
petitioner to present proof that he indeed
paid it, he had not presented any. Under
these facts and even if we concede that the
sale was perfected, still petitioner failed to
perform his obligation to pay the
consideration of PhP 30,000 to Romana.
Since petitioner failed to comply with what is
incumbent upon him, the injured parties
(respondents as heirs of Romana) may
choose between fulfillment and rescission of
the sale under Art. 1191 of the Civil Code.
Respondents chose rescission. Thus, the
juridical tie between the parties is invalidated
and it leaves the parties with their respective
property rights relating to Lot No. 6416
before the celebration of the December 22,
1981 Deed of Sale.
What remains therefore is the undisputed
March 15, 1965 Deed of Sale with Romana
as the buyer. Petitioners possession of Lot
No. 6416, owned by his parents, was an
implied trust constituted upon petitioner. The
CA is correct in applying Art. 1456 on
implied trust to this case.
Art. 1456 provides, If property is acquired
through mistake or fraud, the person
obtaining it is, by force of law, considered a

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trustee of an implied trust for the benefit of
the person from whom the property comes."

CHAPTER 3
IMPLIED TRUST
Art. 1447. The enumeration of the
following cases of implied trust does not
exclude others established by the
general law of trust, but the limitation laid
down in Article
1442 shall be applicable.
Art. 1448. There is an implied trust when
property is sold, and the legal estate is
granted to one party but the price is paid
by another for the purpose of having the
beneficial interest of the property. The
former is the trustee, while the latter is
the beneficiary. However, if the person to
whom the title is conveyed is a child,
legitimate or illegitimate, of the one
paying the price of the sale, no trust is
implied by law, it being disputably
presumed that there is a gift in favor of
the child.
Art. 1449. There is also an implied trust
when a donation is made to a person but
it appears that although the legal estate
is transmitted to the donee, he
nevertheless is either to have no
beneficial interest or only a part thereof.
Art. 1450. If the price of a sale of property
is loaned or paid by one person for the
benefit of another and the conveyance is
made to the lender or payor to secure the
payment of the debt, a trust arises by
operation of law in favor of the person to
whom the money is loaned or for whom
its is paid. The latter may redeem the
property and compel a conveyance
thereof to him.
Art. 1451. When land passes by
succession to any person and he causes
the legal title to be put in the name of
another, a trust is established by
implication of law for the benefit of the
true owner.
Art. 1452. If two or more persons agree to
purchase property and by common
consent the legal title is taken in the

Atty. Chato Olivas-Gallo

name of one of them for the benefit of all,


a trust is created by force of law in favor
of the others in proportion to the interest
of each.
Art. 1453. When property is conveyed to
a person in reliance upon his declared
intention to hold it for, or transfer it to
another or the grantor, there is an
implied trust in favor of the person
whose benefit is contemplated.
Art. 1454. If an absolute conveyance of
property is made in order to secure the
performance of an obligation of the
grantor toward the grantee, a trust by
virtue of law is established. If the
fulfillment of the obligation is offered by
the grantor when it becomes due, he may
demand the reconveyance of the
property to him.
Art. 1455. When any trustee, guardian or
other person holding a fiduciary
relationship uses trust funds for the
purchase of property and causes the
conveyance to be made to him or to a
third person, a trust is established by
operation of law in favor of the person to
whom the funds belong.
Art. 1456. If property is acquired through
mistake or fraud, the person obtaining it
is, by force of law, considered a trustee
of an implied trust for the benefit of the
person from whom the property comes.
Art. 1457. An implied trust may be proved
by oral evidence.
IMPLIED TRUSTS
A. Meaning
An implied trust is one that is DEDUCTIBLE
from the nature of the transaction as a
matter of intent or which is superinduced on
the transaction by operation of law as a
matter of equity, INDEPENDENTLY OF A
PARTICULAR
INTENTION
OF
THE
PARTIES.
Enumerated cases of implied trusts are NOT
exclusive. The limitation that trusts should
not be in conflict with the Civil Code, the
Code of Commerce, the Rules of Court and
special laws are applicable.

