OBLIGATIONS AND CONTRACTS

Introduction

Our Civil Code follows the Gaian order which is of three parts: Persons, Things and Obligations.

The title of Book IV of the Civil Code is inaccurate. While the title is “Obligations and C ontracts”, it
should only be “Obligations” since by including “Contracts” in the title, it is putting the latter on equal
footing with the former; but this is not correct since contracts is only one of the sources of obligations.

Obligations is the most important, most abstract and most difficult of all of civil law.

It is the entirety of private law.

A. The term “obligations” was derived from the words “ob” and “ligare” which means “ to bind
or tie together.” “Ligare” is the source of several common words such as “ligament” and “ligation.”
B. “Obligatio” was initially a physical act of being chained (with shackles). Before, under Roman law,
if the debtor cannot pay, the creditor can bring him to the magistrate and the magistrate can authorize
the creditor to cuff the debtor and offer him for sale for 3 days, the proceeds of which go to the
creditor. The debtor then becomes a slave. If he is not bought, the creditor can have him chopped into
little pieces or have him sold to the barbarians.
C. As time passed, cruelty softened. By the time of Cicero, “ligatio” does not mean vincu lum of
chains but vinculum juris (bond of law). Obligation became metaphorical and not literal.

I. OBLIGATIONS:
A. DEFINITION OF OBLIGATION:

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

• This was borrowed from Sanchez Roman.

• However, many commentators say it is incomplete because the “obligation” is only from the point
of view of the debtor. To make it complete, it must cover the points of view of both the debtor and
creditor. Obligations are bilateral. It should include what can be required, the remedy and the means by
which the creditor can take to pursue the remedy.
• Balane’s definition: An obligation is a juridical relation whereby a person should engage or refrain from
engaging in a certain activity for the satisfaction of the private interest of another who, in the case of non-
fulfillment of such duty, may obtain from the patrimony of the former through proper judicial proceedings
the very prestation due or in default thereof, the economic equivalent that it represents (Diaz Piero).
• An obligation is a juridical relation whereby a person (called a creditor) may demand from another (called
the debtor) the observance of a determinate conduct, and, in case of breach, may obtain satisfaction from
the assets of the latter (Arias Ramos).

B. CHARACTERISTICS OF OBLIGATIONS:
1. It represents an exclusively private interest.
2. It creates ties which are by nature transitory.
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 3. Because obligations are extinguished. But the period is relative – could be seconds (e.g., buying
coke) and could be years (e.g., partnership, lease)
4. It involves the power to make the juridical tie defective in case of nonfulfillment through
satisfaction of the debtor’s property.

C. TRENDS IN THE MODERN LAW OF OBLIGATIONS: 1. Progressive spiritualization of the law on obligations.

• Before, obligations were very formal and ritualistic. If it was not in the proper form, no obligations will
assume. Now, the emphasis is in the meeting of the minds, and not on the specific form.
• There is even no need that it be in writing, as a General Rule, since consensuality is the prevailing doctrine.
As long as it can be manifest – and any kind of manifestation will do – it is sufficient.
• Roman Law was formalistic. Vestiges of Roman Law in the Civil Code can be seen in the law governing
donations, which is very formal. Even for sales, the requirement of form is only for enforceability and not
for validity. This is to make it conducive to business and facilitate commercial transactions.
• This is still an ongoing trend: e-commerce added another option in form and proof of contracts (but this is
not applicable to all, usually only for business, not applicable to wills).

2. The principle of autonomy of will of the parties is now subject to several restrictions.
• While the principle still operates, the exceptions (prohibited areas) have grown larger and larger.
• Article 1306 gives the five restrictions: not contrary to law, morals, good customs, public order, or public
policy.
• Those which are against these five restrictions are void, as can be seen in Article 1409.
• However, now we have restrictions such as social justice, environmental preservation.
• Environmental restrictions sale of ivory, of a tamaraw
• Economic Law corp code
• Labor Code

3. The mitigation of the principle that the debtor should answer with all his property
• Before, the debtor had to answer his debts with all his property. Now, certain properties are exempt and
these can be found in substantive law (i.e., home) and in procedural law (i.e. support, etc.)
• Also, the debtor may not be imprisoned for non-payment of debts.
• The theory is to leave the debtor something to live decently by
4. The weakening of the principle that liability arises from responsibility
This is basically the principle in quasi-delicts. Now, in many cases, a person may be held liable even if not
responsible.
• For example, under workman’s compensation, the employer is liable to compensate the
employee even if the employer was not negligent.

5. The tendency of unity in modern legislation

• This can be manifest in the rise of a “global village.”
• This can be seen particularly in trade laws.

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• The tendency now is to make things uniform especially in commerce. Different rules in shipping for
example would impede commerce.
• Example: ASEAN integration

D. ESSENTIAL REQUISITES OF OBLIGATIONS:

1. Active Subject:
• The active subject is called a creditor if the obligation is to give. The active subject is called an obligee if the
obligation is to do.
• The active subject is always a person whether juridical or natural.

2. Passive Subject:
• The passive subject is called a debtor if the obligation is to give. The passive subject is called an obligor if
the obligation is to do.
• The passive subject must be determinate or determinable
• How can both subjects be determinate or determinable? You can have 3 possibilities:
a. Both are completely and absolutely determined at the birth of an obligation.
o If A and B are parties to a contract of sale and B doesn’t comply. A cannot sue C.
b. Only one subject is determined at the moment of the birth of the obligation and the other subject is to
be determined subsequently in accordance with a predetermined criterion. o B makes a promissory
note payable to M or order. In this case, the creditor is not necessarily M. The creditor is either M or
to whomever the promissory note is endorsed.
o Tolentino: promise of a prize or reward for anyone performing a certain act.
c. Subjects are determined in accordance with its relation to a thing.
o At the time of the birth of the obligation, the payee is not yet known but the obligation is valid.
o The ‘real’ rights o A mortgaged property to X pursuant to a loan. The mortgage attaches to the
property. If A sells the property to B, the annotation in the TCT will follow and B becomes the
mortgagor. If A doesn’t pay, X goes against B.
o Obligor in this case is whoever owns the land. X doesn’t care whether its A or B.

3. Object of the Obligation

• The object of the obligation always consists in an activity or conduct to be observed by the debtor
towards the creditor. This conduct to be observed is also known as the prestation
In a contract of sale for example, the object of the obligation is the conduct of the vendor in
delivering the car. The car, on the other hand, is the object of the prestation.
• Sometimes, commentators confuse the car as the object of the obligation. The object is not the car but the
prestation.
• The distinction between the object of the obligation and the object of the prestation has been blurred by
Articles 1347-1349.

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• Requisites of the Object of the Obligation:
o Licit (Legal):
 Example: Can’t validly enter into a contract for sexual services o Possible
both in fact and in law:
 Determined by the rules of experience o Determinate
or determinable
 Can’t say that “I promise to sell you something.”  Example of
determinate: I promise to sell you my car.
 Example of determinable: I promise to sell you my riceland in Bicol in November (will become
determinate when time comes).
o Must have pecuniary value:
 Tolentino: may be for the benefit of a 3rd person
 Tolentino: but need not be of an economic character to have a pecuniary value. There are
prestations which are purely moral, but when they are violated the sanction becomes pecuniary in
nature. The criterion to determine whether an obligation has a pecuniary value is not limited to the
object or prestation but extends to the sanction which corresponds to the juridical duty.

4. Vinculum juris
• The vinculum juris is the legal tie. It consists of the enforceability of the obligation. If the debtor does not
conform, the creditor has the power to go to court to make the debtor perform – coercive.
• What makes an obligation is the power of the creditor to haul the debtor before the court, summoning
powers of the state if needed.
• Voluntariness goes into entering into an obligation. But once you enter, it becomes involuntary.

5. Causa
• Castan adds a 5th essential requisite – causa. Also known as causa debendi or causa obligationes. Causa
means the why of an obligation.
• The object of an obligation answers the question “What is owed?” (Quid).
• The causa answers the question “Why is it owed?” (Cur).
• For example, A will deliver a car to B since A expects to get P300,000. The P300,000 is the causa of the
obligation.

6. Form
• Another commentators say that the 6th essential requisite is form. Form means some manifestation of
intent. In some cases the manifestation is specific such as in the case of donations.
According to Professor Balane that the general rule is that there is no specific form for a valid obligation.
However, if form means that there is some external manifestation, fine, since we are not telepathic after
all. However, there should still be no specific form.

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 E. SOURCES OF OBLIGATIONS (ARTICLE 1157)

Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.

• French civilist says that an obligation is derived from either contractual or non-contractual source. Sanchez
Roman says contract or acts.
• Balane performs acts of negotiorium gestio--> saves your goods. immediate source: Quasicontract;
ultimate= law.
• It would be correct to say that obligations arise from law ALONE.
• Law is the only mediate or direct source YES! Same can be said about acquiring property. Law is the
ultimate source.
• There is really only one source of obligations – just law. Without the law saying that a particular contract is
enforceable, the contract will not give rise to an obligation.
• However, “source” can be understood in both the ultimate and immediate sense. In the ultimate
sense, law is the solitary source. In the immediate sense, there are 5, those enumerated in Article 1157.
• Law is therefore both an immediate and ultimate source. Examples of law being an immediate source are
payment of taxes and accession. And support.
• The Supreme Court in the case of Sagrada Orden vs. NACOCO seem to suggest that the enumeration is
exclusive. However, this is only by implication or indication. The Court did not make an explicit statement
that it is.
• Many commentators including Professor Balane believe that the list is not exclusive. At present, there is
one more possible source of obligations – public offer (but not under our law).
• Example: In commercials, there is an offer to replace 30 sachets of Tide for one Venetian-cut glass until the
end of the year. There is no contract or quasi-contract. But if before the end of the year, you present your
Tide sachets, you can demand for your glass.
• Public offer is a source of obligation under the BGB (the German Civil Code), Article 657 which provides
that a person who by public notice announces a reward in the performance of the act is liable even if such
person did not act in view of such reward.
o This is unilateral, so it’s not a contract o Tolentino calls it a unilateral
promise
o Applies even if the person did not intend to get the reward o Balane
thinks bounty should be a source too.
• Although public officers are supplemented by DTI regulations, Professor Balane thinks that public offer
should be made part of the law since regulations easily change.

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 1. Law (Article1158)

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or
in special laws are demandable, and shall be regulated by the precepts of the law which establishes them;
and as to what has not been foreseen, by the provisions of this Book.

• This talks about law as an immediate source of the obligation. Like support.

• 2. Contract (Article1159)

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith.

• Contract is only 1 of the sources of obligations.

• This provision combines two concepts of Roman law – equity or good faith (bona fides/ ius gentium) and
strict compliance (stricti iuris) by the parties (ius civile).
• A contract is a meeting of minds between 2 persons whereby one binds himself, with respect to the other,
to give something or to render some service (Article 1305)
• 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
(Article 1306).
• 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 (Article 1315).
• In case of doubt, the interpretation consistent with good faith is followed. SC did not espouse a literal
view, but a gf view (People’s Car vs. Commando Security).
• Party cannot excuse themselves on the ground that it has become unprofitable. Law will not protect you
from your own bad judgment.

• 3. Quasi-contract (Article 1160)

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII,
of this Book.

• Tolention: a quasi-contract is a juridical relation which arises from certain lawful, voluntary, and unilateral
acts, to the end that no one may be unjustly enriched or benefitted at the expense of another (Art 2144-
2175).

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• 4. Delict (Article 1161)
Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the
provisions of article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human
Relations, and of Title XVIII of this Book, regulating damages.
• General Rule: If you commit a crime, you are liable both criminally and civilly.
• Exception: No private offended party (e.g. contempt, etc.)
• The Civil Code deals with the civil aspect (i.e. indemnification for loss of earning capacity).

• 5. Quasi-delict (Article 1162)

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII
of this Book, and by special laws.

• Quasi-delict is a civil law term while tort is a common law term.

• It’s really Aquilian fault negligence. Based on the concept of culpa aquilana in Spanish law. Our Code
Commissioners invented the term Quasi- delict.
• Difference between Contractual Liability and Quasi-Delict
• In quasi-delict, the obligation arises only when there is a violation. Without violation, there is no
obligation. It is the breach itself which gives rise to the obligation.
• In contracts, there is already an obligation which exists prior to or even without a breach. The breach of
the contract is immaterial to the legal obligation.
• Example: Contract of sale of watch. If both parties perform their obligation, the contract is extinguished.
There is no breach, but there is an obligation. (Compare the above example with the one below)
• Example: Driving recklessly, A hits a child. When did the obligation came to being? When there was injury
due to negligence. (Negligence per se does not give rise to a quasi-delict unless there is injury.)
• Breach and quasi-delict are inseparable. But contract and breach may be separable.
• Question: Are contracts and quasi-delicts mutually exclusive? No.
• Gutierrez vs. Gutierrez: there was a collision between a bus and a car and a passenger of the bus was
injured. It was proven that the driver of the car was a minor and an incompetent driver. The passenger
sued against them all. The Supreme Court held that the bus driver, bus owner and the driver of the car
(through his father) are jointly and severally liable to the passenger. The liability of the owner of the bus
and the bus driver rests on that of a contract. On the other hand, the father is responsible for the acts of
his son and is therefore responsible for the negligence of the minor. Here, it is clear that breach of contract
and quasi-delict are separate.
• However, they can overlap as can be seen in the following example: Bus driver drives recklessly and the
bus hits a tree. A passenger is injured. The passenger and sue the driver for quasi-delict (due to negligence)
or for crime or the bus company for breach of contract of carriage or for quasi- delict (negligence in the
selection and supervision).
• The cause of action one chooses determines the:
• Parties involved
• Degree of proof
• Defenses
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• One can tailor his suit depending on the cause of action he chooses.
• Can there be multiple sources in one? Yes. o Leon rides a taxi. It gets into an accident because the driver is
speeding.
o Can he sue for a quasi-delict? Yes.
 There were decisions before that said that you can’t have quasi-delict if there is a preexisting
contract between the parties. Note: Art. 2176 says “..such fault or negligence, if there is no pre-
existing contractual relation…”
 However, in Cangco, the SC ruled that quasi- delict is broader in scope than contract. Thus, you can
choose, but there are consequences of that choice.
• Difference between contract, quasi-delict and delict in a situation where a passenger is injured in an
accident. (Parties: passenger, driver, bus co).
Contract Quasi- Delict Delict

Who can you sue? Only your privies, so Driver, Bus Co, or both.
only the bus co.
What to prove Mere breach of Must prove negligence of
contract driver. If the driver’s
negligence is proven, then the
negligence of the bus co in
the selection and supervision
of the driver is presumed.
Only driver (have to convict in
order for bus co to be subsidiarily
liable.)
Must prove driver’s guilt beyond
reasonable doubt. To be able to
claim from the bus Co, you need
to prove insolvency of the driver.
No need to prove negligence of
bus co.

Presumptions Presumed negligent

unless you can prove
fortuitous event

• LRTA Case: If it is the tort that breaches the contract, you can chose either
• Limitation you can’t recover twice from the same act.
• Mercury Drug Cases: Dude had diabetes. He went to Mercury. Instead of giving him his meds, they gave
him dormicum! o Sued on quasi-delict. Failed to prove diligence in supervision.

• Mercury Drug again: Some dude prescribed eye drops to his friend on a napkin. They gave him ear drops
instead of eye drops.
o They argued that they train their people, and the prescription did not specify cortisporin ophthalmic and
not cortisporin otic. Also, only the latter is marketed in the Ph.
o SC held Mercury liable. They have to observe extra-ordinary diligence coz they are dealing
with drugs!

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 F. NATURE AND EFFECT OF OBLIGATIONS
1. Kinds of Prestations
a. To give (Articles 1163-1166)

Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper
diligence of a good father of a family, unless the law or the stipulation of the parties requires another
standard of care.

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it
arises. However, he shall acquire no real right over it until the same has been delivered to him.

Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and
accessories, even though they may not have been mentioned.

i. To give a determinate thing

• A specific thing Inova, black with motor number 3444, plate no. AAA 566
• To give is a real obligation it attaches to the res
• Primary Obligation: Giving what is supposed to be given.
• Tolentino’s definition of a determinate or specific thing: one that is individualized and can be identifies or
distinguished from others of its kind.
• Tolentino’s definition of a determinable thing: one that is indicated only by its kind, without being
designated and distinguished from others of the same kind. o The moment of delivery it becomes
determinate
• 3 Accessory/Auxilliary Obligations:
o These 3 DO NOT apply to generic things
1. After constitution of the obligation and before delivery, to take care of it with the proper diligence of
a good father of the family (Article 1163) o General Rule: Diligence of a good father of the family o
Exception: Law or stipulation requires different standard of care o If through negligence, something
causes the thing damage, the debtor is liable for damages. o This is not applicable to a generic thing.
o On Feb 10, 2015, Santos and Nitura agree to sell Santo’s Vios 2013 with motor number
12345 on Feb 28, 2015 for P300,000. From Feb 10-28, Santos is still the owner; however, Nitura has
an expected right by virtue of the Contract. Santos has the obligation to take care of the car with the
diligence of a good father of a family until Feb 28, 2015. If he doesn’t deliver it on the 28th, the
obligation still continues.
o Gerona binds himself to deliver to Nitura 1000kg Milagrosa rice. It’s generic—specific only as to kind
and quantity. If he has a warehouse and its flooded and the rice is damaged, it doesn’t matter. He’s still
liable for the rice.

2. To account and deliver to the creditor the fruits if the thing bears fruits upon the time the obligation
to deliver it arises (Article 1164). o However, ownership is transferred only by delivery. Hence,
creditor’s right over the fruits is merely personal.

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 o Example: A sold B a mango plantation to be delivered on January 1. Come January 1, A did not deliver.
A instead sold the fruits to C, a buyer in good faith. B sues A for specific performance. Court awards the
plantation to B. Does B have a right to the fruits? Yes, as against A. No, as against C, because B’s right
over the fruits is only personal. B’s remedy is to go against A for the value of the fruits.
o Example (2015): Meer owns a mango plantation in Misamis Oriental. Meer binds himself to sell the
mango plantation in Misamis Oriental to Nitura on Feb 28, 2015. Nitura demands on Feb 28. Meer
doesn’t comply and he is in delay. However, Nitura will have a right to all fruits derived from Feb 28 to
when he actually delivers. If Meer delivers in May, Nitura can get the fruits from Feb 28. If the fruits
are rotten, then he can ask Meer for the value.
o Meer sells the fruits to Giltendez. Giltendez is in good faith. Nitura cannot go after Giltendez.
However, if she knew of the contract then she is an accomplice.
o Note: with respect to term there is a dispute whether the obligation to deliver the fruits is from arrival
of term or from perfection. (I guess he thinks it’s the former coz he gave the above example.)

3. To deliver the accessions and accessories (Article1166) o Don’t take accession in the technical sense
(or else, it might overlap with ii). Understand it to mean things that go with the thing to be delivered
(i.e. radio of the car).
• Remedies:
1. Specific performance – the debtor must perform it personally (¶1 of 1165)
2. Equivalent performance–damages

• Remedies Available to the Creditor

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.

1. Specific performance – the debtor must perform it personally (¶1 of 1165)

2. Substitute performance (¶2 of 1165)
3. Equivalent performance–damages (¶3 of 1165)
• Damages may be obtained exclusively or in addition to the 1st 2 actions.
ii. To give a generic thing
• Generic: an Innova you can’t give a thing of better or less quality.
• Generic: specific only as to kind and quantity
• Remedies Available to the Creditor
1. Specific performance–the debtor must perform it personally
2. Substitute performance – done by someone else (perform at the expense of the debtor)
3. Equivalent performance–damages

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• Damages may be obtained exclusively or in addition to the 1st 2 actions.

b. To do (Article 1167):
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.

• This is a personal obligation. To give is real because it relates to the res.

• Specific performance is not available, because it would violate the constitutional proscription against
involuntary servitude.
• There can always be performance for contracts, but it depends what kind of performance.
• Example: Yaya took out a loan from employer. She wanted to leave, but the employer asked the court to
compel her to keep working until her debt is paid. SC: NO! You would be making her a slave.

i. Only the obligor can do (personalisimo)

 Remedies Available to the Creditor
1. Equivalent performances–damages

ii. Anyone else can do it (not personalisimo)

 Remedies Available to the Creditor
1. Substitute performance – done by someone else (perform at the expense of the debtor)
 Nitura was a carpenter. He agreed to construct a fence for Balane. He failed to do so. If Balane
contracts with another carpenter but for a higher price than that offered by Nitura, then Nitura is
liable for damages equivalent to the difference between the prices. He’s also liable for damages if a
robber enters the house, because that is precisely why Balane wanted a fence.

2. Equivalent performance–damages
 Damages may be obtained exclusively or in addition to the 1st 2 actions.

c. Not to do (Article1168)

Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it
shall also be undone at his expense.
• This includes the obligation not to give.
• All negative obligations are subsumed here.
• Remedies Available to the Creditor
i. Substitute performance - done by someone else (perform at the expense of the debtor) ii.
Equivalent performance-damages
 Damages may be obtained exclusively or in addition to the 1st 2 actions.
 Some things can’t be undone (like revelation of trade secrets). Damages will be given instead.

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 Specific Substitute Equivalent
1. To give

a. Determinate Thing  X 
b. Determinable Thing   
2. To do
a. Personalisimo X X 
b. Not Personalisimo X  

3. Not to do X  

2. Irregularity in Performance
• There are 2 types: culpable (a) and non-culpable (b)
• Under culpable there are 3 kinds: fraud (i), negligence (ii), or mora (iii).
• Under non- culpable: fortuitous event (i).

a. Attributable to the Debtor (culpable)

• Article 1170 provides that 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.
• According to Professor Balane, the phrase “who in any manner contravene the tenor thereof” is a catch-all
provision. However, such is unnecessary. Nothing will escape fraud, negligence or delay.
• Arrieta v. NARIC: The court relied on contravention. Balane thinks this is very generic, but NARIC could have
been liable under any of the other 3.

Arrieta v. NARIC: Arrieta will deliver Burmese rice while NARIC committed to pay for the said rice by means of
a L/C in favor of Arrieta and/or supplier. Arrieta informed NARIC that 5% of the F.O.B price of the 20k tons will
be forfeited if the there is no L/C before Aug. 4. PNB approved NARIC’s application for the opening of L/C
subject to the condition that it must pay the marginal cash deposit and that drafts are to be paid upon
presentment. However, NARIC failed to comply with the requirement. Thus, the 5% deposit was forfeited.
Held: NARIC’s failure to immediately open the L/C amounted to a breach of the contract. What delayed the
opening of the L/C and which, caused the cancellation of the allocation in Burma, was the inability of NARIC to
meet the condition of the Bank. NARIC’s liability stems not only from this failure to satisfy the requirements of
the bank but also from its willful and deliberate assumption of contractual obligations even as it was well
aware of its financial incapacity to undertake the prestation. Despite knowing that was it financially
incompetent to open a L/C immediately, it agreed to pay immediately "by means of an irrevocable, confirm
and assignable L/C," It must be held to have bound itself to answer for all and every consequences that would
result from the representation. In general, every debtor who fails in performance of his obligations is bound to
indemnify for the losses and damages caused thereby. The phrase "any manner contravene the tenor" of the
obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation or every kind
or defective performance.

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 i. Fraud (Articles 1170, 1171)

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.

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for
future fraud is void.

• The problem with fraud is the term. It is used in different meanings in the Code.
• Fraud may be defined as “the voluntary execution of a wrongful act, or willful omission, knowing and
intending the effects which naturally and necessarily arise from such act or omission. Fraud is the deliberate
and intentional evasion of the normal fulfillment of the obligation. It is distinguished from negligence by the
presence of deliberate intent, which is lacking in the latter (Legaspi Oil vs. CA).”
• Fraud under Article 1170 is more properly called malice.
• Fraud under Article 1170 must not be confused with fraud under Article 13381. Fraud under Article 1338 is
more properly called deceit.
• In Article 1338, fraud preexists the obligation, thus the obligation is voidable. Deceit vitiates consent in
contracts. Deceit is antecedent fraud. The deceit occurs by using insidious words machinations. Without this
deceit, the other party would not have entered into the contract.
• In Article 1171, there was already an obligation before the fraud exists. Malice is subsequent fraud. Fraud
here is in the performance.
• Example: Francis undertakes to bake a low fat, sugar free cake. He uses a ton of sugar. There is malice.
• Example of fraud as deceit under Article 1338: A and B entered into a contract of sale of a diamond necklace.
However, the necklace was really made of glass. Fraud here is deceit. There was vitiation
of consent hence the contract is voidable.
• Example of fraud as malice under Article 1171. A and B entered into a contract. B will deliver furniture made
of narra but B delivered one made of plywood. Fraud here is malice. It will not affect the validity of the
contract.
• Can you waive fraud that has already occurred? Yes.

• Effects of Fraud (Articles 1170, 1171)

1. Creditor may insist on proper substitute or specific performance (Article 1233 2); or

2. Rescission/Resolution (Article11913)

3. Damages in either case (Article1170)

1
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.
13
Cases:

Legaspi Oil v. CA: Private respondent Oseraos and Legaspi had several transaction for the sale of copra
wherein Oseraos and his agents would sell copra to the company. Between May to December 1975, there
were several contract of sale and delivery of copra, the price of the copra varying from
P79 to P102). However, during the Feb 1976 contract (contract price of copra was P82 per 100kilos),
Oseraos and his agent Llover failed to deliver sufficient number of copra. They only sold around 46,000 leaving
behind a balance of around 53,600. Despite repeated demands, Oseraos failed to comply with the delivery
prompting Legaspi Oil to buy the same in the open market (value of copra is P168, double the amount in the
contract). Held: Oseraos should be liable for damages arising from fraud or bad faith in deliberately breaching
the contract of sale. Despite repeated demands, Oseraos failed to comply with his obligation. He was warned
in the last demand letter that Legaspi Oil would get the deficient amount in the open market, but there was
still no compliance. Thus, there was fraud. In general, fraud may be defined as the voluntary execution of a
wrongful act, or a wilfull omission, knowing and intending the effects which naturally and necessarily arise
from such act or omission; the fraud referred to in Article 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. Pursuant art. 1170, private respondent is liable for damages equal to the net loss
shouldered by Legaspi Oil.

Go v. CA: The video coverage of the wedding of Sps. Ong held in Dumaguete City was contracted to Sps. Go.
The newlyweds tried to claim the video tape of the wedding but failed 3 times. The tape had been erased and
could no longer be delivered. Held: Go is liable. Nancy Go failed to provide Sps.

2
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.
3
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.
Ong with their tape. She is guilty of contravening their obligation and thus liable for damages. Note: Moral
damages cannot be recovered in an action for breach of contract because this case is not among those
enumerated in Art. 2219. Except: liability for a quasi-delict may still exist despite the presence of contractual
relations, that is, the act which violates the contract may also constitute a quasi-delict. Consequently, moral
damages are recoverable for the breach of contract which was palpably wanton, reckless, malicious or in bad
faith, oppresive or abusive.

RCBC v. CA: Lustre purchased a car from Toyota, the balance of purchase price of which were to be paid in
installments. In order to secure the payment, he executed a chattel mortgage over the purchased Corolla in
favour of Toyota. The contract of mortgage provided for an acceleration clause in case of failure to pay. When
Lustre issued an unsigned check, RCBC (assignee of Toyota’s rights) invoked the acceleration clause and
demanded payment of the entire balance. RCBC claims that Lustre's check representing the fifth installment
was "not encashed," such that the installment for August 1991 was not paid. By virtue of paragraph 11, RCBC
14
submits that it "was justified in treating the entire balance of the obligation as due and demandable." Held:
assuming that Lustre was guilty of delay in the payment of the value of unsigned check, Lustre cannot be held
liable for damages. There is no imputation, much less evidence, that Lustre acted with malice or negligence in
failing to sign the check. Such omission was mere "in advertence" on the part of Lustre.

Telefast v. Castro: Consolacion died in the Ph. Her daughter, Sofia sent a telegram thru Telefast to her
husband and kids who was living in the US. The telegram never reached the addressees and Consolacion was
buried with only the daughter in attendance. Held: Telefast and Sofia entered into a contract whereby, for a
fee, petitioner undertook to send said her message overseas by telegram. This, Telefast did not do, despite
performance by said private respondent of her obligation by paying the required charges. Telefast was
therefore guilty of contravening its obligation to said private respondent and is thus liable for damages. This
liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in this regard
would result in an inequitous situation where
Telefast will only be held liable for the actual cost of a telegram fixed thirty (30) years ago.We find Art. 2217 of
the Civil Code applicable to the case at bar. It states: "Moral damages include physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the
proximate results of the defendant's wrongful act or omission." Here, Telefast's act or omission, which
amounted to gross negligence, was precisely the cause of the suffering private respondents had to undergo.

NPC v. CA: Rayo et. al filed a case against NPC to recover actual and other damages for the loss of lives and the
destruction to property caused by the inundation of the town of Norzagaray, which was caused by the
negligent release by the NPC of water through the spillways of the Angat Dam (Hydroelectric Plant) during the
typhoon Kading.” Held: NPC was guilty of "patent gross and evident lack of foresight, imprudence and
negligence in the management and operation of Angat Dam," and that "the extent of the opening of the
spillways, and the magnitude of the water released, are all but products of NPC's headlessness, slovenliness,
and carelessness." If upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided
for in Article 1170 of the Civil Code, which results in loss or damage, the obligor cannot escape liability. NPC
cannot be heard to invoke the act of God or force majeure to escape liability for the loss or damage since they,
the petitioners, were guilty of negligence.

ii. Negligence
• Negligence is the absence of due diligence (Article 1173)

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.

Jimenez v. Manila: Jimenez went to the market when it was flooded with ankle deep rainwater. He stepped
on an uncovered opening which could not be seen because of the dirty rainwater, causing a dirty and rusty
four- inch nail, stuck inside the uncovered opening, to pierce his left leg penetrating to a depth of about one

15
and a half inches. He confined for 15 days and incapacitated to walk and work for 15 days. Held: City of Manila
should be solidarily liable with Asiatic Integrated Corp for the injuries petitioner suffered. As a defense against
liability on the basis of a quasi-delict, one must have exercised the diligence of a good father of a family. (Art.
1173 of CC). It is the duty of the City to exercise reasonable care to keep the public market reasonably safe for
people going to the market which it failed to do. Respondent City of Manila and Asiatic Integrated Corporation
being joint tortfeasors are solidarily liable under Article 2194 of the Civil Code.

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.

• Like fraud, negligence results in improper performance. But it is characterized by lack of care, unlike fraud
which is characterized by malice.
• Lack of care means lack of due diligence or the care of a good father of the family (bonus pater familias)
under Article 1163.
• In English law, due diligence is called the diligence of a prudent businessman, since they are more
commerce-oriented.
• 2 Types of Negligence: (1) Simple and (2) Gross.
• The determination of due diligence is always relative. It will depend on:
1. The nature of the obligation
2. Nature of the circumstances of
a.Person
b. Time
c. Place

• Example: The diligence required in shipping hinges is different from the diligence required in shipping the
Pieta de Michaelangelo. The shipper must observe the diligence of a good father of the family in both cases
but the standard of care is different. It is much higher for the Pieta.
• The diligence of a good father of the family is the imaginary standard.
• Can you have negligence in an positive obligations? Yes.
• What about in negative? Yes.
o Example: Taruc and Balane enter into a contract and the stipulation is Balane should not enter into Cavite.
He didn’t know he was crossing the boundary.
• Can you waive future negligence? Commentators say that you can waive simple negligence, but not fraud,
since gross negligence is equivalent to fraud. Gross negligence is governed by Art. 1171.

• Effects of Negligence (Articles 1170, 1172)

1. Creditor may insist on proper substitute or specific performance (Article 1233);
2. Rescission/Resolution (Article1191)
3. Damages in either case (Article1170)

16
Cases:

Metrobank v. CA: On the basis of a credit memo with Metrobank, Katigbak (president of Rural Bank of Padre
Garcia) issued checks to several people, including Spouses Roque. These checks were dishonored several
times. Katigbak asked someone to verify her bank records with MBTC to determine what caused the bouncing
of the checks as she was pretty sure that the same were covered by the credit memo. The assistant cashier of
MBTC insulted said person instead. Held: MBTC was negligent in its duty and obligation to treat RBPG’s
account with the highest degree of care, considering the fiduciary nature of their relationship. It must bear the
blame for failing to discover the mistake of its employee despite the established procedure.

Mitsubishi v. Mitsubishi: The CBA provides that the company shoulder the hospitalization expenses of the
dependents of covered employees subject to certain limitations and restrictions. Covered employees pay part
of the hospitalization insurance premium through monthly salary deduction while the company, upon
hospitalization of the covered employees' dependents, shall pay the hospitalization expenses incurred for the
same. The conflict arose when a portion of the hospitalization expenses of the covered employees'
dependents were paid/shouldered by the dependent's own health insurance. While the company refused to
pay the portion of the hospital expenses already shouldered by the dependents' own health insurance, the
union insists that the covered employees are entitled to the whole and undiminished amount of said hospital
expenses. Held: If an injured person receives compensation for his injuries from a source wholly independent
of the tortfeasor, the payment should not be deducted from the damages which he would otherwise collect
from the tortfeasor. It finds no application to cases involving no-fault insurances under which the insured is
indemnified for losses by insurance companies, regardless of who was at fault in the incident generating the
losses. Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay the hospitalization
expenses of the dependents of its employees which had already been paid by separate health insurance
providers of said dependents.

Notes from Tolentino:

• Art. 1172 refers to culpa contractual. Thus, mitigation of liability under this article doesn’t apply to culpa
aquilana.
• The special faculties of a particular individual are not taken into account in determining negligence, unless
the contract presupposes a special confidence or reliance upon such special faculties.

iii. Delay (Mora)

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

17
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.

• Delay has nothing to do with quality but only with punctuality.

• Delay is the non-fulfillment of the obligation with respect to time. In fraud and negligence, the question is
the quality even if performed on time. In delay, even if the quality is excellent but the performance is not in
due time, the debtor is liable.
• There is no delay in negative obligations, only positive.

• Requisites of delay (SSS vs. Moonwalk):

1. Obligation is demandable and already liquidated
 Raquel-Santos v. CA: A debt is liquidated when the amount is known or is determinable by inspection
of the terms and conditions of relevant documents.
2. The debtor delays performance
3. The creditor demands the performance judicially and extrajudicially.
 In reciprocal obligations, you have to show that you are willing to perform in order for there to be a
demand.
 Example: Santos sole Nitura his car. They agreed to meet in the Ateneo parking lot at 10am on
Saturday. Santos said “here’s the car. Where’s my money?” Nitura doesn’t have the cash. Nitura is in
delay because Santos was ready to give the car. Here, it is reciprocal and simultaneous.
 If the contract is not simultaneous, this doesn’t apply. If Santos has to deliver on Feb 14, but Nitura
will pay on the 28th, then Nitura doesn’t have to be ready to pay on the 14th to demand the car.

• In reciprocal obligations (obligations with a counterpart prestation) which require simultaneous

performance, demand is still needed.
• What is the form of such demand? Any communication of a party that he is ready and willing to comply with
his obligation. If after receipt of demand and the other party does not comply with his obligation, he is in
delay.
• 3 Kinds of Delay
1. Mora Solvendi
• Delay in performance incurred by the debtor.
• Requisites:
a. The obligation is demandable and liquidated
b. Debtor delays performance either because of dolo or culpa
c. The creditor demands the performance either judicially or extrajudicially

• General Rule: Demand is necessary (mora solvendi ex persona). Thus, no demand, no delay.
• Exceptions: (mora solvendi ex re) – Article 1169
a. When the obligation or the law expressly so declares
 Mere setting of due date is not enough. This does not constitute automatic delay.

18
  There must be an express stipulation to the following effect: “Non-performance on that day is delay
without need of demand.” (Dela Rosa vs. BPI)
 BPI v. CA: BPI granted 8 loans to Noah’s Ark, evidenced by 8 PNs, signed by Jimmy, which were
secured by a real estate mortgage. Noak’s Ark defaulted and so FEBTS extrajudicially foreclosed on
the mortgage. Jimmy claimed that demand was not made upon him. Held: demand unnecessary
because he waived demand and the PNs contain an
acceleration clause. The PN said: “Upon the happening of any of the following events, FAR EAST
BANK AND TRUST COMPANY or the holder, may at its option,
forthwith accelerate maturity and the unpaid balance of the principal, as well as interest and other
charges which have accrued, shall become due and payable without demand or
notice[:](1) default in payment or performance of any obligation of any of the undersigned to FAR
EAST BANK AND TRUST COMPANY or its affiliated companies…I/We hereby waive any diligence,
presentment, demand, protest or notice of non-payment o[r] dishonor with respect to this note or
any extension thereof.

b. When it appears from the nature and circumstances of the obligation that time was a controlling
motive for the establishment of the contract.
 Example: The wedding gown has to be ready before the wedding.
 Lorenzo Shipping v. BJ Marthel: BJ supplies Lorenzo with spare parts. Sometime in 1989, Lorenzo
asked for a quotation for machine parts. In response, BJ sent a formal quotation which included the
date of delivery and the terms of payment. Thereafter, Lorenzo issued 2 purchase orders for
cylinder liners. The purchase order contained the terms of payment but did not contain the date of
delivery. BJ delivered the cylinder liners on April 20, 1990. After having demanded that Lorenzo pay
the cylinder liners, the latter refused to pay on the ground that the cylinder liners were delivered
late. Lorenzo argues that time was of the essence in the contract. Held: BJ was not in delay. While
the quotation provided by respondent evidently stated that the cylinder liners were supposed to be
delivered within 2 months from receipt of the firm order of petitioner, the purchase orders
prepared by petitioner clearly omitted these significant items. If time was really of the essence,
Lorenzo should have stated the same in the said purchase orders, and not merely relied on the
quotation. Since time was NOT of the essence in the contract, BJ was merely obliged to deliver
within a reasonable time.

c. When demand would be useless, when obligor has rendered it beyond his power to perform.
 Example: A sold the fruits of the mango plantation he already sold to B to C. B need not make a
demand on A to deliver the fruits since demand would be useless.

• Effects of Mora Solvedi

a. When the obligation is to deliver a determinate thing, the risk is placed on the part of the debtor
(Article 1165ª)
b. Damages
c. Rescission/ Resolution (Article 1191)

19
Cases:

Agcaoili v. GSIS: GSIS approved the application of Agcaoili for the purchase of a house and lot subject to the
condition that the latter should forthwith occupy the house. This condition Agacoili tried to fulfill but could not
bec. the house was absolutely uninhabitable. Agcaoili, after paying the first installment and other fees,
thereafter refused to make further payment of other stipulated installments until GSIS had made the house
habitable; and GSIS refused to do so, opted to cancel the award and demand the vacation by Agcaoili. Held:
Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke
Agcaoili's suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic
that "(i)n 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." Also, Agcaoili did attempt to comply with the
condition by immediately occupying the house.

SSS v. Moonwalk: Moonwalk contracted an interim loan with SSS for 30M and executed several deeds of
mortgage to secure such loan. About 12M was released and Moonwalk executed a promissory note and
Moonwalk paid about 23.6M for the entire loan (principal and interest) based on the statement of account
prepared by SSS. SSS then released the properties from the mortgage. However, SSS sent letters to Moonwalk
stating that it committed an honest mistake for releasing Moonwalk from its obligation because the penalty
charges, as stated in the contract, were not included in the computation. Held: SSS is not excused from making
demand because the case does not fall under the exceptions. Mere delinquency in payment by Moonwalk
does not necessarily mean delay in the legal concept. The provision on the promissory note (providing for the
time when payment by amortization is to be made) does not excuse SSS from making a demand. Penalty
cannot be collected because Moonwalk was never in delay. SSS failed to demand when demand is not
excused.

ASJ v. Spouses Evangelista: For the incubation and hatching of eggs, Sps. Evangelista availed of the hatchery
services of ASJ, a corp registered in the name of San Juan. Initially, the service fees were paid upon release of
the eggs and by-products to Sps. Evangelista. But as their business went along, Sps. Evangelista’s delays on
their payments were tolerated by San Juan, who just carried over the balance into the next delivery. One day
San Juan refused to release the chicks and by products due to Sps. Evangelista’s failure to settle accrued
service fees. Held: San Juan’s retention of the chicks and byproducts on account of the Sps.’ failure to pay the
corresponding service fees was justified. It was Sps. Evangelista who violated the very essence of reciprocity in
contracts, consequently giving rise to San Juan’s right of retention. This case is clearly one among the species
of non-performance of a reciprocal obligation. Reciprocal obligations are those which arise from the same
cause, wherein each party is a debtor and a creditor of the other, such that the performance of one is
conditioned upon the simultaneous fulfillment of the other. From the moment one of the parties fulfills his
obligation, delay by the other party begins. Since Sps. Evangelista are guilty of delay, they are liable to pay San
Juan actual damages.

Raquel-Santos v. CA: A debt is liquidated when the amount is known or is determinable by inspection of the
terms and conditions of relevant documents. Under the attendant circumstances, it cannot be said that
Finvest’s debt is liquidated. At the time PSE left the negotiating table, the exact amount of Finvest’s fines,
penalties and charges was still in dispute and as yet undetermined.

J Plus v. Utiliy: J Plus & Mabunay entered into a Construction Agreement for a 72-storey condotel in Boracay
to be completed within a year from day after the signing of the agreement. An evaluation and status report
20
showed that after 7 months, the project remains to be 1/3 complete, and that there was an overpayment
made by J Plus. CA held that it is only from the completion date that default should be reckoned because the
Construction Agreement provided only for delay in the completion of the project and not delay on a monthly
basis using the work schedule approved by petitioner as the reference point. Held: The work schedule was
intended, not only to serve as its basis for the payment of monthly progress billings, but also for evaluation of
the progress of work by the contractor. The Construction Agreement provides that the contractor shall be
deemed in default if, it had delayed without justifiable cause the completion of the project "by more than 30
calendar days based on official work schedule duly approved by the OWNER." Records showed that as early as
April 2008, or within 4 months after Mabunay commenced work activities, the project was already behind
schedule. As of Nov 2008, the project was only 31.39% complete. Instead of doubling his efforts as the
scheduled completion date approached, Mabunay did nothing to remedy the delays and even reduced the
deployment of workers at the project site. Neither did he ask for an extension to complete the project. Thus, J
Plus advised Mabunay of its decision to terminate the contract on account of the tremendous delay the latter
incurred.

Cruz v. Gruspe: Cruz’s minibus collided with Gruspe’s car. Cruz went to Gruspe’s office and executed a Joint
Affidavit of Undertaking promising jointly and severally to replace the Gruspe’s damaged car in 20 days, or
until November 15, 1999, of the same model and of at least the same quality; or, alternatively, they would pay
the cost of Gruspe’s car amounting to P350,000.00, with interest at 12% per month for any delayed payment
after November 15, 1999, until fully paid. When Cruz and Leonardo failed to comply with their undertaking,
Gruspe filed a complaint for collection of sum of money against them on November 19, 1999. Held: 12% per
annum interest imposed on the amount due shall accrue only from Nov 19, 1999, when judicial demand was
made. In the absence of a finding that Gruspe made a demand prior to the filing of the complaint, the interest
cannot be computed from Nov 15, 1999 because until a demand has been made, Cruz and Leonardo could not
be said to be in default. Demand could be considered to have been made upon the filing of the complaint on
Nov 19, 1999.

Notes from Tolentino:

• The effects of mora only apply when delay is imputable to debtor

• Art. 1169 ¶ 2 the law does not require expressly that the debtor should know that the fixing of the date
for performance was a controlling motive on the part of the creditor; but this knowledge is essential in order
that it can be said that the debtor has tacitly consented to incur in delay without necessity of demand. This
knowledge, however, may be shown by the express provisions of the written contract, or by the very nature
of the obligation, or from the circumstances under which it was created.
• Art. 1169 ¶3 like when debtor is hiding or absent.

2. Mora accipiendi (we’ll deal with this in Art. 1256):

• The creditor incurs in delay when debtor tenders payment or performance, but the creditor refuses to
accept it without just cause.
• Mora accipiendi is related to payment (consignation).

21
• Requisites:
a. An offer of performance by the debtor who has the required capacity
b. The offer must be to comply with the prestation as it should be performed
c. The creditor refuses the performance without just cause.

• Effects of Mora Accipiendi

a. Responsibility of debtor for the thing is limited to fraud and gross negligence
b. Debtor is exempted from risk of loss of thing w/c automatically pass to creditor
c. Expenses incurred by debtor for preservation of thing after the delay shall be chargeable to creditor.
d. If the obligation has interest, debtor shall not have obligation to pay the same from the time of the
delay
e. Creditor becomes liable for damages
f. Debtor may relieve himself by consignation of the thing

3. Compensatio morae
• Delay on both sides in reciprocal obligations, cancel each other out.

b. Not Attributable to the Debtor (non-culpable)

i. Fortuitous event

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.

• Also governed by Article 12212 but it is called ‘loss’ there, a cause for extinguishment of obligation.
• Also called caso fortuioto, force marjeure, act of God, caso mayor.
• Requisites (Nakpil vs. CA)
1. The cause of the unforeseen and unexpected occurrence, or the failure to comply with his obligations,
must be independent of the human will
2. It must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen, it
must be impossible to avoid
3. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal
manner
4. The obligor must be free from any participation in the aggravation of the injury resulting to the creditor

2
Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault
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.
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• General Rule: When a debtor is unable to fulfill his obligation because of a fortuitous event or force
majeure, he cannot be held liable for damages or non-performance.
• Exceptions:
1. When the law so provides
 Article 1165:3 you are punished for delay or wrongful conduct.
 Also possessors in bad faith for fruits that were received and could have been received.
2. When there is express stipulation:
 Fortuitous event yields to contrary stipulation.
3. When the nature of the obligation requires the assumption of risk  Insurance contracts

Cases:
Nakpil v. CA: PBA’s office building was damaged due to a 7.3 earthquake (United was responsible for its
construction while the Nakpils were responsible for the plans, specifications and designs). After the earthquake,
PBA sued UNITED and the Nakpils. Commissioner Hizon, to whom the technical issues were referred to during
the pre-trial, ruled that the damage to the PBA building was caused by (1) the earthquake; (2) defects in the
plans and specifications prepared by the Nakpils; (3) UNITED’s deviations from said plans and specifications and
its failure to observe the requisite workmanship in the construction of the building; and (4) failure of PBA to
exercise the requisite degree of supervision in the construction of the building. Held: Although the earthquake
was an act of God, Nakpil and United are not excused from liability because of their negligence. To exempt the
obligor from liability for a breach of an obligation due to an “act of God,” the following must concur: (a) the
cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the
injury to the creditor. The defects in the construction and in the plans and specifications were the proximate
causes that rendered the PBA building unable to withstand the earthquake.

• In recit, Balane said that there was no fortuitous event. But earlier he said “is it not correct to say that
there was a fortuitous event, but Nakpil is still liable?” He went through the requisites (1&2) present, but
(3&4) were not.

Quisumbing v. CA: PAL’s plane was hi-jacked while in flight by 4 robbers. As a result, petitioners were divested
of properties. They are now claiming against PAL. Held: hi-jacking is force majeure and therefore, PAL is
discharged from liability. Also, the evidence shows that PAL was not negligent in preventing hi-jackers from
boarding its plane and they handled the situation in the best possible way the could at the time.

Bachelor Express v. CA: A passenger of Bachelor stabbed another passenger. Nagkagulo. Ornominio Beter and
Narcisa Rautraut were shoved out the only door of the bus. They died. Bachelor argues that such event could
not be foreseen or controlled. Held: Bachelor and driver Rivera are liable. Although it was within the context
of a fortuitous event, in order that a common carrier may be absolved from liability it must still prove that it
was not negligent in causing the injuries resulting from such accident. Bachelor was negligent because the bus
driver did not immediately stop; the bus was speeding from a full stop; the victims fell from the bus door when
it was opened or gave way while the bus was still running; and the bus was not properly equipped with doors

3
Article 1165, ¶2. 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.
23
in accordance with law. Other examples of caso fortuito: destruction of houses, unexpected fire, shipwreck,
violence of robbers, as floods, torrents, shipwrecks, conflagrations, lightning, compulsion, insurrections,
destruction of buildings by unforeseen accidents and other occurrences of a similar nature.

NPC v. CA: Rayo, et al, sought to recover actual and other damages for the loss of lives and the destruction to
property caused by the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978. The flooding
was purportedly caused by the negligent release by the NPC of water through the spillways of the Angat Dam
(Hydroelectric Plant). NPC, et al. alleged that written notices were sent and the water released during the
typhoon was needed to prevent the collapse of the dam and avoid greater damage to people and property.
Held: NPC liable. The proximate cause of the loss and damage was the negligence of the NPC, and that the 24
October 1978 "early warning notice" supposedly sent to the affected municipalities was insufficient. The effect
then of the force majeure in question may be deemed to have, even if only partly, resulted from the
participation of man. Thus, the whole occurrence was thereby humanized, and removed from the laws
applicable to acts of God.

Sia v. CA: Sia rented a safety box in Security Bank where he stored his stamp collection. The box was located at
the lowest level. During the floods in 1985-86, water seeped into box, which damaged the stamps. Held: Bank
is liable. The stipulation stating that it will only “ prevent the opening of the safe by any other person” and
that the bank “assumes absolutely no liability in connection therewith” is void for being contrary to law and
public policy. A contract for the use of a safety deposit box is a contract of lease. It is a special kind of deposit.
Said provisions are inconsistent with Security Bank's responsibility as a depositary under Section 72 (a) of
the General Banking Act. Both exempt the latter from any liability except as contemplated in condition 8
thereof which limits its duty to exercise reasonable diligence only with respect to who shall be admitted to any
rented safe. Further, although the floods can be considered a fortuitous event, not all requisites for exemption
of liability are present since SB was negligent. It was aware of the floods; it knew that the floodwaters
inundated the room where the Deposit Box was located. It should have notified Sia of the damage as early as
that time to prevent aggravating the damage to the stamps.

Southeastern v. CA: When Typhoon Saling hit Metro Manila, the roof of SCI was blown away and destroyed the
roofing of the house of the Dimaanos. An ocular inspection was conducted thereafter and the report showed
that 2 possible reasons why the roof was ripped off – (1) with strong winds, the formation of the building became
funnel-like and (2) the steel bars embedded on the concrete roof beans were not bolted nor nailed to the
trusses. Held: SCI is not liable. SCI has not been shown negligent or at fault regarding the construction and
maintenance of its school building in question and that typhoon "Saling" was the proximate cause of the damage
suffered by the Dimaanos' house. In fact, SCI obtained both building permit and certificate of occupancy. These
are, at the very least, prima facie evidence of the regular and proper construction of subject school building. SCI
cannot be made to answer for a purely fortuitous event. Note: Civilist Tolentino (and Balane agrees) adds that
"[f]ortuitous events may be produced by 2 general causes: (1) by nature, such as earthquakes, storms, floods,
epidemics, fires, etc. and (2) by the act of man, such as an armed invasion, attack by bandits, governmental
prohibitions, robbery, etc.” Balane said riots are included too.

Mindex v. Morillo: Morillo and Mindex for the lease of the former’s cargo truck for use in MINDEX’s mining
operations. However, the truck was burned by unidentified persons while it was parked unattended. Held:
Mindex is not excused by a fortuitous event. Mindex was negligent because it failed to employ reasonable
foresight, diligence and care that would have exempted it from liability resulting from the burning of the truck.
Showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not
24
exempt one from liability. When the effect is found to be partly the result of a person’s participation -- whether
by active intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the
rules applicable to acts of God. There were no guards to look after the truck at night, and they left a truck on
land owned by dismissed employees.

3. Other Provisions

Art. 1175. Usurious transactions shall be governed by special laws.

• Article 1175 is dead letter law because of the lifting of the ceiling on interest rates. Thus, usury has been
decriminalized, but the decriminalization cannot be given retroactive effect (with respect to the civil aspect).
• Some decisions have struck down high interests, not because they were usurious but because such rates
were unconscionable.
• Correlate Article 1175 with Articles 1957,4 14135 and 1961.6 • 5/6 system although not usurious, it’s
unconscionable.
• SC: unconscionable rates are not demandable because they are contrary to morals, good customs and public
policy.
• Makalinaw v. BPI (600 SCRA 2009): 3% per month and above = unconscionable
• But this is fluctuating
• Despite the fact that there is no maximum rate, the court can lower the rates.
• Unconscionable rates are not demandable. Principal is always demandable.
• Legal rate of interest: 6%. Loans and Forebearace= 12% (acc. to monetary board)
• Now, Monetary Board in 2013 lowered the rate for loans and forbearance to 6%

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.

• 2 Presumptions regarding:
1. Interest bearing debt
 Presumption that interest has been paid if the principal has been received without reservation
regarding interest,
 Correlate with 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.  Based on Art. 1253, then if the
payment is applied  Can prove that it was a mere book keeping error.

4
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the laws against usury shall be
void. The borrower may recover in accordance with the laws on usury.
5
Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon
from the date of the payment.
6
Art. 1961. Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with
this Code.
25
 2. Debt payable in installments
 Presumption that earlier installments have been paid if the later installment has been received
without reservation regarding the previous installments.
 What about rentals? This applies although this is not a debt on installment. It’s akin to a debt on
installment
 Perez v. Garcia Bosque (7 Phil): Start renting in January. If you pay and you are credited with
payment for November, then it is presumed that you have paid all other rents from Jan.
• These are only rebuttable presumptions, you can prove through other evidence. You can prove mistake.
• Tolentino: this doesn’t apply to taxes.
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.

• Enforcement of Creditor’s Remedies:

1. Levy and execution of the debtor’s non-exempt properties (Art. 1177, 22367)
2. Accion Subrogatoria
 Subrogatory action premised on the theory that “the debtor of my debtor is my debtor.”  You are
subrogated or substituted in the rights of your debtor.
 This is an agency created by law. You sue as representative of your debtor.
 Nitura owes Balane 500K. Meer owes Nitura P1M. Balane can get the WHOLE P1M, but he must
turn over the 500K to Nitura (minus expenses of litigation etc).
 Requisites:
a. Creditor has a right of credit against the debtor.
b. Credit against the 3rd party is due and demandable.
c. Failure of debtor to collect his own credit from a third person either through malice or
negligence.
d. Insufficiency of assets of the debtor to satisfy the creditor’s credit
e. Right (of account) is not intuitu personae

3. Accion Pauliana (Articles 1380-1389)

 Right of creditors to rescind alienations by debtor which are prejudicial to them to the extent of the
prejudice.
 Example: A donates land to C, worth P1M but A owes B, P500K. A has no other property. B can
rescind the donation to C to the extent of 500K.
 This is different from accion subrogatoria because you don’t stand in your debtors shoes.
YOU CANNOT RESCIND THE WHOLE DONATION. ONLY AMOUNT BY WHICH YOU WERE
PREJUDICED.
 Requisites:
a. There is a credit in favor of the plaintiff

7
Art. 2236. The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the
exemptions provided by law.
26
 b. The debtor has performed an act subsequent to the contract, giving advantage to other
persons.
c. The creditor is prejudiced by the debtor’s act which are in favor of third parties and rescission
will benefit the creditor.
d. The creditor has no other legal remedy.
e. The debtor’s acts are fraudulent.
 Examples by Tolentino: alienations of property, payment of debts which are not due, renunciation of
rights, such as usufruct or inheritance, assignment of credit and remission of debts. The debtor’s
renunciation of a prescription which has already been acquired.
 Tolentino again: The creditors are protected, not only from voluntary acts of the debtor, but also from
judicial acts, such as, when the debtor, in connivance with another, permits the
latter to bring an action against him and obtain a judgment by default or confession and such judgment
is enforced against the debtor’s property. But payments of pre-existing obligations already due
whether natural or civil, cannot be impugned by an accion pailuana.

Siguan v. Lim: LIM was charged with estafa. Siguan alleged that a Deed of Donation executed by Lim in favour
of her daughters (executed in 1989 but registered only in 1991) was antedated and was a conveyance done in
fraud of creditors and as such, must be rescinded. Held: Lim won. Accion pauliana has the ff requisites: (1) the
plaintiff asking for rescission has a credit prior to the alienation, although demandable later: (2) the debtor has
made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other
legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the
property conveyed, if it is by onerous title, has been an accomplice in the fraud. Rescission requires the existence
of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the
judicial pronouncement setting aside the contract. In the case at bar, failed to prove that the requisites were
complied with.
REQUISITE#1and 2: We are not convinced with the allegation of the Siguan that the questioned deed was
antedated to make it appear that it was made prior to Siguan’s credit.
REQUISITE#3: It is essential that the party asking for rescission prove that he has exhausted all other legal means
to obtain satisfaction of his claim. Siguan neither alleged nor proved that she did so.
REQUISITE#4: It was not sufficiently established that the properties left behind by LIM were not sufficient to
cover her debts existing before the donation was made. Hence, no presumption of fraud.

