I.
OBLIGATIONS Q: Distinguished civil and natural obli
A. In General
1. Definition
Q: What is an obli?
A: Art. 1156 – Civil Obligation
From Art. 1156, it can give an idea of Kinds of Obli as to the Prestation.
3 Kinds of Obligation:
a. To give – consists in the delivery of a thing
b. To do – includes all kinds of work or services
c. Not to do – consists of abstaining from some act
Importance of the difference between these 3 prestations: Goes into the
Rules to apply, e.g., Manner of Compliance, Remedies available
NOTE: The definition in Article 1156 pertains to ―Civil Obligation‖,
because of the words ―juridical necessity‖. In other words, these obligation
grants right of action to demand fulfillment through court action. Whereas,
―natural obligation‖ does not grant a right of action to demand fulfillment.
Although if there is n involuntary fulfillment of such obligation (natural),
the creditor would have the right what was paid or delivered.
2. Kinds of Obligation as to basis & enforceability
- Art. 1423
a. Civil Obligation (Art. 1156)
b. Natural Obligation (Art. 1423 -1430)
Ansay v. NDC: Bonus is not a demandable and enforceable obligation. It is
so when it is made part of the wage or compensation. Nevertheless, it may
be granted on equitable consideration.
Villaroel v. Estrada: Obligation arising from loan, being prescribed, would
still be demandable in this case since the son assumed the fulfillment of the
obligation by executing a document promising to pay the said loan. A moral
obligation is a consideration enough to create an enforceable obligation.
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A: Use Parameters.
As to the nature: Civil Obli is based on positive law while Natural obli
based on on natural law and equity.
As to enforceability: Civil Obli give a right of action to compel their
performance while Natural obli do not grant a right of action to enforce
their performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason
thereof.
NOTE: Art. 1231- Prescription. It extinguishes civil obligation but it
becomes a natural obligation if there is voluntary reimbursement.
3. Prescription of Actions
- What prescribes is the debt and not the right of action.
- Reckoning Period is IMPORTANT.
DBP v. Confessor: Right to prescription may be waive or renounced (Art.
1112) In this case, when Confessor executed a second PN whereby he
promised to pay the amount covered by previous PN, and upon failure to do
so, agreed to the foreclosure of mortagage, said act renounced and waived
his right to prescription. Where a party acknowledges the correctness of
debt and promises to pay if after the same has prescribed and with full
knowledge of the prescription, he waives the benefit of prescription.
4. Elements of Obligation
a. Active Subject – One who has the right to demand the fulfillment
of the obligation. Usually called the Creditor or Obligee.
b. Passive Subject – One who has the duty to fulfill the obligation.
c. Object – prestation. Not always a thing. It may refer to a particular
conduct.
d. Juridical Tie – Art. 1157. It binds the party.
 B. Sources of Obligation (Art. 1157)
Is the enumeration in Art. 1157 exclusive? YES
Sagrada Orden v. NACOCO: For there to be an obligation to pay
rentals, that obligation must arise from any of the 5 sources of
obligation (law, contract, quasi-contract, delict and quasi-delict).
Otherwise, there is no obligation to pay it.
In this case, there is no crime since NACOCO occupied the property
with the permission of APC. No negligence on their part. There is also
no contract, whether express or implied since there is no privity of
contract between APC and Taiwan Tekkosho which secured the
possession of the property from plaintiff and APC was not even a
trustee of plaintiff.
NOTE: A single act may give rise to obligations arising from different
sources of obligation.
Consider this question: What is the cause of action?
Importance of this question: Theory of plaintiff. Defense of
defendant. Remedies available.
1. Law (Art. 1158)
- Not presumed.
2. Contract (Arts. 1159, 1305)
- Obli arising from contracts have the force of law between the
contracting parties (jus civii)
- There must be compliance in good faith (jus gentium)
Whether an academic institution can be held liable for injury
sustained by a student inside its premises? Yes
Saludaga v. FEU: When an academic institution accepts students for
enrolment, there is established contract between them, resulting in
bilateral obligations which both parties are bound to comply with. For
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its part, the school is mandated to impart knowledge and equip students
with necessary skills to pursue higher education and to ensure peace
and order within the campus.
In culpa contractual, the mere proof of existence of the contracts and
the failure of its compliance justify, prima facie, a corresponding right
of relief. In this case, there is a prima facie showing that FEU failed to
comply with its obligation to provide safe and secure environment to its
students when the shooting happened inside its premises. They failed to
prove that they ensured that the guards assigned in the campus met the
requirement stipulated in SSA. Moreover, the defense of Force Majeure
can only be used when there is no negligence or misconduct committed
that may have occasioned the loss.
Pres of FEU cannot be held vicariously liable under Art. 2180 since
respondents are not the employers of the security guard.
Whether one can be held liable to damages in accordance with the
provisions of contract? Yes
People’s Car v. Commando Security Service: Art. 1159 of Civil Code:
Obli arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.
In this case, plaintiff is liable to its customer for the damages caused in
latter’s car which had been entrusted into its custody. The damages
were caused by the unlawful and wrongful acts of defendant’s security
guard in breach of their contract. Plaintiff could not tell its customer
that under Guard Service Contract it was not liable for the damage but
the defendant since the customer could not hold defendant to account
for damages as he had no privity of contract with defendant.
Whether an obligation based on a contract executed in the name of
another without authorization or legal representation is valid? Yes
provided there is ratification.
 Gutierrez Hermanos v. Orense: Art 1259 of Civil Code, a contract
executed in the name of another by one who has neither his
authorization nor legal representation shall be void, unless it should be
ratified by the person in whose name it was executed before being
revoked by the other contracting party.
In this case, the sworn statement by Orense, while testifying as a
witness at Duran’s trial, virtually confirms and ratifies the sale of his
property effected by his nephew Duran, and pursuant to Art. 1313,
remedies all defects which the contract may have contained from the
moment of its execution.
3. Quasi-contract (Art. 1160)
Q: If an act is punished by law, can it be the basis of QC?
A: No. Only lawful, voluntary and unilateral act can give rise to QC.
(Art. 2142)
Whether one, who claims having enriched somebody, can claim
against a party pursuant to an existing contract with a third party?
No.
Cruz v. Tuazon: From the language of Art. 2142, Civil Code, it is
presumed that quasi-contract cannot emerge as against one party when
the subject matter thereof is already covered by an existing contract
with another party. If the one who claims having enriched somebody
has done so pursuant to a contract with a third party, his cause of action
should be against the latter, who in turn may, if there is any ground,
seek relief against the party benefited. It is essential that the act by
which the defendant is benefited must have been voluntary and
unilateral on the part of the plaintiff. It is voluntary since the actor is
not bound by any pre-existing obligation to act. It is unilateral since it
arises from the sole will of the actor who is not previously bound by
any reciprocal or bilateral agreement. The reason why law creates a
juridical relations and imposes certain obligation is to prevent a
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situation where a person is able to benefit or take advantage of such
lawful, voluntary and unilateral act at the expense of said actor.
In this case, the plaintiff has a clearer and more direct recourse against
the Deudors with whom he entered into an agreement regarding the
improvements and expenditures made by him on the land of the latter.
a. Negotiorum gestio (Art. 2144)
- Arised whenever a person voluntarily takes charge of an
agency or management of business or property of another
without any power or authority from the latter.
May a co-owner acquire exclusive ownership over the property
held in common on the basis that there is failure on the part of his
co-heirs to join him in its redemption? No.
Adille v. CA: The right of repurchase may be exercised by a co-owner
with respect to his share alone. It does not terminate the co-ownership.
In this case, the petitioner must be said to be a negotiorum gestor or
trustee of the property on behalf of his co-heirs. There is fraud in the
registration of the said property since he pretended that he was the sole
heir of the land in his affidavit. In taking over the property, dis so either
on behalf of his co-heris, in which event, he constituted himself as
negotiorum gestor under Art. 2144 or for his exclusive benefit, in
which case, he is guilty of fraud, and must act as trustee, his co-heirs
being the beneficiaries under Art .1456.
b. Solutio Indebiti (Art. 2154)
- Whenever a person unduly delivers a thing through or by
mistake to another who has no right to demand it.
Whether a party has the right to recover a second remittance
which is delivered by mistake to the other party? Yes.
Andres v. Mantrust: Art. 2154, Civil Code refers to quasi-contract of
solution indebiti (no one shall enrich himself at the expense of another).
 For this article to apply: (1) that he who paid was not under obligation
to do so; (2) that payment was made by reason of an essential mistake
of fact.
In this case, FACETS (PR) delivered another $10K remittance while
unaware that the first one was already received by the petitioner. The
contention of the petitioner that she has the right to demand the said
money since FACETS still had balance is without merit. The contract
of petitioner, as regards the sale of garments, was with FACETS. It was
the latter and not defendant which was indebted to her. On the other
hand, the contract for transmittal of dollars from US to petitioner was
entered by defendant with FNSB. Petitioner, although named as payee
was not privy to the contract of remittance of dollars. There being no
contractual relation between them, she has no right to apply the second
payment delivered by mistake to FACETS’ outstanding account.
Moreover, there is no negligence in this case. From CA findings, the
second remittance was made by mistake and, it is final and conclusive
being based on substantial evidence.
Whether the taxes paid without protest are refundable? Yes.
Puyat & Sons v. City of Manila: Art. 2154, Civil Code. Art. 2156
states that if the payer was in doubt whether the debt was due, he may
recover if he proves that it was not due.
The defense that the payment was not voluntarily made, but on the
erroneous belief, that they were due, has no merit in this case. Pursuant
to Art. 2156, petitioner had duly proved that taxes were not lawfully
due by invoking Ordinance No. 3816.
Whether the principle of solutio indebiti is applicable in tax refund
claims cases? No.
CBK Power v. CIR: According to the principle of solutio indebiti, if
something is received when there is no right to demand it, and it was
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unduly delivered through mistake, the obligation to return it arises. In
that situation, a creditor-debtor relationship is created under a quasi-
contract, whereby the payor becomes the creditor who then has the
right to demand the return of payment made by mistake, and the person
who has no right to receive the payment becomes obligated to return it.
There is solutio indebiti when: (1) Payment is made when there exists
no binding relation between the payor, who has no duty to pay, and the
person who received the payment; and (2) Payment is made through
mistake, and not through liberality or some other cause.
In this case, it is not applicable. First, there exists a binding relation
between petitioner and the CIR, the former being a taxpayer obligated
to pay VAT. Second, the payment of input tax was not made through
mistake, since petitioner was legally obligated to pay for that liability.
The entitlement to a refund or credit of excess input tax is solely based
on the distinctive nature of the VAT system. At the time of payment of
the input VAT, the amount paid was correct and proper.
Finally, equity, which has been aptly described as "a justice outside
legality," is applied only in the absence of, and never against, statutory
law or judicial rules of procedure. Section 112 is a positive rule that
should preempt and prevail over all abstract arguments based only on
equity. Well-settled is the rule that tax refunds or credits, just like tax
exemptions, are strictly construed against the taxpayer. The burden is
on the taxpayer to show strict compliance with the conditions for the
grant of the tax refund or credit.
c. Other quasi-contract (Art. 2164-2175)
4. Delict (Art. 1167, 2177, Art. 100-104, RPC)
May the “Hold Out” clause be enforcd if the case is still pending in
the court?
 Metrobank v. Rosales: The ―Hold Out‖ clause applies only if there is a
valid and existing obligation arising from any of the sources of
obligation enumerated in Art. 1157 of Civil Code.
In this case, petitioner failed to show that respondents have an
obligation to it under any law, contract, quasi-contract, delict or quasi-
delict. There is no legal basis for petitioner to issue the ―Hold Out‖
order since the case is still pending and no final judgment of conviction
has been rendered. Moreover, at the time of the issuance of the order,
the criminal complaint had not yet been filed.
URIBE: If that all, Rosales may be held liable under what source?
A: Contract since there is a contract of loan between a bank and
depositor. Also delict provided there is final judgment of conviction.
Q: Whether civil liabilities of an accused arising from delict were
extinguished due to his death.
A: People v. Chavez: Yes, the death of accused-appellant during the
pendency of his appeal, extinguished not only his criminal liability, but
also his civil liabilities arising from or based on the crime. BUT,as held
in Bayotas, accused-appellant’s civil liability may be based on other
sources of obligation other than ex delicto, in which case the heirs of
Virgilio A. Matundan may file a separate civil action against the estate
of accused-appellant, as may be warranted by law and procedural rules.
5. Quasi-delict
Whether the defense of exercising due diligence in selecting and
supervision of employees a defense in obli arising contract? NO
Cangco v. MRR: No, it is a defense available in cases of obli arising
from quasi-delict and not from contracts. It cannot be doubted that the
employees of defendant were guilty of negligence in piling these sacks
on the platform in the manner stated. It necessarily follows that the
defendant company is liable for the damage thereby occasioned unless
recovery is barred by the plaintiff’s own contributory negligence. It is
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to note that the foundation of the legal liability is the contract of
carriage.
However Art. 1903 relates only to culpa aquiliana and not to culpa
contractual, as the Court cleared on the case of Rakes v. Atlantic Gulf.
It is not accurate to say that proof of diligence and care in the selection
and control of the servant relieves the master from liability fro the
latter’s act. The fundamental distinction between obligation of this
character and those which arise from contract, rest upon the fact that in
cases of non-contractual obligations it is the wrongful or negligent act
or omission itself which creates the vinculum juris, whereas in
contractual relations the vinculum exists independently of the breach of
the voluntary duty assumed by the parties when entering into the
contractual relation. When the source of obligation upon which
plaintiff’s cause of action depends is a negligent act or omission, the
burden of proof rest upon the plaintiff to prove negligence. On the other
hand, in contractual undertaking, proof of the contract and of its
nonperformance is suffient prima facie to warrant recovery.
The negligence of employee cannot be invoked to relieve the employer
from liability as it will make juridical persons completely immune from
damages arising from breach of their contracts. Defendant was
therefore liable for the injury suffered by plaintiff, whether the breach
of the duty were to be regarded as constituting culpa aquiliana or
contractual. As Manresa discussed, whether negligence occurs as an
incident in the course of the performance of a contractual undertaking
or is itself the source of an extra-contractual obligation, its essential
characteristics are identical. There is always an act or omission
productive of damage due to carelessness or inattention on the part of
the defendant. The contract of defendant to transport plaintiff carried
with it, by implication, the duty to carry him in safety and to provide
safe means of entering and leaving its trains. Contributory negligence
on the part of petitioner as invoked by defendant is untenable. In
determining the question of contributory negligence in performing such
act- that is to say, whether the passenger acted prudently or recklessly-
age, sex, and physical condition of the passenger are circumstances
 necessarily affecting the safety of the passenger, and should be b.Moral Damages – it depends if there is bad faith or wanton
considered. It is to be noted that the place was perfectly familiar to negligence (Telefast v. Castro)
plaintiff as it was his daily routine. ii. If quasi-delict
a. Actual damages – yes
Whether the father, who was not present during the incident, be b. Moral damages – Yes provided it falls under Art. 2217.
held liable for damages to injury caused by his child? Yes
C. Compliance with Obligations
Gutierrez v. Gutierrez: The liability of the owner of truck and the
driver of car rests on a different basis. In this case, the liability of Q: How obli should be complied with?
Saturnino Cortez, the owner of the truck, is based on culpa contractual
while the liability of owner of car (father) is under Art. 2180, imputed A: Depends on the source of obligation. If regardless of source, there is
liability for culpa aquiliana. The reason for this conclusion reaches to question still, check the prestation.
the findings of the trial court concerning the position of the truck on the
bridge, the speed in operating the machine, and the lack of care NOTE: Art. 19 of Civil Code is enshrined with the compliance of the
employed by the chauffeur. While these facts are not as clearly obligation.
evidenced as are those which convict the other defendant, we
3 types of Obli:
nevertheless hesitate to disregard the points emphasized by the trial
judge. In its broader aspects, the case is one of two drivers approaching a. Obli to give – to deliver the thing
a narrow bridge from opposite directions, with neither being willing to Obligations: To take care the thing with diligence of a good father
slow up and give the right of way to the other, with the inevitable result (Art. 1163), To deliver the fruits to the creditor (Art. 1164) and to
of a collision and an accident. deliver accessions and accessories (Art. 1166)
i. Determinate thing – one that is particularly designated or
The defendants Velasco and Cortez further contend that there existed
physically segregated from all other of the same class
contributory negligence on the part of the plaintiff, consisting
(Art. 1460)
principally of his keeping his foot outside the truck, which occasioned
his injury. In this connection, it is sufficient to state that, aside from the Performance:
fact that the defense of contributory negligence was not pleaded, the (1) Specific performance – by the D himself (Art. 1165);
evidence bearing out this theory of the case is contradictory in the
extreme and leads us far afield into speculative matters. (2) Equivalent performance – grant of damages (Art.
1170)
Q: When is one liable for actual damages? Moral Damages?
ii. Generic thing – one that is indicated only by its kinds
A: It depends on the cause of action: without being distinguished from others of the same kind.
i. If breach of contract
Performance:
a. Actual damages – yes
(1) Specific performance – by the D himself (Art. 1165);