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When a disqualified alien purchased land in
the Philippines and placed the property in
the name of a dummy to circumvent the law,
NO TRUST IS CREATED.
Albert F. Kiel vs. Estate of PS Sabert
G.R. No. L-3717
Digested by: Bryan ONeal Cua
Facts: Petitioner in the case is asking the
court to secure from the estate of the
deceased P20,000 resulting from a legal
right granted to him by the CFI and
escalated to this court. In 1907, Kiel and
Milfeil commenced to work on public lands
known as Parang Plantaion Company in the
province of Cotobato, having taken over the
interest of Milfeil, Kiel by the 1910s had P.S.
Sabert enter in to an agreement to provide
capital for the endeavor with him as the
manager. Such was that the true intention of
the partners was to acquire the property in
Saberts name as Kiel was a german and
hence incapable of owning the land himself.
From 1910 -1917, the duo worked on the
development of the land until the War broke
out and Kiel was sent back to Germany. On
August 16, 1919, five persons, including P.
S. Sabert, organized the Nituan Plantation
Company, with a subscribed capital of
P40,000. On April 10, 1922, P. S. Sabert
transferred all of his rights in two parcels of
land situated in the municipality of Parang,
Province of Cotabato, embraced within his
homestead application No. 21045 and his
purchase
application No. 1048, in
consideration of the sum of P1, to the Nituan
Plantation Company. A letter dated 6-6-1918
from Sabert addressed to Kiel contained the
intentions of the former to settle what he
apparently owes to the partnership with the
latter, but before any settlement between the
two can be reached Sabert died.
Issue: Does a trust form from the
partnership of Kiel and Sabert over the
land?
Held: No; however he is entitled to his share
of the value of the improvements made upon
such land, such belonging to the partnership
they had.
Ratio: The court explains that in this case
no trust can arise in the ownership of the
land in question. Kiel being an alien is

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OBLIGATIONS
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disqualified from purchasing lands in the


Philippines and to circumvent such laws, he
had the land placed in the name of a dummy
to which describes the role of Sabert in their
partnership.
The court further elaborates: A trust will not
be created when, for the purpose of evading
the law prohibiting one from taking or
holding real property, he takes a
conveyance thereof in the name of a third
person.
Furthermore: As we have already intimated,
we do not think that Kiel is entitled to any
share in the land itself, but we are of the
opinion that he has clearly shown his right to
one-half of the value of the improvements
and personal property on the land as to the
date upon which he left the plantation. Such
improvements and personal property include
buildings, coconut palms, and other
plantings, cattle and other animals,
implements,
fences,
and
other
constructions, as well as outstanding
collectible credits, if any, belonging to the
partnership.
The
value
of
these
improvements and of the personal property
cannot be ascertained from the record and
the case must therefore be remanded for
further proceedings.
When the purchaser paid for the price, but
the legal title (or estate) is granted to
another, there is an implied trust. The
purchaser has the beneficial interest in the
property and is therefore the beneficiary.
The one to whom the title or estate is
conveyed to is the trustee.
BUT, if the title is conveyed to a legitimate or
illegitimate child, there is no trust implied by
law. PRESUMPTION: The property is a gift
in favour of the child. No need to follow
formalities of donation.
Purchase money resulting
another term for implied trust.

trust:

is

Elements of Purchase Money Resulting


Trust/Implied Trust:
1) There is an actual payment of money,
property, service or an equivalent
(valuable consideration).

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2) Such consideration must be furnished
by the alleged beneficiary.
Note: The burden of proving the evidence of
a trust is on the party asserting its existence.
The elements must be satisfied.
Thomson v. CA
G.R. No. 116631
Digested by: Dino De Leon
Facts:
Petitioner
Marsh
Thomson
(Thomson) was the Executive VicePresident and, later on, the Management
Consultant of private respondent, the
American Chamber of Commerce of the
Philippines, Inc. (AmCham) for over ten
years, 1979-1989.
While petitioner was still working with private
respondent, his superior, A. Lewis Burridge,
retired as AmCham's President. Before
Burridge decided to return to his home
country, he wanted to transfer his
proprietary share in the Manila Polo Club
(MPC) to petitioner. However, through the
intercession of Burridge, private respondent
paid for the share but had it listed in
petitioner's name.
When petitioner's contract of employment
was up for renewal in 1989, he notified
private respondent that he would no longer
be available as Executive Vice President
after September 30, 1989. Still, the private
respondent asked the petitioner to stay on
for another six (6) months.
Petitioner indicated his acceptance of the
consultancy arrangement with a counterproposal in his letter dated October 8, 1989,
indicating among others, Retention of the
Polo Club share, subject to my reimbursing
the purchase price to the Chamber, or one
hundred ten thousand pesos (P110,000.00).
AMCHAM rejected the counter proposal of
Thomson. On April 5, 1990, private
respondent, through counsel sent a letter to
the petitioner demanding the return and
delivery of the MPC share which "it
(AmCham) owns and placed in your
(Thomson's) name."
Failing to get a favorable response, private
respondent filed on May 15, 1990, a
complaint against petitioner praying, inter
alia, that the Makati Regional Trial Court
render judgment ordering Thomson "to

