II.
RECIPROCAL OBLIGATIONS
A. Definition
Reciprocal obligations
● Must have reciprocity between them
● Arise from the same cause
● Correlative obligations that are dependent on each
other
● Performed simultaneously
Vermen Realty Development Corp v CA (1993)
Rule: Reciprocal obligations are created or established at the
same time, out of the same cause, and which results in a
mutual relationship of creditor and debtor between parties. In
reciprocal obligations, the performance of one is conditioned
on the simultaneous fulfilment of the other obligation.
Integrated Pacakging Corp v CA (2000)
Rule: Reciprocal obligations are to be performed
simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfilment of the other.
Comments of Sir Casis on the above definitions of reciprocal
obligations in jurisprudence:
- In general, all contracts are, by nature, reciprocal
- The “simultaneous performance” definition is
problematic because in reality, the acts of each party
do not happen at the same time. Hence,
“simultaneous” here is only relative.
B. Implied Power to Rescind
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should
become impossible.
The court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of
third persons who have acquired the thing, in accordance
with Articles 1385 and 1388 and the Mortgage Law.
(1124)
- “Implied” means that it is a condition imposed by law,
even if there is no corresponding agreement between
parties.
1. Trigger
● In case one of the obligors fails to comply with the
obligation (note: in reciprocal obligations a party is both
a creditor and debtor with respect to the other)
● This is a tacit resolutory condition - one imposed by
law which extinguishes rights and obligations
● Injured party has power to rescind
2. Breach contemplated
● Breach must be substantial - to defeat the purpose of
the obligation
Ong v CA (1999)
Facts: Petitioner Ong and respondent spouses Robles had
a Contract to Sell. They agreed that upon Ong’s payment of
the purchase price of P2Million (including downpayment,
payment of the loan in BPI, and quarterly installements), the
spouses Robles will deliver the deed of sale and clean title
of 2 parcels of land. Nonetheless, upon execution of the
contract, Ong already took possession of the 2 parcels of
land. At some point, the checks that Ong paid to Robles
were dishonored for insufficiency of funds. He also failed to
pay the loan in BPI, Hence, the Robleses, through a letter,
demanded Ong to return the lands. The Trial Court and CA
ruled in favor of the Robleses. The SC upheld the rulings
but clarified that the rescission should not be based on Art.
1191.
Rule: “The breach contemplated in Art.1191 is the obligor’s
failure to comply with an obligation already extant, not a
failure of a condition to render binding that obligation.”
Ratio: The case differentiated between contract of sale and
contract to sell. In a contract of sale, the title is transferred
upon execution of the contract. In a contract to sell, the title
is transferred only upon full payment. “In a contract to sell,
the payment of the purchase price is a positive suspensive
condition, the failure of which is not a breach, casual or
serious, but a situation that prevents the obligation of the
vendor to convey title from acquiring an obligatory force.”
*word of caution on Ong v. CA: it was only in this case that the
SC distinguished between Contract to Sell and Contract of Sale.
In most other cases, a Contract to Sell, like other contracts, is
also a reciprocal obligation that implies the power to rescind.
Vda de Mistica v Naguiat (2003)
Facts: Mistica leased a part of his land to Naguiat. They
eventually entered a contract of sale of said portion. Naguiat
already made partial payments but failed to complete
payment, even after Mistica’s death. He offered to pay the
balance during Mistica’s funeral, but Mistica’s heirs did not
accept it. More than 10 years since the execution of the
contract,, Mistica’s heirs filed a complaint for rescission of
the contract on the ground that Naguiat failed to complete
payment. The lower court, CA and SC disallowed the
rescission.
Rule: “Rescission is allowed only where the breach is
substantial and fundamental to the fulfilment to the
obligation.”
Ratio: “The failure of respondent to pay the balance of the
purchase price within ten years from the execution of the
Deed did not amount to a substantial breach. In the
Kasulatan, it was stipulated that payment could be made
even after ten years from the execution of the contract,
 provided the vendee paid 12% interest. The stipulations of
Art 1191 Art 1380
the contract constitute the law between the parties; thus, the
courts have no alternative but to enforce them as agreed Rescission of reciprocal Rescission of contracts
upon and written.” obligations

Sps Cannu v Sps Galang (2005) Breach of faith by By reason of economic

Facts: The Galang spouses had a mortgage with the defendant violating prejudice/ interest
NHMFC to buy a house. They cannot sustain paying for the reciprocity
mortgage so they had an agreement with the Cannu
spouses in the sale of the property on the condition that the Principal action Subsidiary action
latter would also assume the remaining mortgage
obligations. The Cannus’ then took possession of the land.
However, the Cannus’ assumption of the mortgage was not
approved by NHMFC. Eventually, the Galang spouses were Pryce Corp v PAGCOR (2005)
able to pay the balance of their loan with the NHMFC. When Rule:
NHMFC was about to issue the title to the Galang spouses, Ratio:
the Cannus’ filed a complaint for specific performance
seeking to be declared owners of the property, promising to
reimburse the Galangs. The TC ruled in favor of the
Ong v CA (1999)
Galangs, ordering them to return the payments already
Rule:
made to them by the Cannus.
Ratio:
Rule: “Rescission will not be permitted for a slight breach of
the contract. Rescission may be had only for such breaches
that are substantial and fundamental as to defeat the object Sps Cannu v Sps Galang (2005)
of the parties in making the agreement. The question of Rule:
whether a breach of contract is substantial depends upon Ratio:
the attending circumstances and not merely on the
percentage of the amount not paid.”
Deiparine v CA (1993)
Ratio: Even though the remaining balance that the Cannus Facts:
haven’t paid constituted only 18% of the total purchase price, Rule:
it has been 18 months since their last payment before Galang Ratio:
paid the balance of the loan with the NHMFC. This length of
time without paying is tantamount to their intention to renege
in their obligation. Laperal v Solid Gomes (2005)
Facts:
Rule:
Angeles v Calasanz (1985) Ratio:
Facts:
Rule:
Ratio:
4. Judicial or extrajudicial
Nolasco v Cuerpo (2015)
Facts: ● There is no need for a judicial procedure to rescind an
Rule: obligation. The law does not prohibit a party to enter
Ratio: into an agreement wherein the terms stipulate the right
to rescind upon violation of the obligation,
3. Distinguished from other types of rescission ● Tolentino: If obligation is not yet performed but the
other party is ready and willing, an extra-judicial
Termination Rescission declaration is sufficient. However, if obligations have
already been performed and the other party opposes
Enforces the terms prior to Not predicated on rescission, a court action must be taken.
termination economic interest but on a ● However, this is not absolute, a party can still question
breach of faith before the court the validity of the rescission. (UP v De
Los Angeles)
Has to fulfill obligations Declares a contract void ab
prior to termination initio, restores parties to ● However, in Iringan v CA the court held that a judicial
original status (mutual or notarial act is necessary for a rescission to take
restitution) place.

NOTE: Im not sure what rule applies, although Iringan

Note: similar to void ab initio and annulled marriages
was the most recent case, it made no mention of
reversing UP, nor did it even mention it as a precedent
rule
 In this case, indemnity for damages may be demanded
UP v De Los Angeles (1970) from the person causing the loss. (1295)
Facts:
Rule:
Ratio: Acquisition of a 3rd party of a thing due bars and action for
rescission bars an action for rescission if the 3rd person:
Angeles v Calasanz (1985) 1. Is in lawful possession of the thing due
Rule: 2. Acted in good faith
Ratio:
A valid transfer to a 3rd person who acquires the property in
Iringan v CA (2001) good faith defeats the action for rescission. BUT, if the transfer
Facts: is gratuitous (not onerous), the creditor will have a better right
Rule:
over the 3rd person, regardless if the latter acted in good or bad
Ratio:
faith.

Sps Cannu v Sps Galang (2005)

In the event that rescission has been decreed (extrajudicially or
Facts:
Rule: judicially), if the 3rd person:
Ratio:
Acted in good faith 1. Not obliged to
Spouses Lam v Kodak Phils (2016) pay the fruits of
Rule: “Court intervention for the rescission of contracts only the thing
becomes necessary when the non performing party disputes received by him
the rescission. However, when both parties exercised their 2. Entitled to
right to resolve, extrajudicial rescission is enough.” reimbursements
Ratio: Both parties in this case sent letters to each other, both for any
informing the other of their mutual desire to rescind the necessary
contract. In this case, court intervention is not necessary and expenses
an extrajudicial rescission would suffice. incurred
3. Not liable for any
loss or
Sps Cannu v Sps Galang (2005) deterioration of
Facts: thing, except if he
Rule: acted
Ratio: fraudulently

Nissan Car Lease Phils. V Lica Management (2016) Acted in bad faith Not entitled to damages
Rule: “Even when there are no contractual grounds, from the debtor who
extrajudicial rescission shall be recognized as long as the alienated the thing to him
opposing party doesn’t question the same. However, even if
there were contractual grounds for extrajudicial rescission,
the opposing party may still dispute it with the courts as to In both cases above mentioned, the 3rd person must return the
whether or not the rescission was proper.” thing received by him.

Ratio: While NCLPI and LMI’s lease contract doesn’t contain

a provision expressly authorizing extrajudicial rescission, LMI
can nevertheless rescind the contract, without prior court
approval.
Art. 1388. Whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter
for damages suffered by them on account of the
alienation, whenever, due to any cause, it should be
impossible for him to return them.

If there are two or more alienations, the first acquirer shall

be liable first, and so on successively. (1298a)
5. Subject to rights of third party acquirers

● This article applies to anyone (referred to as the

Art. 1385. Rescission creates the obligation to return the
things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission
can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which
are the object of the contract are legally in the possession
of third persons who did not act in bad faith.
Acquirer or Transferee) who acquires a thing by
alienation from a debtor.
● Liability of transferees to indemnify for damages
will arise when:
a. The debtor alienated the thing in fraud of the
creditor.
b. The transferees acted in bad faith when they
acquired the thing.
 c. The thing is impossible to return to the
creditor for any cause.
● Bad Faith of transferee: When a transferee knows the
intention of the transferor to defraud the creditor, and
the transferee makes no effort to inquire or verify the
fraud, then the transferee acted in bad faith. What
matters is knowledge of the transferee when he
acquired the thing.
● If a transferee acted in bad faith, he is liable for
damages.
● In cases when there are successive transferees,
whenever someone along the succession line acts in
good faith, him and all transferees after him cannot be
liable for damages, regardless if the subsequent
transferees acted in bad faith.
● For example, in a case where the debtor alienated the
thing to the first transferee who acted in good faith, and
the thing was successively alienated to a second
transferee, who acted in bad faith, both the first and
second transferees are not liable. But if the second
transferee connived with the debtor to use the first
transferee as an innocent intermediator, then the
second transferee would still be liable.
● Gratuitous acquisition of the thing by a transferee who
acted in good faith shall still be liable for damages.
novation, it is clear that it was Ong who first violated the
contract by not paying the 4th billing.
IV. OBLIGATIONS WITH A PERIOD
A. Definition
Art. 1193. Obligations for whose fulfillment a day
certain has been fixed, shall be demandable only
when that day comes.
Obligations with a resolutory period take effect at
once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must
necessarily come, although it may not be known
when.
If the uncertainty consists in whether the day will
come or not, the obligation is conditional, and it
shall be regulated by the rules of the preceding
Section. (1125a)
Period or Term – a space of time which, exerting an influence
on obligations as a consequence of a juridical act, suspends
their demandability or determines their extinguishment.

Differences between a Period and a Condition

C. In case both parties are in breach
Differences Condition Period
Art. 1192. In case both parties have committed a breach regarding:
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, Fulfillment Uncertain Event that must
the same shall be deemed extinguished, and each shall event necessarily
bear his own damages. (n) come, regardless
of whether the
date is
Yao v Matela (2006) predetermined
Facts: Petitioners partially paid respondents for the
substandard performance of respondent’s obligation to Influence on Gives rise or No effect on the
build a townhouse. This may be an example of a
the extinguishes existence of the
contravention of the tenor of the obligation.
Rule: If both parties breached their contract, and it can Obligation an obligation obligation
not be conclusively determined who the first infractor is, Effect is on
Article 1192 will apply. demandability
Ratio: Since it cannot be conclusively determined who No retroactive
the first violator is, then justice and equity call for the effect
application of the said Article.
Time Refers to the Always refers to
future or a the future
Ong v Bagnalnal (2006)
past unknown
Facts: After the petitioner failed to pay the respondent
the 4th progress billing for the construction of a
boutique, the respondent never came back to fully fulfill If the Annuls the Merely
the obligation. Ong never paid the progress billing due Condition Obligation empowers the
to allegations that the respondent used materials not and Period is court to fix a
prescribed in their contract. up to the Will period
Rule: The damages for the second breach, which would of Debtor
have been payable by the second infractor, is
compensated instead by the mitigation of the first
infractor’s damages. Requisites of a Period:
Ratio: Considering the finding that there had been no · Future
· Certain
· Possible
Kinds of Terms:
· Suspensive (ex die) – one that must lapse before the
obligation becomes demandable
· Resolutory (in diem) – the period after which the
performance must terminate
Kinds according to source:
· Legal – fixed by law
· Voluntary – by stipulation
· Judicial - allowed by the courts
Other classifications:
· Express – specifically stated
· Tacit – refers to periods for obligations that can only be
done within a specific period
· Original
· Period of Grace
· Definite – Fixed known date or time
· Indefinite – A future event that must necessarily happen
Obligations with a period are demandable only when the day
fixed for their performance arrives. The right of action arises
only when the date fixed has arrived; hence the date of
prescription must also be counted from this date, not from the
date of the obligation.
A stipulation suspending a contract during the period of a
fortuitous even or force majeure does not suspend the period.
It only suspends the fulfillment of the obligation during the said
period.
Definition of a Period (According to Prof. Cases):
A span of time starting or ending on “a day certain”
at which point an obligation begins or ends.
Lirag Textile Mills, Inc v CA
Rule: A period has been defined as a space of time
which has an influence on obligation as a result of a
juridical act and either suspends their
demandableness or produces their
extinguishment.
Obligations with a period are those whose
consequences are subjected in one way or another
to the expiration of said period or term.
Solante v COA
Facts: The City of Mandaue and F. F. Cruz had a
Contract of Reclamation where F. F. Cruz would
reclaim part of the city in exchange for a share in the
land. It was stipulated that the project was
estimated to be completed in 6 years. They also
had a MOA where F. F. Cruz could put up structures
on a portion of the City’s land provided that upon
completion of the project, said structures will be
owned by the City.
However, the City had a road widening project which
includes the land where F.F. Cruz put up the said
structures. The head of the road widening project
asked F. F. Cruz to demolish the said structures in
exchange for a sum of money. However, when the
compensation for the demolition was being
processed, the ownership of the said structures was
questioned. It was contended that it was already
owned by the City because 6 years have already
passed; hence, there was no need to compensate F.
F. Cruz for the demolition.
The SC ruled that the structures were still owned by
F. F. Cruz. Thus, they still have to be compensated
for the demolition of the project.
Rule: “A plain reading of the Contract of Reclamation
reveals that the 6 year period provided for project
completion or, with like effect, termination of the
contract, was a mere estimate and cannot be
considered a period or a ‘day certain’ in the
context of Art.1193…as such, the lapse of 6 years
did not, by itself make the obligation to finish the
reclamation project demandable…”
Ratio: The MOA states that the structures built by F.
F. Cruz on the property of the city will belong to the
latter only upon completion of the project. Clearly,
the completion of the project is a suspensive
condition that has yet to be fulfilled. Until the
condition arises, ownership of the structures
properly pertains to F. F. Cruz.
*Even if the contract indicates a period, it
doesn’t necessarily mean that it is an obligation
with a period.
QUESTION: “the expected date of completion is 2
years” Is it the same with “estimate”?
B. When courts may fix a period
Art. 1197. If the obligation does not fix a period, but
from its nature and the circumstances it can be
inferred that a period was intended, the courts may
fix the duration thereof.
The courts shall also fix the duration of the period
when it depends upon the will of the debtor.
In every case, the courts shall determine such
period as may under the circumstances have been
probably contemplated by the parties. Once fixed
by the courts, the period cannot be changed by
them. (1128a)
DIGESTED: The courts may fix the duration of obligations when:
a. If the obligation does not fix a period
a. But its nature and circumstances necessitate that a
period is intended
b. The duration depends on the will of the debtor
IN ALL CASES: Courts shall determine such period as may
under the circumstances have been probably contemplated by
the parties
ONCE FIXED BY THE COURTS: periods cannot be changed

INSTANCES WHEN THE COURT MAY NOT FIX THE TERM:
1. When no term was specified because no term was ever
intended;
2. When the obligation is “payable on demand” (pure);
3. When specific periods are provided by law (implicit);
4. When what appears to be a term is really a condition;
5. When the period w/in which to ask the court to have the period
fixed has itself already prescribed.
DISCUSSION:
When a decision is rendered conformably with a compromise
agreement but no time is specified within which the parties
should comply with their commitments, either party may move
the court to have a period fixed for the compliance of their
respective commitments.
Art. 1197 does not apply to contract of services and to pure
obligations. Mere failure of parties to fix a period will not always
justify the court in fixing one, especially where the duration is to
be implicitly fixed, in default of express stipulation. The court,
however, to prevent unreasonable interpretations of the
immediate demandability of pure obligations, may fix a
reasonable time in which the debtor may pay.
The only action that can be maintained by the creditor under Art.
1197 is the action to ask the courts to fix the term within which
the
debtor must comply with his obligation. The fulfillment of the
obligation itself cannot be demanded until after the court has
fixed the period for compliance therewith, and such period has
arrived.
Art. 1197 applies to a situation in which the parties intended a
period. [Where] no period was intended by the parties… Their
mere failure to fix the duration of their agreement does not
necessarily justify or authorize the courts to do so. Furthermore,
in fixing the period. The term contemplated by the parties should
be ascertained. Once the period has been fixed by the court, it
becomes part of the contract, and therefore, cannot be
subsequently changed without the consent of both parties. In
this case, default of the debtor only occurs after the expiration
of the period fixed by the court, and the obligations may not be
demanded any time before the fixed period.
Araneta v Phil Sugar
Facts: JM Tuason & Co. sold a land to Phil Sugar
Est Devt Co. through Gregorio Araneta Inc. The
parties stipulated that the buyer will build a church
while the seller will build streets around the piece of
land. When the buyer has built the church however,
the seller could not finish constructing the streets
yet because there were squatters occupying the
area where the streets would be. The buyer filed a
complaint for specific compliance against the seller.
The defense was that the action was premature
because the obligation did not have a definite
period. Hence, the complaint should have been to
ask the court to fix a period first. The CFI fixed a
period of 2 years for the seller to finish constructing
the street. The SC set aside the CFI ruling and fix
the period of the obligation to the date that all the
squatters were finally evicted.
Rule: “Art.1197 involves a two-step process. The
Court must first determine that the obligation does
not fix a period or that the period is made to
depend upon the will of the debtor, but from the
nature and circumstances it can be inferred that a
period was intended. This preliminary point settled,
the Court must then proceed to the second step,
and decide what period was probably contemplated
by the parties. So that, ultimately, the court cannot
fix a period merely because in its opinion it is or
should be reasonable but must set the time that the
parties are shown to have intended. As the record
stands, the trial Court appears to have pulled the
two-year period set in its decision out of thin air,
since no circumstances are mentioned to support
it.”
Ratio: Since the land was occupied by squatters,
the performance of the obligations depend on when
the squatters would be evicted.
Macasaet v Macasaet
Facts:
Rule: Art 1197 only applies to stipulations in which
parties intended a period.
Ratio: Parents invited the petitioners to live on the
land because of their familial love. The agreement
subsisted as long as parents and children mutually
benefitted, therefore it is a resolutory condition.
Because of their conflict, the agreement was
terminated. There is no period intended in the
agreement, therefore courts may not fix such.
Art. 1180. When the debtor binds himself to pay
when his means permit him to do so, the obligation
shall be deemed to be one with a period, subject to
the provisions of Article 1197. (n)
Notes
C. Beneficiary of Period
Art. 1196. Whenever in an obligation a period is
designated, it is presumed to have been
established for the benefit of both the creditor and
the debtor, unless from the tenor of the same or
other circumstances it should appear that the
period has been established in favor of one or of
the other. (1127)
Gerneral Rule: 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
Exception: unless from the tenor of the [obligation] or other
circumstances it should appear that the period has been
established in favor of one or the other
Effects of Art.1196 on the beneficiary:
1. If the term is for the benefit of both parties (general
rule) - before the period stipulated:
a. Creditor cannot demand payment
b. Debtor cannot make an effective tender and
consignation of payment
2. If it is for the benefit of the debtor only
a. Creditor cannot demand payment anytime
(debtor may oppose)
b. Debtor may validly pay anytime before the
period expires
- A stipulation that the payment is to be made
“within” the stipulated period is obviously for
the benefit of the debtor. Hence, the debtor
may waive the period and waive in advance.
3. If it is for the benefit of the creditor only
a. Creditor can demand payment anytime
b. Debtor cannot compel creditor to accept
payment before period expires
- BUT, in a mortgage contract where it was
provided that the debtor cannot pay the
principal before the expiration of the period
therein stipulated, if the creditor accepts
partial payment, this is deemed a waiver by
the creditor of his right to refuse any
payment before the expiration of the term.
Example - Contracts of Loan:
1. If the interest is stipulated - period is generally for the
benefit of both parties; hence, debtor cannot pay in
advance against the will of the creditor, unless he
pays, the full interest for the period agreed upon
2. If the loan is gratuitous or without interest - the term is
ordinarily for the exclusive benefit of the debtor, who
may therefore pay in advance of the period.
- BUT even when there is no interest
stipulated, the period may still be for the
benefit of both parties, and the debtor cannot
pay in advance without consent of the
creditor, if the creditor receives other
benefits by reason of the term.
Other circumstances where the general rule does not apply:
- Creditor may want to keep his money invested safely
instead of having it in his hands*
- Creditor by fixing a period may protect himself from
sudden decline in the purchasing power of the
currency loaned*
*Note: in these circumstances, the benefit of the term/period is
for the creditor; hence, the creditor cannot be compelled to
receive payment in advance even if the debtor offers to pay the
full interest for the entire period stipulated
LL and CO v Huang Chao
Facts:
Rule: There is a presumption that the period is for
the benefit of both parties. Therefore, renewal of
the contract would only be upon mutual agreement
of joint will.
Ratio: The contract of lease had a definite period of
5 years. Extension of such contract must be made
before the term expires. Since the contract had the
term “option to renew,” which indicated that it was a
reciprocal obligation, it follows that the period
stipulated is presumed to be for the benefit of both
parties. Therefore, renewal of such would require
the agreement of both parties.
D. When debtor loses right to make use of a period
Art. 1198. The debtor shall lose every right to make
use of the period:
(1) When after the obligation has been contracted,
he becomes insolvent, unless he gives a guaranty
or security for the debt;
(2) When he does not furnish to the creditor the
guaranties or securities which he has promised;
(3) When by his own acts he has impaired said
guaranties or securities after their establishment,
and when through a fortuitous event they
disappear, unless he immediately gives new ones
equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to the
period;
(5) When the debtor attempts to abscond. (1129a)
E. In case of loss, deterioration or improvement of thing
Art. 1194. In case of loss, deterioration or
improvement of the thing before the arrival of the
day certain, the rules in Article 1189 shall be
observed. (n)
Art 1189:
1. Loss
a. Without fault of debtor: obligation shall be
extinguished
b. Through the fault of the debtor: obliged to
pay damages
2. Deteroriation
a. Without fault of debtor: impairment is to be
borne by creditor
b. Through fault of debtor: Creditor may choose
between (1) rescission or (2) fulfillment, with
indemnity for damages for either
3. Improvement
 a. By its nature of by time: inure to the benefit
of the creditor
b. At the expense of the debtor: debtor has
usufructuary rights
F. In case of premature payment/delivery
Art. 1195. Anything paid or delivered before the
arrival of the period, the obligor being unaware of
the period or believing that the obligation has
become due and demandable, may be recovered,
with the fruits and interests. (1126a)
HISTORY/ SOURCE OF THE PROVISION: The present article
changed the old rule (Art 1126, Old Civil Code) by allowing the
debtor to recover what has been delivered prematurely
together with the fruits.
Observations of Tolentino:
1) General Rule (Before): What has been delivered cannot
be recovered
● Assumes knowledge of the term or period
● Exception: Right to recover fruits and interests, if one
paid in ignorance of the term
2) According to Tolentino, the present article provides the
exception without providing for the general rule.
● Implied General Rule (Present): Recovery is barred if
the premature payment was made with knowledge of
the term.
3) Dictated by reason and equity: it is but just to allow the
debtor to recover such fruits and interests before the
maturity of the obligation.
4) For Tolentino, the right to recover what has been paid or
delivered in advance has no justification, given that there
is an existing obligation.
OBLIGATION COVERED: Obligations to give only
EFFECT OF ARRIVAL OF TERM:
1) Allows recovery of the thing or money itself, plus fruits of
interests (from the moment of payment to the date of
recovery)
2) If action to recover has not been brought before the date
of maturity, the right to recover the thing or money will
cease, but the recovery of fruits and interests is still
justified.
RIGHT TO INTERESTS AND FRUITS:
1) In all cases where the debtor paid under mistake as to
period
2) Comment of Tolentino: The article must be construed in
relation to provisions on solutio indebiti (payment of what
is not due)
● If creditor accepts in bad faith: Creditor shall pay legal
interest (if sum of money), or shall be liable for fruits
received or should have been received (if the thing
produces fruits)
● If creditor accepts in good faith: Creditor is liable for
fruits only in so far as they benefitted him
WHEN FRUITS CAN BE RECOVERED:
1) Reciprocal obligations where there has been
premature performance on both sides
2) When the obligation is a loan on which the debtor is
bound to pay interest
3) When period is exclusively for the benefit of the
creditor, because the debtor by paying in advance
loses nothing.
BURDEN OF PROOF: Debtor will have the burden of proving
ignorance of the period
PAYMENT WITH KNOWLEDGE OF TERM: Payment cannot
be recovered (debtor can be considered as having tacitly
waived the benefit of the term)
V. ALTERNATIVE AND FACULTATIVE OBLIGATIONS
A. Definition
1. Alternative
Art. 1199. A person alternatively bound by different
prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one
and part of the other undertaking. (1131)
Obligations can have several objects or prestations:
a. Conjuctive Obligations - D has to perform several
prestations, and such obligations is only extinguished
upon performance of all prestations. (Diego binds
himself to deliver a can of Coke and a pack of bread
to Jeorge in exchange for a case digest.)
b. Alternative Obligations - Several objects or
prestations are due, but the fulfillment of one is
enough. As a general rule, D has the right to choose.
(Nepo binds himself to write a love poem or to buy
flowers for his girlfriend, in consideration of the latter’s
love and affection.)
● Election (aka right to choose) may be granted to
creditor.
● Loss of one of the things due does not extinguish the
obligations, regardless if D acted in bad faith or note.
(TOLENTINO SAID THIS).
c. Facultative Obligations - Only one thing is due, but D
has the right to substitute prestation for another. (Jolo
binds himself to deliver a brand new Ferrari to Karlo;
in case of an economic recession, however, Jolo
reserves the right to deliver a tricyle instead.)
● Election may not be granted to creditor. Right to
substitute belongs exclusively to the debtor.
● Loss of the principal thing will extinguish the
obligation (assuming the D acted in good faith). Loss
of the substitute will not affect the obligation and
principal thing is still the object of the obligation.

Arco Pulp and Paper Co v Lim (2014)
Facts: Arco Pulp and Dan Lim had an agreement where
Lim would deliver scrap paper while Arco can either pay
Lim or deliver to him the finished product in equivalent
amount. Apparently, Arco had a MOA w/ Eric Sy that
the finished product will be delivered to his company. In
the same MOA, Lim’s company was identified as the
supplier of the raw materials. After Lim delivered the
scrap paper, Arco gave a PDC as partial payment.
However, when Lim deposited the PDC, it was
dishonored. After Arco failed to pay Lim despite a letter-
demand, Lim filed a complaint for recovery of sum of
money. The RTC dismissed the case, saying that the
MOA novated the contract, making Eric Sy the new
debtor of Lim. The CA reversed the RTC ruling, saying
that there was no novation and that the obligation was
an alternative one. The SC affirmed the CA ruling,
ordering Arco to pay Lim.
Rule: In an alternative obligation, there is more than one
object, and the fulfilment of one is sufficient, determined
by the choice of the debtor who generally has the right
of election.
Ratio: In the case, Arco had the alternative obligations
of ether paying Lim or delivering to him the finsihed
product in equivalent amount.
B. In case of loss
2. Facultative 1. Alternative
a. Where obligor has the right to choose
Art. 1206. When only one prestation has been agreed
upon, but the obligor may render another in substitution,
the obligation is called facultative.
The loss or deterioration of the thing intended as a
substitute, through the negligence of the obligor, does
not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.
(n)
Definition: when there is ONE PRESTATION but the obligor
may render another in SUBSTITUTION
Substitute:
- Not the prestation due Through fault of the debtor
- Only the PRINCIPAL obligation is enforceable
- If becomes impossible due to fault/negligence of
debtor, NO DAMAGES
- Exclusively dependent upon the will of the debtor
- Matter of absolute choice Through fortuitous event
- Nullity does not invalidate obligation
Principal:
- Impossibility to perform principal due to debtor, liable
to pay damages
- Nullity invalidates obligation
When the substitute becomes effective:
- Law: does not expressly state
- Tolentino: from the time the debtor communicates he
elects to perform substitute presentation
- Obligation then becomes a simple one, once
substitute has been elected, this is the only
one demandable
Alternative Facultative
Various pretestations Only the principla
pretestation is the
obligation (the
accessory is merely a
means of facilitation of
payment)
Nullity of one Nullity of principal
pretestation does not invalidates obligation
invalidate all others
Right to choose may be Right to choose
given to creditor EXCLUSIVE on the
debtor
Art. 1204. The creditor shall have a right to indemnity
for damages when, through the fault of the debtor, all
the things which are alternatively the object of the
obligation have been lost, or the compliance of the
obligation has become impossible.
The indemnity shall be fixed taking as a basis the value
of the last thing which disappeared, or that of the
service which last became impossible.
Damages other than the value of the last thing or
service may also be awarded. (1135a)
1. If only some of the prestations are rendered
impossible: he’s not liable because he can still comply
by performing the remaining
2. If all the prestations become impossible: he’s liable
1. If all the prestations become impossible: obligation is
extinguished and debtor is not liable
2. If one or more prestations due become impossible
through fortuitous event, leaving only one, which
becomes impossible by fault of the debtor: he’s liable,
the basis for the damages is the last prestation (which
was lost through his fault)
3. If one or more prestations become impossible
through fortuitous event and the remaining one also
becomes impossible because of fortuitous event:
debtor is liable but the basis of damages is the last
prestation
 ○ Debtor should not be relieved from liability
when his fault or negligence concurred with
the fortuitous event
b. Where obligee has right to choose
Art. 1205. When the choice has been expressly given
to the creditor, the obligation shall cease to be
alternative from the day when the selection has been
communicated to the debtor.
Until then the responsibility of the debtor shall be
governed by the following rules:
(1) If one of the things is lost through a fortuitous event,
he shall perform the obligation by delivering that which
the creditor should choose from among the remainder,
or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the
fault of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault of
the former, has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the
debtor, the choice by the creditor shall fall upon the
price of any one of them, also with indemnity for
damages.
The same rules shall be applied to obligations to do or
not to do in case one, some or all of the prestations
should become impossible. (1136a)
Creditor’s selection takes effect from the moment it is
communicated to the debtor.
● May be made tacitly or expressly
● If creditor fails to make a selection, debtor will not
incur in delay
Responsibilities of the debtor before creditor communicates his
choice with regards to loss of:
1. One of the things
a. Through fortuitous event: debtor shall
perform the obligation by delivering what the
creditor chooses from the remainder
b. Through fault of the debtor: creditor may
claim any of those subsisting or the price of
that which has disappeared, with damages
2. All the things
a. Through fault of the debtor: creditor can
choose among the prices of any of them,
with damages
2. Facultative
Art. 1206. When only one prestation has been agreed
upon, but the obligor may render another in substitution,
the obligation is called facultative.
The loss or deterioration of the thing intended as a
substitute, through the negligence of the obligor, does
not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.
DISTINCTION AS TO EFFECT OF LOSS:
Alternative Facultative
Only the impossibility of Impossibility of the
ALL the prestations due principal obligation is
without the fault of the sufficient to extinguish the
debtor extinguishes the obligation
obligation ● Even if the substitute
is still possible
LOSS OF SUBSTITUTE:
Before the substitution is effected: The substitute is not the
prestation due; only the principal prestation is due and
enforceable by the creditor at that time.
● Therefore, if substitute prestation becomes impossible
due to fault or negligence of debtor, obligation is not
affected; debtor cannot be held liable for damages.
● If the loss of substitute is due to malice or bad faith,
Article 1206 does not provide.
○ But Tolentino believes that the cause of
impossibility of the substitute prestation in this
case (WON there is bad faith) is immaterial. The
debtor still cannot be held liable for damages. This
is because:
■ The option to perform the substitute
prestation is dependent upon the will of the
debtor. Even if it were possible, the debtor
could not have been compelled to perform.
■ Substitution is a matter of absolute choice
on the debtor’s part.
C. Right to Choose
1. Who has the right
Art. 1200. The right of choice belongs to the debtor,
unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those
prestations which are impossible, unlawful or which
could not have been the object of the obligation. (1132)
General rule: The right of choice belongs to the debtor
Exception: unless it has been expressly granted to the
creditor.
- The grant must be expressed; it cannot be implied.
- The choice may also be entrusted by the parties to a
third person.
Art. 1206. When only one prestation has been agreed
upon, but the obligor may render another in substitution,
the obligation is called facultative.
 The loss or deterioration of the thing intended as a
substitute, through the negligence of the obligor, does
not render him liable. But once the substitution has
been made, the obligor is liable for the loss of the
substitute on account of his delay, negligence or fraud.
(n)
While in alternative obligations, the right to choose may be
given to the creditor, in facultative obligations, only the debtor
can choose the substitute prestation.
2. Limitations on choice
Art. 1199. A person alternatively bound by different
prestations shall completely perform one of them.
The creditor cannot be compelled to receive part of one
and part of the other undertaking. (1131)
Art. 1200. The right of choice belongs to the debtor,
unless it has been expressly granted to the creditor.
The debtor shall have no right to choose those
prestations which are impossible, unlawful or which
could not have been the object of the obligation. (1132)
Limits on Election:
a. The debtor cannot choose part of one prestation and
part of another.
- The right to choose is indivisible.
b. The debtor cannot choose unlawful or impossible
undertakings.
- The presence of such undertakings does not
annul the obligation if there are other lawful
and possible objects.
c. The debtor cannot choose prestations which could not
have been the object of the obligation.
- This refers to prestations which turn out to
be different from what the parties supposed
and which do not serve the purpose for
which the obligation was contracted, such as
when the things are future ones or when
some accident happens to the object which
gives it a new aspect.
3. When right to choose is lost
Art. 1202. The debtor shall lose the right of choice
when among the prestations whereby he is alternatively
bound, only one is practicable. (1134)
Whenever the debtor loses the right of choice due to the
practicability of only one prestation, then the obligation ceases
to be alternative, and it becomes a simple obligation.
This article only applies when the debtor has the right to
choose.
Art. 1203. If through the creditor's acts the debtor
cannot make a choice according to the terms of the
obligation, the latter may rescind the contract with
damages. (n)
If through the creditor’s fault, the debtor cannot make a choice,
the debtor may:
● Rescind the contract with damages.
● Elect the performance of the only prestation left.
● Elect the performance of one of the remaining
prestations.
The right to rescind in this sense is just one of the choices of
the debtor.
Art. 1205. When the choice has been expressly given
to the creditor, the obligation shall cease to be
alternative from the day when the selection has been
communicated to the debtor.
Until then the responsibility of the debtor shall be
governed by the following rules:
(1) If one of the things is lost through a fortuitous event,
he shall perform the obligation by delivering that which
the creditor should choose from among the remainder,
or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the
fault of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault of
the former, has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the
debtor, the choice by the creditor shall fall upon the
price of any one of them, also with indemnity for
damages.
The same rules shall be applied to obligations to do or
not to do in case one, some or all of the prestations
should become impossible. (1136a)
When the creditor has the right to choose, the selection takes
effect from the moment it is communicated to the debtor.
The selection by the creditor may be:
● Expressly
● Tacitly – There is tacit selection when the creditor:
a. Accepts a prestation offered by the debtor.
b. Brings an action for the enforcement of one
of the prestation.
If the creditor fails to make a choice, the debtor does not incur
delay, regardless of the presence of a period.
Once the obligation becomes simple due to the creditor’s
selection, then the debtor may become liable for delay.
The period is considered waived by the creditor when he fails
to make a selection before the period. Also, the obligation of
the debtor to perform does not arise due to the lack of a
prestation.
4. When choice effective The right to choose is not lost by the mere fact that the party
entitled to choose delays in making his selection. There are two
theories in foreign jurisprudence in this case:
Art. 1201. The choice shall produce no effect except
from the time it has been communicated. (1133)
French German

Arco Pulp and Paper Co v Lim (2014) Court should give the The right to choose
Rule: The right of election is extinguished when the party entitled to choose a passes automatically to
party who may exercise that option makes his or her period in which to make the other party when there
choice known. The choice of the debtor must be
the choice. is delay on the part of the
communicated to the debtor who must receive notice of
it. party entitled to choose
Ratio: In the case, when Arco issued the check to Lim in If the party does not
partial payment, they already made the choice to pay choose, the Court will
instead of delivering the finished product. Also, by either:
executing a MOA w/ Eric Sy, they already made the - Make the choice
choice not to deliver the finished product to Lim. - Give the right to
choose to the
Choice shall produce no effect except from the time it has been other party
communicated. [Art. 1201]
The German doctrine is acceptable under our law, provided, that
Form of notice
although the right to choose pertains to the debtor, he cannot
Notice of selection or choice may be in any form provided it is
paralyze the remedy of the creditor by refusing to make a
sufficient to make the other party know that the selection has
selection.
been made. It can be:
1. oral
If the debtor does not select at the time when performance
2. in writing
should be effected, the choice can be made for him by the
3. tacit
creditor by applying Art. 1167 in obligations to do (debtor
4. any other equivocal means
considered to have waived his right, subject to equity
considerations).
Selection made may be implied in the fact of performance of the
debtor. The exception is when the choice of the debtor is not the
object of the obligation; the creditor’s consent would bring about
Effect of notice of choice
a novation of the obligation. The law does not require the other
party to consent to choice made by the party entitled to choose.
The effect of the notice is to limit the obligation to the object or
prestation selected. The obligation is converted into a simple
Consent in obligations with various debtors and creditors
obligation to perform the prestation chosen. Once a selection
In a joint obligation w/ various debtors and creditors, the consent
has been communicated, it is irrevocable. Instances when
of all is necessary to make the selection effective. If the
obligation is converted into a simple obligation
obligation is solidary, and there is no stipulation to the contrary,
(1) The person with the right of choice has communicated his
the choice by one will be binding personally upon him but not as
choice [Arts. 1201, 1205 par 1]
to the others.
(2) Only one prestation is practicable [Art. 1202]

Selection by a party cannot be subjected by him to a condition

5. Necessity of obligee consent
or a term, unless the other party consents.

Example: Arco Pulp and Paper Co v Lim (2014)

Nepo and Joseph solidarily bind themselves to deliver
shawarma or kwek kwek to Gab, the selection of Nepo of
shawarma, when communicated, will bind him. Nepo cannot
later on choose to deliver kwek kwek instead. Joseph however,
is not bound by the same, who may choose to deliver kwek kwek
instead of shawarma.
Debtor cannot make a choice, or delays selection
If through the creditor's acts the debtor cannot make a choice
according to the terms of the obligation, the latter may rescind
the contract with damages. [Art 1203]
Rule: The creditor must receive notice of the debtor’s
choice so that the creditor can express his consent or to
impugn the election made by the debtor., and only after
said notice shall the election take legal effect when
consented by the creditor, or if impugned by the latter,
when declared proper by a competent court.
Ratio: Lim consented to Arco’s choice to make a
payment instead of the delivery of the finished product
when he accepted the check in partial payment and
deposited the same.
VI. JOINT, SOLIDARY, DIVISIBLE AND INDIVISIBLE
OBLIGATIONS
 ○ Usually liability for wrongful acts (crime, quasi
PH Credit Court v CA (2001)
A solidary obligation is one in which each of the delicts)
debtors is liable for the entire obligation and each of 4. Imposed by final judgment
the creditors is entitled to demand the satisfaction of 5. Nature of obligation requires such
the whole obligation from any or all of the debtors.
On disjunctive obligations
A joint obligation is one in which each debtor is liable ● Two or more creditors/debtors but they are named as
only for a proportionate part of the debt, and the
alternatives
creditor is entitled to demand only a proportionate
part of the credit. ● Intention of the parties should prevail in determining
whether rules on solidarity or on alternative obligations
Proportionate - equally divided among number of debtors will apply
or creditors (has a different meaning for agents and ● In case of doubt, solidarity should be favored
partnerships) ○ This is more conducive to fulfillment of the
obligation
A. When solidary
Relations of co-parties may be regulated in their internal
relations with each other
Art. 1207. The concurrence of two or more creditors or ● This includes determining a division of responsibility
of two or more debtors in one and the same obligation
Note: obligation may have dual character
does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, ● It may be joint on the side of creditors and solidary on
entire compliance with the prestation. There is a solidary the side of debtors (and vise versa)
liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires
solidarity. (1137a) Lafarge Cement v Continental Cement (2004)
Rule: Obligations are generally considered joint, except
when otherwise expressly stated or when the law or
nature of the obligation requires solidarity.
Exception: HOWEVER, obligations arising from tort are
Joint Solidary by nature always solidary.

Each of the debtors is
liable only for a entire obligation
proportionate part of the
debt
Each creditor is entitled
only to a proportionate
part of the credit
Mancomunada simple / pro
rata
Each debtor is liable for the Ratio: Obligations may be classified as either joint or
solidary. “Joint” or “jointly” or “conjoint” means mancum
or mancomunada or pro rata obligation. Solidary
obligations may be used interchangeable with “joint and
several” or “several”.
Each creditor is entitled to
demand the whole In a joint obligation, each obligor answers only for a part
obligation of the whole liability; in a solidary or joint and several
obligation, the relationship between the active and the
Mancomunada solidiaria / passive subjects is so close that each of them must
joint and several or in comply with or demand the fulfillment of the whole
solidum obligation.

Presumed* Has to be expressly stated, IN THE CASE,

or when law or nature of
the obligation requires
such
*When a final judgment of the Court does not specify that
obligation is solidary, the obligation is deemed joint. After it has
become final, Court has no power to amend it and convert it to
solidary.
When does solidarity exist?
1. Express stipulation in the contract
○ Need not to use the word “solidary”
○ Sufficient that contract states that each one of
the debtors can be compelled to pay totality
2. Charge or condition is imposed upon heirs or legatees
and testament expressly makes the charge or
condition in solidum
3. Law expressly provides
The fact that the liability sought against CCC is for
specific performance and tort while that sought against
individual respondents is based solely on tort does not
negate the solidary nature of their liability for tortuous
acts alleged in the counterclaims.
Ronquillo v CA (2004)
Ratio: By the express term of the compromise agreement
and the decision based upon it, the defendants obligated
themselves to pay their obligation “individually and
jointly”
● The term “individually” has the same meaning
as “collectively”, “separately”, “distinctively”,
“respectively” or “severally”
● An agreement to be individually liable
undoubtedly creates a several obligation and a
several obligation is one by which one binds
himself to perform the whole obligation.
Inciong v CA (1996) as that of
Ratio: When a guarantor may bind himself solidarily with 2. One creditor does payment
the principal debtor, the liability of a guarantor is different not represent the
from that of a solidary debtor. others in acts of 2. Total remission of
A guarantor who binds himself in solidium with the novation, the debt in favor
principal debtor under the provisions of the second compensation, of a debtor
paragraph does not become a solidary co-debtor to all and remission releases all the
intents and purposes. debtors
There is a difference between a solidary co-debtor and a 3. Credit and
fiador in solidium (surety) benefits and 3. When remission
● Surety, outside the liability he assumes to pay divided equally affects only the
the debtor before the property of the principal unless there is an share of one
debtor has been exhausted, retains all other agreement debtor, the other
rights, actions and benefits which pertains to among them to debtors are still
him by reason of fiansa divide it differently liable for the
● Solidary co debtor has no other rights than balance.
those bestowed upon him in Section 4 Chapter 4. Debtor may pay
3 Title I Book IV of the Civil Code (law on joint to any solidary 4. All debtors are
and several obligations) creditor but if a liable for the loss
judicial demand is of the thing due
made on him, he even if loss is
Art. 1210. The indivisibility of an obligation does not must pay only to caused by fault of
necessarily give rise to solidarity. Nor does solidarity of the plaintiff only one of them
itself imply indivisibility. (n) or by fortuitous
5. Each creditor event after one of
may renounce his the debtors
● Indivisibility and Solidarity - Various creditors or right even against incurred delay
various debtors, the obligation is joint even if the the will of the
performance is indivisible. debtor 5. Interruption of
prescription as to
● Indivisible Joint - creditor cannot demand more than
one debtor affects
his share and debtor is not liable for more than his all others
share; refers to the prestation which is not capable of
partial performance 6. Renunciation by
● Solidarity - each creditor may demand full prestations one debtor of
and each debtor has duty to comply with entire prescription does
prestation; refers to the legal tie defining extent of the not prejudice
other debtors
liability.
7. Interest due by
Art. 1211. Solidarity may exist although the creditors and reason of delay of
the debtors may not be bound in the same manner and one debtor is
by the same periods and conditions. (1140) borne by all of
them

Active Solidarity Passive Solidarity ● The legal bonds in solidarity may either be
○ Uniform – bound by same conditions and
Each creditor has authority Each debtor may be clauses
to claim and enforce the compelled to pay the whole ○ Varied – liable for same prestation but are not
rights of all obligation
subject to same terms and conditions
Results to an obligation of Results to a right on the ■ Before the fulfillment of condition or
the creditor of paying every part of debtor-payor to arrival of term which affects only a
other creditor what belongs recover from others their particular debtor, an action may be
to him shares brought for recovery minus the
portion subject to the condition or
Effects: Effects:
term
1. Each creditor 1. Debtor who is
represents the required to pay
others in the act may set up by Lafarge Cement v Continental Cement (2004)
of receiving way of Rule: Obligations are generally considered joint, except
payment and in compensation his when otherwise expressly stated or when the law or
all other acts that own claim against nature of the obligation requires solidarity.
secure the credit the creditor; in Exception: HOWEVER, obligations arising from tort are
or make it this case, the by nature always solidary.
advantageous effect is the same

Ratio: Obligations may be classified as either joint or
solidary. “Joint” or “jointly” or “conjoint” means mancum
or mancomunada or pro rata obligation. Solidary
obligations may be used interchangeable with “joint and
several” or “several”.
In a joint obligation, each obligor answers only for a part
of the whole liability; in a solidary or joint and several
obligation, the relationship between the active and the
passive subjects is so close that each of them must
comply with or demand the fulfillment of the whole
obligation.
IN THE CASE,
The fact that the liability sought against CCC is for
specific performance and tort while that sought against
individual respondents is based solely on tort does not
negate the solidary nature of their liability for tortuous
acts alleged in the counterclaims.
Operators v American (1987)
Rule: The disparity in their functions under the contracts
does not vary the fact that they were bound in connection
with ABC’s liabilities jointly and severally.
Ratio: There is no mistaking the fact that Operators and
ABO had assumed, per their agreements, ABC’s
liabilities to its creditors in solidium
Art 1211 CC: “solidarity may exist although the debtors
may not be bound in the same manner and by he same
periods and conditions.
B. When joint
Art. 1208. If from the law, or the nature or the wording of
the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be
presumed to be divided into as many shares as there are
creditors or debtors, the credits or debts being
considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits. (1138a)
What are the Effects of Joint Liability?
1. Demand by creditor upon one debtor produces effects
of default only with respect to the creditor who
demanded and the debtor on whom the demand was
made
2. Interruption of prescription by judicial demand of one
creditor upon debtor does not benefit other creditors
nor interrupt prescription as to other debtors
3. VIces of each obligations arising from the personal
defect of a debtor/creditor does not affect the
obligation/rights of the others
4. Insolvency of debtor does not increase responsibility of
co-debtors
PH Credit v CA (2001)
Facts:
Rule:
Ratio:
C. When Indivisible or Divisible
1. Obligations
Art. 1225. For the purposes of the preceding articles,
obligations to give definite things and those which are not
susceptible of partial performance shall be deemed to be
indivisible.
When the obligation has for its object the execution of a
certain number of days of work, the accomplishment of
work by metrical units, or analogous things which by their
nature are susceptible of partial performance, it shall be
divisible.
However, even though the object or service may be
physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be
determined by the character of the prestation in each
particular case. (1151a)
Spouses Lam v Kodak Phils. (2016)
Facts: Spouses Lam and Kodak Philippines entered into
an agreement for the sale of 3 Kodak Minilab Equipment
for P1.796 mill each. Kodak delivered only 1 unit.
Spouses issued postdated checks for 12 months worth
P35k each to pay for the one unit. The first 2 checks were
honored and the other 10 were not. Kodak cancelled the
sale and demanded the Spouses return the unit together
with accessories. The spouses ignored the demand but
rescinded the contract through writing. Kodak filed a
complaint for replevin and/or recovery of sum of money
and recovered the unit, accessories and a generator.
RTC held in a separate case that the spouses are entitled
to damages because Kodak did not honor the agreement
because it only delivered 1 unit out of the 3. Spouses are
also liable because they accepted the delivery. They
appealed partially and affirmed RTC but added that the
agreement showed their obligations were susceptible of
partial performance. Thus Spouses must pay remaining
balance.
Rule: The agreement contained an indivisible obligation.
Contract must be rescinded. Spouses must return the
equipment and Kodak must return the amount tendered.
Kodak must pay damages.
Ratio: The 3 units were considered as a “package deal”.
In fact, the object of the contract was referred to as
Minilab Equipment Package. The agreement showed
that the sale was supposed to be a single transaction.
Kodak was supposed to deliver all 3 units and Spouses
were supposed to pay in full. If the parties intended a
divisible obligation, separate agreements should have
been made.
Trigger effect: Obligations to give definite things and those not
susceptible to partial performance -> indivisible
Obligations that have for its object things susceptible to partial
performance -> divisible
General rule: Definition stated above
Exception: Even though an object may be physically divisible, it
may be considered indivisible if provided by law or intended by
the parties.
In obligations not to do, div or indiv to be determined by the
character of the prestation in each particular case.
Example:
Indivisible: A promises to deliver to B a Mercedes Benz. It is not
possible for A to deliver only ⅓ of the car.
C agrees to give D 50k in full. C cannot pay in installments.
Divisible: E promises to give F 10 candies, 1 for every time F
accomplishes another 10% of a school project.
Obligation not to do: Indivisible: G agrees to pay 500 to H every
time the former drinks alcohol. According to their agreement, he
is obligated not to drink even a sip. If he sips even just 10% of a
shot, his obligation to pay 500 would not be divided.
Notes
The test of divisibility of an obligation is whether or not it is
susceptible to partial performance. This susceptibility to partial
performance should be understood in the sense of whether or
not such separation into parts is contrary or not to end which the
obligation seeks to attain.
The following may be considered as factors which determine
whether an obligation is divisible or indivisible: will or intention
of parties (expressed or presumed), objective or purpose of the
stipulated prestation, nature of the thing and provisions of law
affecting the prestation.
2. Things
Art. 1223. The divisibility or indivisibility of the things that
are the object of obligations in which there is only one
debtor and only one creditor does not alter or modify the
provisions of Chapter 2 of this Title. (1149)
Trigger effect: Divisibility or indivisibility of the things that are the
object of the obligation with only one debtor and one creditor ->
does not alter or modify provisions of Chapter 2 of this Title
Example: Refer to examples in previous section since they only
have 1 creditor and 1 debtor
Notes
The division of a thing may be qualitative which is not entirely
homogeneous (e.g. inheritance). It may also be qualitative which
is homogeneous. Division may also be ideal when parts are not
separated in a material way but are assigned to several persons
(e.g. co-ownership).
D. Joint Indivisible Obligation
Art. 1209. If the division is impossible, the right of the
creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding against
all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share. (1139)
Definition: when there are several creditors OR debtors and the
pretestation is indivisible
General rule: The obligation is joint
Exception: unless solidarity has been stipulated
EFFECTS:
Debtor:
- Cannot be made to answer for his co debtor
- Fulfillment of the obligation requires the concurrence of
all the debtors (each for his part)
Creditors:
- No creditor can do acts prejudicial to others
Note: collective action expressly required for prejudicial acts
When there are several creditors, one debtor
Obligation is performed by delivery to ALL creditors jointly
If there is delivery to only one creditor
- Debtor is liable for damages (non performance to other
creditors)
- UNLESS such creditor is authorized to
receive item on behalf of all
If there is non performance: damages
- Obligation becomes divisible, each creditor may
demand his proportionate share
Note: each creditor is SEPARATE from that of the other
Plurality of debtors
Obligation can only be performed by acting together
If any debtor is not willing to perform
- The pretestation is converted to indemnification for
damages
- Once converted, creditor can sue separately
Art. 1224. A joint indivisible obligation gives rise to
indemnity for damages from the time anyone of the
debtors does not comply with his undertaking. The
debtors who may have been ready to fulfill their promises
shall not contribute to the indemnity beyond the
corresponding portion of the price of the thing or of the
value of the service in which the obligation consists.
Trigger effect: when a debtor is insolvent or fails to comply
General rule: others are not liable for his share, those ready to upon. B constituted C in default. This is allowed under
comply shall not contribute to the indemnity beyond the Article 1212.
price/value of the obligation ● But if, without A’s consent, B gives C an extension or
allows payment by installment, A may invoke the said
article.
Solidarity Indivisibility
ACTS WHICH ARE BENEFICIAL: Each solidary creditor may:
Refers to subject Refers to object 1) Interrupt prescription
2) Constitute the debtor in default
Plurality of subjects Plurality not required 3) Bring suit so that the obligation may produce interest

Solidarity remains despite When indivisibility is ACTS WHICH ARE PREJUDICIAL:

non performance converted for damages, 1) Remission
becomes divisible
● Reason: One solidary creditor alone cannot make
Death of debtor terminates Indivisibility affects heirs of it, but authorized under Article 1215
solidarity debtor 2) Novation
3) Compensation
4) Merger or Confusion
Indivisible solidary obligations

→ Other creditors will not be able to recover anymore from the

Every debtor is liable for losses and damages
debtor because of the provisions of article 1215.
- Those ready to perform can recover from guilty one
Creditor can demand entire indemnity from any debtor
Comment of Tolentino: This provision must be harmonized
with Article 1215, to achieve the meaning that the act of
A debtor who paid entire indemnity may recover from the others
extinguishment will be valid so as to extinguish the claim against
their respective shares in the proce
the debtors but not with respect to the co-creditors whose rights
- From the guilty debtor, entire amount of damages
still subsist and can be enforced against the creditor who
performed the act alone.
Example: Red, Blue, Yellow and Green are obliged to give Lion
a car. Blue fails to perform. Lion can demand from any of them
2. Not assign rights
indemnity, If Yellow pays full indemnity, then he may recover
from Red, Yellow and Green their respective shares in the price,
but he can recover from Blue the entire indemnity. Art. 1213. A solidary creditor cannot assign his rights
without the consent of the others.
E. Rights/Obligations of solidary creditors
Trigger effect: Assignment of rights of a solidary creditor to a
1. Do useful and non-prejudicial acts third person without the consent of co-creditors

Art. 1212. Each one of the solidary creditors may do Example: A and B sold a car to C. B allowed D to collect the
whatever may be useful to the others, but not anything payment for the said car, without C’s consent.. B paid D.
which may be prejudicial to the latter. Applying the provision, the payment made by B to D produces
no effect.

