demand A:is it for the

important identity
Elements:
passive (debtor)
to
right
(creditor) or
t he be known?
active of subject
. subject: for
being
togive
do
to or to
not do
able
it
9:No. But
Prestation: the future
2.
-
of
subject
the obligation -mined in

that is required and

Ex. Hit run
driver
but ran
away
-Particular conduct
o Aug. 21, 1980 – RCBC filed a civil case against X to of
-
obligation
indemnity
to

obligations identified
enforce the terms of a Trust Receipt Agreement executed Obligation 3. Juridical
ties: sources
-driver yet has not

on April 1, 1974 which X failed to comply with • A legal bond whereby constraint is laid upon a person or group of
o Mar. 3, 1981 - Summons could not be served to X, so case persons to act or forebear on behalf of another person or group of
was dismissed without prejudice to any future proceedings persons
o Dec. 2, 1988 – RCBC filed another case against X for the • “Persons” – both natural & juridical
same cause of action & subject matter • Requisites for the existence of an obligation: (JOS)
o X contends that the second action filed by RCBC already 1) Juridical tie (vinculum juris) – the efficient cause established by
prescribed the various sources of obligations (e.g. law, contracts, quasi-
• Held: Action did not prescribe, because the filing of the first action contracts)
interrupted the period. The period began to run again on Mar 3. 2) Object – the prestations or conduct required to be observed (to
1981, when the case was dismissed. give, to do or not to do) should definite? YES, puede
it pero in no madetermine
it
can
after g

be determinable?
obligation long as as

3) Subject-persons – viewed from demandability: Ex:Harvest:

there's obligation give pero depende
to

so tuborg
Summary Charts for Extinctive Prescription a. Active – obligee creditor of Obligation:prestation
Object crops
in the

b. Passive - obligor debtor

future young

Objectof prestation: ibibigcy

do
depends to
if give or to

Art. 1157. Sources of Obligation. before itcould be

should be an obligation
Obligations arise from:
there
that
presumed.
never
say the law must
demandable
contracts
L (1) The law
than 5k, need written
w orth m o re
o f donation (it
Contract nadedeli
Formal contract: obligation kapag
di po
(doesn't create an

C (2) Contracts
pledge
Real Contract:contraco
t f

QC (3) Quasi-contracts
D (4) Acts or omissions punished by law (delicts)

①D (5) Quasi-delicts

Sources
• List is exclusive – no other sources of obligations
• Kinds:
something that * 1) Civil – give a right of action to compel their performance
can be enforced
2) Natural – not based on positive law, but on equity & natural law
in court
o Does not grant a right of action to enforce their
performance
o BUT after voluntary fulfillment by the obligor, they authorize
the retention of what has been delivered or rendered by
reason thereof
BOOK IV: OBLIGATIONS AND CONTRACTS Art. 1158. Law as a Source of Obligation.
Obligations derived from law are not presumed. Only those expressly
TITLE I. – OBLIGATIONS determined in this Code or in special laws are demandable, & shall be
regulated by the precepts of the law which establishes the; & as to what has
CHAPTER 1. GENERAL PROVISIONS not been foreseen, by the provisions of this Book.
Art. 1156. Obligation Defined. Law
An obligation is a juridical necessity to give, to do or not to do. • Most important source of obligation

21 | Katrina Gaw | Block C 2018

 • An exaction or command that is forced upon you; not dependent on according to their nature, may be in keeping with good faith, usage
the will of the parties & the law
• Basis must be clear & cannot be presumed
o The payment of taxes must be specifically directed by tax CASE: Perla Compania de Seguros, Inc v. CA
statutes • Lesson: Contracts have the force of law between the parties, & the
o Parents & children are obliged to support each other court cannot change its stipulations & substitute the content with

E o Even a 1-page labor contract contains the entire Labor

Code
o “Do not kill” – NOT an obligation in as understood in
its own interpretation, even if some provisions seem unfair, for as
long as the essential requisites for validity are present
• Facts:
OBLICON o There was an insurance contract which stipulated that the
• Existing law enters into & forms part of a valid contract without insurer’s liability for all damages arising out of death or
need for the parties expressly making references thereto bodily injury by one person was limited to P12,000
o A contract is understood to incorporate therein the o It also said that, before the insured enters into a contract
provisions of law specifying the obligations of the parties with the injured party, the express written consent of the
under the contract insurer must be obtained
o All other forms of obligations also have underlying statutes o CA substituted these provisions with their own
governing them interpretation of equity
• Held: CA was mistaken. Contracts are the private laws between the
Art. 1159. Contract as a Source of Obligation. contracting parties & should be fulfilled according to the literal
Obligations arising from contracts have the force of law between the sense of their stipulations, for as long as the stipulations are clear
contracting parties and should be complied with in good faith. & leave no room for doubt as to the intention of the parties

Components of a Contract Art. 1160. Quasi-contract as a Source of Obligation.

1) Complying in good faith - unwritten; implied Obligations derived from quasi-contracts shall be subject to the provisions
2) Observing the stipulations in the contract – expressly written of Chapter 1, Title XVII, of this Book.

Contracts Quasi-contracts notcontracts no consent ->

• There are express, implied, oral & written contracts • Certain lawful, voluntary & unilateral acts to the end that no one
• A meeting of the minds between 2 persons whereby one binds shall be unjustly benefited or enriched at the expense of another
himself, with respect to another, to give something or to render • Examples:
some service o Solutio indebiti – obligation to return what was obtained by
paid
A the bill when

o May involve more than 2 persons the yet

bill is mistake paymentby
not due.
mistake

o May involve mutual & reciprocal obligations & duties A

can claim
! When something is received when there is no
reimbursement

by
between & among the parties payment
right to demand it & it was unduly delivered by
since is
it a

mistake

• “Force of law between contracting parties” = obligatory nature of a mistake, the obligation to return it arises
binding & valid agreement
o Willful non-fulfillment may involve sanctions Art. 1161. Delicts as Sources of Obligation.
o Binding between the parties so long as they are not Civil obligations arising from criminal offenses shall be governed by the
contrary to law, morals, good customs, public policy or penal laws, subject to the provisions of Art. 2177, & of the pertinent
public order provisions of Ch. 2, Preliminary Title, on Human Relations, & of Title XVIII of
• Once a contract is perfected, the parties are bound not only by what this Book, regulating damages.
is expressly stipulated, but also to all the consequences which,
Requisites of Obligations in Relation to Delicts

22 | Katrina Gaw | Block C 2018

 1. Juridical Tie – crime committed ! Art. 34 – When a member of a city or municipal
do
2. Prestation – to give damages give, do, police force refuses or fails to render aid or
to
to
not
to

3. Subject – obligor (offender); obligee (victim) protection to any person in case of danger to life
or property
Civil Liability in Criminal Liability o Title XVIII of the Civil Code – the rules covering damages
• Civil liability attaches to any individual who is found to be criminally ! Rules laid down in other laws shall likewise apply
liable so long as they are not inconsistent with the Civil
• Civil Code Statutes on Damages: Code
o Art. 2176 – defines quasi-delicts: “whoever by act or
b ack
omission causes damage to another, there being fault or Art. 1162.
it
Restitution:to bring negligence, is obliged to pay for the damage done” Obligations derived from quasi-delicts shall be governed by the provisions of
Reparation:repair ! Art. 2177 - the plaintiff shall not be entitled to Chapter 2, Title XVII of this Book & by special laws.
Indemnification:pay value of
thing recover damages twice for the same act or
omission of the defendant even if the negligence Quasi-delicts
Even ifn ot criminally liable, may constitute an entirely different cause of • Whoever by act or omission causes damage to another, there being
he can
be
still
liable
civilly action fault or negligence & no pre-existing contractual relation, is obliged
the quantum
of
o Art. 19-36 which give a person or persons cause of action to pay for the damage done.
-
because

proofin criminal
cases is
for filing damage suits (requires only preponderance of
differentfrom civil
cases
evidence) CHAPTER 2. NATURE & EFFECT OF OBLIGATIONS.
reasonable
! Art. 29 – When accused is acquitted because he
aim: proof beyond
-

is not proved guilty beyond reasonable doubt, civil Art. 1163.

doubt
action for the same act may be instituted Every person obliged to give something is also obliged to take care of it with
civil:proof of preponderance
-

• If the judgment of acquittal is based on the proper diligence of a good father of a family, unless the law or the
of evidence
reasonable doubt, the court shall so stipulation of the parties requires another standard of care.
declare or it may be inferred from the text
of the decision Determinate Object Real:to give
do,
to to give
• Art. involves prestation “to give”
n ot
personal:to do,
! Art. 30 – When a separate civil action is brought
n ot

arising from a criminal offense & no criminal • “Something” – refers to a determinate object which is definite,
proceedings are filed during the pendency of the known & has already been distinctly decided & particularly
civil case specified as the matter to be given from among the same things
! Art. 32 – Violation of enumerated constitutional belonging to the same kind
rights can make one liable for damages, whether • Ex.: Computer with serial no. 7777 (not just any kind of computer)
or not the act constitutes a criminal offense
• Exempition: when the crime is committed Good Father of a Family
by a judge, unless his act is a violation of • Once the determinate thing is specified as the object of the
the Penal Code or other penal statutes prestation, the person whose duty is to give the object must take
! Art. 33 – An entirely separate & distinct action care of it
from the criminal case can be filed for civil • Synonymous with “ordinary diligence”
damages in cases of: • If the law or contract does not state the diligence required, the
• Defamaton diligence of a good father of a family is required
• Fraud o Varies if the law or stipulation requires another standard of
• Physical Injuries care

23 | Katrina Gaw | Block C 2018

 ! In case of a contrary stipulation, it CANNOT be one ! W/N the right to the delivery has accrued in favor
contemplating the relinquishment or waiver of the of the creditor is irrelevant
most ordinary diligence ! The aggrieved creditor can go against the debtor
o Ex.: Common carriers – persons, corporations, firms or for damages
associations engaged in the business of carrying or ! Even personal right grants a demandable right
transporting passengers or good or both, by land, water or • Real right – The power belonging to a person over a specific thing,
air, for compensation, offering their services to the public without a passive subject individually determined, against whom
• Bound to observe “extraordinary such right may be personally exercised.
diligence” in the vigilance over the goods o Prior to the delivery of the object, there is no real right yet
& passengers for the future receiver
• Generally, negligence must be proven. o Enforceable & binding against the whole world over the
But in cases requiring extraordinary objects & its fruits in favor of the person to whom it should
diligence, negligence is presumed. be given
o No definite debtor; passive subject
SITUATION o Will prejudice anybody claiming the same object of the
• Facts: X has to deliver an apple to Y with X’s name on it & X’s spit, prestation.
as promised. Lightning struck & the apple with the spit was o General rule: delivery creates real right
deliver crises
destroyed.
to
Gwhen
does obligation

• Answer: The obligation is extinguished, because the apple was a Kinds of Fruits A: depends
It
contract
• Natural – things that naturally grow
of

specific object (X’s apple with his name & spit) that was destroyed v
from
+ 8c
=
perfection
arrives/condition happens
by a fortuitous event. • Civil – rentals product commercial
of transaction
xc x +
ter m
moment
=

• Reverse: If the apple was just “an apple” then obligation is not • Industrial – hard work, labor =x: Nagtanim Kang pechay
extinguished, because it is generic.
SITUATION
Art. 1164. • Facts: X & Y signed a contract where Y will give X a pen. The
The creditor has a right to the fruits of the thing from the time the obligation contract is valid & perfected. Who owns it now?
to deliver it arises. However, he shall acquire no real right over it until the • Answer: Still Y, because the pen was not yet delivered to X.
same has been delivered to him.
SITUATION
Real & Personal Right • Facts: B sold Lot Z to C. After having done so, B then sold the same
• The Art. involves a prestation “to give” Lot Z to D. Who has the real right over Lot Z?
• Personal right – the power of one person to demand from another, • Answer: Neither C or D, because delivery was still not made to
as a definite passive subject, the fulfillment of a prestation to give, either.
to do or not to do. • Note: When it comes to real property, whoever registers it has the
o Begins when the right to deliver the object of the prestation better right.
has risen in favor of the creditor
o Enforceable only against the debtor under obligation to SITUATION
give • Facts:
o With a passive, definite debtor o Feb. 1– A buys a mango orchard from X, to be delivered on
o Can be defeated by a 3rd person in good faith who has March 1
innocently acquired the property prior to the scheduled ! On March 1, A shall have the right to the fruits of
delivery the mango orchard

24 | Katrina Gaw | Block C 2018

 him a
If I
promised
to
X give
creditor when debtor fails to
comply:
Remedies of the
still
phone the
but phone is

agreed take care

starts when the party duty to
imported abroad. I
being

promise
to
to deliver until delivered
don'thave
the obligation to
~ demand specific performance
perfected contract yet I cancellation
(there's already a preserve
demand rescission
~ 24
first
Incidental obligations without
with
or
~ demand damages
Preserve I take care

fruits of
o If the property is delivered only on April 1, A can still ask for
·Deliver the

the thing
the fruits accruing since March 1 SITUATION
·
Deliver accessories
and ! If X sells the fruits on March 20 to B who does not • Facts: For P50, X will give Y a fruit. Is there a contract?
accessions know of the previous sale to A & who immediately • Answer: NO. The object must be either generic or determinate. A
takes possession of the fruits, B shall have the fruit is neither, so no contract is formed.
better right over the fruits Need to o The fruit must at least be a species of its own—an apple,
• Reason: There is still no delivery of the specify! for instance—to be considered generic
property to A on March 20, so A has no Example:Ai s obliged B this Before delivery, an earthquake
give
to car.

real right over it Fortuitous Events Actof God destroyed Obligation deliver the
extinguished car. to is

• A’s remedy is to seek damages from X • An event which could not be foreseen, or which though foreseen,
! If the mango orchard has already been delivered Since lost, if the book can
it's it
was inevitable Example:
B book. generic, is
obliged give A
is to a even

be replaced by obligation
others.extinguished
Thus, the is not

as of March 20, A has a real right over the fruits • General rule: debtors are relieved from obligation “to give” if the
• If X sells the fruits to B after delivery to A, object is lost through a fortuitous event
A can recover from B • HOWEVER, a fortuitous event will not excuse the obligor from the
• B can seek damages from X obligation: ordinary delay:non-performance
stipulated at the time

1) If the obligor delays, or default:virtual nonfulfillment obligation o f the

ordinary
Art. 1165. 2) If he has promised to deliver the same thing to 2 or more If obliged, liable *

and not
delay
When what is to be delivered is a determinate thing, the creditor, in addition persons who do not have the same interest if forfitous event
to the right granted him by Art. 1170, may compel the debtor to make the • In both exceptions, the obligor will be liable. He will either: destroys

delivery. o Be liable for damages, or I f demand, default *

liable
be
If the thing is indeterminate or generic, he may ask that the obligation be and must

o Will be bound to replace the lost object of the prestation in for damages in

complied with at the expense of the debtor. cases when the obligee agrees to the replacement of fortitous case
event

If the obligor delays, or has promised to deliver the same thing to 2 or more
persons who do not have the same interest, he shall be responsible for any Art. 1166.
Limited Generic
fortuitous event until he has effected the delivery. The obligation to give a determinate thing includes that of delivering all its
one
is
that

individualized
accessions & accessories, even though they may not have been mentioned.
not

is
but
Generic & Determinate Objects
determinate
Accession:w h ateve r built
or planted Alluvion of course of river
is change
• XProvision involves the prestation “to give”; object can be
by
Explanation BPS
X
cow owned the of islands
a
belong
Industrial:o n the land formation
to
if there2. stipulation
Natural:Avulsion is
in the warehouse of 1.
land
sack rice owner the
of

determinate or generic
of

• The principal always includes its accessories & accessions said effect, to

replaceable • Generic – any object belonging to the same kind/class/species necessary

not • Accession – something produced by the object of an obligation accessories
and accessions

to
In the event of non-delivery, the creditor can have it do have
be o
principal object
(pregnant dogs producing puppies)
not
to
cannot
be included
Examples: pointed accomplished in any legal way & charge the debtor
out
• Accessories – something joined to the object (radio in a car)
a car particularity
o Creditor can ask 3rd party to deliver the same thing of the
with
purposesaware principal object t

a 2020 BMW

color black Specific same kind with all expenses paid by debtor Art. 1167. Obligations “To Do”. Remedies of creditor

• Determinate – an object that is definite, known & has already been If the person obliged to do something fails to do it, the same shall be
if debtor fails to do:

the
distinctly decided & particularly specified as the matter to be given
to have
executed at his cost.
1.

obligation performed
Examples: from among the same things belonging to the same kind This same rule shall be observed if he does it in contravention of the tenor at debtor's expense
·this car

owned by Sept
o Remedy in case of non-delivery is to file an action for
A on 2020 of the obligations. Furthermore, it may be decreed that what has been obtain
2. to

specific performance to compel the debtor to make the

the car

car with
plate
1814 (2020)
no. poorly done be undone. damages

this particular picture

Hazel
delivery
of

inmy
book o If the debtor is guilty of delay, fraud, negligence or Art. 1168. Obligations “Not to Do”. Ex

contravention in the performance of the obligation, the When the obligation consists in not doing & the obligor does what has been disclosing
info
creditor can seek damages forbidden, it shall also be undone at his expense.

be ordered undone:
25 | Katrina Gaw | Block C 2018 NOTE:Specific performance is not
a
When a thing may
remedy personal obligations;otherwise, another and damages)
in
1. If made poorly (may demand performance by
this to forced labor
may amount
impossible)
which is prohibited under the constitution
2. t he
If obligation is negative (provided the undoing is
 (3) When demand would be useless, as when the obligor has
Rules on “To Do” rendered it beyond his power to perform.
• The creditor can ask any 3rd person to perform the obligation due In reciprocal obligations, neither party incurs in delay if the other does not
should the debtor fail to do it comply or is not ready to comply in a proper manner with what is incumbent
o Debtor will be liable for all the expenses thereof upon him. From the moment one of the parties fulfills his obligation, delay
• When the debtor poorly undertook the obligation, the creditor has by the other begins.
the right to have everything undone at the expense of the debtor
Provision Breakdown
“Not to Do” • Par. 1 – general rule
• If he performs the act despite the obligation, it can be undone at • Par. 2 – exceptions
his own expense • Par. 3 – reciprocal obligations
• Par. 2 & 3 – require no judicial or extrajudicial demand
CASE: Chaves v. Gonzales • Par. 1 & 2 – usually, to be performed at different times (e.g. Effects:

• Lesson: The remedies of a person who has hired another to do purchaser pays carpenter in advance to go to his house & repair may 1

interests
be liable for

something, such as to repair a typewriter, when such is done poorly later) 2. bear the risk of loss

or not done at all: • Par. 3 – simultaneous; normal, everyday transactions (e.g. buying 3, liable
even for a

1) Damages pens from a store) ( forfitous event

to
only applies
2) File a suit o When you buy something, it is immediately given to you a determinate

3) Have it executed at the other’s cost Delay negative obligations

Reside, andteachersand required
enforceable,
unless not

obligation for due

• Facts: • Kinds of delay: obligations

natural 2. non-performance
4. demand be
must

o X was hired to repair Y’s typewriter "stific t o Mora solvendi – delay or default committed by debtor
would only be in

performance
/ i t failed to

o When Y demanded for his typewriter, X returned it with payment

o Mora accipiendi – delay or default in acceptance
default

comply judicial
from or
arises

missing parts & without having it repaired 2.Obligation

delicto
(result
ofa
committed by creditor
crimes
extra-judicial demands
o Y had another company fix the typewriter, then sued X to
ex

3.Improper
refusal oft he
! Debtor can consign whatever is due to the creditor
lesson

obligate him to pay for the repair to accept

tendered by
the rents
in court if the circumstances warrant
• Held: X is liable & must pay for the cost of the execution of the the lessee
• Delay in the performance of an obligation must be either malicious
obligation, which is the cost of the labor expended on the repair of or negligent
the typewriter. He is also liable for the cost of the missing parts, o If the delay was due only to inadvertence without malice or
because he was also bound to return the typewriter in the same negligence, the obligor is not liable under Art. 1170
condition it was when he received it. • General rule: delay begins from the moment the creditor demands
the performance of the obligation
Art. 1169. o Without judicial (e.g. commencement of a suit) or
Those obliged to deliver or to do something incur in delay from the time the extrajudicial (e.g. notice) demand, the effects of default will
obligee judicially or extrajudicially demands from them the fulfillment of not arise
their obligation.
However, the demand by the creditor shall not be necessary in order that Demand
delay may exist: • General rule: for an obligation to become due, there must be a
(1) When the obligation or the law expressly so declares; demand
(2) When from the nature and the circumstances of the obligation it • Must be a DEMAND
appears that the designation of the time when the thing is to be o Ex.: “We request for you to pay” is not a demand
delivered or the service is to be rendered was a controlling motive o Absent express demand, one cannot make another party
for the establishment of the contract; or liable for damages

Demand be
may
26 | Katrina Gaw | Block C 2018 i s filed
specific complaint
. Judicial:when a

cour t proceedings
2. Extrajudicial:without
 a valid demand:
characteristics of

be
must
a categorical demanding the obligation
1. There
compels
that performance
- be
must something
has reached max demand
the
that obligee
- be
must shown

- An obligor is liable for damages for delay not from the time the
order
catagorical • 1) Ejectment cases – before a lessor ejects a lessee, the
object is to be delivered, but from the time of extra-judicial or lessor must first make an extrajudicial demand for the
judicial demand lessee to vacate the premises
o Damages for delay accrue from time of demand, not o Without extrajudicial demand, suit will be dismissed
delivery date 2) Consignment cases – the debtor must first make an
o Ex.: X was supposed to deliver a house to Y on Nov. 19, but extrajudicial demand for the creditor to accept payment
doesn’t. Is X liable for delay? o If creditor unjustifiably refuses to accept payment, the
! NO, there must still be judicial or extrajudicial debtor can now consign the amount in court to
demand extinguish his obligation
• Art. 1169 applies only in obligations to do something other than the o If there is no extrajudicial demand, the consignment
payment of money case will be dismissed
o In obligations to pay money, Art. 2209 applies ! UNLESS tender of payment prior to consignment
when damages
interests
or
! When the debtor incurs in delay, the indemnity for need not be made pursuant to the law
lost:
may be damages, absent any contrary stipulations, will be
is allowed to “In Delay” means “In Default” breach of the obligation
. principal obligation the payment of the interest agreed upon 12%
! If there is no stipulation, the legal interest of ,
6% • When the law uses the phrase “in delay”, it means “in default”
lapse by prescription
per annum will apply o Mere delinquency in payment does not necessary mean
to prescribe
2. allowed
o The interest replaces the damages delay in the legal concept
3. Condoned o Default begins after extrajudicial or judicial demand • To be in default – involves the beginning of a special condition or
! UNLESS the contract stipulates from what time status which has its own peculiar results & effects
interest will be counted
• Interest will become payable from such Requisites of Default
time, & not the date of the filing of the 1) Obligation is demandable & already liquidated
complaint A 2) The debtor delays performance
! If no interest is stipulated or a date is not given, 3) Creditor requires the performance judicially or extrajudicially -> demand
interest will begin to run only from demand o Default generally begins from the moment the creditor
• Extrajudicial demand is not a prerequisite for filing an action demands the performance of the obligation
o An action can be filed at anytime after the non-compliance
of the other party because the cause of action of will When Demand is Not Necessary
always start from such time. 1) When the obligation expressly so declares
o HOWEVER, damages or interest shall start to run only after o Ex.: When a promissory note providing payment shall be made
judicial or extra-judicial demand. on a particular date without necessity of demand makes the
o Ex.: If the obligation is due on Mar. 1, 1998, the aggrieved debtor in default upon his failure to pay on a particular date
party can file suit for specific performance immediately o Ex.: Law expressly declares that taxes to be paid to the
after Mar. 1, 1998 government should be made on a particular date
! If, without any extrajudicial demand from the 2) When time is of the essence in a particular contract
obligor, suit is filed on Apr. 15, 1998, damages o Ex.: In stock market transactions made in the stock exchange,
will be reckoned only from Apr. 15 time is of the essence such that there is no need of demand
! If, however, extrajudicial demand was made on before the delivery of the shares of stock ought to be made by
Mar. 15 & suit subsequently field on Apr. 15, the seller.
damages will be reckoned from Mar. 15 o Ex.: If a contract stipulates that a special car is to be delivered
• 2 cases where an extrajudicial demand should first be made prior to the obligee to be used solely for a particular parade at a
to filing a civil suit:

27 | Katrina Gaw | Block C 2018

 particular time, such as an exhibit in a one-day car fair to be oThe obligation of one is a resolutory3 condition of the
held on a particular date obligation of the other, the non-fulfillment of which entitles
o CASE: Bargaza v. CA the other party to rescind the contract
! Lesson: Time is of the essence when the supplier is o Ex.: A contract of loan – the promise of the borrower to pay
aware that that an item is to be used for a specific is the consideration of the obligation of the bank to furnish
date for a specific purpose the loan
! Facts: o Ex.: Contract of sale, lease
o A contract was entered into in time for the • Where one of the parties to a contract does not perform the
delivery of materials on Dec. 22, 1990, in undertaking which he is bound by the terms of the agreement to
time to construct a niche for the petitioner’s perform, he is NOT entitled to insist upon the performance of the
wife’s grave. other party
o The wife had expressed that she wanted to be o For failure of the other party to assume & perform the
buried before Christmas day. obligation imposed upon him, the other party does not
o The supplier, despite knowing the timetable & incur in delay
having been paid, failed to make the delivery • CASE: Binalbagan Tech., Inc. v. CA
despite pleas & earnest follow-ups of the o Facts:
widower ! Buyer X purchased a house from seller Y.
o As a result, the crypt could not be constructed ! Through no fault of seller Y, a third party-claimant,
on time for Christmas Z, through a court order, evicted X from the said
! Held: Supplier is liable for both the delay & the breach place
3) When it would be useless, as when the obligor has rendered it • As a result, X was not able to take
beyond his power to perform possession of the property that he bought
o Ex. A debtor promised to constitute his house as a collateral for from the seller for 8 years
4. Obligor has a particular loan which is payable at a particular date. But • X also did not pay the balance of the
expressly acknowledged before the debtor could make the mortgage, he donates the purchase price during the 8-year period
house to his friend. ! The judicial decree of eviction was later reversed
he is really
that
! Demand from the creditor to constitute the house as a by the court, allowing the buyer to retake
in default collateral would now be useless. In this case, the possession of the property
debtor’s obligation becomes immediately demandable o Held: Y cannot rescind the contract for failure of the X to
considering that he loses his right to the period within pay
which to pay the loan ! Even if the eviction was not Y’s fault, Y was not in
a legal position to demand compliance of the
Reciprocal obligations prestation of X to pay the price. Y’s right to
• Those created & established at the same time, out of the same demand payment was suspended during that
cause period.
• Results in the mutual relationship of creditor & debtor between the o CASE: Agcaoili v. GSIS
parties ! Facts:
• In reciprocal obligations, the performance of one is conditioned • GSIS & Agcaoili entered into a contract of
upon the simultaneous fulfillment of the other sale of a government housing unit on the
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
3 Rights & obligations come into existence immediately upon agreement between the parties. If

a resolutory condition is fulfilled, the operation of the rights & obligations cease.
!
28 | Katrina Gaw | Block C 2018
 condition that Agcaoili should occupy the o X also insists that Y bear his own
same within 3 days from receipt of the loss
notice. ! Held: When the windmill failed to function properly
o Failure to immediately occupy it became incumbent upon petitioner to institute
contractually allowed the GSIS to the proper repairs in accordance with the guaranty
terminate the contract. in the contract. Thus, Y cannot be said to have
• Agcaoili, upon receipt of the notice, incurred in delay; instead, it is X who should bear
immediately went to the place & found a the expenses for the reconstruction of the
house in a state of incompleteness that windmill
civilized occupation was not possible, &
that even basic amenities were non- Art. 1170. Sources of Liability.
existent. Those who in the performance of their obligations are guilty of fraud,
• Agcaoili paid the 1st monthly installment, negligence, or delay, & those who in any manner contravene the tenor
but refused to make further payments thereof, are liable for damages.
until the housing unit was complete
• GSIS cancelled the award & told him to Awarding of Damages Incidental:committed in the

vacate the premises. • Sources of Liability: an obligation

performance
of

! Held: GSIS had no right to rescind the same dow o Fraud malice dishonesty
or

because it failed to do its part in the obligation. It alpa o Negligence voluntary, no malice

demanded the buyer’s immediate occupation, yet mora o Delay

the basic amenities were not even ready. o Contravention of the tenor of the obligation
• To say, as the GSIS does, that this was • If any of the 4 co-exist with a fortuitous event or aggravates the loss
what was intended by the parties, since caused by a fortuitous event, the obligor cannot be excused from
the contract did not clearly impose upon it being liable on his obligation Those liable under pay damages,
Art. 1170 should

a side from
• CASE: Bargaza v. CA contract,breach
the obligation to deliver a habitable
if of
but
generally only
caused
o Facts:
was
damage
house, is to advocate an absurdity, the prejudice or

creation of an unfair situation. By any ! A contract was entered by a widower into in time
objective interpretation of its terms, the for the delivery of materials on Dec. 22, 1990, in
contract can only be understood as time to construct a niche for the petitioner’s wife’s
imposing on the GSIS an obligation to grave.
deliver to Agcaoili a reasonably habitable ! The wife had expressed that she wanted to be
dwelling in return for his undertaking to buried before Christmas day.
pay the stipulated price. ! The supplier, despite knowing the timetable &
o CASE: Tanguilig v. CA having been paid, failed to make the delivery
! Facts: despite pleas & earnest follow-ups of the widower
• X & Y entered into a contract for the X’s for
construction of a windmill for P60,000 • The employees were also feckless when
with 1-year guaranty reminded by the widower, indicating gross
• After completion X sued Y for non- 1
negligence on the part of the owner
payment of the balance ! The things were delivered 2½ days later; as a
o Y did not pay because the result, the crypt could not be constructed on time
windmill collapsed due to the for Christmas
defects in the construction o Held: Supplier is liable for both the delay & the breach

29 | Katrina Gaw | Block C 2018

Art 1170: 2. Rate of the penalty
interest

·Following do excuse
not non-fullfilment: -shall be agreed upon

increase in cost performance -in the absence stipulation a particular rate of

1. of of
penalty

2.
poverty interest, then the additional shall
interest be at a rate equal

3. war, as
long as substantial compliance can be done the
to
regular monetary interest

-if no
regular constitutes
interest the price or of
cost the use

Recovery of damages for breach of contract of money

and thus, until the
principal due is returned

-breach of contract:failure to comply without cause

just to the creditor, such continues
interest to accue since the

1. Measure of recoverable damages debtor continues to use such principal account

-one injured shall have fair and compensation

just Note:Usury Law has prescribed that
the rate of for
interest

2. Contractual interests obligee

of or
promise, remedy serves to
preserve
the loan or forbearance of
any money, goods, or credits

-a breach allows injured to

party recover what was lost and the rate allowed in judgements, in the absence of

-remedy serves to
preserve the interests of the promise includes:
that
express as
contract to such rate ofinterest, shall be

a. expectation interest:benefit
ofhis bargain 12% annum
per

b. reliance interest:reimburse for loss

c. restitution interest:resture
any benefit When
negligence:fraud
3. Excuse from ensuing liability
-

negligence shows bad faith or is so gross that

itamounts to

mere
proof of existence of the and
contract the failure of compliance malice, the rules on fraud shall apply

justify the
right to relief when
except he shows due diligence -gross negligence:failure exercise
to even
slight
care or diligence
of of MENTAL
4.
Duty Obliged minimize
to
damages ·kinds Damages

-imposed uponclaimant 1. Moral:anguish,

worry,
and
anxiety
demand of
Exemplary:corrective
-

equity 2.