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OBLIGATIONS
AND
CONTRACTS

return the Manila Polo Club share to the


plaintiff and transfer said share to the
nominee of plaintiff."
RTC awarded the ownership of the MPC
shares to Thomson and ordered him to pay
AmCham 300,000.00. In said decision, the
trial court awarded the MPC share to
defendant (petitioner now) on the ground
that the Articles of Incorporation and Bylaws of Manila Polo Club prohibit artificial
persons, such as corporations, to be club
member.
CA awarded the ownership, on the other
hand to AmCham saying:
Issue: Who is the rightful owner of the
Manila Polo Club Shares?
Held: AmCham is the rightful owner of the
MPC Shares.
Ratio: The beneficiary of a trust has
beneficial interest in the trust property, while
a creditor has merely a personal claim
against the debtor. In trust, there is a
fiduciary relation between a trustee and a
beneficiary, but there is no such relation
between a debtor and creditor. While a debt
implies merely an obligation to pay a certain
sum of money, a trust refers to a duty to
deal with a specific property for the benefit
of another. If a creditor-debtor relationship
exists, but not a fiduciary relationship
between the parties, there is no express
trust. However, it is understood that when
the purported trustee of funds is entitled to
use them as his or her own (and commingle
them with his or her own money), a debtorcreditor relationship exists, not a trust.
In the present case, as the Executive VicePresident of AmCham, petitioner occupied a
fiduciary position in the business of
AmCham. AmCham released the funds to
acquire a share in the Club for the use of
petitioner but obliged him to "execute such
document as necessary to acknowledge
beneficial ownership thereof by the
Chamber". A trust relationship is, therefore,
manifestly indicated.
Moreover, petitioner failed to present
evidence to support his allegation of being
merely a debtor when the private
respondent paid the purchase price of the

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MPC share. Applicable here is the rule that
a trust arises in favor of one who pays the
purchase money of property in the name of
another, because of the presumption that he
who pays for a thing intends a beneficial
interest therein for himself.
Although petitioner initiated the acquisition
of the share, evidence on record shows that
private respondent acquired said share with
its funds. Petitioner did not pay for said
share, although he later wanted to, but
according to his own terms, particularly the
price thereof.
While private respondent paid the purchase
price for the share, petitioner was given
legal title thereto. Thus, a resulting trust is
presumed as a matter of law. The burden
then shifted to the transferee to show
otherwise, that it was just a loan. Such
resulting trust could have been rebutted by
proof of a contrary intention by a showing
that, in fact, no trust was intended. Petitioner
could have negated the trust agreement by
contrary,
consistent
and
convincing
evidence on rebuttal. However, on the
witness stand, petitioner failed to do so
persuasively.
Turning now to the other issue, the petitioner
contends that the Articles of Incorporation
and By-laws of Manila Polo Club prohibit
corporate membership. However, private
respondent does not insist nor intend to
transfer the club membership in its name but
rather to its designated nominee. Therefore,
there is no violation of the MPC by-laws.
Castro v. Castro
G.R. No. 36199.
Digested by: Othello Mendoza, II
Facts: A parcel of land formerly belonged to
the deceased Mariano. His daughter
Maximiana is married to Vicente Castro.
They produced six children: Jose (the
eldest), Vicente, Manuel, Consolacion,
Maria and Pedro. Vicente (Maximiana's son)
is already dead but was survived by his four
minor children. Mariano's heirs divided the
land. The subject land in this case has been
assigned to Maximiana. She was aided by
Jose in bringing portions of the property
back into a state of cultivation.