Quiombing v CA (1990) REASON FOR ARTICLE: The solidary creditor is an agent of

Facts: the others; hence he cannot assign that agency to a third person
Rule:
without the consent of the other creditors.
Ratio:
EFFECT OF UNAUTHORIZED TRANSFER:
Trigger effect: Doing acts which are beneficial or doing non- ● The assignment produces no effect, the co-creditors
prejudicial acts and the debtor or debtors are not bound and the
assignee cannot be regarded as a solidary creditor.
General rule: ○ Except if the assignment was made to a co-
● A solidary creditor can do whatever may be useful to creditor.
the others
● A solidary creditor cannot do anything which may be For Justice Reyes, the provision is unjustified, for placing
prejudicial to the others unnecessary restriction on the rights of a solidary creditor. The
representation by each of the solidary creditors is created by law
Example: and not by consent.
● A and B sold a car to C, where C is to pay in full on a
specific date. C was not able to pay on the day agreed
F. Who debtor must pay
Art. 1214. The debtor may pay any one of the solidary
creditors; but if any demand, judicial or extrajudicial, has
been made by one of them, payment should be made to
him. (1142a)
Trigger effect: Solidary creditor makes a demand
General rule: Debtor may pay to any one of the solidary creditors
Exception: If one of the solidary creditors make a demand,
whether judicial or extra judicial, payment should be made to
that creditor.
Example: Sasha owes Maria and Mia a debt of Php 500 pesos
which was taken from their Partnership Funds. Sasha may pay
either Maria or Mia, unless one of them demands, to which case
Sasha must pay to the person who demanded.
Kinds of Demand
1. Judicial Demand – in court
2. Extra-judicial Demand
Judicial Demand
The solidary creditors are tacitly mutual representatives of
each other for demanding payment. The equality of the rights
of the solidary creditors by virtue of this mutual representation,
however, lasts only until one of them goes ahead of the others
and sues the debtor.
Once he is sued by one of the solidary creditors, he cannot be
sued by the others.
Payment made to any of the other solidary creditors who did not
sue will be a payment made to a third person, in so far as the
shares of the others in the credit are concerned.
If the debtor makes a payment to the other solidary creditors, he
can still be required to pay to the plaintiff the full amount minus
the share of the creditor to whom payment was made.
If the suit is dismissed, the other solidary creditors may in turn
sue the debtor.
Extra-judicial Demand
Extra-judicial demand has the same effect as judicial demand.
It terminates the mutual representation among the solidary
creditors and one who made the demand is deemed the
representative of all the solidary creditors.
Tolentino says: Giving extra-judicial demand the same effect
as judicial demand is juridically erroneous and impractical. In
judicial demand, a suit of one creditors would suspend the rights
of other creditors from filing a suit only while the first action is
pending. In extra-judicial demand, if one creditor makes an
extra-judicial demand and takes no further step in enforcing
collection in court, all the other creditors are forever barred from
filing an action to demand payment judicially and the debt may
never be collected.
Demand by Several Creditors
If all or several creditors demand payment separately, the
debtor should pay to the one who first notified him.
If they demand at the same time or collectively, the debtor
preserves his right to choose and may pay anyone demanding
payment.
Partial Payment
There is no absolute rule on whether the debtor can pay the
obligation to the other creditors their respective part once
demand is made by another creditor because the law does not
distinguish between full or partial payments.
Tolentino says: The solidary creditor who makes the demand
for payment merely consolidates in himself the representation of
all others, but does not deprive the other creditors of the
character of principal as to their respective shares.
In Mixed Solidary
When one creditor makes a demand upon one of the debtors,
the latter cannot pay to any other creditor other than the one who
made the demand.
This does not apply to the other debtors whom no demand has
been made. As long as no creditor makes a demand, they can
still pay to any of the creditors.
G. When solidary creditor extinguished obligation
Art. 1215. Novation, compensation, confusion or
remission of the debt, made by any of the solidary
creditors or with any of the solidary debtors, shall
extinguish the obligation, without prejudice to the
provisions of Article 1219.
The creditor who may have executed any of these acts,
as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to
them. (1143)
Trigger effect: Novation, compensation, confusion, or remission
of debt was made by any solidary creditors
General rule: Obligation is extinguished when novation,
compensation, confusion or remission of the debt is made
Exception: Liability of creditors to his co-creditors and the liability
of a debtor to his co-debtor is not extinguished upon such act.
Example: Cardo and Onyok promised to deliver 1 kilo of German
franks (explicitly agreed upon was they should share half of the
worth) to Tito, VIc, and Joey. Vic told Cardo that he could deliver
1 kilo of Bibbo hotdog instead, which is 20 pesos cheaper than
the original obligation which is the German franks. Cardo, from
his own money, bought 1 kilo of Bibbo hotdog and gave it to Vic.
Vic is liable to Tito and Joey for their shares from the original
obligation of Cardo and Onyok, which is the worth of 1 kilo of
German franks. Cardo may also demand compensation from
Onyok for a portion of what he spent for the BIbbo hotdog.
Notes
When the sureties are bound in solidum, material alteration
made by the creditor and debtor, without their (surety)
knowledge, completely discharges the sureties from all the
liability on the contract of suretyship.
Dation in payment is the delivery of a specific object as a
simultaneously. The demand made against one of them
substitute for the performance of the obligation. If dation is in the shall not be an obstacle to those which may
form of promise, it is considered novation. subsequently be directed against the others, so long as
Partial merger or compensation, or when there is doubt as to the debt has not been fully collected.
what part of debt it should be applied, the rules on application of
payments should govern. Total compensation extinguishes the
This article only applies to solidary obligations.
obligation and relationship between groups of creditors and
groups of debtors ceases. Intra-group liabilities are left.
Solidary debtors may be sued either simultaneously in one suit
or successively in different actions. However, parties may still
Remission made by one creditor extinguishes the obligation in
stipulate that the solidary debtors can only be sued
the amount and to which extent it is made, and such creditor
simultaneously, or they may provide for the order in which the
becomes liable to his co-creditors. If several, but not all,
debtors may be sued individually.
creditors make the remission, same rule applies, and f one is
insolvent, his share shall be made up by the others who
In a case where 1 of creditors sued only 1 of the debtors and the
concurred in the remission. Partial remission in favor of a debtor
judgement rendered is favorable to the said creditor (meaning
does not remove his character as a solidary debtor. If remission
the debtor is ordered to pay), the judgement inures to the benefit
is made with respect to his full share in the obligation, he ceases
of the co-creditors.
to have a relation with the creditors, unless he has other
obligations.
However, if the judgement is unfavorable to the creditor, such
decision will have the effect of res judicata against the other co-
creditors and co-debtors. Meaning if there is a decision adverse
Party involved Effect to a solidary creditor, co-creditors may not file against the same
debtor.
Creditor→ Debtor 1. Obligation is
extinguished The ratio behind this is that it would be anomalous to hold that
2. No creditor may
one creditor would represent his fellow co-creditors in a
sue any debtor
(except in prosperous suit but will not if the action fails.
novation, where
there is only
PNB v Independent Planters (1983)
partial change of
Facts:
parties)
Rule:
Ratio:
Creditor→ Co-creditor 1. Act of any
extinguishes the
obligation does Trigger effect: Obligations is already due and demandable
not prejudice the General rule: Creditor may sue one, some or all solidary debtors
right of other
simultaneously.
creditors to
recover their Exception: Unless otherwise stipulated by the contracting
respective share parties
from the creditor Example: Joseph, Nepo and Jolo are jointly and severally liable
who effected to Jeorge for 500 pesos. Jeorge may file a case against one,
such change some or all of them for the recovery of the sum of money.

Debtor→ Co-debtor 1. Debtors may not

Notes
recover from his
co-debtor more
than their I. Payment by solidary debtor
respective shares
in what he has
given up/lost as Art. 1217. Payment made by one of the solidary debtors
the consideration extinguishes the obligation. If two or more solidary
for the debtors offer to pay, the creditor may choose which offer
extinguishment of to accept.
the obligation
He who made the payment may claim from his co-
debtors only the share which corresponds to each, with
the interest for the payment already made. If the payment
H. Who creditor may proceed against is made before the debt is due, no interest for the
intervening period may be demanded.

Art. 1216 - The creditor may proceed against any one of When one of the solidary debtors cannot, because of his
the solidary debtors or some or all of them insolvency, reimburse his share to the debtor paying the
 ● The obligation has been extinguished by other causes
obligation, such share shall be borne by all his co-
debtors, in proportion to the debt of each. (1145a) (like previous payment or total remission).

The debtor may also not recover his payment from the creditor,
Payment by one solidary debtor releases the other solidary except in cases governed by quasi-contracts.
debtors from liability to the creditor (if the whole amount due to
the creditor has been delivered). However, a new joint obligation
will arise between the debtors to reimburse the amount to the J. Remission by creditor
debtor who made the payment. In this joint obligation to
reimburse, whenever one of the debtors becomes insolvent, the
other debtors (including the one to be paid) will bear the Art. 1219. The remission made by the creditor of the
insolvent’s share proportionally. share which affects one of the solidary debtors does not
release the latter from his responsibility towards the co-
debtors, in case the debt had been totally paid by anyone
Bottomline: of them before the remission was effected. (1146a)
● Creditor-Debtor relation - principal solidary obligation.
● Debtor-Debtor relation - Joint obligation to reimburse
Trigger effect: When the creditor remits the obligation of one
the paying debtor.
solidary debtor.
Example: If A, B, C, and D have a solidary obligation to pay
General rule: The remission does not release the remitted
P1200 to E, and A makes full payment of the amount to E, then
solidary debtor from reimbursing his co-debtor who made
the solidary obligation to pay E is extinguished. However, a joint
payment before the remission.
obligation between B, C, and D to reimburse their share of the
payment to A arises, where they will each have to pay P300 to
However, the question of the liability of the solidary debtor
A (P1600 divided by 4 people). If D is insolvent, then A, B, and
whose obligation was remitted arises when one of his co-
C will bear his share proportionately, meaning that B and C will
debtors becomes insolvent. There are three views considered
have to pay an additional P100 each to A (P300 divided by 3
by Tolentino, but we’ll have to wait for sir to give his opinion.
remaining debtors), while A will have to bear the loss of P100
Here’s an example:
from his share of D’s insolvency.

A, B, C, D, and E are solidarily obligated to pay F the amount of

Recovery or reimbursement may only arise when a solidary
P15000, meaning that they each have a responsibility of P3000.
debtor pays in excess of his share.
F then remits A’s responsibility, meaning that the remaining four
debtors will still have to pay P3000 each to F, since A’s
Vigilla v Philippine College of Criminology (2013) remission does not delegate his share to the other debtors. After
Facts: this, B makes full payment, and then C becomes insolvent,
Rule: meaning that B, D, and E will have to bear his share.
Ratio:
The question is, will A, whose obligation has been remitted, also
bear the share of C’s insolvency? There are three views
Cruz v Spouses Basister (2012)
Facts: regarding this (we’ll pick after Sir’s discussion):
Rule:
Ratio: First View: The creditor shall bear the insolvency (widely used
interpretation).
● In the given example, since it was F (the creditor) who
Escaño v Ortigas Jr (2007) remitted A’s obligation, F will have to bear the burden
Facts: of C’s insolvency which A was supposed to carry.
Rule:
● F, D, and E shall pay B P750 (P3000 share per person
Ratio:
divided by four debtors) each, while B bears a P750
loss.
Second View: The remitted debtor shall bear the insolvency
Art. 1218. Payment by a solidary debtor shall not entitle (preferred view of Tolentino).
him to reimbursement from his co-debtors if such ● Recognizes the creditor-debtor (solidary obligation)
payment is made after the obligation has prescribed or and debtor-debtor relation (reimbursement/recovery
become illegal. (n) obligation) of the parties, since the creditor is a total
stranger when it comes to the debtor-debtor relation.
A solidary debtor will not be entitled to recovery or ● A, D, and E shall pay P750 to B, while B bears a P750
reimbursement from his co-debtors if: loss.
Third View: Only the remaining debtors shall bear the
● The obligation has prescribed. insolvency.
● The obligation has become illegal.
 ● Since there is no express provision in our code
regarding this issue, then only the remaining debtors
should split the burden of the insolvency.
● In the given example, D and E will payP1000 (P3000
share per person divided by three remaining debtors)
to B, while B bears a P1000 loss.
Note: Wait for Sir’s opinion regarding this if he discusses it.
Art. 1220. The remission of the whole obligation,
obtained by one of the solidary debtors, does not entitle
him to reimbursement from his co-debtors. (n)
K. In case of loss
Art. 1221. If the thing has been lost or if the prestation
has become impossible without the fault of the solidary
debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall
be responsible to the creditor, for the price and the
payment of damages and interest, without prejudice to
their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the
performance has become impossible after one of the
solidary debtors has incurred in delay through the judicial
or extrajudicial demand upon him by the creditor, the
provisions of the preceding paragraph shall apply.
(1147a)
Trigger effect: Thing has been lost or prestation has become
impossible
● Without the fault of the solidary debtors
● Through fault on the part of any one of them
● Through a fortuitous event after a solidary debtor has
incurred in delay
Non-performance without loss
● If the thing is not lost or prestation has not become
impossible but there is delay, fraud, fault or negligence
or some other breach, creditor may recover indemnity
for damages from any of the solidary debtors
● BUT the guilty debtor cannot be compelled to
shoulder the shares of the co-debtors in the original
obligation - only the damages are to be borne by the
guilty debtor
Example:
Loss or impossibility of performance
● Pam, Cella and Jeli are bound solidarily to deliver
flowers for Raya for Valentine’s. However, Pam
accidentally left the flowers inside her car over the
weekend and they died. Raya can demand from any of
them, even Jeli and Cella who were faultless, the price
and damages for the flowers. Jeli or Cella can then
recover the full amount of the price and indemnity from
Pam, but Pam can’t do the same with Jeli and Cella
because she is at fault.
No loss or impossibility of performance
● Pam, Cella and Jeli are bound solidarily to deliver
flowers for Raya for Valentine’s. However, Valentine’s
day passes and Raya demands for the delivery, but
Pam keeps forgetting to bring them, hence they incur
delay. If Raya demands from Jeli the price and
indemnity for damages, Jeli can’t demand from Pam to
pay her the full amount. She can only demand from
Cella and Pam their respective shares, and the
damages from Pam. Even the debtors who are free
from delay must bear a part of the price of the thing,
but the guilty debtor (Pam) shoulders the damages
exclusively.
L. Defense of solidary debtors

General Rule
Thing has been lost
Without the fault of the
solidary debtors
Effect
Obligation is extinguished
and no debtor is held liable
for damages
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. (1148a)

Through fault of any of the Obligation is converted into

solidary debtors
Through a fortuitous event
after a solidary debtor has
incurred in delay
an obligation to pay
indemnity (price, damages
and interest)
Even if only one debtor is
at fault or incurred delay,
the entire indemnity may
be recovered by the
creditor from the other
debtors who were free
from fault or delay
● The co-debtors
may recover from
the guilty debtor
Ouano Arraste Service Inc v Aleonar (1991)
Facts:
Rule:
Ratio:
Trigger: In actions filed by creditor,
General rule: A solidary debtor may avail himself of all defenses
which are derived from:
1. The nature of the obligation and
2. Those which are personal to him or pertain to his own
share
Exception: 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.

Examples per kind of defense:
1. Defenses inherent in obligation (these constitute a total
defense):
a. Illicit cause or object
b. Defect in capacity or consent of all debtors
such minority, mistake, fraud or violence
c. Unenforceability because of lack of proper
proof under the Statute of Frauds
d. Non-performance of suspensive condition or
non-arrival of period affecting the entire
obligation
e. Extinguishment of the obligation by payment
or remission
f. Res judicata, prescription, etc.
2. Defenses Personal to Defendant (may be total or
partial defense):
a. Total defense: Sufficient causes to annul
consent such as minority, insanity, fraud,
violence or intimidation → serve as complete
exemption of defendant from liability to
creditor
b. Partial defense: Special terms and conditions
affecting his part of the obligation → exempts
defendant only in relation to his part but he
can still be sued for the portions not subject to
terms or conditions, because he is solidarily
liable
3. Defenses Personal to Other Debtors (partial defense
only) → exempts debtor-defendant from payment of
portions of the obligation corresponding to the other
debtors who have such personal defenses:
a. Defenses affecting capacity or consent of
other debtors such as minority and insanity
b. Special terms and conditions affecting shares
of other debtors
VII. OBLIGATIONS WITH A PENAL CLAUSE
A. Purpose of Penalty
Florentino v Supervalue (2007)
A penal clause is an accessory undertaking to
assume greater liability in case of breach. It is
attached to an obligation in order to insure
performance and has a double function:
1. To provide for liquidated damages
2. To strengthen the coercive force of the
obligation by the threat of greater
responsibility in the event of breach
Art 1226. In obligations with a penal clause, the
penalty shall substitute the indemnity for damages
and the payment of interests in case of
noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions of
this code. (1152a)
Trigger Effect:
1. In obligations with a penal clause,
In case of noncompliance,
If there is no stipulation to the contrary,
→ The penalty shall substitute:
>The indemnity for damages, and
>The payment of interests
2. Damages shall be paid if the obligor
→ Refuses to pay the penalty, or is
→ Guilty of fraud in the fulfillment of the
obligation.
3. The penalty may be enforced
→ Only when it is demandable
→ In accordance with Civil Code provisions.
General Rule:
1. In case of noncompliance to the obligation, the
penalty shall substitute the indemnity for damages
and payment of interests.
2. The penalty may be enforced only when it is
demandable in accordance with Civil Code provisions.
Exceptions:
1. When the contrary is stipulated.
2. When the debtor refuses to pay the penalty imposed
in the obligation.
3. When the obligor is guilty of fraud in the fulfillment of
the obligation.
Example:
A contracted B to build his house, where in case of
breach, a penalty of P100,000 will be imposed. B did not build
the house. Therefore, B must pay the penalty of P100,000.
But if B refused to pay the penalty, then B will be
liable for damages.
Notes:
Penal clause – an accessory undertaking to assume greater
liability in case of breach.
● Double function:
1. To provide for liquidated damages
2. To strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of
breach.
● May be:
1. Subsidiary or alternative – upon non-performance
only the penalty can be asked.
2. Joint or cumulative – both the principal undertaking
and the penalty may be damaged.
● Its purpose may be:
1. Reparation – it substitutes the damages suffered by
the creditor
 2. Punishment – the right to damages, besides the
penalty. leaves the other
penalty, subsists. subsisting.

Purpose of Penal Clause Damages The debtor cannot choose The debtor can choose
to pay the penalty to which prestation to fulfill.
relieve himself of the
Punishment Not resolved, and remains
principal obligation, unless
subsisting
that right is expressly
granted to him.
Reparation Generally resolved.
Represents the estimate
X binds himself to deliver X binds himself either to
of the damages that a
a horse to Y, and in case deliver a horse or to pay
party might suffer from
he fails he will pay P500. P500 to Y.
non-performance of the
obligation, thereby
avoiding the difficulties of
proving such damages.
Obligation with a Penal Facultative Obligation
Clause
There are 3 cases when damages and interest may be
recovered in addition to the penalty: The payment of the The power of the debtor to
1. When there is an express provision to that effect penalty in lieu of the make the substitution is
2. When the debtor refuses to pay the penalty principal obligation can be absolute.
3. When the debtor is guilty of fraud in the non-fulfillment of made only by express
the obligation stipulation.

The creditor can demand The creditor can never

The principal obligation may be joint, and yet the penalty may both prestations. demand both prestations.
either be joint or solidary, depending upon the agreement of
the parties. If X promises to deliver a
horse to Y, or at his option
If the principal obligation, however, is solidary, since the substitute P500 for the
penalty is a substitute for losses and damages suffered by the horse.
creditor, the penalty must be enforced in its entirety.
Guaranty – a contract by virtue of which a third person, called
the guarantor, binds himself to fulfill the obligation of the
Obligation with a Conditional Obligation
Penal Clause principal debtor in case the latter should fail to do so.

There is already an There is no obligation

Similarities Differences
existing obligation (the before the suspensive
principal) from the very condition happens; it is the
In penal clause In guaranty
beginning. fulfillment of the condition
that gives rise to the
obligation. They are both The obligation to The object of the
intended to pay the penalty obligations of
insure is different from the principal
It is the accessory The principal obligation
performance of the principal debtor and the
obligation (penalty) which itself is dependent upon
the principal obligation. guarantor is the
is dependent upon non- an uncertain event.
obligation. same.
performance of the
principal obligation.
They are both The principal The principal
accessory and obligation and debtor cannot be
subsidiary the penalty can guarantor of the
obligations. be assumed by same obligation.
Obligation with a Penal Alternative Obligation the same
Clause person.

There is only 1 prestation 2 or more obligations are The penalty is The guaranty
and it is only when this is due, but fulfillment of one extinguished by subsists even
not performed that the of them is sufficient. the nullity of the when the
penal clause is principal principal
enforceable. obligation, obligation is
except when the voidable or
The impossibility of the The impossibility of one of penal clause is unenforceable or
principal obligation the obligations, without the assumed by a is a natural one.
extinguishes also the fault of the debtor, still third person.
 If the penal
clause, however,
is assumed by a
third person, the
same principle
will apply as in
the case of a
guaranty.
Cabarroguis v Vicente (1960)*
*this case is an example of the 2nd exception to the
general rule that the penalty substitutes the
indemnity for damages and payment of interests.
It’s an example of When the debtor refuses to pay
the penalty imposed in the obligation
Facts
Petitioner Cabarroguis got injured in a vehicular
accident. The driver of the jeepney she was riding
promised to pay her P2,500 as damages. She
received P1,500. In a compromise agreement, the
driver promised to pay the remaining P1,000 and if
he fails to do so within 60 days, he would pay an
additional P200. The driver failed to complete
payment. Hence, Cabarroguis filed suit.
Issue: WoN Cabarroguis is entitled to the balance,
penalty, and interest → YES, she is entitled to
P1,200 plus interest on the penalty
Rule: In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the
payment of interests.
Exceptions:
1. When the contrary is stipulated
2. When the debtor refuses to pay the penalty
imposed in the obligation
3. When the obligation is guilty of fraud in the
fulfillment of the obligation
Ratio: it is evident that no interest can be awarded
on the principal obligation of defendant, the penalty
of P200 agreed upon having taken place of the
payment of such interest and the indemnity for
damages. No stipulation to the contrary was made
and while defendant was sued for breach of the
Right of Debtor
compromise agreement, the breach was not
occasioned by fraud.
General Rule: “The debtor cannot exempt himself from the
performance of the obligation by paying the penalty…”
It has been held that in obligations for the payment
of a sum of money when a penalty is stipulated for
default, both the principal obligation and the penalty
can be demanded by the creditor.
Country Bankers v CA (1991)*
Exception: “…save in the case where this right has been
*this case is an example to the 1st exception
expressly reserved for him.”
Facts
Issue
Rule
Ratio: In the case at bar, inasmuch as the forfeiture
clause provides that the deposit shall be deemed
forfeited, without prejudice to another obligation still
owing by the lessee to the lessor, the penalty
cannot substitute for the P100,000 suuposed
damage resulting from the issuance of the
injunction against the P290,000 remaining cash
deposit.
Pamintuan v CA (1979)*
*this case is an example of the 3rd exception
Facts
Issue
Rule: Justice would be adequately done in this
case by allowing Yu Ping Kun Co., Inc. to recover
only the actual damages proven and not to award
to it the stipulated liquidated damages of P10,000
for any breach of the contract. The proven
damages supersede the stipulated liquidated
damages.
In case of fraud the difference between the proven
damages and the stipulated penalty may be
recovered.
Ratio
Art. 1227. The debtor cannot exempt himself from
the performance of the obligation by paying the
penalty, save in the case where this right has been
expressly reserved for him. Neither can the creditor
demand the fulfillment of the obligation and the
satisfaction of the penalty at the same time, unless
this right has been clearly granted him. However, if
after the creditor has decided to require the
fulfillment of the obligation, the performance thereof
should become impossible without his fault, the
penalty may be enforced. (1153a)
- Ratio for the general rule: the object of the penalty
is to secure the compliance of the obligation. Hence, the
obligor cannot use the penalty as an excuse not to fulfil
the principal obligation.
 - Note: the right of debtor to exempt himself from
Art 1229. The judge shall equitably reduce the
performance of obligation by paying the penalty needs to
penalty when the principal obligation has been
be expressly granted.
partly or irregularly complied with by the debtor.
Even when there has been no performance. The
Right of Creditor
penalty may also be reduced by the courts if it is
iniquitous or unconscionable
General Rule: “…Neither can the creditor demand the
fulfilment of the obligation and the satisfaction of the penalty at
the same time…” Trigger Effect: partial or irregular compliance, inquitious or
unconscionable penalty
- Given the choice of enforcing the principal
obligation or availing of the forfeiture of the penalty, the The penalty is reduced when:
creditor can only choose one.
Compliance:
Exception: “…unless this right has been clearly granted him.” 1. Partial
2. Irregular
- In obligations for the payment for a sum of money,
when a penalty is stipulated for default, both the principal Non Compliance:
obligation and the penalty can be demanded by the 3. Iniquitous (synonymous to sinful)*
creditor. 4. Unconscionable (shocking to the conscience)*
*Sir Casis made a comment that these are too
- Note: the right of debtor to exempt himself from subjective; another problem arises - if it violates public policy
performance of obligation by paying the penalty needs to and good morals then the stipulation should have been invalid
be expressly granted. But the right of the creditor to
demand both the principal obligation and the penalty at
Performance
the same time only needs to be clearly granted; it may be
implied, inferred or presumed, based on evidence.
Partial Irregular
Exception to the exception: “…However, if after the creditor
has decided to require the fulfilment of the obligation, the Refers to extent, quality Refers to form
and fulfillment
performance thereof should become impossible without his
fault, the penalty may be enforced.”

- Note: Tolentino thinks this sentence is misleading. Application of provision

The clause “the performance thereof should become
impossible without his fault” seems to refer to the creditor;
however, in cases of impossibility due to fortuitous When judge DOES NOT When penalty is reduced
events, the principal clause as well as the penal clause exercise authority in this
article
would be extinguished. The law obviously means that
performance becomes impossible through the fault of the
When parties had in mind When the indemnity fixed
debtor; it is in this case that the penalty may be enforced. a reasonable and fair is without regard to
compensation probable damage
Art 1228. Proof of actual damages suffered by the
Where purpose of penalty When the indemnity is a
creditor is not necessary in order that the penalty is to provide for mere penalty
may be demanded. (n) anticipated damages

Trigger Effect: The penalty in an obligation with a penal clause

is demanded. General rule:
- The amount of penalty is not determined by
General Rule: There is no need for proof of actual damages. the injury suffered but by what has been
agreed upon
*Sir Casis made a comment that parties to a contract prefer to Exception:
have a penal clause because that way they do not have to - When penalty is iniquitous - When through a
prove actual damages. supervening change in circumstances the
amount is grossly disproportionate to
B. When courts may reduce damages suffered

What courts consider when reducing the penalty:

 - Interest of the creditor (patrimonial injury, sentimental
value, etc.)
- Benefits debtor derived from it
- Proportion of the actual damage caused by non
performance
- Gravity of the violation of the performance
General rule:
- parties are free to stipulate the penalty
Limitations:
- when it is against good customs (leads to economic
ruin or undue exploitation)
- When there is a change in circumstance which makes
it grossly disproportionate to the damage done
If parties agree that the penalty is for debtor to oay attorney’s
fees, court has jurisdiction to detemrine reasonableness
- Fees not need be exempt from law, morals or public
order, but it is unreasonable
When penalties are entirely voided
- Contrary to: laws, good customs, morals
Makati Development v Empire (1967)*
*this case is an example of partial/irregular
performance
Facts
Issue
Rule: if the purpose of the penalty is to compel the
performance of the obligation and punish non-
compliance, then the court, may reduce the
penalty. If the purpose of the penalty is to substitute
for compensatory damages, the amount of the
penalty should be enforced.
Ratio: The penal clause in this case was inserted
not to indemnify the Makati Development
Corporation for any damage it might suffer as a
result of the breach of the contract but rather to
compel performance of the so-called “special
condition” and thus encourage home building
among lot owners in the Urdaneta Village.
Considering that a house had been built shortly
after the period stipulated, the substantial, if tardy,
performance of the obligation, having in view the
purpose of the penal clause, fully justified the trial
court iin reducing the penalty.
Filinvest Land Inc v CA (2005)*
*this case is an example of partial/irregular
performance. This changed the rule in Makati
Development on when the court may reduce the
penalty
Facts
Issue
Rule: A distinction between a penalty clause
imposed essentially as penalty in case of breach
and a penalty clause imposed as indemnity for
damages should be made in cases where there
has been neither partial nor irregular compliance
with the terms of the contract. In cases where there
has been partial or irregular compliance, as in this
case, there will be no substantial difference
between penalty and liquidated damages insofar as
legal results are concerned. (Because the Code
does not distinguish)
In Ligutan v. CA, the question whether a penalty is
reasonable or iniquitous can depend on such
factors as the type, extent and purpose of the
penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening
realities, the standing and relationship of the
parties, and the like, the application of which is
addressed to the sound discretion of the court.
Ratio: in this case, there has been substantial
compliance in good faith on the part of Pecorp
which renders unconscionable the application of
the full force of the penalty
Florentino v Supervalue (2007)*
*this case is an example of
iniquitous/unconscionable penalty
Facts
Issue
Rule
Ratio: the forfeiture of the entire amount of the
security deposits was excessive and
unconscionable considering that the gravity of the
breaches committed by the petitioner is not of such
degree that the respondent was unduly prejudiced
thereby. It is but equitable therefore to reduce the
penalty to 50% of the total amount of the security
deposits.
Pryce Corp v PAGCOR (2005)*
**this case is an example of
iniquitous/unconscionable penalty and the
importance of due diligence
Facts
Issue
Rule
Ratio: PAGCOR conducted a series of negotiations
and consultations before entering into the Contract.
It took pains to contest the ordinances before the
courts, which consequently declared them
unconstitutional. PAGCOR was also advised by the
 - Synonymous to bad faith; dishonest purpose
OP to stop the games in CDO, prompting the
or some moral obliquity and conscious doing
former to cease operations prior to Sept. 1993.
of wrong
- Ratio: evasion of a legitimate obligation for
C. Effect of Nullity benefits admittedly received constitutes
unjust enrichment
Art. 1230. The nullity of the penal clause does not
2. Negligence (or Fault) - culpa contractual (vis-a-vis
carry with it that of the principal obligation.
The nullity of the principal obligation carries with it culpa aquiliana or extra-contractual in Art.2176)
that of the penal clause. (1155)
Culpa contractual Culpa aquiliana or extra-
Trigger Effect: The penal clause is null and void because it is (Art.1170,1173) contractual (Art.2176)
contrary to law, good customs, public morals etc.
General Rule: The principal obligation still stands and is not Fault or negligence of the Fault or negligence which
debtor as an incident in the constitutes an independent
void by reason of the penalty’s nullity.
fulfilment of an existing source of obligation
Exception: If the principal obligation is void because it is obligation between parties not
contrary to law, good customs, public morals etc., the penalty previously bound
is void as well.

- Whether contractual or non-contractual, the

Example:
negligence of the defendant should be the proximate
A promises to deliver a car to B. If A fails to deliver the car, he
cause of the damage to the plaintiff if liability is to attach
shall be obligated to kill a person of B’s choosing. (Void penal
clause, but principal prestation still exists).
3. Delay
4. “In any manner contravene the tenor” - any illicit act
A entered into a kill contract with B, where the former would kill
which impairs the strict and faithful fulfilment of the
B’s father. If A fails in his mission, A would pay B 1M pesos.
obligation or every kind of defective performance
(Void principal prestation, despite valid penalty, entire
- Examples:
obligation is void).
- When Meralco disconnects your
electricity connection without prior
I. KINDS OF NON-PERFORMANCE
notice, Meralco is liable for damages
- When you send a package via LBC
Art 1170. Those who in the performance of their obligations and paid the necessary fees but the
are guilty of fraud, negligence, or delay, and those who in supposed recipient did not get the
any manner contravene the tenor thereof, are liable for package, LBC is liable for damages
damages. (1101) - A contractor who did not follow the
plans and specifications in the
construction of a building is liable for
Trigger: fraud, negligence, or delay in the performance of the
damages
obligation, or contravention of the tenor
- Note: it is not enough that there is non-
Effect: Guilty debtor would be liable for damages
performance; the non-performance must be
imputable to the debtor for him to be liable for
KINDS OF NON-PERFORMANCE
damages. The contravention of the obligation
must either be malicious or negligent.
1. Fraud - deliberate and intentional evasion of the
normal fulfilment of obligations.
EXCUSES FOR NON-PERFORMANCE
- Distinguished from negligence by the
1. In the following cases, the debtor cannot be held liable
presence of deliberate intent, which is lacking
for damages*:
in the latter
a. Fortuitous events
- Any voluntary and willful act or omission
b. Force majeure
which prevents the normal realization of the
*unless there is an express agreement to the contrary, or the law
prestation (in an obligation that is already
otherwise provides in particular cases (ie. Art.1174 onwards)
existing), knowing and intending the effects
2. The following do not constitute a defense to an action
which naturally and necessarily arise from
for specific performance*:
such act
a. pecuniary inability to fulfill an obligation
- Implies malice or dishonesty; cannot cover
b. increase in the cost of performance
cases of mistake and errors of judgment
c. Unexpectedly burdensome and oppressive
made in good faith
war conditions
d. Labor strike
 e. Inconvenience or unexpected impediments
*these are insufficient excuses. Though the fulfilment of the
obligation may become impossible of exact performance, it will
still be given effect if it can by any reasonable construction be
treated as still capable of being performed in substance.
RECOVERABLE DAMAGES
- Include any and all damages that a human being may
suffer in any and all manifestations of his life (physical
or material, moral or psychological, mental or spiritual,
financial, economic, social, political and religious)
- Breach of contractual obligation entitles the other party
to damages even if no penalty for such breach is
provided in the contract.
- Examples:
- In damages to an established business,
satisfactory evidence of the amount of the
business transacted before and after the
injury complained of must be submitted
before damages may be awarded
- In a replevin suit, damages are ordinarily to
compensate the plaintiff for the loss he has
sustained by being wrongfully deprived of his
property
- In obligations consisting in the payment of
money, the indemnity for damages, there
being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and
in the absence of stipulation, the legal
interest, which is 6% per annum.
- The responsibility for damages arising from non-
fulfillment of a contractual obligation cannot be divided
nor can it be extended to persons who have nothing to
do with the obligation
A. Delay
Art. 1169. Those obliged to deliver or to do something
incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare;
or

 (2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered
was a controlling motive for the establishment of the
contract; or
 extrajudicial demand before action for performance
(3) When demand would be useless, as when the obligor
has rendered it beyond his power to perform.
 ■ If there is no particular date, from the filing of
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. From
the moment one of the parties fulfills his obligation, delay
by the other begins. (1100a)
Trigger Effect: The creditor judicially or extrajudicially demands
the fulfillment of the obligation
General Rule: Delay generally begins from the moment the
creditor demands the performance of the obligation
Exception:
1. When the obligation or the law expressly so declares
that demand is not necessary for delay to exist
2. When from the nature or the circumstances of the
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be
rendered was a controlling motive for the
establishment of the contract
3. When demand would be useless, as when the obligor
has rendered it beyond his power to perform.
Example:
CONCEPT AND NATURE OF DELAY:
o Synonymous to default or mora
o Delay in the fulfillment of obligations; non-fulfillment with
respect to time
o Only in positive obligations (to do and to give); no delay in
negative obligations (not to do or not to give)
KINDS OF MORA
o Mora solvendi: Default on the part of the debtor
● Either ex re referring to obligations to give, or ex
persona, referring to obligations to do
● Presupposes a prestation due and enforceable
● The debtor will have the burden of proving that the
cause of the delay is not imputable to him in order to
exempt him from responsibility.
● Requisites:
○ That the obligation be demandable and already
liquidated
○ That the debtor delays performance
○ That the creditor requires the performance judicially
or extrajudicially
● Need for Demand: Default generally begins from the
moment the creditor demands the performance of the
obligation; without which effects of the default will not
arise.
○ May be in any form, provided it can be proved.
○ Proof of demand will be incumbent upon the creditor.
○ Generally necessary even if a period has been fixed
in the obligation.
○ When default begins: where there has been an
was filed, the effects of default arise from the date of
such extrajudicial demand.
the complaint.
○ Nature of demand: must refer to the prestation that
is due and not to another.
 ○ When demand is not required: ● Express or Implied (ex. grant of extension)
■ When there is an express stipulation to that o Prescription
effect
■ Where the law so provides
→ Note: For the first two, it must be further stated that after the 1. Concept of Delay
period lapses, default will commence.
■ When the period is the controlling motive or the
Santos v Santos (2004)
principal inducement for the creation of the
Facts
obligation
Issue
→ According to Tolentino, the law does not require expressly
Rule
that the debtor should know, but this knowledge is essential in
Ratio
order that it can be said that the debtor has tacitly consented to
incur in delay without the necessity of a demand. This
knowledge may be shown by the express provisions of the
Gilat Satellite Networks v UCPB General Insurance
written contract, or by the very nature of the obligation, or from
(2014)
the circumstances under which it was created.
Facts
■ Where demand would be useless (the
Issue
performance has become impossible
Rule
● There must be an express recognition of the default and
Ratio
not merely requests for extension of time to perform.
● Effects of Mora Solvendi:
○ When it has for its object a determinate thing, the
RCBC v CA (1999)
delay places the risks of the thing on the debtor
Facts
○ Debtor becomes liable for damages for the delay
Issue
Rule
o Mora accipiendi: delay in the performance based on the
Ratio
omission by the creditor of the necessary cooperation (esp.
acceptance on his part)
● It is necessary that it be lawful for the debtor to perform 2. Necessity of demand
and that he can perform
● Creditor incurs in delay when the debtor tenders
Rivera Spouses Chua (2015)
payment or performance but the creditor refuses to
Facts: Rivera obtained a promissory note from spouses
accept it without just cause
chua which states Rivera owed them a sum of money.
● Requisites of Mora Accipiendi:
The note also contains a penal clause that should Rivera
○ An offer of performance by the debtor who has the
be in default of the installments, the obligation shall be
required capacity
demandable in it's entirety.
○ The offer must be to comply with the prestation as it
Issue: WON Rivera is in delay is demandable even
should be performed
without a demand.
○ The creditor refuses the performance without just
Rule: No demand is necessary if there is a stipulation
cause
saying so
● Effects of Mora Accipiendi:
Ratio: YES. Rivera is in delay since the clause in the
○ The responsibility of the debtor for the thing is
agreement states that the obligation is demandable upon
reduced and limited to fraud and gross negligence
default of the installments.
○ The debtor is exempted from the risks of loss of the
thing (risk passes on to the creditor)
○ All expenses incurred by the debtor for the
Aerospace v CA (1999)
preservation of the thing after the mora shall be
Facts: Aerospace purchased from Philippine Phosphate
chargeable to the creditor
fertilizer Corp. 500 MT of sulfuric acid. Aerospace
○ Debtor does not have to pay for interests after the
contracted the MV Sultan Kayumanggi to lift the product
mora
from 2 storage facilities. The product was not completely
○ Creditor becomes liable for damages
lifted since the boat first stilted, then eventually sank.
○ Debtor may relieve himself of the obligation by the
Fertilizer corp then sent several letters of demand
consignation of the thing
seeking to compel Aerospace to retrieve the remaining
product or be liable for storage costs. Aeorospace claims
o Compensatio morae: default of both parties in reciprocal
that it has fulfilled it’s obligation by paying for the product
obligations
and the failure to deliver belonged to Fertilizzer. It also
claimed that the sinking of the ship was a fortuitous
CESSATION OF EFFECTS OF DELAY:
event.
o Renunciation by the Creditor
 Issue: WON Aerospace committed breach of contract by the other begins. (1100a)
Rule: Demand needs to be EXPLICITLY stated, it should
not merely be a statement of facts
RECIPROCAL OBLIGATIONS
Ratio: YES. Aerospace committed breach of contract. It
● Neither party incurs in delay if:
was not the sinking of the ship that was the issue, its that
○ Other party doesn’t comply or isn’t ready to
petitioner contracted a ship that was not capable of lifting
comply in a proper manner
the 500 mt of sulfuric acid.
● Delay by the other begins:
○ From the moment one of the parties fulfills his
2 letters were sent demanding fulfillment of the
obligations
obligation. The first was merely a statement of the facts
(that there is remaining product which needs to be
Parties in a reciprocal obligation can regulate the order in which
extracted) It was the second letter which was an explicit
they shall comply with their obligations.
demand. Hence the time of delay should be counted from
● Ex. Buyer is given a term to pay the price
the second letter considering the reasonable time to fulfill
If the parties didn’t determine the the order of fulfillment, it is
the obligation.
reciprocal and simultaneous.

General Rule: Fulfillment of the parties should be simultaneous.

