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OBLIGATIONS AND CONTRACTS Chapter 1 GENERAL PROVISIONS Art. 1156 Definition of Obligation -a juridical necessity to give, to do or not to do.

. -a juridical relation whereby a person (called the creditor) may demand from another (called the debtor) the observance of a determinate conduct (the giving, doing, or not doing), and in case of breach, may demand satisfaction from the assets of the latter. ( Arias Ramos, p. 74) Judicial necessity because non-compliance can result in judicial or legal sanction. Elements of Obligation: 1) an active subject (obligee or creditor): the possessor of a right; he in whose favor the obligation is constituted; 2) a passive subject (obligor or debtor): he who has the duty of giving, doing or not doing; 3) the object or prestation: the subject matter of the obligation; it may consist of giving a thing, or doing or not doing a certain act; 4) the efficient cause (vinculum or juridical tie): the reason why the obligation exists and 5) Causa (causa debendi/causa obligationes) - why obligation exists Requisites of Object: a. licit - if illicit, it is void b. possible - if impossible, it is void c. determinate or determinable - or else, void d. pecuniary value Kinds of Obligations 1) From the viewpoint of sanction a) civil obligation (perfect obligation) : defined in Art. 1156, Civil Code, and sanctioned by judicial process b) natural obligation: the duty not to recover what has voluntarily been paid although payment was no longer required : it is sanctioned by law, but only because conscience had originally motivated the payment Example: Knowing that it already prescribed, a debtor still paid his debt to the creditor. c) moral obligation: sanctioned by conscience or morality, or the laws of the church. Example: the duty of a catholic to hear mass on Sundays 2) From the viewpoint of subject matter a) real obligation: the obligation to give b) personal obligation: to obligation to do or not to do 3) From the affirmativeness and negativeness of the obligation a) positive or affirmative obligation: the obligation to give or to do b) negative obligation: the obligation not to give or not to do 4) From the persons obliged a) unilateral: when only one of the parties is bound b) bilateral: where both parties are or may be bound i) reciprocal: the performance of one is dependent upon the performance of the other ii) non-reciprocal: the performance of one is not dependent on the performance by the other

Article 1157, Articles 1158-62 Art. 1157 Sources of Obligation (LCQAQ) 1) Law, (OBLIGATION EX LEGE ) - Must be expressly or impliedly set forth and cannot be presumed 2) Contracts, (OBLIGATION EX CONTRACTU ) - Must be complied with in good faith because it is the law between parties; neither party may unilaterally evade his obligation in the contract, unless: a) contract authorizes it b) other party assents Parties may freely enter into any stipulations, provided they are not contrary to law, morals, good customs, public order or public policy 3) Quasi-contracts (OBLIGATION EX QUASI-CONTRACTU ) - That juridical relation resulting from a lawful, voluntary and unilateral act, and which has for its purpose, the payment of indemnity to the end that no one shall be unjustly enriched or benefited at the expense of another 4) Acts or omissions punishable by law/Delicts (OBLIGATION EX MALEFICIO OR EX DELICTO ) and 5) Quasi delicts/Torts ( OBLIGATION EX QUASI-DELICTO or EX QUASI MALEFICIO ) - It is a fault or act of negligence ( or omission of care ) which causes damage to another, there being no pre-existing contractual relations between the parties Art. 1158: law Obligations derived from law are 1) not presumed but must be expressly determined in this Code or other special laws; 2) regulated by the precepts of law which establishes them; and as to what not has been foreseen, by the provisions of this book. Art. 1159: contracts Obligations arising from contracts: 1) have the force of law between the parties; and meaning that neither party may unilaterally and upon his own exclusive volition, escape his obligations under the contract, unless the other party assented thereto, or unless for causes sufficient in law and pronounced adequate by a competent tribunal. (p. 81) 2) should be complied with in good faith. Compliance in good faith means that we must interpret not by the letter that killeth but by the spirit that giveth life. (p. 81) Principle of Privity of Contracts: The terms of the contract cannot be extended to third parties or those not included in the contract. Article 1160: quasi-contracts Obligations derived from quasi-contract shall be subject to the provisions of Chapter 1, Title XVII, of this Book. Definition of Quasi-contract: that juridical relation resulting from a lawful, voluntary, and unilateral act, and which has for its purpose the payment of indemnity to the end that no one shall be unjustly enriched or benefited at the expense of another. (Art. 2142, Civil Code) Kinds of Quasi-contract 1) Negotiorium gestio (unauthorized management): takes place when a person voluntarily takes charge of anothers abandoned business or property without the owners authority; Reimbursement should be made to the gestor for necessary and useful expenses. 2) Solutio Indebiti (undue payment) : takes place when something is received when there is no right to demand it, and it was unduly delivered by mistake. The recipient has the duty to return what was received.

Art. 1161: Ex Delicto or Ex Maleficio Rules that govern: 1) pertinent provisions of the Revised Penal Code and other penal laws, subject to the provisions of Art. 2177, Civil Code; 2) Chapter 2, Preliminary Title, on Human Relations of the Civil Code; 3) Title 18 of Book IV of the Civil Code (on damages). What civil liability arising from a crime includes: a. restitution b. reparation of damage caused c. indemnity for consequential damages Effect of acquittal in criminal case: when acquittal is due to reasonable doubt no civil liability when acquittal is due to exempting circumstances there is civil liability when there is preponderance of evidence there is civil liability Art. 1162: Ex Quasi-Delicts or Ex Quasi-Maleficio Rules that govern: 1) Chapter 2, Title 17, Book IV, Civil Code 2) Special laws. Definition of Quasi-delict: a fault or act of negligence (or omission of care), which causes damages to another, there being no pre-existing contractual relations between the parties. Definition of Negligence: the omission of that diligence which is required by the circumstances of person, place and time (Art. 1173) Requirements before a Person can be held Liable for a Quasi Delict 1) There must be fault or negligence attributable to the person charged; 2) There must be damage or injury; 3) There must be a direct relation of cause and effect between the fault or negligence on the one hand and the damage or injury on the other hand (proximate cause). Proximate cause is that adequate and efficient cause, which in the natural order of events, necessarily produces the damages or injury complained of. (p. 102)

In Sagrada v. Naccoco, the Supreme Court held that the sources of obligation in Art 1157 is exclusive. Many commentators believe, however that it should not be. At present, there is one more possible source of obligations - PUBLIC OFFER (Public Offer is in fact a source of obligation in the German Civil Code)

Chapter 2 NATURE AND EFFECT OF OBLIGATIONS EFFECTS OF OBLIGATION 1. Obligation to give - obligation to deliver the thing agreed upon 2. Obligation to do/not to do - obligation to do/not to do the service agreed upon ACCESSORY OBLIGATIONS: 1. Exercise diligence / Preserve the thing (Art. 1163) EDD Art. 1163: The obligation of every person to take care of a DETERMINATE/SPECIFIC THING with proper diligence of a GOOD FATHER OF A FAMILY. standard of care: that of a good father of a family unless the law or stipulation requires another standard of care 2. Delivery of fruits (Art. 1164) Art. 1164: Nature of the rights of the creditor The creditor has the rights to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. When does the right begin to exist : from the time to deliver arises a) when there is no term/condition from the perfection of the contract b) when there is a term/condition from the moment the term or condition arises 3. Delivery of accessories & accessions ( obligation to deliver determinate thing, even if the stipulation does not mention delivery of accessories & accessions) Accessories - those joined to or included with the principal for the latters better use, perfection or enjoyment Accessions additions to or improvements upon a thing When does right to fruits arise? from the time the obligation to deliver arises a) Conditional from the moment the condition happens b) With a term/period upon the expiration of the term/period c) Simple from the perfection of the contract IT DEPENDS! A. If there is no term or condition, then from the perfection of the contract B. If there is a term or a condition, then from the moment the term arrives or the condition happens. PERSONAL RIGHT jus in personam or jus ad rem Power demandable by one person of another (obligation to give, to do or not to do) REAL RIGHT jus in rem A power over a specific thing and it is binding on the whole world. KINDS OF DELIVERY A. ACTUAL OR TRADITION physically, the property changes hands B. CONSTRUCTIVE DELIVERY where the physical transfer is implied 1. Traditio Simbolica (symbolical tradition) as when the keys to the bodega are given 2. Tradition Longa Manu (delivery by mere consent or the pointing out of the object) like pointing out to the car, which is the object of a sale. 3. Tradition Brevi Manu (delivery by short hand) a possessor of a thing not as an owner, becomes the possessor as owner like when a tenant already in possession buys the house he is renting. 4. Tradition Constitutum Possessorium opposite of Brevi Manu the delivery whereby a possessor of a thing as an owner retains possession no longer of a thing as an owner but in some other capacity. 5. Tradition by the Execution of Legal Forms and Solemnities like the execution of a public instrument selling land.

Art. 1165 DELAY in this article means LEGAL DELAY or DEFAULT a. ORDINARY DELAY merely the non-performance at the stipulated time b. LEGAL DELAY or DEFAULT that delay which amounts to a virtual nonfulfillment of the obligation. AS A RULE, to put a debtor in default, there must be a JUDICIAL or EXTRAJUDICIAL DEMAND or fulfillment WHEN THE DEBTOR FAILS TO COMPLY WITH HIS OBLIGATION, THE CREDITOR CAN: 1. Demand specific performance or compliance - Specific Performance- performance of the prestation itself - Substitute Performance - someone else performs or something else is performed at the expense of debtor - Equivalent Performance demand for damages a. If the thing is determinate compel obligor to deliver the thing b. If the thing is generic demand obligor to comply with his obligation you cannot compel him to deliver a specific thing. 2. Demand rescission or cancellation 3. Demand Damages Art. 1166 ACCESSORIES those joined to or included in the principal for the latters better use, perfection or enjoyment. (Example: keys to a house, jack of a car) ACCESSIONS additions to improvements upon a thing (Examples: whatever is built, planted or sown on a parcel of land). If there is a stipulation to said effect, accessions and accessories do not have to be included. Art. 1167: The Obligation TO DO If DEBTOR fails to Do something, CREDITOR can: Have the obligation performed by himself or another at the debtors expense (only if another can do the performance) Obtain Damages only if personal or special, or if others or the creditor cant do it Specific performance is not a remedy in personal obligations, otherwise, this may amount to involuntary servitude, which is prohibited under our Constitution When a Thing May be Ordered Undone: If poorly made performance by another and damages may be demanded If the obligation is a negative one provided the undoing is possible Art. 1168 When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. Table of Remedies in case of FAILURE TO COMPLY WITH PERFORMANCE/REMEDIES: Obligation to give (Real Obligation) Specific Generic
X X X X

Remedies SPECIFIC PERFORMANCE EQUIVALENT PERFORMANCE SUBSTITUTE PERFORMANCE

Obligations to do (Personal Obligation) To do Not to do undo the things X already done Can only be demanded if obligation is not very X personal Undo the things X already done at debtor's expense

RESCISSION/ CANCELLATION X X A. CAUSES ATTRIBUTABLE TO DEBTOR 1.


2.

Contravention of tenor Delay/ Mora - Non performance with respect to time

a. Mora solvendi default on the part of the debtor; 2 kinds: (1) Mora Solvendi Ex re default in real obligations (2) Mora Solvendi Ex persona default in personal obligations Elements: (1) The obligation must be due, enforceable and already liquidated or determinate in amount (2) There must be non-performance (1) There must be a demand, unless demand is not required Effects: a. if determinate thing - debtor bears risk of loss (even when there is fortuitous event) b. debtor liable for damages/interest c. resolution (art 1170, in proper cases) b. Mora accepiendi default on part of creditor; Creditor is guilty of default when he unjustifiably refuses to accept payment or performance at the time payment/performance can be done Effects: (1) responsibility of debtor is reduced to fraud and gross negligence (2) debtor is exempted from risk of loss of thing / creditor bears risk of loss (3) expenses by debtor for preservation of thing after delay is chargeable to creditor (4) if obligation bears interest, debtor does not have to pay from time of delay (5) creditor liable for damages (6) debtor may relieve himself of obligation by consigning the thing c. Compensatio morae both parties are in default (in reciprocal obligations); the effect: is as if there is no default Art 1169 Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extra-judicially demands from them the fulfillment of their obligation. However, the demand from the creditor shall not be necessary in order that delay may exist: a. When the obligation or the law expressly so declares. ONU b. When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered to the service is to be rendered was a controlling motive for the establishment of the contract c. When demand would be useless, as when the obligor has rendered it beyond his power to perform In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. Extra-judicial demands may be written or oral-but best if written because it can be presented as evidence. AS A RULE-to put a debtor in default, DEMAND is needed. Demand is not Needed to Put Debtor in Default When:

a. When the law so provides b. When the obligation expressly so provides c. When the fixing of the time was the controlling motive for the establishment of the contract d. When demand would be useless e. When the obligor has expressly acknowledged that he really is in default BUT IN THE PHILIPPINE LAW, THIS IS NO LONGER SO because it is expressly provided that in reciprocal obligations, neither party incurs default if the other does not comply with what is incumbent upon him. Even if there were (written) demands from both sides, there is no default when neither has done his obligation. It is only when one party fulfills his obligation, delay by the other begins (assuming that there is no date set in the contract for his performance). Fraud / Dolo Voluntary execution of a wrongful act or willful omission, knowing and intending the effects which naturally and necessarily arise from such act or omission a. Causante ( causal ) - makes contract voidable b. incidente ( incidental ) - fraud in performance of obligation; does not affect validity of obligations
3.

Remedies of Person in fraud under obligations are: a. insist on specific performance (art 1233) b. resolve contract (art 1191) c. claim damages, in either case Negligence /Culpa - absence of due diligence Elements: a) Omission of diligence required b) Diligence required per nature of obligation, circumstances of persons, time and place Art 1170
4.

Those who in the performance of their obligation are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof are liable for damages. Grounds for Liability in the Performance of Obligations a. Fraud-use of deceit or other machinations to intentionally evade the fulfillment of the obligation -This type of fraud is applicable in obligations only-it is different from CAUSAL OR INCIDENTAL fraud (fraud that exists between parties when there is no preexisting contractual relations or obligations between them). b. Negligence-fault-0no intent c. Default d. Violation of the terms of Obligation (unless excused in proper cases by fortuitous events) The Following do not Exempt from the Fulfillment of the Obligation a. Increase in the cost of the performance b. Poverty c. War between the subject of the neutral country and the subject of a country at war, as long as the substantial compliance can still be done. Those liable under this Article should pay damages, only if prejudice or damage was caused. Kinds of Damages a. Moral-for moral and physical anguish b. Exemplary-corrective or to set an example c. Nominal-to vindicate a right-when no other kind of damages may be recovered d. Temperate-when the exact amount of damages cannot be determined e. Actual-actual losses as well as unrealized profits

f.

Liquidated predetermined beforehand by agreement.

Art 1171 Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. Art 1172 Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. Art 1173 The fault or negligence of the obligor consists in that omission of the diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201 paragraph 2, shall apply. Kinds of Diligence Under the Civil Code a. That agreed upon by the parties b. In the absence of that agreed upon by the parties, that required by law c. In the absence of that required by law, that expected of a good father of a family. FRAUD DISTINGUISHED FROM NEGLIGENCE

FRAUD NEGLIGENCE There is deliberate intention to cause There is no deliberate intention to cause damage. damage. Liability cannot be mitigated. Liability may be mitigated. Waiver for future fraud is void. Waiver for future negligence may be allowed in certain cases: a) gross can never be excused in advance; against public policy b) simple may be excused in certain cases Art 1174 Concept: Fortuitous Event - event which could not be foreseen, or which though foreseen, were inevitable Refers to as caso fortuito, act of God, force majeure, unavoidable accident Eg. Natural calamities Essential Characteristics of a fortuitous Event (Nakpil & Sons vs. CA) 1. The cause of the breach of the obligation must be independent of the will of the debtor 2. The event must be either unforeseeable or unavoidable 3. The event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner 4. The debtor must be free from any participation in, or aggravation of injury to the creditor Liability for fortuitous events

General Rule for Fortuitous Events- No person shall be liable for fortuitous events; i.e., his obligation will be extinguished:

Exceptions to the General Rule- when the debtor shall be held liable for a fortuitous event (Art. 1174) a) when expressly declared by law ( bad faith, subject matter is generic, debtor is in delay ) b) when expressly declared by stipulation or contract c) when the nature of the obligation requires assumption of risk (eg. obligation of an insurer) FORTUITOUS EVENTS CANNOT EXEMPT ONE FROM COMPLIANCE IF: 1. The obligor defaults 2. The obligor is guilty of Bad Faith (for having promised to deliver to two or more persons who do not have the same interest). EXAMPLE: Jaypee is obliged to give Jaboom his car on Dec. 7, 1991. If on that said day, Jaypee does not deliver, he is in ordinary delay. If on Dec. 8, 1991, an earthquake destroys the car, he is not liable because the obligation is extinguished. Art 1175 Usurious transactions shall be governed by special laws. Usury-contracting for or receiving something in excess of the amount allowed by the law for the loan or use of money, goods, chattels (estate inheritance, personal property) or credit

Art 1176 Presumptions on receipt of principal or of later installment (these are disputable presumptions and evidence may be introduced to the contrary by the creditor.) 1. The receipt of the principal by the creditor without reservation as to interest, shall give rise to the presumption that said interest has been paid. 2. The receipt of a later installment without reservation as to prior installments, shall give rise to the presumption that such prior installments have been paid. The condition not to do an impossible thing shall be considered as not having been agreed upon: a. If condition is to do an impossible of illegal thing=condition and obligation are void b. If the condition is negative/not to do the impossible=just disregard the condition but the obligation remain c. If the obligation is negative/not to do= both condition and obligation are valid

Art. 1177 Remedies of creditor to enforce payment of his claims against debtor Exact performance - specific, substitute, equivalent Attach and execute debtor's property which is not exempt (art 2236) - pursue the property in the possession of the debtor, except those exempt by law. 3. Accion subrogatoria (Art 1171)- exercise all the rights and bring all the actions of the debtor except those personal to him.
1. 2.

Requisites: a. Creditor must have right of return against debtor b. The debt is due and demandable c. There is a failure of the debtor to collect his own debt from 3rd persons either through malice or negligence d. Debtor's assets are insufficient e. The right of account is not purely personal
4.

Accion directa (arts 1729 & 1652)

Accion pauliana the right to impugn the acts which the debtor may have done to defraud his creditors. (remedy is rescission)
5.

Requisites: a. There is a credit in favor of plaintiff b. The debtor has performed an act subsequent to the contract, giving advantage to other persons c. The creditor is prejudiced by the debtor's act which are in favor of 3rd parties and rescission will benefit the creditor d. The creditor has no other legal remedy e. The debtor's acts are fraudulent Art. 1178 Rule on transmissibility of rights and exceptions thereto. All rights acquired by virtue of an obligation are generally transmissible Exceptions: 1. If the law prohibits the transmission of rights; 2. It the parties stipulated; 3. If the right is not transmissible. Eg. personal obligation

CHAPTER III DIFFERENT KINDS OF OBLIGATIONS CATEGORIES:

a. b. c. d. e.

Demandability - pure, conditional or with a term Plurality of object - simple, alternative or facultative Plurality of subject - simple, joint or solidary Performance - divisible or indivisible Sanctions for breach - with or without a penal clause

Primary Classification 1. Pure obligation 2. Conditional Obligation 3. Obligation with a period 4. Alternative Obligation 5. Facultative Obligation 6. Joint Obligation 7. Solidary Obligation 8. Divisible obligation 9. Indivisible Obligation 10. Obligation with a Penal Clause PURE AND CONDITIONAL OBLIGATIONS: 1. Pure obligation demandable at once, with no term and no condition Eg. I will give you ten pesos. 2. Conditional Obligation- one whose demandability or extinguishment depends upon the happening of a condition. A condition is a future and an uncertain event or a past event unknown to the parties eg. I will give you one million pesos if you pass the Bar. Definition of Condition: It is an uncertain event which wields influence on a legal relationship (Manresa) Kinds of Condition 1. Suspensive and Resolutory 2. Potestative, Casual and Mixed 3. Possible and Impossible 4. Positive and Negative 5. Divisible and Indivisible i. Suspensive happening of condition gives rise to obligation; also called as condition antecedent or condition precedent. Effects: 1. effectivity is retroactive 2. no retroactivity with reference to fruits or interest & prescription 3. creditor may preserve rights 4. debtor recovery of payment by mistake or even w/o mistake ii. Resolutory happening of condition extinguishes the obligation, referred to as condition subsequent Effects: 1. no retroactive effect 2. obligation extinguished 3. restore to each other what was received plus interest/fruits

iii. Potestative dependent on sole will of a party; if on part of debtor & suspensive the obligation is void. Art. 1182 Even if the condition is fulfilled, obligation is not demandable.; eg. Debtor will give creditor P10000 if debtor goes to US If potestative on the part of the creditor, obligations is valid whether condition is suspensive or resolutory- eg. Debtor is to give Creditor P10000 if creditor goes to US iv. Casual dependent upon chance or hazard, or upon the will of a third person eg. Ill give you P1000 if I will win first prize in the lotto which I bet today v. Mixed dependent partly upon chance and upon the will of one of the parties, or upon the will of a third person. Eg. I will give you P1million if you marry A. vi. With term Positive extinguished if time expires or indubitable of condition to happen Negative effective from moment of time elapsed or evident it can't happen vii. Possible and Impossible Possible- capable of being fulfilled in its nature and by law. Impossible- incapable of being fulfilled by its nature and due to operation of law. To do - both the condition and the obligation are void Not to do disregard the condition, the obligation is still valid; Condition not to do an impossible thing, deemed to have been not agreed upon. Art. 1183
(1) (2)

Impossible condition physically not feasible Illegal condition prohibited by law, good custom, public policy and morals viii. Positive and Negative Positive the condition that some event happen at a determinate time. Obligation is extinguished as soon as the time expires or it has become indubitable that the event will not take place or it has become indubitable that the event will not take place. Eg. Debtor to give creditor P1000 if Creditor will marry A on or before December 30, 2011. obligation is extinguished if creditor will not marry A on Dec 30, 2011. Negative Condition that some event will not happen at a determinate time. Oblgiation be comes effective as soos as the time indicated has elapsed or it become evident tha event will not occur. Eg. Ill give you 10000 if you have not yet married A as of Dec 30 2011. ix Divisible and Indivisible Divisible capable of partial performance, eg. A will give B 1000 if B will finish his law course and P10,000 if B pass the bar. Indivisible incapable of partial performance, eg. A will give P1million to B if B finish his law course and also top the bar. Rules on loss, impairment, improvement of the subject matter pending the happening of suspensive condition/ term (Art. 1189) Liability in Liability in case of Improvement case of Loss/ Impairme nt Indemnity & specific performance, rescission & damages damages If it improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (art 1189)

w/ debtors fault or at expense of obligor/ usufructuary

w/o debtors fault or not at expense of d obligor

Extinguishe

Creditor to bear damages Creditor gets it

REQUISITES FOR THE AFOREMENTIONED RULE: 1. There is a suspensive condition 2. There is an obligation to deliver a determinate thing 3. There is loss, deterioration or improvement before the happening of the condition OBLIGATION WITH A PERIOD future & certain, past & uncertain, payable when able When stipulation says payable when able it is with a period, remedy: a) b) agreement among parties court shall fix period of payment when parties unable to agree

Kinds: a. Resolutory ( in diem ) takes effect at once but terminate upon arrival of the day certain; Day certain that which must necessarily come, although it may not be known when
b. Suspensive ( ex die ) takes effect on the day stipulated

WHEN COURTS MAY FIX PERIOD: a) art 1197


b) art 1197, 2nd paragraph c)

art 1191, 3rd paragraph

d) art 1687, 2nd, 3rd, 4th sentence

e) art 1180 WHEN DEBTOR LOSES RIGHT TO PERIOD: a. b. c. d. e. insolvency of debtor, unless security provided did not deliver security impaired security- thru fault or fortuitous event violate undertaking in consideration of extension of period attempts to abscond

(4). Facultative only one prestation has been agreed upon but another may be given in substitution Effect of loss or deterioration thru negligence, delay or fraud of obligor:
a)

of thing intended as substitute - no liability

b) of the substitute after substitution is made with liability

(5). Alternative bound by different prestations but only one is due

Right of choice: General rule: right of choice belongs to debtor a. the choice is with debtor
(1) If only 1 is left either because of fortuitous events or due to debtor's acts,

perform what is left. The effect is that the debtor loses the right of choice
(2) if the choice is limited because of the creditor's acts, the debtor has the right

of resolution and damages


(3) if all are lost due to debtor, the creditor is entitled to damages (4) if some are lost, the debtor can choose from the remaining

b. the choice is with creditor


(1) if one or some are lost due to fortuitous event, the creditor chooses the

remainder
(2) if one or some is lost because of the fault of debtor, the creditor may choose

either the remainder or the value of any which disappeared, and damages in either case
(3) if all is lost due to the debtor's fault, the creditor may choose the value of any

if some is lost due to debtor's fault, the creditor chooses the remainder
(4) if all is lost due to fortuitous event, obligation is extinguished (5) if all is lost due to creditor's fault, the obligation is extinguished

Requisites for making the choice: a) Made properly so that creditor or his agent will actually know b) Made with full knowledge that a selection is indeed being made c) Made voluntarily and freely d) Made in due time before or upon maturity e) Made to all proper persons f) Made w/o conditions unless agreed by the creditor

g) May be waived, expressly or impliedly DISTINCTIONS BETWEEN ALTERNATIVE AND FACULTATIVE OBLIGATIONS ALTERNATIVE a) Various things are due but the giving principally of one is sufficient b) If one of prestations is illegal, others may be valid but obligation remains FACULTATIVE a) Only one thing is due but a substitute may be given to render payment/fulfillment easy b) If principal obligations is void and there is no necessity of giving the substitute; nullity of P carries with it nullity of S c) If it is impossible to give all except c) If it is impossible to give the principal, the one, the last one must still be given substitute does not have to be given; if it is impossible to give the substitute, the principal must still be given d) Right to choose may be given either d) The right of choice is given only to the debtor to debtor or creditor

(6). Joint presumption when 2 or more creditors or 2 or more debtors concur in one and the same obligation Effects: a. Demand on one produces delay only with respect to the debt b. Interruption in payment by one does not benefit or prejudice the other c. Vices of one debtor to creditor has no effect on the others d. Insolvency of one debtor does not affect other debtors (7). Solidary must be expressed in stipulation or provided by law or by nature of obligation
a.