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OBLIGATIONS
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Maximiana died. At that time, Jose was the


only one of her children who was of age. He
assumed the administration of the land. He
also acted as representative of all
Maximiana's children. He registered the land
in his sole name. Jose's uncle Manuel
assented to this scheme and aided his
nephew in obtaining the registration of the
property, in the belief that Jose was acting
for all the heirs. He alleged that he had
acquired the land by inheritance from his
mother Maximiana. He now claims that he
had taken possession of the property in his
own right, prior to his mother's death, by
virtue of an assignment of the property
made to him by his mother, acting in concert
with her brothers and sisters.
Issue: Are Jose's brothers and sister and
the deceased Vicente's minor children
entitled to shares of a parcel of land issued
in the name of Jose?
Held: Yes. When Jose procured the land
registration in his name, he was acting in a
trust capacity and as representative of all his
brothers and sisters. As consequence, he is
now holding the registered title in a trust
capacity. The plaintiffs are entitled to their
several pro rata shares.
Ratio: One who acquires a Torrens title in
his own name to property which he is
administering for himself and his brothers
and sisters as heirs in common by descent
from a common ancestor may be compelled
to surrender to each of his co-heirs his
appropriate share; and a proceeding for
partition is an appropriate remedy by which
to enforce this right.
A donation made to a person (donee) is also
an implied trust. The donee may not have
any beneficial interest. Even if he has, it may
be only on a part of the whole property.
The payor of a property (for the benefit of
another), and the conveyance of the
property was made to the payor (to secure
the payment of debt), there is a trust
established. The beneficiary may go after
the payor to redeem the property and he can
compel conveyance of the property to
himself. This is a CONSTRUCTIVE TRUST.
To prevent unjust enrichment.
Land inherited by an heir can be registered
in the name of another.

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De Jesus v. De Jesus
GR No. L-16553
Digested by: Ken Gador
Facts: Melecio de Jesus died. His wife, Ines
Alejandrino, became the administratrix of his
estate. She later on filed an inventory of
Melecio's estate. Subsequently, Melecio's
sister, Eusebia, filed a verified claim against
the estate for Php 7,585.84. Instead, Ines,
Eusebia and Cirilio entered into a stipulation
of facts wherein Ines recognized that
Eusebia and Cirilio are co-owners of
Melecio's certain property, and that said
property was registered in the sole name of
Melecio only in trust for all the co-owners.
Due to the stipulation of facts, Eusebia
waived her claim. Both agreements were
approved
by
the
probate
court.
Subsequently, Ines was replaced by her
son, Leon, in the administration of Melecio's
estate. Both mother and son, subsequently,
filed a petition in the lower court, seeking to
annul the stipulations entered into by Ines,
Eusebia and Cirilio. The grounds upon by
the mother and son relied on were: 1. lack of
jurisdiction from the probate court, 2. Lack of
the requisite notices to all the interested
parties, specifically the heirs of Melecio.
Eusebia and Cirilio moved to dismiss the
complaint. The lower court ruled against the
mother and son.
Issue: Does the probate court have
jurisdiction to approve the agreement?
Held: Yes, the probate court has jurisdiction
Ratio: The probate court has jurisdiction to
act on and approve the stipulation in
question, not only as an incident to its power
to exclude any property from the inventory of
the estate of Melecio, but under Section 9,
Rule 90 of the Rules of Court. Said provision
permits the probate court, whenever the
deceased in his lifetime held real property in
trust of another person, to authorize the
executor or administrator to deed such
property to the person or persons for whose
age and benefit it was so held.
There being no controversy between the
former administratrix (Ines) and the
defendants, that the latter and Melecio owns
the property in question as co-owners and
that it was registered in Melecio's name only

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OBLIGATIONS
AND
CONTRACTS

in trust for all the co-owners, there was no


need to file a separate action in an ordinary
court to establish the common ownership of
the parties over said properties.
On the contentions raised by the plaintiffs
regarding the failure to deliver notices to the
heirs, the SC said that it can't determine if
the notices were indeed given. That is why,
the case was remanded to the trial court.
Purchasers of a property can place the legal
title in the name of one them. The
purchasers are co-owners. If there is no
agreement, their shares are presumed
equal.
Uy Aloc v Cho Jan Ling
G.R. No. 5333
Digested by: Ana Victoria Hernandez
Facts: A number of Chinese merchants
raised a fund to purchase a land and
erected a building to be used as a club
house.
The
subscribers
organized
themselves but they did not have regular
articles of association and was not
registered in any commercial registry thus
they are not a legal entity. It was agreed that
they will place the name of Cho Jan Ling in
the title of the property. Ling agreed to hold
the property as an agent. He collected 25,
000 in rents for which he failed to account
and when he was compelled to do so he
alleged that he bought the said property with
his own money. The trial court made Ling
accountable to the rents received.
Issue: Should Ling be accountable to the
rents amounting to 25, 000?
Held: Yes, the plaintiffs are entitled to relief.
Ratio: In the case at bar we think that the
evidence clearly discloses not only that the
funds with which the property in question
was purchased were furnished by the
members of the association, but that Cho
Jan Ling, in whose name it was registered,
received and holds the property as agent
and trustee of the association; that on at
least one occasion he admitted the
beneficial ownership to be in the
association; and that while the legal
registered title is in his name the beneficial
ownership is in the association.