3. Nominal:vindicate a
right
-
when no other kind ofdamages may

·Damages Recoverable where obligation Pay Money

to be recovered

Penalty for Ventanilla

1. interest
delay or
non-performance v. Centera

recovered under Art damages for indemnification

damages be 110 when the
obligation is It
was held that nominal NOT
-

are
may

do of the loss suffered, for

but the vindication of the
something right
to

-do include of interest violated, the of which is left

to the discretion
not computation assessment

of the court
 4. Temperate: of
amount
exact damages be
can't determined

5. Actual actual losses as well as unrealized profit

beforehand
9. Liquidated:predetermined by agreement

·Damages in
Monetary obligations
for
indemnity damages
-

a.
agreed upon

b. in the absence of agreement, the legal rate interest

of

·
Remedies of Professors and Teachers

provision governing the relative rights of teacher profs

-
no a or

remedy can be found today in RA 1952 (one-month

pay when
 future
fraud may be pasto r
the time commission,
of
According
to
indemnity
generosity right
to
an of
act
be considered as
fraudsvalid
Past waiver can
knows hewordone
that
liability: the obliges

againstlaw andpublicpolicybecause
Future fraud:wid -

Supplier was considered negligence, & also

! • The omission of that diligence which is required by the nature of the
incurred in delay obligation & corresponds with the circumstances of the persons, of
• NOTE: Inadvertent non-compliance will not lead to delay & damages the time & of the place
o Ex.: Forgetting one check out of a series of checks • The want of care required by the circumstances
• In the absence of stipulation, the diligence required is that of a
Refers to Art. 1171. good father of a family (ordinary diligence)
incidental Responsibility arising from fraud is demandable in all obligations. Any • Relative or comparative, rather than an absolute term
fraud waiver of an action for future fraud is void. o Its application depends on the situation of the parties
o Liability can be regulated by the courts depending on the
Classified:
Fraud circumstances
I obtaining consent •When a party complies with or performs an obligation fraudulently, • General rule: negligence must always be proven
rent
2.

performingacar he is liable for damages • Tantamount to FRAUD when there is bad faith (gross negligence)
b.dolo incidente• Ex.: A buys a car from B worth P50,000. After the delivery of the car
misrepresentation
-

by B, A paid B counterfeit money on due date. A is liable for CASE: Syquia v. CA

Evasion:
damages. • Lesson: Liability for negligence is dependent on the nature &
Tox

·fraud through
the use o If the contract of sale stipulated that any fraudulent act by circumstances of a situation; if one thing is done to prevent another
preteness
of
forbidden
and
the other in the performance of his obligation shall not be evil, then there is no negligence
a ground for to file a suit against the other for fraud is a
defect taxes

• Facts:
or
lessen
to ↓
legal right
the

void stipulation.
has
taxpayer
o The personnel of a memorial park company, with the
·

when the
I avoid
them

the amount
• BUT the dolo or fraud which is committed to induce a party to enter consent of the latter, bore a hole on the grave of the
lawpermits
into a contract is not covered in Art. 1171. deceased X during a rainy day to prevent the vault from
o In such a case, the contract would be annullable falling, consequently preventing the earth from caving in
• In Art. 1171, the contract is valid, but in the performance of the and filling-up the grave
same, fraud is committed ! However, the hole made possible the entry of
more water and soil than was natural had there
Art. 1172. been no hole, damaging the vault.
Responsibility arising from negligence in the performance of every kind of • Held: The memorial company was not negligence. Had the company
obligation is also demandable, but such liability may be regulated by the decided not to bore the hole, the vault would have been caved into
courts, according to the circumstances. the earth
Art. 1173. CASE: PNB v. CA
The fault or negligence of the obligor consists in the omission of that • Lesson: Banks must be extremely diligent with the accounts of their
diligence which is required by the nature of the obligation & corresponds -

depositors. While a bank’s negligence may not have been attended

with the circumstances of the persons, of the time & of the place. When with malice and bad faith, nevertheless, if it caused serious anxiety,
negligence shows bad faith, the provisions of Articles 1171 & 2201, embarrassment and humiliation to a depositor, the depositor can
paragraph 2, shall apply. be awarded reasonable moral damages
If the law or contract does not state the diligence which is to be observed in
• Facts:
the performance, that which is expected of a good father of a family shall be
o The bank negligently dishonored the check of the depositor
required.
• Held: This Court has ruled that a bank is under obligation to treat
the accounts of its depositors with meticulous care whether such
Negligence Negligence depends on the nature and circumstances
account consists only of a few hundred pesos or of millions of
of the situation pesos.

30 | Katrina Gaw | Block C 2018

 Article 1172: 3) Limits the liability
to an agreed value UNLESS the shipper declares
. Fraud distinguished from negligence a
higher value and
pays a
higher rate of fright
American President Lines v. Klepper, al.
et

Dolo Culpa The awarded

Court
only the stated
amount in the bill of
lading-
Deliberate intention
Although voluntary, #500, instead of 6,729.50 -
the of
amount actual damages.
to cause damage no deliberate intention klepper elude
cannot its
provisions simply because they prejudice
him, and take advantage of those that
a re beneficial

Liability
from dolo negligence
due to
Liability Ex.No matter how the
negligent carrier may be, will
it
pay
mitigated be reduced 100. But, if
be
can't
may damages only up
to the shipper declares that

the value of his goods is more than $100 and

pays a

future fraud is void future culpa may be allowed higher rate of freight, then
damages be recovered
may
in some certain sense to the extent

3. Rule in contracts of Adhesion

Stipulations re:
negligence greater freedom to stipulate negligence if the
parties are
-
2. on

reckless or purposeful indifference

a. Gross negligence can never be excused because it

is
contrary to on an equal plane

public policy not where

they are
obviously in the case of on
employment
careless mistake

b. Simple negligence in some cases be excused or mitigated transportation contracts

may the
for
contract

2.3 usual kinds stipulation

of in a
lading
of shipping/transporting of

goods
-stipulations on
negligence be
must
strictly construed the
party
1) Exempt
the carrier from all liabilities situated in a
higher or more advantageous position
for damage occasioned by Reason of adhesion one-sided document
loss or its own 4.
why a contract is a
not

negligence Bela CWC v. Planters Products, Inc.

Ex.No matter now

negligent the carrier will be, it
w ill not A of
contract adhesion prepared by corporation
one
party, usually a

be responsible for the

damage caused is generally NOT
a one-sided document
as
long as the
signatory
Limits liability agreed from before
2) the toan valuation is not
prevented studying it
signing
caused, kinds of Classified According of
-no matter how much
damage is the value that 5. Culpa to the source the
obligation
can be recovered is the same a.
culpa contractual:contractual negligence
Ex.No matter how the
negligent carrier will be, and result breach of contract
-

in a

regardless of the value the

of goods, it
will b. Wlpa equilicua:civil negligence
pay

damages only up
to 100 (since this is void, the actual c. civil
negligence:criminal negligence
still be recovered
damages may
G. Distinctions re:3 kinds of Culpa because he did arrive
not safely

1
Criminal if defective
Contractual Aquilliana -
the taxicontained parts, negligence on the of
part

merely incidental direct, substantive, direct, substantive, the

Negligence company
and and
independent independent - instances recklessness
of on the of the driver
part
fast d. entry one-way streets
a. driving on

Obligation pro-existing no
pre-existing no
pre-existing b. flagrantviolations e. intoxication

did f. vehicle
c. not
signal attempt
topass another

Proof preponderance preponderance proof of guilty -

instances of racklessness on the of
part
the owner

of evidence of evidence
beyond reasonable a. fail to repair defective parts
doub b. fail furnish driver
to
competent
Defense of c. fail detect
to a defect
in an
appliance
and and
proper
x proper proper
x
and
good father
v
complete complete complete
family "
of a b. alpa Acquiliana:pedestrian was by
hit a taxi

-
no
existing between
contract
pedestrian and driver

driver and
duty prove until
innocent
bring action both
company
-
to can to
debtor victim
it
-

due drivers,
negligence proven guilty owner can
prove diligence in selection of

he will be
not liable

pedestrian has burden of proof

·

7. Some Illustrative Examples

a. Culpa Contractual:
Passenger of taxi was hurt
due to driver's negligence C.
Gulpa Criminal:Pedestrian was hit
by a taxi

-
there's of
contract between ·

also file criminal action (physical injuries through reckless

a
carriage passenger can

and owner of the taxicab

company imprudence)
of contractual iffound driver
hurt
passenger bring civil culpa guilty, will be
subsidiarily liable is
-
a case owner if
may

the of the taxicab insolvent

against owner
company
-
the
if owner can
prove that
he exercised due diligence in the
-
victim have
just to:

selection and
supervision of the driver, said owner is still 1 judgement
present declaring guilt
of
responsible because the rule
master-servant 2. proof of driver's
insolvency
~

all that
the prove is the existence the
passenger must of

of
contract carriage, and the fact there
that was a breach
·Responsibility
arising from negligence demandable 1173:
Art

the performance of kind of debtor also for

1. In every obligation, the is liable. Test
determining whether a
person is negligent

for damages resulting from his negligence 1. Reasonable care:foresight

of harm

both the fault one the No hard and fast

r ule for degree of care:itis the law
A
2. When parties are
mutually negligent, of cancels 2.
measuring

negligence ofthe other that

considers would
what be reckless or and
negligent determines liability

of of from ·Factors to be considered

·validity waiver action arising negligence
An action for future (not fraud) be renounced obligation (smoking flammable things
-

negligence may where Nature while

except 1. of
carrying

of of the I guard duty)

the nature
obligation requires the exercise
extraordinary diligence 2. Circumstances of
person sleeping on

3. Circumstances of time (driving a car headlights

without at
night
·
Effects negligence
of on the of
part the injured party 4. Circumstances ofthe place (driving 60km/hr on
highway

Q:
Suppose the creditor is also guilty of negligence, can he recover damages? driving
X 60km/hr in MNL when traffic

A: Art 2179 of Civil Code

"When the plaintiff's negligence the immediate and ·Degrees of Culpa

own was
proximate

of he recover damages. But

if his If slight diligence required, is negligence
cause his
injury, cannot
negligence 1. is it
only grave
was
only contributory, he
may recover damages" that
w ill make the debtor liable

the law does that of the defendant

should ordinary diligence required,
not require the negligence 2. If is is
it
only ordinary negligence

be the sole cause of the damage that

w ill make the debtor liable

of
the defense contributory negligence of the injured does not If great
diligence is required, negligence
slight
-

3. even
party

apply in criminal cases where the offense was committed by the accused that
w ill make the debtor liable

through reckless imprudence

·kinds of Diligence

I agreed upon by parties (orally or in writing

2. In the absence of
(1), required by the law

of
NOTE:responsibility a common carrier is EXTRAORDINARY and lasts

from the time the goods are placed in its possession until they

are delivered

3. In the absence (2),

of that
expected of a
good father of a
family
NOTE:In the of
contract common carrier for passengers (like taxi), the law

provides the
that carrier is bound to
carry the passengers

safely

Meaning of a "Contracto fCarriage"

association of obligate themselves transport:
-
to
person or
persons

a
person be things c. news

·
Measure of for damages
liability
1. Civil Provisions

2. Contractual breach committed in good faith/bad faith

When breaching contract, the defendant

is shown
not have
to acted

fraudulently or in bad faith

for damages limited and

liability is to the natural probable
of the breach and which the had foreseen
consequences parties

3. With
respect
to moral damages

damages:suffering inflicted
 o A customer’s check can be wrongfully refused payment were, and removed from the rules applicable to the acts of
without some impeachment of his credit which must in fact God
be an actual injury, although he cannot, from the nature of o This is true even if the immediate cause of damage is the
the case, furnish independent & distinct proof thereof act of God
• General rule: No one should be held liable to account for fortuitous
Bad Faith events
• A state of mind affirmatively operating with furtive design or with or Requisites

some motive of ill will Elements of a Fortuitous Event (Nakpil v. CA)

• Not merely bad judgment or negligence 1) The cause of the breach of the obligation must be independent of
• Synonumous with fraud; involves a design to mislead or deceive the will of the debtor.
another, not prompted by honest mistake as to one’s rights & 2) The event must be either unforeseeable or unavoidable.
duties 3) The event must be such as to render it impossible for the debtor to
• Art. 1171 (on fraud) applies in cases where negligence concurs fulfill his obligation in a normal manner.
with bad faith 4) The debtor must be free from any participation in, or aggravation of
o Pursuant to Art. 2201, par. 2 – obligor shall be responsible the injury.
for all damages which may be reasonably attached to the o If event concurs with fraud, negligence, delay or violation in any
non-performance of the obligation manner of the tenor of the obligation, the obligor cannot
escape liability
Art. 1174. Fortuitous Events.
Except in cases expressly specified by the law, or when it is otherwise CASE: Tanguilig v. CA
declared by stipulation, or when the nature of the obligation requires the • Lesson: The negligence of a party can be “implied” given the
assumption of risk, no person shall be responsible for those events which, circumstances, & from there liability can arise even when coupled
could not be foreseen, or which, though foreseen, were inevitable. with fortuitous events
• Facts:
Fortuitous Events o The contractor construct a windmill, which collapsed due to
• Events which could not be foreseen, or which though foreseen, a typhoon
were inevitable o The contractor was sued for the destruction of the
• Major casus est, cui humana infirmitas resistere non potest - "no windmill, & he resisted liability by invoking that the
one shall be liable for events which could not be foreseen, or which collapse was due to a fortuitous event
having been foreseen were inevitable, with the exception of the • Held: SC ruled that the fact of the typhoon was not proven, due to
cases expressly mentioned in the law or those in which the there only being proof of strong winds; also, windmills are
obligation so declares” constructed to withstand strong winds. It would not have collapsed
• Nemo tenetur ad impossibilia – Nobody can be forced to do the had there not been an inherent defect.
impossible
• An Act of God – an accident due directly & exclusively to natural CASE: Sia v. CA
causes without human intervention, which no amount of foresight, • Lesson: Failing to inform a party of a fortuitous event the one is
pains or care or reasonable expectation, could have been aware of that may lead to an aggravation of said party’s loss, when
prevented given such a responsibility, is tantamount to negligence.
o When the effect, the cause of which is to be considered, is • Facts:
found to be in part the result of the participation of man, o A bank failed to notify its client that there was flooding in a
whether it be from active intervention or neglect, or failure safety deposit box containing the client’s valuable stamp
to act, the whole occurrence is thereby humanized, as it collection

be on the of
part obligor
There
*
must no
previous negligence
could have been avoided. Art
114 be
can't applied
31 | Katrina Gaw | Block C 2018 If
* the loss or injury
 the obligation deliver
to
specific thing extinguished?
:
a
FE +
Negligence is

A:It depends
FE proximate cause extinguished
1.

2. Negligence proximate not

cause: extinguished

o The bank already had 2 previous incidents of flooding in the running of the period agreed upon. It only relieves the
the same deposit box parties from the fulfillment of their respective obligations
o The bank was supposedly guarded 24 hours a day during that time — the planters from delivering sugar cane
• Held: The bank was negligent & aggravated the injury of the and the central from milling it
petitioner, failing to exercise the prudence of a good father of a o To entitle the central to demand the fulfillment of the other
family. party of their part in the contract, the latter must have
been ABLE to perform, but FAILED to do so, not prevented
CASE: Dioquino v. Laureano by a fortuitous event
• Lesson: The essential element of a fortuitous event is that there is
some extraordinary circumstance independent of the will of the SITUATION
obligor. If such exists, then there is no required diligence beyond Facts: If a contracts ends on Nov. 19, 1996, but for 2 months it was
what human care & foresight can provide impossible to perform the object of the contract because of a
• Facts: X gave his car to Y, who was going to register the car. fortuitous event, when will the contract end?
o As Y drove the car to the place of registration, some Answer: Still on Nov. 19, 1996. The requirement to comply to an
mischievous boys threw stones at the car of X, causing obligation need not be done during the period of a fortuitous event.
damage to the car
• Held: The throwing of the stone was a fortuitous event which could CASE: Ace-Agro Development Co. v. CA
not be foreseen by Y, or which, though foreseen, was inevitable; Y • Lesson: A contract of employment cannot be extended
cannot be held liable for damages. even if the laborer was not able to perform some tasks due
to a fortuitous event.
CASE: Victorias Planters Assoc. Inc. v. Victorias Milling Co. • Facts:
• Lesson: Fortuitous event relieves the obligor from fulfilling a o X was engaged by Company Y to clean its bottles
contractual obligation. Parties cannot extend a previous contract by & repair wooden shells inside its plant from
adding to the number of years written in the original contract January 1, 1990 up to December 31, 1990
agreed upon because a fortuitous event prevented fulfillment of the o Due to the burning on April 25, 1990 of the said
original period. plant, the work of X was suspended
• Facts: o X sought an extension of the contract period,
o The contract between the parties stipulated that, in the refusing to work without such extension
event of a fortuitous event, the period provided in the • Held: Extension cannot be granted.
contract for the delivery of certain products shall be o The period during which work was suspended did
suspended not justify an extension of the term.
o The contract was suspended for 6 years due to the war o The contract was subject to a resolutory period
o The central mill wanted to add 6 more years to the contract which relieved the parties of their respective
to make up for the 6-year suspension period obligations but did not stop the running of the
• Held: SC ruled that extending the contract 6 more years was not period of their contract.
allowed given that the suspension was caused by a fortuitous
event. The period of time when the contract was suspended Generic Prestations & Fortuitous Events
CANNOT be deducted from the term of the contract because, to add • When the object is generic (e.g. the payment of money), the debtor
the said years upon the resumption of the contract would in effect cannot avail of the benefit of a fortuitous event
be an extension of the contract o Ex. If the object is the payment of money as a
o The stipulation that in the event of force majeure, the consequence of a loan contract, debtor cannot avail of the
contract shall be deemed suspended during said period, benefit of fortuitous event even if the object for which the
does not mean that the happening of those events stops

32 | Katrina Gaw | Block C 2018

 loaned money is used, such as the construction of a (4) He lends or leases the thing to a 3rd person who is
factory, is wiped out by a typhoon not a member of his household
• No fortuitous event as an excuse for money obligations (5) In applicable situations, being able to save either
the thing borrowed or his own thing, he chose to
Exception to Rule on Fortuitous Events save the latter
• One can still be held liable for fortuitous events when: 2) The stipulation of the parties expressly so stipulates
1) The law so requires o Ex. A contract provides that the obligor shall, within 10
o Art. 1165, par. 3 – when obligor delays, or promises to days, deliver a computer with serial number 2222 & shall
deliver the same thing to 2 or more persons who do not be liable if the computer shall be destroyed by an Act of
have the same interest God for the value of the same.
o Art.1268 – when the debt of a determinate thing proceeds 3) When the nature of the obligation so requires (assumption of
from a criminal offense, the debtor shall not be exempted risk)
from the payment of its price, whatever may be the cause o CASE: Republic v. Luzon Stevedoring
for the loss, unless the thing having been offered by him to ! Lesson: The mere difficulty to foresee the
the person who should receive it, the latter refused without happening of an event is not the same as
justification to accept it impossibility to foresee the same. An event must
o Art. 552 – a possessor in bad faith shall be liable for be impossible to foresee & avoid to constitute a
deterioration or loss in every case, even if caused by a fortuitous event. When precautions are set up by a
fortuitous event company, it could be used as a sign that the event
o Art. 129(6), Family Code - unless the owner had been was, in fact, foreseeable
indemnified from whatever source, the loss or ! Facts:
deterioration of movables used for the benefit of the o A towed barge, which usually traversed
family, belonging to either spouse, even due to fortuitous the river passing the Nagtahan bridge,
event, shall be paid to said spouse from the conjugal funds rammed against one of the wooden piles
o Art. 1919 – if a depository, by force majeure or of the bridge, smashing the post &
government order loses the thing & receives money or causing the bridge to list
another thing in its place, he shall deliver the sum or other o The river was swollen at the time & the
thing to the depositor currents were swift due to heavy
o Art. 1935 – the bailee4 of a commodatum is liable for the downpour in Manila
loss of the thing, even if it should be through a fortuitous o The barge owner contended that it should
event, when: not be held liable for the damage on the
(1) He devotes the thing to any purpose different from bridge as such damage was caused by
that for which it was loaned fortuitous event
(2) He keeps it longer than the period stipulated, or ! He also contended that there
after the accomplishment of the use for which the were many precautions taken &
commodatum has been constituted that the bridge’s construction
(3) The thing loaned has been delivered with appraisal was misplaced
of its value unless there is a stipulation exempting ! Held: These very precautions completely destroy
the bailee from responsibility in case of a the appellant’s defense. For caso fortuito or force
fortuitous event majeure are extraordinary events not foreseeable
or avoidable, events that could not be foreseen, or
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! which, though foreseen, were inevitable. It is
4 One who acquires the use of a thing but not its fruits; if the bailee must pay compensation,
the contract ceases to be a commodatum; it is a loan of chattels (personal property) to be therefore not enough that the event should not
returned without payment for their use

33 | Katrina Gaw | Block C 2018

 have been foreseen or anticipated, as is principal was made because the debtor requested
commonly believed, but it must be one impossible the creditor to apply the payment to the principal
to foresee or to avoid. first)
o There was an assumption of risk, because • The payment of the later installment shall give rise to the
it knew the perils of the swollen river & presumption that prior installments have already been paid.
currents o Fact giving rise to the presumption – payment of later
CentralBank
Circular
799: installment
Article 1175. Usurious Transactions. of is
interest 6%/annum o Presumption made – prior installments have been paid
legal
rate
-

Usurious transactions shall be governed by special laws. o Installment must clearly indicate that it indeed is the latest
installment
Usurious Transactions Usury:exaction excessive interest
of
o Burden of proof – creditor must overturn by showing clear
We don't h ave
• Not regulated or prohibited by the Civil Code; the Usury Law is & strong evidence to the contrary
currently suspended ! CASE: Manila Trading & Supply Co. v. Medina
transactions
usurious

of
anymore because
circular 905,
• Higher
which is
interest rates than that normally set When Art 1176 can't be applied: • Lesson: Receipts should always explicitly
CB
will punished
be
not o Ex.: A 35% per annum interest rate is not against the law, Reservation
interest
as
to state date of payment to give rise to
why people 1.

for imposing
higher
than 6%
interests
though
much,
it may be iniquitous in character -
reservation may
be made writing presumption that prior installments have
in

too
However,
the
if
•
reduce
rate is
A special
it
law may regulate, prohibit or allow usurious interest verbally
or
been paid (e.g. “This payment is for Jan.
the may
court

2. Receipt for of principal

part a
1945”)
Article 1176. Art
- 117 only applies the receipt
• Facts:
to

The receipt of the principal by the creditor, without reservation with respect of LAST
installment the of o X made a purchase from Y,
to the interest, shall give rise to the presumption that said interest has been ENTIRE capital
his
paying by installment.
creditor waived
paid. -implies the that
first
o X presented numerous receipts
payment the
The receipt of a later installment of a debt without reservation as to prior right apply to

then the principal to

to prove his payments, some of
installments, shall likewise raise the presumption that such installments which, according to the court,
interest
the to

paid installment
particular
have been paid. were partly spurious & partly
indication of
3. Receipt without

4. Payment
taxesof
genuine
installments
Presumptions o X insists that, even if some
not
taxes payable by
year the are
-

2 kinds:
• Presumptions always arise from a set of facts 5.
Non-payment proven
receipts are spurious, the
.
Conclusive:
• likeTo have probative value, presumptions must be provided by law receipts found to be genuine
-
be contradicted
can't
that
o Once facts are proven, then the presumption of law will were allegedly made in Jan.
everyone
presumption Pari 1957, after the issuance of the
the
law
attach 1st
with 80% interest, received spurious receipts; thus, the
knows the
o Will hold as true unless rebutted creditor of IM
A
Disputable
2.

be contradicted
by evidence
in the payment of Principal. Interest was presumption that the prior
IM
installments had been paid
can

Presumptions in Art. 1176 not referred in the payment.

to
It is

• When an obligation consists in the payment of principal with the 80% interest had already already should arise
presumed that Held: SC rejected this contention, stating
interest •
been previously paid. that this might be true if such receipts
o Fact giving rise to presumption – payment of principal as rule a
of the interest
without reservation as to the interest -payment recited that they were issued for the
o Presumption made – interest has already been paid precedes payment installments corresponding to the month
o Burden of proof – creditor must show interest has not of Jan., 1957; but nowhere does that fact
2nd Par: appear
been paid the 4th
! Can be rebutted by strong evidence to the contrary If a creditor receives o Also, it would just give rise to a
(e.g. it can be shown that the payment of the installment of debt, ita
i s understood
presumption, which could be
installments have
the
that
3
first

34 | Katrina Gaw | Block C 2018 been paid

 Art 1175: 14% per annum:more than 500

·kinds of Interests 2. Legal rate (when no rate is

expressly stipulated in
writing (

Compensation (borrowing and back interest

with -12% as directed by Central Bank Circular

r paying
.
money per annum a

1
2.
Way of
damages (compensates damage caused

1. Simple Crate
interest stipulated by parties compute
*
from
interest
judicial and extra-judicial demand

2. Compound (interest
interest earned is upon duel
interest

↳ 3. Legal interest (presumed by law)

A
4. Lawful interest) within max allowed by usury
law

5. Unlawful interest (beyond max fixed

by law

Requisites for
monetary
·

interest
recovery of

interest:fixed
-monetary by parties

-compensatory interest:imposed
by law or
by courts

For interest
may be recovered: Monetary and
Compensatory:
monetary

stipulated 6%
*
interest:i fthere's
1
expressly an
agreement

be
must but
no interest stated
2. agreement in
writing was

3. interest be
must lawful

Definition of loan (mutuum)

simple

-one of the delivers another the

parties to
money or other consumable
things upon

condition that the kind

the same amount
of same and shall
quality be
paid

·
Interest
Rules:

Lawful rates (authorized rates) ->

under former
1. max
usury

12% real estate

per annum:whole
title is recorded
a. or in
by
part a
mortgage, of

b. 14% loan scored

per annum: is not

c. For pawnshops:
·
2 12% a month:sum lent
is less than $500

2 % a month:#100 -
7500
 When
family home is notexempted

Rights which
inherent be
cannot exercised by creditors. Judicial family home

existence of taxes
1. to
Right c. non-payment
debt
character positions)
(gout b. satisfaction of
a
judgement
on a secured by a

2. Relations of a public
mortgage constituted on the immovable before or after the
of honorary character (law degree)
3. Rights of fam home

""""""
establishment the
to home and family overturned by clear evidence that creditor’s rights in collecting later on from the
4. Rights pertaining

>)$*Sjsitant
the payments made do not debtor
correspond to the installments o Creditor’s right is still a personal right to receive
falling due on the dates of the red on after such declarine
payment for the loan
C. Right
toappear in proceedings
cour t

genuine receipts
d. debts due to rendered
laborers who service
o A deed of sale would be the transfer of a real right
• BUT the creditor cannot bring those which are inherent in the
Article 1177. person of the obligor
The creditors, after having pursued the property in the possession of the o Action for support – the creditor cannot file an action on
debtor to satisfy their claims, may exercise all the rights and bring all the behalf of the obligor to claim support from the latter’s
actions of the latter for the same purpose, save those which are inherent in parents to satisfy the indebtedness
his person; they may also impugn the acts which the debtor may have done
to defraud them. SITUATION
Facts: X borrowed money from Y. To secure the indebtedness, X mortgages
Protection of Creditors his house. But X was going to sell his lot to Z. Y files an injunction suit to
• The law protects creditors stop me from selling the house. Will it prosper?
• Civil obligations are demandable & enforceable in the court of law Answer: No. The contract between X & Y is merely a contract of loan. There
• Law gives all possible remedies to creditors to satisfy the must first be exhaustion. The first move of Y should be to demand from X
obligations of the obligor extrajudicially or judicially before filing a case for foreclosure.
o The creditor, after exhausting all the means to satisfy his
claim, is given the opportunity to bring all actions which the Art. 1178. Transmissibility of Obligations.
obligor can institute against his own debtors to protect & Subject to the laws, all rights acquired in virtue of an obligation are
satisfy his claims against said obligor transmissible, if there has been no stipulation to the contrary.
o Ultimately, if all else fails, the creditor may also have the
contract rescinded Transmissibility
• Successive measures (remedies) that must be taken by a creditor Exceptions: • General rule: rights growing out of an obligation are transmissible
before he may bring an action for rescission of an allegedly Prohibited by law o Ex.: The transferee of an educational insurance plan,
1.

fraudulent sale: by
partnership originally obtained by a transferor, acquires all the rights of
-
of
contract
contribute money
divide profits the transferor under said plan
/more ppl
1) Exhaust the properties of the debtor through levying by property
2

or
then

attachment & execution upon all the property of the debtor, by

agency ! Transferee can avail of all the bonuses provided
-
of
contract

accion subrogatoria
except such as are exempt by law from execution render
of commadatum
by the plan if the child of the transferee graduates
service

creditor exercises by contract

the debtor2) Exercise all the rights & actions of the debtor, save those with distinction if such right is provided in the
-
-

soa t
rights of

something notunable
deliver
the

in
latter's
the personal to him (accio subrogatoria)
name
contract
3) Seek rescission of the contracts executed by the debtor in Prohibited by • HOWEVER, the person who transmits the right CANNOT transmit
2.

fraud of their rights (accion pauliana) stipulations greater rights than he himself has by virtue of the obligation
accion pauliana o Art 1381(1): a contract entered into by the debtor is o Person to whom it is received also receives no greater
-itis essential that
rescissible if it were made in fraud of creditors when the
the
rights than the transferor had at the time of the
creditor has
otherno
latter cannot in any other manner collect the claim due transmission of the rights
satisfy his
them • May be limited, or altogether prohibited by stipulation of the
to

legal remedy
the debtor
claim against ! CASE: Adorable v. CA – Unless a debtor acted in parties.
fraud of his creditor, the creditor has no right to o Ex.: A contract may stipulation that the assignment of any
rescind a sale made by the debtor to someone on or all rights granted is prohibited.
the mere ground that such sale will prejudice the o Ex.: A less prohibitive provision – not allowed unless the
parties consent
4. Exact payment

35 | Katrina Gaw | Block C 2018

 EX. I promise to
pay you M
no condition
date
demandable oncel
at

and no specific

• ALSO, no transmission of a particular right can be made if the 1) Pure obligation – an unqualified obligation which is demandable
personal qualifications or circumstances of the transferor are the immediately
material ingredient in the obligation o Performance does not depend upon a future or uncertain
o Ex.: An author who specializes in horror stories written in a event, or past even unknown to the parties
very distinct style & who has been engaged by a publisher o Ex.: Bank depositor & bank
to write his (the author’s) kind of horror stories for his o CASE: Pay v. Vda. de Palanca
magazine cannot transmit his rights arising from such ! Lesson: Action to demand compliance to the obligation
obligation to anybody else prescribes if the creditor fails to make a demand within the
• Must be subject to the pertinent laws proper prescriptive period & the contract contains the
o Ex.: If the law prohibits the alienation of homesteads within phrase “upon demand”
5 years from the issuance by the government of the ! Facts:
patent, any transmission of rights of dominion over the • The debtor issued a promissory note to the creditor to
same within the prohibitory period shall be void pay a sum of money payable upon receipt of a
• General rule on real & personal rights particular sum of money from the estate of a certain
o Real rights – transmissible deceased person or upon demand
o Personal rights – not transmissible • The case for collection on the basis of said note was
filed 15 years after the execution of the promissory
SITUATION note
Facts: A lessee to a condominium unit has children. The lessee dies. The ! Held: The action can no longer prosper, since the
lessor tries to eject the kids. Will the case prosper? prescriptive period for filing the action based on a written
Answer: No. Being a lessee is a real & not a personal right, making a document was 10 years & considering that the promissory
contract of lease transmissible. note’s payment constituted a pure obligation & thus
demandable at once.
CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS there
is a o Though there is nothing to indicate the 1st
condition condition occurred, the 2nd provides “upon
SECTION 1. – PURE & CONDITIONAL OBLIGATIONS. before the demand,” which was made much too late
fulfilled
promise 2) Conditional obligation – opposite of a pure obligation
is

Art. 1179. • A condition - an act or event, other than a lapse of time, which,
Characteristics:
Every obligation whose performance does not depend upon a future or unless the condition is excused, must occur before a duty to
Future and uncertain
uncertain event, or upon a past event unknown to the parties, is .
perform a promise in the agreement arises or which discharges
Pastbut unknown
demandable at once. 2.
a duty of performance that has already arisen
Every obligation which contains a resolutory condition shall also be When i s demandable
it once:
o The performance depends upon a future or uncertain
at

demandable, without prejudice to the effects of the happening of the event. whenI pure
is
it
event or upon a past event unknown to the parties
• Its efficacy or obligatory force is subordinated to the happening
2. When it has
Special Notes of a future or uncertain event.
resolutory condition
a

• The end point of an obligation is extinguishment. 3. subjectto resolutory

a period
o Ex.: If X gives Y a pen & Y gives X money, then there will be Kinds of Conditions
no more obligation. 1) Resolutory Condition the happening the condition extinguishes the obligation
of

• The law should really say “future & uncertain”, because for • Once the condition is established and acknowledged, the right
something that happens in the future to be a condition, it should be immediately exists; the obligation concomitant to the right can
unknown be demanded at once
• Once the future or uncertain event happens which constitutes
Kinds of Obligations the condition, it discharges the obligation
if
but fail, will cease
I give you my your ownership
-
1( can now
you
36 | Katrina Gaw | Block C 2018 and w ill
it be mine again
 oObligation is extinguished by operation of law • NOT demandable at once
oBUT such resolution can be made effective at some • Gives rise to the performance of the obligation
later date if the parties so stipulate in their contract, o If the condition does not take place, the parties would
such as when the parties stipulate that resolution stand as if the conditional obligation never existed
becomes effective only from the date written notice • Examples:
thereof is sent o Contract to sell - where, in a purchase of property in
• Examples: installment, it is expressly provided in the contract that
o When the contract provides that a purchaser can title remains vested on the seller until after the last
obtain a refund of their money for as long as the payment of the installment is made by the buyer.
government continues to allow refunds of such a ! Payment = positive suspensive condition
character ! There is no consent relative to the transfer of
! In such a case, the purchaser could have ownership yet, because the seller expressly
immediately asked for a refund reserve the transfer of title until the
! But as soon as the government creates a law happening of the suspensive condition
disallowing the refund, the purchaser can no • Seller – given the unilateral right to
longer do so terminate the contract in case of non-
o Reciprocal obligations – the obligation of one is a payment of the price
resolutory condition of the obligation of the other; the ! Provides a positive suspensive condition
non-fulfillment of which entitles the other party to • Failure to pay is not a breach, causal
rescind the contract or serious; it is simply an event which
o Contract of sale – when there is a breach, there is an prevented the obligation of the owner
option to rescind to convey title from acquiring binding
o You have the right to drive. But the law states that a force
constant violator of traffic laws can have the right of ! Prior to the last payment, the purchaser has
his license revoked. no title to the property.
o When a person donates land to another on the ! However, once the future event, which is the
condition that the latter would build upon the land a payment of the last installment, occurs, the
school, the condition imposed is a resolutory condition obligation of the seller to execute the final
! NOT suspensive in character – the school did deed of sale & to transfer title arises. It is
not have to be constructed for the condition to from that time that the purchaser can
be effective demand transfer of the title.
! The donation had to be valid before the o Conditional contract of sale - where the seller may
fulfillment of the condition. If there was no likewise reserve title to the property subject of the sale
fulfillment, the donation may now be revoked until the fulfillment of a suspensive condition
& all rights which the donee may have ! Non-payment = negative resolutory condition
acquired under it shall be deemed lost & ! There is already consent regarding the
extinguished transfer (unlike in a contract to sell), although
o Obligations where there is the power to rescind are it is conditioned upon the happening of a
resolutory contingent event which may or may not occur.
2) Suspensive Condition happening the condition gives
of the obligationrise to