Santos v Santos (2004)
Neither party incurs in default if the other does not comply or
Facts: Pet and Resp entered into a compormise
isn’t ready to comply in a proper manner.
agreement. The lawsuit would be dropped by the Pet if
● Where both are in default, their respective liability for
Resp pays 14.5 M. 1.5 will be paid outright while the
damages are offset equitably.
remaining balance of 13M will be paid within 2 years. The
compromise agreement also stipulated that if the Resp
Trigger: One of the contracting parties fulfills his obligation and
sell any of the properties subject of the original case, the
becomes invested with power to determine the contract,
obligation shall become immediately demandable. Resp
because of the failure of the other party to carry out the
sold 2 properties.
agreement
Issue: WON the obligation is demandable
Effect: Delinquency (default, delay) commences
Rule: No demand is necessary if (among others) there is
an express stipulation
B. Fraud
Ratio: YES. Obligation is demandable even without a
demand since there was an express stipulation.
Art. 1171. Responsibility arising from fraud is demandable
in all obligations. Any waiver of an action for future fraud
3. Special Rule for Reciprocal Obligations
is void. (1102a)

Art. 1169. Those obliged to deliver or to do something

Renunciation of future fraud is not allowed
incur in delay from the time the obligee judicially or
● To permit such would practically leave the obligation
extrajudicially demands from them the fulfillment of their
without effect
obligation.
● The law, however, does not prohibit the renunciation of
the action for damages on the ground of fraud already
However, the demand by the creditor shall not be
committed
necessary in order that delay may exist:
Trigger: One of the parties commits fraud in fulfillment of the
(1) When the obligation or the law expressly so declare;
obligations
or
Effect: Responsibility from fraud is demandable

 (2) When from the nature and the circumstances of the Example:
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to be
Legaspi Oil Co, Inc v CA (1994)
rendered was a controlling motive for the establishment
Facts:
of the contract; or
 Private respondent Bernard Oseraos, acting through his
(3) When demand would be useless, as when the obligor authorized agents, had several transactions with Legaspi
has rendered it beyond his power to perform.
 Oil for the sale of copra to the latter. The price at which
Oseraos sells the copra varies from time to time,
depending on the prevailing market price when the
In reciprocal obligations, neither party incurs in delay if
contract is entered into. Jose Llover, Oseraos’ agent, had
the other does not comply or is not ready to comply in a
previous transactions with Legaspi Oil for the sale and
proper manner with what is incumbent upon him. From
delivery of copra, wherein 70 tons of copra were sold at
the moment one of the parties fulfills his obligation, delay
P95 per 100 kilos, and another 30 tons at P102 per 100
kilos. Subsequently, another agent of Oseraos signed a
contract in behalf of private respondent for the sale of 100
tons of copra at P79 per 100 kilos with delivery terms of
25 days. At this point, the price of copra had been
fluctuating. Llover signed a contract for the sale of 100
tons of copra at P82 per 100 kilos with delivery terms of
20 days. Compared to previous transaction, the current
price agreed upon is slightly higher than the last contract.
In all these contracts though, the selling price had always
been stated as “total price” rather than per 100 kilos.
However, the parties had understood the same to be per
100 kilos in their previous transactions.After the period to
deliver had lapsed, Oseraos sold only 46,334 kilos of
copra, thus leaving a balance of 53,666 kilos. Accordingly,
demands were made upon Oseraos to deliver the balance
with a final warning that failure to deliver will mean
cancellation of the contract, the balance to be purchased
at open market and the price differential will be charged
against Oseraos. Since there was still no compliance,
Legaspi Oil exercised its option under the contract and
purchased the undelivered balance from the open market
at the prevailing price of P168 per 100 kilos, or a price
differential of P86 per 100 kilos, a net loss of P46,152.76
chargeable against appellant. Afterwards, petitioner filed
a complaint against Oseraos for breach of contract and for
damages. CFI held Oseraos liable for damages. CA
reversed prior decision of CFI. Hence, the instant petition.
Issue:
WoN Oseraos is liable for damages arising from fraud or
bad faith in deliberately breaching the contract of sale
entered into by the parties.
Rule
The fraud referred to in Art. 1170 is the deliberate and
intentional evasion of the normal fulfillment of obligation,
it is distinguished from negligence by the presence of
deliberate intent, which is lacking in the latter.
In case of fraud, bad faith, malice, or wanton attitude, the
guilty party is liable for all damages which may be
reasonably attributed to the non-performance of
obligation. (Magat v. Medialdea)
Ratio: Yes.
The conduct of Oseraos clearly manifests his deliberate
fraudulent intent to evade his contractual obligation for the
price of copra had in the meantime more than doubled
from P82 to P168 per 100 kg. Under Art. 1170, 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.
Therefore, Oseraos is liable for damages. On account of
Oseraos’ deliberate breach, petitioner was compelled to
buy the balance of 53,666 kilos of copra in the open
market at the then prevailing price of P168 per 100 kg.,
thereby paying P46,152.76 more than he would have paid
had Oseraos completed delivery of the copra as agreed
upon. Thus, Oseraos is liable to pay petitioner the amount
of P46,152.76 as damages.
Woodhouse v Halili (1953)
Facts:
The parties entered into a written agreement where:
1) They shall organize a partnership for the bottling
and distribution of Mission softdrinks, plaintiff to
act as industrial partner or manager, and the
defendant, as a capitalist, furnishing the capital
necessary therefor.
2) The defendant was to decide matters of general
policy regarding the business, while the plaintiff
was to attend to the operation and development
of the bottling plant.
3) The plaintiff was to secure the Mission Soft
Drinks franchise for and in behalf of the proposed
partnership.
4) The plaintiff was to receive 30% of the net profits
of the business.
Prior to entering into this agreement, plaintiff had
informed the Mission Dry Corporation of L.A., California,
USA manufacturers of the bases and ingredients of the
beverages bearing its name, that he had interested a
prominent financier, who is the defendant herein, in the
business, who was willing to invest half a million dollars in
the bottling and distribution of said beverages, and
requested, in order that he may close the deal with him,
that the right to bottle and distribute be granted him for a
limited time under the condition that it will finally be
transferred to the corporation.
A franchise agreement was entered into between
the Mission Dry Corporation and Fortunato F. Halili and/or
Charles F. Woodhouse, granting defendant the exclusive
right, license, and authority to produce, bottle, distribute,
and sell Mission beverages in the Philippines.
Plaintiff reported for duty in January, but
operations were not begun until a month later.
For the first 2 months, P2,000 was given to
plaintiff alongside the use of a car, but on the 3rd month,
only P1,000 was given and the car was withdrawn from the
plaintiff.
When the bottling plant was already operating,
plaintiff demanded of the defendant that the partnership
papers be executed.
At first, defendant excused himself, saying there
was no hurry.
Then he promised to do so after the sales of the
products had been increased to P50,000.
As nothing definite was forthcoming, after this
condition was attained, and as defendant refused to give
further allowances to plaintiff, the latter caused his
attorneys to settle the issue.
In his complaint, plaintiff asked for the execution
of the contract of partnership, an accounting of the profits,
and a share of 30%, as well as damages worth P200,000.
Defendant countered that:
1) Defendant’s consent to the agreement was
secured by the representation of the plaintiff that he was
the owner, or was about to become owner of an exclusive
bottling franchise, which representation was false, and that
plaintiff did not secure the franchise, but was given to
defendant himself.
2) Defendant did not fail to carry out his
undertakings, but that it was plaintiff who failed.
3) Plaintiff agreed to contribute the exclusive
franchise to the partnership, but plaintiff failed to do so.
CFI ruled in favor of plaintiff.
It held that the execution of the contract of
partnership could not be enforced upon the parties, but it
also held that the defense of fraud was not proved.
Issue:
1) WoN plaintiff had falsely represented that he had
an exclusive franchise to bottle Mission beverages
2) WoN this false representation or fraud, if it
existed, annuls the agreement to form the partnership.
3) WoN the partnership agreement may be carried
out.
4) What damages may be bestowed upon the
parties.
Rule:
The effect of incidental fraud is that only damages may be
filed, but the contract still subsists.
Ratio:
1) Yes, the plaintiff had falsely represented that he
had an exclusive franchise.
CFI: It is improbable
that defendant was never shown the letter
granting plaintiff the option,
that defendant would not have gone to the US
without knowing what authority plaintiff had,
that the drafts of the contract prior to the final one
cannot be considered for the purpose of determining the
issue as they are presumed to have been already
integrated into the final agreement
that fraud is never presumed and must be
proved.
On this appeal, the defendant insists that plaintiff
did represent to the defendant that he had an exclusive
franchise, when as a matter of fact, at the time of its
execution, he no longer had it as the same had expired,
and that, therefore, the consent of the defendant to the
contract was vitiated by fraud and it is, consequently, null
and void.
Plaintiff’s attorney, Mr. Laurea, testified that
Woodhouse presented himself as being the exclusive
grantee of a franchise. Moreover, the 1st draft he prepared
expressly states that plaintiff had the exclusive franchise.
CFI did not consider this draft on the principle of
integration of jural acts.
This is inapplicable in this case since the purpose
of considering the prior draft is not to vary, alter, or modify
the agreement, but to discover the intent of the parties
thereto and the circumstances surrounding the execution
of the contract.
The act or statement of the plaintiff was not
sought to be introduced to change or alter the terms of the
agreement, but to prove how he induced the defendant to
enter into it – to prove the representations or inducements,
or fraud, with which or by which he secured the other
party’s consent thereto.
Fraud and false representation are an incident to
the creation of a jural act, not to its integration, and are not
governed by the rules on integration.
Were parties prohibited from proving said
representations or inducements, on the ground that the
agreement had already been entered into, it would be
impossible to prove misrepresentation or fraud.
The alleged representation took place before the
conferences were had; in other words, plaintiff had already
represented to defendant, and the latter had already
believed in, the existence of plaintiff’s exclusive franchise
before the formal negotiations, and they were assisted by
their lawyers only when said formal negotiations took
place.
2) No.
Art. 1270 of Spanish Civil Code distinguishes 2
kinds of (civil) fraud:
1) Causal fraud (dolo causante) – which may be a
ground for the annulment of a contract
2) Incidental deceit (dolo incidente) – which only
renders the party who employs it liable for damages
The Court has held that in order that fraud may
vitiate consent, it must be the causal, not merely the
incidental inducement to the making of the contract.
The record abounds with circumstances
indicative of the fact that the principal consideration, the
main cause that induce defendant to enter into the
partnership agreement with plaintiff, was the ability of
plaintiff to get the exclusive franchise to bottle and
distribute for the defendant or for the partnership.
While the representation that plaintiff had the
exclusive franchise did not vitiate defendant’s consent to
the contract, it was used by plaintiff to get from defendant
a share of 30% of the net profits; in other words, by
pretending that he had the exclusive franchise and
promising to transfer it to defendant, he obtained the
consent of the latter to give him (plaintiff) a big slice in the
net profits.
This is the dolo incidente defined in Art. 1270 of
the Spanish Civil Code, because it was used to get the
other party’s consent to a big share in the profits, an
incidental matter in the agreement.
3) No.
Because it was agreed upon that the partnership
will be formed at a latter date.
Moreover the trial court is correct in ruling that it
cannot compel the defendant to carry out the agreement
or execute the partnership papers against his will.
Under the Spanish Civil Code, the defendant has
an obligation to do, not to give. The law recognizes the
individual’s freedom or liberty to do an act he has promised
to do or not to do it, as he pleases. It falls within what
Spanish commentators call a very personal act, of which
courts may not compel compliance, as it is considered an
act of violence to do so.
4) Plaintiff is entitled to 15% of the profit, not 30% as
initially agreed upon.
When defendant learned of
misrepresentation done by the plaintiff, his spontaneous
reaction is only to reduce the share from 30% to 15%, to
which plaintiff readily assented.
Geraldez v CA (1994)
Facts:
Petitioner availed of a European tour package
from Kenstar Travel Corporation (KTC), the private
respondent.
She availed of the “Volare 3,” a 22-day tour of
Europe for which she paid $2,990 or P190,000.
Petitioner claimed that during the tour, she was
disappointed as contrary to what was stated in the
brochure KTC’s representative showed her,
there was no European tour manager for their
group of tourists,
the hotels booked were not first-class,
the UGC Leather Factory which was specifically
added as a highlight of the tour was not visited,
the Filipino lady tour guide is a first-timer in
showing tourists around.
Petitioner filed an action for damages, and
moved for the issuance of a writ of preliminary attachment
against KTC on the ground that it committed fraud in
contracting an obligation, to which no opposition by the
latter appears on the record.
RTC granted this, but the preliminary attachment
was subsequently lifted upon the filing by KTC of a
counterbond of P990,000.
During the pendency of said civil case for
damages, petitioner also filed other complaints before the
DOT and SEC wherein KTC was fined P5,000 by DOT and
P10,000 by SEC. This was not disputed by KTC.
RTC ordered KTC to pay the following to
petitioner:
P500,000 – moral damages
P200,000 – nominal damages
P300,000 – exemplary damages
P50,000 – attorney’s fees and costs of suit
CA reduced the awards:
P30,000 – nominal damages
P10,000 – attorney’s fees
Issue:
WoN KTC acted in bad faith or with gross
negligence in discharging its obligations under the
contract.
Rule:
The fraud involved is a causal fraud if without which, the
parties may have decided otherwise. Meaning, had the
other parties known the truth behind the fraud before they
had entered into the agreement/contract, they would not
have agreed into it.
Ratio:
the Yes.
CA:
No malice or bad faith could be imputed to KTC,
hence, there is no justification for the award of moral and
exemplary damages.
Furthermore, it held that while petitioner is
entitled to nominal damages, the amount awarded by RTC
was unconscionable since petitioner did not suffer actual
or substantial damage from the breach of contract.
Breaches done by KTC:
1) Having an on-the-job trainee as a tour guide, who
is also her first time to go to Europe during the tour.
2) Inconvenient locations of hotels, which are not
even first-class.
CA erred in deleting the award for moral and
exemplary damages. Moral damages may be awarded in
breaches of contract where the obligor acted fraudulently
or in bad faith. From the facts earlier narrated, KTC can be
faulted with fraud in the inducement, which is employed by
a party to a contract in securing the consent of the other.
The fraud or dolo which is present or employed
at the time of birth or perfection of a contract may either be
dolo causante or dolo incidente.
In either case, whether KTC has committed dolo
causante or dolo incidente by making misrepresentations
in its contracts with petitioner and other members of the
tour group which deceptions became patent in the light of
after-events when, contrary to its representations, it
employed an inexperienced tour guide, housed the tourist
group in substandard hotels, and reneged on its promise
of a European tour manager, and the visit to the leather
factory, it is indubitably liable for damages to petitioner.
When moral damages are awarded, especially
for fraudulent conduct, exemplary damages may also be
decreed.
C. Negligence
Art. 1172. Responsibility arising from negligence in the
performance of every kind of obligation is also
demandable, but such liability may be regulated by the
courts, according to the circumstances. (1103)
Trigger: Every kind of obligation; there is negligence
Effect: That there is responsibility which may be regulated by the
courts according to the circumstances
Purpose: To show the effect of negligence from an obligation
General Rule: There is responsibility arising from negligence
Exception: May be regulated by the courts

Kinds of Culpa
Culpa contractual - Not a source of obligation. It merely makes
the debtor liable for damages in view of his negligence in the
fulfillment of a pre-existing obligation.
- The court is given a discretion to mitigate liability
according to the circumstances of the case (article
1172).
Example: A was to deliver to B a specific horse on a certain day.
The horse died before that day. A is liable for damages for failing
to fulfill a pre-existing obligation.
Culpa aquiliana - Negligence which by itself is the source of an
obligation between the parties not formally bound by a pre-
existing contract. Also known as a “tort” or “quasi-delict”.
- No discretion is given by the court in dealing with
liability arising under article 2176.
Example: A was driving his motorcycle inside his subdivision
and accidentally hit B’s car, denting it slightly. A is liable for
damages because of tort.
In a liability arising from culpa aquiliana, an employer or master
may exempt himself from liability under article 2180 of the Civil
Code by proving that he had exercised due diligence to prevent
the damage.
Stipulations on Liability for Negligence
1. Graduating the responsibility of the debtor by
determining the degree of diligence to be required
which may be more or less than the standard fixed by
law.
2. Imposing a liability for fault or negligence, where the
law does not impose it unless the law dispenses of it
as a matter of public policy.
Exemption from Liability - two kinds of stipulation exempting
from liability for fault or negligence
1. A party to a contract is relieved from the effects of his
fault or negligence by a third person (e.g. insurance).
2. One party to a contract renounces in advance the right
to enforce liability arising from the fault or negligence
of the other. This is valid in simple negligence because
of the absence of provisions in the Code prohibiting
advance renunciation of liability arising from
negligence. This is void in gross negligence because
such negligence amounts to fraud.
>Advance renunciation for such should not be
upheld in cases where there are strong reasons
against it (e.g. contracts of adhesion)
>Irresponsibility clauses exempting one
liability from damages should be taken with great
caution because they might encourage negligence.
Art 1173. The fault or negligence of the obligor consists in
the omission of that diligence which is required by the
nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place.
When negligence shows bad faith, the provisions of articles
1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is
to be observed in the performance, that which is expected
of a good father of a family shall be required.
Trigger: An omission of diligence required by the nature of the
obligation...
Effect: There is fault or negligence
Purpose: Definition of fault or negligence/show what kind of
diligence is required
General Rule: Diligence observed in the performance of an
obligation should be that expected of a good father of a family.
Exception: If another standard of diligence is stated by the law
or contract
A good father of a family or bonos paterfamilias, means a person
of ordinary or average diligence. There is no fixed standard of
diligence applicable to each and every obligation. Each must be
determined upon its particular facts and circumstances. The
care required is commensurate with what the circumstances
demand. For instance, when human life is involved or a
dangerous agency is being employed, more care is required.
Picart v Smith Jr (1918)
Facts: Picart was riding a pony over Carlatan Bridge, San
Fernando, La Union when Smith was approaching from
the other direction in his automobile, 10 or 12 m/h. Smith
saw him, blew his horn, but stayed on his lane. After 2
more blasts, it appeared to him that the man on
horseback wasn’t observing the rule of the road.
Picart saw and heard the horns, but he was perturbed by
the novelty or the rapidity of the approach (shookt), he
pulled the pony to the right instead of going to the left.
Supposed reason was that he thought he didn’t have
enough time to get to the other side.
Smith guided his auto to the left, which was the proper
side. He assumed that Picart would move to the other side.
The pony has not yet exhibited fright. When he realized
that the pony wouldn’t be able to change lanes anymore,
he turned to the right to escape hitting the horse but he
passed in such a close proximity to the animal that it
became frightened and turned its body across the bridge,
with its head toward the railing.
 Horse fell and the man was thrown off -> horse died,
Picard received contusions wc caused temporary
unconsciousness
Issue: WN Smith was guilty of negligence in maneuvering
his car – YES
Ratio: Smith had the right to assume that horse and rider
would go to the proper side – but as he moved to the center
of the bridge, it became obvious that it wasn’t possible
 Must have perceived that it was too late
 Nature of the situation: he must have noticed this
when the automobile was still at a distance
 Picard – at that time no longer had the power to
escape with his pony
 Control of the situation: passed to the defendant; duty
to bring his car to an immediate stop
o Deceived bc the horse didn’t exhibit fright yet
Rule: Test by wc to determine the existence of negligence
 Did the defendant in doing the alleged negligent act
use that reasonable care and caution which an
ordinarily prudent person would have used in the
same situation?
 Not determined by reference to personal judgment of
the actor but what would be negligent for the man of
ordinary intelligence and prudence
 Human experience and the facts of a particular case
– determine what would the conduct of a prudent man
be
Reasonable men govern their conduct by the
circumstances wc are before them or known them. –
Not supposed to be omniscient of the future.
Negligence = reasonable foresight of harm + ignoring
suggestion born of this prevision
 Prudent man would have recognized the risk
 Who is liable: person who has last fair chance to avoid
the impending harm
 ITC: Picart – guilty of antecedent negligence; remote
factor
o Smith – immediate and determining cause
Picart recover damages from Smith – no need to weigh or
offset, compared to Rakes v Atlantic case bc in that case
it was contributory negligence and defendant wasn’t
present
Philippine National Bank v Santos (2014)
Facts: Respondents are children of late Angel Santos.
They found out that their father had a premium savings
account and a time deposit with PNB. When they went to
withdraw, they were required to submit 5 documents. They
obtained these but when they returned with them they were
informed that Bernardito Manimbo already withdrew the
deposits.
 Missing from the documents Manimbo presented:
BIR-issued payment of exception from estate tax,
original copy of the death cert (only presented a
photocopy), deed of extrajudicial settlement
(presented a falsified affidavit of self-adjudication and
SPA), and certified time deposit
Issue: WN PNB was negligent in releasing the deposit to
Manimbo – YES
Ratio: GROSS NEGLIGENCE
Simple loan arrangement in a bank -> debtor: bank,
creditor: person
RULE: Proper diligence of a good father is the standard
diligence required in normal cases. BUT in other industries,
because of their nature, have higher standards of
diligence.
 Ex: extraordinary diligence in passenger safety in
common carriers because of the public interest
 Banking = impressed with public interest
o Affects economies, significant role in
businesses
o Fiduciary nature of banking (involves trust)
ITC: Aguilar’s negligence – she wasn’t competent to make
a conclusion whether that deed was genuine or not
Negligence was not based on failure to accept resp’s
documents but failure to exercise diligence required of
banks when they accepted the fraudulent docs
 They gave fixed standards to the Santoses – but they
didn’t follow their standards or there really was no fixed
standards
o Diligence = required them to verify
D. Contravention of the Tenor
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof,
are liable for damages. (1101)
Art. 1167. If a person obliged to do something fails to do it,
the same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation. Furthermore, it
may be decreed that what has been poorly done be
undone. (1098)
Trigger: Contravene of the tenor of the obligation
 “In any manner contravene the tenor” - includes any
illicit act which impairs the strict and faithful fulfillment
of the obligation
Effect: Liable for damages and executed at his cost
Purpose: To protect the creditor from substandard or incorrect
performance of the obligation
General Rule: Every debtor who fails in the performance of his
obligation is bound to indemnify for the losses and damages
caused thereby
 Art 1170: provides for damages as a remedy, which
may include any and all damages that a human being
may suffer in any and all manifestations of his life
 Art 1167: provides for the remedy of having the thing
done in a proper manner, by the creditor or by a third
person, at the expense of the debtor
Chaves v Gonzales (1970)
Facts: July 1963: Chaves employed Gonzales for his
portable typewriter’s routine cleaning and servicing. Despite

repeated reminders, Gonzales would just assure him but
wouldn’t return the typewriter.
October 1963: Gonzales asked for money for spare parts wc
Chaves gave. But still Gonzales didn’t return the typewriter
which led to Chaves going to Gonzales’ house to demand
the typewriter. He was given a wrapped package and when
he got home and opened it, he discovered that his typewriter
was in shambles.
Chaves had it repaired by another business (Freixas). LC
granted damages but only on the value of the missing parts.
Issue: WN Gonzales is liable to pay for the cost of executing
obligation in a proper manner – YES
Ratio: Gonzales contravened the tenor of his obligation
 Not only did not repair the typewriter but returned it in
shambles
Rule: For such contravention – liability under Art 1167 for
the cost of executing the obligation in a proper manner
and liability under 1170 for the cost of the missing parts
(damages)
 ITC: cost of the service in repairing the typewriter and
the cost of the missing parts
Claims for damages and attorney’s fees must be pleaded –
existence of the actual basis thereof must be proved.
II. EFFECT OF FORTUITOUS EVENTS
Art. 1174. Except in cases expressly specified by the law,
or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could
not be foreseen, or which, though foreseen, were
inevitable. (1105a)
Art. 1165. When what is to be delivered is a determinate
thing, the creditor, in addition to the right granted him by
Article 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the
obligation be complied with at the expense of the debtor.
If the obligor delays, or has promised to deliver the
same thing to two or more persons who do not have
the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery.
(1096)
Trigger effect: Unforeseen or inevitable event happens
General rule: No person is liable
Exception: 1. In cases specified by law
2. If declared by stipulation
3. If the nature of the obligation requires
assumption of risk
4. There is negligence on the part of the
debtor
A fortuitous event (caso fortuito) is an event which takes place
by accident and could not have been foreseen. Esriche defines
it as “an unexpected event or act of God which could neither be
foreseen nor resisted, such as floods, torrents, shipwrecks,
conflagrations, lightning, compulsion, insurrections, destruction
of buildings by unforeseen accidents and other occurrences of
a similar nature.” This may be produced either by nature
(earthquakes, storms, floods, etc.) or by man (armed invasion,
attack by bandits, governmental prohibitions, etc.).
Fortuitous event includes unavoidable accidents even if there is
an intervention of human element, provided fault or negligence
cannot be imputed to the debtor.
There is no essential difference between fortuitous event and
force majeure, which both refers to causes independent of the
will of the obligor.
Characteristics of a fortuitous event:
1. Cause of the failure of the debtor to comply with his
obligations must be independent of human will
2. Either impossible to foresee or impossible to avoid
3. Occurrence should render the obligation impossible to
perform
4. Obligor must not have participated in any act that may
have aggravated the injury to the creditor
For the defense of fortuitous event to prosper, accident must be
due to natural causes and free from human intervention.
The general effect of fortuitous events is that it releases the
debtor from liability from nonperformance of an obligation. An
exception is when there is negligence on the part of the debtor,
in which he becomes liable for damages.
The debtor may also still be liable, despite an occurrence of a
fortuitous event if both the parties agreed to stipulate it in the
contract. The provision in a contract imposing liability even in
case of fortuitous event should be clearly expressed.
The debtor may also still be liable if the nature of the obligation
requires the assumption of risk, in which case, the basis would
be social justice (and/or ethico-economic sensibility of modern
society “which has noted the injustices which industrial
civilizations has created”). If a person, for profit, creates risk for
the public which formerly did not exist, although morally his fault
or negligence may not be the cause of the damages resulting
therefrom, nevertheless he should be liable for such damages:
qui sentit commodum sentire debet et incommodum. A
person who benefits from a means that produced the loss, he
should be liable for the consequences of the loss.
Example: MRT is derailed. MRT authorities are bound to
indemnify the passengers caught in the accident, even if there
is no fault or neglect on their part. The debtor is released from
liability if it is due to the act of the creditor.
Example: Vice sent through a private contracted mailing service
a loosely covered jar containing bagoong. The courier of the
package is not liable if the bagoong spills.
Article 1165 of the Civil Code provides that on the occurrence of
a fortuitous event after the debtor has incurred delay, he should
be liable for damages.
Tanguilig v CA (1997)
Facts: Tanguilig proposed to Herce, Jr. construction of a
windmill system for him. (Tanguilig would construct
through JMT Engineering) They agreed on P60k with a 1-
year guaranty. After a year, Herce refused and failed to
pay the P15k balance. He claims he already paid SPGMI,
who constructed the deep well, and that the P15k should
be offset bc the windmill system collapsed when a strong
wind hit.
P. Arg: Collapse was due to a typhoon .:. force majeure
Issue: WN Tanguilig is under obligation to reconstruct the
windmill after it collapsed – YES
Rule: In order for a party to claim exemption from liab bc
of fortuitous event (Art 1174) – event should be the sole
and proximate cause of the loss or destruction of the
object
4 requisites:
1. Cause of the breach = independent of the will of the
debtor
2. Event = unforeseeable or unavoidable
3. Event = render it impossible for the debtor to fulfill his
obligation in a normal manner
4. Debtor = free from any participation in or aggravation
of the injury to the creditor
ITC: Petitioner – failed to show that collapse of windmill
due solely to a fortuitous event
 Merely stated that there was “strong wind”…. Wc
should be present naman in places where there are
windmills… um…
 Windmill wouldn’t have collapsed if there was no
inherent defect wc could be attributed to Tanguilig
Obligation is a reciprocal obligation
 Petitioner’s argument that Herce was already in delay
for payment that’s why he should bear his own loss =
untenable
 Neither party incurs in delay if other does not
comply in a proper manner what is incumbent
upon him
 ITC: windmill failed to function so pet should have
repaired -> resp not in delay .:. pet should bear
expenses for reconstruction of the windmill
Nakpil & Sons v CA (1986)
Facts: United Construction Inc would construvt the building
for the Philippine Bar Association while Juan F. Nakpil &
Sons prepared the plans and specifications for the building.
On Aug 2, 1968 (around 2 yrs after building was
completed), there was an unusually strong earthquake that
hit Manila. The building sustained major damages, and it
partially collapsed.
Issue: WN an act of God exempts from liability the parties
who are otherwise liable bc of their negligence – NO
Ratio: Art 1723 – engineer or architect who drew up the
plans is liable for damages if within 15 yrs building should
collapse bc of defect
 Harmonize w Art 1174 – no person liable for fortuitous
events
Rule: When the negligence of a person concurs with an
act of God in producing a loss, person is not exempt
from liability by showing that the immediate cause of
the damage was the act of God.
 To be exempt: must show that he’s free from any
previous negligence or misconduct by wc that loss
or damage may have been occasioned
 Act of God: accident, due directly and exclusively to
natural causes w/o human intervention – no amount of
foresight, pains or care, reasonably to have been
expected could have prevented it
o Must be occasioned exclusively by the
violence of nature and all human agencies
excluded from it
4 requisites:
1. Cause of the breach = independent of the will of the
debtor
2. Event = unforeseeable or unavoidable
3. Event = render it impossible for the debtor to fulfill his
obligation in a normal manner
4. Debtor = free from any participation in or aggravation
of the injury to the creditor
ITC: negligence – substantial deviations from the plans
and specifications and failure to observe the requisite
workmanship in the construction
 Defects in construction and plans = proximate cause
of collapse
 Proof negligence is present – some of the older
buildings in the vicinity were able to withstand the
earthquake
Dioquino v Laureano (1970)
Facts: Atty Pedro Dioquino wished to register his car when
he met Federico Laureano who is a patrol officer of the
MVO office, waiting for a jeepney to fo tho the PC barracks.
Dioquino requested Laureano to introduce him to one of
the clerks who could facilitate his car’s registration.
Laureano did so and bc of this, Dioquino let him take his
car when he was going to the PC barracks (just him and
Dioquino’s driver). As they were reaching their destination,
the car was stoned by mischievious boys, which broke
the windshield of the car. Laureano refused to file charges
against the boys and refused to pay for the windshield bc
it was force majeure.
Issue: WN Laureano is liable for damages – NO
Rule: Art 1174 – No person shall be liable for those events
wc could not be foreseen or those which, though foreseen,
were inevitable.
 Major casus est, cui humana infirmitas resistere non
potest
 Some extraordinary circumstance independent of the
will of the obligor = essential element of caso fortuito
 No requirement of “diligence beyond what a
human care and foresight can provide”
ITC: Stoning of the boys = clearly unforeseen
 Fortuitous event resulting in a loss, wc must be borne
by the owner of the car
Austria v CA (1971)
Facts: Maria Abad received from Guillermo Austria a
pendant w diamonds wc she was to sell on commission
basis or to return on demand. She was walking home with
the jewelry when she was robbed by two men, one hitting
her on the face and the other snatching her purse. Austria
initiated a case against her because she failed to return or
pay for the jewelry.
P. Arg: She failed to prove the robbery, or if it was
committed, that she was not negligent. Also there’s no final
judgment on the occurrence of robbery.
Issue: WN Abad is liable – NO
Rule: To avail of the exemption granted in the law, it is not
necessary that the persons responsible for the occurrence
are punished but it is sufficient to establish that the
unforeseeable event took place without any
concurrent fault on the debtor’s part.
 Debtor must be free of any concurrent or contributory
fault or negligence
ITC: No negligence on her part bc criminality was not so
prevalent in Manila when this robbery took place
 If it happened today (1971), where Manila and its
suburbs has a high incident of crime, travel after
nightfall without suitable precaution carrying the
jewelry = negligence
Phil Communications v Globe (2004)
Facts: Globe Telecom engaged in the coordination of the
provision of various communication facilities for the military
bases of US in Clark and Subic. Philcomsat is one of the
local service providers. On May 7, 1991, Globe and
Philcomsat entered into an 5-yr Agreement: Philcomsat
would establish, operate and provide an IBS earth station
for the exclusive use of the US Defense Communications
Agency.
 Sec 8: neither party shall be held liable for failure to
perform its obligation if failure results from force
majeure or fortuitous event
Both of them were aware that the RP-US Military Bases
Agreement would expire in 1991. Sep 1991, Senate of the
Philippines decided to not concur and not ratify the Treaty
of Friendship, effectively terminating the RP-US Military
Bases Agreement.
P.Arg: Termination of the RP-US Bases =/= fortuitous
event bc it was foreseeable
Issue: WN termination of RP-US Bases Agreement would
constitute a force majeure wc would exempt Globe from
complying w its obligation to pay rentals – YES
Rule: Art 1174 exempts a person from liability on account
of fortuitous event if:
 Events are unforeseeable OR
 Those which are unforeseeable but inevitable
These may either be:
1. An act of God (natural occurences) OR
2. An act of man
ITC: For Globe to be exempt from non-compliance with its
obligation to pay rentals, concurrence of the ff elements:
1. Event = independent of human will
2. Occurrence of event = render it impossible for the
debtor to fulfill the obligation in a normal manner
3. Obligor = free of pariticipation
 Philcomsat and Globe -> no control over non-renewal
of RP-US Agreement
 It would be unjust to require Globe to continue paying
even though Philcomsat can’t be compelled to
perform its corresponding obligation
o Only liable for payment of rentals until Dec
31 1992 bc US military forces withdrew only
on that date
III. SUBSIDIARY REMEDIES OF CREDITOR
Art 1177. The creditors, after having pursued the property
in possession of the debtor to satisfy their claims, may
exercise all the rights and bring all the actions of the latter
for the same purpose, save those which are inherent in his
person; they may also impugn the acts which the debtor
may have done to defraud them. (1111)
Purpose: Satisfaction of the Creditor’s claim.
General Rule: The creditor may levy the property of the debtor.
After exhaustion, the creditor may exercise the debtor’s actions
or rights. As a last recourse, the creditor may impugn the actions
done by the debtor to defraud him.
Exception: There are exceptions to what property may be levied,
what rights or actions may be exercised, and what actions would
be considered fraud.
In order to satisfy the claims of the creditor against the debtor,
they have the following successive right (“successive” means
the first one must be exhausted before you can use next § Alienations of property
remedy): § Payment of debts which are not due
§ Renunciation of Rights (like Usufruct or
1. Property Levying - To levy by attachment and execution upon Inheritance)
all the property of the debtor, except such as are exempt by law § Assignments of credit
from execution. § Remissions of debt
● This states that the patrimony of the debtor (present § Debtor’s renunciation of a Prescription
and future property) is subject to the liabilities he may § When the debtor, in connivance with a third
contract in obligations. party, allows that third party to file an action
2. Accion Subrogatoria - To exercise all the rights and actions of against him in court, and obtain a judgment
the debtor, except such as are inherently personal to him. – (may be by confession or default) that would
● This means that the creditor can use the rights that the be enforced against his property.
debtor should’ve exercised in order to fulfill the o This does not include payments of pre-existing
obligation. obligations already due.
o Essentially, it is the doing by the creditor of all o Regarding the act of acquiring new liabilities:
possible actions and using any right that is available to § Gasperi Opinion (preferred view of
the debtor in order to satisfy the obligation. Tolentino) – not included in Accion Pauliana.
● In order for the creditor to exercise the debtor’s rights, § Ruggiero Opinion – included in Accion
the following requisites are essential: Pauliana.
o The creditor has an interest in the right or action not
only because of his credit but because of the
Adorable v CA (1999)
insolvency of the debtor.
Facts
o Malicious or negligent inaction of the debtor in the
Issue
exercise of his right or action of such seriousness as to
Rule
endanger the claim of the creditor.
Ratio
o The credit of the debtor against a third person is
certain, demandable, and liquidated.
o The debtor’s right against the third person must be
Khe Hong Cheng v CA (2001)
patrimonial, or susceptible of being transformed to
Facts
patrimonial value for the benefit of the creditor.
Issue
● It is not essential that the creditor’s claim is prior to the
Rule
acquisition of the right by the debtor.
Ratio
● Rights of the creditor that cannot be exercised by the
creditor to satisfy his credit (things the creditor cannot
use against the debtor in order to get paid):
o Right to Existence (Money received from support) EXTINGUISHMENT OF OBLIGATIONS
o Rights or Relations of a Public Character
o Rights of an Honorary Character I. PAYMENT OR PERFORMANCE
o Rights consisting of powers which have not been
used, like:
Art. 1231. Obligations are extinguished:
§ Power to Administer (the creditor cannot
(1) By payment or performance:
lease the debtor’s property)
§ Power to carry out an agency or deposit
(2) By the loss of the thing due:
(creditor cannot create this for the debtor
§ Power to accept an offer for a contract
(3) By the condonation or remission of the debt;
(Creditor cannot accept a contract for the
debtor)
(4) By the confusion or merger of the rights of creditor and
o Non-Patrimonial Rights (Legal Separation,
debtor;
Annulment, etc.)
o Patrimonial Rights subject to execution (Pension)
(5) By compensation;
o Patrimonial Rights inherent in the debtor’s person
(Right to revoke donation, right to remove an unworthy
(6) By novation.
heir)
3. Accion Pauliana - To ask for the rescission of the contracts
Other causes of extinguishment of obligations, such as
made by the debtor in fraud of their rights.
annulment, rescission, fulfillment of a resolutory condition,
● Acts of the debtor that the creditor may revoke or set and prescription, are governed elsewhere in this Code.
aside: (1156a)
o Any fraudulent act that reduces the debtor’s property
(includes both onerous or gratuitous) such as:
Trigger effect:
1. Payment/ performance
2. Loss of thing due
3. Condonation/remission
4. Confusion/merger of rights
5. Compensation
6. Novation
General rule: Obligation is extinguished
Exception: Annulment, rescission, fulfillment of resolutory
condition, and prescription may extinguish obligation
There are other causes of extinguishment of obligation.
Prescription is provided for by the Code in other articles. Death
may extinguish obligations which are personal character, apart
from its extinctive effect in some contracts, such as partnership
and agency. As a general rule, death of either the creditor or the
debtor does not extinguish the obligations; obligations when the
law, the stipulation of the parties, or nature of obligation prevents
such transmission. There is also renunciation by the creditor,
compromise, fulfillment of resolutory conditions and arrival
of resolutory periods, recission and nullity of contracts, and
mutual dissent. In some contracts, extinction may be produced
by the will of one of the parties, or a change in civil status of
those who make them.
Want of interest of the creditor in the fulfillment of the obligation
does not extinguish it.
Abandonment of the thing charged with the obligation may result
in the extinguishment of the obligation.
Contracts can be terminated by agreement of the parties,
express or implied.
An obligation is not extinguished by the insolvency of the debtor,
unless it has been judicially declared and a discharge has been
given to him.
A. In general
1. Definition
Art 1232. Payment means not only the delivery of money
but also the performance, in any other manner, of an
obligation.
Trigger:
(1) Delivery of money
(2) Performance, in any other manner, of an obligation
Effect: Payment is made through the two above-mentioned
acts.
Purpose: Article 1232 defines payment, listing down the two
ways in which payment is made. .
CONCEPT OF PAYMENT:
● Payment and fulfillment are identical
● Payment is the fulfillment of the prestation due, a
fulfillment that extinguishes the obligation by a
realization of the purposes for which it was
constituted.
● A juridical act which is voluntary, licit, and made with
the intent to extinguish an obligation.
REQUISITES OF PAYMENT:
(1) The person who pays
(2) The person to whom payment is made
(3) The thing to be paid
(4) The manner, time and place of payment, etc.
KINDS OF PAYMENT:
● Normal- when the debtor voluntarily performs the
prestation stipulated
● Abnormal- when the debtor is forced by means of a
judicial proceeding, either to comply with the
prestation or to pay for indemnity.
2. Requirements
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.
Trigger: There has been a valid payment
Effect: Obligations is extinguished by virtue of a valid payment
General Rule: Debt is paid when the prestation of the
obligations has been completely delivered (in cases for
obligation to give) or rendered (obligations to do)
Purpose: To determine when there is a valid payment of debt
2 requisites of a valid payment:
1. Identity of the prestation - the very thing or service
due must be delivered or rendered.
2. Integrity of the prestation - prestation must be
completely fulfilled
Payment must be done on the date, time and place stipulated
by the parties.
When the existence of a debt is established, the debtor has the
burden of proving that such debt has been extinguished by his
or her payment or performance.
3. Substantial performance
Art 1234. If the obligation has been substantially performed
in good faith, the obligor may recover as though there has
been a strict and complete fulfillment, less damages suffered
by the obligee.
Trigger: substantial performance of the obligation with good
faith
Effect: Obligor may recover as if there has been strict
fulfillment
Requisites for the application of the article:
1. There is substantial performance
2. It was done with good faith

Substantial performance:
- There must be an attempt at the performance of good
faith
- The deviation from the obligation must be slight
- Technical
- Not be so material to prevent attainment of
the obligation which the parties had in mind
- Burden of proof: party who claims substantial
performance must show the good faith
Party who RECEIVES A party who has
substantial performance substantially PERFORMED
cannot retain such thing May enforce specific
without paying the price performance of the other
agreed upon or returning party, or damages for breach
such benefits of an obligation
RESULT
(personal notes) in reciprocal obligations, one cannot evade
the performance of his obligation by claiming substantial;
performance of the other party. He must perform his
obligation THEN rely on his claim for damages with respect
to the defect or omission in the performance
Int’l Hotel Corp v Joaquin, Jr.
Facts: Joaquin submitted a proposal to the BOD of IHC for
him to render technical assistance in securing a foreign loan
for the construction of a hotel to be guaranteed by DBP.
He recommended Materials Handling Corp (more favorable
terms); which was accepted and negotiations were made).
While ongoing, Joaquin and Valero met with another
financier, Weston. Barnes failed to deliver needed loan, IHC
informed DBP that it would submit Weston for DBP’s
consideration. [DENIED BY DBP]
IHC cancelled Joaquin’s stock for failure to secure needed
loan. Joaquin alleged that they failed to meet their obligation
because IHC intervened and negotiated with Barnes instead
of Weston.
Issue: WON respondents made substantial performance of
his obligation? NO
Rule: Art 1234 CC applies only when an obligor admits
breaching a contract after honestly and faithfully performing
all the material elements thereof except for some technical
aspects that cause no serious harm to the obligee.
Ratio:
Principle of substantial performance is inappropriate when the
incomplete performance constitute a material breach of the
contract.
IN CASE,
Obtaining the loan was the very essence of the obligation so
obtaining the loan is the material element of the obligation.
4. Incomplete/Irregular Performance
Art 1235. When the obligee accepts the performance,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is
deemed fully complied with.
Trigger: When the obligee accepts the performance (knowing
its incompleteness or irregularity, and without expressing any
protest or objection)
Effect: The obligation is deemed fully complied with.
General Rule: When the obligee accepts the performance, the
obligation is deemed fully complied with.
Exception: When the obligee did not know of the
incompleteness or irregularity, or when he expressed any
protest or objection.
Purpose: To show the effect of obligee’s acceptance of a
performance that is incomplete or irregular, knowing that it is
so and without protesting or objecting.
WAIVER OF DEFECT IN PERFORMANCE
Where there is a contract for work of a particular
description, and he accepts work of another kind, he
discharges the debtor from the obligation of furnishing a thing
which complies with the specifications of the contract.
But he is not obliged to accept anything else in place
of that which he has contracted for; and if he does not waive
this right, the other party cannot recover against him without
performing all the stipulations on his part.
To constitute a waiver, however, there must be an
intentional relinquishment of a known right.
A waiver will not result from a mere failure to assert a
claim for defective performance when the thing or work is
received, or from mere payment in accordance with the terms
of the contract.
There must have been acceptance of the defective
performance with actual knowledge of the incompleteness or
the defect, under circumstances that would indicate an
intention to consider the performance as complete and
renounce any claim arising from the defect.
Accept – means to take as satisfactory or sufficient, or
agree to an incomplete or irregular performance.
Mere receipt of a partial payment =/= Required
acceptance of performance as would extinguish the whole
obligation.
ESTOPPEL OF CREDITOR
A creditor cannot object because of defects in
performance resulting from his own acts or directions.
Where a party makes particular objections to the
sufficiency of performance, he is estopped to later set up other
objections.
Esguerra v Villanueva
Facts: Isidro De Guzman leased a building owned by the

Esguerras. He failed to pay the rental and the balance of the
purchase price of equipment (P2100). Isidro’s mother,
Segunda, executed a promissory note of P2100 in favor of the
Esguerras. No payment were made so the Esguerras
commenced civil cases against the De Guzman.
They entered a compromise agreement admitting liability to
pay the amount of P2260 and should they fail to perform,
execution of judgment of the civil cases on their properties will
be made.
They failed to pay so Judge Villanueva issued writs of
execution.
NOTE: Day before writ of execution was issued, De Guzmans
delivered P800. And after less than a month of the issuance,
De Guzmans delivered P1460. [receipt made by Esguerra]
Issue: WON receipt of sums of money constitute acceptance
of incomplete and irregular performance? NO
Rule: To “accept” (Art 1235 CC) means to take as
“satisfactory or sufficient” or to “give assent to” or to “agree”
or to “accede” to an incomplete or irregular performance.
Ratio: Esguerra had neither acceded or assented to said
payment, nor taken the same as satisfactory or sufficient
compliance with the judgment. Asking Judge Villanueva to
issue writs of execution constitutes an implied objection or
protest to said partial payment.
5. Partial Prestations
Art 1248. Unless there is an express stipulation to that effect,
the creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may the
debtor be required to make partial payments.
However, when the debt is in part liquidated and in part
unliquidated, the creditor may demand and the debtor may
effect the payment of the former without waiting for the
liquidation of the latter.
Trigger: When the obligation consists of several prestations.
Purpose: The article sets the rule on partial prestations.
General Rule: Creditor cannot be compelled to receive partially
the prestation in which the obligation consists; neither may the
debtor be required to make the partial payment
Exception:
○ The obligation expressly stipulates the contrary.
○ The different prestations constituting the objects of the
obligation are subject to different terms and conditions.
○ The obligation is in part liquidated and in part unliquidated.
The creditor who refuses to accept partial prestations does not
incur in delay or mora accipiendi, except when there is abuse of
right or if good faith requires acceptance.
Ex. When the amount or quantity of the thing being delivered is
so big that the performance can reasonably be expected to be
made in various deliveries or when the difference in the quantity
delivered and that stipulated is so negligible as to be
unimportant to the creditor. In these cases, partial performance
cannot be refused.
This rule does not apply to obligations where there are several
subjects or where the various parties are bound under different
terms and conditions.
Ex. In joint obligations, one debtor may offer to pay only his
share and the creditor can’t refuse the partial performance.
Partial Liquidation: If a person is bound to pay P1,000 under a
contract which also provides for damages in case of non-
fulfillment at maturity, the principal debt of P1,000 is liquidated
and can be demanded and paid even before the determination
of the damages, as to which the obligation is unliquidated.
Barons Marketing Corp v CA (1998)
Facts:
Issue:
Rule:
Ratio:
6. Payment by 3rd Party
Art 1236. The creditor is not bound to accept payment or
performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the
contrary.
Whoever pays for another may demand from the debtor what
he has paid, except that if he paid without the knowledge or
against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.
Trigger: payment or performance by a third person who has no
interest in the fulfilment of the obligation
Effect on creditor
Old Civil Code New Civil Code
General Rule: payment by a General Rule: the creditor is
third person is admissible not bound to accept*
Exception: payment by a third Exception: unless there is a
person is inadmissible only stipulation to the contrary
when the prestation depends
on the personal qualities of
the debtor
*Ratio: whenever a third person pays there is a modification of
the prestation that is due. The creditor should have a right to
insist on the liability of the debtor. The creditor might dislike or
distrust the third person offering payment or performance.
**Disadvantage: may also prevent donations by third parties
who pay for the debtor. It may lead to the increase of burdens
arising from default when debtor may be away.
Effect on debtor
General Rule: whoever pays for another may demand from the
debtor what he has paid
Exception: if he paid without the knowledge or against the will
Art 1238. Payment made by a third person who does not
of the debtor**, he can recover only in so far as the payment intend to be reimbursed by the debtor is deemed to be a
has been beneficial to the debtor donation, which requires the debtor's consent. But the
**Payment against the will of the debtor: payment is in any case valid as to the creditor who has
- if the debt has been remitted, paid, compensated or accepted it.
prescribed, a payment by a third person would constitute a
payment of what is not due; his remedy would be against the Trigger: payment made by a third person who does not intend
person who received the payment under such conditions, and to be reimbursed by the debtor
not against the debtor who did not benefit from the payment. Effect on debtor: it is deemed to be a donation, which requires
- It is optional for the creditor to accept payment form a the debtor’s consent
third person. If the debtor opposes the payment by a third Effect on creditor: the payment is valid as to the creditor who
person, the latter will be entitled to recover from the debtor only has accepted it
to the extent that the payment has benefitted him. But as
between the debtor and the creditor, the obligation is
extinguished.
Moreño-Lentfer v Jurgen Wolff (2004)
Facts:
Spouses Publico v Bautista (2010) Issue:
Facts: Rule:
Issue: Ratio:
Rule:
Ratio:
7. Incapacity to Pay

Art 1237. Whoever pays on behalf of the debtor without the Art. 1239. In obligations to give, payment made by one who
knowledge or against the will of the latter, cannot compel the does not have the free disposal of the thing due and capacity
creditor to subrogate him in his rights, such as those arising to alienate it shall not be valid, without prejudice to the
from a mortgage, guaranty, or penalty. provisions of Article 1427 under the Title on "Natural
Obligations." (1160a)
Trigger: payment or performance by a third person without the
knowledge or against the will of the debtor IF: person paying has not capacity to make the payment
THEN: Creditor cannot be compelled to accept it
Effect: third person who paid cannot compel the creditor to ● Consignation won’t be proper
subrogate him in his rights*, such as those arising from a ● In case: creditor accepts
mortgage, guaranty, or penalty ○ Payment NOT valid
○ EXCEPTION: Art 1247: Unless it is
Reimbursement Subrogation otherwise stipulated, the extrajudicial
expenses required by the payment shall be
It gave rise to the third Upon payment of credit, the for the account of the debtor. With regard to
person’s right to recover from payor steps into the shoes of judicial costs, the Rules of Court shall
the debtor based on the mere the creditor and becomes govern.
fact of payment and entitled to exercise the rights
considerations of justice which the creditor could have 8. Payment recipient
exercised.
Art. 1240. Payment shall be made to the person in whose
The payment extinguished The payment did not favor the obligation has been constituted, or his successor in
the obligation extinguish the obligation; interest, or any person authorized to receive it. (1162a)
merely a change in the active
subject
Payment to:
1. Person in whose favor the obligation has been
*the article says “cannot compel the creditor”: constituted
- this gives the impression that there may be subrogation if the 2. His successor in interest
creditor willingly and spontaneously permits the third person to 3. Any person authorized to receive it
be subrogated
- however, this would be unfair to the debtor. There is no Authorized person to receive payment
provision granting the creditor with the right to subrogate the ● Types:
rights arising from payment without the debtor’s consent. ○ Legal
■ Conferred by law
■ EX: authority of guardian of an
incapacitated creditor or
 administrator of estate of deceased
creditor
○ Conventional
■ Authority given by creditor himself
■ EX: agent appointed to collect from
the debtor
■ Debtor may be authorized by
creditor to make payment to
another whether 3rd person is
creditor’s representative or not
● Payment to wrong party
● DOESN’T extinguish the obligation as to the creditor
○ If no fault or negligence wc can be imputed
to the creditor
● GR: Payment to one who is not in fact his creditor or
authorized to receive such payment = VOID
○ Even if debtor acted in utmost good faith and
by mistake as to the person of his creditor, or
through error induced by fraud of the 3rd
person
○ EXCEPTION: Art 1241
Deposit in bank
● Deposit by debtor in a bank, in the name and to the
credit of the creditor, without authorization of the
creditor =/= payment
● BUT if creditor cannot be found in place of payment –
deposit = valid excuse for not holding debtor in default
Deposit in Court
● Consignation in Court of the thing or amount due,
when properly made = EXTINGUISH obligation
● Must be in a case where payment is demanded
Cembrano v City of Butuan (2006)
Facts:
Issue:
Rule:
Ratio:
Spouses Culaba v CA (2004)
Facts:
Issue:
Rule:
Ratio:
9. Payment to Incapacitated/ Third Person
Art 1241. Payment to a person who is incapacitated to
administer his property shall be valid if he has kept the thing
delivered, or insofar as the payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it
has redounded to the benefit of the creditor. Such benefit to the
creditor need not be proved in the following cases:
1. If after the payment, the third person acquires the
creditor's rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditor's conduct, the debtor has been led to
believe that the third person had authority to receive
the payment.
To incapacitated person:
Trigger: Payment to incapacitated person
General Rule: Valid only insofar as the incapacitated
person benefitted
● When creditor is incapacitated, payment must be made
to his legal representative. If there is no legal
representative, debtor may relieve himself by
delivering the thing to the court in consignation (1256)
● If payment was made to the incapacitated, it shall be
valid only insofar as it accrued to his benefit
● In the absence of this benefit, the debtor may be made
to pay again
How do we measure benefit? Three schools of thought:
1. Roman doctrine - benefit subsisting at the time of the
complaint
2. Aubry and Rau - so long as the incapacitated person
has received the benefit, regardless if it still subsists
3. Demolombe (Tolentino thinks this is the correct
criterion) - if incapacitated made an intelligent and
reasonable use thereof for purposes necessary or
useful to him, such that which his legal
representative would have done
To third party
Trigger: Payment to third party
General Rule: Valid only insofar as creditor benefitted
● Same principles governing payment to an
incapacitated creditor, except that the person who
paid has right to recover the payment from third party.
○ However, if he cannot recover, he shall
suffer the loss.
● Note Art. 1240. This is an exception to this provision
only insofar that the payment inured to the benefit of
the creditor.
○ Other exceptions: Art 1626, Art. 1242
Valarao v CA (1999)
Facts:
Issue:
Rule:
Ratio:
10. Payment to Possessor of Credit
Art 1242. Payment made in good faith to any person in
possession of the credit shall release the debtor
Trigger: Payment in good faith to any person in possession of
the credit
Effect: Releases the debtor
General Rule: Art 1240 (Recipient of payment)
Exception: Payment to those in possession of the credit
● This is an exception to Art. 1240.
 ● The person in possession of the credit is neither the
creditor nor authorized to receive payment
● However, under the circumstances of the case, he
appears to be the creditor
● Note, possession of the credit is different from the
possession of the document representing the credit
○ It is necessary to consider the nature of the
credit
○ For example, payment to the possessor of
the document payable to order/definite
person (who is not the possessor) would not
extinguish the obligation / would not trigger
this provision
● What constitutes good faith? Belief of the debtor that
the party who presents the title of the obligation is the
true creditor
○ Immaterial whether the payee acts in good
faith as this provision gives protection to the
debtor.
Orata v IAC (1990)
Facts:
Issue:
Rule:
Ratio:
National Power Corp v Ibrahim (2015)
Facts:
Issue:
Rule:
Ratio:
11. Payment after judicial order to retain
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.
Trigger: The debtor has been judicially ordered to retain the
debt.
Effect: Payment made by the debtor to the creditor is not valid.
Purpose: This provision gives the effect of a payment made
after a judicial order to retain.
EFFECT OF GARNISHMENT:
● The payment to the creditor after the credit has been
attached or garnished, is void as to the party who
obtained the attachment or garnishment, to the extent
of the amount of the judgment in his favor.
● The debtor can therefore be made to pay again to the
party who secured the attachment or garnishment, but
he can recover to the same extent what he has paid
to his creditor.
● CONSIGNATION: The debtor upon whom a
garnishment order is served, can always deposit the
money in court by way of consignation, and thus
relieve himself of further liability.
● If the action of the attaching or garnishing creditor
fails, the garnishment is of no effect, as it is only
incidental or accessory to the main action. Payment
made by the garnishee is valid.
12. Substitution of prestation
Art 1244. The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same
value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot
be substituted by another act or forbearance against the
obligee’s will.
General Rule: The debtor of a thing cannot compel the creditor
to receive a different one.
Exception: If the creditor agrees or consents to the substitution
Purpose: The provision states the rule on substitution of
prestation.
SUBSTITUTION OF PRESTATION:
● Upon agreement or consent of the creditor, the debtor
may deliver a different thing or perform a different
prestation in lieu of that stipulated.
○ There may be Dation in payment (Article
1245) or Novation (Article 1291)
WAIVER OF DEFECTS:
● The defects of the thing delivered may be waived by
the creditor, if he expressly so declares, or if with
knowledge thereof, he accepts the thing without
protest or disposes it or consumes it.
13. Dation in Payment
Art 1245. Dation in payment, whereby property is alienated to
the creditor in satisfaction of a debt in money, shall be
governed by the law of sales. (n)
Trigger: When a property is alienated to the creditor in
satisfaction of a debt in money.
Effect: The obligation is extinguished to the extent of the value
of the thing delivered, either as agreed upon by the parties, or
as may be proved. The obligation is fully extinguished when by
express or implied agreement, or by their silence, the
obligation is considered totally extinguished.
General Rule: The law on Sales shall apply if the debt to be
satisfied is in money.
Exception: If the debt to be satisfied is not in money, then the
Dation in Payment shall be considered a Novation by change
of object.
Example: A owes B P1000. A then delivers a Cake to B in
exchange of his debt. B accepts. In this case, there is Dation in
Payment, and the law on sales shall apply.
Dation in Payment – delivery and transmission of ownership of
a thing by the debtor to the creditor as an accepted equivalent
of the performance of the obligation.