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The legal title of the holder of the registered
title is not questions; it is admitted that the
members of the association voluntarily
obtained the inscription in the name of Cho
Jan Ling, they have no right to have it
cancelled, but they maintain and we think
that they rightly maintain that he holds it
under an obligation, both expressed and
implied, to deal with it exclusively for the
benefit of the members of the association
and subject to their will.
There is also an implied trust when property
conveyed to a person is committed to hold
or transfer it to another.
When there is an absolute conveyance of
property to secure the performance of an
obligation and once the obligation is fulfilled,
the grantor may demand reconveyance of
the property to himself. (Like a sale of
repurchase).
Escobar vs. Locsin
G.R. No. 48309
Digested by: Martin Angelo Millete
Facts: Eusebia Escobar is the owner of a lot
in Nueva Ecija. She acquired the said lot
from Pablo Ringor in 1914 by way of
donation propter nuptias. Being illiterate, she
sought the help of one Domingo Sumangil to
help her claim the lot in question in the
cadastral proceedings. However, Sumangil
claimed the lot for himself. Due to the
breach of trust committed, Ramon Locsin,
the special administrator of the estate of
Juana Ringor to which the lot in question is
a part of, assigned the land to Sumangils
estate. In lieu of such, Escobar files a
petition before the Supreme Court, asking
for the reconveyance of the lot in question.
Issue: May Sumangil be ordered to convey
the land to Escobar?
Held: Yes, Sumangil may be ordered to
convey the lot to Escobar. Clearly, he
committed a breach of trust reposed unto
him by Escobar, who was illiterate and
sought his help in the cadastral proceedings.
Ratio: A trust such as that which was
created between the plaintiff and Domingo
Sumangil is sacred and inviolable. The
Courts have therefore shielded fiduciary

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OBLIGATIONS
AND
CONTRACTS

relations against every manner of chicanery


or detestable design cloaked by legal
technicalities. The Torrens system was
never calculated to foment betrayal in the
performance of a trust.
The fiduciary can use trust funds in
purchasing property in his name. But the
conveyance was made to a third person.
Prevents unjust enrichment on the part of
the fiduciary.
Camacho v. Municipality of Baliuag
G. R. No. 9363
Digested by: Maria Corazon Baluyut
Facts: There are lots owned by the
municipal government of being occupied as
a school and as the municipal building.
When the central government claimed the
land and ordered for its sale (via an auction),
herein plaintiff Albino Camachos bid of P
300 was accepted and the title was issued
to him and was subsequently registered in
1896. However after the sale the
municipality continued to occupy and collect
rent from the said lots. Camacho claims that
he had lost his documents of the title during
the revolution and that his attorney was the
one who returned it to him. In the testimony
of Father Prado (the parish priest of the
municipality during the period in question)
during the time when the insular government
directed a sale, he chose Camacho to
appear at the auction and bid for the
property, and that Camacho purchased the
land with Father Prados money. When
Camacho received the title he turned them
over to Father Prado who kept it in his
possession until he was obliged to leave the
municipality. Many other witnesses testified
that Camacho was just a representative of
either the municipality or of Father Prado.
Even the tenants testified that when they
would pay the rent it was always paid to the
municipality and not to Camacho.
Issue: Is Camacho the holder of the land for
and on behalf of the municipality or is he the
owner?
Held: The court simply absolved the
defendant from the complaint. The
defendant municipality does not ask for a
cancellation of the deed. The deed is relied
upon to supplement the oral evidence

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showing that the title to the land is in the
defendant. The proper procedure in such a
case, so long as the rights of innocent third
persons have not intervened, is to compel a
conveyance to the rightful owner. This ought
and can be done under the issues raised
and the proof presented in the case at bar.
If the property is acquired through mistake
or fraud, the one who acquired it is

Atty. Chato Olivas-Gallo

OBLIGATIONS
AND
CONTRACTS

considered to be a trustee of an implied


trust, for the benefit of the real owner. Not
applicable to violation of conditions of a
donation.