• Can be demanded only upon the happening of the future or

unknown event or a past event unknown to the parties, which
constitutes the condition
after
the
I'll give you my can only
if bar
I'll buy you pass
a car
you by
that the end
you can prove
37 | Katrina Gaw | Block C 2018 of the
year, you passed all

your subjects
 ! If the suspensive condition is not fulfilled, the When the debtor binds himself to pay when his means permit him to do so,
perfection of the contract is abated the obligation shall be deemed to be one with a period, subject to the
! Further examples: provisions of Art. 1197.
• Contract to sell – There is a building
being developed by Y. Y executes a Differences Conditional Contract of Sale Contract to Sell
contract to sell with X. This means If the The contract of sale is Upon full payment of the
that if building is finished (suspensive suspensive perfected purchase price, contract is not
condition), X & Y can negotiate for a condition is perfected
possible sale. After negotiations, fulfilled
there will be a contract to sell. Transfer of If there was already previous Ownership will not
o When an obligor promises to give an obligee a book if Ownership delivery of the property, automatically transfer to the
it rains the next day, which is an uncertain event ownership automatically buyer although the property
! Obligation arises once it really rains the next transfers to the buyer by may have been previously
day operation of law without any delivered to him. The
o CASE: Javier v. CA further act by the seller prospective seller still has to
! Lesson: When a contract is subject to a convey title to the prospective
suspensive condition, its birth or effectivity buyer by entering into a
can take place only if & when the event which contract of sale
constitutes the condition happens or is
fulfilled. Effect if Sold to The fulfillment of the No double sale, since title will
! Facts: In consideration of rights to a timber a 3rd Person suspensive condition will only transfer to the buyer after
license, the obligor undertook to pay the sum Not a Party to affect the seller’s title registration; a 3rd person
of P30,000 to the obligee as soon as the the Contract thereto, & the seller will no buying such property despite
additional area for forest concession has Despite longer have any title to the fulfillment of the
been obtained by the obligee & approved by Fulfillment of transfer to 3rd third person. suspensive condition such as
the government. The obligee never obtained the Condition the full payment of the
the additional area. Art. 1544 (Civil Code) - such purchase price, cannot be
! Held: Obligor was not liable, as it involves the 2nd buyer of the property deemed a buyer in bad faith;
non-happening of the suspensive condition— cannot be a registrant in the prospective buyer cannot
the approval by the government of the new good faith who may have: seek the relief of
area. • Had actual or reconveyance of the property.
constructive
Similarities between Pure & Resolutory Conditions knowledge of such
• Both are demandable at once defect in the
seller’s title, or
ILLUSTRATIONS • Was charged with
• Obligations with a Period – I’ll give you a pen when X dies. the obligation to
• Obligations with a Condition – I’ll give you a pen if X dies on discover the defect.
Monday. Such 2nd buyer cannot defeat
the first buyer’s title.
Art. 1180. Means Permit Him To Do So. Reconveyance 1st buyer can seek for 1st buyer cannot seek the relief
reconveyance of reconveyance of property

38 | Katrina Gaw | Block C 2018

 when
TIME
Depends on the
does not depend
payment made
the is to be
debtor's will payment
Meaning on
o This type of condition is VOID
• By its nature, “means permit him to do so” is suspensive & • Leads to the stipulation (only) being declared void
debtor
talk to
potestative o HOWEVER, the entire contract could be declared void if the
when he'll pay
o If the law did not exist, it would be void birth of the obligation depends on the sole will of the
once period fixed, •
is When the debtor binds himself to pay when his means permit him debtor (GENERAL RULE)
debtor
but
did c omply,
not
to do so, the law presumes that the debtor really intends to satisfy ! Ex.: if the fulfillment of the suspensive conditions
action
his obligation, but payment, on the part of the creditor, becomes an leads to the “birth” of a new contract of lease, or a
an
canfile
you

uncertain event new contract of sale

o Thus, the law classifies this as an obligation with a period • “When the fulfillment of the condition” – connotes a suspensive
• Art. 1197 – The parties may ask the court to fix the duration of the character of the prestation
period within which the payment is to be made especially when the o The expectation of the existence or accomplishment of a
period depends upon the will of the debtor duty to give or to render some service in the future
• Ex. I’ll pay you when I hold the book.
Art. 1181. Conditional Obligations. o The condition “when I hold the book” is void, but main
In conditional obligations, the acquisition of rights, as well as the obligation to pay subsists
extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition. CASE: Lao Lim v. CA
• Lesson: A stipulation which states that a lessee will continue
Terminology give
to
acquisition
rise theright of
staying in the premises as long as he wants, as long as he pays rent
• A suspensive condition is also called a condition precedent is void for being a suspensive potestative condition that leads to
promise
I o An act or event, other than a lapse of time, which must
to the birth of the obligation, because it leaves to the lessees the sole
do youwhat
exist or occur before a duty to perform a promised power to determine the continuation of the lease. The entire
that performance arises contract is therefore void.
ask provided

loss of rights
o If the condition does not occur & is not excused, the
is
• Facts:
the condition
already acquired with
promised performance need not be rendered o A stipulation provides that the lease contract shall subsist
complied
o Suspends efficacy of contract “for as long as the defendant needs the premises & can
- • A resolutory condition is also called a condition subsequent meet & pay said increases”
I'll give you
o An event, the existence of which, by agreement of the
a
o The contracts also states that a renewal of the 3-year lease
bag you
now if parties, operates to discharge a duty of performance that period constitutes a new contract of lease although with
finish your
task has arisen
but the same terms & conditions as those in the expired lease.
if you give
not, o Demandable at once • Held: This stipulation & entire obligation is void.
o It is a purely potestative condition, leaving the effectivity of
to me
b ack
it

Art. 1182. Suspensive Potestative Condition. leasehold rights to the exclusive will of the lessee. It is
When the fulfillment of the condition depends upon the sole will of the likewise a suspensive condition because the renewal of
debtor, the conditional obligation shall be void. If it depends upon chance or the said lease, which gives rise to a new lease depends
upon the will of a third person, the obligation shall take effect in conformity upon said condition.
with the provisions of this Code. ! The said condition is not resolutory because it is
not a condition that terminates the lease contract.
both the Suspensive Potestative Condition DEBTOR The lease contract is for a definite period of 3
condition and the • When the fulfillment of the condition in an obligation depends upon years upon the expiration of which the lease
obligation are VOID, the sole will of the debtor automatically terminates.
the obligation is
illusory o Whether or not the debtor will fulfill the obligation is a
future & uncertain event

39 | Katrina Gaw | Block C 2018

 Art 1182: y,
Ex:Where X, building contractor, obliges in favor
himself of owner, to
repair

·
Potentative Casual X's after
v. at expense, any damage the
to
building taking place an
earthquake if

1. Potestative:depends on exclusive will of the

contracting parties/suspensive in nature found by a
panel of arbitrators that
construction defects contributed

Casual:depends of third
2. on chance or will parties to the
damage
Both
conditions take
must place in order X's
that obligation will arise

·
Potestative Condition

a. On the partof the DEBTOR Mixed

. Suspensive:both
the condition and the obligation are WID
obligation be
can't demanded Xbinds himself to
give
500 to Y as soon as he receives
money
from the sale of his

Ex:I'll -> condition:

pay you
100 if Iwant-based on the will of the debtor house mixed VALID
because depends
it on the will of the debtor,

Resolutory:VALID the price of and of buyer

2.
acceptability
of the sale, availability the

Ex. I'll
employ you now in the factory if
but for
any reason, the
machinery which potestative

from the Xbinds himself to GIVE 500 to Y as soon as he receives from the sale his
money
of
I
ordered the us will arrive, will end
not
employment

b. On the of
part the CREDITOR:VALID house, he
if
finally decides to sell the house:W ID because depends
it on

Ex. I'll
give you my pen
if
wantt o
have it the sole will of the debtor

·Casual condition NOTE: If the obligation that does not depend

is a
pre-existing one, it on the

the
If
suspensive condition depends chance will of 3rd condition for existence, the condition b ut
VOID the obligation
1.
upon or upon the a
person, its
only
the and
obligation to
subject itis VALID: will chance be
must complied with is VALID

Ex. Where S binds himself sell

to his land to s if he wins a case which is 9:If X OWES Y
money.
A
promises Y to
pay
the house 500 as

before SC he funds from the sales of his house,ifhe

pending the soon as receives

2. When the fulfillment

of the condition does depend
not on the will of the obligor, but
t hat
finally decides to sell

on a 3rd person who already did everything comply

to but
still can't, his of
part obligation:pay 500 is still
existing because came
it first

condition:WiD, toseta
period
the is
contract deemed complied and
with he has the demand performance
rightt o
must
go the
to court

Mixed
·

Condition

obligation is VALID if the

suspensive condition depends partly upon chance and partly

upon the will of a 3rd person

 ! If this condition were to be allowed, the owner happening of the condition dependent upon 3rd persons—
would never be able to discontinue it if the lessees the children.
kept paying
o Furthermore, because the renewal or “birth” of the new Potestative, Based on Fulfillment of Condition
lease also depends on the debtor, the entire obligation & • The condition alone is voided, but not the obligation
not just the stipulation is void. • The potestative condition is not on its birth, but on its fulfillment—in
this situation, there is an acknowledgment of indebtedness already;
Birth of an Obligation through Potestative Condition it’s not just a possibility.
• Art. 1380 – When the birth of the new lease contract (renewal)
depends upon the sole will of the lessee, the whole contract is CASE: Osmeña v. Ramos
INVALID & not just that stipulation. • Lesson: Where there is an acknowledgment of indebtedness, there
o HOWEVER, if the potestative condition is imposed not on is not just the possibility of a birth of an obligation, but an actual
the birth of the obligation but on its fulfillment, only the obligation already—thus, a suspensive potestative condition in
condition is avoided, leaving obligation valid relation to said obligation may be void, but the obligation itself
remains valid.
CASE: Trillana v. Quezon College • Facts: A promissory note stated: “On this date, I hereby promise
• Lesson: When the condition is imposed upon the birth or creation of that, if the house of strong material in which I live in Q.C. is sold, I
the obligation, the entire contract—& not just the stipulation—would will pay my indebtedness to Don Tomas Osmeña as set forth in this
be void. document.”
• Facts: The full payment of the shares in a certain school was to be • Held: The suspensive potestative condition is void, but the
made only after the obligor harvested fish. obligation to pay subsists.
o Note: Similar to the conditional contract of sale, no
contract is created yet because the full payment awaits the CASE: Security Bank & Trust Company v. CA
debtor’s performance of the harvesting of the fish. • Lesson: Sometimes, the fact that the condition is a suspensive
• Held: The condition & obligation itself is solely based on the will of potestative condition is not so clear, as when the contract states
the obligor. Thus, the whole obligation is void. that the condition is the “mutual agreement” of the parties, but in
practice, it becomes dependent on the sole will of one party.
Resolutory Potestative Conditions DEBTOR • Facts:
• If a condition is both facultative & resolutory, it may be valid, o A contractor spent more than the cost construction
though dependent on the will of the debtor. contemplated in the contract. It applied with the owner to
• Ex. If a person promises to put in the possession of his friend a adjust the contract price.
house while he (the giver) is abroad but requires that the house be o The owner did not act upon the adjustment on the ground
returned to his possession in the event that he returns to the that there was “no mutual agreement of both parties”
Philippines, the condition is valid as it is resolutory in nature. pursuant to the contractual provision. The provisions
• CASE: Ducusin v. CA states:
o Facts: The lease contract provides that “the term of the ! “If, at anytime prior to the completion of the work
contract shall be on a month-to-month basis commencing to be performed, increase in prices of construction
on February 19, 1975 until terminated by mutual materials or labor supervene through no fault on
agreement or terminated by the lessor on the ground that the part of the contractor, or any act of the
his children need the premises for their own use.” government and its instrumentalities which
o Held: Stipulation is valid. The happening of the condition is directly or indirectly affects the increase of the
not dependent solely on the will of the lessor but on the cost of the project, OWNER shall equitably make

40 | Katrina Gaw | Block C 2018

 the appropriate adjustment on mutual agreement • Held: The stipulation is valid. It is true that it is a potestative
of both parties.” condition, since the condition depends on the sole will of X (“for as
• Held: SC ruled against the owner, requiring it to pay & fulfill its long as it is needed”), but there are other factors validating the
obligation. The mutual agreement stipulated is in effect a condition obligation, which is that I will also cease “when Y is forced to stop
dependent on the owner’s will, since the contractor would naturally or abandon its operations.”
give consent to such an agreement which would allow him recovery. o The latter is a causal condition, dependent on chance,
hazard or the will of a 3rd person.
Effect of Void Stipulation
• When a condition is declared void but the obligation subsists, the QUESTION
obligation will become one with a period. (Patente v. Omega) • Is a suspensive potestative condition ALWAYS void? Yes.
o Reason: converting it into a pure obligation may result in
an arrangement which was not in the contemplation of the 4 Cases Where Legal Treatment Transforms to a Period (Court)
parties 1. When only a suspensive potestative condition, not the obligation
• The creditor can ask the court to fix the period. itself, is void.
2. When the debtor will pay when his means permit him to do so.
SITUATION 3. When the Court finds there is a just cause for fixing a period.
• Facts: X & Y have an agreement, where X borrowed money from Y. X 4. Doesn’t fix a period, but from its nature & circumstances it can be
tells Y later that he is still unable to pay, & says, “I’ll pay you when I inferred a period was intended.
swim in the Pasig river.” Is this valid?
• Held: The obligation still stands, but the condition is void. The Valid Potestative Conditions
obligation is transformed to one with a period. • Art. 1180 – when the debtor will pay when his means permit him to
do so
Mixed Obligations • All RESOLUTORY conditions (e.g. X will give Y a pen, provided that Y
• Those which depend not only upon the will of the debtor, but also will always stay in the Philippines)
upon chance & some other factors.
• CASE: Romero v. CA Art. 1183. Impossible Conditions.
o Facts: A contract stipulates that the downpayment made Impossible conditions, those contrary to good customs or public policy and
by the buyer to the seller regarding the sale of the property those prohibited by law shall annul (Note: VOID) the obligation which
shall be returned in the event that the seller “shall not be depends upon them. If the obligation is divisible, that part thereof which is
able to remove the squatters from the property” within 60 not affected by the impossible or unlawful condition shall be valid.
days from the execution of the contract. The condition not to do an impossible thing shall be considered as not
o Held: This is not a potestative condition & is valid. It is a having been agreed upon.
mixed condition, dependent not only on the will of the
debtor but on 3rd persons, like the squatters & the Impossible Conditions suspensive conditions

government. • The condition & the obligation will be void.

• Ex. An obligation to give money as a loan only if it snows in the
CASE: Naga Telephone Inc. v. CA Philippines is void. The condition makes the prestation void.
• Lesson: When there are other causal conditions governing (chance, • Also true of cases that are against (1) good customs, (2) public
hazards or the will of a 3rd person) a stipulation which is also policy or are (3) prohibited by law.
potestative, it is a mixed condition, & it is valid.
• Facts: X & Y stipulated that X can use the electrical posts of Y for as Condition Not to Do an Impossible Thing
long as it needed the post but the contract can nevertheless be • Useless stipulation
terminated should Y be forced to stop or abandon operations.

41 | Katrina Gaw | Block C 2018

Art
1183:

·Two kinds of impossible conditions Q:How will the condition be valid?

1.
Impossible logically (make a dead man alive) there
A:If is a
period for performance

Illegal prohibited by good law X void Ex: y 500 if he travels to

customs, will give
=

2. X

v valid
=

within
jupiter 1
year: intention to

·
Effects: allow the to
event
happen

If x
1. the condition is do
to an
impossible or illegal thing
condition
x
obligation
Ex. I'll sell
my land if can make a dead alive again
you you man

2. If the condition NEGATIVE -

NOT to do the impossible, disregard
just the condition But
the obligation remains

Ex. I'll sell land if make circle is

that the same time
you my you cannot a at a
square

This becomes and valid obligation. The condition here be fulfilled

a
pure can
always
If the condition is NEGATIVE do condition v
obligation
3. NOT
to an
illegal thing ~
-

Ex. I'll sell land if do kill

you my you not X

Positive
*
Condition:requires the happening of the condition
 Art. 1184. Extinguishment of Obligations with Time-Based Conditions. • Ex.: The condition is simply the non-election of Mr. X.
The condition that some event happen at a determinate time shall o If the law provides that elections are to be held on August
extinguish the obligation as soon as the time expires or if it has become 1998 & August 1998 passes without X being elected, the
indubitable that the event will not take place. condition is deemed fulfilled.

Extinguishment of Obligations with Time-Based Conditions. Art. 1186. Constructive Fulfillment.

• When the condition consists of some event that must happen at a The condition shall be deemed fulfilled when the obligor voluntarily prevents
particular time, the obligation is extinguished should the condition its fulfillment.
not happen within the said period.
If period of fulfillment
• Ex.: Y will give X a particular car (the prestation) if X is elected CLASS QUESTION
is fixed,
not
the
President on or before 1998. Q: What is the implied term of the contract?
will determine
court
o Once Mr. X becomes the president prior to 1998 or on A: Must be complied with in GOOD FAITH; otherwise, there are
the intended period
1998, the obligor has to give the car. consequences such as the doctrine of constructive fulfillment.
• The same situation applies if there is doubt that the event will occur
in the given time. Constructive Fulfillment: Act of Prevention
o In the same example, if X dies before he even files his • The good-faith obligation includes an implied term on the part of
candidacy, it is clear that his becoming president will not the said parties not to impede, hinder, obstruct or prevent the
happen anymore on or before 1998. This will immediately fulfillment of the obligation.
extinguish the obligation to give the car. o Undertaking these preventive acts constitutes breach of
contract.
Art. 1185. • Construct fulfillment - If obligor voluntarily prevents the fulfillment
The condition that some event will not happen at a determinate time shall of the condition in an obligation, the law states that the obligation
render the obligation effective from the moment the time indicated has shall be deemed fulfilled.
elapsed, or if it has become evident that the event cannot occur. o Within penumbra of good faith duty; contemplates things
If no time has been fixed, the condition shall be deemed fulfilled at such that are not in the contract that could happen
time as may have probably been contemplated, bearing in mind the nature • Ex. X will give to a school a brand new computer if the school will
of the obligation. donates its old computer to charity.
o If X voluntarily destroys the old computer, the condition will
“Condition Will Not Happen” be considered as having been fulfilled. He is now bound to
• Ex.: Again, the condition is the election of X as president on or deliver a new computer to the school.
before 1998 & the prestation is the giving of a particular car by Y &
-

Choy give IM if
will the effect is the effectivity of the obligation when the condition does CASE: Tayag v. CA
married
Yanna yet is NOT happen. • Lesson: In reciprocal obligations, both parties are the debtors &
on Dec 30
o Once X does not become the president prior to 1998 or on creditors of each other; thus, either one of them can carry out
· is liable if y
not
1998, Y has to give the car. constructive fulfillment of the condition & prevent the other from
prior
30
o If X becomes president on or before 1998, then the car fulfillment of the obligation.
or
Dec
marries on

not
liable if y
should not be given.
is
· c is
guy same
or
• Facts:
o If Mr. X dies before he even files his candidacy, it is clear
the

o As a condition of a contract of sale of real property, the

married to

after Dec 30
if Y manies
that his becoming president will not happen anymore on or buyer, X, was required to pay the balance of a particular
without
·
t he guy
If
dies on
before 1998. This will immediately give rise to the
Now
loan which was collateralized by the property subject of the
is
obligation
being married,
the
obligation to give the car. sale so that the said property can be delivered to him.
be
can't
effective by they married
still
o The seller prematurely paid the loan, thereby preventing
“No Time is Fixed” the buyer to fulfill the condition.

42 | Katrina Gaw | Block C 2018

 Art 1186:

Effect
of Unmet Conditions
·

DBP vs. Sta Ines

When conditions entitled of their advances and

were not met, they become only
not the
to return payment

of their stocks, also

but the for the of their and
shares of to
compensation use
money property
·Rule Debtor Fulfillment
Prevent of the Condition
when
Voluntarily
-deals constructive
with or
presumed fulfillment

Reason:one not
must
profit
by his own fault

·Requisites:

.
voluntarily
-either
maliciously or not, the to
intent prevent be
must present

2. Prevents

-
intention without
prevention, or prevention without
intention is not sufficient

Example:A A
promised to sell to B a car if a could pass the bar. On the end of the examination. caused C to be

poisoned and be hospitalized. A

is still bound to sell the car

If, however, turns

it that
out I was
really disqualified to take the bar, as when he had notfinished

high school. A
is not bound

·Constructive Fulfillment
of
Resolutory
-
with
respect
tothe debtor who is bound to return what
he has received upon the fulfillment of the condition

Example:Asold land now toB on condition that B marries C within 1 otherwise B should return the land.
year,

A
If kills C, B
does not have to return the land because A is fault
at
-
Elements:

1. Intent
to on
prevent the of
part obligor
Act
to
obligor
2.
prevent
on the of
part

3. There be
must an actual happening of

the event

Exception to constructive Fulfillment:

1. Lack of on
intent the of the obligor to prevent of
the fulfillment condition
part

2. Exercise of a
right

NOTE:

condition of the
even if the creditor is the one who prevents the because of his intent
to the
prevent happening condition.

constructive fulfillment
can still be applied
 o The seller claims that Art. 1186 cannot apply, because o When the suspensive condition occurs, the effect of a
they are the obligees while the proviso speaks of the conditional obligation “to give” retroacts to the day of the
obligor. constitution of the obligation.
• Held: Art. 1186 applies. • Ex. On Feb. 1996, X, the obligor, promises to give Y a specific car in
o In a reciprocal obligation like a contract of purchase, both the event it rains on the June 1, 1996. It rains on June 1, 1996.
parties are mutually obligors & also obligees. o X must give Y the accessories of the car as of Feb. 1996.
! Any of the contracting parties may, upon non- o The obligor is duty bound to take care of the car & its
fulfillment by the other privy of his part of the accessories from the time the obligation has been
prestation, rescind the contract or seek fulfillment. constituted.
o It is puerile for petitioners to say that they are the only
obligees since they are also bound as obligors to permit X Unilateral Obligations
to assume the loan, & would also be obliged to execute the • The debtor keeps the fruits & interests received
final deed of sale. o UNLESS from the nature & circumstances of the obligation
it should be inferred that the parties intended differently.
CLASS QUESTION o Ex. Following the same example provided above, if X’s car
• Q: There is a BUYER & a SELLER. Who is the debtor & who is the is chosen as a special car in a competition & wins a prize
creditor? after Feb. 1996 but before June 1996, the prize obtained
• A: The question is irrelevant if the obligation is a reciprocal by X belongs to X.
obligations.
o As a general rule, all contracts are reciprocal, because Reciprocal Obligations
both give each other something. • The fruits & interests during the pendency of the condition shall be
o Ex.: lessor & lessee, mortgagor & mortgagee (unless the deemed to have been mutually compensated.
lender is also the mortgagee, like a bank, which these days o Ex. X promises to give a mango orchard to Y & Y promises
happens more often). to give X P50,000. Both obligations shall take effect only if
it rains on June 1.
Art. 1187. Effect of Fulfillment of Conditions. ! Any fruit of the orchard & any interest on the
The effects of a conditional obligation to give, once the condition has been money shall mutually compensate each other. X
fulfilled, shall retroact to the day of the constitution of the obligation. will not get the interest on the money, & Pedro will
Nevertheless, when the obligation imposes reciprocal prestations upon the not get the fruits of the orchard once the condition
parties, the fruits & the interests during the pendency of the condition shall is fulfilled, even though technically their right to
be deemed to have been mutually compensated. If the obligation is the fruits & interest retroacts to the date the
unilateral, the debtor shall appropriate the fruits & interests received, obligation has been constituted.
unless from the nature & circumstances of the obligation it should be
inferred that the intention of the person constituting the same was different. SITUATION
In obligations to do & not to do, the courts shall determine, in each case, • Facts: X is buying from Y a farm for P100,000 if it rains on Tuesday
the retroactive effect of the condition that has been complied with. next month. They signed a contract & it is perfected, but X & Y hold
it in abeyance. Y’s farm is growing abundantly, but X’s money is
Suspensive Condition decreasing in value. It rains on Tuesday. Who will have a personal
• Resolutory condition – Art. 1187 is NOT relevant. Here, the right to the fruits & instruments?
fulfillment of the event extinguishes the obligation. • Answer: X technically has personal rights to the fruits. However, the
• Suspensive condition – Art. 1187 applies only to suspensive law provides that in a reciprocal obligation, the fruits & interests
condition, where the efficacy of the obligation is merely suspended during the pendency of the condition shall be deemed mutually
until the condition is fulfilled.

43 | Katrina Gaw | Block C 2018

Art. 1187:

·
Retroactive Effects Fulfillment
of ofSuspensive Condition Exceptions:
to
retroact
nothing to

. Obligations to
give -> real obligation 1. the obligation involves
If a real contract perfected by
-
mere
delivery teendinettpoint
-
demandable only upon the fulfillment
of condition If -
2. the obligation is performed successively or in intervals e.g. paid monthly

fulfilled, effects
-once the condition is its shall retract
tothe day when the
obligation was constituted

Reason:An obligation a condition

can exist without
being subject
to

Rule perfected the

only by delivery obligation
has real
NOTE: on
retroactivity no
application to contracts as
they are of

No
retroactivity reference
with
-

to
only

. fruits or interests

2. period of prescription

do to do
2. Obligations to or not

-
no fixed rule

-retroactivity be applied by the court

may
·

Retroactive Effects as Fruits

to and Interests

. Reciprocal Obligation
fruits
mutually compensated off
and the the condition deemed
the interests
during pendancy set
-

of are

for of convenience
-necessary purposes

Unilateral -
2. obligation only 1 has
party
the to
duty perform

-gratuitous
-the debtor from creditor. Thus, fruits and interests the
receives
nothing the belong to debtor unless there is

a
contrary intent
 compensated. Thus, X & Y’s fruits & interests will compensate one (2) If the thing is lost through the fault of the debtor, he shall be
another instead. obliged to pay damages; it is understood that the thing is lost when
it perishes, or goes out of commerce, or disappears in such a way
Obligations “To Do” & “Not To Do” that its existence is unknown or it cannot be recovered;
• The courts shall determine, in each case, the retroactive effect of (3) When the thing deteriorates without the fault of the debtor, the
the condition that has been complied with. impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may
Art. 1188. choose between the rescission of the obligation & its fulfillment,
The creditor may, before the fulfillment of the condition, bring the with indemnity for damages in either case;
appropriate actions for the preservation of his right. (5) If the thing is improved by its nature, or by time, the improvement
The debtor may recover what during the same time he has paid by mistake shall inure to the benefit of the creditor;
in case of a suspensive condition. (6) If it is improved at the expense of the debtor, he shall have no other
"Ask for security
right than that granted to the usufructuary.
Preserving Rights other actions:

goodor badfactthe • The law allows the creditor to protect

to prevent
the alienation
cour t
Ask 2.

his interest even if the Suspensive Condition temporary suspension

of

creditor while awaiting

condition has not yet been fulfilled. • When the performance of something is held in abeyance activity
resolution

o Thus, a creditor can file an injunction suit to stop the • Usually entails a retroactive effect of personal rights
payment
If was not

mistake, can there debtor from alienating his property, if it is supposed to be • While still unfulfilled, the obligation has not yet arisen & the
by
be recovery? given to the creditor once a particular condition is fulfilled. determinate thing is usually in the possession or control of the
• If, prior to the happening of the suspensive condition, the debtor debtor.
A:It
depends pays the creditor by mistake, the debtor can recover the payment.
is fulfilled. to give
Different Ways of Losing the Object -> specific/real obligation:
condition
If
o The obligation is not yet due & demandable.
1.

recovery
X
cause retroactivity
of

Not fulfilled, Irecovery

o The condition may not be fulfilled, in which case he will 1) It perishes.
never be liable. o Ex. When, during the pendency of the suspensive condition, the
2.

it's a donation n omaterialize

unless condition may t

object, a car, is hit by a bomb & explodes

SITUATION 2) It goes out of commerce.
• Facts: An employer & employee enter into a contract. In their CBA, o Ex. If the car has been discovered to have historical value & is
the employer agreed that an employee who had served deemed a national treasure and the government prohibits the
continuously for 10 years until the age of 50. But all the employees sale of the car
have the same birthdays, & all turn 50 at the same time. What can 3) It disappears in such a way that its existence is unknown or it
the employee do to protect his right? cannot be recovered.
• Answer: The employee may, before the fulfillment of the condition, o Ex. If the car is transported from Mindanao to Luzon by ship, &
bring the appropriate actions for the preservation of his right the ship has been lost at sea & cannot be found
pursuant to Art. 1188.
“Fault of the Debtor”
Art. 1189. Improvement, Loss & Deterioration in Suspensive Conditions. • To be understood in relation to the Sources of Liability (Art. 1170),
When the conditions have been imposed with the intention of suspending which constitute breach of the obligation:
the efficacy of an obligation to give, the ff. rules shall be observed in case of o Negligence
the improvement, loss or deterioration of the thing during the pendency of o Delay
the condition: o Fraud
(1) If the thing is lost without the fault of the debtor, the obligation o Contravention of the tenor of the obligation
shall be extinguished;
Effect of Loss

44 | Katrina Gaw | Block C 2018

 3 rights
of usufractuary:

I remove improvements
make
to
use of together with
the object the improvement
2.