4. Accion Directa
 A direct (not subrogatory) action by the creditor against his debtor’s debtor, a remedy which gives
the creditor the prerogative to act in his own name, such as the actions of the lessor against the
sublessee (Article 16528), the laborer of an independent contractor against the owner (Article

8
Art. 1652. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sublessee shall not be
responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extra-judicial
demand by the lessor.
Payments of rent in advance by the sublessee shall be deemed not to have been made, so far as the lessor's claim is concerned,
unless said payments were effected in virtue of the custom of the place.
27
 17299), the principal against the subagent (Article 189310), and the vendor-a-retro against the
transferee of the vendee (Article 160813).
 This is an exception to the relativity of contracts.
 Example 1: A leases apartment out to B. B sub-lets to C. There are two separate contracts
here: The contract of lease between A and B and the contract of sub-lease between B and C. C
owes B P7000. B owes A P5000. Ordinarily, A cannot sue C since there is no relationship between
them, but in Article 1652, A can sue C for P5000 (not the full amount of P7000)
 Example 2: A, customer, and B, contractor, enter into an agreement for a piece of work. B has a
labor contract with C, worker. Again, there are two separate contracts here: The contract for a
piece of work between A and B and the contract of labor between B and C. A owes B P10,000 which
is not fully paid yet. B owes C P5000 for unpaid wages. C can go after A directly for P5000.

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has
been no stipulation to the contrary.

• Rights are transmissible unless the rights are personal.

• Nature, law, stipulation

G. DIFFERENT KINDS OF OBLIGATIONS 1. According to Demandability

(Articles1179-1192)

Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon
a past event unknown to the parties, is demandable at once.

Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the
effects of the happening of the event.

a. Pure
• A pure obligation is one which has neither a condition nor a term attached to it. It is one which is subject to
no contingency.
• A pure obligation is demandable at once (Article 1179).
• Art. 1179 oblique definition of pure.

Pay v. Palanca: Pay is the creditor of the late Palanca. The latter and his wife, Rosa issued a promissory note
payable on demand in 1952, in the amount of P26,900 with interest of 12% per annum. Held: the creditor is
barred from collecting. More than fifteen years after the execution of the promissory note this petition was

9
Art. 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action
against the owner up to the amount owing from the latter to the contractor at the time the claim is made. However, the following
shall not prejudice the laborers, employees and furnishers of materials: (1) Payments made by the owner to the contractor before
they are due; (2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws.
10
Art. 1893. In the cases mentioned in Nos. 1 and 2 of the preceding article, the principal may furthermore bring an action against
the substitute with respect to the obligations which the latter has contracted under the substitution. 13 Art. 1608. The vendor may
bring his action against every possessor whose right is derived from the vendee, even if in the second contract no mention should
have been made of the right to repurchase, without prejudice to the provisions of the Mortgage Law and the Land Registration
Law with respect to third persons.
28
filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code
provides: "Every obligation whose performance does not depend upon a future or uncertain event, or upon a
past event unknown to the parties, is demandable at once." The obligation being due and demandable
(payable on demand), it would appear that the filing of the suit after 15 years was much too late.

b. Conditional
• A condition is a future and uncertain event upon which an obligation is made to depend.
o The Code says or this is wrong!
• All conditions are future.
• Article 1179 mentions the term “past event unknown to the parties.” This has been criticized by many
commentators. This is a contradiction in terms. The condition in a past even unknown to the parties is
knowledge by the parties of the past event. o What this means is that the condition is the knowledge, not
the event.
o Example: Guy went to Balane and said that “if my father wins the election then I’ll buy you lunch.” The
election was done when he talked to Balane, but he didn’t know if his dad had won. After class 2 hours
later, he found out his dad lost. Note: when this happened there were no cellphones yet.
• A past event CAN NEVER BE A CONDITION. It’s impossible.
• In conditional obligation, the happening of the condition determines its birth or death. In term, the
happening of the term determines its demandability.
• Tolentino: The condition must be imposed by the will of a party and must not be a necessary legal
requisite of the act. Thus, a promise to give a donation proper nuptias if the donee gets married cannot be
considered conditional.

1st Classification of Conditions:

i. Suspensive
ii. Resolutory

2nd classification of conditions:

i. Potestative ii. Casual

• In a casual condition, the fulfillment of the condition depends upon chance and/or upon the will of a 3rd
person and not on the will of a party.
• Example: I will give you my house if the Philippines renounces its foreign debt in 5 years. (Dependent
solely on the will of a third person or on chance).
• Example of casual: I will sell you my house in the Kiev, if the situation in the Ukraine improves.

iii. Mixed
• In a mixed condition, the fulfillment of the condition depends partly upon the will of a party to the
obligation and partly upon chance and/or the will of a 3rd person.
• When the condition depends not only upon the will of the debtor, but also upon chance or will of the
others, the obligation is valid.

29
• Example: I will give you my house if you marry him within 3 years. (The condition here is a mixed
condition. In this case, the condition of marriage depends partly on the creditor, a party to the obligation,
and partly on a 3rd person.)

3rd way of classifying conditions:

i. Possible
ii. Impossible

4th way of classifying conditions:

i. Positive
• A condition is positive when the condition involves the performance of an act.

ii. Negative
• A condition is negative when the condition involves the non-performance of an act.

5th way of classifying conditions:

i. Indivisible
• A condition is indivisible when the condition is not susceptible of partial realization.

ii. Divisible
• A condition is divisible when the condition is susceptible of partial realization.

6th way of classifying conditions:

i. Conjunctive
• When there are several conditions all of which must be realized.

ii. Alternative
• A condition is alternative when there are several conditions, only one of which must be realized.

7th way of classifying conditions:

i. Express
• A condition is express when the condition is statedexpressly.

ii. Implied
• A condition is implied when the condition is tacit.

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.

• This is a term, so we’ll deal with it later.

30
Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those
already acquired, shall depend upon the happening of the event which constitutes the condition.

• Also called a condition precedent.

• Suspensive has the opposite effect of resolutory.
• The fulfillment of a suspensive condition results in the acquisition of rights arising out of the obligation.

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional
obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall
take effect in conformity with the provisions of this Code.

• In a potestative condition, the fulfillment of the condition depends upon the will of a party to the
obligation.
• Tolentino definitions:
o A potestative condition is one which depends upon the will of one of the contracting parties  Acc. to
Tolentino there are 2 kinds: simple and purely potestative.
 Simple= presupposes not only a manifestation of will but also the realization of an external act, such
as “if you sell your house”
 Pure= depends solely and exclusively on the will, such as “if I like”
 Simple does not prevent the formation of a valid obligation o A casual condition is one which
depends exclusively upon chance or other factors, and not upon the will of the contracting parties.
o A mixed condition is one which depends on the will of one of the contracting parties and other
circumstances.
• If the condition depends upon the will of the creditor, then the obligation is valid. In this case, there is a
vinculum juris. The creditor can compel the debtor to perform the obligation.
• Example: I will give you my pomelo plantation if you establish permanent residence in Davao. This is a
suspensive condition dependent on the sole will of the creditor. It becomes pure and demandable at once.
• Article 1182 prohibits a suspensive potestative condition dependent on the will of the debtor. The entire
obligation is void.
• Example: I will sell you my car if I want to.
• Why does it annul the entire obligation? Because there is no juridical tie. Remember, an obligation is one
which has to be performed regardless of the will of the debtor. There is no element of compulsion. In the
example above, the creditor can never compel, can never have a cause of action.
• In reciprocal obligations, the law only talks about the first prestation, the reciprocal prestation is not taken
into consideration.
• Requisites:
1. Suspensive if resolutory, then no problem
2. Dependent on the will of the debtor
3. Potestative

Smith Bell v. Matti: Smith Bell and Vicente Sotelo entered into contracts of sale where the former is the seller
and the latter is the buyer. In the contracts, they agreed the shipment of (a) 2 steel tanks “within 3 or 4
months”; (b) 2 expellers “in the month of Sept. 1918, or ASAP”; (c) 2 electric motors, “approximate delivery

31
within 90 days—This is not guaranteed.” In the contracts, there were clauses that the shipment shall be
subject government regulations/certificates/requirements, embargoes, etc. This was during the war;
transportation was difficult. Held: Smith Bell was able to perform its obligations in due time. From the
stipulations in the contracts, it cannot be said that any definite date was fixed for the delivery of the goods.
Considering these contracts in the light of the civil law, we cannot but conclude that the term which the
parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles
could be brought to Manila or not. If that is the case, as we think it is, the obligations must be regarded as
conditional. And as the export of the machinery in question was, as stated in the contract, contingent upon
the sellers obtaining certificate of priority and permission of the United States Government, subject to the
rules and regulations, as well as to railroad embargoes, then the delivery was subject to a condition the
fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third
persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly
provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently
performed his part of the obligation, if he has done all that was in his power, even if the condition has not
been fulfilled in reality.

Security Bank v. CA: Security Bank (SB) contracted Ferrer to build a building in Davao. Ferrer was able to
complete it within the specified time, but incurred extra expenses, due to drastic increases in cost of
construction materials. He priced these extra expenses at P300K, supported by receipts and other docs. These
extra expenses were also made known to SB. SB looked at it internally, and verified Ferrer’s claims, however,
recommending that only P200K be paid. But, instead of paying either amount, SBTC suddenly refused to pay.
This contract reads: “If at any time prior to the completion of the work to be performed hereunder, increase in
prices of construction materials and/or labor shall supervene through no fault on the part of the contractor
whatsoever […] SB shall equitably make the appropriate adjustment on mutual agreement of both parties.” SB
thus claims that there was no mutual agreement as to the payment of any extra expenses to Ferrer. Held: SC
disagreed with SB. First, a conditional obligation shall be void if the fulfillment of the condition depends on the
sole will of the debtor. The abovequoted provision is exactly that, since, obviously, Ferrer would agree to
being paid for the extra amount he incurred by reason of price increase. Secondly, to allow SB to enjoy a
building while paying much less than its worth is tantamount to unjust enrichment which is also prohibited by
the law.

Romero v. CA: Romero was offered a parcel of land registered in the name of Respondent vda. De Ongsiong.
Upon inspection of the property, it was deemed suitable except for some informal settlers occupying parts of
the land. The brokers offered that upon downpayment of Php 50000 (to be used for evicting the informal
settlers) the respondent is willing to sell. A deed of conditional sale was executed between the parties. The
contract stipulates that respondent has 60 days to evict the informal settlers from the signing. Despite filing an
ejectment case, respondent delayed in fulfilling his obligation to evict. Thus, respondent wrote petitioner that
she is returning the 50,000 down payment. Petitioner, through counsel, replied that since a favorable
judgment has been rendered then petitioner is willing to undertake the eviction and pursue the sale.
Respondent, through counsel insisted that the non compliance of the obligation rendered the conditional sale
null and void. Held: the vendor may not demand rescission for a cause traceable to his own failure to evict the
squatters within the contractually-stipulated period. The condition in the contract was imposed upon the
vendor and not upon the perfection of the contract. Hence, under the law, it is the oblige (vendee in this case)
that has the option either to proceed with the agreement (accept the return of the 50,000 as stipulated in the
contract) or waive the condition (the 60 day period to evict). (NOTE: it would be different if the condition was
imposed on the perfection of the sale. If condition was not met under this kind, then the juridical relationship
32
would not arise). The undertaking of the respondent is not a potestative condition solely dependent on his will
(void according to Art. 1182) but a mixed condition dependent not on the will of the respondent-vendor alone
but also of third persons like the informal settlers and government agencies and personnel concerned. Where
the so-called "potestative condition" is imposed not on the birth of the obligation but on its fulfillment, only
the obligation is avoided, leaving unaffected the obligation itself. Respondent had no right to rescind being the
guilty party.

Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by
law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof
which is not affected by the impossible or unlawful condition shall be valid.

The condition not to do an impossible thing shall be considered as not having been agreed upon.

• A condition is possible when it is capable of realization according to nature, law, public policy or good
customs.
• A condition is impossible when it is not capable of realization according to nature, law, public policy or good
customs.
• Impossibility can be physical (contrary to law of nature) or juridical (contrary to law, morals, good customs,
public policy).
o Tolentino: juridically impossible when it restricts certain essential rights like not to change domicile, to
change or not change religion, not to get married.
• The effect of an impossible condition is to annul the obligation (Article 1183). The effect of an impossible
condition regarding donations and succession is different. In donations and succession, an impossible
condition is simply disregarded. The distinction can be explained by the fact that Article 1183 refers to
onerous obligation whereas donations and succession are gratuitous.
• However, if the obligation is divisible and that part of the obligation is not unaffected by the impossible
condition, then the obligation is valid (Article 1183).
• Justice Paras distinguishes as follows:
1. Positive condition to do something impossible: whole obligation is void (condition and obligation).
2. Negative condition not to do something impossible: Disregard the condition, the obligation is valid
3. Negative condition not to do something illegal: Valid condition and obligation.
 Balane sells his property to you and 1 stipulation is that you should not cook meth on the
premises VALID!
 It’s a resolutory condition
 A negative suspensive is the same as a positive resolutory.

• Tolentino notes: o The condition must be impossible when the contract is entered into; otherwise, art.
1266 or art. 1184 will apply.
o The difference is that under art. 1266 and 1184, there is a valid obligation, which became extinguished.
Under art. 1183 the obligation never comes into existence. Effect is the same in either case.

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Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as
soon as the time expires or if it has become indubitable that the event will not take place.

• This is suspensive.

Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation
effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot
occur.

If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.

• This is suspensive.

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment.

Doctrine of Constructive Compliance

• The condition shall be deemed fulfilled when the obligor • Only applies to potestative • It can apply to
mixed.
• If the debtor must do something to give birth to the obligation
• The principle underlying constructive fulfillment of conditions is that a party to a contract may not be
excused from performing his promise by the non-occurrence of an event which he himself prevented.

• Requisites:
1. Intent of the debtor to prevent fulfillment of the obligation
 Where the act of the debtor, however, although voluntary, did not have for its purpose the
prevention of the fulfillment of the condition, it will not fall under the doctrine of constructive
compliance.
2. Actual prevention of compliance

Tayag v. CA: Sellers entered into a contract of sale with a purchaser. 1 of the conditions of which, purchaser
agreed to assume the indebtedness of the seller with phil veterans bank. Purchaser only paid 6,900 of the
10,000 peso debt to phil. veterans bank, the co-seller paid the remaining balance. RTC: this was a ploy under
art. 1186 that prematurely prevented the purchaser from paying the debt fully. Sellers argue that they are
only obligees in the contract so the principle of constructive fulfillment cannot be invoked against them (codal
says, when obligor voluntarily prevents fulfillment). Held: In a reciprocal obligation, like in a contract of
purchase, both parties are mutually obligors and obligees. it is puerile for the sellers to say that they are the
only obligees under the contract since they are also bound as obligors to respect the stipulation in permitting
the purchasers to assume the loan with the Philippine Veterans Bank which sellers impeded when they paid
the balance of said loan.
Bonrostro v. Luna: Luna bought a piece of land from Bliss Dev., less than a year she entered into a contract to
sell with Bonrostro. B failed to pay the subsequent installments so L filed an action for rescission and payment
of unpaid obligations. Sps. Bonrostro also alleged that the Sps. Luna sent a letter to BLISS instructing the
company to refuse acceptance of amortizations of the lot from anyone other them, also paying the
amortization, thereby preventing the Sps. Bonrostro from complying with the contract..B alleged that they are
34
willing to pay and sought a 60-day extension. B argued that they were prevented by Sps. Luna from fulfilling
such obligation. Held: that Art. 1186 speaks of a situation where it is the obligor who voluntarily prevents
fulfillment of the condition, not the obligee. Moreover, the mere intention to prevent the happening of the
condition or the mere placing of ineffective obstacles to its compliance, without actually preventing fulfillment
is not sufficient for the application of Art. 1186. Two requisites must concur for its application, to wit: (1)
intent to prevent fulfillment of the condition; and, (2) actual prevention of compliance. Here, Sps. Luna is not
the obligor but the obligee, and their actions were only sought to ensure and not defeat the fulfillment of the
contract. Their payment (1) avoided the cancellation of both the contract of sale, and consequently, the
contract to sell; and (2) avoid the penalty for unpaid amortizations equivalent to 1/10th of 1% per day of delay
shall be imposed for all payments made after due date (3% monthly or 36% per annum rate of interest).

Lim v. DBP: Lim obtained 2 loans from DBP to finance their cattle raising business. To secure the loans,
petitioners executed a mortgage in favor of DBP over real properties. Petitioners failed to pay the loan
amortizations. Lim eventually received a Notice of Foreclosure. In order to stop the foreclosure proceedings,
Lim offered to restructure the loan settlement by paying it over five years. DBP at first refused but eventually
agreed to the Restructuring Agreement provided that Lim complies with certain conditions. Lim failed to
comply with the conditions causing the foreclosure of his properties. WON DBP’s acts and omissions in
discharging its reciprocal obligations to petitioners effectively prevented the petitioners from paying their loan
obligations in a proper and suitable manner hence the obligation should be deemed fully complied with and
extinguished in accordance with the principle of constructive fulfillment. Held: NO. Article 1186 enunciates
the doctrine of constructive fulfillment of suspensive conditions, which applies when the following three (3)
requisites concur, viz: (1) The condition is suspensive; (2) The obligor actually prevents the fulfillment of the
condition; and (3) He acts voluntarily. Suspensive condition is one the happening of which gives rise to the
obligation. It will be irrational for any Bank to provide a suspensive condition in the Promissory Note or the
Restructuring Agreement that will allow the debtor-promissor to be freed from the duty to pay the loan
without paying it. Besides, petitioners have no one to blame but themselves for the cancellation of the
Restructuring Agreement. It is significant to point out that when the Regional Credit Committee reconsidered
petitioners’ proposal to restructure the loan, it imposed additional conditions which petitioners failed to do.
DBP therefore had reason to cancel the Restructuring Agreement.

Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact
to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal
prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed
to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits
and interests received, unless from the nature and circumstances of the obligation it should be inferred that
the intention of the person constituting the same was different.

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.

• This is suspensive.
• By the principle of retroactivity, therefore, a fiction is created whereby the binding tie of the conditional
obligation is produced from the time of its perfection, and not from the happening of the condition.
• The law does not require the delivery or payment of the fruits or interests accruing before the happening of
the suspensive condition. The right to the fruits of the thing is not within the principle of retroactivity of
conditional obligations (Article 1187)
35
• If the obligation imposes reciprocal prestations, fruits and interest are deemed mutually compensated.
• Example: I promise to sell my mango plantation at P5000/hectare if you pass the bar examination in 2015. I
do not have to give you the fruits from the time of the agreement to the release of the bar exams.
o Deemed to have effect when they agreed
o Effect: If Balane sells the property before Nitura takes the bar in 2015, then Nitura has a better right (we
aren’t talking about registered land)
• If the obligation is unilateral, debtor appropriates the fruits.

Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the
preservation of his right.

The debtor may recover what during the same time he has paid by mistake in case of a suspensive
condition.

• This is suspensive.
• JBL Reyes criticizes the use of the word “bring.” The 1st ¶ of Article 1188 does not limit itself to judicial
actions. Thus, the word “take” is better. o Example: Could publish a letter. Can have a claim annotated on
the Torrens title.
• ¶2: you can only recover if you discover your mistake BEFORE the condition happens
• If the condition happened but you didn’t know, you still can’t recover.
• Tolentino: if he gives it knowing the condition has not been fulfilled, there is no mistake. There is a waiver.

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an
obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of
the thing during the pendency of the condition:

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished;

(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood
that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its
existence is unknown or it cannot be recovered;

(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the
creditor;

(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the
obligation and its fulfillment, with indemnity for damages in either case;

(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the
creditor;

(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the
usufructuary.

36
• Requisites (there are 4. I’m missing 1!):
1. Must be a determinate thing
2. Condition happens
3. Loss, deterioration
4. There’s a suspensive/resolutory condition or term

• ¶ 2: choice is with the injured party

• ¶ 4: creditor may choose specific perf or recission.
o Correlate with Art. 1191 deterioration must be substantial o If the damage is minimal, then
you can only get damages but you cannot seek recission.
• ¶ 6: Usufructuary Art. 579 and 58011

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the
parties, upon the fulfillment of said conditions, shall return to each other what they have received.

In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the
debtor, are laid down in the preceding article shall be applied to the party who is bound to return.

As for the obligations to do and not to do, the provisions of the second paragraph of article 1187 shall be
observed as regards the effect of the extinguishment of the obligation.

• Resolutory condition. Also called condition subsequent.

• The fulfillment of the resolutory condition results in the extinguishments of rights arising out of the
obligation.
• If the resolutory condition is fulfilled, the obligation is treated as if it did not exist. Thus, each party is bound
to return to the other whatever he has received, so that they may be returned to their original condition
before the creation of the obligation (Article 1190).
• 1263,15 1264,16 126517 fault presumed
• Tolentino: return fruits, but not for reciprocal obligations.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the
latter should become impossible.

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.

11
Art. 579. The usufructuary may make on the property held in usufruct such useful improvements or expenses for mere pleasure as
he may deem proper, provided he does not alter its form or substance; but he shall have no right to be indemnified therefor. He
may, however, remove such improvements, should it be possible to do so without damage to the property.
Art. 580. The usufructuary may set off the improvements he may have made on the property against any damage to the same.
37
• Why is this here? This is the section on rescission. Because the breach is a resolutory condition.
• It is a tacit resolutory condition.
• Resolution (Article 1191) is found in the conditional obligations because if there is a breach, the breach is a
resolutory condition which extinguishes the obligation.
• Article 1191 uses the term “rescission.”
• The better term is “resolution.” The term rescission is also found in Article 1381, 18 rescissible contracts.
Resolution is different from rescission. Resolution is based on the non-fulfillment of the obligation.
Rescission is based on economic prejudice. Furthermore, the character of resolution is principal and
retaliatory while the character of rescission is subsidiary. This means that in resolution there is no need to
show that there is no other remedy. In rescission, the plaintiff must show that there is no other recourse.
• “Reciprocal obligations are those which arise from the same cause, and in which each party is a

15
Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not
extinguish the obligation.
16
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.
17
Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault,
unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in
case of earthquake, flood, storm, or other natural calamity. 18 Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than onefourth of
the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those
which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of
the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the
other. They are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other [Tolentino].”
o Example of Tolentino: “A person may be a debtor of another by reason of agency, and his creditor by
reason of loan. They are mutually obligated, but the obligations are not reciprocal.”
• Balane: prestations arise from the same source. The obligations must be interlocked. They must be
counterparts of each other.
o Example: Sale of a Car. 2 prestations: Balane must deliver his car, while Leon must pay him.
• The right of resolution applies to reciprocal obligations.
• A reciprocal obligation has 2 elements:
1. 2 prestations arising from the same source
2. Each prestation is designed to be the counterpart of the other
• An example of a reciprocal obligation is a contract of sale.
• Summary of Rulings on Resolution
1. The right to resolve is in inherent in reciprocal obligations.
2. The breach of the obligation must be substantial. Proof of substantial breach is a prerequisite for
resolution. o Proof is a condition precedent [Zulueta v. Mariano].

38
 o Not just casual [Palay v. Clave].
3. The right of resolution can be exercised extrajudicially and will take effect upon communication to the
defaulting party. This notice of resolution is necessary.
4. The exercise of this right can be the subject of judicial review.
5. Upon resolution, there must be mutual restitution of the object and its fruits
6. The parties are returned to their original situation – status quo ante.
7. If the aggrieved party has not performed the prestation and resolves extrajudicially, then all the
aggrieved party has to do is to refuse to perform his prestation.
8. If the aggrieved party has performed the prestation, the aggrieved party can demand recovery. If the
defaulting party refuses to return it, the aggrieved party must go to court in order to recover.
9. The injured party must not have breached the contract.

• In Ilingan v.CA (September 26, 2001), there was an obiter dictum that the operative act that resolves a
contract is the decree of court and the right should be exercised judicially. Professor Balane says this is
wrong. However, the ratio of the case said that the communication must be a notarial notice.

4 Questions:

1. Does the right to resolve have to be stipulated between the parties? No. Law provides it.
o Like warranty of eviction and warranty from hidden defect, its deemed written in, because the law
provides it.

2. Is this a remedy of last resort? No. According to JBL, rescission is in principal action retaliatory in
character [Universal Foods v. CA].

3. Can it be done extra-judicially? Yes. But the offended party proceeds at his own risk because there is
nothing that stops the other party from questioning the propriety of the rescission [UP v. ALUMCO].
Court can find 2 things:
a. Rescission is proper effectivity as of the time it was availed of by the offended party
b. Rescission not proper then the contract will stand. o There’s a line of decisions that says you
have to go to court. Balane thinks that it is not necessary.

4. Is there a duty of mutual restitution? Yes. See Magdalena v. Myrick below. Must return to status quo
ante. In this respect, Art. 1191 shares similar effect with Art. 1381 o Sidenote: developers coz of this
case used to provide that in the event of default, the buyer would forfeit installments. This is no longer
allowed by the Maceda Law, which says that if you pay x amount of installments, you are entitled to a
cash surrender value.
o Recto Law also.

Cases:
Universal Food v. CA: The formula of Mafran sauce was invented by Magdalo. Magdalo secured the financial
assistance of Reyes which lead to the execution of the Bill of Assignment with Universal. Magdalo became the
chief chemist and Victorian, the auditor and superintendent. Tirso Reyes made Ricardo Francisco the Chief
Chemist and eventually, Magdalo was terminated. Held: BOA can be rescinded. Universal Foods argue that
39
there can be no rescission because it can only be granted if the person suffering economic damage has no
other recourse for reparation. This is not the case here. In this case, there is no controversy that the provisions
of the Bill of Assignment are reciprocal in nature. The corporation violated ¶5-(a) and (b) of the BOA by
terminating the services of the Magdalo without lawful and justifiable cause. Rescission of a contract will not
be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would
defeat the very object of the parties in making the agreement. The question of whether a breach of a
contract is substantial depends upon the attendant circumstances. The fact remains that the Franciscos had
no alternative but to file the present action for rescission and damages.
JBL concurring: The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity between
the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing anywhere that the
action for rescission thereunder is subordinated to anything other than the culpable breach of his obligations
by the defendant. This rescission is in principal action retaliatory in character, it being unjust that a party be
held bound to fulfill his promises when the other violates his. Hence, the reparation of damages for the breach
is purely secondary. On the contrary, in the rescission by reason of lesion or economic prejudice, the cause of
action is subordinated to the existence of that prejudice, because it is the raison d'etre as well as the measure
of the right to rescind. Hence, where the defendant makes good the damages caused, the action cannot be
maintained or continued, as expressly provided in Art.1383 and 1384. But the operation of these 2 articles is
limited to the cases of rescission for lesion in Art. 1381, and does not, apply to cases under Art. 1191.
Magdalena v. Myrick: Magdalena Estate sold to Myrick lots providing that the price shall be payable in 120
equal monthly installments. Myrick made several monthly payments however made a default on payment.
Magdalena notified Myrick that agreement has been cancelled as of that date, thereby relieving him of any
further obligation and that all the amounts already paid by him had been forfeited in favor of Magdalena. Held:
Myrick should recover sums he paid. The contract was rescinded. Magdalena argues that the letter was just a
notification and since Myrick did not reply there was no rescission. Magdalena’s acts of taking possession of the
lots, not demanding the balance and reiterating the intent to cancel show that it intended to cancel the contract.
The fact that the parties did not provide for resolution is now of no moment. The obligations arising from the
contract of sale being reciprocal, such obligations are governed by art. 1191, which declares that the power to
resolve, in the event that one of the obligors should not perform his part, is implied. The contract of sale contains
no provision authorizing the vendor, in the event of failure of the vendee to continue in the payment of the
stipulated monthly installments, to retain the amounts paid to him on account of the purchase price.
Magdalena’s claim that it has the right to forfeit said sums is untenable. Magdalena may choose between
demanding the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative,
and Magdalena, having elected to cancel the contract cannot avail himself of the other remedy of exacting
performance.

• Note from Tolentino: the party seeking rescission cannot have performance as to a part and rescission as to
the remainder. But in your prayer you can ask for fulfillment and rescission in the alternative.

UP v. De los Angeles: UP and ALUMCO entered into a logging agreement whereby ALUMCO was granted
exclusive authority to cut, collect and remove timber from the Land Grant given to UP in consideration of
payment of royalties and forest fees. On Dec. 8, 1964, ALUMCO incurred an unpaid account of P219,362.94 and
despite repeated demands, failed to pay. So UP sent a notice to rescind the logging agreement. ALUMCO
executed an instrument which stipulated that “in the event that the debtor fails to comply with any of its
promises, the Debtor agrees without reservation that Creditor shall have the right to consider the Logging

40
Agreement rescinded, without the necessity of any judicial suit.” ALUMCO again incurred an additional unpaid
account. On July 19,1965, UP informed ALUMCO that it had, as of that date, considered rescinded the logging
agreement. Held: U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any
judicial pronouncement to that effect. UP and ALUMCO expressly stipulated that upon default by the debtor,
UP has the right and the power to consider the Logging Agreement rescinded without the necessity of any
judicial suit. “There is nothing in the law that prohibits the parties from entering into agreement that violation
of the terms of the contract would cause cancellation thereof, even without court intervention. In other words,
it is not always necessary for the injured party to resort to court for rescission of the contract.” It must be
understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by
the other contracting party must be made known to the other and is always provisional, being ever subject to
scrutiny and review by the proper court. the party who deems the contract violated many consider it resolved
or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and finally settle whether the action taken was
or was not correct in law.
BALANE: SC was confused by the terminology. Resolver/Resolucion in the Spanish Code is correct.

Zulueta v. CA: Zulueta and Avellana entered into a contract to sell Zulueta’s house and lot. The contract
allowed Zulueta to extrajudicially recover possession of the house, lot and improvements in case Avellana
failed to meet the conditions of the contract, and the forfeiture of money obligations with the installments
already paid considered as rentals. The parties agreed on a purchase price of P75,000 payable in twenty years
with Avellana assuming to pay a down payment of P5,000.00 and a monthly installment of P630.00 payable in
advance before the 5th day of the corresponding month, starting with December, 1964. Avellana failed to pay.
Zulueta filed an ejectment case. Avellana averred that the MTC did not have jurisdiction over the case as it
involved the interpretation and/or rescission of a contract; and that prior to the execution of the contract to
sell, Zulueta owed him P31,269, which was understood to be the down payment of the property. Held: MTC
had no jurisdiction as it was for rescission of a contract. When the contract between the parties provided for
extrajudicial rescission, this takes legal effect only when the other party does not oppose it. Where it is
objected to, a judicial determination of the issue is still necessary. Zulueta had alleged violation by Avellana
of the stipulations of their agreement to sell and thus unilaterally considered the contract rescinded. Avellana
denied any breach. Proof of violation is a condition precedent to resolution or rescission. It is only when the
violation has been established that the contract can be declared resolved or rescinded. Upon such rescission,
in turn, hinges a pronouncement that possession of the realty has become unlawful. Thus, the basic issue is
not possession but one of rescission or annulment of a contract which is beyond the jurisdiction of the MTC. A
stipulation entitling one party to take possession of the land and building if the other party violates the
contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to
without judicial intervention and determination.

Palay v. Clave: Palay sold a parcel of land to Dumpit. ¶6 of the contract provided for automatic extrajudicial
rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration
of the grace period of 1 month, without need of notice and with forfeiture of all installments paid. Dumpit
failed to pay some installments. Almost 6 years later, Clave wrote Palay offering to update all his overdue
accounts and sought consent to the assignment of his rights to Dizon. Palay informed him that the Contract
had long been rescinded pursuant to ¶6, and that the lot had already been resold. Held: Demand is necessary
to rescind the contract. The judicial action for the rescission of a contract is not necessary where the contract
provides that it may be revoked and cancelled for violation. However, in the cited cases, there was at least a
written notice sent to the defaulter informing him of the rescission. A written notice is indispensable to
41
inform the defaulter of the rescission. Hence, the resolution by petitioners of the contract was ineffective and
inoperative against Clave for lack of notice. There was no waiver by Clave of his right to be notified since it was
a contract of adhesion, a standard form of Palay, and Clave had no freedom to stipulate.

Angeles v. Calasanz: Calasanz and Angeles entered into a contract to sell a piece of land for P3,920.00 plus 7%
interest p.a. Angeles made a downpayment of P392.00. Angles paid the monthly installments of P41.2 until
July 1966, when their aggregate payment already amounted to P4,533.38.
On Dec 7, 1966, Calasanz wrote Angeles a letter requesting the remittance of past due accounts. Upon failure
of Angeles, Calasanz cancelled the contract. Held: contract not validly cancelled. While it is true that ¶2 of the
contract obligated Angeles to pay P3,920 plus 7% interest p.a, it is likewise true that under ¶12 the seller is
obligated to transfer the title to the buyer upon payment of the said price. The contract to sell, being a
contract of adhesion, must be construed against the party causing it. Since the principal obligation under the
contract is only P3,920.00 and Angeles has already paid P4,533.38, the courts should only order the payment
of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the
balance without any interest thereon, the Calasanz must immediately execute the final deed of sale in favor of
the Angeles. Art. 1234 also militates against the unilateral act of the defendants-appellants in cancelling the
contract

Boysaw v. Interphil Promotions: Boysaw and his Manager, Ketchum, signed with Interphil represented by
Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest. It was stipulated that the
bout would be held on Sept 30, 1961 or not later than thirty [30] days thereafter should a postponement be
mutually agreed upon, and that Boysaw would not, prior to the date of the boxing contest, engage in any
other such contest without the written consent of Interphil.
Boysaw fought Louis Avila in Vegas. Ketchum assigned to Araneta the managerial rights over Boysaw. Araneta
assigned to Yulo the managerial rights over Boysaw. Yulo wrote to Sarreal informing him of his acquisition of
the managerial rights over Boysaw and indicating Boysaw's readiness to comply with the boxing contract. The
GAB scheduled the Elorde-Boysaw fight for Nov 4, 1961. Yulo refused to accept the change in date,
maintaining his refusal even after Sarreal offered to advance the date to Oct 28, 1961 which was within the
30-day period of allowable postponements provided in the principal boxing contract. The fight contemplated
in contract never materialized. Boysaw and Yulo sued Interphil, Sarreal for damages occasioned by the refusal
of Interphil and Sarreal to honor their commitments.

Held: there was a violation of the contract, but since it was Boysaw and Yulo who caused it, they are not
entitled to damages. Boysaw violated the contract when w/o the approval of Interphil, he fought Avila. While
the contract imposed no penalty for such violation, this does not grant any of the parties the unbridled liberty
to breach it with impunity. Our law on contracts recognizes the principle that actionable injury inheres in every
contractual breach. There is no doubt that the contract in question gave rise to reciprocal obligations. The
power to rescind is given to the injured party. Where the plaintiff is the party who did not perform the
undertaking which he was bound by the terms of the agreement to perform, he is not entitled to insist upon
the performance of the contract by the defendant, or recover damages by reason of his own breach.

Another violation of the contract was the assignment and transfer, first to Araneta, and subsequently, to Yulo,
Jr., of the managerial rights over Boysaw without the knowledge or consent of Interphil. The assignments,
from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the original contract which, to
be valid, should have been consented to by Interphil. When a contract is unlawfully novated by an applicable
and unilateral substitution of the obligor by another, the aggrieved creditor is not bound to deal with the
42
substitute. The consent of the creditor to the change of debtors, whether in expromision or delegacion is an
indispensable requirement.

In a show of accommodation, the appellees offered to advance the fight just to place it within the 30- day limit
of allowable postponements stipulated in the original boxing contract. The refusal of Yulo to accept a
postponement without any other reason but the implementation of the terms of the original boxing contract
entirely overlooks the fact that by virtue of the violations they have committed of the terms thereof, they
have forfeited any right to its enforcement. The violations of the terms of the original contract by Yulo vested
Interphil with the right to rescind and repudiate such contract altogether. That they sought to seek an
adjustment of one particular covenant of the contract, is under the circumstances, within its rights.

Pilipinas Bank v. IAC: Hacienda entered into a contract to sell land with Pilipinas Bank. The contract contained
an automatic rescission clause that allowed the vendor to resell the property and to forfeit installments
already made in favor of the vendor when the vendee fails to pay installments when due. Hacienda sent series
of notices to the Bank for the latter’s balances. The Bank partially complied and requested for extensions.
Hacienda, for the last time, reminded the Bank to pay their balance. After more than 2 years, the Bank sent a
letter expressing their desire to settle their desire to fully settle their obligation. Hacienda wrote a letter to the
Bank, informing them that the contract to sell had been rescinded. TC and CA held that Hacienda waived the
automatic rescission clause by accepting payment and by sending letters advising Bank of the balances due.
Held: Not automatically rescinded. An “automatic rescission” clause in a contract, while valid, may be waived
through the actions of the obligee when the obligee allows the obligor to continue the fulfillment of the terms
of the contract despite the initial breach bringing into force the automatic rescission clause. Hacienda’s many
extensions granted to the Bank never called attention to the proviso on "automatic rescission." Hacienda, by
it’s own actions, waived the automatic rescission clause. A contractual provision allowing "automatic
rescission", without prior need of judicial rescission, resolution or cancellation, is VALID. The remedy of one
who feels aggrieved in a contract with an “automatic rescission” clause is to go to Court for the cancellation of
the rescission itself, in case the rescission is found unjustified under the circumstances.

Tolentino: a stipulation that a contract will be automatically rescinded is in the nature of a facultative
resolutory condition.

Ong v. CA: Ong entered into an “Agreement of Purchase and Sale” with the Robles spouses concerning 2
parcels of land. The spouses undertook to deliver the titles upon full payment. The checks of Ong were
dishonored. Held: the agreement may be set aside, but not because of a breach of Ong for failure to complete
payment. Rather, his failure to do so brought about a situation which prevented the obligation of spouses to
convey title from acquiring an obligatory force. A careful reading of the parties’ Agreement shows that it is in
the nature of a contract to sell, as distinguished from a contract of sale. In a contract of sale, the title to the
property passes to the vendee upon the delivery of the thing sold; while in a contract to sell, ownership is, by
agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. In
a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is
not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from
acquiring an obligatory force. The promise of the spouses to sell was subject to the fulfillment of the
suspensive condition of full payment of the purchase price. The non-fulfillment of the condition of full
payment rendered the contract to sell ineffective and without force and effect. The breach in Art. 1191 is the
obligor's failure to comply with an obligation.

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Fil-Estate v. Vertex: FEGDI sold, on installment to RSACC 1 Class "C" Common Share of Forest
Hills. Prior to the full payment of the purchase price, RSACC sold them to Vertex. Vertex enjoyed membership
privileges in Forest Hills. 17 months after the sale, Vertex wrote FEDGI a letter demanding the issuance of a
stock certificate in its name. FELI replied, initially requested Vertex to first pay the necessary fees for the
transfer. Although Vertex complied with the request, no certificate was issued. Held: there was substantial
breach. In “a sale of shares of stock, physical delivery of a stock certificate is one of the essential requisites for
the transfer of ownership.” Here, Vertex fully paid the purchase price by February 11, 1999 but the stock
certificate was only delivered on January 23, 2002 after Vertex filed an action for rescission against FEGDI.
FEGDI clearly failed to deliver the stock certificates within a reasonable time from the point the shares should
have been delivered. This was a substantial breach of their contract that entitles Vertex the right to rescind
the sale under Art. 1191. It is not correct to say that a sale had already been consummated as Vertex already
enjoyed the rights a shareholder can exercise. The enjoyment of these rights cannot suffice where the law, by
its express terms, requires a specific form to transfer ownership.

Gotesco v. Spouses Fajardo: Sps. Fajardo entered into a Contract to Sell with GPI for the purchase of a lot.
Despite its full payment of the purchase price and subsequent demands, GPI failed to execute the deed and to
deliver the title and physical possession of the subject lot. GPI claimed that the failure to deliver the title was
beyond their control because while GPI's petition for inscription of technical description was favorably granted
by the RTC the same was reversed by the CA; this caused the delay in the subdivision of the property. GPI thus
argued that Article 1191 remained inapplicable since they were actually willing to comply with their obligation
but were only prevented from doing so due to circumstances beyond their control. HELD: Sps. Fajardo have a
right to rescind the contract. In a contract to sell, the seller's obligation to deliver the certificates of title is
simultaneous and reciprocal to the buyer's full payment. §25 of PD 957, which regulates the subject
transaction, imposes on the subdivision owner or developer the obligation to cause the transfer of the
corresponding certificate of title to the buyer upon full payment. GPI acquired the subject property through a
Deed executed between it and the former registered owner. However, no explanation was advanced as to
why the petition for inscription was filed only after almost 8 years from the acquisition of the subject property.
Neither did GPI sufficiently explain why GPI took no positive action to cause the immediate filing of a new
petition for inscription within a reasonable time from notice of the CA Decision which dismissed GPI’s earlier
petition based on technical defects, this notwithstanding Sps. Fajardo's full payment of the purchase price and
prior demand for delivery of title. Clearly, the long delay in the performance of GPI's obligation from date of
demand was unreasonable and unjustified. It cannot therefore be denied that GPI substantially breached its
contract to sell with Sps. Fajardo which thereby accords the latter the right to rescind the same pursuant to
Article 1191. It is noteworthy to point out that rescission does not merely terminate the contract and release
the parties from further obligations to each other, but abrogates the contract from its inception and restores
the parties to their original positions as if no contract has been made. Consequently, mutual restitution, which
entails the return of the benefits that each party may have received as a result of the contract, is thus
required. To be sure, it has been settled that the effects of rescission as provided for in Article 1385 12 of the

12
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 obligated 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.
44
Code are equally applicable to cases under Article 1191. Fajardo must be able to recover the price of the
property pegged at its prevailing market value.

Reyes v. Rossi: Reyes and Advanced Foundation, represented by Rossi, executed a deed of conditional sale
involving the purchase by Reyes of equipment consisting of a Dredging Pump. Reyes failed to pay. Reyes was
charged with estafa and BP22. Held: action for rescission of contract is not a prejudicial question. The action
for the rescission of the deed of sale on the ground that Advanced Foundation did not comply with its
obligation actually seeks one of the alternative remedies available to a contracting party under Art. 1191. Art.
1191 recognizes an implied or tacit resolutory condition in reciprocal obligations. It is true that the rescission
of a contract results in the extinguishment of the obligatory relation as if it was never created, the
extinguishment having a retroactive effect. The rescission is equivalent to invalidating and unmaking the
juridical tie, leaving things in their status before the celebration of the contract. However, until the contract is
rescinded, the juridical tie and the concomitant obligations subsist. The civil action for the rescission of
contract was not determinative of the guilt or innocence of Reyes. Under the law on contracts, vitiated
consent does not make a contract unenforceable but merely voidable, the remedy of which would be to annul
the contract since voidable contracts produce legal effects until they are annulled. On the other hand,
rescission of contracts in case of breach pursuant to Art. 1191 of the Civil Code of the Philippines also
presupposes a valid contract unless rescinded or annulled.

Sandoval v. PMMA: PMMA and Sandoval Shipyard entered into a Ship Building Contract, whereby Sandoval
will build two lifeboats for PMMA. PMMA filed a case for rescission when Sandoval failed to follow the
contract specifications (a different engine was used; not delivered w/in 45 working days from date of
contract). Both RTC and CA found Sandoval to have breached the contract and ordered rescission. Sandoval is
now questioning whether the case is for rescission and not damages/breach of contract. Held: the failure or
breach of PMMA’s contractual rights is the cause of action. Rescission or damages are part of the reliefs.
Rescission requires a mutual restoration of benefits received. However, Sandoval Shipyard failed to deliver the
lifeboats; their alleged delivery to Rosario was invalid, as he was not a duly authorized representative named
in the contract. Hence, Sandoval Shipyard could not compel PMMA to return something it never had
possession or custody of.

Eds v. Healthcheck: Eds got health insurance from HCI. 2 months into the program, HCI notified Eds that its
accreditation with DLSUMC was suspended and advised it to avail of the services of nearby accredited
institutions. In a quickly convened meeting, HCI agreed that there would be “No renewal of contract w/ HC
should there be another suspension of services in any hospitals.” Despite this commitment, HCI failed to
preserve its credit standing with DLSUMC prompting the latter to suspend its accreditation. Due to this, EMI
notified HCI that it was rescinding the contract. Held: although a ground exists to validly rescind the contract
between the parties, it appears that EMI failed to judicially rescind the same. In Iringan v. CA, this Court
reiterated the rule that in the absence of a stipulation, a party cannot unilaterally and extrajudicially rescind a
contract. A judicial or notarial act is necessary before a valid rescission (or resolution) can take place. The
operative act which produces the resolution of the contract is the decree of the court and not the mere act of
the vendor. Since a judicial or notarial act is required by law for a valid rescission to take place, the letter written
by respondent declaring his intention to rescind did not operate to validly rescind the contract.

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor
shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own damages.
45
• Applies if both breach independently, not if 1 causes the other to breach.
• Not retaliatory
• Resolutory also

CB v. CA: Tolentino took out a loan for P80K from Island Savings Bank secured by a mortgage. ISB only
released 17k. Tolentino failed to pay the 17k. ISB filed extrajudicial foreclosure of the mortgage. Held:
Rescission only of the remaining 63K. Tolentino is bound by the promissory note he released WRT the P17k
loan. He has a reciprocal oblig to pay such when it falls due. So WRT to this amount, he’s not entitled to
recission since he’s also a party in default (CC Art. 1191). As a matter of fact, right to rescind belongs to the
aggrieved party, ISB. Had he not signed a promissory note, Tolentino would be entitled to ask for recission of
entire loan there being no date for him to perform his reciprocal oblig to pay. Since both parties were in
default, they’re both liable for damages. Thus, ISB’s liability for damages is offset by Tolentino’s liability for
damages in the form of penalties & surcharges.

c. Term (Articles 1193-1198):

• A term is a length of time which, exerting an influence on an obligation as a consequence of juridical acts,
suspends its demandability or determines its extinguishment.
• Term or period.
• Similarity between condition and term: both future. Dissimilarity: uncertainty.
• A term is a future and certain event (i.e. death)
• Term may be certain as to time (i.e. June 3, 2015), or certain as to event (i.e. death, when Pnoy steps down
from the presidency, when the bar results of 2015 will be released)
• Tolentino’s examples of certain as to event (indefinite or indeterminate period): movable religious holidays
like Holy Week, events in civil or political life.
• Tolentino: if the term is when the person turns 18 and the person dies before that, the term is not
converted to a condition. The period will be computed just the same in spite of the death of the person. (Idk
what Balane thinks tho).

Art. 1180 When the debtor binds himself to pay when his means permit him to do so, the obligation is one
with a term.

• Although Article 1180 looks like a condition dependent on the sole will of the debtor, the law treats it as a
term.
• Strictly speaking it is not a term; speaking it is a condition, but the law says it’s a term so too bad.
• Tolentino: the creditor should file an action to fix a period for the payment of the obligation. An immediate
action to enforce the obligation, without a period having been previously fixed by the court, would be
premature.

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.

46
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.

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.

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.

• If prepayment is made without the debtor being aware that the period had not yet arrived, then the thing
and the fruits can be recovered.
• If prepayment is made and the debtor was aware that the period had not yet arrived, then the debtor
waives the benefit of the term.
• Tolentino: only in obligations to give
• An obligation was entered on May 1, 2002 between A and B. The obligation is to be performed on October
1, 2002. A delivers on September 1, 2002 by mistake to B. A discovers his mistake and tells B to return the
object and the fruits delivered.
• Can’t collect when:
1. The term has come He realizes his mistake on Oct 30
2. He waives the period He knows its due on Oct 1, but chooses to pay on June 1.

• Article 1195 does not answer who is entitled to the fruits that have been produced in the meantime (May 1,
2002 to October 1, 2002).
• According to the Spanish Code, the debtor (A) can get only the fruits.
• There are 2 views:
1. The debtor is entitled to the fruits produced in the meantime (Tolentino) o This is because delivery is
not required until October 1.
2. The creditor is entitled to the fruits since the obligation is demandable only when the period arrives o
This is because the obligation is already existing although it is not yet demandable.
o BALANE believes that the fruits belong to the debtor. Why would Article 1195 allow the debtor to
recover the fruits if he should still give them back after the term comes?

• Instances when the Fruits Cannot be Recovered

1. When the obligation is reciprocal and there has been pre-payment of both sides
2. When the obligation is a loan and the debtor is bound to pay interest
3. When the period is exclusively for the creditor’s benefit
4. When the debtor is aware of the period and pays anyway – waiver

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.

47
• The effect of this presumption is that the creditor cannot demand payment before the period arrives nor
can the debtor demand the creditor to accept payment before the period arrives.
• Example: A issues a promissory note to B demandable on October 15. A cannot insist on prepayment nor
can B insist that he be paid on September.
• If the period is for the benefit of the creditor only, the creditor can demand performance at any time, but
the debtor cannot compel him to accept payment before the period expires
• If the period is for the benefit of the debtor only, the debtor can oppose a premature demand for payment,
but may validly pay at any time before the period expires.
• Acc. to case law the ff wording means that the term is for the benefit of the debtor o “I promise to pay
within 6 months from date,” the period is for the benefit of the debtor.
o “I promise to pay on or before June 1, 2015” the period is for the benefit of the debtor.

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.

Araneta Inc v. Phil. Sugar Estates: Art. 1197 inapplicable because the period was clear: the eviction of the
squatters.
2 steps:
1. Did they intend a period?
2. What did they intend?
• Can’t ask for specific performance and ask for the period because a period is future.
• 2 steps involved in an action for fixing a period:
1. The court should determine that the obligation does not fix a period but it can be inferred that a period
is intended due to the circumstances OR the period is dependent on debtor’s will.
2. Court shall decide what period was probably contemplated by the parties.
• Court should make an educated guess.
• Court should not fix a period which it thinks is fair or reasonable but rather the period which was probably
contemplated by the parties.

• Instances When Court May Fix a Period:

1. Article1197,¶1: 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. o Exceptions:
a. Articles 168220 and 1687, 1st sentence21
b. Pacto de retro sales (Article1606)22
c. Contract of services for an indefinite period o Court cannot fix a period or else it would amount to
involuntary servitude.

2. Article1197,¶2: The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
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 3. Article1191,¶3: The court shall decree the rescission claimed, unless there be just cause authorizing
the fixing of a period.

4. Article 1687, 2nd, 3rd and 4th sentences: However, even though a monthly rent is paid, and no period
for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied
the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period
after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix
a longer period after the lessee has stayed in the place for over one month.

5. Article1180: 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.

Cases:

Chaves v. Gonzales: Chaves delivered to Gonzales a portable typewriter for routine cleaning and servicing.
Gonzales was not able to finish the job after some time despite repeated reminders. After getting exasperated
with the delay of the repair, Chaves went to the house of Gonzales and asked for the return which was done.
Gonzales contends that he is not liable for damages because his contract with Chaves did not contain a period,
so Chaves should have first filed a petition for the court to fix the period. Held: Gonzales cannot invoke Article
1197 of the Civil Code for he virtually admitted

20
Art. 1682. The lease of a piece of rural land, when its duration has not been fixed, is understood to have been for all the
time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once,
although two or more years have to elapse for the purpose.
21
Art. 1687, 1st sentence. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent
agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if the
rent is to be paid daily.
22
Art. 1606. The right referred to in article 1601, in the absence of an express agreement, shall last four years from the date
of the contract.
Should there be an agreement, the period cannot exceed ten years.
However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil
action on the basis that the contract was a true sale with right to repurchase.

nonperformance by returning the typewriter that he was obliged to repair in a non-working condition, with
essential parts missing. They intended that the defendant was to finish it at some future time, although such
time was not specified; and that such time had, passed without the work having been accomplished, for the
defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his obligation,
without demanding that he should be given more time to finish the job, or compensation for the work he had
already done. The time for compliance having evidently expired, and there being a breach of contract by non-
performance, it was academic for the plaintiff to have first petitioned the court to fix a period for the
performance of the contract before filing his complaint in this case.

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Encarnacion v. Baldomar: Encarnacion leased his house to Baldomar with rentals paid on a monthly basis.
After 6 years, Encarnacion asked Baldomar to vacate. Baldomar argued that the contract authorized them to
continue occupying the house indefinetly and while they should faithfully fulfill their obligations as respects
the payment of the rentals. Held: Baldomar should GTFO. The defense would leave to the sole and exclusive
will of one of the contracting parties (defendants) the validity and fulfillment of the contract of lease, within
the meaning of art. 1256, since the continuance and fulfillment of the contract would then depend solely and
exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely
depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected
to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue
it; conversely, although the owner should desire the lease to continue, the lessees could effectively thwart his
purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the
rentals. This, of course, is prohibited by the aforesaid article of the Civil Code.

Eleizegui v. Manila Lawn: A contract of lease was entered into by Eleizegui, as lessor, with Manila Lawn Tennis
Club, as lessee. It was stipulated that the lessee can make improvements thereon, and the lessee may lease it
“for all the time the members of the said club may desire to use it . . . Third. . . . the owners of the land
undertake to maintain the club as tenant as long as the latter shall see fit.” Eleizegui terminated the contract,
relying on article 1581 (legal term), which states that if the term has not been fixed, it shall be understood to
be for months when the rent is monthly. Held: a period has been fixed but must be determined by the court.
The parties have agreed on a term. Since a there was a conventional term, the judge can not apply the legal
term fixed in subsidium to cover a case in which the parties have made no agreement whatsoever with respect
to the duration of the lease. Since this is a lease contract, it is, by nature, for a determinate period. On the
other hand, it cannot be concluded that the termination of the contract is to be left completely at the will of
the lessee, because it has been stipulated that its duration is to be left to his will. In every contract there is
always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation to
perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors.
Thus, in this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554,
and is the debtor with respect to the obligations imposed by articles 1555 and 1561. The term within which
performance of the latter obligation is due is what has been left to the will of the debtor. This term it is which
must be fixed by the courts. Unlawful detainer cannot be maintained, the court has to determine if the
term/period has expired. The judgment was entered below upon the theory of the expiration of a legal term
which does not exist, as the case requires that a term be fixed by the courts under the provisions of article
1128 with respect to obligations which, as is the present, are terminable at the will of the obligee.

Philbanking v. Lui She: Justina Santos is an old rich lady who lived with 17 dogs (cute) and 8 maids. She leased
her property to Wong. The lease was for 50 years, although the lessee was given the right to withdraw at any
time from the agreement. In another contract, she gave Wong an option to buy the property within 10 year.
Later, she extended the lease to 99 years and the option to 50 years. The stipulation that "the lessee may at
any time withdraw from this agreement" is claimed to offend against art.1308 which provides that “the
contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of
them.” Held: art. 1308 creates no impediment to the insertion in a contract for personal service of a
resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as
can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the
will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have
agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as
any other act which may have been the subject of agreement. Indeed, the cancellation of a contract in
50
accordance with conditions agreed upon beforehand is fulfillment. In contrast to Encarnacion v. Baldomar, the
right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that
it cannot be said that the continuance of the lease depends upon his will. At any rate, even if no term had
been fixed in the agreement, this case would at most justify the fixing of a period but not the annulment of
the contract.

Lim v. People: Lim offered to sell Ayroso’s tobacco and agreed to turn over the price “as soon as it [is] sold.”
Held: Art. 1197 does not apply because this is a contract of agency because the proceeds of the sale of the
tobacco should be turned over to the complainant as soon as the same was sold, or, that the obligation was
immediately demandable as soon as the tobacco was disposed of. The fact that Lim received the tobacco, the
proceeds to be given to complainant as soon as it was sold, strongly negates transfer of ownership of the
goods to the petitioner. The agreement constituted her as an agent with the obligation to return the tobacco
if the same was not sold.

Araneta Inc. v. Phil Sugar: Araneta sold land to Phil Sugar. Phil. Sugar was obliged to build Sto. Domingo
Church on a portion of the land, while Araneta was supposed to construct the streets around it. Araneta failed
to comply. It argued that the action was premature since its obligation to construct the streets in question was
without a definite period which needs to be fixed first by the court in a proper suit for that purpose before a
complaint for specific performance will prosper. Held: period fixing is not justified. Neither of the courts below
seems to have noticed that what the answer put in issue was not whether the court should fix the time of
performance, but whether or not the parties agreed that the petitioner should have reasonable time to
perform its part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable time;"
and all that the court should have done was to determine if that reasonable time had already elapsed when
suit was filed if it had passed, then the court should declare that petitioner had breached the contract, as
averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet
elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be
logically held that under the plea, the intervention of the court to fix the period for performance was
warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties.
Millare v. Hernando: Millare as lessor and Elsa Co, as lessee executed a 5-year contract of lease. The parties
agreed to rent out a commercial unit for a monthly rate of P350. Before the expiration of the lease contract,
the lessor informed them that the lessee can continue renting the unit as they were amenable to paying
increased rentals of P1,200.00 a month. In response, a counteroffer of P700.00 a month was made by the
lessee. At this point, the lessor allegedly stated that the amount of monthly rentals could be resolved at a later
time since "the matter is simple among us", which alleged remark was supposedly taken by the spouses Co to
mean that the Contract of Lease had been renewed. On 22 July 1980, Mrs. Millare wrote the Co spouses
requesting them to vacate the leased premises as she had no intention of renewing the Contract of Lease.
Lessees responded by reiterated their unwillingness to pay the P1,200.00 monthly rentals and by depositing
the P700 monthly rentals in court. HELD: The lessor and the lessee conspicuously failed to reach agreement
both on the amount of the rental to be payable during the renewal term, and on the term of the renewed
contract. The respondent judge cited Articles 1197 and 1670 when he ordered the renewal of the lease for
another term of five years and fixed monthly rentals thereunder at P700.00 a month. ¶1, Art. 1197 is clearly
inapplicable, since the Contract of Lease did in fact fix an original period of five years. The ¶2 of Art. 1197 is
equally inapplicable since the duration of the renewal period was not left to the will of the lessee alone, but
rather to the will of both the lessor and the lessee. The implied new lease during the continued occupancy
could not possibly have a period of five years, but rather would have been a month-tomonth lease since the
rentals (under the original contract) were payable on a monthly basis. Most importantly, Article 1197 applies
51
only where a contract of lease clearly exists. It follows that the judge's decision requiring renewal of the lease
has no basis in law or in fact since courts have no authority to prescribe the terms and conditions of a contract
for the parties.