Active on the part of creditor or obligee Effects: 1. Death of 1 solidary creditor transmits share to heirs (but collectively) 2. Each creditor represents the other in the act of recovery of payment 3. Credit is divided equally between creditors as among themselves 4. Debtor may pay any of the solidary creditors

b.

Passive on the part of debtors or obligors Effects: 1. Each debtor may be requested to pay whole obligation with right to recover from co-debtors 2. Interruption of prescription to one creditor affects all 3. Interest from delay on 1 debtor is borne by all

c.

Mixed on the part of the obligors and obligees, or the part of the debtors and the creditors Conventional agreed upon by the parties Legal imposed by law Instances where law imposes solidary obligation: 1. obligations arising from tort 2. obligations arising from quasi-contracts 3. legal provisions regarding obligation of devisees and legatees 4. liability of principals, accomplices, and accessories of a felony 5. bailees in commodatum

d. e.

Effects: a. payment made before debt is due, no interest can be charged, otherwise interest can be charged

b. c.

insolvency of one others are liable for share pro-rata if different terms & conditions collect only what is due, later on collect from any

d. no reimbursement if payment is made after prescription or became illegal


d. e. f. g.

remission made after payment is made co-debtor still entitled to reimbursement effect of insolvency or death of co-debtor still liable for whole amount fault of any debtor every one is responsible price, damage & interest

complete/ personal defense total or partial ( up to amount of share only ) if not personal to him Effect of loss or impossibility of the prestation:
a. b. c.

if without fault no liability if with fault there is liability (also for damage and interest) loss due to fortuitous event after default there is liability (because of default)

(8). Divisible obligation that is capable of partial performance a. execution of certain no of days work b. expressed by metrical units c. nature of obligation susceptible of partial fulfillment (9). Indivisible one not capable of partial performance a. to give definite things b. not susceptible of partial performance c. provided by law d. intention of parties (10). With penal clause - an accessory undertaking to assume greater liability in case of breach; CHARACTERISTICS OF PENAL CLAUSES
1.

Subsidiary - As a general rule, only penalty can be demanded, principal cannot be demanded, except: Penalty is joint or cumulative Exclusive - takes place of damage, damage can only be demanded in the ff. cases: a. Stipulation granting right b. c. refusal to pay penalty with dolo ( not of creditor )

2.

Causes for reduction of penalty: a. partial/irregular performance b. penalty provided is iniquitous/unconscionable

Art 1184 The condition that some event will happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. If the period is not fixed in the contract, the court, considering the parties intentions, should determine what period was really intended.

Art 1185 The condition that some event will not happen at a determinate time shall ender the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have been contemplated, bearing in mind the nature of the obligation. This article refers to negative conditions.

Art 1186 The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment (Doctrine of Constructive Fulfillment) This Article deals with Constructive or Presumes Fulfillment. Reason for the article: One must not profit by his own fault. Requisites: a. Voluntarily made-intent to prevent must be present b. Actually prevents-intention without prevention or prevention without intention is not sufficient Art 1187 The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. Art 1188 The creditor may, before the fulfillment of the condition, bring the appropriate actions fro the preservation of his rights. The debtor may recover what during the same time he has paid by mistake in case of suspensive condition. Art 1189 When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: a. If the thing is lost without the fault of the debtor, the obligation shall be extinguished b. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages, it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or cannot be recovered.

c. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor d. If it deteriorates through the fault of the debtor, the creditor may choose from the rescission of the obligation and its fulfillment, with indemnity for damages in either case e. If the thing is improved by its nature or by time, the improvement shall inure to the benefit of the creditor f. If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufractuary. Effects of Partial Loss-It may be partial loss: a. That would amount to a loss important enough to be considered a complete loss (this will be determined by the courts) b. That would merely be considered a deterioration of the thing, in which case the rules on deterioration should apply Art 1190 When the condition have for their purpose the extinguishments of an obligation to give, the parties, upon fulfillment of said conditions, shall return to each other what they have received. Effects When Resolutory Condition is Fulfilled: a. The obligation is extinguished b. Because the obligation has been extinguished and considered to have had no effect, the parties should restore to each other want they have received c. Aside from the actual things received, the fruits of the interests thereon should also be returned after deducting of course the expenses made for their production, gathering and preservation d. The rule on Art 1189 will apply to whoever has the duty to return in case of the loss, deterioration or improvement of the thing e. The courts are given power to determine the retroactivity of the fulfillment of resolutory conditions. Art 1191 The power to rescind obligations is implied in reciprocal ones in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. To rescind=to cancel/revoke Rescission may be judicial or extra-judicial (but best to be judicial) Effect of Rescission-mutual restitution This article speaks of reciprocal obligations Characteristics of the Right to Rescind of Resolve a. It only exists in reciprocal obligations b. It can be demandable only if the plaintiff is ready, will and able to comply with his own obligation, and the other is not The Right to Rescind is not Absolute a. trivial causes for slight breaches will not case rescission b. If there be a just cause for fixing the period within which the debtor can comply, the court will not decree rescission

c.

If e property is now in the hands of an innocent 3rd party who has lawful possession of the same

Judicial approval for rescission is needed when there has already been delivery of the object (unless there is a voluntary returning) Judicial approval is not needed when there has been no delivery yet Choice by the Injured Party a. Fulfillment or specific performance with damages or b. Rescission plus damages

Art 1192 In case both parties have committed a breach of the obligation. The liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. Breach of the second infractor provides mitigating effect to the liability of the first infractor because of this, the courts shall temper/regulate/lessen the liability of the first infractor. Section 2 Obligations with a Period Art 1193 Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with resolutory period take the effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily some, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional and it shall be regulated by the rules of the preceding Section. Period ids a certain length of time which determines the effectively or the extinguishment of the obligation (it must surely come)

Different Kinds of Periods or Terms a. Definite-exact date or time is known or given b. Indefinite-something will surely happen but the date is unknown c. Legal-period granted under the provision of the law d. Conventional or Voluntary-period agreed upon or stipulated by the parties e. Judicial-period is fixed by the courts for the performance of an obligation or for its termination f. Ex Die- a period with suspensive effect- the obligation begins upon the arrival of the period g. In Diem-a period with a resolutory effect- the obligation terminates upon the arrival of the period Requisites for a Valid Period or Term a. It must refer to the future b. It must be certain, but can be extended c. It must be physically or legally impossible, otherwise the obligation is void. Art 1194 In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Art 1189 shall be observed.

Art 1195 Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with fruits and interests. Art 1196 Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. General Rule: Term is for the benefit of the debtor or creditor. Meaning, the debtor cannot prematurely pay and the creditor cannot demand prematurely. This Article applies only to a contract with a period they fixed themselves. Art 1197 If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. Art 1198 a. b. c. d. e. The debtor shall lose every right to make use of the period: When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt When he does not furnish to the creditor the guarantees or securities which he has promised When by his own acts he has impaired said guaranties and securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory When the debtor violates any undertaking, in consideration of which the creditor agreed to the period When the debtor attempts to abscond.

The debtor shall lose every right to make use of the period-it means that the term is extinguished and the creditor can demand fulfillment at once. Art 1199

A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. Art 1200 The right of choice belongs to the debtor, unless if as been expressly granted to the creditor.

The debtor shall have no right to choose from those prestations which are impossible, unlawful, or which could not have been the object of the obligation. General Rule-In the absence of any stipulations, the right if choice belongs to the debtor. Limitation on the Debtors Choice- the debtor shall have no right to choose prestations which are: a. Impossible b. Unlawful c. Which could not have been the object of the obligation Art 1201 The choice shall produce no effect except from the time it has been communicated. The choice may be communicated orally or in writing, expressly or impliedly. Once notice has been made that a choice has been done, the obligation becomes a simple obligation to do or to deliver the object selected. An election once made is binding on the person who makes it, and he will not therefore be permitted to renounce his choice and take an alternative which was first open to him.

Requisites for Making the Choice: a. Made properly so that the creditor or his agent will actually know b. Made with full knowledge that a selection is indeed being made c. Made voluntarily and freely d. Made in due time-that is before or upon maturity e. Made to all the proper persons f. Made without conditions unless agreed to by the creditor g. May be waived expressly or impliedly Art 1202 The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. Art 1203 If through the creditors acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. The debtor may: a. Rescind the obligation plus collect damages b. Perform other prestation(s) Observe that the contract is not automatically rescinded. Art 1204 The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the vale of the last thing which disappeared, or that of the services which last become impossible. Art 1205

When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: a. If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists b. If the lose of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former has disappeared, with a right to damages c. If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any of them, also with indemnity for damages. Art 1206 When only one prestation has been agreed upon the obligor may render another in substitution, the obligation is called facultative. Facultative Obligation- one where only one prestation has been agreed upon but the obligor may render another in substitution.

Section 4 Joint and Solidary Obligation Art 1207 Joint Obligations- each obligor answers only for a part of the whole liability and to each obligee belongs only a part of the correlative (equivalent) rights Solidary / Joint and Several Obligations- the relationship between the active and the passive subjects is so close that each of the former or of the latter may demand the fulfillment of or must comply to the whole obligation. General Rule: When there are two or more debtors or two or more creditors the obligation is joint. Exceptions: a. When there is a stipulation to the contract that the obligation is solidary b. When the object of the obligation requires liability to be solidary c. When the law declares the obligation to be solidary Art 1208 Liability of Partners: a. If it arises out of contracts the liability is joint or pro-rata b. If it arises out of a crime or quasi-delict, the liability is solidary together with the partnership Art 1209 If the division is impossible, the rights of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. Characteristics

a. The obligation is joint but since the object is indivisible, the creditor may proceed against all the joint debtors for compliance is possible only if all the joint debtors would act together b. Demand must therefore be made on all the joint debtors if anyone of the debtors does not comply with his monetary obligation for damages c. If any of the debtors shall be insolvent, the others shall not be liable for his share d. If there be joint creditors, delivery must be made to all, and not merely to one, unless that one be specifically authorized by others e. Each joint creditor is allowed to renounce his proportionate credit Art 1210 The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. Indivisibility- refers to the subject matter Solidarity- refers to the tie between the parties Art 1211 Different Ways by Which Two Debtors may be Bound: a. Uniform-when the debtors are bound by the same stipulations and clauses b. Otherwise-where the obligor, though liable for the same prestation are nevertheless not subject to the same secondary stipulations and clauses Art 1213 A solidary creditor cannot assign his rights without the consent of the others. Art 1214 The debtor may pay any one of the creditors: but if any demand has been made by any one of them, payment must be made to him. Art 1215 The creditor who may have expected any of these acts, as well as he who has collects the debt, shall be liable to the others for the share in the obligation corresponding to them. Novation- the modification of an Obligation by changing its object or principal conditions, or by substituting the person of the debtor or by subrogating a third person in the rights of the creditor Compensation- that which takes place when 2 persons in their own right are creditors and debtors of each other. Compensation may be Total or Partial depending upon the amount involved Confusion or Merger- That which takes place when the characters of the creditor and debtor are merged in the same person Remission or Waiver- that act of liberality whereby the creditor condones the obligation of the debtor, that where the creditor tells the debtor to forget the whole thing Payment- one of the ways by which the obligation is extinguished and consists in the delivery of the thing or the rendition of the service which is the object of the obligation. Art 1218 Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. Art 1220 The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him from reimbursement from his co-debtors.

Art 1221 If the thing has been lost or the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. A solidary obligation implies mutual agency and mutual confidence.

Art 1222 A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. Kinds of Defense a. Those derived from the nature of the obligation - Lack of consideration or cause - Absolute simulation-as when the contract is totally fictitious - Illegal consideration - Extinguishment of the obligation-as when the whole debt has been paid, remitted, etc. - Non-fulfillment of the suspensive condition - Statute of frauds - When all the debtors were incapacitated to give consent-such as unemancipated minors, insane, etc. - When there are Vices of Consent/Vitiated Consent on the part of all the debtors b. Those personal to the debtor sued c. Those personal to the other

Section 5 Divisible and Indivisible Obligations Art 1223 The divisibility of the indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. Divisible Obligations-one capable of partial performance Indivisible Obligations- one not capable of partial performance Classes of Kinds of Indivisibility a. Conventional- by common agreement b. Natural or Absolute- because of the nature of the undertaking c. Legal- if so provided by law Kinds of Division a. Quantitative- depends on quantity b. Qualitative- depends on quality, irrespective of quantity c. Intellectual or Moral- one that exists only in the mind, and nor in physical reality

Art 1224 A joint indivisible obligation give rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall nor contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. Effect of Non Compliance- the obligation is converted to a monetary one for indemnity. Art 1225 For the purpose of the preceding articles, obligations to give definite and those which are not susceptible of partial performance shall be deemed to be indivisible. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. Obligations that are Deemed Indivisible: a. Obligations to give definite things b. Those which are not susceptible of partial performance c. Even if the thing is physically divisible, it may be indivisible if so provided by law d. Even if the thing is physically divisible, it may be indivisible if such was the intention of the parties concerned Obligations that are Deemed Divisible a. When the object of the obligation is the execution of a certain number of days of work b. When the object of the obligation is the accomplishment of work by metric units c. When the purpose of the obligation is to pay a certain amount in installment d. When the object of the obligation is the accomplishment of work susceptible of partial performance The character of the prestation or obligation will determine the divisibility or indivisibility of obligation not to do. Section 6 Obligations with a Penal Clause Art 1226 In obligation with a penal clause, the penalty shall substitute the indemnity fro damages and the payment of interest in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. Principal Purpose of the Penal Clause- to insure the performance of the obligation and also to substitute for damages and the payment of interest in case of non-compliance. Exceptions to the General Rule: a. When there is express stipulation to the effect that damages or interest may still be recovered, despite the presence of the penalty clause b. When the debtor refuses to pay the penalty imposed in the obligation c. When the debtor is guilty of fraud in the fulfillment of the obligation Art 1227 The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted to him. However, if after the creditor has decided to require the fulfillment of the obligation, the

performance thereof should become impossible without his fault, the penalty may be enforced. IF the debtor can just pay the penalty, the fulfillment of the obligation will be considered an alternative one.

Art 1228 Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. Art 1229 The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. When Penalty may be Reduced by Court; a. When the obligation has been partly complied with by the debtor b. When the obligation has been irregularly complied with by the debtor c. When the penalty is iniquitous or unconscionable, even if there has been no performance at all It is thus clear that the penal clause cannot be enforced if a. The breach is the fault of the creditor b. A fortuitous event intervened, unless the debtor expressly agreed on his liability in case of fortuitous events c. The debtor is not yet in default Art 1230 The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause.

CHAPTER IV EXTINGUISHMENT OF OBLIGATIONS 1. 2. 3. 4. 5. 6. 7. 8. 9.


1.

Modes of Extinguishment of Obligation: Payment or performance Loss of the thing due Condonation or remission of debt Confusion or merger of rights Compensation Novation Annulment Rescission Fulfillment of resolutory condition PAYMENT OR PERFORMANCE delivery of money and performance, in any other manner of the obligation REQUISITES FOR VALID PAYMENT/PERFORMANCE A. With respect to prestation itself: (1) identity (2) integrity or completeness (3) indivisibility
B. With respect to parties - must be made by proper party to proper party

(1) Payor
(a) Payor - the one performing, he can be the debtor himself or his heirs or

assigns or his agent, or anyone interested in the fulfillment of the obligation; can be anyone as long as it is with the creditor's consent
(b) 3RD person pays/performs - only the creditor's consent;

If performance is done also with debtor's consent - he takes the place of the debtor. There is subrogation except if the 3rd person intended it to be a donation
(c) 3rd person pays/performs with consent of creditor but not with debtor's

consent, the repayment is only to the extent that the payment has been beneficial to debtor (2) Payee
(a) payee - creditor or obligee or successor in interest of transferee, or agent (b) 3rd person - if any of the ff. concur:

i.

it must have redounded to the obligee's benefit and only to the extent of such benefit

ii. it falls under art 1241, par 1,2,3 - the benefit is total so, performance is total
(c) anyone in possession of the credit - but will apply only if debt has not

been previously garnished PAYMENT MADE TO AN INCAPACITATED PERSON , VALID IF: 1. Incapacitated person kept the thing delivered, or 2. Insofar as the payment has been beneficial to him PAYMENT TO A 3RD PARTY NOT AUTHORIZED, VALID IF PROVED & ONLY TO THE EXTENT OF BENEFIT; PRESUMED IF:
1. 2.

After payment, 3rd person acquires the creditors rights Creditor ratifies payment to 3rd person

3. By creditors conduct, debtor has been led to make the payment (estoppel) PAYMENT MADE IN GOOD FAITH TO A PERSON IN POSSESSION OF CREDIT SHALL RELEASE DEBTOR, Requisites: 1. Payment by debtor must be made in good faith 2. Creditor must be in possession of the credit & not merely the evidence of indebtedness
C. With respect to time and place of payment - must be according to the

obligation Where payment should be made: 1. In the place designated in the obligation If there is no express stipulation and the undertaking is to deliver a specific thing at the place where the thing might be at the moment the obligation was constituted
2.

3. In other case in the place of the domicile of the debtor Time of payment - time stipulated Effect of payment extinguish obligation Except: order to retain debt SUBSTANTIAL PERFORMANCE 1. Attempt in Good Faith to perform without willful or intentional departure 2. Deviation is slight 3. Omission/Defect is technical or unimportant

4. Must not be so material that intention of parties is not attained Effect of Substantial performance in good faith 1. Obligor may recover as though there has been strict and complete fulfillment, less damages suffered by the obligee 2. Right to rescind cannot be used for slight breach SPECIAL RULES/FORMS OF PAYMENT - Special Forms:
a.

Application of Payments the designation of the debt which payment shall be made, out of 2 or more debts owing the same creditor: stipulation or application of party given benefit of period OK; to be valid: must be debtors choice or w/ consent of debtor Requisites for the Application of payment: 1. Various debts of the same kind 2. 3. 4. Same debtor Same creditor

All debts must be due Exception: there may be application of payment even if all debts are not yet due if: a) parties so stipulate b) when application of payment is made by the party for whose benefit the term has been constituted 5. Payment is not enough to extinguish all debts

HOW APPLICATION IS MADE: 1. Debtor makes the designation


2.

If not, creditor makes it by so stating in the receipt that he issues unless there is cause for invalidating the contract If neither the debtor nor creditor has made the application or if the application is not valid, then application, is made by operation of law

3.

WHO MAKES APPLICATION: General Rule: Debtor Exception: Creditor a) Debtor without protest accepts receipt in which creditor specified expressly and unmistakably the obligation to which such payment was to be applied debtor in this case renounced the right of choice b) When monthly statements were made by the bank specifying the application and the debtor signed said statements approving the status of her account as thus sent to her monthly by the bank IN CASE NO APPLICATION HAS BEEN MADE 1. Apply payment to the most onerous
2.

If debts are of the same nature and burden, application shall be made to all proportionately

b.

Dacion en Pago mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor property for the satisfaction of monetary debt;

extinguish up to amount of property unless w/ contrary stipulation; A special form of payment because 1 element of payment is missing: IDENTITY Governed by law on sales

Conditions for a valid dacion: 1) If creditor consents, for a sale presupposes the consent of both parties 2) If dacion will not prejudice the other creditors 3) If debtor is not judicially declared insolvent
c.

Cession/Assignment in Favor of creditors the process by which debtor transfer all the properties not subject to execution in favor of creditors is that the latter may sell them and thus, apply the proceeds to their credits; extinguish up to amount of net proceeds ( unless w/ contrary stipulation ) Kinds:
1.

Legal governed by the insolvency law

2. Voluntary agreement of creditors REQUISITES FOR VOLUNTARY ASSIGNMENT a) More than 1 debt b) More than 1 creditor c) Complete or partial insolvency of debtor d) Abandonment of all debtors property not exempt from execution e) Acceptance or consent on the part of the creditors EFFECTS: a) Creditors do not become the owner; they are merely assignees with authority to sell b) Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the contrary c) Creditors will collect credits in the order of preference agreed upon, or in default of agreement, in the order ordinarily established by law
d.

Consignation Tender -the act of offering the creditor what is due him together with a demand that the creditor accept the same (When creditor refuses w/o just cause to accept payment, he becomes in mora accepiendi & debtor is released from responsibility if he consigns the thing or sum due) Consignation the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment; generally requires prior tender of payment

REQUISITES OF VALID CONSIGNATION: (1) Existence of valid debt (2) Consignation was made because of some legal cause - previous valid tender was unjustly refused or circumstances making previous tender exempt Prior Notice of Consignation had been given to the person interested in performance of obligation (1st notice)
(3)

(4) authorities
(5)

actual deposit/Consignation with proper judicial subsequent notice of Consignation (2nd notice)

Effects: Extinguishment of obligation (1) Debtor may ask judge to order cancellation of obligation (2) Running of interest is suspended (3) Before creditor accepts or before judge declares consignation has been properly made, obligation remains ( debtor bears risk of loss at the meantime, after acceptance by creditor or after judge declares that consignation has been properly made risk of loss is shifted to creditor) Consignation w/o prior tender allowed in: 1. creditor absent or unknown/ does not appear at the place of payment 2. incapacitated to receive payment at the time it is due 3. refuses to issue receipt w/o just cause 4. 2 or more creditor claiming the same right to collect 5. title of obligation has been lost 2. LOSS OF THE THING DUE partial or total/ includes impossibility of performance WHEN IS THERE A LOSS: 1) When the object perishes (physically) 2) When it goes out of commerce 3) When it disappears in such a way that: its existence is unknown or it cannot be recovered WHEN IS THERE IMPOSSIBILITY OF PERFORMANCE 1) Physical impossibility 2) Legal impossibility : (a) Directly caused as when prohibited by law (b) Indirectly caused as when debtor is required to enter a military draft OBLIGATION TO DELIVER A SPECIFIC THING General Rule: Extinguished

Exceptions: a) Debtor is at fault b) Debtor is made liable for fortuitous event because of a provision of law, contractual stipulation or the nature of the obligation requires assumption of risk on part of debtor OBLIGATION TO DELIVER A GENERIC THING General Rule: Not extinguished Exceptions: a) if the generic thing is delimited b) if the generic thing has already been segregated c) monetary obligation OBLIGATION TO DO General Rule: Debtor is released when prestation becomes legally or physically impossible without fault on part of debtor EFFECT OF PARTIAL LOSS ( judicial determination of extent is necessary)
a)

when loss is significant may be enough to extinguish obligation

b) when loss insignificant not enough to extinguish obligation

WHEN THING IS LOST IN THE POSSESSION OF THE DEBTOR Presumption: Loss due to debtors fault ( disputable ) Exception: natural calamity, earthquake, flood, storm 3. REBUS SIC STANTIBUS - agreement is valid only if the same conditions prevailing at time of contracting continue to exist at the time of performance EFFECT OF DIFFICULTY BEYOND PARTIES CONTEMPLATION Rule: Obligor may be released in whole or in part REQUISITES: The event or change could not have been forseen at the time of the execution of the contract (a) The performance is extremely difficult, but not impossible (because if it is impossible, it is extinguished by impossibility) (b) The event was not due to the act of any of the parties (c) The contract is for a future prestation 4. CONDONATION/REMISSION OF THE DEBT gratuitous abandonment of debt; right to claim; donation; rules of donation applies; express or implied REQUISITES: a. There must be an agreement

b. There must be a subject matter (object of the remission, otherwise there would be nothing to condone) c. Cause of consideration must be liberality (Essentially gratuitous, an act of liberality ) d. Parties must be capacitated and must consent; requires acceptance by obligor; implied in mortis causa & expressed inter vivos e. Formalities of a donation are required in the case of an express remission f. Revocable subject to rule on inofficious donation ( excessive, legitime is impaired ) & ingratitude & condition not followed

g. Obligation remitted must have been demandable at the time of remission h. Waivers or remission are not to be presumed generally Forms: Extent: a. Express formalities a. total of donation b. Implied conduct is b. partial sufficient Kinds: a. Principal accessory also condoned b. accessory principal still outstanding c. accessory oblig. Of pledge condoned; presumption only, rebuttable Requisites of Implied: voluntary delivery presumption; when evidence of indebtedness is w/ debtor presumed voluntarily delivery by creditor; rebuttable
1.

effect of delivery of evidence of indebtedness is conclusion that debt is condoned already conclusion; voluntary delivery of private document
2.

if in hands of joint debtor only his share is condoned if in hands of solidary debtor - whole debt is condoned c. Tacit voluntary destruction of instrument by creditor; made to prescribe w/o demanding
a. b.

5. CONFUSION OR MERGER OF RIGHTS character of debtor & creditor is merged in same person with respect to same obligation REQUISITES: a. It must take place between principal debtor & principal creditor only b. Merger must be clear & definite c. The obligation involved must be same & identical one obligation only d. Revocable, if reason for confusion ceases, the obligation is revived 6. COMPENSATION Set off; it is a mode of extinguishment to the concurrent amount the obligation of persons who are in their own right reciprocally debtors or creditors REQUISITES: a. Both parties must be mutually creditors and debtors - in their own right and as principals b. Both debts must consist in sum of money or if consumable , of the same kind or quality c. Both debts are due d. Both debts are liquidated & demandable (determined)

Neither debt must be retained in a controversy commenced by 3rd person & communicated w/ debtor (neither debt is garnished)
e.

Kinds: legal by operation of law; as long as 5 requisites concur- even if unknown to parties & if payable in diff places; indemnity for expense of exchanges; even if not equal debts only up to concurring amount b. conventional agreement of parties is enough, forget other requirement as long as both consented c. facultative one party has choice of claiming/opposing one who has benefit of period may choose to compensate - not all requisites are present - depositum; commodatum; criminal offense; claim for future support; taxes
a.

judicial set off; upon order of the court; needs pleading & proof; all requirements must concur except liquidation e. total when 2 debts are of the same amount f. partial when 2 debts are not of the same amount
d.

Effect of assignment of credit to 3rd person; can there still be compensation a. if made after compensation took place no effect; compensation already perfected b. if made before compensation took place depends with consent of debtor debtor is estopped unless he reserves his right & gave notice to assignee 2. with knowledge but w/o consent of debtor compensation may be set up as to debts maturing prior to assignment 3. w/o knowledge compensation may be set-up on all debts prior to his knowledge
1.