3. Set off compensation

• If the thing is lost without the fault of the debtor, the obligation is o Usufruct - gives a right to enjoy the property of another with
extinguished unless of course the thing to be given is not the obligation of preserving its form & substance unless
determinate but generic. the title constituting it or the law otherwise provides.
o If it is generic, the obligation still stands
o Implies a fortuitous event Art. 1190. Fulfillment of Resolutory Condition.
• If the thing is lost through the fault of the debtor, he shall be liable When the conditions have for their purpose the extinguishment of an
for damages. obligation to give, the parties, upon the fulfillment of said conditions, shall
return to each other what they have received.
Deterioration In case of the loss, deterioration or improvement of the thing, the provisions
• If the thing deteriorates without fault of the debtor, any impairment which, with respect to the debtor, are laid down in Art. 1189 shall be applied
is to be borne by the creditor. to the party who is bound to return.
• If the deterioration is caused by the debtor, the creditor can choose As for obligations to do and not to do, the provisions of the 2nd par. of Art.
between (1) rescission of the obligation and its (2) fulfillment, with 1187 shall be observed as regards the effect of the extinguishment of the
damages in either case. obligation.
• If the object has deteriorated so badly that the creditor no longer an will end in the of
event

sees use for the object, he could choose to rescind the obligation Fulfillment of Resolutory Condition agreement
certain circumstances

plus damages. It could be considered lost. • Extinguishes the obligation return

o Ex. During the pendency of the suspensive condition, the • There must be restitution of what has been obtained
debtor uses the car, which he is supposed to give to the • Ex. X & Y promised that X (the debtor) will continue having
creditor upon the happening of the condition, in a racing possession over a particular car, provided that X will watch TV.
event which causes its deterioration. o If X watches TV, his right to the possession of the car is
! The creditor can seek rescission of the obligation applies even extinguished, & the obligation of Y to allow X the
& damages in the amount equivalent to the unilateral possession is also extinguished.
to

deterioration of the car. o If, while the resolutory condition has not yet been fulfilled:
! If, however, the creditor believes that he can still 1) If car is destroyed without the fault of the debtor X, the
rules of 1189
make use of the car, the creditor can seek obligation to return is extinguished.
also applies
fulfillment with damages. 2) If the car is lost through the fault of the debtor, he
• Choice of the remedies to be pursued, whether rescission plus debtor creditor shall be liable for damages.
damages or fulfillment plus damages, belongs to the creditor, 3) If the car deteriorates without the fault of the debtor,
regardless of the degree of deterioration caused by the debtor. the impairment is to be borne by the creditor.
o Even if the object, through the fault of the debtor, 4) If the car deteriorates through the fault of the debtor,
deteriorated but the same can still be used, the creditor the obligee may choose between the rescission &
can still choose rescission plus damages. fulfillment, with indemnity for damages in either case.
o The debtor cannot say that the remedy chosen by the 5) If the car is improved by its nature, or by time, the
creditor should have been fulfillment plus damages. improvement shall inure to the benefit of the obligee.
6) If the car improves at the expense of the debtor, he
Improvements shall have no other right than that granted to the
! If it improves (1) by nature or (1) by time, such shall inure to the usufructuary.
benefit of the creditor. • In obligations to do and not to do, the court shall determine the
!* If it is improved at the expense of the debtor, his only right would be effect of the extinguishment of the obligation.
that of a usufructuary.
↳ Ex. repainted
I the car and changed the seat
cover
Art. 1191.
it
I'll have the right
to
enjoy the property
while preserving

45 | Katrina Gaw | Block C 2018

 if
Q:What the condition does not happen?
A: become consolidated and becomes
Rights
ARTICLE 1189: ARTICLE 1190: absolute
=
no need to

extinguished
return

t he
If
obligation
condition happens then the
is

Requisites for application of Article 1189: Effects of fulfillment of resolutory condition andapplies:
restitution roles

now
on laws,

applies to
improvement
the
and deterioration

who
party
is bound to

1. Real obligation 1. In obligations to give: the obligation is extinguished and the parties are thing return the

2. Object is specific or determinate thing obliged to return to each other what they have received under the obligation
3. Obligation is subject to a suspensive condition - the effect of the fulfillment of the condition is retroactive
4. Condition is fulfilled - the obligation of mutual restitution is absolute. It applies not
5. There is loss, deterioration, or improvement of the only to the thing but also to the fruits and interests
thing during the pendency of the happening on one - in case the thing to is “legally in the possession of a
condition third person who did not act in bad faith,” the remedy of the party
entitled to restitution is against the other
Kinds of loss: - no exceptions to retroactivity, whether the obligation is bilateral
1. Physical loss: When it perishes (house is burnt to or unilateral (since the fulfillment of the resolutory condition
ashes) produces the extinguishment of the obligation as though it never
2. Legal Loss: When a thing goes out of commerce existed)
- if the condition is not fulfilled, the rights acquired by the party
(government prohibited the sale of the car that was
becomes vested
found out to have historical value) legal object-> illegal
- the rules given in Art 1189 will apply to whoever has the duty to
3. Civil loss: disappears in such a way that its
return in case of the loss, deterioration or improvement of the thing
existence is unknown (a dog missing for some
(fulfillment of resolutory condition coverts creditor to debtor, and debtor to
time) or it cannot be recovered (when Rose
creditor)
dropped the blue diamond necklace into the ocean
in Titanic)
Example: A gave a parcel of land on the condition that B will never go to the
casino. A month later, B went to the casino. What happens to A’s obligation?
What are the 3 things that may happen to the
A: A’s obligation is extinguished. B will therefore have to return both the land
object of an obligation pending the fulfillment of a
and the fruits he had received therefrom from the moment A had given him the
suspensive condition? land
1. The object may be lost
2. The object may deteriorate What if the land had been improved through its nature or by time, who benefits?
3. The object may be improved A: A gets the benefit because he will now be recovering the land
 Article 1191

The power to rescind obligations is implied in reciprocal ones, in case one of o Exception: if there is a stipulation in the contract giving a
the obligors should not comply with what is incumbent upon him. party the unilateral power to rescind the contract
The injured party may choose between the fulfillment & the rescission of the • Predicated on the breach of faith by any of the parties, violating
obligation, with the payment of damages in either case. He may also seek reciprocity between them. betrayal

rescission, even after he has chosen fulfillment, if the latter should become o Must be SERIOUS & SUBSTANTIAL
impossible. o No breach of faith = no rescission
The court shall decree the rescission claimed, unless there be just cause • Ex. A property that was subject of a contract of sale was already
authorizing the fixing of a period. transferred to the buyer.
This is understood to be without prejudice to the rights of third persons who o The buyer cancelled the deeds of sale, on the valid ground
have acquired the thing, in accordance with Art. 1385 & 1388 & the that there was negation of the cause of the contract, as
Mortgage Law. the properties turned out to be unsuitable for the purpose
for which they were acquired without fault of the seller.
Two Options o This cancellation of contract is NOT rescission in Art. 1911.
• To rescind ! No breach of faith on the part of any party.
• To fulfill ! The seller complied & the buyer did not suffer
• Either way, with damages (Sources of Liability) direct injury.

Reciprocal Obligations power to rescind is implied CASE: Philippine Amusement Enterprises, Inc. v. Natividad
• Those that: • Lesson: A mere causal breach does not justify rescission.
o Arise from the same cause & • Facts: The lessee of a jukebox sought rescission of the contract of
o In which each party is a debtor & a creditor of the other, lease of the said machine because “there were times” the machine
such that the obligation of one is dependent upon the did not work.
obligation of the other • Held: There can be NO rescission.
• The obligation of one is a resolutory condition of the obligation of o Rescission is ordered only when the breach is substantial
the other; the non-fulfillment one of entitles the other to rescind. as to defeat the object of the parties in entering into the
If di binigay
x-deal

di ko
• Ex. In a contract of sale, the non-payment of the balance of the agreement.
product,
o Occasional failure is not frequent enough to render it
na

magagawa yung
video price by the buyer gives rise to the seller’s right to rescind.
because my obligation • In case of non-compliance, the aggrieved party has an implied unsuitable.
depends
on them sending power to rescind or resolve the contract. o There was also no claim of any damage on the part of
the products o Termination in Art. 1911 is more appropriately called lessee, like a drop of income.
resolution & not rescission (but they are used
interchangeably here) CASE: Tan v. CA
• Lessons:
Rescinding a Contract o W/N a breach is substantial depends upon the attendant
• Rather than just to terminate the contract & to release the parties circumstances
from further obligations, it means to: o Slight delay when time is not of the essence is not
o Abrogate the contract from the beginning & considered substantial breach.
o Restore the parties to their relative positions as if no o Where the fulfillment of the condition does not depend on
contract has been made the will of the obligor, but on that of a 3rd person, the
• Similar to declaring the contract void at its inception obligor’s part of the contract is complied with if he does all
• Generally, with rescission, one must always go to court if one wants that is in his power & it then becomes incumbent upon the
damages other contracting party to comply with all the terms of the
Characteristics of Rightto Rescind:
reciprocal obligation
contract.
1. Exists only to

is ready, willing, and able to and the other is

2. Demanded only the
if plaintiff comply not

46 | Katrina Gaw | Block C 2018 3. Right rescind

to is NOT ABSOLUTE

breaches will c ause rescission

-
trivial causes or slight not

need substantial breach

ARTICLE 1191: Effect of Rescission
Choice by the Injured Party • to rescind a contract is to undo it from the beginning, that is
1. The injured party may choose between: to annul the contract and restore the parties to the relative
a. Fulfillment (specific performance) + damages positions which they would have occupied as if no such
b. Rescission + damages contract had ever been made
1. The right is alternative and an alternative prayer may be made • Rescission creates the obligation to return the object
in court complaint unless either had been waived previously • Mutual restitution of benefits
2. The right is not conjunctive — the plaintiff cannot ask for both
remedies. However, in some cases, partial rescission and Court may grant guilty party term for performance
partial fulfillment may be allowed • the court shall decree the rescission claimed unless there
3. The injured party who has elected fulfillment may, if fulfillment should be just cause for granting the party in default a term for
be impossible, still ask for rescission. The rule is vice-versa, the performance of his obligation
provided the court has yet given a final judgement • this exception only applies when the guilty party is willing to
4. If an action is brought for specific performance, the damages comply with his obligation but needs time to do so
sought must be asked in the same action; otherwise, the
damages deemed wave Limitation on right to demand rescission
• Not absolute fixed
Breach of Obligation • Contestable and subject to scrutiny and review by the courts
• occurs when there is failure or refusal, by a party without • The Court has the discretionary power to allow a period
legal reason or excuse to perform within which a person in default may be permitted to perform
• the party who has not performed his part of the agreement is his obligation
not entitled to sue
• Only the injured party can rescind a contract without violating Waiver of Right
the principle of mutuality of contract • Right the rescind may be waived, expressly or impliedly
to the courto
t claim rescission
mustgo
judicial rescission:injured party
ofrescission is done
accept
·
Exception: rescission send
-> must a notion and the other must
party
expressly
allowed extrajudicial decide
a nd ask to
court now rescission is correct
:Parties -> if other did accept
not must
-
go to
party
the
is
contract purely executory (there's still no performance on both sides)
2. In case
Rescission of contract without previous judicial decree Damages for Breach of Lease Contract
1. Where automatic rescission expressly stipulated How much damages may be recovered in case a lease contract
• The parties may validly enter into an agreement that violation is broken by, say, non-payment of rent when the period has not
of the terms of the contract would cause cancellation thereof yet expired?
even without judicial intervention
2. Where contract still executory 1. Specific Performance
• in the absence of stipulation to the contract, the right to • Accrued rent + future rent for the unexpired term
rescind a contract must be invoked judicially 2. Rescission
• back rents and outs of the lessee + damages
Procedure where extrajudicial rescission contested • Not future rents or rentals for the unexpired term
1. With stipulation for automatic revocation
• judicial intervention is necessary to determine whether or not
rescission was proper
2. Without stipulation for automatic revocation
• the party who deems the contract violated may consider it
resolved or rescinded without previous court action, but he
proceeds at his own risk

Automatic Rescission Clause

- effectively rescinds the contract upon breach without need of
any judicial declaration

Rescission v. Termination
• Rescission: undo from the begginning
• Termination: end in time or close
 • Facts: • Held: Rescinding is valid. While a delay of 20 days, 1 week or even
o A buyer bought a piece of legally-obtained public land from a month may be causal provided that time is not of the essence,
a seller. The buyer tasked the seller with clearing the land the totality of the whole case shows that the qualified offer to pay
& with cancelling the mortgage on the property in favor of was a repudiation of the existing obligation, which was legally due &
DBP, giving the seller earnest money to cancel the demandable under the contract of sale.
mortgage. o The creditor was left with no other legal option but to
o The seller failed to clear the lot for a few days & failed to validly rescind the contract.
cause the cancellation of the mortgage as it took DBP
some time to process the papers on the date set for the Rescinding due to Non-Compliance
execution of the deed of sale, & were delayed for 12 days. • Remedy is either fulfillment or rescission, with damages either way
! He also failed to get the DENR permit. • CASE: Areola v. CA
! HOWEVER, he already did everything to effect the o Facts:
cancellation. ! X was insured under an insurance company.
! Notice of levy & execution had also already been ! X had a rightful claim which the company did not
filed by the seller, though it was not yet cancelled comply with, because of an erroneously canceled
by the Registry of Deeds. insurance policy on the part of the company.
o DBP delayed the cancellation of the contract until 12 days ! X was successful in seeking the enforcement of
after it was due. the erroneously canceled insurance policy by
• Held: There was substantial compliance on the part of the seller to seeking the reinstatement of the same.
clear the property; there can be no rescission. ! The insurance company stated that, because X
o There were only slight delays, & time was not of the sought the reinstatement of the same, X in effect
essence in the contract. chose the fulfillment of the obligation (as opposed
o The interest in the land was already conveyed to the buyer. to rescission) & thus need not be paid damages.
o Even not yet getting the DENR permit can be considered as o Held: Whether the party demands fulfillment or rescission,
substantial breach. he is entitled to damages.
! Prior approval by the DENR is required only in case • Injured party may seek rescission even after he has chosen
of sale & encumbrance of public land: fulfillment, if the latter should become impossible.
• During the pendency of the application • CASE: Ayson Simon v. Adamos
by the purchaser & o Facts:
• Before his compliance with the ! The buyer of a lot filed a case against the seller for
requirements of the law. delivery.
o The seller here already properly conveyed title to buyer. ! HOWEVER, a case was previously filed by the heirs
of the deceased original owner against the seller
CASE: Velarda v. CA for delivery of the same properties to them.
• Lesson: Even if delay is only slight & time is not of the essence, ! Both the heirs & the buyer won their cases against
when the existing obligation is repudiated because the debtor the seller.
imposes pre-conditions for payment, or makes it a qualified offer to • HOWEVER, the delivery to the buyer had
pay, there can be rescission. become impossible, because the
• Facts: properties were already validly possessed
o The debtor delayed paying the obligation for 1 month. by the heirs.
o The debtor imposed upon the creditor pre-conditions for ! The buyer filed another suit for rescission &
the payment, making the payment a qualified offer to pay. damages.
o The debtor claims this slight delay is only a causal breach.

47 | Katrina Gaw | Block C 2018

 o Held: The buyer was correct to file the rescission case, act of rescission but merely declaratory or an affirmation of the
because fulfillment had become impossible. revocation.
• HOWEVER, the law does not authorize the injured party to rescind • Requisites for Effectivity of Expressly Stipulated Rescission:
the obligation & at the same time seek partial fulfillment in the o Agreement providing that the violation of the terms shall
guise of recovering damages. cause the rescission without court intervention
o Thus, the Court has disallowed the recovery of penalty o Notice to be given to defaulter
charges stipulated in a contract which was also sought to
be rescinded. Implied Power of Rescission
• The court shall decree the rescission claimed
Express Contracts o UNLESS there is just cause authorizing the fixing of a
• The power to rescind can also be expressly stipulated in the period.
contract. • CASE: Roman v. CA
o Unilateral extra-judicial stipulation o Facts:
• The law does not prohibit parties from entering into an agreement ! The contract stipulated that the buyer shall pay
providing that the violation of the terms of the contract shall cause the purchase price within 60 days from receipt of
the cancellation, termination or rescission thereof even without the notice that the properties have already been
court intervention. titled.
• The stipulation is in the nature of a facultative5 resolutory condition ! Notice was sent on Oct. 11, 1958. Payment
• HOWEVER, notice must always be given to the defaulter before however was not made. An action was filed for
rescission can take effect. rescission.
• Still provisional, & subject to scrutiny & review by the courts ! The buyer claimed that he was not given notice &
o If the other party does not believe rescission to be justified, prayed for a period within which to pay.
it can result to judicial action o Held: There would be no just cause for fixing a period. After
o If the court, after due hearing, decides that the rescission institution of the action against him, what the buyer should
was not warranted, the responsible party will be sentenced have done, which he did not do, was to pay the seller
to damages within 60 days after service of summons (the notice).
o In the contrary case, the resolution will be affirmed, & • CASE: Central PH University v. CA
consequent indemnity will be awarded to the party o Facts: The donee failed to comply with the resolutory
prejudiced. condition provided in the deed of donation.
• The party who deems the contract violated may consider it o Held: There was no just cause for the fixing of a period,
rescinded & act accordingly, without previous court action, but it since a more than a reasonable period of 50 years had
proceeds at its own risk. already been allowed the donee to comply with the
o Only final judgment of the court will conclusively settle condition, even if the condition is burdensome.
whether the action taken was or was not correct in law. ! The fixing of a period would be a mere technicality
o BUT the party who believes itself injured need not file suit & formality & would serve no purpose than to
first & wait for a judgment before taking extra-judicial steps delay or lead to an unnecessary and expensive
to protect its interest. multiplication of suits.
! The law itself requires that he should exercise due
diligence to minimize its own damages. Valid Rescission
• If there is an express stipulation of rescission, any court decision • Creates an obligation to return the things which were the object of
adjudging its propriety extra-judicially made is NOT the revocatory the contract
o Designed to restore parties to their former situations
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5 Contingent; may or may not happen

48 | Katrina Gaw | Block C 2018

 • Can only be made when the one who demands the rescission can
return what he is obliged to return RA No. 6552
• If one of the parties has already paid the price in a contract, but • “An Act to Provide Protection to Buyers of Real Estate on
has not received what should be delivered to him, he has nothing to Installment Payments”
restore. • Effectivity Date: September 14, 1972
o He is entitled to the return of what he has paid. • Highlights importance of making a notice of cancellation regarding
real estate sold in installment
Contract to Sell v. Contract of Sale o The actual cancellation of the contract shall take place 30
• Contract to sell – the seller is given the unilateral right to terminate days from receipt by the buyer of notice of cancellation or
the contract in case of non-payment of the purchase price demand for rescission of the contract by a notarial act &
o Vendor remains the owner as long as the vendee has not o Upon full payment of the cash surrender value to the buyer
fully complied with the purchase price
o Termination is NOT a rescission under Article 1191 but an CLASS DISCUSSION
enforcement of the contract • General rule in rescission – you must always go to court if you want
! Because title remains with the vendor & does not to claim damages
pass to the vendee until full payment of price o Exception – if there is express stipulation in the contract
! If the vendor ejects the vendee for failure to meet ! Unilateral power give to a party to rescind the
the condition, he is just enforcing the contract, not contract
rescinding it • What is the operative act that revokes the contract in court?
o Payment – positive suspensive condition o The court decision
o Failure to pay is NOT a mere breach, causal or serious o Gives it finality
! It PREVENTS the obligation of the vendor to o In reciprocal obligations, there is always an implied power
convey title from applying obligatory force to revoke.
• Contract of sale – non-payment is a negative resolutory condition ! The court’s decision is just the revocatory act.
o The vendor has lost ownership of the thing sold & cannot • What is the operative act of rescission in a stipulation?
recover it, unless the contract of sale is rescinded o Notice for express stipulations
o But party can go to Court still to determine if there really
CASE: Palay, Inc. v. Clave was substantial breach
• Lesson: There must always be notice before rescission, even when ! The decision will affirm the validity of the decision
there is an express stipulation of rescission “without notice” in a made
contract between two parties.
• Facts: Art. 1192.
o The parties entered into a contract to sell a parcel of land In case both parties have committed a breach of the obligation, the liability
where it was expressly stipulated that the seller “shall have of the first shall be equitably tempered by the courts. If it cannot be
the right to declare this contract canceled & of no effect determined which of the parties first violated the contract, the same shall
without notice” to the buyer in case the latter fails to pay be deemed extinguished, & each shall bear his own damages.
his installment.
o The seller did indeed cancel the contract without notice Violation of Both Parties
upon failure of the buyer to pay the installment. • 1st violator is penalized only - if, in fact or by evidence, such first
• Held: Cancellation is invalid, since there was no notice to the violator can be determined.
defaulter informing him of the termination. o The subsequent violator will not be held liable.
o The stipulation allowing “no notice” was disregarded by the o The liability of the 1st violator shall be equitably tempered
Supreme Court. by the court as the injury to the 2nd violator might not have

49 | Katrina Gaw | Block C 2018

 been so great had it not for the subsequent infraction of Kinds of Periods
the 2nd party-violator. • Suspensive period - gives rise to effectivity of obligation
• When 1 violator cannot be determined - obligation shall be
st o Ex. On Dec. 1, 1997, X promises to sing at Y’s nightclub
deemed extinguished, & each shall bear his own damages. starting March 1, 1998.
o CASE: Camus vs. Price, Inc. ! While the obligation is constituted earlier, its
! Facts: effectivity only commences on a certain future
means that
• The lessor did not comply with his period of time, March 1, 1998.
should
contract obligation to increase the elevation of the o CASE: Gaite vs. Fonacier
b
not e enforced low portion of the lot ! Facts: The contract provided that the balance of
• The lessee also did not comply with his the purchase price “will be paid from & out of the
obligation to cover the building with first letter of credit covering the first shipment of
insurance iron ores &/ or the first amount derived from the
• It could not be determined with local sale of iron ore made by the Larap Mines
definiteness which party committed the Co., Inc.”
1st infraction of the terms of the contract ! Held: The stipulation is a suspensive period, NOT a
! Held: The parties are actually in pari delicto6 & the suspensive condition, because they express no
contract deemed extinguished, with the parties contingency in the obligation to pay, even if there
suffering their respective losses. is no exact date given.
• By the very terms of the contract, the
CLASS DISCUSSION existence of the obligation to pay is
• When there is mutual negligence, they cancel each other out; it is recognized; only its maturity or
not mitigating. demandability is deferred.
o This is still subject to the doctrine of unjust enrichment. • Resolutory period – extinguishes the obligation
o Ex. X promises to sing at Y’s nightclub as soon as the
SECTION 2. – OBLIGATIONS WITH A PERIOD. contract is signed on Dec. 1, 1997 up to March 1, 1998
! Obligation to sing can be demanded at once by
Art. 1193. the obligee but the obligation shall be
Obligations for whose fulfillment a day certain has been fixed, shall be extinguished on a day certain, March 1, 1998.
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon A Day Certain
arrival of the day certain. • That day which must necessarily come, although it may not be
A day certain is understood to be that which must necessarily come, known when.
although it may not be known when. o If the uncertainty consists in whether the day will come or
If the uncertainty consists in whether the day will come or not, the obligation not, it is a condition.
is conditional, & it shall be regulated by the rules of the preceding Section. • Ex: An obligor commits to deliver immediately a lollipop to his
sister’s 6-year-old son son when the son’s temporary front tooth
Obligations with a Period naturally falls off, it is not known when the temporary tooth will fall-
• Period - designates a particular time which is certain to happen off or be removed but it is certain to happen.
o The moment when the obligation will either be effective or o The “condition” above refers to a period.
be extinguished. o HOWEVER, if the stipulation is that the candy will be given
when he passes the entrance examination at the Ateneo, a
condition exists because its happening is uncertain.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6 In equal fault

50 | Katrina Gaw | Block C 2018

Article 1193
Period and Condition distinguished
1. As to fulfillment period Condition
• Period: certain event which must happen sooner or later
• Condition: uncertain event certain even uncertain event
Fulfillment
2. As to Time
• Period: future
a event
• Condition: refers also to a past event unknown to the parties past
Time future unknown to
3. As to influence on the obligation
• Period: faces the time for the efficaciousness of the the parties
obligation. If suspensive, it cannot prevent the birth of the Time for efficaciousness
Influence on
obligation in due time. If resolutory, it does not annul the fact Suspensive:can'tprevent
causes an
obligation
of obli
birth in due time

of its existence
the obligation Resolutory:does not annul
arise
to or to cease

• Condition: causes an obligation to arise or to cease the fact

ofits existence

4. As to effect, when left to debtor’s will Effect

when empowers the sole
court
will of the
• Period: depends upon the will of the debtor empowers the to
left the duration
to fix debtor invalidates
court to fix the duration debtor's will the obligation
• Condition: depends upon the sole will of the debtor
invalidates the obligation Retroactivity
retroactive retroactive
5. As to retroactivity of effects of effects X v
effect effect
• Period: no retroactive effect
• Condition: has retroactive effect
 Art. 1194. • Always presumed, absent any language showing that the period
In case of loss, deterioration, or improvement of the thing before the arrival was set for the debtor or creditor alone
of the day certain, the rules in Art. 1189 shall be observed. CASE: Abesamis v. Woodcraft Works, Inc.
• Lesson: When a fortuitous event occurs prior to the arrival of the
Applicability of Art. 1189 period in an obligation with a period, the loss cannot be borne by
• Applies to obligations subject to suspensive or resolutory periods. the debtor.
• Facts:
Art. 1195. applies only to obligation give
to
o X promised Y a shipment of logs, & promises he will make
Anything paid or delivered before the arrival of the period, the obligor being the shipment “before the end of July, but not earlier than
unaware of the period or believing that the obligation has become due & April with the option to make partial shipment depending
demandable, may be recovered with the fruits and interests. on the availability of logs & vessels.” Y would furnish the
vessel.
Payment by Mistake o A storm swept away almost all the logs awaiting shipment
• In a suspensive period, the obligation to give will not take effect sometime in May.
until the arrival of the period. o Y demands damages from X because of the loss of the
• The creditor has no right to obtain the thing until the arrival of the logs.
period. • Held: X cannot be held liable for damages. The obligation is one
o UNLESS the debtor & the creditor, with full knowledge of with a period, intended for the benefit of both parties.
Debtor presumed
the period, decide to give & accept the thing to be o The obligation between the parties was a reciprocal one, Y
sware the period
delivered or the payment. X
of

do todo
to furnish the vessel & X to furnish the logs.
applied obligations
to to or not

impossible to services
o The obligation being reciprocal & with a period, neither
-physically recover
Right to Recovery party could demand performance nor incur in delay before
• Debtor’s right to recover includes the fruits & interest for said the expiration of the period.
period he mistakenly paid. o Consequently, when the typhoon struck in May, there was
• Ex. X, on Oct. 1, promises to deliver to Y a mango orchard on Dec. yet no delay on the part of X. Y must shoulder the
1. However, on Nov.1, X delivers the orchard believing that it is due corresponding loss.
& demandable on that date.
o He can recover what he has delivered together with fruits Waiver
and interest. • The benefit of the period may be waived by the person in whose
o Prior to Dec. 1, Y obviously has no right to possess the favor it was constituted
Mango orchard. • CASE: Abesamis v. Woodcraft Works, Inc.
o However, if Y is in the possession of the mango orchard by o Facts: X bound himself to deliver logs to Y before the end
Dec. 1, John can only recover the fruits & interest from the of July 31. However, X informed Y that he will make an
time he delivered the property (Nov. 1) up to Dec. 1. earlier delivery of these subject portions of the shipment
on July 25. X failed to make delivery.
Article 1196. o Held: X was made liable for the logs due on July 25,
Whenever in an obligation a period is designated, it is presumed to have because he waived his right to make use of the period by
been established for the benefit of both the creditor & the debtor, unless his explicit notice to Y of earlier delivery.
from the tenor of the same or other circumstances it should appear that the
period has been established in favor of one or of the other. SCENARIO
• Facts: X loans P10M from Y, payable at the year 2020, with interest
For the Benefit of Both Parties of 10% per annum. 5 years later, X wants to back out. X tells Y he
wants to pay the P10M now, but Y refuses. Is Y’s refusal justified?

51 | Katrina Gaw | Block C 2018

Article 1196 2. When the creditor is interest in keeping his money safely
For Whose Benefit the Term Has Been Established invested or when the creditor wants to protect himself from the
GR: Term is for the benefit of debtor or creditor dangers of currency depreciation
• Meaning: The debtor cannot pay prematurely and the creditor
• For the benefit of the debtor
cannot demand prematurely 1. When the loan is without interest
• NOTE: This Article applies only when the parties agreed to have NOTE: NOT ABSOLUTE. Even if the creditor receives no interests
a fixed period, not when the parties authorized the Court to fix a he may have entered into the contract to protect himself against
term. the sudden decline in the purchasing power of the currency
Exceptions:
2. When payment is to be made within a certain period from
• Only the debtor will benefit date of contract
Meaning: He is required to pay only at the end, but he may pay
even before • For the benefit of the creditor
Example: D borrowed 10,000 from C to be paid within 1 yr without -only exists if there is a stipulation to this effect, as when the
contract provides that no payment should be made til after a
interest. certain given period
In this case, the period of 1 yr should be deemed intended for
the benefit of D only. So he can pay any time but he cannot be Effect of acceptance by creditor of partial payment
compelled to pay before 1 year. • the acceptance of a partial payment by a creditor amounts to a
waiver of the period agreed upon during which payment should
• Only the creditor will benefit
not be made
Meaning: Creditor can demand at any time even before the term
expires, and he cannot be compelled to accept payment from the
debtor prior to the stipulated period
Example: D promised to pay on Dec 1, 2005, with the creditor
given the right to demand performance even before said date

Circumstances Which Indicate for Whom the Benefit of the

Term Is
• For the benefit of both
1. When there is interest stipulated (creditor is interested in the
term because of the interests that would be earned, the debtor
is interested because he is given enough time to pay)
 • Answer: YES. A period is fixed for the benefit of both parties. o The parties knew that they must resort to legal processes
o Normal lenders (not banks) often use have a penalty for to evict the squatters; they realized that the duration of the
pre-payment, though Congress did not allow this in banks. suits to be brought would not be under their control.
o The conclusion: the parties must have intended to defer
Art. 1197. the performance of the obligations under the contract until
If the obligation does not fix a period but from its nature & the the squatters were duly evicted
circumstances it can be inferred that a period was intended, the courts may
fix the duration thereof. CASE: Radiowealth Finance Company vs. Del Rosario
The courts shall also fix the duration of the period when it depends upon the • Lesson: The act of leaving the exact date in a promissory note
will of the debtor. blank does not necessarily mean that the debtors were allowed to
In every case, the courts shall determine such period as may under the pay as and when they could. If this was the intention of the parties,
circumstances have been probably contemplated by the parties. Once fixed they should have so indicated in the promissory note.
by the courts, the period cannot be changed by them. o It is enough that the note specifies that payment shall be
made, for example, in equal installments for 12 months.
The Two-Step Process • Facts:
1) The Courts must first determine that: o X owes Y some money, evidenced in a promissory note, to
o The obligation does not fix a period, or be paid in monthly installments as agreed upon by the
o That the period is made to depend upon the will of the parties, though the exact dates were left blank.
debtor o Y allowed X to apply X’s promotion services in payment of
But from the nature & circumstances it can be inferred that a X’s promissory note.
period was intended. o Y made a demand for the payment when X’s check
2) If the 1st step is satisfied, the court must decide what period was payment to Y bounced.
probably contemplated by the parties. o X contended that, since the date was left in blank, it
o This period must not be arbitrary, & must be based on the signified that, before their debt would be due, the court
nature & circumstances of the case. should first fix a period of payment considering that the
payment was dependent upon the sole will of X.
CASE: Gregorio Araneta, Inc. vs. Phil. Sugar Estates Development Co., Ltd. • Held: X was liable to Y.
• Lesson: o While the specific date on which each installment would be
o The court cannot fix a period merely because in its due was left blank, the Note clearly provided that each
opinion it is reasonable; it must set the time that the installment should be payable each month.
parties are shown to have intended. o It also provided for an acceleration clause & a late
o The period in an obligation with a period may be payment penalty, which showed the intention of the parties
indefinite, as long as it is not uncertain. that the debt should be paid at a definite date.
• Facts: o X already tried to pay Y for the month, which further reveals
o X bound himself to deliver a piece of land to Y, but both their intentions.
were aware that there were squatters occupying the lot at
the time. No Changing
o The court set a period of 2 years for the obligation of X. • Once the court fixes a period, the parties cannot change it
• Held: There is no justification for setting the date of performance anymore.
at any other time than that of the eviction of the squatters. The
circumstances in the contract admit no other view, even if such Article 1198.
period is indefinite. The debtor shall lose every right to make use of the period:

52 | Katrina Gaw | Block C 2018

Article 1197 2. If the obligation is subject to a condition which depends upon the
Court generally without power to fix a period will of the debtor, the conditional obligation is void because it is
• refers to judicial period distinguished from the period fixed by the actually the fulfillment of the obligation that depends upon the will
parties in their contract which is known as contractual period of the debtor
• if the obligation does not state a period and no period is
intended, the court is not authorized to fix a period When the Court may not fix the term
• the courts have no right to make contracts for the parties 1. When no term was specified because no term was even intended
2. Obligation is payable on demand
When the court may fix a period 3. When specific periods are provided for in the law, as in an
• Depends on the will of the debtor employment contract. The time of employment depends upon the
1. When my means permit me to do so time for payment of salary
2. I’ll pay you little by little
3. As soon as possible Ultimate Facts to be alleged in complaint to properly use Art 1197
4. As soon as I have money 1. Showing that a contract was entered into, imposing obligations
5. In partial payments 2. From which an inference may reasonably be drawn that a period
6. When the debtor is in the position to discharge the obligation for performance was intended
• Although the obligation does not fix a period, it can be inferred
that a period was intended
Examples:
1. A contract to construct a house where the period was not
stated
2. In a sale on credit, when the parties forgot to state in the
invoice the period for payment

Legal effect where suspensive period/condition depends upon

will of debtor
1. Existence of obligation is not affected. It is only the
performance with respect to time that is left to the will of the
debtor.
 (1) When after the obligation has been contracted, he becomes event they disappear, unless he immediately gives new ones
insolvent, unless he gives a guaranty or security for the debt; equally satisfactory
(2) When he does not furnish to the creditor the guaranties or o CASE: Gaite v. Fonacier
securities which he has promised; ! Facts:
(3) When by his own acts he has impaired said guaranties or securities • Payment was secured through 2 security
after their establishment, & when through a fortuitous event they bonds—one with a mining company & another
disappear, unless he immediately gives new ones equally with a bonding company.
satisfactory; • The obligor was obliged to pay the
(4) When the debtor violates any undertaking, in consideration of indebtedness from the time it received the
which the creditor agreed to the period; proceeds of the sale of iron ore.
(5) When the debtor attempts to abscond. escape
• The obligor failed to renew the surety bond
with the bonding company, prior to the arrival
Instances When Debtor Loses Right to Make Use of the Period of the period for delivery, & did not replace it
1) When the debtor becomes insolvent, becomes insolvent, unless he with an equivalent guarantee.
gives a guaranty or security for the debt. ! Held: The obligor lost the right to make use of the
o If a debtor has been given up to Jan. 8 to pay his obligation period, because he had impaired 1 of the security
& he becomes insolvent, the creditor need not wait up to bonds by failing to renew it.
Jan. 8, 1996 to demand payment • The obligee’s acceptance of the surety
! HOWEVER, if the debtor has asked a 3rd person to company’s bond with full knowledge that on
guarantee his debt, or if the debtor puts up his its face it would automatically expire within
house as collateral, he will again have the benefit one year does not amount to a waiver of the
of the period renewal after the expiration date.
o Insolvency need not be judicially declared. o The debtor loses the benefit of the period even if the
2) When the debtor does not furnish the creditor the guaranties or guaranties or securities disappear through a fortuitous
securities he has promised event
o Usually, when the debtor fails to pay & the creditor has ! UNLESS new ones equally satisfactory are
exhausted all avenues to satisfy his claim without any immediately given
favorable result, the creditor can turn to the guarantor for ! Ex. If the house used as collateral is hit by
payment lightning, the debtor will still lose the right to the
! If the guarantor has committed himself solidarily, period unless he gives another house of the same
the creditor can even go against the guarantor quality as collateral
immediately without going against the debtor. 4) When the debtor violates any undertaking, in consideration of
o Securities can take the form of real-estate mortgages or which the creditor agreed to the period
pledges. o Ex. If X convinces Y to allow him to pay his indebtedness on
! If the loan is collateralized through the mortgage May 7, instead of Jan. 30 & Y agrees because X, who is a
of a house & the debtor does not pay, the singer, promises to sing in Y’s nightclub for 3 nights for only
mortgage will be foreclosed. The house will be half the talent fee, & the debtor fails to sing as promised,
sold in a public bidding & a sufficient amount of the debtor loses his right to the period
the proceeds to satisfy the indebtedness will go to o Ex. If, through the act of the owner in a construction
the creditor. contract, the contractor has been prevented from finishing
3) When, by his own acts, the debtor impairs said guaranties or the works on the contractual completion date, the owner is
securities after their establishment, & when through a fortuitous deemed to have waived the time limit & the contractor is

53 | Katrina Gaw | Block C 2018

 bound only to finish the construction within a reasonable • The obligation will not be satisfied through partial fulfillment of
time. several prestations.
! If there are liquidated damages provided for in the • If all but one of the alternatives become legally impossible to fulfill,
contract in case of delay, a claim for such damages the obligation will no longer be alternative.
cannot be sustained; o Ex. Where a loan was payable in PHP or USD, the
! The liquidated damages can’t be restored & made alternative obligation ceased to exist when, at the time the
applicable to an unreasonable length of time. amount became due during the Japanese Occupation,
5) When the debtor attempts to abscond payment in USD was prohibited.
o If the debtor attempts to flee from his obligations, or to
move away to evade payment of his indebtedness, the debt NOTE
can be demanded from him immediately. • In alternative obligations, the prestations need not be the same,
but they could be the same

CLASS DISCUSSION Art. 1200.