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CIVIL LAW BAR EXAMINATION QUESTIONS (Obligations & Contracts)


2010
A. What is the difference between guaranty and suretyship?
2009
A. Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of
five million pesos (P5,000,000.00). To buy a new car, she obtained a loan from the
same bank in the amount of P1,200,000.00, payable in twelve monthly installments.
Sarah issued in favor of the bank post-dated checks, each in the amount of
P100,000.00, to cover the twelve monthly installment payments. On the third, fourth
and fifth months, the corresponding checks bounced.
B. The bank then declared the whole obligation due, and proceeded to deduct the
amount of one million pesos (P1,000,000.00) from Sarahs deposit after notice to her
that this is a form of compensation allowed by law. Is the bank correct? Explain.
(4%).
C. Rosario obtained a loan of P100,000.00 from Jennifer, and pledged her diamond ring.
The contract signed by the parties stipulated that if Rosario is unable to redeem the
ring on due date, she will execute a document in favor of Jennifer providing that the
ring shall automatically be considered full payment of the loan.
D. Is the contract valid? Explain. (3%)
E. Will your answer to [a] be the same if the contract stipulates that upon failure of
Rosario to redeem the ring on due date, Jennifer may immediately sell the ring and
appropriate the entire proceeds thereof for herself as full payment of the loan?
Reasons. (3%)
2008
A. Eduardo was granted a loan by XYZ Bank for the purpose of improving a building
which XYZ leased from him. Eduardo, executed the promissory note (PN) in favor
of the bank, with his friend Recardo as co-signatory. In the PN, they both
acknowledged that they are individually and collectively liable and waived the need
for prior demand. To secure the PN, Recardo executed a real estate mortgageon his
own property. When Eduardo defaulted on the PN, XYZ stopped payment of rentals
on the building on the ground that legal compensation had set in. Since there was
still a balance due on the PN after applying the rentals, XYZ foreclosed the real
estate mortgage over Recardos property. Recardo opposed the foreclosure on the
ground that he is only a co-signatory; that no demand was made upon him for
payment, and assuming he is liable, his liability should not go beyond half the
balance of the loan. Further, Recardo said that when the bank invoked compensation
between the reantals and the amount of the loan, it amounted to a new contract or
novation, and had the effect of extinguishing the security since he did not give his
consent (as owner of the property under the real estate mortgage) therto.
a. Can XYZ Bank balidly assert legal compensation? (2%)
b. Can Recardos property be foreclosed to pay the full balance of the loan?
(2%)
c. Does Recardo have basis under the Civil Code for claiming that the original
contract was novated? (2%)

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B. AB Corp. entered into a contract with XY Corp. whereby the former agreed to
construct the research and laboratory facilities of the latter. Under the terms of the
contract, AB Corp. agreed to complete the facility in 18 months, at the total contract
price of P10 million. XY Corp. paid 50% of the total contract price, the balance to be
paid upon completion of the work. The work stated immediately, but AB Corp. later
experienced work slippage because of labor unrest in his company. AB Corp.s
employees claimed that they are not being paid on time; hence, the work slowdown.
As of the 17th month, work was only 45% completed. AB Corp. asked for extension
of time, claiming that its labor problems is a case of fortuitous event, but this was
denied by XY Corp. When it became certain that the contruction could not be finished
on time, XY Corp. sent written notice cancelling the contract, and requiring AB Corp.
to immediately vacate the premises.
a. Can the labor unrest be considered a fortuitous event? (1%)
b. Can XY Corp. unilaterrally and immediately cancel the contract? (2%)
c. Must AB Corp. return the 50% downpayment? (2%)
2007
A. What are obligations without an agreement? Give five examples of situations giving
rise to this type of obligations?
B. A deposit made in compliance with a legal obligation is:
a.
b.
c.
d.
e.

an extrajudicial deposit;
a voluntary deposit;
a necessary deposit;
a deposit with a warehouseman;
letters a and b.