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.

• The debtor shall lose every right to make use of the period:
1. When after the obligation has been contracted, the debtor becomes insolvent unless he gives a
guaranty or security for the debt (Article 1198 (1)) o The insolvency here need not be judicial. It can be
actual insolvency.
2. When he does not furnish to the creditor the guaranties or securities which he has promised (Article
1198 (2))
3. When by his own acts he has impaired the said guaranties or securities after their establishment, and
when through a fortuitous event they disappear, unless he immediately gives new ones equally
satisfactory (Article 1198 (3))
4. When the debtor violates any undertaking, in consideration of which the creditor agreed (Article 1198
(4))
5. When the debtor attempts to abscond (Article1198(5))
6. When the creditor is deceived on the substance or quality of the thing pledged, the creditor may either
claim another thing in its stead or demand immediate payment of the principal obligation (Article
2109)

• Types of Periods

i. Suspensive (ex die)

• The period is suspensive when the obligation becomes demandable only upon the arrival of the period.

ii. Resolutory (in diem)

• The period is resolutory when the performance must terminate upon the arrival of the period.

Classification according to source:

i. Legal
• A period is legal when it is granted by law.
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 ii. Voluntary
• A period is voluntary when it is stipulated by the parties.

iii. Judicial
• A period is judicial when it is fixed by the courts.
• 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 (Article 1197, 1st ¶). i. Express
• A period is express when the period is specifically stated.

ii. Tacit
• A period is tacit when a person undertakes to do some work which can be done only during a particular
season.

i. Original ii. Grace

• A grace period is an extension fixed by the parties or by the court.

i. Definite
• A period is definite when it refers to a fixed known date or time.
ii. Indefinite
• A period is indefinite when it refers to an event which will necessarily happen but the date of its happening
is unknown (i.e. death)

2. According to Plurality of Object (Articles 1199-1206)

• How do you classify in terms of object? Simple or multiple. Conjuctive: have to do many things for one
consideration. Or it can be Alternative or facultative.

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.

• Alternative obligation!

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.
• Choice= concentration
• Can pick a third person to decide too.
• Once the choice has been made, then the obligation is concentrated in 1 object.
• After choice is communicated, it ceases to be alternative.
• If you don’t communicate there is no concentration.

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Art. 1201. The choice shall produce no effect except from the time it has been communicated.
• BALANE: you need to communicate to allow the person to prepare!
• Before the choice is communicated then there are 2 objects.
• From communication it becomes specific, not alternative.
• So if Balane promises to give his car or a watch, and Nitura picks the car. If the car burns (fortuitous event),
then Nitura can’t claim the watch coz he already picked the car. Obligation is extinguished.
• BUT, in Ong Guan vs. Century Insurance, the Supreme Court said that the purpose for notice to the
creditor is to give the creditor the opportunity to express his consent or to impugn the election made by
the debtor. Professor Balane does not agree with this statement since the creditor does not have the right
to impugn, otherwise, the obligation would not be an alternative obligation. A better reason according to
Professor Balane is to give the creditor time to prepare.
• Example: The choice is either to give diamond ring or a Mercedes Benz. The debtor should notify the
creditor so the creditor can either rent a safety deposit box or prepare a garage.
• However, according to Professor Balane, the best reason is because once the choice is communicated, the
obligation ceases to be alternative. The risk of loss belongs to the creditor now.
• Effect of communication: if he chooses the ring then its lost by a fortuitous evet, then the obligation is
extinguished.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively
bound, only one is practicable.

Art. 1203. If through the 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. 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.

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;

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(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.

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.

a. Alternative
• An obligation is alternative when several objects or prestations are due, but the payment or performance
of 1 of them would be sufficient.
• A promise to deliver either 500 kgs of rice or 1000 liters of gas. The obligation is alternative. The debtor
cannot perform the obligation by giving 250 kgs of rice and 500 liters of gas unless the creditor agrees. In
which case there is a novation.
• General Rule: The right of choice the right to belongs to the debtor.
• Exceptions:
1. When it is expressly granted to the creditor
2. When it is agreed upon by the parties that a 3rd person shall make the choice

• Choice Belongs to the Debtor

1. When through fortuitous event or through the debtor’s acts, there is only 1 prestation left, the
obligation ceases to be alternative (Article 1202).
2. When the choice of the debtor is limited through the creditor’s own acts, then the debtor has the
remedy of resolution (Article 1191) plus damages (Article 1203)
3. When all things are lost due to the debtor’s fault, the creditor can sue for damages (Article 1204)
o Measure: value of the last prestation
4. When some things are lost due to the debtor’s fault but there are still some things remaining, then the
debtor can choose from what’s left
5. When all the things are lost due to a fortuitous event, the obligation is extinguished
6. When all but 1 of the things are lost due to a fortuitous event and the last object is lost through the
debtor’s fault, then the creditor can sue for damages
7. When all but 1 of the things are lost through the debtor’s own acts and the last object is lost through a
fortuitous event, the obligation is extinguished

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Choice Belongs to the Creditor (Article 1205)
1. When 1 or some of the objects are lost through fortuitous events, then the creditor chooses from the
remainder
2. When 1 or some of the objects are lost due to the debtor’s fault, the creditor may choose from the
remainder or get the value of any of the objects lost plus damages in either case
3. When all of the things are lost due to the debtor’s fault, the creditor can get the value of any of
the objects lost plus damages
4. When some are lost through the debtor’s fault, the creditor chooses from the remainder
5. When all the objects are lost due to a fortuitous event, then the obligation is extinguished
6. When all the objects are lost due to the creditor’s fault, the obligation is extinguished

b. Facultative
• An obligation is facultative when only 1 object or prestation has been agreed upon by the parties to the
obligation, but the debtor may deliver or render another in substitution. o Debtor reserves the right to
substitute it with another prestation
• Facultative obligations bear a resemblance to alternative obligations particularly when the choice in an
alternative obligation is with the debtor.
• In a facultative obligation, the right of choice is always with the debtor. Only debtor can make the choice
• In an alternative obligation, if 1 of the prestations is impossible, then there are other choices. In a
facultative obligation, if the principal obligation is impossible, then everything is annulled.
• In theory, it is easy to distinguish a facultative obligation from an alternative obligation. In practice, it is
difficult to do so since most of the time, the words are ambiguous. For example, I promise to deliver my
Honda Accord, but I reserve my right to substitute this with my Gold Rolex. In this case, it is not very clear
whether the obligation is alternative or facultative.
• According to Professor Balane, the rule is that one must look at the circumstances of the obligation to
determine the intent of the parties. If it is impossible to determine which one, then the doubt should be
resolved in the favor of an alternative obligation since its effects are less radical.
• Differences between alternative and facultative acc. to Tolentino

Alternative Facultative
Contents Various prestations all of Only the principal prestation
which constitute parts of the constitutes the obligations,
obligation the accessory being only a
means to facilitate payment
Nullity Nullity of 1 doesn’t invalidate Nullity of the principal
the obligation invalidates the obligation
Choice Either debtor or creditor Only the debtor
Effect of loss Only impossibility of all The impossibility of the
without the fault of the principal is sufficient, even if
debtor will extinguish the the substitute is possible.
obligation

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 3. According to Plurality of Subject (Articles1207-1222)
Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the latter
is bound to render, entire compliance with the prestation. There is a solidary liability only when the
obligation expressly so states, or when the law or the nature of the obligation requires solidarity.

Ronquillo v. CA: Ronquillo was one of the 4 defendants of the Civil case filed by So for collection of money
amounting to 117M. They entered into a compromise agreement, which said that failure of either party to
comply with the terms and conditions, the innocent party will be entitled to an execution. Because of failure
of the other 2 defendants to pay their part of the obligation, a writ of execution was issued against the
properties of the 4 defendants including Ronquillo, single and jointly liable. The compromise agreement
provides that “defendants individually and jointly agree to pay. HELD: the liability of Ronquillo and the 4 other
is solidary. By the terms of the compromise agreement and the decision based upon it, the defendants
obligated themselves to pay their obligation “individually and jointly.” An agreement to be “individually liable”
undoubtedly creates a several obligation. A several obligation is one by which one individual binds himself to
perform the whole obligation. Note: “individually” has the same meaning as collectively, separately,
distinctively, respectively or severally, juntos or separadamente.

Malayan Insurance v. CA: Sio Choy got 3rd party insurance for his jeep from Malayan for P20K. Sio
Choy’s jeep driven by an employee of San Leon. Passenger of jeep died and claimed against Malayan,
Sio Choy and San Leon. Held: Malayan is not solidarily liable with the tortfeasors. Only liable for 20k. An
insurer is not a solidary debtor in a case of joint tortfeasors where a third party liability insurance contract
exists, as their liability for payment is based on different obligations: one is based on tort and the other on
contract.

RCBC v. CA: Ching was surety for PBM to guarantee PBM’s payment to RCBC. In an injunctive
Order, all actions for claims against PBM were suspended by the SEC in order to give the
Commission the opportunity to pass upon the feasibility of any rehabilitation plans. Held: Ching still has to
pay, notwithstanding the injunction. The extent of a surety's liability is determined only by the clause of the
contract of suretyship. It cannot be extended by implication, beyond the terms of the contract. Conversely,
liability therefor may not be restricted unless expressly so stated.

Quisumbing v. CA: Quisumbing and Biscocho were solidarily obliged to build a house. Once it was built
Quisumbing filed a case against sps Saligo who refused to pay. Held: The question of who should sue the sps
Saligo was a personal issue between Quisumbing and Biscocho in which the sps Saligo had no right to
interfere. Where the obligation of the parties is solidary, either one of the parties is indispensable, and the
other is not even necessary because complete relief may be obtained from either.

Republic Planters Bank v. CA: Canlas and Yamaguchi signed promissory notes executed by World Garment
Manufacturing in favor of Planters. Held: Canlas is solidarily liable. Where an instrument containing the words
“I promise to pay” is signed by two or more persons, they are deemed to be jointly and severally liable
thereon. Canlas is solidarily liable on each of the promissory notes bearing his signature for the following
reasons: The promissory notes are negotiable instruments and must be governed by the Negotiable
Instruments Law.

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Inciong v. CA: Where the promissory note expressly states that the three signatories therein are jointly and
severally liable, any one, some or all of them may be proceeded against for the entire obligation - the choice is
left to the solidary creditor to determine against whom he will enforce collection.

• Joint: each of the creditors can demand only a proporationate part of the credit.
o Mancomunada, mancommunada simple, pro rata
• Solidary: Each of the creditors can demand can demand the whole or anyone of the debtors can be
required to perform all
o In PN, if you use singular pronouns solidary if signed by 2 or more persons o Joint and solidary, in
solidum, solidaria
o Other words indicating solidarity acc. to Tolentino: juntos o separadamente, “individually and
collectively,” “individually liable,” “individually and jointly,” mancomunada solidaria

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.

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.

• Tolentino notes:
o If the object is indivisible and there are several joint creditors, the obligation can be performed only by
delivering the object to all the creditors jointly. If the debtor delivers to only 1, he will be liable for
damages.
o If only some of the debtors ask for delivery, the debtor can refuse to perform.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of
itself imply indivisibility.

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same
manner and by the same periods and conditions.

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything
which may be prejudicial to the latter.

Art. 1213. A solidary creditor cannot assign his rights without the consent of the others.

• Tolentino: If a solidary creditor does so, then it produces no effect. If payment is made to the new creditor,
it is made to a third person. However, if assignment is to a co-creditor then Tolentino thinks this is ok
because the co-creditor already enjoys the confidence of his co- creditors.

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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.
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.

• Is there a conflict between Article 1212 and Article 1215? Article 1212 provides that each of the solidary
creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the
latter. But Article 1215 allows novation, compensation, confusion or remission on the part of the solidary
creditor. Why? According to Professor Balane, this is absurd.
• One way of reconciling is that under Article 1215, any creditor can remit or condone the obligation. But
because the obligation is extinguished, the condoning creditor must be liable for the other creditor’s
share. Here, there is no prejudice.
• A, B and C are creditors of X. A can condone the entire 3M. However, A must pay B and C 1M each.
o It’s effective as to A and X, but not B and C
• However, another problem arises if the condoning creditor later on becomes insolvent.
• Tolentino: where the creditor in a solidary obligation has, by a subsequent instrument, covenanted with
some of the solidary debtors different periods of payment and different conditions, the solidarity
stipulated in the original contract is not thereby destroyed.

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not been fully collected.

PNB v. Planters: PNB filed a complaint for the collection of a sum of money against several solidary debtors.
After PNB presented its evidence, one of the defendants, Ceferino Valencia, died. Thus, the CFI dismissed the
action holding that it should be prosecuted in the estate proceedings of the deceased under Rule 86 of the
Rules of Court. Held: the death of one defendant does not deprive the court of jurisdiction to proceed with the
case against the surviving defendants an action for collection of a sum of money based on contract against all
the solidary debtors. Article 1216 grants the creditor the substantive right to seek satisfaction of his credit
from one, some or all of his solidary debtors. If, after instituting a collection suit based on contract against
some or all of them and, during its pendency, one of the defendants dies, the court retains jurisdiction to
continue the proceedings and decide the case in respect of the surviving defendants.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share which corresponds to each, with
the interest for the payment already made. If the payment is made before the debt is due, no interest for
the intervening period may be demanded.
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When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor
paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his codebtors if such
payment is made after the obligation has prescribed or become illegal.

Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does
not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid
by anyone of them before the remission was effected.

• Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does
not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid
by anyone of them before the remission was effected.
• A is the creditor of V, W, X, Y,and Z. W, X, Y, and Z owe A 10,000. The obligation is solidary.
• A remits X’s share – P2,000. A can go after V for only P8,000. The remission benefits X initially since X
only has to pay P8,000 instead of 10,000. However, X can only recover P2,000 each from the rest.
• A is the creditor of V,W,X,Y, and Z. V, W, X, Y, and Z owe A P10,000. The obligation is solidary. A remits X’s
share – P2,000. A can go after X for the balance since X is still a solidary debtor for the balance. Otherwise,
the effect of remission would be extended. However, X can recover P8,000 from everyone.
• A is the creditor of V, W, X, Y, and Z. V, W, X, Y, and Z owe A P10,000. The obligation is solidary. A remits
X’s share– P2,000. Y becomes insolvent. A sues W for the balance of P8,000.
o What happens? 3 views:
 Creditor bears loss: A only gets 6,000 (10k-X’s share- Y’s share=10k-2k-2k)  All of them
except X bear the loss.
 All will bear the loss (inc. X): Art. 1217 must be applied. Thus, the insolvency of Y is shouldered by V,
W, and Z. So, W can recover P2,000 from X and P500 from Y instead of collecting P3,000. W has to
shoulder P500 as a loss due to Z’s insolvency.
 Balane thinks this is most equitable. Only his 2000 share is remitted, but he remains liable for
his portion of the share of the insolvent debtor.

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.

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.

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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.

3 Kinds of Defenses:
i. Real defenses
• These are defenses derived from the nature of the obligation.
• A real defense is a total defense. It benefits all the debtors.
• Total: deliver drugs

ii. Personal defenses

• Personal defenses may either be total or partial defenses.
• An example of a total personal defense is if the consent of the debtors were all vitiated.
• An example of a partial defense is that a certain amount is not yet due. It is partial since there may be
amounts which are already due. Thus, the debtor has to pay for those amounts which are due.
o A, B, C debtors. If C’s not yet due, he only has to pay 2/3. This is partial

iii. Defenses which are personal to the other co-debtors

• The debtor can only avail himself of these defenses only with regard to the part of the debt which his co-
debtors are responsible for.
• These defenses are partial.
• The debtor sued can invoke all three kinds of defenses. The difference is whether such defense would
result in total or partial exculpation.

Universal Motors v. CA: Rafael Verendia, Teodoro Galicia and Marcelina Galicia purchased from Universal
Motors Corporation two (2) Mercedes Benz trucks. They were solidary debtors and they failed to pay.
Judgment was rendered against them. Held: the appeal of Verendia will inure to the benefit of the others who
have not appealed the decision. When the obligation of the other solidary debtors is so dependent on that of
their co-solidary debtor, the release of the one who appealed, provided it be not on grounds personal to such
appealing private respondent, operates as well as to the others who did not appeal.

a. Single
• An obligation is single when there is only 1 debtor and 1 creditor.

b. Joint
• An obligation is joint when each of the debtor is liable only for a proportional part of the debt, and each
creditor is entitled only to a partial part of the credit.
• General Rule: The obligation is joint since joint obligations are less onerous.

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• Exceptions:
i. Agreement of the parties ii. Law (i.e.tortfeasors are
solidarily liable) iii. Nature of the obligation
o According to many commentators, this is superfluous since a solidary obligation arises because of law.
o ESSENTIAL NATURE: There are as many obligations as there are creditors multiplied by as many
debtors.

Types of Joint Obligations

i. Active joint:
• In active joint, there are multiple creditors.
• A, B, and C are creditors, and X is the debtor. If the obligation is joint, there are 3 obligations – X’s
obligation to A, X’s obligation to B, and X’s obligation to C.
• The demand of 1 creditor on 1 debtor will not constitute a demand on the others.
• The prescription of 1 of the debts will not affect the other debts.
• So if the credit is about to prescribe, and A makes a demand on X the day before it prescribes. The debt of
B and C prescribe

ii. Passive joint:

• In passive joint, there are multiple debtors.
• X, Y, and Z are debtor, and A is the creditor. If the obligation is joint, there are 3 obligations – X’s obligation
to A, Y’s obligation to A, and Z’s obligation to A.
• The demand of 1 creditor on 1 debtor will not constitute a demand on the others.
• The prescription of 1 of the debts will not affect the other debts.
• The insolvency of 1 of the debtors will not affect the burden of the other debtors.

iii. Mixed joint

• In mixed joint, there are multiple creditors and debtors.
• X, Y, and Z are debtors, and A, B, and C are the creditors. If the obligation is joint, there are 9 obligations –
X’s obligation to A
X’s obligation to B, X’s obligation to C, Y’s obligation A, Y’s obligation to B, Y’s obl igation to C,
Z’s obligation to A, Z’s obligation to B, and Z’s obligation to C.

c. Solidary
• An obligation is solidary when any of the debtors can be hled liable for the entire obligation, and any of the
creditors is entitled to demand the entire obligation.
• A solidary obligation is also called joint and several, joint and individual, and in solidum.
• If a promissory says, “I promise to pay,” and it is signed by K, B, and M, then the obligation is
solidary.

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• An obligation is solidary when:
i. The parties so agree
ii. Law so provides (i.e.tortfeasors are solidarily liable) o Tolentino: 2 or more persons acting jointly
who are liable under art. 19-22 CC, because of the nature of the obligation
o Tolentino: liability from crimes, quasi-delict o Tolentino: solidarity is imposed even on joint
payees of things delivered by mistake (art. 2157).
iii. When nature of the obligation requires the obligation to be solidary
• According to many commentators, this is superfluous since a solidary obligation arises because of law.

Types of Solidary Obligations:

i. Active solidary
• In active solidary, there are multiple creditors.
• Characteristics of Active Solidary:
• A credit once paid is shared equally among the creditors unless a different intention appears.
• The debtor may pay any of the creditors, but if any demand, judicial or extrajudicial is made on him, he
must pay only to the one demanding payment (Article 1214).
• Article 1214 can be open to abuse. For example, if A writes Y demanding the performance of the obligation
and A takes no further action, B and C cannot demand from Y. This is open to collusion.
• Suppose A, B, and C are creditors of X. A demands the payment of the loan worth P9,000. X instead pays to
B. The payment to B will be treated as a payment to a 3rd person. Therefore, X must still pay A the amount
of the loan minus the share of B. So, X has to pay P6,000 to A.
• Mutual agency acc. to Manresa.
o Kind of true because A has to give to B and C what he collected o Balane: to a certain extent only

ii. Passive solidary

• In passive solidary, there are multiple debtors.
• Characteristics of Passive Solidary:
• Each debtor may be required to pay the entire obligation but after payment, he can recover from his co-
debtors their respective shares.
• Manresa: there is mutual guarantee o Balane: only to a certain extent (pro tanto)

iii. Mixed solidary

• In mixed solidary, there are multiple debtors and creditors.
• Characteristics of Mixed Solidary
• A credit once paid is shared equally among the creditors unless a different intention appears.
• The debtor may pay any of the creditors, but if any demand, judicial or extrajudicial, is made on him, he
must pay only to the one demanding payment (Article 1214).
• According to Professor Balane, Article 1214 is problematic. For example, X owes A, B and C. B makes an
extrajudicial demand on X. X cannot pay A or C anymore. The problem is when B does not follow up the
demand, it can keep the obligation in suspension indefinitely.

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• The rule in the Spanish Code was that the debtor cannot pay the other non-demanding solidary creditors
only if one of the solidary creditor makes a judicial demand.
• Suppose the debtor upon whom the demand is made pays a creditor who did not make a demand
• The payment is considered a payment to a third person. Therefore the debtor can still be made to pay by
the one who made the demand on him.
• Example: X owes A and B. B demanded from X. X pays A. X must still pay B P6000. But the payment to the
demanding creditor can be reduced by the share of the paid creditor.
o The debtor can still recover from the paid creditor (solution indebiti). SO in total X paid 15k.
o But if X sees B and says here’s what I owe you valid. X will pay B P6000 nalang.
• Suppose A and B are creditors while X and Y are debtors. A demands from Y. Now, X pays B. The payment
of X to B extinguishes the entire solidary obligation. X is not bound by the demand by A on Y. There is no
violation of Article 1214.
• Each debtor may be required to pay the entire obligation but after payment, he can recover from his co-
debtors their respective shares.
• What if A recovers from Y, and subsequently, B recovers from Z.
o The first payment extinguishes the obligation. There is solution indebti between B and Z.

4. According to Performance(Articles1223-1225)

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.

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.

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.

• Divisible and indivisible obligations have nothing to do with the object of the prestation. A common
misconception is if the object of the prestation is divisible, then the obligation is also divisible.
• We are talking about the prestation! Not the object of the prestation.
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• Doesn’t matter what the underlying object of the prestation is!
• Divisibility of the object does not mean that the obligation is also divisible. But indivisibility of the object
necessarily means an indivisible obligation.
• So if you are obliged to deliver 100 sacks of sugar. The object of the prestation is divisible but the
obligation is not. You are not allowed to deliver it in installment.

a. Divisible
• An obligation is divisible when it is susceptible to partial performance.

b. Indivisible
• An obligation is indivisible when it cannot be validly performed in parts.

• General Rule: Obligations are indivisible.

• Exceptions:
i. When the parties provide otherwise (Articles 1225, 3rd ¶, 124813) ii. When the
nature of the obligation necessarily entails the performance of the obligation in parts
o Example: Hiring a security guard to guard from 8pm to 2am daily for 6 months. This obligation cannot
be performed indivisibly. You can’t compress time.
o 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 (Article 1225, 2nd ¶)
o Exception to the Exception: However, even though the object or service may be physically divisible, an
obligation is indivisible if
1. So provided by law 2. Intended by the
parties.

iii. When the law provides otherwise o There are provisions on payment which provide that
performance may be divisible.

5. According to Sanction for Breach (Articles1226-1230)

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.

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Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither may the debtor be required to make partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the
payment of the former without waiting for the liquidation of the latter.
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Bacharach v. Espiritu: Espiritu bought trucks from Bacharach. It was agreed in both sales that 12% interest will
be paid on the unpaid price, and in case of the non-payment of the total debt at maturity, 25% shall be the
penalty. Espiritu failed to pay. Court ordered him to pay the interest and the penalty. Held: the penalty clause
can be imposed separately from the interest. Article 1152 permits the agreement upon a penalty apart from
the interest. Should there be such an agreement, the penalty, as was held in Lopez vs. Hernaez, does not
include the interest, and as such the two are different and distinct things which may be demanded separately.
The penalty is not to be added to the interest for the determination of whether the interest exceeds the rate
fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly
performed, and making use of the power given to the court by article 1154 this penalty is reduced to 10 per
cent of the unpaid debt.

Robes- Francisco v. CFI: In May 1862, Robes-Francisco Realty & Dev’t Corp. agreed to sell to Lolita
Milan a 276 sq. m. parcel of land in Caloocan for the sum of Php3,864. Milan completed payments by
December 1971, having paid a total of Php5,193.63 inclusive of interests and expenses for registration of title.
Thereafter, she made repeated demands for the execution of the final deed of sale and the issuance of a TCT
over said lot. While the parties executed a final deed of sale a few months thereafter, still, no TCT has been
issued. Said deed of sale provided that should the vendor warrants that a TCT shall be transferred to Milan
within 6 months, and that should it fail to do so, it will refund Milan with the total amount paid plus 4%
interest. Six months lapsed and still no TCT was transferred. Milan filed a complaint for specific performance.
She won in the lower courts. Now, Robes-Francisco is questioning the award of nominal damages and
attorney’s fees. It invokes Art. 1226, which provides that in obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment of interests for non-compliance, if there is no
stipulation to the contrary. The Court, however, rejects this contention. It would have agreed with petitioner
had the clause in the deed of sale been an actual penal clause. It wasn’t. Even without it, under Art. 2209, the
vendee is entitled to a refund plus interest rate which is higher than the 4% stipulated in the contract. Thus,
said clause in the deed of sale cannot preclude the award of damages to Milan.

Pamintuan v. CA: Pamintuan entered into an agreement to with Tokyo Menka Kaisha to ship his corn to
Tokyo, in exchange for plastic sheetings. He then contracted to sell the plastic sheetings to Yu Ping Kun Co.
Pamintuan was to deliver the sheetings to Yu Ping’s bodegas in Manila within one month upon arrival of
carrying vessels; Any violation of the contract of sale would entitle the aggrieved party to collect from the
offending party P10k liquidated damages. Upon arrival of the plastic sheets in Manila, Pamintuan did not
deliver all the shipments to Yu Ping’s bodega. During this time, Pamintuan informed Yu Ping that he needed
cash to pay his obligations and asked that he be paid immediately. Thus, Pamintuan and Yu Ping agreed to fix
the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value
thereof. After Pamintuan delivered some of the sheetings of inferior quality, he refused to deliver the
remainder of the shipments, saying that that the company failed to comply with the conditions of the contract
and that it was novated with respect to the price. Yu Ping entitled to recover liquidated and actual damages.
Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheetings and he
overpriced them. He is responsible for all damages which may be reasonably attributed to the
nonperformance of the obligation. As a general rule, the penalty takes the place of the indemnity for damages
and the payment of interest. This is subject to three exceptions: (1) when there is an express stipulation to
that effect; (2) when the obligor having failed to comply with the principal obligation also refuses to pay the
penalty, in which case the creditor is entitled to interest in the amount of the penalty, in accordance with
Art.2209; and (3) when the obligor is guilty of fraud in the fulfillment of the obligation. The reason for the third
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exception is based on the principle that an action to enforce liability for future fraud cannot be renounced, as
that would be against public policy and would contravene the express provisions of Article 1171 of the Civil
Code which states that any waiver of an action for future fraud is void.” The second sentence of art. 1226 itself
provides that nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the
obligation". "Responsibility arising from fraud is demandable in all obligations." "In case of fraud, bad faith,
malice or wanton attitude, the obligor shall be responsible for an damages which may be reasonably
attributed to the non-performance of the obligation" (art. 2201). There is no justification for the Civil Code to
make an apparent distinction between penalty and liquidated damages because the settled rule is that there is
no difference between penalty and liquidated damages insofar as legal results are concerned and that either
may be recovered without the necessity of proving actual damages and both may be reduced when proper.
After consideration of all the surrounding circumstances, 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 10k for any breach of the contract. The proven damages supersede the stipulated
liquidated damages. This view finds support in the opinion of Manresa (whose comments were the bases of
the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the
difference between the proven damages and the stipulated penalty may be recovered.

Balane’s comments on Pamintuan: The penalty was 10k. But there was fraud so 90k of actual damages was
proved. Since the amount of the penalty is smaller than actual damages, then the penalty is deemed merged
with the actual. Fraud is one of the exceptions were you can claim both. This is a deviant. Follow Bacharach,
Country bankers.

Country Bankers v. CA: OVEC and Sy entered into a Lease Agreement for the lease of 3 theaters for 6 years.
After more than 2 years of operation, OVEC demanded for repossession because Sy didn’t pay the monthly
rentals and the amusement taxes. But they compromised and he was allowed to continue upon entering a
supplemental agreement. However, the amusement tax liability of the theaters, which Sy had been deducting
from the monthly rentals with the obligation to remit to Cabanatuan Gov’t, was not paid despite 2 demands.
Therefore, OVEC repossessed the property. Sy filed the case for reformation of the agreement, damages, and
injunction. Held: the forfeiture of the deposit initially paid by Sy in favor of OVEC in case of default would not
unjustly enrich OVEC. A provision which calls for the forfeiture of the remaining deposit still in the possession
of the lessor, without prejudice to any other obligation still owing, in the event of the termination or
cancellation of the agreement by reason of the lessee's violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into.

Heirs of Manuel Uy v. Meer Castillo: Parties entered into an agreement that Petitioner will finance the
litigation of the Deceased Respondent in the condition that if latter wins, he will sell a portion of the disputed
land to petitioner. Agreement included a penal clause providing that any party violating the Kasunduan would
pay the aggrieved party a penalty fixed in the sum of P50,000.00, together with the attorney’s fees and
litigation expenses incurred should a case be subsequently filed in court. So obviously Respondent did not
follow the agreement to the letter. SC said that the agreement is binding. Since the parties fixed liquidated
damages in the sum of P50,000.00 in case of breach, we find that said amount should suffice as petitioners'
indemnity, without further need of compensation for moral and exemplary damages. In obligations with a
penal clause, the penalty generally substitutes the indemnity for damages and the payment of interests in
case of non-compliance. Usually incorporated to create an effective deterrent against breach of the obligation
by making the consequences of such breach as onerous as it may be possible, the rule is settled that a penal
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clause is not limited to actual and compensatory damages. The RTC's award of attorney's fees in the sum of
P50,000.00 is also proper. Aside from the fact that the penal clause included a liability for said award in the
event of litigation over a breach of the Kasunduan, petitioners were able to prove that they incurred said sum
in engaging the services of their lawyer to pursue their rights and protect their interests.

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.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded.

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable.

Lo v. CA: Lo acquired 2 parcels of land from Land Bank. Nat’l Onion Growers had a subsisting contract of lease
with Land Bank, which provided for the payment of P5000 for everyday of delay. Nat’l Onion Growers delayed
in vacating. Held: CA did not err in reducing penalty from P5000 to
P1000 a day for being unconscionable and iniquitous. It was unconscionable coz Nat’l Onion
Growers was obligated to pay monthly rent of P30,000, while the penalty was at P5,000 a day or P150,000 per
month, or 5 times the monthly rent. It was inequitable coz delay was caused by a wellfounded belief that of
Nat’l Onion Growers’ right of preemption to purchase the subject premises had been violated.

Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation.

The nullity of the principal obligation carries with it that of the penal clause.

• A penal clause is an accessory undertaking to assume greater liability in case of breach (SSS vs.
Moonwalk).
• Doesn’t have to be money. But it usually is
• Penal clauses are governed by Articles 2226-2228,14 the provisions on liquidated damages since a penal
clause is the same as liquidated damages (Lambert vs. Fox).
• Penal clauses may be reduced by the courts if unconscionable.
• 2 Functions of a Penal Clause (SSS vs. Moonwalk)

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Art. 2226. Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof. Art. 2227.
Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
Art. 2228. When the breach of the contract committed by the defendant is not the one contemplated by the parties in agreeing
upon the liquidated damages, the law shall determine the measure of damages, and not the stipulation.
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 i. To provide liquidated damages o The creditor can demand liquidated damages without having to
prove actual damages. o The only limitation that the courts will reduce the liquidated damages if
the same is scandalously unconscionable.

ii. To strengthen the coercive force of the obligation by the threat of greater responsibility in case of
breach
o Stipulates a penalty which is greater than one without a penal clause. Thus, Robes-Francisco states that
4% interest is not a penal clause.
o If its less than the legal rate, it is not a penal clause. But it is nevertheless valid.

• 2 Characteristics of a Penal Clause

i. Subsidiary or alternative (Article 1227)
o General Rule: Upon breach of the obligation, the creditor has to choose whether to demand the
principal or the penalty.
o Exception: The principal obligation and the penalty can be demanded when the penal clause is joint or
cumulative. This occurs when it is the creditor has been clearly granted such right (Article 1227, 2nd
sentence), either expressly or impliedly. The implied right must be one ascertainable from the nature
of the obligation. An example is in the construction industry where the contractor must pay the
penalty if the work is completed after the stipulated time frame but must also finish the agreed
construction.
o Doesn’t have to be explicit. It just has to be clear.
o Example: Gov’t enters into a contract to complete a fly over which must be completed in 6m. If it’s not
completed, there will be a penalty of 50k for everyday of delay. There was a 30 day delay.
o Contractor can’t say that I won’t finish construction, but here’s the 1.5M

ii. Exclusive (Article 1226)

o General Rule: The penalty clause takes the place of other damages (that’s why in imposing a
penalty clause, make sure that the penalty is stiff).
o Exception (not just reparation but punitive): Both the penalty and actual damages may be recovered
in the following:
1. Express stipulation
2. Refusal by the debtor to pay the penalty
3. The debtor is guilty of fraud (malice) in the performance of the obligation.

H. EXTINGUISHMENT OF OBLIGATIONS

Art. 1231. Obligations are extinguished:

(1) By payment or performance:
(2) By the loss of the thing due:
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation;
(6) By novation.

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Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory
condition, and prescription, are governed elsewhere in this Code.

• So why are only 6 enumerated, and then 4 others given?

• The first 6 have sub-sections. They are simple causes for the estinguishment of obligation • The one’s in
the paragraph have are multi-purpose. They have other natures
• Are these complete? NO.
• Examples:
1. Death
 intuitu personae obligations like support
 obligations in marriage, obligation to support, obligations in a partnership, etc.
2. Renunciation of the creditor
 The creditor waives the obligation.
 The renunciation need not be in any specific form.
 Renunciation and remission are 2 different things. A renunciation is a refusal by the creditor to
enforce his claim with the intention of waiving it. A remission is in the nature of a donation.
3. Compromise
 akin to novation
4. Arrival of the resolutory term
 the provision only speaks of the condition.
5. Mutual desistance (Saura v. DBP):

Saura v. DBP: Saura applied to RFC (now DBP) for a loan of P500,000. RFC passed Reso 145 approving the loan
application for P500,000.00. RFC passed Reso 9083: “That in view of observations made of the shortage and
high cost of imported raw materials, the DAR shall certify to the following: 1. That the raw materials needed
by the borrower-corporation to carry out its operation are available in the immediate vicinity; and 2. That
there is prospect of increased production thereof to provide adequately for the requirements of the factory.”
Saura sent a letter to RFC stating that according to a special study made by the Bureau of Forestry “kenaf will
not be available in sufficient quantity this year or probably even next year.” RFC replied: “With respect to our
requirement of the DAR certification, we wish to reiterate that the basis of the original approval is to develop
the manufacture of sacks on the basis of the locally available raw materials.” With the foregoing letter the
negotiations came to a standstill. Saura did not pursue the matter further. Instead,
it requested RFC to cancel the mortgage, and so RFC executed the corresponding deed of cancellation and
delivered it to Saura. TC ruled that there was a perfected contract between the parties and that the defendant
was guilty of breach. Held: there was a perfected contract between RFC (DBP) and Saura, but Saura, is not
entitled to damages because the obligation was extinguished by mutual desistance. It should be noted that
RFC entertained the loan application of Saura on the assumption that the factory to be constructed would
utilize locally grown raw materials. Evidently Saura realized that it could not meet the conditions required by
RFC. This was a deviation from the terms laid down in Reso 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon. So
instead of doing so and insisting that the loan be released as agreed upon, Saura asked that the mortgage be
cancelled. The action thus taken by both parties was in the nature of mutual desistance, “mutuo disenso”
(Manresa) — which is a mode of extinguishing obligations. It is a concept that derives from the principle that

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since mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment (Castan).The subsequent conduct of Saura confirms this desistance. It did not protest against
any alleged breach of contract by RFC, or even point out that the latter’s stand was legally unjustified. Its
request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have
against RFC for the latter's non-compliance.

Floro v. CA: Floro and Phil. Rabbit entered into an agreement denominated as “Agreement for Equipment
Lease, Service and Maintenance” whereby Floro, Inc. agreed to furnish Phil. Rabbit with certain computer
equipment including 4 Model 85 monitors. Appearing on the bottom portion of the Agreement was a
handwritten annotation, which read: “5 five years, the computer becomes your property.” The Agreement
provided for the payment by Phil. Rabbit to Floro, Inc. of a downpayment upon signing of the Agreement and
certain monthly payments, plus certain other amounts upon delivery of the computer equipment. The
computer equipment specified in the Agreement was delivered to Phil. Rabbit except for the 4 Model 85
monitors. In lieu thereof, Floro, delivered and installed Model 82 monitors. Phil. Rabbit made several verbal
and written demands on Floro, Inc. to deliver the Model 85 monitors. Upon assurances made by Floro that the
Model 85 monitors “will be forthcoming,” Phil. Rabbit made several payments in accordance with the terms of
the Agreement. However, despite the assurances made by Floro, the Model 85 monitors were never
delivered. Phil. Rabbit wrote Floro, Inc. asking for the cancellation of the Agreement alleging that the
computers were not placed in full operation due to the nondelivery of the Model 85 monitors. Floroe xpressed
its conformity to the “mutual cancellation” of the Agreement and demanded the return of the computer
equipment. Phil. Rabbit informed Floro that the computer equipment would be returned only upon the
reimbursement of P295,169. Held: The agreement between the parties is one of sale on an installment basis
and not of lease. The mutual restoration is in consonance with the basic principle that when an obligation has
been extinguished or resolved, it is the duty of the court to require the parties to surrender whatever they
may have received from the other so that they may be restored, as far as practicable, to their original
situation. Since the parties had agreed to a mutual cancellation of the Agreement, the court ordered each to
restore to the other what each had received under the Agreement in accordance with Art. 1385. The
computer equipment had been previously returned to Floro by virtue of the writ of replevin. Phil. Rabbit had
been able to make use of the computer equipment for 6 months; hence, Phil. Rabbit was ordered to pay the
sum of P120,564 to be deducted from the sum of P295,169.00 which it had already paid to Floro. Floro was
ordered to return the balance of P174,605.00.

6. Unilateral withdrawal
 GR: unilateral withdrawals are not allowed
 Ex: partnership
7. Change of civil status
 voidable marriage, once voided extinguishes obligation to give support and to live together
8. Rebus Sic Stantibus
9. Want of interest
 Tiu v. Platinum: Non- compete clause valid limited in time, place and scope. But what if the
premium company imposing the non-compete clause goes out of business? Then no more interest
 Example: A owns a peking duck restaurant with a secret recipe for preparing peking duck. A
disclosed the secret recipe to B, his cook. B is then prohibited in his employment contract to work
in another restaurant.

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 10. Judicial insolvency
 The effect of judicial insolvency is that all unpaid debts are written off for good. Thus, even if the
debtor has improved his financial situation because of judicial insolvency, there is no need for the
debtor to pay his unpaid debts.
 They are not revived even if the status of the debtor should recover

1. Payment or Performance (Articles1232–1251)

• This is the paradigmatic mode. Most people do not foresee that the obligation will be extinguished by
other means.
• To give: payment
• To do: performance

Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner,
of an obligation.

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the
obligation consists has been completely delivered or rendered, as the case may be.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment, less damages suffered by the obligee.

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.

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.

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.

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed
to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor
who has accepted it.

Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due
and capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427 under the
Title on "Natural Obligations."

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Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.

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.

Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.

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.

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.

Cathay Pacific v. Vasquez: Spouses Vasquez, together with their maid and friends, flew to HK for biz and
pleasure. On their return flight to Manila via Cathay Pacific, the ground attendant in HK informed them that
their Business Class ticket was upgraded to First Class because of overbooking. They refused the upgrade,
since they don't want to leave their companions in the Business Class.
They eventually relented. The Vasquezes filed a complaint for breach of contract. SC said that the Vazquezes
had every right to decline the upgrade and insist on the Business Class accommodation they had booked for.
By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes. However, there was
no bad faith or fraud on the part of Cathay. Hence, there can be no award of moral or exemplary damages
because of the absence of bad faith. Only entitled to nominal damages of PhP5k because of the breach of
contract.

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.

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.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for
the account of the debtor. With regard to judicial costs, the Rules of Court shall govern.

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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.

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible
to deliver such currency, then in the currency which is legal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.

In the meantime, the action derived from the original obligation shall be held in the abeyance.

DBP v. Sima Wei: The delivery of checks in payment of an obligation does not constitute payment unless they
are cashed or their value is impaired through the fault of the creditor.

Tibijia v. CA: Eden Tan filed a collection suit against the Tibajia spouses. The trial court ruled in favor of Tan
and ordered the spouses to pay the former. The spouses paid partly in check and partly in cash. Tan refused to
accept the payment and asked that the garnished funds be withdrawn to satisfy the judgment obligation.
Held: payment by means of check is not considered payment in legal tender. A check, whether a manager's
check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender
of payment and may be refused receipt by the obligee or creditor.

New Pacific Timber: Held that a certified check is as good as cash.

• Balane never thought so. What if the bank is put under receivership
• For example, A gives B a manager’s check and bank closes for a bank holiday.

Citibank v. Sebeniano: Sabeniano was a client of both Citibank and FNCB, however their relationship went
awry. Sabeniano claimed to have substantial deposits and money market placements with the petitioners as
well as money market placements with the Ayala Investment and Development Corporation, the proceeds of
which were supposedly deposited automatically and directly to her accounts with Citibank. Sabeniano alleged
that petitioners refused to return her deposits and the proceeds of her money market placements despite her
repeated demands. Petitioners admitted that Sabeniano had deposits and money market placements with
them including dollar accounts. However, they allege that the Sabeniano later obtained several loans from
Citibank for which she executed Promissory notes and secured by a declaration of pledge for her dollar
account in Citibank‐ Geneva and Deeds of Assignment for her money market placements with petitioner FNCB
Finance. Held: The checks issued by Sabeniano as payment for her loans are not legal tender. A check,
whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt
is not a valid tender of payment and may be refused receipt by the obligee or creditor. Mere delivery of checks

74
does not discharge the obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized.

BPI v. Roxas: Roxas delivered stocks of vegetable oil to spouses Rodrigo and Marissa Cawili. As payment, they
issued a personal check therefor, spouses Cawili issued a personal check in the amount of P348,805.50.
However, when Roxas tried to encash the check, it was dishonored by the drawee bank. BPI contends that the
element of “value” is not present, therefore, respondent could not be a holder in due course. Held: as general
rule, every holder is presumed prima facie to be a holder in due course. One who claims otherwise has the
onus probandi to prove that one or more of the conditions required to constitute a holder in due course are
lacking. Value “in general terms may be some right, interest, profit or benefit to the party who makes the
contract or some forbearance, detriment, loan, responsibility, etc. on the other side.” A cashier’s check is
really the bank’s own check and may be treated as a promissory note with the bank as the maker. The check
becomes the primary obligation of the bank, which issues it and constitutes a written promise to pay upon
demand. The mere issuance of a cashier’s check is considered acceptance thereof.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless
there is an agreement to the contrary.

• Only during the Japanese occupation (1942-1945)

• You need a declaration that there is extra-ord inflation by the BSP o He said that you’ll see this in the
cases, but actually you don’t so IDK.

Velasco v. Meralco: In Art. 1250, the employment of the words "extraordinary inflation or deflation of the
currency stipulated" envisages contractual obligations where a specific currency is selected by the parties as
the medium of payment; hence it is inapplicable to obligations arising from tort and not from contract.

Filipino Pipe v. NAWASA: NAWASA entered into a contract with the plaintiff FPFC for the latter to supply iron
pressure pipes to be used in the construction of the Anonoy Waterworks in Masbate and the Barrio San
Andres-Villareal Waterworks in Samar. NAWASA paid in installments. NAWASA failed to pay so FPFC filed a
collection suit. Held: no extraordinary inflation of the currency justifying an adjustment of NAWASA's unpaid
judgment obligation to FPFC.
Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or
increase could not have reasonably foreseen or was manifestly beyond contemplation the parties at the time
of the establishment of the obligation. While appellant's voluminous records and statistics proved that there
has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot
be considered "extraordinary." It is simply a universal trend that has not spared our country.

Del Rosario v. Shell: Shell leased the land of Del Rosario located in Albay for P250 per month. ¶14 of the lease
contract stipulated that there shall be an adjustment of the rental in case of official appreciation or
devaluation of the Philippine currency. President Diosdado Macapagal promulgated EO 195 titled "Changing
the Par Value of the Peso from US$0.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in Effect on
July 1, 1944). This took effect at noon of November 8, 1965. Del Rosario sought to increase the rental fee to

75
P487.50. The RTC denied Del Rosario’s petition; the RTC opined that there was no official devaluation, there
was merely modification of the par value of the Philippine Peso. Held: It will be noted that devaluation is an
official act of the government (as when a law is enacted thereon) and refers to a reduction in metallic content;
depreciation can take place with or without ailieged official act, and does not depend on metallic content
(although depreciation may be caused curency devaluation). Here, while no express reference has been made
to metallic content, there nonetheless is a reduction in par value or in the purchasing power of Philippine
currency. Even assuming there has been no official devaluation as the term is technically understood, the fact
is that there has been a diminution or lessening in the purchasing power of the peso, thus, there has been a
"depreciation." Moreover, when laymen unskilled in the semantics of economics use the terms "devaluation"
or "depreciation" they certainly mean them in their ordinary signification — decrease in value. Hence as
contemplated cuirrency the parties herein in their lease agreement, the term "devaluation" may be regarded
as synonymous with "depreciation," for certainly both refer to a decrease in the value of the currency. The
rentals should therefore by their agreement be proportionately increased.

Sangrador v. Valderama: Sps. Valderama loaned 1M pesos from Sangrador. As a security, there was a real
estate mortgage on the spouses' house and lot. A acceleration scluase provided that “in the event that an
extraordinary inflation of the Philippine Peso should supervene between now and 8 months after date, then
the value of the Philippine Peso at the time of the establishment of this obligation, shall be the basis of
payment pursuant to Art. 1250, and for this purpose, we hereby acknowledge the official exchange rate at
P14.002 to $1. The corresponding adjustment in the value of the Philippine Peso shall be made in the event
that at the time of the maturity of this obligation, the rate of exchange will have changed as a result of the
supervening inflation. We further agree that the official rate of exchange as set by the Central Bank of the
Philippines for private transactions, shall be the basis of this adjustment.” When the defendants failed to pay
the sum stated in the promissory note, a complaint for foreclosure was instituted. Plaintiff said loan is now
1.4M. The defendants in their answer denied that the loan was P1.4M. They alleged that it was only P1M and
that the additional P400,000 represented usurious interest. Held: the escalation clause is not valid. The rate
of interest for loans or forbearance of money, in the absence of express contract as to such rate of interest,
shall continue therefore to be 12% per annum. Extraordinary inflation exists when 'there is a decrease or
increase in the purchasing power of the Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such decrease or increase could not have been reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the
obligation. Since petitioners failed to prove the supervening of extraordinary inflation between 6 April 1984
and 7 December 1984—no proofs were presented on how much, for instance, the price index of goods and
services had risen during the intervening period—an extraordinary inflation cannot be assumed; consequently,
there is no reason or basis, legal or factual, for adjusting the value of the Philippine Peso in the settlement of
respondents' obligation.

Telentagan v. US: US Lines filed a case against Telangtan Bros & Sons, Inc. seeking payment of demurrage
charges plus interest and damages because of the failure of Telangtan to withdraw its goods from the
containers within the 10-day freedom period provided for in Far East Conference Tariff No. 12. This Tarriff
provides that consignees who fail to take delivery of their containerized cargo within the 10-day free period
are liable to pay demurrage charges. Telangtan failed to withdraw the goods. Both RTC and CA favored US
Lines and awarded the sum for the demurrage who shall bear interest and be recomputed in accordance with
Art. 1250 of the Civil Code. Main issue for Oblicon in this case is whether or not CA and RTC erred in ordering
for the recomputation of the judgment award in accordance with Article 1250 of the Civil Code contrary to
76
existing jurisprudence and without any evidence at all to support it. SC sad that while Telangtan was truly
liable for the demurrage charges, the recomputation under Art. 1250 was erroneous. Extraordinary inflation or
deflation exists when there is an unusual increase or decrease in the purchasing power of the Philippine peso
which is beyond the common fluctuation in the value of said currency, and such increase or decrease could
not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of
the establishment of the obligation. Extraordinary inflation can never be assumed; he who alleges the
existence of such phenomenon must prove the same. And while courts may take judicial notice of the decline
in the purchasing power of the Philippine currency, such downward trend of the peso cannot be considered as
the extraordinary phenomenon contemplated by Article 1250 of the Civil Code. Also, Article 1250 clearly
provides that the value of the peso at the time of the establishment of the obligation shall control and be the
basis of payment of the contractual obligation, unless there is "agreement to the contrary." It is only when
there is a contrary agreement that extraordinary inflation will make the value of the currency at the time of
payment, not at the time of the establishment of obligation, the basis for payment. No such agreement was
present in the agreement / bills of lading.

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.
• Like obligee and creditor, payment and performance are twin terms. Payment refers to obligations to give
while performance refers to obligations to do.
• ayment and performance is the paradigmatic mode. When obligations are entered into, the parties expect
payment or performance. All other modes of extinguishing obligations are abnormal modes.
• Requisites of Payment:
a. As to prestation (3 requisites i-iii below):
i. Identity (identitas)
• Identity means that the very prestation must be performed.
• For example, if the obligation is to give a car, one cannot fulfill the obligation by giving a house.
• If the prestation is specific, the debtor must give or deliver the specific thing which was agreed upon
(Article 1244).
• If the prestation is generic, the creditor cannot demand a thing of superior quality. However, the debtor
cannot give a thing of inferior quality (Article 1246).

• The payment of debts in money shall be made in the currency stipulated, and if it not possible to deliver
such currency, then in the currency which is legal tender in the Philippines (Article 1249, 1st ¶).

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• R.A. No. 529 has been repealed by R.A. No. 8183 which allows payment in different currency.
However, in the absence of an agreement, payment shall be made in Pesos.
o R.A. 529 This made it unlawful to be paid in currency. o R.A. 8183
repealed 529. It’s really a revival of Art. 1249

• Negotiable papers and other commercial documents can be refused by the creditor unless there is
stipulation to the contrary.
• If the negotiable papers and other commercial documents are accepted by the creditor, it has only a
provisional effect. There is payment only in the following (Article 1249, 2nd ¶).
1. When they have been honored and cashed; or
2. When through the fault of the creditor, they have been impaired o This will only apply when the check
is the check of another person, not a party, before there will be impairment [Namarco].
o For example, A gave B a check as payment for a loan. B did not encash the check as a result of
which, the check became stale. There is no impairment here. B can still ask A for payment of the
loan.
o However, if B endorsed a check made by A to C as payment for a loan and C did not encash the
check which became stale, then C can no longer ask B to pay him again.

• Exceptions to the Requirement of Identity

1. Dacion en pago (Article 1245)
2. Novation

ii. Integrity (integritas)

• Identity means that the entire prestation must be performed (Article 1233)
• Also called completeness
• If I owe you 500K, I can’t just pay 300K
• Exceptions to Integrity
1. Substantial compliance in good faith (Article1234)
2. Waiver (Article 1235)
3. In application of payments if the debts are equally onerous (Article 1254, 2nd ¶)15

Legarda v. Saldana: Saldaña entered into 2 written contracts with Legarda Hermanos as subdivision owner,
whereby the latter agreed to sell to him Lots 7 and 8 of the subdivision. It was payable for 10 years divided
into 120 monthly installments. Saldaña faithfully paid for 8 continuous years about 95 of 120 monthly
installments. Since S failed to complete total payment of the 120 installments they cancelled the contracts and
all the amounts paid have been considered as rents paid and as payment for damages suffered by their failure.
Held: The total sum of P3,582.06 (including interests of
P1,889.78) already paid by S (which was more than the value of two lots), was already more than the value of
one lot of P1,500 and hence 1 of the 2 lots as chosen by S would be considered as fully paid, is fair and just and
in accordance with law and equity. Regardless, however, of the propriety of applying said Art. 1592 thereto,
Court finds that plaintiff herein has not been denied substantial justice because of Art. 1234 of said Code.

15
If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.
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JM Tuazon v. Javier: JM Tuazon and Javier entered into a contract to sell. It was stipulated in the contract that
upon failure of respondent to pay the monthly installment, she is given a 1 month grace period to pay such
installment together with the monthly installment falling on the said grace period. Furthermore, failure to pay
both monthly installments, respondent will pay an additional 10% interest. And after 90 days from the end of
the grace period, petitioner can rescind the contract, the payments made by respondent will be considered as
rentals. Javier religiously paid the monthly installment until Jan 5, 1962. Javier was unable to the pay the
monthly installments within the grace period which JM Tuazon, subsequently, sent a letter to Javier on May
22, 1964 that the contract has been rescinded and asked the latter to vacate. Upon failure to vacate, JM
Tuazon filed for the rescission. Held: Art. 1234 applies. Javier religiously satisfied the monthly installments for
almost 8 years. It has been shown that Javier had already paid Php4,134.08 as of Jan5, 1962 which is beyond
the stipulated amount of Php3,691.20. Javier has offered to pay all installments overdue including the
stipulated interest, attorney’s fees and the costs which the CFI accordingly sentenced respondent to pay such
installment, interest, fees and costs. Thus, JM Tuazon will be able recover everything that was due thereto.
Under these circumstances, in the interest of justice and equity, the contract to sell has not yet been
rescinded.

Presbitero v. CA: Presbitero and Canoso entered into a contract wherein Cañoso would negotiate with the
Land Bank and the Ministry of Agrarian Reform for the sale of Presbitero’s land which was to be accomplished
within 120 days. Once his claim was approved, he sent a letter to the Bank to release part of the proceeds.
However, when a part of the proceeds was released, Cañoso was not given his share as agreed upon. This was
accomplished past the 120-day period. Cañoso filed against Presbitero for his share 17.5%. Held: no
substantial breach was committed by the private respondent sufficient enough to warrant a rescission. From
all indications, private respondent was able to perform his obligation; this conclusion follows in the wake of
the approval of the claim. Presbitero substantially performed the obligation in good faith, thus, he may
recover as if he strictly complied with the obligation. There was no proof presented that Cañoso was negligent
and that Presbitero closed the deal based on his sole acts.

Tayag v. CA: Siblings Juan Galicia and Ceterina Labuguin entered into a contract to sell a parcel of land to
Albrigido Lewa. Lewa is to pay 3k upon agreement, 10k after agreement, 10k representing the vendor's
indebtedness to Phil Veterans Bank, and 27k within 1 year from execution of contract. Lewa defaulted as he
didn’t pay in full, on time. However, even after the grace period for payment and during litigation of the claim
for specific performance, the petitioners still allowed Lewa to pay. Respondent now claims that petitioners, in
accepting payment even after the grace period, are now barred to take action by the principle of estoppel.
Held: barred. The right to rescind is not absolute and will not be granted where there has been substantial
compliance by partial payments. Petitioners accepted Lewa’s delayed payments not only beyond the grace
periods but also during the pendency of the case for specific performance. Indeed, the right to rescind is not
absolute and will not be granted where there has been substantial compliance by partial payments. By and
large, petitioners’ actuation is susceptible of but one construction — that they are now estopped from
reneging from their commitment on account of acceptance of benefits arising from overdue accounts of
private respondent.

Azcona v. Jamandre: Azcona leased 80 of his 150 hectare pro indiviso share of Hacienda Sta. Fe, the agreed
yearly rental was P7,200 to Jamandre. The lease was for three agricultural years beginning 1960, extendible at
the lessee's option to two more agricultural years, up to 1965. The first rental due was not paid because the
79
property was not yet delivered. Jamandre only entered the property on October 1960 by paying 7,000. Azcona
issued a receipt which acknowledges the 7,000 as payment for 1961-62. On 1961, Azcona notified Jamandre
that the lease was deemed terminated because the rental was short of 200. Held: It seems to us that this
meaning was adequately conveyed in the acknowledgment made by the petitioner that this was "payment for
the rental corresponding to crop year 1961-62" and "corresponds to the rentals due on or before January 30,
1961, as per contract." On the other hand, if this was not the intention, the petitioner does not explain why he
did not specify in the receipt that there was still a balance of P200.00 and, to be complete, the date when it
was to be paid by the respondent. The petitioner says that he could not demand payment of the balance of
P200.00 on October 26, 1960, date of the receipt because the rental for the crop year 1961-62 was due on or
before January 30, 1961. But this would not have prevented him from reserving in the receipt his right to
collect the balance when it fell due. Moreover, there is no evidence in the record that when the due date
arrived, he made any demand, written or verbal, for the payment of that amount.