• In this provision, it does not matter if the period was fixed to benefit The right of choice belongs to the debtor, unless expressly reserved by the
just the debtor or both parties. creditor.
• In reciprocal obligations, the word “debtor” in this provision would The debtor shall have no right to choose those prestations which are
be irrelevant, because the parties are the creditors & debtors of impossible, unlawful or which could not have been the object of the
each other. obligation.
• Insolvency – person still has assets, but his liabilities exceed his
assets assuming that he pays of all his debts at the same time Debtor’s Choice NOT ABSOLUTE

o Insolvent is required to leave with the Court all his • The choice is given to the debtor by law
properties o EXCEPT when expressly reserved by or granted to creditor
o Any doubt as to who chooses must always be interpreted in
SECTION 3. – ALTERNATIVE OBLIGATIONS. favor of the debtor
• Debtor cannot choose impossible or unlawful prestations, or those
Art. 1199. A which could not have been the object of the obligation.
A person alternatively bound by different prestations shall completely o Ex. if for the accomplishment of the obligation, the debtor
perform one of them. Limitations: can either give a car, fly to the moon, or not join the army,
The creditor cannot be compelled to receive part of one & part of the other 1. Ifthere is nothing to he has all the three prestations as alternatives, namely: to
undertaking. choose
from lisang give, to do & not to do.
choice nalang
natival, ! The 1st & the last alternatives are possible &
Complete Performance debtor must
perform that
lawful while the second, which is to fly to the
• Partial performance of the different prestations cannot be remaining prestation
last moon, is impossible. The debtor therefore has no
considered fulfillment of the obligation & cannot be done Effect of Notice:
2. right to choose this second alternative.
o UNLESS the creditor accepts such partial performance as Q:When will the choice o Ex. If the alternatives are: to give opium, to sing a song or
complete performance. produce effect? not to join the navy,
effect
• Ex. If the debtor can either give a house & a car or paint two A: will only produce ! The 1st alternative is clearly unlawful, so the
the debtor says
murals to satisfy his obligation, he cannot give the car & one mural. the moment
debtor has no right to choose this prestation.
to the creditor
o The creditor cannot even be compelled to accept it; it is choice o Ex. If the alternatives in a modeling contract are: to deliver
choice:alternative
considered an incomplete satisfaction. before saying the dresses, to act as model or to engage in prostitution
and
o The debtor must choose to either deliver the house & car after: pure obligation ! Not only is the last alternative illegal but it could
irrevocable
or the painting of two murals. now not have been the object of the prestation.

54 | Katrina Gaw | Block C 2018

 If through the creditor’s acts the debtor cannot make a choice according to
Article 1201. the terms of the obligation, the latter may rescind the contract with
The choice shall produce no effect except from the time it has been damages.
communicated.
Rescission in Alternative Obligations
in writing
Right of Notification of Creditor orally or
• Ex. If the debtor has three alternatives: to give a particular car, to
• Communication to the creditor gives effect to the choice. sing at a particular night club, or not to resign from his job, & the What ifthe debtor

o The manner of communication can vary, provided that it creditor burns the particular nightclub where he should sing, the have a choice
don't

because the fault

of

clearly conveys the unmistakable choice of the debtor. debtor has effectively been prevented from making a choice from the
of
debtor?

• When the alternatives are all possible, lawful or consistent with the the 3 alternatives, due to the fault of the creditor.
object of the obligation, the creditor cannot oppose the choice. o The debtor can ask for the rescission with damages.
• HOWEVER, if some of the prestations are impossible, unlawful or o If, despite, the act of the creditor, the debtor still wants to
which could not have been the object of the obligation, the creditor maintain the contract, the debtor can select from the
can relay his objection so that the debtor will know remaining choices.
o BUT anyway, the debtor has no right to choose such
proscribed alternatives. Article 1204.
The creditor shall have a right to indemnity for damages when, through the
Article 1202. fault of the debtor, all the things which are alternatively the object of the
The debtor shall lose the right of choice when among the prestations obligation have been lost, or the compliance of the obligation has become
whereby he is alternatively bound, only one is practicable. impossible.
The indemnity shall be fixed taking as a basis the value of the last thing
Only One Practicable which disappeared, or that of the service which last became impossible.
• Generally, whether only one, some, or a majority are practicable is Damages other than the value of the last thing or service may also be
irrelevant to the rights of the creditor. awarded.
o It is generally the debtor’s choice which prevails.
• If only one is practicable, the creditor has no right to complain, Liability for Debtors
because it is the debtor who will lose his right of choice. • The debtor will not be liable in any way for reducing the alternatives
o The creditor must accept this single choice, unless it is from 3 to 2 alternatives, provided what remains are lawful,
unlawful or inconsistent with the object of the obligation. practicable, possible or consistent with the object of the obligation.
• Practicable - capable of being done; feasible. o The debtor will also not even be liable for converting his
o Prestations that are not “practicable” may also include alternative obligation to one where there is only 1 lawful &
lawful, possible prestations but, because of some special possible prestation.
attendant circumstances, they cannot be done. o The debtor may even cause the loss of the thing, or render
• Ex. If the debtor has the following alternatives: to kiss a highly the service impossible.
contagious leper, to sing a song, or not to pay taxes, it is clear that • The debtor must be responsible for losing ALL alternative
A prestations to entitle the creditor to damages.
the last alternative is not only impracticable but also unlawful. The
first alternative, although not unlawful & not impossible, is • Ex. If the debtor has the ff. alternative prestations: to give a car
nevertheless not practicable because it will endanger the debtor’s worth P50,000 or to paint a portrait in a special canvass worth
health. In this case therefore, the debtor loses his right of choice P25,000, the debtor will be liable for damages if he willfully
because only one prestation is practicable which is to sing. destroys the car & willfully destroys the special, rendering both
alternatives impossible.
Article 1203. o If the special canvass were first destroyed & thereafter the
car, the damages to be paid to the creditor will be the

55 | Katrina Gaw | Block C 2018

 SA EXAM, DETERMINE
WHO
become
is
lost generic,
the obligation will
RIGHTTO CHOOSE
NOTE:I fthe thing HAS THE
the
the debtor
can give
just
the
thing of

and
pure
Ok!! BASAHIN NO MABUTI
same
kind and quality

value of the last thing which disappeared—the car worth o If the car, the truck & the boat were lost because of a
P50,000. fortuitous event, the obligation is extinguished.
• The indemnity shall be fixed, taking as a basis the value of the last o If only the car were lost, then the creditor can choose
thing which disappeared, or that of the service which last become between the 2. If only the boat remains, then the obligation
impossible. becomes simple & creditor can demand the delivery.
o Also, damages other than the value of the last thing or 2) Thing is lost through the fault of the debtor - the creditor may claim
service may also be awarded. any of those subsisting, or the price of that which, through the fault
of the former, has disappeared, with a right to damages.
Art. 1205. choice belongs to creditor o If the debtor destroys the car, the creditor still has 3
When the choice has been expressly given to the creditor, the obligation choices, the truck, the boat or the price of the car. In
shall cease to be alternative from the day when the selection has been addition, the creditor shall be entitled to damages
communicated to the debtor. regardless of which alternative he chooses.
Until then the responsibility of the debtor shall be governed by the following 3) Things are lost through the fault of the debtor - creditor can choose
rules: based on the price of any one of them, also with indemnity for
(1) If one of the things is lost through a fortuitous event, he shall damages.
perform the obligation by delivering that which the creditor should o If the car, the truck and the boat were all lost through the
choose from among the remainder, or that which remains if only fault of the debtor, the creditor still has 3 choices: the price
one subsists; of the car, the price of the truck or the price of the boat. In
(2) If the loss of one of the things occurs through the fault of the all cases, the creditor shall be entitled to damages.
debtor, the creditor may claim any of those subsisting, or the price • The same rules shall be applied to obligations to do or not to do in
of that which, through the fault of the former, has disappeared, with case one, some or all of the prestations should become impossible.
a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice Article 1206.
by the creditor shall fall upon the price of any one of them, also with When only one prestation has been agreed upon, but the obligor may render
indemnity for damages. another in substitution, the obligation is called facultative.
The same rules shall be applied to obligations to do or not to do in case one, The loss or deterioration of the thing intended as a substitute, through the
some or all of the prestations should become impossible. negligence of the obligor, does not render him liable. But once the
substitution has been made, the obligor is liable for the loss of the
Creditor’s Choice substitute on account of his delay, negligence or fraud.
• When the choice is given to the creditor, the conferment must
always be express. Facultative-Alternative Obligation.
o Once the choice of the creditor has been communicated to • Ex. If the debtor is obliged to give a car, such prestation is the
the debtor, the obligation ceases to be alternative. principal obligation.
o If the debtor has 3 alternative prestations, once he o It becomes facultative if, in lieu of the car, he can
receives the selection of the creditor, the debtor is bound undertake another prestation like the painting of a mural.
to deliver the choice properly. • Undertaking the substitute prestation is NOT mandatory in the
• The debtor is obliged to take care of it with the proper diligence of a event that the principal prestation is NOT performed as the creditor
good father of a family, unless the law or the stipulation of the only agrees that it may be given as a substitute.
parties requires another standard of care. • If the substitute however is given, the creditor cannot refuse it
Pre-Selection Rules unless it is unlawful.
1) Thing is lost through fortuitous event – the debtor deliver that o However, there is nothing to prevent the parties from
which the creditor should choose from among the remainder, or agreeing that the giving of the substitute prestation is
that which remains if only one subsists.

56 | Katrina Gaw | Block C 2018

 substitution will only take effect
The
of the choice
upon communication
Article 1206 the creditor
to Alternative and Facultative Obligations Distinguished
Facultative Obligation Defined belongs to granted)
debtor, creditor or 3rd person (if expressly

• First by, example: several prostation

choice

prestation sufficient is
performance of is due I

• only one presentation has been agreed upon but the obligor may 1. Alternative - D will give object 1 or 2. If object 1 is lost by
render another in substitution fortuitous event, D will still have to give object 2
Example: D promised to give C his diamond ring but it was 2. Facultative - D will give No 1 but if D wants, he may give
stipulated that D could give his BMW car as a substitute object 2. If object 1 is lost by a fortuitous event, the obligation
is extinguished and D does not have to give object 2.
Effect of loss agreed
have
Either perform the prestation we
upon, or
give the substitute
the
to debtor
choice only belongs

1. Before substitution Query

• if the principal thing is lost through a fortuitous event, the • The law says that the loss or deterioration of the thing intended
obligation is extinguished; otherwise, the debtor is liable for as a substitute, through the negligence of the obligor, does not
damages render him liable. Suppose instead of loss through negligence,
Example: S will give B item 1 or if S wants, item 2. loss of the substitute was done deliberately should the debtor be
a. If item 1 is lost through fortuitous event, the obligation of S is now held liable?
extinguished A: Still no, since he can always comply with the principal
b. If item 1 is lost through fault of S, S is liable for damages obligation.
c. If item 2 is lost with or without the fault of S, S is still liable to
deliver item one; he is not liable for damage for the loss of item 2
2. After substitution
• if the principal thing is lost, the debtor is not liable because it is
no longer due
• if the substitute is lost, the liability of the debtor depends upon
WON the loss is due through his fault
Example: S will give B item 1 or if S wants, item 2.
a. If item one is lost with or without the fault of S, S is not liable for
its loss since his obligation is to deliver item two
b. If item 2 is lost through a fortuitous event, the obligation of S is
extinguished
c. If item 2 is lost through the fault of S, S is liable for damages
 Individual: 1 creditor/debtor

collective accreditors/debtors credits and debts DISTINCT from each other

shares. The are

be divided as
into many equal
↳ presumed to
alone and do affect another
they stand not

mandatory in the event the principal obligation cannot be Art. 1207.

performed. The concurrence of two or more creditors or of two or more debtors in one &
the same obligation does not imply that each one of the former has a right
Effect of Loss to demand, or that each one of the latter is bound to render, entire
• If the substitute is lost through the negligence of the debtor, it does compliance with the prestation. There is solidary liability only when the
not affect the principal obligation & debtor will not be liable. obligation expressly so states, or when the law or the nature of the
• If there is bad faith on the part of the debtor, it depends: obligation requires solidarity.
o If the substitute prestation was one of the main reasons Any of the solidary creditors
may demand full or entire compliance to the obligation

why the creditor was induced the creditor to enter into the Solidary Obligation -> Any
of the may extinguish
the obligation by fully
debtors paying due the amount

contract with the debtor, but the latter did not really intend • Gives anyone, some or all of the creditors the right to demand from
to constitute it as a substitute, this could be an act of fraud anyone, some or all of the debtors the satisfaction of the total
on the part of the debtor, which could make the whole obligation, not merely the share of each debtor in the debt
contract voidable. • Exists only: they being bound solidarily
that are

• Ex. A debtor promises to give a particular car to the creditor. o When the obligation expressly so states, or If absent, obligation

o The debtor negotiates so that he can give a boat to the o When the law or the nature of the obligation requires it. presumed is to

creditor instead of a particular car, which is preferred by · When the law requires
be joint, especially
the obligation
the creditor. Surety v. Guarantor when

is silent
o The creditor resists but he agrees on the promise of the • Surety – an insurer of debt; binds himself to pay the obligation of
nothing if there is
debtor to give not 1 but 2 cars of the same type, which the the debtor when it becomes due. ↳
said liability in the

debtor represents as owned by him, as substitute o Becomes a solidary debtor; the creditor need not go :presumed joint
prestation in the event that the principal prestation is not against the principal debtor first before the creditor can
performed. collect from the surety, either the whole amount of the
o Here, the creditor would not have agreed without this indebtedness or for such amount as the surety was made
substitute prestation. liable by contract.
o After the signing of the contract & before the fulfillment of • Guarantor – an insurer of solvency; subsidiarily liable for the debt
the main prestation, the creditor learns that the debtor of the debtor.
does not own the cars. o Can be required to pay the indebtedness of the principal
• The act of the debtor may constitute fraud & the whole contract debtor only after the creditor has unsuccessfully exhausted
may be annulled. all means to collect from the debtor.
o If the creditor does not try to annul the contract & accepts o Not considered solidarily or even jointly liable.
the giving of the boat, he can no longer assail the contract o HOWEVER, by stipulation of the parties, the guarantor can
as his acceptance cured the defect of said voidable make himself solidarily liable for the indebtedness.
contract.
o HOWEVER, if the promise to the creditor relative to the 2 CASE: Sesbreño v. CA
substitute cars does not constitute the reason for which • Lesson: Custodianship does not equate to solidary liability.
the creditor entered into the contract, the debtor would not • Facts:
be liable for his bad faith if the principal obligation can still o Y was indebted to Z.
be performed. o X company issued a promissory note in favor of Y for the
• Once the substitution has been made, the obligor is liable for the amount of P300K, assigning such to Z as security for the
loss of the substitute on account of his delay, negligence or fraud. payment of Y’s indebtedness to Z.
o The note was placed under the custody of Pilipinas Bank,
SECTION 4. JOINT & SOLIDARY OBLIGATIONS. which informed Z via “Denominated Custodian Receipt”
that it “possessed the promissory note & that upon Z’s

57 | Katrina Gaw | Block C 2018

Article 1207 Some Instances Where the Law Imposes Solidary Liability '
Joint Distinguished from Solidary Obligations 1. Obligations arising from tort
debtor is liable for his share
only own

2. Obligations arising from quasi-contracts

each
• Joint (to each his own) t
May A:
be share B:3/4 cannot
share:
be more

– whole obligation is to be paid or fulfilled proportionately by the 3. legal provisions re: the obligation of devisees and legatees
different debtors and/or is to be demanded proportionately by the 4. Liability of principals and accomplices, and accessories of a
different creditors felony
Example: A and B are joint debtors of C to the amount of 5. bailees in commodatum
1,000,000. C can demand only 500,000 from A and only 500,000 JOINT DIVISIBLE
RULES

from B. ·
X, Y, 2 pays
A and B12,000
X A 16
• Solidary (one for all, all for one) = G obligations ->
-
12,000

B 2,000 each
– each on of the debtors is bound to render, and/or each of the 2

and 2. If X, Y, and 2 proceeds A alone

to

creditors has a right to demand entire compliance with the ·

A, B, C pay X, Y,

X, Y, 2
prestation -
X
9,000/5 divide among
A
y
Example: A and B are solitary debtors of C to the amount of 3,000
=
=1,000 each
2
1,000,000. C can demand the whole 1,000,000 from A. A in turn, A, B, and, I
to can he the
get
whole
IfXalone goes
after paying C, can ask reimbursement from B to the amount of No. He
his
only get
share of 3,000 (1,000
debt? can

500,000.
each from A, B, and C)
from At 1,000
X
If only only
General Rule and Exceptions gets
*
others liable for his
"we" insolvent, the are
GR: Joint
not
pro proportionate,
rata, If C is

Exceptions: share because the debts are distinct a**

interrupts
1. Stipulation in the contract that the obligation is solidary ·In case one
of the creditors makes a demand that

debtor, it
will prejudice
2. Nature of the obligation requires liability to be solidary one not
the running
of prescription to

SHARES NIYO
KO PAKE SA
3. Law declares the obligation to be solidary the others LA

sacks X
rice to
deliver 1,000
of
to
themselves
Words used to indicate solidary liability · A and
If
b bound
X alone. I can still
sacks to
delivered 1,000
• severally, jointly, solidarity, together / separately, individually/ and they
Y. But
B. I can compel
A and B

share
from A and
could go after
collectively demand his
The remedy
of A and B is they
250 sacks each.
• “I promise to pay” signed by two or more persons to deliver
by mistake
reimbursement payment
=

and ask for

X
 written instructions, the bank would undertake physical o An agreement between 3 creditors of a bankrupt, that it
delivery of the above securities fully assigned to Z.” should have a 1/3 of any dividend paid on a claim filed by
• Held: The bank’s statement does not make it a solidary debtor. 2 of the debtors, has been held joint & several contract.
There was no express assumption of solidary liability. o Such expressions as “we or either of us,” or “we jointly and
severally promise”
CASE: PNB v. Sta. Maria
• Lesson: Special power of attorney does not grant the attorney the The Use of “I”
authority to bind himself solidarily with the principal on any loan the • It counts as a solidary obligation when the debtors who were
attorney might thereunder secure. referred merely as “I” were not identified in the body or content of
• Facts: The principal, in a special power of attorney, empowered his the document itself.
agent to borrow money & mortgages of real estate to the creditor. • HOWEVER, if “I promise to pay” were worded differently in that it
Said agent indeed borrowed money, but executed a mortgage not identified the particular person referred to as “I,” then even if there
on the account of his principal but in his own name. The lower court were a number of signatures in the note, the others cannot be held
ruled that this would make the obligation joint & several. liable as solidary debtors because only 1 person as identified
• Held: Such a scenario does not create a solidary obligation. expressly in the promissory note made the promise to pay.
o The others who sign are witnesses & cannot even be held
Express Stipulation for Solidary Liability liable as joint debtors.
• Parties can expressly stipulate solidary liability. • Ex. The promissory note reads: “I, Mr. X, promise to pay Mr. J
• CASE: Pacific Banking Corp. v. IAC P1,000 on or before Jan. 1, 2003.” The signatures of Mr. X (the
o Lesson: It is not the title of the document, but its content, debtor) and Mr. J (the creditor) appear.
that determines what type of obligation it is. o At the lower portion of this document, the signatures of Mr.
o Facts: The document was denominated as a “Guarantor’s M & Mr. N appear, it can never be presumed that Mr. M
Undertaking” but the provision therein stated that the and Mr. N also signed as solidary debtor or creditor.
guarantor jointly & severally shall pay the bank any & all o This is so because:
indebtedness of the principal debtor. ! The law does not make such a presumption.
o Held: Since the undertaking expressly stipulated the joint & ! There is no fact in the wording of the document
several obligation of the debtor, the nature of the from where such a presumption could arise.
obligation was clearly solidary. ! The names of the only debtor & the only creditor
• The ff. phrases that there is a solidary obligation: were exactly identified in the body of the
o Individually & jointly liable document, as Mr. X was identified in the body of
o “Collectively,” “separately,” “distinctly,” “respectively” or the document immediately preceding the word “I”
“severally” & he signed it.
o Individually liable ! Even the nature of the obligation (simple loan)
o Several obligation does not give rise to a solidary obligation.
o “Juntos o separadamente” • Once the terms of an agreement have been reduced into writing, it
o “Mancomun o insolidum” is deemed to contain all the terms agreed upon by the parties & no
o Jointly & severally guaranteed evidence of such terms other than the contents of the written
• The ff. scenarios also display solidary obligation: agreement shall be admissible
o Where the contract reads “I promise,” or “I hereby bind
myself,” & is signed by two or more promisors Effect of Judicial Decision
o Where it reads: “I promise to pay” & is signed by one • Even if the parties stipulated in their contract that the obligation of
person at the bottom & by another on the back thereof. the obligor is solidary but such contract was superseded by a

58 | Katrina Gaw | Block C 2018

 judicial decision declaring the obligation to be merely joint, the said • Some provisions in the Preliminary Title, Ch. 2 on Human Relations
decision must be enforced in a joint manner. of the Civil Code, particularly Articles 19-22, though not expressly
• ALSO, if a decision does not state that the obligation of the providing for solidary liability, nevertheless should give rise to
judgment debtors is solidary, the writ of execution enforcing such a solidary obligations if violated by 2 or more persons.
decision cannot be implemented in a solidary manner among the
judgment debtors. Art. 1208.
If from the law, or the nature or the wording of the obligations to which the
Law & Solidary Obligations preceding article refers the contrary does not appear, the credit or debt
• Art. 94 & 121, last par., Family Code – If the ACP/CPG is shall be presumed to be divided into as many equal shares as there are
insufficient to cover the liabilities for which the ACP/CPG is liable, creditors or debtors, the credits or debts being considered distinct from one
the spouses shall generally be solidarily liable for the unpaid another, subject to the Rules of Court governing the multiplicity of suits.
balance with their separate properties
• Art. 145, Family Code - If the property arrangement of the spouses Joint Obligations
is the separation of property, the liability of the spouses to creditors • Presumption of law - an obligation is always joint.
for family expenses shall be solidary. • In the absence of a finding of facts that debtors made themselves
• Art. 927, Civil Code – In inheritance, if 2 or more heirs take individually liable for the debt incurred, they are obliged to pay only
possession of the estate (of the deceased), they shall be solidarily their share in the indebtedness.
liable for the loss or destruction of a thing devised or bequeathed, o Creditors can only claim their share in the credit in
even though only one of them should have been negligent. proportion to own & owe.
• Art. 1824, Civil Code - All partners are solidarily liable with the • It is only when the (1) law, or (2) the nature or (3) the wording of the
partnership for everything chargeable to the partnership in cases in obligation clearly provides for solidary liability will the obligation be
Art. 1822 & 1823 of the Civil Code. such.
• Art. 1894, Civil Code - 2 or more agents may agree to bind • Unless otherwise specified, the creditors & debtors in a joint
themselves solidarily obligation shall be entitled or shall make payment in equal
o Art. 1895, Civil Code – If solidarity is agreed upon, each of proportions.
the agents is responsible for the non-fulfillment of the o If A & B are indebted to C & D for P1,000:
agency, & for the fault or negligence of his fellow agents, ! C can collect from A & B P250 each.
except in the latter case when the fellow agents acted ! D can likewise collect from A & B P250 each
beyond the scope of their authority • If in the same P1,000 obligation, A owes only 1/3 of the
• Art. 1945, Civil Code - With respect to bailees in commodatum, indebtedness & B owes 2/3 while creditor C owns 1/5 of the credit
when there are 2 or more bailees to whom a thing is loaned in the & D owns 4/5:
same contract, they are liable solidarily. o A is obliged to pay C only P66.67 & D only P266.67.
• Art. 2146, Civil Code - In the quasi-contract negotiorum gestio, ! A owes only 1/3 of P1,000 which is P333.33.
pertinently provides that the responsibility of 2 or more officious ! C & D can collect only from that share of A.
managers shall be solidary, unless the management was assumed ! Since C only owns 1/5 of P333.33, he can only
to save the thing or business from imminent danger. collect P66.67 from A.
• Art. 2157 - The responsibilities of 2 or more payees, when there is ! Since D owns 4/5 of P333.33, he can only collect
payment of what is not due, is solidary. P266.67 from A.
• Art. 2194 - The responsibility of two or more persons who are liable ! B is obliged to pay P133.33 to C & to D only
for quasi-delict is solidary. P533.33.
! Following the same principle, B only owes 2/3 of
Nature of the Obligation & Solidarity the P1,000 indebtedness which is P666.67. C & D
can collect only from that share of B.

59 | Katrina Gaw | Block C 2018

 kinds Solidarity:
of

Active:creditors
Conventional:agreed upon by parties
law
Passive:debtors Legal:imposed by
Examples:

coina
·bri">⑤I*$iri
Mixed:o n the of creditors and debtors
part

! Since C only owns 1/5 of P666.67, he o Since the obligation is joint, the debtors shall not be responsible for
can only collect P133.33 from B. the share of a debtor who is insolvent.
! Since D owns 4/5 of P666.67, he can
only collect P533.33 from B. Art. 1210.
The indivisibility of an obligation does not necessarily give rise to solidarity.
Art. 1209. Nor does solidarity of itself imply indivisibility.
If the division is impossible, the right of the creditors may be prejudiced only
all be
by their collective acts, & the debt can be enforced only by proceeding Solidary v. Indivisibility Jointindivisible:debtors deliver it
simultaneously
must creditors -> must

to
present
against all the debtors. If one of the latter should be insolvent, the others • Solidary obligation - refers to the nature of the obligation attaching collect

shall not be liable for his share. to the obligor & obligee entire compliance demanded by creditor, fulfillmentby debtor
• Indivisibility - refers to the nature of the object of the prestation
Effect of Impossible Division Ex. You deliver
can't a car part by If
part puede by d ivisible
part:

• If the division of the obligation is impossible & the obligation is Art. 1211.
joint, the creditors must act collectively. Solidarity may exist although the creditors & the debtors may not be bound
• Ex. If the joint obligation is to give a house to 3 creditors, one of the in the same manner & by the same periods & conditions.
creditors cannot undertake an act which will prejudice the others. same stipulations
Uniform:bound by
o A waiver of the obligation cannot be made by anyone of the Creditors & Debtors Need Not be Bound in the Same Manner varied:NOT bound by the same

creditors UNLESS such waiving-creditor has been • A solidary obligation refers to the nature of the obligation. stipulations

authorized by the others to undertake such act. o It can exist even if the creditors & debtors are not bound in
o If there is no such authority & a waiver is to be made, ALL the same manner & by the same periods & conditions.
the creditors must waive the obligation. o The creditor, for example, can collect an amount owed by
• If there are 3 debtors obliged to give a single house, all of the back
solidary debtors at the time when the periods imposed on
debtors must be sued if they renege on their obligation. go
onpromise the particular debtors have been fulfilled.
o If 1 of the 3 debtors refuses to deliver the house, the • Ex. If A, B & C are solidarily indebted to D in the amount of
obligation will be converted into a claim for damages. P15,000, D can collect from anyone of the debtors the whole
! A joint indivisible obligation gives rise to indemnity amount of the indebtedness. A is required to pay only on Aug. 1,
for damages from the time any of the debtors 1997, B only on May 1, 1998 & C immediately.
does not comply with the undertaking. o If D demands payment from C on Jan. 6, 1997, he can pay
! The debtors who were ready to fulfill their only P5,000 which pertains to his share. The liability of A &
promises shall not contribute to the indemnity B have not yet matured.
beyond the corresponding portion of the value of o On August 2, 1997, creditor D can still demand payment of
the thing or service in which the obligation the balance from C who can legally pay only P5,000
consists. representing A’s share considering that B’s liability has not
o Ex. If the house is worth P150,000, the creditors can file a yet matured.
case for damages against the 3 debtors in the amount of
P150,000. Each of the debtors will be liable for P50,000. CLASS DISCUSSION
! The debtor who refuses to deliver or who is, in • Solidary debt can be enforced as JOINT in relation to obligations
effect, responsible for the suit by the creditor may with a period (Art. 1211 & 1212).
be liable for additional damages. o You can collect from anyone, but only the share that is due.
! Those who were willing shall not contribute to the
indemnity beyond their corresponding debt. Art. 1212.
Each one of the solidary creditors may do whatever may be useful to the
Where One Debtor is Insolvent others, but not anything which may be prejudicial to the latter.

be Art
with 11215
should read together
60 | Katrina Gaw | Block C 2018
 if of the debtors
Q:What one
joint
JOINT the car?
fails to deliver
car?
(precunian liability(
refused the
accept
Q:What
itone the
of creditors to
be converted to damages
will
the car and the obligation
deliver
Debtors may longer
A: no

in court the car is 240,000, 3 debtors,

the car of
consign
just A:I fthe value
remedy
to
is each
80,000
be paying
they will
to wait Art. 1213.
insolvent? They have
All for One, One for All A solidary creditor cannot assign his rights without the consent of the
if
what
he is able to pay
until

• Even just one of the solidary creditors can file a suit for recovery of others.
the entire indebtedness from the solidary debtors.
o But when he does something prejudicial to the other Mutual Trust
creditors, the action of said creditor is not necessarily void. • Ideally, the relationship between & among solidary creditors is one
• CASE: Quiombong v. CA of mutual trust.
o Facts: Only one of the solidary creditors filed suit for • Thus, a solidary creditor cannot assign his rights without the
collection against the solidary debtors. The debtors moved consent of the others.
for the dismissal of the suit on the ground that the other
solidary creditor should have been included in the case. Art. 1214.
o Held: Recovery of the contract price was surely a useful act The debtors may pay any one of the solidary creditors; but if any demand,
& can be done even by one solidary creditor. judicial or extrajudicial, has been made by one of them, payment should be
! The question as to who should sue on a solidary made to him.
creditorany beneficial
do
obligation for the collection of the price was a
act
solidary
A may

or useful the
to
perform
others he
but personal issue between the solidary creditors, & it
cannot Payment to the Creditor Who Makes the Demand
any prejudicial
act
them
to
did not matter who as between them filed the • Generally, a debtor may pay any of the solidary creditors.
complaint, since the debtors were liable to either • BUT if one of them makes an extrajudicial or judicial demand,
of them for the whole obligation. payment must be made to such creditor.
• If one of the solidary creditors makes an extrajudicial demand for
the debtor to pay, this will benefit also the other creditors. Two Views
o The demand will make the prescriptive period for the • Once a court case has been filed by one solidary creditor, the
fulfillment of the obligation run anew. debtor cannot pay the other solidary creditor who is not included in
• HOWEVER, a solidary creditor should NOT do anything which may the case.
be prejudicial to the other solidary creditors. • The effect of paying a different creditor has led to 2 views:
o Ex. If the solidary obligation has become due & the debtor 1) If payment is made to a creditor who is not a party to the suit or
decides to make complete payment to one of the solidary did not make the demand, the payment is INVALID.
creditors, such solidary creditor must accept payment. o Based on the view that, as soon as one of the creditors
! Non-acceptance is prejudicial to the other solidary make the demand, the mutual representation of the
creditors, as it would lead to a delay on the part of creditors with respect to each other momentarily
the creditors for which they all may be liable. ceases
o Ex. If one of the solidary creditors remits the obligation in o When the case terminates & demanding-creditor
favor of one of the solidary debtors, the whole obligation is accepts partial payment with a reservation as to the
extinguished. balance or, if after extra-judicial demand, the
! The extinguishment can no longer be invalidated. demanding-creditor accepts partial payment with
! Their remedy is to collect their share of the reservation as to the balance, the other creditors can
indebtedness from the solidary creditor who made now again seek payment from the debtor.
the remission. 2) The payment made to the other creditors is VALID (the Sta.
! They can likewise ask for damages for what ever Maria opinion).
they may have lost as a result of the remission, o Art. 1214 does not provide for invalidity, so the answer
such as interest which should have been earned should be what is most beneficial to the creditors.
had it not for the remission. o Payment to the demanding creditor must be seen as a
preference only.