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 (2) Substitute performance – performance at the expense KINDS:
of D (Art. 1165)
i. Pure (Arts 1179, 1197) – one whose performance does
(3) Equivalent performance – grant of damages (Art. not depend upon a future or uncertain event ot upon a past
1170) event unknown to the parties.

b. Obli to do (Art. 1167) Whether a promissory note without a date of payment

Rules:
1. If purely personal, equivalent performance.
2. If not, Substitute performance or Equivalent performance
Q: Why specific performance NOT available?
A: It will be in violation of right against involuntary servitude.
c. Obli not to do (Art. 1168)
indicated is demandable at once? Yes
HSBC v. Sps. Broqueza: Since the Promissory Notes do not
contain a period, HSBC has the right to demand immediate
payment. Article 1179 of the Civil Code applies. The spouses
Broqueza’s obligation to pay HSBC is a pure obligation. The fact
that HSBCL-SRP was content with the prior monthly check-off
from Editha Broqueza’s salary is of no moment. Once Editha
Broqueza defaulted in her monthly payment, HSBC made a
demand to enforce a pure obligation.

Performance: Whether a creditor is barred by prescription in his attempt to

collect on a PN executed more than 15 yrs earlier with the
(1) Substitute performance debtor promising to pay either upon receipt by him of his
share from a certain estate or upon demand, the basis for the
(2) Equivalent performance
action being the latter alternative? No

Pay v. Palanca: From the manner in which the promissory note

was executed, it would appear that petitioner was hopeful that the
D. Kinds of Civil Obligation
satisfaction of his credit could he realized either through the debtor
sued receiving cash payment from the estate of the late Carlos
1. As to perfection and extinguishment
Palanca presumptively as one of the heirs, or, as expressed therein,
Usual questions: "upon demand." There is nothing in the record that would indicate
whether or not the first alternative was fulfilled. What is
a. When would the obligation be due and demandable? undeniable is that on August 26, 1967, more than fifteen years
b. When would the obligation arise? after the execution of the promissory note on January 30, 1952,
c. When would the obli be extinguished? this petition was filed. The defense interposed was prescription. Its
d. Is the obligation valid? merit is rather obvious. Article 1179 of the Civil Code provides:
"Every obligation whose performance does not depend upon a

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 future or uncertain event, or upon a past event unknown to the Q: When is Art 1189 applicable?
parties, is demandable at once." The obligation being due and
demandable, it would appear that the filing of the suit after fifteen A: Requisites:
years was much too late.
(1) there is loss, delay or deterioration;
Uribe Q: (2) There is an obl to deliver a determinate thing;
(3) There is loss, deterioration or improvement before the
a. Can the obli be both pure and conditional, at the same time? happening of the condition;
NO. (4) The condition happens.
b. How was the issue resolved? How is it considered as pure?
Relied on the choice of creditor – filed relying on the words Q: A promised to give B a condo unit upon B’s passing the Bar
―upon demand‖ Exam (2016). A sold the condo to C in 2017. B passed the bar in
2018. (a) Who is entitled to the condo? (b) Assuming B is entitled,
ii. Conditional (Arts. 1181-1190) who is entitled to rentals from 2016-2017?

Kinds of conditional obligation: A: (a) B is entitled because of Art. 1187 UNLESS C is puschaser
in good faith and for value; (b) It will be A (art. 1187)
a. As to acquisition or extinguishment (Art. 1181)
1. Suspensive - upon the happening of the condition, the 2. Resolutory - upon the fulfillment of the condition, the
obligation will arise. obligation is extinguished.

Q: If the condition did not happen, may the performance of the b. As to fulfillment of condition dependent upon parties (Art.
obligation be demanded? 1182)
1. Potestative - depends upon the will of one of the
A: Yes in case of constructive fulfillment under Art. 1186. This contracting parties.
will not be applicable in case C in preventing fulfillment of the obli
is exercising a valid right. Rules:

Q: Obli to deliver a house and lot upon fulfillment of condition. i. If on the part of C, the obli is VALID whether the condition
Before fulfillment, D repainted the house and constructed a fence. is suspensive or resolutory.
Upon fulfillment, C demanded H &L but D demanded ii. If on the part of D, the obli is VOID if the condition is
reimbursement from C before delivery. Is D correct? SUSPENSIVE.

A: No. Art 1189(6). D has no right of retention. Only the right to 2. Casual - depends upon chance or upon the will of a 3rd
remove it without damage. person.
3. Mixed
NOTE: Memorize Art. 1189.

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 c. As to whether they can be fulfilled or not (Art. 1183)
1. Possible
2. Impossible – applies only if positive impossible obli. In
this case, the whole obli is VOID. If Negative
Impossible Condition, the effect is that the condition is
deemed not written (as if there is no condition).
Therefore, demandable at once
What will happen if the term or period attempted to be fixed
by the party is uncertain that one cannot tell if it’s going to
arrive?
Smith Bell v. Sotelo Matti: 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. In this case, it is conditional since the delivery is
dependent on the issuance of export permits.
Art. 1125. Obligations for the performance of which a day certain
has been fixed shall be demandable only when the day arrives.
A day certain is understood to be one which must necessarily
arrive, even though its date be unknown.
If the uncertainty should consist in the arrival or non-arrival of the
day, the obligation is conditional and shall be governed by the
rules of the next preceding section.
Under the stipulations, it cannot be said that any definite date was
fixed for the delivery of the goods. As to the tanks, the agreement
was that the delivery was to be made "within 3 or 4 months," but
that period was subject to the contingencies referred to in a
subsequent clause. With regard to the expellers, the contract says
"within the month of September, 1918," but to this is added "or as
soon as possible." And with reference to the motors, the contract
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contains this expression, "Approximate delivery within ninety
days," but right after this, it is noted that "this is not guaranteed."
From the record it appears that these contracts were executed at the
time of the world war when there existed rigid restrictions on the
export from the United States of articles like the machinery in
question, and maritime, as well as railroad, transportation was
difficult, which fact was known to the parties; hence clauses were
inserted in the contracts, regarding "Government regulations,
railroad embargoes, lack of vessel space, the exigencies of the
requirements of the United States Government," in connection with
the tanks and "Priority Certificate, subject to the United State
Government requirements," with respect to the motors. At the time
of the execution of the contracts, the parties were not unmindful of
the contingency of the United States Government not allowing the
export of the goods, nor of the fact that the other foreseen
circumstances therein stated might prevent it.
iii. With a term or period (Arts. 1180, 1193-1198)
Note: Term or period refers to a space of time
Condition vs. Term:
a. As to fulfillment: Condition is an uncertain event while a
term is an event that will necessarily come.
b. As to influence on the obli: Condition gives rise to an obli or
extinguishes one already existing while a period refers to
demandability or performance of obli.
c. As to time: Condition may refer to a past unknown to the
parties while period refers to the future.
Kinds of Terms:
a. As to influence or effect on obli
i. Suspensive
ii. Resolutory
 b. As to source Instances:
i. Legal
ii. Voluntray 1. D become insolvent (financial difficulty is sufficient)
iii. Judicial UNLESS he gives a guaranty.
c. As to certainty 2. D fails to furnish the guaranty or security he has promised.
i. Definite 3. D impairs the guaranty or security by his own acts or when
ii. Indefinite thru a FE, they disappears UNLESS he gives new ones equally
satisfactory.
4. D violted any undertaking in consideration of which the C
agreed to the period.
Q: In obli with a period, before the arrival of the period, may C 5. D attempts to abscond.
demand the fulfillment before arrival of the period?
Q: If the obli did not state a period, what kind of obli?
A: It depends.
A: It depends. If from the nature and circumstances it can be
If resolutory period, yes. inferred that a period was not intended, it may be a pure obligation
or conditional obligation.
If suspensive period, it depends on whose benefit the term is
constituted. (Art. 1196) If from the nature and circumstances it can be inferred that a
period was intended, it is an obli with a period.
PRESUMPTION: For the benefit of both C and D. Unless from
the tenor of the same or circumstances it should appear that the Q: When is Art 1197 applicable?
period has been established in favor of one.
A:
Rules: If for the benefit of C, the C can demand performance at
anytime. But D cannot pay insist on performance before arrival of 1. When from the nature and circumstances it can be inferred
period. Ex: C may use the prop during the said period. that a period was intended;
2. When it depends upon the will of the debtor.
If for the benefit of D, the C cannot demand performance before
arrival of period. But D can insist on performance at anytime. Ex: Whether a lease contract which entitle the defendants the
―within‖, ―on or before‖ occupancy of the property as long as they pay rentals valid?
No.
Q: If period is for the benefit of D, may the C compel the
performance of obli even before the arrival of the period? Encarnacion v. Baldomar: The defense set up by defendant
Fernando would leave to the sole and exclusive will of one of the
A: Yes, if D loses the benefit of period. (Art. 1198). Here, the contracting parties (defendants in this case) the validity and
obligation becomes due and demandable. fulfillment of the contract of lease, within the meaning of article

10 | P a g e
 1256 of the Civil Code, 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.
Whether a lease contract which stipulated that its duration
depends upon the will of the lessee means that the termination
of said contract is to be left completely at the will of lessee? No.
Elezuigui v. Lawn Tennis Club: The Civil Code has made
provision for such a case in all kinds of obligations. In speaking in
general of obligations with a term it has supplied the deficiency of
the former law with respect to the "duration of the term when it has
been left to the will of the debtor," and provides that in this case
the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every
contract, as laid down by the authorities, 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.
The only action which can be maintained under the terms of the
contract is that by which it is sought to obtain from the judge the
determination of this period, and not the unlawful detainer action
11 | P a g e
which has been brought — an action which presupposes the
expiration of the term and makes it the duty of the judge to simply
decree an eviction. To maintain the latter action it is sufficient to
show the expiration of the term of the contract, whether
conventional or legal; in order to decree the relief to be granted in
the former action it is necessary for the judge to look into the
character and conditions of the mutual undertakings with a view to
supplying the lacking element of a time at which the lease is to
expire.
Whether a lease contract which states that: "The lessee may at
any time withdraw from this agreement.” lacks mutuality,
hence, void (in violation of Art. 1308)? No.
Philbanking v. Lui She: The case of Encarnacion v. Baldomar
cannot be cited in support of the claim of want of mutuality,
because of a difference in factual setting. In that case, the lessees
argued that they could occupy the premises as long as they paid the
rent. This is of course untenable, for as this Court said, "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."
Here, in contrast, 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.
3. When D binds himself to pay when his means permit him to
do so (Art. 1180)
 Process under Art. 1197:
1. Determine first if there is a perfected contract (Millare v.
Fernando). If none, no obli and no period to fix.
2. If there is a contract, determine if there is a period stated (Lim
v. People).
3. If no period is stated, determine if from the nature and
circumstances it can be inferred that a period was intended.
a. If yes, then the Court will decide what period was
probably contemplated by the parties (Araneta v. PSE).
b. If no, Court cannot fix a period.
Or if a period is stated, it is dependent upon the will of the D
or D binds himself to pay when his means permit him to do so,
the Court may also fix the period probably contemplated by
the parties.
Whether Art. 1197 is applicable in a receipt stating that: “the
obligation was therefore, immediately demandable as soon as
the tobacco was sold"? No.
Lim v. People: It is clear in the agreement that 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. Hence, Article
1197 of the New Civil Code, which provides that the courts may
fix the duration of the obligation if it does not fix a period, does
not apply.
The fact that appellant received the tobacco to be sold at P1.30 per
kilo and 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.
12 | P a g e
When is the court required to fix a period?
Araneta Inc., v. Phil Sugar Estates: It must be recalled that
Article 1197 of the Civil Code involves a two-step process. The
Court must (1) determine that "the obligation does not fix a period"
(or that the period is made to depend upon the will of the debtor),"
but from the nature and the circumstances it can be inferred that a
period was intended" (Art. 1197, pars. 1 and 2); and (2) then,
decide what period was "probably contemplated by the parties"
(Do., par. 3). So that, ultimately, the Court cannot fix a period
merely because in its opinion it is or should be reasonable, but
must set the time that the parties are shown to have intended.
In this case, the trial Court appears to have pulled the two-year
period set in its decision out of thin air, since no circumstances are
mentioned to support it. Plainly, this is not warranted by the Civil
Code.
Moreover, the fixing of a period by the courts under Article 1197
of the Civil Code is sought to be justified on the basis that
petitioner (defendant below) placed the absence of a period in issue
by pleading in its answer that the contract with respondent gave
petitioner "reasonable time within which to comply with its
obligation to construct and complete the streets." Neither of the
courts below seems to have noticed that, on the hypothesis stated,
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 above quoted, 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. Fernando: Art. 1197 is not applicable in this case since
the Contract of Lease did in fact fix an original period of five
years, which had expired. It is also clear from the provisions that
the parties reserved to themselves the faculty of agreeing upon the
period of renewal contract. 2nd par of Art. 1197 is also inapplicable
since the duration of the renewal period was not left to the will of
lessee alone, but rather to the will of both the lessor and lessee.
Most importantly, Art. 1197 applies only where a contract of lease
clearly exists. In this case, the contract was not renewed at all,
there was in fact no contract at all the period of which could have
been fixed.
NON-APPLICABILITY OF ART. 1197
Can defendant invoked Art. 1197 when he returned the
typewriter that he was obliged to repair in a non-working
condition? No.
Chavez v. Gonzales: No, since there is already a breach of
obligation. The appealed judgment states that the "plaintiff
delivered to the defendant . . . a portable typewriter for routine
cleaning and servicing" ; that the defendant was not able to finish
the job after some time despite repeated reminders made by the
plaintiff" ; that the "defendant merely gave assurances, but failed
to comply with the same" ; and that "after getting exasperated with
the delay of the repair of the typewriter", the plaintiff went to the
house of the defendant and asked for its return, which was done.
The inferences derivable from these findings of fact are that the
appellant and the appellee had a perfected contract for cleaning and
13 | P a g e
servicing a typewriter; that they intended that the defendant was to
finish it at some future time although such time was not specified;
and that such time had passed without the work having been
accomplished, far 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. Defendant cannot invoke Article 1197 of the Civil Code for
he virtually admitted non-performance by returning the typewriter
that he was obliged to repair in a non-working condition, with
essential parts missing. The fixing of a period would thus be a
mere formality and would serve no purpose than to delay.
2. As to Plurality of Prestation
Kinds:
a. Conjunctive – ―and‖
b. Alternative – ―or‖
c. Facultative – only one prestation is due but D may render in
substitution
Rules on Alternative Obli:
On the right to choose:
General Rule: It belongs to D (Art. 1200)
Exception: Expressly given to C.