C. A contract of antichresis is always:


a) a written contract;
b) a contract with a stipulation that the debt will be paid through receipt of the
fruits of an immovable;
c) involves the payment of interests, if owing;
d) all of the above;
e) letters a and b.
Note: no specific questions on obligations and contracts have been found in the 2006 bar
exam
2005
A. Marvin offered to construct the house of Carlos for a very reasonable price of
P900,000.00, giving the latter 10 days within which to accept or reject the offer. On
the fifth day, before Carlos could make up his mind, Marvin withdrew his offer.
a) What is the effect of the withdrawal of Marvins offer? (2%)
b) Will your answer be the same if Carlos paid Marvin P10,000.00 as
consideration for that option? Explain. (2%)
c) Supposing that Carlos accepted the offer before Marvin could communicate
his withdrawal thereof? Discuss the legal consequences. (2%)
B. Bernie bought on installment a residential subdivision lot from DEVLAND. After
having faithfully paid the installments for 48 months, Bernie discovered that

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DEVLAND had failed to develop the subdivision in accordance with the approved
plans and specifications within the time frame in the plan. He thus wrote a letter to
DEVLAND informing it that he was stopping payment. Consequently, DEVLAND
cancelled the sale and wrote Bernie, informing him that his payments are forfeited in
its favor.
a) Was the action of DEVLAND proper? Explain. (2%)
b) Discuss the rights of Bernie under the circumstances. (2%)
c) Supposing DEVLAND had fully developed the subdivision but Bernie failed
to pay further installments after 4 years due to business reverses. Discuss
the rights and obligations of the parties. (2%)
C. Under a written contract dated December 1, 1989, Victor leased his land to Joel for a
period of five (5) years at a monthly rental of P1,000.00, to be increased to P1,200.00
and P1,500.00 on the third and fifth year, respectively. On January 1, 1991, Joel
subleased the land to Conrad for a period of two (2) years at a monthly rental of
P1,500.00. On December 31, 1992, Joel assigned the lease to his compadre, Ernie,
who acted on the belief that Joel was the rightful owner and possessor of the said lot.
Joel has been faithfully paying the stipulated rentals to Victor. When Victor learned
on May 15, 1992 about the sublease and assignment, he sued Joel, Conrad and
Ernie for rescission of the contract of lease and for damages.
a) Will the action prosper? If so, against whom? Explain. (2%)
b) In case of rescission, discuss the rights and obligations of the parties.
(2%)
D. Before he left for Riyadh to work as a mechanic, Pedro left his Adventure van with
Tito, with the understanding that the latter could use it for one year for his personal
or family use while Pedro works in Riyadh. He did not tell Tito that the brakes of the
van were faulty. Tito had the van tuned up and the brakes repaired. He spent a total
amount of P15,000.00. After using the vehicle for two weeks, Tito discovered that it
consumed too much fuel. To make up for the expenses, he leased it to Annabelle.
Two months later, Pedro returned to the Philippines and asked Tito to return the van.
Unfortunately, while being driven by Tito, the van was accidentally damaged by a
cargo truck without his fault.
a) Who shall bear the P15,000.00 spent for the repair of the van? Explain.
(2%)
b) Who shall bear the costs for the van's fuel, oil and other materials while it
was with Tito? Explain. (2%)
c) Does Pedro have the right to retrieve the van even before the lapse of
one year? Explain. (2%)
d) Who shall bear the expenses for the accidental damage caused by the
cargo truck, granting that the truck driver and truck owner are insolvent?
Explain. (2%)

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De La Salle University
BIBLIOGRAPHY