61 | Katrina Gaw | Block C 2018

 o If the non-demanding creditors accept the payment, • Confusion: If D issues a promissory note to X in the amount of
the demanding creditor will not be prejudiced because P1,500 & X endorses it to A who endorses it to D, there is a merger.
the case for collection pending in court will not o The debt has been extinguished because of creditor D
necessarily be dismissed. There will still be interest, without creditors E and F being benefited.
damages or attorney’s fees to talk of, unless the • So as not to prejudice the other solidary creditors, D must pay each
creditor waives them. of them P500.
o The same should apply in extrajudicial demand. o The creditor who may have executed any of these acts of
o Consistent with Art. 1222 – where a solidarity debtor novation, compensation, merger or confusion, as well as
may avail himself of all the defenses which are derived he who collects the debt, shall be liable to the others for
from the nature of the obligation & those personal to the share in the obligation corresponding to them.
him, or pertain to his own share.
CLASS DISCUSSION
Art. 1215. • In Art. 1215, despite the prejudice to the unknowing creditor, the
Novation, compensation, confusion or remission of the debt, made by any of obligation is nevertheless extinguished.
the solidary creditors or with any of the solidary debtors, shall extinguish the • All other modes of extinguishment by one creditor will have the
obligation, without prejudice to the provisions of Art. 1219. same effect as those mentioned in Art. 1215, which will also still
The creditor who may have executed any of these acts, as well as he who apply.
collects the debt, shall be liable to the others for the share in the obligation
corresponding to them. Art. 1216. Notapplicable to a obligation
joint

prejudicial the co-creditors:will be liable The creditor may proceed against any one of the solidary debtors or some or
Modes of Extinguishing an Obligation
to

if beneficial, only all of them simultaneously. The demand made against one of them shall not
1) Novation – the change of creditors, debtors or the principle pay
liable
to
be an obstacle to those which may subsequently be directed against the
condition of the contract shares due to the

creditors others, so long as the debt has not been fully collected.
other
o MUST clearly release the solidary obligation of debtors
2) Compensation – when 2 persons, in their own right, are creditors & CASE: Imperial Insurance, Inc. v. David
debtors of each other • Lesson: A solidary debtor of a deceased co-debtor can be
3) Confusion - the merger of the characters of the creditor & debtor in proceeded against by the creditor for the enforcement of the debt,
the same person even if the creditor did not participate in the intestate proceedings.
4) Remission – the condonation of an obligation
• Facts:
o A husband & wife bound themselves jointly & severally in
Illustrative Example
favor of the obligee for a sum of money.
• NOTE: The entire obligation is extinguished, not just the debt of o When the husband died, the obligee demanded payment
the debtor whose debt was expressly extinguished. from the wife who resisted payment, claiming that the
• A, B & C are solidary debtors of D, E & F in the amount of P1,500. obligee’s claim is barred by its failure to file a claim in the
• Novation: If A informs D that X is paying the debt provided that A is intestate proceeding of the deceased husband.
released from the obligation, & X & D agree to the change, there is • Held: The obligee can properly claim from the wife, as the obligation
a novation in the person of A, one of the debtors. is solidary.
o Because of this novation, not only A’s obligation, but also o If husband and wife bound themselves jointly& severally, in
B’s and C’s are extinguished. case of his death her liability is independent of & separate
• Compensation: If A becomes the creditor of D, also for P1,500, & from her husband’s; she may be sued for the whole debt. It
said amount is also due, there is compensation between A & D. is wrong to hold that the claim against her & her husband
o The compensation extinguishes not only the obligation of A should be made in the decedent’s estate.
but also that of B and C.

62 | Katrina Gaw | Block C 2018

Article 1215 Example of Partial Compensation:
Effect of Novation A and B are solidary debtors of C to the amount of 2,000,000, but
• modification of an obligation by changing its object or principal C is indebted to A for 500,000. This is a case of partial
conditions compensation, and therefore the solidary obligation amounting to
Example: A and B are solidarity liable to X and Y. Solitary 1,500,000 still subsists.
creditors, for the payment of 800,000. A and X agreed that
instead of paying 800,000, A will just paint X’s house. Here, the Effect of Confusion (or Merger)
solidary obligation of paying 800,000 is extinguished and • characters of creditor and debtor are merged in the same person
replaced by the obligation of painting the house. If B did not
consent to the location, B will not be bound to X and Y, and Effect of Remission (or Waiver)
moreover, will not be obliged to give A anything. Also, only X will• act of liberality whereby a creditor condones the obligation of the
be allowed to prejudice his co-creditor Y, so X must reimburse Y debtor
for 400,000 (which is really Y’s share of the credit) • creditor tell the debtor “forget about the whole thing”
Example of Total Remission:
Effect of Compensation A and B are solidary debtors of X and Y, solidary creditors to the
• takes place when two persons are creditors and debtors of amount of 4 million. X tells A that he was waiving the whole
each other obligation. Here, the total remission completely extinguishes the
• may be total or partial depending upon the amount involved whole obligation, without prejudice to Y collecting from X his share
• total compensation automatically extinguishes the obligations, of the credit of 2 million, otherwise X’s remission would prejudice
whether known or unknown to the parties Y.
Example of Total Compensation: Example of Partial Remission:
A and B are solidary debtors of X and Y, solidary creditors to the A, B, and C are solidary debtors of X in the amount of 3 million. X
amount of 400,000. But X owes A 400,000 on account of a then made a demand from A but collected only 2 million because
different obligation. Here we have a case of automatic he was remitting A's share (of 1 million). How much can A recover
extinguishment of the obligation by virtue of total compensation. from B
But B should not benefit completely since it was A’s credit that
was used to compensate. So B owes A 200,000 (his share of
debt). Upon the other hand, Y should not be prejudiced, so Y
can recover 200,000 from X.
Effect of extension of time given by creditor to a solidary Article 1217:
debtor Effects of payment by a solidary debtor
• an extension of time granted by the creditor to a solidary debtor • Article 1217 refers to the effects of payment by one of the
does not amount to a novation that will discharge the other solidary debtors. It is not applicable where no such payment has
solidary debtors been made
• the latter shall be liable for the whole debt les the share of the 1. Between the solidary debtors and creditors: Payment made
debtor granted the extension by one of the solidary debtors extinguished the obligation.
• upon the expiration of the term, the creditor can demand However, the creditor for his protection is given the right to
payment of the unpaid share from any of the solidary debtors choose which offer to accept if two or more solidary debtors
• in surety ship, the effect of the extension given to the principal offer to pay
debtor without the consent of the surety is to extinguish the 2. Among the solidary debtors: payment by one of the solidary
contract of suretyship debtors does not create a real case of subrogation. It merely
NOTE: in a suretyship, a person (surety) binds himself solidarity entitles him to claim reimbursement from his co-debtors
with the principal debtor. In a solidary obligation, a solidary debtor “only the share which corresponds to each”
is himself a principal debtor. Hence, a solidary debtor cannot be 3. Among the solidary creditors: the receiving creditor is jointly
considered a guarantor of his co-debtor liable to the others for their corresponding shares

Effect of novation, etc. where obligation joint Basis of the right to be reimbursed
• does not extinguish or modify the obligation except with respect • the fact of payment is the basis of the right to be reimbursed,
to the creditor or debtor affected, without extending its operation for not until then had he the right to be reimbursed
to any other part of the debt or of the credit • hence, the obligation of the others to reimburse him arises only
from the time payment is made
Article 1216:
Against whole creditor more proceed
• against any, some, or all of the solidary debtors —
simultaneously
Effect of not proceeding against all
• if the creditor sues only one, or two, or several of the debtors
(but not all) there is no waiver against those not yet sued. They
may be proceeded against later.
CASE: Guererro v. CA If the payment is made before the debt is due, no interest for the
• Lesson: Compromise is not the same as novation; thus when a intervening period may be demanded.
compromise agreement between the creditor & one solidary debtor When one of the solidary debtors cannot, because of his insolvency,
fails, the creditor can still seek payment from the other debtor. reimburse his share to the debtor paying the obligation, such share shall be
• Facts: borne by all his co-debtors, in proportion to the debt of each.
o The creditor filed a suit against one of the solidary debtors.
The suit was compromised without novating the solidary Creditor’s Choice
debt. • Creditor can choose whom he will enforce payment
o The said solidary debtor defaulted in making payment, • Creditor may also choose which offer to accept when 2 or more
resulting in the creditor demanding payment from the solidary debtors offer him payment
other solidary debtor. • Ex. A, B & C are solidarily indebted to D for P1,500 on May 1.
o The other solidary debtor claimed that there was already a o A, B & C offered to pay D on the due date.
waiver by the creditor to go against him considering that he ! D can choose whose payment to accept.
already compromised the case with his other solidary o If D accepts payment from A, the obligation is totally
debtor. extinguished.
• Held: There was no waiver. The fact that in the compromise ! A then has the right to claim P500 each from B &
agreement the creditor chose to go after the 1st debtor did not C (their respective shares in the indebtedness).
imply waiver of its right to proceed against any of the solidary o If A paid interest on the indebtedness, B & C must also
debtors or some or all of them simultaneously. share in the payment of the interest.
o Demand made against one of them is not an obstacle to ! NOTE: If payment is made before the debt is due,
demands which may subsequently be directed against the no interest for the intervening period may be
others so long as the debt or any part of it remains demanded.
outstanding & unpaid. o If A pays the indebtedness on Feb. 1, no interest can be
claimed by A for the period beginning Feb. 1 up to May 1,
Partial Payment the due date of the obligation.
• The solidary creditor has a right not to accept partial payment from o If C cannot pay because he is insolvent, his share shall be
the solidary debtors. borne by A & B in proportion to the debt of each.
o AND if he accepts partial payment from some, he is not ! A is liable for P250 & so is B. Since A paid the
prevented from claiming from those who have not yet paid entire obligation, A can ask reimbursement of said
• If a claim from one of the solidary debtors has been dismissed by a P250 (C’s share) from B.
court on grounds other than the extinguishment of the whole CLASS DISCUSSION
obligation or prescription, it does not necessarily mean that the • When a solidary debtor pays for the entire debt of his co-debtors &
solidary indebtedness cannot be claimed against the other solidary his own & has a right to reimbursement from his fellow debtors, the
debtors who were (1) not impleaded in the case or against those debt of the debtors becomes JOINT, not solidary.
who were (2) impleaded but whose liability was found by the court
as proper. SCENARIO
o Facts: A, B & C are solidarily indebted to X for P200. A told X that he
Art. 1217. would pay X partially, P110, with reservation that the balance was
Payment made by one of the solidary debtors extinguishes the obligation. If still due. What happens next?
two or more solidary debtors offer to pay, the creditor may choose which o Answer: A has paid more than his share & now has the right to
offer to accept. collect from B & C.
He who made the payment may claim from his co-debtors only the share
which corresponds to each, with the interest for the payment already made. Art. 1218.

63 | Katrina Gaw | Block C 2018

 the share of the debtor,
only
If pertains
to

the
not
entire obligation, it
d oes nor
t elieve

debtor from his share

the paying

Payment by a solidary debtor shall not entitle him to reimbursement from Only ONE Creditor in Art. 1219
his co-debtors if such payment is made after the obligation has prescribed • Article 1219 is applicable only when there is one creditor.
or become illegal. • If there are many solidary creditors involved, remission of the debt
by one of them without the consent of the others will be prejudicial
No Reimbursement for Payment Made by a Co-Debtor When: to the other solidary creditors & is now allowed (Art. 1219).
(1) Payment is made after the obligation has prescribed no longer due o If the remission is done, the solidary creditor who made the
(2) Payment is made after the obligation has become illegal remission shall be liable for the share which the other
creditors should answer for damages which the other
Illustrative Example: Prescription solidary creditors may suffer as a result of the remission.
• An action based on a written agreement must be brought within 10 • Ex. A, B & C are solidary creditors of X, who owes them P1,500
years from the time the cause of action accrues. payable on Dec. 30, 2001 with interest of 15% per annum. B
• Hence, if A & B, solidary debtors pursuant to a written loan condoned the debt on April 1, 2001 just one day after it was
agreement, are bound to pay C on May 2, 199Y. On the said date, incurred.
the creditor makes a demand on them, but does not collect until o B shall be liable to A for P500 & C for P500, plus damages
after 12 years from the demand. equivalent to the interest which A & C would have gotten
o The claim clearly has prescribed. had the obligation not been condoned & had it been paid
• However, if A pays the creditor despite prescription, B can refuse to on Dec. 30; thus, interest from April 1-Dec. 30, 2001.
pay A his share because technically the debt has prescribed.
Art. 1221.
cancellation Prevents fraud and
give justice paying debtor
Art. 1219. If the thing has been lost or if the prestation has become impossible without
to

The remission made by the creditor of the share which affects one of the the fault of the solidary debtors, the obligation shall be extinguished.
solidary debtors does not release the latter from his responsibility towards If there was fault on the part of any one of them, all shall be responsible to
the co-debtors, in case the debt had been totally paid by anyone of them the creditor, for the price & the payment of damages & interest, without
before the remission was effected. prejudice to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has
Art. 1220. become impossible after one of the solidary debtors has incurred in delay
The remission of the whole obligation, obtained by one of the solidary through the judicial or extrajudicial demand upon him by the creditor, the
debtors, does not entitle him to reimbursement from his co-debtors. provisions of the preceding paragraph shall apply.

Effects of Remission When Thing is Lost

• Depends when the remission was in fact given by the creditor • Obligation is extinguished & debtors are not liable when lost or
• Ex. A, B and C are solidary debtors of D in the amount of P1,500. A when the prestation becomes impossible without their fault d ebtors
innocent

persuades D to condone the debt. • When there is fault or delay on the part of any of the solidary cango after the

debtor
o A cannot collect reimbursement from B or C because the debtors before it is lost or becomes impossible, all the solidary guilty

remission by D of A’s debt extinguishes the entire debtors will still be held liable. price of the thing lost+damages
obligation.
o HOWEVER, if C, after the debt becomes due, pays the Art. 1222.
whole indebtedness & A only convinces D to condone the A solidary debtor may, in actions filed by the creditor, avail himself of all
debt after C’s payment, remission has no effect. defenses which are derived from the nature of the obligation and of those
! By the time the remission was made, D’s credit which are personal to him, or pertain to his own share. With respect to those
has already been extinguished. C can still claim which personally belong to the others, he may avail himself thereof only as
from A, the latter’s share of the indebtedness. regards that part of the debt for which the latter are responsible.

64 | Katrina Gaw | Block C 2018

Article 1221 • Those personal to the debtor sued (this is complete defense
If the thing is lost or the prestation becomes impossible, the generally, but if the defense is non-fulfillment yet of a condition or
liability of the solitary debtors depends upon WON there is the non-arrival yet of the term, this only a partial defense, that is,
fault or delay he will still be liable except forms own share in the meantime)
1. Loss without fault and BEFORE delay: obligation is Examples:
extinguished 1. Vitiated Consent (he was forced) — complete defense
2. Loss is due to fault on the part of a solidary debtor: all shall be 2. Incapacity to give consent (a minor) — complete defense
responsible to the creditor, for the price and the payment of 3. Non-fulfillment of condition imposed regarding his share
damages and interest (PARTIAL defense)
3. Loss is without fault but AFTER delay: all of the solidary 4. Non-arrival of term (regarding his share — partial defense)
debtors are responsible (even for a fortuitous event)
• Those personal to the others — partial defense
Article 1222
Kinds of defenses raised by solidary debtor Effect of Debtor’s Death
• Derived from the nature obligation (complete defense) X is Y’s surety. Creditor sued Y, who died pending the
Examples: proceedings. Although the credit must now be Brought in the
1. Lack of consideration or cause special settlement proceedings of Y’s estate, an ordinary action
2. Absolute simulation (contract is totally fictitious) filed against X as surety would prosper, the transfer not being a
3. Illegal consideration defense of X
4. Extinguishment of the obligation (whole debt is paid, remitted,
or has prescribed)
5. Non-fulfillment of suspensive condition (if made upon the whole
object or upon all the debtors)
6. Statute of frauds
7. When ALL the debtors were incapacitated to give consent
8. When there are VICES OF CONSENT (vitiated consent) on the
part of ALL the debtors (such as when all were forced or
intimidated or unduly influenced)
 • Divisible obligation – easy to demand from each joint obligor
Scenario payment of his respective share
• Ex. A, B & C are indebted to G in the amount of P1,500, but B shall • Indivisible – each debtor must coordinate with the rest of the
only pay if he passes the bar exam for lawyers in 1996 & C shall debtors for the fulfillment of the obligation
pay only on Jan. 2, 1997, & A when he reaches the age of 18. • Ex. If A, B & C are jointly bound to deliver a computer worth
o If G sues B in 1996 after he passes the bar, B can set up P30,000 to D & the latter, on due date, demands payment from
the defense that C’s obligation is subject to a period which them, all of them must fulfill the obligation.
has not yet arrived, & also the defense that A’s contract is o If A & B are ready to deliver but C, for no justifiable reason,
voidable since he was a minor at the time he (A) refuses to deliver, said debtors’ joint obligation is
contracted the solidary obligation. converted into a claim for damages on the part of the
o If B is successful in claiming said defenses, he will aggrieved creditor, who can file a case against all them for
nevertheless pay the amount of P500 which pertains to his the amount of the computer. He can also demand for
share because there is no impediment in collecting the damages he suffered due to the non-delivery of the
same from him. computer, such as exemplary damages, moral damages, or
attorney’s fees.
CLASS DISCUSSION o A & B however should not be held liable for these other
• There is always a choice in delay & other faults of debtors: damages as they were willing to deliver the computer. It
o Specific performance will only be C who should shoulder these other damages.
o Damages
Art. 1225.
SECTION 5. – DIVISIBLE & INDIVISIBLE OBLIGATIONS. For the purposes of the preceding articles, obligations to give definite things
& those which are not susceptible of partial performance shall be deemed
Art. 1223. to be indivisible.
The divisibility or indivisibility of the things that are the object of obligations When the obligation has for its object the execution of a certain number of
in which there is only one debtor & only one creditor does not alter or modify days of work, the accomplishment of work by metrical units, or analogous
the provisions of Ch. 2 of this Title. things which by their nature are susceptible of partial performance, it shall
be divisible.
Divisibility or Indivisibility However, even though the object or service may be physically divisible, an
• The nature& effect of obligations do not affect the divisibility or obligation is indivisible if so provided by law or intended by the parties.
indivisibility of the things that are the objects of the obligations in In obligations not to do, divisibility or indivisibility shall be determined by the
which is only 1 debtor & 1 creditor. character of the prestation in each particular case.

Art. 1224. Indivisible Obligations

A joint indivisible obligation gives rise to indemnity for damages from the • An obligation which is not susceptible of partial performance
time anyone of the debtors does not comply with his undertaking. The o Ex. a contract stipulating that an actor has to sing & dance
debtors who may have been ready to fulfill their promises shall not simultaneously, is also indivisible.
contribute to the indemnity beyond the corresponding portion of the price of • An obligation to give definite things.
the thing or of the value of the service in which the obligation consists. o Ex. an obligation to give a particular house.

Joint Debtors Divisible Obligations

• Bound only to perform their respective portion in a particular • When the obligation has for its object the execution of a certain
indebtedness. number of days of work
of
Effect Non-compliance
is converted a
into monetary for indemnity
obligation
one

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Article 1223
2. Qualitative: based on quality
Meaning of Divisible and Indivisible Obligations
Example: if one child inherits land and the other inherits cash
1. Divisible: capable of partial performance
3. Intellectual/Moral: exists merely on the mind
Example: deliver 200 kg of sugar
Example: My brother and I own in common a car. My one-half
2. Indivisible: not capable of partial performance
share is only in the mind.
Example: deliver a specific car
Kinds of indivisibility
Test for the distinction
1. Legal: where a specific provision of law declares as indivisible
• What is the purpose of the obligation?
2. Conventional: where the will of the parties makes as indivisible
• What is the purpose of the parties?
3. Natural: where the nature of object or prestation does not
• When the object is not physically divisible or the service is not
admin it of division (ex: to give a particular car, to sing a song)
susceptible of partial performance, the obligation is ALWAYS
indivisible Article 1225
• Presumed indivisible: only one creditor and only one debtor Obligations that are deemed indivisible
1. Obligations to give definite things (to give this specific car)
Indivisibility v. Solidarity
2. Those which are not susceptible of partial performance (to
sing a song, to dance tinkling)
Indivisibility Solidarity
3. Obligations provided by law to be indivisible even if thing or
Refers to nature of obligation refers to ties between the parties
service is physically divisible (under the law, taxes should be
only needs 1 debtor needs at least 2 debtors/creditors
paid within a definite period. Although money is physically
& 1 creditor
divisible, the amount of tax payable must be delivered in toto,
The fault of 1 is the fault the fault of 1 is not the fault of
not partially)
of others. others
4. Obligations intended by the parties to be indivisible even if
thing or service is physically divisible (the obligation of D to
Kinds of Division
give 1,000 to C on certain date. Money is physically divisible
1. Quantitative: based on quality
but the clear intention here is for D to deliver 1,000 at one time
Example: if 10 chairs are equally divided between 2 brothers
and as a whole)
Obligations deemed divisible
1. When the object of the obligation is the execution of a certain
number of days of work (when a laborer is hired to work for 10
days)
2. When the object of the obligation is the accomplishment of
work by metrical units (when a laborer is hired to construct a
street 3m wide and 50m long)
3. When the purpose of the obligation is to pay a certain amount
in installments (when a debtor is required to pay in 10 annual
installments)
4. when the object of the obligation is the accomplishment of
work susceptible of partial performance

Divisibility or Indivisibility in Obligations Not to Do

• In negative obligations not to do, the character of the prestation
in each particular case shall determine their divisibility or
indivisibility
Examples:
1. Indivisible: X obliged himself to Y not to sell cigarettes in his
store for one year. Here, the obligation should be fulfilled
continuously during a certain period
2. Divisible: if the obligation of X is not to sell cigarettes in his
stores only during Sundays and holidays, the obligation is
divisible because the forbearance is not continuous

Obligations to do and not to do are generally indivisible

Obligations to do stated in par. 2 of Art 1224 are divisible
 • When the object is the accomplishment of work by metrical units, or • Example of a divisible obligation – projects with phases (like
analogous things, which by their nature are susceptible of partial subdivisions)
performance
SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE.
Express Stipulation
• Despite the nature of the obligation, the parties themselves may Art. 1226.
stipulate whether or not the object or service shall, for purposes of In obligations with a penal clause, the penalty shall substitute the indemnity
their contract, be divisible or indivisible. for damages & the payment of interests in case of non-compliance, if there
• The wording of the contract therefore will be material to show the is no stipulation to the contrary. Nevertheless, damages shall be paid if the
characterization of the obligation. obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
• CASE: Government vs. CFI obligation.
o The penalty may be enforced only when it is demandable in accordance with
o Lesson: Words like “in proportion” & “stages” are the provisions of this Code.
indicative of the divisible nature of the obligation.
o Facts: The compromise agreement stated, among others, Penal Clause accessory
->

that the work was to be done in stages to be determined • GENERALLY, Obligation is extinguished when penalty is paid.
by the City Engineer, that the contractor was to advance • An accessory obligation which the parties attach to a principal
the necessary amount needed for each stage of the work obligation for the purpose of insuring the performance thereof by
to be reimbursed by the Pasay City Government, & that the imposing on the debtor a special prestation (generally consisting in
contractor was to furnish in favor of the Pasay City the payment of a sum of money) in case the obligation is not
Government a new performance bond in the amount fulfilled or is irregularly or inadequately fulfilled
required by law & regulations in proportion to the • If the principal obligation has been complied with, the penal clause
remaining value or cost of the unfinished work of the has lost its efficacy or enforceability
construction per approved plans and specifications. • Application may be governed by the parties
o Held: The provisions in the compromise agreement read o If there is nothing stipulated as to how it shall be applied,
together clearly show a divisible obligation. then the law applies: the penalty substitutes the indemnity
! If the parties really intended the legal rate of 20% for damages & interest in case of non-compliance
performance bond to refer to the whole unfinished • In some foreign jurisdictions (United Kingdom, Australia, New
work, then the provisions should have required Zealand and some states in the United States), a penalty is
the plaintiff contractor to submit & file a new different from liquidated damages.
performance bond to cover the remaining o Penalty - there is need of proof of loss
value/cost of the unfinished work of the o Liquidated damages - may be made without proof of loss
construction. Using the words in proportion then • HOWEVER, in the Philippines, there is no difference between them
significantly changed the meaning of the legally, though they may differ as a matter of language.
paragraph to ultimately mean a performance bond o In either case, the creditor is entitled to recover the sum
equal to 20% of the next stage of the work to be stipulated without the necessity of proving damages.
done. o It is meant to be harsh.
• Generally, imposition of the liquidated for breach of contract, such
Obligations “To Do” or “Not To Do” as in a building contract, bars any award for additional damages at
• Divisibility or indivisibility shall be determined by the character of large for the same breach.
the prestation in each particular case o HOWEVER, if the parties stipulate that the award of the
penalty pursuant to the penalty clause will not bar recovery
CLASS DISCUSSION of damages or interest, then it shall be so.

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Article 1226 Obligations with penal clause strictly construed
Meaning of Principal and Accessory Obligations • obligations imposing penalties and forfeitures are strictly
1. Principal: can stand by itself and does not depend for its construed. Thus, it is well-settled that sureties are only
validity and existence upon another obligation chargeable according to the strict terms of the bond
2. Accessory: attached to a principal obligation (can’t stand
alone) Kinds of Penal Clause
1. As to its origin:
Meaning of obligation with a penal clause a) Legal: provided by law
• one which contains an accessory undertaking to assume greater b) Conventional: provided for by stipulation of the parties
liability in case of breach 2. As to its purpose:
• coercive means to obtain from the debtor compliance from the
·
a) Compensatory: penalty takes place the place of damages
debtor b) Punitive: penalty is imposed merely as punishment for breach
3. As to its dependability or effect:
Purpose of penal clause a) Subsidiary/Alternative: only the penalty can be enforced
1. To insure their performance by creating an effective deterrent b) Joint/Cumulative: both the principal obligation and the penal
against breach, making the consequences of such breach as clause can be enforced
onerous as it may be possible
2. To substitute a penalty for the indemnity for damages and the Liability for Penalty, Damages, and/or Interests L~
GR

payment of interests in case of non-compliance 1. Penalty substitutes for damages and interests in non-compliance
case

and breach
of

of the

3. To punish the debtor for the non-fulfillment or violation of his- proof of actual damages suffered by the creditor is not principal
obligation necessary in order that the penalty may be enforced
2. Penalty and interests enforceable
Penal Clause v. Condition - law permits an agreement upon a penalty apart from the
1. The first constitutes an obligation although accessory, while interest
the latter does not - should there be such agreement, the penalty does not include
2. Former may become demandable in default of the the interest and as such, the two are different and distinct things
unperformed obligation and sometimes jointly with it, while the which may be demanded separately
latter is never demandable - a penalty to answer not only for atty’s fees but for collection
fees as well, is in the nature of liquidated damages
3. Penalty, damages, and interests enforceable Exception

a) when stipulated by parties

b) when the obligor refuses to pay the penalty
c) when the obligor is guilty of fraud in the fulfillment of the
obligation
- when both the penalty and the damages or interests may be
recovered, it is evident that the purpose of the penal clause is the
punishment of the debtor for his breach of the principal
obligation
4. Requirement to make penalty enforceable
- penalty may be enforced only when it is demandable in
accordance with the provisions of Civil Code
- penalty, as a stipulation in a contract, is demandable only if
there is a breach of the obligation and it is not contrary to law,
morals, good customs, etc.
- if the obligation cannot be fulfilled due to a fortuitous event, the
penalty is not demandable
 • The penalty may be in any form, which is determined or liquidated o Once the obligation has been complied with &
• The creditor in an obligation with a penal clause shall still be extinguished, the penal clause has lost its raison d’etre.
entitled to damages when: • GENERAL RULE: When the penalty is paid, the obligation is
o The debtor is guilty of fraud; extinguished.
o The debtor refuses to pay the penalty; o HOWEVER, the parties CAN stipulate that payment of the
o When stipulated by the parties penalty & satisfaction of the obligation can be demanded
• The penalty may be enforced only when it is demandable. at the same time.
o An obligor is in delay only upon judicial or extra-judicial • In the event that (1) the creditor demands fulfillment of the
demand unless legally excused as provided by law. obligation & (2) it has become impossible without his fault, the
o Hence, the penalty may be claimed only when there is penalty may be enforced.
demand, whether judicial or extrajudicial, unless the law, o Ex. A is to deliver a particular computer to B on May 7,
the stipulation of the parties or the nature of the contract 1997. It was stipulated that in the event he fails to deliver
(time is of the essence) otherwise demands. on time, he shall be liable for liquidated damages in the
CLASS DISCUSSION amount of P200,000. B demands delivery of the particular
• 3 Exceptions to the General Rule on Penalties Replacing Damages: computer on the due date but A fails to deliver. Thereafter,
1) When parties stipulate in the contract that both are still the computer is hit by lightning after his default. B can
demandable. demand payment of the P200,000 penalty.
2) When there is fraud on the part of the person who must pay
3) When the debtor refuses to pay the penalty CLASS DISCUSSION
• Penalty may or may not extinguish the obligation, especially when • The debtor still owes the performance of the main obligation even if
the contract says: “penalty for each & every day of delay” he pays the penalty, though the creditor cannot ask simultaneously
• Can creditors/debtors manipulate the penalty clause to their liking? for penalty & fulfillment
Generally, yes.
• Is penalty a substitute for non-compliance? Yes. Art. 1228. Applies only penalty
where is to for
fixed by parties substitute indemnity damages
Proof of actual damages suffered by the creditor is not necessary in order
Art. 1227. that the penalty may be demanded.
The debtor cannot exempt himself from the performance of the obligation
by paying the penalty, save in the case where this right has been expressly Proof of Damages Not Necessary
reserved for him. Neither can the creditor demand the fulfillment of the • Because the particular penalty in the penalty clause is already
obligation & the satisfaction of the penalty at the same time, unless this specified & hence liquidated
right has been clearly granted him. However, if after the creditor has • The person will perform the penalty in the agreement for as long as
decided to require the fulfillment of the obligation, the performance thereof there is irregular or no compliance with the principal obligation
should become impossible without his fault, the penalty may be enforced. regardless of whether or not the person seeking it suffers damages
• CASE: Allen v. Province of Albay:
Performance of the Principal Obligation o If through the act of the owner in a contract, the contractor
• Penalty is merely an accessory obligation. It is not the principal will be prevented from finishing the works on the
obligation. contractual completion date:
GR: o The debtor CANNOT substitute the performance of the 1) The owner shall be deemed to have waived the
principal obligation by the mere payment of the penalty. time limit or the time period
Exception:o HOWEVER, the parties can stipulate otherwise. 2) The contractor is bound only to finish the
• Likewise the creditor CANNOT demand fulfillment of the obligation construction within a reasonable time
& payment of the penalty at the same time.