Property that may be given:
● Thing
● Real Right (such as a usufruct or inheritance)
● Credit against a third person
Modern concept: Dation in Payment is Novation by Change of
Object. However, as the provision expressly states, when the
Dation in Payment is for the debt of money, the law on sales
shall apply. Given this, Dation in Payment for debts that are not
in money shall be considered as Novations.
Distinguished from Assignment (Cession): Dation in Payment
does not involve multiple creditors, or whole of the property of
the debtor, unlike Cession. (There will be a further discussion
on the differences once we reach Art. 1255)
There is a strong presumption towards the delivery being a
Pledge if the debtor’s personal property is delivered to the
creditor, unless the intention of the properties is clearly a
Dation in Payment.
In cases where the original obligation has be revived for the
recovery of the creditor (like when the creditor is evicted from
the thing given as Dation in Payment), then the creditor may
recover for breach of warranty under Art. 1555. The General
rule here is that the original obligation cannot be revived since
the Dation already extinguished the obligation.
When there is an error in payment, the debtor may recover the
thing, not its price.
Tan Shuy v Spouses Maulawin (2012)
Facts:
Issue:
Rule:
Ratio:
Philippine Lawin v CA (2002)
Facts:
Issue:
Rule:
Ratio:
Filinvest Credit Corp v Philippine Acetyene Co, Inc (1982)
Facts:
Issue:
Rule:
Ratio:
14. Same quality
Art 1246. When the obligation consists in the delivery of an
indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot
demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation
and other circumstances shall be taken into consideration.
(1167a)
● Trigger: Obligation to deliver an indeterminate or
generic thing, whose quality and circumstances have
not been stated
● Effect: Creditor cannot demand a thing of superior
quality. Debtor cannot deliver a thing of inferior
quality.
● General Rule: What is stated in the effect
● Exception: Quality stipulated in the obligation
● Purpose: To determine the quality of the thing to be
delivered
If there is disagreement between the debtor and creditor as to
the quality of the thing to be delivered, the court should decide
whether it complies with the obligation, taking into
consideration the purpose and other circumstances of the
obligation.
Creditor or debtor may waive the benefit of this article unless
the price to be paid is dependent upon the quality.
15. Extrajudicial expenses
Art 1247. Unless it is otherwise stipulated, the extrajudicial
expenses required by the payment shall be for the account of
the debtor. With regard to the judicial costs, the Rules of
Court shall govern. (1168a)
● Trigger: There are extrajudicial expenses required by
the payment of an obligation
● Effect: Such expenses shall be for the account of the
debtor. Judicial costs » Rules of Court
● General Rule: Extrajudicial expenses » account of
debtor
● Exception: otherwise stipulation
● Purpose: To determine who shall shoulder
extrajudicial expenses and what rule shall govern
judicial costs.
Reason for this article is that payment is the debtor’s duty and
it inures to his benefit in that he is discharged from the burden
of the obligation.
16. Payment currency and value
Art 1249 par 1. The payment of debts in money shall be
made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
● Trigger: The payment of debts in money…
● Effect: shall be made in the currency stipulated
● General Rule: The payment of debts in money shall
be made in the currency stipulated.
 ● Exception: If it is not possible to deliver such
currency, then in the currency which is legal tender in
the Philippines.
● Purpose: Shows in what currency the debt should be
paid in.
● Example: If it was stipulated in the contract that the
debt shall be paid in US dollars, then the debt shall be
paid in US dollars.
Art 1249 par 2 and 3. The delivery of promissory notes
payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the
creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in abeyance.

Trigger: payment made with promissory notes payable to

Union Bank v Sps Tiu (2011)
order, or bills of exchange or other mercantile documents
Rule:

General Rule: effective only when encashed

Art 1250. In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation
shall be the basis of the payment, unless there is an
agreement to the contrary.
Exception: impaired through fault of creditor
Purpose: to show when payments made with negotiable
instruments become effective

● Trigger: In case an extraordinary inflation or
deflation…
● Effect: the value of the currency at the time of the
establishment of the obligation shall be the basis of
payment
● General Rule: 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
the payment.
● Exception: Unless there is an agreement to the
contrary.
● Purpose: Shows the effect of an extraordinary
inflation or deflation.
● Example: In case hyperinflation occurred, the value of
the currency at the time the debt was incurred shall
be the basis of payment.
Example: A owes B Php 500. A pays B with a Check, A is not
have deemed to pay B until B has cashed the check.
Applicability:
1. Instruments executed by a third person and delivered
by debtor to creditor
2. Not executed by debtor himself and delivered to
creditor
Payment by check:
- May be validly refused by creditor
- Since an obligation must be paid in legal
tender (cash)
- Applied in payment made in court
A check whether an ordinary or manager's check IS NOT
LEGAL TENDER
Loss of value:

Telengtan Brothers v United States (2006) If negotiable instrument impaired by the creditor, payment
Facts:
considered in effect
Issue:
Rule: - Applicable only to Instruments executed by a third
Ratio: person and delivered by debtor to creditor

Citibank v Sabeniano (2007)

Facts: Papa v Valencia (1998)
Issue: Facts:
Rule: Issue:
Ratio: Rule:
Ratio:

Equitable PCI v Ng Sheung (2007)

Facts: Philippine Airlines v CA (1990)
Issue: Facts:
Rule: Issue:
Ratio: Rule:
Ratio:

17. Payment in Negotiable Instruments

Tibajia, Jr. v CA (1993)
Rule:
18. Interest and Installments
Art. 1176. The receipt of the principal by the creditor without
reservation with respect to the interest, shall give rise to the
presumption that said interest has been paid.
The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise raise the
presumption that such installments have been paid. (1110a)
● Trigger: Receipt of the principal/later installment by
the creditor from the debtor, without any reservation
to the interest/prior installments
● Effect: Presumption that such interest/prior
installments have already been paid.
● Purpose: The law gives a presumption that creditor
waives his right to the interest OR a presumption that
creditor received the prior installments, given that he
made no reservation with respect to the interest/prior
installments when he received the principal/later
installment
The basis Article 1176 is Article 1253, where if a debt produces
interest, payment of the principal amount shall not be deemed
made until the interest has been covered.
This doctrine does not apply to payment of taxes because the
tax of one year is independent of the taxes for other taxes for
other years. These do not constitute installments of the same
obligation
Marquez v Elisan Credit Corp (2015)
Facts:
Issue:
Rule:
Ratio:
19. Place of Payment
Art. 1251. Payment shall be made in the place designated in
the obligation.
There being no express stipulation and if the undertaking is
to deliver a determinate thing, the payment shall be made
wherever the thing might be at the moment the obligation
was constituted.
In any other case the place of payment shall be the domicile
of the debtor.
If the debtor changes his domicile in bad faith or after he has
incurred in delay, the additional expenses shall be borne by
him.
These provisions are without prejudice to venue under the
Rules of Court. (1171a)
General Rule: Payment must be made in the place stipulated
by the parties.
Payment must be made at the place where the thing was
located when the obligation was constituted. REQUISITES:
1. Applies to obligation to deliver determinate things
2. Applies to obligations to do = services
3. There is no stipulation between the parties with
respect to the place where payment/performance
would be made.
HOWEVER, payment must be made at the debtor’s domicile if:
1. Thing to be delivered is determinate
2. The existence of the thing at the place where it was
located when the obligation was constituted was
merely temporary (such as when the thing was on
transit)
● In obligation to give a sum of money, creditor has the
duty to go to debtor’s domicile to collect, absent any
stipulation to the contrary.
○ Debtor has the right to wait for creditor, or
the latter’s representative, to collect from the
debtor. Until then, the debtor will not incur in
delay.
○ Creditor will shoulder the expenses he will
incur in going to debtor’s domicile, because
1251 imposes a duty to the creditor to pay in
the debtor’s domicile.
■ But debtor would shoulder the
creditor’s additional expenses if the
former changes domicile in bad
faith
B. Application of Payments
Application of payments – designation of the debt which is
being paid by a debtor who has several obligations of the same
kind in favor of the creditor to whom payment is made
Art.1252 to 1254 apply to a person owing several debts of the
same kind to a single creditor.
Art 1252. He who has various debts of the same kind in
favor of one and the same creditor, may declare at the time
of making the payment, to which of them the same must be
applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose
benefit the term has been constituted, application shall not
be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot
complain of the same, unless there is a cause for
invalidating the contract. (1172a)
TRIGGER: various debts of the same kind in favor of one and
the same creditor

PURPOSES:
1. Who can declare to which debt the payment is to be
applied
2. On what debts can the payment be applied
FIRST PURPOSE:
General Rule: He who has various debts of the same kind in
favor of one and the same creditor (debtor) may declare at
the time of making the payment, to which of them the same
must be applied.
Exception: (2nd par.) 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
Exception to the exception: unless there is a cause for
invalidating the contract.
SECOND PURPOSE:
General Rule: application shall not be made as to debts which
are not yet due
Exceptions: unless (1) the parties so stipulate, or (2) when the
application of payment is made by the party for whose benefit
the term has been constituted
Debts to be Paid
- In order that the rules for application of payment
may be applied, it is necessary that the obligations must
all be due except:
o In case of mutual agreement of the parties
o Upon the consent of the party in whose favor
the term was established
- All debts must be for the same kind, generally of a
monetary character. This includes obligations which were
not originally of a monetary character but, at the time of
application of payment, had been converted into an
obligation to pay damages by reason of breach or non-
performance.
Right of Debtor
- The law grants to the debtor a preferential right to
choose the debt to which his payment is to be applied.
- Ratio → under equal circumstances, the law favors
the debtor
- Limitations → debtor cannot impair the rights
granted by law to the creditor:
o Cannot compel creditor to accept partial
payment (Art. 1248)
o If there is only one obligation bearing
stipulated interest, the debtor cannot apply the
payment to the principal, because the law
requires its application to interest first (Art. 1253)
o Cannot apply payment to a debt not yet
liquidated
o Cannot choose a debt with a period for the
benefit of the creditor, when the period has not
yet arrived
o Cannot change a prior agreement on
application of payment
- The right to select the obligation to which the
payment is to be applied must be exercised when the
debt is paid
- After exercising the said right by indicating the debt
to which payment is to be applied, debtor cannot claim
that it should be understood as applied to another debt
Effect of Creditor’s Refusal
- if creditor refuses to accept the selection made by
the debtor, he will incur in delay.
Application by creditor
- if debtor does not exercise his right of application,
then (1) the application may be as provided by law or (2)
creditor can make the application, subject to acceptance
by the debtor
- the creditor can express his choice of application in
the receipt issued at the time of payment
- debtor should validate application express in said
receipt
- once the debtor has accepted the application made
by the creditor, he cannot contest it anymore
- application made by the creditor without the
knowledge and consent of the debtor is not binding
Contested by debtor
- debtor may only contest if “there is a cause for
invalidating the contract” à referring to the consent given
by the debtor to the application made in the receipt
- debtor’s consent to creditor’s application may be
vitiated by mistake, violence, intimidation, fraud, etc.
Application by law
- when neither the debtor nor the creditor has made a
valid application of payment, or when the application
made by the creditor is annulled by the debtor, then
Art.1253 and 1254 shall apply
Change of application
- debtor and creditor can agree to change the
application of payment already made, without prejudice to
the rights of third persons acquired before such
agreement.
Liggett & Myers v Associated Insurance (1960)
Facts:
Issue:
Rule:
Ratio:
Premiere Development v Central Surety (2009)
Facts:
Issue:
Rule:
Ratio:

Art 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until the
interests have been covered. (1173)
Purpose: provides a rule on application of payments if the
debts produces interest
Trigger: if the debt produces interest
Effect: payment of the principal shall not be deemed to have
been made until interests have been covered
Payment of interest before payment of principal
- obligatory principle that can only be dispensed with
by mutual agreement
- creditor may oppose an application of payment
made by the debtor contrary to this rule
Interests covered
- according to Tolentino, the article should cover all
interests because it does not make any distinction
Magdalena Estates Inc v Rodriguez (1966)
Facts:
Issue:
Rule:
Ratio:
Art 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application can not
be inferred from other circumstances, the debt which is most
onerous to the debtor, among those due, shall be deemed to
have been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately.
(1174a)
Triggers:
1. when the payment cannot be applied in accordance with
the preceding rules
2. if application can not be inferred from other
circumstances
Effects
- General Rule: debt which is most onerous to the
debtor, among those due, shall be deemed to have been
satisfied
- Exception: if the debts are of the same nature and
burden, the payment shall be applied to all of them
proportionately
Ratio: the law considers the interest of the debtor, as if the
debtor himself were making the application. It is assumed that
if the debtor had chosen the debt to be paid, he would have
relieved himself first of the more burdensome debt.
Most Onerous Debts – question of fact which courts must
determine on the basis of the circumstances of each case. The
following may be bases for determination:
1. Being bound as principal debtor in one obligation is more
burdensome than being a surety in another obligation. Being
the sole debtor in one obligation is more burdensome than
being a solidary debtor in another.
2. Older debts are more burdensome than recent debts
3. Debts bearing interest are more burdensome than those
that do not (even if the latter is the older debt). Where both
obligations bear interest, that which has a higher rate is more
burdensome. An unsecured debt bearing interest is more
onerous than a secured one without interest.
4. Debt with a guaranty is more onerous than that without
security.
5. Debt which is subject to the general rules on damages is
less burdensome than that in which there is a penal clause
6. Liquidated debt is more burdensome than the
unliquidated one
7. An obligation in which the debtor is in default is more
onerous than one in which he is not.
Paculdo v Regalado (2000)
Facts:
Issue:
Rule:
Ratio:
C. Payment by Cession
Art. 1255. The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless there
is stipulation to the contrary, shall only release the debtor
from responsibility for the net proceeds of the thing
assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors
shall be governed by special laws. (1175a)
Assignment or cession - abandonment of the universality of
the property of the debtor for the benefit of his creditor
● For the purpose of applying the payment for his credit
● Initiative comes from the debtor but must be accepted
by the creditors
Two forms of assignment by debtor:
1. Voluntary - this article
2. Legal - Insolvency Law (if offer of debtor is not
accepted by creditors, proceeding in insolvency may
be initiated)
Voluntary assignment
● Doesn’t have the effect of making the creditors the
owners of the property of the debtor
○ Unless there’s an agreement to that effect
● Gives the creditors the right to proceed to the sale of
the property and to pay themselves in the amount
from the proceeds
● Property Exempt: De Diego (scholar) - debtor must
reserve amount needed for support that he is required
to reserve in case of donations
 ○ Assignment can’t include family home but
can include other properties exempt from
execution if debtor waives exemption
Dation in Payment Voluntary Assignment of
Property
Effect: Debtor released from liability
General Rule: Consignation releases debtor from liability only
when a tender of payment was made
Exception: Consignation may release the debtor from liability
even without tender in the 5 enumerated cases
Purpose: Effects of consignation; causes of consignation

Transfers ownership of thing Only possession and Tender of payment

alienated administration are ● Required only in case where the creditor without just
transferred with cause refuses to accept it
authorization to convert ● Not required in five other situations enumerated in the
property into cash article
● Effect on interest - when followed by prompt attempt
May totally extinguish the Only extinguishes the credits
obligation and release the to the extent of the amount to deposit the means of payment by way of
debtor realized from the properties consignation, accrual of interest will be suspended
assigned unless otherwise from the date os duch tender.
agreed upon
Requisites of Consignation
Cession of only some Involves all the property of 1. There was a debt due
specific thing the debtor
● Provisions of consignation are not applicable
Transfer is only in favor of Various creditors when there is no obligation to pay
one creditor to satisfy his ● Note: consignation is a form of payment of
debt an obligation
2. Consignation was made because of some legal cause
● Unjust refusal of the creditor to accept after
DBP v CA (1998) tender of payment was made
Rule: Note: Tender of payment is an indispensable
requirement - must be tender of very thing due (if
money, legal tender); unconditional
D. Tender of Payment and Consignation
● Absence
● Incapacity
Meat Packing v Sandiganbayan (2001) ● Various claimants
Rule: ○ Claimants must have appearance of
a right to collect such that the debtor
would have reasonable doubt, not
1. Effect
based on negligence
● List provided by provision is not exclusive
Art 1256. If the creditor to whom tender of payment has been 3. Previous notice of the consignation (Art. 1257)
made refuses without just cause to accept it, the debtor shall 4. The amount or thing due was placed at the disposal
be released from responsibility by the consignation of the of the court (1258)
thing or sum due. 5. After the consignation, the persons interested were
Consignation alone shall produce the same effect in the notified (1258)
following cases:

(1) When the creditor is absent or unknown, or does not Spouses Cinco v CA (2009)
appear at the place of payment; Facts:
Issue:
(2) When he is incapacitated to receive the payment at the Rule:
time it is due; Ratio:

(3) When, without just cause, he refuses to give a receipt;

Spouses Llobrera v Fernandez (2006)
(4) When two or more persons claim the same right to collect; Facts:
Issue:
(5) When the title of the obligation has been lost. (1176a) Rule:
Ratio:

Trigger: Tender of payment made; Creditor refuses without

just cause to accept; Consignation of the thing Art 1260 par 1. Once the consignation has been duly made,

the debtor may ask the judge to order the cancellation of the
obligation.
Trigger: Consignation duly made, debtor asks judge to cancel
obligation
Effect: Cancels debtor’s obligation / releases debtor from
liability
When does consignation take effect (completed)?
● At the time creditor accepts the consignation without
objections
● If creditor objects, at the the time the court declares
that it has been validly made in accordance with law
Effects of Consignation
● Released in the same manner as if he performed the
obligation
● Accrual of interest suspended from moment of
consignation
● Deteriorations / loss without fault of the debtor borne
by creditor
Note: risk of the thing transferred to creditor from
moment of deposit
● Increment or increase in the value of the thing inures
to the benefit of creditor
Note: Consignation has a retroactive effect. Payment
deemed to have been made at the time of the deposit of the
thing in court.
Consignation and Reciprocal Obligations - Debtor can ask
the court that the thing be delivered to the creditor only upon
compliance of the creditor with the counter-prestation.
2. Requirements
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.
(1)
Trigger: Notice of consignation to persons interested in the
fulfillment of the obligation
Effect: The consignation of the thing due releases the obligor.
(2)
Trigger: Consignation not made strictly in consonance with the
provisions which regulate payment.
Effect: The consignation is ineffectual
Purpose: The article provides the requirements for
consignation, namely that of notice to persons interested in the
fulfillment of the obligation and being made in consonance with
provisions on payment.
PERSONS TO BE NOTIFIED: The notice of consignation must
be given to all persons interested in the fulfillment of the
obligation.
● Includes passive subjects (e.g. co-debtors,
guarantors, sureties), active subjects (e.g. solidary
creditors), and possible litigants (e.g. all those who
claim to be entitled to the payment)
HOW NOTICE IS GIVEN:
● The tender of payment and the notice of consignation
sent to the creditor may be made in the same act.
● In case of absent or unknown creditors, the notice
may be made by publication.
The lack of notice does not invalidate the consignation, but
simply makes the debtor liable for the expenses.
● However, Tolentino cites jurisprudence where the SC
held that for consignation to be valid, the notice
requirements must be complied with (Valdellon v
Tengco). Without prior notice, consignation is void as
payment (Soco v Militante)
Art 1258 Consignation shall be made by depositing the
things due at the disposal of judicial authority, before whom
the tender of payment shall be proved, in a proper case, and
the announcement of the consignation in other cases.
The consignation having been made, the interested parties
shall also be notified thereof.
Rules:
(1) Consignation is made by depositing the things due at the
disposal of judicial authority.
● The tender of payment shall be proved before such
judicial authority in a proper case
● The announcement of consignation shall be proved in
other cases.
(2) After the consignation has been made, interested parties
should be notified.
Purpose: The article provides for the procedure for
consignation (i.e. how consignation is made).
DEPOSIT IN COURT: The very thing due must be placed at
the disposal of the judicial authority.
JUDICIAL AUTHORITY: Includes the sheriff in cases of
consignation of the amount for the redemption of property sold
in execution by said sheriff.
POWER OF THE COURT:
● Court may order that the property be taken into the
custody of an officer of the court or a receiver to be
specially authorized by it.
● Court may also make an order for the sale of property
and the payment of the proceeds into the court
 ○ This is important especially if the goods are General Rule: The debtor may withdraw the thing or sum
of perishable nature deposited.
Exception: When the creditor has already accepted
NOTICE AFTER CONSIGNATION: This is fulfilled by the consignation or when there has been a judicial declaration that
service of summons upon the defendant, together with a copy the consignation has been properly made.
of the complaint.
Tolentino: The debtor shall bear all expenses of the
obligation’s revival.
Spouses Cinco v CA (2009)
Facts:
Issue: Pabugais v Sahijwani (2004)
Rule: Facts:
Ratio: Issue:
Rule:
Ratio:
Spouses Llobrera v Fernandez (2006)
Facts:
Issue: Art 1261. If, the consignation having been made, the
Rule: creditor should authorize the debtor to withdraw the same,
Ratio: he shall lose every preference which he may have over the
thing. The co-debtors, guarantors and sureties shall be
released. (1181a)
c. Expenses

Trigger:
Art. 1259. The expenses of consignation, when properly
Effect:
made, shall be charged against the creditor. (1178)
General Rule:
Exception:
Trigger: When a consignation has been properly made. Purpose:
Effect: The expenses of consignation shall be borne by the Example:
creditor. Trigger: When the creditor allows the debtor to withdraw the
obligation.
Consignation is Properly Made when: Effect: The obligation shall be revived.
1. After the thing has been deposited in court, the Exception: The co-debtors, guarantors and sureties shall be
creditor accepts the consignation without objection released regardless.
and without any reservation of his right to contest it
because of failure to comply with any of the requisites IX. LOSS OF THING DUE
for consignation.
2. The creditor objects to the consignation but the court, ● Not a strict legal meaning of “loss” but extends to
after proper hearing, declares that the consignation those which are personal
has been validly made. ● Embraces all causes wc may render impossible the
performance of the prestation
d. Withdrawal ● Impossibility of performance – must be subsequent to
the execution of the contract, to extinguish the
obligation
Art 1260 Par 2. Before the creditor has accepted the
consignation, or before a judicial declaration that the
A. When loss extinguishes
consignation has been properly made, the debtor may
withdraw the thing or the sum deposited, allowing the
obligation to remain in force. (1180) Art. 1262. An obligation which consists in the delivery of
a determinate thing shall be extinguished if it should be
lost or destroyed without the fault of the debtor, and
Trigger:
before he has incurred in delay.
Effect:
General Rule:
When by law or stipulation, the obligor is liable even for
Exception:
fortuitous events, the loss of the thing does not extinguish
Purpose:
the obligation, and he shall be responsible for damages. The
Example:
same rule applies when the nature of the obligation requires
the assumption of risk. (1182a)
Effect: Allows the obligation to remain in force.
Trigger: Obligation to deliver a determinate thing
obligation
● Thing is lost or destroyed
● Without the fault of the debtor
● Before he has incurred in delay ● Impossibility must be subsequent to the constitution
of the obligation (after it has been constituted)
Effect: Obligation is extinguished
Nature of Impossibility
Thing is lost when: ● Physical impossibility
● Perishes ○ Act by reason of its nature can’t be
● Goes out of commerce accomplished
● Disappears in such a way that its existence is ● Legal impossibility
unknown or it cannot be recovered ○ Act, by reason of a subsequent law, is
● Non-existence in the hands of the obligor – when prohibited
through any cause the fulfillment of the obligation ● Objective impossibility
becomes impossible ○ When the act or service in itself, without
considering the person of the obligor,
Subjective impossibility becomes impossible
● Ex: thing belongs to another ● Subjective impossibility
● Failure of performance – imputable to debtor -> must ○ Act or service can’t be done by the debtor
indemnify the creditor for the damages suffered himself, but it can be accomplished by others

Fortuitous event Partial Impossibility

● Does not necessarily extinguish the obligation by itself ● Art 1264 applies - Circumstances may indicate that
● Impossibility of performance, without negligence of partial impossibility be considered equivalent to total
the parties impossibility:
○ Prevents enforcement of obligation in the ○ Importance of the consequence of the partial
absence of law or stipulation to the contrary impossibility
○ Purpose of obligation
Reciprocal Obligations
● Entire juridical relation is extinguished Temporary Impossibility
● Debtor must return to the creditor whatever the latter ● Obstacles which may be expected to disappear in the
may have already delivered by reason of the near future
obligation ● DON’T extinguish the obligation
● Principle of res perit domino – if an obligation is ● BUT if they’re for an unknown and unforeseen
extinguished by the loss of the thing or impossibility of duration, obligation may be considered juridically
performance c/o fortuitious events, then counter- impossible
prestation = also extinguished ○ Obligation may be extinguished and in this
case, won’t be revived even if it becomes
possible later on
Art. 1266. The debtor in obligations to do shall also be
released when the prestation becomes legally or physically
Reciprocal obligations
impossible without the fault of the obligor. (1184a)
● Release of the debtor due to impossibility of
performance also releases the creditor from the
Trigger: Obligation to do counter-prestation
● Prestation becomes legally or physically impossible
● Without fault of debtor
PNCC v CA (1997)
Facts:
Effect: Debtor is released
Issue:
● Cannot make him liable for damages
Rule:
Ratio:
ART 1348 ART 1266

Impossibility existing at the
time of the obligation
Brings about the nullity of
the contract
Impossibility which
supervenes at the time of
performance
Brings about a modification
or extinguishment of the
B. When loss does not extinguish
Art. 1262. An obligation which consists in the delivery of a
determinate thing shall be extinguished if it should be lost or
destroyed without the fault of the debtor, and before he has
incurred in delay.

When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not
extinguish the obligation, and he shall be responsible
for damages. The same rule applies when the nature of
the obligation requires the assumption of risk. (1182a)
● Aforementioned provision provides instances where
loss will not extinguish the obligation, which includes:
○ If the law/stipulation provides that the debtor
is still liable even if loss is due to fortuitous
events.
○ If the nature of the obligation requires the
assumption of risk.
○ If debtor’s acted with fault or negligence,
which concurred with the fortuitous event.
○ If debtor has incurred in delay.
○ If debtor has promised to deliver same thing
to 2 or more persons.
○ If the obligation to deliver a determinate thing
arises from a criminal act.
● Aforementioned article provides one of the instances
where loss will not extinguish the obligation.
○ The obligation to deliver a determinate thing
arises from a criminal act.
■ Example: I stole someone’s phone. I
got convicted of theft. I am obliged to
return the phone, and if it lost,
regardless whether it is due to my
fault or not, the obligation subsists.
○ EXCEPTION: If the creditor unjustly refuses
to receive the thing due.
● If the debtor tenders payment and the creditor unjustly
refuses, the former may either consign the thing due or
keep such thing with the obligation to use due
diligence.
C. Partial Loss
Art. 1264. The courts shall determine whether, under the
circumstances, the partial loss of the object of the obligation
is so important as to extinguish the obligation. (n)

Trigger: when there is a fortuitous event ; circumstance not

Art. 1263. In an obligation to deliver a generic thing, the loss
imputable to debtor
or destruction of anything of the same kind does not
extinguish the obligation. (n)
Effect: should still be delivered to creditor in impaired condition
EXCEPT if decided that such loss negates the obligation
● Generic things are not particularized and are confined
to its nature or genus. The test to see WON loss is so important is to see WON the
● Generic things are not considered lost because the obligation would be constituted without it
debtor can always procure another thing of its kind.
○ Latin maxim: genus nunquam perit – THE D. Presumption of Fault
GENUS NEVER PERISHES.
● EXCEPTION: Delimited generic things
Art. 1265. Whenever the thing is lost in the possession of
○ If there is a limitation to the generic object to
the debtor, it shall be presumed that the loss was due to his
a particular existing mass or group of things.
fault, unless there is proof to the contrary, and without
■ Example: I obligate myself to give
prejudice to the provisions of article 1165. This presumption
you one of my cars. The car is a
does not apply in case of earthquake, flood, storm, or other
delimited generic thing because it is
natural calamity. (1183a)
limited to an existing group of things
which is the cars that I own.
Trigger: Thing is lost in the possession of the debtor
Gaisano v Insurance Company (2006)
Effect: Presumed the loss was due to debtor’s fault
Facts:
Issue:
General Rule: If lost in possession of debtor, it will be
Rule:
presumed that the loss was due to debtor’s fault
Ratio:
Exception: If there is proof to the contrary, without prejudice to
the provisions of article 1165 and in case of earthquake, flood,
Art. 1268. When the debt of a thing certain and determinate
storm, or other natural calamity.
proceeds from a criminal offense, the debtor shall not be
exempted from the payment of its price, whatever may be
Purpose: To determine who is at fault
the cause for the loss, unless the thing having been offered
by him to the person who should receive it, the latter refused
The debtor must show that he is free from negligence, for
without justification to accept it. (1185)
negligence is presumed from the mere fact of loss, except in
the case of natural calamity, where lack of fault on the part of
the debtor is likely and it is unjust to presume negligence on
his part. Requisites for the application of the article:
1. Event or change in circumstances could not have
been foreseen at the time of the execution of the contract
Jimmy Co v CA (1998)
o The court considers events which, normally and in the
Facts:
ordinary course of life, according to the circumstances of
Issue:
time and place, the parties may reasonably contemplate
Rule:
as possible.
Ratio:
o Change in circumstances should be greatly beyond
what could have been reasonably foreseen by diligent
E. Unforeseen Difficulty persons at the time of the celebration of the contract.
o The contract must be respected as long as the
injustice is not intolerable.
Art. 1267. When the service has become so difficult as to be
2. Makes the performance of the contract extremely
manifestly beyond the contemplation of the parties, the
difficult but not impossible
obligor may also be released therefrom, in whole or in part.
o Difficulty of performance = manifest disequilibrium in
(n)
the prestations, such that one party would be placed at a
disadvantage by the unforeseen event.
Trigger: When the service has become so difficult as to be 3. Event must not be due to the act of any of the
manifestly beyond the contemplation of the parties parties
4. Contract is for a future prestation
Effect: the obligor may be released therefrom, in whole or in *excluded from the article are contracts that are purely
part. speculative and aleatory contracts (those in which the
performance of one or both parties is contingent upon the
Change of circumstances occurrence of a particular uncertain event)
General Rule: impossibility of performance releases the obligor
Exception: When the service has become so difficult as to be
Occena v CA (1976)
manifestly beyond the contemplation of the parties, the court
Facts:
should be authorized to release the obligor in whole or in part.
Issue:
Limit: the intention of the parties should govern. The courts
Rule:
cannot remake, modify or reverse the contract stipulated with
Ratio:
the force of law, so as to substitute its own terms for those
covenanted by the parties themselves (Occena v CA and
Jabson)
PNCC v CA (1997)
*This article states in our law the DOCTRINE OF
Facts:
UNFORESEEN EVENTS.
Issue:
- Based on the discredited theory of rebus sic stantibus in
Rule:
public international law
Ratio:
- Under this theory, parties stipulate in light of certain
prevailing conditions. Once these conditions cease to exist, the
contract also ceases to exist.
Naga Telephone v CA (1994)
- The disappearance of the bases of a contract gives
Facts:
rise to a right to relief in favor of the party prejudiced.
Issue:
- However, this doctrine would endanger the security of
Rule:
contractual relations.
Ratio:
o Hence, the parties to the contract must be
presumed to have assumed the risk of unfavorable
developments.
Tagaytay Realty Co, Inc v Gacutan (2015)
o Only changes of circumstances that are absolutely
Rule:
exceptional should provide the debtor with a right to
relief. This is based on equity.
- Example: Buyer and seller of merchandise never
Spouses Poon v Prime Savings Bank (2016)
considered that a heavy tax would later be imposed on the
Facts:
article. In this case, the court may grant relief.
Issue:
- The question of granting relief based on the demands of
Rule:
equity is a question of fact left to the discretion of the court.
Ratio:
- This rule does not apply to payments of a sum of money
when there is a change in the value of the stipulated currency.
In such case, Art.1250 should apply. F. Creditor’s Rights

Art. 1269. The obligation having been extinguished by the
loss of the thing, the creditor shall have all the rights of
action which the debtor may have against third persons by
reason of the loss. (1186)

Trigger: The obligation having been extinguished by the loss of
the thing…
Effect: ...the creditor shall have all the rights of action which the
debtor may have against third persons by reason of the loss.
General Rule: 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 the third person by
reason of loss.
Purpose: To show the effects of the obligation extinguished by
the loss to creditor’s rights.
Example: Where a vessel guilty of negligence in a collision, is
sunk, ordinarily its owners are already relieved from liability for
damages caused by the collision to other vessels or owners of
cargo; but if the vessel is insured, and the insurance money is
collected by the owners of the vessel, such insurance money is
liable for the damages suffered by others.
EXTENT OF CREDITOR’S RIGHTS
● This article refers not only to the rights and actions
which the debtor may have against third persons, but
also to indemnity which the debtor may have already
received.
● This article is applicable to the money obtained from
the insurance of the thing lost or destroyed.
● This article applies also to money paid to the debtor
upon the expropriation of the property which is the
object of the obligation.
X. CONDONATION OR REMISSION OF DEBT
A. Nature and Requisites
Art. 1270. Condonation or remission is essentially gratuitous,
and requires the acceptance by the obligor. It may be made
expressly or impliedly.
One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (1187)
Remission is an act of liberality by virtue of which, without
receiving any equivalent, the creditor renounces the
enforcement of the obligation.
● Obligation is extinguished in its entirety or in that part
or aspect remission refers to
● Essential that it be gratuitous; otherwise, the nature
of the act changes
● Being an act of liberality, remission should be proved
by cclearer and more convincing evidence than
what is required to establish payment
Kinds of Remission
1. As to form
● Express - made formally; in accordance with
the forms of ordinary donations (Second par)
○ Must be accepted in order to be
effective
○ If debt refers to movable/personal
property - art 748 applies
○ If immovable or real property - art
749 governs
● Implied - can be inferred from the acts of the
parties (Refer to Art 1271-1272)
2. As to extent
● Total
● Partial - may refer to amount or an
accessory obligation
3. As to manner
● Intervivos- effective during lifetime of the
creditor
● Mortis cause - effective upon debt of
creditor; contained in will or testament
Applicable Rules - Condonation / Remission is essentially
a donation of the credit to the debtor
● Bilateral act - requires acceptance by the debtor
Note though, that there is nothing that can prevent a creditor
from making a unilateral renunciation of right, abandoning his
credit and thereby extinguishing it (expressly allowed, Art. 6)
● Subject to the rules on donations with respect to
acceptance, amount, and revocation
Requisites
1. The debt must be existing and demandable
2. Renunciation must be gratuitous
3. Debtor must accept
Yam v CA (1999)
Facts:
Issue:
Ratio:
Rule:
B. Implied renunciation
Art. 1271. The delivery of a private document evidencing a
credit, made voluntarily by the creditor to the debtor, implies the
renunciation of the action which the former had against the
latter.
If in order to nullify this waiver it should be claimed to be
inofficious, the debtor and his heirs may uphold it by proving
that the delivery of the document was made in virtue of
payment of the debt. (1188)
Trigger: Delivery of a private document evidencing a credit Purpose: The article provides for the relationship between the
made voluntarily by the creditor to the debtor principal debt and accessory obligations in cases of
Effect: Implied Renunciation renunciation.
Exception: Unless evidence against renunciation is proven by
the creditor.
Art. 1274. It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged, after its
This provision is limited to private documents, since public
delivery to the creditor, is found in the possession of the debtor,
documents are assumed to always have a copy in the
or of a third person who owns the thing. (1191a)
archives.

The voluntary return of the Private Document is presumed to Triggers:

be for remission, not by reason of payment of debt. (1) A thing is pledged
(2) There has been a delivery of such thing to the creditor
(3) The thing pledged is found in the possession of the
Trans-Pacific v CA (1994)
debtor, or of a third person who owns the thing
Facts:
Effect: It is presumed that the accessory obligation of pledge
Issue:
has been remitted.
Ratio:
Rule:
Purpose: The article states the presumption of the remission
of the pledge arising from the possession of the thing by the
debtor or a third person who owns it.
Bognot v RRI Lending Corp (2014)
Facts:
● Under the old Code (Art. 1191), the presumption of
Issue:
remission of the pledge arises only from the
Ratio:
possession of the thing by the debtor. Under the
Rule:
present article, it arises also from possession by a
third person who owns the thing.
● The presumption is prima facie, based on the
Art. 1272. Whenever the private document in which the debt
assumption that the creditor voluntarily returned the
appears is found in the possession of the debtor, it shall be
thing pledged to the debtor.
presumed that the creditor delivered it voluntarily, unless the
○ It may be shown that the debtor recovered
contrary is proved. (1189)
the thing pledged without the consent of the
creditor (e.g. lost, stolen, used for a limited
Trigger: When the private document in which the debt appears time or for a special purpose)
is found in the possession of the debtor. ○ This can also be seen in Article 2210.
Effect: There is a presumption that it has been voluntarily ● If the presumption of return is prima facie, the
delivered by the creditor. presumption of remission must likewise be prima
Exception: Unless the contrary is proved. facie.
● Effect of the Renunciation of the Pledge: The
If the obligation is joint, only the remission of the possessing remission of the pledge extinguishes only the security,
debtor is recognized to have been remitted. If the obligation is it does not affect the principal obligation, which
solidary, then the total debt of the debtor is assumed to have remains subsisting.
been remitted.