Pagsibigan v. CA: Pagsigiban obtained a loan from Planters Development Bank ("Bank") for P4,500.00, secured
by a mortgage over a parcel of land. The Promissory Note for the said loan stipulated for the first payment to
be made on May 3, 1977 and payments every six months thereafter at P1,018.14 with 19% interest for unpaid
amortizations. It also contained an acceleration clause. Initial payment was made in July 6, 1977, followed by
several payments in the total amount of
P11,900.00. However, only four of these payments were applied to the loan, while the rest were "temporarily
lodged to accounts payable since the account was already past due". In 1984, the property was foreclosed
extrajudicially upon Petition by the bank for failure to pay an outstanding balance of P29,554.81. This resulted
in the property being sold to the bank for P8,163.00, and later claimed a deficiency of P21,391.81. Held:The
legality of the foreclosure cannot be sustained because of substantial performance on the part of petitioner.
When the creditor accepts performance, knowing its incompleteness and irregularity without protest or
objection, the obligation is deemed complied with. There is no question that the respondent bank has the
right to foreclose the mortgage upon the first default of petitioner on May 3, 1977, but the records show that
it did not. When it received payment of petitioner on July 6, 1977, which had been 2 months and 3 days
delayed, it applied P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of
receiving delayed payment, it is clear that the respondent bank had waived its right under the acceleration
clause so that instead of claiming penalty charges on the entire amount of P4,500.00, it only computed the
penalty based on the defaulted amortization payment which is P1,018.14. If it computed the penalty charge at
19% of the entire amount of P4,500.00 which would have been due and demandable by virtue of the
acceleration clause, the penalty charges would be much more than P25.20. We also noticed that in Exhibit “D-
3”, the receipt which the respondent bank issued to petitioner for the August 26, 1978 partial payment, it
waived its right under Article 1253 of the Civil Code on Application of Payments when it applied the payment
to the principal instead of the interest. Thus, on that date the outstanding obligation of petitioner was already
reduced to P3,558.21 after she had paid a total of P2,200.00 over a period of nine months from the time the
loan was obtained.

iii. Indivisibility
• Indivisibility means that the obligor must perform the prestation in one act and not in installments (Article
1248). The creditor can validly refuse if the performance is not in one act.
• Exceptions to Indivisibility (Cases when the law allows installment performance)
1. In case of express stipulation (Article1248)

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 2. In prestations which necessarily entail partial performance (Article 1225, 2nd ¶)16
3. If the debt is liquidated in part and unliquidated in part (Article 1248)
4. In joint divisible obligations (Article1208)17
5. In solidary obligations when the debtors are bound under different terms and conditions (Article
1211)18
6. In compensation where there is a balance left (Article1290)19
7. If the work is to be delivered partially, the price or compensation for each part having been fixed
(Article 1720)20
8. In case of several guarantors who demand the right of division (Article 2065)21
9. In case of impossibility or extreme difficult of a single performance
• For example, A is obligated to deliver 1 million bags of cement. Under the circumstances, this may be
extremely difficult.

Nasser v. Cuevas: An agreement provided for the payment of the attorney's fees of Atty. Paterno Canlas for
P600,000 in property and in cash. The agreement also contained a provision creating a charging lien in Canlas'
favor. The provision stated that “until there has been full payment, all the properties are charged with a lien
for attorney’s fees.” Held: the stipulation does not provide for payment in instalments. The proviso that “upon
full payment of the corresponding liability of a party the lien on his/ her share is extinguished,” evidently
contemplates the probability that the heirs who are obliged to pay the attorney’s fees would pay at different
times, and denotes nothing more than that if one of the obligors separately pays his share in the attorney’s
fees, the lien on his share of the estate is thereby extinguished. The clause cannot be construed as granting to
any of the obligors, by implication, the option to pay in installments, or as impliedly binding the obligee to
accept payment by parts. The legal principle, in any event, is that “the creditor cannot be compelled partially
to receive the presentations in which the obligation consists” unless “there is an express stipulation to that
effect,” in much the same way that the debtor may not “be required to make partial payments.”

b. As to the parties
i. Payor, Obligor, Debtor

16
Art. 1254, ¶ 4When 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.
17
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.
18
Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same
periods and conditions.
19
Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation.
20
Art. 1720. The price or compensation shall be paid at the time and place of delivery of the work, unless there is a stipulation to the
contrary. If the work is to be delivered partially, the price or compensation for each part having been fixed, the sum shall be paid at
the time and place of delivery, in the absence if stipulation.
21
Art. 2065. Should there be several guarantors of only one debtor and for the same debt, the obligation to answer for the same is
divided among all. The creditor cannot claim from the guarantors except the shares which they are respectively bound to pay, unless
solidarity has been expressly stipulated.
The benefit of division against the co- guarantors ceases in the same cases and for the same reasons as the benefit of excussion
against the principal debtor.
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• Who may be the Payor?
1. Without the consent of the creditor
a. The debtor himself
b. The debtor’s heirs or assigns
c. The debtor’s agent
d. Anyone interested in the fulfillment of the obligation (e.g. guarantor)

2. With the consent of the creditor

• Anyone can pay if the creditor consents
• Effect of Payment by a 3rd Person
1. Payment was with the Debtor’s Consent o General Rule: The payor steps into the shoes of the
creditor and becomes entitled not only to recover what he has paid, but also to exercise all the rights
which the creditor could have exercised – subrogation (Articles 1236, 1237).
o There is no extinguishment of the obligation but a change in the active subject.
o Exception: No subrogation if intended to be a donation (Article 1238).
2. Payment was without the Debtor’s Consent
o The 3rd person may demand repayment to the extent that the debtor has benefited (Article 1236, 2nd
¶).

ii. Payee,Obligee,Creditor
• Who may be the Payee
1. The creditor himself (Articles1240,1626)
2. The creditor’s successor or transferee (Article 1240)
3. The creditor’s agent (Article 1240)
4. Any third person subject to the following conditions:
a. Provided it redounded to the creditor’s benefit and only to the extent of such benefit
(Article 1241, 2nd par)
b. If it falls under Article 1241 ¶2 (1), (2) and (3), the benefit is total.

5. Anyone in possession of the credit(Article1242)

6. In all these 5 instances, it is required that the debt should not be garnished (Article 1242). If there is
payment despite garnishment, then there is no payment.

Aranas v. Tutaan: In a decision rendered on May 3, 1971 by the CFI, said court declared that Arañas was the
owner of 400 UTEX shares of stock issued in the names of defendants Gene Manuel and B.R. Castañeda,
including the stock dividends that accrued to said shares. UTEX was then ordered to cancel said certificates
and issue new ones in the name of Arañas. UTEX filed a motion for clarification. This was granted which ruled
that its judgment against UTEX was to pay Luisa Arañas cash dividends which accrued to the stocks after the
rendition of this decision, excluding those paid to Manuel and Castañeda. Arañas asked for a writ of execution.
However, UTEX moved for partial consideration, alleging that cash dividends of the stocks corresponding to
the periods of 1972-79 had already been paid and delivered to M & C who then still appeared to be the
registered owners of the shares. Held: UTEX paid the wrong parties, notwithstanding its full knowledge of the

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final judgment; thus, it was liable to pay all dividends accruing after the trial court’s judgment in 1971 to
Aranas as the lawfully declared owners. It only had itself to blame. The burden of recovering the supposed
payment of the cash dividends made by UTEX to the wrong parties Castañeda and Manuel squarely falls upon
itself by its own action and cannot be passed by it to Aranas as innocent parties. It is elementary that payment
made by a judgment debtor to a wrong party cannot extinguish the judgment obligation of such debtor to its
creditor.

PAL v. CA: Respondent Tan commenced a complaint for damages against PAL. CFI ruled in favor of Tan. The
writ of execution was duly referred to Sheriff Emilio Z. Reyes of CFI Manila for enforcement. 4 months later,
Tan moved for the issuance of an alias writ of execution saying that the judgment had remained unsatisfied. It
turns out that Reyes failed to surrender the amounts paid to him by PAL; he could no longer be found as he
has absconded or disappeared. Held: The payment made to the absconding sheriff by check in his name did
not satisfy the judgment debt. Under the peculiar circumstances of this case, the payment to the absconding
sheriff by check in his name did not operate as a satisfaction of the judgment debt. In general, a payment, in
order to be effective to discharge an obligation, must be made to the proper person. Under Art. 1240,
payment must be made to the obligee himself or to an agent having authority, express or implied, to receive
the particular payment. Payment made to one having apparent authority to receive the money will, as a rule,
be treated as though actual authority had been given for its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work a discharge. The receipt of money due on adjudgment
by an officer authorized by law to accept it will, therefore, satisfy the debt. The circumstances of this case,
however, compel a different conclusion. The payment made by the petitioner to the absconding sheriff was
not in cash or legal tender but in checks. The checks were not payable to Amelia Tan or Able Printing Press but
to the absconding sheriff. Such payment did NOT extinguish debt. In the absence of an agreement, either
express or implied, payment means the discharge of a debt or obligation in money and unless the parties so
agree, a debtor has no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Consequently, unless authorized to do so by law or by consent of the obligee a public
officer has no authority to accept anything other than money in payment of an obligation under a judgment
being executed. Strictly speaking, the acceptance by the sheriff of the petitioner's checks, in the case at bar,
does not, per se, operate as a discharge of the judgment debt. Since a negotiable instrument is only a
substitute for money and not money, the delivery of such an instrument does not, by itself, operate as
payment. If bouncing checks had been issued in the name of Amelia Tan and not the Sheriff's, there would
have been no payment. After dishonor of the checks, Ms. Tan could have run after other properties of PAL.
The theory is that she has received no value for what had been awarded her. Because the checks were drawn
in the name of Emilio Z. Reyes, neither has she received anything. The same rule should apply. In the first
place, PAL did not pay in cash. It paid in cheeks. Payment in money or cash to the implementing officer may be
deemed absolute payment of the judgment debt BUT As a protective measure, therefore, the courts
encourage the practice of payments by check provided adequate controls are instituted to prevent wrongful
payment and illegal withdrawal or disbursement of funds. If particularly big funds are involved, escrow
arrangements with a bank and carefully supervised by the court would be the safer procedure. It is, indeed,
out of the ordinary that checks intended for a particular payee are made out in the name of another. Making
the checks payable to the judgment creditor would have prevented the encashment or the taking of undue
advantage by the sheriff, or any person into whose hands the checks may have fallen, whether wrongfully or
in behalf of the creditor. By doing so, PAL, in this instance, without prudence, departed from what is generally
observed and done.

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 c. As to the time and place of performance

i. When Payment Should be Made

• Payment should be made when it is due.
• Even if the payment is due, the General Rule is that demand is still necessary.
• Article 1169 provides the instances when demand is not necessary
1. When the obligation or the law expressly so declares
2. Time is the controlling motive for the establishment of the contract
3. Demand would be useless

ii. Where Payment Should be Made:

• Primary Rule: Agreement of the parties
• Secondary Rule: Place where the thing was at the time the obligation was constituted if the obligation is to
deliver a determinate thing
• Tertiary Rule: Debtor’s domicile (not residence)

4 Special Forms of Payment:

a. Dacion en pago (Article 1245)
• Dacion en pago is the act of extinguishing the obligation by the substitution of payment. It is the delivery
and transmission of ownership of a thing by the debtor to the creditor as an accepted
performance/payment of an obligation.
• Filinvest v. Phil. Acetylene: dacion en pago, as a special mode of payment, the debtor offers another thing
to the creditor who accepts it as equivalent of payment of an outstanding debt.
• By agreement of the parties, the prestation is changed.
• Dacion en pago is a special form of payment since it does not comply with the requisite of identity.
• Other terms for dacion en pago include dation in payment, dation en paiement and datio in solutum.
• Dacion en pago is governed by the law on sales (Article 1245).
o Balane will sell Nitura an Innova in 10 days. Balane says “we have no Innovas right now, but we do
have fortuner for a lower price.” BALANE: Ooops!!! This is novation pala!
o Balane borrows 500k from Nitura. On due date he said, “I have no cash moneyz. But I have an Innova.
Want it?” Nitura says k.
o Here, the debt is in money but payment is in something else. o Because it is as if Balane is the vendor
and Nitura the vendee o All the rules on sales apply!

Lo v. KJS: Lo owed KJS P335,462.14. In order to settle this obligation, Lo executed a Deed of Assignment in
favor of KJS wherein Lo assigned his receivables from Jomero. When KJS tried to collect from Jomero, Jomero
refused because Lo still had unpaid obligations to it. Held: The Deed of Assignment did not extinguish the
obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt. In order that there be a valid dation in
payment, the following are the requisites:
(1) There must be the performance of the prestation in lieu of payment (animo solvendi) which may
consist in the delivery of a corporeal thing or a real right or a credit against the third person;
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 (2) There must be some difference between the prestation due and that which is given in substitution
(aliud pro alio);
(3) There must be an agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that due.
The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing
or property of the debtor, payment for which is to be charged against the debtor’s debt. As such, the vendor
in good faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for
the solvency of the debtor, in specified circumstances.

• According to the old traditional concept, it is like a sale because P100,000 seemed to be the purchase price
and the car is the object. However, the modern view is to look at dacion en pago as a novation (change in
object)
• 3rd school (acc. to Balane most accurate) Castan has another view of dacion en pago. He believes that it is
neither a sale nor a novation but a special form of payment. It is a species/variation of payment implying
an onerous transaction similar to but not equal to a sale. It is not novation since there is no new obligation.
It is species of payment that is similar to sale.
o It’s special because it departs from the requisite of identity.
o There’s no novation coz the obligation is extinguished in novation.
• Dacion en pago will take place only if the parties consent.
• What is the effect? Dacion en pago extinguishes the obligation up to the value of the thing delivered
unless the parties agree that the entire obligation is extinguished (Lopez vs. CA).
o So you have to appraise it, unless the parties agree otherwise.

Filinvest v. Phil. Acetylene: This case involves a sale of a motor vehicle. Phil. Acetylene Co (PAC) bought a car
from Lim, and undertook to pay it in installments. There was a chattel mortgage executed on the car for
security of the debt. Lim assigned his rights to Filinvest Credit Corporation (FCC). PAC defaulted on several of
the payments, so FCC sent letters demanding that the payment be made. PAC instead delivered to FCC the car.
PAC claimed that the delivery of the car to FCC extinguished the obligation. Held: the mere return of the
vehicle does not constitute dation in the absence of evidence of the true intention of the parties. Dation is the
transmission of the ownership of a thing by the debtor to the creditor as accepted equivalent of the
performance of the obligation. The debtor offers another thing which the creditor accepts as equivalent
payment. It’s really a sort of sale. The creditor buys the property, and he pays by charging it against the
debtor’s debt. The elements of a sale are present – consent, object certain, and cause or consideration. Dacion
is an objective novation, where the thing offered in lieu of money is accepted as an equivalent – this is the
object certain – and the debt is considered as the purchase price. CONSENT is a prerequisite for the novation
or sale to extinguish the obligation. This consent was not present here, since there is no indication that FCC
intended or consented to the mere delivery being construed as actual payment, or dation.

Citizen’s Surety v. CA: Petitioner, a surety company, issued two surety bonds in behalf of respondent to
guaranty the fulfillment of an obligation under a contract of sale the latter had entered into with the Singer. In
consideration of the bonds, two indemnity agreements were executed by respondent followed by a deed of
assignment executed on the same date. After respondent’s failure to comply with its obligation under the
contract of sale, petitioner was compelled to pay under the surety bonds. When respondent failed to
reimburse it, petitioner filed a collection suit. Respondent opposed the money claim, and asserted that the
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surety bonds and the indemnity agreements had been extinguished by the execution of the deed of
assignment. Held: The transaction could not be dation in payment. When the deed of assignment was
executed, the obligation of the assignor to refund the assignee had not yet arisen. There was no obligation yet
on the part of the petitioner to pay Singer Sewing Machine Co. There was nothing to be extinguished on that
date, hence, there could not have been a dation in payment. The deed of assignment cannot be regarded as
an absolute conveyance whereby the obligation under the surety bonds was automatically extinguished.
Respondent’s subsequent acts showed that the deed of assignment was intended merely as a security for the
issuance of the two bonds. Partial payments were made after the execution of the deed of assignment to
satisfy the obligation under the two surety bonds. Moreover, a second real estate mortgage in favor of
petitioner was executed by respondent. These circumstances showed that no debt was extinguished upon the
execution of the deed of assignment, which was intended merely as another security for the issuance of the
surety bonds.

b. Application of payments/ Imputacion (Articles 1252-1254)

• Designation of the debt of the debtor who has several obligations of the same kind to the creditor, to
whom payment is made.
• Requisites:
1. Several debts
2. All must be due
3. Can’t pay all

• If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
• Application payment is the 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.
• The situation in application of payments is that a debtor owes his creditor. There are several debts due,
but the debtor cannot pay all of the debts due.
• Example: A owes B P2000, P3000 and P10,000. A gives B P15,000. There is no application of payment here
because it is equal to the total amount due.
• The creditor can always not accept application of payments since the creditor cannot be compelled to
accept partial performance of the obligation. However, this may not be wise since the debtor may have
other creditors.
• The rules on application of payment solve the problem of distributing the payment which is less than the
total obligation.

• Rules in Application of Payment

• 1st Rule: Apply in accordance with the agreement
• 2nd Rule: If there is no agreement, the debtor has the right to apply • 3rd Rule: If the debtor does not
choose, the creditor can choose.
• 4th Rule: Apply to the most onerous debt (Article 1254, ¶1)

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• Rules to Determine Which is the More Onerous Obligation
1. An interest bearing obligation is more onerous than a non-interest bearing obligation.
2. An older debt is more onerous than a recent debt
3. An obligation where the party is bound as a principal is more onerous than an obligation is bound as a
surety
4. An obligation which is secured is more onerous than an obligation which is unsecured
5. An obligation with a penal clause is more onerous than an obligation without a penal clause
• 5th Rule: If equally onerous, apply proportionately (Article 1254, ¶2) o Exception to the rule on
indivisibility provided by the law!
• What makes it special? Violates indivisibility and integrity.

Rapanut v. CA: Flunker decided to sell her property in Pasay. It was to be paid on installments. Rapanut has
been paying the 500 per month installments until a letter was sent to him by Flunker’s counsel informing him
that for his failure to pay the monthly installments plus 10% per annum interest on the balance and rescinding
the contract. RTC and CA ruled in favor of Flunker. The trial court and the appellate court agreed with private
respondent's theory that the above payments should be applied to the unpaid accrued interest (10% per
annum on the balance) for the years 1986 to 1989 totalling P10,966.18. Held: A liberal interpretation of the
contracts in question is that at the end of each year, all payments made shall be deducted from the principal
obligation. The 10% interest on the balance is then added to whatever remains of the principal. Thereafter,
petitioner shall pay the monthly installments on the stipulated dates. In other words, the interest due are
added to and paid like the remaining balance of the principal. Thus, we must rule that the parties intended
that petitioner pay the monthly installments at predetermined dates, until the full amount, consisting of the
purchase price and the interests on the balance is paid. Significantly, private respondent accepted the
payments petitioner religiously made for four years. Private respondent cannot rely on the clause in the
contract stating that no demand is necessary to explain her silence for four years as to the 10% interest, as
such clause refers to the P500.00 monthly installments. In a contract involving installment payments with
interest chargeable against the remaining balance of the obligation, it is the duty of the creditor to inform of
the amount of interest that falls due and that he is applying the installment payments to cover said interest.
Otherwise, the creditor cannot apply the payments to the interest and then hold the debtor in default for non-
payment of installments on the principal.

Gobongseng v. CA: Gobonseng sps filed with the SIHI an application for a P2M loan. The parties agreed to
reduce the amount of the loan from P2M to P900K. SIHI granted the Gobonsengs credit lines for such amounts
which they desire to avail of. The availments of such amounts, renewable from time to time, have an average
term of 60 days each. Gobonsengs availed of the full amount of 900K which they renewed from time to time.
With respect to the loan of 800K, the Gobonsengs obtained various amounts in installments. Claiming that the
Gobonsengs failed to pay the two loans on their due date on May 2, 1984 and that despite demands, failed to
remit the payment due, SIHI instituted an extrajudicial foreclosure proceedings. Gobonsengs filed with the
court a quo a complaint for annulment/reformation of documents and damages with prayer for a temporary
restraining order and preliminary injunction. Held: If the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have been covered. As a matter of fact, an amount of
P7,417.86 was credited to the principal in the promissory note per Official Receipt dated 2 May
1984. This partial payment for the principal clearly proves that the interest due had been paid. Article 1253 of
the Civil Code provides that if the debt produces interest, payment of the principal shall not be deemed to
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have been made until the interests have been covered. Consequently, automatic renewal of the loans by way
of promissory notes for the succeeding interest period was unavoidable.

c. Payment by cession (Article 1255)

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.
• Tolentino: the assignment or cession contemplated by this article is the abandonment of the universality
of the property of the debtor for the benefit of his creditors in order that such property may be applied to
the payment of the credits.
• 1 debtor several creditors: Balane owes Loque, Nitura and Caguioa. Balane will give you some land and
they will sell it and divide the proceeds.
o Remember: they have to agree!
o This is different from dacion because ownership is not transferred over the land. They only acquire the
authority to sell.
o This is a SPA to sell o If the sale doesn’t cover everything, then he will still owe the balance.
• The situation is contemplated here is that the debtor has several creditors and several debts. He turns over
property to his creditors who are given the authority to sell the property and to apply the proceeds to his
debt.
• In payment by cession, property is turned over by the debtor to the creditors who acquire the right to sell
it and divide the net proceeds among themselves.
• In payment by cession, the creditors do not own the property to be sold. The creditors only have the
power to sell. The net proceeds of the sale will be distributed according to the agreement.
• Payment by cession is a special form of payment because there is no completeness of performance –
integrity. In most cases, there will be a balance due.
• More differences acc. to Tolentino:
o Dation: only 1 specific thing v. Cession: all property.
o Dation: only in favor of 1 creditor; Cession: several creditors
• Payment by Cession Distinguished from Dacion en Pago
• In dacion en pago, there is a transfer of ownership from the debtor to the creditor. In payment by cesion,
there is no transfer of ownership. The creditors simply acquire the right to sell the properties of the debtor
and apply the proceeds of the sale to the satisfaction of their credit.
• Payment by cession does not generally terminate all debts due since normally there is still a balance due.
The balance will continue to be due unless the parties agree otherwise. Usually, the termination is only to
the extent of the net proceeds. The extinguishment of the obligation is pro tanto.
• What makes it special? Violates indivisibility and integrity
• Payment by cession must be distinguished from insolvency.

• 2 Kinds of Insolvency (not discussed)

i. Extrajudicial or Voluntary (this is voluntary) o In extrajudicial insolvency, if there is a
balance left, the debtor must still pay.
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 o However, the debtor may limit which properties will be sold by the creditors since the agreement is
contractual.
ii. Judicial o In judicial insolvency, the obligation is totally extinguished even if there’s still a balance.
o In judicial insolvency, every property which is not exempt from attachment or execution is made
available for sale.

d. Tender of payment and consignation (Article1256-1261)

• Consignation is the act of depositing the thing due w/ the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment.
• It is defined in the case of Soco v. Militante as a deposit of the object of the prestation in a competent
court in accordance with the rules prescribed by law, after tender of payment was refused or
circumstances which render payment impossible or inadvisable.
• According to Balane, the title of the subsection is wrong. It should have been consignation only because
that is the special mode of payment and not the tender of payment.
• Tender of payment is a manifestation made by the debtor of his willingness, readiness and ability to pay.
• Tolentino notes: it only applies to discharge a debt and not to exercise a right. So in redemption or right to
repurchase, tender is sufficient.
• It is a special mode of payment because payment is made not to the creditor but to the court.
• Consignation is an option on the part of the debtor because consignation assumes that the creditor was in
mora accipiendi when the creditor without just cause, refuses to accept payment. Of course, if the creditor
without just cause refuses to accept payment, the debtor may just delay payment. But something still
hangs above his head. He is therefore, given the option to consign.
• Mora accipiendi will not extinguish. But stops running of interest from time of mora.
• Requisites (Soco v. Militante):
i. That there was a debt due
ii. That the consignation of the obligation had been made because of some legal cause, either
because
a. Tender of payment was unjustly refused by the creditor:
o tender= manifestation to comply with the obligation coupled with the offer of immediate
performance
b. There is no need for tender of payment due to circumstances which make tender of payment
impossible or inadvisable

o Circumstances Which Make Tender of Payment Unnecessary (Article 1256)

a. The creditor was absent or unknown, or does not appear at the place of payment o Tolentino:
absence need not be judicially declared. He must also have no legal representative, or the
debtor does not know of such legal representative.
b. The creditor was incapacitated to receive the payment at the time it was due o Payment made
to an incapacitated person does not count except to the extent that the incapacitated person is
benefited or if he has kept the thing.
c. The creditor, without just cause refuses to give a receipt o According to Professor Balane, this is
wrong. This presupposes that there has been a prior tender of payment.

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 d. Several persons claimed to be entitled to receive the amount due o The debtor should file
interpleader with consignation
e. The title of the obligation has been lost

iii. First notice: That previous notice of the consignation had been given to the person interested in
the performance of the obligation (Article 1257)
iv. That the amount due was placed at the disposal of the court (consignation proper)
v. That after the consignation had been made the person interested was notified thereof (second
notice.)
• Tolentino: this second notice can be service of summons.
• All persons interested in the fulfillment of the obligation, whether passive or active must be notified.

• Failure of any of these requirements is enough ground to render a consignation ineffective.

• Why is it special? You have to pay the creditor or his successor in interest. Here, you pay the court.

Soco v. Militante: Soco leased her commercial building and lot to Francisco at P800 monthly rental, other
terms of which were in a Contract of Lease. Claiming that ¶11 was in fact not part of the contract because it
was cancelled, Soco filed for annulment and/or reformation of the contract. Before this case, Soco also
learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than
P3,000. Since Soco felt he was on the losing end of the contract, he looked for ways to terminate it. Soco
served notice to the Francisco ‘to vacate the premises leased.’ Soco stopped sending his collector to Francisco
and has not accepted payment. As a response,
Francisco informed Soco that all payments of rental due were in fact paid by Commercial Bank and
Trust Company through the Clerk of Court since Soco was not collecting anymore directly from Francisco.
Held: Militante has utterly failed to prove the following requisites of a valid consignation: First, tender of
payment of the monthly rentals to the lessor. Second, respondent lessee also failed to prove the first notice to
the lessor prior to consignation. From their arrangement, it was the lessee’s duty to send someone to get the
cashier’s check from the bank and logically, the lessee has the obligation to make and tender the check to the
lessor. This the lessee failed to do. Third, respondent lessee likewise failed to prove the second notice that is
after consignation has been made, to the lessor. And the fourth requisite that respondent lessee failed to
prove is the actual deposit or consignation of the monthly rentals except the two cashier’s checks. Not a single
copy of the official receipts issued by the Clerk of Court was presented at the trial of the case to prove the
actual deposit or consignation.

Alfonso v. CA: Sps. Danilo and Luzviminda Basco are the owners of an apartment building, having acquired it
by purchase from Pacifico Vibar and Antonia Mapay Vibar (former owners). The “fourth door” unit of the
apartment was being rented out by the former owners to Roland Alfonso at a monthly rental of P185. After
Sps. Basco had purchased the property from the former owners, they sent to Alfonso a letter saying that Sps.
Basco are giving Alfonso 90 days within which to vacate the premises and deliver possession to them because
the spouses will use the said property as their residence. Alfonso refused to vacate said unit and instead he
sent by registered mail his April 1984 rental payment, which was rejected by Sps. Basco. Sps. Basco proposed
to give Alfonso a period of 1 year from April 1, 1984 within which to stay at the premises free from rental in
exchange for the voluntary surrender of the premises. Alfonso insisted that he could not be ejected from
subject premises. Sps. Basco a complaint for ejectment. On November 5, 1984, Alfonso, filed a motion praying
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that the rentals from April 1984 up to the current month of November, be ordered deposited in court. Sps.
Basco manifested that the deposit of the unpaid rentals for 8 months, April to November, 1984 cannot render
ineffective the provision of Sec. 5(b) of BP 25 which allows the ejectment of a lessee in case of arrears in
payment of rent for (3) months at one time, provided, that in case of refusal by the lessor to accept payment
of the rental agreed upon, the lessee shall either deposit by way of consignation, the amount in Court or in a
bank in the name of and with notice to the lessor. Held: Mere tender of payment is not enough. Consignation
must follow to extinguish the obligation. It must be noted that the free rent offer was merely a proposal of
Sps. Basco to Alfonso who rejected it by tendering his payment corresponding to the April 1984 rental and by
consistently refusing to vacate the premises. Such rejection rendered the proposal of free rental without force
and effect. Alfonso was duty bound to pay the rentals as they fall due in order to abort any ejectment
proceedings against him. If the lessor refuses to accept the payment, as in the case at bar, Alfonso had a
remedy provided for by law, namely consignation in court or deposit in a bank in the lessor’s name with due
notice to the lessor. Alfonso did not avail of such remedy so that when Sps. Basco filed the ejectment
proceedings against him, the rentals corresponding to the month of April to July 1984 had not yet been paid
by Alfonso. Tender of payment is not enough—consignation must follow in order to extinguish the debt.
Otherwise, failure to comply with the requirements provided for under Sec. 5, paragraph (b) BP 25 is a ground
for ejectment. Delayed consignation or deposit will not do. Moreover, when Alfonso filed his Motion to
Consign Rentals in November 1984, he was already 8 months delayed in the payment of his rentals.

Tayag v. CA: The late Juan Galicia, Sr., together with his sister, Celerina Labuguin, executed a deed of
conveyance in favor of Abrigido Leyva involving a piece of land for the sum of Php50K. Said deed of
conveyance is now the subject matter of litigation. Galicia Sr.’s heirs are contending that there was a breach of
compliance with the stipulations therein by herein private respondents. Because of the heirs’ reluctance,
Leyva (private respondent herein) filed a suit for specific performance. Held: Consignation alone produced the
effect of payment in the case at bar because it was established below that two or more heirs of Juan Galicia,
Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5, Decision in Civil Case No. 681-G; pp.
67-68, Rollo). Moreover, petitioners did not bother to refute the evidence on hand that, aside from the
P18,520. which was consigned, private respondent also paid the sum of P13,908.25. These two figures
representing private respondent's payment of the fourth condition amount to P32,428.25, less the P3,778.77
paid by petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of P1,649.48 to private
respondent as overpayment of the P27,000.00 balance.

Parishca v. Luis Dison: Luis Dison Realty, and Pasricha executed two Contracts of Lease over a building in
Ermita as lessor and lessees respectively. Lessees agreed to pay monthly rentals. While the contracts were in
effect, Pacheco, then General Manager was replaced by a certain Bautista. Lessees paid monthly rentals until
May 1992 then stopped. Despite final demand by respondents, lessees did not comply. Pasricha admitted
their failure to provide for the stipulated rent but claimed it is justified because of the confusion as to the
person authorized to receive the payment because of the change in management. HELD: Not knowing to
whom payment should be made does not justify the failure of lessees to pay because they were not without
remedy. They should have availed provisions of the Civil Code on consignation of payment by depositing
things due at the disposal of judicial authority and of the Rules of Court on interpleader. Here, consignation
alone would have produced the effect of payment. The rationale for consignation is to avoid the performance
of an obligation becoming more onerous to the debtor by reason of causes not imputable to him. The
Pasrichas claim that they made a written tender of payment and actually prepared vouchers for their monthly

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rentals. But wellsettled is the rule that tender of payment must be accompanied by consignation in order that
the effects of payment may be produced.

Go Cinco v. CA: Manuel Cinco obtained a commercial loan from MTLC and it was secured by a real estate
mortgage over his land and building. When M’s obligation amounted to P1,071, 256.66. To be able to pay such
loan, they applied for a loan from PNB. The latter granted the application on the condition that the existing
mortgage be cancelled so the land can be used as a security for the new loan. Manuel went to the house of
MTLC’s Presiden, Estert and informed her that payment was ready at PNB. M executed a SPA authorizing the
Este to collect the proceeds of his PNB loan. Outraged that the Go Cinco used the same properties mortgaged
to MTLC as collateral for the PNB loan, Ester refused to sign the deed and did not collect the P1.3 Million loan
proceeds. Held: the obligation was not extinguished but Go Cinco was freed from the obligation to pay
interest on the outstanding amount from the time the unjust refusal took place. While Ester’s refusal was
unjustified and unreasonable, Manuel’s position that this refusal had the effect of payment that extinguished
his obligation to MTLC is wrong because a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the law requires the
companion acts of tender of payment and consignation. Tender and consignation have the effect of payment,
as by consignation, the thing due is deposited and placed at the disposal of the judicial authorities for the
creditor to collect. While no completed tender of payment and consignation took place sufficient to constitute
payment, Go Cinco duly established that they have legitimately secured a means of paying off their loan with
MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept the proceeds of the
PNB loan through her refusal to execute the release of the mortgage on the properties mortgaged to MTLC.
MTLC and Ester in fact prevented the Go Cinco from the exercise of their right to secure payment of their loan.
Court ordered to release the mortgage to MTLC as a condition to the release of the proceeds of the PNB loan
and to accept the proceeds, sufficient to cover the total amount of the loan to MTLC, as payment for Manuel’s
loan with MTLC.

Bonrostro v. Luna: There are 2 contracts to sell involving the same house and lot in Diliman. The first one was
entered into by Luna, as buyer, with Bliss. Barely a year later, Luna (this time as seller) entered into another
contract to sell with Bonrostro over the same property; the 2nd contract was for 1.2M Php, and provided for
payment on installment basis; it provided for interest in case of default, rescission and forfeiture in certain
cases. Bonrostro defaulted so Luna filed a case for rescission with the RTC. Also, in order for the 1st contract to
remain valid despite the default of the Bonrostros, the
Lunas paid the amortization to Bliss. The Lunas sought reimbursement for this, plus damages. In the RTC, the
spouses Bonrostro claimed that they were wiling to their total balance of 630k Php to spouses Luna after they
sought from the latter a 60-day extension to pay the same. However, during the time they were ready to pay,
neither the spouses Luna nor their lawyer had appeared. Later, the Bonrostros sent a letter to the lawyer of
Luna expressing their desire to pay the balance but received no response from the latter. Bonrostros claimed
that the Lunas had instructed Bliss not to receive amortization payments from anyone. Held: the act of
sending of the letter does not constitute a valid tender of payment. The Bonrostros assert that their letter
amounts to tender of payment of the remaining balance, thus accrual of interest must be suspended from that
date. Tender of payment "is the manifestation by the debtor of a desire to comply with or pay an obligation. If
refused without just cause, the tender of payment will discharge the debtor of the obligation to pay but only
after a valid consignation of the sum due shall have been made with the proper court." "Tender of payment,
without more, produces no effect." "To have the effect of payment and the consequent extinguishment of the
obligation to pay, the law requires the companion acts of tender of payment and consignation." As to the
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effect of tender of payment on interest, Tolentino explained: When a tender of payment is made in such a
form that the creditor could have immediately realized payment if he had accepted the tender, followed by a
prompt attempt of the debtor to deposit the means of payment in court by way of consignation, the accrual of
interest on the obligation will be suspended from the date of such tender. But when the tender of payment is
not accompanied by the means of payment, and the debtor did not take any immediate step to make a
consignation, then interest is not suspended from the time of such tender. Here, the subject letter merely
states Lourdes’ willingness and readiness to pay but it was not accompanied by payment. She claimed that she
made numerous telephone calls to Atty. Carbon reminding the latter to collect her payment, but, neither said
lawyer nor Constancia came to collect the payment. After that, the spouses Bonrostro took no further steps to
effect payment. They did not resort to consignation of the payment with the proper court despite knowledge
that under the contract, non-payment of the installments on the agreed date would make them liable for
interest thereon. Bonrostro erroneously assumed that their notice to pay would excuse them from paying
interest. Their claimed tender of payment did not produce any effect whatsoever because it was not
accompanied by actual payment or followed by consignation. Hence, it did not suspend the running of
interest. The spouses Bonrostro are therefore liable for interest on the subject installments from the date of
default until full payment of the sums of P300,000.00 and P330,000.00.

Cacayorin v. AFPMBAI: Petitioner got a loan from the bank to buy a house and lot from respondent. The bank
later went into receivership. Later, respondent was able to obtain the loan documents (like the promissory
note) – how, nobody knows. So petitioner now did not know to whom they will pay to the bank or respondent.
So they filed a case for consignation. The contention of respondent is that there is no proper consignation
since petitioner did not first made a tender of payment. Held: consignation is proper as it appears that there
are 2 entities which petitioners must deal with in order to fully secure their title to the property – the bank
(the named creditor in the loan agreement) and Respondent (the holder of the loan documents). Clearly, the
allegations in the Complaint present a situation where the creditor is unknown, or that two or more entities
appear to possess the same right to collect from petitioners. The lack of prior tender of payment by the
petitioners is not fatal to their consignation case. Petitioners filed the case for the exact reason that they were
at a loss as to which between the two – the Bank or respondent – was entitled to such a tender of payment.
Article 1256 authorizes consignation alone, without need of prior tender of payment, where the ground for
consignation is that the creditor is unknown, or does not appear at the place of payment; or is incapacitated to
receive the payment at the time it is due; or when, without just cause, he refuses to give a receipt; or when
two or more persons claim the same right to collect; or when the title of the obligation has been lost.
Consignation is necessarily judicial; hence, jurisdiction lies with the RTC, not with the HLURB. Tender of
payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act
preparatory to the consignation, which is the principal, and from which are derived the immediate
consequences, which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation.

2. Loss of the Thing Due (Articles1262-1269)

• Loss of the thing due is appropriate for to give. Impossibility of performance= to do.
• Tolentino: In reciprocal obligations, it extinguishes the entire juridical relation. The debtor must return to
the creditor whatever the latter may have already delivered.

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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.

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind
does not extinguish the obligation.

• Genus numquam perit: the genus does not perish

• Exceptionally if the whole genus is lost, then it will excuse
• If the genus becomes contraband.

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.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was
due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article
1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.

People v. Franklin: Franklin was accused of estafa. She was arrested and was granted bail, which was
guaranteed by ASIC. When the time for arraignment came, Franklin didn’t show up. ASIC asked for time to
produce her for arraignment, but even with extensions granted, they were unable to make her show up to be
arraigned. Thus, the bond posted by ASIC was forfeited. ASIC tries now to escape liability by invoking Art.
1266. They say that they were unable to produce Franklin because she was allowed by the Philippine
government to leave the country. Therefore, they say, the obligation has become impossible without their
fault. Held: the relationship of Debtor-Creditor contemplated in 1266 is different from the relationship of
State and Surety upon a bail bond. The Surety, by posting the bail bond, becomes absolutely responsible for
the accused’s custody, and is responsible for any flight that might occur. ASIC could have informed the DFA
and other government agencies that she was free on bail.

Immaculata v. Navarro: This is a MR on the court’s decision denying Immaculata’s petition to set aside a
decision in another civil case. In the latter case Victoria filed for specific performance compelling Immaculata
to execute the document in relation to the sale of parcel of land. In giving its ruling, the court inadvertently
missed a point wherein Immaculata alternatively prayed therein that, in case the validity of the sale is upheld,
he be allowed to legally redeem the parcel of land previously obtained through a free patent. Held:
Immaculata may legally redeem the land. The court held that while the sale was originally executed sometime
in December, 1969, it was only on February 3, 1974 when a "deed of conveyance" was formally executed.
Since offer to redeem was made on March 24, 1975, this was clearly within the five-year period of legal
redemption allowed by the Public Land Act. The allegation that the offer to redeem was not sincere, because

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there was no consignation of the amount in Court is devoid of merit. The right to redeem is a RIGHT, not an
obligation, therefore, there is no consignation required to preserve the right to redeem.

PNCC v. NLRC: PNCC hired Romeo Buan to work as Civil Engineer III in Saudi Arabia for a period of 2 years.
While in Saudi Arabia, Buan was assigned to work in the Saudi Government’s Mecca Stormwater Drainage
Project. He renewed his contract. Held: Appraising the second employment contract between PNCC and Buan
in terms of Philippine law, there are 3 reasons why PNCC cannot be held liable under that contract for breach
thereof. First, it will be seen that the renewal of Buan’s Residence and Work permit constituted a condition to
his continued employment in Saudi Arabia. That condition was resolutory in nature, that is, the non-renewal of
private Buan’s permit had the effect of resolving, or rendering cancellable, that contract. The second reason is
found in the rule that an obligor shall be released from his obligation when the prestation has become legally
or physically impossible without fault on his part. The supervening impossibility of performance, based upon
some factor independent of the will of the obligor, releases the obligor from his obligation after restitution of
what he may have received, if any, in advance from the other contracting party; the obligor incurs no liability
for damages for his inability to perform. Lastly, Paragraph 13 of the second contract expressly envisaged the
possibility that renewal of the Residence and Work permit of private Buan could “be denied by the concerned
authorities for any reason,” in which case, the contract would be “cancelled.” Buan was, of course, aware that
his original permit was about to expire when he left for Saudi Arabia the second time. He must or should have
been also alerted by the second contract of employment to the possibility of non-renewal of his Residence and
Work permit and the ensuing cancellability of the contract. PNCC did not, in other words, conceal the legal and
practical situation from private Buan.

PNCC v. CA: PNCC refused to pay the rentals as stipulated in the contract of lease on an undivided portion of
land owned by Raymundo. PNCC refused to pay since it would no longer pursue their rock crushing project
and that the contract of lease would only begin upon the approval of their license. PNCC wants to terminate
the contract due to “financial and technical difficulties.” Held: PNCC must pay. Art. 1266 is applicable only to
obligations “to do” and not to obligations “to give.” The obligation to pay rentals or deliver the thing in a
contract of lease falls within the prestation “to give”; hence, it is not covered within the scope of Article 1266.
At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in said article. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the
thing having been offered by him to the person who should receive it, the latter refused without
justification to accept it.

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.
• Loss of the thing here is not to be taken in the strict legal meaning of
“loss”. Loss can be applied in an obligation to give a determinate thing (Article 1262), in an obligation
to give a generic thing (Article 1263) and in an obligation to do (Article 1266)
• The term loss embraces all causes which may render impossible the performance of the prestations –
impossibility of performance

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• A thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is
unknown or it cannot be recovered.
• When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not
be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing
having been offered by him to the person who should receive it, the latter refused without justification to
accept it (Article 1268).
• Kinds of Impossibility According to Time:

a. Original Impossibility
• If the impossibility had already existed when the contract was made, then the result is not
extinguishments but inefficacy of the obligation under Art.134822 and 1493.23 The contract is void.

b. Supervening Impossibility
• The impossibility of performance must be subsequent to the execution of the contract in order to
extinguish the obligation.

Change in the Circumstances

• Rebus sic stantibus literally means “things as they stand.” It is short for clausula rebus sic stantibus –
agreement of things as they stand. Also called Riesgo imprevisible (Spanish), Theorie d’imprevision
(French) and Verschuvinden des Grundgeschäftes (German).

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in whole or in part.
• In Roman law, no matter how difficult the obligation is, it has to be performed or else the obligor may be
liable for damages (pacta sunt servanda). In Medieval times, although agreements should be complied
with, in certain extreme circumstances, the debtor can be released because of the difficulty in
performance.
• This is a principle of international law that holds that when 2 states enter into a treaty, they enter taking
into account the circumstances at the time it was entered into and should the circumstances change as to
make the fulfillment of the treaty very difficult, one may ask for a termination of the treaty. This principle
of international law has spilled over into Civil law.
• The underlying philosophy here is that when parties enter into an agreement, the parties contemplate
existing circumstances. When things supervene, the parties may be discharged because they did not
contemplate such difficult circumstances.
• This doctrine is also called the doctrine of extreme difficulty and frustration of commercial object or
enterprise.

22
Art. 1348. Impossible things or services cannot be the object of contracts.
23
Art. 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the
contract shall be without any effect.
But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding
the remaining part, paying its price in proportion to the total sum agreed upon.
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• The attitude of the courts on this doctrine is very strict. This principle has always been strictly applied. To
give it a liberal application is to undermine the binding force of an obligation. Every obligation is difficult.
The performance must be extremely difficult in order for rebus sic stantibus to apply.
• Frustration of the enterprise or frustration of commercial objects= English term for rebus sic stantibus
• Requisites
i. The supervening event or change could not have been foreseen at the time of the execution of the
contract
ii. The event or change makes the performance extremely difficult but not impossible
 This is what distinguishes this from loss or fortuitous event.
iii. The event must not be due to an act of either party iv. The contract is for a future prestation.
 Performed over a long period of time or over successive performances
 Some commentators like J. Caguioa is to do only. But see Naga Telephone v. CA where it was
applied to obligations to give.

Naga Telephone v. CA: NATELCO and CASURECO entered into a contract wherein NATELCO shall use
CASURECO’s electric light posts in Naga City. In consideration, CASURECO agreed to install free of charge, 10
telephone connections for NATELCO’s use. After the contract has been enforced for 10 years, CASURECO filed
a case for reformation of the contract on the ground that it has become too one-sided in favor of NATELCO
because after 11 years of NATELCO’s use of the posts, the telephone cables strung by them have become
much heavier with the increase in the volume of their subscribers, worsened by the fact that their linemen
bore holes through the posts at which points those posts were broken during typhoons. Held: Art. 1267 is
applicable. The report of the Code Commission reveals that the rationale behind the article is that when the
service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should
be authorized to release the obligor in whole or in part. This article is based on the doctrine of rebus sic
stantibus which recognizes that the parties stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist the contract also ceases to exist. Considering practical needs and the demands
of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of
the party prejudiced. Further, “service” under 1267 should be understood as referring to “performance” of the
obligation. In this case, the performance contemplated is CASURECO’s obligation to allow NATELCO to use its
posts. Also, 1267 does not require that the contract be for future service with future unusual change, contrary
to NATELCO’s argument. Finally, the Occeña ruling which provides that courts cannot modify the contract is
inapplicable in this case since the Court is NOT making a new contract for the parties herein, but instead finds
the compensation necessary in order not to disrupt the basic and essential services being rendered by both
parties herein to the public and to avoid unjust enrichment by appellant at the expense of plaintiff.

Laguna v. Manabat: Binan leased their certificates of public convenience to Laguna-Tayabas Bus Co. and
Batangas Transpo separately. Laguna and Batangas stopped paying rent due to a rally conducted by their
employees and “the reduction in the amount of dollars allowed by the Monetary Board for the purchase of
spare parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts,
and their procurement at exorbitant costs, the high cost of operation, coupled with the lack of passenger
traffic on the leased lines resulted in financial losses. Held: the alleged causes for the suspension of operations
on the lines leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar
allocations, “already existed when the contract of lease was executed.” The cause of petitioners' inability to
operate on the lines cannot, therefore, be ascribed to fortuitous events or circumstances beyond their control,
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but to their own voluntary desistance. 3rd , performance is not excused by subsequent inability to perform, by
unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by breaking of
machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits to be had under the
contract, by weather conditions, by financial stringency or by stagnation of business. Neither is performance
excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable,
illadvised, or even foolish, or less profitable, unexpectedly burdensome.

Occena v. Jabson: Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its
subdivision contract with petitioners, alleging that due to the increase in price of oil and its derivatives and the
concomitant worldwide spiraling of prices, which are not within the control of plaintiff, of all commodities
including raw materials required for such development work, the cost of development has risen to levels
which are not within the remotest contemplation of the parties at the time said agreement was entered into.
It further alleges that further performance by the plaintiff under the contract, will result in situation where
defendants would be unjustly enriched at the expense of the plaintiff. Tropical homes prays for the
modification of the terms and conditions of the contract by fixing the proper shares that should pertain to the
herein parties out of the gross proceeds from the sales of subdivided lots. Held: The complaint seeks not
release from the subdivision contract but that the court "render judgment I modifying the terms and
Conditions of the Contract. 1267 does not grant the courts this authority to remake, modify or revise the
contract or to fix the division of shares between the parties as contractually stipulated with the force of law
between the parties, so as to substitute its own terms for those covenanted by the parties themselves.

Magat v. CA: Guerrero Transport Services, owned by Guerrero, won a bid for the operation of a fleet of radio-
controlled taxicabs within the Subic Naval Base. LOI 1 was passed by Marcos seizing all privately owned media
facilities, including radio facilities. The Radio Control Office also issued AC 4, suspending acceptance of
application for permits to own and/or possess radio transmitters and transceivers. Thereafter, Guerrero and
Victorino entered into a contract for the sale of transceivers and Victorino placed an order with his Japanese
supplier. However, since the government refused to grant the permit to import the transceivers, the order was
cancelled by Guerrero. Held: no breach of contract and even if there was, such will not give rise to damages.
The law provides that "[w]hen the service (required by the contract) has become so manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part." Here,
Guerrero's inability to secure a letter of credit and to comply with his obligation was a direct consequence of
the denial of the permit to import. For this, he cannot be faulted. Note: Nowhere in the LOI and Admin.
Circular is there an express ban on the importation of transceivers. Possession and importation of the radio
transmitters and transceivers was legal provided one had the necessary license for it. Transceivers were not
prohibited but merely regulated goods.

• If the contract is of immediate fulfillment, the gross inequality of the reciprocal prestation may involve
lesion or want of cause.

• Obligations to give:
a. Obligation to give a determinate thing
• The happening of a fortuitous event in itself does not necessarily extinguish an obligation to deliver a
determinate thing. An obligation consisting in the delivery of a specified thing, shall be extinguished when
the said thing is lost or destroyed without the fault of the obligor and before he is in default.

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• Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to
his fault, unless there is proof to the contrary, and without prejudice to the provisions of Article 1165. This
presumption does not apply in case of earthquake, flood, storm or other natural calamity (Article 1265)

b. Obligation to give a generic thing:

• The happening of a fortuitous event does not extinguish the obligation to deliver a generic thing Genus
nunquam perit – “genus never perishes.” This is the general rule. Sometimes, though, the entire genus
perishes because it becomes illegal.
• What is not covered by this rule is an obligation to deliver a limited generic.
• Example: I promise to deliver to you one of my Amorsolos (I have 4). This is not generic because
I only have four but not specific because I did not specify which one. This is governed by Article 1262. In
this case, the obligation may be extinguished by the loss of all the things through fortuitous event.
• Obligation to do
• The debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor (Article 1266).
• The impossibility here must be supervening. If it is original, then the contract is void.

• Kinds of Impossibility According to Nature:

a. Objective Impossibility
• In objective impossibility, the act cannot be done by anyone. The effect of objective impossibility is to
extinguish the obligation.

b. Subjective Impossibility
• In subjective impossibility, the obligation becomes impossible only w/ respect to the obligor. There are 3
views as to the effect of a subjective impossibility:
i. The obligation is not extinguished. The obligor should ask another to do the obligation. ii. The
obligation is extinguished.
iii. A third view distinguishes one prestation which is very personal and one which are not personal
such that subjective impossibility is a cause for extinguishes a very personal obligation but not an
obligation which is not very personal.

• Effect of Loss on Creditor’s Rights

• 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 the loss.
• A common example of this is insurance.
• In a reciprocal obligation of the thing is lost, one party is absolved. Is the other party still bound to
perform?
o Example: Balane sells car to Nitura for 10k. He will deliver and Nitura will pay in 10 days. If his car is
lost, is Nitura still liable to pay?
o This is disputed. o Tolentino and Castan: no! They are counterparts, so if one is lost then the counter
part is lost  Follows res perit domino. I lost the car, so I lost the payment o JBL Reyes: res perit
creditore. Roman rule: Nitura has to pay!  Basis: Art. 1269.
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 3. Condonation or Remission of the Debt Due

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.

• Condonation or remission is an act of liberality by virtue of which, without receiving any equivalent, the
creditor renounces enforcement of an obligation which is extinguished in whole or in part.
• Requisites
a. The debt must be existing
• You can remit a debt even before it is due.
• Doesn’t have to be due. But you can’t make one if there is no debt yet
• Balane cannot say that “tomorrow, I will enter into a loan with you and then I will condone it.” That’s not a
condonation. If today Balane contracts a loan with Fajardo, tomorrow he can condone it even if it’s due
next week. Example: I owe A P1M. I promised to pay on July 31, 2002 with interest. On May 31, A
condones the obligation. The obligation is existing but not yet due but it can be condoned.
b. The renunciation must be gratuitous
• If renunciation is for a consideration, the mode of extinguishment may be something else. It may be
novation, compromise or dacion en pago for example. c. There must be acceptance by the debtor
d. The parties must have capacity
• The creditor must have capacity to give away.
• The debtor must have capacity to accept.

• Form
a. If the renunciation is express, then it is a donation.
o The form of donation must be observed. If the condonation involves movables, apply Article 748.24 If it
involves immovables, apply Article 749.25

Yam v. CA: Yam entered into three loan agreements with Manphil. These agreements were attended with
penalties for non-payment such as 12% annual interest, 2% monthly penalty, 1 1.2% monthly service charge
and 10% attorney's fees. Yam, after paying the first loan, only paid the second loan partially. Yam wrote a
letter to Manphil proposing to settle their obligation and Manphil replied with an offer to reduce the penalty

24
Art. 748. The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of
the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing, otherwise,
the donation shall be void.
25
Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the
property donated and the value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is
done during the lifetime of the donor.
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charges should the loan be paid on a certain date. The debt was not paid so Manphil sent 2 demand letters.
Yam contended that they fully paid their obligation with Manphil's president agreed to waive the penalties.
Held: Yam liable for the payment of the penaties.
Art. 1270 provides that express condonation must comply with the forms of donation. Art. 748, par. 3
provides that the donation and acceptance of a movable, the value of which exceeds P5,000,00, must be made
in writing, otherwise the same shall be void. Under Art. 417, par. 1, obligations, actually referring to credits,
are considered movable property. It is undisputed than the alleged agreement to condone P266,196.88 of the
second IGLF loan was not reduced in writing.

b. If the renunciation is implied, then it is tantamount to a waiver. o There is no prescribed form in a

waiver (Article 6).26 For example, the creditor can just refuse to collect the debt.

• Ways of Remission
a. will
b. agreement

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.

Art. 1272. Whenever the private document in which the debt appears is found in the possession of the
debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved.

• According to Balane, Articles 1271 and 1272 refer to a kind of implied renunciation when the creditor
divests himself of the proof credit.
• 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 providing that the delivery of the document was made in virtue of payment of the debt (Article 1271).
• Article 1271 has no application to public documents because there is always a copy in the archives which
can be used to prove the credit. Private document refers to the original in order for Article 1271 to apply.
• By delivering the private document, the creditor deprives himself of proof.
• The second paragraph of Article 1271 implies that the voluntary return of the title of credit is presumed to
be by reason of remission and not by reason of the payment of debt. According to Professor Balane, this is
anomalous. This provision is absurd and immoral in that it authorizes the debtor and his heirs to prove that
they paid the debt, when the provision itself assumes that there has been a remission, which is gratuitous.
• You are encouraging him to tell a lie.

26
Art. 6. Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or good customs, or
prejudicial to a third person with a right recognized by law.
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• Whenever the private document in which the debt appears is found in the possession of the debtor, it
shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved (Article 1272).
• 2 Presumptions: A presumption based on a presumption!
i. If a private document is found in the possession of the debtor, then it is presumed that the creditor
voluntarily delivered it to him
ii. Since the creditor voluntarily delivered the private document, then there is a presumption of
remission

Trans-Pacific v. CA: Trans-Pacific applied for and was granted loan accommodations by Associated Bank. The
loans were evidenced by 4 promissory notes and secured by 4 mortgages. Unable to settle its obligation in full,
Trans-Pacific asked for a restructuring of the remained of the loan, which Associated Bank accepted. The
restructured loan was evidenced by 3 new promissory notes. 3 new mortgages were fixed, and the 4 original
mortgages were released. Trans-Pacific sold the parcels of land making up the 4 original mortgages, and the
proceeds were used to pay off the restructured loans. Subsequently, Associated Bank returned the duplicate
original copies of the 3 new promissory notes to Trans-Pacific with the word “PAID” stamped thereon.
However, Associated Bank demanded from Trans-Pacific the value of the interest accrued from the loan. The
Bank claimed that the promissory notes were erroneously returned. Initially, Trans-Pacific wanted to settle the
interest payment, but had a change of heart and instead filed a case for specific performance, demanding the
Bank to release the mortgages, and to have the loan be declared fully paid. Held: Trans-Pacific did not pay its
loan in full. The presumption created by the Art. 1271 is not conclusive but merely prima facie. Here, there’s
sufficient justification to overthrow the presumption of payment generated by the delivery of the documents
evidencing petitioners indebtedness. There is no document presented by Trans-Pacific showing that the debt
has been fully paid. The testimony an employee of the Bank reiterated that the interest had not been paid,
though the principal obligation had already been “removed from [their] books.” A letter from Trans-Pacific to
the Bank showed that Trans-Pacific proposed to have the interest payment be settled by dacion en pago
instead, and also they acknowledged the existence of the obligation to pay the interest. The returned
document was not an original copy, but an original duplicate. Art. 1271 raises a presumption, not of payment,
but of the renunciation of the credit where more convincing evidence would be required than what normally
would be called for to prove payment. The rationale for allowing the presumption of renunciation in the
delivery of a private instrument is that, unlike that of a public instrument, there could be just one copy of the
evidence of credit. Where several originals are made out of a private document, the intendment of the law
would thus be to refer to the delivery only of the original rather than to the original duplicate of which the
debtor would normally retain a copy. It would thus be absurd if Art.1271 were to be applied differently.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of
the latter shall leave the former in force.