7. NOVATION extinguishment of obligation by creating/ substituting a new one in its place a. changing object or principal conditions b. substituting person of debtor c. subrogating 3rd person in right of creditor REQUISITES: a. valid obligation b. intent to extinguish old obligation expressed or implied: completely/substantially incompatible old and new obligation on every point c. capacity & consent of parties to the new obligation d. valid new obligation EFFECT OF NOVATION: a. extinguishment of principal carries accessory, except: stipulation to contrary stipulation pour autri unless beneficiary consents modificatory novation only; obliged to w/c is less onerous old obligation is void b. old obligation subsists if: new obligation is void or voidable but annulled already ( except: intention of parties ) if old obligation has condition

c.

if Resolutory & it occurred old obligation already extinguished; no new obligation since nothing to novate if suspensive & it never occurred as if no obligation; also nothing to novate
-

if old obligation has condition, must be compatible with the new obligation; if new is w/o condition deemed attached to new
d.

e.
-

if new obligation has condition if resolutory: valid if suspensive & did not materialize: old obligation is enforced

KINDS:
a.

REAL/OBJECTIVE change object, cause/consideration or principal condition

b. PERSONAL/SUBJECTIVE 1. substituting person of debtor ( passive )

EXPROMISION; initiative is from 3rd person or new debtor; new debtor & creditor to consent; old debtor released from obligation; subject to full reimbursement & subrogation if made w/ consent of old debtor; if w/o consent or against will , only beneficial reimbursement; if new debtor is insolvent, not responsible since w/o his consent DELEGACION; initiative of old debtor; all parties to consent; full reimbursement; if insolvent new debtor not responsible old debtor because obligation extinguished by valid novation unless: insolvency already existing & of public knowledge or know to him at time of delegacion
a. b. c. 2. a.

Delegante old debtor Delegatario - creditor Delegado new debtor subrogating 3rd person to rights of creditor ( active )

conventional- agreement & consent of all parties; clearly established legal- takes place by operation of law; no need for consent; not presumed except as provided for in law:
b.

presumed when1. creditor pays another preferred creditor even w/o debtors knowledge
2.

3rd person not interested in obligation pays w/ approval of debtor

3. person interested in fulfillment of obligation pays debt even w/o knowledge of debtor

Difference from payment by 3rd person 1. debtor is not nec. Released from debt 2. can be done w/o consent of creditor 3. 1 obligation 4. 3rd person has no oblig. to pay if insolvent

Change of debtor 1. debtor is released 2. needs consent of creditor express or implied 3. 2 obligations; 1 is extinguished & new one created 4. new debtor is obliged to pay

Art 1231 Obligations are extinguished: a. By payment or performance b. By the loss of the thing due c. By the condonation or remission of the debt d. By the confusion or merger of the rights of creditor and debtor e. By compensation f. By novation Other causes of extinguishment of obligation, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this code. Still other causes: a. Death of a party in case the obligation is a personal one b. Resolutory term c. Change of civil status d. Compromises e. Mutual dissent f. Impossibility of fulfillment g. Fortuitous event Section 1 Payment or Performance Art 1232 Payment means not only the delivery of money but also the performance in any other manner, of an obligation. Art 1233 a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. Requisites for a valid payment under this Article: a. The very thing or service contemplated must be paid b. Fulfillment must be complete Art 1235 When the obligee accepts the performance, knowing its incompleteness of irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. Art 1236 Creditor may accept payment from a stranger: a. if there is a stipulation allowing this b. or if said third person has an interest in the fulfillment of the obligation The third person may pay: a. With the knowledge and consent of the debtor- here, the payor/said 3rd person is entitled to Reimbursement and Subrogation to such rights as guaranty, penalty clause, or mortgage b. Without the debtors knowledge or against his will here, the payor is not entitled to subrogation: he is allowed only Beneficial reimbursement Instances when recovery can be had from the creditor and not from the innocent debtor: a. When the debt has prescribed b. When the debt had been completely remitted c. When debt has already been paid

d. When legal compensation had already taken place Art 1237 Whoever pays on behalf of the debtor without the knowledge or against the will of the later, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. Art 1238 Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtors consent. But the payment is in any case valid as to the creditor who has accepted it. Art 1239 In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid without prejudice to the provisions of Art 1427 under the Title on Natural Obligations General Rule- if the person paying has no capacity to give: a. Payment is not valid-if accepted b. Creditor cannot even be compelled to accept it c. The remedy of consignation Exception- When a minor between 18 and 21 years of age, who has entered into a contract without the consent of the parents or guardian voluntarily pays a sum of money or delivers a fungible thing in the fulfillment of an obligation, there shall be no right to recover from the same from the obligee who has spent or consumed it in good faith. Art 1240 - Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. If the recipient was not authorized, the payment is generally not valid.

Art 1241 Payment to a third parson who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proven in the following case: a. If after the payment, the third person acquires the rights of the creditor b. If the creditor ratifies the payment to the third person c. If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive the payment Examples When Benefit to the Creditor is Presumed: a. If after payment, the third person acquires the creditors rights-as when the creditor is indebted to the third person b. If the creditor ratifies the payment to the third person-like if Meralco, a few days after its unauthorized collector had collected form you, tells you that the payment to him is all right. Here, the defect is cured. c. If by the creditors conduct, the debtor has been led to make the payment-like when the impostor agent had been given by the Meralco the usual uniform for collectors. Art 1242 Payment made in good faith to any person in possession of the credit shall release the debtor. Requisites: a. Payment by the payor must be made in good faith (this is presumed, but payee may be in good or bad faith) b. The payee must be in possession of the credit itself (not merely the document evidencing credit)

Art 1243- Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. Garnishment: a. Takes place when the debtor of a debtor is ordered not to pay the latter so that preference would be given to the latters consent b. The preceding by which a debtors credit is subjected to the payment of his own debt to another Interpleader- the technical name of an action in which a certain person is in possession of certain property wants claimants to litigate among themselves for the same. Injunction- a judicial process by virtue of which a person is generally entered to refrain from doing something. It is called Preliminary Injunction is the prohibition is during the pendency of certain proceedings Art 1244 The debtor of a thing cannot compel the creditor to receive different one, although the latter may be of the same value as, or more valuable that which is due. In obligation to do or not to do, an act of forbearance cannot be substituted by another act or forbearance against the obligees will. Instances when Art 1244 does not apply: A. In case of facultative obligations In case there is another agreement resulting in either a. dation in payment or b. novation

Art 1245 Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales. Dation in Payment- that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor property for the satisfaction of monetary debt. Sale vs. Dation in Payment a. Sale -there is no pre-existing credit -This gives rise to obligations -The cause or consideration here is the Price (from the point of view of the seller) or the object (from the point of view of the buyer) -There is greater freedom in the determination of the price The giving of the price may generally and the obligation of the buyer b. Dation in Payment -There is a pre-existing credit -This extinguishes obligations The cause or consideration here, from the viewpoint of the debtor is the extinguishment of his debt, and from the point of view of the creditor, it is the acquisition of the object offered in credit -There is less freedom in determining the price The giving of the object in lieu if the credit may extinguish completely or only partially the credit (depending on the agreement) Conditions in which dation in payment would be valid: a. If the creditor consents, for a sale presupposes the consent of both parties. b. If the dation in payment will not prejudice the other creditors for this might lead to debtor to connive with one creditor in defrauding the other creditors. c. If the debtor is not judicially declared insolvent, for here, his property is supposed to be administered by the assignee. In dation, it is not always necessary that all the property of the debtor will be given to satisfy the credit.

Art 1246 When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. If the contract does not specify the quality: a. The creditor cannot demand a thing of superior quality- but if he desires, he may demand and accept one of inferior quality. b. The debtor cannot deliver a thing of inferior quality- but if he so desires, he may deliver one of superior quality- provided it is not of a different kind.

Art 1248 Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and on part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation lf the latter. Exceptions when Partial Performance is Allowed: a. When there is stipulation to this effect b. When the different prestations are subject to different conditions or different terms (e.g. like a debt payable in installment) c. When a debt is in part liquidated and in part unliquidated, in which case performance of the liquidated part may be insisted upon by either by the debtor or creditor. d. When a joint debtor pays his share or the creditor demands the same e. When a solidary debtor pays only the part demandable because the rest are not yet demandable on account on their being subject to different terms and conditions f. In case of compensation, which one debt is larger than the other, it follows that a balance is left. Art 1249 That payments of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. In the meantime, the action derived from the original obligation shall be held in abeyance. Legal tender- it is that which a debtor may compel the creditor to accept in payment of a debt. Stipulation of another currency: a. Under the first paragraph of this Article, payment may be either: In the currency stipulated Or if it is not possible to deliver such currency, then in Philippine legal tender Art 1250 In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall b the basis of payment, unless there is an agreement to the contrary. Inflation it is a sharp sudden increase of money or credit or both without a corresponding increase in business transaction * Under this article, the basis of payment is the value at the time the obligation was constituted or incurred, unless there is an agreement to the contrary.

Art 1251 - Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case, the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith, or after he has incurred in delay, the additional expenses shall be borne by him. Where payment must be made: a. If there is stipulation in the place designated b. If there is no stipulation: - If it is an obligation to deliver a determinate thing, then on the place where the thing might be at the time the obligation was constituted; - If the obligation is for any other thing, delivery must be made to the domicile of the debtor. Subsection 1 Application of Payments Art. 1252 4 special forms of payment: a. Application or imputation of payments b. Dation in payment c. Assignment in favor of creditors/cessation d. Tender of payment and consignation Application of payment the designation of the debt to which should be applied a payment made by a debtor who owes several debts in favor of the same creditor Requisites for application: a. There must be 2 or more debts b. The debts must be of the same kind c. The debts are owed by the same debtor in favor of the same creditor d. All the debts must be due General rule: it is the debtor who is given the right to select which of his debt he is paying. Exception: d. e. If there was a valid prior but contrary agreement, the debtor cannot choose The debtor cannot choose to pay part of the principal ahead of the interest unless the creditor consents.

How application for payment is made: a. The debtor makes a designation b. If not, the creditor makes it, by so stating in the receipt that he issues, unless there is cause for invalidating the contract c. If neither the debtor nor the creditor has made the application, or if the application is not valid, then application is made by operation of law. If the creditor makes the application without the knowledge and consent of the debtor, the application is not valid. Once the application has been made, it may not be revoked, unless both parties agree. Even if both parties agree, however, still the revocation or change in the application will not be allowed if third persons would be prejudiced. Application must be made at the time when payment by the debtor is made, not afterwards.

Art. 1253 If the debt produces interest, payment of the principal shall not be deemed to have been made until the interest has been covered. Interest must be paid first the debtor cannot insist that his payment be credited to the principal instead of the interest. However, if the creditor agrees, that is ala right. Effect if payment is credited to the principal reduction of the principal would of course result in the decrease of the total interest collectible. What interest I supposed to be paid: d. Interest by way of compensation e. Interest by way of damages due to default Art. 1254 Rules in case no application for payment has been voluntarily made a. Apply it to the most onerous/heavy/burdensome- (in case the due and demandable debts are of different natures) b. If the debts are of the same nature and burden, application shall be made to all proportionately. 1.If the debtor makes the application, the payment should be credited to the first debt. The debtor cannot insist that the creditor accept it for the second debt for insofar as the second debt is concerned, it is only a partial payment. And under the law, a creditor cannot generally be compelled to receive partial payment 3. If no application has been made, the law steps in, and application will be made, not equally but proportionately. Section 2 Payment by Cession Art 1255 Cession or assignment in favor of creditors- it is a process by which a debtor transfers all the properties not subject to execution in favor of his creditors so that the properties not subject to execution in favor of his creditors so that the latter may sell them, and thus apply the proceeds to their credits. Kinds or Classes of Assignment a. Legal- the majority of creditors must agree; governed by the insolvency law b. Voluntary-all creditors must agree; this is referred to in Art 1255 Requisites for Voluntary Assignment: a. More than 1 debt b. More then 1 creditor c. Complete or partial insolvency of debtor d. Abandonment of all debtors property not exempt from execution in favor of creditors (unless exemption is validly waived by the debtor) e. Acceptance on consent on the part of the creditors (for it cannot be imposed upon an unwilling creditor) Effect of Voluntary Assignment a. The creditor do not become the owners; they are merely assignees with authority b. The debtor is released up to the amount of the net proceeds of the sale, unless there is stipulation to the contrary. The balance remains collectible. c. Creditor will collect credits in the order of preference agreed upon, or in default of agreement, in the order ordinarily established by law. Cession Distinguished from Dation in Payment a. Dation in Payment

-Does not affect all the properties -Does not require plurality of creditors -Only the specific or concerned creditors consent is required -May take place during the solvency of the debtor Transfers ownership upon delivery -This is really an act of novation b. Cession -In general, affects all the properties of the debtor -Requires more than 1 creditor Requires the consent of all the creditors -Requires full or partial insolvency Does not transfer ownership Not an act of novation Art 1256 Tender of Payment- the act of offering the creditor what is due him together with a demand that the creditor accept the same. Consignation-the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of payment. It releases the debtor of his debt. In tender of payment and consignation, to extinguish the debtors obligation, one must comply with the requisites provided in Arts 1256-1258.

Art 1257 In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. Essential Requisites for Consignation: a. Existence of a valid debt b. Valid prior tender, unless tender is excused c. Prior notice of consignation (before deposit0 d. Actual consignation (deposit) e. Subsequent notice of consignation Art 1258 Consignation shall be made by depositing the thing due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. Art 1259 The expenses of consignation, when properly made shall be charged against the creditor. Art 1260 Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. If the consignation is duly (properly) made: a. The debtor may ask the judge to order the cancellation of the obligation b. The running of interest is suspended c. Before the creditor accepts, or before the judge declares that consignation has been made, the obligation remains When debtor may withdraw the thing or sum consignated: a. As a matter of right

Before the creditor has accepted the consignation Or before there is a judicial declaration that the consignation had been properly made-obligation and accessory stipulation remain b. As a matter of privilege When after consignation had been properly made, the creditor authorizes the debtor to withdraw the thing. Art 1261 If the consideration having made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released.

1. 2.

Section 2 Loss of the Thing due Loss- under this section, loss includes impossibility of performance When is there a loss? a. When the object perishes (physically it is destroyed) b. When it goes out of commerce c. When it disappears in such a way that: Its existence is unknown Or it cannot be recovered Impossibility of Performance includes: a. Physical impossibility b. Legal impossibility- which is either Directly caused-when prohibited by law Indirectly caused- when the debtor is required to enter a military draft c. Moral impossibility- impracticability Art 1262 An obligation which consists in the delivery of a determinate thing shall be extinguished it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. 2 Kinds of Obligations To Give a. Obligation to give a Generic Thing- obligation is not extinguished by loss or by fortuitous event because genus never perishes b. Obligation to give a Specific Thing Effect of Loss on an Obligation to Deliver a Specific Thing General Rule: the obligation is extinguished Exceptions: a. If the debtor is at fault b. When the debtor is made liable for a fortuitous event because: Of a previous law Of a contract stipulation The nature of the obligation requires the assumption of risk on the part of the debtor Examples of instances when the law requires liability even in the case of a fortuitous event:

a. When the debtor is in default b. When the debtor has promised to deliver the same thing to 2 or more parties who do not have the same interest c. When the obligation arises from a crime d. When the borrower of an object has lent the thing to another who is not a member of his own household e. When the thing loaned has been delivered with appraisal of the value, unless there is a stipulation exempting the borrower from responsibility in case of a fortuitous event f. When the payee in solutio indebiti is in bad faith Art 1263 In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Exceptions: a. If the generic thing is delimited b. If the generic thing has already been segregated or set aside in which case, it has become specific. Art 1264 The courts shall determine whether, under the circumstances, the partial loss of the obligation is so important as to extinguish the obligation. Art 1265 Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This presumption does not apple in case of earthquake, flood, storm or other natural calamity. In a case filed by the creditor, he doesnt have to prove that the debtor was at fault, because it is already presumed. When presumption does not apply: In case of earthquake, flood, storm or other natural calamity.

Art 1266 The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. This Article refers to a case when compliance of a personal obligation becomes, without the debtors fault: a. A legal impossibility b. Or a physical impossibility The impossibility must be after the constitution of the obligation. If the act is subjectively impossible (for the debtor himself), but otherwise objectively possible (for all others), usually the obligation subsists, unless personal considerations are involved such as when only a particular company is prohibited by law to furnish work on a certain day.

Art 1267 This Article refers to Moral Impossibility or Impracticability due to change of certain conditions (rebus sic stantibus) also referred to as the Doctrine of the Frustration of the Commercial Object/frustration of Enterprise Real Obligations (to give) are not included in this Article General Rule- Impossibility of performance releases the obligor

Requisites for Art. 1267: a. The service must become so difficult that it was manifestly beyond the contemplation of BOTH parties. The difficulty could not possibly have been anticipated or foreseen. b. One of the parties must ask for relief

c. The object must be a future service with future unusual change in conditions. Art 1268 This Article gives one instance where a fortuitous event does not extinguish the obligation. Exception: When the creditor is in Mora Accipiende (default on the part of the creditor)

Art 1269 The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. Section 3 Condonation of Remission of the Debt Art 1270 Condonation or remission is essentially gratuitous and requires the acceptance of the obligor. It may be made expressly or impliedly. Remission or Condonation- it is the gratuitous abandonment by the creditor of his rights. Essential Requisites for Remission: a. There must be an agreement since acceptance of the offer is required. b. The parties must be capacitated and must consent. c. There must be subject matter. d. The cause of consideration must be liberality e. The obligation remitted must have been demandable at the time of remission. f. The remission must not be in officious. g. Formalities of a donation are required in the case of an express remission. h. Waivers or remissions are not to be presumed generally. Classes of Remission: a. As regards its effect or extent: Total Partial-only a portion is remitted or the remission may refer only to the accessory obligations b. As regards its date of effectivity: inter vivos- during life mortis causa- after death c. As regards its form: *Implied or Tacit- required no formality Express of Formal- requires formalities of a donation if inter vivos; of a will or cordial if mortis causa Effect if Remission is not Accepted by the Debtor- This would not be remission. If the creditor does not really collect within the statute of limitations, the debt may be said to have been extinguished by prescription.

Art 1271 The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action the former had against the latter. Art 1271 tantamount to an implied Remission Art 1272 Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. Art 1273 The renunciation of the principal debt shall extinguish the accessory obligation; but the waiver of the latter shall leave the former in force.

Art 1274 It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. In a contract of pledge, delivery is mandatory so that the contract is perfected.

Section 4 Confusion or Merger of Rights Art 1275 The obligation is extinguished from the time the characters of creditors and debtors are merged in the same person. Merger or Confusion It is the meeting in one person the qualities of a creditor and debtor with respect to the same obligation. Requisites of a Valid Merger: a. It should take place between the principal debtor and creditor. b. The merger must be clear and definite. c. The very obligation involved must be the same or identical. Art 1276 Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. Art 1277 Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. In joint obligations, the debts are distinct and separate from each other. Section 5 Compensation Art 1278 Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. Compensation vs. Payment a. While payment must be complete and indivisible as a rule, in compensation, partial extinguishment is always permitted. b. While payment involves action or delivery, true/legal compensation takes place by operation of law. Compensation vs. Merger/Confusion a. As to the number of persons Confusion- there is only 1 person in whom is merged the qualities of creditor and debtor Compensation there must be 2 persons who are mutually creditor and debtor of each other. b. As to the number of obligations: Confusion- there can only be 1 Compensation-there must be 2 Classes of Compensation a. According to its effect or extent Total-both obligations are completely extinguished because they are of the same amount Partial- when a balance remains b. According to its origin or cause

Legal- takes place by operation of law Voluntary or Conventional- due to the agreement of both parties Judicial- also called set off Facultative- one of the parties has the choice of claiming the compensation or of opposing it.

Art 1279 The requisites enumerated under Art 1279 are those for LEGAL compensation. VOLUNTARY compensation in general requires no requisite except that the agreement be voluntarily and validly entered into.

Negative Requisites for Legal Compensation a. Over either of the debts must there be any retention or controversy commenced by third persons and communicated in due time to the debtor. (There can be no legal compensation when ones claim against another is still the subject of court litigation) b. There must have been no waiver of the compensation c. The compensation of the debts must not have been prohibited by law Art 1280 Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. Art 1281 Compensation may be total or partial. When the two debts are of the same amount, there is total compensation. Art 1282 The parties may agree upon the compensation of debts whish are not yet due. This applies to conventional or voluntary compensation. Requisites in Art 1279 do NOT apply.

Art 1283 If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. All the requisites mentioned in Art 1279 must be present, except at the time of the pleading, the claim need not yet be liquidated.

Art 1284 When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. Rescissible or voidable debts are valid until rescinded or voided, hence, compensation is allowed. Art 1285 The 3 Cases covered by Art 1285 a. The assignment may be made with the consent of the debtor EFFECT: Compensation cannot be set up- because there has been consent and therefore a waiver EXCEPTION: If the right to the compensation (that has already taken place) is reserved. b. The assignment may be made with the knowledge but without the consent (or against the will) of the debtor EFFECT: Compensation can be set up regarding debts previous to the cession or assignment. This refers to debts maturing before the assignment (that is, before the notice) hence here, legal compensation has already taken place. c. The assignment may be made without the knowledge of the debtor.

EFFECT: Debtor can set up compensation as a defense for all debts maturing PRIOR to his knowledge of the assignment (whether the debts matured before or after the assignment) Art 1286 Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. Art 1287 Compensation shall not be proper when one of the debts arises from a depositum or from the obligation of a depository or of a bailee in commodatum. This Article speaks of instances when legal compensation cannot take place, such as: a. When one debt arises from a depositum (not bank deposit for this is really a loan)- It is the depository who cannot claim compensation. The depositor is allowed to so claim. b. When one debt arises from the obligations of a depository c. When one debt arises from the obligations of a bailee in commodatum (the borrower of property who pays nothing for the loan)- the lender may claim compensation, the borrower is not allowed to do so. Obligations of the Depository a. He is obliged to keep the thing safely and to return it when required, to the depositor, or to his heirs and successors, or to the person who may have been designated in the contract. b. Unless there is a stipulation to the contrary, the depositary cannot deposit the thing to a third person c. If a deposit with a third person is allowed, the depositary is liable for the loss of he deposited the thing with a person who is manifestly careless or unfit. d. The depositary is responsible for the negligence of his employees e. The depositary cannot make use of the thing deposited without the express permission of the depositor. Otherwise, he shall be liable for damages. However, when the preservation of the thing requires its use, it must be used only for that purpose. Art 1288- Neither shall there be compensation if one of the debts consists of civil liability arising from a penal offense. Art 1289 If the person shall have against him, several debts which are susceptible of compensation, the rules on the application of payment shall apply to the order of the compensation. Art 1290 When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.

Art 1291 Novation- the substitution or change of an obligation by another, which extinguishes or modifies the first, either changing its object or principal condition, or substituting another in place of the debtor, or subrogating third person in the right of the creditor. Kinds of Novation:

A. According to its Object or Purpose: 1. Real or Objective- changing the object or principal conditions of the obligation 2. Personal or Subjective -change of persons a. Expromission or Delegacion- substituting the person of the debtor b. Subrogating a third person in the rights of the creditor- may be b1.Conventional Subrogation- by agreement b2.Legal Subrogation- by operation of law b3. Mixed- change of object or parties B. According to the form of the constitution 1. Express- it is declared in unequivocal terms 2. Implied- when the 2 obligations are essentially incompatible with each other. C. According to its extent of effect 1. Total or extensive novation when the old obligation is completely extinguished 2. Partial or Modificatory also called imperfect or improper the old obligation is merely modified, thus, it still remains in force insofar as it has been modified. Requisites for Novation: a. The existence of a valid OLD obligation b. The intent to extinguish or modify the old obligation by a substantial difference (the extinguishment/modification itself is a result of novation) c. The capacity and consent of all the parties (except in the case of expromision, where the old debtor does not participate) d. The validity of the new obligation Art 1292 In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on every point incompatible with each other. How implied Novation may be Made- it is done by making Substantial Changes in: a. The object or subject matter of the contract (e.g. delivery of a car instead of a diamond ring) b. The cause or consideration of the contract (e.g. upward changes in price) a. The principal terms of the contract (e.g. reduction of the term or period originally stipulated)

Art 1293 2 Kinds if Personal or Subjective Novation: a. Passive- change in the debtor b. Active- change in the creditor Art 1293 speaks of Passive subjective Novation- which may be in the form of: a. Expromission- initiative comes from a third person c. Delegacion- initiative comes from the debtor, for it is he who delegates another to pay the debt, and thus, he excuses himself. The 3 parties, the old debtor, the new debtor and the creditor, must agree. Art 1294 If the substitution is without the knowledge or against the will of the debtor, the new debtors insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor. Requisites for Expromision: a. The initiative must come from a third person-who will be new debtor

b. the new debtor and the creditor must consent c. the old debtor must be excused or released from his obligation (The old debtors knowledge/consent is not required Art 1295 The insolvency of the debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge or known to the debtor, when he delegated his debts. Requisites for Delegacion: a. The initiative comes from the old debtor b. All the parties concerned must consent or agree Art 1296 Accessory obligations or stipulations made in favor of third persons remain unless said third persons have their consent to the novation.

Art 1297 If the new obligation is void, the original one shall subsist unless the parties intend that the former relation should be extinguished in any event. Other factors: a. If the new obligation is subject to a condition and said condition does not materialize, the old obligation subsists. If the new obligation was intended, but the new contract was never perfected fro lack of the necessary consent, the old obligation continues. Rule if New Obligation is Merely Voidable; a. The old obligation is novated because a voidable obligation is valid until it is annulled b. If the new obligation is annulled, the old obligation subsists, and whatever novation has taken place will naturally have to be set aside Art 1298 - Effect if the Old Obligation was Void a. if the old obligation is VOID, there is no valid novation b. if the obligation was VOIDABLE and has already been annulled, there is no more obligation. Thus, the novation is also void. If the old obligation was VODABLE, and has NOT YET been annulled, there MAY BE a valid novation, provided that: a. Annulment may be claimed only by the debtor or b. When ratification validates acts which are voidable Rule if the Old Obligation was Extinguished by Loss If the loss was purely because of a fortuitous event, without liability on the part of the debtor, the novation is VOID for there would be NO obligation to novate. a. If the loss made the debtor liable, there is still an existing monetary obligation the may be the subject of novation. A prescribed obligation may be the subject of novation because unless the defense of prescription is set up by the debtor, the obligation continues, since this failure amount to a WAIVER.