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 3) If there are liquidated damages provided for in partially performed his obligation to complete at least 50%
case of delay, a claim for such damages cannot be his house within 2 years, having done so a month after
sustained. deadline.
4) Neither could the liquidated damages be restored o CASE: Palmares v. CA
to be made applicable to an unreasonable length ! Facts: There was a penalty interest of 3% per
of time. month on the total amount due but unpaid in a
contract. The total amount owed was P5,000 &
CLASS DISCUSSION there was partial payment of P8,600 on due date.
• The principal is extinguished when you pay the penalty. There was also a heavy compensatory interest
• This rule on actual damages applies because the amount for the separate from the penalty interest.
penalty has already been pre-determined ! Held: The Court eliminated the penalty charge for
• General Damages: being excessive & unwarranted under the
o Compensatory/actual damage – cost of object circumstances.
o Moral damages – sleepless nights, anguish o CASE: Jison v. CA
o Exemplary damages – extreme breach in bad faith ! Lesson: When there has been partial or irregular
! Moral & exemplary – bigger than actual damage compliance with a contract for special
o Bad faith = further damages indemnification in the event of failure to comply
with its terms, the courts will rigidly apply the
• There CAN be breach of contract in good faith. doctrine of strict construction & against the
o In such a case, only actual damages is paid. enforcement in its entirety of the indemnification
where said indemnity is essentially a mere penalty
Art. 1229. reduced by
having for its principal object the enforcement of
court:
When the penalty be
may
The judge shall equitably reduce the penalty when the principal obligation partly complied
has
compliance with the contract
with
obligation
.

has been partly or irregularly complied with by the debtor. Even if there has by the debtor ! Facts:
been no performance, the penalty may also be reduced by the courts if it is Obligation
2. irregularly
has been
o The contract price was originally P55K.
o The contract states that, in case the
with the debtor
complied by
iniquitous or unconscionable. if
contract is cancelled, the amounts
even
is unconscionable,
3.Penalty
a all
performance
been
already paid shall be forfeited in favor of
no t
has
Equitable Reduction
there

• A contract is a source of obligation. the vendor as liquidated damages.

o Law between the parties o The amount already paid, P47K, was
o Neither the law nor the courts will extricate a party from an forfeited as per the contract stipulation
undesirable contract he entered into with all the required when said contract was cancelled.
formalities & with full awareness of its consequences ! Held: While the resolution of the contract & the
forfeiture of the amounts already seen were seen
• Exception to the general rule: PENALTIES
as valid & binding, the Court reduced the penalty
o If a penalty is unconscionable, the court may (1) temper,
from P47K to P23K. Furthermore, since the
(2) reduce or, in some cases, (3) delete it.
contract was cancelled, the lot reverts back to the
• Situations when court modified the penalty:
owner.
o The court reduced the 25% penalty charge to cover the
attorney’s fees & collection fees, which was in addition to
Invalid Penalty Clause
the 12% annual interest, to 10% for being manifestly
• If the penalty clause, construed against the one enforcing it, is so
exorbitant
unconscionable that its enforcement constitutes an undue
o The court reduced a subdivision lot buyer’s liability from
the stipulated P12K to P1.5K after finding that he had

68 | Katrina Gaw | Block C 2018

 deprivation or confiscation of the property of the obligor, the courts (2) Loss of the thing due
can strike it down. (3) Condonation or remission of the debt
(4) Confusion or merger of the right of the creditor & debtor
SCENARIO (5) Compensation
• Question: The car is valued at P1,000 & the penalty for failure to (6) Novation
deliver is P1M. Can the debtor complain when he is in delay & (7) Annulment
made to pay the penalty? (8) Rescission – cancellation of the creditor due to substantial non-
• Answer: NO. The amount is pre-determined damage. This would be compliance (breach of trust)
the same if the car value is P1M & the penalty is P1,000. (9) Fulfillment of a Resolutory Condition
o BUT the debtor has a remedy: he can go to the courts. (10) Prescription

Article 1230. Effect of Death of a Party

The nullity of the penal clause does not carry with it that of the principal • Does not extinguish an obligation unless said obligation is:
obligation. o Personal in nature
The nullity of the principal obligation carries with it that of the penal clause. o Intransmissible
• Heirs – The lessor’s heirs who inherit the leased property from the
Principal Obligation & Penal Clause deceased lessor cannot set up the claim that the obligation to allow
• The penal clause, being merely an accessory obligation, does not the property under the lease contract in the possession of the
invalidate the principal obligation in the event that such penal lessee has been & eject the lessee under the deceased lessor’s
clause is void or without effect. contract
• The nullity of the principal obligation carries with it that of the penal o Death of a party does not excuse non-performance of a
clause. t he principal obligation
If
void, the penal clause isvoid is also contract which involves a property right
-
clause s tand
can't alone obligation
without
which
o Rights thereunder pass to the personal representatives of
acted bad faith,
the deceased
who in
to the fault
ofthe debtor
is due
t he
If nullity
enforced
resulted damages,
to the may
penalty be
o Nonperformance is also not excused by death
CHAPTER 4 – EXTINGUISHMENT OF OBLIGATION • Crime – When there is civil liability for the commission of a crime,
the death of the offender generally extinguishes the crime & the
GENERAL PROVISIONS civil liability.
o CASE: People v. Jose
Art. 1231. Modes of Extinguishing Obligations. ! Facts: The accused forcibly abducted & raped the
Obligations are extinguished: victim & was convicted, with obligation to pay
(1) By payment or performance; moral & exemplary damages. He appealed the
(2) By the loss of the thing due; decision, but before the judgment of conviction
(3) By the condonation or remission of the debt; could become final, he died.
(4) By the confusion or merger of the rights of creditor & debtor; ! Held: The case was dismissed & he & his heirs
(5) By compensation; were relieved from all penalties.
(6) By novation. o HOWEVER, if the civil liability neither solely nor originally
Other causes of extinguishment of obligations, such as annulment, springs from the crime, the liability shall persist despite the
rescission, fulfillment of a resolutory condition, & prescription, are governed extinction of the criminal liability.
elsewhere in this Code. ! CASE: Torrijos v. CA
• Facts: A person bought a property from
Ways of Extinguishing an Obligation: the accused, & thereafter the accused
(1) Payment or performance again sold the property to another person.

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Article 1231 Article 1232
Classification by CASTAN of Causes of Extinguishment of Meaning of payment
Obligations • delivery of money and giving of a thing other than money, the
1. Voluntary doing of an act, or not doing of an act.
a. Performance: Payment & Consignation
b. Substitution: Dacion en pago (conveyance for payment) & Elements of Payment:
novation 1. Persons who may pay and to whom payment may be made
c. By release agreement: 2. Thing or object in which payment must consist
i. Agreement subsequent to the constitution of the obligation: 3. The cause thereof
• mutual waiver, unilateral waiver, and remission 4. The mode or form thereof
ii. Agreement simultaneous to the constitution of the 5. The place and the time in which It must be made
obligation 6. The imputation of expenses occasioned by it
• resolutory condition and extinctive period 7. The special parts which may modify the same and the effects
they generally produce
2. Involuntary
a. By reason of the subject: confusion and death of the Acceptance by Creditor
contracting parties in the cases where the obligations are • For payment to properly exist, the creditor has to accept the
personal same, expressly or implicitly
b. By reason of the object: impossibility of performance, loss of
the thing due Effect of Payment Under Void Judgement
c. By failure to exercise (right of action): extinctive prescription • the payment is also null and void

Burden of Proving Payment

• An alleged creditor has the burden of showing that a valid debt
exists
• Once he does, the debtor has the burden of proving that he has
paid

Means of Proving
• Presentation of receipt
 The accused was charged & convicted of • Lesson: Promissory notes in the hands of
the crime of estafa & was made to pay the creditor are proofs of debt rather than
damages. The accused died while the proofs of payment.
appeal was pending. • Facts: X presented promissory notes
• Held: While his criminal liability was showing Y’s debts. But there were no
extinguished, his civil liability was not. His receipts or other satisfactory evidence to
civil liability did not arise solely or prove Y’s alleged payment to X.
originally from the crime itself, but from a • Held: The Court upheld Y’s indebtedness.
contract of sale of property not The burden of proof to show the
implemented due to his deceitful acts. obligation has been extinguished due to
payment is on the debtor Y.
CLASS DISCUSSION
• Technically speaking, when X pays Y with a check, that is NOT CLASS DISCUSSION
payment. When paying through a check, the MONEY is not yet • Payment is an active mode of extinguishing an obligation.
delivered. o Some of the modes are passive.
• In reciprocal obligations, both parties always pay:
SECTION 1. PAYMENT OR PERFORMANCE. o If X pays Y to sing.
! X pays Y with money.
Art. 1232. ! Y’s singing is payment.
Payment means not only the delivery of money but also the performance, in o If X gives Y a piano, Y will give him P10,000.
any other manner, of an obligation. ! Both parties are PAYING.
! X pays through the piano.
Obligation to Pay ! Y pays by giving P10,000.
• Not limited to the delivery of money
• Any manner of performing the obligation with the end in view of Art. 1233.
extinguishing it. A debt shall not be understood to have been paid unless the thing or service
o Ex. A purchases a car from seller B. A can pay not only in in which the obligation consists has been completely delivered or rendered,
money, but also In services, provided that B agrees. as the case may be.
• There are presumptions made by law in favor of payment.
o The receipt of the principal by the creditor, without Complete Delivery
reservation with respect to the interest, shall give rise to • FULL satisfaction of the debt or obligation
the presumption that said interest has been paid. • Must comprise everything that is necessary to satisfy the obligation
o The receipt of a later installment of a debt, without consistent with the object of the same
reservation as to prior installments, shall likewise give rise o Ex. Determinate things must include the delivery of all
to the presumption that such installments have been paid. accessories & accessions, even if not mentioned; payment
o These presumptions can be rebutted by evidence. of loan with stipulated interest is only complete when
! If presumptions are overturned, the burden of money is given with interest
proving there has been payment rests on the • Anything less may be considered a breach of the obligation
obligor. • CASE: PNB v. CA
o It has been consistently held that the burden of proof to o Lesson: Debtor must also be able to prove that payment
show payment once the debt has been fully established by was made to the correct person or representative.
evidence is on the debtor
! CASE: Biala v. CA

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 o Facts: PNB paid an alleged attorney-in-fact of the creditor, actual debt. This can merit the release of a mortgage, or prevent a
but there was no proof that the alleged attorney-in-fact was creditor from rescinding the contract.
the representative of the creditor. • Facts:
o Held: Payment was not effective. A check was never o The debtor had already paid the creditor more than the
delivered to the creditor. original amount of loan, which had a security of mortgage,
due to the imposition of a high interest rate plus penalty
Art. 1234. Doctrine of Substantial Performance. charges.
If the obligation has been substantially performed in good faith, the obligor o The debtor, as payment of the remaining balance of
may recover as though there had been a strict and complete fulfillment, less P3,558.20, had in effect paid P8,650.00 in addition to the
damages suffered by the obligee. P1,000 it also paid
• Held: The mortgage could be released because there was already
Obligor May “Recover” substantial compliance. However, the debtor was still required to
• Obligor may be paid, minus damages pay some penalties.
• The part that was not performed must not destroy the value of the
purpose of the contract & there must be good faith Damages
• The obligor may recover as though there had been a strict &
Doctrine of Substantial Performance complete fulfillment, less damages suffered by the obligee.
• NOT complete performance o Obligor may be compensated for the work performed.
• Constitutes a breach of the obligation if not for the legal treatment • Examples:
that when such occurs, the obligor may recover as though there o The difference between the value of the house as built
had been strict & complete fulfillment, less damages suffered by &the value it would have had had it been constructed
the obligee strictly according to the contract is the measure of
o HOWEVER, breach should NOT be a material one enough damages in such a contract.
to compel the obligee to rescind the whole obligation o The defaulting party will be allowed to recover the contract
o The part unperformed must NOT destroy the value or price less the cost of correction of the defects of the
purpose of the contract unfinished work.
o It must also be done in good faith
Requisites: ! Conscious departure from the contract will not CASE: JM Tuason & Co. Inc. v. Javier
1. There must be substantial necessarily defeat recovery. The pertinent inquiry • Lesson: The obligor may ask for a reasonable extension to pay all
performance. Its ·

is not whether the breach was willful but whether his obligations to the obligee.
existence depends upon the behavior of the party in default comports with • Facts:
the circumstances of the standards of good faith & fair dealing. o The obligor had been religiously satisfying the monthly
each particular case
! Even an adverse conclusion on this point is not installments after the execution of the contract for a period
2. The obligor must be in
decisive but is to be weighed by other factors, of almost 8 years.
good faith.
such as the extent to which the owner will be o The total aggregate amount the obligor has paid to the
deprived of a reasonably expected benefit & the obligee, when including interests, already exceeds the
extent to which the builder may suffer forfeiture, in original loan.
deciding whether there has been substantial • Held: The obligor was allowed time to pay his debts, taking into
performance. account the circumstances of his case.

CASE: Pagsibigan v. CA CLASS DISCUSSION

• Lesson: There is substantial compliance when the debtor, due to • General rule: COMPLETE compliance is required
the interest charged, technically already paid much more than the
When is Art 1234 Applicable?
• applies only when an obligor admits breaching the contract after honestly and faithfully performing all
71 | Katrina Gaw | Block C 2018 the material elements thereof except for some technical aspects that cause no serious harm to the obliges

NOTE: the determination of the existence of a breach of contract is a factual matter not usually reviewable
 NOTE: Article 1235 does not require the protest or objection of the creditor to be made in a particular time or
manner. So long as the acts of the creditor, at the time of the incomplete or irregular payment of the debtor,
evince that the former is not satisfied, the obligation shall be deemed extinguished

o Exceptions: Doctrine of Substantial Compliance (where ! Accepting – agreeing or acceding to an incomplete

there is a breach, but it is substantially complete) or irregular performance
! Art. 1234 – Good faith – no waiver of damages
! Art. 1235 – Irregularity is accepted – waiver of CASE: Tayag v. CA
damages • Facts: The sellers accepted from the purchaser numerous
• Magdalena case – just pay what is lacking if there is substantial payments in installment of the purchase price of a particular piece
compliance; no more extinguishment of land after due date & posterior the grace periods provided in the
• If the payment is still with the obligor, the object of the contract contract without any protest as to the delayed payments. The
(e.g. a car) is still with the obligor. purchaser filed a case for specific performance relative to the sale,
& consigned at the same time the balance of the purchase price
Art. 1235. • Held: The actuation of the sellers was clearly a waiver of his right to
When the obligee accepts the performance knowing its incompleteness or rescind the contract. Also, on the basis of Art. 1235, he was
irregularity, and without expressing any protest or objection, the obligation is likewise estopped from reneging their commitment on account of
deemed fully complied with. acceptance of benefits arising from overdue accounts of the
purchaser.
Waiver Reason for the article: presence of waiver and estoppel
• The substantial compliance in Art. 1235 connotes the waiver of the No Objection to Invoice
obligee of damages arising from the breach of the contract which • If a party fails to interpose any objection to the entries in an invoice
resulted in the incompleteness or irregularity furnished to him by the other party, such failure can be considered
• By not expressing any protest or objection, the obligee accepts the as implied acceptance & he will be liable to pay the amount stated
performance of the obligation as fully complied with despite his
knowledge of such irregularity. SCENARIO
• CASE: Esguerra v. Villanueva • Facts: X owes Y P1M. X offers to pay P900K. Y can legally refuse it,
o Lesson: The law does not require the protest of the creditor but should he?
to be made in a particular manner or at a particular time. • Held: No. Y should just take it. But he MUST protest & say, “Give me
Recovery allowed when So long as the acts of the creditor, at the time of the the 900K, but you still owe me for the rest.”
incomplete or irregular
incomplete payment by the debtor, or within a reasonable o Y should give a receipt for the amount received & the
performance is waived
• founded on the principle of time thereafter, evince that the former is not satisfied with balance that is still due.
estoppel said payment, the obligation is still not fully extinguished.
• in case of acceptance, theo Facts: CLASS DISCUSSION
law considers that the ! The debtor claimed that, because the creditor • If obligee says nothing about a defect upon acceptance, the
creditor waives his right. The received his partial payments of P800 & P1,400, obligation is deemed fulfilled.
whole obligation is
the creditor was to be considered to have o HOWEVER, acceptance (agreeing with the payment) is not
extinguished.
• If the payment is accepted the incompleteness of the performance. the same as receipt (receiving the object)
incomplete or irregular, the ! The day immediately following the first payment of • Objection can be done reasonably after the receipt; the
creditor may properly reject it P800, the creditor asked the judge to issue the concurrence of the receipt & the objection is not necessary.
corresponding writs of execution in the case. o Ex. X owes Y P100K. X pays only P90K. Y did not protest
Requisites: o Held: The debtor is wrong. The creditor patently manifested during receipt, but after seeing the missing money, Y went
1. The obligee knows that his dissatisfaction in relation to the 1st payment of the
the performance is immediately to the sheriff to enforce the mortgage. This
incomplete/irregular
P800 when he filed the case the next day. Even the debtor objection is valid even if it occurred after receipt of P90K.
2. He accepts the impliedly acknowledged the dissatisfaction when, after the • Failure to interpose objection = estoppel within reasonable time.
performance without suit was filed against them already, they paid the creditor
expressing any protest or P1,400. Receipt is NOT the same as acceptance. Article 1236.
objection

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Persons from whom the creditor must accept payment
1. The debtor
2. Any person who has an interest in the obligation
3. A third person who has no interest in the obligation when there is stipulation that he can make payment

The creditor is not bound to accept payment or performance by a 3rd person ! X can only recover the amount of P500,000 but
who has no interest in the fulfillment of the obligation, unless there is a he cannot compel the creditor to transfer the
stipulation to the contrary. mortgage to him.
Whoever pays for another may demand from the debtor what he has paid, ! In case A does not pay X, X cannot foreclose on
except that if he paid without the knowledge or against the will of the the mortgage to satisfy his claim.
debtor, he can recover only insofar as the payment has been beneficial to • HOWEVER, if the third party who paid is interested in the obligation,
the debtor. such as a guarantor, surety, or co-debtor, legal subrogation is
presumed.
Article 1237. o Such interested third party-payor can have the right even
Whoever pays on behalf of the debtor without the knowledge or against the as to the accessory obligations such as a mortgage.
will of the latter, cannot compel the creditor to subrogate him in his rights, o HOWEVER, the presumption is rebuttable.
such as those arising from a mortgage, guaranty, or penalty. • Legal subrogation - transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor or
Article 1238. against 3rd persons, be they guarantors, or possessors of
Payment made by a 3rd person who does not intend to be reimbursed by the mortgages.
debtor is deemed to be a donation, which requires the debtor’s consent. But
the payment is in any case valid as to the creditor who has accepted it. 2) 3rd Person Pays the Creditor with the Knowledge of the Debtor, but
Payments Made by a 3rd Person Debtor Objects
• Payment made by a third person & accepted by the creditor • Effect is the same as in #1
extinguishes the obligation in ALL CASES as to the original creditor.
o The difference lies in the rights of the new creditor, 3) When 3rd Person Pays the Creditor with Knowledge & Consent of Debtor
depending on the knowledge of the debtor. With regard to • 3rd person can recover from the debtor the amount paid to the
the old creditor, the obligation is extinguished either way.
creditor!
• The good faith or bad faith of 3rd person is immaterial. • 3rd person can also compel the creditor to transfer to him any
• W/N the one who paid completely acquires the rights of the creditor mortgage, guaranty or penalty – there is legal subrogation!
as against the debtor depends on W/N the payment has been • Ex. from No. 1: X can recover P500,000.!
made without knowledge or against the will of the debtor. o X can compel the creditor to transfer to him the real estate
mortgage of A so that if A does not pay, X can foreclose on
1) 3rd Person Pays without Knowledge or Against the Will of the Debtor
the mortgage to satisfy his claim.!
• 3rd person can only recover from the debtor to the extent that the
debtor has been benefited. 4) When the Creditor Accepts Payment Due to Contract
• As to what is beneficial to the debtor can be invoked only by such • When the contract between the debtor & creditor states that a 3rd
debtor & not the creditor. person can make the payment, the effect is the same as #3.
o W/N it is beneficial to the debtor is determined by the law
& not the will of the debtor. 5) When 3rd Person Pays the Creditor without Intending to be Reimbursed
o The beneficial effects must be determined at the time the • Obligation is extinguished whether or not the consent of the debtor
payment was made.
is obtained.
• The 3rd person cannot compel the creditor to subrogate him in his • However, payment will be treated as a donation, which requires the
rights, such as those arising from a mortgage, guaranty or penalty. consent of the debtor.
o Ex. A is indebted to B for P500,000 secured by a real
• Ex. A is indebted to B. X pays B the said indebtedness without
estate mortgage on the house of A, & X pays B the said
intending to be paid back by A. This will be treated as a donation &
indebtedness in the amount of P500,000 without the
hence A should accept the payment made by X.
knowledge or against the will of A.

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Article 1236 NOTE: Other instances when recovery can be had from the
Persons from whom the creditor must accept payment creditor and not from the innocent debtor
1. The debtor 1. When the debt has prescribed
2. Any person who has an interest in the obligation (e.g. 2. When the debt has been completely remitted
guarantor) 3. when the debt has already been paid
3. A third person who has no interest in the obligation when there 4. When legal compensation has already taken place
is stipulation that he can make payment
Payment with/without the knowledge or against the will of the
Right of Creditor to Refuse Payment by 3rd Person debtor
• Exceptions: 1. “Can recover only insofar as the payment has been beneficial
1. If there is a stipulation allowing this to the debtor”
2. If said obligation has an interest in the fulfillment of the • when made without his knowledge or against his will, is a
obligation defense that may be availed only by the debtor, not the creditor
• once the creditor has accepted payment, his status and rights
Effect of Payment by a 3rd Person become automatically extinguished
1. If made without the knowledge or against the will of the debtor 2. If the 3rd person pays with the knowledge of the debtor, the
• the recovery is only up to the extent or amount of the debt at the latter must oppose the payment before or at the time the same
time of the payment was made
• payor is not entitled to subrogation (such as those arising from
penalty, mortgage, or guarantee); he is allowed only beneficial Agoncillo v. Javier
reimbursement • FACTS: D owed C. Without D’s knowlege, X, a friend, paid C part
-reimburse
Example: puede ipa of D’s debt. So, D still owed the remainder. Does X’s payment of
If X pays for Y’s transportation fare, without Y’s knowledge, or part of the debt prevent the running of the prescriptive period
against Y’s will, and later discovers that Y was entitled to HALF- regarding the remaining part?
FARE, X can recover only said half-fare, even if he had paid the • HELD: NO, because in no way may D be said to have
FULL FARE. This is clearly the fault of X. acknowledged the existence of the debt
2. If made with knowledge of the debtor
• the payor is entitled to reimbursement an subrogation, that is, to
recover what he has paid and to acquire all the rights of the debtor
Article 1237
Subrogation Defined
• act of putting somebody into the shoes of the creditor, hence,
enabling the former to exercise all the rights and actions that have
been exercised by the latter

Right of Creditor to Refuse Payment by 3rd Person

• Exceptions:
1. If there is a stipulation allowing this
2. If said obligation has an interest in the fulfillment of the
obligation

Some Rights Which May Be Exercised by the Person

Subrogated in the Place of the Creditor
• Rights arising from:
1. Mortgage
2. Guaranty
3. Penalty or Penal Clause

Right of 3rd Person to Subrogation

• Whoever pays on behalf of the debtor is entitled to subrogation if
the payment is with the consent of the latter
• If the payment is without the knowledge or against the will of the
debtor, the 3rd person cannot compel the creditor to subrogate
him in the latter’s accessory rights of mortgage, guaranty, or
penalty
Q: May there be subrogation if the creditor willingly permits the
payor to be subrogated in his rights?
A: Since this provision is for the benefit of the debtor, the
subrogation can only take place with his consent.
 o If A does not consent, the obligation nevertheless will be recover the same from the obligee who has spent or
extinguished in so far as B is concerned. consumed it in good faith.
o Ages here have been REPEALED. A minor is now below 18
CASE: Tanguilig v. CA years of age.
• Lesson: There must be an agreement between the 3rd party & the o If ever, this applies to only minors who are below 18.
original creditor regarding the payment of the debtor’s debts for • Minors do not have free disposal; contracts entered into by them
this provision to even apply. are annullable.
• Facts: o Even if a minor owns something, especially those which
o X was supposed to pay Y because Y built a windmill for X. have significant value, he does not, on his own, have the
o X claimed he made payment to another contractor who free disposal of it without the consent of his parents & the
built the well to which the windmill system was connected courts.
& such payment must be credited as payment to Y.
• Held: X is incorrect. The only contract that existed between X & Y Article 1240.
was the construction of a windmill & therefore any payment to the Payment shall be made to the person in whose favor the obligation has
contractor of the deep well was ineffective. been constituted, or his successors-in-interest, or any person authorized to
o X cannot claim the benefit of the law concerning receive it.
“payments made by a 3rd person.” The provisions do not
apply because no creditor-debtor relationship between Y Payment should only be made to:
(the creditor) & the 3rd party has been established 1) The creditor or the obligee
regarding the construction of the deep well. Specifically, 2) His successors-in-interest
the 3rd party did not testify that he entered into a contract 3) Any person authorized to receive it - not only a person authorized by
with Y for the construction of X’s deep well. If 3rd party was the same creditor, but also a person authorized by law, such as a
really commissioned by Y to construct the deep well, an guardian, executor or administrator of estate of a deceased, &
agreement particularly to this effect should have been assignee or liquidator of a partnership or corporation, as well as
entered into. any other who may be authorized to do so by law

Article 1239. Rules on Payment

In obligations to give, payment made by one who does not have the free • No consideration for good faith or bad faith
disposal of the thing due & capacity to alienate it shall not be valid, without o Payment to a stranger would be generally invalid even with
prejudice to the provisions of Art. 1427 under the Title on Natural good faith
Obligations. • CASE: Panganiban v. Cuevas - Payment made to a 3rd person, even
through error & in good faith, shall not release the debtor of the
Incapacity obligation to pay & will not deprive the creditor of his right to
• General rule: One has the free disposal of the thing due & capacity demand payment.
to alienate it only if he is the owner of the thing or at least he has o If it becomes impossible to recover what was unduly paid,
been given authority by the owner to use the property as payment any loss resulting is borne by the deceived debtor, who is
for the obligation “to give.” the only one responsible for his own acts unless there is a
• “Without prejudice to the provisions of Article 1427 under the Title stipulation for the wrongful payment.
on “Natural Obligations.” below 18 • CASE: PNB v. CA - Where payment was made to one claiming to be
o When a minor between 18 & 21, who has entered into a the attorney-in-fact of the creditor but no evidence of his authority
contract without the consent of the parent or guardian, was presented, the Court ruled that payment was not effected.
voluntarily pays a sum of money or delivers a fungible thing
in fulfillment of the obligation, there shall be no right to CASE: BPI v. CA

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 • Lesson: The relationship between a bank & its depositor, was one
of creditor and debtor (the depositor being the creditor & the bank Rules for Payment to an Incapacitated Person
being the debtor), & any withdrawal by the depositor was in effect • Incapacitated person – minor, insane
payment of a debt by a bank • Generally, for an incapacitated person to be able to administer his
o Payment made by the creditor to the wrong party does not property & transact business, he must have a court-appointed
extinguish the obligation as to the creditor who is without guardian handle his affairs.
fault or negligence, even if the debtor acted in utmost good o However, the father and the mother shall be the legal
faith & by mistake as to the person of the creditor, or guardian of the property of the unemancipated common
through error induced by fraud of a 3rd person. child without the necessity of a court appointment.
• Facts: • Payment should be made to the guardians of the incapacitated
o BPI was aware of the dispute involving the ownership of a person. If it is made directly to the incapacitated person, said
certain deposit; despite this, it allowed the withdrawal of payment is voidable.
the said deposit by the heirs of the deceased. • Payment made to a 3rd person is also valid if it redounds to the
o They claimed the deposit was that of their deceased father benefit of the incapacitated person/creditor
o They also successfully obtained a judicial resolution from the o BUT the benefit must be proven
probate court allowing the withdrawal of the said money, • HOWEVER, if payment is made to an incapacitated person, it is
although said resolution did not specifically order the bank to effective in two situations:
release the money 1) When he has kept the thing delivered
o BPI, relying on the judicial resolution, released in good faith the o If payment is made to a minor, he must keep it in
money which turned out as belonging to another. his possession until he reaches the age of majority
• Held: The debt herein was paid to persons who were not the for such payment to be valid.
creditors or at least successors-in-interest of the same, therefore o This act of still holding on to the thing delivered as
no payment extinguished the obligation as the withdrawal was not payment at the time when the person is already
proper. capacitated can be considered as ratification of
o Because the ownership of the deposit remained the payment, curing the irregularity of the same
undetermined, BPI had no right to pay persons other than 2) In so far as the payment is beneficial to him.
those in whose favor the obligation was constituted or o If the minor uses the payment for activities
whose right is indisputable. The payment of the money beneficial to him (e.g. to pay school tuition fees),
deposited with BPI that will extinguish its obligation to the then the payment is valid to the extent that he has
creditor-depositor is payment to the person of the creditor been benefited
or to one authorized by him or by law to receive it. • In paying an incapacitated person under a voidable contract, the
capacitated person, who may have even acted in good faith, is at a
Article 1241. disadvantage.
Payment to a person who is incapacitated to administer his property shall o Generally, the capacitated person CANNOT ask for the
be valid if he has kept the thing delivered, or insofar as the payment has annulment of the contract on the basis of the incapacity of the
been beneficial to him. other party
Payment made to a 3rd person shall also be valid insofar as it has o In the event that the contract is annulled, the incapacitated
redounded to the benefit of the creditor. Such benefit to the creditor need person is not obliged to make restitution except in so far as he
not be proved in the ff. cases: has been benefited by the thing or price received by him.
(1) If after the payment, the 3rd person acquires the creditor’s rights;
(2) If the creditor ratifies the payment to the 3rd person; SITUATION
(3) If by the creditor’s conduct, the debtor has been led to believe that • Q: X pays Y, a 13-year-old, P100,O00. Y heads to PAGCOR & spends all
the 3rd person had authority to receive payment. the money. When Y hits 18, is the payment valid?

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• A: NO. Payment is only valid when it benefited the minor, or he has kept considered extinguished. If A pays the interest to X,
it. the totality of the obligation is extinguished.
2) When the creditor ratifies the payment to the originally
Payment to Someone Who Is Not Creditor unauthorized 3rd person (ratification).
• Payment to a stranger is general invalid even if made in good faith, o Creditor need not be benefited.
though this Art. provides exceptions o In the same example, if B, after learning that
• Payment made to a person who is not the creditor, his successor-in- payment was made to X approves of the payment to
interest, or a person authorized to receive payment is not effective the latter, the debt is extinguished.
payment which will bind the creditor. 3) When, by the creditor’s conduct, the debtor has been led
o HOWEVER, if such payment nevertheless benefits the creditor, to believe that the 3rd person has authority to receive the
such payment shall be effective in so far as it has redounded to payment (estoppel).
the benefit of the creditor. o In the same example, if B tells A that he can
• Ex. A is the debtor of Mr. B. A, instead of paying B directly, pays ½ of the transact any business or any of his concerns with X,
indebtedness to B’s brother, whom B never authorized to receive including the P1,000 indebtedness,& later A pays X
payment. This payment is NOT valid. the indebtedness, the obligation is extinguished, as
o HOWEVER, if the brother of B uses the money to pay B’s B cannot disclaim the payment to X. By his
indebtedness to somebody, then the payment will become representation to A, B is estopped from claiming
valid. It will extinguish A’s indebtedness in so far as the that X had no authority to accept payment.
payment has redounded to the benefit of B which, in this case,
is ½ of the indebtedness. CLASS DISCUSSION
• To accept payment, & for said payment to be valid, it must be made
Exception to Proving Benefit of Creditor under Special Power of Attorney
• The benefit to the creditor for payment made by the debtor to a 3rd o SPA must be very specific
person must always be proven except in 3 cases: o “To mortgage” would not be the same as “to buy”
1) If after payment, the 3rd person acquires the creditor’s
rights. Article 1242.
o Ex. A is indebted to B for P1,000. A does not pay B Payment made in good faith to any person in possession of the credit shall
on due date despite proper demand, such that the release the debtor.
stipulated interest on the indebtedness accrues in
the amount of P100. Possession of Credit
! If A (the debtor) pays X (3rd person) the • A person in possession of the credit is presumed to own the credit.
principal amount, such payment is not o A debtor who pays the possessor in good faith is released
effective. from the debt.
! HOWEVER, if there is concrete proof that o Whether the creditor willfully, unintentionally or negligently
interest has not yet been paid, & later B (the allowed a 3rd person to possess the credit does not matter
real creditor) empowers X to also collect the in so far as the debtor who paid in good faith is concerned.
interest of P100 for himself (X) & not for B, • The risk is always on the creditor provided payment is made by the
then the benefit to the creditor need not be debtor in good faith.
proven. o If payment is made to a person who is not in possession of
o The fact that X acquires the creditor’s right to collect the credit, the debtor will not be released from his
the interest is enough to show that payment to the obligation regardless of whether or not payment was made
3rd person X benefited the creditor B. The P1,000 in good faith.
principal indebtedness therefore must be

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CLASS DISCUSSION Dation in payment, whereby property is alienated to the creditor in
• Promissory Notes – a negotiable instrument; if a completely satisfaction of a debt in money, shall be governed by the law on sales.
random stranger picks this up, he can have the amount already
o There are always at least 2 parties in a promissory note Dation in Payment (Dacion en Pago)
o Can be endorsed at the back to other persons, making the • The delivery or transmission of ownership of a thing by the debtor
debtor liable to pay said 3rd person to the creditor as an accepted equivalent of the performance of an
• FRONT obligation.
o “I promise to pay X P1,000 on May 1, 2015.” o PURPOSE – to transfer ownership
o Signature of debtor (maker of the note) • NOT mortgage or security - mere repossession of certain machinery
o “To order” or “To bearer” & equipment for purposes of securing payment of an obligation &
• BACK not for the purpose of transferring ownership is NOT dation in
o “Endorsed to M” payment

Article 1243. Requisites for Valid Dation in Payment (Caltex v. IAC):

Payment made to the creditor by the debtor after the latter has been (1) There must be performance of the prestation in lieu of payment
judicially ordered to retain the debt shall not be valid. (animo solvendi)
o May consist in the delivery of a corporeal thing or a real
Payment After Judicial Order to the Contrary right or a credit against the 3rd person
• To prevent any transaction which might be intended to defraud said (2) There must be some difference between the prestation due &
creditors, the debtor is prohibited from paying a particular that which is given in substitution (aliud pro alio)
creditor during the effectivity of a court order prohibiting him to (3) There must be an agreement between the creditor & debtor that
make such payment to that particular creditor. the obligation is immediately extinguished by reason of the
• In the event that the debtor makes such payment, it shall not performance of a prestation different from that due.
extinguish the obligation as the law considers such payment
as invalid. CASE: Caltex v. IAC
• Lesson: Dation in payment is not total extinguishment of an
Article 1244. No Substitution. obligation—it extinguishes the obligation up to the value of the thing
The debtor of a thing cannot compel the creditor to receive a different one, delivered. The obligation is totally extinguished only when the
although the latter may be of the same value as, or more valuable than that parties, by agreement, express or implied, or by their silence,
which is due. consider the thing as equivalent to the obligation, in which case the
In obligations to do or not to do, as act or forbearance cannot be substituted obligation is totally extinguished.
by another act or forbearance against the obligee’s will. • Facts:
o The debtor assigned to the creditor its receivables from the
No Substitution Special Fund Import Payments due from the National
• A debtor cannot pay by giving a particular car if the agreement is to Treasury of the Philippines to be applied as payment of the
give a particular jeep even if the car is more expensive than the amount of P4,072,683.13 it owed to the creditor.
jeep. ! The amount actually received from the Special Fund
• Likewise, if one has been engaged to sing for one night in exchange by the debtor was more than P4,072,683.13.
for an airplane ticket, the obligor cannot fulfill the obligation by o Their Deed of Assignment said:
dancing for one week even if such dancing is worth more than the ! Debtor has outstanding obligation of
singing. P4,072,683.13, plus any applicable interest on
overdue account.
Article 1245. Dation in Payment.