LIMITATIONS:
1. No right to choose prestation which are impossible, unlawful
or cannot be an object of an obli. (Art. 1200, par 2)
2. D cannot compel the C to receive part of one and part of
another undertaking (Art. 1199, par 2)
Q: When is obli cease to be an alternative and becomes a simple obligation?
A:
1. D communicated his choice to C if D has the right of choice (Art.
1201)
2. Only one prestation is practicable (Art. 1202)
3. C communicated his choice to D if the right to choose is expressly
granted to him.
Whether D may still choose the alternative obli despite the fact that
he already communicated his choice to C ?
Arco Pulp and Paper v. Lim: The rule on alternative obligations is
governed by Article 1199 of the Civil Code. In an alternative
obligation, there is more than one object, and the fulfillment of one
is sufficient, determined by the choice of the debtor who generally
has the right of election.‖ The right of election is extinguished
when the party who may exercise that option categorically and
unequivocally makes his or her choice known. The choice of the
debtor must also be communicated to the creditor who must
receive notice of it since the object of this notice is to give the
creditor . . . opportunity to express his consent, or to impugn the
election made by the debtor, and only after said notice shall the
election take legal effect when consented by the creditor, or if
impugned by the latter, when declared proper by a competent
court.
14 | P a g e
In this case, the payment for the delivery of scrap materials became
petitioner’s obligation. By agreement, petitioner, as the debtor, had
the option to either (1) pay the price or (2) deliver the finished
products of equivalent value to respondent. The appellate court,
therefore, correctly identified the obligation between the parties as
an alternative obligation, whereby petitioner Arco Pulp and Paper,
after receiving the raw materials from respondent, would either pay
him the price of the raw materials or, in the alternative, deliver to
him the finished products of equivalent value.
When petitioner Arco Pulp and Paper tendered a check to
respondent in partial payment for the scrap papers, they exercised
their option to pay the price. Respondent’s receipt of the check and
his subsequent act of depositing it constituted his notice of
petitioner Arco Pulp and Paper’s option to pay.
Q: When will the obli be considered extinguished?
A:
1. In conjuctive, all prestations are performed.
2. In alternative, it depends if the choice has been communicated
already. It will be considered extinguished if the prestation
which becomes impossible or lost is the one chosen and
communicated.
3. In facultative, if the principal prestation is performed or if
substitute is chosen by D, then upon performance of the
substitute prestation.
Q: If all the prestations are lost, destroyed or services became
impossible BEFORE THE CHOICE IS COMMUNICATED. Can
D be held liable? If liable, up to what extent?
A: It depends on the ff: (i) Who has the right to choose: (ii) reason
of loss or impossibility.
Rules:
 i. If D has the right to choose:
a. One or some are lost thru FE or D’s fault, D may deliver:
(1) any of the subsisting, or (2) only thing remaining if
only one subsists
b. All lost thru FE, obli is extinguished UNLESS exceptions
under Art. 1174 are present.
c. All lost thru D’s fault, D shall pay indemnity which shall
be the value of the last thing which disappeared or service
which last became impossible.
ii. C has the right to choose:
a. One or some are lost thru FE, D may deliver: (1) what C
may choose from among the remainder; or (2) that which
remain if only one subsists.
b. One or some are lost thru D’s fault, C may claim: (1) any
of those subsisting, or (2) the priceof that which, thru the
fault of D, has disappeared. BOTH with Right to
Damages.
c. All lost thru D’s fault, C’s choice shall fall upon the price
of ANY one of them, with indemnity for damages.
3. As to rights and obligations of multiple parties
Usual questions:
1. Can D be compelled to perform the entire obligation?
2. Can C demand the performance of entire obligation?
Note: If there is one plaintiff or defendant, don’t assume that there
is only 1 D or C or that it is a solidary obligation.
Q: A, B, C borrowed 1M from X to put up a business. They
promised to pay the whole amount. Because of their lack of know-
15 | P a g e
how, their business was bankrupt. A has a business so X went
against him and demand the entire obli. Will the action prosper?
A: No, X may not demand payment of the entire obligation from
A. 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 (Art. 1207, Civil Code). In this case, there is no
indication that they bound themselves solidarity to pay X, nor does
the law or nature of the obligation require solidarity. Hence,
ABC’s obligation is joint, and X can only demand payment of 1/3
of the obligation from A, which is presumed to be his share in the
obligation in the absence of stipulation to the contrary (Art. 1208,
Civil Code).
NOTE: Under Art. 1207, the obligations are considered joint
EXCEPT when (1) Obligation expressly so states; (2) When the
law provides; or (3) When the nature of the obligation requires
solidarity (Gutierrez v. Gutierrez.).
Q: Can a person subsidiarily liable be held solidarily liable?
A: No. Take note of the case of parents and teachers and
administration. (Art. 219, FC)
Q: ABC (partners) borrowed money from X. X delivered money to
C but the latter misappropriated it. If Xbrough action against A,
will the action prosper?
A: No, it is a joint obligation. Art. 1823(2) not applicable since the
money is not a property of a 3rd person. When C received it, it
became the money of the partnership.
a. Joint
 b. Solidary
Q: If PN does not contain the word “solidary”, is the obli joint?
A: No. Ronquillo v. CA
Is the statement, “the defendants individually and jointly agree
to pay…” in the nature of solidary or joint liability?
Ronquillo v. CA: It implies solidary liability. The term
―individually‖ has the same meaning as to ―collectively‖,
―separately‖, ―distinctively‖, respectively or ―severally‖. An
agreement to be ―individually liable‖ undoubtedly creates a several
obligation, and a ―several obligation‖ is one by which individual
binds himself to perform the whole obligation. Hence, the
obligation in the case at bar being described as ―individually and
jointly‖, the same is therefore enforceable against one of the
numerous obligors.
What is the nature of liability of 2 or more persons who are
liable for a quasi-delict?
Malayan Insurance v. CA: It is solidary. In this case, Sio Choy
and San Leon Rice Mill are the only one liable to respondent
Vallejos (jeep passenger) for the damages. The liability of Sio
Choy, as owner of the insured jeep, is pursuant to Art. 2184 of
Civil Code while the liability of San Leon Rice Mill, as the
employer of the driver of the jeep, is based on Art. 2180, Civil
Code. They are the primary tortfeasors who are primarily liable to
Vallejos.
What is the basis of liability of the insurance company? Can
they be held solidarily liable with the tortfeasors? NO.
16 | P a g e
Malayan Insurance v. CA: The basis of petitioner’s liability is its
insurance contract with Sio Choy. While it is true that where the
insurance contract provides for indemnity against liability to third
persons, such third persons can directly sue the insurer, however,
the direct liability of the insurer under indemnity contract against
third party liability does not mean that the insurer can be held
solidarily liable with the insured and/or other parties found at fault.
The liability of the insurer is based on contract, that of the insured
is based on tort. Thus, it is incorrect for the lower court to held the
petitioner solidarily liable with the principal tortfeasors since it
would result in a violation of the principles underlying solidary
obligation and insurance contracts. In solidary obligation, the
creditor may enforce the entire obligation against one of the
solidary debtors. On the other hand, insurance is defined as ―a
contract whereby one undertakes for a consideration to indemnify
another against loss, damage, or liability arising from an unknown
or contingent event.‖
Ruks Consult v. Adworld Sign and Transworld Media: Under
2194 of the Civil Code, joint tortfeasors are solidarily liable for the
resulting damage. In other words, joint tortfeasors are each liable
as principals, to the same extent and in the same manner as if they
had performed the wrongful act themselves. Joint tortfeasors are
those who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort, or
approve of it after it is done, if done for their benefit. They are also
referred to as those who act together in committing wrong or
whose acts, if independent of each other, unite in causing single
injury.
There is no contribution between joint tortfeasors whose liability is
solidary since both of them are liable for the total damage. Where
the concurrent or successive negligent acts or omissions of two or
more person, although acting independently, are in combination
the direct and proximate cause of a single injury to a third person,
 it is impossible to determine in what proportion each contributed to
the injury and either of them is responsible for the whole injury
In this case, Transworld’s initial construction of its billboard’s
lower structure without proper foundation, and that of Ruks’
finishing its upper structure and just merely assuming that
Transworld would reinforce the weak foundation are the 2
successive acts which were the direct and proximate cause of
damages sustained by Adworld. Both of them are fully aware that
the foundation was weak. Clearly, they are both negligent and they
are jointly and severally liable for damages sustained by Adworld.
Whether in an action for collection of a sum of money based on
contract against all the solidary debtors, the death of one of the
solidary debtors deprives the court to proceed with the case
against the surviving debtors? NO
PNB v. Independent Planters: Art. 1216, CC grants the creditor
the substantive right to seek satisfaction of his credit from one,
some or all of his solidary debtors, as he deems fit or convenient
for the protection of his interests; and 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. Nothing in Rule 86, Sec 6
prevents the creditor from proceeding against the surviving
solidary debtors. It merely sets up the procedure in enforcing
collection in case a creditor chooses to pursue his claim against the
estate of the deceased solidary debtor. In Art. 1216, creditor is
given the right to proceed against any one of the solidary debtor or
some or all of them simultaneously. It is not mandatory for him to
have the case dismissed against the surviving debtors and file its
claim in the estate of the deceased solidary debtor. Moreover, Rule
86 cannot be made to prevail over Art. 1216, the former being
merely procedural, while the latter, substantive.
17 | P a g e
Whether the employer may be held solidarily liable with the
employee in a criminal case? NO
Calang and Philtranco v. People: No, the employer may not be
held solidarily liable since he is not a party in the criminal case. In
this case, the cause of action against Calang was based on delict.
Hence, the lower courts erred to held Philtranco jointly and
severally liable with Calang based on quasi-delict under Arts. 2176
and 2180(2). These provisions of law do not apply to civil liability
arising from delict. If at all, Philtranco’s liability may only be
subsidiary on the basis of Art. 102 and 103 of RPC. These are
deemed written into the judgments in cases to which they are
applicable. However, before this liability may be enforced,
adequate evidence must exist establishing that (1) they are indeed
the employers of the convicted employees; (2) they are engaged in
some kind of industry; (3) the crime was committed by employees
in the discharge of their duties; and (4) the execution against the
latter has not been satisfied due to insolvency.
When will solidary liability in Art. 2194 not apply?
TMBI v. Feb Mitsui Marine Insurance Co: Art. 2194 will not be
applicable if the sources of liability of two or more persons are
different. In this case, TMBI’s liability to Mitsui does not stem
from a quasi-delict but from its breach of contract. The tie that
binds TMBI with Mitsui is contractual, albeit one that passed on to
Mitsui as a result of TMBI’s contract of carriage with Sony to
which Mitsui had been subrogated as an insurer who paid Sony’s
insurance claim. The legal reality that results from this contractual
tie precludes the application of quasi-delict based on Art. 2194.
KINDS OF SOLIDARITY:
1. Active – one that exists among the C; MUTUAL
REPRESENTATION
 2. Passive – one that exists among the D; MUTUAL
GUARANTY.
3. Mixed
c.Disjunctive – there are two or more C or two or more D,
but they are named disjunctively; they are named as D or
as C in the alternative.
NOTE: In doubt, apply rules on Alternative obligations.
BAR Q. Joey, Jovy and Jojo are solidary debtors under a loan obligation of
P300,000 which has fallen due. The creditor has, however, condoned Jojo's
entire share in the debt. Since Jovy has become insolvent, the creditor
makes a demand on Joey to pay the debt.
1. How much, if any, may Joey be compelled to pay?
2. To what extent, if at all, can Jojo be compelled by Joey to
contribute to such payment?
ANS:
1. Joey can be compelled to pay only the remaining balance of
P200.000, in view of the remission of Jojo's share by the creditor.
(Art. 1219, Civil Code)
2. Jojo can be compelled by Joey to contribute P50.000 Art. 1217.
par. 3, Civil Code provides. "When one of the solidary debtors
cannot, because of his insolvency, reimburse his share to the debtor
paying the obligation, such share shall be borne by all his
codebtors, in proportion to the debt of each." Since the insolvent
debtor's share which Joey paid was P100,000, and there are only
two remaining debtors - namely Joey and Jojo - these two shall
share equally the burden of reimbursement. Jojo may thus be
compelled by Joey to contribute P50.000.00.
18 | P a g e
URIBE:
1. Here, there is no full condonation because even though the
obligation is solidary, there can be partial
extinguishment/condonation. The correct answer is P200K.
However the insolvency of Jovy will not result to the further
reduction of the obligation because his share would have to be
shouldered by the other Ds.
2. In a solidary obligation, in case one of the D became insolvent, his
share would have to be shouldered by all solvent Ds including the
D whose share was condoned because such condonation does not
exempt him from his obligations to his co-Ds. So the answer is
P50K.
Q: ABC obliged theselves to deliver a specific dog to X. Dog died
due to C’s fault. Value of dog is 300K. X filed a case against A.
A’s defense: He cannot be held liable since NOT all SD are
impleaded in the case. (1) Is the defense tenable? (2) Is there a
basis to conclude that the obli is solidary? (3) What is the action to
be filed? Why?
A: (1) No. Art. 1216; (2) Yes, may be stipulated by the parties; (3)
Damages since it pertains to specific thing. Not specific
performance since the specific dog died.
Q: If the obli is joint indivisible and this is an action for damages.
Is the defense of A tenable?
A: No. It will only apply in action for specific performance. (Art
1209)
4. As to performance of prestation
Q: A promised to pay 1M. Divisible or indivisible?
A: As a rule, it is considered indivisible pursuant to Art. 1233 and
1248.
 Q: May an obli be considered divisible even if no intention was
expressed?
A: Yes, Art. 1225(2)
What factors are to be considered in determining the
divisibility of an obligation?
Sps. Lam v. Kodak Phil: In determining the divisibility of an
obligation, the following factors may be considered: (1) the will or
intention of the parties, which may be expressed or presumed; (2)
the objective or purpose of stipulated prestation; (3) the nature of
the thing; and (4) the provisions of law affecting the prestation.
In this case, the intention of the parties is for there to be a single
transaction covering all three units of Minilab Equipment.
Respondent’s obligation was to deliver all products purchased
under a ―package,‖ and, in turn, petitioner’s obligation was to pay
for the total purchase price, payable in installments. Moreover, the
is only one agreement covering all three units of the Minilab and
their accessories. The Letter Agreement specified only one purpose
for the buyer, which was to obtain these units for three different
outlets. Furthermore, the 19% multiple order discount was applied
to all 3 acquired units and the ―no downpayment‖ was also
applicable to those 3 units. Lastly, the fourth clause of the
agreement clearly referred to the object of the contract as ―Minilab
Equipment Package.‖ Hence, the intent of the parties must prevail
even though the articles involved are physically separable and
capable of being paid for and delivered individually pursuant to
Art. 1225, par 3.
5. As to the presence of an accessory undertaking in case of
breach
a. With a penal clause
19 | P a g e
Q: In agreement between A and B, it is stipulated that if B will not
be able to pay the amount owing to A upon demand, he will be
liable for interest of 5% per annum. Is it an obli with PC?
A: No, it must provide for greater liability in case of non-
performance.
Whether pursuant to Art. 1226, 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?
Robes-Francisco v. CFI Rizal: This would only apply in
obligations with penal clause. In this case, the clause being referred
to by the petitioner does not convey any penalty, for even without
it, pursuant to Art. 2209, the vendee would be entitled to recover
the amount paid by her with legal rate of interest which is even
more than the 4% provided for in the clause. It does not provide for
a greater liability in case of non-performance. It is therefore
inconceivable that the provision in the deed of sale is a penal
clause which will preclude an award of damages to the vendee
Millan.
Q: In obli with PC, in case of non-compliance, is there an instance
where D can only be held liable to the penalty agreed upon?
A: Yes. Art. 1226. Take note of the exceptions.
General Rule: Penalty shall be a substitute for payment of
damages.
NOTE: It should provide for a greater punishment in case of non-
fulfillment.
EXCEPTIONS:
1. There is stipulation
 Bachrach v. Espiritu: 25% penalty upon the debt, in addition to
the 12% interest per annum, in case of non-payment does not make
the contract usurious. Art. 1152 permits the agreement upon a
penalty apart from the interest. Should there be such an agreement,
the penalty does not include the interest and may be demanded
separately. The penalty should not 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 granted by Art. 1154, the penalty is reduced to 10% of the
unpaid debt.
2. There is fraud in the fulfillment of obli.
3. D refuses to pay the penalty.
Who has the burden of proof in obli with penal clause?
Castillo v. Security Bank: The enforcement of penalty can be
demanded by the creditor in case of non-performance due to the
debtor’s fault or fraud. The nonperformance gives rise to the
presumption of fault and in order to avoid the penalty, the debtor
has the burden of proving that the failure of the performance was
due to either force majeure or creditor’s own acts. In this case,
petitioner failed to discharge the burden and thus cannot avoid the
payment of the penalty charge agreed upon.
Whether the aggrieved party is entitled to recover only
liquidated damages based on the stipulation “that any violation
of the provisions of this contract shall entitle the aggrieved
party to collect liquidated damages in the sum of 10k”?
Whether the penalty is the same as liquidated damages?
Pamintuan v. CA: 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
20 | P a g e
damages and both may be reduced when proper. The penalty
clause is strictly penal or cumulative in character and does not