Effect on a Voidable Obligation of Novation by Expromision a. The debtor is no doubt released from his obligation to the creditor for the substitution was not done through his initiative. b. But when the new debtor, after payment, sues the old debtor for Beneficial reimbursement, the old debtor can set up whatever defenses he could have set against the creditor.

Art 1299 If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. Art 1300 Subrogation- the transfer to a third person of all the rights appertaining to the creditor, including the right to proceed against guarantors, or possessors of mortgages, subject to any legal provision or any modification that may be agreed. Kinds of Subrogation: From the viewpoint of Cause of Origin a. Conventional or Voluntary Subrogation- requires an agreement and the consent of the original parties and of the creditor. b. Legal Subrogation- takes place by operation of law From the viewpoint of extent a. Total Subrogation b. Partial Subrogation- there would now be 2 or more creditors Legal subrogation is not presumed, except in cases expressly mentioned in the law. Conventional subrogation must be clearly established, otherwise, it is as id no subrogation has taken place.

Art 1301 Conventional subrogation of a third person requires the consent of the original parties and of the third person. Note: Generally, the debtor losses the right to present against the new creditor any defense which he, the debtor, could have set up against the old creditor. Distinctions between Conventional Subrogation and Assignment of Credit a. Conventional Subrogation - Extinguishes the obligation and creates a new one - This requires debtors consent - The defect of the old obligation may be cured in such a way that the new obligation becomes entirely valid b. Assignment of Credit - Mere transfer of the same right or credit (the transfer die not extinguish the credit) - This does not require the debtors consent - The defect in the credit or right is not cured simply by assigning the same An assignment of a savings deposit in a bank is not a withdrawal but a sort of subrogation, with the account being continued in the name of the assignee.

Art 1302 This Article speaks of Legal Subrogation. Art 1303 Effects of Total Subrogation The credit and all appurtenant rights, either against the debtor, or against third persons, are transferred (thus, in a sense the obligation subsists, that is, it has not yet been extinguished or paid). Art 1304 Partial Subrogation Here, there are the creditors a. The old creditor, who still remains a creditor as to the balance (because partial payment has been made to him) b. The new creditor who is a creditor to the extent of what he had paid the creditor.

PART II CONTRACTS

Meeting of minds bet 2 parties whereby one binds himself with respect to other to give something or render some service PRINCIPAL CHARACTERISTICS: Autonomy of wills parties may stipulate anything as long as not illegal, immoral, etc.
1. 2.

Mutuality performance or validity binds both parties; not left to will of one of

parties Obligatory Force parties are bound from perfection of contract: a. fulfill what has been expressly stipulated b. all consequences w/c may be in keeping with good faith, usage & law
3.

Relativity binding only between the parties, their assigns, heirs; strangers cannot demand enforcement
4.

EXCEPTION TO RELATIVITY: a. Accion pauliana b. Accion directa c. Stipulation pour autrui REQUISITES OF STIPULATION POUR AUTRUI (1) Parties must have clearly and deliberately conferred a favor upon a 3rd person
(2) The stipulation in favor of a 3rd person should be a part of, not the whole

contract (3) That the favorable stipulation should not be conditioned or compensated by any kind of obligation whatsoever
(4) Neither of the contracting parties bears the legal representation or

authorization of 3rd party (5) The third person communicates his acceptance before revocation by the original parties d. Art 1312 e. Art 1314 REQUISITES OF ART 1312: (1) Existence of a valid contract
(2) Knowledge of the contract by a 3rd person (3) Interference by the 3rd person

KINDS OF CONTRACTS As to perfection or formation:

1. 2. 3.

consensual perfected by agreement of parties real perfected by delivery ( commodatum, pledge, deposit ) formal/solemn perfected by conformity to essential formalities ( donation )

As to cause
1. 2. 3.

Onerous with valuable consideration Gratuitous founded on liberality Remunerative prestation is given for service previously rendered not as obligation

As to importance or dependence of one upon another


1. 2. 3.

principal contract may stand alone accessory depends on another contract for its existence; may not exist on its own Preparatory not an end by itself; a means through which future contracts may be made

As to parties obliged:
1. 2.

Unilateral only one of the parties has an obligation Bilateral both parties are required to render reciprocal prestations

As to name or designation: 1. Nominate 2. Innominate


a)

Do ut des I give that you may give

b) Do ut facias I give that you may do c)

Facio ut des I do that you may give

d) Facio ut facias I do that you may do

STAGES IN A CONTRACT: 1. Preparation - negotiation 2. perfection/birth 3. consummation performance ESSENTIAL ELEMENTS:


1.

Consent meeting of minds between parties on subject matter & cause of contract; concurrence of offer & acceptance Requirements: a. Plurality of subject

b. Capacity c. Intelligence and free will d. Manifestation of intent of parties e. Cognition by the other party f. Conformity of manifestation and cognition Note: We follow the theory of cognition and not the theory of manifestation. Under our civil law, the offer and acceptance concur only when the offeror comes to know, and not when the offeree merely manifests his acceptance ELEMENTS OF VALID OFFER a. definite b. complete c. intentional ELEMENTS OF VALID ACCEPTANCE a. unequivocal b. unconditional

WHEN OFFER BECOMES INEFFECTIVE: 1. death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed 2. 3. express or implied revocation of the offer by the offeree qualified or conditional acceptance of the offer

4. subject matter becomes illegal or impossible before acceptance is communicated PERIOD FOR ACCEPTANCE 1. stated fixed period in the offer 2. no stated fixed period offer is made to a person present acceptance must be made immediately
a)

offer is made to a person absent acceptance may be made within such time that, under normal circumstances, an answer can be received from him
b)

OPTION - option may be withdrawn anytime before acceptance is communicated but not when supported by a consideration other than purchase price: option money Note: Ang Yu v. CA (1994) states that a unilateral promise to buy or sell, if not supported by a distinct consideration, may be withdrawn but may not be done whimsically or arbitrarily; the right of the grantee here is damages and not specific performance; Equatorial v. Mayfair(264 SCRA 483) held that an option clause in order to be valid and enforceable must indicate the definite price at which the person granting the option is willing to sell, contract can be enforced and not only damages; Paranaque Kings V CA (1997) states that right of first refusal may be enforced by specific performance.

PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT: 1. Minors 2. 3. Insane or demented persons Illiterates/ deaf-mutes who do not know how to write

4. 5. 6.

Intoxicated and under hypnotic spell Art 1331 - person under mistake; mistake may deprive intelligence Art 1338 - person induced by fraud (dolo causante)

Note: Dolus bonus (usual exaggerations in trade) are not in themselves fraudulent RULE ON CONTRACTS ENTERED INTO BY MINORS General Rule: VOIDABLE EXCEPTIONS: 1. Upon reaching age of majority they ratify the same 2. They were entered unto by a guardian and the court having jurisdiction had approved the same 3. They were contracts for necessities such as food, but here the persons who are bound to give them support should pay therefor 4. Minor is estopped for having misrepresented his age and misled the other party (when age is close to age of majority as in the Mercado v Espiritu & Sia Suan v Alcantara cases) Note: In the Sia Suan v Alcantara case, there is a strong dissent by J.Padilla to the effect that the minor cannot be estopped if he is too young to give consent; one that is too young to give consent is too young to be estopped. Subsequently, in Braganza v Villa-Abrille, the dissent became the ruling. Minors could not be estopped DISQUALIFIED TO ENTER INTO CONTRACTS: ( contracts entered into are void ) 1. those under civil interdiction 2. hospitalized lepers 3. prodigals 4. deaf and dumb who are unable to read and write 5. those who by reason of age, disease, weak mind and other similar causes, cannot without outside aid, take care of themselves and manage their property, becoming an easy prey for deceit and exploitation CAUSES WHICH VITIATE FREEDOM 1. violence REQUISITE: a. Irresistable physical force b. Such force is the determining cause for giving consent 2. Intimidation REQUISITE: a. Determining cause for the contract b. Threatened act is unjust and unlawful

c. Real and serious d. Produces a well grounded fear that the person making it will carry it over 3. undue influence SIMULATED CONTRACTS absolute no intention to be bound at all, fictitious only void from beginning
a.

relative there is intention to be bound but concealed; concealed contract binds: 1. no prejudice to 3rd persons 2. not contrary to law, morals, etc.
b. 2.

OBJECT The prestation REQUISITES: a) Within the commerce of man - either existing or in potency b) c) Licit or not contrary to law, good customs Possible

d) Determinate as to its kind or determinable w/o need to enter into a new contract e)
3.

Transmissible

CAUSA reason why parties enter into contract REQUISITES: a) It must exist b) It must be true c) It must be licit MOTIVE - purely private reason; illegality does not invalidate contract except when it predetermines purpose of contract; when merged into one ABSENCE OF CAUSA ILLEGALITY OF CAUSA FALSITY OF CAUSA CAUSA NOT STATED IN CONTRACT INADEQUACY OF CAUSA VOID - produce no legal effect VOID - produce no legal effect VOIDABLE party must prove that cause is untruthful; presumption of validity but rebuttable PRESUMED TO EXIST - burden of proof is on the person assailing its existence DOES NOT INVALIDATE CONTRACT PER SE Exceptions: 1. fraud 2. mistake 3. undue influence 4. cases specified by law - contracts entered when ward suffers lesion of more than 25%

4.

FORM in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is executed or manifested

a.

Informal may be entered into whatever form as long as there is consent, object & cause Formal required by law to be in certain specified form such as: donation of real property, stipulation to pay interest, transfer of large cattle, sale of land thru agent, contract of antichresis, contract of partnership, registration of chattel mortgage, donation of personal prop in excess of 5,000 Real creation of real rights over immovable prop must be written

b.

c.

WHEN FORM IS IMPORTANT: 1) 2) for validity (formal/solemn contracts) for enforceability (statute of frauds)

3) for convenience General Rule: contract is valid & binding in whatever form provided that 3 essential requisites concur Exception: a. Law requires contract to be in some form for validity - donation & acceptance of real property b. Law requires contract to be in some form to be enforceable - Statute of Frauds; contract is valid but right to enforce cannot be exercised; need ratification to be enforceable Law requires contract to be in some form for convenience - contract is valid & enforceable, needed only to bind 3rd parties
c. -

ex: public documents needed for the ff: 1. contracts w/c object is creation, transmission or reformation of real rights over immovables 2. cession, repudiation, renunciation of hereditary rights/CPG 3. power to administer property for another 4. cession of action of rights proceeding from an act appearing in a public inst. 5. all other docs where amount involved is in excess of 500 ( must be written even private docs )

REFORMATION OF CONTRACTS remedy to conform to real intention of parties due to mistake, fraud, inequitable conduct, accident CAUSES/GROUNDS: mutual: instrument includes something w/c should not be there or omit what should be there
a.

b.

mutual mistake of fact clear & convincing proof causes failure of instrument to express true intention unilateral

one party was mistaken other either acted fraudulently or inequitably or knew but concealed party in good faith may ask for reformation

mistake by 3rd persons due to ignorance, lack of skill, negligence , bad faith of drafter, clerk, typist
c.

d. others specified by law to avoid frustration of true intent REQUISITES: 1. there is a written instrument 2. 3. 4. 5. there is meeting of minds true intention not expressed in instrument clear & convincing proof facts put in issue in pleadings

Note: prescribes in 10 years from date of execution of instrument WHEN NOT AVAILABLE: a. simple donation inter vivos b. c. d. wills when real agreement is void estoppel; when party has brought suit to enforce it

KINDS OF DEFECTIVE CONTRACTS:


1.

RESCISSIBLE CONTRACTS Those which have caused a particular economic damage either to one of the parties or to a 3rd person and which may be set aside even if valid. It may be set aside in whole or in part, to the extent of the damage caused' REQUISITES: a. Contract must be rescissible (1) Under art 1381: i. Contracts entered into by persons exercising fiduciary capacity (a) Entered into by guardian whenever ward suffers damage by more than 1/4 of value of object (b) Agreed upon in representation of absentees, if absentee suffers lesion by more than of value of property (c) Contracts where rescission is based on fraud committed on creditor (accion pauliana) (d) Objects of litigation; contract entered into by defendant w/o knowledge or approval of litigants or judicial authority (e) Payment by an insolvent on debts w/c are not yet due; prejudices claim of others (f) Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560, 1567 and 1659 ii.Under art 1382 - Payments made in a state of insolvency b. Plaintiff has no other means to obtain reparation

b. Plaintiff must be able to return whatever he may be obliged to return due to rescission
c.

The things must not have been passed to 3rd parties who did not act in bad faith

d. It must be made within the prescribed period OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT: Mutual Restitution 1. Things w/c are the objects of the contract & their fruits 2. Price with interest

Note: Mutual restitution N.A. when: 1. creditor did not receive anything from contract thing already in possession of party in good faith; subject to indemnity only; if there are 2 or more alienations liability of 1st infractor
2. 2.

VOIDABLE CONTRACTS intrinsic defect; valid until annulled; defect is due to vice of consent or legal incapacity CHARACTERISTICS: a. b.
c.

Effective until set aside May be assailed or attacked only in an action for that purpose

Can be confirmed ( Note: CONFIRMATION IS THE PROPER TERM FOR CURING THE DEFECT OF A VOIDABLE CONTRACT) d. Can be assailed only by the party whose consent was defective or his heirs or assigns WHAT CONTRACTS ARE VOIDABLE: a. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING CONSENT TO A CONTRACT (legal incapacity) (1) minors ( below 18 ) (2) insane unless acted in lucid interval (3) deaf mute who cant read or write (4) persons specially disqualified: civil interdiction (5) in state of drunkenness (6) in state of hypnotic spell b. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE, INTIMIDATION, UNDUE INFLUENCE OR FRAUD (vice of consent)
(1) mistake false belief into something

REQUISITES: 1. Refers to the subject of the thing which is the object of the contract

2. 3.
4.

Refers to the nature of the contract Refers to the principal conditions in an agreement

Error as to person - when it is the principal consideration of the contract Error as to legal effect - when mistake is mutual and frustrates the real purpose of parties
5. (2) violence serious or irresistible force is employed to wrest consent (3) intimidation one party is compelled by a reasonable & well-grounded fear

of an imminent & grave danger upon person & property of himself, spouse, ascendants or descendants (moral coercion)
(4) undue influence person takes improper advantage of his power over will of

another depriving latter of reasonable freedom of choice


(5) fraud thru insidious words or machinations of contracting parties, other is

induced to enter into contract w/o w/c he will not enter (dolo causante)

PERIOD TO BRING ACTION FOR ANNULMENT Intimidation, violence, undue influence Mistake, fraud Incapacity EFFECTS OF ANNULMENT:
1. 2.

4 years from time defect of consent ceases

4 years from time of discovery from time guardianship ceases

Obligation to give mutual restitution Obligation to do value of service

PRESCRIPTION IN ACTION FOR ANNULMENT OF VOIDABLE CONTRACTS: Intimidation/Violence/undue Influence Mistake/Fraud Contracts entered into by minors/incapacitated persons
3.

4 years from time defect of consent ceases 4 years from time of discovery 4 years from time guardianship ceases

UNENFORCEABLE CONTRACT valid but cannot compel its execution unless ratified; extrinsic defect; produce legal efefcts only after ratified KINDS/VARIETIES:
1.

Unauthorized/No sufficient authority entered into in the name of another a. no authority conferred b. in excess of authority conferred ( ultra vires )

when:

Note: Curable by RATIFICATION


2.

Both parties incapable of giving consent -2 minor or 2 insane persons

Note: Curable by ACKNOWLEDGEMENT 3. Failure to comply with Statute of Frauds a. Agreement to be performed within a year after making contract b. Special promise to answer for debt, default or miscarriage of another c. Agreement made in consideration of promise to marry Agreement for sale of goods, chattels or things in action at price not less than 500; exception: auction when recorded sale in sales book
d.

e. Agreement for lease of property for more than 1 year & sale of real property regardless of price f. Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS: 1. Failure of defendant to object in time, to the presentation of parole evidence in court, the defect of unenforceability is cured 2. Acceptance of benefits under the contract. If there is performance in either part and there is acceptance of performance, it takes it out of unenforceable contracts; also estoppel sets in by accepting performance, the defect is waived
4.

VOID OR INEXISTENT of no legal effect CHARACTERISTICS: a. It produces no effect whatsoever either against or in favor of anyone b. There is no action for annulment necessary as such is ipso jure. A judicial declaration to that effect is merely a declaration c. It cannot be confirmed, ratified or cured d. If performed, restoration is in order, except if pari delicto will apply e. The right to set up the defense of nullity cannot be waived f. Imprescriptible

g. Anyone may invoke the nullity of the contract whenever its juridical effects are asserted against him KINDS OF VOID CONTRACT: Those lacking in essential elements: no consent, no object, no cause (inexistent ones) essential formalities are not complied with ( ex: donation propter nuptias should conform to formalities of a donation to be valid ) (a) Those w/c are absolutely simulated or fictitious no cause (b) Those which cause or object did not exist at the time of the transaction no cause/object (c) Those whose object is outside the commerce of man no object (d) Those w/c contemplate an impossible service no object (e) Those w/c intention of parties relative to principal object of the contract cannot be ascertained
1)

2)

Prohibited by law

(f) Those expressly prohibited or declared void by law - Contracts w/c violate any legal provision, whether it amounts to a crime or not Illegal/Illicit ones Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy ; Ex: Contract to sell marijuana
3)

KINDS OF ILLEGAL CONTRACTS CONTRACT CONSTITUTE CONTRACT DOES NOT CRIMINAL OFFENSE CONSTITUTE CRIMINAL OFFENSE BUT IS ILLEGAL OR UNLAWFUL PER SE Parties are in No action for specific No action for specific pari delicto performance performance No action for restitution on No action for restitution on either side. The law will leave either side. The law will leave you where you are you where you are Both shall be prosecuted No confiscation Thing/price to be confiscated in favor of government Only one party No action for specific No action for specific is guilty performance performance Innocent party is entitled to Innocent party is entitled to restitution restitution Guilty party is not entitled to Guilty party is not entitled to restitution restitution Guilty party will be prosecuted Instrument of crime will be confiscated in favor of govt PARI DELICTO DOCTRINE -both parties are guilty, no action against each other; those who come in equity must come with clean hands; applies only to illegal contracts & not to inexistent contracts; does not apply when a superior public policy intervenes EXCEPTION TO PARI DELICTO RULE If purpose has not yet been accomplished & If damage has not been caused to any 3rd person
1.

Requisites: a) contract is for an illegal purpose


b) contract must be repudiated by any of the parties

before purpose is

accomplished or damage is caused to 3rd parties c) court believes that public interest will be served by allowing recovery (discretionary upon the court ) based on remorse; illegality is accomplished when parties entered into contract; before it takes effect party w/c is remorseful prevents it 2. Where laws are issued to protect certain sectors: consumer protection, labor, usury law
a)

Consumer protection if price of commodity is determined by statute, any person paying an amount in excess of the maximum price allowed may recover such excess to receive less may still be entitled to recover the deficiency; if law set max

b) Labor if law sets the minimum wage for laborers, any laborer who agreed

working hours & laborer who undertakes to work longer may demand additional compensation c) Interest paid in excess of the interest allowed by the usury law may be recovered by debtor with interest from date of payment If one party is incapacitated, courts may allow recovery of money, property delivered by incapacitated person in the interest of justice; pari delicto cannot apply because an incapacitated person does not know what he is entering into; unable to understand the consequences of his own action
3.

If agreement is not illegal per se but merely prohibited & prohibition is designated for the protection of the plaintiff may recover what he has paid or delivered by virtue of public policy
4.

MUTUAL RESTITUTION IN VOID CONTRACTS General Rule: parties should return to each other what they have given by virtue of the void contract in case where nullity arose from defect in essential elements 1. 2. return object of contract & fruits return price plus interest

Exception: No recovery can be had in cases where nullity of contract arose from illegality of contract where parties are in pari delicto; except: a. incapacitated not obliged to return what he gave but may recover what he has given b. other party is less guilty or not guilty CONTRACTS Art 1305 ELEMENTS OF A CONTRACT a. Essential Elements 1.Consent 2.Subject Matter 3.Cause or Consideration b. Natural Elements- presumed to exist, unless the contrary is stipulated Ex. Warrants against eviction and against hidden defects c. Accidental Elements existence of such is dependent on the agreement of the parties. Classification of Contracts a. According to perfection or formation 1. Consensual 2. Real-perfected by delivery 3. Formal or Solemn b. According to cause of equivalence of the value of prestations: 1. Onerous 2. Gratuitous or Lucrative 3. Remunerative

c. According to Importance or dependence of one upon another 1. Principal can stand alone 2. Accessory depends upon the existence of another contract 3. Preparatory here, the parties do not consider the contract as an end by itself, but as a means thru which future transaction or contracts may be made Ex. Agency, partnership d. According to the parties obligated 1. Unilateral 2. Bilateral e. According to their Name or Designation 1. Nominate 2. Innominate f. According to the risk of fulfillment 1. Commutative 2. Alienatory

g. According to the time of performance or fulfillment 1. Executed- one completed at the time the contract is entered into 2. Executory one where the prestations are to be complied with at some future time h. According to subject matter 1. Contracts involving things 2. Contracts involving rights or credit 3. Contracts involving services i. According to obligations imposed and required by law 1. Ordinary 2. Institutional-like contract of marriage According to the evidence required for its proof 1. Those requiring merely oral or parol evidence 2. Those requiring written proof

j.

k. According to the number of persons actually and physically entering into the contracts 1. Ordinary two parties are represented by different persons 2. Auto Contracts where only one person represents two opposite parties, but in different capacities l. According to the number of persons who participated in the drafting of the contract 1. Ordinary 2. Contract of Adherence

m. According to the nature of the contract 1. Personal 2. Impersonal STAGES OF A CONTRACT a. Preparation b. Perfection c. Consummation (or death or termination) Basic Principles or Characteristics of a Contract a. Freedom to stipulate b. Obligatory force and compliance in good faith

c. Perfection by mere consent d. Both parties are mutually bound e. Relativity Art 1306 Freedom or autonomy of contract Art 1307 Four Kinds of Innominate Contracts a. Du ut des (I give that you may give) b. Do ut facias (I give that you may do) c. Facio ut des (I do that you may give) d. Facio ut facias (I do that you may do) Art 1308-1310 MUTUALITY OF CONTRACTS The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. The validity or fulfillment may be left to the will of a third person. The validity or fulfillment may be left to chance. Art 1311 This principle stresses the Principle of Relativity. Contracts are generally effective only between the parties, their assigns and their heirs. Exceptions: a. Where the obligation arising from the contract are not transmissible by their nature, by stipulation, or by provision of law. b. Where there is stipulation pour atrui (a stipulation in favor of a third party) c. Where a third person induces another to violate his contract d. Where, in some cases, third persons may be adversely affected by a contract where they did not participate. e. Where the law authorizes the creditor to sue on a contract entered into by his debtor. Art 1312 A real right binds the property over which it is exercised. Exception to the general rule that a contract binds only the parties. Art 1313 Right of defrauded creditor. Art 1314 Requisites before a third person in this article can be held for damages a. Existence of a valid contract b. Knowledge on the part of the third person of the existence of the contract c. Interference by the third person without legal justification or excuse Art 1315-1316 Perfection of contracts

Art 1317 Requisites for a Person to Contract in the Name of Another a. He must be duly authorized (expressly or impliedly) b. Or he must have by law a right to represent him c. Or the contract must be subsequently ratified Art 1318 Requisites of Contracts a. Consent (Art 1319-46) b. Object (Art 1347-1349) c. Cause (Art 1350-55) Art 1319 Definition of Consent -Art 1319,first paragraph Requisite of Consent a. There must be two or more parties b. The parties must be capable or incapacitated c. There must be no vitiation of consent d. There must be no conflict between what was expressly declared and what was really intended e. The intent must be declared properly Requisites for the meeting of minds a. An offer that must be certain b. And an acceptance must be unqualified and absolute Concurrence of offer and acceptance (Art 1319-26) Legal capacity of contracting parties (Art 1327-29) Characteristics of Consent (Art 1330-46)

Art 1320 Forms of Acceptance Art 1322 Acceptance of an Offer made thru an agent Art 1323 Other instances when the offer becomes ineffective a. When the offeree expressly or impliedly rejects the offer b. When the offer is accepted with qualification or condition c. When before acceptance is communicated, the subject matter becomes illegal or impossible d. When the period of time given to the offeree within which he must signify his acceptance has already lapsed e. When the offer is rejected in due tome Art 1324 Option Contract Option- it is a contract granting a person the privilege to buy or not to buy certain objects at anytime within the agreed period at a fixed price

Perfection of Option When there is a meeting of minds on the option Art 1325-1326 If the advertisement contains all the specific particular needed in a contract, it is a definite offer. If important details are left out, the advertisement is not a definite offer, but a mere invitation to make an offer. Art 1327 in relation to Art 1329 Who cannot give consent. Art 1328 Voidable contracts by reason of incapacity Art 1330 This article enumerates causes or vices of consent. Art 1331 in relation to Art 1333 Mistake It is a false belief about something. Requisites for mistake to vitiate consent a. Object of the contract b. The condition which principally proved or induced one of the parties c. Identify or qualifications, but only if such was the principal cause of the contract. d. The error must be excusable e. The error must be a mistake of fact Kinds of Mistake a. Mistake as to the object 1. Mistake as the identity of the thing 2. Mistake as to the substance of the thing 3. Mistake as to the conditions of the thing 4. Mistake as to the quantity of the thing b. Mistake as to person 1. Mistake must be either with regards to the identify or with regard to the qualification of one of the contracting parties 2. Such identity or qualification must have been the principal consideration for the celebration of the contract Art 1332 Burden of proof in case of mistake Art 1333 Effect of knowledge of risk Art 1334 Mistake of Law Is that which arises from an ignorance of some provision of law, or from an erroneous interpretation of its meaning, or from an erroneous conclusion as to the legal effect of the agreement, on the part of one of the parties. Requisites: a. There must be mutual error b. The error must refer to the legal effect of the agreement c. The real purpose of the parties is frustrated Art 1335-1336