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

• Effect of Partial Remission

• The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the
latter shall leave the former in force (Article 1273).

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• Example: Loan secured by a mortgage. If I condone the loan, I condone the mortgage. But if I condone the
mortgage, I do not condone the loan which merely becomes unsecured.
• The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the same
causes as all other obligations (Article 2076).
• The guarantors, even though they be solidary, are released from their obligation whenever by some act of
the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter (Article
2080).
• It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its
delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing
(Article 1274).
• Based on 209327
• According to Professor Balane, the accessory obligation of pledge is extinguished because pledge is a
possessory lien. The presumption in this case is that the pledgee has surrendered the thing pledged to the
pledgor. However, this is not a conclusive presumption according to Art.2110, ¶2.
• This presumption is not applicable in a mortgage since there is no possessory lien.
• In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement (Article 2093)
• The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until
he has paid the debt and its interest, with expenses in a proper case (Article 2105).

4. Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in
the same person.

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the
guarantors. Confusion which takes place in the person of any of the latter does not extinguish the
obligation.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the
creditor or debtor in whom the two characters concur.

• Confusion is the meeting in one person of the qualities of the creditor and debtor with respect to the same
obligation.
• Confusion or merger of rights extinguishes the obligation because the creditor becomes his own debtor.
Therefore, how can the creditor sue himself.
• Requisites of Confusion
a. It must take place between the creditor and the principal debtor (Article 1276) o A borrowed P 1M
from B with C as guarantor. If C acquires the right to collect the P 1M, there is no confusion since C is

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Art. 2093. In addition to the requisites prescribed in Article 2085, it is necessary, in order to constitute the contract of pledge, that
the thing pledged be placed in the possession of the creditor, or of a third person by common agreement.
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 neither a principal debtor or creditor. The effect is that the guaranty is extinguished. The principal
obligation remains. o You can’t be personal guarantor of your own debt
b. The very same obligation must be involved (Article1275)

• Usual Causes of Confusion:

a. Succession (compulsory, testate, intestate)
b. Donation
c. Negotiation of a negotiable instrument • Confusion can overlap with remission or payment.
o Example of confusion overlapping with payment. A makes a promissory note and endorses it to B. B
endorsed it to C. C to D. D endorsed it back to A.
o Example of confusion overlapping with remission: X owes O P100,000. O bequeath to X that credit. And
then she died. In this case, there is extinguishment both by merger. But in this case, merger could
overlap with remission.

5. Compensation

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

• Compensation is a mode of extinguishing, to the concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors and creditors of each other.
• Perhaps, next to payment, compensation is the most common mode of extinguishing an obligation.
• Compensation Distinguished from Confusion
• In compensation, there are 2 parties and 2 debts, whereas in confusion, there are 2 debts and only 1 party.
• Banks always do this
• Kinds of Compensation:
1. Legal (Art. 1279)
2. Facultative (Art. 1287-1288)
3. Conventional or Contractual (Article 1282)
4. Judicial (1283)

Gan Tion v. CA: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an
ejectment case against the former, alleging non-payment of rents for August and September of that year, at
P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed monthly
rental was only P160, which he had offered to but was refused by the plaintiff. CFI ordered the plaintiff to pay
the defendant the sum of P500 as attorney's fees. That judgment became final. On Oct 10, 1963 Gan Tion
served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and
at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00,
corresponding to a period from August 1961 to October 1963. Ong Wan Sieng was able to obtain a writ of
execution of the judgment for attorney's fees in his favor. Gan pleaded legal compensation before the CA,
claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 f or unpaid rents. Held: There has been
legal compensation. It is the litigant, not his counsel, who is the judgment creditor and who may enforce the

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judgment by execution. Such credit, therefore, may properly be the subject of legal compensation. Quite
obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is
indebted to him for more than P4,000. The nature of the award of damages – attorney’s fees – is that it is
made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable
by the former in the cases enumerated in Article 2208.

PNB v. CA: Isabela’s savings account with PNB, with Php2M, is the subject of 2 conflicting claims. One is
asserted by the Aceros who seek to enforce against said savings the final judgment in their favor by the CFI.
The other is by PNB, which claims that since Isabela was at some point both its creditor and debtor, Isabela’s
deposit being deemed a loan to PNB, there had occurred a mutual setoff between them, which precludes the
Aceros’ recourse to that deposit. Held: Art. 1278 does indeed provide that "Compensation shall take when
two persons, in their own right, are creditors and debtors of each other. Nonetheless, these legal provisions
cannot apply to PNB's advantage because it has not proven by competent evidence that it is a creditor of
Isabela. Their evidence only prove that they may have opened a line of credit for Isabela, but not that it was
ever availed of. There being no indebtedness to PNB on Isabela's part, there is in consequence no occasion to
speak of any mutual setoff, or compensation, whether it be legal, i.e., which automatically occurs by operation
of law, or voluntary, i.e., which can only take place by agreement of the parties.

Francia v. IAC: Francia is the owner of a residential lot and a two-storey house built upon it. Pursuant to the
road widening project in Buendia Ave, the Republic expropriated a portion (125 sqm) of the said property for
P4,116.00. Francia failed to pay real estate tax on the property for 14 years amounting to P2,400.00. Because
of this, his property was sold at public auction, with Ho Fernandez as the highest bidder. Francia received a
notice of hearing from buyer Ho because the latter had filed a petition for the issuance of TCT over the
property in Ho’s name. Bill of sale was given to Ho. Auction sale and bill of sale were annotated in the TCT.
Francia filed a complaint to annul the auction sale. Held: there was no legal compensation. The circumstances
of the case do not satisfy the requirements provided by Article 1279. There can be no off-setting of taxes
against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government. Internal Revenue Taxes can not be the subject of
set-off or compensation. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the
contract or transaction sued on. Taxes are not in the nature of contracts but grow out of duty to, and are the
positive acts of the government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. The government and taxpayer are not mutually creditors and debtors of each other.

Mondragon v. Sola: Mondragon hired Sola to build a bodega where Mondragon would sell its products. They
agreed that Sola would be entitled to a service fee, or a commission based on Monthly Sales. Before the
contract was executed, however, Sola acknowledged in a letter to Mondragon that his wife had a debt to
Mondragon in the amount of P1,973,154.73. In this letter, he bound himself to pay to Mondragon on
installment the sums his wife owed. Thus, Mondragon withheld some payments of the service fees, and
applied these to the debts of Sola’s wife. Sola, feeling aggrieved, closed the office where Mondragon was
selling its products and tried to rescind the sale. Held:
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withholding of payment was proper, and rescission could not be had. When Sola acknowledged that he and his
wife would pay in installment, he could no longer claim that his claim to the service fee and his wife’s
indebtedness were separate. Since the parties were now mutually creditor and debtor of each other,
compensation took place and Mondragon acted properly.

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.

• This is legal compensation

• Legal compensation takes place automatically by operation of law once all the requisites under Article
1279 are present.
• Requisites:
1. The parties must be mutually debtors and creditors of each other in their own right and as principals.
o There can be no compensation if 1 party occupies only a representative capacity (i.e. agent). Likewise,
there can be no compensation if in one obligation, a party is a principal obligor and in another
obligation, he is a guarantor.
2. The things due must be fungible
o Article 1279 uses the word “consumable.” This is wrong. The proper terminology is “fungible”
which refers to things of the same kind which in payment can be substituted for another.
o Fungibile is a thing deemed by the parties as the same as a thing of the same kind and quality.
3. The 2 debts must be due
4. The 2 debts must be liquidated and demandable o Because you have to know the amount for sure
o Demandable means that the debts are enforceable in court, there being no apparent defenses
inherent in them. The obligations must be civil obligations, excluding those that are purely natural.
Before a judicial decree of rescission or annulment, a rescissible or voidable debt is valid and
demandable; hence, it can be compensated.
5. A debt is liquidated when its existence and amount are determined. And a debt is considered
liquidated, not only when it is expressed already in definite figures w/c do not require verification, but
also when the determination of the exact amount depends only on a simple arithmetical operation.
Neither of the debts should be garnished 6. Compensation must not be prohibited by law o Articles
1287, 1288 and 179428 are examples of when legal compensation is not allowed. o Legal compensation
is not allowed when there is conventional or facultative compensation.

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Art. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate
them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have
been realized.
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 6. Neither of the debts should be garnished 6. Compensation must not be prohibited by law o Articles
1287, 1288 and 179429 are examples of when legal compensation is not allowed. o Legal compensation
is not allowed when there is conventional or facultative compensation.
o Balane thinks this is redundant.

• Effect of Legal Compensation

• 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 (Article 1289)
• When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of
law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not
aware of the compensation (Article 1290)
• You don’t need any communication. Compensation takes effect by strict operation of law.

Republic v. de los Angeles: Sps. Farin mortgaged a land to Marcelo Steel. Pending the foreclosure, Farin leased
the building located in the land to RCA and other tenants. Marcelo Steel then, on the basis of Article 5 of the
Mortgage Contract, filed a motion requesting that rent be directly paid to it. This was granted. RCA then filed
an MR alleging that Farin has outstanding debts to RCA and whatever rents due were compensated to such
indebtedness. Trial court denied this and all subsequent motion. It is relevant that the Trial Court based its
decision on the ground that the records of the case do not show that Farin was indebted to RCA. Held: there
was compensation of debt. Proof of the liquidation of a claim, in order that there be compensation of debts, is
proper if such claim is disputed.
But, if the claim is undisputed, as in the case at bar, the statement is sufficient and no other proof may be
required.

Solinap v. Del Rosario: Solinap contends that respondent judge gravely abused her discretion in not declaring
the mutual obligations of the parties extinguished. Held: this argument fails to consider Article 1279 which
provides that compensation can take place only if both obligations are liquidated.
Solinap’s claim against the respondent Luteros is still pending determination by the court in Civil Case 12379.
Moreover, the claim of Solinap in that case is disputed by the Luteros on both factual and legal grounds. Upon
this premise, Solinap’s claim in that case cannot be categorized as liquidated credit which may properly be set-
off against his obligation. Compensation cannot take place where
one’s claim against the other is still the subject of court litigation. It is a requirement, for compensation to take
place, that the amount involved be certain and liquidated.”

Sycip v. CA: Jose Lapuz (JL) received from Albert Smith 2000 shares of stock owned by Dwight Dill who left for
Honolulu. JL was supposed to sell these stocks. Francisco Sycip (FS) approached JL and told him he had good
connections in stock exchange. FS sold 758 shares for 12,128. FS again sold 500 shares but this time, he gave
JL a draft for the full value of 8000. When JL presented the draft to the bank, it was denied due to lack of
funds. So he ran after FS, FS gave JL a check in the amount of P5000, but the check was still dishonored. FS

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Art. 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate
them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably
lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have
been realized.
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contends that respondent Court of Appeals erred in not applying the provisions on compensation or setting-
off debts under Articles 1278 and 1279 of the New Civil Code, despite evidence showing that JL still owed him
an amount of more than P5,000 (Commission). Held: This contention is untenable. Compensation cannot take
place in this case since the evidence shows that Jose K. Lapuz is only an agent of Albert Smith and/or Dr.
Dwight Dill. Compensation takes place only when two persons in their own right are creditors and debtors of
each other, and that each one of the obligors is bound principally and is at the same time a principal creditor
of the other. Moreover, as correctly pointed out by the trial court, Lapuz did not consent to the off-setting of
his obligation with petitioner's obligation to pay for the 500 shares.

CIA v. CA: Froilan purchased from Shipping Administration a boat for P200,000. Despite demands, Froilan
failed to pay a number of installments. Shipping Administration then moved to take possession of the vessel.
Pan-Oriental offered to charter the said vessel from Shipping Administration paying for repairs and other
useful expenses. However, the Cabinet revoked the cancellation of
Froilan’s purchase and restored all his rights to the vessel. The court ruled that Shipping
Administration, Compania Maritima (Purchased the vessel from Froilan) and Froilan are liable to Pan-
Oriental for damages and for the repairs and useful expenses incurred by Pan-Oriental. Shipping
Administration claimed that the amount payable to Pan-Oriental should be set-off with the rental owed by
Pan-Oriental. Held: all the elements for Compensation to take place were not present on the date of
dispossession. The amount expended for repairs and improvements had yet to be determined by the Trial
Court. At the time of dispossession also, PAN-ORIENTAL was still insisting on its right to purchase the vessel.
The obligation of REPUBLIC to reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled.
Rentals for the use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of
dispossession but only after this Court had issued its Resolution of August 27, 1965. But although
compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL, by specific
pronouncement of this Court in its Resolution of November 23, 1966, the rentals payable by PAN-ORIENTAL in
the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal interest due,
assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments can be
made depending on the totality of the respective amounts.

Int’l Corp Bank v. IAC: Private respondent secured from petitioner's predecessors-in-interest, the then
Investment and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of
P50,000,000. To secure this loan, private respondent mortgaged her real properties in Quiapo, Manila and in
San Rafael, Bulacan, which she claimed have a total market value of
P110,000,000. Private respondent made a money market placement with ATRIUM in the amount of
P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date.
Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the
latter refused to pay the proceeds of the money market placement on maturity but applied the amount
instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being
the only bidder, said properties were sold in its favor for only P20,000,000. Petitioner claims that after
deducting this amount, private respondent is still indebted in the amount of P6.81 million. Petitioner contends
that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of
P6.81 million against which it has the right to apply or set off private respondent's money market claim
ofPl,062,063.83. Held: The argument is without merit. There can be no doubt that petitioner is indebted to
private respondent in the amount of P1,062,063.83 representing the proceeds of her money market
investment. However, legal compensation cannot take place because compensation is not proper where the
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claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot
extend to unliquidated, disputed claim arising from breach of contract. It must be noted that Civil Case No. 83-
19717 is still pending consideration at the RTC Manila, for annulment of Sheriff s sale on extrajudicial
foreclosure of private respondent's property from which the alleged deficiency arose. Therefore, the validity
of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it
is evident, that the requirement that the debts must be liquidated and demandable has not yet been met. For
this reason, legal compensation cannot take place.

Ong v. CA: Fermin borrowed money from Mariano. Fermin failed to pay. The Fermin says that he stored in
Mariano's warehouse a quantity of zippers valued at P181,000.00, from which he occasionally made
withdrawals in the presence of Mariano's son. When he subsequently tried to get the rest of his zippers,
Fermin claims Mariano refused to release them on the ground of non- payment of the loan. Held: The instant
case does not certainly satisfy the above because (1) appellant is not a debtor of appellee, it is only the latter
who is indebted to appellant; (2) the debts, even admitting that the delivery of the zippers to plaintiff is a
debt, do not both consist in a sum of money nor are they of the same quality and kind. The petitioner says,
however, that there was a judicial set-off under Article 1283. The trouble is that Fermin has not proved the
right to any damage as a result of the claimed retention of the zippers by Mariano. There was also no proof of
the amount of such damages as he could not even say how many of the zippers had been earlier withdrawn by
him.

Pioneer Insurance v. CA: Pioneer Insurance issued general warehousing bonds in favor of the Bureau of
Customs for importation of raw materials. The bonds were issued on behalf of the private respondents
Wearever Textile and Vicente Lim. To secure the petitioner, the respondents jointly executed jointly and
severally in favor of the petitioner indemnity agreements. The respondents failed to comply with their
commitment under the warehousing bonds. As such the BoC demanded from the petitioner the payment of
the value of bonds. In 1979, a fire gutted the Respondent's factory destroying materials insured with the
petitioner. Respondents demanded from the petitioner payment of the proceeds of the insurance policy but
the latter refused to pay claiming that the said proceeds must be applied by way of partial compensation or
set-off against its liability with the BoC. Held: Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. When all the requirements under Article 1279 are met, then
legal compensation must take place. The two debts must be due and they must be liquidated and
demandable. Here, at the time of the fire, the liability of the private respondents, alongside the petitioner to
the BoC has already been set, due to the former's default. Clearly, the petitioner can demand reimbursement
from the respondents even before it has actually paid its obligation to the BoC. The liability has already been
fixed.

Silahis Marketing v. IAC: De Leon delivered to Silahis various items with the aggregate amount of 22k. De leon
filed a claim in the CFI for the said amounts. Silahis in its answer alleged that there are commissions which
were not given to him. The lower court confirmed the liability of Silahis for the claim of de Leon but at the
same time ordered that it be partially offset by Silahis’ counterclaim. Held: compensation (by the LC) was not
proper. Compensation is not proper where the claim of the person asserting the set-off against the other is
not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of
contract. Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent in
the amount of P 22,213.75 as contained in its answer. But whether private respondent is liable to pay the

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petitioner a 20% margin or commission on the subject sale to Dole Philippines, Inc. is vigorously disputed. This
circumstance prevents legal compensation from taking place.

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation
as regards what the creditor may owe the principal debtor.

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a
total compensation.
Art. 1282. The parties may agree upon the compensation of debts which are not yet due.
• This is Conventional or Contractual
• Contractual or conventional compensation takes place when parties agree to set-off even if the requisites
of legal compensation are not present.
• The parties may agree upon the compensation of debts which are not yet due.
• The parties may compensate by agreement any obligations, in w/c the objective requisites provided for
legal compensation are not present.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the
former may set it off by proving his right to said damages and the amount thereof.
• This is judicial
• By virtue of a final judgment
• Judicial compensation is compensation decreed by the court in a case where there is a counterclaim.
• If one of the parties to a suit over an obligation has a claim for damages against the other, the former may
set it off by proving his right to said damages and the amount thereof.
• When does it take effect?

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other
before they are judicially rescinded or avoided.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his
right to the compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set
up the compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all
credits prior to the same and also later ones until he had knowledge of the assignment.

• There are 2 credits: credit I and credit II. In credit I, X is the creditor and Y is the debtor. In credit II, X is the
creditor and Y is the debtor. X wants to assign credit I to Z. X cannot assign credit II since it is passive
subjective novation. Can Y now invoke against Z the compensation of credit II?
• It depends:
a. If the assignment is with the debtor’s (Y’s) consent o Debtor cannot set up compensation at
all unless the right is reserved.

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 b. If the assignment is with the debtor’s (Y’s) knowledge but without consent o The debtor can
set up compensation with a credit already existing at the time of the assignment.

c. If the assignment is without the debtor’s (Y’s) knowledge

o Debtor can set up as compensation any credit existing at the time he acquired knowledge even if it arose
after the actual assignment.

Sesbreno v. CA: Petitioner made a placement with Philfinance. The latter delivered to him documents, some of
which was a promissory note from Delta Motors and a post-dated check. The post-dated checks were
dishonored. This prompted petitioner to ask for the promissory note from DMC and it was discovered that the
note issued by DMC was marked as non-negotiable. As Sesbreno failed to recover his money, he filed case
against DMC and Philfinance. Held: The nonnegotiability of the instrument doesn’t mean that it is non-
assignable or transferable. It may still be assigned or transferred in whole or in part, even without the consent
of the promissory note, since consent is not necessary for the validity of the assignment. In assignment, the
assignee is merely placed in the position of the assignors and acquires the instrument subject to all the
defenses that might have been set up against the original payee.

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at
different places, but there shall be an indemnity for expenses of exchange or transportation to the place of
payment.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title,
without prejudice to the provisions of paragraph 2 of article 301.

• Articles1287 and 1288 are facultative

• There is some impediment to legal set-off, but only one party is allowed to claim it
• Facultative compensation takes place when compensation is claimable by only one of the parties but not
of the other.
• Compensation shall not be proper when one of the debts arises from a depositum or from the obligations
of a depositary or of a bailee in commodatum.
• Depositary is a fiduciary relationship.
• Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title,
without prejudice to the provisions of paragraph 2 of article 301 (Article 1287)
• The prohibition of compensation when one of the debts arises from a depositum or commodatum is based
on justice. A deposit is made or a commodatum is given on the basis of confidence in the depositary or the
borrower. It is therefore, a matter of morality, that the depositary or the borrower should in fact perform
his obligation; otherwise, the trust or confidence of the depositor or lender would be violated.
• With respect to future support, to allow its extinguishments by compensation would defeat its exemption
from attachment and execution (Article 205, Family Code) and may expose the recipient to misery and
starvation. However, support in arrears can be compensated.

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• The depositary cannot set up compensation w/ respect to the things deposited to him. But the depositor
can set up the compensation. There can be facultative compensation, even if there can’t be legal.
• Example: A is a warehouseman. B deposits 1000 quedans of rice with A. B also owes A 1000 kilos of rice. A
cannot claim compensation but B can set up compensation.
• When does it take effect? From communication

Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a
penal offense.

• Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense
(Article 1288)
• If 1 of the debts consists in civil liability arising from a penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is imperative.
• The person who has the civil liability arising from the crime cannot set up compensation. However, the
offended party is entitled to set up compensation.
• This is coz of public policy

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.

Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and
debtors are not aware of the compensation.

Mindanao Cement v. CA: Atty. Laquihon, in behalf of Pacweld as the latter’s attorney, filed a motion to direct
payment of attorney’s fee to counsel (himself), invoking the fact that in the decision of the court MPCC was
adjudged to pay Pacweld the sum of P10,000 as attorney’s fees. MPCC filed an opposition to Atty. Laquihon’s
motion, stating that said amount is set-off by a like sum of P10,000. MPCC argue that it has collectible in its
favor from Pacweld also by way of attorney’s fees which MPCC recovered from the same CFI in another civil
case to which a writ of execution had already been issued. Held: There was compensation between MPCC and
Pacweld, therefore MPCC should not be ordered to pay Atty. Laquihon. MPCC and Pacweld, were creditors
and debtors of each other, their debts to each other consisting in final and executory judgments of the CFI in 2
separate cases, ordering the payment to each other of the sum of P10,000 by way of attorney’s fees. The two
(2) obligations, therefore, respectively offset each other, compensation having taken effect by operation of
law and extinguished both debts to the concurrent amount of P10,000 even though the creditors and debtors
are not aware of the compensation.”

6. Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

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Foundation Specialist v. Bentoval: FSI and Betonval executed 3 contracts for the delivery of ready mixed
concrete by Betonval to FSI. The contract provided for FSI to pay Betonval within 7 days after presentation of
the invoices plus 30% interest p.a. in case of overdue payments. Betonval delivered the ready mixed concrete
but FSI failed to pay its outstanding balances starting Jan 1992. As an accommodation to FSI, Betonval
extended the 7 day credit period to 45 days. FSI sent Betonval a proposed schedule of payments devised with
a liability for late payments fixed at 24% p.a. FSI paid Betonval according to the terms of its proposed schedule
of payments (with 24% interest rate. FSI opposed the CA’s imposition of a 24% p.a. interest on the award to
Betonval allegedly because: (a) the grant to FSI of a 45-day credit extension novated the contracts insofar as
FSI’s obligation to pay any interest was concerned; (b) Betonval waived its right to enforce the payment of the
30% p.a. interest when it granted FSI a new credit term and (c) Betonval’s prayer for a 24% p.a. interest
instead of 30%, resulted in a situation where, in effect, no interest rate was supposedly stipulated, thus
necessitating the imposition only of the legal interest rate of 6% p.a. from judicial demand. Held: Only
modificatory novation. Interest=24%. Novation may: Either be extinctive or modificatory, much being
dependent on the nature of the change and the intention of the parties. Extinctive novation is never
presumed; there must be an express intention to novate. Novation is merely modificatory where the change
brought about by any subsequent agreement is merely incidental to the main obligation (e.g change in
interest rates or extension of time to pay; the new agreement will not have the effect of extinguishing the first
but would merely supplement it or supplant some but not all of its provisions.) The grant by Betonval to FSI of
a 45-day credit extension did not novate the contracts so as to extinguish the latter. The grant of a 45-day
credit period merely modified the contracts by extending the period within which FSI was allowed to settle its
obligation. Since the contracts remained the source of FSI’s obligation to Betonval, the stipulation to pay 30%
p.a. interest likewise remained. However, FSI’s proposed schedule of payments, referring to Betonval’s
statement of account, contained computations of FSI’s arrears and billings with 24% p.a. interest. There can be
no other conclusion but that Betonval had reduced the imposable interest rate from 30% to 24% p.a. and this
reduced interest rate was accepted, albeit impliedly, by FSI when it proposed a new schedule of payments
and, actually made payments to Betonval with 24% p.a. interest. By its own actions, FSI is estopped from
questioning the imposable rate of interest.

Land Bank v. CA: Spouses Suarez were former owners of agricultural lands that was subjected to the
Operation Land Transfer (OLT). As part of the financing support for OLT, Land Bank issued 3 Land Bank Interim
Bond Certificates registered in the name of Sps. Suarez as partial payment for their agricultural lands with a
maturity of 25 years from date of issue and bear interest at the rate of 6% per annum, tax-free and payable
semi- annually on May 20 and November 20 of each year. Sps. Suarez requested the Bank to convert their
bonds from registered bonds to bearer bonds, in preparation for their intended delivery or transfer to third
parties. Respondents were required to fill up three (3) sets of LBP Form No. 64· Request for Transfer/
Redenomination of Bonds. In each of said LBP forms, respondents themselves inserted the following notation:
It is understood that the interest from November 21, 1974 to March 17, 1975 shall accrue to the transferor.
This notation was typed in by a clerk of the Bank at the exclusive request of Sps. Suarez, and was done not in
response to any question posed by the LBP Form 64 nor to fill in any blank line required by LBP Form 64 to be
filled up. The LBP Forms 64 were processed and signed by the manager of Bank’s Cash Department, Mr.
Bajada. Thereafter and upon the surrender by respondents of their registered bonds, 8 new bearer bonds with
different denominations but of equivalent aggregate face value were issued by the Bank to the Spouses
Suarez. The new bonds were covered by the same terms and conditions as the prior registered bonds. On the
first interest payment date after the conversion, Sps. Suarez demanded from the Bank the payment of
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P11,877.24 representing that part of the accrued interest on the three (3) registered bonds formerly held by
them which corresponded to the period from 21 November 1974 to 17 March 1975. The Bank declined to
honor the demand when Sps Suarez refused or failed to present the Bearer Bond Certificates as required by
Land Bank Implementing Guidelines and Procedures on The Processing Payment of Interest on LBP Bonds.
Held: The printed terms of the new bearer bonds were not novated by the notation the spouses inserted in
LBP Forms 64 and Land Bank was not thereby bound or obligated to pay a portion of the November 21, 1974-
May 20, 1975 interest to the spouses. None of the requirements of novation either of the subject matter of
the bond agreement or of (partial) subrogation of the creditor (obligee) thereunder, is visible in the instant
case. Of equal importance is the fact that the unilateral notation of the respondents was not inserted in the
new bearer bond certificates. The “new terms” were inserted by a unilateral notation done by the spouses on
the LBP Forms 64. The notation apportioned the interest from November 21, 1974 to May 20, 1975 between
the spouses (from November 21, 1974 to March 17, 1975 or P11,877.24) and the third party transferees (from
March 18, 1975 to May 20, 1975 or P6,822.96). This was done without the consent of either Land Bank or the
unknown third party transferee.

Reyes v. CA: In concluding that a novation took place, the respondent court relied on the two letters dated
March 19, 1991, which, according to it, formalized petitioner’s and respondent Eleazar’s agreement that
BERMIC would directly settle its obligation with the real owners of the funds—the AFP-MBAI and DECS-IMC.
Be that as it may, a cursory reading of these letters, however, clearly and unmistakably shows that there was
nothing therein that would evince that respondent AFPMBAI agreed to substitute for the petitioner as the
new creditor of respondent Eleazar in the contract of loan. It is evident that the two letters merely gave
respondent Eleazar an authority to directly settle the obligation of petitioner to AFP-MBAI and DECS-IMC. It is
essentially an agreement between petitioner and respondent Eleazar only. There was no mention whatsoever
of AFP-MBAI’s consent to the new agreement between petitioner and respondent Eleazar much less an
indication of AFPMBAI’s intention to be the substitute creditor in the loan contract. Well settled is the rule
that novation by substitution of creditor requires an agreement among the three parties concerned—the
original creditor, the debtor and the new creditor. It is a new contractual relation based on the mutual
agreement among all the necessary parties. Hence, there is no novation if no new contract was executed by
the parties. Novation is never presumed—there must be an express intention to novate.—The fact that
respondent Eleazar made payments to AFP-MBAI and the latter accepted them does not ipso facto result in
novation. There must be an express intention to novate—animus novandi. The mere circumstance of the
creditor receiving payments from a third party who acquiesced to assume the obligation of the debtor when
there is clearly no agreement to release the debtor from her responsibility does not constitute novation—at
most, it only creates a juridical relation of co-debtorship or suretyship on the part of the third party to the
contractual obligation of the debtor, and the creditor can still enforce the obligation against the debtor.—The
consent of the creditor to a novation by change of debtor is as indispensable as the creditor’s consent in
conventional subrogation in order that a novation shall legally take place. The mere circumstance of AFP-MBAI
receiving payments from respondent Eleazar who acquiesced to assume the obligation of petitioner under the
contract of sale of securities, when there is clearly no agreement to release petitioner from her responsibility,
does not constitute novation, at most, it only creates a juridical relation of codebtorship or suretyship on the
part of respondent Eleazar to the contractual obligation of petitioner to AFP-MBAI and the latter can still
enforce the obligation against the petitioner.

Quinto v. People: There are two ways which could indicate, in fine, the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the same. The first is when
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novation has been explicitly stated and declared in unequivocal terms. The second is when the old and the
new obligations are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first. Corollarily, changes that breed incompatibility must
be essential in nature and not merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change
would be merely modificatory in nature and insufficient to extinguish the original obligation.

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.

Deganos v. People: The Office of Prosecutor Brigida D. Luz, alias Aida Luz, and Narciso Degaños with estafa.
Prosecution: Private complainant Lydia Bordador, a jeweler, testified that Brigida/Aida Luz was the one who
gave instructions to Narciso Degaños to get gold and jewelry from Lydia for them to sell. Narciso Degaños
returned the jewelry and Aida/Brigida Luz called her to ask if she could trust Narciso Degaños to get the pieces
of jewelry from her for Aida/Brigida Luz to sell. Lydia agreed on the condition that if they could not pay it in
cash, they should pay it after one month or return the unsold jewelry within the said period. They were able to
pay only up to a certain point. Receipt nos. 614 to 745 were no longer paid and the accused failed to return
the jewelry covered by such receipts. Held: novation had not converted the liability of the accused into a civil
one. There are two ways which could indicate, in fine, the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. 1. The first is when novation has
been explicitly stated and declared in unequivocal terms. 2. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether or not the two obligations
can stand together, each one having its independent existence. The changes that breed incompatibility must
be essential in nature and not merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof; otherwise, the change
would be merely modificatory in nature and insufficient to extinguish the original obligation. Although the
novation of a contract of agency to make it one of sale may relieve an offender from an incipient criminal
liability, that did not happen here, for the partial payments and the proposal to pay the balance the accused
made during the barangay proceedings were not at all incompatible with Deganos liability under the agency
that had already attached. Rather than converting the agency to sale, therefore, he even thereby confirmed
his liability as the sales agent of the complainants.

Millar v. CA: Eusebio Millar obtained a favorable judgment from the CFI in a collection case against Antonio
Gabriel. After the remand of the CA of the case, the petitioner moved ex parte for the execution of the
judgment. The respondent, however, pleaded with the petitioner to release the jeep under an arrangement
whereby the respondent, to secure the payment of the judgment debt, agreed to mortgage the vehicle in
favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties executed a chattel
mortgage on the jeep. It was stipulated that upon failure to pay the first instalment, a writ of execution would
be obtained against respondent Gabriel. Held: no novation. Where the new obligation merely reiterates or
ratifies the old obligation, although the former effects but minor alterations or slight modifications with
respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial
incompatibility between the two obligations Only those essential and principal changes introduced by the new
obligation producing an alteration or modification of the essence of the old obligation result in implied
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novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient
indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced
indebtedness was the result of the partial payments made by the respondent before the execution of the
chattel mortgage agreement and (b) the latter's admissions bearing thereon. At best, the deed of chattel
mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the
judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the
amounts already paid and as to the sum still due, decided to state with specificity in the deed of chattel
mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore,
the first circumstance fails to satisfy the test of substantial and complete incompatibility between the
judgment debt and the pecuniary liability of the respondent under the chattel mortgage agreement.

Cochingyan v. R&B Surety: Novation is the extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which terminates it, either by changing its object or principal conditions,
or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the
creditor. Novation through a change of the object or principal conditions of an existing obligation is referred to
as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is
described as subjective (or personal) novation. Novation may also be both objective and subjective (mixed) at
the same time. In both objective and subjective novation, a dual purpose is achieved—an obligation is
extinguished and a new one is created in lieu thereof.

Balila v. IAC: The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981
decreed by the trial court in its judgment by compromise was novated and amended by the subsequent
mutual agreements and actions of petitioners and private respondents. Petitioners paid the aforestated
amount on an installment basis and they were given by private respondents no less than eight extensions of
time to pay their obligation. These transactions took place during the pendency of the motion for
reconsideration of the Order of the trial court dated April 26, 1983 in Civil Case No. U-3501, during the
pendency of the petition for certiorari in AC-G.R. SP 01307 before the Intermediate Appellate Court and after
the filing of the petition before Us. This answers the claim of the respondents on the failure of the petitioners
to present evidences of proofs of payment in the lower court and the appellate court.

People’s Bank v. Syvel: It is clear, therefore, that a novation was not intended. The real estate mortgage was
evidently taken as additional security for the performance of the contract.

Broadway Centrum v. Tropical Hut: It is hardly necessary to add that the rule that novation is never
presumed, is not avoided by merely referring to partial novation. The will to novate, whether totally or
partially, must appear by express agreement of the parties, by their acts which are too clear and unequivocal
to be mistaken.

Ajax v. CA: The attendant facts do not make a case of novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three loan agreements through the execution of PN BDS-3065.
The provisions of PN BDS-3065 yield no indication of the extinguishment of, or an incompatibility with, the
three loan agreements secured by the real estate mortgages over TCT No. 105233. On its face, PN BDS-3065
has these words typewritten: “secured by REM” and “9. COLLATERAL. This is wholly/partly secured by: (x) real
estate” which strongly negate petitioners’ asseveration that the consolidation of the three loans effected the
discharge of the mortgaged real estate property. Neither can it be validly contended that there was a change
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or substitution in the persons of either the creditor (Metrobank) or more specifically the debtors (petitioners)
upon the consolidation of the loans. The bare fact of petitioners’ conversion from a partnership to a
corporation, without sufficient evidence, either testimonial or documentary, that they were expressly released
from their obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new
debtor within the context of a subjective novation. If at all, petitioner AJAX only became a co- debtor or
surety. Without express release of the debtor from the obligation, any third party who may thereafter assume
the obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in
the person of the debtor must be clear and express because, to repeat, it is never presumed.

Cruz v. CA: A notarized deed of partial partition and a memorandum of agreement were executed by the Cruz
children and their mother on lands. The MOA states that “despite the execution of this Deed of Partial
Partition and the eventual disposal or sale of their respective shares, the contracting parties herein
covenanted and agreed among themselves and by these presents do hereby bind themselves to one another
that they shall share alike and received equal shares from the proceeds of the sale of any lot or lots allotted to
and adjudicated in their individual names by virtue of this deed of partial partition; That this Agreement shall
continue to be valid and enforceable among the contracting parties herein up to and until the last lot covered
by the Deed of [P]artial [P]artition above adverted to shall have been disposed of or sold and the proceeds
thereof equally divided and their respective shares received by each of them.” The documents were registered
and annotated in the TCTs of the properties involved. Meanwhile, Sps Malolos filed a complaint against one of
the Cruz children for sum of money. The case was decided in favor of the spouses thus the sheriff of the court
levied upon the lands in question. For failure to redeem the property, the Malolos asked for the owner’s
duplicate copy of the 7 titles of the land but Nerissa Cruz refused to give such title. The Malolos couple then
asked the court to declare the titles null and void. The other Cruz children then moved for intervention by
alleging that they are co-owners of the land. The court then issued an order directing the surrender of the
titles and annotation of the interests of the Malolos.
A case was then subsequently filed by the Cruzes for the partition of the lands in question. Held: no novation.
The stipulation that the petitioners and Spouses Tamayo were co-owners was merely the introductory part of
the MOA. Following the above-quoted stipulation is a statement that the subject parcels of land had in fact
been partitioned, but that the former co-owner intended to share with petitioners the proceeds of any sale of
said land. The MOA falls short of producing a novation, because it does not express a clear intent to dissolve
the old obligation as a consideration for the emergence of the new one. Likewise, petitioners fail to show that
the DPP and the MOA are materially and substantially incompatible with each other. Petitioners admit that,
under the MOA, they and the Tamayo spouses agreed to equally share in the proceeds of the sale of the lots.
Indeed, the DPP granted title to the lots in question to the co-owner to whom they were assigned, and the
MOA created an obligation on the part of such co-owner to share with the others the proceeds of the sale of
such parcels. There is no incompatibility between these two contracts. Verily, the MOA cannot be construed
as a repudiation of the earlier DPP. Both documents can exist together and must be so interpreted as to give
life to both. The basic principle underlying this ruling is simple: when the text of a contract is explicit and
leaves no doubt as to its intention, the court may not read into it any intention that would contradict its plain
import.

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Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even without the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

Rodriguez v. Reyes: By buying the property covered by TCT No. 48979 with notice that it was mortgaged,
respondent Dualan only undertook either to pay or else allow the land’s being sold if the mortgage creditor
could not or did not obtain payment from the principal debt when the debt matured. Certainly the buyer did
not obligate himself to replace the debtor in the principal obligation, and he could not do so in law without the
creditor’s consent. The obligation to discharge the mortgage indebtedness remained on the shoulders of the
original debtors and their heirs since the record is devoid of any evidence of contrary intent.

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's
insolvency or non- fulfillment of the obligations shall not give rise to any liability on the part of the original
debtor.

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by
the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency
was already existing and of public knowledge, or known to the debtor, when the delegated his debt.

Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations
may subsist only insofar as they may benefit third persons who did not give their consent.

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the
former relation should be extinguished in any event.

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.

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation
shall be under the same condition, unless it is otherwise stipulated.

Art. 1300. Subrogation 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.

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the
third person.

Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share.

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Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation.

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.

• Novation is the extinguishment of an obligation by the substitution or change of the obligation by a

subsequent one which extinguishes or modifies the first, either by changing the object of principal
conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the
creditor.
• It’s odd because it is relative, meaning the old obligation is extinguished but another takes it place
• It’s an imperfect mode of extinguishment.
• Novation is the most unusual mode of extinguishing an obligation. It is the only mode whereby an
obligation is extinguished and a new obligation is created to take its place. The other modes of
extinguishing an obligation are absolute in the sense that the extinguishment of the obligation is total.
Novation, on the other hand, is a relative mode of extinguishing an obligation.
• A compromise is a form of novation. The difference is that a compromise has some judicial participation.
The effect of compromise is the same as novation.
• Classification of Novation

a. Subjective or Personal Novation– change of one of the subjects

i. Active subjective
 This a change of creditor.
 This is also known as subrogation.
• 2 Kinds of Subrogation 1. Legal (Article1302) o It is presumed that there is legal
subrogation:
a. When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
b. When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor
c. When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share;

2. Conventional
o Conventional subrogation of a third person requires the consent of the original parties and of the third
person (Article 1301)

• Effect of Subrogation
1. 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 (Article 1304)

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 2. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining,
either against the debtor or against third persons, be they guarantors or possessors of mortgages,
subject to stipulation in a conventional subrogation (Article 1303)

ii. Passive subjective

• This is a change of debtor.
• Types of Passive Subjective 1. Expromission (Article 1293)
o In expromission the changing of the debtor is not upon the old debtor's initiative. It could be upon the
initiative of the creditor or of the new debtor.
o This requires the consent of the creditor since the changing of the debtor may prejudice him.
This requires the consent of the new debtor since he is the one who will pay.
o The consent of the old debtor is not required.
o The intent of the parties must be to release the old debtor. The release of the old debtor is absolute
even if it turns out that the new debtor is insolvent.
o Cases of expromission are quite rare.
o Initiative is not from the debtor. May come from new debtor or creditor

2. Delegacion (Article 1295)

o In delegacion the change is at the debtor’s initiative. Release is qualified, unless it turns out the new
debtor was insolvent at the time of the substitution and was publicly known
o The consent of the old debtor (delegante), the new debtor (delegado), and the creditor (delegatario)
are all required.
o The intent of the parties must be to release the old debtor. However, release of the old debtor is not
absolute. He may be held liable:
a. If the new debtor was already insolvent at the time of the delegacion; and
b. Such insolvency was either known to the old debtor or of public knowledge

b. Objective or Real Novation

• In objective novation there is a change in the object or in the principal conditions.
• Novation by a change in the principal conditions is the most problematic kind of novation because one has
to determine whether or not the change in the conditions is principal or merely incidental.
o When are the conditions principal and when are they not? o Go by jurisprudence! Look at the cases!
o Modificatory novation
• If the amount of debt is increased, Castan thinks that there is a novation while Caguioa thinks there is no
novation. Professor Balane thinks that Castan is correct. The old obligation is merged with the new.
• If the amount of the debt is decreased, according the SC in Sandico vs. Piguing, there is no novation. One
can look at the decrease of the amount as a partial remission.
o Sandico vs. Piguing: We adjudge the respondent’s judgment debt as having been fully satisfied. We see
no valid objection to the petitioners and the respondent entering into an agreement regarding the
monetary obligation of the latter under the judgment of the Court of Appeals, reducing the same from
P6,000 to P4,000. The payment by the respondent of the lesser amount of P4.000, accepted by the
petitioners without any protest or objection and acknowledged by them as “in full satisfaction of the

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 money judgment” in civil case 1554, completely extinguished the judgment debt and released the
respondent from his pecuniary responsibility.
• In Millar vs. CA, there is no novation if the terms of the payment are changed. In this case, there was a
change from lump sum to installment payments.
• In Fua vs. Yap, not only was the amount reduced, mode of payment was changed from single payment to
installment. Finally, a mortgage was constituted. The SC said in Fua vs. Yap that there was a novation.
Therefore, a mere change in the amount or mode of payment if taken singly is not a novation. But taken
together, there is a novation. o Fua vs. Yap: We concur in the theory that appellants liability under the
judgment in civil case No. 42125 had been extinguished by the settlement evidenced by the mortgage
executed by them in favor of the appellee on December 16, 1933. Although said mortgage did not
expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from
the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's
fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated for
attorney's fees, and is secured by a mortgage.
• In Inchausti vs. Yulo, the SC said that the mere extension of time is not a novation for the period does
affects only the performance and not the creation of an obligation. In another case, the SC said that the
shortening of the period is a novation.

c. Mixed Novation
• Mixed is a combination of both subjective and objective novation.
• Requisites of Novation
a. There must be a previous valid obligation
o 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 (Article
1298)
b. There must be an agreement of the parties to create the new obligation
o 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 (Article 1299)
c. There must be an extinguishments of the old obligation o Professor Balane considers this as an effect
rather than a requisite of novation. o 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 (Article 1292)
d. The new obligation must be valid
o If the new obligation is void, the original one shall subsist, unless the parties intended that the former
relation should be extinguished in any event (Article 1297)

Effect of Novation
• Accessory obligations may subsist only insofar as they may benefit third persons who did not give their
consent, e.g., stipulation pour autrui
• General Rule: In a novation, the accessory obligation is extinguished.
• Exception: In an active subjective novation, the guarantors, pledgors, mortgagors are not released.

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• Under Article 1303, accessory obligations are not extinguished. So there is a conflict? How do you resolve?
According to commentators, Article 1303 is an exception to Article 1296.
• B owes K P1M. M is a guarantor of B. B is substituted by U. B is released. M is also released under Article
1296. M is released since he guarantees B’s performance and not U’s. B might have a good credit standing
but U may not. M might be prejudiced if he has to guarantee U’s performance.
• If there is a change in the creditor under Article 1303, the guarantor is not released since it doesn’t make a
difference. What the guarantor guarantees is the integrity of the debtor.

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II. CONTRACTS

• Comes from the words cum and trahere

• Trahere is to draw
• Means to be brought together

A. GENERAL PROVISIONS
1. Definition

Art. 1305. A contract is a meeting of the minds between 2 persons whereby one binds himself, with respect
to the other, to give something or to render some service.

• Professor Balane thinks that the definition in Article 1305 is inaccurate. The term “persons” should be
submitted by the term “parties.” Also, contracts may be multilateral; there can be more than 2 parties
involved (i.e. partnership). o There can be an auto-contract. You can have only one signatory, if he
represents another. o See Art. 189030
o If Squil is Fajardo’s atty. In fact and Fajardo wants to borrow money, Squil can lend him the money at the
current rate. So Squil will sign a PN on behalf of Fajardo as debtor and on her own behalf as creditor.
• More academic definition of a contract: A bilateral, legal transaction to create, modify or terminate a legal
tie between the parties.

Batchelder v. CB: Monetary Board Reso. 857 requires Filipino and American resident contractors for
constructions in U.S. military bases to surrender to the CB their dollar earnings under their respective
contracts but were entitled to utilize 90% of their surrendered dollars for importation at the preferred rate of
commodities for use within or outside said U.S. military bases. Reso 695 moreover, denies their right to
reacquire at the preferred rate ninety per cent of the foreign exchange the sold or surrendered earnings to CB
for the purpose of determining whether the imports against proceeds of contracts entered into prior to April
25, 1960 are classified as dollar-to-dollar transactions or not. George Batchelder surrendered to the CB his
dollar earnings amounting to U.S. $199,966.00. He compels Central Bank of the Philippines to resell to
him$170,210.60 at the preferred rate of exchange of P2.00375: $1 which was denied by the court. He
contended that said decision failed to consider that if there was no contract obligating the bank to resell to
him at the preferred rate, the judgment of the lower court should nevertheless be sustained on the basis of
there being such an obligation arising from law. Held: Monetary Board resolutions do not create contracts
between Central Bank and dollar earner - Considering the fundamental meaning of „contracts under the Civil
Law and the nature of the administrative authority of the Monetary Board to promulgate rules and regulations
governing the monetary and banking system of the Philippines, the Monetary Board Resolutions Nos. 857
dated June 17, 1960 and 695 dated April 28, 1961 are not contracts that give rise to obligations which must be
fulfilled by the Central Bank in favor of affected parties. These resolutions merely lay down a general policy on
the utilization of the dollar earnings of Filipino and resident.
American contractors undertaking projects in U.S. military bases.

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Art. 1890. If the agent has been empowered to borrow money, he may himself be the lender at the current rate of interest. If he
has been authorized to lend money at interest, he cannot borrow it without the consent of the principal.
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Capitol Medical Center v. CA: We, therefore, hold that the lower court gravely abused its discretion in
compelling the CMCC to reopen and re-admit the striking students for enrollment in the second semester of
their courses. Since their contracts with the school were terminated at the end of the first semester of 1987,
and as the school has already ceased to operate, they have no “clear legal right” to re-enroll and the school
has no legal obligation to reopen and re-admit them. The contract between the college and a student who is
enrolled and pays the fees for a semester, is for the entire semester only, not for the entire course. The law
does not require a school to see a student through to the completion of his course. If the school closes or is
closed by proper authority at the end of a semester, the student has no cause of action for breach of contract
against the school.

2. Characteristics of Contracts

a. Obligatory force
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.
• General Rule: Contracts are perfected by mere consent – the principle of consensuality (Article 1315)
• Exception: Real contracts, such as deposit, loan, pledge, and commodatum are not perfected until the
delivery of the object of the obligation (Article 1316)
• Obligations arising from contracts have the force of law between the parties and should be complied with
in good faith (Article 1159)
• Some are formal like chattel mortgage, donation.

Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the
other contracting party.
• This is a new provision. Based on jurisprudence.
• It is not clear whether Article 1314 is a tortious liability or a contractual liability. Professor Balane considers
it as only a tortious liability so it is not violative of the rule on relativity of contracts.
• Article 1314 is really a quasi-delict.
• Requisites:
i. Existence of a valid contract ii. Knowledge by the 3rd person of the existence of the contract
iii. Interference by the 3rd person in the contractual relation without legal justification.
• It doesn’t have to be malicious!
• In Indencia some priests were concerned that a contract of an old lady was not in her best interest, so they
induced her to break it.

Innocencio v. Hospicio: A contract of lease was entered into by HDSJ and German. German constructed 2
buildings, which he subleased, and designated his son, Ramon, as the administrator. After German died,
Ramon continued to collect rentals from the sublesses. HDSJ notified Ramon that it was terminating the lease
contract. The sublessees were given notices to vacate. HDSJ also posted a Patalastas stating that it is willing to
work out an amicable arrangement with the sublessees, although the latter are not considered as legal
occupants or tenants of the property. Because of this, some of the sublessees refused to pay rentals to
Ramon. Held: HDSJ is not guilty of tortious interference. The facts of the instant case show that there were

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valid sublease contracts which were known to HDSJ. However, we find that the third element is lacking in this
case. There is no tortious interference if the intrusion was impelled by purely economic motives. The evidence
shows that HDSJ entered into agreements with Ramon’s former sublessees for purely economic reasons
(payment of rentals). HDSJ had a right to collect the rentals from the sublessees upon termination of the lease
contract. It does not appear that HDSJ was motivated by spite or ill will towards the Inocencios.

Daywalt v. Recoletos: Teodorica Endencia executed a contract whereby she obligated herself to convey to
Geo W. Daywalt a 452-hectare parcel of land for P4000. They agreed that a deed should be executed as soon
as Endencia’s title to the land was perfected in the Court of Land Registration and a Torrens title issued in her
name. When the Torrens title was issued, Endencia found out that the property measured 1248 hectares
instead of 452 hectares, as she initially believed. Because of this, she became reluctant to transfer the whole
tract to Daywalt, claiming that she never intended to sell so large an amount and that she had been
misinformed as to its area. Daywalt filed an action for specific performance. The SC ordered Endencia to
convey the entire tract to Daywalt. Meanwhile, Recoletos, was a religious corp., w/c owned an estate
immediately adjacent to the property sold by Endencia to Daywalt. Fr. Sanz, the representative of the
Recoletos, exerted some influence and ascendancy over Endencia. Fr. Sanz knew of the existence of the
contracts with Daywalt and discouraged her from conveying the entire tract. Daywalt filed an action for
damages against the Recoletos on the ground that it unlawfully induced Endencia to refrain from the
performance of her contract for the sale of the land in question and to withhold delivery of the Torrens title.
Daywalt’s claim for damages against the Recoletos was for the huge sum of P 500,000. Held: Recoletos not
liable. The stranger who interferes in a contract between other parties cannot become more extensively liable
in damages for the non-performance of the contract than the party in whose behalf he intermediates. Hence,
in order to determine the liability of the Recoletos, there is first a need to consider the liability of Endencia to
Daywalt. The damages claimed by Daywalt from Endencia cannot be recovered from her, first, because these
are special damages w/c were not w/in the contemplation of the parties when the contract was made, and
secondly, these damages are too remote to be the subject of recovery. Since Endencia is not liable for
damages to Daywalt, neither can the Recoletos be held liable. As already suggested, by advising Endencia not
to perform the contract, the Recoletos could in no event render itself more extensively liable than the
principal in the contract.

b. Mutuality
Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the
will of one of them.

• Not necessarily reciprocal prestations, but it must bind both parties

• Issue: Escalation clause creditor is given the right to adjust the interest rates o The court has
fluctuated on this
o Best statement of the rule is Polotan v CA (248 SCRA 247): An escalation clause is not per se invalid. It is
per se valid, as long as the change or modification is not left to the sole will of the creditor. As long as
not purely potestative.
o If it says “as creditor sees fit” void and oppressive. It’s one-sided
o If it is pegged to a criterion that is independent of the will of the creditor then it is valid. Like prevailing
market rates. Pegged on something objective.

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Cases:

Sampaguita v. PNB: NSBCI applied for a commercial loan with the PNB for P8M, mortgaging the properties of
its President and Chairman Dee as collateral. NSBCI executed various PNs and later on failed to comply with its
obligations under them. Dee wrote to PNB requesting for a 90-day extension for the payment and
restructuring of the loan, which PNB accepted. Dee tendered PDCs but 2 of them bounced so PNB sent a
demand letter again. This time, no answer so the properties were foreclosed. There is a deficiency balance,
however, so now PNB filed this instant case for collection. Held: loans were bloated because the PNs
contained a clause authorizing PNB to increase the interest rates unilaterally. Courts have the authority to
strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to increase
interest rates, penalties and other charges at the latter’s sole discretion and without giving prior notice to and
securing the consent of the borrowers. This unilateral authority is anathema to the mutuality of contracts and
enables lenders to take undue advantage of borrowers. One-sided impositions do not have the force of law
between the parties, because such impositions are not based on the parties’ essential equality. The clause
cited earlier made the fulfillment of the contracts “dependent exclusively upon the uncontrolled will” of
respondent and was therefore void.

Lao Lim v. CA: Contrary to the ruling of the court, the disputed stipulation “for as long as the defendant
needed the premises and can meet and pay said increases” is a purely potestative condition because it leaves
the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a
suspensive condition because the renewal of the lease, which gives rise to a new lease, depends upon said
condition. It should be noted that a renewal constitutes a new contract of lease although with the same terms
and conditions as those in the expired lease. It should also not be overlooked that said condition is not
resolutory in nature because it is not a condition that terminates the lease contract. The lease contract is for a
definite period of 3 years upon the expiration of which the lease automatically terminates. The continuance,
effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving
the owner of any say in the matter. Mutuality does not obtain in such a contract of lease and no equality exists
between the lessor and the lessee since the life of the contract is dictated solely by the lessee. Resultantly, the
contract of lease should be and is hereby construed as providing for a definite period of three (3) years and
that the automatic increase of the rentals by twenty percent (20%) will take effect only if the parties decide to
renew the lease. A contrary interpretation will result in a situation where the continuation and effectivity of
the contract will depend only upon the will of the lessee, in violation of Article 1308.

PNB v. CA: Spouses Fernandez, obtained a 50K loan under the CIGLF from PNB which is evidenced by a Credit
Agreement. A real estate mortgage on an unregistered agricultural land was executed to secure a loan. The
credit agreement provided that the bank may increase the interest rate at anytime depending on whatever
policy it may adopt in the future. PNB then informed the Fernandez that the interest rate of the loan is now
25% per annum plus a penalty of 6% per annum. It further increased the interest rate to 30%, and later to
42%. Held: P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely
regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money,
goods or credits. In fine, they can agree to adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the said law and circular did not authorize
either party to unilaterally raise the interest rate without the other's consent. It is basic that there can be no
contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. If
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this assent is wanting on the part of the one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind. Similarly, contract changes must be made with the
consent of the contracting parties. The minds of all the parties must meet as to the proposed modification,
especially when it affects an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a capital venture. Thus,
any change must be mutually agreed upon, otherwise, it is bereft of any binding effect. We cannot
countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled right to
unilaterally upwardly adjust the interest on private respondents' loan. That would completely take away from
private respondents the right to assent to an important modification in their agreement, and would negate
the element of mutuality in contracts.
Private respondents are not also estopped from assailing the unilateral increases in interest rate made by
petitioner bank. No one receiving a proposal to change a contract to which he is a party, is obliged to answer
the proposal, and his silence per se cannot be construed as an acceptance.

Florendo v. CA: In general there is nothing inherently wrong with escalation clauses. Escalation clauses are
valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long
term contracts. The unilateral determination and imposition of increased interest rates by the herein
respondent bank is obviously violative of the principle of mutuality of contracts.

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.

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.
• An example of a determination made by a 3rd person (Article 1309) is the fixing of the price by the 3rd
person.
• The contract may be revoked if there is mutual dissent.

c. Relativity
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.
• General Rule: The contract is binding only upon the parties and their successors (Article 1311). However, if
the contract is purely personal (intuitu personae), then the contract will not bind assigns and heirs.
• Same principle involved in res inter alios acta. Things transacted between other persons cannot affect 3rd
persons.
• Exception: 3 parties are affected by the contract in the following instances and can take appropriate action
i. Accion pauliana (Article 1177)31
o An rescissory action involving a contract in fraud of creditors. Art. 1313. Creditors are protected in cases
of contracts intended to defraud them.

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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.
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 ii. Accion directa
o A direct (not subrogatory) action by the creditor against his debtor’s debtor, a remedy which gives the
creditor the prerogative to act in his own name, such as the actions of the lessor against the
sublessee (Art. 1652), the laborer of an independent contractor against the owner (Art. 1729), the
principal against the subagent (Article 1893), and the vendor- a-retro against the transferee of the
vendee (Art. 1608).

Velasco v. CA: Article 1311 of the Civil Code which GSIS invokes is not applicable where the situation
contemplated in Article 1729 obtains. The intention of the latter provision is to protect the laborers and the
materialmen from being taken advantage of by unscrupulous contractors and from possible connivance
between owners and contractors. Thus, a constructive vinculum or contractual privity is created by this
provision, by way of exception to the principle underlying Article 1311 between the owner, on the one hand,
and those who furnish labor and/or materials, on the other. As a matter of fact, insofar as the laborers are
concerned, by a special law, Act No. 3959, they are given added protection by requiring contractors to file
bonds guaranteeing payment to them. And under Article 2242, paragraphs (3) and (4), claims of laborers and
materialmen, respectively, enjoy preference among the creditors of the owner in regard to specific immovable
property.