partake of the nature of liquidated damages (pena sustitutiva).
General Rule: Court cannot reduce penalty if PC is stipulated in
the contract.
Exceptions:
1. Partial Performance
2. Unconscionable – will depend on the principal amount.
Whether a proviso in parties’ contract allowing the forfeiture
of advance rentals is considered as a penal clause? Whether the
penalty agreed upon by the parties may be equitably reduced
under Art. 1229?
Sps. Poon v. Prime Savings: Yes, the forfeiture clause in the
Contract is penal in nature. A provision is a penal clause if it calls
for the forfeiture of any remaining deposit still in 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 thereof.
The clause is an accessory obligation meant to ensure the
performance of the principal obligation by imposing on the debtor
a special prestation in case of nonperformance or inadequate
performance of the principal obligation. In this case, the forfeiture
clause in penal in nature in the sense that it provides for liquidated
damages. It served the two functions of a penal clause, i.e., (1) to
provide for liquidated damages and (2) strengthen the coercive
force of the obligation by the threat of greater responsibility in case
of breach.
Yes, it may be equitably reduced by the court. The reasonableness
of thepenalty depends on the circumstances in each case, because
 what is iniquitous and unconscionable in one may be totally just
and equitable in another. In resolving this issue, courts may
consider factors like the type, extent and purpose of the penalty;
the nature of the obligation; the mode of the breach and its
consequences; the supervening realities and the standing and
relationship of the parties.
E. BREACH OF OBLIGATION
The most important provision here is:
Article 1170. Those who in the performance of their obligations are
guilty of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.‖
Note: The provision did not say the only the D may be held liable under
it. It could also be the C.
When is there a breach of obligation?
Honrado v. GMA Network
Basis of the action: Contract particularly, Par 4 of the Agreement:
―Program titles listed above shall be subject to approval by
MTRCB, and the event of disapproval, petitioner will either
replace it with another title or proportionate reduction from total
price‖
Why? Petitioner allegedly failed to replace the film that GMA
rejected.
Ruling: There is no breach of Agreement on the part of the
petitioner. Under the stipulation, what triggers the rejection and
replacement of any film listed in the Agreement is the
―disapproval‖ of its telecasting by MTRCB. Nor is there any
dispute that GMA Films rejected Evangeline Katorse not because
it was disapproved by MTRCB but because the film’s total running
21 | P a g e
time was too short for telecast. Instead of rejecting GMA Film’s
demand for falling outside the terms of par 4, petitioner voluntarily
acceded to it and replaced such film with Winasak na Pangarap.
Regardless of the Film Certification, GMA Films’ rejection of
Winasak na Pangarap finds no basis in the Agreement. Par 4 of the
Agreement requires the intervention of MTRCB before GMA
Films can reject a film and require its replacement. Here, GMA
Films does not allege, and Court find no proof on record
indicating, that MTRCB reviewed Winasak na Pangarap and X-
rated it. GMA’s act of rejecting it because it considered it as
―bomba‖ is beyond its assigned role under the Agreement of
screening films to test their broadcast quality and assumed the
function of MTRCB to evaluate the films for propriety of their
content.
1. Manner of Breach
a. Fraud
Q: If A offered to sell to B a ring, misrepresenting the ring that it is
24K, when in fact it is only gold-plated. Is there a fraud under Art.
1170/1171?
A: No since this is fraud in obtaining consent.
Kinds:
i. Dolo Causante – Art. 1338; in obtaining consent in a
contract.
Remedy: Annulment
ii. Dolo Incidente – Art. 1170 with Art. 1171; in the
performance of an obligation.
Remedy: Claim for damages.
b. Negligence
 Article 1173. The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons,
of the time and of the place. When negligence shows bad faith, the
provisions of articles 1171 and 2201, paragraph 2, shall apply.
If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good
father of a family shall be required.
NOTE: Check the degree of diligence that must be observed.
General Rule: Ordinary diligence - diligence of a good father of a
family.
What is the degree of diligence to be exercised by a stevedoring
company?
Mindanao Terminal v. Phoenix Assurance
Basis of the action: Contract of Shipment (Del Monte and
Mindanao Terminal; Insurance contract (Del Monte and Phoenix
Assurance)
Why? The 16, 069 cartons of banana shipment and 2, 185 cartons
of pineapple shipment were damaged that they no longer had
commercial value
Defense of Mindanao Terminal: It is not required to exercise
ecxtraordinary diligence since it is a stevedoring company and not
a common carrier.
Ruling: The present action is based on quasi-delict, arising from
the negligent and careless loading and stowing of the cargoes
belonging to Del Monte Produce. Even assuming that both Phoenix
and McGee have only been subrogated in the rights of Del Monte
Produce, who is not a party to the contract of service between
Mindanao Terminal and Del Monte, still the insurance carriers may
have a cause of action in light of the Courts consistent ruling that
the act that breaks the contract may be also a tort. In fine, a liability
for tort may arise even under a contract, where tort is that which
breaches the contract. In the present case, Phoenix and McGee are
22 | P a g e
not suing for damages for injuries arising from the breach of the
contract of service but from the alleged negligent manner by which
Mindanao Terminal handled the cargoes belonging to Del Monte
Produce. Despite the absence of contractual relationship between
Del Monte Produce and Mindanao Terminal, the allegation of
negligence on the part of the defendant should be sufficient to
establish a cause of action arising from quasi-delict.
Article 1173 of the Civil Code is very clear that if the law or
contract does not state the degree of diligence which is to be
observed in the performance of an obligation then that which is
expected of a good father of a family or ordinary diligence shall be
required. Mindanao Terminal, a stevedoring company which was
charged with the loading and stowing the cargoes of Del Monte
Produce aboard M/V Mistrau, had acted merely as a labor provider
in the case at bar. There is no specific provision of law that
imposes a higher degree of diligence than ordinary diligence for a
stevedoring company or one who is charged only with the loading
and stowing of cargoes. It was neither alleged nor proven by
Phoenix and McGee that Mindanao Terminal was bound by
contractual stipulation to observe a higher degree of diligence than
that required of a good father of a family.
There is a distinction between an arrastre and a stevedore. Arrastre,
a Spanish word which refers to hauling of cargo, comprehends the
handling of cargo on the wharf or between the establishment of the
consignee or shipper and the ship's tackle. The responsibility of the
arrastre operator lasts until the delivery of the cargo to the
consignee. The service is usually performed by longshoremen. On
the other hand, stevedoring refers to the handling of the cargo in
the holds of the vessel or between the ship's tackle and the holds of
the vessel. The responsibility of the stevedore ends upon the
loading and stowing of the cargo in the vessel. Here, Mindanao
Terminal, as a stevedore, was only charged with the loading and
stowing of the cargoes from the pier to the ships cargo hold; it was
never the custodian of the shipment of Del Monte Produce. A
stevedore is not a common carrier for it does not transport goods or
passengers; it is not akin to a warehouseman for it does not store
goods for profit.
 Mindanao terminal had duly exercised the required degree of
diligence in loading and stowing the cargoes, which is the ordinary
diligence of a good father of a family. It is merely a stevedoring
company which was tasked by Del Monte to load and stow the
shipments of fresh banana and pineapple of Del Monte Produce
aboard the M/V Mistrau. How and where it should load and stow a
shipment in a vessel is wholly dependent on the shipper and the
officers of the vessel. In other words, the work of the stevedore
was under the supervision of the shipper and officers of the vessel.
Even the materials used for stowage, such as ropes, pallets, and
cardboards, are provided for by the vessel. Even the survey report
found that it was because of the boisterous stormy weather due to
the typhoon Seth, as encountered by M/V Mistrau during its
voyage, which caused the shipments in the cargo hold to collapse,
shift and bruise in extensive extent. They failed to show that it
failed the due diligence required.
Exception: EO diligence or Utmost diligence.
NOTE: In this case, the defenses of exercise of due diligence and
mirror doctrine will NOT apply.
Meralco v. Ramoy
Basis of the action: Service Contract
Why? Meralco disconnected its power supply to defendants
Defense of Meralco: There is decision of MTC QC ruling that the
respondents were among the illegal occupants of NPC’s right of
way.
Ruling: Yes, Meralco failed to exercise due diligence in cutting the
power supply of defendants. In culpa contractual, the mere proof of
the existence of the contract and the failure of its compliance
justify, prima facie, a corresponding right of relief. A breach upon
the contract confers upon the injured party a valid cause for
recovering that which may have been lost or suffered. The remedy
serves to preserve the interests of the promissee that may include
his expectation interest, which is his interest in having the benefit
of his bargain by being put in as good a position as he would have
been in had the contract been performed, or his reliance interest,
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which is his interest in being reimbursed for loss caused by
reliance on the contract by being put in as good a position as he
would have been in had the contract not been made; or his
restitution interest, which is his interest in having restored to him
any benefit that he has conferred on the other party. Indeed,
agreements can accomplish little, either for their makers or for
society, unless they are made the basis for action. The effect of
every infraction is to create a new duty, that is, to make
recompense to the one who has been injured by the failure of
another to observe his contractual obligation unless he can show
extenuating circumstances, like proof of his exercise of due
diligence, or of the attendance of fortuitous event, to excuse him
from his ensuing liability.
As a public utility, MERALCO has the obligation to discharge ts
functions with utmost care and diligence. Here, MERALCO failed
to exercise the utmost degree of care and diligence required of it. It
was not enough for MERALCO to merely rely on the Decision of
the MTC without ascertaining whether it had become final and
executory. Verily, only upon finality of said Decision can it be said
with conclusiveness that respondents have no right or proper
interest over the subject property, thus, are not entitled to the
services of MERALCO. Although MERALCO insists that the
MTC Decision is final and executory, it never showed any
documentary evidence to support this allegation. Moreover, if it
were true that the decision was final and executory, the most
prudent thing for MERALCO to have done was to coordinate with
the proper court officials in determining which structures are
covered by said court order. Likewise, there is no evidence on
record to show that this was done by MERALCO.
On the issue of damages, MERALCO is liable for damages under
Art 1170 for failure to exercise diligence required. Ramoy is
entitled to moral damages. MERALCO's failure to exercise utmost
care and diligence in the performance of its obligation to Leoncio
Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy
testified that he suffered wounded feelings because of
MERALCO's actions. Furthermore, due to the lack of power
supply, the lessees of his four apartments on subject lot left the
premises. But they are not entitled to exemplary damages since
 MERALCO’s actions cannot be considered wanton, fraudulent,
reckless, oppressive or malevolent.
Whether an employer can be held liable in injuries caused by
negligence of its employees?
Cangco v. MRR
Basis of the action: Contract of carriage
Why? MRR employee injured due to sack of watermelons in the
platforms
Ruling: In this case, MRR was held liable because of its breach of
its obligation arising from a contract of carriage. The contract of
defendant to transport plaintiff carried with it, by implication, the
duty to carry him in safety and to provide safe means of entering
and leaving its trains (civil code, article 1258). That duty, being
contractual, was direct and immediate, and its non-performance
could not be excused by proof that the fault was morally imputable
to defendant's servants. The liability of masters and employers for
the negligent acts or omissions of their servants or agents, when
such acts or omissions cause damages which amount to the breach
of a contact, is not based upon a mere presumption of the master's
negligence in their selection or control, and proof of exercise of the
utmost diligence and care in this regard does not relieve the master
of his liability for the breach of his contract.
The railroad company's defense involves the assumption that even
granting that the negligent conduct of its servants in placing an
obstruction upon the platform was a breach of its contractual
obligation to maintain safe means of approaching and leaving its
trains, the direct and proximate cause of the injury suffered by
plaintiff was his own contributory negligence in failing to wait
until the train had come to a complete stop before alighting. Under
the doctrine of comparative negligence announced in the Rakes
case , if the accident was caused by plaintiff's own negligence, no
liability is imposed upon defendant's negligence and plaintiff's
negligence merely contributed to his injury, the damages should be
24 | P a g e
apportioned. It is, therefore, important to ascertain if defendant was
in fact guilty of negligence. However, the Court held that there is
no negligence on the part of the petitioner. In this particular
instance, that the train was barely moving when plaintiff alighted is
shown conclusively by the fact that it came to stop within six
meters from the place where he stepped from it. Thousands of
person alight from trains under these conditions every day of the
year, and sustain no injury where the company has kept its
platform free from dangerous obstructions. There is no reason to
believe that plaintiff would have suffered any injury whatever in
alighting as he did had it not been for defendant's negligent failure
to perform its duty to provide a safe alighting place.
When may moral damages be awarded by the court?
Telefast v. Castro
Basis of the action: Contract of telegram
Why? Daughter of deceased sent a telegram, thru the petitioner, to
his father informing him the death of her mother but the father
failed to receive it.
Defense of Telefast: Unable to transmit due to technical and
atmospheric factors beyond its control; No fraud, malice and
recklessness that will warrant the award of damages to defendants
Ruling: No, moral damages may be awarded in this case since it is
not limited to actual or quantified damages. Moral damages may
be awarded in contract in cases where there is bad faith or wanton
disregard on the part of the debtor. In this case, petitioner and the
daughter entered into a contract whereby, for a fee, petitioner
undertook to send said private respondent's message overseas by
telegram. This, petitioner did not do, despite performance by said
private respondent of her obligation by paying the required
charges. Petitioner 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 petitioner will only be held liable for
the actual cost of a telegram fixed thirty (30) years ago. Art. 2217
 is applicable here. Here, petitioner's act or omission, which
amounted to gross negligence, was precisely the cause of the
suffering private respondents had to undergo.
Whether City of Manila may be held liable to injury caused by
uncovered opening along the market?
Jimenez v. City of Manila
Basis of the action: Negligence of City of Manila and Asiatic
Integrated Corporation under whose administration the Sta. Ana
Public Market had been placed by virtue of a Management and
Operating Contract
Defense/s of City of Manila: (1) Management and Operating
Contract wherein Asiatic Integrated Corporation assumed all
responsibility for damages which may be suffered by third persons
for any cause attributable to it;
(2) Art. 1, Sec. 4 of RA 409: ―The City shall not be liable or held
for damages or injuries to persons or property arising from the
failure of the Mayor, the Municipal Board, or any other City
Officer, to enforce the provisions of this chapter, or any other law
or ordinance, or from negligence of said Mayor, Municipal Board,
or any other officers while enforcing or attempting to enforce said
provisions;
Ruling: In City of Manila v. Teotico, it was held that Art. 1, Sec. 4
of RA 409 establishes a general rule regulating the liability of City
of Manila while Art. 2189 of NCC governs the liabilitydue to
defective conditions of roads, streets, bridges, public buildings and
other public works under their control or supervision. The latter is
therefore decisive in this case. What said article requires is that the
province, city or municipality has either "control or supervision"
over the public building in question. In this case, there is no
question that the Sta. Ana Public Market, despite the Management
and Operating Contract between respondent City and Asiatic
Integrated Corporation remained under the control of the former.
The fact of supervision and control of the City over subject public
market was admitted by Mayor Ramon Bagatsing in his letter to
Secretary of Finance Cesar Virata. In fact, the City of Manila
25 | P a g e
employed a market master for the Sta. Ana Public Market whose
primary duty is to take direct supervision and control of that
particular market, more specifically, to check the safety of the
place for the public.
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 the Civil Code). There is no argument that it is the
duty of the City of Manila to exercise reasonable care to keep the
public market reasonably safe for people frequenting the place for
their marketing needs. While it may be conceded that the
fulfillment of such duties is extremely difficult during storms and
floods, it must however, be admitted that ordinary precautions
could have been taken during good weather to minimize the
dangers to life and limb under those difficult circumstances. For
instance, the drainage hole could have been placed under the stalls
instead of on the passage ways. Even more important is the fact,
that the City should have seen to it that the openings were covered.
Sadly, the evidence indicates that long before petitioner fell into
the opening, it was already uncovered, and five (5) months after
the incident happened, the opening was still uncovered. Neither
was it shown that any sign had been placed thereabouts to warn
passersby of the impending danger.
It appears evident that the City of Manila is likewise liable for
damages under Article 2189 of the Civil Code, respondent City
having retained control and supervision over the Sta. Ana Public
Market and as tort-feasor under Article 2176 of the Civil Code on
quasi-delicts.
c. Delay
Kinds of Delay:
1. Mora Solvendi - delay on the part of the D
2. Mora Accipiendi - delay on the part of the C
3. Compensatio Morae - delay - D and
NOTE: If both parties are in delay, in contemplation of law, no
delay.