Violation refer to physical coercion Intimidation refers to moral coercion Requisites for violence to vitiate consent a. Employment of serious or irresistible force b. It must have been the reason why the contract was entered into Requisites for intimidation to vitiate consent a. Reasonable and well-grounded fear b. Of an imminent and grave evil c. Upon his person, property, or upon the person of property of his spouse, descendents or ascendants d. It must have been the reason why the contract was entered into e. The threat must be an unjust act, an actionable wrong Art 1337 Requisites for undue influence to vitiate consent a. Improper advantage b. Power over the will of another c. Deprivation of the latters will of a reasonable freedom of choice Art 1338-1341 Kinds of Fraud a. Fraud in the celebration of the contract 1. Dolo Causante or causal fraud (Art 1338) 2. Dolo Incidente of incidental fraud b. Fraud in the performance of the obligations stipulated in the contract Requisites of Dolo Causante a. The fraud must be material and serious b. The fraud must have been employed by one of the contracting parties, because if both committed fraud, the contract would remain valid c. There must be a deliberate intent to deceive to induce d. The other party must have relied on the untrue statement, and must himself not be guilty of negligence in ascertaining the truth Art 1342-1344 Speaks about misrepresentation Art 1345-1346 Simulation Simulation of a Contract defined It is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) Or which is different from the true agreement relative simulation. Kinds a. Absolute; Effect; the contract is void b. Relative; Effect; the parties are bound to the real or true agreement excepta. If the contract should prejudice third persons b. Or if the purpose is contrary to law, morals, public order, policy or good customs Requisites a. An outward declaration of will difference from the will of the parties b. The false appearance must have been intended by mutual agreement c. The purpose is to deceive third persons Art 1347-1349 Objects (Subject Matter) of a contract

A thing or a service

Requisites a. The thing or service must be within the commerce of man b. Must be transmissible c. Must not be contrary to law, morals, good customs, public order, or public policy d. Must not be impossible e. Must be determinate as to its kind or determinate without the need of a new contract or agreement CAUSE OF CONTRACTS Art 1350 Cause defined -It is the essential and impelling reason why a party assumes an obligation Art 1351 Motive is the purely personal or private reason which a party has in entering into a contract Motive vs. Cause Motive a. May vary although he enters into the same kind of contract b. May be unknown to the other c. The presence of motive Cause a. Always the same b. Always known c. Cannot cure the absence of cause Art 1352-1355 Requisites for cause a. It must be present b. It must be true c. It must be lawful CHAPTER 3 FORM OF CONTRACTS Art 1356 Meaning of form of contracts -Refers to the manner in which a contract is executed or manifested Rules regarding from of contracts (Art 1356) Art 1357-1358 Principles regarding formalities for the efficacy of a contract a. Art 1357 and Art 1358 do not require the execution of a contract either in a public or private instrument in order to validate enforce it but only to ensure its efficacy, so after its existence has been admitted, the party bound may be compelled to execute the necessary document b. Even where the contract has not been reduced to the required form, it is still valid and binding as far as the parties are concerned c. From the moment one of the contracting parties invokes the provisions of Art 1357 and 1358by means of a proper action, the effect is to place the existence of the contract in issue, which must be resolved by the ordinary rules of evidence d. Art 1357 does not require that the action to compel the execution of the necessary document must precede the action upon the contract e. However, although the provisions of Art 1357 in connection with those of Art 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfillment thereof, yet from the

moments when any of the contracting parties invokes said provisions, it is evident that under them the execution of the required document must precede the determination of the other obligations derived from the contract

CHAPTER 4 REFORMATION OF INSTRUMENT Reformation is that remedy by means of which a written instrument is amended or rectified so as to express or conform to the real agreement or intention of the parties when by reason of mistake, fraud, or inequitable contract, or accident the instrument fails to express such agreement or intention. Requisites for reformation a. There is a meeting of minds of the parties to the contract b. The written instrument does not express the true agreement or intention of the parties c. The failure to express the true intentions is due to mistake, fraud, inequitable conduct or accident d. The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings e. There is clear and convincing evidence of the mistake, fraud, inequitable conduct, or accident Reformation vs. Annulment In reformation, there has been a meeting of the minds of the parties, hence, a contract exists while in annulment, there has been none, the consent of one of the parties being vitiated by mistake, etc. Art 1360-69 Art 1360 Rule in case of conflict Art 1366 Instances when reformation is not allowed CHAPTER 5 INTERPRETATION OF A CONTRACT Art 1370 Definition of interpretation of contract -Is the determination of the meaning of the terms or words used by the parties in their contract Art 1371-79 (provisions) Kinds of defective contracts a. Rescissible (Art 1380-89) b. Voidable (Art 1390-1402) c. Unenforceable (Art 1403-1408) d. Void or Inexistent (Art 1409-1422) Art 1381 in relation to Art 1382 Meaning of rescissible contracts

-Those validly agreed upon because all the essential elements exists but in some cases established by law, the remedy of rescission is granted in the interest of equity Requisites of rescission a. The contracts must be validly agreed upon b. There must be lesion or pecuniary prejudice to one of the parties or to a third person c. The rescission must be based upon a case especially provided by law d. There must be no other legal remedy to obtain reparation of the damages e. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract f. The object of the contract must not legally g. The object of the contract must not legally be in the possession of third persons who did not act in bad faith h. The period for filing the action of rescission must have not prescribed Meaning of Rescission -Remedy granted by law to the contracting parties and sometimes even to third persons in order to secure reparation of damages caused by them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of the said contract. Art 1385 Effects of rescission Art 1324 Prescription

VOIDABLE CONTRACTS Definition -Are those which possess all the essential requisites of a valid contract but one of the parties is incapable of giving consent, or consent is vitiated by mistake, violence, intimidation, undue influence, or fraud Characteristics a. Their defect consist in the vitiation of consent of one of the contracting parties b. They are binding until they are annulled by competent court c. They are susceptible of convalidation by ratification or by prescription Voidable vs. Rescissible Contracts Voidable a. Defect is intrinsic b. Contract is voidable even if there is no damage or prejudice c. Annulability of the contract is based on law d. Susceptible of ratification e. The causes of annulment The causes of rescission Rescissible a. Defect is extrinsic b. Contract is not rescissible id there is no damage or prejudice c. Rescissibility of the contract is based on equity d. Not susceptible of ratification e. Are different form

Art 1390 Voidable contracts Art 1391 Prescription Art 1392-96 Concept of Ratification -By virtue of which efficacy is given to a contract which suffers from a vice of curable nullity Requisites for ratification a. The contract should be tainted with a vice which is susceptible of being cured b. The confirmation should be effected by the person who is entitled to do so under the law c. It should be effected with knowledge of the vice or defect of the contract d. The cause of the nullity or defect should have already disappeared Art 1397 in relation to Art 1391 -Who and when may an action for annulment of contract be instituted Art 1398-99 Effects of annulment Art 1400-02 - Effect pf failure to make restitution -Where loss is due to fault of plaintiff -Where loss is due to fault of defendant -Where loss is due to fortuitous event CHAPTER 8 UNENFORCEABLE CONTRACTS Meaning of unenforceable contracts -Those that san not be enforced in court or sued upon by reason of defects provided by law until and unless they are ratified according to law. Kinds: a. Those entered into in the name of another by one without or acting in excess of authority b. Those that do not comply with the statute of fraud c. Those where both parties are incapacitated of giving consent Unauthorized contracts -Those entered into in the name of another person by one who has been given no authority or legal representation on who has acted beyond his powers. Characteristics of Unenforceable Contracts a. They can not be enforced by a proper action in court b. They are susceptible of ratification c. They can not be assailed by third persons Unenforceable vs. Rescissible a. An unenforceable contract cannot be enforced by a proper action in court, while a rescissible contract can be enforced, unless it is rescinded b. The causes for the unenforceable character of the former are different from the causes fro the rescissible character of the latter

c. The former is susceptible of ratification, while the latter is not d. The former cannot be assailed by third persons, while the latter may be assailed by third persons who are prejudiced Unenforceable vs. Voidable a. An unenforceable contract cannot be enforced by a proper action in court, while a voidable contract can be enforced, unless it is annulled b. The causes for the unenforceable character of the former are different from the causes for the voidable character of the latter STATUTE OF FRAUDS Purpose -Not only to prevent fraud but also to guard against the mistakes of honest men by requiring that certain agreement specified must be in writing. Application a. Not applicable in actions which are neither for damages because of a violation of a contract, nor for the specific performance thereof b. Applicable only to executory contracts and not to contracts which are totally or partially performed c. Not applicable where the contract is admittedly expressly, or impliedly by the failure to deny specifically its existence, no further evidence thereof being required in such case. d. Applicable only to the agreements enumerated therein e. Not applicable where a writing does not express the true agreement of the parties f. It does not declare the contracts infringing it are void but merely unenforceable g. The defense of the statute of frauds may be waived h. The defense of the statute of frauds is personal to the parties and cannot be enforced by strangers to the contract Effect of Non-Compliance -The contract or agreement is unenforceable by action Ratification of Unenforceable Contracts Either by: a. the failure of object to the presentation of oral existence to prove the same c. The acceptance of benefits under them Art 1404-1408 (provisions)

CHAPTER 9 VOID OR INEXISTENT CONTRACTS Void Contracts -Those, which of certain defects generally produce no effect at all Inexistent Contracts -Refer to agreements which lack one or some or all the elements or do not comply with the formalities which are essential for the existence of a contract Characteristics of a Void or Inexistent Contracts a. Generally, it produces no effect b. It cannot be ratified c. The right to set up the defense of legality cannot be waived d. The action or defense for the declaration of its inexistence does not prescribe e. The defense of illegality is not available to third persons whose interests are not directly affected f. It cannot give rise to a valid contract

Art 1410 -Imprescriptibility of void or inexistent contract Art 1411-1412 Where both parties are in pari delicto a. The parties shall have no action against each other b. Both shall be prosecuted c. The things or the price of the contract, as the effects of the crime shall be confiscated in favor of the government Where only one party is guilty -The rule in paragraph 1 of Art 1411 applies only to the guilty party or the more guilty party Exceptions to the principle of pari delicto Art 1413-1419 Art 1420-22 (provisions)

NATURAL OBLIGATIONS Art 1423 -Defines Natural Obligations Civil vs. Natural Obligations Civil a. Arise from la, contracts, quasi-contracts, and quasi-delicts b. Give a right of action to compel their performance Natural a. Based not on positive law but on equity and natural law b. Do not grant such right of action to enforce their performance TITLE IV ESTOPPEL Art 1431 Definition of Estoppel -Condition or state by virtue of which admission or representation is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon Art 1432 Adoption of the principle Art 1433 Kinds of Estoppel A. Estoppel in Pais (equitable estoppel) -That which arises one y his acts, representations, or admission, or by his silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such, other rightfully relies and acts on such belief, as a consequence of which he would be prejudice if the former is permitted to deny the existence of such facts Kinds a. Estoppel by conduct or by acceptance of benefits b. Estoppel by representation or concealment

c. Estoppel by silence d. Estoppel by omission e. Estoppel by laches Requisites a. As related to the party being estopped a. Conduct which amounts to a false representations or concealment of material facts, or at least which is calculated to convey the impression that the facts are otherwise than, and inconsistent with those which the party subsequently attempts to assert; b. The intention or at least the expectation, that such conduct shall be acted upon, or influence, the other party or other person; and c. Knowledge, actual or constructive, of the real facts b. As related to the party claiming the estoppel a. Ignorance or lack of knowledge and of the means of knowledge of the truth as to the facts in question b. Reliance in good faith, upon the conduct or statement of the party to be estopped; and c. Action or inaction based thereon of such a character as to chance the position or status of the party claiming the estopped, to his injury, detriment, or prejudiced B. Estopped by deed or by record -Types of technical estoppel Kinds a. Estoppel by deed proper b. Estoppel by judgment as a court record Estoppel by Laches Definition of Laches -Failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence, one could or should have done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert on Requisites a. Conduct on the part of the defendant, or of one under whom he claims, giving rise to the situation of which complaint is made b. Delay in asserting the complainants right, the complainant having had knowledge or notice of the defendants conduct and having been afforded an opportunity to sue; actual knowledge of the omission of the adverse act is not necessary, it being enough that such knowledge may be imputed to the complainant because of circumstances of which he was cognizant; c. Lack lf knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit; d. Injury or prejudice to the defendant in the event of relief is accorded to the complainant, or the suit is not held to be barred Laches vs. Prescription Laches a. Concerned with the effect of delay b. Principally a question of inequity of permitting a claim to the enforced c. Not statutory d. Applies in equity e. Not based on fixed time Prescription

a. b. c. d. e.

Concerned with the fact of delay Question of matte of time Statutory Applies at law Based on fixed time

GOLDEN ROD INC. vs CA (May 2000) Contracts; Sales; RescissionLand dispute between Barreto Realty executed an agreement w/ Golden Rod wherein Barreto accepted Golden Rods offer to buy the properties of Golden Rod which was subject to imminent foreclosure. Later on, Golden Rod informed Barreto, then its president, that it would not go through w/ the sale because of the denial of UCPB of its request for an extension of time to pay the obligation. He also demanded the refund of the earnest money of P1M which it gave to Barreto. Art. 1385 of the CC provides that rescission creates the obligation to return the things which were the object of the contract together with their fruits and interest. The vendor is therefore obliged to return the purchase price paid to him by the buyer if the latter rescinds the sale, or when the transaction as called off and the subject property had already been sold to a 3rd person, as what was obtained in this case. Therefore, by virtue of the extrajudicial rescission of the contract to sell by the petitioner without opposition from private respondents who, in turn, sold the property to other persons, private respondent Barreto Realty, as the vendor, had the obligation to return the earnest money of P1M plus legal interest. METROBANK v. CA (G.R. No. 122899, June 8, 2000) Civil Law/Oblicon/ Estoppel: In Maneclang vs. Baun, this Court enumerated the requisites for estoppel by conduct to operate, to wit: 1. there must have been a representation or concealment of material facts; 2. the representation must have been with knowledge of the facts; 3. the party to whom it was made must have been ignorant of the truth of the matter; and 4. it must have been with the intention that the other party would act upon it. ROMAGO ELECTRIC CO. v. CA (G.R. No. 125947, June 8, 2000) Civil Law/ Oblicon/ Contracts: There is no contract here. We are not convinced that there was a meeting of the minds between Romago and TSI regarding the question of sharing of payment of rentals and utilities charges, pending the consummation of the Stock Purchase Agreement. There is no adequate showing that TSI consented to any such verbal agreement. On the contrary, TSI through its General Manager Severino Lim and Director Jorge Salazar denied the existence of such verbal agreement or understanding. YUCHENGCO v. REPUBLIC (G.R. No. 131127, June 8, 2000) Civil Law/ Oblicon/ Constructive Trust: Constructive trust is that created by reason of equity to answer the demands of justice and prevent unjust enrichment. It arises against one, who, by fraud, duress or abuse of confidence, obtains or holds the legal right to property which he ought not, in equity and good conscience, hold. Correspondingly, actions thereon prescribe after ten (10) years as provided by Article 1144 of the Civil Code: The following actions must be brought within ten (10) years from the time the right of action accrues: (1) upon a written contract; (2) upon an obligation created by law; and (3) upon a judgment. Article 1154 of the Civil Code is applicable by parallelism: the period during which the obligee was prevented by fortuitous event from enforcing his right is not reckoned against him.

JARDINE DAVIES INC. v. CA (G.R. No. 128066, June 19, 2000) Civil Law/ Oblicon/ Condition: We distinguish between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an

obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect his interests. by the unilateral cancellation of the contract, the defendant has acted with bad faith and this was further aggravated by the subsequent inking of a contract between defendant and co-defendant. It is very evident that (the defendant) thought that by the expedient means of merely writing a letter would automatically cancel or nullify the existing contract entered into by both parties after a process of bidding. This, to the Court's mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings to which every man is due. ESPINA v. CA (G.R. No. 116805, June 22, 2000) Civil Law/ Oblicon/ Novation/ Application of Payment: Novation is never presumed; it must be proven as a fact either by express stipulation of the parties or by implication derived from an irreconcilable incompatibility between old and new obligations or contracts. Novation takes place only if the parties expressly so provide, otherwise, the original contract remains in force. In other words, the parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. Where there is no clear agreement to create a new contract in place of the existing one, novation cannot be presumed to take place, unless the terms of the new contract are fully incompatible with the former agreement on every point. Thus, a deed of cession of the right to repurchase a piece of land does not supersede a contract of lease over the same property. Petitioner gave respondent a notice to vacate the premises and to pay his back rentals. Failing to do so, respondent's possession became unlawful and his eviction was proper. Now respondent contends that the petitioner's subsequent acceptance of such payment effectively withdrew the cancellation of the provisional sale. We do not agree. Unless the application of payment is expressly indicated, the payment shall be applied to the obligation most onerous to the debtor. In this case, the unpaid rentals constituted the more onerous obligation of the respondent to petitioner. As the payment did not fully settle the unpaid rentals, petitioner's cause of action for ejectment survives. VIEWMASTER CONSTRUCTION CORP vs. ROXAS (G.R. No. 133576, July 13, 2000) Civil Law/ Contracts/ Statute of Frauds/ Implied Trusts/ Sales: The verbal agreement entered into between petitioner Viewmaster and respondent Allen Roxas was an agreement that by its terms is not to be performed within a year from the making thereof. To be taken out of the operation of the Statute of Frauds, the agreement must be fully performed on one side within one year from the making thereof. In the case at bar, since neither of the parties has fully performed their obligations within the one-year period, then it behooves this Court to declare that the case falls within the coverage of the Statute of Frauds. Also, as the sale of fifty percent (50%) of Allen Roxass shareholdings in State Investment would amount to more than five hundred pesos (P500.00), the contract must be in writing to be enforceable. There is no implied trust here for in order for the provisions of Article 1448 to apply in the case at bar "the price is paid by another for the purpose of having the beneficial interest of the property." It bears stressing that respondent Allen Roxas obtained a loan from First Metro Investments, Inc. not from petitioner Viewmaster. It was FMIC that provided the funds with which Allen Roxas acquired the controlling interest in State Investment Trust, Inc. FMIC lent the money to Roxas because the latter needed the money and not to obtain any beneficial interest in the shares of stock in State Investment. Viewmaster merely facilitated the loan by acting as guarantor of the loan and nothing more. ARRIOLA vs. DEMETRIO Civil Law/ Contracts/ Fraud : The law, however, requires that in case one of the parties to a contract is unable to read and fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. Consent, having been obtained by fraud, the deed entered into could be annulled.

PILIPINAS HINO vs. CA Civil Law/ Oblicon/Application of Equity/ Sales: Obligations arising from contracts and agreements between parties not contrary to law, morals, good customs, public policy or public order have the force of law between the contracting parties and should be complied with in good faith. Equity is applied only in the absence of, and never against, statutory law or judicial rules of procedure. Also, while this Court recognizes that in contracts to sell even if the contract is terminated the seller can retain the sums already received or paid, such can be done only if it is expressly provided for in the contract.

ACE HAULERS CORP. vs. CA Civil Law/ Civil Liability/ Damages: Civil liability coexists with criminal responsibility. In negligence cases, the offended party (or his heirs) has the option between an action for enforcement of civil liability based on culpa criminal under Article 100 of the Revised Penal Code and an action for recovery of damages based on culpa aquiliana under Article 2176 of the Civil Code. Article 2177 of the Civil Code, however, precludes recovery of damages twice for the same negligent act or omission. Consequently, a separate civil action for damages lies against the offender in a criminal act, whether or not he is criminally prosecuted and found guilty or acquitted, provided that the offended party is not allowed, if he is actually charged also criminally, to recover damages on both scores, and would be entitled in such eventuality only to the bigger award of the two, assuming the awards made in the two cases vary. PRODUCERS BANK OF THE PHILIPPINES v. BPI (G.R. No. 125167, September 8, 2000) Civil Law/ Oblicon/ Action for Written Contract: The nature of an action is determined by the allegations of the complaint. In this case, petitioners' complaint alleges facts constituting its cause of action based on a written contract, the deed of pledge. Hence, the prescriptive period is ten (10) years. SBMA v. UNIVERSAL INTERNATIONAL GROUP OF TAIWAN (G.R. No. 131680, September 14, 2000) Civil Law/ Oblicon/ Extrajudicial Rescission: A stipulation authorizing a party to extrajudicially rescind a contract and to recover possession of the property in case of contractual breach is lawful. But when a valid objection is raised, a judicial determination of the issue is still necessary before a takeover may be allowed. In the present case, however, respondents do not deny that there was such a breach of the Agreement; they merely argue that the stipulation allowing a rescission and a recovery of possession is void. Hence, the other party may validly enforce such stipulation. PILIPINAS BANK v. CA (G.R. No. 141060, September 29, 2000) Civil Law/ Oblicon/ Interpretation of Contracts: Section 9, Rule 130 of the Revised Rules of Court expressly requires that for parol evidence to be admissible to vary the terms of the written agreement, the mistake or imperfection thereof or its failure to express the true agreement of the parties should be put in issue by the pleadings. Disallowance of parol evidence in the absence of an intrinsic ambiguity, mistake or failure to express the true intent and agreement of the parties is in accord with the rule that when the terms of an agreement have been reduced to writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such other terms other than the contents of the written agreement.

TUAZON v. CA (G.R. No. 119794. October 3, 2000) Civil Law/ Contracts/ Equitable Mortgage/ Reformation of Contract: Article 1602 of the Civil Code provides that a contact shall be presumed to be an equitable mortgage by the presence of any of the following: '(1) When the price of a sale with right to repurchase is unusually inadequate; (2) When the vendor remains in possession as lessee or otherwise; (3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.'" Under Article 1604 of the New Civil Code, the provisions of Article 1602 shall also apply to a contract purporting to be an absolute sale. And for these provisions of law to apply, two requisites must concur: that the parties entered into a contract denominated as a contract of sale and that their intention was to secure an existing debt by way of mortgage. As to the reformation of contracts, Article 1365 applies only if there is evidence, clear and convincing, that the parties did agree upon a mortgage of subject property. Here, everything appears to be clear and unambiguous and nothing is doubtful, within the contemplation of Article 1602. When the words of the contract are clear and readily understandable, there is no room for construction, the contract being the law between the parties. SINGSON v. CALTEX (PHILIPPINES) (G.R. No. 137798. October 4, 2000) Civil Law/ Contracts/ Extraordinary Inflation: Article 1250 of the Civil Code states that in case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. Erosion is indeed an accurate description of the trend of decline in the value of the peso in the past three to four decades. Unfortunate as this trend may be, it is certainly distinct from the phenomenon contemplated by Article 1250. Moreover, the effects of extraordinary inflation are not to be applied without an official declaration thereof by competent authorities.

SANTOS v. HEIRS OF MARIANO (G.R. No. 143325. October 24, 2000) Civil Law/ Contracts/ Sales: What determines the validity of a contract, in general, is the meeting of the minds of the parties as to (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. Due execution of documents representing a contract is one thing, but perfection of the contract is definitely another. DBP v. CA (G.R. No. 137557. October 30, 2000) Civil Law/ Contracts/ Breach/ Rescission: Under the Civil Code, parties to a contract can make stipulations therein provided they are not contrary to law, morals, good customs, public order or public policy. The interest and penalty charges to be paid in case of delay in payments were expressly stipulated in the Conditional Contract of Sale. There being no question as to the validity of the Conditional Contract of Sale, the DBP correctly applied the provision on interests and penalty charges when private respondents failed to pay on the dates agreed upon. No further notice to private respondents had to be given to them.

Rescission of a contract will not be permitted for a slight or casual breach, but only such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. Notwithstanding private respondents' delay in paying the amortizations, petitioner DBP unqualifiedly accepted the payments made by them. Hence, petitioner lost its right to rescind the sale on the basis of such late payments. PACULDO v. REGALADO (G.R. No. 123855. November 20, 2000) Civil Law/ Contracts/ Application of Payments: The right to specify which among his various obligations to the same creditor is to be satisfied first rests with the debtor.If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. Also, under the law, if the debtor did not declare at the time he made the payment to which of his debts with the creditor the payment is to be applied, the law provided the guideline--no payment is to be made to a debt that is not yet due and the payment has to be applied first to the debt most onerous to the debtor. Assnt to the change in the manner of application of payment must be clear and unequivocal. Mere silence is not tantamount to consent. PUA v. CA (G.R. No. 134992. November 20, 2000) Civil Law/ Contracts/ Minors Entering Into Contracts/ Sales/ Simulated Contract: Unemancipated minors, insane or demented persons, and deaf-mutes who do not know how to write can not validly give consent to contracts. In the instant case, Johnny P. Uy could not have validly given his consent to the contract of sale, as he was not even conceived yet at the time of its alleged perfection. For lack of consent of one of the contracting parties, the deed of sale is null and void Without authority from the Court, no person can make a valid contract for or on behalf of a minor. Coloma therefore could not have acted as representative of Johnny P. Uy. Besides, petitioners themselves insist that Coloma was not acting in a representative capacity when she purchased the subject, but rather, that she was acting in her own behalf as the actual buyer of said land. An absolutely simulated contract is not susceptible of ratification. SPOUSES BUENAFLOR v. CA (G.R. No. 142021. November 29, 2000) Civil Law/ Obligations/ Payment/ Substantial Performance: In the Civil Law sense, payment means not only the delivery of money but also the performance, in any other manner, of the obligation. Article 1234 of the Civil Code allows substantial performance in the payment of obligations. In order that there may be substantial performance of an obligation, there must have been an attempt in good faith to perform, without any willful or intentional departure therefrom. This concept of substantial performance may be applied by analogy in the determination of question on the proper payment of the appellate docket fees. AYALA CORPORATION v. ROSA-DIANA REALTY AND DEVELOPMENT CORPORATION (G.R. No. 134284. December 1, 2000) Civil Law/ Contracts/ Obligatory Force: Contractual obligations between parties have the force of law between them and absent any allegation that the same are contrary to law, morals, good customs, public order or public policy, they must be complied with in good faith. The party guilty of violating the deed restrictions may only be held alternatively liable for substitute performance of its obligation, that is, for the payment of damages. ORTIGAS & CO. LTD. v. CA (G.R. No. 126102. December 4, 2000) Civil Law/ Contracts/ Stipulations Contravening Law, Good Customs, etc: The contractual stipulations annotated on the Torrens Title, on which Ortigas relies, must yield to the ordinance. When that stretch of Ortigas Avenue from Roosevelt Street to Madison Street was reclassified as a commercial zone by the Metropolitan Manila Commission in March 1981, the restrictions in the contract of sale between Ortigas and Hermoso, limiting all construction on the disputed lot to single-family residential buildings, were deemed extinguished by the retroactive operation of the zoning

ordinance and could no longer be enforced. While our legal system upholds the sanctity of contract so that a contract is deemed law between the contracting parties, nonetheless, stipulations in a contract cannot contravene "law, morals, good customs, public order, or public policy." Otherwise such stipulations would be deemed null and void. LHUILLIER v. CA (G.R. No. 128058. December 19, 2000) Civil Law/ Contracts/ Lease: A covenant to renew a lease, which makes no provision on its terms, implies an extension or renewal subject to the same terms in the original lease contract. Since the parties did not make a new one, the terms and conditions of the original except the provision on the rate and period of lease are deemed extended. The parties agreed that all improvements introduced by the lessee would accrue to the benefit of the owner at the end of the lease, without reimbursement. This stipulation, not being contrary to law, morals, public order or public policy, binds the parties and is the law between them. 1999 CHUA v. CA (Jan. 21, 1999) Civil Law/ Contracts/ Lease/ Power of Courts to Extend Lease/Improvements: (1)The potestative authority of the courts to fix a longer term for a lease under Art. 1687 of the CC applies only to cases where there is NO period fixed by the parties. Where the lease agreement between the parties has already expired, courts are without jurisdiction to extend said lease, for to do so would in effect allow the courts to make a contract for the parties. (2) Improvements made by lessees on the leased premises are not valid reasons for their retention thereof; otherwise, a lessee would improve his landlord out of his property. Art. 448 of the CC, in relation to Art. 546, which provides for full reimbursement of useful improvements and retention of the premises until reimbursements us made, applies only to a possessor in good faith, i.e., one who builds on a land in the belief that he is the owner thereof. Also, Art. 1678 merely grants to such a lessee making in good faith useful improvements the right to be reimbursed of the value of the improvements upon the termination of the lease, or, in the alternative, to remove the improvements if the lessor refuses to make reimbursement. ABS-CBN v. CA (Jan. 21, 1999) Civil Law/ Contracts/ Basis for the Award of Damages: (1) A contract is a meeting of the minds between two persons whereby one binds himself to give something or render some service to another for a consideration. In the instant case, there was no acceptance of VIVAs offer for it was met by a counter-offer which substantially varied the terms of the offer. ABS-CBN made no unqualified acceptance of VIVAs offer hence, they underwent a period of bargaining. (2) The award of moral damages cannot be granted in favor of a corporation because being an artificial person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. (3) The claims of RBS against ABS-CBN are not based on contract, quasicontract, delict, or quasi-delict. Hence, the claims of moral and exemplary damages can only be based on Articles 19, 20, and 21 of the CC. Verily then, malice or bad faith is at the core of Articles 19, 20, 21. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity. Such must be substantiated by evidence. There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was honestly convinced of the merits of its cause after it had undergone serious negotiations culminating in its formal submission of a draft contract. Settled is the rule that the adverse result of an action does not mean to impose a penalty on the right to litigate. If damages result from a persons exercise of a right, it is damnum absque injuria.