Kauffman v. PNB: Wicks, treasurer of the Company, requested that a telegraphic transfer of $45,000 be made
to Kauffman in NYC. Wicks drew and delivered a check for P90,355.50, total cost of said transfer, including
exchange and cost of message which was accepted by the officer selling the exchange in payment of the
transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which
is referred to by the bank’s assistant cashier as its official receipt. On the same day PNB dispatched to its New
York agency a cablegram: Pay George A. Kauffman,
New York, account Philippine Fiber Produce Co., $45,000. However, the bank’s representative in New York
replied suggesting the advisability of withholding this money from Kauffman. The PNB dispatched to its New
York agency another message to withhold the Kauffman payment as suggested. Meanwhile, upon advice of
Wicks that the money has been placed to his credit, Kauffman presented himself at the office of the PNB in
New York and demanded the money. Payment was refused. Held: Kauffman cannot claim the amount.
Inasmuch as it never left the possession of the bank, or its representative in NYC, there was no delivery in the
sense intended in §16 of NIL. In this connection it is unnecessary to point out that the official receipt delivered
by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in
the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by
the bank.

Marimperio v. CA: A party who has not taken part in it cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected thereby. In a sub-lease, there are two
leases and two distinct judicial relations although intimately connected and related to each other, unlike in a
case of assignment of lease, where the lessee transmits absolutely his right, and his personality disappears;
there only remains in the juridical relation two persons, the lessor and the assignee who is converted into a
lessee. In other words, in a contract of sub- lease, the personality of the lessee does not disappear; he does
not transmit absolutely his rights and obligations to the sublessee; and the sub-lessee generally does not have
any direct action against the owner of the premises as lessor, to require the compliance of the obligations
contracted with the plaintiff as lessee, or vice versa

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Barfel v. CA: a party who has not taken part in it cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby.” A “real interest” has been defined as “a
present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate or
consequential interest.”

Capital Insurance v. Central Azucarera: The binding effect of the March 3, 1960 Agreement does not extend
to those not parties to the contract, Capital Insurance & Surety Co., Inc. in this instance. Thus, Article 1311,
Civil Code of the Philippines provides, inter alia: „ART. 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of
the property he received from the decedent.‰ x x x x Capital Insurance & Surety Co., Inc., cannot, therefore,
be prejudiced by the terms of the March 3, 1960 Agreement. Insofar as the insurance company is concerned,
Central Azucarera del Danao is and shall remain to be its debtor until payment is made.

iii. Article 1312

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.

• A mortgagee and mortgagor are the parties, but a 3rd person who acquires it can be sued, provided that
the mortgage is registered

Bel Air v. Dionisio: purchasers of a registered land are bound by the annotations found at the back of the
certificate of title covering the subject parcel of land. Petitioner’s contention that he has no privity of contract
with respondent association, not persuasive. In effect, the petitioner’s contention that he has no privity of
contract with the respondent association is not persuasive. When the petitioner voluntarily bought the subject
parcel of land it was understood that he took the same free of all encumbrances except the notations at the
back of the certificate of title, among them, that he automatically becomes a member of the respondent
association.

iv. Stipulation pour autrui: stipulation in favor of a 3rd person

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.
• This was unknown in Roman law. It’s from the Code Napoleon.
• Agreement between 2 parties which is intended to benefit a 3 rd person. Exceptionally, such 3rd person can
sue the obligor even if he isn’t a party

• Requisites
1. There must be a stipulation in favor of a 3rd person
2. That stipulation in favor of a 3rd person should be a part and not the whole of the contract o If it’s the
whole contract, then the 3rd person is a party.

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 3. A clear and deliberate intent to confer a benefit on a 3rd person and not merely incidental
o In the case of Mandarin Villa vs. CA, the credit card holder was held to have a right to sue under the
contract between the establishment and the bank. The Supreme Court said that it’s a stipulation pour
autrui to confer benefit on the customer to purchase on credit.
o However, Professor Balane believes that it is debatable whether an agreement between a credit card
company and establishment is a clear and deliberate conferment of benefit on a third party. He would
have concurred with the decision in Mandarin Villa if the basis was quasi- delict. (This is from the old
notes. He did not mention this is 2015).
o This must clearly appear. This is really an exception.

4. That the favorable stipulation should not be conditioned or compensated by any kind of obligation
whatever
o Because the 3rd person becomes a contracting party.

5. Neither of the contracting parties bears the legal representation of authorization of the 3rd parties
o If the 3rd parties is represented, then the principles of agency apply. Thus, the 3 rd party is really a
contracting party

6. The 3rd person must have communicated his acceptance to the obligor before its revocation.

Mandarin Villa v. CA: De Jesus went to a restaurant and offered to pay with his credit card. It was rejected for
being expired. Held: An “Agreement” between Mandarin Villa and BANKARD provides: “The MERCHANT shall
honor validly issued PCCCI credit cards…provided that the card expiration date has not elapsed…” While De
Jesus may not be a party to the said agreement, the stipulation conferred a favor upon him, a holder of credit
card validly issued by BANKARD. This stipulation is a stipulation pour autri and under Art. 1311 De Jesus may
demand its fulfillment provided he communicated his acceptance to the Mandarin Villa before its revocation.
De Jesus’ offer to pay by means of his BANKARD credit card constitutes not only an acceptance of the said
stipulation but also an explicit communication of his acceptance to the obligor. Also, Mandarin posted a logo
inside the restaurant stating that “Bankard is accepted here.”

Baluyot v. CA: UP was going to donate 15.8379 hectares to the Association. Association proposed to accept
and the defendant UP manifested in writing consent to the intended donation directly to the plaintiff
Association. UP backed-out from the arrangement to Donate directly to the plaintiff Association for the
benefit of the qualified residents and high-handedly resumed to negotiate the donation thru the defendant
Quezon City Government. UP executed that Deed of Donation, in favor of the defendant QC for the benefit of
the qualified residents of Cruz-na-Ligas. UP had continuously despite requests to comply with their reciprocal
duty, to deliver the certificate of title to enable the Donee, the QC, to register the ownership so that the QC
can legally and fully comply with their obligations under the said deed of donation. For alleged non-
compliance of QC,UP issued AO 21 declaring the deed of donation revoked and the Donated property be
reverted to defendant UP. Held: complaint states a cause of action. While, admittedly, petitioners were not
parties to the deed of donation, they anchor their right to seek its enforcement upon their allegation that they
are intended beneficiaries of the donation to the Quezon City government. Under Art. 1311, the following
requisites must be present in order to have a stipulation pour autrui: (1) there must be a stipulation in favor of
a third person; (2) the stipulation must be a part, not the whole of the contract; (3) the contracting parties
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must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or
interest; (4) the third person must have communicated his acceptance to the obliger before its revocation; and
(5) neither of the contracting parties bears the legal representation or authorization of the third party.
Respondent UP has an obligation to transfer the subject parcel of land to the city government so that the
latter can in turn comply with its obligations to make improvements on the land and thereafter transfer the
same to Baluyot, et al. For the purpose of determining the sufficiency of petitioners' cause of action, these
allegations of the amended complaint must be deemed to be hypothetically true. So assuming the truth of the
allegations, we hold that petitioners have a cause of action against UP.

Uy v. CA: Uy and Roxas were agents authorized to sell eight parcels of land by their owners. They sold the lands
located in Benguet to NHA, and Deeds of Absolute Sale were concluded. However, only 5 were paid for by the
NHA, since a study showed that the other three lots were prone to landslides and were not suitable for housing.
The NHA thus cancelled the sale over the three parcels, and offered the landowners the amount of 1.225M as
daños perjucios. Held: CA did not err in dismissing the complaint. Based on Art. 1311, as petitioners are not
parties, heirs, assignees, or beneficiaries of a stipulation pour autrui under the contracts of sale, they do not,
under substantive law, possess the right they seek to enforce. There is no stipulation in the Deeds of Absolute
Sale “clearly and deliberately” conferring a favor to any third person. An agent entitled to receive a commission
from his principal upon the performance of a contract which he has made on his principal’s account does not,
from this fact alone, have any claim against the other party for breach of the contract, either in an action on the
contract or otherwise.
• Benefit was merely incidental

Constantino v. Heirs of Constantino: Respondents inherited parcels of land from their predecessors land
which was contained in a document called “Pagmamana sa Labas ng Hukuman.” Petitioners filed this case to
annul such document and to get a portion of that land. Held: "privity in estate denotes the privity between
assignor and assignee, donor and donee, grantor and grantee, joint tenant for life and remainderman or
reversioner and their respective assignees, vendor by deed of warranty and a remote vendee or assignee. A
privy in estate is one, it has been said, who derives his title to the property in question by purchase; one who
takes by conveyance." As such, he stands exactly in the shoes of his predecessor in interest, the original
defendant, and is bound by the proceedings had in the case before the property was transferred to him. He is
a proper, but not an indispensable, party as he would, in any event, have been bound by the judgment against
his predecessor. Thus, any condition attached to the property or any agreement precipitating the execution of
the Deed of Extrajudicial Settlement with Waiver which was binding upon Maria Laquindanum is applicable to
respondents who merely succeeded Maria.

Bonifacio Bros v. Mora: The fairest test to determine whether the interest of a third person in a contract is a
stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed
by their contract. A policy of insurance is a distinct and independent contract between the insured and
insurer. A third person has no right in law or equity to the proceeds of an insurance unless there is a contract
or trust, expressed or implied, between the insured and third person. The clause in an insurance policy,
authorizing the owner of the damaged vehicle to contract for its repair does not mean that the repairman is
entitled to collect the cost of repair out of the proceeds of the insurance. It merely establishes the procedure
that the insured has to follow in order to be entitled to indemnity for repair.

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Florentino v. Encarnacion: The stipulation is part of an extra-judicial partition duly agreed and signed by the
parties, hence the same must bind the contracting parties thereto and its validity or compliance cannot be left
to the will of one of them (Art. 1308). Under Art. 1311, this stipulation takes effect between the parties, their
assigns and heirs. Considering the nature and purpose of the stipulation, said stipulation is a stipulation pour
autrui. The fairest test to determine whether the interest of third person in a contract is a stipulation pour
autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their
contract. In applying this test, it matters not whether the stipulation is in the nature of a gift or whether there
is an obligation owing from the promisee to the third person. That no such obligation exists may in some
degree assist in determining whether the parties intended to benefit a third person. The evidence on record
shows that the true intent of the parties is to confer a direct and material benefit upon the Church. The fruits
of the aforesaid land were used thenceforth to defray the expenses of the Church in the preparation and
celebration of the Holy Week, an annual Church function. While a stipulation in favor of a third person has no
binding effect in itself before its acceptance by the party favored, the law does not provide when the third
person must make his acceptance. As a rule, there is no time limit; such third person has all the time until the
stipulation is revoked. Here, the Church accepted the stipulation in its favor before it is sought to be revoked
by some of the co-owners, namely the petitioners-appellees herein. It is not disputed that from the time of
the death of Dona Encarnacion Florentino in 1941 til May 1964, the Church had been enjoying the benefits of
the stipulation. The enjoyment of benefits flowing therefrom for almost 17 years without question from any
quarters can only be construed as an implied acceptance by the Church of the stipulation pour autrui before
its revocation.

Bank of America v. IAC: Contract between foreign bank and a local bank asking the latter topay an amount to
a beneficiary, is a stipulation pour autrui. The opening of a letter of credit in favor of the exporter becomes
ultimately but the result of a stipulation pour autrui.” Similarly, when KYOWA asked BANKAMERICA to pay an
amount to a beneficiary (either ACTC or Minami), the contract was between KYOWA and BANKAMERICA and it
had a stipulation pour autrui.

Summa Insurance v. CA: Petitioner was subrogated to the rights of the consignee. The relationship therefore
between the consignee and the arrastre operator must be examined. This relationship is much akin to that
existing between the consignee or owner of shipped goods and the common carrier, or that between a
depositor and a warehouseman. In the performance of its obligations, an arrastre operator should observe
the same degree of diligence as that required of a common carrier and a warehouseman as enunciated under
Article 1733 and §3(b) of the Warehouse Receipts Law, respectively. Being the custodian of the goods
discharged from a vessel, an arrastre operator’s duty is to take good care of the goods and to turn them over
to the party entitled to their possession. In the performance of its job, an arrastre operator is bound by the
management contract it had executed with the Bureau of Customs which is a sort of a stipulation pour autrui
which is also binding on the consignee (and the insurer, as successor-in-interest of the consignee) including
those which are intended to limit the liability of the arrastre operator. A management contract is also binding
on a consignee because it is incorporated in the gate pass and delivery receipt which must be presented by
the consignee before delivery can be effected to it. The insurer, as successor-in- interest of the consignee, is
likewise bound by the management contract. Indeed, upon taking delivery of the cargo, a consignee (and
necessarily its successor-in-interest) tacitly accepts the provisions of the management contract, including
those which are intended to limit the liability of one of the contracting parties, the arrastre operator.
However, a consignee who does not avail of the services of the arrastre operator is not bound by the

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management contract. Such an exception to the rule does not obtain here as the consignee did in fact accept
delivery of the cargo from the arrastre operator.
Sps. Mamaril v. BSP: owners parked their six (6) passenger jeepneys inside the BSP compound for a monthly
fee of P300.00 for each unit and took the keys home with them. BSP contracted with a guard service.
Paragraph 3(a) thereof which provides that the security agency shall indemnify defendant-appellant for all
losses and damages suffered by it attributable to any act or negligence of the former's guards. Held: not a
stipulation pour autrui. defendant-appellant sought the services of defendant AIB Security Agency for the
purpose of the security and protection of its properties, as well as that of its officers and employees, so much
so that in case of loss of [sic] damage suffered by it as a result of any act or negligence of the guards, the
security agency would then be held responsible therefor. There is absolutely nothing in the said contract that
would indicate any obligation and/or liability on the part of the parties therein in favor of third persons such as
herein plaintiffs-appellees.

d. Autonomy of will

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.

• Public policy is the invasion of public law in the area of private law.

Republic v. PLDT: The Bureau of Telecommunications entered into an agreement with PLDT for the rental of
the latter’s trunk lines. The agreement prohibited the public use of the service. Since then however, the
Bureau has extended its service to the general public using PLDT’s trunk lines. PLDT thereafter severed the
connections. The Republic now seeks to compel PLDT to enter into an interconnection agreement with it.
Held: PLDT may not be forced to enter into an agreement. Parties cannot be coerced to enter into a contract
where no agreement is had between them as to the principal terms and conditions of the contract. Freedom
to stipulate such terms and conditions is of the essence of our contractual system.

Cui v. Arellano: Emetrio Cui enrolled in Arellano Uni’s College of Law from 1st year until 1st semester of his 4th
year. He was awarded scholarship grants of the said university amounting to a total of P1,033.87. He then
transferred and took his last at Abad Santos University. To take the bar, he needed his transcript of records
from Arellano University. The defendant refused to issue the TOR until he had paid back the P1,033.87
scholarship grant, which Emetrio refunded as he could not take the bar without Arellano’s issuance of his TOR.
Terms of scholarship were: "In consideration of the scholarship granted to me by the University, I hereby
waive my right to transfer to another school without having refunded to the University the equivalent of my
scholarship cash. Held: the provision of the contract whereby Cui waived his right to transfer to another
school without refunding to the latter the equivalent of his scholarships in cash is void. The stipulation in
question, asking previous students to pay back the scholarship grant if they transfer before graduation, is
contrary to public policy, sound policy and good morals or tends clearly to undermine the security of individual
rights and hence, null and void.
Notes:
• Public policy: ‘In determining a public policy of the state, courts are limited to a consideration of the
Constitution, the judicial decisions, the statutes, and the practice of government officers.’

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• Manresa’s definition of morals: “It is good customs; those generally accepted principles of morality which
have received some kind of social and practical confirmation”

Saura v. Sindico: 2 candidates contending for nomination as the official candidate of the Nacionalista party for
the congressional elections entered into a contract. They agreed that each will respect the result of the
convention and no one will run as an independent candidate after losing. Saura was elected and proclaimed
the official congressional candidate of the Nacionalista party. Nonetheless, Sindico filed her certificate of
candidacy. Held: the contract is void. Among those that may not be the subject matter (object) of contracts
are certain rights of individuals, which the law and public policy have deemed wise to exclude from the
commerce of man. Among them are the political rights conferred upon citizens, including, but not limited to,
one's right to vote, the right to present one's candidacy to the people and to be voted to public office,
provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be
bargained away curtailed with impunity, for they are conferred not for individual or private benefit or
advantage but for the public good and interest.

Balane: Void contract because it is not within the commerce of man. You can’t bargain away your right to run.

Regino v. Pangasinan Colleges: Regino is a 1st year computer science student at PCST. PCST held a fund raising
campaign, “Rave Party and Dance Revolution,” the proceeds of which were to go to the construction of the
school’s tennis and volleyball courts. Each student was required to pay for 2 tickets at the price of P100 each.
Financially strapped and prohibited by her religion from attending dance parties and celebrations, Regino
refused to pay for the tickets. On her final examinations in logic and statistics, her teachers allegedly
disallowed her from taking the tests, failing to pay for her tickets. Held: schools have a contractual obligation
to afford its students a fair opportunity to complete the course they seek to pursue. School-student
relationship is contractual in nature. It is also reciprocal. The school undertakes to provide students with
education sufficient to enable them to pursue higher education or a profession. On the other hand, the
students agree to abide by the academic requirements of the school and to observe its rules and regulations.
Barring any violation of the rules on the part of the students, an institution of higher learning has a contractual
obligation to afford its students a fair opportunity to complete the course they seek to pursue. PCST imposed
the assailed revenue-raising measure belatedly, in the middle of the semester. It exacted the dance party fee
as a condition for the students’ taking the final examinations, and ultimately for its recognition of their ability
to finish a course. The fee was not part of the school-student contract entered into at the start of the school
year. Hence, it could not be unilaterally imposed to the prejudice of the enrollees.

Duncan v. Glaxo: Tecson was hired by Glaxo as a medical representative. Before such employment, he signed
a contract stating that he should report any relationship with his co-employees or employees of competing
companies and should management determine that there exists a conflict of interest, he would be deemed
resigned. He entered into a relationship with Bettsy, an employee of Astra Pharmaceuticals and eventually
married her. He was repeatedly reminded by his superiors of the existing conflict of interest but he did
nothing. He was then transferred by the company to another location. He claimed constructive dismissal.
Held: The assailed company policy which forms part of respondent’s Employee Code of Conduct and its
contracts with its employees, such as that signed by Tecson, was made known to him prior to his employment.
Since Tecson knowingly and voluntarily entered into a contract of employment with Glaxo, the stipulations
therein gave the force of law between them and thus, should be complied with in good faith. The prohibition
against personal or marital relationships with employees of competitor companies upon Glaxo’s employees is
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reasonable under the circumstances because relationships of that nature might compromise the interests of
the company. Glaxo only aims to protect its interests against the possibility that a competitor company will
gain access to its secrets and procedures.

Star v. Simbol: Simbol and Comia were compelled to resign after marrying their co- employees, pursuant Star’s
policy against employees getting married. This is in pursuant to the company policy promulgated in 1995
wherein new applicants will not be hired if he/she has a relative up to the 3rd degree of relationship if one is
already employed by the company. Also, if two employees decided to get married, one of them must resign.
Held: the policy is invalid because Star was unable to show a reasonable business necessity, and how such
policy relates to their qualifications. This pertains to the prerogative of the company to make stipulations in
their employment contract. However, the same must policies will be valid if it is a bonafide occupational
qualification (BFOQ). To justify a BFOQ, the employer must prove: (1) that the employment qualification is
reasonably related to the essential operation of the job involved; and, (2) that there is a factual basis for
believing that all or substantially all persons meeting the qualification would be unable to properly perform
the duties of the job. In this case, there was no compelling business necessity for which no alternative exists
other than the discriminatory practice. The policy is premised on the mere fear that employees married to
each other will be less efficient. If SC upholds the rule without valid justification, the employer can create
policies based on an unproven presumption of a perceived danger at the expense of an employee’s right to
security of tenure. Note: SC cited the ff provisions: Art 1700 of CC and Consti and LC on protection of workers.

Acol v. PCCCI: Manuel Acol he lost his Bankard and on the following morning he called PCCCI to report the loss.
He again called on another day and asked if there were additional requirements to report the loss. He was told
to write a letter notifying the company of the loss, which he did. Unfortunately, somebody was able to use the
card on April 19 and 20. These charges appeared on Manuel’s April 30 billing statement. Manuel informed
PCCCI he would not pay for the purchases made after the day he notified PCCCI of the loss. An investigation
confirmed that it was not Manuel who used his Bankard on April 19 and 20, 1987. Nevertheless, he was still
required to pay. PCCCI cited provision no. 1 which states that “holder's responsibility for all charges made
through the use of the card shall continue until the expiration or its return to the Card Issuer or until a
reasonable time after receipt by the Card Issuer of written notice of loss of the Card and its actual inclusion in
the Cancellation Bulletin.” Held: the provision was not valid. A stipulation providing that the effectivity of the
credit card cancellation rests on an act entirely beyond the control of the cardholder is void for being contrary
to public policy. Article 1306 prohibits contracting parties from establishing stipulations contrary to public
policy.

Aznar v. Citibank: Aznar, a known businessman in a Cebu, is a holder of a Preferred Mastercard credit card
issued by Citibank. He made a total advanced deposit with Citibank with the intention of increasing his credit
limit. During his Asian Tour with his wife and grandchildren, his Citibank credit card was not honored in some
establishments in Malaysia, Singapore and Indonesia. He filed a complaint for damages. Citibank invoked ¶7
(Citibank is not responsible if the Card is not honored by any merchant affiliate for any reason) & ¶15 (Citibank’s
liability shall not exceed P1,000.00 or the actual damages proven, whichever is lesser) of the terms and
conditions governing the issuance of its Mastercard. (see below). Held: such stipulations are invalid. Par. 7 is
vague and as a contract of adhesion, any ambiguity in its provisions must be construed against the party who
prepared the contract, Citibank. Par. 15 is unconscionable as it precludes payment of a larger amount even
though damage may be clearly proven. But notwithstanding their invalidity, the Court cannot grant damages to

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Aznar as he failed to show by preponderance of evidence that Citibank breached any obligation that would make
it answerable for his emotional suffering.

Macalinao v. BPI: BPI filed a complaint for a sum of money against Macalinao for the latter’s failure to pay its
credit card purchases. In its Complaint, BPI originally imposed the interest and penalty charges at the rate of
9.25% per month or 111% per annum. MeTC and RTC found such rate unconscionable and thus reduced it to
2% per month or 24% per annum. On appeal, CA modified the rate of interest and penalty charge and increased
them to 3% per month or 36% per annum based on the Terms and Conditions Governing the Issuance and Use
of the BPI Credit Card. Held: 2% per month or 24% p.a. Jurisprudence has considered the interest rate of 3%
per month as excessive and unconscionable. As such, it is void, and it is as if there was no express contract
thereon. Hence, courts may reduce the interest rate as reason and equity demand. The same is true with respect
to the penalty charge. Article 1229 allows the judge to equitably reduce the penalty if it is iniquitous or
unconscionable, considering the circumstances of each case.

Castro v. Tan: Tan mortgaged their Bulacan property for a P30k loan with the Castros as embodied in a
“kasulatan.” The interest stipulated was 5% monthly interest rate, or 60% per annum, compounded monthly.
After maturity of the loan, Tan offered to pay the 30k with a portion of the interest but the Castros demanded
P359k. Failing to pay the said amount, the Castros foreclosed the property. Held: The interest rate is void ab
initio for being violative of Article 1306. despite the suspension of the Usury Law, interest rates may still be
declared illegal whenever they are found to be unconscionable. The Castros stress that it is a settled principle
that the law will not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into
with all the required formalities and with full awareness of what he was doing. However, the freedom of
contract is not absolute. The same is understood to be subject to reasonable legislative regulation aimed at the
promotion of public health, morals, safety and welfare.

Tiu v. Platinum Plans: Platinum Plans is a domestic corporation engaged in the pre-need industry. In
1993, Daisy Tiu was appointed as senior AVP and territorial operations head in charge of its Hong Kong and
Asean operations. They executed a contract for 5 years. In 1995, Tiu stopped reporting for work, and after a
couple of months, she suddenly entered into another pre-need company as its VP for sales. Platinum sued Tiu
for damages for violation of the “non-involvement” clause in her employment contract which states that during
her employment with Platinum and for the next 2 years thereafter, she cannot engage herself with the work of
another pre-need company. Tiu argues it was void since it was contrary to public policy. Held: non-involvement
clause is valid. A noninvolvement clause is not necessarily void for restraining trade so long as the limitations
as to time, trade, and place are reasonable. The non-involvement clause here was reasonable as it only
prohibited Tiu for only 2 years and only for the same business (pre-need company). This was only to protect
the company since Tiu’s position with them allowed her to be privy to highly-confidential and sensitive
marketing strategies.

Mallari v. Prudential: Sps. Mallari obtained 2 loans from Prudential Bank. For the first loan, the interest rate
was 21% per annum while the penalty charge was 12% per annum. For the second loan, the interest rate was
23% per annum while the penalty charge was also 12% per annum. Held: interest and penalty rates are not
unconscionable. 23% and 12% are not unconscionable under jurisprudence. Spouses Mallari cannot back out on
their obligation under the contract. Note: stipulated interest rates of 3% per month and higher are excessive,
unconscionable and exorbitant.

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Leal v. IAC: Public order signifies the public weal-public policy. Essentially, therefore, public order and public
policy mean one and the same thing.

Non v. Dames: The contract between the school and the student is not an ordinary contract. It is imbued with
public interest, considering the high priority given by the Constitution to education and the grant to the State
of supervisory and regulatory powers over all educational institutions. A school cannot refuse to enroll a student
on the simple ground that his contract expires every end of a semester. Respondent school cannot justify its
actions by relying on ¶137 of the Manual of Regulations for Private Schools, which provides that “when a
student registers in a school, it is understood that he is enrolling for the entire semester for collegiate courses,
which the Court in Alcuaz construed as authority for schools to refuse enrollment to a student on the ground
that his contract, which has a term of one semester, has already expired. The termination of contract theory
does not even find support in the Manual. Paragraph 137 merely clarifies that a college student enrolls for the
entire semester. It serves to protect schools wherein tuition fees are collected and paid on an installment basis,
i.e. collection and payment of the downpayment upon enrollment and the balance before examinations. Thus,
even if a student does not complete the semester for which he was enrolled, but has stayed on for more than
two weeks, he may be required to pay his tuition fees for the whole semester before he is given his credentials
for transfer.

De Luna v. Abrigo: Paragraph 11 of the "Revival of Donation Intervivos, has provided that "violation of any of
the conditions (herein) shall cause the automatic reversion of the donated area to the donor, his heirs, . . .,
without the need of executing any other document for that purpose and without obligation on the part of the
DONOR". Said stipulation not being contrary to law, morals, good customs, public order or public policy, is valid
and binding upon the foundation who voluntarily consented thereto.

Llorin v. CA: For a stipulation on an escalation clause to be valid, it should specifically provide (1) that there can
be an increase in interest if increased by law or by the Monetary Board, and (2) it must include a provision for
reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law
or by the Monetary Board. The purpose of the law in mandating the inclusion of a de-escalation clause is to
prevent one-sidedness in favor of the lender, which is considered repugnant to the principle of mutuality of
contracts. The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the validity
and enforceability of an escalation clause in the contract. In other words, in the absence of a corresponding de-
escalation clause, the escalation clause shall be considered null and void. There is no dispute that the escalation
clause in the promissory note involved in this case does not contain a correlative de- escalation clause or a
provision providing for the reduction of the stipulated interest in the event that the applicable maximum rate
of interest is reduced by law or by the Monetary Board. Notwithstanding the absence of such stipulation,
however, it is similarly not controverted but, as a matter of fact, specifically admitted by petitioner that
respondent APEX unilaterally and actually decreased the interest charges it imposed on herein petitioner on
three occasions. Consequently, we hold that with this actuality, the escalation clause involved in this case
remains valid and enforceable.

Heirs of Manuel Uy v. Meer Castillo: Parties entered into an agreement that Petitioner will finance the litigation
of the Deceased Respondent in the condition that if latter wins, he will sell a portion of the disputed land to
petitioner. Agreement included a penal clause providing that any party violating the Kasunduan would pay the
aggrieved party a penalty fixed in the sum of P50,000.00, together with the attorney’s fees and litigation
expenses incurred should a case be subsequently filed in court. So obviously Respondent did not follow the
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agreement to the letter. SC said that the agreement is binding. Since the parties fixed liquidated damages in the
sum of P50,000.00 in case of breach, we find that said amount should suffice as petitioners' indemnity, without
further need of compensation for moral and exemplary damages. In obligations with a penal clause, the penalty
generally substitutes the indemnity for damages and the payment of interests in case of non-compliance.
Usually incorporated to create an effective deterrent against breach of the obligation by making the
consequences of such breach as onerous as it may be possible, the rule is settled that a penal clause is not
limited to actual and compensatory damages. The RTC's award of attorney's fees in the sum of P50,000.00 is
also proper. Aside from the fact that the penal clause included a liability for said award in the event of litigation
over a breach of the Kasunduan, petitioners were able to prove that they incurred said sum in engaging the
services of their lawyer to pursue their rights and protect their interests.

Advocates v. BSP: By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties' freedom of
contract to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which 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. However, the lifting
of the ceilings for interest rates does not authorize stipulations charging excessive, unconscionable, and
iniquitous interest. Stipulations authorizing iniquitous or unconscionable interests have been invariably struck
down for being contrary to morals, if not against the law.

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.
• Remember, the contract is only unenforceable; thus, capable of performance.

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

• Root word of consent= Cum-sentive: to feel together

• It’s the concurrence of the offer and the acceptance
• The essential elements are those without which there can be no contract. These elements are, in turn,
subdivided into common (communes), special (especiales), and extraordinary (especialisimos). The
common elements are those which are present in all contracts, such as consent, object certain, and cause.
The special elements are present only in certain contracts, such as delivery in real contracts or form in
solemn ones. The extraordinary elements are those which are peculiar to a specific contract (i.e. price in
sales).

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Ong Yiu v. CA: The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives
his consent. And as held in Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878; Rosenchein vs.
Trans World Airlines, Inc., 349 S.W. 2d 483, “a contract limiting liability upon an agreed valuation does not
offend against the policy of the law forbidding one from contracting against his own negligence.” Considering,
therefore, that petitioner had failed to declare a higher value for his baggage, he cannot be permitted a
recovery in excess of P100.00. Besides, passengers are advised not to place valuable items inside their baggage
but “to avail of our V-cargo service” (Exh. “1”). It is likewise to be noted that there is nothing in the evidence
to show the actual value of the goods allegedly lost by petitioner.

i. Consent

Consent in General
• Definition of Consent
Art. 1319, 1st sentence. Consent is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract.

• Elements of Consent
a. Plurality of subjects
b. Capacity
c. Intelligent and free will
d. Express or tacit manifestation of the will o Can be body language. Like nodding your head.
o Manifestation to be taken in the widest possible understanding e.
Conformity of the internal will and its manifestation

Velasco v. CA: It is not difficult to glean from the aforequoted averments that the petitioners themselves
admit that they and the respondent still had to meet and agree on how and when the down-payment and the
installment payments were to be paid. Such being the situation, it cannot, therefore, be said that a definite
and firm sales agreement between the parties had been perfected over the lot in question. Indeed, this Court
has already ruled before that a definite agreement on the manner of payment of the purchase price is an
essential element in the formation of a binding and enforceable contract of sale. The fact, therefore, that the
petitioners delivered to the respondent the sum of P10,000.00 as part of the down-payment that they had to
pay cannot be considered as sufficient proof of the perfection of any purchase and sale agreement between
the parties under article 1482 of the new Civil Code.

Weldon v. CA: the first proposal submitted by Weldon Construction for rendering service under a contract of
supervision is simply that, a proposal. It never attained perfection as the contract between the parties. Only an
absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract
(Article 1319). The advance payment of P10,000 was not an unqualified acceptance of the offer contained in
the first proposal as in fact an entirely new proposal was submitted by Weldon Construction subsequently. If,
as claimed by the petitioner, the parties had already agreed upon a contract of supervision, why then was a
second proposal made? Once a contract is shown to have been consummated or fully performed by the
parties, its existence and binding effect can no longer be disputed. It is irrelevant and immaterial to dispute
the due execution of a contract.

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i.e. the date of signing by one of the parties, if both of them have in fact performed their obligations
thereunder and their respective signatures and those of their witnesses appear upon the face of the
document. Thus, even assuming that the Building Contract was signed by the private respondent only after the
Gay Theater building had been completed and the stipulated price of P600,000.00 Pesos fully paid, such fact
can no longer negate the binding effect of that agreement if its existence and especially, its consummation can
be established by other evidence, e.g by the contemporaneous acts of the parties and their having performed
their respective obligations pursuant to the agreement.

Maria Christina v. CA: Whether deemed to be an offer or an acceptance, the letter obviously is far from the
requisite offer or acceptance contemplated under Article 1319. An offer must be clear and definite, while an
acceptance must be unconditional and unbounded, in order that their concurrence can give rise to a perfected
contract. The letter of MCFC and MSC referred to in the questioned decision of the appellate court, cannot be
so considered as a perfected agreement between the parties as it proposed new terms and conditions for the
alleged contract – it was a counteroffer.

What vitiates consent?

Art. 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.

• What if there is a 17 year old girl who is very precautious, she misrepresents that she is of age. The other
party says she looks over 18. So the other party contracts with her. She sues. Is she estopped? SC in
Mercado said that he is estopped. He cannot take advantage of his own wrong. He misrepresented his age.
• Alcantara: also said the kid is estopped. Dissenting opinion of Padilla said that if he is too young to
contract, he is too young to be estopped.
• Braganza: he is too young to contract, he is too young to be estopped. This is the better view. He cannot
be estopped because of his active misrepresentation.

Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.

Art. 1329. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is
understood to be without prejudice to special disqualifications established in the laws.

Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or
fraud is voidable.

Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which
is the object of the contract, or to those conditions which have principally moved one or both parties to
enter into the contract.

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Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity
or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

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.

Offer
• offer is a unilateral proposition which 1 party makes to Another for the celebration of a contract.

Art. 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must
be complied with.
• Requisites of Offer
a. Definite
o The offer must be definite, so that upon acceptance, an agreement can be reached on the whole
contract.
o That’s why ads are not usually offers. The ad will just say “a house in a nice residential area. Call for
further inquiries.”

b. Complete
o The offer must be complete, indicating with sufficient clearness the kind of contract intended and
definitely stating the essential conditions of the proposed contract as well as the nonessential ones
desired by the offeror.
c. Intentional
o An offer without seriousness, made in such manner that the other party would not fail to notice such
lack of seriousness, is absolutely without juridical effects and cannot give rise to a contract (i.e. must
not be made in jest, or a prank).

Acceptance
• Requisites of Acceptance
i. Unequivocal ii. Unconditional iii.
Absolute

• If the acceptance is qualified, then that is a counter- offer (Article 1319, 3rd sentence).
• An amplified acceptance may or may not be an acceptance of the original offer. It depends on the
circumstances. o Example: A offers to sell 2000 kilos of rice. B says he wants to buy 5000 kilos of rice. Is
the 2000 kilos accepted? It depends. If buyer wants a block sale, that is, only 5000 kilos and nothing less,
then it is a counter-offer.
o But if you wanted to buy in bulk, 5000 or nothing, then B’s statement is just a counter offer.

Manifestation of Acceptance
Art. 1320. An acceptance may be express or implied.
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• Silence is ambiguous. Silence in itself is neither acceptance nor rejection. Can it mean acceptance? One
must look at the circumstances.
• Examples: A and B are own stalls which sell rice. C delivers 1000 kilos of rice to A every Sunday. If A is not
there, C just leaves it with A’s assistant. C tries to do business with B. B is not there though. C leaves rice
with B’s assistant. B does not call C. Both A and B are silent. A accepted the rice because of the
arrangement. If A did not want to accept the rice, then A should have called. B’s silence is not acceptance.
• This is so even if C explains that if B doesn’t want the rice, then he should call him the next day.

Cognition Theory
Article 1319, 2nd ¶. Acceptance made by letter of telegram does not bind the offerer except from the time it
came to his knowledge.
• This is known as the Cognition Theory. Commercial law uses the Theory of Manifestation.

Offer and acceptance take effect only from the time knowledge is acquired by the person to whom it is
directed. If during intervening time, the offer or acceptance is extinguished by death/insanity, such offer or
acceptance has no more effect.
• Example: Offeror gave offer on March 1. The offer reached the offeree on March 5. From the point of view
of the offeror, offer is counted from March 5. He can still countermand before March 5.
• If the parties are face to face, then there is no problem since there is no time gap.
• The problem arises when there is a time gap. Under Article 1319, there is perfection of the contract when
there is knowledge of the other party’s acceptance. This has serious consequences.
• Example 1. The offer was made in Davao on February 1. The offer was sent through mail which is received
in Manila on February 5. On the same day, the offer is accepted. Mail is sent to Davao on February 5
signifying acceptance. On February 8, the party in Manila becomes insane. On February 13, the mail
reaches Davao. According to Professor Balane, under Article 1323, there is no contract since there was no
contractual capacity.
• Example 2. The offer was made in Bacolod on March 1. It was received in Quezon City on March
3. On March 4, the offeree sends his acceptance. On March 5, the offeror countermands offer.
• Now, both acceptance and countermand of offer are in the mail. Whichever reaches the destination first
will be counted.
• Balane makes an offer to Nitura to sell. Balane writes a letter to Nitura offering to sell his plantation with
the terms. He mails it March 3. Nitura gets it March 4th. Nitura accepts and mails the letter on March 9. On
the 8th, Balane changes his mind. Both letters are in transit. Balbarosa says whichever letter is received
first. If Nitura gets the withdrawal first, then he doesn’t get the plantation. If Nitura’s acceptance reaches
him first then Balane is bound to sell the land o Coz of Cognition theory.

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 Instances when the Offer is withdrawn:
1. Art. 1323
2. Lapse of period stated in the offer without acceptance of offeree
3. Qualified or conditioned acceptance
4. Communication of offeror to offeree of revocation before communication of acceptance
5. I am missing one

Offers Through Agents

Art. 1322. An offer made through an agent is accepted from the time acceptance is communicated to him.

Effect of Death,Insanity
Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either
party before acceptance is conveyed.

Withdrawal of the Offer

Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn
at any time before acceptance by communicating such withdrawal, except when the option is founded upon
consideration, something paid or promised.
Article 1324 is related to Article 1479, ¶2.32 They actually say the same thing.
1. Unilateral offer to buy or to sell o S offers to sell a car to B for P300,000. B needs to think about it, and so
B asks for 30 days. B does not pay S for time, but S promises to give B 30 days. In this case there is no
option contract (Falls under #1 above)
o Cannot be exercised whimsically; otherwise, Art. 19 is triggered. o However, in Sanchez vs. Rigos, the
Supreme Court said that even if there was no option contract, S must still communicate the
withdrawal of the offer to B. If S does not communicate his withdrawal, that is tantamount to a
continuing offer. Professor Balane does not agree with this
o Applies if there is no consideration distinct from the price.
• According to him, if there is no valid option contract, there should be no continuing offer.
• According to Professor Balane, the Supreme Court should have explained that.

2. Option Contract:
o Definition: a preparatory contract which one party grants to another for a fixed period the privilege to
buy or to sell and it must be supported by a consideration distinct from the price [Vasquez v. Ayala].
o S offers to sell a car to B for P300,000. B needs to think about it, and so B asks for 30 days and pays S
P5,000. The payment of P5,000 is a distinct consideration from the price of the car. This distinct
consideration of P5,000 is payment for the 30 days. B is paying for time. The option contract is
separate from the contract of sale. S cannot sell the car to anybody else within that 30-day period. If S

32
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.

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 sells the car to someone else within the 30- day period, he is guilty of contractual breach. But B can
buy the car before the end of the 30-day period and such will be a valid sale.
o Now S can’t pre-terminate the contract. o Subject matter of the sale is the time. o Option contract
must be onerous. Cannot be gratuitous [Sachez v. Rigos]. o Commentators say that this can be
compelled by specific performance.
o But if you sold it to a buyer in good faith sorry
• S offers to sell a car to B for P300,000. B needs to think about it, and so B asks for 30 days and pays P5,000
to S. B decides to buy the car within 30 days. The car is not sold to anybody else. S does not want to sell
the car to B. B can sue S for specific performance – compel S to sell him the car.
• S offers to sell a car to B for P300,000. B needs to think about it, and so B asks for 30 days and pays P5,000
to S. B decides to buy the car within 30 days. Before B is able to buy the car, S sells the car to X. B can sue
S for damages. B cannot sue for specific performance since the car has been sold to an innocent
purchaser.

3. Right of first refusal

Definition: It is a contractual grant, not for the sale of property but of the first priority to buy in the event
the owner decides to sell the same [Villegas v. CA].
• Rules:
a. Is it valid? Yes.
b. Does it have to have consideration? Yes.
 The consideration in the lease can be also for RoR.  Must be
separate and distinct.
c. Is it enforceable? Yes.
d. If its sold to a 3rd person, you can enforce it against him if the buyer had knowledge
 If no knowledge damages
e. Is it covered by the Statute of Frauds? No.
 It’s not a sale of realty, but the right to be the 1st offeree.

• A right of first refusal is different from an option contract. A right of first refusal is the right to have first
opportunity to purchase or the right to meet any other offer. On the other hand, an option contact limits
the promissor’s power to revoke an offer. The right of first refusal is not covered by the Civil Code.
• Differs from option because in option, you get all the terms. In RoR, you don’t set anything. You just say
that if I ever decide to sell, I’ll make you the first offer.
• A right of first refusal is a statement by a person to another that if the former decides to sell the object,
the latter will have the first offer. Here, the object is determinable. But the exercise of the right to buy is
conditioned on the seller’s decision to sell on terms which are not yet certain.
• According to Equatorial vs. Mayfair, the requirement of separate consideration is not applicable in a right
of first refusal.
o According to Professor Balane, this is peculiar since an option contract is more firm and yet it requires
the payment of separate consideration but a right of first refusal does not.
o RoR is valid but not expressly provided in the Code, because of autonomy of will.

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• However, in Litonjua vs. CA, the Supreme Court said that in a right of first refusal, the consideration for the
loan or mortgage is already a part of the consideration for the right of first refusal.
• In Ang Yu vs. CA, the SC said that an action for specific performance will not lie against the promissor.
However, a complaint under Article 19 for damages may be filed if the actions of the promissor are
whimsical. In Equatorial vs. Mayfair the right of first refusal was violated when the vendor sold the object
to another person. The SC in Equatorial vs. Mayfair said that an action for specific performance may be
filed. Equatorial vs. Mayfair is totally inconsistent with Ang Yu vs. CA.
• The Supreme Court has held (Equatorial vs. Mayfair, Parañaque Kings vs. CA, Litonjua vs. CA, PUP vs. CA)
that the right of first refusal is enforceable by an action for specific performance. And that the actual
vendee may be required to sell the property to the holder of the right of first refusal at the price which he
bought it.
• However, in a recent case, Rosencorr vs. CA (March 8, 2001), the Supreme Court has held that the right of
first refusal need not be written to be enforceable since it is not included in the Statute of Frauds. Also, if
the vendee is in good faith, he may not be compelled by specific performance since he relied on a title
which is clean. The remedy is to go after the vendor.
In a right of first refusal, there is no definite offer since the vendor has to option of deciding not to sell the
object. Also, in a right of first refusal, there is no need for a separate consideration. In an option contract,
there is a definite offer. According to Professor Balane, the right of first refusal is inferior to an option
contract since there is no definite offer. Professor Balane does not understand why an action for specific
performance is allowed in violations of rights of first refusal but not in the case of option contracts when
the object is sold to another person. Why is the SC giving greater legal effect to a right of first refusal
which is more tentative? Also, where the SC get these rules since the right of first refusal is not covered by
the Civil Code.

Sanchez v. Rigos: Nicolas Sanchez and Severina Rigos executed an instrument entitled "Option to
Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to sell" to Sanchez the sum of P1,510.00,
a parcel of land, within 2 years from said date with the understanding that said option shall be deemed
"terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the property" within the stipulated
period. Held: Rigos should sell the property to Sanchez. The offer can be withdrawn in this case since it is not
supported by consideration, but only before the promissee communicates his acceptance. In other words,
since there may be no valid contract without a cause or consideration, the promisor is not bound by his
promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes,
however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale.

Ang Yu v. CA: In the 1st case, Ang Yu Asuncion and Keh Tiong, et al. are tenants or lessees of residential and
commercial spaces owned by Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan. The owners decided to sell the
property and gave Ang Yu priority to buy it. However, despite negotiations, the parties did not reach a final
agreement. Ang Yu sued the owners then to compel them to sell the property. The court held that the offer to
sell was never accepted by the plaintiffs for the reason that the parties did not agree upon the terms and
conditions of the proposed sale, hence, there was no contract of sale at all. Also, the court ruled that should
the defendants subsequently offer their property for sale at a price of P11-million or below, plaintiffs will have
the right of first refusal. Later on, the owners sold the property to Buen Realty for 15M. Ang Yu then filed a
motion for execution to compel the owners to sell them the property (2nd case). Held: Motion for Execution is
without merit because the judgment of the court only gave Ang Yu et al the right of first refusal (but it did not

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decree a contract of sale). Its breach cannot justify correspondingly an issuance of a writ of execution under
a judgment that merely recognizes its existence, nor would it sanction an action for specific performance
without thereby negating the indispensable element of consensuality in the perfection of contracts. It held
that the option to buy, given to the buyer is not the contract of sale itself. The optionee has the right, but not
the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the
option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply
with their respective undertakings. At any time prior to the perfection of the contract, either negotiating party
may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately
after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal. If
the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right
to withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming
to know of such fact, by communicating that withdrawal to the offeree.
Equatorial v. Mayfair: Carmelo owned a parcel of land, together with two 2-storey buildings constructed
thereon. He entered into two contract of leases with Mayfair. Both leases contained a clause giving Mayfair a
right of first refusal to purchase the subject properties. Carmelo sold its entire land and building, which included
the leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute
Sale, for the total sum of P11,300,000. This was NOT offered first to Mayfair. Mayfair instituted the action a quo
for specific performance and annulment of the sale of the leased premises to Equatorial. Held: The rule so early
established in this jurisdiction is that the deed of option or the option clause in a contract, in order to be valid
and enforceable, must, among other things, indicate the definite price at which the person granting the option,
is willing to sell. ¶8 grants the right of first refusal to Mayfair and is not an option contract. It is evident that the
provision granting Mayfair "30-days exclusive option to purchase" the leased premises is NOT AN OPTION in the
context of Arts. 1324 and 1479, second paragraph. Although the provision is certain as to the object (the sale of
the leased premises) the price for which the object is to be sold is not stated in the provision. Otherwise stated,
the questioned stipulation is not by itself, an "option" or the "offer to sell" because the clause does not specify
the price for the subject property. In the instant case, the right of first refusal is an integral part of the contracts
of lease. The consideration is built into the reciprocal obligations of the parties. Since Equatorial is a buyer in
bad faith, this finding renders the sale to it of the property in question rescissible. Equatorial was aware of the
lease contracts because its lawyers had, prior to the sale, studied the said contracts.

Bible Baptist Church: Bible Baptist Church entered into a contract of lease with spouses Villanueva. Bible Baptist
seeks to buy the leased premises from the spouses Villanueva, under the option given to them. Petitioners claim
that they (Baptist Church) agreed to advance the large amount needed for the rescue of the property but, in
exchange, it asked the Villanuevas to grant it a long term lease and an option to buy the property for P1.8 million.
However, the spouses Villanueva did not agree saying that there is no separate consideration. Bible Baptist
argue that there is a consideration — the consideration supporting the option was their agreement to pay off
the Villanuevas P84,000 loan with the bank, thereby freeing the subject property from the mortgage
encumbrance. Spouses Villanueva argue that the amount of P84,000 has been fully exhausted and utilized by
their occupation of the premises and there is no separate consideration to speak of which could support the
option. Held: no separate consideration that would render the option contract valid and binding. An option
contract, to be valid and binding, needs to be supported by a separate consideration. The consideration need
not be monetary but could consist of other things or undertakings. However, if the consideration is not
monetary, these must be things or undertakings of value, in view of the onerous nature of the contract of option.
Furthermore, when a consideration for an option contract is not monetary, said consideration must be clearly
specified as such in the option contract or clause.

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Villegas v. CA: This involves 2 consolidated cases involving a parcel of land in Quiapo, Manila owned by the heirs
of Dr. Lorenzo Reyes which was being leased by the petitioner-lessees (the 2 Villegas and the 2 Sanchez). The
Administrative Committee of the heirs informed petitioner-lessees of the heirs’ decision to sell the property and
given them the opportunity to exercise their right of pre-emption.
However, after many offers & counter-offers and a failed conference meeting to establish the price, the parties
failed to reach an agreement. And so the “respondent-heirs,” owner of the 75% undivided property, decided to
sell their shares to Lita Sy. As a consequence of which, petitioner-lessees filed an action against respondent-
heirs and Spouses Sy for Annulment of the Sale/Title, Specific Performance, and Consignation of Rentals with
Damages. They contend that there was already a perfected contract of sale when they accepted the P5 Million
offer for the property in their letter dated Oct. 18, 1988 and that the sale between respondent-heirs and Lita Sy
should be annulled since it violated their right of first refusal. Held: the respondent-heirs were correct that there
was no perfected contract of sale because there was no meeting of minds. Where a time is stated in an offer
for its acceptance, the offer is terminated at the expiration of the time given for its acceptance. The offer may
also be terminated when the person to whom the offer is made either rejects the offer outright or makes a
counter-offer of his own. Here, petitioner-lessees already exercised their right of first refusal when they refused
to respond to the latest offer of respondent-heirs (the letter dated Nov. 3, 1988 wherein only the 75% undivided
interest of the property was for sale at P3,825,000). Upon petitioner-lessees’ failure to respond to this latest
offer of respondent-heirs, the latter could validly sell the property to other buyers under the same terms and
conditions offered.

Eulogio v. Sps. Angeles: A house and lot in Timog Avenue, QC was being leased out to Arturo by Spouses Apeles.
Upon Arturo’s death, Enrico (Arturo’s son) succeeded as lessor. Allegedly, Enrico and Luz (authorized by SPA)
entered into a Contact of Lease with Option to Purchase, affording Enrico, before the expiration of the three-
year lease period, the option to purchase the subject property for a price not exceeding P1.5M. When Enrico
wanted to exercise such right, the Spouses Apeles refused. Enrico filed a complaint for specific performance and
damages. Spouses Apeles contended that Luz’s signature in said contract was forged and they did not intend to
sell such property. Held: the Contract of Lease with Option to Purchase is unenforcable against Spouses Apeles.
An option is a contract by which the owner of the property agrees with another person that the latter shall have
the right to buy the former’s property at a fixed price within a certain time. It is not a sale of property but a sale
of the right to purchase. Under the 2¶ thereof, an option contract to be valid and enforceable against the
promissor, there must be a separate and distinct consideration that supports it. We have painstakingly
examined the Contract of Lease with Option to Purchase, as well as the pleadings and testimonies, for any direct
evidence or evidence aliunde to prove the existence of consideration for the option contract, but we have found
none.

Vasquez v. Ayala: On April 23, 1981, the Vasquez spouses entered into a Memorandum of Agreement (MOA)
with regarding the development of Ayala Alabang. Aside from a portion of the land being reserved for the
spouses, 4 lots were agreed to be offered for sale to the spouses at the prevailing price at the time of the
purchase. The pertinent portion of the moa provided “5.15. The BUYER agrees to give the SELLERS a first option
to purchase four developed lots next to the "Retained Area" at the prevailing market price at the time of the
purchase." The spouses now are seeking to buy the lots at the 1984 prices while Ayala had offered to sell them
at the 1990 price (when the village was finally developed). Held: Contract is ROFR. In a right of first refusal, while
the object might be made determinate, the exercise of the right would be dependent not only on the grantor’s
eventual intention to enter into a binding juridical relation with another but also on terms, including the price,
that are yet to be firmed up. Here, ¶5.15 is obviously a mere right of first refusal and not an option contract.

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Although the paragraph has a definite object, i.e., the sale of subject lots, the period within which they will be
offered for sale to petitioners and, necessarily, the price for which the subject lots will be sold are not specified.
Therefore, Ayala was free to set the price based on 1990. Moreover, since spouses refused to purchase the
properties at the price given by Ayala, they necessarily lost their ROFR.

Natino v. IAC: A commitment by the bank to resell a property within a specified period, although accepted by
the party in whose favor it was made, is considered an option not supported by consideration distinct from the
price, and therefore, not binding upon the promissor. Even if Mrs. Brodeth is to be understood to have promised
to allow the petitioners to buy the property at any time they have the money, the Bank was not bound by the
promise not only because it was not approved or ratified by the Board of Directors but also because, and more
decisively, it was a promise unsupported by a consideration distinct from the re-purchase price. A commitment
by the bank to resell a property, within a specified period, although accepted by the party in whose favor it was
made, was considered an option not supported by a consideration distinct from the price and, therefore, not
binding upon the promissor. Pursuant to Southwestern Sugar and Molasses Co. vs. Atlantic Gulf and Pacific
Company, it was void.

Serra v. CA: In a unilateral promise to sell, where the debtor fails to withdraw the promise before the acceptance
by the creditor, the transaction becomes a bilateral contract to sell and to buy, because upon acceptance by the
creditor of the offer to sell by the debtor, there is already a meeting of the minds of the parties as to the thing
which is determinate and the price which is certain. In which case, the parties may then reciprocally demand
performance. Jurisprudence has taught us that an optional contract is a privilege existing only in one party—the
buyer. For a separate consideration paid, he is given the right to decide to purchase or not, a certain
merchandise or property, at any time within the agreed period, at a fixed price. This being his prerogative, he
may not be compelled to exercise the option to buy before the time expires. On the other hand, what may be
regarded as a consideration separate from the price is discussed in Vda. de Quirino v. Palarca wherein the facts
are almost on all fours with the case at bar. The said case also involved a lease contract with option to buy where
we had occasion to say that “the consideration for the lessor’s obligation to sell the leased premises to the
lessee, should he choose to exercise his option to purchase the same, is the obligation of the lessee to sell to
the lessor the building and/or improvements constructed and/or made by the former, if he fails to exercise his
option to buy said premises.” In the present case, the consideration is even more onerous on the part of the
lessee since it entails, transferring of the building and/or improvements on the property to petitioner, should
respondent bank fail to exercise its option within the period stipulated. The bugging question then is whether
the price “not greater than TWO HUNDRED PESOS” is certain or definite. A price is considered certain if it is so
with reference to another thing certain or when the determination thereof is left to the judgment of a specified
person or persons. And generally, gross inadequacy of price does not affect a contract of sale. In the present
dispute, there is evidence to show that the intention of the parties is to peg the price of P210 per square meter.

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Advertisements
Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but
mere invitations to make an offer.

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the contrary appears.
• Most advertisements are simply invitations to make an offer and are not offers in themselves since not all
the necessary terms can fit in the advertisement.
• Even if the ad had all the necessary terms, it’s still an invitation to make offer since there is no
definite person to whom the offer is being made (public offer).

C&C Construction v. Menor: Moreover, it was not the ministerial duty of the Nawasa officials to award the
contract to C & C Commercial Corporation even if it was the lowest bidder. The Nawasa in its addendum No. 1
to the invitation to bid dated July 6, 1966 reserved the right “to reject the bid of any bidder” (p. 35, Record on
Appeal). Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to dispute the award
to another bidder

Simulated Contracts
Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do
not intend to be bound at all; the latter, when the parties conceal their true agreement.

Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not
prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public
order or public policy binds the parties to their real agreement.

Absolutely Simulated (contrato simulado)

• Absolute simulation of a contract takes place when the parties do not intent to be bound at all (Article
1345).
• For example, X pretends to sell his car to avoid tax liability. However X has no real intention to sell the car.
• An absolutely simulated or fictitious contract is void (Article 1346)
• All the requisites are missing.
o No consent they really had no intention to sell o No object car was no delivered o No
cause no money changed hands
• Gonzalez v. Trinidad: Pari delicto rule does not apply here, because Object and cause are not illegal

Relatively Simulated (contrato disimulado)

• Relative simulation of a contract takes place when the parties conceal their true agreement (Article 1345).
• They intend to enter into a contract, but they disguise it as another.
o Like they make it a sale when its really a donation to avoid taxes.
o If there is enough evidence to establish the intent of the parties the law treats it under the laws
governing the intended contract. It will judged according to it’s real nature.
• In a relatively simulated contract, the parties enter into a contract but disguise it as another.

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• For example, X has many creditors, and they are going after X’s car. X cannot donate his car to Y since
the creditors will just resort to accion pauliana. So, X antedates a contract of sale, selling his car to Y,
except that X’s intention is to donate his car to Y .
• A relatively simulated contract, when it does not prejudice a 3rd 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 (Article 1346).
• The law will apply the rules of the true contract and not the ostensible contract.