Agcaoili v. GSIS
Basis of the action: Contract of sale of house and lot
Why? Agcaoli after paying the first installment and other fees,
having thereafter refused to make further payment of other
stipulated installments until GSIS had made the house habitable
Defense/s: Agcaoili's suspension of payment of amortizations as
cause to cancel the contract between them; and Agcaoili had not
complied with the condition of occupying the house within three
(3) days
Ruling: There was then a perfected contract of sale between the
parties; there had been a meeting of the minds upon the purchase
by Agcaoili of a determinate house and lot in the GSIS Housing
Project at Nangka Marikina, Rizal at a definite price payable in
amortizations at P31.56 per month, and from that moment the
parties acquired the right to reciprocally demand performance. It
was, to be sure, the duty of the GSIS, as seller, to deliver the thing
sold in a condition suitable for its enjoyment by the buyer for the
purpose contemplated, in other words, to deliver the house subject
of the contract in a reasonably livable state. This it failed to do.
Under the circumstances there can hardly be any doubt that the
house contemplated was one that could be occupied for purposes
of residence in reasonable comfort and convenience. By any
objective interpretation of its terms, the contract can only be
understood as imposing on the GSIS an obligation to deliver to
Agcaoili a reasonably habitable dwelling in return for his
undertaking to pay the stipulated price. Since 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."
26 | P a g e
Nor may the GSIS succeed in justifying its cancellation of the
award to Agcaoili by the claim that the latter had not complied
with the condition of occupying the house within three (3) days.
The record shows that Agcaoili did try to fulfill the condition; he
did try to occupy the house but found it to be so uninhabitable that
he had to leave it the following day. He did however leave a friend
in the structure, who being homeless and hence willing to accept
shelter even of the most rudimentary sort, agreed to stay therein
and look after it.
In this case, the Court cannot require specific performance of the
contract in question according to its literal terms, as this would
result in inequity. In the exercise of its equity jurisdiction, the
Court may adjust the rights of parties in accordance with the
circumstances obtaining at the time of rendition of judgment, when
these are significantly different from those existing at the time of
generation of those rights. That adjustment is entirely consistent
with the Civil Law principle that in the exercise of rights a person
must act with justice, give everyone his due, and observe honesty
and good faith. Adjustment of rights has been held to be
particularly applicable when there has been a depreciation of
currency.
The completion of the unfinished house so that it may be put into
habitable condition, as one form of relief to the plaintiff Agcaoili,
no longer appears to be a feasible option in view of the not
inconsiderable time that has already elapsed. That would require an
adjustment of the price of the subject of the sale to conform to
present prices of construction materials and labor. It is more in
keeping with the realities of the situation, and with equitable
norms, to simply require payment for the land on which the house
stands, and for the house itself, in its unfinished state, as of the
time of the contract.
Q: When would delay set-in?
A: (1) There must be a demand; and (2) an offer to pay and refuse
without just cause.
 General Rule: To be considered in delay, there should be a prior
demand (Art. 1169)
EXCEPTIONS:
1. When stipulated; or
2. The law so provides;
3. The time is the controlling motive
4. Demand would be useless.
Solar Harvest v. Davao Corrugated
Basis of the action: Contract of purchase of corrugated carton
boxes
Why? Despite payment, petitioner did not receive any boxes from
respondent.
Defense/s: Respondent stated that petitioner was to pick up the
boxes at the factory as agreed upon, but petitioner failed to do so.
Ruling: In reciprocal obligations, as in a contract of sale, the
general rule is that the fulfillment of the parties respective
obligations should be simultaneous. Hence, no demand is generally
necessary because, once a party fulfills his obligation and the other
party does not fulfill his, the latter automatically incurs in delay.
But when different dates for performance of the obligations are
fixed, the default for each obligation must be determined by the
rules given in the first paragraph of the present article, that is, the
other party would incur in delay only from the moment the other
party demands fulfillment of the formers obligation. Thus, even in
reciprocal obligations, if the period for the fulfillment of the
obligation is fixed, demand upon the obligee is still necessary
before the obligor can be considered in default and before a cause
of action for rescission will accrue.
Here, there was lack of demand by petitioner upon respondent to
fulfill its obligation to manufacture and deliver the boxes. The
Complaint only alleged that petitioner made a follow-up upon
respondent, which, however, would not qualify as a demand for the
fulfillment of the obligation. Petitioners witness also testified that
they made a follow-up of the boxes, but not a demand. Note is
taken of the fact that, with respect to their claim for
reimbursement, the Complaint alleged and the witness testified that
27 | P a g e
a demand letter was sent to respondent. Without a previous
demand for the fulfillment of the obligation, petitioner would not
have a cause of action for rescission against respondent as the
latter would not yet be considered in breach of its contractual
obligation.
Even assuming that a demand had been previously made before
filing the present case, petitioners claim for reimbursement would
still fail, as the circumstances would show that respondent was not
guilty of breach of contract. As correctly observed by the CA,
aside from the pictures of the finished boxes and the production
report thereof, there is ample showing that the boxes had already
been manufactured by respondent. There is the testimony of
Estanislao who accompanied Que to the factory, attesting that,
during their first visit to the company, they saw the pile of
petitioners boxes and Que took samples thereof. The Court also
believes that the agreement between the parties was for petitioner
to pick up the boxes from respondents warehouse, contrary to
petitioners allegation. Thus, it was due to petitioners fault that the
boxes were not delivered to TADECO. Hence, petitioner failed to
establish a cause of action for rescission.
NOTE: Follow-up is NOT a demand.
Whether a demand is necessary despite presence of the word
“upon default” in PN?
Rivera v. Sps. Chua
Basis of the action: PN from loan obtained by Rivera which
states: ―It is agreed and understood that failure on my part to pay
the amount of (120,000.00) One Hundred Twenty Thousand Pesos
on December 31, 1995. (sic) I agree to pay the sum equivalent to
FIVE PERCENT (5%) interest monthly from the date of default
until the entire obligation is fully paid for.
Should this note be referred to a lawyer for collection, I agree to
pay the further sum equivalent to twenty percent (20%) of the total
amount due and payable as and for attorney’s fees which in no case
shall be less than ₱5,000.00 and to pay in addition the cost of suit
and other incidental litigation expense.‖