DIZON v. CA (Jan. 28, 1999) Civil Law/ Contracts/ Lease with Option to Purchase/ Exception of Period to Exercise Option:The other terms of the original contract of lease which are revived in the implied new lease under Art.1670 of the CC are only those terms which are germane to the lessees right of continued enjoyment of the property leased. Therefore, an implied new lease does not ipso facto carry with it any implied revival of private respondents option to purchase (as lessee thereof) the leased premises. The provision entitling the lessee the option to purchase the leased premises is not deemed incorporated in the impliedly renewed contract because it is alien to the possession of the lessee. Private respondents right to exercise the option to purchase expired with the termination of the original contract of lease for one year.

RAMOS v. CA (Feb. 3, 1999) Civil Law/ Oblicon/ Principle of Relativity of Contracts/ Land Titles/ Prescription or Adverse Possession: (1) In the absence of registration as to operate against the whole world, contracts bind only the parties who had entered it by virtue of the basic principle of relativity of contracts. This basic principle applies even if the sales were supposedly concluded at a time prior to the operation of the Torrens system of land registration over the properties involved. (2) Under the Cadastral Act, the OCTs issued to the original registrant, shall have the same effect as CTs granted to an application for registration of land under the Land Registration Act, because no title to registered land in derogation to that of the registered owner shall be acquired by prescription or adverse possession. CARCELLER v. CA (Feb. 10, 1999) Civil Law/ Oblicon/ Contracts/ Option: (1) An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, WON to enter into a principal contract. It binds the party who has given the option, not to enter into the principal contract with the one to who, the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the contract which the parties may enter upon the consummation of the option. (2) In the contractual relations, the law allows the parties leeway in the terms of their agreement, which is the law between them.

MISENA v. RONGAVILLA (Feb. 25, 1999) Civil Law/ Contracts/ Sale of Real Property, When Presumed an Equitable Mortgage Instead: Art. 1602 of the CC enumerates instances when a contract regardless of its nomenclature may be presumed an equitable mortgage. It also applies to a contract purporting to be an absolute sale, and the presence of any of the circumstances in 1602 give rise to the presumption in favor of an equitable mortgage. Here, the CA confirmed that 3 circumstances were present and proven, to wit: (1) the inadequacy of the consideration; (2) the respondent remained in possession of the land and (3) the subject property was charged as security for the loan. LOGRONIO v. TALESEO (August 1999) Civil Law/ Laches: Currit Tempus contra decides et sui juris contemptores (Time runs against the slothful and those who neglect their rights). Through their inaction for 39 years, the petitioners were barred by laches from asserting ownership and possession of the property in dispute. SPS. CO v. CA (August 1999) Civil Law/ Contracts/Sale/Option Contract: An option contract is distinct from a contract of sale, it is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is separate and distinct contract from that which the parties may

enter into upon the consummation of the option. It must be supported by consideration. A contract of sale on the other hand is a consensual contract and is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. In the case at bar, the contract entered into was a Contract of sale and not an Option Contract so that the proper remedy would be rescission. LAPAT v. ROSARIO (August 1999) Civil Law/ Contracts/Equitable Mortgage: Where the presumptions under the law that a contract is an equitable mortgage are present, it shall be considered as such regardless of its nomenclature: (1) when the price of a sale with the right to repurchase is unusually inadequate; (2) when the vendor remains in possession as lessee or otherwise; (3) when upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (4) when the purchaser retains a part of the purchase price; (5) when the vendor binds himself to pay the taxes on the thing sold, and; (6) in any other case where it may fairly be inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or performance of any other obligation. In determining the nature of a contract, courts are not bound by its form or title but by the intention of the parties. LAO v. MACAPUGAY (August 1999) Civil Law/ Contracts/ Compromise: A compromise is a bilateral act or transaction that is expressly acknowledged as a juridical agreement by the CC. Art 202 provides that a compromise is a contract whereby the parties by making reciprocal concessions, avoid a litigation or put an end to one already commenced. The CC does not only defines and authorizes compromises, it in fact encourages them in civil actions. They are generally to be favored and cannot be set aside if the parties acted in good faith and made reciprocal concessions to each other in order to terminate a case. However, the law abhors settlement of criminal liability so that the compromise agreement cannot affect charges of violation of RA 3019, sec 3(e) and (j) and Sec 4 and RPC Art 171, 172 par 2, Arts. 206 and 207. HEIRS OF YAP v. CA (August 1999) Civil Law/ Contracts/ Trusts: One basic distinction between an implied trust and an express trust is that while the former may be established by parol evidence, the latter cannot. Even then, in order to establish an implied trust in real property by parol evidence, the proof should be convincing as if the acts giving rise to the trust obligation are proven by an authentic document. An implied trust, in fine, cannot be established upon vague and inconclusive proof. Not to be dismissed, however, is the long standing and broad doctrine of clean hands that will not allow the creation or the use of a juridical relation, a trust whether express or implied included, to perpetuate fraud or tolerate bad faith nor to subvert, directly or indirectly, the law. SPS. BAUTISTA v. PILAR DEVT CORPORATION (August 1999) Civil Law/ Contracts/ Novation: The extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first is a novation. It is made either by changing the object or principal conditions referred to as an objective or real novation; or by substituting the person of the debtor or subrogating a 3rd person to the rights of the creditor, which is known as subjective or personal novation. Novation may either be express or implied: Express, when the new obligation declares in unequivocal terms that the old obligation is extinguished. Implied, when the new obligation is on every point incompatible with the old one. In the case at bar, there was clearly an animus novandi, an express intention to novate. The 1st promissory note which provides for an interest rate of 12% was cancelled and replaced by a 2nd note which stipulated a higher interest of 21%. This 2nd note became the new contract governing the parties obligations. 1998

JAPAN AIRLINES v. CA (August 1998) Civil Law/ Contracts/ Fortuitous Event/ Nominal Damages: Respondents are passengers of Japan Airlines who were stranded for almost a week in Japan due to the Pinatubo eruption which made NAIA inaccessible to airline traffic. As a result of the refusal of JAL to pay for the accommodations of respondents during their whole stay in Japan, they commenced an action for damages against JAL. As a general rule, common carriers are expected to follow a standard of care and diligence which is higher and different in kind to that of ordinary carriers. However, in the case at bar, JAL is not absolutely responsible for all injuries or damages suffered by respondents because such was caused by a fortuitous event. They are liable for nominal damages to respondents though, for their failure to make the necessary arrangements to transport respondents on the first available connecting flight to Manila. Nominal damages are adjudicated in order that a right of a plaintiff, which has been violated of invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying any loss suffered by him. VALGOSONS REALTY INC. v. CA (September 1998) Civil Law/ Lease/ Non-delivery of the Leased Premises: Under Art. 1654 of the NCC, it is the duty of the lessor, in this case, petitioner VRI (Valgosons Realty Inc), to deliver the thing which is the object of the contract ., failure to do so constitutes a wrong to which petitioner exposes itself to legal action including being held liable for damages. The fact that respondent Prudential Bank (PB), the former lessee of the same space, did not vacate the premises at the time the new lessee (respondent UDB) was supposed to enter therein cannot exculpate petitioner VRI from its liability for the non-performance of its obligation to URB. Moreover, UDB has no cause of action against the first lessee (PB) because there is no privity of contract between the two respondents-lessees. POLOTAN, SR. v. CA (September 1998) Civil Law/ Contracts/ Binding Effect/ Escalation Clause/ Contract of Adhesion: Petitioner is a holder of a credit card of Security Diners International Corporation (Diners Club). He was adjudged by the RTC and CA to be indebted to the company for the use of the card. The contract entered into between petitioner and the company is a contract of adhesion. A contract of adhesion is one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject but cannot modify. Nevertheless, these types of contracts have been declared as binding as ordinary contracts, the reason being that the party who adheres to the contract is free to reject it entirely. The binding effect of any agreement between parties to a contract is premised on two settled principles: (1) that any obligation arising from a contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. The court is therefore not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they should be ignored for being obviously too one-sided. In the instant case, the claim of petitioner that the contract is one-sided has no basis. The fact that the contract allows for the escalation of interests but does not provide for a downward adjustment of the same does not boost his claim. There is nothing inherently wrong with escalation clauses, as long as they are not merely potestative but based on reasonable and valid grounds. They are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. In this case, the interest rate is based on the fluctuation in the market rates, which is beyond the control of the credit card company. 1997 ROBLETT INDUSTRIAL CONSTRUCTION CORP. v. CA (G.R. No. 116682, Jan. 2, 1997) Civil Law/ Estoppel: Estoppel in pais arises when one, by his acts, representations or admissions, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is

permitted to deny the existence of such facts. (Panay Electric v. CA, 174 SCRA 500 [1989]) This doctrine obtains here. A statement of account for P376,350.18 covering the period above mentioned was received from respondent by petitioner with nary a protest from the latter. Neither did petitioner controvert the demand letter concerning the overdue account; on the contrary, it asked for ample time to source funds to substantially settle the account. TANGUILIG v. CA (G.R. No. 117190, Jan. 2, 1997) Civil Law/Contracts/ Interpretation/ Payment/ Fortuitous Event/ Delay: (1) The installation of a deep well was not included in petitioner's proposals to construct a windmill system for respondent. While the words "deep well" and "deep well pump" are mentioned in the proposals, these do not indicate that a deep well is part of the windmill system. They merely describe the type of deep well pump for which the proposed windmill would be suitable. Since the terms of the instruments are clear they should not be disturbed. (2) In the absence of a creditor-debtor relationship, respondent cannot claim the benefit of the law concerning payments made by a third person (Arts. 1236 & 1237).. (3) In order for a party to claim exemption from liability by reason of fortuitous event under Art. 1174, the event should be the sole and proximate cause of the loss or destruction of the object of the contract. In Nakpil v. CA (144 SCRA 596 [1986]), 4 requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in or aggravation of the creditor's injury. A strong wind causing the collapse of the windmill cannot be considered fortuitous, for it must be present where windmills are constructed. There must have been an inherent defect in the windmill itself. (4) In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. (Art. 1169) When the windmill failed to function properly it became incumbent upon petitioner to repair it in accordance with the stipulated guaranty. Thus, respondent cannot be said to have been in delay; instead, it is petitioner who should bear the expenses for the reconstruction of the windmill. Art. 1167 provides that if a person obliged to do something fails to do it, the same shall be executed at his cost. ACE-AGRO DEVELOPMENT CORP. v. CA (G.R. No. 119279, Jan. 21, 1997) Civil Law/Contracts/Force Majeure: The temporary suspension of work did not merit an automatic extension of the period of the contract. (Victorias Milling v. Victorias Milling Planters Cooperative, 97 Phil. 318 [1955]) The fact is that the contract was subject to a resolutory period which relieved the parties of their respective obligations but did not stop the running of the period of the contract. Petitioner may not be to blame for the failure to resume work after the fire (there were alleged intervening causes, e.g., labor problems due to the work stoppage), but neither is private respondent. HEIRS OF SUICO v. CA (G.R. No. 120615, Jan. 21, 1997) Civil Law/ Contracts/Property/Lease: (1)The parties to the oral lease in question did not fix a specified period therefor. However, since the rentals were paid monthly, the lease may be deemed to be on a monthly basis, expiring at the end of every month, pursuant to Arts. 1687 and 1673. In such case, a demand to vacate was not even necessary for judicial action after the expiration of every one month. (2) The power of a court to extend the term of the lease under the second sentence of Art. 1687 is potestative, or more precisely, discretionary. The court is not bound to extend it, and its exercise depends upon the circumstances surrounding the case. Basic common law principles of fairness and equity shun property entailment that borders on perpetuity to the exclusion of the owner. (3) The value of the house is inconsequential since it was build in 1950, and private respondents can remove it if petitioners opt not to retain it by paying 1/2 of its value, pursuant to Art. 1678, which provides that the lessors would become the owner of the house constructed by reimbursing the lessees in said amount. Petitioners-lessors are thus given the option to pay indemnity, while private respondents-lessees do not

have a right to demand that they be paid. If the former refuses to reimburse, the latter's remedy is to remove the house, even though petitioners' lot may suffer damage thereby, as long as the damage caused is not more than reasonably necessary. RAMOS v. CA (July 1997) Civil Law/ Oblicon/ Supervening Inflation: (1) Failure to comply with a provision deemed by the parties themselves as so important is a ground for the termination of the contract. (2) Art. 1250 requires for its application a declaration of inflation by the Central Bank, without such declaration creditors cannot demand an increase of what is due them. MATANGUIHAN v. CA (July 1997) Civil Law/Equitable Mortgages: In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Accordingly, there are instances where the form and stipulations of a contract must give way to reflect the true intention of the parties. This is best illustrated in the instances where contracts of sale, whether absolute, or one where the vendor reserves the right to repurchase the thing sold or a sale pacto de retro, are presumed to be an equitable mortgage. An equitable mortgage is defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. Its essential requisites are: (1) That the parties entered into a contract denominated as a contract of sale; and (2) That their intention was to secure an existing debt by way of a mortgage. Under the wise, just and equitable presumption in Article 1602, a document which appears on its face to be a sale - absolute or with pacto de retro - may be proven by the vendor or vendor-a-retro to be one of a loan with mortgage. In this case, parol evidence becomes competent and admissible to prove that the instrument was in truth and in fact given merely as a security for the payment of a loan. And upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the true intent of the parties at the time of the execution of the contract. Sales with a right to repurchase are not favored. As before, instruments shall not be construed to be sales with a right to repurchase, with the stringent and onerous effects which follow, unless the terms of the document and the surrounding circumstances so require. Whenever, under the terms of the writing, any other construction can be fairly and reasonably inferred, such construction will be adopted and the contract construed as a mere loan unless the court sees that, if enforced according to its terms, it is not an unconscionable pact. NOOL v. CA (July 1997) Civil Law/Void Contracts/Sales: (1) A contract of repurchase arising out of a contract of sale where the seller did not have any title to the property "sold" is not valid. Since nothing was sold, then there is also nothing to repurchase. A void contract cannot give rise to a valid one. (2) The right to repurchase presupposes a valid contract of sale between the same parties. (3) In light of the prohibition against unjust enrichment, if a void contract has already been performed, the restoration of what has been given is in order. Corollarily, interest thereon will run only from the time of private respondents' demand for the return of this amount in their counterclaim. ONG v. CA (July 1997) Civil Law/Contracts/Rescission: Arts 1191 and 1383 are inapplicable in this case: Art 1191 refers to rescission applicable to reciprocal obligations which should be distinguished from rescission of contracts under Art 1383. Although both presupposed contracts validly entered into and subsisting and both require mutual restitution when proper, they are not entirely identical. SPOUSES SANTIAGO v. CA (August 1997) Civil Law/ Oblicon/ Simulated or Fictitious Contracts: Here, while petitioners (buyers in a conditional deed of sale) were able to occupy the property allegedly sold, they were relegated to a small bedroom without bath and toilet, while Arcega (seller)

remained virtually in full possession of the house and lot, using the master's bedroom. If the transaction was indeed an absolute sale, then Arcega had no business remaining on the property. Also if petitioners were the legitimate owners, they would have collected rent from Arcega. Since the transaction was used merely to facilitate a loan with the SSS with petitioners using the property as collateral, the contract was absolutely simulated or fictitious, declared void as per Art. 1409, NCC. The fact that petitioners were able to secure a title in their names did not operate to vest ownership upon them. The Torrens system does not create nor vest title, but merely confirms and records title already existing and vested.

BANGAYAN v. CA (August 1997) Civil Law/Contracts/ Lease/ Novation: Art. 1311, NCC, provides that contracts take effect only between the parties, their assigns and heirs, except where the rights and obligations arising from contract are not transmissible by their nature, or by stipulation or by provision of law. Here, paragraphs 4 and 5 of the lease contract provided that the right of first option was not transmissible, which are consistent with Art. 1649, NCC that the lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. The lessor's consent is necessary as the assignment of the lease would involve the transfer not only of rights, but also of obligations. It constitutes novation by a substitution of the person of one of the parties. It cannot be denied that Teofista's right of first option to buy the leased property in case of its sale is but part of the bigger right to lease said property. The option was given to Teofista as she was the lessee. It was a component of the consideration of the lease. The option was by no means an independent right which Teofista could exercise. It ought to follow that if Teofista was barred by contract from assigning her right to lease the lot, she was similarly barred from assigning her right of first option to Angelita.

RAMOS v. CA (September 1997) Civil Law/Contracts/ Sale with Assumption of Mortgage: In sales with assumption of mortgage, the assumption of mortgage is a condition to the seller's consent so that without approval by the mortgagee, no sale is perfected. SPOUSES PANGALINAN v. CA (September 1997) Civil Law/Sales/Contract to Sell/Extrajudicial Rescission: Art. 1592, NCC, requiring demand by suit or by notarial act in case the vendor of realty wants to rescind does not apply to a contract to sell but only to a contract of sale. To argue that there was only a casual breach is to proceed from the assumption that the contract is one of absolute sale, where non-payment is a resolutory condition, which is not the case. The applicable provision of law is Art. 1191, NCC. Pursuant to this, the law makes it available to the injured party alternative remedies such as the power to rescind or enforce fulfillment of the contract, with damages in either case if the obligor does not comply with what is incumbent upon him. The validity of the stipulation in the contract providing for automatic rescission upon non-payment cannot be doubted. It is in the nature of an agreement granting a party the right to rescind a contract unilaterally in case of breach without need of going to court. Thus, rescission under Art. 1191 was inevitable due to petitioners' failure to pay the stipulated price within the original period fixed in the agreement. TIGNO v. CA (October 1997) Civil Law/ Contracts/ Implied Trusts: An implied trust is deducible by operation of law from the nature of the transaction as matters of equity, independently of the particular intention of the parties. It arises where a person purchases land with his own money and takes conveyance thereof in the name of another. In such a case, the property is held on resulting trust in favor of the one furnishing the consideration for the transfer, unless a different intent appears. The trust which results under such circumstances does not arise from a contract or an agreement of the parties, but from the facts and

circumstances; i.e., the trust results because of equity and it arises by implication or operation of law. VILLAFLOR v. CA (October 1997) Civil Law/Contracts/Simulated Contracts/Land Titles: (1) Petitioner's delivery of the certificate of ownership and execution of the deed of absolute sale were suspensive conditions, which gave rise to a corresponding obligation on the part of private respondent, i.e., the payment of the last installment of the consideration mentioned in the first agreement. Such conditions did not affect the perfection of the contract or prove simulation. Neither did the mortgage. Simulation occurs when an apparent contract is a declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act which does not exist or is different from that which was really executed. (Tongoy v. CA, 123 SCRA 99, 118 [1983]) Such an intention is not apparent in the agreements. The intent to sell, on the other hand, is clear. (2) At most, nonpayment only gives petitioner the right to sue for collection. Generally, in a contract of sale, payment of the price is a resolutory condition and the remedy of the seller is to exact fulfillment or, in case of substantial breach, to rescind the contract under Art. 1191, NCC. However, failure to pay is not even a breach, but merely an event which prevents the vendor's obligation to convey title from acquiring binding force. (Jacinto v. Kaparaz, 209 SCRA 246, 254-55 [1992]) (3) The transfer of ownership via the 2 agreements and the relinquishment of rights, being private contracts, were binding only between petitioner and private respondent. The Public Land Act finds no relevance as the disputed land was covered by said Act only after issuance of the order of award in favor of private respondent. Thus, possession of any disqualification by private respondent under said Act is immaterial to the private contracts between the parties thereto. (We are not, however, suggesting a departure from the rule that laws are deemed written in contracts.) BINGCOY v. CA (October 1997) Civil Law/Prescription: Acquisitive prescription is in itself a mode of acquiring ownership over a parcel of land and does not require successional rights in order to ripen into ownership. There is nothing on the record that discloses even an attempt by petitioners to rebut the evidence of private respondents as to their peaceful, continuous, adverse and open possession in the concept of an owner over the lots for 22 years. Under the law then, Act No. 190, 41 (Code of Civil Procedure), 10 years of continuous, actual adverse possession was sufficient. YOBIDO v. CA (October 1997) Civil Law/Oblicon/Fortuitous Event: The explosion of a newly installed tire of a passenger vehicle causing the vehicle to fall in the ravine is not a fortuitous event that exempts the carrier from liability for the death of a passenger. To be considered a fortuitous event: (a) the cause of the unforeseen and unexpected occurrence must be independent of human will; (b) it must be impossible to foresee the event which constitutes the caso fortuito, or if it could be foreseen, must have been impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; (d) obligor must be free from any participation in the aggravation of the creditor's injury; (e) entire exclusion of human agency from the cause of injury or loss. Under the circumstances here, there are human factors involved. The fact that the tire was new (in fact, grooves/tread were still visible) did not imply that it was entirely free from manufacturing defects or that it was properly mounted on the vehicle. Neither may the fact that the tire bought and used vehicle is of a brand name noted for qualify, resulting in the conclusion that it could not explode within 5 days' use. Be that as it may, it is settled that an accident caused either by defects in the automobile or through the negligence of its driver is not a caso fortuito that would exempt the carrier from liability for damages. MURLI SADHWANI v. CA (October 1997) Civil Law/Contracts/Lease/Sublease: Under Art. 1650, NCC, when the lease contract does not expressly forbid a sublease, the lessee may sublet the thing leased. The rule is different, however, re: assignments of lease. Art. 1649 provides that the lessee cannot

assign the lease without the consent of the lessor, unless there is a stipulation to the contrary.. Indeed, the consent of the lessor is necessary because the assignment of lease would involve the transfer not only of rights, but also of obligations. Such assignment would constitute novation by substitution of one of the parties, i.e., the lessee. There is no evidence here showing that Sawit subsequently agreed to a substitution of petitioners in place of Orient as lessee. 1996 DOMINGO v. CA (March 1996) Civil Law/ Contracts/ Compromise: A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation or put an end to one already commenced. Essentially, it is a contract perfected by mere consent. Once an agreement is stamped with judicial approval, it becomes more than a contract binding upon the parties; having the sanction of the court and entered as its determination of the controversy, it has the force and effect of any other judgment. PCIB v. CA (March 1996) Civil Law/ Contracts/ Absolution from Liability: A stipulation embodied in the standard application for/receipt furnished by petitioner for the purchase of a telegraphic transfer which relieves it of any liability resulting from loss caused by errors or delays in the course of the discharge of its services cannot absolve the petitioner from liability, where it has acted fraudulently and in bad faith. In Geraldez v. CA (230 SCRA 320 [1994]), it was unequivocally declared that notwithstanding the enforceability of a contractual limitation, responsibility from a fraudulent act cannot be exculpated because the same is contrary to public policy. (See Art. 21, Civil Code.) Freedom of contract is subject to the limitation that the agreement must not be against public policy and any agreement made in violation of this rule is not binding and will not be enforced. (17 Am Jur. 2d, Contracts 257) PNB v. CA (April 1996) Civil Law/ Oblicon/ Payment/ Exemplary Damages: (1)When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, a debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered. The burden of proof of such payment lies with the debtor. (Pinon v. Osorio, 30 Phil. 365) (2) Jurisprudence has set down the requirements for exemplary damages to be awarded: 1. they may be imposed by way of example in addition to compensatory damages, and only after the claimant's right to them has been established; 2. they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant; 3. the act must be accompanied by bad faith or done in a wanton manner. (Octol v. Ybaez, 111 SCRA 79 [1982]; De Leon v. CA, 165 SCRA 166 [1988]) In the case at bench, while there is a clear breach of petitioner's obligation to pay there is no evidence that it acted in a fraudulent manner. Furthermore, there is no award of compensatory damages which is a prerequisite before exemplary damages may be awarded. SPOUSES ALMEDA v. CA (April 1996) Civil Law/Contracts/Obligatory Force/Interest/Escalation Clause: (1)The binding effect of any agreement between parties to a contract is premised on two settled principles: (a) that any obligation arising from contract has the force of law between the parties; and (b) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is

void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties, is likewise, invalid. PNB unilaterally altered the terms of its contract with petitioners by increasing the interest rates on the loan without prior assent of the latter. Article 1956 stipulates that "No interest shall be due unless it has been expressly stipulated in writing." (2)Escalation clauses are not basically wrong or legally objectionable as long as they are not solely potestative but based on reasonable and valid grounds.