Payongayong v. CA: Mendoza is the original owner of a parcel of land. He mortgaged the property to
MESALA to secure a loan; this was duly annotated. Mendoza executed a Deed of Sale with
Assumption of Mortgage over the parcel of land together with all the improvements thereon in favor of
Spouses Payongayong. The sale was never annotated. Later on, Mendoza mortgaged the same property to
MESALA to secure another loan; this was annotated on the title. Lastly, Mendoza executed another Deed of
Sale over the same property in favor of respondents spouses Salvador. Getting wind of the second sale to
Spouses Salvador, Spouses Payongayong filed a complaint for annulment of deed of absolute sale and transfer
of title with recovery of possession over the said land. Held: the sale to Spouses Salvador was not fictitious.
Simulation occurs when an apparent contract is a declaration of a fictitious will, deliberately made by
agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act
which does not exist or is different from that which was really executed. Its requisites are: a) an outward
declaration of will different from the will of the parties; b) the false appearance must have been intended by
mutual agreement; and c) the purpose is to deceive third persons. The basic characteristic then of a simulated
contract is that it is not really desired or intended to produce legal effects or does not in any way alter the
juridical situation of the parties. The cancellation of Mendoza’s certificate of title over the property and the
procurement of one in its stead in the name of respondents, which acts were directed towards the fulfillment
of the purpose of the contract, unmistakably show the parties’ intention to give effect to their agreement.
The claim of simulation does not thus lie.

Ureta v. Ureta: Francisco suggested to his father, Alfonso, that in order to reduce inheritance taxes, Alfonso
should make it appear that he had sold some of his lands to his children. Alfonso executed 4 Deeds of Sale
covering several parcels of land in favor of 3 of his children and his common law wife. Since the sales were
made only for taxation purposes and no monetary consideration was given, Alfonso continued to own, possess
and enjoy the lands and their produce. Policronio, Alfonso’s eldest, was given under a Deed of Sale 6 parcels of
land but he and his heirs only took possession of a portion of parcel 5. When Alfonso died, a Deed of
Extrajudicial Partition was entered into by Alfonso’s heirs. Policronio’s heirs now allege that the 6 parcels of
land conveyed to Policronio under the Deed of Sale should be excluded in the partition. Held: Deed was void
for being absolutely simulated. Lacking in an absolutely simulated contract is consent which is essential to a
valid and enforceable contract. Thus, where a person, in order to place his property beyond the reach of his
creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and
control of the property; hence, the deed of transfer is but a sham. Similarly, in this case, Alfonso simulated a
transfer to Policronio purely for taxation purposes, without intending to transfer ownership over the subject
lands.It is clear that the Deeds of Sale were only executed for taxation purposes. There is clearly no intent on
the part of Alfonso to divest himself of ownership over the properties. The most
protuberant index of simulation of contract is the complete absence of an attempt in any manner on the part
of the ostensible buyer to assert rights of ownership over the subject properties. Policronio’s failure to take

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exclusive possession of the subject properties or, in the alternative, to collect rentals, is contrary to the
principle of ownership. Such failure is a clear badge of simulation that renders the whole transaction void.

Umali v. CA: There is absolute simulation, which renders the contract null and void, when the parties do not
intend to be bound at all by the same. The basic characteristic of this type of simulation of contract is the fact
that the apparent contract is not really desired or intended to either produce legal effects or in any way alter
the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor
subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond
in favor of Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, conduce to the conclusion that petitioners had every intention to be bound by
these contracts. The occurrence of these series of transactions between petitioners and private respondents is
a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their
respective obligations from one another.
Carino v. CA: There is merit to the Encabos' claim that the simulated deed of sale in favor of the Cariños was
executed in order to protect the money Quesada invested in the purchase of the rights to the lot in question,
which transfer of said lot to his name was later on disapproved by the LTA. As can be gleaned from the
testimony of Josue Quesada, he did this by putting Cirila Vicencio as the vendee in the simulated Deed of Sale,
when in fact, Encabo and Quesada meant her only as a dummy for the latter.
Javier v. CA: It is settled that the previous and simultaneous and subsequent acts of the parties are properly
cognizable indicia of their true intention. Where the parties to a contract have given it a practical construction
by their conduct as by acts in partial performance, such construction may be considered by the court in
construing the contract, determining its meaning and ascertaining the mutual intention of the parties at the
time for contracting. The deed of assignment of February 15, 1966 is a relatively simulated contract which
states a false cause or consideration, or one where the parties conceal their true agreement. A contract with a
false consideration is not null and void per se. Under Article 1346 a relatively simulated contract, when it does
not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public
order or public policy.

Formaran v. Ong: The subject Deed of Sale is indeed simulated, as it is: (1) totally devoid of consideration; (2)
it was executed on August 12, 1967, less than two months from the time the subject land was donated to
petitioner on June 25, 1967 by no less than the parents of respondent Glenda Ong; (3) on May 18, 1978,
petitioner mortgaged the land to the Aklan Development Bank for a P23,000.00 loan; (4) from the time of the
alleged sale, petitioner has been in actual possession of the subject land; (5) the alleged sale was registered on
May 25, 1991 or about twenty four (24) years after execution; (6) respondent Glenda Ong never introduced
any improvement on the subject land; and (7) petitioner’s house stood on a part of the subject land. These are
facts and circumstances which may be considered badges of bad faith that tip the balance in favor of
petitioner. The sale of the land in question was purely simulated. It is void from the very beginning. If the sale
was legitimate, defendant Glenda should have immediately taken possession of the land, declared in her
name for taxation purposes, registered the sale, paid realty taxes, introduced improvements therein and
should not have allowed plaintiff to mortgage the land. These omissions properly militated against defendant
Glenda’s submission that the sale was legitimate and the consideration was paid. While the Deed of Absolute
Sale was notarized, it cannot justify the conclusion that the sale is a true conveyance to which the parties are
irrevocably and undeniably bound. Although the notarization of Deed of Absolute Sale, vests in its favor the
presumption of regularity, it does not validate nor make binding an instrument never intended, in the first
place, to have any binding legal effect upon the parties.
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ii. Object

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object
of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise
be the object of a contract.

Art. 1348. Impossible things or services cannot be the object of contracts.

Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not
determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine
the same, without the need of a new contract between the parties.

• Object is always an act or conduct.

• The object of the contract is the prestation. Thus, it is always the conduct which is to be observed. It is not
a concrete object like a car. In a contract of sale, the object is the delivery of the object and not the object
itself.
• The provisions on object however blur the distinction between the object of the contract, the prestation,
and the object of the prestation. According to Professor Balane, these provisions are not fatal though.
• Requisites of Object
1. The object must be within the commerce of man, either already existing or in potency
(Article 1347) o Within the commerce of man means that the object is capable of
appropriation and transmission.
o The term “in potency” means that the object will come into existence in the future. o Generally in
reciprocal contracts particularly sales, the sale of future things is allowed. For example, it is possible
to sell the future harvest of a farm.
o The coming into being of the future thing is a suspensive condition.
o Some future things are not allowed to be objects of the prestation. The law does not allow contracts
on future inheritance.
o Res existentes o Res futurea can’t dispose of it coz its future or you don’t won it yet.
 Exception: you can’t donate future property and you can’t sell future inheritance.
 Emptio rei speratae is a conditional sale. There is a suspensive condition. If the future thing does not
come into existence, then there is no contract of sale.
 Emptio spei is the sale of a hope. Even if the future thing does not materialize, the buyer must pay
since the buyer is taking a chance. (i.e. sale of lotto ticket). Hope is a present thing.

2. The object must be licit, or not contrary to law, morals, good customs, public policy or public order
(Article 1347)

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 3. The object must be possible (Article1348) o If the object is impossible, then the contract is void for lack
of cause.
o Article 1348 does not talk of supervening impossibility which is a mode of extinguishments. o
Impossibility under Article 1348 must be actual and contemporaneous with the making of the contract.

4. The object must be determinate as to its kind and determinable as to its quantity (Article
1349) o The object need not be individualized. It must be determinate as to its kind or species.
o The quantity of the object may be indeterminate, so long as the right of the creditor is not rendered
illusory.

5. The object must be transmissible

o This is actually a redundancy since this is already in the requisite of being within the commerce of man.

iii. Cause
Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or
promise of a thing or service by the other; in remuneratory ones, the service or benefit which is
remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.

Villamor v. CA: consideration is "the why of the contracts, the essential reason which moves the contracting
parties to enter into the contract." The cause or the impelling reason on the part of private respondent in
executing the deed of option as appearing in the deed itself is the petitioners' having agreed to buy the 300
square meter portion of private respondents' land at P70.00 per square meter "which was greatly higher than
the actual reasonable prevailing price."

Art. 1351. The particular motives of the parties in entering into a contract are different from the cause
thereof.

Olegario v. CA: In a contract of sale, consideration is, as a rule, different from the motive of the parties.
Consideration is defined as some right, interest, benefit, or advantage conferred upon the promisor, to which
he is otherwise not lawfully entitled, or any detriment, prejudice, loss, or disadvantage suffered or undertaken
by the promisee other than to such as he is at the time of consent bound to suffer. As contradistinguished,
motive is the condition of mind which incites to action, but includes also the inference as to the existence of
such condition, from an external fact of a nature to produce such a condition. Under certain circumstances,
however, the motive of the parties may be regarded as the consideration when it predetermines the purpose
of the contract. When they blend to that degree, and the motive is unlawful, then the contract entered into is
null and void. The primary motive of Marciliano in selling the controverted 91-square meter lot to private
respondents was to illegally frustrate petitioners’ right of inheritance and to avoid payment of estate tax. In
their memorandum private respondents did not refute petitioners’ charge that the said sale is fictitious. The
conclusion is thus inescapable that the purported sale of April 15, 1986 of the subject lot is null and void.
Illegal motive predetermined the purpose of the contract.

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Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good customs, public order or public policy.

Lagunzad v. Gonzales: It is necessary to distinguish between real duress and the motive which is present when
one gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his
own wish and desires, or even against his better judgment. In legal effect, there is no difference between a
contract wherein one of the contracting parties exchanges one condition for another because he looks for
greater profit or gain by reason of such change, and an agreement wherein one of the contracting parties
agrees to accept the lesser of two disadvantages. In either case, he makes a choice free and untramelled and
must accordingly abide by it. The Licensing Agreement has the force of law between the contracting parties
and since its provisions are not contrary to law, morals, good customs, public order or public policy, petitioner
should comply with it in good faith.

Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that
they were founded upon another cause which is true and lawful.

Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless
the debtor proves the contrary.

Law v. Olympic Sawmill: Law loaned P10K to defendants. Defendants were not able to pay and asked for
extension. Law granted but added P6K for attorney’s fees, legal interest, and other costs. Defendants still
unable to pay so collection case. Defendants said P6K is usurious. Held: Under Article 1354 in regards to the
agreement of the parties relative to the P6K obligation, “it is presumed that it exists and is lawful, unless the
debtor proves the contrary.” No evidentiary hearing having been held, it has to be concluded that defendants
had not proven that the P6K obligation was illegal.P6K was liquidated damages so allowed unless proven
illegal, which defendants did not do.

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.

• The cause of a contract is the “why of the contract,” the immediate and most proximate
purpose of the contract, the essential reason which impels the contracting parties to enter into it and
which explains and justifies the creation of the obligation through such contract.
• Causa or cause. Consideration is a bad translation. The cause is different from consideration.
Consideration in the Anglo-American sense must always be valuable or capable of pecuniary estimation.
Cause, on the other hand, need not be material at all, and may consist in a moral satisfaction for the
promissor.
• Causa is the immediate why, motive is the ultimate why.
• Requisites of Cause
1. It must exist
2. It must be true/ real
 Not simulated.
3. It must be licit

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• Cause is different from motive. Cause is the proximate why while motive is the ultimate why. For example,
A wants to sell his house for P60 M because A is moving to Canada. B is willing to buy the house for P60 M.
In this case, the cause for A is the
P60 M while the cause for B is the house. A’s motive is to dispose of the house which he
does not need since A is going to Canada.
• Like failure of or lack of object, the failure of cause has an effect on the contract. If there is no cause or the
cause is illegal, then the contract is void. This is unlike the lack of consent. When consent is lacking, the
contract is not void. The contract is merely voidable.
• General Rule: Failure of motive as a General Rule does not affect the contract.
• Exception: Motive affects the contract when
1. The motive becomes a suspensive condition; or o Balane will sell to Nitura his house for 20M on the
condition that his visa to Canada is granted
2. The realization of the motive is the cause for the contract and there is an intervening serious mistake of
fact o Contract will become voidable for mistake.

• In onerous contracts, the cause is the prestation or promise of a thing or service by the other party.
• It has been held that, as a mortgage is an accessory contract, its cause or consideration is the very cause or
consideration of the principal contract, from which it receives its life, and without which it cannot exist as
an independent contract (China Bank vs. Lichauco).
• In remuneratory contracts, the cause is the service or benefit which is remunerated .
• A 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.
• In gratuitous contracts, the cause is the mere liberality of the benefactor.
• Delivery – for real contracts
• Form – for formal contracts

b. Natural Elements
• The natural elements are those which are derived from the nature of the contract and ordinarily accompany
the same. They are presumed by law, although they can be excluded by the contracting parties if they so
desire.
i. Right to resolve (Article 1191)
ii. Warranties in sales contracts

c. Accidental Elements
• The accidental elements are those which exist only when the parties expressly provide for them for the
purpose of limiting or modifying the normal effects of the contract (i.e. conditions, terms, modes)

4. Stages of a Contract
a. Preparation, conception, or generation, which is the period of negotiation and bargaining, ending at
the moment of agreement of the parties

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 b. Perfection or birth of the contract, which is the moment when the parties come to agree on the terms
of the contract
• General Rule: Contracts are perfected by mere consent – the principle of consensuality (Article 1315)
• Exception: Real contracts, such as deposit, pledge, and commodatum are not perfected until the delivery
of the object of the obligation (Article 1316)

c. Consummation or death, which is the fulfillment or performance of the terms agreed upon

5. Classification of Contracts
a. According to Degree of Dependence
i. Preparatory
• A preparatory contract is one which has for its object the establishment of a condition in law which is
necessary as a preliminary step towards the celebration of another subsequent contract (i.e. partnership,
agency).

ii. Principal
• A principal contract is one which can subsist independently from other contracts and whose purpose can
be fulfilled by themselves (i.e. sales, lease).

iii. Accessory
• An accessory contract is one which can exist only as a consequence of, or in relation with, another prior
contract (i.e. pledge, mortgage).

b. According to Perfection
i. Consensual
• A consensual contract is one which is perfected by mere agreement of the parties (i.e. sales, lease). ii. Real
• A real contract is one which requires not only the consent of the parties for their perfection, but also the
delivery of the object by 1 party to the other (i.e. commodatum, deposit, pledge).

c. According to their Form

i. Common or informal
• An informal contract is one which does not require some particular form (i.e. loan, lease).

ii. Special or formal

• A formal contract is one which requires some particular form (i.e. donation, chattel mortgage).

d. According to Purpose
i. Transfer of ownership (i.e. sale) ii. Conveyance of
use (i.e.commodatum)
iii. Rendition of service (i.e. agency)

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 e. According to Subject Matter
i. Things (i.e. sale, deposit, pledge) ii. Services
(i.e.agency, lease of services)

f. According to the Nature of the Obligation

i. Bilateral
• A bilateral contract is one which gives rise to reciprocal obligations for both parties (i.e. sale, lease). ii.
Unilateral
• A unilateral contract is one which gives rise to an obligation for only 1 of the parties (i.e.
commodatum, gratuitous deposit).
• Can be cinelagmatic?

g. According to Cause
i. Onerous
• An onerous contract is one in which each of the parties aspires to procure for himself a benefit through
the giving of an equivalent or compensation (i.e. sale).

ii. Gratuitous
• A gratuitous contract is one in which one of the parties proposes to give to the other a benefit without any
equivalent or compensation (i.e. commodatum).

h. According to Risk
i. Commutative
• A commutative contract is one in which each of the parties acquires an equivalent of his prestation and
such equivalent is pecuniarily appreciable and already determined from the moment of the celebration of
the contract (i.e. lease).

ii. Aleatory
• An aleatory contract is one in which each of the parties has to his account the acquisition of an equivalent
prestation , but such equivalent, although pecuniarily appreciable, is not yet determined, at the moment
of the celebration of the contract, since it depends upon the happening of an uncertain event, thus
charging the parties with the risk of loss or gain (i.e. insurance).

i. According to Name
i. Nominate
• A nominate contract is one which has a name and is regulated by special provisions of law (i.e. sale, lease)
• We have 18.
ii. Innominate

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of
Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the
customs of the place.
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• An innominate contract is one that does not have a name and is not regulated by special provisions of law.
• A contract is not void just because it has no name. It is not a requisite for validity. A contract may have no
name but it can be valid provided it has all the elements of a contract and all the restrictions are
respected.
• 4 Classes of Innominate Contracts o do ut des (“I give that you give”) o do ut facias (“I give that you
do”) o facio ut des (“I do that you give”) o facio ut facias (“I do that you do”)

Corpus v. CA: Moreover, the payment of attorney’s fees to respondent David may also be justified by virtue of
the innominate contract of facio ut des (I do and you give) which is based on the principle that “no one shall
unjustly enrich himself at the expense of another.” Innominate contracts have been elevated to a codal
provision in the New Civil Code by providing under Article 1307 that such contracts shall be regulated by the
stipulations of the parties, by the general provisions or principles of obligations and contracts, by the rules
governing the most analogous nominate contracts, and by the customs of the people.

B. FORM OF CONTRACTS
Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. However, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties stated in the following
article cannot be exercised.

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.
• General Rule: There is no need for a specific form, but there must still be some
manifestation of consent.
• Exception: When the written form is required 1. For validity o If it not written, the
same is void.
o Examples are donations (Articles 748, 749),42 antichresis (Article 2134),43 interest in a loan (Article
1956),44 sale of land by an agent (Article 1874),45 contribution of immovables in a partnership (Article
1773)46
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 2. For enforceability

42
Art. 748. The donation of a movable may be made orally or in writing.

An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated.

If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in
writing, otherwise, the donation shall be void. (632a)

Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the
property donated and the value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is
done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be
noted in both instruments.
43
Art. 2134. The amount of the principal and of the interest shall be specified in writing; otherwise, the contract of antichresis shall
be void.
44
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
45
Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
46
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property
is not made, signed by the parties, and attached to the public instrument.

o The contract is unenforceable if it is not written.

a. An agreement that by its terms is not to be performed within a year from the making thereof
(Article 1403 (a))
b. A special promise to answer for the debt, default or miscarriage of another (Article 1403
(b))
c. An agreement made in consideration of marriage, other than a mutual promise to marry
(Article 1403 (c))
d. An agreement for the sale of goods, chattels or things in action, at a price not less than P500,
unless the buyer accepts and receives part of such goods and chattels, or the evidence, or some of
them, of such things in action, or pay at the time some part of the purchase money; but when a
sale is made by auction and entry is made by the auctioneer in his sales book, at the time of 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 (Article 1403 (d))
e. An agreement of lease for a period of more than 1 year, or the sale of real property or of an
interest therein (Article 1403 (e))
f. A representation as to the credit of a 3rd person (Article 1403 (f))
g. No express trusts concerning an immovable or any interest therein may be proved by parol
evidence (Article 1443)
• In neither case can you compel the other to reduce the agreement to writing or to comply with the form.
There is no cause of action.

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 3. For registrability (1358)
The following must appear in a public instrument:
a. 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
governed by Articles 1403 (2) and 1405
o Like contract creating usufruct or easement

b. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of
gains
c. 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 3rd person
d. The cession of actions or rights proceeding from an act appearing in a public document o Contracts
enumerated in Article 1358 are valid as between the contracting parties even when they have not
been reduced to public or private writings.
• Except in certain cases where public instruments and registration are required for the validity of the
contract itself, the legalization of a contract by means of a public writing and its entry in the register are
not essential solemnities or requisites for the validity of the contract as between the contracting parties,
but are required for the purposes of making it effective as against 3rd person. Article 1357 gives the
contracting parties the coercive power to reciprocally compel the execution of the formalities required by
law, as soon as the requisites for the validity of the contracts are present.
• Parties can compel each other to execute it in a public document.

Lao Sok v. Sabaysabay: Lao Sok made an offer which was duly accepted by the private respondents. There
was, therefore, a meeting of the minds between two parties whereby one bound himself with respect to the
other, to give something or to render some service. By the unconditional acceptance of the offer that they
would be paid separation pay, a contract was therefore perfected. Contracts in whatever form they may have
been entered into are binding on the parties unless form is essential for the validity and enforceability of that
particular contract.

Deloso v. SB: Sandiganbayan’s conclusions are erroneous. The lease in this case isn’t one of those required by
law to be in writing / in any particular form to be valid / enforceable. Absence of bond doesn’t make
transactions criminal. There’s also no evidence that canvass / bidding is a requirement.

PNB v. IAC: While Article 1358 requires that the revocation of Alcedo’s Special Power of Attorney to mortgage
his property should appear in a public instrument: nevertheless, a revocation embodied in a private writing is
valid and binding between the parties for—“The legalization by a public writing and the recording of the same
in the registry are not essential requisites of a contract entered into, as between the parties, but mere
conditions of form or solemnities which the law imposes in order that such contract may be valid as against
third persons, and to insure that a publicly executed and recorded agreement shall be respected by the latter.

Tapec v. CA: the said private instrument is a deed of sale in which all the requisites of a valid contract are
present and which is binding upon the parties. The trial court erroneously held that it is invalid because it is
not in a public document as required by Article 1358. Article 1358 does not invalidate the acts or contracts
enumerated therein if they are not embodied in public documents.
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 C. REFORMATION OF INSTRUMENTS
Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true
intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake,
fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to
the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has
prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument
but annulment of the contract.

Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as
they are not in conflict with the provisions of this Code.

Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real
agreement, said instrument may be reformed.

Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the
instrument does not show their true intention, the former may ask for the reformation of the instrument.

Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state
their real agreement, but concealed that fact from the former, the instrument may be reformed.

Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the
parties, the courts may order that the instrument be reformed.

Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument
states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is
proper.

Art. 1366. There shall be no reformation in the following cases:

(1) Simple donations inter vivos wherein no condition is imposed;
(2) Wills;
(3) When the real agreement is void.

Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently
ask for its reformation.

Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the
mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be
promulgated by the Supreme Court.
• Once the minds of the contracting parties meet, a valid contract exists, whether the agreement is reduced
to writing or not. There are instances however, where in reducing their agreements to writing, the true
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 intention of the contracting parties are not correctly expressed in the document, either by reason of
mistake, fraud, inequitable conduct or accident. It is in such cases that reformation of instruments is
proper. The action for such relief rests on the theory that the parties came to an understanding, but in
reducing it to writing, through mutual mistake, fraud or some other reason, some provision was omitted or
mistakenly inserted, and the action to change the instrument so as to make it conform to the contract
agreed upon.
• Reformation Distinguished from Annulment
• The action for reformation of instruments presupposes that there is a valid existing contract between the
parties, and only the document or instrument which was drawn up and signed by them does not correctly
express the terms of their agreement. On the other hand, if the minds of the parties did not meet, or if the
consent of either one was vitiated by violence or intimidation or mistake or fraud, so that no real and valid
contract was made, the action is for annulment. Annulment involves a complete nullification of the
contract while reformation gives life to it upon certain corrections.

• Operation and Effect of Reformation

• Upon reformation of an instrument, the general rule is that it relates back to, and takes effect from the
time of its original execution, especially as between the parties.
• Requisites of Reformation
1. There must have been a meeting of the minds upon the contract
2. The instrument or document evidencing the contract does not express the true agreement between
the parties
3. The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable
conduct or accident

• Requisites of Mistake
a. That the mistake is one of fact
o Whenever an instrument is drawn with the intention of carrying an agreement previously made, but
which, due to mistake or inadvertence of the draftsman or clerk, does not carry out the intention of
the parties, but violates it, there is a ground to correct the mistake by reforming the instrument.

b. common to both parties

o A written instrument may be reformed where there is a mistake on 1 side and fraud or inequitable
conduct on the other, as where 1 party to an instrument has made a mistake and the other knows it
and conceals the truth from him.
o The mistake of 1 party must refer to the contents of the instrument and not the subject mater or the
principal conditions of the agreement. In the latter case, an action for annulment is the proper remedy.
o If 2 parties agree upon the mortgage or pledge of real property or personal property, but the
instrument states that the property is sold absolutely or with a right of repurchase, reformation is
proper.
c. The proof of mutual mistake must be clear and convincing

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• Limitations of Reformation
1. Reformation is not proper in the following cases:
a. Simple donations inter vivos wherein no condition is imposed
b. Wills
c. When the real agreement is void

2. Who may ask for reformation

a. If the mistake is mutual
o Reformation may be ordered at the instance of either party or his successors in interest b. If the
mistake is not mutual o Reformation may be ordered upon petition of the injured party or his heirs
and assigns

3. Effect of enforcing an action

• When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for
its reformation.

D. INTERPRETATION OF CONTRACTS
• Where the parties have reduced their contract into writing, the contents of the writing constitutes the sole
repository of the terms of the agreement between the parties. Whatever is not found in the writing must
be understood as waived and abandoned. Generally, therefore, there can be no evidence of the terms of
the contract other than the contents of the writing, unless it is alleged and proved that the intention of the
parties is otherwise.

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the
former.
• When the terms of the agreement are so clear and explicit that they do not justify an attempt to read into
it any alleged intention of the parties, the terms are to be understood literally just as they appear on the
face of the contract.
• When the true intent and agreement of the parties is established, it must be given effect and prevail over
the bare words of the written agreement.

Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered.

Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend
things that are distinct and cases that are different from those upon which the parties intended to agree.

Repulic v. Castelvi: 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. Intention cannot prevail over the clear and express terms of the lease contract. Intent is to be
deduced from the language employed by the parties, and the terms of the contract, when unambiguous, are
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conclusive in the absence of averment and proof of mistake or fraud—the question being not what the
intention was, but what is expressed in the language used. Moreover, in order to judge the intention of the
contracting parties, their contemporaneous and subsequent acts shall be principally considered.

Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual.

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.
• Where the instrument is susceptible of 2 interpretations, 1 which will make it invalid and illegal, and
another which will make it valid and legal, the latter interpretation should be adopted.
In the construction of an instrument where there are several provisions or particulars, such a construction
is, if possible, to be adopted as will give effect to all.

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.

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.

• When there is doubt as to the meaning of any particular language, it should be determined by a
consideration of the general scope and purpose of the instrument in which it occurs.
• An instrument may be construed according to usage in order to determine its true character.

Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who
caused the obscurity.
• The party who draws up a contract in which obscure terms or clauses appear, is the one responsible for
the obscurity or ambiguity; they must therefore be construed against him.

Eastern Shipping v. Margarine: There is a clear and irreconcilable inconsistency between the YorkAntwerp
Rules expressly adopted by the parties as their contract under the bill of lading which sustains respondent’s
claim and the codal article cited by petitioner which would bar the same. Furthermore, as correctly contended
by respondent, what is here involved is a contract of adhesion as embodied in the printed bill of lading issued
by petitioner for the shipment to which respondent as the consignee merely adhered, having no choice in the
matter, and consequently, any ambiguity therein must be construed against petitioner as the author.

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding
articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of
rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest
reciprocity of interests.

If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what
may have been the intention or will of the parties, the contract shall be null and void.

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Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed
in the construction of contracts.
Rule 130, Rules of Court
Sec. 10. Interpretation of a writing according to its legal meaning. — The language of a writing is to be
interpreted according to the legal meaning it bears in the place of its execution, unless the parties intended
otherwise.

Sec. 11. Instrument construed so as to give effect to all provisions. — In the construction of an instrument
where there are several provisions or particulars, such a construction is, if possible, to be adopted as will
give effect to all.

Sec. 12. Interpretation according to intention; general and particular provisions. — In the construction of an
instrument, the intention of the parties is to be pursued; and when a general and a particular provision are
inconsistent, the latter is paramount to the former. So a particular intent will control a general one that is
inconsistent with it.
• When a general and a particular provision are inconsistent, the particular provision will control.

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.

Sec. 14. Peculiar signification of terms. — The terms of a writing are presumed to have been used in their
primary and general acceptation, but evidence is admissible to show that they have a local, technical, or
otherwise peculiar signification, and were so used and understood in the particular instance, in which case
the agreement must be construed accordingly.

Sec. 15. Written words control printed. — When an instrument consists partly of written words and partly of
a printed form, and the two are inconsistent, the former controls the latter.

Sec. 16. Experts and interpreters to be used in explaining certain writings. — When the characters in which
an instrument is written are difficult to be deciphered, or the language is not understood by the court, the
evidence of persons skilled in deciphering the characters, or who understand the language, is admissible to
declare the characters or the meaning of the language.

Sec. 17. Of two constructions, which preferred. — When the terms of an agreement have been intended in a
different sense by the different parties to it, that sense is to prevail against either party in which he
supposed the other understood it, and when different constructions of a provision are otherwise equally
proper, that is to be taken which is the most favorable to the party in whose favor the provision was made.

Sec. 18. Construction in favor of natural right. — When an instrument is equally susceptible of two
interpretations, one is favor of natural right and the other against it, the former is to be adopted.
Sec. 19. Interpretation according to usage. — An instrument may be construed according to usage, in order
to determine its true character.

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Lim v CA: Considering the admitted fact that the contract of sale was prepared in the office of respondent
company by Generoso Bongato, Assistant to the Manager of the company, upon instruction of General
Manager Emiliano L. Abalos who is a lawyer, and We are now confronted with the varying or conflicting
interpretations of the parties thereto, the respondent company contending that the stipulation “Terms: Cash
upon signing of this contract” does not mean that the agreement was a cash transaction because no money
was paid by the petitioner at the time of the signing thereof whereas the petitioner insists that it was a cash
transaction inasmuch as he paid cash amounting to P142,975 upon the signing of the contract, the payment
having been made to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed to in the
morning of the same day, the conflicting interpretations have shrouded the stipulation with ambiguity or
vagueness. Then, the cardinal rule should and must apply, which is that the interpretation shall not favor the
party who caused the ambiguity (Art. 1377). The above facts show contemporaneous and subsequent acts of
the parties in relation to the transaction between them as embodied in the Contract of Sale of Sugar (Exh.
„A‰) from which the intention of the contracting parties may be judged correctly. The trial court was correct
in judging and deciding the intention of the parties from their actuations
contemporaneous with and subsequent to the agreement for the sale of the sugar in question, and we sustain
the trial court, applying Art. 1371, New Civil Code,

E. DEFECTIVE CONTRACTS
• The remaining chapters deal with defective contracts. The Civil Code made major and important
improvements on this topic. Unlike the Spanish Code, the defective contracts were ambiguous and had
unclear classifications. They were simply void (nulos) or voidable (anulables). Here, in our present code,
there are for types of defective contracts, from the serious to less serious, in the following order:
• However, our Code still has some imperfections. As pointed out by Tolentino, there must be a “relatively
void” contract. For example, in an assignment of lease without authority, this is void as to third
parties, but valid as between the parties.
o A contract of lease can’t be assigned unless there is express provision. The status of the lease is
relatively void. Void as between the lessor and lease, but valid between the assignor aad assignee
o Balane owes Meer and Aquino. Aquino garnishes his debt against Meer. Balane paid Meer. Valid
between B and M, but invalid between B and A. o There have been several cases decided by our
Supreme Court wherein a chattel mortgage over real property was declared void as to third parties but
valid as between the parties.
• Whatever imperfections the Code has, it still is better than other codes on this topic.

Kinds in ascending order of defect:

• Rescissible: One which has caused economic damage and which can be set aside, although valid.
o it can’t be cured because there’s nothing really wrong with it.
• Voidable either due to lack of capacity or consent. It is valid until set aside o Good until set aside. o
Convalidated  only in voidable and unenforceable
• Unenforceable: lack of authority or of writing or for incompetence of both parties cannot be given effect
unless property ratified.
o This is why unenforceable is more defective. It’s unenforceable til it is ratified. Voidable is valid til set
aside.

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• Void: Contract only in name. One which is an absolute nullity and produces no effect as if it had never
been executed or entered into. o Void: cannot be cured.

1. Rescissible Contracts
Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law.

Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by
more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in
representation of absentees, if the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without the
knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

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.

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.

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused.

Art. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when he
who demands rescission can return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

Art. 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts
approved by the courts.

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.

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In addition to these presumptions, the design to defraud creditors may be proved in any other manner
recognized by the law of evidence.

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.

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.

• Rescission: Process or remedy designated to render a contract validly entered into and normally binding
by reason of external conditions causing an economic prejudice, wither to a party or to his creditors.
• In a sense, a rescissible contract is a valid contract. It’s defect is external, not internal. That’s why you can’t
cure it.
• Defect: damage to one of the parties or 3rd person.
• IT IS VALID! But it is nonetheless defective.
• This is not be to confused with resolution, discussed in Article 1191. This chapter on rescissible contracts is
the proper rescissible.
• According to Scaevola, rescission is a process designated to render inefficacious a contract validly entered
into and normally binding, by reason of external conditions, causing an economic prejudice to a party or to
his creditors.
• A rescissible contract is a contract which is valid because it contains all the essential requisites prescribed
by law, but which is defective because of injury or damage to either of the contracting parties or to 3rd
persons, as a consequence of which it may be rescinded by means of a proper action for rescission.
• Rescission is a process or remedy granted by law to the contracting parties, and even to 3rd persons, to
secure the reparation of damages caused to them by a contract, even if the same should be valid, by
means of the restoration of things to their condition prior to the celebration of the contract.

Requisites of Rescission
a. The contact must be a rescissible contract under Article 1381 or Article 1382

• The following contracts are rescissible:

i. Those entered into by guardians whenever the whom they represent suffer lesion by more
than 1⁄4 of the value of things which are the object thereof (Art. 1381 (1))

• Rescission shall not take place with respect to contracts approved by the court (Article 1386).
• As a rule, when a guardian enters into a contract involving the disposition of the ward’s property, the
guardian must secure the approval of the guardianship court. A guardian is only authorized to manage the
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 estate of the ward. A guardian has no power to dispose of any portion of the estate without approval of
the court. If more than acts of mere administration are involved, judicial approval is necessary.
• In case of sale, mortgage, or other encumbrance of any portion of the estate which does not have judicial
approval is an unenforceable contract (Article 1403 (1)).
• Therefore, Article 1381 (1) is limited to contracts which constitute mere acts of administration (i.e. the
purchase of equipment for the cultivation of lands, purchase of materials for repair of buildings, etc.).
• Lesion is very difficult to apply in practice.
• For example, A is the agent of B. B owns land worth P10 M. A sells the land for P7 M. From the facts, the
lesion suffered by B is 30%. In practice, are you sure that P10 M is the fair market value of the land. What if
the situation is urgent and that property must be disposed of right away?
• Another example, A is the agent of B. B owns land worth P10M. Cwantstobuytheland.
CiswillingtopayP7M– lump sum payment. D is willing to pay P 10 M but on installments.
• Is it so low to amount of want of consideration?

ii. Those agreed upon in representation of absentees, if the absentee suffers lesion by more
than 1⁄4 of the value of things which are the object thereof (Art.1381 (2))
• Rescission shall not take place with respect to contracts approved by the court (Article 1386).
• As a rule, when the legal representative of an absentee enters into a contract involving the disposition of
the absentee’s property, he must secure the approval of the court. A legal representative is only
authorized to manage the estate of the absentee. He has no power to dispose of any portion of the estate
without approval of the court. If more than acts of mere administration are involved, judicial approval is
necessary.
• In case of sale, mortgage, or other encumbrance of any portion of the estate which does not have judicial
approval is an unenforceable contract (Article 1403 (1)).
• Therefore, Article 1381 (2) is limited to contracts which constitute mere acts of administration (i.e. the
purchase of equipment for the cultivation of lands, purchase of materials for repair of buildings, etc.).
• Lesion is very difficult to apply in practice.
• For example, A is the agent of B. B owns land worth P10 M. A sells the land for P7 M. From the facts, the
lesion suffered by B is 30%. In practice, are you sure that P10 M is the fair market value of the land. What if
the situation is urgent and that property must be disposed of right away?
• Another example, A is the agent of B. B owns land worth P10M. Cwantstobuytheland.
CiswillingtopayP7M– lump sum payment. D is willing to pay P 10 M but on installments.

• Correlate with Art. 1386. If the court gives its approval then there can be no lesion.
• But if you sell without court authority unenforceable.
• So, it is only rescissible if the sale doesn’t require prior judicial approval: sales of personalty which are pure
acts of admin (Rule 96, §§1-2).

iii. Those undertaken in fraud of creditors when the creditors cannot in any other manner
collect the claims due them (Art.1381 (3))
• This is an exception to the principle of relativity of contracts.

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• 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
(Article 1177).
• Creditors are protected in cases of contracts intended to defraud them (Article 1313).
• In determining whether or not a certain conveyance is fraudulent, the question in every case is whether
the conveyance was a bona fide transaction or trick and contrivance to defeat creditors, or whether it
conserves to the debtor a special right.
• All contracts by virtue of which the debtor alienates property by gratuitous tile are presumed to have been
entered into in order to defraud creditors, when the donor did not reserve sufficient property to pay all
debts contracted before the donation (Article 1387, 1st ¶).
• Alienations by onerous title are also presumed fraudulent when made by persons against whom some
judgment has been rendered in any instance or some writ of attachment has been issued. The decision or
attachment need not refer to the property alienated, and need not have been obtained by the party
seeking the rescission (Article 1387, 2nd ¶).
• This is accion pauliana. Only applies if the alienation is subsequent. Also, good faith finds no application in
donation, since he didn’t give anything.
• Badges of Fraud
1. The fact that the consideration of the conveyance is inadequate
2. A transfer made by a debtor after suit has begun and while it is pending against him
3. A sale upon credit by an insolvent debtor
4. Evidence of large indebtedness or complete insolvency
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially
6. The fact that the transfer is made between father and son when there are present any of the above
circumstances

7. The failure of the vendee to take exclusive possession of all the property

• 1387 is presumptive fraud

iv. 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
(Article 1381 (4))
• Article 1381 (4) refers to a contract executed by the defendant in a suit involving the ownership or
possession of a thing, when such contract is made without the knowledge and approval of the plaintiff or
court.
• As in the case of a contract in fraud of creditors, the remedy of rescission in this case is given to a 3rd
person who is not a party to the contract. The purpose is to protect the plaintiff.

v. All other contracts specially declared by law to be the subject of rescission (Article 1381 (5))

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• The following provision in sales are examples of rescissible contracts declared by law – Arts 1526, 1534,
1538, 1539, 1540, 1556, 1560, 1567, 1659.
• Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be
compelled at the time they were effected (Article 1382)

b. The person asking for rescission must have no other legal means to obtain reparation for the
damages suffered by him (Article 1383)

c. The person demanding rescission must be able to return whatever he may be obliged to restore if
rescission is granted (Article 1385, 1st par)
• This requisite is only applicable if the one who suffers the lesion is a party to the contract.
• This requisite does not apply when a defrauded creditor resorts to accion pauliana.
• This will not apply to ¶3-4.

d. The things which are the object of the contract must not have passed legally to the possession of
a 3rd person acting in good faith (Article 1385, 2nd ¶)
• 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 (Article 1388,1st ¶).
• If there are 2 or more alienations, the 1st acquirer shall be liable 1st, and so on successively (Article 1388,
2nd ¶).

e. The action for rescission must be brought within the prescriptive period of 4 years (Article 1389)

Guzman v. Bonnevie: The status of creditors could be validly accorded the Bonnevies for they had substantial
interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their
right of first priority under the Contract of Lease.
Same; Rescissible contracts; Petitioner not deemed purchaser in good faith.—A purchaser in good faith and for
value is one who buys the property of another without notice that some other person has a right to or interest
in such property and pays a full and fair price for the same at the time of such purchase or before he has
notice of the claim or interest of some other person in the property. Good faith connotes an honest intention
to abstain from taking unconscientious advantage of another. Tested by these principles, the petitioner cannot
tenably claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies and
such knowledge should have cautioned it to look deeper into the agreement to determine if it involved
stipulations that would prejudice its own interests.

Siguan v. Lim: LIM was charged with estafa. Siguan alleged that a Deed of Donation executed by Lim in favour
of her daughters (executed in 1989 but registered only in 1991) was antedated and was a conveyance done in
fraud of creditors and as such, must be rescinded. Held: Lim won. Accion pauliana has the ff requisites: (1) the
plaintiff asking for rescission has a credit prior to the alienation, although demandable later: (2) the debtor has
made a subsequent contract conveying a patrimonial benefit to a third person; (3) the creditor has no other
legal remedy to satisfy his claim; (4) the act being impugned is fraudulent; (5) the third person who received the

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property conveyed, if it is by onerous title, has been an accomplice in the fraud. Rescission requires the existence
of creditors at the time of the alleged fraudulent alienation, and this must be proved as one of the bases of the
judicial pronouncement setting aside the contract. In the case at bar, failed to prove that the requisites were
complied with.
REQUISITE#1and 2: We are not convinced with the allegation of the Siguan that the questioned deed was
antedated to make it appear that it was made prior to Siguan’s credit.
REQUISITE#3: It is essential that the party asking for rescission prove that he has exhausted all other legal means
to obtain satisfaction of his claim. Siguan neither alleged nor proved that she did so.
REQUISITE#4: It was not sufficiently established that the properties left behind by LIM were not sufficient to
cover her debts existing before the donation was made. Hence, no presumption of fraud. Cabaliw v. Sadorra:
For the heart of the matter is that about seven months after a judgment was rendered against him in Civil
Case No. 43192 of the CFI and without paying any part of that judgment, Benigno Sadorra sold the only two
parcels of land belonging to the conjugal partnership to his son-in-law. Such a sale even if made for a valuable
consideration is presumed to be in fraud of the judgment creditor who in this case happens to be the offended
wife. Furthermore, the presumption established by the law in favor of petitioners is bolstered by other indicia
of bad faith on the part of the vendor and vendee. Thus (1) the vendee is the son-in-law of the vendor. Close
relationship between the vendor and the vendee is one of the known badges of fraud. (2) At the time of the
conveyance, the vendee, Sotero, was living with his father-in-law, the vendor, and he knew that there was a
judgment directing the latter to give a monthly support to his wife Isidora and that his father-in-law was
avoiding payment and execution of the judgment. (3) It was known to the vendee that his father-in-law had no
properties other than those two parcels of land which were being sold to him. The fact that a vendor transfers
all of his property to a third person when there is a judgment against him is a strong indication of a scheme to
defraud one who may have a valid interest over his properties. On the part of the transferee, he did not
present satisfactory and convincing evidence sufficient to overthrow the presumption and evidence of a
fradulent transaction. His is the burden of rebutting the presumption of fraud established by law, and having
failed to do so, the fraudulent nature of the conveyance in question prevails.

2. Voidable Contracts
Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage
to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;

(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud.

These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of
ratification.

Art. 1391. The action for annulment shall be brought within four years. This period shall
begin:

In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases.

In case of mistake or fraud, from the time of the discovery of the same.

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And when the action refers to contracts entered into by minors or other incapacitated persons, from the
time the guardianship ceases.

Art. 1392. Ratification extinguishes the action to annul a voidable contract.

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.

Art. 1394. Ratification may be effected by the guardian of the incapacitated person.

Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the
action for annulment.

Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted.

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.

International House v. IAC: respondent CENTERTOWN is not qualified to acquire properties under its Articles
of Incorporation. The petitioner has confused a void contract with an ultra vires contract which is merely
voidable. Privity of petitioner to the deed of sale being absent, it cannot assail the validity of the contract
between the GSIS and the corporation and the assignment of the deed by the corporation to its sister
corporation. Petitioner is neither a party nor a privy to the Deed of Conditional Sale and the assignment
thereof: thus, it cannot assail the validity of the said contracts.

Malabanan v. Gaw Ching: The firmly settled rule is that strangers to a contract cannot sue either or both of
the contracting parties to annul and set aside that contract. It is the existence of of an interest in a particular
contract that is the basis of one’s right to sue for nullification of that contract and that essential interest in a
given contract is, in general, possessed only by one who is a party to the contract. From these legal provisions
it is deduced that it is the interest had in a given contract, that is the determining reason of the right which lies
in favor of the party obligated principally or subsidiarily to enable him to bring an action for the nullity of the
contract in which he intervened, and therefore, he who has no right in a contract is not entitled to prosecute
an action for nullity, for, according to the precedents established by the courts, the person who is not a party
to a contract, nor has any cause of action or representation from those who intervened therein, is manifestly
without right of action and personality such as to enable him o to assail the validity of the contract. Mr. Justice
Torres went on to indicate a possible qualification to the above general principle, that is, a situation where a
non-party to a contract could be allowed to bring an action for declaring that o contract null: “He who is not
the party 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; but, in order that such be
the case, it is indispensable to show the detriment which positively would result to him from the contract in
which he had no intervention.” Gaw Ching does not fall within the possible exception. Gaw Ching had no legal
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right of preemption in respect of the house and lot here involved. Even assuming, for purposes of argument
merely, that the land here involved was in fact embraced in a declared Urban Land Reform Zone (which it was
not), Gaw Ching would still not have been entitled to a right of preemption in respect of the land sold. The
preemptive or redemptive right of a lessee under P.D. No. 1517 exists only in respect of the urban land under
lease on which the tenant or lessee had built his home and in which he had resided for ten (10) years or more
and that, in consequence, where both land and building belong to the lessor, the preemptive or redemptive
right was simply not available under the law.

Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things
which have been the subject matter of the contract, with their fruits, and the price with its interest, except
in cases provided by law.

In obligations to render service, the value thereof shall be the basis for damages.

Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated
person is not obliged to make any restitution except insofar as he has been benefited by the thing or price
received by him.

Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so
because it has been lost through his fault, he shall return the fruits received and the value of the thing at the
time of the loss, with interest from the same date.

Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object
thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing
shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of
the plaintiff.

Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of
annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon
him.
• Characteristics:
1. Effective until set aside
2. Capable of ratification/ confirmation
3. Elective (only one party can set it aside)
4. Prescriptible
• A voidable contract is a contract in which all of the essential elements for validity are present, but the
element of consent is vitiated either by lack of legal capacity of 1 of the contracting parties or by mistake,
violence, intimidation, undue influence, or fraud.
• Voidable contracts are binding unless they are annulled by a proper action court. They are susceptible to
confirmation.
• This is elective because only one can annul.

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• There is a difference between confirmation and ratification. Confirmation (1392-1396) is the process of
curing the defect of a voidable contract. Ratification is the process of curing contracts which are defective
because they were entered into without authority.
• The following contracts are voidable or annullable, even though there may have been no damage to the
contracting parties

a. Those where one of the parties is incapable of giving consent to a contract

i. Unemancipated minors
• Where necessaries are sold and delivered to a minor or other person without capacity to act, he must pay
a reasonable price therefore. Necessaries include everything that is indispensable for sustenance,
dwelling, clothing, and medical attendance.
• Contracts effected by minors who have already passed the age of puberty and adolescence and are near
the adult age, when they pretend to have already reached the age of majority, while in fact they have not,
are valid, and cannot be permitted afterwards to excuse themselves from compliance with obligations
assumed by them or seek their annulment. This is in consonance with the rules of estoppel. (Mercado vs.
Espiritu).
• However in Braganza v, De Villa, the SC said that the misrepresentation of an incapacitate person does not
estop him from denying that he was of age, or from asserting that he was under age, at the time he
entered into the contract. According to Professor Balane, this view is very logical. If the minor is too young
to enter into contracts, he is too young to be estopped.

ii. Insane or demented persons, and deaf mutes who do not know how to write

Art. 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of
drunkenness or during a hypnotic spell are voidable.

Art. 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and is
understood to be without prejudice to special disqualifications established in the laws.
b. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud

Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence or
fraud is voidable.

i. Mistake
Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which
is the object of the contract, or to those conditions which have principally moved one or both parties to
enter into the contract .
Mistake as to the identity or qualification of one of the parties will vitiate consent only when such identity
or qualifications have been the principal cause of the contract.

A simple mistake of account shall give rise to its correction.

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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.

Art. 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object
of the contract.

Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is
frustrated, may vitiate consent.

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.

ii. Violence
Art. 1335, 1st ¶. There is violence when in order to wrest consent, serious or irresistible force is employed.
• Violence shall annul the obligation, although it may been employed by a 3rd person who did not take part
in the contract (Article 1336).
• Requisites of Violence
1. Irresistible physical force is employed
2. The force is the determining cause for giving consent

• Collectively called duress

• Violence and intimidation perpetrated by a 3rd person vitiates consent
• Different rule for fraud.

De Leon v. CA: According to Article 1335, in order that intimidation may vitiate consent and render the
contract invalid, the following requisites must concur: (1) that the intimidation must be the determining cause
of the contract, or must have caused the consent to be given; (2) that the threatened act be unjust or
unlawful; (3) that the threat be real and serious, there being an evident disproportion between the evil and
the resistance which all men can offer, leading to the choice of the contract as the lesser evil; and (4) that it
produces a reasonable and well-grounded fear from the fact that the person from whom it comes has the
necessary means or ability to inflict the threatened injury. Applying the foregoing to the present case, the
claim of Macaria that Sylvia threatened her to bring Jose Vicente to court for support, to scandalize their
family by baseless suits and that Sylvia would pardon Jose Vicente for possible crimes of adultery and/or
concubinage subject to the transfer of certain properties to her, is obviously not the intimidation referred to
by law. With respect to mistake as a vice of consent, neither is Macaria’s alleged mistake in having signed the
LetterAgreement because of her belief that Sylvia will thereby eliminate inheritance rights from her and
Jose Vicente, the mistake referred to in Article 1331. It does not appear that the condition that Sylvia “will
eliminate her inheritance rights” principally moved Macaria to enter into the contract. Rather, such condition
was but an incident of the consideration thereof which, as discussed earlier, is the termination of marital
relations.
iii. Intimidation
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Art. 1335, 2nd ¶. 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.
• Requisites of Intimidation
1. The threat must be the determining cause for giving consent 2. The threatened act is unjust and unlawful
o GR: Threatened act must be unlawful o Ex: even if it’s lawful o Balane saw Nitura kill someone and he has
footage. B says that if N doesn’t sell his house to B, B will go to the police with the tape. Acc. to Balane, this
is voidable even if reporting is not illegal. This is extortion, and an aspect of abuse of right. o A threat to
enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent
(Article 1335, 4th ¶).
o The threat to enforce a right, should not be aimed at a result which is contrary to law or morals, or
which is unjust and contrary to good faith. Although it is lawful to exercise rights, it is not always lawful
to use them for purposes different from those for which they were created. Thus, although it is lawful
to report crimes, the threat to report it may be illicit if the purpose is not to cooperate in the discovery
and prosecution of the crime, but to obtain some prestation from the culprit which otherwise could
not be obtained and which does not constitute indemnity for damages for the crime committed.
o Thus, the rule is, generally, a threat to do something lawful does not constitute intimidation.
o Example: If you don’t marry my daughter, I’ll report you to the IBP. This is not unlawful because
the person did commit immorality. o Sometimes, though, it may constitute intimidation.
o Example: A saw B commit murder. A threatened B that he will report him to the police unless B gives A
his house. This is intimidation because there is no connection between the crime and the contract.
3. The threat is real and serious o For example the threat must be to kill you or burn your house and not
merely to pinch you.

4. The threat produces a well-grounded fear that the person making it can and will inflict harm o To
determine the degree of intimidation, the age, sex, and condition of the person shall be borne in mind
(Article 1335, 3rd ¶).
o For example, a 75year old man who is bed ridden and says that he will kill you does not produce a well-
grounded fear.
o Intimidation shall annul the obligation, although it may have been employed by a 3rd person who did
not take part in the contract (Article 1336).

iv. 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 confidentiality, 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.

• Doesn’t affect intelligence but free will.

• This is very subjective. Depends on the respective personalities of the parties, and their relationship with
each other.
• If your friend makes pa-cute and asks Nitura to sell his house due influence

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• If Nitura is in danger of failing the subject, and Balane says “I know you’re in danger of failing, so sell me
you house.” undue influence
• When Nitura is already a lawyer and Balane does the same thing not undue influence

v. Fraud
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.

Tang v. CA: It is the position of the petitioner that because Lee See Guat was illiterate and spoke only Chinese,
she could not be held guilty of concealment of her health history because the applications for insurance were
in English and the insurer has not proved that the terms thereof had been fully explained to her. Held: It
should be noted that under Art. 1332, the obligation to show that the terms of the contract had been fully
explained to the party who is unable to read or understand the language of the contract, when fraud or
mistake is alleged, devolves on the party seeking to enforce it. Here the insurance company is not seeking to
enforce the contracts; on the contrary, it is seeking to avoid their performance. It is petitioner who is seeking
to enforce them even as fraud or mistake is not alleged. Accordingly, respondent company was under no
obligation to prove that the terms of the insurance contracts were fully explained to the other party. Even if
we were to say that the insurer is the one seeking the performance of the contracts by avoiding paying the
claim, it has to be noted as above stated that there has been no imputation of mistake or fraud by the
illiterate insured whose personality is represented by her beneficiary the petitioner herein. In sum, Art. 1332 is
inapplicable to the case at bar.

Cayabyab v. IAC: Indeed, the general rule is that whosoever alleges fraud or mistake in any transaction must
substanti-ate his allegation, since it is presumed that a person takes ordinary care for his concerns and that
private transactions have been fair and regular. This rule is especially applied when fraud or mistake is alleged
to annul notarial documents which are clothed with the prima facie presumption of regularity and due
execution. Nevertheless, the general rule admits of exceptions, one of which is Article 1332. Under the
foregoing provision, where a party to a contract is illiterate, or can not read nor understand the language in
which the contract is written, the burden is on the party interested in enforcing the contract to prove that the
terms thereof are fully explained to the former in a language understood by him. In all contractual, property or
other relations, where one of the parties is at a disadvantage on account of his physical, mental or other
handicap, the courts must be careful and vigilant for his protection.

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.

• This is known as deceit or dolo causante. This is different from dolo incidente which means fraud on things
which would not prevent you from entering into a contract but may hold the other liable for damages.
• There’s dolus bonus (1340).
• It has a decisive effect on giving consent.
• This is the only kind of dolo that will make a contract voidable.
• Requisites of Fraud
1. Fraud is employed by 1 party on the other (Articles 1342, 1344)
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 2. The other party was induced to enter into the contract (Article 1338) 3. The fraud must be
serious (Article1344) o Incidental is not serious. dolo 4. There is damage or injury caused

Abando v. Lozada: The strategem, the deceit, the misrepresentations employed by Cuevas and Pucan are facts
constitutive of fraud which is defined in Article 1338 as that insiduous words or machinations of one of the
contracting parties, by which the other is induced to enter into a contract which, without them, he would not
have agreed to. When fraud is employed to obtain the consent of the other party to enter into a contract, the
resulting contract is merely a voidable contract, that is, a valid and subsisting contract until annulled or set
aside by a competent court. Thus, contrary to the assertion of petitioners the joint venture agreement and the
deed of assignment which they unknowingly signed are not void contracts. In Rivero vs. CA, this Court held
that when one party was made to think by the other that the contract he had signed was one of mortgage
when in fact it was one of sale, the resulting contract is a voidable contract of sale.

Alcasid v. CA: To invalidate consent, the error must be real and not one that could have been avoided by the
party alleging it. The error must arise from facts unknown to him. He cannot allege an error which refers to a
fact known to him or which he should have known by ordinary diligent examination of the facts. An error so
patent and obvious that nobody could have made it, or one which could have been avoided by ordinary
prudence, cannot be invoked by the one who made it in order to annul his contract. Undue influence,
therefore, is any means employed upon a party which, under the circumstances, he could not well resist and
which controlled his volition and induced him to give his consent to the contract, which otherwise he would
not have entered into. It must in some measure destroy the free agency of a party and interfere with the
exercise of that independent discretion which is necessary for determining the advantages or disadvantages of
a proposed contract. If a competent person has once assented to a contract freely and fairly, he is bound
thereby.

Samson v. CA: In contracts, the kind of fraud that will vitiate consent is one where, 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. This is known as dolo causante or causal fraud which is basically a
deception employed by one party prior to or simultaneous to the contract in order to secure the consent of
the other. Public respondent Court of Appeals was correct when it faulted petitioner for failing to exercise
sufficient diligence in verifying first the status of private respondent’s lease. We thus quote with approval the
decision of the Court of Appeals when it ruled, thus: “When appellant Angel C. Santos said that the lease
contract had expired but that it was impliedly renewed, that representation should have put appellee on
guard. To protect his interest, appellee should have checked with the lessor whether that was so, and this he
failed to do; or he would have simply deferred his decision on the proposed sale until Miss Madrigal’s arrival,
and this appellee also failed to do. In short, as a buyer of the store and lease right in question—or as a buyer
of any object of commerce for that matter—appellee was charged with the obligation of caution aptly
expressed in the universal maxim caveat emptor.” In sum, we hold that under the facts proved, private
respondent cannot be held guilty of fraud or bad faith when he entered into the subject contract with
petitioner. Causal fraud or bad faith on the part of one of the contracting parties which allegedly induced the
other to enter into a contract must be proved by clear and convincing evidence. This petitioner failed to do.

Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound
by confidential relations, constitutes fraud.

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Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are
not in themselves fraudulent.