Pineda, E. (2000). Civil Code of the Philippines: Obligations and Contracts (9th edition). Quezon
City: Central.
Tolentino, A. (1990). Obligations and Contracts (Book IV). Quezon City: Central.
Cases
Abaya v. Enriquez, 101 Phil. 1210
Agoncillo v. Javier, 30 Phil. 124
Alpuerto v. Perez Pastor, 38 Phil. 785
Amerol v.Bagumbaran, 154 SCRA 397
Andreas v. BPI, 47 Phil. 795
Associated Bank v. CA, 291 SCRA 513
Azarraga v. G ay, 52 Phil. 599
Batangan v. Cojuangco, 78 Phil. 481
Berg v. M agdalena Estate, 92 Phil. 110
Bishop ofJaro v. De La Pena, 26 Phil.144
Braganza v.De Villa Abrille, 105 Phil.456
Bundalian v. CA, 129 SCRA 645
Cabaliw v.Sadorra, 64 SCRA 310
California Bus v.State Investment, 418 SCRA 297
Camacho v. M un. of Baliw ag, 28 Phil. 466
Cannu v.Galang, 459 SCRA 80
Castro v. Castro, 57 Phil. 675
CFSharp& Co.v. Northwest,381SCRA314
China Bankinhg v.CA, 327 SCRA 378
Compania G eneral v. Araza, 7 Phil. 455
Cosmic Lumber v. M anaois, 106 Phil. 1015
Cristobal v. G omez, 50 Phil. 810
Cruzv.JM TuasonandCo.,Inc.,76SCRA543
DBP v.CA, 96 SCRA 342
De Jesus v.De Jesus, 113 Phil.528
Dumasug v. M odelo, 34 Phil. 252
Escobar v. Locsin, 74 Phil. 86
Everett Steamship v. CA, 297 SCRA 496
Fieldmans Ins.v. Vda.de Songco, 25 SCRA 70
Francel Realty v. Sycip, 469 SCRA 431
German & Co.v.Donaldson, 1 Phil.63
Goldenrod v.CA, 299 SCRA 141
Government v.Derham Bros., 36 Phil.960
Grace Park Eng.v.Dimaporo, 107 SCRA 266
Guiang v. CA, 291 SCRA 383
Gutierrez v. Gutierrez, 56 Phil. 177
H ernaez v. H ernaez, 32 Phil. 214
Hill v. Veloso, 31 Phil.160
Jayme v. Alampay, 62 SCRA 131
Kauffman v.PNB, 42 Phil.182
Kiel v. Estate of PS Sabert, 46 Phil. 193
Labayan v. Talisay, 52 Phil. 440
Lambert v. Fox, 26 Phil. 588
Laudico v. Arias, 43 Phil. 270
Legarda v. Miailhe, 88 Phil. 637
Llacer v. M unoz, 12 Phil. 328
Magdalena Estates v.Rodriguez, 18 SCRA 967

Atty. Chato Olivas-Gallo

De La Salle University
Manila Lodge v. CA, 73 SCRA 162
Marin v. Adil, 130 SCRA 406
Marquez v.CA, 300 SCRA 655
Medel v.CA, 299 SCRA 481
Metromedia v. Pastoria, 465 SCRA 335
Muller v.Muller, 500 SCRA 65
Mun.ofCavite v. Rojas, 30 Phil.602
MWSS vs CA, 297 SCRA 287
Nilo v. Romero, 1 SCRA 926
Ong Chua v. Carr, 53 Phil. 975
PAL v. H eald Lumber, 101 Phil. 1031
Panganiban v. Cuevas, 7 Phil. 477
Pedrano v. Heirs ofBenedicto Pedrano, 539 SCRA 401
Phil.Trust Co. v.Roldan, 99 Phil.393
Ras v. Sua, 25 SCRA 153
Republic v.Grijaldo, 15 SCRA 681
Rios v. Palma, 49 Phil. 7
Rivera v.Del Rosario, 419 SCRA 626
Rongavilla v. CA, 294 SCRA 289
Rosencor Dev.Corp.v.Inquing, 354 SCRA 119
Rosenstock v. Burke, 46 Phil.217
Sanchezv.Rigos, 45 SCRA 368
Sing Juco v. Sunyantung, 43 Phil. 589
Siy v.CA, 138 SCRA 536
SMBv. Law Union& RockIns.,40Phil.674
Songco v. Sellner, 37 Phil. 254
Stabilization Inc.v.Relloraza, 97 Phil.153
Tan v. Mandap, 429 SCRA 712
Terminal Facilities v. Philippine Ports Authority, 378 SCRA 82
Thomson v. CA, 298 SCRA 280
Torcuador v.Bernabe, 459 SCRA 439
UCPB v.Buluso, 530 SCRA 567
Uy Aloc v. Cho Jan Ling, 19 Phil. 202
Valencia v. RFC, 103 Phil.444
Vda. de Espiritu v.CFIofCavite, 47 SCRA 354
Velasco v. M esa, 10 Phil. 279
Velez v.Ramas, 40 Phil.787
Wolfson v. Estate of M artinez, 20 Phil. 340
Woodhouse v.Halili, 93 Phil.526

Atty. Chato Olivas-Gallo

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