WILLEX PLASTIC v. CA(April 1996) Civil Law/ Oblicon/Accessory Obligations/Sureties/Retroactivity of Sureties: The consideration necessary to support a surety obligation need not pass directly to the surety, a consideration moving to the principal alone being sufficient. Moreover, as we held in BPI v. Foerster, although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the intention of the parties as revealed by the evidence is controlling. In this case, the parties clearly provided that the guaranty would cover "sums obtained and/or to be obtained. YNSON v. CA; YULIENCO v. CA (June 1996) Civil Law/ Remedial Law/Compromise: Since the parties entered into this compromise agreement freely without any vice of consent, the same must govern the relations of the parties. A judicial compromise has the force of law and is conclusive between the parties. A compromise upon its perfection becomes binding upon the parties and has the effect and authority of res judicata even if not judicially approved. VILLA v. CA (G.R. No. 119850, June 20, 1996) Civil Law/ Oblicon/ Stipulation Pour Autrui/ Torts:(1)The "Agreement" entered into by petitioner and Bankard, provides inter alia that the merchant shall honor validly issued PCCCI credit cards provided that the card expiration date has not elapsed and the card number does not appear on the latest cancellation bulletin of lost, suspended and canceled PCCCI credit cards and, no signs of tampering appear on the face of the credit card. While de Jesus may not be a party to the said agreement, the above-quoted stipulation conferred a favor upon de Jesus, a holder of a credit card validly issued by Bankard. This is a stipulation pour autri and under Article 1311 of the Civil Code de Jesus may demand its fulfillment provided he communicated his acceptance to the petitioner before its revocation. In this case, de Jesus' offer to pay by means of his Bankard constitutes not only an acceptance of the said stipulation but also an explicit communication of his acceptance to the obligor. (2)The test for determining the existence of negligence in a particular case may be stated as follows: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent person would have used in the same situation? If not, then he is guilty of negligence. While it is true that de Jesus did not have sufficient cash on hand this fact alone does not constitute negligence on his part. Neither can it be claimed that the same was the proximate cause of his damage. We take judicial notice of the current practice among major establishments to accept payment by means of credit cards in lieu of cash. ABELLA v. CA (June 1996) Civil Law/Interpretation of Contracts: It is a cardinal rule in the interpretation of contracts that "if the terms are clear, the literal meaning of its stipulations shall control." No amount of extrinsic aids are required. INCIONG v. CA (June 1996) Civil Law/Contracts/Fraud/ Credit Transactions/ Solidary Obligations v. Suretyship/ Joint Obligations: (1) Fraud must be established by clear and convincing evidence, mere preponderance of evidence, not even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving testimony. (2) Petitioner signed the promissory note as a solidary co-maker and not as a guarantor. A solidary or joint and several obligation is one in which each debtor is liable

for the entire obligation, and each creditor is entitled to demand the whole obligation. While a guarantor may bind himself solidarily with the principal debtor, the liability of a guarantor is different from that of a solidary debtor. "A guarantor who binds himself in solidum does not become a solidary co-debtor to all intents and purposes. There is a difference between a solidary co-debtor and a fiador in solidum (surety). The latter, outside of the liability he assume to pay the debt before the property of the principal debtor has been exhausted, retains all other rights, actions and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in Section 4, Chapter 3, Title I Book IV of the Civil Code (3) Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation, the presumption is that the obligation is joint so that each of the debtors is liable only for a proportionate part of the debt. There is solidary liability only when the obligation expressly so states, when the law so provides or when the nature of the obligation so requires. Because the promissory note involved in this case expressly states that the three signatories therein are jointly and severally liable, any one, some or all of them may be proceeded against for the entire obligation. The choice is left to the solidary creditor to determine whom he will enforce collection. NATIONAL WATERWORKS (now MWSS) v. NLRC (July 1996) Civil Law/Contracts/Prescription: Article 1155 of the Civil Code provides the specific instances when the period of prescription may be interrupted. Any such interruption is a factual matter to be properly supported by evidence. Private respondents' claims herein are not barred by prescription, the period having been interrupted by the written extrajudicial demands made by private respondents, coupled with petitioner's own pleas for time within which to pay the claims. AMERICAN HOME ASSURANCE v. NLRC (July 1996) Civil Law/ Oblicon/ Condition: Petitioners denied the grant of the bonus to private respondent because the condition for its grant is that the employee must retire under the SERP. Yet, it was the unjust denial of his applications that prevented private respondent from complying with such condition for early retirement. As petitioners, being employers-obligors, voluntarily prevented fulfillment of the condition by their own acts, private respondent is deemed to have fulfilled the condition for early retirement. PNB v. CA (July 1996) Civil Law/Oblicon/Compensation: What petitioner bank is effectively saying is that since the respondent appellate court ruled that petitioner bank could not do a shortcut and simply intercept funds being coursed through it, for transmittal to another bank, and eventually to be deposited to the account of an individual who happens to owe some money to petitioner, and because respondent court ordered petitioner bank to return the intercepted amount to said individual, who in turn was found by the appellate court to be indebted to petitioner bank, therefore, there must now be legal compensation of the amounts each owes the other, hence, there is no need for petitioner bank to actually return the amount, and finally, that petitioner bank ends up in exactly the same position as when it first took the improper and unwarranted shortcut by intercepting the said money transfer, notwithstanding the assailed decision saying that this could not be done! There is here a clever ploy to use this Court to validate an improper act of petitioner bank, with the not impossible intention of using this case as precedent for similar acts of interception in the future. BRILLO HANDICRAFTS v. CA (G.R. No. 109090, Aug. 7, 1996) Civil Law/Contracts/Estoppel: Estoppel has set in where petitioner had partially paid the amount and acquiesced to the respondents rate. CUIZON v. CA (G.R. No. 102096, Aug. 22, 1996) Civil Law/Oblicon/Interpretation/Fraud: (1) In contractual relations, the law allows the parties much leeway and considers their agreement to be the law between them. This is because "courts cannot follow one every step of his life and extricate him from bad bargains xxx relieve him from one-sided contracts, or annul the effects of foolish acts." (Vales v. Villa, 35 Phil. 769)

(2) Where the parties have given a practical construction by their conduct, as by acts in partial performance, such construction may be considered by the court in determining its meaning and ascertaining the mutual intention of the parties at the time of the contracting. (Javier v. CA, 183 SCRA 171) If it were true as private respondents claim that their agreement was for the transfer of the subject lots only upon payment of the full consideration, why then did private respondents execute a deed of sale over one [of six] lot[s] although they knew too well that a partial amount only of the purchase price was paid? No credible explanation was given by private respondents. (3) In construing a written agreement, the reason behind and the circumstances surrounding its execution are of paramount importance to place the interpreter in the situation occupied by the parties concerned at the time the writing was executed. (Vicente v. Shotwell, 38 SCRA 107) Admittedly, the intention of the contracting parties should always prevail because their will has the force of law between them. (Kasilag v. Rodriguez, 69 Phil. 217) (4) We do not find it proper to use the fair market value as the price of one lot. This is not in accord with the contract between the parties. It is not the province of the court to alter a contract by construction or to make a new contract for the parties; its duty is confined to the interpretation of the one which they have made for themselves without regard to its wisdom or folly as the court cannot supply material stipulations or read into the contract words which it does not contain. (Bacolod Murcia v. Banco Nacional, 74 Phil. 675) (5) Fraud is the deliberate or intentional evasion of the normal fulfillment of an obligation. (8 Manresa 72) The mere failure of private respondents to execute a deed of sale because they demanded first an accounting of the lots used as collateral by petitioner and amount of loans secured could not be considered as fraud. Fraud is never presumed; it must be alleged and proven. (Atilano v. Inclan, 45 Phil. 246) Fraud is negated when private respondents partially performed their obligation when they executed a deed of sale over 1 lot. RIZAL SURETY v. CA & TRANSOCEAN TRANSPORT (G.R. No. 96727, Aug. 28, 1996) Civil Law/ Contracts/Trusts: In Mindanao Devt. Authority v. CA (113 SCRA 429, 436-437 [1982]), this Court held the elements of an express trust: 1) Competent trustor and trustee; 2) An ascertainable trust res; and 3) Sufficiently certain beneficiaries. There is no need for stilted formalities. There must be a present and complete disposition of the trust propoerty, notwithstanding that the enjoyment in the beneficiary will take place in the future. Also, the purpose must be an active one to prevent trust from being executed into a legal estate or interest, and one not in contravention of some prohibition of statute or rule of public policy. Power of administration must be other than a mere duty to perform a contract although the contract is for a 3rd party beneficiary. A declaration of terms is essential, and these must be stated with reasonable certainty in order that the trustee may administer, and the court, if called upon to do so, may enforce the trust. INTER-ASIA SERVICES CORP. v. CA (G.R. No. 106427, October 1996) Civil Law/ Contracts/ Lease/ Renewal v. Extension: To renew means the old contract is extinguished, thus a new one must be executed, and vice-versa. In this case, there was only an extension where after the contract expired on 14 July 1990, agreements were entered into for petitioner to stay on the leased premises up to 1 January 1991 and subsequently up to 1 March 1991. In Fernandez v. CA (166 SCRA 577 [1988]), this Court held that an alleged verbal assurance of renewal of a lease is inadmissible to qualify the terms of the written lease agreement under the parole evidence rule and unenforceable under the Statute of Frauds. PHIL. INTL. TRADING CORP. v. ANGELES (G.R. No. 108461, October 1996) Civil Law/Publication of Laws: In Taada v. Tuvera (146 SCRA 446 [1986]), we ruled that executive issuances meant to enforce and implement an existing law pursuant to a valid delegation, must be published.

SECURITY BANK & TRUST CO. v. RTC (G.R. No. 113926, October 1996) Civil Law/Interest/Usury: Should the rate of interest on a loan as stipulated in a contract (23% here), far in excess of the ceiling prescribed under or pursuant to the Usury Law prevail over 2 of CB Circular No. 905 which prescribes that the rate of interest thereof shall continue to be 12% per annum? Circular No. 905 merely suspended the effectivity of the Usury Law. Where the rate of interest was agreed upon by the parties freely, it is not for respondent court to change the stipulations in the contract where it is not illegal. Further, Art. 1306, NCC provides that contracting parties may establish stipulations as they deem convenient, provided they are not contrary to law, etc. We find no valid reason for the respondent court to impose a 12% interest rate on the principal balanc. In a loan, the interest due should be that stipulated in writing, and in the absence thereof, the rate shall be 12% p.a. (Eastern Shipping v. CA, 234 SCRA 78) Hence, only in the absence of a stipulation can the court impose the 12% interest rate. MACTAN CEBU INTL. AIRPORT AUTHORITY v. CA (G.R. No. 121506, October 1996) Civil Law/Contracts/Statute of Frauds: Under Art. 1403, NCC, a contract for the sale of real property shall be unenforceable unless the same or some note or memorandum thereof be in writing and subscribed the party charged or his agent. Evidence of the agreement cannot be received without the writing, or a secondary evidence of its contents. In case at bench, the deed of sale and verbal agreement allowing the right of repurchase should be considered an integral whole. The deed of sale relied upon by petitioner is in itself the note or memorandum evidencing the contract. Thus, the requirement of the Statute of Frauds has been sufficiently complied with. Moreover, the principle of the Statute of Frauds only applies to executory contracts and not to contract either partially or totally performed (Victoriano v. CA, 194 SCRA 19), as in this case, where the sale has been consummated; hence, the same is taken out of the scope of the Statute of Frauds. As the deed of sale has been consummated, by virtue of which, petitioner accepted some benefits thereunder, it cannot now deny the existence of the agreement. (Art. 1405, NCC) The Statute of Frauds was enacted for the purpose of preventing fraud and should not be made the instrument to further them. (National Bank v. Phil. Vegetable Oil, 49 Phil. 857) PHIL. NATIONAL BANK v. CA (G.R. No. 123643, October 1996) Civil Law/Damages/Interest: The 12% interest rate referred to in Circ. 416 applies only to loans or forbearance of money, or where money is transferred from one person to another and the obligation to return the same or a portion thereof is adjudged. xxx (FTI v. CA & TAO Devt., G.R. No. 120097, 23 Sept. 1996) Therefore, the proper rate of interest referred to in the judgment under execution is only 6%, to be computed from the time of the filing of the complaint considering that the amount adjudged can be established with reasonable certainty (P98,691.90). CONSTANTINO v. CA (G.R. No. 116018, November 1996) Civil Law/Contracts/Land Titles/Fraud: We find respondents allegation that they signed the deed prior to the survey worthy of credit. As found by the trial court, petitioners contrary contention was contradicted by petitioners own witness who positively asserted in court that the survey was conducted 6 days after the signing. Obviously, when respondents signed the deed, it was still incomplete sice petitioner who caused it to be prepared left several spaces blank, regarding the dimensions of the property to be sold. The heirs were persuaded to sign the document only upon assurance of petitioner that Roque would be present when the property would be surveyed. But this turned out to be a ruse of petitioner to induce respondents to sign the deed. (See Periquet v. IAC, 238 SCRA 697 [1994]) Thus all elements of fraud vitiating consent for purposes of annulling a contract concur: (a) employed by a contracting party upon the other; (b) induced the other party to enter into the contract; (c) serious; and (d) resulted in damage and injury to the party seeking annulment. (Alcasid v. CA, 237 SCRA 419 [1994])

Perhaps, another reason to annul the document is that the second page manifests that the number of the subdivision plan and the respective area of the lot were merely handwritten while the rest of the statements were typed, which leads us to conclude that the handwritten figures were not available at the time the document was formalized. CATHOLIC BISHOP OF BALANGA v. CA (G.R. No. 112519, November 1996) Civil Law/Contracts/Land Titles/Laches: The elements of laches are: 1) Defendants conduct giving rise to the situation complained of; 2) Delay in asserting complainants right after he had knowledge of defendants conduct and after he had opportunity to sue; (a) knowledge of defendants action; (b) opportunity to sue defendant after obtaining such knowledge; and (c) delay in suing 3) Lack of knowledge or notice on defendants part that complainant would assert the right on which he based his suit; and 4) Injury or prejudice to defendant if relief is accorded to complainant. (citations omitted) In this case, petitioner sued only after 49 years since the donation, without explanation for this long delay making petitioner guilty of laches. Further, while petitioner is still the registered owner, and jurisprudence is settled as to the imprescriptibility of a Torrens Title, there is equally an abundance of cases where we categorically ruled that a registered landower may lose his right to recover the possession of his registered property by reason of laches. (citations omitted) SPOUSES FLORENDO v. CA (G.R. No. 101771, Dec. 17, 1996) Civil Law/Contracts/Escalation Clauses: In Banco Filipino v. Navarro (152 SCRA 346,353 [1987]), we ruled that in general, there is nothing inherently wrong with escalation clauses. In IBAA v. Spouses Salazar (159 SCRA 133, 137 [1988]), the Court reiterated the rule that escalation clauses are valid in commercial contracts. ManCom Resolution 85-08, which is neither a rule nor a CB resolution, cannot be used as basis for escalation in lieu of CB issuances, since par. (f) of the mortgage contract categorically specifies that any interest rate increase be in accordance with prevailing rules, regulations and circulars of the CB. The Banco Filipino and PNB doctrines thus apply four-square, that without such CB issuances, any proposed increased rate will never become effective. It will not be amiss also to point out that the unilateral determination and imposition of increased interest rates by LBP violates the principle of mutuality of contracts (Art. 1308, NCC). 1995 DEL MUNDO v. CA (240 SCRA 348 [1995]) Civil Law/Damages: Actual and moral damages cannot be dealt with in the aggregate, each must be separately identified and independently justified. CASTELO v. CA (244 SCRA 180 [May 1995]) Civil Law/Oblicon/ Damages/ Interest: In case of ambiguity in language of contract, that interpretation which establishes a less onerous transmission of rights or permits greater reciprocity is to be adopted. In delay in discharging an obligation consisting of a payment of a sum of money, the appropriate measure of damages is payment of penalty interest. Under Art. 2209, use the rate agreed upon, if none, pay additional interest at a rate equal to the regular or monetary interest, if none, legal interest of 6% or 12% (latter if loan or forbearance of money).

RAPANUT v. CA (246 SCRA 323 [July 1995]) Civil Law/Oblicon/Contracts Involving Installment Payments/Estoppel: (1) Failure to exercise the right to rescission after petitioner's alleged default constitutes a waiver, further, continued acceptance of the installment payments constitutes estoppel. (2) In a contract involving installment payment with interest chargeable against the remaining balance of the obligation, it is the duty of the creditor to inform the debtor of the amount of interest that falls due and that he is applying the installment payments to cover said interest. Otherwise, the creditor cannot apply the payments to the interest and then hold the debtor in default for non-payment of installments on the principal (Art. 1253, Civil Code). DBP v. CA (G.R. No. 110053, Oct. 16, 1995) Civil Law/Oblicon/Void Contracts/Restoration: If both parties have no fault or are not guilty, the restoration of what was given by each of them to the other is in order. The declaration of nullity of a contract which is void ab initio operates to restore things to the state and condition in which they were found before the execution thereof. AG & P v. CA (G.R. Nos. 114841-42, Oct. 20, 1995) Civil Law/Contracts/Damages/Interest: When an obligation not constituting a loan or forbearance of money is breached, interest on the amount of the damages awarded may be imposed at the rate of six percent (6%) per annum. No interest shall be adjudged on unliquidated claims unless the same can be established with reasonable certainty. The actual base for the computation of such legal interest, however, shall be the amount as finally adjudged by this Court. Furthermore, when our judgment herein becomes final and executory, the rate of legal interest shall be twelve percent (12%) from such finality until the satisfaction of the total judgment account, the interim period being effectively equivalent to a forbearance of credit. CASE NO.9 SM: Contracts; suretyship; Art. 2047, NCC PALMARES vs. CA GR # 126490, March 31, 1998 FACTS: Pursuant to a promissory note (PN), private respondent MB Lending Corp. (MB) extended a loan to the spouses Azarraga together with petitioner amounting to P30k but debtors were able to pay only P16, 300. Consequently, on the basis of petitioners solidary liability under the PN, MB filed a complaint against petitioner as the lone party defendant to the exclusion of the principal debtors, allegedly due to the latters insolvency. Petitioner claimed that while she agreed to be liable on the note upon default of the principal debtor, MB acted in bad faith in suing her alone without including the Azarragas when they were the only ones who benefited from the loans proceeds. HELD: Petitioner expressly bound herself to be jointly and severally liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that petitioners liability is that of a surety. A surety is an insurer of the debt, a suretyship is an undertaking that the debtor shall pay. A surety promises to pay the principals debt. If the principal will not pay, he binds himself to perform if the principal does not, w/o regard to his ability to do so. In fine, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default. It has not been shown, either in the contract or the pleadings that MB agreed to proceed against petitioner only if and when the defaulting principal has become insolvent CASE NO. 10 SM: Contracts; A. 1342, NCC PBC vs. CA GR # 109803, April 20, 1998 FACTS: Chee Puen, then the general manager of Global Inc., informed private respondent, his estranged wife that their company a P300k loan for its operational expenses. He proposed that her paraphernal lot in Makati be used as collateral. He assured her that the loan would not exceed P300k and she was asked to sign 3 sets of

blank forms of real estate mortgage (REM) of PBC. He wrote down in pencil the figure 300 under the space provided for the amount to be loaned and respondent signed the blank mortgage forms due to Chee Puens representations. Chee Puen had the REM document later notarized by Atty. Arzadon using a residence certificate bearing respondents forged signature. Apparently, Chee Puen applied for a P3M loan from PBC. To secure the loan, he mortgaged respondents paraphernal lot in Makati, using the blank REM forms signed by her. He also misrepresented himself as president and acting corporate secretary of Global, Inc. PBC did not investigate Chee Puens authority to mortgage respondents property. Private respondent discovered that Chee Puen obtained a loan of P3M from PBC. HELD: Respondent has not consented to collateralize Global, Incs P3M loan with her paraphernal lot. All facts show that she was misled by Chee Puen and thus, the REM should be nullified. The established facts preclude the application of estoppel against the respondent. Respondent did not deliberately or intentionally lead the PBCtobelieve that she was putting up her paraphernal realty to secure the P3M loan of Global.It was Chee Puen who made the misrepresentation thus defrauding respondent herself. Further, PBCs reliance in the REMs signed in blank by the respondent was unreasonable. As a banking institution, PBC was grossly negligent when (a) it took no step to verify whether the respondent was really offering her paraphernal property as collateral; (b) made no credit check on respondent and Global, Inc.; and (c) conducted no investigation on the authenticity of the Secretarys Certificate of Board Resolution.The business of a bank is affected with public interest and it should observe a higher standard of diligence when dealing with the public. Neither will it matter that PBC itself was misled by Chee Puen, a 3rd person to the contract. Under A.1342, NCC, the misrepresentation of a 3rd person will vitiate consent if it has resulted in substantial mistake and the same is mutual. CASE NO.22 SM: Contracts; Arts. 1385 &1482 GOLDENROD, INC. vs. CA GR# 126812, November 124, 1998 FACTS: Petitioner and private respondent Baretto Realty (BR) entered into a contract to sell for one of the lots sold by BR. Petitioner gave BR earnest money for the said property. It appeared that the same was intended to form part of the purchase price and absent any express provision it shall not be forfeited in favor of BR in case petitioner fails to comply with his obligation. Petitioner informed BR that it would no longer push thru with the sale. It then resorted to extrajudicial rescission of its agreement to which BR did not object. In fact, BR sold the subject realty a day after said letter of rescission was received by BRs president. Petitioner demanded the return of its earnest money but BR refused. HELD: Under A.1482, NCC, whenever earnest money is given in a contract of sale, it shall be considered as part of the purchase price and as proof of he perfection of the contract. Petitioner clearly stated without any objection from BR that the earnest money was intended to form part of the purchase price. It was an advance payment which must be deducted from the total price. Thus, the parties could not have intended that the earnest money or advance payment would be forfeited when the buyer should fail to pay the balance of the price, especially in the absence of a clear and express agreement thereon. Petitioner resorted to extrajudicial rescission of its contract with BR which in turn did not object. If the party does not oppose the declaration of rescission of the other party, specifying the grounds therefore, and if it fails to reply or protest against it, its silence thereon suggests an admission of the veracity and validity of the rescinding partys claim. By virtue of the extrajudicial rescission of the contract to sell by petitioner without opposition from BR, which, in fact, sold the property to other persons, BR, as the vendor, had the obligation to return the earnest money of P1M. It would be most inequitable if respondent BR would be allowed to retain it and at the same time appropriate the proceeds of the 2nd sale.

CASE NO. 23 SM: Quasi delicts; Liability of employers under Arts.2180 & 2194, NCC METRO MANILA TRANSIT CORP. vs. CA

GR# s 116617 & 126395, November 16, 1998 FACTS: Liza Rosalie Rosales died due to a vehicular accident involving petitioner MMTCs vehicle driven by Pedro Musa. Her parents sued MMTC and Musa for damages. According to MMTC, it has exercised the diligence of a good father of a family with respect to the selection of employees by presenting mainly testimonial evidence on its hiring procedure. Thus, it should not be liable for damages. HELD: The evidence presented by MMTC to show that it exercised the diligence of a good father of a family in the selection and supervision of employees and thus avoid the vicarious liability for the negligent acts of its employees is insufficient to overcome the presumption of negligence against it. MMTC is thus primarily liable for damages arising from the negligence of its employee in view of A.2180, NCC. It can recover from its employee but does not make the latters liability subsidiary. They are solidarily liable. The liability of the registered owner of a public service vehicle for damages arising from the tortious acts of its driver is primary, joint and direct with the driver. NO. 25 SM: Obligations and contracts; double sale CHENG vs. GENATO GR# 129760, December 29, 1998 FACTS: Respondent Ramon Genato entered into a contract to sell with the other respondents, spouses Da Jose. The contract was in a public instrument and was duly annotated at the back of the 2 Transfer of Certificate of Titles covering the said lots. The contract provided, among others, the partial down payment of P50k and the payment of the remaining P950k after 30 days and only after verifying and confirming the truth and authenticity of the documents. Said 30 days was executed for another 30 days. Pending the effectivity of said extension, and without notifying the Da Joses, Genato executed an Affidavit to Annul the Contract to Sell but no annotation of the same was made at the back of his titles. Cheng and Genato thereafter entered into a contract of sale over the lands. Genato decided to continue the contract he had with the Da Joses and sent back Chengs check but Cheng demanded compliance with their agreement as it was already perfected. Cheng further executed as Affidavit of Adverse Claim which was annotated on the subject TCTs. Meanwhile, the Da Joses paid Genato the P950k balance. HELD: The Da Joses were not in default since the 30 day extension period has not yet expired. In addition, no further condition was agreed upon when the Da Joses were granted the 30 days extension. Even if they did default in their Contract to sell, the affidavit to annul is not even called for. With or with out it, their non-payment to complete the full down payment of the purchase price ipso facto avoids their contract to sell, it being subjected to a suspensive condition. When a contract is subject to a suspensive condition, its birth/effectivity can take place only if and when the event which constitutes the condition happens or is fulfilled. If it does not take place, the parties would stand as if the conditional obligation had never existed. Further, the act of a party of canceling a contract should be made known to the other. Since that was not made, the Da Joses contract was not rescinded properly. Lastly, the knowledge gained by Cheng of t heist transaction between the Da Joses and Genato defeats his rights even if he is first to register the 2nd transaction, since such knowledge taints his prior registration with bad faith. CASE NO. 29 SM: Obligation and contracts; Rescission, A.1191, NCC ONG vs. CA GR# 97347, July 06, 1999 FACTS: Petitioner Jaime Ong and respondent spouses Miguel and Alejandra Robles executed an Agreement of Purchase and Sale on 2 lots for P2M. Ong paid the Robles couple the initial payment of P103, 499.91 as agreed upon, by depositing it with the UPCB. Ong took possession of the property will all the improvements thereon. He further deposited the remaining payment with the BPI in accordance with their stipulation

that Ong pay the respondents loan with BPI. Ong issued 4 post dated Metro Bank checks to answer fro his P1.4M balance but they were dishonored for insufficient funds. Ong failed to replace the checks and out of the P496, 500 BPI loan, he only paid P393, 679.60. Respondents then sold 3 of their rice mills transformers found in the subject lots and Ong gave them the authority to operate the mill while retaining possession of the lots. Respondents demanded Ong the return of their properties. Ong ignored the same. HELD: A careful reading of the parties contract shows that it is a contract to sell whereby ownership is by agreement, reserved in the vendor and is not to pass to the vendee till full payment of the purchase price. In a contract to sell, payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, causal or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. In the instant case, the respondents bound themselves to deliver a deed of absolute sale and a clean title upon full payment by Ong of the P2M. Ongs failure to complete payment rendered the contract to sell ineffective and without force and effect. The breach contemplated in A.1191, NCC is the obligors failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation. Hence, the agreement of the parties herein maybe set aside, but not because of a breach on Ongs part to pay in full. Rather, his failure brought a situation which prevented the obligation of respondents to convey title from acquiring an obligatory force.