Why? Almost three years from the date of payment stipulated in
the promissory note, Rivera failed to pay it despite demands.
Defense/s: Sps. Chua never demanded the payment of PN and its
interest even after 4 yrs from alleged default
Ruling: Yes, Rivera was already in delay since the PN is
unequivocal about the date when the obligation falls due and
becomes demandable—31 December 1995.
Under Art, 1169, NCC, there are four instances when demand is
not necessary to constitute the debtor in default: (1) when there is
an express stipulation to that effect; (2) where the law so provides;
(3) when the period is the controlling motive or the principal
inducement for the creation of the obligation; and (4) where
demand would be useless. In the first two paragraphs, it is not
sufficient that the law or obligation fixes a date for performance; it
must further state expressly that after the period lapses, default will
commence.
In the PN executed by Rivera, the clause expressly requires the
debtor to pay a 5% monthly interest from the "date of default"
until the entire obligation is fully paid for. The parties evidently
agreed that the maturity of the obligation at a date certain, 31
December 1995, will give rise to the obligation to pay interest. The
Promissory Note expressly provided that after 31 December 1995,
default commences and the stipulation on payment of interest
starts.
The date of default under the Promissory Note is 1 January 1996,
the day following 31 December 1995, the due date of the
obligation. On that date, Rivera became liable for the stipulated
interest which the Promissory Note says is equivalent to 5% a
month. In sum, until 31 December 1995, demand was not
necessary before Rivera could be held liable for the principal
amount of ₱120,000.00. Thereafter, on 1 January 1996, upon
default, Rivera became liable to pay the Spouses Chua damages, in
the form of stipulated interest.
28 | P a g e
The liability for damages of those who default, including those
who are guilty of delay, in the performance of their obligations is
laid down on Article 1170 of the Civil Code. Corollary thereto,
Article 2209 solidifies the consequence of payment of interest as
an indemnity for damages when the obligor incurs in delay. Article
2209 is specifically applicable in this instance where: (1) the
obligation is for a sum of money; (2) the debtor, Rivera, incurred
in delay when he failed to pay on or before 31 December 1995;
and (3) the Promissory Note provides for an indemnity for
damages upon default of Rivera which is the payment of a
5%monthly interest from the date of default.
As observed by [Rivera], the stipulated interest of 5% per month or
60% per annum in addition to legal interests and attorney’s fees is,
indeed, highly iniquitous and unreasonable. Stipulated interest
rates are illegal if they are unconscionable and the Court is allowed
to temper interest rates when necessary. Since the interest rate
agreed upon is void, the parties are considered to have no
stipulation regarding the interest rate, thus, the rate of interest
should be 12% per annum computed from the date of judicial or
extrajudicial demand.
At the time interest accrued from 1 January 1996, the date of
default under the Promissory Note, the then prevailing rate of legal
interest was 12% per annum under Central Bank (CB) Circular No.
416 in cases involving the loan or for bearance of money. Thus, the
legal interest accruing from the Promissory Note is 12% per annum
from the date of default on 1 January 1996. However, the 12%
perannumrate of legal interest is only applicable until 30 June
2013, before the advent and effectivity of Bangko Sentral ng
Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate
of legal interest to 6% per annum. In short, the applicable rate of
legal interest from 1 January 1996, the date when Rivera defaulted,
to date when this Decision becomes final and executor is divided
into two periods reflecting two rates of legal interest: (1) 12% per
annum from 1 January 1996 to 30 June 2013; and (2) 6% per
annum FROM 1 July 2013 to date when this Decision becomes
final and executory.
 URIBE: Do not agree since default requires demand. Here, no
demand hence, no delay. NO express declaration.
d. Any other manner of contravention
Arrieta v. Naric
Basis of the action: Contract of Sale of rice under the terms of
which the former obligated herself to deliver to the latter 20,000
metric tons of Burmess Rice at $203.00 per metric ton, CIF
Manila. In turn, the defendant corporation committed itself to pay
for the imported rice "by means of an irrevocable, confirmed and
assignable letter of credit in U.S. currency in favor of the plaintiff-
appellee and/or supplier in Burma, immediately.‖
Why? It was only on July 30, 1952, or a full month from the
execution of the contract, that the defendant corporation, thru its
general manager, took the first to open a letter of credit; and it was
not in a sound financial position to meet the condition of the bank
Defense/s: Appellant corporation disclaims responsibility for the
delay in the opening of the letter of credit. On the contrary, it
insists that the fault lies with the appellee. Appellant contends that
the disputed negotiable instrument was not promptly secured
because the appellee , failed to seasonably furnish data necessary
and required for opening the same, namely, "(1) the amount of the
letter of credit, (2) the person, company or corporation in whose
favor it is to be opened, and (3) the place and bank where it may be
negotiated."
Ruling: It is clear upon the records that the sole and principal
reason for the cancellation of the allocation contracted by the
appellee herein in Rangoon, Burma, was the failure of the letter of
credit to be opened with the contemplated period. This failure
must, therefore, be taken as the immediate cause for the
consequent damage which resulted.
The defense that the delay, if any in opening the letter of credit was
due to the failure of plaintiff to name the supplier, the amount and
the bank is not tenable. Plaintiff stated in Court that these facts
were known to defendant even before the contract was executed
because these facts were necessarily revealed to the defendant
before she could qualify as a bidder. She stated too that she had
29 | P a g e
given the necessary data immediately after the execution of
contract to Mr. GABRIEL BELMONTE, General Manager of the
NARIC, both orally and in writing and that she also pressed for the
opening of the letter of credit on these occasions. These statements
have not been controverted and defendant NARIC,
notwithstanding its previous intention to do so, failed to present
Mr. Belmonte to testify or refute this.
Secondly, from the correspondence and communications which
form part of the record of this case, it is clear that what singularly
delayed the opening of the stipulated letter of credit and which, in
turn, caused the cancellation of the allocation in Burma, was the
inability of the appellant corporation to meet the condition
importation by the Bank for granting the same. The letter of the
Philippine National Bank to the NARIC was plain and explicit that
as of the said date, appellant's "application for a letter of credit ...
has been approved by the Board of Directors with the condition
that 50% marginal cash deposit be paid and that drafts are to be
paid upon presentment."
The liability of the appellant, however, stems not alone from this
failure or inability to satisfy the requirements of the bank. Its
culpability arises from its willful and deliberate assumption of
contractual obligations even as it was well aware of its financial
incapacity to undertake the prestation. First, that the appellant
knew the bank requirements for opening letters of credit; second,
that appellant also knew it could not meet those requirements.
When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant
agreed in paragraph 8 of the contract to pay immediately "by
means of an irrevocable, confirm and assignable letter of credit," it
must be similarly held to have bound itself to answer for all and
every consequences that would result from the representation.
Under Art. 11 of Civil Code, not only debtors guilty of fraud,
negligence or default in the performance of obligations a decreed
liable; 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.
Sanico and Castro v. Colipano
Basis of the action: Contract of carriage
Why? Colipano claimed she was made to sit on an empty beer case
at the edge of the rear entrance/exit of the jeepney with her
sleeping child on her lap. Her leg was crushed when jeepney slid
bawckwards.
Defense/s: When the incident happened, they instructed everyone
not to panic but Colipano tried to disembark and her foot got
caught in between the step board and the coconut tree.13 Sanico
claimed that he paid for all the hospital and medical expenses of
Colipano,and that Colipano eventually freely and voluntarily
executed an Affidavit of Desistance and Release of Claim.
Ruling:
Only Sanico breached the contract of carriage.
Here, it is beyond dispute that Colipano was injured while she was
a passenger in the jeepney owned and operated by Sanico that was
being driven by Castro. Both the CA and RTC found Sanico and
Castro jointly and severally liable. This, however, is erroneous
because only Sanico was the party to the contract of carriage with
Colipano.
Since the cause of action is based on a breach of a contract of
carriage, the liability of Sanico is direct as the contract is between
him and Colipano. Castro, being merely the driver of Sanico's
jeepney, cannot be made liable as he is not a party to the contract
of carriage.
Since Castro was not a party to the contract of carriage, Colipano
had no cause of action against him and the pomplaint against him
should be dismissed. Although he was driving the jeepney, he was
a mere employee of Sanico, who was the operator and owner of the
jeepney. The obligation to carry Colipano safely to her destination
was with Sanico.
Sanico is liable as operator and owner of a common carrier
30 | P a g e
Specific to a contract of carriage, the Civil Code requires common
carriers to observe extraordinary diligence in safely transporting
their passengers (Article 1733).
Such extraordinary diligence in the vigilance over the goods is
further expressed in Articles 1734, 1735 and 1745, Nos. 5, 6, and
7, while the extraordinary diligence for the safety of the passengers
is further set forth in Articles 1755 and 1756.
This extraordinary diligence, following Article 1755 of the Civil
Code, means that common carriers have the obligation to carry
passengers safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons, with due
regard for all the circumstances.
In case of death of or injury to their passengers, Article 1756 of the
Civil Code provides that common carriers are presumed to have
been at fault or negligent, and this presumption can be overcome
only by proof of the extraordinary diligence exercised to ensure the
safety of the passengers.
Being an operator and owner of a common carrier, Sanico was
required to observe extraordinary diligence in safely transporting
Colipano. When Colipano's leg was injured while she was a
passenger in Sanico's jeepney, the presumption of fault or
negligence on Sanico's part arose and he had the burden to prove
that he exercised the extraordinary diligence required of him. He
failed to do this.
The evidence indubitably established Sanico's negligence when
Castro made Colipano sit on an empty beer case at the edge of the
rear entrance/exit of the jeepney with her sleeping child on her lap,
which put her and her child in greater peril than the other
passengers. The CA also correctly held that the defense of engine
failure, instead of exonerating Sanico, only aggravated his already
precarious position. The engine failure "hinted lack of regular
check and maintenance to ensure that the engine is at its best,
considering that the jeepney regularly passes through a
mountainous area.‖ This failure to ensure that the jeepney can
 safely transport passengers through its route which required
navigation through a mountainous area is proof of fault on Sanico's
part. In the face of such evidence, there is no question as to
Sanico's fault or negligence.
In Magat v. Medialdea the Court ruled: "The phrase 'in any manner
contravene the tenor' of the obligation includes any illicit act or
omission which impairs the strict and faithful fulfillment of the
obligation and every kind of defective performance. There is no
question here that making Colipano sit on the empty beer case was
a clear showing of how Sanico contravened the tenor of his
obligation to safely transport Colipano from the place of departure
to the place of destination as far as human care and foresight can
provide, using the utmost diligence of very cautious persons, and
with due regard for all the circumstances.
Sanico's attempt to evade liability by arguing that he exercised
extraordinary diligence when he hired; Castro, who was allegedly
an experienced and time-tested driver, whom he had even
accompanied on a test-drive and in whom he was personally
convinced of the driving skills, are not enough to exonerate him
from liability - because the liability of common carriers does not
cease upon proof that they exercised all the diligence of a good
father of a family in the selection and supervision of their
employees (Art. 1759).
The only defenses available to common carriers are (1) proof that
they observed extraordinary diligence as prescribed in Article
1756, and (2) following Article 1174 of the Civil Code, proof that
the injury or death was brought about by an event which "could not
be foreseen, or which, though foreseen, were inevitable," or a
fortuitous event.
The Court finds that neither of these defenses obtain. Thus, Sanico
is liable for damages to Colipano because of the injury that
Colipano suffered as a passenger of Sanico's jeepney.
2. Excuses for non-performance
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a. Fortuitous event
Q: Whether D is liable if the thing is lost through FE?
A:
General rule: NO. person shall be responsible for those events
which could not be foreseen, or though foreseen, are inevitable.
(Art 1174)
Exceptions:
1. The parties so stipulate
2. If the law so provides
3. If the nature of the obligation requires the assumption of risk
(eg. obligation of the insurance company)
NOTE: Check if there is delay already (Art. 1165). If none, not
liable. If yes, liable.
Q: During the bar exam month, X lent the car to his girlfriend, Y,
who parked the car at the Mall of Asia's open parking lot, with the
ignition key inside the car. Car thieves broke into and took the car.
Is X liable to C for the loss of the car due to Y's negligence?
A: Yes, X is liable to C. Since X lent the car to Y without C's
consent, X must bear the consequent loss of the car. The bailee is
liable for the loss of the thing, even if it should be through a
fortuitous event if he lends or leases the thing to a third person,
who is not a member of his household (Art 1942, Civil Code).
Art. 1942: The bailee is liable for the loss of the thing, even if it
should be through a fortuitous event:
1. If he devotes the thing to any purpose different from that
for which it has been loaned;
2. If he keeps it longer than the period stipulated, or after the
accomplishment of the use for which the commodatum has been
constituted;
 3. If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
4. If he lends or leases the thing to a third person, who is not
a member of his household;
5. If, being able to save either the thing borrowed or his own
thing, he chose to save the latter.
Is earthquake an act of God that will exempt the obligor from
responsibility?
Nakpil & Sons v. CA
Basis of the action: Construction contract
Why? Partial collapse of the PBA building during the earthquake
due to alleged defects in the construction
Defense/s of Nakpil & Sons: Claimed that it was an act of God
that caused the failure of the building which should exempt them
from responsibility and not the defective construction, poor
workmanship, deviations from plans and specifications and other
imperfections in the case of United Construction Co., Inc. or the
deficiencies in the design, plans and specifications prepared by
petitioners in the case of the Nakpils.
Ruling: The applicable law governing the rights and liabilities of
the parties herein is Article 1723, NCC. On the other hand, the
general rule is that no person shall be responsible for events which
could not be foreseen or which though foreseen, were inevitable
(Art. 1174).
An act of God has been defined as an accident, due directly and
exclusively to natural causes without human intervention, which
by no amount of foresight, pains or care, reasonably to have been
expected, could have been prevented. There is no dispute that the
earthquake of August 2, 1968 is a fortuitous event or an act of
God.
To exempt the obligor from liability under Article 1174 of the
Civil Code, for a breach of an obligation due to an "act of God,"
the following must concur: (a) the cause of thebreach of the
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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. Thus, if upon the happening of a fortuitous event or an act
of God, there concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability. The
principle embodied in the act of God doctrine strictly requires that
the act must be one occasioned exclusively by the violence of
nature and all human agencies are to be excluded from creating or
entering into the cause of the mischief. Thus it has been held that
when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by
showing that the immediate cause of the damage was the act of
God.
Here, the negligence of the defendant and the third-party
defendants petitioners was established beyond dispute both in the
lower court and in the IAC. Defendant United Construction Co.,
Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite
workmanship in the construction as well as to exercise the requisite
degree of supervision; while the third-party defendants were found
to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, 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 of August 2, 1968. For this reason the
defendant and third-party defendants cannot claim exemption from
liability.
Is Robbery a fortuitous event?
Sicam v. Jorge
Basis of the action: Contract of loan
Why? Robbery in the pawnshop where jewelries of defendant
were deposited
 Defense/s: Petitioners insist that they are not liable since robbery is
a fortuitous event and they are not negligent at all
Ruling: No, robbery is not FE in this case. Fortuitous events by
definition are extraordinary events not foreseeable or avoidable. It
is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one
impossible to foresee or to avoid. The mere difficulty to foresee the
happening is not impossibility to foresee the same.
To constitute a fortuitous event, the following elements must
concur: (a) the cause of the unforeseen and unexpected occurrence
or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it
must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal
manner; and, (d) the obligor must be free from any participation in
the aggravation of the injury or loss.
The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it. And, in order for a fortuitous event to
exempt one from liability, it is necessary that one has committed
no negligence or misconduct that may have occasioned the loss.
It has been held that an act of God cannot be invoked to protect a
person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have concurred
with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the
damage or injury was a fortuitous event would not 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.
Petitioner Sicam had testified that there was a security guard in
their pawnshop at the time of the robbery. He likewise testified that
when he started the pawnshop business in 1983, he thought of
opening a vault with the nearby bank for the purpose of
33 | P a g e
safekeeping the valuables but was discouraged by the Central Bank
since pawned articles should only be stored in a vault inside the
pawnshop. The very measures which petitioners had allegedly
adopted show that to them the possibility of robbery was not only
foreseeable, but actually foreseen and anticipated. Petitioner
Sicam’s testimony, in effect, contradicts petitioners’ defense of
fortuitous event.
Robbery per se, just like carnapping, is not a fortuitous event. It
does not foreclose the possibility of negligence on the part of
herein petitioners. CA did not err in finding that petitioners are
guilty of concurrent or contributory negligence as provided in
Article 1170 of the Civil Code.
Article 2123 of the Civil Code provides that with regard to
pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis. The provision on pledge,
particularly Article 2099 of the Civil Code, provides that the
creditor shall take care of the thing pledged with the diligence of a
good father of a family. This means that petitioners must take care
of the pawns the way a prudent person would as to his own
property.
Sicam's admission that the vault was open at the time of robbery is
clearly a proof of petitioners' failure to observe the care, precaution
and vigilance that the circumstances justly demanded. Petitioner
Sicam testified that once the pawnshop was open, the combination
was already off. Considering petitioner Sicam's testimony that the
robbery took place on a Saturday afternoon and the area in BF
Homes Parañaque at that time was quiet, there was more reason for
petitioners to have exercised reasonable foresight and diligence in
protecting the pawned jewelries. Instead of taking the precaution to
protect them, they let open the vault, providing no difficulty for the
robbers to cart away the pawned articles.
 TMBI v. Feb Mitsui Marine Insurance Co
Basis of the action: Contract of shipment (Sony and TMBI) and
Subcontract for transport (TMBI and BMT Trucking) and
Insurance contract for goods (Sony and Mitsui)
Why? The goods were ―hijacked‖ by the driver of BMT Trucking.
Defense of TMBI: Insists that Robbery is a fortuitous event.
Ruling: The theft or the robbery of the goods is not considered a
fortuitous event or a force majeure. Nevertheless, a common
carrier may absolve itself of liability for a resulting loss: (1) if it
proves that it exercised extraordinary diligence in transporting and
safekeeping the goods; or (2) if it stipulated with the shipper/owner
of the goods to limit its liability for the loss, destruction, or
deterioration of the goods to a degree less than extraordinary
diligence.
However, a stipulation diminishing or dispensing with the common
carrier’s liability for acts committed by thieves or robbers who do
not act with grave or irresistible threat, violence, or force is void
under Article 1745 of the Civil Code for being contrary to public
policy. Jurisprudence, too, has expanded Article 1734’s five
exemptions. De Guzman v. Court of Appeals47 interpreted Article
1745 to mean that a robbery attended by "grave or irresistible
threat, violence or force" is a fortuitous event that absolves the
common carrier from liability.
Despite the subcontract, TMBI remained responsible for the cargo.
Under Article 1736, a common carrier’s extraordinary