C. Renunciation of Accessory Obligations XI. CONFUSION OR MERGER OF RIGHTS

Art. 1273. The renunciation of the principal debt shall Art. 1275. The obligation is extinguished from the time the
extinguish the accessory obligations; but the waiver of the latter characters of creditor and debtor are merged in the same
shall leave the former in force. (1190) person. (1192a)

Trigger: The principal debt has been renounced Trigger: Merger or confusion - the characters of creditor and
Effect: Accessory obligations are extinguished. debtor are merged in the same person
→ But the waiver of accessory obligations leaves the Effect: Extinguish the obligation

principal debt in force. Merger or confusion

● Meeting in one person of the qualities of creditor and
debtor with respect to the same obligation
● Erases the plurality of subjects
 ● Extinguishes the obligation ○ If the guarantor acquires the credit, his
● Purposes for which the obligation may have been obligation as a guarantor is extinguished, but
created – considered as fully realized principal obligation subsists
Requisites: ● Mortgaged property: if mortgagee acquires ownership
1. Take place between creditor and principal debtor of mortgaged property, mortgage is extinguished, but
2. Very same obligation must be involved it doesn’t necessarily mean that obligation is
3. Confusion must be total or as regards the entire extinguished as well, even if the whole property was
obligation acquired
Causes of Merger
● Arises from any act which brings about a succession
Art. 1277. Confusion does not extinguish a joint obligation
to the credit
except as regards the share corresponding to the creditor or
○ Universal or particular
debtor in whom the two characters concur. (1194)
○ Inter vivos or mortis causa
● Most frequent: testate or intestate succession
○ Debtor inherits credit from the creditor General Rule: Merger / confusion doesn’t extinguish a joint
○ Not applicable when creditor inherits from obligation
debtor – debt is not transmitted to heir under Exception: To the extent of the share of the creditor or debtor
present law in whom the two characters concur
Revocation
● If the act which occasions the merger is susceptible of XII. COMPENSATION
termination or revocation, then the merger that took
place is also terminated or revoked A. General Rules
● Obligation is recreated in the same condition that it
had when the merger took place 1. Definition
● Time intervening between merger and revocation –
not to be computed in the determination of period of
Art. 1278. Compensation shall take place when two persons, in
prescription
their own right, are creditors and debtors of each other. (1195)
Real Rights
● Real rights which do not involve the relation of the
debtor and creditor may be extinguished by the
“merger” of the real right with the right of ownership Trigger: Two persons are creditors and debtors of each other
○ This isn’t “merger” as used in law of Effect: Compensation takes place
obligations but more like a consolidation of
ownership Purpose: 1. Identifies when compensation takes place

Compensation is a mode of extinguishing to the concurrent

Valmonte v CA (1999)
amount, the obligations of those persons who in their own right
Facts:
are reciprocally debtors and creditors of each other. Involves
Issue:
the offsetting or balancing of two obligations; a figurative
Ratio:
operation of weighing two obligations simultaneously in order to
Rule:
extinguish them to the extent in which the amount of one is
covered by the other.
Art. 1276. Merger which takes place in the person of the
Example: My payment of Php 500 for your meal today may be
principal debtor or creditor benefits the guarantors. Confusion
deducted from my Php 1000 debt from you.
which takes place in the person of any of the latter does not
extinguish the obligation. (1193)

COMPENSATION PAYMENT
General Rule: If merger or confusion takes place in person of
principal debtor or creditors, obligation will be extinguished and
- Capacity to dispose of the -Said capacity is needed
the guarantors will be benefitted.
thing paid and capacity to
If merger or confusion takes place in the person of guarantors,
receive payment is not
the obligation is not extinguished.
necessary -Performance must be
-There may be partial complete
Guarantors in merger / confusion
extinguishment of obligation
● Extinguishment of principal obligation = releases the
- It takes effect without action
guarantors
by either party to extinguish
● If merger takes place in person of guarantor,
their respective obligation
obligation is not extinguished
 iii. Two debts arising from the final and
- There is more guaranty in
executory judgments may be extinguished
making the credit effected
due to compensation
because there is less risk of
loss by the creditor due to
insolvency or fraud Bangko Sentral v COA (2006)
Facts:
COMPENSATION MERGER Issue:
Ratio:
-There must be two - There is only one obligation Rule:
obligations -There is only one person in
-There are two persons who whom characters of creditor
are mutually debtors and and debtor meet Figuera v Ang (2016)
creditors in two separate Facts:
obligations arising from Issue:
different cause Ratio:
Rule:
COMPENSATION COUNTERCLAIM

- Takes place by operation of - Must be pleaded to be 2. Nature and Effect

law, and extinguishes effectual
reciprocally the two debts as Art. 1281. Compensation may be total or partial. When the
soon as they exist two debts are of the same amount, there is a total
simultaneously compensation. (n)

Trigger: Two debts are of same amount

Kinds of Compensation: Effect: There is a total compensation
A. Effects Purpose: States the effect of having two debts of the same
a. Total: two obligations are of the same amount amount with regard to compensation
b. Partial: amounts are not equal Example: A owes B 50php. B wishes to buy from A a Muji pen
B. Origin worth 60 pesos. The debts offset one another and there is
a. Legal: takes place by operation of law partial compensation.
because all the requisites are present
b. Facultative: it can be claimed by one of the
parties who has the right to object to it Art. 1286. Compensation takes place by operation of law,
i. Can be set up only at the option of a even though the debts may be payable at different places,
creditor, when legal compensation cannot take place but there shall be an indemnity for expenses of exchange or
because of the want of some legal requisites for the transportation to the place of payment. (1199a)
benefit of the creditor.
ii. Creditor may renounce his right to oppose the Trigger: Requisites of compensation + debts be paid at
compensation different places
iii. Facultative compensation is unilateral Effect: There should be an indemnity for expenses of
c. Conventional: the parties agree to compensate their exchange or transportation to place of payment
mutual obligations even if some requisite is lacking (1282) General Rule: See effect
i. Agreement of parties Purpose: To show effects of paying at different places
ii. Intended to eliminate or overcome (indemnity)
obstacles which prevent ipso jure
extinguishment of their obligations ● Only applies to legal compensation.
iii. Requisites:
1. Each party can dispose of
the credit he seeks to compensate Art. 1290. When all the requisites mentioned in Article 1279
2. They agree to the mutual are present, compensation takes effect by operation of law,
extinguishment of the credits and extinguishes both debts to the concurrent amount, even
d. Judicial when decreed by the court in a case where though the creditors and debtors are not aware of the
there is a counterclaim (1283) compensation. (1202a)
i. Defendant (creditor of the plaintiff for
an unliquidated amount) sets up his credit as Trigger: Requisites in 1279 are present
a counterclaim against the plaintiff Effect: Compensation takes effect (even if both parties are
ii. Credit is liquidated by the judgment, unaware), extinguishes both debts to the offset amount.
compensating it with the credit of the plaintiff
Purpose: To show the effects of fulfilling the requisites in 1279
Legal compensation takes place ipso jure, its effects arise on
the very day all its requisites concur. When it is used as a
defense or when a judgment declares it to exist, it retroacts to
the date when its requisites are fulfilled.
Voluntary or conventional compensation takes effect upon
agreement of parties.
Facultative compensation takes place when the creditor
declares his option to set it up.
Judicial compensation takes place upon final judgment.
Effects of compensation:
1) both debts are extinguished to the concurrent amount;
2) interests stop accruing on the extinguished obligation or the
part extinguished;
3) the period of prescription stops with respect to the obligation
or part extinguished;
4) all accessory obligations of the principal obligation which
has been extinguished are also extinguished.
Compensation must be alleged and proven by the debtor who
claims its benefits. Once proven, the effects retroact.
Compensation may be renounced either at the time an
obligation is contracted or afterwards. A universal declaration
would be sufficient renunciation. It may be renounced
expressly or impliedly.
Examples of implied renunciation: not setting up litigation,
consenting to assignment of credit (art 1285), by paying debt
voluntarily with knowledge that it has been extinguished by
compensation.
>cannot be made to the prejudice of 3rd persons.
Even if all requisites are met, compensation may not take
place when there is a renunciation of the effects of
compensation by a part and when the law prohibits
compensation (e.g. arts 1287 & 1288)
Trinidad v Acapulco (2006)
Facts:
Issue:
Ratio:
Rule:
3. Requisites
Art. 1279. In order that compensation may be proper, it is
necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other;

(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (1196)

Trigger: All requisites are present.
1. Principally and mutually bound obligors
2. Debts are either a sum of money, or consumable,
provided that they are of the same kind and quality
3. Debts are due
4. Debts are liquidated and demandable
5. Object of the debts are not involved in any
controversy or retention by third persons
Effect: There is compensation
General Rule: Compensation may only rise if the requisites are
present
Exception: In voluntary and facultative compensation, some of
the requisites may be lacking
Purpose: Defines the requisites of a proper legal compensation
Requisites of a proper compensation:
1. Obligors are bound principally
a. Parties must be mutually debtors and
creditors in their own rights and as
principals
b. If there is no relationship, then there can be
no compensation
c. No compensation may occur if any of the
party is occupying representative capacity
(i.e. administrator, guardian, etc.)
d. There is also no compensation if one party is
a principal creditor in one obligation and a
surety or guarantor in the other.
2. Objects of the obligation are fungible
a. A mistake of the Old CC is that it takes the
object as contemplated in this provision as
being limited to consumable things only
b. This requirement means that things due
must be fungible; that it may be substituted
c. Things due must be of the same kind which
payment can be substituted for another
d. The specie of the things should be
determined
e. If the obligations refer to determinate things,
there can be no compensation
3. Debts are due
a. There can be compensation only when
BOTH debts are due
b. There can be compensation if one of the
debt matures before a payment of the earlier
debt has been made
4. Debts are demandable
a. Both debts are demandable in court
 b. Obligations must be civil obligations,
excluding those that are purely natural
c. Obligations subject to suspensive conditions
may not be subject to compensation until the
fulfillment of the condition
d. If the debt prescribes, there can be no
compensation
e. If the obligation is not demandable, then
there can be no compensation, such as in
cases where:
i. Period has not het arrived
ii. Suspensive condition has not
happened
iii. Cannot be sued upon (natural
obligation)
f. In prescriptions against compensation, to
determine, the moment when both debts
coexisted should be considered
g. Rescissible or voidable debts may be
compensated before rescission. The decree
of rescission retroacts, and compensation
can no longer take place
5. Debt is liquidated
a. This means that the amount of the debt has
already been determined and admitted by
the debtor
b. There is no need for it to appear in a final
judgment of the court
6. There are claims to the debt by third persons
a. If the obligation is subject to suit by a 3rd
person, the compensation is suspended
b. If the 3rd person is adjudged as the creditor,
then there can be no compensation
*There can be no legal compensation if:
1. One obligation is simple, while the other is alternative
2. The obligation is facultative
Silahis Marketing v IAC (1989)
Facts:
Issue:
Ratio:
Rule:
Union Bank of the Phils v DBP (2014)
Facts:
Issue:
Ratio:
Rule:
Art. 1282. The parties may agree upon the compensation of
debts which are not yet due. (n)
Purpose: Exception to requirement/ general rule that debts
must be due
Voluntary Compensation
● Not limited to obligations which are not yet due
● Any obligation in which objective requisites for legal
compensation are not present
● Requirement: Parties have the capacity to dispose of
the credits which they compensate
○ Extinguishment of the obligations - arise
from the wills of the parties, not from law
United Planters v CA (2009)
Facts:
Issue:
Ratio:
Rule:
4. Order of compensation
Art. 1289. If a person should have against him several debts
which are susceptible of compensation, the rules on the
application of payments shall apply to the order of the
compensation. (1201)
Trigger: When a person has several debts which are
susceptible f compensation
Effect: rules on application of payments apply
Rules on application of payments (note: apply previous
lesson)
1. Debtor has preferential right
a. Unless there is stipulation
2. If debtor does not exercise right, as provided by law
3. If not, creditor makes application subject to
acceptance by debtor
B. Specific scenarios
1. When applicable
a. In favor of guarantor
Art. 1280. Notwithstanding the provisions of the preceding
article, the guarantor may set up compensation as regards
what the creditor may owe the principal debtor. (1197)
Trigger: Compensation by the guarantor
Effect: Extinguish the obligation, totally or partially
General Rule: Guarantor may set up compensation to the
amount of what the creditor may owe the principal debtor.
● Requisites of 1279 must be complied with
Example: X has a P100 debt to A, Y guarantor of X’s debt. A
has a P50 debt to X. Y may set up compensation regarding A’s
debt of P50.
Reason for the article: Extinguishment of the guaranteed debt,
totally or partially, would benefit the guarantor.
● Liability of the guarantor – only subsidiary
○ Can be held liable only to the same extent as
the debtor
 ● Accessory to the principal obligation of the debtor ● Effect: Extinguishment of one or the other of the
obligations
b. In claim of damages ● General Rule: Subsequent assignment to the
compensation – no effect against debtor
● Assignee left with action for eviction or for damages
Art. 1283. If one of the parties to a suit over an obligation
for fraud against the assignor
has a claim for damages against the other, the former may
● Exception: When debtor consents to the assignment
set it off by proving his right to said damages and the
of credit
amount thereof. (n)
○ Debtor’s consent = waiver of the
compensation
Trigger: One of the parties in a suit over an obligation has a ● Exception to exception: Unless at the time he gives
claim for damages against the other party his consent, he informs assignor that he reserved his
Effect: The party who has a claim for damages may set it off by right to the compensation
proving his right to said damages and the amount thereof.
2. Assignment before compensation
c. Resscissible/voidable debts ● Reasons: Either because at the time of assignment
one of the debts is not yet due or liquidated or
because of some other cause which impedes the
Art. 1284. When one or both debts are rescissible or
compensation
voidable, they may be compensated against each other
before they are judicially rescinded or avoided. (n)
A. Debtor knew and consented to assignment of
rights
Trigger: One or both debts are rescissible or voidable. ● Assignment only takes effect for the debtor from the
Effect: They may be compensated against each other but it time he is notified thereof (and consents)
must be before they are judicially rescinded or avoided. ○ If notice of assignment = simultaneous to
● After judgment (where it is rescinded or annulled): transfer
decree of rescission or annulment is retroactive ■ Then debtor can set up
○ Compensation – considered cancelled compensation of debts due prior to
the assignment
Rescission or annulment ○ If notice of assignment = before transfer
● Requires mutual restitution ■ Then this takes effect at the time of
● Party whose obligation is annulled or rescinded can assignment (same rule)
recover to the extent that his credit was extinguished ○ If he consents to assignment (notice after it
by the compensation (to that extent he is deemed to occurred)
have made a payment) ■ Then he waives compensation even
of debts already due
d. Assignment before compensation ■ Unless he makes a reservation

B. Debtor knew of assignment but didn’t consent

Art. 1285. The debtor who has consented to the assignment
● If debtor is notified and doesn’t consent, and credit
of rights made by a creditor in favor of a third person, cannot
assigned to a third person matures
set up against the assignee the compensation which would
○ Debtor may set up compensation when the
pertain to him against the assignor, unless the assignor was
third person (assignee) attempts to enforce
notified by the debtor at the time he gave his consent, that
the assigned credit
he reserved his right to the compensation.
■ Provided that the credit of debtor
became due after assignment
If the creditor communicated the cession to him but the
○ If assigned credit matures earlier than that of
debtor did not consent thereto, the latter may set up the
debtor, assignee may immediately enforce it
compensation of debts previous to the cession, but not of
■ Debtor cannot set up compensation
subsequent ones.
because his credit is not yet due

If the assignment is made without the knowledge of the

C. Debtor didn’t know of assignment
debtor, he may set up the compensation of all credits prior to
● If the debtor didn’t have knowledge of the assignment
the same and also later ones until he had knowledge of the
○ Then he may set up by way of compensation
assignment. (1198a)
all credits maturing before he is notified
(prior and after assignment, until his
Two situations contemplated in 1285: knowledge thereof)
1. Compensation before assignment
 under Art. 205 of the Family Code, thus allowing the recipient of
Perez v CA (1984)
such support to suffer.
Facts:
Issue:
*HOWEVER, support in arrears may be the subject of
Ratio:
compensation
Rule:
b. In case of civil liability arising from penal offense
2. When not applicable
Art. 1288. Neither shall there be compensation if one of the
a. In case of deposit
debts consists in civil liability arising from a penal offense.
(n)
Art. 1287. Compensation shall not be proper when one of
the debts arises from a depositum or from the obligations of
If one of the debts consists in the civil liability of arising from a
a depositary or of a bailee in commodatum.
penal offense, compensation would be improper because the
satisfaction of the debt is imperative.
Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without
*HOWEVER, only the person who has incurred the civil liability
prejudice to the provisions of paragraph 2 of Article 301.
cannot set up compensation, but the offended party, who is
(1200a)
entitled to receive the civil liability, can set up compensation.
This is another example of a facultative compensation where
1287 provides instances when compensation may not be compensation can only occur upon the instance of the creditor
availed of: (the injured party in this case).

1. In case of deposit and commodatum

What is a depositum?
Metrobank v Tonda (2000)
A contract where a person receives personal property belonging
Rule:
from another with the obligation of safely keeping it and returning
the same. (Example: Park N’ Fly services in NAIA)
XIII. NOVATION
What is a commodatum?
A gratuitous contract where one party delivers to a party a non- A. The Concept of Novation
consumable property, so that the latter may use it for a certain
time and return it afterwards. (Example: A borrows B’s car for Novation - extinguishment of an obligation by the substitution
the latter’s stay in Manila for a business trip) or change of the obligation by a subsequent one which
extinguishes or modifies the first either by changing the object
Why is compensation inapplicable in depositum or in or principal conditions, substituting the person of the
commodatum? debtor, or subrogating a third person in the rights of the
Because depositum and commodatum are based on morality creditor.
and justice, given the trust given to the depositary by the
depositor or lender. Classification
1. As to nature - objective/real, subjective/personal,
*HOWEVER, only the depositary or the borrower cannot set up mixed
compensation, but the depositor or the lender can set up 2. As to form - express or implied (Art. 1292)
compensation. This is a form of a facultative compensation, 3. As to effect - partial or total
where compensation can only occur upon the instance of the
creditor (the depositor/lender in this case) B. Kinds of Novation

Furthermore, debts in favor of the government, such as taxes,

Art. 1291. Obligations may be modified by:
fees and duties, cannot be the subject of compensation because
these funds are imbued with public interest. (1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

*HOWEVER, debts in favor of the government which are
(3) Subrogating a third person in the rights of the creditor.
contractual in nature can be the subject of compensation.
(1203)
2. In case of future support
To allow the extinguishment of the obligation to give support
would defeat its exemption from attachment and execution
 1. Objective / Real - change of the obligation by substituting ● Must be declared in unequivocal terms (express) or,
the object with another or changing the principal ● Must be established that the old and new contracts
conditions. (no. 1 of Art 1291) are incompatible in all points (implied)
○ No clear form required
○ Incompatibility is only requirement
Caifornia v State Investment (2003)
Test of Incompatibility - whether or not they can stand
Facts:
together, each one having an independent existence
Issue:
○ Change must refer to the object, cause or
Ratio:
principal conditions (must be essential)
Rule:
○ Modifications in accidental or incidental
facts will not extinguish the original
obligation, hence there is no novation
Ong v Bognalbal (2006)
Ultimately, the determination whether the changes are sufficient
Facts:
to bring about novation depends upon facts and circumstances
Issue:
of each case. Courts should consider nature and intent.
Ratio:
Rule:

Tomimbang v Tomimbang (2009)

Millar v CA (1971) Rule:
Facts:
Issue:
Ratio: Rilo v CA (1997)
Rule: Facts:
Issue:
Ratio:
2. Subjective / Personal - modification of the obligation by
Rule:
the change of subject
● Passive - substitution of the debtor (no. 2 of Art 1291)
● Active - subrogated rights of creditor to third person
Cruz v CA (1998)
(no. 3 of Art. 1291)
Facts:
Issue:
Conchingyan v RB Surety (1987) Ratio:
Facts: Rule:
Issue:
Ratio:
D. Expromision and Delegacion
Rule:

Art. 1293. Novation which consists in substituting a new

3. Mixed
C. Requisites
Art. 1292. In order that an obligation may be extinguished
by another which substitute the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each
other. (1204)
According to jurisprudence and Tolentino, the following
are requisites
1. A previous valid obligation
2. Agreement of all parties to the new contract
3. Extinguishment of the old contract
4. Validity of the new contract
These imply that parties have capacity to enter the new
contract and that they intend to bring about the novation
Novation is never presumed
debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Articles 1236 and
1237. (1205a)
Trigger: Novation which consists in substituting a new debtor in
the place of the original one (subjective novation, no. 1 in
Art.1291)
- In this kind of novation, it is not enough to extend the
juridical relation to a third person; it is necessary that
the old debtor be released from the obligation, and
the third person or new debtor take his place in the
relation. Without such release, there is no novation;
the third person merely becomes a co-debtor or a
surety.
Effect: This kind of novation may be made even without the
knowledge or against the will of the original debtor, but not
without the consent of the creditor. Payment by the new debtor particular form, but it must be given by the creditor in
gives him the rights mentioned in Articles 1236 and 1237. one way or another.
- When the original contract authorizes the debtor to
There are two forms of subjective novation: transfer his obligation to a third person, the novation
by substitution of debtor is effected when the creditor
EXPROMISION DELEGACION
is notified that such transfer has been made.
How change/ Does not emanate Debtor offers and - The consent of the creditor cannot be presumed from
substitution is from the debtor; creditor accepts a his acceptance of payments by a third party for the
initiated may be made third person who benefit of the debtor, without further acts
even without consents to the
debtor’s substitution; Why the consent of the new debtor is necessary in both
knowledge, since consent need not expromision and delegacion: because he is to assume the
it consists in a be given
obligation.
third person simultaneously
assuming the
obligation Garcia v Llamas (2003)
Facts:
Whose consent is Creditor and Third Debtor
necessary Person only (delegante), Issue:
Creditor Ratio:
(delegatario), and Rule:
Third Person
(delegado)
Bognot v RRI Lending (2014)
Effect on Old New debtor who New debtor who
Facts:
Debtor in terms of pays the pays the
Recovery obligation w/o obligation could Issue:
(governed by consent of old demand from the Ratio:
rules on payment debtor can old debtor what Rule:
by 3rd party in Art. recover only he has paid
1236) insofar as the
payment has BPI v Domingo (2015)
been beneficial to
the old debtor Facts:
Issue:
Effect on New There can be no Subrogation may Ratio:
Debtor in terms of subrogation take place by Rule:
Subrogation because of the virtue of the
express provision provisions of Art.
of Art.1237 1302, par. 2 (It is 1. Consequence of Expromision
(Whoever pays on presumed that
behalf of the there is legal
debtor without the subrogation when Art. 1293. Novation which consists in substituting a new
knowledge or a third person, not debtor in the place of the original one, may be made even
against the will of interested in the without the knowledge or against the will of the latter, but not
the latter, cannot obligation, pays without the consent of the creditor. Payment by the new
compel the with the express debtor gives him the rights mentioned in Articles 1236 and
creditor to or tacit approval
1237. (1205a)
subrogate him in of the debtor)
his rights, such as
those arising from
a mortgage, Art. 1294. If the substitution is without the knowledge or
guaranty, or against the will of the debtor, the new debtor's insolvency or
penalty) non-fulfillment of the obligations shall not give rise to any
liability on the part of the original debtor. (n)
Why the consent of creditor is necessary in both
expromision and delegacion: Substitution of one debtor may Trigger: If the substitution is without the knowledge or against
delay or prevent the fulfilment of the obligation by reason of the the will of the debtor (Note: this is expromision)
inability or insolvency of the new debtor; hence, the creditor
should accept the substitution in order that it may be binding Effect: the new debtor’s (1) insolvency or (2) non-fulfilment of
on him. the obligation shall not give rise to any liability on the part of
- The consent of the creditor to the substitution may be the original debtor
express or implied. It need not be given
simultaneously with that of the debtor and of the third
party, nor is it required to be in any specific or
Ratio: If the novation was by expromision, no liability for the ○ If the new debtor is only secondarily liable
new debtor’s insolvency can be enforced against the old debtor ○ If the third person is only an agent of the
because the latter did not have the initiative in making the debtor
change, which might have been made even without his ○ Where the new debtor is bound solidarily
knowledge with the old debtor
- The intent of the Code Commission is to generally → Note: In these cases/ “exceptions”, there was no
release the old debtor from any further liability in
novation, so the old debtor has not really been
passive subjective novation, except in the exceptional
released from the obligation.
cases contemplated in Art. 1295 which are limited to
delegacion.
E. Effect on Accessory Obligations
- Art. 1294 should not be interpreted as to imply that if
the old debtor had knowledge of the substitution or
had consented thereto, the exemption from liability Art. 1296. When the principal obligation is extinguished in
provided in this article does not apply. consequence of a novation, accessory obligations may
- To consider the old debtor in expromision as liable subsist only insofar as they may benefit third persons who
simply because he knew of the assumption of his debt did not give their consent. (1207)
by another, or that he assented to it, would make his
liability even greater than that of a debtor who took
Trigger: The principal obligation was extinguished because of a
the initiative and offered a new debtor in his case.
novation.
This result is certainly absurd.
Effect (General Rule): Accessory obligations are generally
- The literal wording of the law should yield to its
extinguished as well.
obvious intention, which is to exempt the old debtor
Exception: Accessory obligations subsist insofar as they may
from future liability when he did not propose the new
benefit the third persons who did not give their consent.
debtor.
Purpose: The article provides for the effects of extinguishment
2. Consequence of Delegacion
of the principal obligation, by novation, on the accessory
obligations.
Art. 1295. The insolvency of the new debtor, who has been
proposed by the original debtor and accepted by the ● The extinguishment of the principal obligation by
creditor, shall not revive the action of the latter against the novation
original obligor, except when said insolvency was already ○ Extinguishes the obligation to pay interests
existing and of public knowledge, or known to the debtor, (unless otherwise stipulated)
when the delegated his debt. (1206a) ○ Releases pledges and mortgages, as well as
guarantors and sureties (unless they agreed
to be bound by the new obligation)
Trigger:
■ Reason: Mortgage, pledge, or
(1) A new debtor has been proposed by the original
guaranty was given (1) to answer
debtor and accepted by the creditor [ Delegacion];
for a particular obligation, or (2) for
(2) The new debtor becomes insolvent
the insolvency of a particular
debtor. Such basis of the consent
Effect (General Rule): The insolvency will not revive the action
given was destroyed by the
against the original debtor
novation.
● The exception refers to a stipulation in favor of a third
Exception: At the time of delegation,
person, which is subordinated to the principal
(1) The insolvency was already existing and of public
obligation (See Article 1311, par. 2)
knowledge; or
○ Reason for the Exception: Although
(2) The insolvency was known to the debtor
technically it is an accessory obligation, it is
in reality a distinct obligation in favor of a
Purpose: The article provides for the consequences of
third person, and cannot be extinguished by
delegacion with respect to the original debtor, if the new debtor
novation without the consent of the latter.
becomes insolvent.
F. Void Obligations
● The article is applicable only to substitution by
delegacion. In case of insolvency of the new debtor, if
the exceptions apply, the creditor can sue the old Art. 1297. If the new obligation is void, the original one shall
debtor. However, the knowledge of the creditor that subsist, unless the parties intended that the former relation
the new debtor was insolvent at the time of delegation should be extinguished in any event. (n)
will bar him from recovering from the old debtor.
● Other Exceptions:
Trigger: The original obligation shall subsist…
Effect: The original obligation shall subsist.
General Rule: The original obligation shall subsist if the new
obligation is void.
Exception: When the parties intended that the former relation
should be extinguished in any event.
Purpose: To show what happens to the original obligation if the
new one is void, and its exception.
NEW VALID OBLIGATION
● In order that a contract may be considered as
novated, it is indispensable that the new contract
which purports to annul the previous one, be valid and
effective.
● A mere draft of a contract which is not perfected
because of the lack of consent of the parties thereto,
cannot annul a prior valid and effective contract that
produces rights and obligations between the parties
thereto.
● Where a new contract was to become effective only
after the signature of other parties thereto had been
secured, a novation does not take place when such
other signatures are not obtained, because then it is
no more than a mere executory agreement subject to
a condition.
NEW OBLIGATION VOIDABLE
● If the new obligation is not entirely void, but only
voidable, the novation becomes effective.
● But if the action to annul is brought, and the obligation
is set aside, it will be deemed as if there had been no
novation, and the original obligation subsists, unless
the parties intended to definitely extinguish it at all
events.
● Thus, where the new contract is set aside on the
ground of minority of one of the parties the attempted
novation fails, and the original contract subsists.
CONDITIONAL NEW OBLIGATION
● The original obligation may be pure, and the new
obligation subject to suspensive condition.
● If the condition is merely to attach the condition to the
original obligation, there is no novation.
● But if the new conditional obligation is intended to
substitute the original pure obligation, the novation
itself, and the consequent extinguishment of the
original obligation, is subject to the condition.
● Therefore, pending the happening of the condition,
the old obligation cannot be considered as
extinguished, nor can its performance be enforced; it
is as much in a state of suspense as the new one.
● If the condition is not fulfilled before one of the parties
withdraws from the proposed conditional contract,
there is no novation at all.
EXTINGUISHMENT OF NEW OBLIGATION
● After a novation has taken place, by the change of the
object of the obligation, the old obligation can no
longer be enforced.
● Hence, if the new obligation is extinguished by the
loss of its object, the creditor cannot demand the
object of the original obligation.
Art. 1298. The novation is void if the original obligation was
void, except when annulment may be claimed only by the
debtor or when ratification validates acts which are voidable.
(1208a)
Trigger: The novation is void…
Effect: The novation is void.
General Rule: The novation is void if the original obligation was
void.
Exceptions:
1. When annulment may be claimed only by the debtor.
2. When ratification validates acts which are voidable.
Purpose: To show when a novation may be void and its
exceptions.
ORIGINAL OBLIGATION VOID
● When the original obligation is void, that is, wanting in
some essential requisite or otherwise inexistent, there
can be no novation, because one of the requisites for
novation would be lacking.
● Thus, a promissory note which represents a gambling
debt and is, therefore, unenforceable in the hands of
the payee, obtains no greater validity in the hands of
an assignee.
● The rule in this article applies to a voidable contract
which has already been set aside or annulled by
decree of a competent court.
● An obligation which has already been extinguished is
also inexistent; hence, it cannot be novated.
OLD OBLIGATION VOIDABLE
● When the original obligation has been ratified before
novation, the novation is effective.
● Even if there had been no previous ratification at the
time of novation, if the nullity can be claimed only by
the debtor, the consent of the debtor to the novation
will render the novation effective, because such
consent is impliedly a waiver of the action for nullity.
● To have a valid novation when the original obligation
is voidable at the instance of the debtor, it is
necessary that
○ such obligation should have the essential
requisites for its existence, and that
○ the debtor consent to the novation with
knowledge of the cause for nullity and after it
has ceased.
● The defect, however, is not completely cured if the
novation takes place by expromision, where the old
debtor may avail himself of the defense of the nullity
of the original obligation, in the event that an action
for reimbursement is brought against him by the new
debtor.
 ○On the other hand, in his relation to the
creditor, the new debtor cannot set up the
nullity as a defense or as a ground for
recovery, if he knew of the cause of nullity.
● PRESCRIPTION
○ When a debt is already barred by
prescription, it cannot be enforced by the
creditor.
○ But a new contract, recognizing and
assuming the prescribed debt, would be
valid and enforceable.
○ The prescription, being available only to the
debtor, can be waived by him; and he does
so by voluntarily promising to pay the
prescribed debt.
○ The novation of a prescribed debt is thus
valid.
G. Conditional Obligations
Art. 1299. If the original obligation was subject to a
suspensive or resolutory condition, the new obligation shall
be under the same condition, unless it is otherwise
stipulated. (n)
Trigger: If the original obligation was subject to a suspensive or
resolutory condition…
Effect: The new obligation shall be under the same condition.
General Rule: If the original obligation was subject to a
suspensive or resolutory condition, the new obligation shall be
under the same condition.
Exception: Unless it is otherwise stipulated.
Purpose: To show what happens in a novation of an original
obligation under a conditional obligation, that is, resolutory or
suspensive condition.
OLD OBLIGATION CONDITIONAL
● The original obligation may be conditional, and the
new obligation pure.
● If the intention is merely to suppress the condition,
there would be no novation; but if it is to extinguish
the original obligation itself by the creation of a new
obligation, the latter does not arise except from the
fulfillment of the condition of the original obligation.
● The reason is, if the suspensive condition of the
original obligation is not performed, that obligation
does not come into existence, and the cause for the
new obligation would then be wanting.
● On the other hand, if the condition of the old
obligation is resolutory, its happening would resolve
the old obligation and place it in the same category as
a void obligation or one which has been extinguished.
● In either case, therefore, one requisite of every
novation – a pre-existing valid obligation – would be
lacking.
● Therefore, where the original obligation is conditional,
the novation itself must be held to be conditional also,
and its efficacy depends upon whether the condition
which affects the former is complied with or not.
● But the parties may, by their express will, substitute a
pure obligation for a conditional one.
BOTH OBLIGATIONS CONDITIONAL
● It may happen that the old and the new obligations
are both conditional.
● If the conditions in the 2 obligations are not
incompatible with each other, and they can stand
together, they must all be fulfilled in order that the
novation may become effective and the new
obligation be enforceable.
● If only the conditions affecting the old obligation are
fulfilled, and those affecting the new obligation are
not, then there is no novation, and the old obligation
subsists, because the requisite of a new valid
obligation would be lacking.
● Likewise, if only the conditions affecting the new
obligation are fulfilled, but he conditions of the old
obligation are not, there will be no novation, since the
requisite of a previous existing obligation would be
wanting.
● If the conditions of the old and the new obligations are
incompatible with each other, there is an obvious
intention to substitute the new conditional obligation
for the old conditional obligation; the result is the
extinguishment of the old obligation, leaving only the
new obligation, subject to its conditions.
● Only the conditions of the new obligation, therefore,
have to be fulfilled, in order that such obligation may
become enforceable.
H. Kinds of Subrogation
Art. 1300. Subrogation of a third person in the rights of the
creditor is either legal or conventional. The former is not
presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it
may take effect. (1209a)
Subrogation is the transfer of all rights of the creditor to a third
person, who substitutes him in all his rights.
Legal Subrogation is that which takes place without agreement
but by operation of law because of certain acts.
Conventional Subrogation is that which takes place by
agreement of the parties.
Ledonio v Capitol Development Corp (2007)
Facts:
Issue:
Ratio:
Rule:
1. Conventional
 Issue:
Art. 1301. Conventional subrogation of a third person Ratio:
requires the consent of the original parties and of the third Rule:
person. (n)

Figuera v Ang (2016)

Trigger: When the original parties and a third person consents
Facts:
to the subrogation of the third person.
Issue:
Effect: There is Conventional Subrogation.
Ratio:
Rule:
Conventional Subrogation Assignment of Credit

Requires the consent of the Consent of debtor not I. Effect on Subrogation

debtor required
Art. 1303. Subrogation transfers to the persons subrogated
Extinguishes an obligation Refers to the same rights the credit with all the rights thereto appertaining, either
and gives rise to a new one passed by one person to
against the debtor or against third person, be they
another
guarantors or possessors of mortgages, subject to
Invalidity of the original Assignment cannot remedy stipulation in a conventional subrogation. (1212a)
obligation is cured by an invalid obligation
subrogation by creating a Effect of subrogation
new and valid obligation ● Transfers to 3rd person or new creditor: ENTIRE
CREDIT
2. Legal ○ With ALL rights, either against debtor or 3rd
persons (guarantors, possessors of
mortgages)
Art. 1302. It is presumed that there is legal subrogation: ● Suspensive condition attached to the credit
(1) When a creditor pays another creditor who is preferred, transferred: must first be fulfilled so that new creditor
even without the debtor's knowledge;
 may exercise his right
(2) When a third person, not interested in the obligation, ● Prestations which couldn’t have been required of the
original creditor can’t be demanded from the new one
pays with the express or tacit approval of the debtor;

● Subrogation in insurance: When insurer pays for the
(3) When, even without the knowledge of the debtor, a loss, he is entitled to be subrogated pro tanto to any
person interested in the fulfillment of the obligation pays, right of action which the insured may have had,
without prejudice to the effects of confusion as to the latter's against the 3rd person whose negligence or wrongful
share. (1210a) act caused the loss

Trigger: When any one of the three circumstances in the article
happens.
Effect: There is legal subrogation.
Circumstances:
1. Preferred creditor: a creditor that the debtor has to
pay first. For example, A is the debtor of two separate
creditors, B and C. A owes B a mortgage debt. A
owes C a simple unsecured debt. If C pays B the
mortgage of debt of A, there is legal subrogation
because C pays B, a preferred creditor (because the
debt is secured), allowing C to become A’s new
creditor for the mortgage debt.
2. Payment by a Third Person with the Debtor’s
approval.
3. Interested Party: Someone who is interested in the
fulfillment of the obligation (like in Figuera).
Metrobank v Rural Bank of Gerona (2010)
Facts:
J. Partial Subrogation
Art. 1304. A creditor, to whom partial payment has been
made, may exercise his right for the remainder, and he shall
be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit.
(1213)
Trigger: Partial subrogation: Partial payment made to a
creditor
Effect: Creditor may exercise his right for the remainder of the
partial payment
General Rule: Creditor in this case is preferred over the person
who has been subrogated in his place, in virtue of the partial
payment of the same credit
Tolentino’s example (Somes v Molina):
FACTS
● Note: Tolentino uses the words vendee/vendor in this
example but for me buyer/seller is easier to
understand
 ● Contract of sale of a business – buyer promised to
pay in 4 installments
● 2 sureties bound themselves solidarily with the buyer
● Buyer failed to pay the first installment so the seller
brought an action against the buyer and sureties
○ First installment satisfied from property of
one of the sureties
● Seller brought two more actions for the other
installments and obtained judgments in his favor
● Surety who paid for 1st installment – brought an action
to declare himself subrogated in the rights of the
seller
○ Argument: The property of the buyer should
first be satisfied for what he (surety) paid
before seller is paid from buyer’s property for
the 2 other judgments
HELD
● 3 judgments are all for one debt, one purchase price –
simply installments
● Partial subrogation took place because of payment by
surety of one of the installments – Surety subrogated
as seller for that one installment
● Applying 1304: Seller as creditor should be entitled
to preference in payment of the remaining
installments before surety can exercise any rights
under subrogation
○ Conforms to justice and equity
CONTRACTS
I. GENERAL PROVISIONS
A. Nature and Definition of Contract
Art. 1157. Obligations arise from:
(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts. (1089a)
Art. 1159. Obligations arising from contracts have the force
of law between the contracting parties and should be
complied with in good faith. (1091a)

Art. 1305. A contract is a meeting of minds between two
persons whereby one binds himself, with respect to the
other, to give something or to render some service. (1254a)
Art. 1254 (Old CC) A contract exists from the moment one
or more persons consent to be bound with respect to
another or others to give something or to render some
service.
B. Content and Subject Matter
1. Freedom to Stipulate
Art. 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy. (1255a)
Freedom of Contract or Autonomy of Contracting Parties:
The code allows allows contracting parties to establish
stipulations as they may deem necessary.
Exception: Not contrary to law, morals, good customs, public
order, or public policy.
Implications of Freedom of Contract as a Contractual
Right:
1. Courts should move with all the necessary caution
and prudence in holding contracts void.
2. A contract is a law between the parties and courts
have no choice but to enforce such contract as long
as it is not contrary to law, morals, good customs,
public order, or public policy.
The courts have no jurisdiction to look into the wisdom of the
contract. They also cannot alter the intention of the parties as
gleaned from their intentions without violating the Freedom of
Contract.
2. Limitation on Stipulation
A stipulation in a contract must not be contrary to law,
morals, good customs, public order, or public policy.
If the stipulation that violates these limitations constitute the
cause, object, or purpose of the contract, such contract is
denied legal existence, deemed inexistent and void from the
beginning.
a. Law
Every contract contains not only what has been explicitly
stipulated, but the statutory provisions that have any
bearing on the matter.
Counter-balancing the principle of Autonomy of COntracting
Parties is the general rule that provisions of applicable law,
are deemed written into the contract.
Pakistan International Airlines Corp. v Ople (1990)
Facts: Private respondents are two Filipino flight attendants
who signed contracts of employment with petitioner Pakistan
International Airlines (PIA), a foreign corporation licensed to
do business in the Philippines. It was a 3-year contract but it
was stipulated that PIA could terminate the employee upon
written notice one month before the intended termination. It
 individual rights, whether of personal liability, or of
was also stipulated that applicable law should be that of
private property.
Pakistan, not of the Philippines. Before the end of their 3-
2. Public Policy is that Principle of Law which holds
year contract, respondents were informed of their
that no subject or citizen can lawfully do that which
termination for being habitual absentees. Respondents filed
has a tendency to be injurious to the public or against
complaint for illegal dismissal with the Ministry of Labor and
the public good. May be termed a Policy of Law.
Employment. The Regional Director and Deputy Minister
ruled in their favor and ordered their reinstatement.
Contract in Restraint of Trade - Those which prevent the
Issue: WoN the contract of employment was valid, therefore other party from pursuing a similar business within a specified
making the dismissal of respondents legal → NO geographical area and within a specified time.

Ratio: the 3-year period of the contract was made a

General rule is that Restraints of trade must specify the
facultative period at the option of the employer PIA. This
restrictions in terms of time, space, and trade (industry).
prevents any security of tenure from accruing in favor of
Contracts with undue or unreasonable restraint on trade are
private respondents. Philippine laws and regulations cannot
unenforceable because they are repugnant to the
be rendered illusory by the parties agreeing upon some
established public policy in a country.
other law to govern their relationship. The contract was not
only executed in the Philippines, it was als performed here,
In determining whether the contract is reasonable or not, the
at least partially; private respondents are Philippine citizens
court should consider the following factors:
and residents, while petitioner, although a foreign
1. Whether the covenant protects a legitimate business
corporation, is licensed to do business and hence resident in
interest of the employer.
the Philippines; private respondents were based in the
2. Whether the covenant creates an undue burden on
Philippines in between their assigned flights. Also, PIA did
the employee.
not plead and prove contents of Pakistan law on the matter;
3. Whether the covenant is injurious to public welfare.
it must therefore be presumed that the applicable provisions
4. Whether the time and territorial limitations contained
of the law of Pakistan are the same as the applicable
in the covenant are reasonable.
provisions of Philippine law.
5. Whether the restraint is reasonable from the
Rule: The principle of party autonomy in contracts is not an
standpoint of public policy.
absolute principle. Counter-balancing the principle of
autonomy of contracting parties is the equally general rule
Restraints on Post-Retirement Competitive Employment or
that provisions of applicable law, especially provisions
Forfeiture of Pensions and Retirement Plans in case of Post-
relating to matters affected with public policy, are deemed
employment competitive employment is generally valid, even
written into the contract. The parties may not contract away
though unrestricted in time or geography. This is because
applicable provisions of law especially peremptory
stipulations like this do not prohibit a post-employment
provisions dealing with matters heavily impressed with
employee from entering competitive work, but merely denies
public interest. The law relating to labor and employment is
him Pension benefits. This is reasonable because stipulations
clearly such an area and parties are not at liberty to insulate
like this protect the employer against competition by former
themselves and their relationships from the impact of labor
employees who may retire and receive such benefits, whom
laws and regulations by simply contracting with each other.
may at the same time engage in competitive employment.