CASE NO. 30 SM: Wills and Succession; Holographic will; A.811, NCC CODOY vs. CALUGAY GR# 123486, August 12, 1999 FACTS: Matilde Seo Vda. De Ramonal executed a holographic will. Herein respondents, devisees and legatees of said will filed with the RTC of Misamis Oriental a petition for probate of said will.Petitioners opposed the petition alleging that the holographic will was a forgery and that the same was even illegible. They argued that the repeated dates incorporated or appearing on the will after every disposition is out of the ordinary. The CA held that the testimonies presented by respondents prove the authenticity of the will and the handwriting and signature therein and allowed the wills probate. HELD: The word shall in a statute commonly denotes an imperative obligation and is inconsistent with the idea of discretion and that the presumption is that the word shall when used in a statute is mandatory. However, in the case at bar, the goal to achieve is to give effect to the wishes of the deceased and the evil to be prevented is the possibility that unscrupulous individuals who for their benefit will employ means to defeat the wishes of the testator. Not all the witnesses presented by the respondents testified explicitly that they were familiar with the testators handwriting. Further, the will was found not in the decedents personal belongings but with one of the respondents who kept it even before the decedents death. There was even no opportunity for an expert to compare the signature and the handwriting of the deceased with other documents signed and executed by her during her lifetime. A comparison of the strokes and signature of the decedent in the will with the other documents written by her prior to said will showed that there is uncertainty that the holographic will is in the deceaseds handwriting. CASE NO. 31 SM: Contracts; A.1603, NCC; equitable mortgage CHING SEN BEN vs. CA GR # 124355, September 21, 1999 FACTS: Petitioner constructed a house on his Marikina lot (TCT 128394) and agreed to transfer the same to Vicente for P150, 000 to be paid by Vicente from the proceeds of his housing loan from the SSS which granted him a P119, 400 loans. Ching then executed a Deed of Absolute Sale over said realty in Vicentes favor. Ching informed Vicente that he has a P43k balance on the house and lot. Vicente failed to pay the said amount. Thereafter, they executed a Deed of Sale with Assumption of Mortgage and With Right to Repurchase whereby Vicente conveyed the property to Ching. It provided

that Ching will assume all the duties and obligations of Vicente imposed upon by the latter in the deed of mortgage he executed in SSSs favor, as if Ching was the original mortgagor in the mortgaged deed. However, Vicente retained possession of the property. Ching paid in full to the SSS Vicentes account. SSS then issued a release of REM annotated on TCT 146078 under Vicentes name. Ching demanded that Vicente execute a Deed of Absolute Sale over the property. Vicente ignored it. HELD: The deed of sale with assumption of mortgage and right to repurchase is actually an equitable mortgage. The purported consideration for the sale with right to repurchasing the amount of P60, 242.86 is unusually inadequate compared to the purchase price of P150k when Vicente bought it from Ching 6 months before the execution of the deed. Not only did Vicente retained possession of the property but he also retained ownership thereof which led Ching to file the consolidation case.The real intention of the parties was to secure the payment by Vicente of the balance of the purchase price and the transfer fees of P43k. The stipulation in the Deed of sale with right to repurchase that absolute title shall be vested in the vendee in case the vendor failed to redeem the property on the specified date is void for being a pactum commissorium. Further, that Ching assumed the mortgage obligation of Vicente to the SSS does not detract from the real nature of the agreement as a contract of mortgage to secure the debts payment. CASE NO. 38 SM: Contracts; void contract; A.1412 (2) CAVITE DEVELOPMENT BANK vs. SPOUSES LIM GR# 131679, February 01, 2000 FACTS: Rodolfo Guansing obtained a P90k loan from CDB and mortgaged a lot covered by TCT#300809 registered in his name. Guansing defaulted in his payment and thus, CDB foreclosed the mortgage which was sold to CDB in the foreclosure sale that ensued. Guansing failed to redeem his lot and CDB eventually consolidated title to the property in its name evidenced by TCT# 355588.Private respondent Lolita Lim offered to buy the lot from CDB. The offer provided 10% option money and the balance payable in cash. Lim discovered that the subject property was originally registered in the name of Perfecto Guansing, Rodolfos father. Apparently, Rodolfo succeeded in having the lot registered in his name under the title he mortgaged to CDB and from which CDBs title was derived. However, Perfecto instituted a case for the cancellation of Rodolfos title which was granted and the decision became final and executory. HELD: In the instant case, the P30k, although denominated in the offer to purchase as option money, is actually in the nature of earnest money or down payment when considered with the other terms of the offer. An option contract is a contract separate from and preparatory to a contract of sale which, if perfected, does not result in the perfection or consummation of the sale. Only when the option is exercised may a sale be perfected. Here however, after the payment of the 10% option money, the offer to purchase provides for the payment only of the balance of the purchase price. This is the result of paying earnest money under A.1482, NCC. Clearly, the parties entered into a contract of sale, perfected and partially executed by the partial payment of the purchase sale. But due to the legal obstacle of the annulment of Rodolfos title from which CDB derived its own title, the contract between it and Lim can not be enforced and is void by reasons of public policy. Since CDB can not be considered a mortgagee in good faith due to its negligence for failing to conduct an exhaustive investigation, it is liable to return the P30k, plus damages as provided by A.1412 (2), NCC. CASE NO. 40 SM: Obligation and contracts; rescissible contracts; A.1381(3), NCC CHINA BANKING CORPORATION (CBC) vs. CA GR# 129644, March 3, 2000 FACTS: Alfonso Roxas Chua obtained a loan from MetroBank which he secured by mortgaging his conjugal share in a property covered by TCT #410603. Alfonso failed to pay and consequently MetroBank foreclosed the realty. In 1988, during the period of exercising his right to redeem said realty, Alfonso sold his right of redemption to his son, Paulino who redeemed the property and caused the annotation thereof at the back of the title. This preceded the annotation of the levy of execution in CBCs favor by 2 years and the certificate of sale also in CBCs favor by more than 3 years. CBC is Alfonsos

creditor which obtained judgment against him and Pacific Multi Agro Industrial Co. on November 07, 1985, 2 years before Alfonso sold his right to redeem to Paulino. Consequently, CBC sued Paulino alleging that the transaction between him and his father was fraudulent and was meant to defraud the latters creditors such as CBC. HELD: Since the judgment of the trial court in CBCs favor against Alfonso was rendered as early as 1985, there is a presumption that the 88 sale of his property, in this case, the right of redemption, is fraudulent under A.1387, NCC. The fact that Paulino redeemed the property and caused its annotation on the TCT ahead of CBC is of no moment since a fraudulent transaction , such as Alfonsos and Paulinos , is not overcome by the mere fact that the deeds of sale were in the nature of public instruments. This presumption is strengthened by the fact that the conveyance has virtually left Alfonsos other creditors with no other property to attach. The mere fact that the conveyance was founded on valuable consideration as in the case at bar, does not necessarily negates the presumption of fraud under A.1387, NCC. There has to be a valuable consideration and the transaction must have been made bona fide. In the instant case, the presumption of fraudulent conveyance has not been overcome. CASE NO. 50 SM: Obligations; when is a contract perfected JARDINE DAVIES INC. vs. CA GR#s 128066 & 128069, June 19, 2000 FACTS: Purefoods Corporation (PC) decided to install 2 1500kw generators in its food processing plant in Marikina City due to the 1992 power crisis.3 bidders submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids as required. Far East Mill Supply Corporation (FEMSCO) won the contract and immediately submitted the required performance bond amounting to P1, 841,187.90 and contractors all-risk insurance policy totaling P6, 137,293 with PC acknowledged in a letter. It also made arrangements with its principal and started purchasing the necessary materials. PC meanwhile returned FEMSCOs Bidders Bond of P1M as requested. However, PC unilaterally cancelled the award allegedly due to significant factors. FEMSCO protested the act and before the matter could be resolved, PC already awarded the project and entered into a contract with Jardine Nell, a division of Jardine Davies, Inc (JDI), which was not one of the original bidders. HELD: Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, maybe in keeping with good faith, usage and law. For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn/ revoked before it is made known to the offeror. PC started the process on entering into the contract by conducting bidding. The bid proposals/quotations submitted by the bidders which included FEMSCO are the offers and PCs reply the acceptance / rejection of the same. The December 12, 1992 letter of PC to FEMSCO constituted acceptance of FEMSCOs offer notwithstanding the conditions contained in the contract. The conditions were imposed on the performance of the obligation rather than on the perfection of the contract. They were prescriptions on how the obligation was to be performed and implemented, not conditions imposed on the perfection of the contract. PCs cancellation of its contract with FEMSCO presupposes that the contract has been perfected. Here, the SC awarded moral damages to FEMSCO after it sufficiently showed that its reputation has been tarnished (cf HANIL and ABS-CBN cases).

CASE NO. 51 SM: Contracts; Novation ESPINA vs. CA GR# 116805, June 22, 2000 FACTS: Respondent Diaz originally occupied the subject condo unit in 1987 as a lessee. While he was its lessee, petitioner agreed to sell the unit to him by installments. The agreement to sell was provisional as the consideration was payable in installments.

Petitioner terminated the provisional deed of sale by a notarial notice of cancellation; Diaz remained the lessee but he failed to pay the rentals due. Diaz subsequently made payment of P100k applicable either to the back rentals or for the purchase of the unit. Nevertheless, petitioner gave Diaz a notice to vacate the premises and to pay his back rentals. Diaz failed to do both and so petitioner filed an action for unlawful detainer against him. Diaz alleged that the provisional deed of sale executed by them novated the original existing contract of lease and thus, petitioner has no cause of action for ejectment against him. HELD: Novation must be clearly proved; its existence is not presumed. It only takes place if the parties expressly so provide, otherwise, the original contract remain in force. Where there is no clear agreement to create a new contract in place of the existing one, novation cannot be presumed to take place, unless the terms of the new contract are fully incompatible with the former agreement on every point. In the case at bar, after the initial down payment , respondents checks in payment of 6 installments all bounced and were dishonored. This led to petitioners termination of the provisional deed of sale. Petitioners subsequent acceptance of payment did not withdraw the cancellation of the provisional sale. Unless the application of payment is expressly indicated, the payment shall be applied to the most onerous obligation of the debtor, in this case, the unpaid rentals. Since the payment did not fully settle the unpaid rentals, the cause of action for ejectment survives. CASE NO. 53 SM: Contracts; A. 1479, NCC SAN MIGUEL PROPERTIES PHIL INC. vs. SPOUSES HUANGS GR# 137290, July 31, 2000 FACTS: The parties in the case at bar executed an instrument involving the sale of the petitioners subject real properties to the Huangs. The Huangs wrote petitioner the terms of their offer. Among the conditions given by the Huangs are: (1) that they be given the exclusive option to purchase the property within 30 days from acceptance of the offer; (2) that during the option period, the parties would negotiate the terms and conditions of the purchase; and (3) petitioner would secure the necessary approval while respondents would handle the documents. The Huangs gave petitioner P1M as earnest deposit. However, the couple and petitioner failed to agree on the terms of the payment. Petitioner gave the Huangs a 45-day extension so that a final agreement may be had. What transpired however was nothing more than offers and counter offers. Petitioner then offered the properties to another. HELD: Under A.1479, NCC, consideration in an option contract maybe anything of value, unlike in sale where it must be the price certain in money or its equivalent. In the case at bar, there is no showing of any consideration for the option. Lacking any proof of such consideration, the option is unenforceable. The manner of payment of the purchase price is an essential element before a valid and binding contract of sale can exist. Although the NCC does not expressly state that the minds of the parties must also meet on the terms/manner of payment of the price, the same is needed; otherwise, there is no sale. Agreement on the manner of payment goes into the price such that a disagreement is tantamount to a failure to agree on the price. Thus, it is not the giving of earnest money, but the proof of the concurrence of all the essential elements of the contract of sale which establishes the existence of a perfected sale. In addition, the Huangs did not give the P1M as earnest money as defined by A.1482, NCC. It was only given not as a part of the purchase price and as proof of the perfection of the contract of sale but only as a guarantee that respondents would not back out of the sale.

CASE NO. 54 SM: Obligations and Contracts; Contract to Sell vs. Contract of Sale SPOUSES FORTUNATO AND ROSALINDA SANTOS vs. CA GR# 120820, August 01, 2000 FACTS: Private respondents, the Caseda couple, possessed the subject house and lot in Paraaque City. However, the TCT over the same issued by the Register of Deeds of Paraaque has always remained in Rosalindas name. Although the parties agreed that the Casedas would assume the mortgage, all amortization, payments made by Carmen Caseda to the bank were in Rosalindas name. The bank cancelled and discharged the

mortgage in Rosalindas favor. Apparently, petitioners thus informally sold with conditions the said realties to the Casedas. The Casedas failed to pay in full. The Santoses thus reposed their property. HELD: A.1458, NCC expressly obliges the vendor in a contract of sale to transfer the ownership of the thing sold as an essential element of such a contract. After a careful examination of the contents of the parties unofficial receipt and other proofs, the SC held that there was no valid transfer of ownership was made by the Santoses to the Casedas. Absent this essential element, their agreement can not be deemed a contract of sale. What they had was a mere contract to sell. In contracts to sell, ownership is reserved in the vendor and is not to pass until full payment of the purchase price. In a contract of sale, the vendor has lost ownership of the thing sold and can not recover it, unless the contract of sale is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as long as the vendee has not complied fully with the condition of paying the purchase. If the vendor should eject the vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding it. Such is what the Santoses did in this case. CASE NO. 65 SM: Obligation and Contracts; Novation AGRO CONGLOMERATES, INC. vs. CA GR# 117660, December 18, 2000 FACTS: The conflict among the parties started from a contract of sale of a farmland between Agro and Wonderland Food Industries.The original plan was that the initial payments would be paid in cash. Subsequently, the parties, with respondent banks participation, executed an addendum providing instead, that Agro would secure a loan in its name for the total amount of the initial payments, while the settlement of said loan would be assume by Wonderland. Thereafter, petitioner Soriano signed several promissory notes (PNs) and received the proceeds in Agros behalf. In effect, the parties entered into a subsidiary contract of suretyship since petitioners signed the PNs as makers and accommodation party for Wonderlands benefit. Petitioners asserted that the addendum provided that their obligation to pay the PNs was novated by substitution of a new debtor, Wonderland, and as such, they were not liable anymore on the PNs. HELD: In order that a novation can take place, the concurrence of the following requisites is indispensable: (1) there must be a previous valid obligation; (2) there must be an agreement of the parties concerned to a new contract; (3) there must be the extinguishment of the old contract; and (4) there must be the validity of the new contract. In the case at bar, the 1st requisite for a valid novation is lacking. There was no novation by substitution of debtor because there was no prior obligation which was substituted by a new contract. The PNs, which bound petitioners to pay, were executed after the addendum. The addendum modified the contract of sale, not the stipulation in the PNs which pertain to the surety contract. Wonderland apparently assured the payment of future debts to be incurred by petitioners. Consequently, only a contract of surety arose. It was wrong for petitioners to presume that a novation had taken place. Settled is the rule that a novation is never presumed, it must be clearly and unequivocally shown. CASE NO. 67 SM: Obligations and Contracts; Novation as a means to extinguish a contract of surety BABST vs. CA GR#s 99398/104625, January 26, 2001 FACTS: Babst alleged that DBP sold ELISCONs entire asset to the NADECO, for the latter to take over and continue the operation of its business. Thereafter, the DBPs Board of Governors adopted Resolution# 2817 providing that DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCON;s creditors, including BPI, amounting to P 4,015,534.54. A Memorandum of Agreement (MOA) between DBP and NDC followed which provided that NDC shall pay to ELISCONs creditors, through DBP, the amount of P299, 524,700. BPI again was listed as a creditor. Babst further alleged that the ELISCON assets which DBP acquired and later transferred to NADECO (NDC) were placed under the Asset Privatization Trust. Thus, he was not liable. Due to its failure to make payment, BPI commenced an action to enforce payment of the credits of ELISCON with CBTC which was acquired in a merger by BPI. The action was against Pacific Multi Commercial Corporation and Babst as ELISCONs sureties. HELD: While a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon

the principal debtors failure/ refusal to pay. In the case at bar, there was no indication that the principal debtor will default in payment. BPIs conduct further showed a clear and unmistakable consent to DBPs substitution for ELISCON as debtor. The authority granted by BPI to its account officer to attend the creditors meeting was an authority to represent the bank such that when he failed to object to the substitution of debtors, he did so in behalf of and for the bank. Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose course of action should be directed against DBP as the new debtor. The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and Multi being accessory obligations are likewise extinguished. CASE NO. 73 SM: Quasi- Contracts; Art. 2141, NCC RODZSSEN SUPPLY CO. VS. FAR EAST GR# 109087, May 09, 2001 FACTS: RODZSSEN applied for and obtained an irrevocable 30- day domestic Letter of Credit from respondent Bank on January 15, 1979, in favor of Ekman & Co. Inc. in order to finance the purchase of 5 units of hydraulic loaders amounting to P190k. After several extensions, the validity was finally granted until October 16, 1979. Far East paid Ekman for the first 3 hydraulic loaders that w ere delivered. The bank however paid Ekman P76k on March 14, 1980 for the last 2 units which petitioner accepted under its trust receipt arrangement with Far East. The latter demanded payment from petitioner which refused the same since the bank paid Ekman when it was no longer bound to do so under the Letter of Credit which expired 5 months prior to the payment of the 2 units. HELD: The subject Letter of Credit had become invalid upon the lapse of period fixed therein. Thus, respondent should not have paid Ekman since it was not obliged to do so. However, Far Easts right to seek recovery from the petitioner is anchored not upon the inefficacious letter of Credit, but on Art. 2142, NCC. Indeed, equitable considerations should be used to allow recovery by respondent. Thus, it erred in paying Ekman but petitioner itself was not without fault in the transaction. It must be noted that the latter had voluntarily received and kept the loaders since October 1979. CASE NO. 77 SM: Contracts; Novation as a mode of extinguishing obligations. MOLINO vs. SECURITY DINDERS INTERNATIONAL CORPORATION GR# 136780, August 16, 2001 FACTS: Danilo Alto is a credit card owner of SDIC. He signed a Surety Undertaking with petitioner to ensure payment of his credit card debts with SDIC. Under the Undertaking, petitioner bound herself jointly ad severally with Alto to pay SDIC all obligations and charges in the use of the Diners Club Card and that any change or novation in the Agreement or any extension of the time granted by SDIC to pay such obligation shall not release her from the Surety Undertaking. Alto upgraded his card and became Diamond card holder. However, he incurred debts of P166, 408.31 in credit card advances which he failed to pay. SDIC sued Alto and petitioner as his surety to collect said amount. HELD: The upgrading was a novation of the original agreement covering the 1 st credit card issued to Alto, basically since it was committed with the intent of canceling and replacing the said card. But the novation did not serve to release petitioner from her surety obligations because in the Surety Undertaking she expressly waived discharged in case of change/ novation in the agreement governing the use of the 1st credit card. The extent of a suretys liability is determined by the language of the surety ship contract/ bond itself. Also, the Surety Undertaking expressly provides that petitioners liability is solidary. Although the contract of surety is in essence secondary only to a valid principal obligation, his liability to the creditor is direct, primary and absolute; he becomes liable for the debt and duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit there from. Petitioner had the option to withdraw her suretyship when Alto upgraded his card to one that permitted unlimited purchases, but instead she approved the upgrading. Hence, her liability subsists. CASE NO. 81 SM: obligations; damages GSIS vs. SPOUSES GONZALO DEANG GR# 135644, September 17, 2001

FACTS: GSIS and the Deangs had a loan agreement secured by a Real Estate Mortgage. The Deangs were able to pay said loan and asked that their duplicate copy of title be released by the GSIS. The latter insisted however that it was not obligated to return said duplicate copy immediately. As a result, the Deangs were not able to secure another loan, resulting to damages to their business. Consequently, they sued GSIS for damages. HELD: Although Article 2180, NCC in inapplicable in the case at bar, GSIS is still liable for damages. Under Articles 1170 and 2001, NCC, GSIS, due to its negligence and refusal to return the duplicate copy of title, should pay the Deangs for the damages they suffered. Since good faith is presumed and bad faith is a matter of fact which should be proved, GSIS was treated by the SC as a party who defaulted in its obligation to return the owners duplicate copy of title. As an obligor in good faith, GSIS is liable for all the natural and probable consequences of the breach of the obligation. The inability of the Deangs to secure another loan and the damages they suffered thereby has its roots in the failure of GSIS to return the owners duplicate copy of title. Hence, award of damage due to the breach of contract is granted. CASE NO. 84 SM: Obligation and Contracts RA 6552 (realty Installment Buyer Protection Act); Art. 1169, NCC LEAO vs. CA GR# 129018, November 15, 2001 FACTS: Petitioner and private respondent Fernando executed a contract to sell over a piece of property. The contract provided that the vendee, herein petitioner, may continue occupying said lot as long as she complies with all the terms and conditions agreed upon. The respondent- vendor meanwhile will only execute a deed of sale after the complete payment of the total purchase price of the property. The parties agreed further that petitioner will pay in monthly installments for a period of 10 years. However, after April 01, 1989, petitioner failed to pay said installments. Respondents thereafter filed an ejectment case against petitioner. HELD: Petitioners non payment of the installments prevented respondents obligation to convey the property from arising. In fact, it brought into effect the provision of the contract on cancellation. Any attempt to cancel the contact to sell would have to comply with the provisions of RA 6552. RA 6552 recognizes on conditional sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to cancel the contract upon non- payment of an installment by the buyer, which is simply an event that prevents the obligation of the vendor to convey title from acquiring binding force. The law also provides for the rights of the buyer in case of cancellation. Sec. 3(b) provides even that If the contract is cancelled, refund to the buyer of the case surrender value of the payments is a must. It also provides that the actual cancellation of the contract shall take place after 30 days from receipt by the buyer of the notice of cancellation/ demand for rescission of the contract. The decision in the ejectment case operated as the notice of cancellation required by Sec. 3 (b). As petitioner was not given the cash surrender value of the payments that she made, there was still no actual cancellation of the contract. Consequently, petitioner may still reinstate the contract by updating her account.

CASE NO. 85 SM: Obligations and Contracts; Double Sale; Art. 1544, NCC TAN vs. CA GR# 135038, November 16, 2001 FACTS: Hayden Luzon bought the subject property from Lorenzo Atega on sale by installment, starting form 1957 till 1987. Leoncio Paredes bought a portion of his property in 1977 and the remaining portion in 1990. However, no registration of their claims had been made in their favor, much less any title issued in their name. Petitioner meanwhile bought the lot through Ismael Elloso. Petitioner thereafter registered said sale with the Register of Deeds in November 1979, soon after title was issued in Ategas name, segregating his share in Lot No. 436-A. petitioner filed a notice of adverse claim

which was duly annotated on Ategas title. HELD: There is evidence showing not only that respondents knew of the sale of the lot by Elloso to petitioner but also that the latter was ahead in registering his acquisition of the lot with the Register of Deeds. Both the prior registration of the deed of sale in petitioners favor, as well as the adverse claim, effectively gave Luzon and Paredes notice of petitioners right on the subject land. Before 2nd buyers like Luzon and Paderes can obtain priority over 1st buyers like Elloso, petitioners predecessor- in interest, they must show that they have acted in good faith throughout, having been ignorant of the 1st buyers rights from the time of their acquisition until the title was transferred to them by registration. The requirement is such that the 2nd buyer must show continuing good faith and innocence or lack of knowledge of the 1st sale till his contract ripens into full ownership through prior registration as provided by law. Evidently, both respondents claim must yield in petitioners favor.

CASE NO. 86 SM: Obligation and Contracts; reciprocal Obligations; Consignation BACUS vs. CA GR# 127695, December 03, 2001 FACTS: Petitioners entered into a lease contract with option to buy with respondents. The private respondents communicated to petitioners their intention to buy the property prior to the expiration of their contract. However, petitioners refused to execute the deed of sale and demanded respondents to first deliver the money before they would execute the same. The respondents filed a case for specific performance in the RTC. Before the RTC rendered its decision, respondents issued a cashiers check in petitioners favor purportedly to bolster their claim that they were ready to pay the purchase price. Asserting that the respondents were in delay when they issued the cashiers check after the contract expired, petitioners filed this petition. HELD: Obligations under an option to buy are reciprocal obligations. In an option to buy, the payment of the purchase price by the creditor is contingent upon the execution and delivery of a deed of sale by the debtor. In the case at bar, when the respondents opted to buy the property, their obligation was to advise petitioners of their decision and their readiness to pay the price. They were not yet obliged to make actual payment. Only upon petitioners actual execution and delivery of the deed of sale were acquired to pay. Respondents did not incur in delay when they did not yet deliver payment nor make a consignation before the expiration of the contract. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Only from the moment one of the parties fulfills his obligation, does delay by the other begin. Accordingly, as there was no compliance yet with what was incumbent upon petitioners under the option to buy, respondents had not incurred in delay when the cashiers check was issued even after the contract expired.