• This is dolus bonus

• Literally good fraud
• It’s called good fraud because everyone expects it.
• Dealer’s fraud, tolerated fraud
• Not prejudicial on free consent.
• Limit= usual exaggerations in trade. When it goes beyond this, it could cross over to dolo causante
o This is the best ruby! It’s fake pala dolo causante not dolus bonus anymore
• Caveat emptor.

Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other
party has relied on the former’s special knowledge.

Art. 1342. Misrepresentation by a 3rd person does not vitiate consent, unless such misrepresentation has
created substantial mistake and the same is mutual.

Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.

Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been
employed by both contracting parties.

Incidental fraud only obliges the person employing it to pay damages.

• If a 3rd person should commit violence or intimidation on 1 of the contracting parties and this vitiates the
contracting party’s consent, then the contract may be annulled (Article 1336).
• By analogy, if a 3rd person should exert undue influence on 1 of the contracting parties and this vitiates
the consent of the contracting party, then the contract may be annulled.
• However, if the 3rd party commits fraud, damages is the only remedy unless the fraud committed by the
3rd person has created a mutual substantial mistake (Article 1342).

Rules Regarding Voidable Contracts

a. Voidable contracts are effective unless set aside (Article1390).

b. The validity of a voidable contract can only be assailed in a suit for that purpose (i.e.
complaint or counterclaim).

• The action for 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 (Article 1397).
• The action for annulment shall be brought within 4 years. This period shall begin

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 i. Intimidation – from the time the defect of the consent ceases
ii.Violence–from the time the defect of the consent ceases
iii.
Undue influence – from the time the defect of the consent ceases iv. Mistake – from the time of
the discovery of the mistake
v. Fraud–from the time of the discovery of the fraud
• The 4 year prescription period to annul contracts entered into by minors or other incapacitated persons
shall begin from the time the guardianship ceases (Article 1391, 4th ¶).
• An obligation having been annulled, the contracting parties shall restore to each other the things which
have been the subject matter of the contract, with their fruits, and the price with its interest, except in
cases provided by law (Article 1398, 1st ¶).
• In obligations to render service, the value thereof shall be the basis for damages (Article 1398, 2nd ¶).
• When the defect of the contract consists in the incapacity of 1 of the parties, the incapacitated person is
not obliged to make any restitution except insofar as he has been benefited by the thing or price received
by him (Article 1399).
• What if the Thing to Be Returned is Lost
i. Loss due to Fault of Defendant Defendant has to pay the plaintiff:
1. value of the thing;
2. Fruits if any
3. Interest
4. Proper damages ( if due to fraud, bad faith etc)

ii. Loss due to a Fortuitous Event or due to a 3rd party Defendant has to pay the plaintiff
1. value of the thing;
2. Fruits if any iii. Loss due to Fault or Fraud of Plaintiff
 The plaintiff loses the right to annul (Article 1401).
 There is fault on the part of the plaintiff once the plaintiff regains capacity.
iv. Loss without Fault on the Plaintiff’s Part
 Commentators have a difference of opinion
1. The right to annul is extinguished unless the plaintiff offers to pay the value of the
object at the time of loss
2. The plaintiff is entitled to annul without having to pay anything.

 First is more equitable. Second is juridical. You decide!

• As long as 1 of the contracting parties does not restore what in virtue of the decree of annulment he is
bound to return, the other cannot be compelled to comply with what is incumbent upon him (Article
1402).
• Commentators however say that there is no obligation of mutual restitution when it would result in unjust
enrichment.
o Example: Nitura= lease and Meer= lessor. When Nitura recovers from his bout of insanity, he cannot ask
Meer to give back the rent he paid, since he did use it.
• The action for annulment will not prosper in the following:
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 i. If the contract has been confirmed (Article 1392) ii. If the action
to annul has prescribed(Article1391)
iii. When the thing which is the object of the contract is lost through the fault or fraud of the person who
has a right to institute the proceedings (Article 1401, 1st ¶)
o With respect to people without capacity, this will occur when the person entitled to sue
recovers minor grows up then losses the thing. Insane becomes sane and then losses the thing
iv. Estoppel

c. Voidable contracts can be confirmed.

• Confirmation extinguishes the action to annul a voidable contract (Article 1392).
• Confirmation is the proper term for curing the defect of a voidable contract.
• Confirmation cleanses the contract from all its defects from the moment it was constituted (Article 1396).

• Requisites of Confirmation
1. That the contract is a voidable or annullable contract’
2. That the ratification is made with knowledge of the cause for nullity
3. That at the time the ratification is made, the cause of nullity has already ceased to exist
• Confirmation may be effected expressly or tacitly. It is understood that there is tacit confirmation 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
(Article 1393).
d. Voidable contracts can be confirmed only by the party whose consent was vitiated
· Confirmation does not require the conformity of the contracting party who has no right to bring the action
for annulment (Article 1395).

· Confirmation may be effected by the guardian of the incapacitated person (Article 1394).

3. Unenforceable Contracts
Art. 1403. The following contracts are unenforceable, unless they are ratified:
(1) Those entered into in the name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases
an agreement hereafter made shall be unenforceable by action, unless the same, or some note or
memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence,
therefore, of the agreement cannot be received without the writing, or a secondary evidence of its
contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry;

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 (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;

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

(3) Those where both parties are incapable of giving consent to a contract.

Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this
Book.

Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of article 1403, are ratified by the
failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit
under them.

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary
for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.

Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification
by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the
same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians,
as the case may be, of both contracting parties, the contract shall be validated from the inception.

Art. 1408. Unenforceable contracts cannot be assailed by third persons.

• Curing= acknowledgement
• An unenforceable contract is a contract which cannot be enforced by a proper action in court, unless they
are ratified, because either they are entered into without or in excess of authority or they do not comply
with the Statute of Frauds or both the contracting parties do not possess the required legal capacity.
• The following contracts are unenforceable unless they are ratified (Article 1403):

a. Those entered into in the name of another person by 1 who has been given no authority or legal
representation, or who has acted beyond his powers

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.

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• 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.
• When a person enters into a contract for and in the name of another, without authority to do so, the
contract does not bind the latter, unless he ratifies the same.
• The agent, who has entered into the contract in the name of the purported principal, but without
authority from him, is liable to 3rd persons upon the contract.
• The proper term for this case is “ratification”.
• Example: In a sale, Y claimed that he was an agent of X, even if not. The contract cannot be enforced
against X. Another example is when the agent is authorized to lease the property but the agent instead
sells the property. The principal is not bound.
• Example of no authority: Nitura forges a SPA purportedly executed by Meer. Nitura sells his house on the
basis of the SPA. Meer is the quasi-principal. It is within his power to ratify it.
• Example of beyond powers: Meer tells Nitura to lease his property. Nitura sells it.

b. Those that do not comply with the Statute of Frauds

• This is the most famous variety.
1. For specific performance or for breach. Not applicable to suits for damages.
2. SOF doesn’t make the contract void. Only unenforceable.
3. Applies only to executor and not to executed contracts.
o Executory means no execution in whole or in part on either side.
o Once their has been performance then you remove it from the SOF.

i. An agreement that by its terms is not to be performed within a year from the making thereof
• In Babao vs. Perez, the Supreme Court interpreted the phrase “not be to performed within a year” to
mean that the obligation cannot be finished within 1 year. Balane does not agree with this interpretation.
According to Professor Balane the phrase “not to be performed within a year” should mean that the
obligation cannot begin within a year. For practical reasons, the contract must be in writing since the
parties might forget. This rule was made to guard against fallibility (forgetfulness) of man and fraud.
• According to Professor Balane, the Supreme Court’s interpretation is incorrect. If the obligation
cannot be finished within 1 year, the contract is not within the Statute of Frauds because of partial
performance.
• In Babao, there was partial performance. So you can’t interpret this phrase in this way.
• Balane: It cannot be begun til more than 1 year.
• Performed should be commenced.

ii. A special promise to answer for the debt, default or miscarriage of another
• This is only a subsidiary contract. It is a contract of guarantee.
• The test as to whether a promise is within the statute has been said to lie in the answer to the question
whether the promise is an original or collateral one. If the promise is an original one or an independent
one, that is, if the promisor becomes thereby primarily liable for the payment of the debt, the promise is
not within the statute.
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• If the promise is collateral to the agreement of another and the promisor becomes merely a surety or
guarantor, the promise must be in writing.
• Militante owes Loque. Balane assured Loque that if Militante doesn’t pay, Balane will pay. This must be in
writing.
• Different if Balane said I’ll pay the debt doesn’t have to be in writing. That would be novation.

iii. An agreement made in consideration of marriage, other than a mutual promise to marry
• A mutual promise to marry does not fall within the Statute of Frauds since they are not made in writing.
• Example: Vergara asks Taruc to marry him. Taruc says “I thought you’d never ask!” This need not be in
writing. If Taruc were to ask Vergara to reduce it to writing, it would ruin the moment.
• If there is collateral damage, then a promise to marry is actionable. The promise need not be in writing.
• Case: a teacher quit her job because her fiancé said that he didn’t want her to work. She quit her job. He
left her at the altar . She can sue his ass for damages.
• Agreements made in consideration of marriage other than the mutual promise to marry are within the
Statute of Frauds.
• In Cabague vs. Auxilio, the father of the groom promised to improve his daughter-inlaw’s father’s house
in consideration of the marriage. The father of the groom made improvements on the house. The
wedding did not take place. The Supreme Court said that the father of the groom could not sue on the oral
contract which as to him is not
“mutual promise to marry.” Professor Balane disagrees with the Supreme Court. According to Professor
Balane, the father of the groom should be able to sue since there was partial performance.

iv. An agreement for the sale of goods, chattels or things in action, at a price not less than P500,
unless the buyer accepts and receives part of such goods and chattels, or the evidence, or
some of them, of such things in action, or pay at the time some part of the purchase money;
but when a sale is made by auction and entry is made by the auctioneer in his sales book, at
the time of 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
• The requirement of a written instrument or a memorandum for sales of personal property for a price not
less than P500, covers both tangible and intangible personal property. It also covers the assignment of
choses in action.
• Where a contract for the sale of goods at a price not less than P500 is oral, and there is neither partial
payment or delivery, receipt, and acceptance of the goods, the contract is unenforceable, and cannot be
the basis of an action for the recovery of the purchase price, or as the basis of an action for damages for
breach of the agreement.
• Where there is a purchase of a number of articles which taken separately does not have a price of P500
each, but taken together, the price exceeds P500, the operation of the statute of frauds depends upon
whether there is a single inseparable contract or a several one. If the contract is entire or inseparable, and
the total price exceeds P500, the statute applies. But if the contract is separable, then each article is taken
separately.

v. An agreement of lease for a period of more than 1 year, or the sale of real property or of an
interest therein
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• As long there is a sale of real property, the sale must be in writing. There is no minimum.
• An oral contract for a supplemental lease of real property for longer period than 1 year is within the
Statute of Frauds.
• An agreement to enter into an agreement is also within the Statute of Frauds.

vi. A representation as to the credit of a 3rd person

• This is quasi- delict. It’s misplaced here. There is no contract, just a misrepresentation.
• A wants to borrow money from C. C does not know A. C goes to B to ask about
A’s credit standing. B says that A’s credit standing is satisfactory even though B knows that A is insolvent.
Under Article 1403, C can go after B if B’s representation was in writing.
• Professor Balane thinks that this does not belong in the Statute of Frauds. There is no contract between C
and B. B did not bind himself to pay C. What we have here is an unenforceable tort. vii. Express trust over
an immovable
Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol
evidence.
• According to Professor Balane, “a representation as to the credit of a 3rd person” should be replaced by
Article 1443. Article 1443 provides that no express trusts concerning an immovable or any interest therein
may be proved by parol evidence.
• When the express trust concerns an immovable or an interest therein, a writing is necessary to prove it.
This writing is not required for the validity of the trust. It is required only for purposes of proof. When the
property subject to the express trust, however is not real estate or an interest therein, then it may be
proved by any competent evidence, including parol evidence.

c. Those where both parties are incapable of giving consent to a contract

• Neither party or his representative can enforce the contract unless it has been previously ratified. The
ratification by 1 party, however, converts the contract into a voidable contract – voidable at the option of
the party who has not ratified; the latter, therefore, can enforce the contract against the party who has
ratified. Or, instead, of enforcing the contract, the party who has not ratified it may ask for annulment on
the ground of his incapacity.
• The proper term is “acknowledgement” (and not ratification).

• 2 Principles in the Statute of Frauds:

a. Parol evidence is not admissible.
o However, there are 2 ways of bringing it out.
i. Failure to object by the opposing lawyer when parol evidence is used (Article 1405)  If there is
no objection, then parol evidence is admitted.
ii. Acceptance of benefits(Article1405)
 If there has been performance on 1 side and the other side accepts, then the Statute of Frauds is
not applicable. Also, estoppel sets in so by accepting performance, the defect is waived.
b. The Statute of Frauds applies only to executory contracts and not to those which have been executed
in whole or in part.
o “Executed” here means there has been performance in part and acceptance by the other.

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• How do you resist?
1. MTD
2. Plead SOF as an affirmative defense
3. You can object when parol evidence is offered.

Ortega v. Leonardo: Ortega and Leonardo claimed the same land. Leonardo asked Ortega to desist from
pressing her claim and promised that if and when he succeeded in getting title to Lot I3 , he would sell to her a
portion, provided she paid for the surveying and subdivision of the Lot and provided that after he acquired title,
she could continue holding the lot as tenant by paying a monthly rental until said portion shall have been
segregated and the purchase price fully paid. Oretega did all this and even made improvements to the lot;
however, Leonardo failed to comply and rejected Ortega’s tender of money. Held: If the statement of the CFI
means that partial performance of a sale contract occurs only when part of the purchase price is paid, it surely
constitutes a defective statement of the law. U.S. Jurisprudence lists other acts of partial performance, such as
possession, the making of improvements, rendition of services, payment of taxes, relinquishment of rights,
etc. As there was partial performance, the principle excluding parol contracts for the sale of realty, does not
apply. Here, the complaint described several circumstance indicating partial performance: relinquishment of
rights, continued possession, building of improvements, tender of payment plus the surveying of the lot at
Ortega’s expense and the payment of rentals. "The making of valuable permanent improvements on the land
by the purchaser, in pursuance of the agreement and with the knowledge of the vendor, has been said to be
the strongest and the most unequivocal act of part performance by which a verbal contract to sell land is taken
out of the statute of frauds, and is ordinarily an important element in such part performance.

Carbonnel v. Poncio: Carbonnel alleges she purchased from Poncio, at P9.50 a square meter, a parcel of land.
Carbonnel paid P247.26 on account of the price and assumed Poncio's obligation with the Republic Savings
Bank amounting to P1,177.48, with the understanding that the balance would be payable upon execution of
the corresponding deed of conveyance. Poncio alleged that he had consistently turned down several offers
made by Carbonnel, to buy the land in question, at P15 a square meter, for he believes that it is worth not less
than P20 a square meter. Poncio claims that Carbonnel's action is barred by the Statute of Frauds. Held:
remanded to TC to determine won there is partial performance. The Statute of Frauds is applicable only to
executory contracts, not to contracts that are totally or partially performed. In executory contracts there is a
wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the
contracting parties. The statute has precisely been enacted to prevent fraud." However, if a contract has been
totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would
enable the defendant to keep the benefits already denied by him from the transaction in litigation, and, at the
same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. The true
basis of the doctrine of part performance is that it would be a fraud upon Carbonnel if the defendant were
permitted to escape performance of his part of the oral agreement after he has permitted the Carbonnel to
perform in reliance upon the agreement. The oral contract is enforced in harmony with the principle that
courts of equity will not allow the statute of frauds to be used as an instrument of fraud. Carbonnel is entitled,
legally as well as from the viewpoint of equity, to an opportunity to introduce parol evidence in support of her
allegations.

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Babao v. Perez: Santiago Babao married the niece of Celestina Perez. In 1924, Santiago and Celestina allegedly
had a verbal agreement where Santiago was bound to improve the land of Celestina by leveling, clearing,
planting fruits and other crops; that he will act as the administrator of the land; that all expenses for labor and
materials will be at his cost, in consideration of which Celestina in turn bound herself to convey to Santiago or
his wife ½ of the land, with all the improvements after the death of Celestina. Shortly before Celestina’s death,
she sold the land to another party. Thus, Santi filed this complaint alleging the sale of the land as fraudulent
and fictitious and prays to recover the ½ land or the expenses he incurred in improving the land. Held: SOF
applies. Contracts which by their terms are not to be performed within one year, may be taken out of the
statute through performance by one party thereto. All that is required in such case is complete performance
within the year by one party, however many years may have to elapse before the agreement is performed by
the other party. But nothing less than full performance by one party will suffice, and it has been held that, if
anything remains to be done after the expiration of the year besides the mere payment of money, the statute
will apply. Santiago Babao has not fully complied with his part within the year from the alleged contract in
question. When, in an oral contract which, by its terms, is to be performed within one year from the execution
of the contracting parties has complied within the year with obligations imposed on him by said contract, the
other party cannot avoid the fulfillment of those incumbent on him under the same contract by invoking the
statute of frauds because the latter aims to prevent and not to protect fraud. Assuming arguendo that the
agreement in question falls also under paragraph (a) of article 1403 of the new Civil Code, i.e., it is a contract
or agreement for the sale of real property or of an interest therein, it cannot also be contended that the
provision does not apply to the present case for the reason that there was part performance on the part of
one of the parties. In this connection, it must be noted that this statute is one based on equity. It is based on
equitable estoppel or estoppel by conduct. The parol contract must be sufficiently clear and definite to render
the precise acts which are to be performed thereunder clearly ascertainable. Its terms must be so clear and
complete as to allow no reasonable doubt respecting its enforcement according to the understanding of the
parties.

Cabague v. Auxillo: Felipe Cabague and son Geronimo sued the defendant Matias Auxilio and his daughter
Socorro to recover damages resulting from defendants' refusal to carry out the previously agreed marriage
between Socorro and Geronimo. The complaint alleged: (a) that defendants promised such marriage to
plaintiffs, provided the latter would improve the defendants' house in Basud and spend for the wedding feast
and the needs of the bride; (b) that relying upon such promises plaintiffs made the improvement and spent
P700; and (c) that without cause defendants refused to honor their pledged word. Held: There is no question
here that the transaction was not in writing. The only issue is whether it may be proved in court. The
understanding between the plaintiffs on one side and the defendants on the other, really involves two kinds of
agreement. One, the agreement between Felipe Cabague and the defendants in consideration of the marriage
of Socorro and Geronimo. Another, the agreement between the two lovers, as "a mutual promise to marry".
For breach of that mutual promise to marry, Geronimo may sue Socorro for damages. This is such action, and
evidence of such mutual promise is admissible. However Felipe Cabague's action may not prosper, because it is
to enforce an agreement in consideration of marriage. Evidently as to Felipe Cabague and Matias Auxilio this
action could not be maintained on the theory of "mutual promise to marry". Neither may it be regarded as
action by Felipe against Socorro "on a mutual promise to marry." Consequently, we declare that Geronimo may
continue his action against Socorro for such damages as may have resulted from her failure to carry out their
mutual matrimonial promises.

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Yoshizaki v. Joy Training: Spouses Johnson, members of the Board of Trustees of Joy Training, sold a parcel of
land and building belonging to the latter to the Spouses Yoshizaki. The acting chairperson of Joy Training filed
an action to cancel the sale claiming that the spouses Johnson did not have the authority from the board of
trustees to sell the properties. Held: unenforceable. There is no contract of agency between Joy Training and
the spouses Johnson to sell the parcel of land with its improvements. The 3 pieces of evidence presented by
Yoshizaki fail to convince the Court that they have the authority to sell the properties. TCT merely states that
Joy Training is represented by the spouses Johnson. The title does not explicitly confer to the spouses Johnson
the authority to sell the parcel of land and the building thereon. Moreover, the phrase "Rep. by Sps. RICHARD
A. JOHNSON and LINDA S. JOHNSON" only means that the spouses Johnson represented Joy Training in land
registration. The resolution which purportedly grants the spouses Johnson a special power of attorney is
negated by the phrase "land and building owned by spouses Richard A. and Linda J. Johnson." Further, the
certification is a mere general power of attorney which comprises all of Joy Training’s business. Necessarily, the
absence of a contract of agency renders the contract of sale unenforceable. Joy Training effectively did not
enter into a valid contract of sale with the spouses Yoshizaki.

Yuvienco v. Dacuycuy: We hold that in any sale of real property on installments, the Statute of Frauds read
together with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in
the sense that the idea of payment on installments must be in the requisite of a note or memorandum therein
contemplated. To put it the other way, under the Statute of Frauds, the contents of the note or memorandum,
whether in one writing or in separate ones merely indicative for an adequate understanding of all the essential
elements of the entire agreement, may be said to be the contract itself, except as to the form.

Clarin v. Rulona: it cannot be denied that there was a perfected contract of sale between the parties and that
such contract was already partially executed when the petitioner received the initial payment of P800.00. The
latter’s acceptance of the payment clearly showed his consent to the contract thereby precluding him from
rejecting its binding effect. With the contract being partially executed, the same is no longer covered by the
requirements of the Statute of Frauds in order to be enforceable. Therefore, with the contract being valid and
enforceable, the petitioner cannot avoid his obligation by interposing that Exhibit A is not a public document.
On the contrary, under Article 1357 of the Civil Code, the petitioner can even be compelled by the respondent
to execute a public document to embody their valid and enforceable contract.

Bisaya Land v. Sanchez: The purpose of the Contracts was to create an agency for BISTRANCO with Marciano
Sanchez as its agent in Butuan City. ¶1, Article 1403 provides that contracts "entered into in the name of
another person by one who has been given no authority or legal representation, or who has acted beyond his
powers" are unenforceable, unless they are ratified. In the case at bar, it is undisputed that Atty. Adolfo Amor
was entrusted, as receiver, with the administration of BISTRANCO and its business. But the act of entering into
a contract is one which requires the authorization of the court which appointed him receiver. Consequently,
the questioned Contracts can rightfully be classified as unenforceable for having been entered into by one
who had acted beyond his powers, due to Receiver Amor's failure to secure the court's approval of said
Contracts. the company cannot deny its ratification of the Contracts even before the time of Benjamin G. Roa,
because when Atty. Fulveo Pelaez succeeded Atty. Adolfo Amor as Receiver, he was represented by
BISTRANCO's shipping manager as having taken cognizance of these Contracts and sanctioned the acts of
Sanchez as shipping agent of BISTRANCO in Butuan City. This is shown by a letter, dated 15, February 1977,
written by Capt. Federico Reyes, the shipping manager of BISTRANCO at that time. The letter states that "the
Receiver (Atty. Fulveo Pelaez) maintains that the previous agency contract remains and (sic) basically the same
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except that the rates of the agency commission were modified". Furthermore, it is clear that BISTRANCO
received material benefits from the contracts of agency of Sanchez, based upon the monthly statements of
income of BISTRANCO upon which the commissions of Sanchez were based A perusal of the Contracts will also
show that there is no single provision therein that can be said as prejudicial or not beneficial to BISTRANCO.
Hernandez v. CA: The respondents’ reliance on the Statute of Frauds to secure a contrary judgment is
misplaced. The Statute of Frauds finds no application to this case. Not every agreement “affecting land” must
be put in writing to attain enforceability. Under the Statute of Frauds, Article 1403(2) (e) of the Civil Code,
such formality is only required of contracts involving leases for longer than one year, or for the sale of real
property or of an interest therein. Hernandez’s testimony is thus admissible to establish his agreement with
Fr. Garcia as to the boundary of their estates.

Victoria v. CA: Apparently, the trial court relied on the Statute of Frauds principle which requires “an
agreement for the sale x x x” of real property or an interest therein (Art. 1403(e)) to be in writing. It
overlooked the fact that this principle applies only to executory contracts. As correctly observed by the Court
of Appeals: ‘The Statute of Frauds is applicable only to executory contracts, not to contracts either totally or
partially performed. Thus, where a contract of sale is alleged to be consummated, it matters not that neither
the receipt for the consideration nor the sale itself was in writing, because oral evidence of the alleged
consummated sale is not forbidden by the Statute of Frauds and may not be excluded in court.

Mactan v. CA: Under Art. 1403 of the Civil Code, a contract for the sale of real property shall be unenforceable
unless the same or some note or memorandum thereof be in writing and subscribed by the party charged or
his agent. Evidence of the agreement cannot be received without the writing, or a secondary evidence of its
contents. In the case at bench, the deed of sale and the verbal agreement allowing the right of repurchase
should be considered as an integral whole. The deed of sale relied upon by petitioner is in itself the note or
memorandum evidencing the contract. Thus, the requirement of the Statute of Frauds has been sufficiently
complied with.

Cebu v. Rubi: As stated, no deed of sale was ever formalized but there was compliance with the requirements
of the statute of frauds. Under this law, an agreement for the sale of real property or of an interest thereon
shall be unenforceable “unless the same or some note or memorandum thereof be in writing” and subscribed
by the party charged or his agent. We hold that the exchange of written correspondence between the parties,
earlier cited, constitutes sufficient writing to evidence the agreement for purposes of complying with the
statute of frauds.

Limketkai v. CA: contracts infringing the Statute of Frauds are ratified when the defense fails to object, or asks
questions on cross-examination. Counsel for respondents cross-examined petitioner’s witnesses at length on
the contract itself, the purchase price, the tender of cash payment, the authority of Aromin and Revilla, and
other details of the litigated contract. Even assuming that parol evidence was initially inadmissible, the same
became competent and admissible because of the crossexamination, which elicited evidence proving the
evidence of a perfected contract. The crossexamination on the contract is deemed a waiver of the defense of
the Statute of Frauds. Moreover, under Article 1403, an exception to the unenforceability of contracts
pursuant to the Statute of
Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be
found in several writings, not necessarily in one document. The memorandum or memoranda is/are written
evidence that such a contract was entered into.
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 4. Void Contracts
• Characteristics:
1. What is void is of no effect
2. You don’t need judicial judgment. It is merely declaratory. o In annulment, the pronouncement is
constitutive of the nullity.
3. incapable of confirmation, ratification or acknowledgment
4. If prestation had been performed, restoration is in order, unless the parties are in pari delicto.
5. The right to set up the dfense of nullity cannot be waived.
6. An action for or against nullity does not prescribe
7. Anyone may invoke the nullity, whenever juridical effects founded thereon are asserted against him.
You don’t have to be a party. Can be collaterally acted.

Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public
policy;
(2) Those which are absolutely simulated or fictitious;
(3) Those whose cause or object did not exist at the time of the transaction;
(4) Those whose object is outside the commerce of men;
(5) Those which contemplate an impossible service;
(6) Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained;
(7) Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.
• A void contract is an absolute nullity and produces no effect, as if it had never been executed or entered
into.
• The following contracts are inexistent and void from the beginning (Article 1409)

a. Those whose cause, object or purpose is contrary to law, morals. Good customs, public order or
public policy
• Purpose shouldn’t be here
• Like unconscionable interest.
b. Those which are absolutely simulated or fictitious

c. Those whose cause or object did not exist at the time of the transaction
• According to Professor Balane, Article 1409 (3) should not be “did not exist.” Rather, the correct phrase
should be “could not come into existence” because there can be a contract over a future thing.
• Examples of “could not come into existence” are tangerine flying elephants and cars running on urine.
• This should be original impossibility

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 d. Those whose object is outside the commerce of men
• Example: Balane sells to use his membership in the Philippine Bar Association.

e. Those which contemplate an impossible service

• Here, there is no object.

f. Those where the intention of the parties relative to the principal object of the contract cannot be
ascertained
• This is similar to being void for vagueness under the Constitutional law.

g. Those expressly prohibited or declared void by law

• An example of this is sale between husband and wife, subject to exceptions. The Supreme Court has held
that contingent fees of lawyers wherein the latter receive part of the property subject of litigation are
valid, unless unconscionable in amount.
• Article 1490:
• Contract over future inheritance.
• Sale of land to aliens

• Characteristics of Void Contracts

a. The contract produces no effect whatsoever either against or in favor of anyone
b. A judgment of nullity would be merely declaratory. There is no action for annulment necessary as such
is ipso jure.
o Even when the contract is void or inexistent, an action is necessary to declare its inexistence, when it
has already been fulfilled. Nobody can take the law into his own hands.
o The intervention of a competent court is necessary to declare the absolute nullity of the contract and
to decree the restitution of what has been given under it.
o The judgment of nullity will retroact to the very day when the contract was entered into.

c. It cannot be confirmed, ratified or cured.

d. If it has been performed, the restoration of what has been given is in order, except if pari delicto will
apply.
e. The right to set the contract’s nullity cannot be waived
f. The action for nullity is imprescriptible (Article 1410)
o As between the parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or
is against public policy.
g. Any person can invoke the contract’s nullity if its juridical effects are felt as to him o The defense of
illegality of contracts is not available to 3rd persons whose interests are not directly affected (Article
1421).

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La’o v. Republic: GSIS and the Republic of the Philippines, through the Office of the Government Corporate
Counsel (OGCC), entered into a “lease-purchase” agreement (first contract). La’o offered to purchase the
property. GSIS and petitioner executed a “lease-purchase” agreement (second contract). Respondents prayed
for the nullification of the second contract. Our issue in this case is whether the second contract valid as claimed
by petitioner or null and void as decided by the courts below? NULL AND VOID. The second contract was null
and void ab initio for being in contravention of Section 3(e) and (g) of RA 3019, otherwise known as the “Anti-
Graft and Corrupt Practices Act”. The Agreement between [petitioner] and the GSIS had in fact transferred the
economic benefits which the Republic used to enjoy to La’o. It clearly shows that the second contract caused
undue injury to the government, gave petitioner unwarranted benefits and was grossly disadvantageous to the
government. Under Article 1409(7) of the Civil Code, the contract was null and void from the beginning because
it is expressly prohibited or declared void by law.

Rubias v. Batiller: Rubias, a lawyer, filed a suit to recover the ownership and possession of certain portions of
land which he bought from his father-in-law, Militante in 1956 against its present occupant defendant, Batiller,
who illegally entered said portions of the lot. Before the war with Japan, Militante filed with the CFI an
application for the registration of the title of the land. However, the record of the case was lost before it was
heard, so after the war, Militante filed a petition, wherein Rubias was the counsel, to reconstitute the record of
the case but it was dismissed. While on appeal, Militante sold the land to Rubias. Respondent, on the other
hand, claims that the land was originally owned and possessed by his great-grandfather, and since succeeding
his father, Batiller has the possession of the land, with actual, open, public, peaceful and continuous possession
in the concept of an owner, exclusive of any other rights and adverse to all other claimants. Defendant further
claimed that the sale of the land to petitioner was void. Held: The contract of sale was void and could produce
no legal effect and cannot be ratified. Fundamental considerations of public policy render void and inexistent
such expressly prohibited purchase. Under Art. 1491, ¶¶4-5, such prohibited contracts are "inexistent and void
from the beginning." The permanent disqualification of public and judicial officers and lawyers grounded on
public policy differs from the first three cases of guardians, agents and administrators, as to whose transactions
it had been opined that they may be "ratified" by means of and in "the form of a new contract, in which cases
its validity shall be determined only by the circumstances at the time the execution of such new contract. The
causes of nullity which have ceased to exist cannot impair the validity of the new contract. Thus, the object
which was illegal at the time of the first contract, may have already become lawful at the time of the ratification
or second contract; or the service which was impossible may have become possible; or the intention which
could not be ascertained may have been clarified by the parties. The ratification or second contract would then
be valid from its execution; however, it does not retroact to the date of the first contract. But in the
disqualification of public and judicial officers, even when the private parties seek to ratify the private wrong,
such cannot resurrect and validate a relationship, which continues to be tainted with a public wrong.

Javier v. Cruz: Delfin Cruz did not have any means of livelihood. He was only the houseboy of Eusebio Cruz. It is
obvious that on January 17, 1941 Delfin Cruz could not have raised the amount of P700.00 as consideration of
the land supposedly sold to him by Eusebio Cruz. Although the deed of sale purports to convey a parcel of land
with an area of only 26,577 square meters, defendants, as heirs of Delfin Cruz, claim a much bigger land
containing an area of 182,959 square meters assessed at P4,310.00. The consideration of P700.00 is not only
grossly inadequate but is shocking to the conscience. No sane person would sell the land claimed by the
defendants for only about P40.00 per hectare. In view of the foregoing, this Court finds that Eusebio Cruz did
not voluntarily affix his thumbmark on the deed of sale and did not receive any consideration for said sale.

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However, the undisputed facts of record support the evidence of the plaintiff that the deed of sale of the land
in question is void and inexistent for lack of consent and consideration.

Menil v. CA: Further, noteworthy is the fact that the second contract of sale over the said homestead in favor
of the same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term
of the said contract is ample manifestation that the same is simulated and that no object or consideration passed
between the parties to the contract. It is evident from the whole record of the case that the homestead had
long been in the possession of the vendees upon the execution of the first contract of sale on May 7, 1960;
likewise, the amount of P415.00 had long been paid to Agueda Garan on that same occasion. We find no
evidence to the contrary.

Director of Lands v. Ababa: Atty. Alberto Fernandez was previously hired by Maximo Abarquez as counsel in
litigation against the latter’s sister, Agripina. The litigation was over two lots in Cebu that Maximo. Litigating as
a pauper, Maximo agreed to reimburse Atty. Fernandez for his services by agreeing to pay him on a contingent
basis. This meant that, should Maximo win the case against his sister, Atty. Fernandez would receive 1/2 of
whatever might be recovered in the two lots that were subject of litigation. After Maximo won the case against
his sister, and hence ownership of the two lots, he inexplicably refused to give Atty. Fernandez his one-half
share. Instead, Maximo (petitioner) offered the whole parcels of land to petitioner-spouses Larrazabal. Held:
Article 1491 prohibits only the sale or assignment between lawyer and his client of property which is the subject
of litigation. In other words, for the prohibition to operate, the sale or assignment must take place during the
pendency of the litigation involving the property. A contract for a contingent fee is not covered by Art. 1491
because the transfer or assignment of the property in litigation takes effect only after the finality of a favorable
judgment.

Tonggoy v. CA: Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the
within action for reconveyance instituted by herein respondents which is anchored on the said simulated
deeds of transfer cannot and should not be barred by prescription. No amount of time could accord validity or
efficacy to such fictitious transactions, the defect of which is permanent.

Lita Enterprises v. IAC: Unquestionably, the parties herein operated under an arrangement, commonly known
as the “kabit system,” whereby a person who has been granted a certificate of convenience allows another
person who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience
is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot be
countenanced. The “kabit system” has been identified as one of the root causes of the prevalence of graft and
corruption in the government transportation offices. Although not outrightly penalized as a criminal offense,
the “kabit system” is invariably recognized as being contrary to public policy and, therefore, void and
inexistent under Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid either
party to enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it was
flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their
predicament. Article 1412 of the Civil Code denies them such aid.

Arsenal v. IAC: Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the
trial court to declare that the benefit of the prohibition in the Public Land Act “does not inure to any third
party.” Such a sweeping declaration does not find support in the law or in precedents. A third person who is
directly affected by a void contract may set up its nullity. In this case, it is precisely the petitioners’ interest in
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the disputed land which is in question. At first blush, the equities of the case seem to lean in favor of the
respondent Suralta who, since 1957, has been in possession of the land which was almost acquired in an
underhanded manner by the petitioners. We cannot, however, gloss over the fact that the respondent Suralta
was himself guilty of transgressing the law by entering, in 1957, into a transaction clearly prohibited by law. It
is a long standing principle that equity follows the law. Courts exercising equity jurisdiction are bound by rules
of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-
settled rule of law or public policy.

Manotok Realty v. IAC: Sale of the paraphernal property of the deceased wife by the husband who was
neither an owner nor administrator of the property at the time of sale is void ab initio; Sale which is void
cannot be subject of ratification by the company or the probate court.—We are, therefore, led to the
inevitable conclusion that the sale between Don Vicente Legarda and the private respondent is void ab initio,
the former being neither an owner nor administrator of the subject property. Such being the case, the sale
cannot be the subject of the ratification by the Philippine Trust Company or the probate court.

Portugal v. IAC: The alleged contract of sale is vitiated by the total absence of a valid cause or consideration.
The petitioners in their complaint, assert that they, particularly Cornelia, never knew of the existence of the
questioned deed of sale. They claim that they came to know of the supposed sale only after the private
respondent, upon their repeated entreaties to produce and return the owner’s duplicate copy of the transfer
certificate of title covering the two parcels of land, showed to them the controversial deed. And their claim
was immeasurably bolstered when the private respondent’s co defendant below, his brother Emiliano
Portugal, who was allegedly his co-vendee in the transaction, disclaimed any knowledge or participation
therein. If this is so, and this is not contradicted by the decisions of the courts below, the inevitable implication
of the allegations is that contrary to the recitals found in the assailed deed, no consideration was ever paid at
all by the private respondent. Applying the provisions of Articles 1350, 1352, and 1409 of the new Civil Code in
relation to the indispensable requisite of a valid cause or consideration in any contract, and what constitutes a
void or inexistent contract, we rule that the disputed deed of sale is void ab initio or inexistent, not merely
voidable.

Board of Liquidators v. Roxas: Since it is not disputed that petitioner PDCI is the titled owner of Lot 3247
having acquired the same by assignment from its owner Maria Roxas Lisao for and in consideration of her
subscription to shares of capital stocks in the PDCI, petitioner PDCI is therefore the absolute owner of the
property. And even if, as claimed by respondent Jose Roxas, Maria Roxas Lisao had subsequently executed a
quitclaim, deed and donation of said property in favor of her brothers and sisters who in turn allegedly
verbally sold the same to respondent, such subsequent disposition is of no legal effect whatsoever inasmuch
as Maria has no more right or title whatever over the property in question to convey to her brothers and
sisters including respondent Jose Roxas. since what appears to have been conveyed by Maria to her brothers
and sisters was no longer her property, the quitclaim, deed and donation that she executed are null and void.
As a matter of fact even prior to said conveyance, the property had been mortgaged by PDCI to the NFPC who
is certainly a mortgagee in good faith.

Fiestan v. CA: The prohibition mandated by par. (2) of Articles 1491 in relation to Article 1409 of the Civil Code
does not apply in the instant case where the sale of the property in dispute was made under a special power
inserted in or attached to the real estate mortgage pursuant to Act No. 3135, as amended. It is a familiar rule
of statutory construction that, as between a specific statute and general statute, the former must prevail since
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it evinces the legislative intent more clearly than a general statute does. The Civil Code (R.A. 386) is of general
character while Act No. 3135, as amended, is a special enactment and therefore the latter must prevail.
Section 5 of Act No. 3135, as amended, creates and is designed to create an exception to the general rule that
a mortgagee or trustee in a mortgage or deed of trust which contains a power of sale on default may not
become the purchaser, either directly or through the agency of a third person, at a sale which he himself
makes under the power. Under such an exception, the title of the mortgagee-creditor over the property
cannot be impeached or defeated on the ground that the mortgagee cannot be a purchaser at his own sale.

Ouano v. Echavez: Ouano and Echavez had promised to share in the property in question as a consideration
for Ouano's refraining from taking part in the public auction, and they had attempted to cause and in fact
succeeded in causing another bidder to stay away from the auction in order to cause reduction of the price of
the property auctioned. In so doing, they committed the felony of machinations in public auctions defined and
penalized in Article 185 of the Revised Penal Code. The agreement therefore being criminal in character, the
parties not only have no action against each other but are both liable to prosecution and the things and price
of their agreement subject to disposal according to the provisions of the criminal code. This, in accordance
with the so-called pari delicto principle set out in the Civil Code.
DBP v. CA: The Court of Appeals, after an extensive discussion, found that there had been no bad faith on the
part of either party, and this remains uncontroverted as a fact in the case at bar.
Correspondingly, respondent court correctly applied the rule that if both parties have no fault or are not guilty,
the restoration of what was given by each of them to the other is consequently in order.
This is because the declaration of nullity of a contract which is void ab initio operates to restore things to the
state and condition in which they were found before the execution thereof. the contract of loan executed
between the parties is entirely different and discrete from the deed of sale they entered into. The annulment
of the sale will not have an effect on the existence and demandability of the loan. The fact that the annulment
of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy
of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also
be enforced by means of an ordinary action. Where a mortgage is not valid, as where it is executed by one
who is not the owner of the property, or the consideration of the contract is simulated or false, the principal
obligation which it guarantees is not thereby rendered null and void. That obligation matures and becomes
demandable in accordance with the stipulations pertaining to it.

Borromeo v. Mina: In other words, transfer of ownership over tenanted rice and/or corn lands after October
21, 1972 is allowed only in favor of the actual tenant- tillers thereon. Hence, the sale executed by Philbanking
on January 11, 1985 in favor of petitioner was in violation of the aforequoted provision of P.D. 27 and its
implementing guidelines, and must thus be declared null and void. In consequence, petitioner cannot assert
any right over the subject landholding, such as his present claim for landholding exemption, because his title
springs from a null and void source. A void contract is equivalent to nothing; it produces no civil effect; and it
does not create, modify or extinguish a juridical relation.
Recio v. Altamirano: The records disclose that the Altamiranos were the ones who offered to sell the
property to Nena but the transaction did not push through due to the fault of the respondents. Thereafter, the
petitioner renewed Nena’s option to purchase the property to which Alejandro, as the representative of the
Altamiranos verbally agreed. The determinate subject matter is Lot No. 3, which is covered under TCT No. T-
102563 and located at No. 39 10 de Julio Street (now Esteban Mayo Street), Lipa City, Batangas. The price
agreed for the sale of the property was Five Hundred Thousand Pesos (P500,000.00). It cannot be denied that
the oral contract of sale entered into between the petitioner and Alejandro was valid.
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 Yanas v. Acaylar: We hold that the sale was fictitious and fraudulent. Among the badges of fraud and
fictitiousness taken collectively are the following: (1) the fact that the sale is in English, the alleged vendor
being illiterate; (2) the fact that his wife did not join in the sale and that her name is indicated in the deed as
“Maria S. Yanas” when the truth is that her correct name is Maria Aglimot Yanas; (3) the obvious inadequacy
of P200 as price for a 13- hectare land (P15.40 a hectare); (4) the notarization of the sale on the day following
the alleged thumbmarking of the document; (5) the failure to state the boundaries of the lot sold; (6) the fact
that the governor approved it more than two years after the alleged sale; (7) its registration more than three
years later, and (8) the fact that the Acaylars were able to occupy only four hectares out of the 13 hectares
and were eventually forcibly ousted therefrom by the children and agents of the vendor. It was not a fair and
regular transaction done in the ordinary course of business. The fact that the alleged sale took place in 1950
and the action to have it declared void or inexistent was filed in 1963 is immaterial. The action or defense for
the declaration of the inexistence of a contract does not prescribe

• Pari Delicto (in equal guilt)

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act
constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each
other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of
effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he
has given, and shall not be bound to comply with his promise.

Yu Bun Guan v. Ong: Ong and Yu Bun Guan are husband and wife. Ong purchased out of her personal funds, a
parcel of land (JP Rizal Property). Before their separation in 1992, she ‘reluctantly agreed’ to the Guan’s
‘importunings’ that she execute a Deed of Sale of the J.P. Rizal property in his favor, but on the promise that
he would construct a commercial building for the benefit of the children. The consideration for the ‘simulated
sale’ was that, after its execution in which he would represent himself as single, a Deed of Absolute Sale would
be executed in favor of the three (3) children and that he would pay the Allied Bank, Inc. the loan he obtained.
Guan on the other hand claimed Ong could not have purchased the property because she had no financial
capacity to do so; on the other hand, he was financially capable although he was disqualified to acquire the
property by reason of his nationality. Ong was in pari delicto being privy to the simulated sale. The Court held
that the principle of in pari delicto provides that when two parties are equally at fault, the law leaves them as
they are and denies recovery by either one of them. However, this principle does not apply with respect to
inexistent and void contracts, as in this case.

Barsobia v. Cuenco: A parcel of coconut land was sold by its Filipino owner, petitioner Epifania, to a Chinese,
Ong King Po, and by the latter to a naturalized Filipino, respondent herein. In the meantime, the Filipino
owner had unilaterally repudiated the sale she had made to the Chinese and had resold the property to
another Filipino. Held: There should be no question that the sale of the land in question in 1936 by Epifania to
Ong King Po was inexistent and void from the beginning because it was a contract executed against the
mandatory provision of the 1935 Constitution, which is an expression of public policy to conserve lands for the
Filipinos. The litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a
disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to own the subject
property. There would be no more public policy to be served in allowing petitioner Epifania to recover the land
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as it is already in the hands of a qualified person. While, strictly speaking, Ong King Po, private respondent’s
vendor, had no rights of ownership to transmit, it is likewise inescapable that petitioner Epifania had slept on
her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held
barred from asserting her claim to the litigated property.

Godinez v. Fong: The Krivenko ruling that “under the Constitution aliens may not acquire private or
agricultural lands, including residential lands” is a declaration of an imperative constitutional policy.
Consequently, prescription may never be invoked to defend that which the Constitution prohibits. However,
we see no necessity from the facts of this case to pass upon the nature of the contract of sale executed by
Jose Godinez and Fong Pak Luen—whether void ab initio, illegal per se, or merely prohibited. It is enough to
stress that insofar as the vendee is concerned, prescription is unavailing. But neither can the vendor or his
heirs rely on an argument based on imprescriptibility because the land sold in 1941 is now in the hands of a
Filipino citizen against whom the constitutional prescription was never intended to apply. The lower court
erred in treating the case as one involving simply the application of the statute of limitations. From the fact
that prescription may not be used to defend a contract which the Constitution prohibits, it does not
necessarily follow that the appellants may be allowed to recover the property sold to an alien. As earlier
mentioned, Fong Pak Luen, the disqualified alien vendee later sold the same property to Trinidad S. Navata, a
Filipino citizen qualified to acquire real property.

Yap v. Grageda: There should be no question that the sale of the land in question in 1936 by Epifania to Ong
King Po was inexistent and void from the beginning because it was a contract executed against the mandatory
provision of the 1935 Constitution, which is an expression of public policy to conserve lands for the Filipinos.
“But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It is no
longer-owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to
own the subject property. There would be no more public policy to be served in allowing petitioner Epifania to
recover the land as it is already in the hands of a qualified person. Applying by analogy the ruling of this Court
in Vasquez vs. Giap and Li Seng Giap & Sons: “if the ban on aliens from acquiring not only agricultural but also
urban lands, as construed by this Court in the Krivenko case, is to preserve the nation’s lands for future
generations of Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the
acquisition of real estate by aliens who became Filipino Citizens by naturalization.”

Pineda v. De la Rama: Whether or not the supposed cash advances reached their destination is of no
moment. The consideration for the promissory note—to influence public officers in the performance of their
duties—is contrary to law and public policy. The promissory note is void ab initio and no cause of action for
the collection cases can arise from it.

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense,
the following rules shall be observed:
(1) When the fault is on the part of both contracting parties, neither may recover what he has given by
virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the
contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the
fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what
he has given without any obligation to comply his promise.
• Articles 1411 and 1412 refer to the pari delicto rule, which literally means “in equal kind”, or also

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 “in equal guilt”– in pari delicto oritur actio and sometimes “in equal guilt, the position of the defendant is
stronger”– in pari delicto potior est condicio defendentis. The position of the defendant is stronger because
the plaintiff’s claim is not really granted.
• The pari delicto rule applies only to contracts which is void for illegality of subject matter. Thus, if the
contract is void for simulation, the pari delicto rule does not apply so a party can claim the object back
through reconveyance.

Constantino v. Heirs of Constantino: Respondents inherited parcels of land from their predecessors land
which was contained in a document called “Pagmamana sa Labas ng Hukuman”. Petitioners filed this case to
annul such document and to get a portion of that land. Issue: w/n in pari delicto doctrine applies? NOPE!
(walang issue sa 1311 there was just a brief discussion) HELD:47The petition at bench does not speak of an
illegal cause of contract constituting a criminal offense under Article 1411. Neither can it be said that Article
1412 finds application although such provision which is part of Title II, Book IV of the Civil Code speaks of
contracts in general, as well as contracts which are null and void ab initio pursuant to Article 1409 of the Civil
Code – such as the subject contracts, which as claimed, are violative of the mandatory provision of the law on
legitimes. Article 1412 of the Civil Code that breathes life to the doctrine speaks of the rights and obligations
of the parties to the contract with an illegal cause or object which does not constitute a criminal offense. It
applies to contracts which are void for illegality of subject matter and not to contracts rendered void for being
simulated, or those in which the parties do not really intend to be bound thereby. Specifically, in pari delicto
situations involve the parties in one contract who are both at fault, such that neither can recover nor have any
action against each other.

Liguez v. CA: The doctrine of in pari delicto applies only where the fault on both sides is more or less
equivalent. It does not, therefore, apply where one party is literate or intelligent and the other is not or where
one party was a man who was advanced in years and mature experience and the other was a minor of 16
years who was not fully aware of the terms of the agreement she had entered into. The rule that parties to an
illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been
interpreted by this Court as barring the party from pleading the illegality of the bargain either as a cause of
action or as a defense. In our opinion, the Court of Appeals erred in applying to the present case the pari
delicto rule. First, because it can not be said that both parties here had equal guilt when we consider that as
against the deceased Salvador P. Lopez, who was a man advanced in years and mature experience, the
appellant was a mere minor, 16 years of age, when the donation was made; that there is no finding made by
the Court of Appeals that she was fully aware of the terms of the bargain entered into by and between Lopez
and her parents; that her acceptance in the deed of donation did not necessarily imply knowledge of
conditions and terms not set forth therein; and that the substance of the testimony of the instrumental
witnesses is that it was

47
Article 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal
offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. xxx xxx
Article 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules
shall be observed:xxx xxx
1. When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or
demand the performance of the other’s undertaking;xxx xxxx

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the appellant's parents who insisted on the donation before allowing her to live with Lopez. These facts are
more suggestive of seduction than of immoral bargaining on the part of appellant. It must not be forgotten
that illegality is not presumed, but must be duly and adequately proved.
In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but
will both be left where it finds them, has been interpreted by this Court as barring the party from pleading the
illegality of the bargain either as a cause of action or as a defense. In the present case, it is scarcely disputable
that Lopez would not have conveyed the property in question had he known that appellant would refuse to
cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful,
necessarily tainted the donation itself. The appellant seeks recovery of the disputed land on the strength of a
donation regular on its face. To defeat its effect, the appellees must plead and prove that the same is illegal.
But such plea on the part of the Lopez heirs is not receivable, since Lopez himself, if living, would be barred
from setting up that plea; and his heirs, as his privies and successors in interest, can have no better rights than
Lopez himself. In this regard, the Court of Appeals correctly held that Lopez could not donate the entirety of
the property in litigation, to the prejudice of his wife Maria Ngo, because said property was conjugal in
character, and the right of the husband to donate community property is strictly limited by law. The text of the
articles makes it plain that the donation made by the husband in contravention of law is not void in its
entirety, but only in so far as it prejudices the interest of the wife.

Philbanking v. Lui She: If an alien is given not only a lease of, but also an option to buy, a piece of land, by
virtue of which the Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years,
then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests
himself in stages not only of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi, and jus
abutendi), but also of the right to dispose of it (jus disponendi)—rights the sum total of which make up
ownership It is just as if today the possession is transferred, tomorrow the use, the next day the disposition,
and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. If this can
be done, then the constitutional ban against alien landholding in the Philippines, as announced in Krivenko vs.
Register of Deeds is indeed in grave peril. It does not follow that because the parties are in pari delicto they
will be left where they are without relief. Article 1416 of the Civil Code provides as an exception to the rule of
in pari delicto that “when the agreement is not illegal per se but is merely prohibited, and the prohibition by
law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what
he had paid or delivered.’ The Constitutional provision is an expression of public policy to conserve lands for
the Filipinos.

Avila v. CA: While it is true that Marciana Avila, their mother and predecessor-in- interest, purchased the
questioned property at a public auction conducted by the government; paid the purchase price; and was
issued a final bill of sale after the expiration of the redemption period, it is however, undisputed that such
purchase was prohibited under Section 579 of the Revised
Administrative Code, as amended. x x x Thus, the sale to her of Lot 594 is void. Moreover, Marciana Avila was
a party to an illegal transaction, and therefore, under Art. 1412 of the Civil Code, she cannot recover what she
has given by reason of the contract or ask f or the fulfillment of what has been promised her.

Teja v. IAC: Unquestionably, the parties herein operated under an arrangement, commonly known
as the "kabit system" whereby a person who has been granted a certificate of public convenience allows
another person who owns motor vehicles to operate under such franchise for a fee. A certificate of public
convenience is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof
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cannot be countenanced. The "kabit system" has been identified as one of the root causes of the prevalence
of graft and corruption in the government transportation offices. Although not outrightly penalized as a
criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore,
void and inexistent under Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid
either party to enforce an illegal contract, but will leave both where it finds them.

PNB v. De los Reyes: Petitioner accedes to the redemption by respondents of the 2 parcels covered by free
patent titles, pursuant to the provisions of the Public Land Act, the period of five (5) years after the grant of
the patents not having expired. This is correct since pursuant to Section 119 of Commonwealth Act No. 141,
the Public Land Act which is the applicable law in this case, the mortgagor had five (5) years from the date of
conveyance within which to redeem the property. It is not even necessary for the preservation of such right to
repurchase to make an offer to redeem, or tender payment of the purchase price within said period of 5 years.
The filing of an action to redeem within that period is equivalent of a formal offer to redeem. There is not
even a need for the consignation of the redemption price. That the situation obtaining in the case at bar is not
within the purview of the aforesaid rule on indivisibility is obvious since the aggregate number of the lots
which comprise the collaterals for the mortgage had already been foreclosed and sold at public auction. There
is no partial payment nor partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is
actually intended for the protection of the mortgagee, specifically refers to the release of the mortgage which
secures the satisfaction of the indebtedness and naturally presupposes that the mortgage is existing. Once the
mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility ceases to apply
since, with the full payment of the debt, there is nothing more to secure. While the law bars recovery in a case
where the object of the contract is contrary to law and one or both parties acted in bad faith, we cannot here
apply the doctrine of in pari delicto which admits of an exception, namely, that when the contract is merely
prohibited by law, not illegal per se, and the prohibition is designed for the protection of the party seeking to
recover, he is entitled to the relief prayed for whenever public policy is enhanced thereby. Under the Public
Land Act, the prohibition to alienate is predicated on the fundamental policy of the State to preserve and keep
in the family of the homesteader that portion of public land which the State has gratuitously given to him, and
recovery is allowed even where the land acquired under the Public Land Act was sold and not merely
encumbered, within the prohibited period. This is without prejudice to such appropriate action as the
Government may take should it find that violations of the public land laws were committed or involved in said
transaction and sanctions are in order.

• Outline:
a. If it constitutes a criminal offense

i. If both parties are in pari delicto

• No action for specific performance can prosper on either side (Article 1411, 1st ¶).
• No action for restitution can prosper on either side (Article 1411, 1st ¶).
• Example: A shabu supplier supplies shabu to the shabu dealer. If the shabu supplier does not deliver the
shabu, the dealer cannot file an action for specific performance.

ii. If only 1 party is guilty

• No action for specific performance can prosper on either side.

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• An action for restitution will be allowed only if the innocent party demands. The guilty party is not entitled
to restitution.

b. If it does not constitute a criminal offense

• Like Art. 1490.
i. If both parties are in pari delicto
• No action for specific performance can prosper on either side (Article 1411, 1st ¶).
• No action for restitution can prosper on either side (Article 1411, 1st ¶).

ii. If only 1 party is guilty

• No action for specific performance can prosper on either side.
• An action for restitution will be allowed only if the innocent party demands.

• Exceptions to Pari Delicto:

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor,
with interest thereon from the date of the payment.

• This is dead letter. But what if it were merely unconscionable? Open question.

Briones v. Cammayo: To discourage stipulations on usurious interest, said stipulations are treated as wholly
void, so that the loan becomes without stipulation as to payment of interest. It should not, however, be
interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the
expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further
deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. A contract of loan with usurious interest consists of principal and accessory
stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. And said
two stipulations are divisible in the sense that the former can still stand without the latter. In simple loan with
stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of
the contract, is not illegal. 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. The debt earns
interest from the date of demand (in this case from the filing of the complaint). Such interest is not due to
stipulation, for there was none, the same being void. Rather it is due to the general provision of law that in
obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages

Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated
by one of the parties before the purpose has been accomplished, or before any damage has been caused to
a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property.

• To encourage people to desists from committing crime.

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Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if
the interest of justice so demands allow recovery of money or property delivered by the incapacitated
person.

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law
is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what
he has paid or delivered.
• Like anti- profiteering laws. Consumer may recover.

Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any
person paying any amount in excess of the maximum price allowed may recover such excess.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a
contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may
demand additional compensation for service rendered beyond the time limit.

• 40 hour work week.

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.

• The above contracts are void but there is some remedy for policy considerations. An example is the
minimum wage law under Article 1419 wherein the employer and the employee freely agree to the terms
of employment below the minimum wage. Although they are in pari delicto, you don’t follow the rules of
pari delicto. There is a policy consideration of social justice involved. This is similar to the preferential
option for the poor of churches.

• Final Provisions
Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter
may be enforced.
• Like when there is a loan with unconscionable interest. The interest can be divided from the principle.

Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not
directly affected.
• If the effects are set-up against you then you can set it up as a defense.

Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

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