b. Morals and Good Customs A grant of Right of First Refusal is contrary to Public Policy
because it violates the requirement of competitive public
Examples of Stipulations contrary to Morals and Good bidding in the award of government contracts.
Customs:
1. Domestic service that is absolutely gratuitous.
Avon Cosmetics, Inc v Luna (2006)
2. Pactum Commissorium or automatic appropriation of
Facts: Luna entered into a Supervisor’s Agreement with
mortgaged or pledged property to the creditor.
Avon where it was stipulated that she shall sell exclusively
3. A sale that is subversive to the stability of the family,
products sold by the company. She eventually began selling
like a sale of a home where a wife and children derive
products of Sandre Philippines, a manufacturer of vitamins
support.
and other food supplements. Hence, Avon terminated Luna
and cancelled her agreement. Luna then filed for damages
c. Public Order or Public Policy
against Avon.
Public Policy defined by various Jurisprudence: Issue: WoN the exclusivity clause of the contract was valid →
1. Stipulations against public policy are those which YES
have the tendency to injure the public, against public
Ratio: The exclusivity clause was neither directed to
good, or contravenes some established interest of
eliminate competition like Sandre Philippines nor foreclose
society, or is inconsistent with sound policy and good
new entrants to the market. In its Memo, Avon admits that
morals, or tends to undermine the security of
the reason for such exclusion is to safeguard the network
that it has cultivated through the years. The limitation does
not affect the public at all. It is only a means by which
petitioner Acon is able to protect its investment. Sale of
Sandre products by Avon dealers will engender a belief int
he minds of loyal Avon customers that the product that they
are buying had been manufactured by Avon.
Rule: Restrictions upon trade may be upheld when not
contrary to public welfare and not greater than is necessary
to afford a fair and reasonable protection to the party in
whose favor it is imposed. Even contracts which prohibit an
employee from engaging in business in competition with the
employer are not necessarily void for being in restraint of
trade. In sum, contracts requiring exclusivity are not per se
void. Each contract must be viewed vis-a-vis all the
circumstances surrounding such agreement in deciding
whether a restrictive practice should be prohibited as
imposing an unreasonable restraint on competition. When is
a restraint of trade unreasonable? When it is contrary to
public policy or public welfare.
The main objection to exclusive dealing is its tendency to
foreclose existing competitors or new entrants from
competition in the covered portion of the relevant market
during the term of the agreement. Only those arrangements
whose probable effect is to foreclose competition in a
substantial share of the line of commerce affected can be
considered as void for being against public policy. Ther
foreclosure effect, if any, depends on the market share
involved. The relevant market for this purpose includes the
full range of selling opportunities reasonably open to rivals,
namely, all the product and geographic sales they may
readily compete for, using easily convertible plants and
marketing organizations.
Ferrazzini v Gsell (1916)
Facts: Ferrazzini was working in Gsell’s company which was
manufacturing umbrellas and hats. It was stipulated in his
employment contract that within 5 years after his
termination, he shall not engage in any enterprise similar to
or in competition with Gsell, and shall not enter into the
employ of any enterprise in the Philippines except after
obtaining special written permission from Gsell. Said
stipulation has been upheld by the Court in previous cases
when another employee of Gsell’s company was fired and
transferred to another company manufacturing hats.
Ferrazzini was eventually fired for being absent from work or
for coming to work drunk. A few days after his termination,
he worked as a foreman on some construction work for a
cement factory.
Issue: WoN the stipulation was valid → NO
Ratio: The contract was limited as to time and space but not
as to trade. The stipulation would force the plaintiff to leave
the Philippines in order to obtain a livelihood in case the
defendant declined to give him the written permission to
work elsewhere in the country.
Rule: Contracts in undue or unreasonable restraint of trade
are unenforceable because they are repugnant to the
established public policy in that country. There are two
principal grounds for this: one, the injury to the public by
being deprived of the restricted party’s industry; and the
other is the injury to the party himself by being precluded
from pursuing his occupation, and thus being prevented
from supporting himself and his family.
Rivera v Solidbank (2006)
Facts: Rivera was offered a Special Retirement Program by
the company. Upon claiming his benefits, he was required
by Solidbank to sign a Release, Waiver and Quitclaim, along
with an Undertaking where he promised that he will not seek
employment with a competitor bank or financial institution
within one year from his separation from the bank and that
any breach of said Undertaking would entitle Solidbank to a
cause of action against him before the appropriate court.
However, after three months from his separation from
Solidbank, Rivera was hired by Equitable Bank. Hence,
Solidbank demanded the return of his benefits and upon his
refusal, filed a complaint for Sum of mOney before the RTC.
Rivera claimed that the employment ban provision of the
undertaking was never conveyed to him until he was made
to sign it and that he did not sign it voluntarily because he
would not receive his benefits unless he signed the same.
Issue: WoN the employment ban in the Undertaking was
valid → on its face, invalid; remanded to the trial court for
submission of evidence
Ratio: on its face it was unreasonable because it had no
geographical limits. There is also a distinction between post-
employment competitive employment and post-retirement
competitive employment. The strong weight of authority is
that forfeitures for engaging in subsequent competitive
employment included in pension and retirement plans are
valid even though unrestricted in time or geography.
Forfeiture, unlike the restraint included in the employment
contract, is not a prohibition on the employee’s engaging in
competitive work but is merely a denial of the right to
participate in the retirement plan if he does so engage
(Rochester Corp. v. Rochester). However, the Undertaking
signed by Rivera did not provide for the automatic forfeiture;
hence, it dod not, on its face, appear to be of the same class
as that contemplated in Rochester. Hence, the need to
remand.
Rule: The employer has to adduce evidence to prove that
the restriction is reasonable and not greater than necessary
to protect the employer’s legitimate business interests. The
restraint may not be unduly harsh or oppressive in curtailing
the employee’s legitimate efforts to earn a livelihood and
must be reasonable in light of sound public policy. The
question of reasonableness of a restraint requires a
thorough consideration of surrounding circumstances,
including the subject matter of the contract, the purpose to
be served, the determination of the parties, the extent of the
restraint and the specialization of the business of the
employer.
In determining whether the contract is reasonable or not, the
 2. A unilateral determination and imposition of increased
court should consider the following factors:
rates
1. Whether the covenant protects a legitimate
3. Escalation clauses (not escalation clauses which
business interest of the employer
provide increase of interest rates “in the event of
2. Whether the covenant creates undue burden on the
changes” can be argues as to not be solely
employee
dependent on the will of the bank)
3. Whether the covenant is injurious to the public
welfare
What DOES NOT violate the Principle of Mutuality
4. Whether the time and territorial limitations
contained in the covenant are reasonable
A lease contract which states the lease may be renewed at the
5. Whether the restraint is reasonable fromt he
option of the lessee
standpoint of pulic policy
- Not dependent exclusively on the will of one of the
parties since the lessor is free to give or not to give the
option to the lessee at the time of the negotiation of the
Tiu v Platinum Plans Phil, Inc (2007)
contract, once the lessee exercise the option to renew, it is
Facts:
still subject to the acceptance of the lessor
Issue:
Ratio:
Rule:
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
Acol v Philippine Commercial Credit Card Inc (2006) them. (1256a)
Facts:
Issue:
Ratio: Floirendo v Metrobank (2007)
Rule: Facts:
Issue:
Ratio:
PSALM v Pozzolanic Philippines, Inc (2011) Rule:
Facts:
Issue:
Ratio: Allied Banking Corp v CA (1998)
Rule: Facts:
Issue:
Ratio:
C. Binding Effect
Rule:
1. Principle of Mutuality
2. Principle of Relativity
Principle of Mutuality of contracts - contract must bind both
contracting parties, validity or compliance cannot be left to one a. General Rule
of them
General Rule – contracts take effect only between the parties,
Purpose: to render void a contract containing a condition their assigns and heirs
which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties Why? Because a contract cannot favor or prejudice a
third person, thus, only parties, as against each other,
HOWEVER – jurisprudence is replete with instances where the may violate a contract. A party who has not taken part
Courts upheld the legality of contracts which left their fulfillment in the contract cannot sue or be sued for performance
or implementation to the will of one of the parties. In these or cancellation UNLESS he has a shown a real
cases, there was a finding of ESSENTIAL EQUALITY of the interest.
parties, which prevents the perpetration of injustice on the
weaker party
Contracts will not take effect on assigns and heirs if they
Examples of contracts which violate the Principle of are not transmissible by
Mutuality: 1. Nature
1. A contract wherein the determination of WON 2. Stipulation
respondent failed to exhibit sufficient skill or 3. Provision of Law
competitive ability to coach solely on the opinion of
the petitioner
DKC v CA – contracts which are in transmissible are those
which are purely personal. It is also said that contracts for the
payment of money or debts are not transmitted to the heirs of a
party but constitute a charge against their estate
American Jurisprudence (on non-transmissible
contracts/those of a personal nature)
● Contracts which require the special exercise of
○ Special knowledge
○ Genius
○ Skill
○ Taste
○ Ability
○ Experience
○ Judgement
○ Discretion
○ Integrity
○ Personal qualification of one or both parties
Example of a transmissible contract: Lease Contract, since
it is not transmissible
Art. 1311 (1). Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and
obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law. The heir
is not liable beyond the value of the property he received
from the decedent.
Estate of K.H. Hemady v Luzon Surety Co, Inc (1956)
Facts:
Issue:
Ratio:
Rule:
b. Exceptions
i. In case of stipulation in favor of third party
Art. 1311 (2). If a contract should contain some stipulation in
favor of a third person, he may demand its fulfillment
provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of
a person is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third
person. (1257a)
Stipulation in favor of a third person / Stipulation pour
autrui
● Third person is not principally or subsidiarily obligated
in a contract, had no intervention
● Stipulation must not convey a mere incidental benefit
or interest
● Fairest test: examine the intention of the parties as
disclosed by their contract; consider the ff:
○ Nature of the benefit or interest
○ Intent of the contracting parties
● Must have been clear and deliberate conferment of
favor upon a third person
● Third person must make acceptance before
revocation
○ Law doesn’t provide for a time limit as long
as it is before stipulation is revoked
(Florentino v Encarnacion)
○ Doesn’t have to be in any particular form
Requisites (Code):
1. 3rd person communicates acceptance before
stipulation is revoked
2. Stipulation not mere incidental benefit or interest
3. Contracting parties clearly and deliberately conferred
a favor
Requisites (Jurisprudence):
1. Stipulation in favor of a third person should be a part,
not the whole, of the contract
2. Favorable stipulation shouldn’t be conditioned or
compensated by any kind of obligation whatever
3. Neither of the contracting parties bears the legal
representation or authorization of third party
ii. In case of contracts creating real rights
Art. 1312. In contracts creating real rights, third persons
who come into possession of the object of the contract are
bound thereby, subject to the provisions of the Mortgage
Law and the Land Registration Laws. (n)
Real right
● Tolentino: directly affects property subject to it
○ Whoever comes into possession of such
property must respect that real right
● Padilla: Innocent third parties who obtained the
property for value and without notice must be
protected
iii. In case of creditors
Art. 1313. Creditors are protected in cases of contracts
intended to defraud them. (n)
Padilla: Contracts intended to defraud creditors shall not
adversely affect them
● Even though creditors are not parties to a contract,
they may be prejudiced
● Thus, they may appeal to the courts to seek a remedy
● Ex: remedy of rescission
D. Determination of Validity/ Compliance/ Performance
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
them. (1256a)
Aforementioned article contemplates the principle of mutuality of
contracts, whose ultimate purpose is to render void any contract
containing a condition which makes its fulfillment dependent on
the exclusive and uncontrolled will of one of the parties.
HOWEVER, not all contracts which vests upon one party the
determination of validity or compliance or the right to terminate
the same are void for being violative of the mutuality principle.
● The contract is not void due to lack of
mutuality if there is an essential equality of the
parties in the contract, thus preventing the
perpetration of injustice upon the other party.
● Thus, the said provision is triggered by an
inherent inequality in the contract which
unduly prejudices the other party.
○ It is repugnant to have one party to
be bound by the contract and leaving
the other free from such.
Art. 1309. The determination of the performance may be left
to a third person, whose decision shall not be binding until it
has been made known to both contracting parties. (n)
Art. 1310. The determination shall not be obligatory if it is
evidently inequitable. In such case, the courts shall decide
what is equitable under the circumstances. (n)
GENERAL RULE: The determination of validity or compliance
with a contract cannot be left one of the parties. (Art. 1308)
SPECIAL RULE: But the determination of its performance may
be left to a 3rd person, but the latter’s decision cannot be
binding until it is made known to both contracting parties. (Art.
1309)
● This rule may apply if the contracting parties
need the expertise of a 3rd party to comply
with their contractual obligation, or if they
agree to an arbitration.
EXCEPTION TO THE SPECIAL RULE: But the determination
of the 3rd party shall not be obligatory if it is evidently
inequitable. The courts will decide what is “equitable” under the
circumstances of the case. (Art. 1310)
E. Perfection
Art. 1315. Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the fulfillment
of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in
keeping with good faith, usage and law. (1258)
● In Asuncion v. CA, it was held that without perfection,
a contract cannot, as an independent source of
obligation, serve as a binding juridical relation.
CONSENSUAL CONTRACTS: established upon mere meeting
of minds, i.e. the concurrence of the offer and acceptance on the
object and on the cause (Asuncion v. CA)
● Nature of Consent Required (Moreno, Jr. v. Private
Management Office):
○ Parties must agree on the same thing in the
same sense
■ Reason: This is so that their minds
meet as to all the terms
○ They must have a distinct intention common
to both and without doubt or difference
■ Reason: Until all understand alike,
there can be no assent and therefore
no contract
○ The minds of the parties must meet at every
point; nothing can be left open for further
arrangement
■ Reason: Uncertainty, indefiniteness,
future negotiations or considerations
implies that there is no contract
Art. 1316. Real contracts, such as deposit, pledge and
Commodatum, are not perfected until the delivery of the
object of the obligation. (n)
REAL CONTRACTS: requires, in addition to meeting of the
minds, the delivery of the object of the obligation (Asuncion v.
CA)
SOLEMN CONTRACTS: requires compliance with certain
formalities prescribed by law (Asuncion v. CA)
F. Authority to Contract
Art. 1317. No one may contract in the name of another
without being authorized by the latter, or unless he has by law
a right to represent him.
A contract entered into in the name of another by one who
has no authority or legal representation, or who has acted
beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf
it has been executed, before it is revoked by the other
contracting party. (1259a)
GENERAL RULE: No one may contract in the name of another
without being authorized by the latter
● Exception: The person has, by law, a right to
represent him
TRIGGERS (when a contract becomes unenforceable):
● A contract is entered into in the name of another;
● The person who entered into the contract
○ Has no authority or legal representation, or
○ Has acted beyond his powers
● Exception: If it is ratified, expressly or impliedly.
RATIFICATION (Requirements):
● It should be done by the person on whose behalf the
contract has been executed.
● Before the other contracting party revokes the contract
G. Inducement to Violate
Art. 1314. Any third person who induces another to violate his
contract shall be liable for damages to the other contracting
party. (n)
Gilchrist v. Cuddy (decided prior to the rule):
● Mere right to compete does not justify interference with
an existing contract
● Competition is not interference, provided that there no
superior right by contract or otherwise is interfered
with.
○ Damage or loss as a result of competition is
damum absque injuria
● There is valid form of interference, but this requires
SUFFICIENT JUSTIFICATION, not simply absence of
improper motives.
● Qualification for sufficient justification: Must be an
equal or superior right in themselves
● Absence of malice does not justify interference
with the contract of another.
● The Court did not say in the Gilchrist case that an
interference must be malicious, or that profit motive is
a valid basis of interference.
● RULING: Absence of malice in the interference did not
exempt the interferors in their liability for damages.
Gilchrist v Cuddy (1915)
Facts:
Issue:
Ratio:
Rule:
Daywalt v La Corporacion de los Padres Agustinos
Recoletos (1919)
Facts: Endencia executed three successive contracts
whereby she obligated herself to convey to the plaintiff, a tract
of land as soon as she receives the Torrens title. Prior to the
issuance of the title she discovered that the land area was
large than she thought and she became reluctant. When the
title was issued she gave the certificate to the chief official of
the defendant corporation who refused to release it to the
plaintiff. Eventually, the plaintiff prevailed over Endencia in a
suit for specific performance which compelled the defendant
to hand over the certificate. The plaintiff sought to recover
damages “based on a liability derived from the wrongful
interference of the defendant in the performance of the
contract between the plaintiff and Endencia.” The plaintiff
alleged that he failed to profit from another contract which
involved sugar growing and milling on the land because of the
defendant’s interference.
Issue: WoN the defendant is liable for damages for interfering
in the contract between plaintiff and Endencia → Held: NO
Ratio: Defendant’s advice to Endencia not to carry the
contract into effect does not constitute actionable interference
because the defendant believed in good faith that the contract
could not be enforced and that Endencia would be wronged if
it should be carried into effect. Said advice was prompted by
“no mean or improper motive”.
Also, the damages claimed by plaintiff cannot be recovered
from Endencia because they are special damages which
were not within the contemplation of the parties when the
contract was made and because said damages are too
remote to be the subject of recovery. Thus, plaintiff also
cannot recover from defendant who cannot be more
extensively liable than the principal in the contract.
Rule: it is enough if the wrongdoer, having knowledge of the
existence of the contract relation, in bad faith sets about to
break it up. Whether his motive is to benefit himself or gratify
his spite by working mischief to the employer is immaterial.
Malice in the sense of ill-will or spite is not essential.
The stranger cannot become more extensively liable in
damages for the nonperformance of the contract than the
party in whose behalf he intermeddles. To hold the stranger
liable for damages in excess of those that could be recovered
against the immediate party to the contract would lead to
results at once grotesque and unjust.
So Ping Bun v CA (1999) *this is a strange jurisprudence
because it inaccurately interprets Gilchrist
Facts: there are four contracts of lease between the lessor
and a partnership. The contracts had one-year terms but
provided that “should the lessee continue to occupy the
premises after the term, the lease shall be on a month to
month basis. When the contracts expired, the parties did not
renew but the lessee continued to occupy the premises. Later
the partnership was dissolved, but its members formed a
corporation, the defendant in this case. Later the petitioner, a
grandson of one of the partners, “occupied the warehouse for
his own textile business”. The lessor sent letters to the
defendant enclosing new lease contracts for signing but these
were never signed. In these letters, the lessor “warned that
the failure of the lessee to accomplish the contracts shall be
deemed as lack of interest on the lessee’s part, and
agreement to the termination of the lease”. Yet the
respondent did not answer any of these letters. Eventually,
petitioner convinced the lessor to execute new contracts of
lease with his company instead.
Issue: WoN petitioner interfered with the contracts of lease of
respondent and its lessor → Held: YES, but petitioner cannot
be held liable for damages because there was no malice on its
part
Ratio: Petitioner asked the lessor to execute lease contracts
in its favor, and as a result, he deprived the respondent of the
latter’s property right. However, there is no proof that
petitioner acted with malice. Hence, he cannot be held liable
for damages. Nonetheless, the injunction on and nullification
of the new contracts of lease between petitioner and lessor
still holds.
Rule: the elements of tort interference are:
1. Existence of a valid contract
2. Knowledge on the part of the third person of the
existence of contract
3. Interference of the third person is without legal
justification or excuse
Sir Casis comments: The court ruled that the three elements
were present. However, the court did not explain the
presence of each.
1. It is questionable if there was even a valid contract;
respondent never answered the lessor’s letters
regarding the renewal of the lease contracts but the
lease contracts were not rescinded.
a. The contracts were on a month to month
basis; at the time petitioner executed new
lease contracts there was no valid contract
as it expired at the end of that month.
b. Also, the respondent corporation, although
having a similar name as the partnership
that was the original party to the contract,
had a separate and distinct personality.
c. It was not even mentioned if respondent
was occupying the premises because the
facts only said it was petitioner’s business
located therein.
2. The Court also did not discuss the second element.
3. As for the third element, the Court was inaccurate on
two grounds:
a. On malice: the Court found nothing on
record imputing deliberate wrongful
motives or malice on the part of petitioner.
It interpreted Gilchrist as holding that
“where there was no malice in the
interference of a contract, and the impulse
behind one’s conduct lies in a proper
business interest rather than in wrongful
motives, a party cannot be a malicious
interferor”. Gilchrist actually ruled that
malice is not required in order to be liable
for interference with contracts.
b. On damages: The Court rejected
petitioner’s argument that because
respondent was not entitled to actual,
moral or exemplary damages, it meant that
he ought to be absolved of any liability. The
Court explained that no damages were
awarded only because the extent of
damages was not quantifiable, claiming
that this was the same ruling in Gilchrist.
However, Gilchrist actually held that
damages were not awarded not because it
was difficult or impossible to determine but
because the claimants were not entitled.
The Court further explained that So Ping
Bun cannot be held liable for damages
because he had no malice.
Lagon v CA (2005)
Facts: Jose Lagon purchased 2 parcels of land from the
estate of Bai Tonina Sepi located at Tacurong, Sultan
Kudarat. Menandro Lapuz filed a complaint for torts and
damges against Lagon in RTC Sultan Kudarat. He claimed
that he entered into a contract of lease with the late Bai
Tonina Sepi over the “property” beginning in 1964. Contract
of lease provision: (1) Lapuz was to build commercial
buildings; (2) Commercial buildings would be leased out to
new tenants; (3) Rentals paid by new tenants would serve as
payment by Lapuz to Bai Tonina. Lease contract expired on
1974, but was allegedly renewed since construction of
commercial buildings was not yet finished. Lapuz continued
collecting rentals from tenants even after Bai Tonina Sepi’s
death. He was only told to stop since Lagon was now the new
owner of the property. Hence Lapuz claim for damages. RTC
ruled in favor of Lapuz, hence this petition by Lagon.
Issue: WON purchase of Lagon of property during supposed
existence of Lapuz’s lease contract with original owner, Bai
Tonina Sepi constituted tortuous interference and should be
held liable for damages? – NO
Ratio: Article 1314 of CC provides that any third person who
induces another to violate his contract shall be liable for
damages to the other contracting party. This interference is
punished since it violates the property rights of a party in a
contract to reap the benefits that should result therefrom.
Elements of Tortuous Interference (So Ping Bun vs CA)
1) Existence of valid contract
2) Knowledge on part of third person of existence of
contract
3) Interference of 3rd person without legal justification
or excuse
Lagon disclaimed knowledge of lease agreement between
Lapuz and Bai Tonina Sepi. Lagon conducted his own
personal investigation and inquiry and unearthed no
suspicious circumstance that would have made a cautious
man probe deeper and watch out for any conflicting claim over
the property. When Lagon bought the property he went to Atty
Benjamin Fajardo. Atty Fajardo allegedly notarized the
contract between Lapuz and Bai Tonina Sepi. Atty Fajardo
showed Lagon four copies of lease renewals but all were
unsigned. No record of any lease contract notarized by Atty
Fajardo had been entered into the Office of Clerk of Court. A
person cannot be made liable for interfering with a contract
he is unaware of. Assuming that Lagon knew of contract, such
knowledge alone was not sufficient to make him liable for
tortuous interference. Lagon must have acted in malice or bad
faith. Lagon’s purchase of the property was merely an
advancement of his own financial or economic interests,
 impelled by a proper business interest. No malice or bad faith Petitioner’s purchase of the
involved. This is a case of damnum absque injuria – damage subject property was merely
without injury. an advancement of his
financial or economic
interests, absent any proof
that he was enthused by
improper motives. In
Continuation of Lagon v. CA (Rule) Gilchrist v. Cuddy, the Court
Elements of Court declared that a person is not
Tort a malicious interferer if his
Interference conduct is impelled by a
proper business interest. In
(1) Existence Present. other words, a financial or
of a valid profit motivation will not
contract; necessarily make a person
an officious interferer
(2) In this case, the Court found liable for damages as long
Knowledge on that Lagon had no as there is no malice or
the part of the knowledge of the lease bad faith involved.
third person of contract.
the existence of (4) It found no inducement on
contract; and Inducement is the part of the petitioner.
required in
actions for Induce – Refers to situations
(3) Absent.
tortuous where a person causes
Interference of
interference. another to choose one
the third person So even if petitioner knew of
course of conduct by
is without legal the contract, such
persuasion or intimidation.
justification or knowledge alone was not
excuse. sufficient to make him liable
for tortuous interference
because the third element II. ESSENTIAL REQUISITES
was absent.
A. Consent
To sustain a case for
tortuous interference, the
defendant must have acted Art. 1318. There is no contract unless the following requisites
with malice or must have concur:
been driven by purely (1) Consent of the contracting parties;

impious reasons to injure the (2) Object certain which is the subject matter of the contract;

plaintiff. (3) Cause of the obligation which is established. (1261)

Trigger: The following are present:

1. Consent of the contracting parties
2. Object certain which is the subject matter of the
contract
3. Cause of obligation
Effect: There is a contract
General Rule: The three requisites must be present
Exception:
Purpose: Identifies the requisites of a contract

1. Requisites of Consent
 An offer is a unilateral proposition which one party makes to the
Art. 1319. Consent is manifested by the meeting of the offer
other for the purpose of the contract. There is an offer, if the
and the acceptance upon the thing and the cause which are
mere acceptance of the proposition without any further act on
to constitute the contract. The offer must be certain and the
the part of the offeror will result to the existence of a contract.
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Offer must be definite, complete, and intentional.

Acceptance made by letter or telegram does not bind the

ii. Acceptance of an offer made through an agent
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made. (1262a) Art. 1322. An offer made through an agent is accepted from
the time acceptance is communicated to him. (n)
Trigger: The following must be present:
1. (consent) should be intelligent, or with exact notion of
There is no need for the acceptance to reach the principal,
the matter to which it refers (vitiated by error)
unless required by the same. The agent is deemed a extension
2. (consent) should be free (vitiated by violence,
of the personality of the principal. The offer, however, must be
intimidation or undue influence)
within the scope of the authority of the agent.
3. (consent) should be spontaneous (vitiated by fraud)
Effect: There is valid consent
iii. Effectiveness of an offer in case of death, civil
General Rule: Thee meeting of the offer and the acceptance of
interdiction, insanity or insolvency
the thing and the cause constitute consent in a contract
Exception: Acceptance made by letter or telegram does not bind
the offerer except from the time it came to his knowledge Art. 1323. An offer becomes ineffective upon the death, civil
Purpose: Presents the effect of consent and acceptance in a interdiction, insanity, or insolvency of either party before
contract acceptance is conveyed. (n)

The essence of consent is the agreement of the parties on the

If the either of the party suffers: a. Death, b. Civil interdiction, c.
terms of the contract, the acceptance by one of the offer made
Insanity, or d. Insolvency, before the acceptance is conveyed,
by the other. The offer must be certain and definite with respect
the offer is ineffective, for the reason that a contract may only be
to the cause or consideration and object of the proposed
perfected by the concurrence of two wills Since in these cases,
contract, while the acceptance of this offer-- express or implied
the offeror became insolvent before the acceptance of the offer
-- must be unmistakable, unqualified, and identical in all
came to his knowledge, the offer becomes ineffective.
respects to the offer.

iv. When validly withdrawn

For there to be consent, the area of agreement must extend to
all points that parties deem material or there is no consent at all.
A mistake may invalidate the consent if it refers to the substance
of the thing which is the object of the contract, or to those
conditions which have principally moved one or both parties to
enter into contract.
Art. 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration, as
something paid or promised. (n)

a. Offer Trigger: Offerer has allowed the offeree a certain period to

i. Requisites for a valid offer
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made. (1262a)
accept
Effect: Offerer may withdraw offer before the acceptance
General Rule: Offer may be withdrawn at any time before
acceptance
Exception: The option is founded upon a consideration
Purpose: Gives ways of valid withdrawal of offer
The right given to the offeree to accept within a period is called
an option. If the right is founded upon a consideration it is called
an option contract.
An option is a mere offer which is not binding until accepted. It
does not impose upon the offeree an obligation to buy nor
obligation on the part of the offerer to sell. It is a mere grant of
privilege to buy or sell within an agreed time and at a determined
price. Option is separate from that of the consummation of the
option.
OPTION CONTRACT: The offeree is given the right to decide to
purchase or not, a certain merchandise or property, at any time
within the agreed period, at a fixed price. The offeree may not
be compelled to exercise the option to buy before the time
expires. A perfected contract of option does not result to the
perfection or consummation of the sale; only whent the option is
exercised may a sale be perfected.
Option and option contract
Rules where a period is given to the offeree within which to
accept the offer (Asuncion v CA):
● If period is not founded upon or supported by a
consideration:
○ No acceptance -> offeror is free and has a
right to withdrawal
○ w/ acceptance (but before the offeror came to
know of such) -> offeror has the right to
withdraw by communicating the withdrawal to
the offeree
○ Right to withdraw must not be exercised
whimsically or arbitrarily otherwise, it could
give rise to a damage claim.
● If period has a separate consideration, an option
contract is deemed perfected.
○ Withdrawing the offer during the agreed
period -> breach of contract
○ Optioner-offeror withdraws the offer before its
acceptance (excercise of the option) by the
optionee-offeree, the latter may not sue for
specific performance on the proposed
contract (“object” of the option) because it has
failed to reach its own stage of perfection BUT
offeror is liable for damages for breach of
option
○ If the payment has been intended to be part
of the consideration for the main contract with
a right to withdrawal on the part of the
optionee, the main contract could be deemed
perfected.
Option and the right of first refusal
An option requires a clear certainty of the object and the cause
or consideration of the envisioned contract. It is for a fixed period
and a determinate price.
In a right of first refusal, the object is determinate but the
exercise of the right depends upon the grantor’s eventual
intention to enter into a binding juridical relation and on terms,
including the price that are later to be firmed up.
Option contract and contract of sale
An option is an unaccepted offer. An option states the terms of
and conditions on which the owner is willing to sell his land within
a fixed period.
● Option holder elects to exercise the option -> he must
give notice to the other party and the accepted offer
becomes a valid and binding contract.
● If acceptance is not made within the period, owner is
no longer bound by the offer and the option is at an
end.
Contract of sale - fixes definitely the relative rights and
obligations of both parties at the time of its execution. The offer
and the acceptance are concurrent since the minds of the
parties meet in the terms of the agreement
An option is an unaccepted offer. An option states the terms
and conditions on which the owner is willing to sell his land on
a fixed period.
● Option holder elects to exercise the option -> must
give notice to other part and the accepted offer
becomes a valid binding contract.
● Does not exercise -> owner is no longer bound by the
option and the option is at an end.
Contract of Sale - fixes definitely the relative rights and
obligations of both parties at the time of its execution. Offer
and acceptance are concurrent because the minds of the
parties meet according to the terms of the agreement.
Option and unilateral promise to sell
Art. 1479 (2). An accepted unilateral promise to buy or to sell
a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price. (1451a)
While in Art 1324, the effect of a consideration for the option to
accept within a period is that the offer MAY NOT be withdrawn
at any time before the acceptance. Under Art 1479, a
consideration distinct from the unilateral promise is a condition
for the promise to be binding upon the promissor. There is a
conflict.
Sanchez v Rigos (1972)
Facts:
Issue:
Ratio:
Rule:
The consideration for the option
Would ordinarily be in a sum of money. But it could also be in
other forms.
Serra v CA - transfer of ownership of the building and/
improvements built by the offeree on the property if the offeree
bank failed to exercise its option within the period stipulated.
(The consideration was the consequence of the non-exercise of
an offer which perfected the contract. YES, there was
the option)
acceptance.
Ratio: Purefoods clearly sent a letter to FEMSCO which
Vda de Quirino v Palarca - In an obligation of the lessee to sell
accepted its proposal, perfecting their contract. Also, the
to the lessor the building and/or improvements constructed or
acceptance is not qualified by the “Basic Terms and
made, the failure to exercise his option to buy said premises was
Conditions” in the letter because they don’t refer to the
the consideration.
perfection of the contract, but to the performance of the
obligation.
Sums paid in consideration may be deemed part of the purchase
Rule: Ads are mere invitations to make offers. Proposals of
price and are sometimes called “earnest money”. The latter is
bidders are offers, while letters sent to the bidders constitutes
part of the purchase price, given only when there is a sale, and
either acceptance or rejection.
the buyer is bound to pay the balance. The former is money
given as a distinct consideration applying to a sale not yet
perfected and the would-be buyer is not required to buy.
Gutierrez v Insular Life (1957)
Facts: Gutierrez filed an a complaint against Insular Life
Effect of acceptance
because the latter accepted the second lowest bid without
any valid reason, in Insular’s bidding for the construction of
2 senses of using the term “acceptance” - acceptance of the
electrical wiring. Gutierrez was the lowest bidder.
offer and acceptance of the option or promise.
Issue: WON acceptance of second lowest bid is invalid. NO
Ratio: No evidence that bidding would award to the lowest
Acceptance of the offer - May be acceptance of an option (Art
bidder. Also, the 20k bond which alledgy implies acceptance
1324) or a unilateral promise to sell (Art 1479). The contract is
of the lowest bid, merely qualifies anyone to submit a bid,
perfected and binding.
nothing more.
Rule: The advertiser is not bound to accept the highest or
Acceptance of the option or promise - The option or promise is
lowest bidder, unless the contrary appears.
founded on a consideration and an option contract is formed.
Contract is binding on the offerer because he cannot withdraw
until the period lapses. b. Acceptance

Diamante v CA - even if the promise was accepted, private resp i. Requisites for a valid acceptance
was not bound thereby in the absence of a distinct
consideration.
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
Exercise of the option
to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
Valid Exercise of Option requires not merely communicating
counter-offer.
acceptance of the offer within the period stated. The offeree
would have to pay or at least make a valid tender of payment of
Acceptance made by letter or telegram does not bind the
the price.
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
v. Advertisements
into in the place where the offer was made. (1262a)
Unless it appears otherwise, business ads of things for sale are
not definite offers, but mere invitations to make an offer. Trigger: Meeting of the offer (certain) and the acceptance
(absolute) upon the thing and the cause which are to constitute
Ads for bidders are simply invitations to make proposals, and the contract.
the advertiser is not bound to accept the highest or lowest offer, Effect: Valid Consent.
unless the contrary appears. General Rule: Consent is manifested by the
Exception: When it is qualified acceptance, it constitutes a
counter-offer, and not an acceptance.
Jardine Davies v CA (2000)
Facts: Purefoods started a bidding for the supply and
When an acceptance has any variation or modification from the
installation of generators. Initially, FEMSCO won the bidding
original offer, or the acceptance is a new proposal itself, it is a
with the lowest offer. Purefoods then canceled its acceptance
qualified acceptance, which constitutes a counter-offer, and is
of FEMSCO’s bid, and awarded the supply ans installation to
not considered valid consent. A qualified acceptance does not
Jardine Davies. FEMSCO filed a case, and won in the lower
make the contract effective.
courts, hence this appeal by Jardine Davies.
Issue: WON there existed a perfect contract between
The inclusion of new conditions only qualifies the acceptance
Purefoods and FEMSCO, aka WON there was acceptance of
when such conditions are imposed on the perfection of the
contract. When the conditions are imposed merely on the
performance of an obligation, it does not result in the failure of
the contract. Failure to comply with the conditions imposed on
the perfection results in the failure of a contract. Failure to
comply with the conditions on performance gives the other party
remedies to protect his interests.
ii. Manner of Acceptance
Express or implied
Art. 1320. An acceptance may be express or implied. (n)
Implied Acceptance - can be inferred from the contemporaneous
and subsequent acts of the contracting parties. A contract may
be binding even if the parties did not affix their signatures on any
written document, as long as there is implied acceptance.
By letter or telegram
Does not bind the offerer except from the times it comes to his
knowledge
- Presumed to be entered in the place where the offer
was made
There is only meeting of the minds when the acceptance wa
smade known to the offeror
Art. 1319. Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which are
to constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
into in the place where the offer was made. (1262a)
General Rule: there is only consent when the offer is absolute
Trigger: Offer is accepted via telegram or letter
Effect: only binds the offeror when it came to his knowledge,
contract presumed to have been entered into the place offer was
made
Right of offeror to fix manner of acceptance
Art. 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be
complied with. (n)
Trigger: a person makes an offer
Effect: he may fix the time, place and manner of acceptance -
all must be complied with
An attempt on the part of the offeree to accept the offeree in a
different manner does not bind the the offeror - there is no
meeting of the minds
When there is an offer made with no time frame and the offer is
made to a person present, it must be accepted immediately
Malbarosa v CA (2003)
Facts:
Issue:
Ratio:
Rule:
2. Vices of Consent
A contract where consent is given through mistake, violence,
intimidation, undue influence or fraud is voidable
Court is given a wide latitude in weighing facts and
circumstances in a given case to determine WON consent was
vitiated
a. Mistake
i. Nature of mistake required
Such mistake should refer to the substance of the thing which is
the object of the contract
- Those conditions which have principally moved one or
both parties to enter into the contract
For mistake to vitiate consent, 2 requisites must occur:
1. Mistaker is with regard to
a. Identity of one of the contracting parties
b. Qualification of one of the contracting parties
2. Identity or qualification must be the principal
consideration for celebration of the contract
The error must be real and not one that could have been avoided
by the party alleging it
- Error must arise from facts UNKNOWN to him
Roman Catholic Church v Pante (2012)
Facts:
Issue:
Ratio:
Rule:
ii. In case of illiterarcy/ unknown language
When one of the parties is unable to read. Or if the contract os
in a language not understood by him and mistake or fraud os
alleged, the person enforcing the contract must have the burden
of proof to show that the terms have been explained to the
former
Leonardo v CA (2004)
Facts:
Issue:
Ratio:
Rule:
ii. In case of illiteracy/ unknown language
Art. 1332. When one of the parties is unable to read, or if
the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained
to the former. (n)
● Exception to rule of presumption of knowledge of
party
○ Intent: protection of the handicapped
● IF:
○ Unable to read OR contract in a language
not understood by him and
○ Mistake or fraud is alleged
● THEN: Burden of proof that it was fully explained
belongs to the person enforcing the contract
● Presumption of mistake or error for those who didn’t
have the benefit of a good education
● Evidence must be full, clear and convincing, and
not merely preponderance of evidence
Leonardo v CA (2004)
Facts: Petitioner Restituta is the only legitimate child of
Tomasina and Balbino while the private respondents are the
illegitimate children of Tomasina with Jose Sebastian.
● Priv respondents persuaded her to sign a deed of
extrajudicial partition of her mother’s estate
● Deed is in english
● Before signing, Restituta insisted that they wait for
her husband so that he could translate the
document
● But she signed the document because priv resp
Corazon (half-sister) assured her that her share as
a legitimate daughter is provided for
Petitioner’s husband was only able to read document when
they hired a lawyer.
Issue: WN consent was given by petitioner - NO
Ratio: Essence of consent is the agreement of the parties on
the terms of the contract, acceptance by one of the offer
made by the other.
● Concurrence of the minds of the parties on the
object and cause
● Area of agreement must extend to all points that
the parties deem material
GR: Party is presumed to know the import of the document
when he signs.
EXC: When one of the parties is unable to read, or the
contract is in a language not understood by him, and
mistake or fraud is alleged: person enforcing the contract
has the burden of proof to show that terms have been fully
explained.
Rule: Contracts where consent is given by mistake is
voidable. There is a presumption of mistake or error
accorded by the law to those who haven’t had the benefit of
a good education, one who alleged any defect or lack of a
valid consent must establish this by clear and convincing
evidence.
ITC: Presumption of mistake or error of petitioner not
sufficiently rebutted by private respondents/
● Petitioner only finished grade 3
● Not in a position to give her free, voluntary and
spontaneous consent without having the document
● Document which was in English wasn’t explained to
her in the Pangasinan dialect
Her wish to wait for her husband showed her uncertainty
Under the law, her share should’ve been 19,282 sq m bu it
was only 7,671 sq m under the document
iii. No mistake when there is knowledge
Art. 1333. There is no mistake if the party alleging it knew
the doubt, contingency or risk affecting the object of the
contract. (n)
● If the party alleging mistake knew of the doubt,
contingency or risk, there is NO MISTAKE
● Mistake: misunderstanding of meaning or implication
of something or wrong action or statement because of
faulty judgment
● Presumption that parties know and understand
○ Also covers situations where he could’ve
known (Leonardo v CA)
iv. In case of mutual error
Art. 1334. Mutual error as to the legal effect of an agreement,
when the real purpose of the parties is frustrated, may vitiate
consent.
Mutual error as to the legal effect when the real purpose of
parties is frustrated
● Consent is vitiated
● Voidable contract
Art. 1361. When a mutual mistake of the parties causes the
failure of the instrument to disclose their real agreement,
said instrument may be reformed.
Under Art 1361, the mistake is as to the way the agreement is
described or detailed in the instrument and not as to the
agreement. Contract is not voidable but instrument may be
reformed.
b. Violence/ Intimidation
Art. 1335. There is violence when, in order to wrest consent,
serious or irresistible force is employed.
There is intimidation when one of the contracting parties is
compelled by a reasonable and well-grounded fear of an
imminent and grave evil upon his person or property, or
upon the person or property of his spouse, descendants or
ascendants, to give his consent.
To determine the degree of intimidation, the age, sex and
condition of the person shall be borne in mind.
A threat to enforce one's claim through competent authority,
if the claim is just or legal, does not vitiate consent.
i. Definition
Violence contemplates both INTENT (to wrest consent from
another) and MEANS EMPLOYED (serious/irresistable force).
It pertains to physical force or compulsion.
Intimidation, on the other hand, pertains to moral force or
compulsion. It is enough that intense fear is produced in the
mind of the victim.
Intimidation, according to Tolentino, must not be limited to the
person or property of the victim (or his spouse, descendants or
ascendants), but should also include one's liberty and honor,
because a threat on the latter two has the same moral effect if
a threat is made upon one's person or property.
What constitutes intimidation for one person may not be
intimidation for another, which why the age, sex and condition
of the person shall be borne in mind in determining the
presence of intimidation. However, no such similar provision
exists when it comes to violence.
REQUISITES OF VIOLENCE:
1. Violence must serious or irresistible, in such a way that the
victim has no choice but to give his or her consent
2. Such violence is the primary cause in giving the consent to
the contract.
REQUISITES OF INTIMIDATION:
1. Threat must be unjust or unlawful
Lawfully created fear is not intimidation. See Art. 1335 par. 4 -
a threat to enforce a valid claim through the proper authorities
2. Threat must be real and serious
There is a great disproportion between evil threatened and the
resistance all men can offer.
3. Threat must produce a well-grounded and reasonable fear
that an imminent a grave evil will be inflicted upon the victim
4. The intimidation must be the primary cause in giving the
consent to the contract
ii. If via 3rd person
Art. 1336. Violence or intimidation shall annul the obligation,
although it may have been employed by a third person who
did not take part in the contract.
Intimidation or violence by a third person, REGARDLESS
whether such person is in connivance with one of the
contracting parties or not, shall annul the obligation.
c. Undue influence
Art. 1337. There is undue influence when a person takes
improper advantage of his power over the will of another,
depriving the latter of a reasonable freedom of choice. The
following circumstances shall be considered: the confidential,
family, spiritual and other relations between the parties, or the
fact that the person alleged to have been unduly influenced
was suffering from mental weakness, or was ignorant or in
financial distress. (n)
i. Definition - means employed on a party, which under
circumstances, he could not well resist and which controlled his
volition and induced him to give his consent to the contract,
which otherwise he would not have entered into.
● In some measure, destroys free agency of a party
● Interferes with exercise of independent discretion
● Moral coercion
● Solicitation, importunity, argument, and persuasion are
not undue influence - not prohibited in law or morals
○ Due influence - full recognition of the liberty
due every true owner to obey the voice of
justice, dictates of friendship, gratitude and
benevolence, and claims of kindred; (own
free choice)
Intimidation Undue Influence
Has to be unjust / Need not be unjust /
unlawful unlawful
ii. Determining existence of undue influence
Following circumstance to be considered -
● confidentiality, family, spiritual and other relations
between the parties
● fact that the person alleged to have been unduly
influenced was suffering from mental weakness, or
was ignorant or in financial distress
Tolentino - list not exclusive but illustrative; what is important is
to look into the power of coercion of one party, and the
susceptibility to its influence of the other
 HI MARC!!!! LOL WAG MO DELETE PARA NASA
Loyola v CA (2000)
REVIEWER NG LAHAT CHZ - OBV crammers, last minute
Facts: Gaudencia sold her share of the parcel of land to the
ginawa hahahahah - BYE MARC!
heirs of Mariano; Petitioners alleged that at the time of the
HI JAJA! :) LOL CHAT BOX HAHAHAHAHAHA TRU!!
sale, undue influence was exerted on Gaudencia by
BYEEEE HAHAH
Romana (one of the heirs) because,
● Gaudencia, at the time was 94 y.o., weak
● In Sps. Tiongson v. Emergency Pawnshop, the Court
● Gaudencia was living with Romana and dependent
held that the misrepresentation by the buyer that the
upon her for her daily needs
postdated check will not bounce on its maturity date
Issue: W/N undue influence was present
does not equate to dolo causante. It was not the
Rule: Undue influence depends upon the circumstances of
principal inducement to sign the Deed of Absolute
each case, not on bare academic rules. Three elements
Sale. There was already an agreement to the sale
must be present
prior to the issuance of the check.
1. Person who can be influence
● The fraud which is present or employed at the time of
2. Improper influence exerted
the birth or perfection of a contract may either be dolo
3. Submission to the overwhelming effect
causante or dolo incidente (Geraldez v. CA)
In the absence of a confidential relationship, the law
does not presume that one person exercised undue
ii. Requisite to Vitiate Consent
influence
● In Tankeh v. DBP, it was held that to constitute fraud
Ratio: In the case, the fact that Romana looked after
that provides basis to annul contracts, it must fulfill
Gaudencia is not sufficient to establish confidential
two conditions:
relationship. Furthermore, petitioners failed to show that
○ The fraud must be dolo causante (fraud in
Romana used Gaudencia’s reliance on her to take advantage
obtaining the consent of the party)
or dominate her and dictate that she sell her land. Undue
○ This fraud must be proven by clear and
influence cannot be inferred from age, sickness or debility, if
convincing evidence
sufficient intelligence remains.
Serious / Dolo Causante
d. Fraud / Misrepresentation 

Article 1344, par. 1. In order that fraud may make a
Art. 1338. There is fraud when, through insidious words or contract voidable, it should be serious and should not have
machinations of one of the contracting parties, the other is been employed by both contracting parties.
induced to enter into a contract which, without them, he would
not have agreed to.
● A deception used by one party prior to or
simultaneous with the contract, in order to secure the
Fraud - refers to all kinds of deception that would lead to an consent of the other (Solidbank v. Ferroalloy Corp.)
ordinarily prudent person into error after taking the ● Must be so material that had it not been present, the
circumstances into account defrauded party would not have entered into the
Insidious words or machinations - those that ensnare, entrap, contract (Tankeh v. DBP)
trick, or mislead the other party who was induced to give consent ● Must be necessary and essential to obtain consent.
which he would not otherwise have given (Spouses Lequin v ● Must be sufficient to impress and lead an ordinarily
Spouses Vizconde) prudent person to error.
● Personal conditions and actual circumstances are
i. Kinds of Fraud considered.

Clear and Convincing Evidence

Dolo Incidente (Incidental) Dolo Causante (Causal)
● Fraud must be established by clear and convincing
● Not serious in ● Serious enough (to evidence; mere preponderance of evidence is not
character be voidable) adequate. (Solidbank Corp v. Mindanao Ferroalloy
● Refers to only ● Refers to the Corp.)
some particular / essential cause of ● This standard of proof is less than proof beyond
accident of the the consent reasonable doubt (for criminal cases) but greater than
obligation ● Without which the
preponderance of evidence (for civil cases). (Tankeh
● Without which the other party would
other party would have not entered v. DBP)
have still entered into the contract. ● Mere allegations will not suffice to sustain the
into the contract ● Effect - nullity of the existence of fraud. (Id.)
● Effect - damages contract + ● The burden of evidence rests on the part of the
indemnification for plaintiff or the party alleging fraud.
damages
● In Tankeh v. DBP, the Court held that both dolo
incidente and dolo causante must be proven by clear
 and convincing evidence. The difference lies in
whether the fraud, if proven, may be the basis for
making the contract voidable (dolo causante), or for
awarding damages (dolo incidente), or both.
Tankeh v Development Bank of the Philippines (2013)
Facts:
- Ruperto Tankeh informed his younger brother
Alejandro Tankeh (petitioner) that he will be operating
a new shipping lines business (SSLI).
● Alejandro Tankeh was assigned shares of stock
● Alejandro signed a PN in favor of DBP, with respect
to the amount of the loan with DBP
● A $3.5 M loan application with DBP, where
Alejandro was solidarily liable with respondents,
was approved
- Realizing that he was just being used by Ruperto, he
sent a letter to Ruperto requesting for a resolution
releasing him from liability, especially with respect to
the DBP loan.
- Petitioner alleges that he signed the PN because of the
deceit employed by Ruperto. He claims that this was
actually a simulated document.
Circumstances claimed to prove Ruperto’s deceit:
● Promised Alejandro that he will give 1000 shares
worth P1M
● Promised that Alejandro and his son will be part of
the administration
● Alejandro attended board meetings only once and
was never invited again. He was not compensated
for being a “Director” and a stockholder.
● That Alejandro never invested any amount, all
money supposedly invested by him were from
Ruperto
● Alejandro was not even allowed to see data about
income and expenses
RTC: There was fraud by Ruperto Tankeh
CA reversed: There was no documentary evidence of fraud,
only based on testimony.
Issue:
- WON there was fraud- No dolo causante, but there
was incidental fraud.
Rule:
● Based on jurisprudence, fraud as basis to annul
contracts must be: (1) dolo causante, (2) the fraud
must be proven by clear and convincing evidence
● The quantum of evidence to prove the existence of
fraud is clear and convincing evidence.
○ This standard of proof is less than proof
beyond reasonable doubt (for criminal
cases) but greater than preponderance of
evidence (for civil cases).
Ratio:
● The required standard of clear and convincing
proof was not met, to prove that there was dolo
causante or fraud used to obtain the petitioner’s
consent to enter into the contract.
○ Reason: The petitioner had the
opportunity to become aware of the facts
and circumstances that attended the
signing of the promissory note.
○ The Court considered Alejandro’s
background as a doctor and as an
experienced businessman.
● But there was incidental fraud in this case, when
the respondent refused to allow the petitioner to
participate in the management of the business.
iii. Failure to disclose 

Article 1339. Failure to disclose facts, when there is a duty
to reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (n)
This rule applies to:
1. Cases where there is a special duty to disclose
certain facts (based on the provision)
2. When according to good faith and the usages of
commerce the communication should be made
(based on jurisprudence)
iv. Usual exaggeration in trade 

Article 1340. The usual exaggerations in trade, when the
other party had an opportunity to know the facts, are not in
themselves fraudulent. (n)
In Tankeh v DBP: the court considered a person’s “standing
and stature” to determine that he was in a position to ascertain
more information about the contract.
v. Expression of opinion 

Article 1341. A mere expression of an opinion does not
signify fraud, unless made by an expert and the other party
has relied on the former's special knowledge. (n)
- Determination of who an expert is depends on the
particular circumstances.
- In the same way that a person who claims to be an
expert is held to the standard of diligence of an
expert, a person claiming to be an expert will be an
expert for purpose of this article, even though in
reality he is not.
vi. By 3rd person 

Article 1342. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation has created
substantial mistake and the same is mutual. (n)
In Rural Bank v. CA: it is not required that misrepresentation
was orchestrated by the other contracting party
- Casis comment: the case cites Hill v Veloso which
holds that to vitiate consent the misrepresentation or
deceit must be in connivance with the other
contracting party. Although it also says that consent
may still be vitiated if there was no such connivance,
it qualified that it is no longer deceit but error.
The code, as to misrepresentation by third person, only has 2
requirements:
1. It created substantial mistake
2. The mistake is mutual
If the misrepresentation was with the connivance of the other
contracting party then there is no mistake on his part. Thus, a
misrepresentation by a third person with the connivance of the
other contracting party cannot possibly fall under this rule.
It seems that the rule contemplates a situation where both
parties to a contract made a substantial mistake resulting from
the misrepresentation of a third party.
vii. In good faith 
 -
Article 1343. Misrepresentation made in good faith is not
fraudulent but may constitute error. (n)
- EXAMPLE: where a person, in order to place his
property beyond the reach of his creditors, simulates
a transfer of it to another, he does not really intend to
divest himself of his title and control of the property
ii. Relative 

- When the parties conceal their true agreement.
- Valerio v. Refresca:
- If the parties state a false cause in the
contract to conceal their real agreement, the
contract is relatively simulated and the
parties are still bound by their real
agreement.
- Where the essential requisites of a contract are
present, and the simulation refers only to the content
or terms of the contract, the agreement is absolutely
binding and enforceable between the parties and their
successors in interest.
- 2 juridical acts involved in relative simulation:
1. Ostensible Act – The contract that the
parties pretend to have executed.
2. Hidden Act – The true agreement between
the parties.
To determine the enforceability of the actual
agreement between the parties, the Court must
discern whether the concealed or hidden act is lawful
and the essential requisites of a valid contract are
present.

Error is different from mistake. The latter, just like fraud, may b. Effects

vitiate consent. A mistake refers “to the substance of the thing
which is the object of the contract, or to those conditions which
have principally moved one or both parties to enter into the ART. 1346 CASIS
contract.” (Art.1331)
An absolutely simulated or Void or inexistent contract
3. Simulation fictitious contract is void. · One which has no
- The declaration of a fictitious will, deliberately made force and effect from
by agreement by the parties, in order to produce, for the very beginning, as if
the purposes of deception, the appearances of a it had never been
juridical act which does not exist or is different what entered into.
that which was really executed (Loyola v CA) · Produces no effect
whatsoever either
Requisites: against or in favor of
1. Outward declaration of will different from the will of anyone.
the parties
A relative simulation,
2. false appearance must have been intended by mutual
when it does not prejudice
agreement
a third person and is not
3. Purpose is to deceive third persons
intended for any purpose
contrary to law, morals,
a. Types
good customs, public
order or public policy
i. Absolute 

binds the parties to their
- When the parties do not intend to be bound at all
real agreement.
- Apparent contract is not really desired or intended to
produce legal effects or in any way alter the juridical
situation of the parties Valerio v. Rafresca:
- There is a colorable contract but it has no substance Where the essential requisites of a contract are present and
as the parties have no intention to be bound by it the simulation refers only to the content or terms of the
- What is lacking is consent
contract, the agreement is absolutely binding and enforceable for the development of the national
between the parties and their successors in interest. wealth.
● Those which cannot be appropriated
○ Open seas
Valerio v Refresca (2006)
○ Heavenly bodies.
Facts:
Issue:
b. Future things
Rule:
Ratio:
It is essential that the object must be in existence at the time of
the perfection of the contract, or that it has the possibility or
potentiality of coming into existence at some future time.
B. Object
Future things
Object of a contract ● Those which do not belong to the obligor at the time
- Contract’s subject matter. the contract is made but they may be made, raised, or
- It is the thing, right or service which is the subject acquired by the obligor after the perfection of the
matter of the obligation arising from contract. contract.
(Tolentino) ● Not only material objects but also future rights.