responsibility over the shipper’s goods lasts from the time these
goods are unconditionally placed in the possession of, and received
by, the carrier for transportation, until they are delivered, actually
or constructively, by the carrier to the consignee.
That the cargo disappeared during transit while under the custody
of BMT – TMBI’s subcontractor – did not diminish nor terminate
TMBI’s responsibility over the cargo. Article 1735 of the Civil
Code presumes that it was at fault.
34 | P a g e
Instead of showing that it had acted with extraordinary diligence,
TMBI simply argued that it was not a common carrier bound to
observe extraordinary diligence. Its failure to successfully establish
this premise carries with it the presumption of fault or negligence,
thus rendering it liable to Sony/Mitsui for breach of contract.
Specifically, TMBI’s current theory – that the hijacking was
attended by force or intimidation – is untenable. First, TMBI
alleged in its Third Party Complaint against BMT that Lapesura
was responsible for hijacking the shipment. Further, Victor Torres
filed a criminal complaint against Lapesura with the NBI.50 These
actions constitute direct and binding admissions that Lapesura stole
the cargo. Justice and fair play dictate that TMBI should not be
allowed to change its legal theory on appeal. Second, neither
TMBI nor BMT succeeded in substantiating this theory through
evidence. Thus, the theory remained an unsupported allegation no
better than speculations and conjectures. The CA therefore
correctly disregarded the defense of force majeure.
Whether the Asian financial crisis constitute a fortuitous event
which would justify delay by petitioners in the performance of
their contractual obligation?
Fil Estate v. Sps. Ronquillo
Basis of the action: Reservation Application Agreement for a
condo unit at Central Park Place Tower owned by petitioners
Why? Upon learning that construction works had stopped,
respondents likewise stopped paying their monthly amortization.
Claiming to have paid a total of ₱2,198,949.96 to petitioners,
respondents through two (2) successive letters, demanded a full
refund of their payment with interest.
Defense/s: Petitioners attributed the delay in construction to the
1997 Asian financial crisis which can be considered as fortuitous
event.
Ruling: The Court cannot generalize that the Asian financial crisis
in 1997 was unforeseeable and beyond the control of a business
corporation. It is unfortunate that petitioner apparently met with
considerable difficulty e.g. increase cost of materials and labor,
even before the scheduled commencement of its real estate project
 as early as 1995. However, a real estate enterprise engaged in the
pre-selling of condominium units is concededly a master in
projections on commodities and currency movements and business
risks. The fluctuating movement of the Philippine peso in the
foreign exchange market is an everyday occurrence, and
fluctuations in currency exchange rates happens everyday, thus,
not an instance of caso fortuito.
Hence, the non-performance of petitioners’ obligation entitles
respondents to rescission under Article 1191 of the New Civil
Code. More in point is Section 23 of Presidential Decree No. 957,
the rule governing the sale of condominiums, which provides:
Section 23. Non-Forfeiture of Payments. No installment payment
made by a buyer in a subdivision or condominium project for the
lot or unit he contracted to buy shall be forfeited in favor of the
owner or developer when the buyer, after due notice to the owner
or developer, desists from further payment due to the failure of the
owner or developer to develop the subdivision or condominium
project according to the approved plans and within the time limit
for complying with the same. Such buyer may, at his option, be
reimbursed the total amount paid including amortization interests
but excluding delinquency interests, with interest thereon at the
legal rate.
Conformably with these provisions of law, respondents are entitled
to rescind the contract and demand reimbursement for the
payments they had made to petitioners.
F. Remedies for Breach of Obligations
Usual Question: Will the action prosper?
Factor to consider: Is the plaintiff the injured party?
Q: A filed an action for rescission against B. Will the action prosper?
A: It depends on whether the plaintiff is THE INJURED PARTY.
35 | P a g e
Whether a party who violated the terms of the contract may insist the
performance of the contract or to recover damages?
Boysaw v. Interphil Promotions
Basis of the action: Contract to engage Gabriel "Flash" Elorde in a boxing
contest for the junior lightweight championship wherein it was agreed upon
that: ―it would be held at the Rizal Memorial Stadium in Manila on
September 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 Promotions, Inc.‖
Why? Boysaw and Yulo sued Interphil for breach of contract since the fight
contemplated in the contract did not materialize.
Defense/: Interphil argued that petitioners violated the contract when
Boysaw fought a match in Las Vegas and there was assignment and transfer
of the managerial rights over Boysaw without the knowledge or consent of
Interphil.
Ruling: 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. "Reciprocal obligations are those which arise from the same
cause, and in which each party is a 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."
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.
On the issue pertaining to the violation of the May 1, 1961 fight contract,
the evidence established that the contract was violated by appellant Boysaw
himself when, without the approval or consent of Interphil, he fought Louis
Avila on June 19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this
fact during the trial. Another violation of the contract in question was the
assignment and transfer, first to J. Amado Araneta, and subsequently, to
appellant Yulo, Jr., of the managerial rights over Boysaw without the
knowledge or consent of Interphil.
The refusal of appellants 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.
On the validity of the fight postponement, the violations of the terms of the
original contract by petitioners vested the respondents 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 the respondents’ rights.
1. Extrajudicial remedies
a. Expressly granted by law
b. Stipulated
Whether a party may resort to rescission without court intervention?
UP v. De Los Angeles
Basis of the action: UP and Alumco Logging Agreement which states that:
―the latter was granted exclusive authority, for a period starting from the
date of the agreement to 31 December 1965, extendible for a further period
of five (5) years by mutual agreement, to cut, collect and remove timber
from the Land Grant, in consideration of payment to UP of royalties, forest
fees.‖
Why? UP rescinded their agreement due to failure on the part of ALUMCO
to pay the fees despite its continuous cutting of timber
Defenses/s: UP's unilateral rescission of the logging contract, without a
court order.
36 | P a g e
Ruling: Yes, UP may rescind the contract. UP and ALUMCO had
expressly stipulated in the "Acknowledgment of Debt and Proposed Manner
of Payments" that, upon default by the debtor ALUMCO, the creditor (UP)
has "the right and the power to consider, the Logging Agreement as
rescinded without the necessity of any judicial suit."
It must be understood that the act of 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. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own behalf,
and bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the responsible
party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it
resolved or rescinded, and act accordingly, without previous court action,
but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the
action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file
suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to
passively sit and watch its damages accumulate during the pendency of the
suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages
(Civil Code, Article 2203).
In this case, the complaint of petitioner made out a prima facie case of
breach of contract and defaults in payment by respondent ALUMCO, to the
extent that the court below issued a writ of preliminary injunction stopping
ALUMCO's logging operations, and repeatedly denied its motions to lift the
injunction; that it is not denied that the respondent company had profited
from its operations previous to the agreement; that the excuses offered in
the second amended answer, such as the misconduct of its former manager
Cesar Guy, and the rotten condition of the logs in private respondent's pond,
which said respondent was in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on their face sufficient
excuse for non-payment; and considering that whatever prejudice may be
suffered by respondent ALUMCO is susceptibility of compensation in
damages, it becomes plain that the acts of the court a quo in enjoining
petitioner's measures to protect its interest without first receiving evidence
on the issues tendered by the parties, and in subsequently refusing to
dissolve the injunction, were in grave abuse of discretion, correctible by
certiorari, since appeal was not available or adequate. Such injunction,
therefore, must be set aside.
Whether a party may resort to rescission despite the absence of such
stipulation in the contract?
NCLPI v. Lica and PROTON
Ruling: YES. It is true that NCLPI and LMI’s Contract of Lease does not
contain a provision expressly authorizing extrajudicial rescission. LMI can
nevertheless rescind the contract, without prior court approval, pursuant to
Art. 1191 of the Civil Code.
Art. 1191 provides that the power to rescind is implied in reciprocal
obligations, in cases where one of the obligors should fail to comply with
what is incumbent upon him. Otherwise stated, an aggrieved party is not
prevented from extrajudicially rescinding a contract to protect its interests,
even in the absence of any provision expressly providing for such right.
We are aware of this Court’s previous rulings in Tan v. Court of Appeals,
Iringan v. Court of Appeals, and EDS Manufacturing, Inc. v. Healthcheck
International, Inc., for example, wherein we held that extrajudicial
rescission of a contract is not possible without an express stipulation to that
effect.
The seeming "conflict" between this and our previous rulings, however, is
more apparent than real.
Whether a contract provides for it or not, the remedy of rescission is always
available as a remedy against a defaulting party. When done without prior
judicial imprimatur, however, it may still be subject to a possible court
review.
In Golden Valley Exploration, Inc. v. Pinkian Mining Company, we
explained:
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This notwithstanding, jurisprudence still indicates that an
extrajudicial rescission based on grounds not specified in the
contract would not preclude a party to treat the same as rescinded.
The rescinding party, however, by such course of action, subjects
himself to the risk of being held liable for damages when the
extrajudicial rescission is questioned by the opposing party in
court. This was made clear in the case of U.P. v. De los Angeles,
wherein the Court held as follows:
Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by
the proper court. If the other party denies that rescission is
justified, it is free to resort to judicial action in its own behalf, and
bring the matter to court. Then, should the court, after due hearing,
decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary
case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was
not correct in law. x x x (Emphasis and underscoring in the
original)
The only practical effect of a contractual stipulation allowing
extrajudicial rescission is "merely to transfer to the defaulter the
initiative of instituting suit, instead of the rescinder."
In fact, the rule is the same even if the parties’ contract expressly
allows extrajudicial rescission. The other party denying the
rescission may still seek judicial intervention to determine whether
or not the rescission was proper.‖
Having established that LMI can extrajudicially rescind its contract with
NCLPI even absent an express contractual stipulation to that effect, the
question now to be resolved is whether this extrajudicial rescission was
proper under the circumstances.
As earlier discussed, NCLPI’s non-payment of rentals and unauthorized
sublease of the leased premises were both clearly proven by the records. We
thus confirm LMI’s rescission of its contract with NCLPI on account of the
latter’s breach of its obligations.
2. Judicial Remedies
a. Principal remedies
Whether dismissal of petitioner will warrant rescission under Art. 1191
as a principal remedy?
Universal Food Corp v. CA
Basis of the action: Bill of Assignment: Right to use Mafran Trademark
and Formula and stipulating among other things that he be the Chief
Chemist and Second Vice-President of UFC and shall have absolute control
and supervision over the laboratory assistants and personnel and in the
purchase and safekeeping of the chemicals used in the preparation of said
Mafran sauce and that said positions are permanent in nature.
Why? Magdalo Francisco (Chief Chemist) wanted to rescind the Bill of
Agreement due to his dismissal by UFC
Defense/s: UFC contends that rescission of the Bill of Assignment should
be denied, because under article 1383, rescission is a subsidiary remedy
which cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same.
Ruling: The general rule is that 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 circumstance.
Petitioner’s contention that Magdalo Francisco’s petition for rescission
should be denied because under Article 1383 of the Civil Code of the
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Philippines rescission can not be demanded except when the party suffering
damage has no other legal means to obtain reparation, was of no merit
because ―it is predicated on a failure to distinguish between a rescission for
breach of contract under Article 1191 of the Civil Code and a rescission by
reason of lesion or economic prejudice, under Article 1381, et seq.‖ 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.
As expressed in the old Latin aphorism: "Non servanti fidem, non est fides
servanda." 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 Articles 1383
and 1384. But the operation of these two articles is limited to the cases of
rescission for lesion enumerated in Article 1381, and does not, apply to
cases under Article 1191.
However, in this case the dismissal of the respondent patentee Magdalo V.
Francisco, Sr. as the permanent chief chemist of the corporation is a
fundamental and substantial breach of the Bill of Assignment. He was
dismissed without any fault or negligence on his part. Thus, apart from the
legal principle that the option — to demand performance or ask for
rescission of a contract — belongs to the injured party, the fact remains that
the respondents-appellees had no alternative but to file the present action for
rescission and damages. It is to be emphasized that the respondent patentee
would not have agreed to the other terms of the Bill of Assignment were it
not for the basic commitment of the petitioner corporation to appoint him as
its Second Vice-President and Chief Chemist on a permanent basis; that in
the manufacture of Mafran sauce and other food products he would have
"absolute control and supervision over the laboratory assistants and
personnel and in the purchase and safeguarding of said products;" and that
only by all these measures could the respondent patentee preserve
effectively the secrecy of the formula, prevent its proliferation, enjoy its
monopoly, and, in the process afford and secure for himself a lifetime job
and steady income. The salient provisions of the Bill of Assignment,
namely, the transfer to the corporation of only the use of the formula; the
appointment of the respondent patentee as Second Vice-President and chief
chemist on a permanent status; the obligation of the said respondent
patentee to continue research on the patent to improve the quality of the
products of the corporation; the need of absolute control and supervision
over the laboratory assistants and personnel and in the purchase and
safekeeping of the chemicals and other mixtures used in the preparation of
said product — all these provisions of the Bill of Assignment are so
interdependent that violation of one would result in virtual nullification of
the rest.
RULES ON DETERMINING IF RESCISSION IS UNDER ART.. 1191
OR 1383:
1. There is a need to look the allegations of the complaint.
2. Then, determine the cause of action.
a. If breach of obli, Art. 1191;
b. If lesion or econ injury, Art. 1383.
Whether a creditor may demand performance despite exercising the
remedy of resolution?
Magdalena Estate v. Myrick
Basis of the action: Contract of Sale of Lot: ―providing that the price of
P7,953 shall be payable in 120 equal monthly installments of P96.39 each
on the second day of every month beginning the date of execution of the
agreement‖
Why? Due to Cyrick’s default, the vendor notified the vendee that, in view
of his inability to comply with the terms of their contract, said agreement
had been cancelled as of that date, thereby relieving him of any further
obligation thereunder, and that all amounts paid by him had been forfeited
in favor of the vendor, who assumes the absolute right over the lots in
question.
Defense/s: The contract, being a bilateral agreement, in the absence of a
stipulation permitting its cancellation, may not be resolved by the mere act
of the petitioner.
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Ruling: NO, when Magdalena rescinded the contract there was
extinguishment of obligation on the pary of Myrick. The obligations arising
from the contract of sale being reciprocal, such obligations are governed by
article 1124 of the Civil Code which declares that the power to resolve, in
the event that one of the obligors should not perform his part, is implied.
Upon the other hand, where, as in this case, the petitioner cancelled the
contract, advised the respondent that he has been relieved of his obligations
thereunder, and led said respondent to believe it so and act upon such belief,
the petitioner may not be allowed, in the language of section 333 of the
Code of Civil Procedure (now section 68 (a) of Rule 123 of the New Rules
of Court), in any litigation the course of litigation or in dealings in nais, be
permitted to repudiate his representations, or occupy inconsistent positions,
or, in the letter of the Scotch law, to "approbate and reprobate."
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. The claim, therefore, of the petitioner that it has the right to
forfeit said sums in its favor is untenable. Under article 1124 of the Civil
Code, however, he may choose between demanding the fulfillment of the
contract or its resolution. These remedies are alternative and not cumulative,
and the petitioner in this case, having to cancel the contract, cannot avail
himself of the other remedy of exacting performance.
As a consequence of the resolution, the parties should be restored, as far as
practicable, to their original situation which can be approximated only by
ordering, as we do now, the return of the things which were the object of the
contract, with their fruits and of the price, with its interest (article 1295,
Civil Code), computed from the date of the institution of the action.
Q: Whether the remedy of rescission may be availed in case of Contract to
Sell?
A: It depends on whether the obligation to deliver arises. (Swire Realty v.
Yu and Olivarez Realty v. Castillo)
Swire Realty v. Jayne Yu
Basis of the action: Contract to sell of a condo unit.
Why? Despite full payment for the unit and making DP for parking area,
petitioner failed to complete and deliver the unit. Hence, respondent filed
for Complaint for Rescission.
Ruling: YES since the obligation of the seller to deliver the unit arises
when the buyer already complied with his obligations. Article 1191 of the
Civil Code sanctions the right to rescind the obligation in the event that
specific performance becomes impossible. Basic is the rule that the right of
rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the
reciprocity between them. The breach contemplated in the said provision is
the obligor’s failure to comply with an existing obligation. When the
obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to
determine the period of compliance, the court shall decree the rescission.
In the instant case, the CA aptly found that the completion date of the
condominium unit was November 1998 but was extended to December
1999 as per License to Sell No. 99-05-3401 dated May 8, 1999. However, at
the time of the ocular inspection conducted by the HLURB ENCRFO, the
unit was not yet completely finished as the kitchen cabinets and fixtures
were not yet installed and the agreed amenities were not yet available.
From the foregoing, it is evident that the report on the ocular inspection
conducted on the subject condominium project and subject unit shows that
the amenities under the approved plan have not yet been provided as of May
3, 2002, and that the subject unit has not been delivered to respondent as of
August 28, 2002, which is beyond the period of development of December
1999 under the license to sell. Incontrovertibly, petitioner had incurred
delay in the performance of its obligation amounting to breach of contract
as it failed to finish and deliver the unit to respondent within the stipulated
period. The delay in the completion of the project as well as of the delay in
the delivery of the unit are breaches of statutory and contractual obligations
which entitle respondent to rescind the contract, demand a refund and
payment of damages.
Olivarez Realty v. Castillo
40 | P a g e
Ruling: NO since the obligation of the seller did not arise when the buyer
failed to fulfill his obligation. In contract to sell, if the condition is not
fulfilled, the obligation of the seller would not even arise. Hence, there is
nothing to rescind.
In both contracts to sell and contracts of conditional sale, title to the
property remains with the seller until the buyer fully pays the purchase
price. Both contracts are subject to the positive suspensive condition of the
buyer’s full payment of the purchase price.
In a contract of conditional sale, the buyer automatically acquires title to the
property upon full payment of the purchase price. This transfer of title is
"by operation of law without any further act having to be performed by the
seller. In a contract to sell, transfer of title to the prospective buyer is not
automatic. "The prospective seller [must] convey title to the property
[through] a deed of conditional sale."
The distinction is important to determine the applicable laws and remedies
in case a party does not fulfill his or her obligations under the contract. In
contracts of conditional sale, our laws on sales under the Civil Code of the
Philippines apply. On the other hand, contracts to sell are not governed by
our law on sales but by the Civil Code provisions on conditional
obligations.
Specifically, Article 1191 of the Civil Code on the right to rescind