1. What may be the object of a contract ART. 1349

The object of every contract must be determinate as to its
ART. 1347 DIGESTED BY CASIS kind. The fact that the quantity is not determinate shall not
be an obstacle to the existence of the contract, provided it
All things which are not The following may be the is possible to determine the same, without the need of a
outside the commerce of object of contracts: new contract between the parties.
men, including future
things, may be the object ● All things which
Domingo Realty v. CA:
of a contract. All rights are not outside
which are not the commerce of The object of a contract, in order to be considered as “certain,”
intransmissible may also man, including need not specify such object with absolute certainty. It is
be the object of contracts. future things; enough that the object is determinable in order for it to be
considered as “certain.”
No contract may be ● All rights which
entered into upon future are not >in the case, the title contained a technical description
inheritance except in intransmissible;
providing the metes and bounds of the property. The area of
cases expressly and
authorized by law. petitioner’s property is determinable based on the technical
● All services which descriptions.
All services which are not are not contrary to
contrary to law, morals, law, morals, good 2. What may not be an object of a contract
good customs, public customs, public
order, or public policy may order or public The following cannot be the object of contracts:
likewise be the object of a policy.
contract. ● Future inheritance except in cases expressly
authorized by law; and
○ “future inheritance” – any property or right
not in existence or capable of determination
a. Not outside the commerce of man
at the time of the contract, that a person may
in the future acquire by succession.
● Properties of public dominion
● Impossible things or services
○ Properties intended for public use
■ Roads
a. Future inheritance
■ Canals
■ Rivers
General Rule: All things, even future things, not outside the
■ Torrents
commerce of many may be the object of a contract.
■ Ports
■ Bridges constructed by State
Exception: future inheritance. The acceptance must not have
■ Banks
been opened at the time of the contract.
■ Shores
Requisites:
■ Roadsteads
■ Others belonging to State and ● Succession has not yet been opened;
intended for some public service or ● That the object of the contract forms part of the
inheritance; and
 ● That the promissory has, with respect to the object,
an expectancy of a right which is purely hereditary in
nature
Exception to the exception: partition inter vivos (Art 1080)
b. Impossible things
Tolentino: The impossibility must be actual and
contemporaneous with the making of the contract and not
subsequent.
C. Cause
The cause is the essential reason which moves the contracting
parties to enter into a contract. It is the immediate, direct and
proximate reason which justifies the creation of an obligation
through the will of the contracting parties.
Requisites:
● It must exist
● It must be true
● It must be licit
1. Kinds
Onerous – cause is understood to be for each contracting
party, the prestation or promise of a thing or service by
another. The cause need not be adequate or an exact
equivalent in point of actual value, esp if the object has a
rapidly fluctuating price
Natural obligation or one of conscience, there is a sufficient
cause to sustain an onerous contract but a moral obligation
arising wholly from ethical considerations not constituting a
natural obligation is not a sufficient cause for onerous
contracts.
Remuneratory – the cause is the service or benefit which is
remunerated. Are remuneratory contract is one where a party
gives something to another because of some service or benefit
given or rendered by the latter to the former, where such
service or benefit was not due as a legal obligation.
Gratuitous – the cause is the liberality of the benefactor. They
are essentially donations. A voluntary conveyance without any
valuable consideration is good as between the parties and
cannot be set aside unless made in fraud of existing creditors.
Torres v CA: consideration can take different forms such as the
prestation or promise of a thing or service by another.
Petitioners contended that a joint venture agreement was void
because it was the direct result of an earlier illegal contract,
which was for the sale of the land without valid reconsideration.
The Court said that the consideration for the sale was the
expectation of profits from the subdivision project.
2. Distinguished from motive
The motive of the contracting party may be different from the
cause.
a. Invalidity of the motive does not invalidate the cause
Motive – Particular reason of a contracting party which does
not affect the other party and which does not preclude the
existence of a different consideration.
General principle: the motive or particular purpose of a party
does not affect the validity nor existence of the contract.
Exception: When the realization of such motive or particular
prupose has been made a condition upon which the contract
is made to depend.
In PNCC, the non-materialzation of the petitioner’s purpose of
using the leased premises as a site of a rock crushing plant,
did not invalidate the contract.
Heirs of Balite v Lim: Contract was valid despite the illegality of
the motive because the contract was valid.
b. When invalidity of the motive invalidates the
cause
General rule: a party’s motive for entering a contract do
not violate the contract
Exception: when the motive predetermines the cause the
motive may be regarded as the cause
Therefore, when the motive is unlawful the contract is
null and void
3. Want of cause
Art. 1352. Contracts without a cause, or with unlawful
cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs,
public order or public policy.
It is the total absence of a cause or consideration that
renders such contract absolutely void and inexistent.
4. Statement of false cause
Art. 1353 The statement of false cause in contracts
shall render them void, if it should not be proved that
they were founded upon another cause which is true
and lawful.
General rule: statement of false cause renders contracts
void
Exception: if founded upon another cause which is lawful

5. Presumed lawful cause
Art 1354. Although the cause it not stated in the
contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary.
A preponderance of evidence must be shown in order to
overcome the presumption
6. Inadequacy of cause
Art. 1355. Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract
unless there has been fraud, mistake or undue
influence.
General rule: lesion or inadequacy of cause shall not
invalidate a contract
Exception: cases specified by law, fraud, mistake or
undue influence
III. Forming the Contract
A. Stages of Formation
Jurisprudence provides 3 distinct stages:
1. Preparation/negotiation
2. Perfection or birth
3. Consummation
1. Negotiation
● Begins: time prospective parties manifest their
interest in the contract
● Ends: moment of agreement, when the contract
is concluded (perfected)
● No element of consent yet at this stage
○ Mere exchange of offers and counter-
offers
2. Perfection
● Birth of the contract
● When the parties agree upon the essential
elements of the contract
● Only becomes binding after perfection
● Dependent on the nature of the contract:
○ Consensual - perfected upon mere
meeting of the minds
○ Real - requires meeting of the minds
and delivery of the object (pledge or
commodatum)
○ Solemn - requires compliance with
certain formalities prescribed by law
3. Consummation
● Begins or occurs when parties fulfill or perform
the terms agreed upon
● Culminates in the extinguishment
● Distinction between consummation and
perfection in a contract of sale:
○ Not required at the perfection stage that
the seller owns the thing sold (ex.
Selling a future thing)
○ But he must be the owner at the time of
consummation or delivery
B. Forms of Contracts
1. General Rule
Art. 1356. Contracts shall be obligatory, in whatever
form they may have been entered into, provided all the
essential requisites for their validity are present.
However, when the law requires that a contract be in
some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such
cases, the right of the parties stated in the following
article cannot be exercised. (1278a)
General Rule: The form of a contract, whether oral or
written, is irrelevant to the binding effect inter partes of a
contract that possesses the 3 validating elements of
consent, subject matter, and cause.
● The spirit and intent of the parties is upholded
over formalities.
● This rule originated from the Spanish CC and of
the “Ordenamiento de Alcala”
● Contracts are perfected by mere consent and
that they are obligatory, whatever form they
may be entered into, provided all essential
requisites are present.
2. Exceptions
Exceptions: When the law requires that the contract is in
some form, for the purpose of:
1. Validity
2. Enforceability
a. When form is required to make contract
effective against third parties
3. Proof
a. When form is required for the purpose of
proving existence of the contract
b. In order for contracts to not be
unenforceable

Court sometimes combines requirement for validity with
enforceability.
Art. 1357. If the law requires a document or other
special form, as in the acts and contracts enumerated
in the following article, the contracting parties may
compel each other to observe that form, once the
contract has been perfected. This right may be
exercised simultaneously with the action upon the
contract.
Art. 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their object the
creation, transmission, modification or extinguishment
of real rights over immovable property; sales of real
property or of an interest therein a governed by
Articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any other
power which has for its object an act appearing or
which should appear in a public document, or should
prejudice a third person;
(4) The cession of actions or rights proceeding from
an act appearing in a public document.
All other contracts where the amount involved
exceeds five hundred pesos must appear in writing,
even a private one. But sales of goods, chattels or
things in action are governed by Articles, 1403, No. 2
and 1405.
a. Contracts required to be in writing (Art. 1358, par.
5)
Art. 1358 enumerates certain types of contracts must
appear in writing and those which must appear in a public
document
However, Art. 1358 does not provide an additional
requisite for these types of contracts to be valid or
enforceable between the contracting parties. Such
contracts are binding and enforceable between the
parties despite the absence of such requirement.
The requirement that such contract must be in writing is
merely for convenience, and the contract may be
enforced even if it may not be in writing. But, as stated in
Art. 1358 par. 5, certain contracts must be made in writing
before it can be enforced pursuant to Art. 1403 and 1405
(these are unenforceable contracts).
b. Contracts required to be in a public document -
(Art. 1358, Nos. 1-4) - also pertains to the notarization of
the document
This requirement does not relate to the validity of the
contact, but to its efficacy or effectiveness and for the
convenience of the contracting parties as well. These
contracts are binding between the contracting parties, and
the absence of the requirement in Art. 1358 does not
invalidate the acts or contracts enumerated therein.
However, this formal requirement is for the benefit of 3rd
persons. As ruled in Manotok vs CA, the legalization of a
contract by means of public writing and its entry in the
registry of deeds are not essential requisites to the validity
of the contracts, but these are required for the purpose of
making the contract effective as against 3rd persons.
Art. 1358, in relation to Art. 1357, allows contracting
parties to reciprocally compel each other to observe this
formal requisites in order to enforce the contract against
3rd persons.
Although the non-notarization of a contract does not affect
the validity or existence of the contract between parties, it
does not mean that it is unimportant. A public document
(or a notarized document) creates a presumption of
validity and a high degree of proof is necessary to
overturn this presumption.
Notarization concerts a private document into a public
one, and renders it admissible in court as evidence
without further proof of its veracity or authenticity.
Despite the fact that non-observance of the public
document requirement does not invalidate the contract,
the Code expressly requires certain contracts to be
embodied in a public document for such contract to be
valid and binding. These are:
● Donations of immovable property (Art. 749)
● Contract of partnership where immovable
property is contributed (Art. 1773)
Manotok Realty Inc v CA (1987)
Facts: The probate court authorized Legarda to sell
Legarda-Tambunting Subdivision on the condition that
they execute necessary documents and submit them to
the Court for approval. Legarda sold part of the subd.
to Lucero (installment basis, paid initial amount of 200).
Lucero then leased the property to Siojo. The probate
 instrument which do not reflect or disclose the
court then authorized Phil Trust Company to sell the
subd. Manotok Realty then bought the whole subdv. (a real meeting of the minds.
deed of sale was executed and approved by the ● Tempers the legalistic rule that a written
probate court). Manotok Realty then filed an ejectment instrument should be the final and inflexible
case against Siojo, alleging that receipt evidencing the criterion and measure of rights and obligations of
sale did not conform to legal requirements of contracts parties
of sale, that contract should be in a public doc to be ● Forestalls effects of mistake, fraud, inequitable
valid and enforceable as it involves a transmission of
conduct or accident
real rights over an immovable property - hence, the sale
to Lucero cannot be enforced against third persons. ● Given that it is an invasion of the parol evidence,
Issue: W/N the sale to Lucero was valid - NO it shall be done sparingly and with great caution
Ratio: The alleged sale should have been embodied
in a public instrument (Art. 1358) and should have
been registered with Register of Deeds to make it Reformation Annulment of Contract
binding against third persons
Other reasons why sale was not binding as to third Presupposes a valid Presupposes a defective
persons existing contract but contract (want / vitiated
1. Authority given by probate court to Legarda instrument drawn up and consent)
required execution of necessary documents signed by parties does not
and its approval (which they did not secure) correctly express terms of
2. Lucero failed to obtain a deed of sale and any agreement
kind of writing evidencing the sale from
Purpose is to establish Declare inefficiency which
Legarda, except for the receipt
and perpetuate true contract already carries
3. No explanation as to why no effort on the part
agreement and to render contract
of Lucero to pay the balance of purchase price
inefficacious
during time Legarda was co-administrator
Rule: Note, while the court held that the sale was null
because of the absence of a public document, the Court
also based its decision on a number of considerations 2. Effect and Purpose
The purpose is to express the true intention of the
Notarization of a document carries considerable contracting parties
legal effect ● Establishes and perpetuates real contract
● Creates presumption of validity between the parties which could not be enforced
● A high degree of proof is necessary to overcome but for such reformation
this presumption ● Does attempt to make another contract
● Entitled to full faith and credit on their face in the 3. When Proper
absence of competent evidence that execution
was tainted by defects or irregularities a. In General
● Renders it admissible in court without further
proof of authenticity
Art. 1359, par. 1. When, there having been a meeting
● Certain agreements that require public doc for
of the minds of the parties to a contract, their true
purpose of validity
intention is not expressed in the instrument purporting
○ Donations of an immovable (Art. 749)
to embody the agreement, by reason of mistake, fraud,
○ Contract of partnership where
inequitable conduct or accident, one of the parties may
immovable property is contributed (Art.
ask for the reformation of the instrument to the end that
1773)
such true intention may be expressed.
C. Reformation of Instruments

1. Nature and basis REQUISITES:

● Remedy in equity by means of which a written
instrument is made or construed so as to express
or conform the real intention of the parties
when some error or mistake has been
committed
● Why the need for it? It would be unjust and
unequitable to allow enforcement of a written
● There must have been a meeting of the minds
of the parties to the contract
● The instrument does not express the true
intention of the parties; and
● The failure of the instrument to express the true
intention of the parties is due to mistake, fraud,
inequitable conduct or accident

Art. 1359, par. 2. If mistake, fraud, inequitable conduct,
or accident has prevented a meeting of the minds of the
parties, the proper remedy is not reformation of the
instrument but annulment of the contract.
● Reformation is not the proper action to remedy
any error in the instrument
○ In Garcia v. Bisaya, the Court looked for
an allegation that the instrument to be
reformed did not express the real
agreement of the parties, and the
allegation of the real agreement or
intention.
● Courts do not reform instruments merely for the
sake of reforming them, but only to enable some
party to assert rights under them as reformed.
● Expediency and convenience are not grounds
for the reformation of the instrument.
○ There is a presumption of validity of the
contract which must be overturned
○ Burden of proving that the true intention
of the parties had not been expressed
● That a particular unintended provision is not yet
exercisable should not prevent an action for
reformation.
○ There is an inconsistency with the real
agreement from the time the document
was executed.
b. Specific Grounds
i. Mutual Mistake
Art. 1361. When a mutual mistake of the parties causes
the failure of the instrument to disclose their real
agreement, said instrument may be reformed.
● In BPI v. Fidelity & Surety Co. (decided prior to
the current Code), the Court held that to justify
the reformation of a written instrument upon the
ground of mistake, three things must concur:
(1) That the mistake should be of a fact
(2) That the mistake should be proved by clear
and convincing evidence
(3) That the mistake should be common to both
parties
ii. Mistake by One
Art. 1362. If one party was mistaken and the other
acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the
former may ask for the reformation of the instrument.
TRIGGERS:
● One of the contracting parties was mistaken
● The other contracting party acted fraudulently or
inequitably
- In such a way that the instrument does
not show their true intention
EFFECT: The former (i.e. party who was mistaken) may
ask for reformation
Art. 1363. When one party was mistaken and the other
knew or believed that the instrument did not state their
real agreement, but concealed that fact from the former,
the instrument may be reformed.
TRIGGERS:
● One of the contracting parties was mistaken
● The other contracting party knew or believed
that the instrument did not state their real
agreement
- But concealed that fact from the former
EFFECT: The instrument may be reformed
iii. Error in drafting
Article 1364. When through the ignorance, lack of
skill, negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the
instrument does not express the true intention of the
parties, the courts may order that the instrument be
reformed.
Triggers:
1. Ignorance
2. Lack of skill
3. Negligence or
4. Bad faith
...On the part of
1. The person drafting the instrument or
2. The clerk or typist
Effect: Courts may order that the instrument be
reformed
iv. Severe pact de retro
 Article 1365. If two parties agree upon the mortgage
or pledge of real or personal property, but the
instrument states that the property is sold absolutely
or with a right of repurchase, reformation of the
instrument is proper.
Triggers:
1. Two parties agree upon the mortgage or pledge
of real property or personal property
2. But the instrument states that the property is
sold absolutely or with a right of repurchase
Effect: reformation of the instrument is propert
Note: this rule applies only if there is evidence, clear and
convincing that the parties did agree upon a mortgage of
subject property
4. When Improper
Article 1366. There shall be no reformation in the
following cases:
(1) Simple donations inter vivos wherein no
condition is imposed;
(2) Wills;
(3) When the real agreement is void.
Ratio (from my own understanding only): Reformation
contemplates the failure of the instrument to reflect the
true intention of both parties. For (1) and (2), they are
based merely on the intention of one of the parties. For
(3), one of the requisites of reformation is lacking, which
is the meeting of the minds.
Article 1367. When one of the parties has brought an
action to enforce the instrument, he cannot
subsequently ask for its reformation.
Trigger: one of the parties has brought an action to
enforce the instrument
Effect: he cannot subsequently ask for its reformation
Jurisprudence also provides that an action for
reformation would not be proper when it would amount
to a collateral attack upon a Torrens title.
Ratio: Reformation is meant to be an equitable relief.
But equity is mean to follow the law. The law provides
that if a piece of land is already titled in the name of a
third party, it cannot anymore be transferred or
appropriated to one who claims it.
5. Who May Order
Article 1368. Reformation may be ordered at the
instance of either party or his successors in interest, if
the mistake was mutual; otherwise, upon petition of
the injured party, or his heirs and assigns.
General Rule: Reformation may be ordered upon
petition of the injured party or his heirs and assigns
Exception: if the mistake is mutual, reformation may be
ordered at the instance of either party or his successors
in interest
6. Governing Law
Article 1360. The principles of the general law on the
reformation of instruments are hereby adopted insofar
as they are not in conflict with the provisions of this
Code.
General Rule: principles of general law adopted
Exception: if they are in conflict with the provisions of
NCC
Note: GENERAL LAW = common law or the law on
reformation by other Civil Law countries in the absence
of an applicable rule in the Code
Article 1369. The procedure for the reformation of
instrument shall be governed by rules of court to be
promulgated by the Supreme Court.
7. Prescription of Action
- In the Civil Code, there is no provision regarding
the period when the action for reformation shall
be brought
- The proper ruling in jurisprudence is that the
prescriptive period is 10 years applying Article
1144 of the Civil Code
Article 1144. The following actions must be brought
within ten years from the time the right of action
accrues:
(1) Upon a written contract;
(2) Upon an obligation created by law;
(3) Upon a judgment. (n)
On when the period of prescription begins to run:
- A party to an instrument is under no obligation to
seek reformation of an instrument while he is
unaware that any opposition will be made to
carry out the actual agreement
- Begins to run when the mistake has been
discovered or ought to have been discovered
IV. INTERPRETATION OF CONTRACTS
INTERPRETATION = act of making intelligible what was
before not understood, ambiguous, or not obvious
- Method by which the meaning of language is
ascertained and the determination of the meaning
attached to the words written or spoken which make
the contract
Basic rule: in the construction of an instrument, the intention
of the parties is to be pursued (Rule 130, Sec 12, RoC)
- All other rules are but ancillary to the ascertainment of
the meaning intended by the parties
Ratio: the intention of the contracting parties should always
prevail because their will has the force of law between them
“Animus hominis est anima scripti”: in case of doubt, it is the
intention of the contracting parties that prevails, for the
intention is the soul of the contract
A. When literal meaning governs
Article 1370 (Par. 1). If the terms of a contract are clear and
leave no doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.
The cardinal rule or the first rule in the interpretation of
contracts:
The contract should simply be applied literally, when the
language of the contract:
● Makes the terms clear; and
● Creates no doubt as to intention of the parties
Plain meaning rule
Assumes that the intent of the parties to an instrument is
embodied in the writing itself, and when the words are clear
and unambiguous the intent is to be discovered only from the
express language of the agreement.
The intention of the parties must be gathered from that
language, and from that language alone. In this scenario, the
court:
● May not read into it any other intention that would
contradict its plain import;
● Has no authority to alter the contract; and
● Need not interpret because the terms are to be
understood literally just as they appear on the
face of the contract and its meaning should be
determined without reference to extrinsic facts or
aids.
The process of interpreting a contract requires the court to
make a preliminary inquiry as to whether the contract is
ambiguous.
The court must read a contract as the average person would
read it and should not give it a strained or forced construction.
A contract provision is ambiguous if it is susceptible of 2
reasonable alternative interpretations.
It is only when the contract is vague and ambiguous that courts
are permitted to resort to the interpretation of its terms to
determine the parties’ intent.
Labasan v. Lacuesta:
● In view of the ambiguity caused by conflicting
terminologies in the document, it becomes necessary
to inquire into the reason behind the transaction and
other circumstances accompanying it so as to
determine the true intent of the parties.
● Once the intent becomes clear then it shall be made
to prevail over what on its face the document appears
to be.
● Each case is to be resolved on the basis of the
circumstances attending the transaction.
B. Intent over literal interpretation
Article 1370 (Par. 2). If the words appear to be contrary to
the evident intention of the parties, the latter shall prevail
over the former.
● The analysis and construction of a contract should not
be limited to the words used, as they may not
accurately reflect the parties’ true intent.
● The reasonableness of the result obtained, after said
analysis, ought likewise to be considered.
Article 1371. In order to judge the intention of the
contracting parties, their contemporaneous and subsequent
acts shall be principally considered.
Rules of Court, Rule 130, Sec. 13
Interpretation according to circumstances. - For the proper
construction of an instrument, the circumstances under which it
was made, including the situation of the subject thereof and of
the parties to it, may be shown, so that the judge may be
placed in the position of those whose language he is to
interpret.
In construing a written agreement, the reason behind and the
circumstances surrounding its execution are of paramount
importance.
This rule must be used for purposes of affirming the validity
of a contract, and not negating its validity.
Where this rule applies, courts have no authority to alter
the contract by construction or to make a new contract for
the parties.
It is only when the contract is vague and ambiguous that courts
are permitted to resort to the interpretation of its terms to
determine the parties’ intent.
Acts in partial performance of a contractual provision may be
used by the court to determine the intent of the parties.
Right of first refusal- that the lessor decide to sell the leased
property during the term of the lease, such sale should first be
offered to the lessee
Labasan v Lacuesta: the terms of an instrument were
ambiguous and could be interpreted either as a pacto
de retro sale or an equitable mortgage
- The instrument was a mere loan with security
based on certain considerations:
o The reason behind the execution of instrument was
that the respondents were in “urgent necessity for
money”
o They had to secure a loan, to which the Riceland
was given as security
o The amount given was too inadequate for a
purchase price
o It was the respondent who continued to be in
physical possession of the property
o Vendees a retro failed to take any step since 1927
to consolidate their alleged ownership over the land

 C. Distinct and different cases excluded
Article 1372. However general the terms of a contract may
be, they shall not be understood to comprehend things that
are distinct and cases that are different from those upon which
the parties intended to agree. (1283)
However general the terms of a contract may be, they shall not
be understood to comprehend things that are distinct and cases
that are different from those upon which the parties intended to
agree
Contract may not be interpreted to cover matters which the
parties never agreed on
Ong Lim Sing Jr. v FEB Leasing and Finance Corp:
petitioner argued that the real intention of the parties
was to enter into a contract of sale on installment and
not a lease contract.
- Court rejected this argument because this would
be reading into the terms of the lease agreement
- This would expand the coverage of the
agreement
- “ Any agreement between the parties after the
lease contract has ended is a different transaction
altogether and should not be included as part of the
lease.”
“Particular over general” rule: to resolve conflicts
between general and specific provisions of a contract
by prioritizing the specific over the general.
This is not supported by Art 1372 as it excludes
“distinct things” and “different cases” from the coverage
of the contract. This article simply prevents the
extension of the efficacy of contracts farther than that
was agreed by the parties.
D. Stipulation interpreted to be effectual 

Article 1373. If some stipulation of any contract should admit
of several meanings, it shall be understood as bearing that
import which is most adequate to render it effectual. (1284)
Article 1373: If some stipulation of any contract should admit
several meanings, it shall be understood as that import which is
most adequate to render it effectual
- Applies when a particular provision of a contract can have
multiple meanings
- The most adequate to render the provision effectual
applies
SM Land, Inc. v BCDA: BCDA argued that the
“disposition process” to which the reservation clause
refers is the entire Swiss Challenge, and not merely the
Stage Three thereof.
- Court: to anchor the real import of the clause on
the basis of only a single word may deviate from the
true meaning of the provision. To do such would run
afoul Art 1373
- The reservation clause could not justify the
cancellation of the entire procurement process
- Respondent cannot merely harp on the lone
provision adverted to without first explaining the
context of the surrounding reservation clause
- The provision cannot be interpreted in a vacuum
and should be read in congruence with the entire
provision
- 1373 mas mentioned but not applied because
the interpretation must be consistent with the other
provisions.
Gonzales v. Heirs of Cruz (1999)
Facts:
Issue:
Ratio:
Rule:
E. Stipulations interpreted together
Art. 1374. The Various stipulations of a contract shall be
interpreted together, attributing to the doubtful ones that
sense which may result from all of them taken jointly.
● A contract is not construed by parts, but its clauses
should be interpreted in relation to one another.
● The legal effect is not determined alone by any
particular provision disconnected from parts, but
whole read together.
● This rule refers to no-segregation principle, or a
holistic approach in interpretation.
National Power Corp v CA: The provisions of an accessory
contract such as a surety bond must be read in its entirety and
together with the principal contract between the parties
Provisions in the principal contract are not always controlling.
In PBC v Lim, the principal contract contained an error with a
stipulation on venue and the circumstances showed that the
accessory contract must govern.
Cañete v. San Antonio Agro-Industrial Development
Corp (1982)
Facts:
● Canete is lessor, and San Antonio is lessee.
● Lease agreement states:
○ Par. 3: “The lease shall begin in crop year
’68-’69 up to and including crop year 
 ’73-
’74, with an option of another 5 years on
the part of the LESSEE to extend”
○ Par. 7: “The LESEE is given an option to
purchase the land in case LESSOR shall
be willing and desirous to sell the same,
and likewise LESSEE is given the option

 to lease the above land in case the
LESSOR is likewise willing to leåase the
same 
 again.”
● San Antonio wrote a letter, informing Canete that
they will exercise their option to extend the lease
for another 5 years. (par. 3)
● Canete wrote a reply, informing San Antonio that
she is terminating the lease contract. (par. 7)
Issue: WON lease contract allows lessee-corporation to
unilaterally extend the contract. Yes, for the first
extension.
Ratio:
● Reconciling apparent conflict between
paragraphs 3 and 7.
● Paragraph 3 gives lessee-corporation the
unqualified option to extend the period 
 of the
lease contract while paragraph 7 refers to an option
given to the lessee to purchase or extend the

 lease, if lessor is willing. 

● Court interprets Par. 3 to only one interpretation:
exclusive and unqualified option to the lessee,
while Par. 7 is susceptible to two interpretations:
● Option unilaterally given to lessee should be
understood as 
 qualified by paragraph 7; or
● Option to lease under par. 7 shall be exercisable
only after the 
 option granted in par. 3 has already
been exercised.
Court said first interpretation of par. 7 would negate par. 3,
contrary to Art. 1374 
 (all terms must be interpreted
together to give effect). Court prefers the second
interpretation.
Carceller v. CA—to ascertain the intent of the parties in a
contract, it is imperative that the various stipulations in a
contract be construed together, consistent with the parties
contemporaneous and subsequent acts as regards execution.
However, there are cases where the Court choose to rule for
holistic interpretation and there are cases where the Court
chose to rule otherwise.
HDMF v. Court of Appeals: The petitioners’ interpretation of the
first clause to uphold the meaning of the contract cannot be
upheld because it completely ignored the second clause of the
scrutiny. In which case the Court ruled to interpret the contract
as a whole and not just certain provisions of the contract.
Complementary-contracts-construed together—an
accessory contract must be read in its entirety and together
with the principal agreement.
Application: PBC v Lim
“A restrictive stipulation on the venue of actions contained in a
promissory note applies to the surety agreement supporting it,
because the nature of the two contracts and the factual
circumstances surrounding their execution were intertwined
together.”
F. Words interpreted according to nature and object of
contract
Art. 1375. Words which may have different significations
shall be understood in that which is most in keeping with the
nature and object of the contract. (1286)
This rule applies to individual words of a contract, when such
words can have more than one meaning or sense depending
on the context. The chosen meaning must be consistent with
the nature and object of the contract.
G. Ambiguities interpreted according to usage and custom
Art. 1376. The usage or custom of the place shall be borne
in mind in the interpretation of the ambiguities of a contract,
and shall fill the omission of stipulations which are ordinarily
established. (1287)

Art 1373
Both can contemplate stipulations with different meanings
The chosen meaning is the
one that would render the
stipulations with multiple
meanings effective
Only one stipulation is
considered
Art 1374
The chosen meaning must
be the one consistent with
the other provisions
All stipulations are
considered
Rules of Court: An instrument may be construed according to
usage, in order to determine its true character. The language
of a writing is to be interpreted according to the legal meaning
it be
H. Interpreted against party causing obscurity
Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who
caused the obscurity. (1288)
RCBC v CA: If the stipulations in a contract of adhesion are 1. Nature and Rationale
obscure or ambiguous, such ambiguities are to be construed
against the party that prepared the same. If the terms are clear It is a remedy granted to:
and leave no doubt, the literal meaning of its stipulation shall - Contracting parties
control. - 3rd persons

I. Interpreted according to Rules of Court In order to secure reparation of damages caused, by restoring
things to their condition prior to the celebration of the said
Principles of interpretation stated in Rules of Court shall be contract
observed in the construction of contracts.
It is a remedy to make ineffective a contract validly entered into
The following rules from the RoC are also provided: and obligatory under normal conditions except that they create
● the circumstances under which an agreement was prejudice by reason of external causes
made, including the situation of the subject thereof
and of the parties to it, may be shown, so that the 2. Distinguished from Article 1191 

judge may be placed in the position of those whose
language he is to interpret.
1191 1358
● the terms of a writing are presumed to have been
used in their primary and general acceptation, but Applies to breach in Is a subsidary action not
evidence is admissible to show that they have a local, recirpocal obligations based on a breach of an
technical, or otherwise peculiar signification, and were obligation
used and understood in the particular instance, in When there is a breach,
which case the agreement must be construed injured party is entitled to Unkaiing of a contract
accordingly. recission
Can be done by mutual
agreement or unilaterally

 J. When principles can’t settle doubts 

Parties are restored to
Art. 1378. When it is absolutely impossible to settle doubts by original condition
the rules established in the preceding articles, and the doubts
refer to incidental circumstances of a gratuitous contract, the 3. Distinguished from termination 

least transmission of rights and interests shall prevail. If the
contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests. Recission Termination

Trigger: the preceeding rules do not settle doubts Restores parties to original Does not restore parties to
condition original condition
Trigger: doubts refer to incidental circumstances of a Contract not treated as
gratuitous contract never existed

Effect: least transmission if rights and interests shall

B. Kinds
prevail

Contracts validly agreed upon may be rescinded in cases

Trigger: contract is onerous
established by law
Effect: doubts settled in favor of greatest reciprocity of
1. Because of lesion or prejudice
interests
2. Those on account of fraud or bad faith
3. Which by special provision of law are susceptible to
Trigger: doubts are cast upon principal object that intention or
recision
will of parties unknown
1. Contracts with lesion 

Effect: contract null and void

Those entered into by guardians and those agreed upon in

V. RESCISSIBLE CONTRACTS
representation of absentees are rescissible if whom they
represent suffer lesion by ¼ the value of the objects
Rescissible contracts remain legally effective until set aside by
rescissory action
2. Contracts in fraud of creditors
A. Rescission
Art. 1381 (3). The following contracts are rescissible:

(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
 1. Execution of a judgment credit against the properties
RESCISSIBLE: Contracts undertaken in fraud of creditors
when the creditors cannot in any other manner collect the
claims due them
● Also applies to contracts where creditors are not
parties (made without their knowledge)
Contracts in fraud of creditors
● Executed with the intent to prejudice the rights of
creditors
● Should not be confused with those entered into
without such mal-intent, even if creditor may suffer
some damage
● Contract otherwise valid may be subsequently
rescinded by reason of injury to 3rd persons (ie
creditors)
● Creditors: doesn’t only cover creditors in the strict or
technical sense but also covers obligees in general or
persons to whom another is bound to perform an
obligation
Accion pauliana
● Action to rescind contracts in fraud of creditors
● Subsidiary remedy
○ Cannot be instituted except when injured
party has no other legal means to obtain
reparation
○ Essential that injured party prove that he has
exhausted all legal means
● Requisites:
○ Plaintiff asking for rescission has a credit
prior to the alienation (although demandable
later)
○ Debtor made a subsequent contract
conveying a patrimonial benefit to a 3rd
person
○ Creditor has no other legal remedy to satisfy
his claim
○ Act being impugned is fraudulent
○ 3rd person who received property conveyed,
if it is by onerous titled, has been an
accomplice in the fraud
● General Rule: Rescission requires existence of
creditors at the time of the alleged fraudulent
alienation.
○ Must be proven as one of the bases of the
judicial pronouncement setting aside the
contract
● If there wasn’t any prior existing debt, there can be no
injury of fraud.
Union Bank v Spouses Ong: For a contract to be rescinded for
being in fraud of creditors, both contracting parties must be
shown to have acted maliciously so as to prejudice the
creditors.
Remedies that must have been exhausted (Holcim Philippines
Inc v Losloso):
of the debtor
2. Initiation of actions in subrogation of the debtor
(Accion subrogatoria)
*If these remedies subsist, accion pauliana will not lie.
a. Presumption of fraud
Art. 1387. All contracts by virtue of which the debtor alienates
property by gratuitous title are presumed to have been
entered into in fraud of creditors, when the donor did not
reserve sufficient property to pay all debts contracted before
the donation.
Alienations by onerous title are also presumed fraudulent
when made by persons against whom some judgment has
been issued. The decision or attachment need not refer to the
property alienated, and need not have been obtained by the
party seeking the rescission.
In addition to these presumptions, the design to defraud
creditors may be proved in any other manner recognized by
the law of evidence
Art. 1387 presumes the existence of fraud by a debtor. In the
absence of sufficient evidence to the contrary, a debtor’s
alienation of his property will be held fraudulent if:
● Contract is gratuitous - if debtor/donor did not reserve
sufficient property to pay all debts contracted before
the donation (par. 1)
● Contract is onerous - if a judgement has been rendered
against the debtor making the alienation (par. 2)
Presumption in Art. 1387 is rebuttable and not conclusive upon
the debtor, provided that he proves:
● Conveyance was made in good faith.
● Conveyance is for a sufficient and valuable
consideration.
*Both of the aforementioned requirements must be
present in order to rebut the presumption of fraud.
Existence of fraud or intent to defraud under Art. 1387 is either:
● Presumed under said article (par. 1 and 2)
● Or duly proven with ordinary rules of evidence (par. 3)
Signs/badges of fraud - Oria v. McMicking:
● The consideration for the conveyance is inadequate or
fictitious.
● Conveyance was made during the pendency of a case
against him.
● Sale upon credit by an insolvent debtor.
● Evidence of large indebtedness or complete
insolvency.
● Transfer of all or nearly all of a debtor’s property,
especially when the latter is insolvent or under financial
difficulty.
The terms “alienations” by onerous title (par. 2) must refer to an
absolute conveyance of real property and must involve the
complete transfer from one person to another.
● An example of this is a sale of a land or other
immovable property.
● An example of an alienation that is NOT an absolute
conveyance is a mortgage.
The presumption of fraud via alienations by onerous title only
applies to the debtor who made such alienation and against
whom some judgement has been rendered (decision or
attachment).
● As a general rule, such presumption cannot
apply to third persons.
● It cannot be automatically presumed that the
third person acted fraudulently or is in
connivance with the debtor who alienated the
object.
○ Ratio: Art. 1385 (2) provides that a
third person who is in lawful
possession of the object enjoys the
presumption of good faith.
Union Bank v Spouses Ong - existence of fraud cannot
plausibly be presumed from the fact that the price paid for a
piece of real estate is perceived to be slightly lower than its
market value.
● Purchase price is only one of the important
considerations
b. Liability of acquirer
Art. 1388. Whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter for
damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him
to return them.
If there are two or more alienations, the first acquirer shall
be liable first, and so on successively. (1298a)
3. Contracts referring to things under litigation
Art. 1381. The following contracts are rescissible:
(4) Those which refer to things under litigation if they have
been entered into by the defendant without the knowledge
and approval of the litigants or of competent judicial authority;
● The provision seeks to remedy the presence of bad
faith / any fraudulent act which they commit with
respect to the thing subject of litigation
○ The thing subject of a judicial controversy
must be bound to whatever disposition the
court shall render
○ Parties are expected to refrain from doing
acts which would debase the thing
● Note, though that it is not absolutely proscribed from
entering into a contract which refer to things under
litigation
○ Contract is valid but may be rescinded at
the instance of the other litigants
In Ada v Baylon, the Court identified the requisites:
● Defendant, during the pendency of the case, enters
into a contract which refers to the thing subject of
litigation
● Said contract was entered into without the
knowledge and approval of the litigants or
competent judicial authority
If these two concur, it becomes the duty of the court to order the
rescission.
In said case, the Court noted that petitioners sufficiently
established presence of the requisites for the rescission
● Undisputed that at the time lot was gratuitously
conveyed by one of the parties in a partition case, the
lots were among the properties subject to said case
pending with the trial court
● Party who conveyed did not seek consent / inform
petitioners or the trial court

 4. Contracts subject to rescission by operation of law
Art. 1381. The following contracts are rescissible:
(5) All other contracts specially declared by law to be subject
to rescission. (1291a)
Malicsi v Carpizo
● Appellant failed and refused to pay monthly stipulated
rental of the property subject of a lease contract for
two months.
● Court held that appellee had the right to ask for the
action for rescission due to Art. 1659
5. Payment made when insolvent
Art. 1382. Payments made in a state of insolvency for
obligations to whose fulfillment the debtor could not be
compelled at the time they were effected, are also
rescissible. (1292)
C. Limitations on rescission
1. Subsidiary
Art. 1383. The action for rescission is subsidiary; it cannot be
instituted except when the party suffering damage has no
other legal means to obtain reparation for the same. (1294)
● Subsidiary remedy: the exhaustion of all remedies
by the prejudiced creditor to collect claims due him
before rescission is resorted to (Siguan v. Lim)
● Party asking for rescission must prove that he has
exhausted all other legal means to obtain satisfaction
of his claim.
○ Action to rescind must be of last resort
 ● Rescission applies only when the creditor cannot
recover in any other manner what is due him (Union
Bank v. Sps. Ong)

 2. To the extent of damage 
 F. Prescription of action
Art. 1384. Rescission shall be only to the extent necessary to
cover the damages caused. (n)
● Only the creditor who brought the action for rescission
can benefit from the rescission. (Siguan v. Lim)
● The revocation is only to the extent of the creditor’s
unsatisfied credit (as to the excess, the alienation is
maintained)
D. Effect of rescission
Art. 1385, par. 1. Rescission creates the obligation to return
the things which were the object of the contract, together with
their fruits, and the price with its interest; [...]
Rescission creates the obligation to return:
● The things which were the object of the contract
● Their fruits
● The price with its interest
Refers to contracts that are rescissible for causes specified in
Articles 1381 and 1382
- Not to contracts that are dissolved by mutual consent
of the parties
The effects provided are also applicable to cases under Article
1191.

 E. When rescission improper 
 VI. VOIDABLE CONTRACTS
Art. 1385, par. 1 & 2. [...] Consequently, it can be carried out
only when he who demands rescission can return whatever
he may be obliged to restore.
Neither shall rescission take place when the things which are
the object of the contract are legally in the possession of third
persons who did not act in bad faith.
Rescission is improper when:
● He who demands rescission cannot return whatever
he may be obliged to restore
● The things which are the object of the contract are
legally in the possession of third persons who did not
act in bad faith
→ Acquisition by a third party of the property subject
of the contract is an obstacle to rescission
- where it is shown that such third person is in
lawful possession of the subject of the
contract, and
- that he did not act in bad faith.
● Note: The rule can only be invoked by the third party
to the contract (Guzman, Bocaling & Co. v. Bonnevie)


Art. 1389. The action to claim rescission must be commenced
within four years.
For persons under guardianship and for absentees, the
period of four years shall not begin until the termination of the
former's incapacity, or until the domicile of the latter is known.
(1299)
● When the prescriptive period commences: From
the moment the cause of action accrues, therefore,
applies. (Khe Hong Cheng v. CA)
● It is the legal possibility of bringing the action which
determines the starting point for the computation of
the prescriptive period for the action.
● In Khe Hong Cheng, the Court also held that an
accion pauliana presupposes the following:
(1) A judgment
(2) The issuance by the trial court of a writ of
execution for the satisfaction of the judgment
(3) The failure of the sheriff to enforce and satisfy
the judgment of the court.
● Requires that the creditor has exhausted the property
of the debtor
● What is important is that the credit antedates that of
the fraudulent alienation by the debtor of his property.
● Jurisprudence provides that the four-year prescriptive
period applies to rescissions under Article 1380 and
1381 and not to Article 1191.
- Annullable contracts
- Existent and binding until annulled
- Annulled due to want of capacity or vitiated
consent of one of the parties
- Before annulment, considered effective and
obligatory between parties
A. Types
Article 1390. The following contracts are voidable or
annullable, even though there may have been no
damage to the contracting parties:
(1) Those where one of the parties is incapable of
giving consent to a contract;
(2) Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled
by a proper action in court. They are susceptible of
ratification. (n)
1. Incapable of Giving Consent

Ratio for voidability: the legal capacity of the parties is an
essential element because it is an indispensable
condition for the existence of consent.
- There is no effective consent in law without the
capacity to give such consent
- Legal consent presupposes capacity
Article 1327. The following cannot give consent to a
contract:
(1) Unemancipated minors;
(2) Insane or demented persons, and deaf-mutes who
do not know how to write. (1263a)
Article 1328. Contracts entered into during a lucid
interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.
(n)
Article 1329. The incapacity declared in article 1327
is subject to the modifications determined by law, and
is understood to be without prejudice to special
disqualifications established in the laws. (1264)
Francisco v. Herrera (where a contract was entered into
by a person with senile dementia) laid down the
distinction between void and voidable contracts:
VOID VOIDABLE
Inexistence contract from Existent and binding until
the beginning; as if never annulled
entered into
Cannot be validated by Can be ratified
passage of time or
ratification
One of the essential Essential requisites of a
requisites of a valid valid contract are present
contract is totally wanting but vitiated
- Ratification may be express or implied.
- Implied ratification may take the form of
accepting and retaining the benefits of a contract
In Francisco v. Herrera, the contracts were voidable and
may be ratified. The Court held that the contracts may
no longer be annulled because the respondent already
received payments on behalf of his father who allegedly
did not have capacity to give consent when he entered
into the contract. If he was not agreeable with the
contracts, he could have prevented petitioner from
delivering payments or immediately instituted action for
reconveyance and have the payments consigned with
the court. He only instituted action when respondent
failed to convince petitioner to increase the price. He did
not even attempt to return the payments upon instituting
action. Hence, there was ratification. Also, one cannot
negotiate for an increase in the price in one breath and
in the same breath content that the contract of sale is
void.
In Heirs of Ureta, Sr. v. Heirs of Ureta, the court held
that failure authority from co-heirs does not result in
incapacity to give consent so as to render the contract
voidable. Rather, the contract is valid but unenforceable
against co-heirs.
1. Vitiated Consent
● Contracts where consent is given by:
○ Mistake
○ Violence
○ Intimidation
○ Undue influence, or
○ Fraud
■ are voidable
● These circumstances are defects of the will, the
existence of which impairs the freedom,
intelligence, spontaneity and voluntariness of the
party in giving consent to the agreement.
● Sps. Viloria v. Continental Airlines:
○ Art. 1338: There is fraud when, through
insidious words or machinations of one
of the contracting parties, the other is
induced to enter into a contract which,
without them, he would not have agreed
to.
○ In order that fraud may vitiate
consent, it must be the causal (dolo
causante), not merely the incidental
(dolo incidente), inducement to the
making of the contract.
○ Fraud – A deception employed by
one party prior to or simultaneous to
the contract in order to secure the
consent of the other. (Samson v. CA)
○ Fraud must be serious and its existence
must be established by clear and
convincing evidence.
■ Mere preponderance of
evidence is not adequate.
○ The existence of fraud cannot be proved
by mere speculations and conjectures
 because fraud is never lightly inferred; it ○ Even if there was causal fraud, the
is good faith that is. contracts have been impliedly ratified
when petitioners decided to exercise
B. Ratification their right to use the subject tickets for
1. Effect the purchase of new ones.
○ Implied ratification may take diverse
ART 1392 ART 1396 forms, such as by silence or
acquiescence; by acts showing approval
Ratification extinguishes Ratification cleanses the or adoption of the contract; or by
the action to annul a contract from all its acceptance and retention of benefits
voidable contract. defects from the moment flowing therefrom.
it was constituted.
Rescission or Annulment (Art 1390)
2. Types Resolution (Art 1191)

Two inconsistent remedies

ART 1393
Ratification may be
effected expressly or
tacitly. It is understood
that there is a tacit
ratification if, with
knowledge of the reason
which renders the
contract voidable and
such reason having
ceased, the person who
has a right to invoke it
should execute an act
which necessarily implies
an intention to waive his
right.
A party whose Mistake or
consent is fraud
vitiated by:
Must have
knowledge of
the true nature
of the
transaction.
Casis’ Digest
All the elements to make One of the essential
ART. 1393 the contract valid are elements to a formation of
Ratification may be present. a contract, which is
effected expressly or consent, is absent.
tacitly.
The defect is in the The defect is already
There is a tacit ratification consummation stage of present at the time of the
if: the contract when the negotiation and perfection
● the person who parties are in the process stages of the contract.
has the right to of performing their
invoke the nullity; respective obligations.
● with knowledge of
the reason which
renders the
● By pursuing the remedy of rescission under Art.
1191, the petitioners had impliedly admitted the
contract voidable;
validity of the subject contracts, forfeiting their
● such reason
right to demand their annulment.
having ceased;
● executes an act ○ A party cannot rely on the contract and
which necessarily claim rights or obligations under it and at
implies an the same time impugn its existence or
intention to waive validity.
his right. ● The ratification identified by the Court in this
case was not in subsequent acts of the
parties but in the allegations of their
complaint for annulment.
Intimidation,
violence or 3. By guardians
under
influence
Art. 1394. Ratification may be effected by the
Can only ratify if guardian of the incapacitated person.
such causes
have ceased.
4. Conformity not required

● Sps. Viloria v. Continental Airlines:


Art. 1395. Ratification does not require the conformity
of the contracting party who has no right to bring the
action for annulment.
C. Who may institute action for annulment
1. Innocent Parties
Art. 1397. The action for the annulment of contracts
may be instituted by all who are thereby obliged
principally or subsidiarily. However, persons who are
capable cannot allege the incapacity of those with
whom they contracted; nor can those who exerted
intimidation, violence, or undue influence, or employed
fraud, or caused mistake base their action upon these
flaws of the contract.
● The party entitled to invoke fraud or bad faith as
a ground for nullifying a contract is the one who
was tricked into giving his consent thereto.
● The only one who can have the contract
annulled is the party:
1. Principally or subsidiarily obliged under the
contract; and
2. Who was incapacitated or did not cause the
vitiation of consent of other parties.
2. Prejudiced Strangers
Strangers to a contract cannot sue either or both of the
contracting parties to annul and set aside the same
except when he is prejudiced in his rights with respect to
one of the contracting parties and can show detriment
which would positively result to him from the contract in
which he has no intervention.
Teves v People’s Homesite and Housing Corp: The
complaint alleged facts which showed that plaintiff
suffered detriment as a result of the deed of sale entered
into by and between the defendants. Plaintiff should be
given a chance to present evidence to establish such
detriment.
Singson v Isabela: Plaintiffs-appellees were prejudiced in
their rights by the execution of the chattel mortgage over
the properties of the partnership “Isabella Sawmill” in
favor of Saldajeno by the remaining partners.
Malabanan v Gaw Ching: “He who is not partly obligated
principally or subsidiarily in a contract may perhaps be
entitled to exercise an action for nullity, if he is prejudiced
in his rights with respect to one of the contracting parties.”
Third parties may sue to nullify a contract only to the
extent that such nullification is absolutely necessary to
protect the plaintiff’s lawful rights. In this case, the
respondent does not fall within the possible exceptions to
the rule.
Bañez v CA: Respondent sought to annul the award of the
property by People’s homesite and Housing corporation
to Cristeta Laquihon and eventually to petitioner. In this
case, respondent was a stranger to the conditional
contract to sell execitued by People’s homesite to
Laquihon, and the transfer of rights from Basilio Laquihon
to the petitioner. The respondent cannot bring an action
to annul the same. The Court found that the respondent
was a squatter on the said property and therefor he had
no right to the disputed land.
House International Building Tenants Ass’n., Inc. v
Intermediate Appelate Court: “He who has no right in a
contract is not entitled to prosecute an action for nullity.”
In this case, the Court made no mention of the exception
and simply applied Art. 1397.
D. Effect of annulment
1. Restoration
Trigger: Obligation is annulled
Effect: The contracting parties shall restore to each other
the things which have been the subject matter of the
contract, with their fruits, and the price with its interest
Exceptions: Cases provided by law
In obligations to render service, the value of the service
shall be the basis for damages.
Not one can be compelled to comply with what is
incumbent upon him if one of the contracting parties does
not restore what he is bound to return.
Villanueva v Chiong: Respondent spouses owned a
parcel of land. A portion was sold to the petitioners. Court
held that the sale was voidable, and the annulment of the
contract would “wipe it out of existence” and restore what
is due to the parties before the contract was entered into.
2. When restoration not required or possible
Trigger: Defect of the contract is due to the incapacity of
one of the parties
Effect: Incapacitated person is not obliged to make any
restitution A. Types

Exception: Insofar as he has been benefitted by the thing

Art 1403. The following contracts are unenforceable,
or price received by him
unless they are ratified:
If a person obliged by the decree of annulment to return
● Those entered into in the name of another
the thing cannot do so because the thing has been lost
person by one who has been given no
through his fault, he shall return the fruits received and the
authority or legal representation, or who has
value of the thing at the time of the loss with interest from
acted beyond his powers;
the same date.
● Those who do not comply with the Statute of
Frauds;
E. Prescription or Extinguishment of action
● Those where both parties are incapable of
giving consent to a contract.
Art 1391. The action for annulment shall be brought
within 4 years.
Statute of Frauds originally appeared from the Rules of
Court but were transferred to the NCC to show that the
Statute of Frauds was substantive law and not just
In cases of... The period begins...
procedural law.
Intimidation, violence or From the time the defect
undue influence of the consent ceases 1. Unauthorized Contracts
(Art 1391)
Unauthorized contracts are governed by Art 1317 and
Mistake or fraud From the time of
the provisions on Agency.
discovery

Contracts entered into by
minors or other
incapacitated persons
From the time Art 1317. No one may contract in the name of another
guardianship ceases
without being authorized by the latter, or unless he
has by law a right to represent him.

Action for annulment of contracts shall also be

extinguished when the thing which is the object of
contract is lost through fault or fault of the one who has
the right. (Art 1401)
If the right of actions is based upon the incapacity of any
one of the contracting, the loss of the thing shall not be
an obstacle to the success of the action, unless said loss
took place through fraud or fault of the plaintiff. (Art
1401)
VII. Unenforceable Contracts
An unenforceable contract cannot be sued upon or
enforced unless it is first ratified in the manner provided
by law.
While rescissible and voidable contracts are binding
unless they are set aside by a competent court, an
unenforceable contract does not produce any effect
unless ratified.
NAPOCOR v National Merchandising: The rule providing
for unenforceability of a contract entered into by an
agent in excess of his authority refers to the
unenforceability of the contract against the principal.
2. Contracts infringing statute of frauds
a. Application
i. Executory contracts
The Statute of Frauds only applies to executory
contracts (those where no performance has yet been
made) and not to partially or completely executed ones.
When a party has alleged partial performance, he is
entitled to a reasonable chance to present parole
evidence the truth of the allegation
Ii. Perfected contracts

An unenforceable contract occupies an intermediate The application of the statute of frauds pre supposes a
ground between voidable and void contracts. perfected contract
 - No perfected contract, no statute of frauds Art 1317. No one may contract in the name of another
application without being authorized by the latter, or unless he
has by law a right to represent him.
Iii. Actions for specific performance or breach of
contract
NAPOCOR v National Merchandising: The rule providing
for unenforceability of a contract entered into by an
Statute of Frauds
agent in excess of his authority refers to the
- Applies: actions for the specific performance of
unenforceability of the contract against the principal.
contracts
- Does not apply:
2. Contracts infringing statute of frauds
- actions which are neither
- Violation of a contract
- Performance thereof Art. 1403. The following contracts are unenforceable,
- Oral contract of sale to be used as a unless they are ratified:
basis of possession

 (2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following
VII. UNENFORCEABLE CONTRACTS cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
● Cannot be sued upon or enforced unless it is first note or memorandum, thereof, be in writing, and
ratified in the manner provided by law. subscribed by the party charged, or by his agent;
● No effect unless ratified. evidence, therefore, of the agreement cannot be
○ Compared to rescissible and voidable received without the writing, or a secondary evidence
of its contents:

contracts which are binding unless they
are set aside by a competent court (a) An agreement that by its terms is not to be
● Intermediate ground between voidable and void performed within a year from the making thereof;
contracts.
(b) A special promise to answer for the debt, default,
A. Types or miscarriage of another;


Art 1403. The following contracts are unenforceable,
unless they are ratified:
1. Those entered into in the name of another
person by one who has been given no
authority or legal representation, or who has
acted beyond his powers.
2. Those who do not comply with the Statute of
Frauds.
3. Those where both parties are incapable of
giving consent to a contract.
Statute of Frauds originally appeared from the Rules of
Court but were transferred to the NCC to show that the
Statute of Frauds was substantive law and not just
procedural law.
(c) An agreement made in consideration of marriage,
other than a mutual promise to marry;

 (d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of
such goods and chattels, or the evidences, or some of
them, of such things in action or pay at the time some
part of the purchase money; but when a sale is made
by auction and entry is made by the auctioneer in his
sales book, at the time of the sale, of the amount and
kind of property sold, terms of sale, price, names of
the purchasers and person on whose account the sale
is made, it is a sufficient memorandum;

(e) An agreement of the leasing for a longer period
than one year, or for the sale of real property or of an
interest therein;


1. Unauthorized Contracts (f) A representation as to the credit of a third person.


Unauthorized contracts are governed by Art 1317 and

a. Application
the provisions on Agency.
i. Executory contracts
The Statute of Frauds only applies to executory
contracts (those where no performance has yet been
made) and not to partially or completely executed ones.
When a party has alleged partial performance, he is
entitled to a reasonable chance to present parol/oral
evidence the truth of the allegation.
ii. Perfected contracts
The application of the statute of frauds presupposes a
perfected contract
● No perfected contract, no statute of frauds
application
Rosencor v Inquing: Right of first refusal is not a
perfected contract of sale of real property. It is a
contractual grant. Therefore, it is not contemplated under
the Statute of Frauds and need not be written to be
enforceable.
iii. Actions for specific performance or breach of
contract
Application of Statute of Frauds: Actions for the specific
performance of contracts
● Therefore, applying the SoF, contracts under the
SoF which are required to be in writing to be
enforceable, when not in writing, cannot be
compelled in an action for specific performance
of contracts.
Does not apply:
● Actions which are neither
○ Violation of a contract
○ Performance thereof
● If oral contract of sale is used as a basis of
possession (instead of for the purpose of
enforcing it, because then the SoF would apply)
b. Requirement
Requirement that certain types of agreements or
some note or memorandum thereof:
1. In writing and
2. Subscribed by the party charged or by his agent
Note or memorandum
● Any type of writing
● Evidence of the agreement
● Used to show the intention of the parties
● May be in several writings, not necessarily one
document
SoF doesn’t require that the contract itself be in writing.
It is sufficient that there is a written note or
memorandum embodying:
1. Essentials of the contract
a. Essential elements expressed with
certainty
2. Signed by the party charged or his agent
a. Names of the parties, terms and
conditions of the contract, and a
description of the property sufficient to
render it capable of identification
This is enough to make the verbal agreement
enforceable.
In some cases, mere existence of receipt (memorandum
of sale) is enough.
City of Cebu v Heirs of Rubi: Exchange of written
correspondence between the parties was accepted by
the Court as evidence of the agreement.
Swedish Match v CA: Exchange of correspondence was
not sufficient because they didn’t indicate the price nor
the mode of payment of the price.
c. Effect or Purpose of Requirement
Statute of Frauds:
● Merely regulates formalities of the contract
necessary to render it enforceable
● Provides the method by which the contracts
enumerated may be proved
● Doesn’t declare them invalid because they aren’t
reduced to writing
● Limited application: only makes actions for
specific performance of contracts covered by it
ineffective
Purpose: Prevent fraud and perjury in the enforcement
of obligations which depend on evidence on unassisted
memory of witnesses
d. Consequence of Non-Compliance
EFFECT OF NON-COMPLIANCE WITH THE STATUTE
OF FRAUDS: the contracts above (a-f) will be
unenforceable and will take no legal effect unless the
requirement (be in writing and subscribed by the parties)
mentioned in Art. 1403 is complied with.
e. Types of Transactions
TYPES OF TRANSACTIONS COVERED BY THE
STATUTE OF FRAUDS: The list is EXCLUSIVE and
cannot apply to those which are not mentioned in Art.
1403 (2, a-f).
i. Performance Not Within a Year
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(a) An agreement that by its terms is not to be
performed within a year from the making thereof;
“FROM THE MAKING OF THE AGREEMENT” = begins
from the day the contract is entered into
● Art. 1403 (2a) refers to agreements where the
consummation of the contract is intended to
extend beyond a year from the perfection of the
contract. In short, the contract will not be fully
complied with or performed within 1 year after the
contract’s perfection.
● In order for a contract to fall under Art. 1403 (2a),
it must appear that the parties intended that the
contract should not be performed within a year
from perfection. We determine such by:
○ Ensuring that such non-performance
does not pertain to natural or physical
impossibility, but it is an impossibility by
provided under the terms of the contract
or by the intention/understanding of the
parties.
● Such contract is within the Statute of the time for
the full performance of the contract exceeds a
year, although the excess is only so little.
When will Art. 1403 (2a) not apply?
● Art. 1403 (2a) only applies to contracts not to be
performed within on either side within one year
from perfection. This contracts to be fully
performed by one side within the year are taken
out of the coverage of the Statute.23
● If an oral contract is not to be performed within a
year from perfection, and one of the parties has
complied with what is incumbent upon within the
year, the other party cannot invoke the Statute of
Frauds in order to avoid the fulfillment of his
obligation to the complying party.
○ The Statute is meant to prevent fraud, not
to perpetrate it.
● If the contract does not fix a time by the parties
for the consummation/performance of the
contract, and there is nothing in the agreement
(neither in the term of the contract nor in the
intention/understanding of the parties) that would
show that it cannot be performed within a year,
the contract is enforceable and is not within the
Statute
ii. Special promise to answer for the debt, default, or
miscarriage of another
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(b) A special promise to answer for the debt,
default, or miscarriage of another;
“SPECIAL” promise = in order for Art. 1403 (2b) to apply,
the promise must not be an original or independent one,
but must be collateral to the agreement of another; thus,
the promissor becomes a mere guarantor or surety.
● It cannot apply where the promisor is the primary
and independent creditor of another, and the
requirement of the Statute need not be complied
with in order for the contract to be voidable
● We can determine if the promise to pay is only
collateral by observing the:
○ Language used in making the promise.
○ Circumstances under which promise was
made.
○ Precise form of the wording of the
promise.
iii. Contracts made in consideration of marriage,
other than a mutual promise to marry
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(c) An agreement made in consideration of
marriage, other than a mutual promise to marry;
Marriage must be THE consideration of the agreement,
not simply A consideration.
● Thus, even when the marriage is a consideration,
but apart from that, there is another consideration
which supports the oral argument, the latter can
be proved without fulfilling the requirement of the
Statute.
● Rule also applies to promises made by 3rd
person to one of the parties contemplating THE
marriage.
Donation propter nuptias are required to be made in a
public instrument.
● The Statute simply provides for rules of evidence
referring to the form of contracts, but other
provisions of the Code on donation govern the
substantial validity of such transaction. The
Statute merely provides for a way on how to
prove the existence of these contracts, namely, in
an agreement, or a note or memo thereof, in
writing and subscribed by parties.
Case Illustrations -
● Cabague v Auxilio - plaintiffs sued to recover
damages resulting from the defendant’s refusal to
carry out the previously agreed marriage
○ Relying on such promises, plaintiffs
made the improvement to defendant’s
home
○ Court held that the action may not
prosper because it was to enforce an
agreement in a consideration of marriage
and there was no written contract
● Bas v Vda. Bas - defendant claims that the
subject parcel of land is a gift in consideration of
marriage, by virtue of the note appearing at the
back of the document of sale
○ Plaintiffs argue that being a donation, it
should have been evidenced by a public
instrument
○ Court ruled in favor of plaintiffs - the
Statute of Frauds merely provides for
rules of evidence referring to the form of
contracts, while the articles on donations
concern the substantial validity of the
contract. The agreement could be proven
by the memorandum, but the effect is
governed by the Civil Code (articles on
donation)
iv. Contracts for the sale of goods, chattels or things
in action
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(d) An agreement for the sale of goods, chattels
or things in action, at a price not less than five
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the
evidences, or some of them, of such things in
action or pay at the time some part of the purchase
money; but when a sale is made by auction and
entry is made by the auctioneer in his sales book,
at the time of the sale, of the amount and kind of
property sold, terms of sale, price, names of the
purchasers and person on whose account the sale
is made, it is a sufficient memorandum
To fall under this category,
● Price must not be less than five hundred pesos
● Buyer must not accept and receive part of such
goods and chattels or the evidence or some of
them of such things in action or pay at the time
some part of the purchase money
- The rule also does not apply when the whole price had
been paid and the chattel has been delivered so that
possession has been passed
- When there is a purchase of multiple of articles, which
separately do not have price of 500 but together have
a price exceeding 500, the operation of the statute
depends upon whether there is a single inseparable
contract or a severable one
- When sale is made by action - entry in sales book at
time of sale of amount and kind of property sold,
terms, names, etc. is a sufficient memorandum
-
v. Contract of lease for more than one year, or for
the sale of real property or of an interest therein
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(e) An agreement of the leasing for a longer
period than one year, or for the sale of real property
or of an interest therein
● Western Mindanao v Medalle - right of way not
one of the contracts covered
● Cruz v JM Tuason - not all dealings involving
interest in real property come under the statute
○ In the case, appellant was seeking to
enforce delivery to him of land in
consideration of his services as mediator
● Rosencor v Inquing - not all agreements affecting
land must be put into writing to attain
enforceability
○ Agreements that are not required to be
put in writing include oral partition of real
property, creating right of way, right of
first refusal.
● Tolentino also noted that Statute does not forbid
oral evidence to prove a consummated sale of
real property (note, Statute only applies to
executory contracts)
 ● Heirs of Ureta, Sr. v Heirs of Ureta - an oral
partition by heirs is valid if no creditors are
affected
○ Partition does not involve conveyance
resulting in a change of ownership but
merely a designation / segregation
● In a contract to sell land, the memorandum must
sufficiently describe land sold, and the statement
of interest to be conveyed therein should be
certain
○ When there is insufficiency, oral
evidence cannot aid
● In a contract of lease, memorandum must
designate length of term and time to begin
vi. Representation as to credit of a 3rd person
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2)(f) A representation as to the credit of a third
person.
● Representation is limited to which operate to
induce the person to whom they are made to
enter into contractual relations with the third
person
● Representation should not be made to defraud
- Note, Statute is made to protect persons
who honestly and in good faith make
assurances respecting the credit of
another
f. Ratification
Article 1405. Contracts infringing the Statute of Frauds,
referred to in No. 2 of article 1403, are ratified by the
failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefit under
them.
Ratified by:
● The failure to object to the presentation of oral
evidence to prove the same
● The acceptance of benefits under them
Article 1406. When a contract is enforceable under the
Statute of Frauds, and a public document is necessary
for its registration in the Registry of Deeds, the parties
may avail themselves of the right under Article 1357.
● ARTICLE 1357 (NCC) provides that if the law
requires a document or other special form, the
contracting parties may compel each other to
observe that form, once the contract has been
perfected.
○ This right may be exercised
simultaneously with the action upon the
contract.
3. Contracts where both parties are incapable of
giving consent
Article 1403 (3). The following contracts are
unenforceable, unless they are ratified:
[..]
(3) Those where both parties are incapable of giving
consent to a contract.
● According to Tolentino, ratification by one party
converts the contract into a voidable contract.
○ Effect: Voidable at the option of the
party who did not ratify.
Article 1407. In a contract where both parties are
incapable of giving consent, express or implied
ratification by the parent, or guardian, as the case may
be, of one of the contracting parties shall give the
contract the same effect as if only one of them were
incapacitated.
If ratification is made by the parents or guardians, as
the case may be, of both contracting parties, the
contract shall be validated from the inception.
Under paragraph 1:
Trigger: (1) both contracting parties are incapable of
giving consent; (2) the parent or guardian of one of the
contracting parties ratifies the contract
Effect: The contract will be as if only one of the parties
were incapacitated
Under paragraph 2:
Trigger: (1) both contracting parties are incapable of
giving consent; (2) the parents or guardians of both
contracting parties ratifies the contract
Effect: The contract is validated from the inception
B. Who may assail
Article 1408. Unenforceable contracts cannot be
assailed by third persons.

According to Padilla, non-contracting parties, as
strangers to the contract, cannot assail the
unenforceable contract.
VIII. Void or Inexistent Contracts
● A void or inexistent contract is one which has no
force and effect from the very beginning.
(Francisco v. Herrera)
○ Produces no civil effects
○ Does not create, modify or extinguish a
juridical relation
○ Cannot be the basis of actions to
enforce compliance.
● It is as if it has never been entered into and
cannot be validated either by the passage of
time or by ratification.
A. Categories
Article 1409. The following contracts are inexistent and
void from the beginning:
(1) Those whose cause, object or purpose is contrary
to law, morals, good customs, public order or public
policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the
time of the transaction;
(4) Those whose object is outside the commerce of
men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to
the principal object of the contract cannot be
ascertained;
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. Neither can the right
to set up the defense of illegality be waived.
1. Essential requisite contrary to law, morals, good
customs, public order or public policy
Article 1352. Contracts without cause, or with unlawful
cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs,
public order or public policy. (1275a)
● In Conjugal Partnership v. Lacaya, the Court held
that an oral contingent fee agreement, where
Atty. Lacaya assumed the litigation expenses in
exchange of one-half of the subject lot, was
champertous and contrary to public policy.
○ Champerty is characterized by (1) receipt
of a share of the proceeds of a litigation
by an intermeddler and (2) the lawyer at
his own expense maintains and takes all
the risks of the litigation.
○ The purpose of the prohibition according
to the Court is to prevent the lawyer from
acquiring an interest between him and
his client.
2. Absolutely simulated or fictitious
Article 1346. An absolutely simulated or fictitious
contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real
agreement. (n)
● In Heirs of Ureta, Sr. v. Heirs of Ureta, the father
sold some of his lands to his children to reduce
the inheritance taxes. This was held to be an
absolute simulation which was defined n Valerio
v. Refresca as having no substance as the
parties have no intention to be bound by it.
3. Cause or object did not exist at the time of the
transaction
● In Bercero v. Capitol Development, the lease
contract between petitioner (lessee) and
respondent (lessor) did not have an existing
object because the subject property was still
under lease with another party, RC Nicolas.
● In Conjugal Partnership of the Spouses
Cadavedo v. Lacaya, the compromise
agreement to ratify and confirm the lawyer’s
acquisition of a share in the property subject of
litigation was void because the acquisition was
void.
4. Object is outside the commerce of men
● This includes property of public dominion:
○ Those intended for public use
○ Those which belong to the State
5. Contemplate an impossible service
Article 1348. Impossible things or services cannot be
the object of contracts. (1272)
● This includes those a service that would be very
dangerous, as held in Labayen v. Talisay where
a contract provided for the construction of a
railroad whenever the contour of land permits
the same.
6. Intention of the parties relative to the principal
object of the contract cannot be ascertained
Article 1378, par.2. If the doubts are cast upon the
principal object of the contract in such a way that it
cannot be known what may have been the intention or
will of the parties, the contract shall be null and void.
(1289)
7. Expressly prohibited or declared void by law
ART. 1409(7): Contracts expressly prohibited or
declared void by law are void.
Hulst v. PR Builders, Inc.:
o A contract to sell a residential unit in a townhouse
project to Dutch nationals was void for violating the
Constitution.
o A contract that violates the Constitution and the law,
is null and void and vests no rights and creates no
obligations. It produces no legal effect at all.
Conjugal Partnership of the Sps. Cadavedo v. Lacaya:
o Art. 1491(5) forbids lawyers from acquiring, by
purchase or assignment, the property that has been the
subject of litigation in which they have taken part by
virtue of their profession.
o Same proscription is provided under Rule 10 of
Canons of Professional Ethics.
o The subject lot was still in litigation when Atty. Lacaya
acquired the disputed ½ portion.
o Lawyer’s acquisition is prohibited and void.
8. Contracts directly resulting from illegal contract
ART. 1422: A contract which is the direct result of a
previous illegal contract, is also void and inexistent.
E. Razon, Inc. v. Philippine Ports Authority:
o WoN respondent’s unilateral cancellation of the
Management Contract with petitioner is valid. – YES.
o The transfer of the control of petitioner E. Razon, Inc.
from petitioner Enrique Razon to Alfredo Romualdez,
which it resolved to be null and void, served as the direct
link to petitioner company’s obtaining the Management
Contract.
o Being the direct consequence and result of a previous
illegal contract, the Management Contract itself is null
and void.
B. No ratification or waiver
ART. 1409: Void contracts cannot be ratified. Neither
can the right to set up the defense of illegality be
waived.
The nullity is permanent, even if the cause thereof
has ceased to exist, or even when the parties have
complied with the contract spontaneously.
C. When divisible
ART. 1420: In case of a divisible contract, if the illegal
terms can be separated from the legal ones, the latter
may be enforced.
EXCEPTIONS:
(1) When the nature of the contract requires
indivisibility.
(2) When the intention of the parties is the contract
be entire.
Sps. Litonjua v. L & R Corp.:
● Petitioners: A void provision of a contract and
another provision should be regarded as a
tandem designed to subvert the sound policy
prohibiting pactum commissorium; that both
paragraphs constitute a package.
○ Par. 9, being intended to support Par. 8
(the void provision), it is therefore
coupled thereto and is thus similarly
mired in its invalidity.
● SC: Pars. 8 and 9 were separate provisions of
the subject contract and the invalidity of one did
not automatically render the other invalid.
○ Contrary to the suppositions of
petitioners, the invalid stipulation was
independent from the rest of the terms
of the agreement, and can easily be
separated therefrom without doing
violence to the manifest intention of the
parties.
Angel Jose v. Chelda Enterprises:
o Simple loan with usurious interest: The illegality lies
only as to the prestation to pay the stipulated interest;
hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal.
D. The in pari delicto doctrine
1. Effect
The principle of in pari delicto non oritur action
denies all recovery to the guilty parties inter se.
It is expressed in the maxims:
§ Ex dolo malo non eritur action
§ In pari delicto potior est condition defedentis
The law will not aid either party to an illegal
agreement, and it leaves the parties where it finds
them.
In pari delicto doctrine holds that:
1. No action arises, in equity or at law, from an
illegal contract;
2. No suit can be maintained for its specific
performance, or
a. to recover the property agreed to be
sold or delivered, or
b. the money agreed to be paid, or
damages for its violation;
3. Where the parties are in pari delicto, no
affirmative relief of any kind will be given to
one against the other.
2. When applicable
E. Recovery
8. When contract violates labor laws
Art. 1418 When the law fixes, or authorizes the fixing of
the maximum number of hours of labor, and a contract is
entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand
additional compensation for the service rendered beyond
the time limit.
Trigger: the law fixes the max labor hours, the contract
makes the laborer work longer
Effect: labor may demand additional compensation
Art. 1419 When the law sets, or authorizes the setting of
a minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a lower wage, he shall
be entitled to recover the deficiency
Trigger: the law sets the minimum wage, laborer accepts
below minimum in the contract
Effect: laborer shall be entitled to recover the deficiency
F. Defense of illegality not available to 3rd persons
Art. 1421 The defense of illegality in contracts is not
available to third persons whose interests are not directly
affected
Defense of illegality only available to 3rd persons who
are DIRECTLY AFFECTED by the contract
Inexistent contracts can be invoked by sny person
whenever juridical effects founded thereon are asserted
against him
G. No prescription
The action or defense for the declaration of the
inexistence of a contract does not prescribe
The defense of a void or inexistent contracts is
permanent
- Mere lapse of time does not give it efficacy
The right to set up the defense of absolute nullity cannot
be waived
Although a void contract has no effect, an action to
declare its inexistence is necessary to allow restitution of
what has been given under it
IX. QUASI CONTRACTS
A. The concept of a quasi contract
Quasi contracts are separate and distinct obligations.
Art. 2142 Certain lawful, voluntary and unilateral acts
give rise to the judicial relation of quasi contract to the
end that no one shall be unjustly enriched or benefited at
the expense of another.
Art 2141 creates the legal fiction of a quasi contract
absent a contractual relation between the parties
concerned
D. The in pari delicto doctrine
1. Effect
The principle of in pari delicto non oritur action denies all
recovery to the guilty parties inter se.
It is expressed in the maxims:
● Ex dolo malo non eritur action
● In pari delicto potior est condition defedentis
The law will not aid either party to an illegal agreement, and it
leaves the parties where it finds them.
In pari delicto doctrine holds that:
1. No action arises, in equity or at law, from an illegal
contract;
2. No suit can be maintained for its specific
performance, or
a. to recover the property agreed to be sold or
delivered, or
b. the money agreed to be paid, or damages
for its violation;
3. Where the parties are in pari delicto, no affirmative
relief of any kind will be given to one against the
other.
2. When applicable
● Applies to cases where the nullity arises from the
illegality of the consideration or the purpose of the
contract
● Doesn’t apply to: inexistent contracts
Gonzalo v Ternate: In pari delicto cannot prevent a recovery if
doing so violates the public policy against unjust enrichment.
Unjust enrichment (Article 22) exists when a person unjustly
retains a benefit at the loss of another, or when a person
retains money or property of another against the fundamental
principles of justice, equity and good conscience.
Pajuyo v CA: Application of the principle of pari delicto to a
case of ejectment between squatters is fraught with danger.
● If squatters were denied relief on the ground of pari
delicto, it would be inviting mayhem and lawlessness.
● Thus, courts must resolve the issue of possession
even if the parties to the ejectment suit are squatters.
E. Recovery
1. When illegal and a crime
When nullity proceeds from the illegality of the cause or
object of the contract + the act constitutes a criminal offense +
both parties are in pari delicto -> they shall have no action
against each other, and both shall be prosecuted. The Penal
Code relative to the disposal of effects or instruments of a
crime shall be applicable to the things or the price of the
contract.
The rule is also applicable when only one party is guilty. The
innocent party may claim what he has given, and shall not be
bound to comply with his promise. (Art 1411)
Under Article 1411, it must be shown that the nullity of the
contract proceeds from an illegal cause or object, and the act
of executing said contract constitutes a criminal offense
(Ramirez v Ramirez).
2. When unlawful/forbidden but not a crime
If the act in act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the following
rules shall be observed:
● Both contracting parties were at fault, neither may
recover what he has given by virtue of the contract, or
demand the performance of the other’s undertaking;
● One contracting party is at fault, he cannot recover
what he has given by reason of the contract or ask for
the fulfillment of what has been promised him. The
one not at fault may demand the return of what he
has given without any obligation to comply with his
promise. (Art 1412)
Heirs of Ureta, Sr. v Heris of Ureta: Art 1412 is not applicable
to fictitious or simulated contracts, because it refers to
contracts with an illegal cause or subject matter. Article 1412
presupposes the existence of a cause, it cannot refer to
fictitious or simulated conttracts which are in reality, non-
existent.
Frenzel v Catito: A contract that violates the Constitution and
the law is null and void and vests no rights and creates no
obligations. It produces no legal effects at all.
>Equity as a rule will follow the law and will not permit
that to be done indirectly which, because of public policy,
cannot be done directly.
>Petitioner could not feign ignorance of the
constitutional proscription, nor claim that he acted in good faith,
let alone assert that he is less guilty than the respondent.
3. When validly repudiated
When money is paid or property delivered for an illegal
purpose, the contract may be repudiated by one of the parties:
● Before the purpose has been accomplished; or
● Before any damage has been caused by a third
person.
The court may, if the public interest will thus be subserved,
allow the party repudiating the contract to recover the money
or property. (Art 1414)
Hulst v P.R. Builders: Generally, parties to a void agreement
cannot expect the aid of the law and the courts leave them as
they are, because they are deemed in pari delicto or “in equal
fault”.
The general rule has exceptions that permit the return to
certain parties of that which may have been given under a void
contract.
● The innocent party (Art. 1411-1412)
● The debtor who pays usurious contracts (Art. 1413)
● The party repudiating the void contract before the
illegal purpose is accomplished or before damage is
caused to a third person and if public interest is
subserved by allowing recovery.
● The incapacitated party if the interest of justice so
demands
 ● The party for whose protection the prohibition by law
is intended if the agreement is not illegal per se but
merely prohibited and if public policy would be
enhances by permitting recovery
● The party whose benefit the law has been intended
such as in the price ceiling laws.
In Hulst v P.R. Builders, it was significant that the agreement
executed by the partiews was a Contract to Sell and not a
contract of sale.
Applies to those contracts, which are merely prohibited, in
order to benefit private interests. It does not apply to contracts
void ab initio
Allowing the petitioner, a foreigner purchaser of 3 parcels of
land, to recover the properties or the money used in the
purchase of parcels of land was subversive to public policy.
Acabal v Acabal

Even assuming that the disposition of the property by Villaner

Contract of Sale
Title passes to the buyer
upon the delivery of the thing
sold.
The vendor has lost and
cannot recover the
ownership of property until
and unless the contract of
sale is itself resolved and set
aside.
Contract to sell
Conditional sale where the
efficacy or obligatory force
of the vendor’s obligation to
transfer title is subordinated
to the happening of a future
and uncertain event
if the suspensive condition
does not take place, the
parties would stand as if
the conditional obligation
had never existed.
was contrary to law, he would still have no remedy under the
law as he and Leonardo were in pari delicto, hence, he is not
entitled to affirmative relief.
Art 1416 is an exception to the pari delicto rule, if the
prohibition is for the protection of petitioners. However, the
land in question was not for the petitioners, but for the
beneficiary farmers.
6. Of usurious interest
General Rule: interest paid in excess of the interest allowed by
the usury laws may be recovered by the debtor, with interest
thereon from the date of the payment.
Angel Jose v Chelda Enterprises

The prospective seller
agrees to transfer ownership
to the buyer after a
happening of an event.
the prospective seller still
has to convey title to the
prospective buyer by
executing a contract of
absolute sale.
The exception under Art 1414 was applicable in this case,
because the petitioner caused the rescission of the contract
before the execution of the final deed transferring ownership.
4. When one party is incapacitated
General Rule: Where one of the parties to an illegal contract is
incapable of giving consent, the courts may, if the interest of
justice so demands, allow recovery of money or property
delivered by the incapacitated person.
This is an exception to the pari delicto rule.
5. When contract is not illegal per se but merely prohibited
General Rule: when the agreement is not illegal per se but is
merely prohibited and the prohibition by the law is designed for
the protection of the plaintiff, he may, if public policy is thereby
enhanced, recover what he has paid or delivered.
The appellant sought to claim a loan with interests. The
defendant claims that the loan is void for having usurious
interests. The Court held that a loan with a usurious interest is
not totally void but void only as to the interest.
The general rule to harmonize Art 1413 with respect to usury
laws is that the whole usurious interest is voided, not just the
excess of those allowed under usury laws, in order to
discourage usurious interest.
The principal debt remaining without stipulation for the
payment of interest can be recovered by judicial action. If in
that demand, the debtor incurs in delay, the debt earns interest
from the day of the demand.
7. Of overprice
Art. 1417. When the price of any article or commodity is
determined by statute, or by authority of law, any person
paying any amount in excess of the maximum price allowed
may recover such excess.
Trigger:
● Price of any article or commodity is determined by
statute or by authority of law and;
● Person paying amount in excess of maximum price
Effect: PErson may recover excess
8. When contract violates labor laws

Frenzel v Catito Art. 1418 When the law fixes, or authorizes the fixing of the
maximum number of hours of labor, and a contract is entered
into whereby a laborer undertakes to work longer than the
maximum thus fixed, he may demand additional compensation
for the service rendered beyond the time limit.
Trigger: the law fixes the max labor hours, the contract makes
the laborer work longer
Effect: labor may demand additional compensation
Art. 1419 When the law sets, or authorizes the setting of a
minimum wage for laborers, and a contract is agreed upon by
which a laborer accepts a lower wage, he shall be entitled to
recover the deficiency
Trigger: the law sets the minimum wage, laborer accepts below
minimum in the contract
Effect: laborer shall be entitled to recover the deficiency
F. Defense of illegality not available to 3rd persons
Art. 1421 The defense of illegality in contracts is not available
to third persons whose interests are not directly affected
Defense of illegality only available to 3rd persons who are
DIRECTLY AFFECTED by the contract
Inexistent contracts can be invoked by sny person whenever
juridical effects founded thereon are asserted against him
G. No prescription
The action or defense for the declaration of the inexistence of a
contract does not prescribe
The defense of a void or inexistent contracts is permanent
- Mere lapse of time does not give it efficacy
The right to set up the defense of absolute nullity cannot be
waived
Although a void contract has no effect, an action to declare its
inexistence is necessary to allow restitution of what has been
given under it
IX. Quasi Contracts
A. The concept of a quasi contract
Quasi contracts are separate and distinct obligations.
Art. 2142. Certain lawful, voluntary and unilateral acts give
rise to the judicial relation of quasi contract to the end that
no one shall be unjustly enriched or benefited at the
expense of another.
Art 2141 creates the legal fiction of a quasi contract absent a
contractual relation between the parties concerned.
Cruz v J.M. Tuason: Presumed quasi-contract cannot emerge
as against one part when the subject matter thereof is already
covered by an existing contract with another party.
● If the one who claims having enriched somebody has
done so pursuant to a contract with a third party, his
cause of action should be against the latter.
● It is essential that the act by which the defendant is
benefited must have been voluntary and unilateral on
the part of the plaintiff.
○ Voluntary: actor in quasi-contracts is not
bound by any pre-existing obligation to act
○ Unilateral: arises from the sole will of the
actor who is not previously bound by any
reciprocal or bilateral agreement
Purpose: To prevent a situation where a person is able to
benefit or take advantage of such lawful, voluntary and
unilateral acts at the expense of said actor.
Locsin II v Mekeni Food Corp: Respondent company offered
petitioner a car plan where they would pay for half of the cost
and the other half would be deducted from petitioner’s salary.
When petitioner resigned, he offered to purchase his service
vehicle by paying the outstanding balance but they couldn’t
agree on the terms. Petitioner thus returned the vehicle and
filed a complaint for recovery of unpaid salaries.
● Court: Because there wasn’t specific terms and
conditions re: car plan arrangement, a quasi-
contractual relation was created between the parties.
Therefore, respondent may not enrich himself by
charging the petitioner for the use of its vehicle.
1. Basis
Padcom v Ortigas Center: Generally, quasi-contracts are
based on the presumed will or intent of the obligor dictated
by equity and by the principles of absolute justice
Examples of these principles / presumptions:
1. That a person agrees to that which will benefit him
2. Nobody wants to enrich himself unjustly at the
expense of another
3. One must do unto others what he would want others
to do unto him under the same circumstances
2. Distinguished from contracts
Because of the absence of consent, quasi-contracts are NOT
CONTRACTS.
But because of the peculiar circumstances or factual
environment, consent is PRESUMED to the end that a
recipient of benefits or favors resulting from lawful, voluntary
and unilateral acts of another may not be unjustly enriched at
the expense of another.
3. Distinguished from acts pursuant to contract
Acts that are done in compliance with a contract are NOT
VOLUNTARY OR UNILATERAL.
● To be a quasi-contract, the act must be a “purely
voluntary act” or “unilateral act”
4. Distinguished from constructive trust
Quasi-contracts and constructive trusts are “closely allied
concepts.”
Constructive trust (Morales v CA)
● Created by operation of law in order to satisfy the
demands of justice and to prevent unjust enrichment
● Raised by equity in respect of property, which has
been acquired by fraud, or where although acquired
originally without fraud, it is against equity that it
should be retained by the person holding it
Requisites of solutio indebiti (Art 2154)
● There is something that has been received when
there is no right to demand it
● It was unduly delivered through mistake
Sir Casis did not distinguish between the two, but mentioned
the case of PNB v CA where the court had a problem
distinguishing between the two but decided to rule for solutio
indebiti because prescription already blocked quasi-contract.
Court implied that same factual circumstances gave rise to
both constructive trust and solutio indebiti.
B. Kinds of Quasi-Contracts
Old Civil Code: Only listed two obligations in the chapter for
quasi-contracts
1. Obligation incident to the officious management of the
affairs of other persons (gestion de negocios ajenos)
2. Recovery of what has been improperly paid (cobro de
lo indebido)
But the list does not signify that this list is exclusive to only
these two.
Current list in the Civil Code is not exhaustive. The Code is
open to the possibility that, absent a pre-existing relationship,
there being neither crime nor quasi-delict, a quasi-contractual
relation may be forced upon the parties to avoid a case of
unjust enrichment.
1. Negotiorum Gestio
Art. 2144. Whoever voluntarily takes charge of the agency or
management of the business or property of another, without
any power from the latter, is obliged to continue the same until
the termination of the affair and its incidents, or to require the
person concerned to substitute him, if the owner is in a
position to do so. This juridical relation does not arise in either
of these instances:
(1) When the property or business is not neglected or
abandoned;
(2) If in fact the manager has been tacitly authorized by the
owner.
In the first case, the provisions of Articles 1317, 1403, No. 1,
and 1404 regarding unauthorized contracts shall govern.
In the second case, the rules on agency in Title X of this Book
shall be applicable.
a. Requisites of Negotiorum Gestio:
1. A person takes charge voluntarily of
2. An agency or management of a business or property
of another
3. Such business or management is neglected or
abandoned
4. Manager was not tacitly/impliedly authorized by the
owner
There is no quasi-contract of negotiorum gestio if:
1. When the property or business is not neglected or
abandoned;
2. If in fact the manager has been tacitly authorized by the
owner.
*If No. 1 is present, the act of the person taking charge taking
charge of the business or property will be treated as
unauthorized acts and will give rise to an unenforceable
contract.
* If No. 1 is present, the rules on Agency will apply.
b. Standard of Diligence Required and Liability for
Damages
Art. 2145. The officious manager shall perform his duties with
all the diligence of a good father of a family, and pay the
damages which through his fault or negligence may be
suffered by the owner of the property or business under
management.
The courts may, however, increase or moderate the
indemnity according to the circumstances of each case.
c. Effect of Delegation
Art. 2146 (par. 1). If the officious manager delegates to
another person all or some of his duties, he shall be liable
for the acts of the delegate, without prejudice to the direct
obligation of the latter toward the owner of the business
This rule is similar to the liability of principals for their agents,
but Art. 2146 doess not provide an exception in instances
where the delegate exceeds the authority granted to him. It is
arguable that even though there is no agenyl relationship
between the officious manager and the owner, there is an
agency relationship between the manager and the delegate.
d. Liability of Managers
i. Solidary Liability
Art. 2146 (par. 2). The responsibility of two or more officious
managers shall be solidary, unless the management was
assumed to save the thing or business from imminent
danger.
ii. Liability for Fortuitous Events
Art. 2147. The officious manager shall be liable for any
fortuitous event:
(1) If he undertakes risky operations which the owner was not
accustomed to embark upon;
(2) If he has preferred his own interest to that of the owner;
(3) If he fails to return the property or business after demand
by the owner;
(4) If he assumed the management in bad faith
Art. 2148. Except when the management was assumed to
save property or business from imminent danger, the officious
manager shall be liable for fortuitous events:
(1) If he is manifestly unfit to carry on the management;
(2) If by his intervention he prevented a more competent
person from taking up the management.
The general rule, as provided in Art. 1174, is that a person is
not responsible for fortuitous events. Art. 2147-2148 are
exceptions to this general rule.
iii. Personal Liability
Art. 2152. The officious manager is personally liable for
contracts which he has entered into with third persons, even
though he acted in the name of the owner, and there shall be
no right of action between the owner and third persons. These
provisions shall not apply:
(1) If the owner has expressly or tacitly ratified the
management, or
(2) When the contract refers to things pertaining to the owner
of the business.
e. Effect of Ratification/Acceptance of Benefits
Art. 2149. The ratification of the management by the owner
of the business produces the effects of an express agency,
even if the business may not have been successful.
If the owner of the property/business ratifies the management,
such relationship is taken out of the coverage of quasi-contracts
and into the realm of Agency Law.
Art. 2150. Although the officious management may not have
been expressly ratified, the owner of the property or business
who enjoys the advantages of the same shall be liable for
obligations incurred in his interest, and shall reimburse the
officious manager for the necessary and useful expenses and
for the damages which the latter may have suffered in the
performance of his duties.
The same obligation shall be incumbent upon him when the
management had for its purpose the prevention of an
imminent and manifest loss, although no benefit may have
been derived.
Art. 2150 provides that even though there has been no express
ratification by the owner who enjoys the advantages of the
property or business shall be liable for:
1. Obligations incurred by the manager in his (owner)
interest.
2. Reimburse the manager for necessary and useful
expenses.
3. Reimburse the manager for damages the latter may
have suffered in the performance of his duties.
Art. 2151. Even though the owner did not derive any benefit
and there has been no imminent and manifest danger to the
property or business, the owner is liable as under the first
paragraph of the preceding article, provided:
(1) The officious manager has acted in good faith, and
(2) The property or business is intact, ready to be returned to
the owner.
Art. 2151 provides that even though there has been no benefit
to the owner and there has been no imminent and manifest
danger to the owner’s property or business, the owner is liable
if:
1. Manager acted in good faith.
2. Property or business is intact, and ready to be returned
f. Extinguishment
The management is extinguished:
1. When the owner repudiates it or puts an end
2. When the officious manager withdraws from the
manager, subject to the provisions of Art. 2144
3. By death, civil interdiction, insanity or insolvency
of the owner or the officious manager
2. Solutio Indebiti
Art 2154. If something is received when there is no right
to demand it, and it was unduly delivered through
mistake, the obligation to return it arises.
Juridical Relation Arises –
1. The thing is received
2. Person who received it had no right to demand it
3. Delivery was by mistake
Jurisprudence
1. Andres v Manufacturers
- Requisites:
● He who has paid was not under obligation to do so
● Payment was made by reason of an essential mistake
of fact
 - applies only to mistaken payment, not to all forms of
mistaken delivery
- solution indebiti is from the principle that not one shall
enrich himself unjustly at the expense of another
- In the said case, pet. was entitled to a remittance from
Facets. Facets instructed First National State Bank (FNSB)
to make remittance. FNSB instructed resp to make
payment. Unaware that remittance was already received,
Facets instructed respt to make payment through another
bank– in effect, pet received a second remittance. Resp
thus asked a recredit of its account. The Court held that
respondent was not a party to the contract between pet and
Facets; hence pet had no right to apply the second
remittance delivered by mistake. The sum of money
belonged to the respondent and not its debtor. Solutio
indebiti was present.
2. Titan-Ikeda v Primetown
- Requisites
● Absence of a right to collect the excess sums
● Payment was made by mistake
- Parties entered into a contract for a piece of work.
They then executed a supplemental agreement – pet as
contractor bound to execute project for resp for a certain
price. They then executed a second contract, extinguishing
the supplemental agreement. Peti. Acknowledged that it
had been overpaid.Court held that it was pet’s obligation to
return the excess to the respondent as both requisites were
present. Pet was only entitled to the cost of services
rendered, not the excess. As for the second requisite, Art
2163 states that it is presumed that there was a mistake if
something, which had been paid, was not due.
3. Metrobank v Absolute Management Corp
- Requisites
● Something had been unduly delivered through mistake
● Something was received when there was no right to
demand it
(These requisites are not entirely accurate – Code requires that
it is the person who received it who had no right to demand it)
- Sherwood Holdings Corp, Inc. made advance
payments to resp covered by Metrobank Checks payable to
Chua, resp’s general management. Metrobank admitted
that it deposited the checks to the account of Ayala Lumber
and Hardware, which Chua owned and managed.
Metrobank filed motion to admit fourth-party complaint
against Chua’s estate, so that the estate would reimburse
Metrobank in case the would be held liable in the complaint
filed by Absolute Management against Metrobank. Court
held that Chua’s estate should reimburse Metrobank incase
it would be help liable as the facts fulfill the requisites of
solution indebiti. Metrobank acted in a manner akin to
mistake when it deposited checks to ALH. ALH had no right
to demand and receive checks as Chua and ALH are two
distinct entities.
- The government is not exempted from the application
of the doctrine that no person shall unjustly enrich
himself at the expense of another.
In Siga-an v. Villanueva, the Court ruled that where solutio
indebiti exists:
● The payor becomes the creditor who then has the right
to demand the return the payment made by mistake
● The person who has no right to receive such payment
becomes obligated to return the same.
Solutio indebiti applies in case of erroneous payment of undue
interest.
b. Presumption of Mistake
Article 2163. It is presumed that there was a mistake in the
payment if something which had never been due or had
already been paid was delivered; but he from whom the
return is claimed may prove that the delivery was made out
of liberality or for any other just cause. (1901)
Presumption of Mistake Arises- when what is delivered:
1. Had never been due; or
2. Had already been paid
The presumption is rebutted by proof that the delivery was made
out of liberality or for any other just cause.
In Andres v. Manufacturers, the Court distinguished mistake
from negligence. A mistake cannot involve a failure to comply
with the requisite level of diligence.
● Article 1173 (NCC) → Fault or negligence consists in
the omission of the diligence which is required by the
nature of the obligation, and corresponds with the
circumstances if the persons, of the time, and of the
place.
c. In case of doubt
Article 2155. Payment by reason of a mistake in the
construction or application of a doubtful or difficult question
of law may come within the scope of the preceding article.
(n)
Trigger: (1) mistake in the construction or application of a
doubtful or difficult question of law; (2) payment was made
because of this mistake
Effect: Obligation to return arises (Article 2154)

In Commissioner of Internal Revenue v. Acesite, the Court ruled

that tax refunds are based on the principle of quasi-contracts or
solutio indebiti.
 Article 2156. If the payer was in doubt whether the debt was
due, he may recover if he proves that it was not due. (n)
Trigger: (1) the payer doubts whether the debt was due; (2) he
proves that it was not due
Effect: The payer may recover
d. Liability of Payees
Article 2157. The responsibility of two or more payees, when
there has been payment of what is not due, is solidary. (n)
e. Property Belonging to 3rd Person
Article 2157. When the property delivered or money paid
belongs to a third person, the payee shall comply with the
provisions of article 1984. (n)
The payee under Article 2158 has the same responsibility as the
depository under Article 1984:
● Must advise the true owner of the money or property
delivered should he discover that it was stolen
● Must return the money or property delivered if he has
reasonable grounds to believe that the thing has not
been lawfully acquired
f. Bad Faith Acceptance
Article 2159. Whoever in bad faith accepts an undue
payment, shall pay legal interest if a sum of money is
involved, or shall be liable for fruits received or which should
have been received if the thing produces fruits.
He shall furthermore be answerable for any loss or
impairment of the thing from any cause, and for damages to
the person who delivered the thing, until it is recovered.
(1896a)
Consequences of bad faith acceptance:
● Payment of legal interest, if a sum of money is involved
● Liability for fruits received or which should have been
received, if the thing produces fruits
● Liability for loss or impairment of the thing from any
cause
● Liability for damages to the person who delivered the
thing, until it is recovered
Bad faith acceptance: recipient was aware that he had no right
to the thing received, but received it anyway
g. Good faith acceptance
Article 2160. He who in good faith accepts an undue
payment of a thing certain and determinate shall only be
responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been
benefited. If he has alienated it, he shall return the price or
assign the action to collect the sum. (1897)
Consequences of good faith acceptance:
● Responsible for the impairment or loss of the same or
its accessories and accessions insofar as he has
thereby been benefited
● Return the price or assign the action to collect the sum,
if he has alienated it.
As explained in Titan-Ikada v. Primetown:
● GENERAL RULE: one who receives payment by
mistake in good faith is only liable to return the thing
delivered
● EXCEPTIONS:
1. Trigger: if he benefited therefrom
Effect: he is also liable for the impairment or loss of the
thing delivered and its accessories and accessions
2. Trigger: if he sold the thing delivered
Effect: he should either deliver the proceeds of the sale
or assign the action to collect to the other party
- In the said case, the SC remanded the case to the RTC
to determine the percentage of the project that
petitioner actually completed and its proportionate
cost. Then, the petitioner should return to respondent
the condo units and parking slots in excess of the value
of its actual accomplishment. If these properties
include units and slots already sold to third persons,
petitioner shall deliver the proceeds of the sale thereof
h. Reimbursement for improvements
Article 2161. As regards the reimbursement for
improvements and expenses incurred by him who unduly
received the thing, the provisions of Title V of Book II shall
govern. (1898)
Trigger: reimbursement for improvements and expenses
incurred by him who unduly received the thing
Effect: provisions on rules of possession will govern
i. Exemption from obligation to restore
Article 2162. He shall be exempt from the obligation to
restore who, believing in good faith that the payment was
being made of a legitimate and subsisting claim, destroyed
the document, or allowed the action to prescribe, or gave up
the pledges, or cancelled the guaranties for his right. He
who paid unduly may proceed only against the true debtor or
the guarantors with regard to whom the action is still
effective. (1899)
Trigger 1: The person who believed in good faith that the
payment was made out of a legitimate and subsisting claim
Effect 2: he is exempt from the obligation to restore if he:
● Destroyed the document
● Allowed the action to prescribe
● Gave up the pledges
● Cancelled the guaranties for his right
Trigger 2: The person who unduly paid
Effect 2: he may proceed against the true debtor or the
guarantors with regard to whom the action is still effective
3. Other Quasi Contracts
a. Support given by stranger or 3rd person
Article 2164. When, without the knowledge of the person
obliged to give support, it is given by a stranger, the latter
shall have a right to claim the same from the former, unless
it appears that he gave it out of piety and without intention of
being repaid. (1894a)
Trigger: a stranger gives support without the knowledge of the
person obliged to give support
Effect:
● GENERAL RULE: the stranger shall have a right to
claim the same from the former
● EXCEPTION: unless it appears that he gave it out of
piety and without the intention of being repaid
Article 2166. When the person obliged to support an orphan,
or an insane or other indigent person unjustly refuses to give
support to the latter, any third person may furnish support to
the needy individual, with right of reimbursement from the
person obliged to give support. The provisions of this article
apply when the father or mother of a child under eighteen
years of age unjustly refuses to support him.
Triggers:
1. Person obliged to support an orphan or insane or other
indigent person unjustly refuses to give support
2. Father or mother of a child under 18 unjustly refuses to
support him
Effects:
1. Any third person may furnish support to the needy
individual
2. Third person has right to reimburse from the person
obliged to give support
Casis’ comment: 2164 and 2166 both require reimbursement
for support given by a stranger or 3rd person. But in 2166, the
obligor unduly refuses to support the persons referred to.
b. Funeral expenses borne by 3rd person
Article 2165. When funeral expenses are borne by a third
person, without the knowledge of those relatives who were
obliged to give support to the deceased, said relatives shall
reimburse the third person, should the latter claim
reimbursement. (1894a)
Triggers:
1. Funeral expenses borne by a third person
2. Without knowledge of relatives who were obliged to
give support to the deceased
Effect: relatives shall reimburse 3rd person upon claim for
reimbursement (hence obligation to reimburse is not automatic)
Casis’ comment: law presumes that relatives would have
provided for the funeral expenses. However, this should only be
limited to necessary expenses.
c. Medical services
Article 2167. When through an accident or other cause a
person is injured or becomes seriously ill, and he is treated
or helped while he is not in a condition to give consent to a
contract, he shall be liable to pay for the services of the
physician or other person aiding him, unless the service has
been rendered out of pure generosity.
Triggers:
1. Accident or other cause
2. Person injured or becomes seriously ill
3. Treated or helped while he is not in a condition to give
consent to a contract
Effects:
● GENERAL RULE: person injured shall be liable to pay
for services of physician or other person aiding him
● EXCEPTION: unless the service has been rendered
out of pure generosity
- The Code Commission created a presumption on
behalf of the sick person that he would request the
services if he were able to do so and would promise to
pay
d. Saved property
Article 2168. When during a fire, flood, storm, or other
calamity, property is saved from destruction by another
person without the knowledge of the owner, the latter is
bound to pay the former just compensation.
Triggers:
1. Fire, flood, storm or other calamity
2. Property is saved from destruction by another person
3. Without the knowledge of the owner
Effect: owner is bound to pay the former just compensation
Casis’ comments:
- no clear meaning of just compensation.
- Value of the property saved or the value of the
services rendered to save it?
- Code Commission intended the latter.
 - The law presumes that the owner would have wanted his
property saved and would have paid a person to save it had he
known or been present to give his consent
e. Government performs necessary work
Article 2169. When the government, upon the failure of any
person to comply with health or safety regulations
concerning property, undertakes to do the necessary work,
even over his objection, he shall be liable to pay the
expenses.
Triggers:
1. Failure of any person to comply with health or safety
regulations concerning property
2. Government does the necessary work even over
person’s objection
Effect: person (one with duty to comply with health or safety
regulations → may or may not be its owner) is liable to pay
expenses
Comment:
- Law creates promise on part of neglectful individual
- Obligation upon non-compliant individual to reimburse
government who did the work but not obligation upon
government to do the work
f. Objector
● ART. 2174: When in a small community a majority of
the inhabitants of age decide upon a measure for
protection against lawlessness, fire, flood, storm or
other calamity, any one who objects to the plan and
refuses to contribute to the expenses but is benefited
by the project as executed shall be liable to pay his
share of said expenses.
● According to the Code Commission, it is unjust for the
person receiving the benefit of the method of protection
to refuse to pay his share of expenses so the law
makes a promise on his behalf.
g. Paid tax of another
● ART. 2175: Any person who is constrained to pay the
taxes of another shall be entitled to reimbursement
from the latter.
● According to the Code Commission, this situation
frequently arises when the possessor of land, under a
contract of lease or otherwise, has to pay the taxes to
prevent seizure of the property by the government,
because the owner became delinquent in payment.
1. Other provisions
● The obligations under each case is created by law and
not by quasi-contract.
● Perhaps the intent of the framers of the Code in placing
it among the provisions in the section on “Other quasi-
contracts” was merely to clarify that the covered
situations do not create a quasi-contract.
a. In case of commingling or confusion
● ART. 2170: When by accident or other fortuitous event,
movables separately pertaining to 2 or more persons
are commingled or confused, the rules on co-
ownership shall be applicable.
b. Lost personal property
● ART. 2171: The rights and obligations of the finder of
lost personal property are governed by Arts. 719 and
720.
● ART. 719: The finder of personal property, which is not
treasure, must return it to its previous possessor if
known. If unknown, the finder shall immediately deposit
it with the mayor of the city or municipality of the place
where he found it. The finding shall be publicly
announced by the mayor for 2 consecutive weeks in
the way he deems best except if the personal property
cannot be kept without deterioration, or without
expenses which considerably diminish its value, in
which case the finding must be published and the
property sold at public auction 8 days after the
publication.
○ If the owner does not appear after 6 months
from the publication the thing found, or its
value, shall be awarded to the finder. The
finder and the owner shall be obliged, as the
case may be, to reimburse the expenses.
● ART. 720: If the owner should appear in time, he shall
be obliged to pay, as a reward to the finder, 1/10 of the
sum or of the price of the thing found.
c. Possessor in good faith
● ART. 2172: The right of every possessor in good faith
to reimbursement for necessary and useful expenses
is governed by Art. 546
● ART. 546: While every possessor is entitled to
reimbursement for necessary expenses, only the
possessor in good faith may retain the thing until he
has been reimbursed therefor.
○ Only the possessor in good faith is entitled to
reimbursement for useful expenses with the
same right of retention. But the person who
has defeated him in the possession has the
option of refunding the amount of the
expenses or of paying the increase in value
which the thing may have acquired by reason
thereof.
d. Third person pays the debt
● ART. 2173: When a third person, without the
knowledge of the debtor, pays the debt, the rights of
the former are governed by Arts. 1236 and 1237.
● ART. 1236: Whoever pays for another may demand
from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been
beneficial to the debtor.
● ART. 1237: Whoever pays on behalf of the debtor
without the knowledge or against the will of the latter,
cannot compel the creditor to subrogate him in his
rights, such as those arising from a mortgage,
guaranty, or penalty.