reciprocal obligations does not apply to contracts to sell. As this court
explained in Ong v. Court of Appeals, failure to fully pay the purchase price
in contracts to sell is not the breach of contract under Article 1191. Failure
to fully pay the purchase price is "merely an event which prevents the
[seller’s] obligation to convey title from acquiring binding force." This is
because "there can be no rescission of an obligation that is still nonexistent,
the suspensive condition not having [happened]."
In this case, Castillo reserved his title to the property and undertook to
execute a deed of absolute sale upon Olivarez Realty Corporation’s full
payment of the purchase price. Since Castillo still has to execute a deed of
absolute sale to Olivarez RealtyCorporation upon full payment of the
purchase price, the transfer of title is notautomatic. The contract in this case
is a contract to sell.
As this case involves a contract to sell, Article 1191 of the Civil Code of the
Philippines does not apply. The contract to sell is instead cancelled, and the
parties shall stand as if the obligation to sell never existed.
In this case, however, Castillo delivered the possession of the property to
Olivarez Realty Corporation prior to the transfer of title. We cannot order
the reimbursement of the installments paid.
In Gomez v. Court of Appeals, the City of Manila and Luisa Gomez entered
into a contract to sell over a parcel of land. The city delivered the property’s
possession to Gomez. She fully paid the purchase price for the property but
violated the terms of the contract to sell by renting out the property to other
persons. This court set aside the contract to sell for her violation of the
terms of the contract to sell. It ordered the installments paid forfeited in
favor of the City of Manila "as reasonable compensation for [Gomez’s] use
of the [property]" for eight years.
In this case, Olivarez Realty Corporation failed to fully pay the purchase
price for the property. It only paid ₱2,500,000.00 out of the ₱19,080,490.00
agreed purchase price. Worse, petitioner corporation has been in possession
of Castillo’s property for 14 years since May 5, 2000 and has not paid for
its use of the property.
Whether a party may rescind the contract in the absence of any notice
given to the other party?
Palay Inc v. Clave
Basis of the action: Contract to Sell a parcel of Land wherein Paragraph 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 one month, without need of notice and
with forfeiture of all installments. paid.
Why? PR failed to pay and it was only after 6 yrs from date of last payment
that he wrote petitioner offering to update all his overdue accounts with
interest.
Defense/s: Rescission made by petitioner was void in the absence of either
judicial or notarial demand.
41 | P a g e
Ruling: A judicial action for the rescission of a contract is not necessary
where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the cited
cases, there was at least a written notice sent to the defaulter informing him
of the rescission. In other words, resolution of reciprocal contracts may be
made extrajudicially unless successfully impugned in Court. If the debtor
impugns the declaration, it shall be subject to judicial determination.
In this case, private respondent has denied that rescission is justified and has
resorted to judicial action. It is now for the Court to determine whether
resolution of the contract by petitioners was warranted.
The Court held that resolution by petitioners of the contract was ineffective
and inoperative against private respondent for lack of notice of resolution.
The indispensability of notice of cancellation to the buyer was to be later
underscored in Republic Act No. 6551 when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place
after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value to
the buyer.
The contention that private respondent had waived his right to be notified
under paragraph 6 of the contract is neither meritorious because it was a
contract of adhesion, a standard form of petitioner corporation, and private
respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty
of choice has been fully accorded. 9 Moreover, it is a matter of public
policy to protect buyers of real estate on installment payments against
onerous and oppressive conditions. Waiver of notice is one such onerous
and oppressive condition to buyers of real estate on installment payments.
As a consequence of the resolution by petitioners, rights to the lot should be
restored to private respondent or the same should be replaced by another
acceptable lot. However, considering that the property had already been
sold to a third person and there is no evidence on record that other lots are
still available, private respondent is entitled to the refund of installments
paid plus interest at the legal rate of 12% computed from the date of the
institution of the action.
When will a breach be considered as substantial to warrant rescission
of the contract? Is 4 months delay in payment considered a substantial
breach despite 9 years of payment?
Angeles v. Calasanz
Basis of the action: Contract to sell a piece of land
Why? Defendants cancelled the said contract because the plaintiffs-
appellees failed to meet subsequent payments pursuant to par 6 of the
contract which grants the seller right to cancel it.
Defense/s: Petitioner argues that par 6 of the contract is contrary to law
insofar because it granted the sellers an absolute and automatic right of
rescission.
Ruling: Article 1191 is explicit. In reciprocal obligations, either party the
right to rescind the contract upon the failure of the other to perform the
obligation assumed thereunder. Moreover, there is nothing in the law that
prohibits the parties from entering into an agreement that violation of the
terms of the contract would cause its cancellation even without court
intervention.
It is not always necessary for the injured party to resort to court for
rescission of the contract when the contract itself provides that it may be
rescinded for violation of its terms and condition is not absolute. However,
the right to rescind the contract for non-performance of one of its
stipulations is not absolute. As held in UFC v. CA, the general rule is that
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.
In this case, the defendants state that the plaintiffs violated the contract
because they failed to pay the August installment, despite demand, for more
than four (4) months. The breach of the contract adverted to by the
defendants-appellants is so slight and casual when we consider that apart
from the initial downpayment of P392.00 the plaintiffs had already paid the
monthly installments for a period of almost nine (9) years. In other words,
in only a short time, the entire obligation would have been paid.
Furthermore, although the principal obligation was only P 3,920.00
excluding the 7 percent interests, the plaintiffs- appellees had already paid
an aggregate amount of P 4,533.38. To sanction the rescission made by the
defendants-appellants will work injustice to the plaintiffs- appellees. It
42 | P a g e
would unjustly enrich the defendants. Article 1234 of the Civil Code also
militates against the unilateral act of the defendants-appellants in cancelling
the contract.
Moreover, the plaintiffs were correct that when the defendants, instead of
availing of their alleged right to rescind, have accepted and received
delayed payments of installments, though the plaintiffs have been in arrears
beyond the grace period mentioned in paragraph 6 of the contract, the
defendants-appellants have waived and are now estopped from exercising
their alleged right of rescission.
b. Subsidiary remedies
c. Ancillary remedies
Pilipinas Bank v. IAC
Basis of the action: Par (e) of their Contract to sell states that: ―The
contract shall be considered automatically rescinded and cancelled and of
no further force and effect upon failure of the vendee to pay when due, three
or more consecutive installments as stipulated therein or to comply with any
of the terms and conditions thereof, in which case the vendor shall have
right to resell the said parcel of land to any person interested, forfeiting
payments made by the vendee as liquidated damages.‖
Why? PR filed Complaint for Specific Performance with Damages to
compel petitioner to execute a deed of sale in their favor, and to deliver to
them the title of the lot in question.
Defense/s: Petitioner claimed that Contract to Sell has been automatically
rescinded or cancelled by virtue of PR’s failure to pay the installments due
in the contract under the automatic rescission clause.
LC/IAC: Ruled in favor of PR stating that petitioner could not rescind the
contract to sell, because: (a) petitioner waived the automatic rescission
clause by accepting payment on September 1967, and by sending letters
advising private respondents of the balances due, thus, looking forward to
receiving payments thereon;
Ruling: Yes, the petitioner waived the automatic rescission clause. While it
is true that in the leading case of Luzon Brokerage Co., Inc. vs. Maritime
Building Co, the Supreme Court reiterated among other things that a
contractual provision allowing "automatic rescission" (without prior need of
judicial rescission, resolution or cancellation) is VALID, the remedy of one
who feels aggrieved being to go to Court for the cancellation of the
rescission itself, in case the rescission is found unjustified under the
circumstances, still in the instant case there is a clear WAIVER of the
stipulated right of "automatic rescission," as evidenced by the many
extensions granted private respondents by the petitioner. In all these
extensions, the petitioner never called attention to the proviso on "automatic
rescission."
Central Bank v. CA
Basis of the action: 80K Loan agreement covered by REM. The Island
Savings Bank filed application for EJF of REM for Tolentino’s failure to
pay the 17K covered by PN.
Why? Tolentino filed petition for specific performance or rescission and
damages alleging that the Bank failed to deliver the bal of 63K of the loan.
Defense/s: Failure of Bank to deliver the balance was due to CB Reso
which prohibited Island Savings Bank from doing further business.
Ruling: When Island Savings Bank and Sulpicio M. Tolentino entered into
an P80K loan agreement on April 28, 1965, they undertook reciprocal
obligations. In reciprocal obligations, the obligation or promise of each
party is the consideration for that of the other and when one party has
performed or is ready and willing to perform his part of the contract, the
other party who has not performed or is not ready and willing to perform
incurs in delay (Art. 1169).
The promise of Tolentino to pay was the consideration for the obligation of
Island Savings Bank to furnish the loan. When Tolentino executed a REM,
he signified his willingness to pay the loan. From such date, the obligation
of Island Savings Bank to furnish the P80K loan accrued.
The Board Resolution No. 1049 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63K
balance because said resolution merely prohibited the Bank from making
new loans and investments, and nowhere did it prohibit island Savings Bank
from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not
discharge the obligation of the contract, nor does it constitute any defense to
43 | P a g e
a decree of specific performance. And, the mere fact of insolvency of a
debtor is never an excuse for the non-fulfillment of an obligation but
'instead it is taken as a breach of the contract by him.
The fact that Tolentino demanded and accepted the refund of the pre-
deducted interest amounting to P4,800 for the supposed P80K loan covering
a 6-month period cannot be taken as a waiver of his right to collect the
P63K balance. The act of Island Savings Bank, in asking the advance
interest for 6 months on the loan, was improper considering that only P17K
out of the P80K loan was released. A person cannot be legally charged
interest for a non-existing debt. Thus, the receipt by Tolentino of the pre-
deducted interest was an exercise of his right to it, which right exist
independently of his right to demand the completion of the P80K loan. The
exercise of one right does not affect, much less neutralize, the exercise of
the other.
The alleged discovery by Island Savings Bank of the over-valuation of the
loan collateral cannot exempt it from complying with its reciprocal
obligation to furnish the entire P80,000.00 loan. 'This Court previously
ruled that bank officials and employees are expected to exercise caution and
prudence in the discharge of their functions. It is the obligation of the bank's
officials and employees that before they approve the loan application of
their customers, they must investigate the existence and evaluation of the
properties being offered as a loan security. The mere reliance by bank
officials and employees on their customer's representation regarding the
loan collateral being offered as loan security is a patent non-performance of
this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral,
the bank shall bear the risk in case the collateral turn out to be over-valued.
The representation made by the customer is immaterial to the bank's
responsibility to conduct its own investigation.
Since Island Savings Bank was in default in fulfilling its reciprocal
obligation under their loan agreement, Tolentino, under Article 1191 of the
Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited
from doing further business by Monetary Board Resolution No. 967, the
Court cannot grant specific performance in favor of Tolentino.
Rescission is the only alternative remedy left. However, that rescission is
only for the P63,000.00 balance of the loan, because the bank is in default
only insofar as such amount is concerned. As far as the partial release of
P17K which Tolentino accepted and executed a promissory note to cover it,
the bank was deemed to have complied with its reciprocal obligation to
furnish a P17K loan. The promissory note gave rise to Tolentino's
reciprocal obligation to pay the P17K loan when it falls due. His failure to
pay the overdue amortizations under the promissory note made him a party
in default, hence not entitled to rescission (Article 1191 of the Civil Code).
If there is a right to rescind the promissory note, it shall belong to the
aggrieved party, that is, Island Savings Bank. If Tolentino had not signed a
promissory note setting the date for payment of P17K, within 3 years, he
would be entitled to ask for rescission of the entire loan because he cannot
possibly be in default as there was no date for him to perform his reciprocal
obligation to pay.
Since both parties were in default in the performance of their respective
reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Tolentino failed to comply with his
obligation to pay his P17K debt within 3 years as stipulated, they are both
liable for damages.
Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the liability
of Island Savings Bank for damages in not furnishing the entire loan is
offset by the liability of Sulpicio M. Tolentino for damages, in the form of
penalties and surcharges, for not paying his overdue P17,000.00 debt. The
liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall
not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that
he should account for the interest thereon.
However,, the REM of Tolentino cannot be entirely foreclosed to satisfy his
P 17K debt. The consideration of the accessory contract of real estate
mortgage is the same as that of the principal contract. For the debtor, the
consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or
unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
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The fact that when Tolentino executed his REM, no consideration was then
in existence, as there was no debt yet because Island Savings Bank had not
made any release on the loan, does not make the real estate mortgage void
for lack of consideration. It is not necessary that any consideration should
pass at the time of the execution of the contract of real mortgage. lt may
either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the
debt secured by it is created as a binding contract to pay. And, when there is
partial failure of consideration, the mortgage becomes unenforceable to the
extent of such failure.
Since Island Savings Bank failed to furnish the P63,000.00 balance of the
P8O,000.00 loan, the real estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence
the real estate mortgage covering 100 hectares is unenforceable to the extent
of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares
subsists as a security for the P17,000.00 debt. 21.25 hectares is more than
sufficient to secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article
2089 of the Civil Code is inapplicable to the facts of this case. The rule of
indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in
this case. Hence, the rule of indivisibility of a mortgage cannot apply.
Unlad Resources v. Dragon, et al
Basis of the action: Petitioner and respondent entered into MOA wherein
the latter, as controlling stockholders of Rural Bank shall allow petitioner to
invest 4.8M in Rural Bank if the form of additional equity. In exchange,
Unlad shall subscribe to a min of 480K person of common or preferred non-
voting shares of stock with total par value of 4.8M and pay up immediately
1.2M pesos for said subscription. That respondents, upon the signing of the
said agreement shall transfer control and management over the Rural Bank
to Unlad Resources.
Why? Unlad Resources has failed and refused to comply with their
obligation under the said Memorandum of Agreement when it did not invest
four million eight hundred thousand pesos (P4,800,000.00) in the Rural
Bank in the form of additional equity and, likewise, it failed to immediately
infuse one million two hundred thousand pesos (P1,200,000.00) as paid in
capital upon signing of the Memorandum of Agreement, hence, respondents
filed Complaint for Rescission.
Defense/s: Petitioners question the jurisdiction of the trial court contending
that the issues that respondents raised before the trial court are intra-
corporate in nature and are, therefore, beyond the jurisdiction of the trial
court. They further argue that the action instituted by respondents had
already prescribed, because Article 1389 of the Civil Code provides that an
action for rescission must be commenced within four years. They claim that
the trial court and the CA mistakenly applied Article 1144 of the Civil Code
which treats of prescription of actions in general. Moreover, petitioners
assert that they have fully complied with their undertaking under the subject
Memorandum of Agreement, but that the undertaking has become a legal
and factual impossibility because the authorized capital stock of the Rural
Bank was increased from P1.7 million to only P5 million, and could not
accommodate the subscription by petitioners of P4.8 million worth of
shares. Such deficiency, petitioners contend, is with the knowledge and
approval of respondent Renato P. Dragon and his nominees to the Board of
Directors. Petitioners also argue that the subject Memorandum of
Agreement could not just be ordered rescinded without the corresponding
order for the restitution of the parties total contributions and/or investments
in the Rural Bank.
Ruling: First, the subject of jurisdiction. The main issue in this case is the
rescission of the Memorandum of Agreement. This is to be distinguished
from respondents allegation of the alleged mismanagement and dissipation
of corporate assets by the petitioners which is based on the prayer for
receivership over the bank. The two issues, albeit related, are obviously
separate, as they pertain to different acts of the parties involved. The issue
of receivership does not arise from the parties obligations under the
Memorandum of Agreement, but rather from specific acts attributed to
petitioners as members of the Board of Directors of the Bank. Clearly, the
rescission of the Memorandum of Agreement is a cause of action within the
jurisdiction of the trial courts, notwithstanding the fact that the parties
involved are all directors of the same corporation.
Moreover, The law in force at the time of the filing of the case was
Presidential Decree (P.D.) 902-A, Section 5(b) of which vested the
Securities and Exchange Commission with original and exclusive
jurisdiction to hear and decide cases involving controversies arising out of
intra-corporate relations. Consequently, whether the cause of action stems
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from a contractual dispute or one that involves intra-corporate matters, the
RTC already has jurisdiction over this case.
Article 1389 specifically refers to rescissible contracts as, clearly, this
provision is under the chapter entitled Rescissible Contracts. The
Memorandum of Agreement subject of this controversy does not fall under
the enumeration of rescissible contract. Accordingly, the prescriptive
period that should apply to this case is that provided for in Article 1144.
There is no question that petitioners herein failed to fulfill their obligation
under the Memorandum of Agreement. It is true that respondents increased
the Rural Banks authorized capital stock to only P5 million, which was not
enough to accommodate the P4.8 million worth of stocks that petitioners
were to subscribe to and pay for. However, respondents failure to fulfill
their undertaking in the agreement would have given rise to the scenario
contemplated by Article 1191 of the Civil Code.
Thus, petitioners should have exacted fulfillment from the respondents or
asked for the rescission of the contract instead of simply not performing
their part of the Agreement. But in the course of things, it was the
respondents who availed of the remedy under Article 1191, opting for the
rescission of the Agreement in order to regain control of the Rural Bank.
Having determined that the rescission of the subject Memorandum of
Agreement was in order, the trial court ordered petitioner Unlad Resources
to return to respondents the management and control of the Rural Bank and
for the latter to return the sum of P1,003,070.00 to petitioners.
Mutual restitution is required in cases involving rescission under Article
1191. This means bringing the parties back to their original status prior to
the inception of the contract. This Court has consistently ruled that Art.
1385 applies to rescission under Article 1191
Rescission has the effect of unmaking a contract, or its undoing from the
beginning, and not merely its termination. [16] Hence, rescission creates the
obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be
obliged to restore. To rescind is to declare a contract void at its inception
and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to
abrogate it from the beginning and restore the parties to their relative
positions as if no contract has been made.

Clearly, the petitioners failed to fulfill their end of the agreement, and thus,
there was just cause for rescission. With the contract thus rescinded, the
parties must be restored to the status quo ante, that is, before they entered
into the Memorandum of Agreement.

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