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 ! Debtor hereby irrevocably assigns & transfers to the subsequent & independent fails to pay the debt,
creditor any & all funds paid by the Special Fund from the original contract the mortgaged or
Import Payments, including all rights & benefits of the parties is executed pledged property of the
accruing to the same, plus any applicable interest to have the property debtor shall
charges, & other avturbo fuel lifting & deliveries that collateralized in the original automatically be
debtor may from time to time receive from the agreement as payment of appropriated or owned
creditor. the debt, thereby by the creditor.
o After the creditor sought the excess of the amount obtained, extinguishing the
the debtor released some of the excess minus P510,550.63 obligation.
which the debtor claimed as interest on the indebtedness.
o CA ruled that this was a dacion en pago case which Valid & provided for by law Void (Art. 2088 of the
completely extinguished the obligation of the debtor & that Civil Code: “The
P510,550.63 should be returned to the creditor. creditor cannot
• Held: SC reversed the CA. Obligation was not totally extinguished, appropriate the things
as the contract between the parties contemplated other given by way of pledge
obligations. or mortgage, or dispose
o There are 3 obligations in this case based on the contract: of them. Any stipulation
! The outstanding obligation of P4,072,683.13 to the contrary is null &
! The applicable interest charges on overdue void.” Any property
accounts made as a security to a
! The other avturbo fuel lifting & deliveries that the loan must 1st undergo
debtor may from time to time receive from creditor public bidding.
o Had the parties intended to limit respondent’s obligation to
P4,072,682.1, they should have said so, & there would have Elements of Pactum Commisorium:
been no need for them to qualify the statement of the 1) There must be a debtor-creditor relationship between the parties;
amount with clauses. 2) The property of the debtor was used as security for the loan, either
! The literal meaning of the Deed of Assignment as a mortgage or pledge; &
should control 3) There was automatic appropriation of the property upon failure of
o Furthermore, even after the payment of money, the the debtor to pay the obligation as provided in their agreement.
creditor continued to charge the debtor for interest & the
debtor made requests to lower the interest. CASE: Bustamante v. Rosel
! In order to judge the intention of the contracting • Lesson: One example of pactum commisorium is when the debtor &
parties, their contemporaneous & subsequent creditor agree to sell the mortgage to the creditor himself & such is
acts shall be principally considered (Art. 1253, as stipulation in their original loan agreement.
Civil Code). • Facts: A debtor & creditor entered into a loan agreement where it
was stipulated that, in case of the default of the debtor, the creditor
Dacion en Pago v. Pactum Commisorium has the option to buy the collateral for a total consideration of
P200,000 inclusive of the borrowed amount & interest thereon.
Dacion en Pago Pactum Commisorium • Held: This stipulation is void. The intent of the creditor appears to
Transfer of Before the creditor The parties agree, be evident, for the debtor is obliged to dispose of the collateral at
Ownership of becomes the owner of the generally in one single the pre-agreed consideration amounting to practically the same
Property After collateralized property, an contract, that, in the amount as the loan. In effect, the creditor acquires the collateral in
Default intervening agreement event that the debtor

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 the event of non-payment of the loan. This is within the concept of • Debtor pays for the extrajudicial expenses for the payment or
pactum commissorium. Such stipulation is void. performance of the obligation, unless the parties otherwise
stipulate.
CASE: DBP v. CA • With respect to judicial cost, the Rules of Court shall apply.
• Facts: The debtor executed a deed of assignment of leasehold
rights of certain properties. Art. 1248.
• Held: These are simply mortgages. Unless there is an express stipulation to that effect, the creditor cannot be
o NOT dacion en pago because the leasehold rights were not compelled partially to receive the prestation in which the obligation consists.
designed to extinguish the obligation, but merely to Neither may the debtor be required to make partial payments.
constitute a security; However, when the debt is in part liquidated & in part unliquidated, the
o NOT pactum commissorium, as they did not provide for the creditor may demand & the debtor may effect the payment of the former
automatic ownership of the properties in case of non- without waiting for the liquidation of the latter.
payment;
o NOT payment by cession because there was only one CASE: Nasser v. Cuevas
creditor. • Lesson: A creditor cannot be compelled partially to receive the
prestations in which the obligation consists unless there is an
Art.1246. express stipulation to that effect.
When the obligation consists in the delivery of an indeterminate or generic • Facts:
thing, whose quality & circumstances have not been stated, the creditor o On the basis of a compromise agreement, a number of
cannot demand a thing of superior quality. Neither can the debtor deliver a obligors agreed to pay a lawyer his legal fees by way of real
thing of inferior quality. The purpose of the obligation & other circumstances property & cash.
shall be taken in consideration. o For this purpose, it was expressly stipulated that a
charging lien for attorney’s fees would be established on
Delivery with Generic Objects the properties to secure payment of the legal fees
• If an obligor, who is not rich, is bound to deliver any rented car to be “provided that upon full payment of the corresponding
used at a very simple wedding ceremony & the obligee knows his liability of a party, the lien on his/her share is
financial capacity, such obligee cannot demand that the obligor extinguished.”
deliver a multi-million Rolls Royce which could only be rented at o Upon demand of the lawyer for payment, the obligors
such amount which the obligor cannot afford. contended that the aforequoted clause gave them the right
• On the other hand, the obligor cannot deliver a car which is so old to pay in installment.
that it would not start unless it is pushed. • Held: This interpretation is wrong. The clause simple means that
the lien will be extinguished when the heirs pay, & do not expressly
Art. 1247. grant the right to pay in partial installments.
Unless it is otherwise stipulated, the extrajudicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, Partial Payment – When Allowed
the Rules of Court shall govern. 1) If there is an express stipulation by the parties allowing the same or
2) If the debt is partially liquidated and partially unliquidated.
Extrajudicial & Judicial Costs o Ex. A debtor is bound to perform an obligation by paying
• The creditor usually benefits from the obligation. It is always in his the amount of P1,000 & by also delivering whatever
favor that the debtor gives, does some service or not do some money he will get from the estate of his already deceased
service. father.
! The creditor may demand & the debtor may pay
the P1,000 without waiting for the determination

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 of the amount of money the debtor will get from or at a fixed or determinable future time, a sum certain in
the deceased father’s estate. money to order or to bearer
• Bills of exchange - an unconditional order in writing addressed by
No Express Stipulation – Still Allowed one person to another signed by the person giving it, requiring the
• Even if there is no express stipulation, partial payment can likewise person to whom it is addressed to pay on demand or at a fixed or
be effective if the creditor accepts it & benefits from it. determinable future time a sum certain in money to order to bearer
• A creditor cannot be considered in delay if he refuses to accept o Check – a bill of exchange drawn on a bank payable on
partial performance because, unless otherwise provided by law or demand
stipulated by the parties, a creditor cannot be compelled to accept ! Not considered legal tender or valid tender of
partial performance. payment
o HOWEVER, the creditor will incur in delay if he does not ! An offer to pay in check may be refused by the
accept such partial performance if: obligee or creditor
(1) Good faith necessitates acceptance or ! HOWEVER, if payment by way of a fully-funded
(2) The creditor abuses his right in not accepting. check were offered & the obligee accepts the
check as payment after the obligor manifests that
Art. 1249. Currency Stipulated & Currency of PH. it was given to settle an obligation, he shall be
The payment of debts in money shall be made in the currency stipulated, & estopped from later on denouncing the efficacy of
if it is not possible to deliver such currency, then in the currency which is such payment.
legal tender in the Philippines. • Specific rule of law - in fulfillment of an obligation by payment of
The delivery of promissory notes payable to order, or bills of exchange or money, only payment in cash will extinguish the obligation
other mercantile documents shall produce the effect of payment only when o Thus, if promissory notes, bills of exchange or checks are
they have been cashed, or when through the fault of the creditor they have given to pay a debt, such debt will NOT be extinguished
been impaired. unless these mercantile documents are encashed.
In the meantime, the action derived from the original obligation shall be • Negotiable instruments – only a substitute for money, & not money
held in abeyance. itself

Currency Impairment by the Creditor

• Uniform Currency Act (RA 529) – It was prohibited to use foreign • “When through the fault of the creditor they have been impaired”
currency in connection with certain contracts in PH o Applicable only to instruments executed by 3rd persons &
o Has been repealed by RA 8183 delivered by the debtor to the creditor
o Though the stipulation for the use of foreign currency is ! Ex. Someone else’s account suddenly runs out;
void, the contract is nevertheless valid. process of endorsement
• RA 8183 – effective on July 6, 1996 o DOES NOT apply to instruments executed by the debtor (as
o All monetary obligations shall be settled in Philippine drawer) himself & delivered to the creditor.
currency which is legal tender in the Philippines. • Checks – must be presented within a reasonable time after its
o HOWEVER, the parties may agree that the transaction shall issue; otherwise, the drawer will be discharged from liability
be settled in any other currency at the time of payment. thereon to the extent of the loss caused by the delay.
o Normal banking practice - a check becomes stale if it has
Negotiable Instruments not been presented to the bank for a period of 6 months
• Promissory note - a document where a promise to pay is made by from the date of the said check.
the debtor to the creditor o HOWEVER, if a creditor allows his checks to become stale,
o An unconditional promise in writing made by one person to it does not mean that the debtor who drew the check will
another, signed by the maker, engaging to pay on demand

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 necessarily be discharged from his debt, or that his In case an extraordinary inflation or deflation of the currency stipulated
obligation will be extinguished. should supervene, the value of the currency at the time of the
! It is only when the creditor does not present the establishment of the obligation shall be the basis of payment, unless there
check for payment & thereafter the bank upon is an agreement to the contrary.
which the check has been drawn collapses or fails
to the point that it cannot meet demands for Extraordinary Inflation
payment, will the debtor be discharged. • Applies only in contractual obligations
! If the bank is still in good credit & is able to pay • Exists when there is a decrease or increase in the purchasing
the check, if the drawer, at the date of the check power of the PH currency which is unusual or beyond the common
or at the time of the presentment of it for payment fluctuation in the value of said currency & such decrease or
& dishonor, has withdrawn his funds, the drawer increase could not have been reasonably foreseen or was
would remain liable to pay the check, manifestly beyond the contemplation of the parties at the time of
notwithstanding the lapse of time. the establishment of the obligation.
o Ex. Hyperinflation of the German mark, from 4.2 to 62 to
CLASS DISCUSSION the USD within a year
• Checks are another form of negotiable instruments • Mere decline in purchasing power is not inflation
o Type of bill of exchange • There MUST be an official declaration by competent authorities,
o Debtor – drawer such as the Central Bank, Dept. of Finance of BSP
o Creditor – payee • The law envisions contractual obligations only
o Bank – drawee • Tort & expropriations by the government of property in the exercise
• Cashier’s/Manager’s Check of eminent domain powers are NOT included
o Drawer is the drawee o In eminent domain, the value at establishment of the
o Not legal tender obligation is the value of the peso at the time of the taking
o Considered as good as cash, though it is not cash of the property, as this is when the obligation of the
o Checks take 3 days to process (before it turns into actual Government to pay arises
cash, or payment) • Value of the currency – purchasing power of money
o Usually stale in 6 months o Also know as “par value,” “legal exchange rate,” or “par of
• General rule: Payment must be in cash to be considered as legal exchange”
payment • Par value - the amount it takes one currency (for example, based on
o Exception: Check can be considered payment if parties so gold) to buy a unit in another currency (also based on gold) that is,
stipulate, but the check must be fully funded how pieces of the one unit (or their gold content) are necessary to
• Is money always legal tender? It depends! It should be in peso. equal the gold content of the other unit
o Value as officially defined in terms of gold or, under the
SCENARIO silver standard, where there was such a standard, in terms
• Q: X gave Y a check. Y kept it in his drawer for a year & forgot about of silver.
it. The bank dishonored the check when Y tried to deposit it. What o The ‘par of exchange’ therefore applies only between
are Y’s remedies? countries having a fixed metallic content for their currency
• A: Y can still ask X for money, following prescriptive period unit. It would be possible to define a currency’s par value
requirements (within 10 years for written, 6 years for oral) in terms of another currency such as the dollar or pound
• So what does the law mean about the creditor impairing the check? sterling, but usage confines the meaning of par to the
o Phrase only applies if check was issued by a 3rd person official value in terms of gold.

Art. 1250. Extraordinary Inflation. Art. 1251. Place of Payment.

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Payment shall be made in the place designated in the obligation.
There being no express stipulation & if the undertaking is to deliver a Art. 1252-1254
determinate thing, the payment shall be made wherever the thing might be • Apply to a person owing several debts of the same kind to a single
at the moment the obligation was constituted. creditor
In any other case the place of payment shall be the domicile of the debtor. • Like in alternative obligations, the choice as to which debt the
If the debtor changes his domicile in bad faith or after he has incurred in payment is to be applied is given to the debtor.
delay, the additional expenses shall be borne by him. o The debtor must make a declaration as to which debt
These provisions are without prejudice to venue under the Rules of Court. should the payment be applied.
• Must conform to the general rules of payment from Art. 1232-1251
Place of Payment o Art. 1233 – Payment must be completely delivered
• The parties can agree as to where the payment shall be made. o Art. 1248 – The creditor cannot be compelled partially to
• If there is no stipulation & the obligation is to give a determinate receive the prestation in which the obligation consists
thing, payment shall be made in the place where the thing is ! If the debtor makes a declaration as to the
located at the time of the constitution of the obligation. particular debt (from among a number of debts) to
• In any other case, the place of payment is the domicile of the which his payment is to be applied, the creditor
debtor. can validly refuse such application if the payment
o Domicile - For the exercise of civil rights & the fulfillment of is to be applied to a debt which will only partially
civil obligations, the domicile of natural persons is the pay a particular indebtedness.
place of their habitual residence.
• The additional expenses attendant in making payment shall be Debts Not Yet Due
borne by the debtor if: • Application of payment cannot be made on debts not yet due
o He changes his domicile in bad faith, such as if the change o Unless the parties agree or
was made precisely for the creditor not to locate him, or o When the application of payment is made by the party,
o After he has incurred in delay. which may either be the debtor or the creditor, for whose
benefit the term has been constituted.
CLASS DISCUSSION • Ex. A is indebted to B in the amount of P1,000, P2,000 & P900
• Place of Payment: which will not earn interest if paid on Jan. 2, 1997 but will earn
1) Agreement, or if none; interest from Feb. 2, 1997, the latter date being the 2nd due date if
2) Determinate – place where thing is found at obligation’s the debtor chooses not to pay on Jan. 2, 1997.
constitution; generic – house of debtor o Clearly the period prior to Jan. 2, 1997 is for the benefit of
the debtor. Thus, if he decides to give B P500 before Jan.
SUBSECTION 1. - APPLICATION OF PAYMENTS. 2, 1997, the choice of application belongs to him.
o If the creditor is agreeable to being partially paid, the
Art. 1252. debtor can apply the P500 to the P1,000, P2,000 or P900
He who has various debts of the same kind in favor of one & the same depending on his choice even if the indebtedness is not yet
creditor, may declare at the time of making the payment, to which of them due.
the same must be applied. Unless the parties so stipulate, or when the o It is clear that in such a case, whether he pays it on or
application of payment is made by the party for whose benefit the term has before Jan. 2, 1997 will not make any difference in so far
been constituted, application shall not be made as to debts which are not as the debtor or creditor is concerned because no interest
yet due. is imposed.
If the debtor accepts from the creditor a receipt in which an application of
payment is made, the former cannot complain of the same, unless there is Receipt
a cause for invalidating the contract.

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 • Gives rise to doctrine of substantial compliance – presumption that If the debt produces interest, payment of the principal shall not be deemed
payment has been made to have been made until the interests have been covered.
o To avoid this, creditors should also state in the receipt on
what account the payment is considered applied & also Principal First
state, “balance is still existing & demandable” • Art. 1253 is merely directory & not mandatory.
• Estoppel - If the debtor accepts from the creditor a receipt in which • Although interest only attaches to the principal, the payment of
an application of payment is made, the debtor cannot complain of both principal and interest, in effect, constitutes two payments by
the same, unless there is a cause for invalidating the contract. the debtor.
o The debtor must not only merely receive the receipt but he o The receipt of the principal by the creditor without
must accept the receipt. reservation with respect to the interest, shall give rise to
• Ex. A is indebted to B for P1,000, P2,000, & P900. A pays B P500 the presumption that the interest has been paid
without mentioning as to which debt the P500 will be applied. B, ! This presumption is rebuttable
the creditor, is agreeable to any partial payment, & issues a receipt • In a contract involving installment payments with interest
indicating therein that the P500 shall be applied to the P1,000 chargeable against the remaining balance of the obligation, it is the
debt, & A readily accepts the said receipt. duty of the creditor to inform the debtor of:
o A cannot later complain that the P500 should have been o The amount of interest that falls due &
applied to the P2,000 debt unless there exists a cause to o That he is applying the installment payments to cover said
invalidate the contract in connection with the indebtedness interest. Otherwise, the creditor cannot apply the payments
in the amount of P1,000. to the interest & then hold the debtor in default for non-
• However, if the indebtedness has been obtained through fraud or payment of installments on the principal.
intimidation which is a cause to annul the contract, the debtor is •
not estopped from questioning the application. • CASE:
• a party Pagsibigan
to a contract whov.unconditionally
CA accepts the settlement of his claim
Lesson:
for damagesowithout reservation is estopped from claiming interest thereafter
CLASS DISCUSSION o Facts: The creditor, in receiving numerous partial payments
• Consignment – an ordinary court case • Effect if paymentfrom the debtor,
is credited applied the
to principal: said payments
decrease to the collectable
of total interest
o 2nd notice – case has been filed against you principal, interest & penalties with the principal getting the
o One of the instances when extrajudicial demand is a • What Interest isbulk of the application.
supposed to be paid: Even in some of the recent partial
requisite 1. Interest by way of compensation
payments, the said payments were applied to the principal
o There must be notice before consignment--“I demand that 2. Interest by way of damages
despite the factdue
thattodefault
the creditor knew that interest was
you accept my payment, & if you do not, I will take this to Reason: the law still
makes
due.no distinction
court. o Held: The creditor waived his rights under Art. 1253.
! HOWEVER, if you staple a check as payment, this
is not counted, as payment is the delivery of CASE: Magdalena Estates, Inc. v. Rodriguez
money • Lesson: When a surety makes the payment, it cannot claim the
applicability of Art. 1253 & thereby raise the presumption in said
SCENARIO provision.
• Facts: X has 3 debts, P1,000, P5,000 & P10,000. X gives Y P1,000 • Facts:
& asks Y to apply this to the P5,000. Can Y say no? o A surety only bound himself solidarily liable to the extent of
• Answer: Yes, because applying the P1,000 to P5,000 would only be P5,000 only & paid such an amount to the creditor when
partial performance, which the creditor can validly object to. the debtor defaulted.
o The creditor still claimed interest from the debtor who
resisted paying such interest on the ground that, in
Article 1253. accepting payment of the principal from the surety in the

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 amount only of P5,000, the creditor waived his right to collateralized by A’s house & payable in equal installment
Article 1253. with the first installment already due & with an
• Held: The creditor is still entitled to the interest. acceleration clause.
o Article 1253 is not applicable here, as the liability of the ! If A makes a payment of P600 without any
surety does not extend beyond the terms of the indication where the latter amount should be
agreement. applied & the creditor agrees to any partial
o The provision on application of payment cannot be made payment, it will be applied to the most onerous
applicable to a person whose obligation as a mere surety is debt which in this case is the P24,000 because,
both contingent & singular. aside from the imposition of an interest rate it has
o The surety’s liability is confined to such obligation, & he is an acceleration clause which will make the whole
entitled to have all payments made applied exclusively to amount due.
said application and to no other. o Between indebtedness resulting from unpaid back rentals
for the condominium unit a debtor was occupying, or to his
Article 1254. obligation arising from his contract to pay the purchase
When the payment cannot be applied in accordance with the preceding price of such condominium unit which he decided to buy,
rules, or if application cannot be inferred from other circumstances, the the unpaid back rentals are more onerous.
debt which is most onerous to the debtor, among those due, shall be • If the debts due are of the same nature & burden, the payment
deemed to have been satisfied. shall be applied to all of them proportionately.
If the debts due are of the same nature & burden, the payment shall be o Ex. A owes B 3 due debts each of which amounts to
applied to all of them proportionately. P30,000, a payment of P9,000.00 by A, without any
indication as to where it is to be applied & where the
Application of the Debt in Other Cases creditor agrees to partial payment, shall be equally applied
• If there is no indication which debt is t to be paid first, it will be to each of the debts. Hence, each debt will be reduced by
applied to the most onerous debt. P3,000 each.
o Most onerous - the indebtedness which exacts the heavier o But if A owes B 3 due debts of P10,000.00, P20,000.00 &
burden from among many. P30,000 & the creditor agrees to partial payment, a
! NOT based on the amount of the debts payment of P6,000 will be applied in the proportion of
! A debt with interest as opposed to simple debt 1:2:3. Thus, P1,000 will be applied to the P10,000 debt;
! A debt with an acceleration clause enabling the P2,000 to the P20,000 debt; and P3,000 to the P30,000
creditor to demand payment of the whole debt.
obligation if the debtor defaults in even one
amortization or installment is more onerous than a SUBSECTION 2. – PAYMENT BY CESSION.
debt payable in installment but without an
acceleration clause. Article 1255. Cession.
• Acceleration clause – payment made in The debtor may cede or assign his property to his creditors in payment of his
installments; if there’s a failure to pay 1, debts. This cession, unless there is stipulation to the contrary, shall only
then the entire amount can be demanded release the debtor from responsibility for the net proceeds of the thing
! A debt secured by a mortgage is more onerous assigned. The agreements which, on the effect of the cession, are made
than one without security. between the debtor & his creditors shall be governed by special laws.
• Examples:
o A owes G a due debt of P30,000 with an interest rate of Cession
12% per annum, another due debt of P22,000 without • Transfer of possession, NOT of ownership (unlike subrogation)
interest but secured by his silver watch, & lastly P24,000 • Refers to a situation where the debtor owes 2 or more creditors

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Article 1254
Rules in case no application of payment has been voluntarily 8. An exclusive debt (not solidary) is more onerous than a solidary
made debt
• apply it to to the most onerous (in case the due and demandable
debt are of different nature) Determination of which obligation is onerous
• if the debts are of the same nature and burden, application shall Obligation A: secured by mortgage, non-interest bearing, and
be made to all proportionately recent
Obligation B: unsecured, but max interest bearing, and old
NOTE: If one debt is for 1M, and another is for 2M and only 1M is • When it cannot definitely be determined whether one debt is
paid, how will the payment be applied? more burdensome than the other, both will be considered equally
1. If the debtor makes the application, the payment should be burdensome, and hence payment must be applied to both
credited to the first debt. The debtor cannot insist that the
creditor accept it for the second debt. Under the law, a Where debts subject to different burdens
creditor cannot generally be compelled to receive partial • the payment should be applied to all of them proportionately
payment
2. If no application has been made: proportionately Article 1255
Payment by Cession Meaning
Samples of more burdensome (more onerous) debts • debtor transfers all the properties not subject to execution in
1. Older ones in case of running accounts favor of his creditors so that the latter may sell them, and thus
2. Interest-bearing debts even if the non-interest bearing debt is apply the proceeds to their credits
older
3. Of two interest-bearing debts, that which charges the higher Requisites of payment by cession
interest is more burdensome 1. There must be 2 or more creditors
4. Debts secured by mortgage or by pledge 2. The debtor must be (partially) insolvent
5. Debts with a penalty clause 3. The assignment must involve all the properties of the debtor
6. Advances for subsistence are more onerous than cash 4. The cession must be accepted by the creditors
advances
7. A debt where the debt is in mora is more onerous than one
where he is not
Effect of payment by cession 3. Creditors will collect credits in the order of preference agreed
• Unless there is a stipulation to the contrary, the assignment does upon, or in default of agreement, in the order ordinarily
not make the creditors the owners of the property of the debtor established by law
• the debtor is still liable if there is a balance
NOTE: Some properties should not be assigned, such as:
Article 1255 refers to voluntary assignment 1. The family home, whether judicially or extajudicially created
• requires the consent of all the creditors as distinguished from 2. The amount needed by the debtor to support himself and
legal or judicial assignment which is governed by the insolvency those he is required by law to support
law
• it merely involves a change of the object of the obligation by Dation in payment and cession distinguished
agreement of the parties at the same time fulfilling the same • dation in payment or dacion en pago is a special form of
voluntarily payment whereby another thing is alienated by the debtor to the
creditor who accepts it as equivalent of payment of an existing
Requisites for voluntary assignment: debt in money,
1. More than one debt
2. More than one creditor Dacion En Pago Cession
3. Complete or partial insolvency of debtor
Does not affect all properties affects all properties of
4. Abandonment of all debtor’s property not exempt from
the debtor
execution (unless exemption is validly waived by debtor) in
does not require plurality of Requires more than one
favor of creditors
creditors debtor
5. Acceptance or consent on the part of the creditors (for it
cannot be imposed on an unwilling creditor) only the specific or concerned requires the consent of all
creditor’s consent is required creditors
Effect of voluntary assignment requires full or partial
may take place during the
1. The creditors do no become the owners; they are merely insolvency
solvency of the debtor
assignees with authority to sell
2. The debtor is released up to the amount of the net proceeds of transfers ownership upon does not transfer ownership
the sale, unless there is a stipulation to the contrary. The delivery
balance remains collectible
 o At least, there must be as many debts as there are between the debtor & his creditors shall be governed by special
creditors laws.
o There can be more debts than the number of creditors o Ex. Insolvency Law - if applicable, shall place the assets of
when, from among the many creditors, the debtor may owe the debtor for judicial liquidation for the purpose of paying
any of them 2 or more debts. off his obligations.
• Also extinguishes debt in an extrajudicial way
• Presupposes financial difficulties on the part of the debtor CLASS DISCUSSION
• Ceding or assigning property – refers to ALL of the properties of the • Cession presupposes the ff.:
debtor which are susceptible of & not exempted by law from being o Debtor is under financial difficulties
alienated. o There are 2 or more creditors
o NOT only the cession of one or a number of properties o There are as many debts due as there are creditors (the
• Family home - generally exempted by law from being executed or minimum rule)
sold A• Insolvency & Cession are not the same
o HOWEVER, it may be sold provided that it strictly follows o Insolvency – requires a court proceeding; whatever the
the requirements of law, such as the procurement of the court decides, that’s it. The creditors can no longer get the
written consent to the sale of the person who constituted remaining amounts.
the home as a family home & the latter’s spouse & a o Cession – no proceeding; creditors pay among themselves
majority of the beneficiaries of legal age of the family ! Transfer is only of possession, not of title
home. ! ALL properties are transferred
! The creditors can still get the remaining amount of
Creditors’ Agreement debt from debtor
• Creditors MUST agree to the cession.
o Among the creditors, they must likewise agree as to which SUBSECTION 3. – TENDER OF PAYMENT.
debt will be paid 1st or as to the proportioning of the
payment of the money obtained through cession for the Art. 1256. Tender of Payment without Creditor’s Acceptance.
payment of debt. If the creditor to whom tender of payment has been made refuses without
• If there is no agreement, the applicable law on preference of credit just cause to accept it, the debtor shall be released from responsibility by
will apply. the consignation of the thing or sum due.
• The creditors will administer the totality of the ceded property Consignation alone shall produce the same effect in the following cases:
without the ownership being transferred to them. (1) When the creditor is absent or unknown, or does not appear at the
o Authorized to sell or alienate the property for purpose of place of payment;
obtaining enough money to pay off their respective debts. (2) When he is incapacitated to receive the payment at the time it is
due;
Extinguishment (3) When, without just cause, he refuses to give a receipt;
(4) When 2 or more persons claim the same right to collect;
• Once cession is made, the obligation of the debtor shall only be
(5) When the title of the obligation has been lost.
extinguished up to the extent that the proceeds are able to satisfy
the claims of the creditors.
Art. 1257. Announcement to Parties Concerned.
o It is possible that the money obtained from the alienation
In order that the consignation of the thing due may release the obligor, it
of the property is not enough to satisfy the claims of the
must first be announced to the persons interested in the fulfillment of the
creditors.
• In such case, the creditors can still demand payment for the
I obligation.
The consignation shall be ineffectual if it is not made strictly in consonance
deficiency. The agreements on the effect of the cession made
with the provisions which regulate payment.

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Article 1256 4. Consignation of the thing or sum due
Meaning of tender of payment and consignation 5. Subsequent notice of consignation made to the interested
1. Tender of payment: the act of the debtor of offering to the parties
creditor the thing or amount due
2. Consignation: the act of depositing the thing or amount due Existence of valid debt
with the proper court when the creditor does not desire, or • consignation is proper only where there is valid debt which is
refuses to accept payment, or cannot receive it, after due. A creditor-debtor relationship must exist between the parties
complying with the formalities required by law otherwise the legal effects thereof cannot be availed of.

Nature of and rationale for consignation Necessity of making tender of payment and consignation
1. Facultative remedy: the debtor may or may not avail • Both tender of payment and consignation must be validly done in
A. If made by the debtor, the creditor merely accepts it if he order to effect the extinguishment of an obligation.
wishes or the court declares that it has been properly made 1. The use of the words “shall” and “must”
B. If the debtor has such right of withdrawal, he surely has the 2. Consignation and tender of payment must not be encumbered
right to refuse to make the deposit in the first place. by conditions if they are to produce the intended result of
2. Avoidance of greater liability: tender of payment and fulfilling the obligation.
consignation, where validly made, or consignation alone in any
of the cases enumerated in Art 1256, produces the effect of Requirements for valid tender of payment
payment and extinguishes an obligation. 1. Tender of payment must comply with the rules on payment.
A. For failure to consign the thing or amount due, the debtor may Thus, a check, whether a manager’s check or ordinary check,
become liable for damages and/or interest is not legal tender
2. It must be unconditional and for the whole amount.
Requisites of a valid consignation 3. It must be actually made. The manifestation of a desire or
1. Existence of a valid debt which is due intention to pay is not enough
2. Tender of payment by the debtor and refusal without justifiable
reason by the creditor to accept it Effect of tender consignation
3. Previous notice of consignation to person interested in the • tender of payment without consignation does not extinguish the
fulfillment of the obligation debt; consignation must follow
When consignation is not required Gregorio Araneta, Inc. v. Tuason de Paterno and Vidal
• where there really exists no debt, no obligation, and where • In this case, the creditor refused the tender because according to
therefore payment is purely voluntary him the debt was not yet due, and he did not want to accept the
• this may happen in the case of options, pacto de retro, or legal check because the tender took place during the Japanese
redemption, where a right, not a duty, exists occupation, and he did not want Japanese money. The Court held
however that the debt was already due, and therefore, payable.
When creditor is justified in refusing tender of payment
• If tender is not valid. To be valid, the tender of payment must When consignation is sufficient even without a prior tender
have the following requisites: 1. Creditor is ABSENT or UNKNOWN or DOES NOT APPEAR at
1. Must be legal tender. Thus, tendering by way of a check, even the place of payment (the creditor need not be judicially
a manager’s check is made, the defect in tender may be declared absent)
considered cured. 2. Creditor is INCAPACITATED to receive the payment at the time
2. Must include whatever interest due it is due (the rule does not apply if the creditor has a legal
3. it must be unconditional representative and this fact is known to the debtor)
4. Obligation must be already due 3. When without just cause, the creditor REFUSES to give a
receipt
Running of interest 4. When 2 or more persons claim the same right to collect (an
1. If after tender, consignation is made very much later (eg. one action in interpleader would be proper here)
year), interest should run until the principal is paid 5. When the title (written document) of the obligation has been
2. Although a certified check is not legal tender, still if it is LOST
tendered, but refused on ground other than the fact that it is 6. When the debtor had previously been notified by the creditor
not legal tender, the refusal is immediately followed by that the latter would not accept any payment
consignation —
a. Is the debt extinguished: NO. Check is not a legal tender so
the consignation was not valid.
b. Did interest run from the date of tender: NO. because the
tender was made in good faith; tender could be readily converted
to cash. After all, the cause of refusal to accept was a ground over
than that it was not a legal tender
 o Provisions on consignment are NOT applicable when there
Art. 1258. Deposit to Judicial Authority. is no obligation to pay.
Consignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a CASE: Vda. De Quirino v. Palarca
proper case, & the announcement of the consignation in other cases. • Lesson: An option contract is not a consignment contract.
The consignation having been made, the interested parties shall also be • Facts: The lessee was given “the right & option to buy the leased
notified thereof. premises for P12,000.”
• Held: The consignation in Art. 1256 is inapplicable. Said provision
Tender of Payment & Consignation refers to consignation as one of the means for the payment or
• Apply in all contracts where there is an obligation to pay discharge of a “debt,” whereas the lessee was not indebted to the
• In a contract to sell, the requisites of a valid tender must be lessor for the price of the leased premises. The lessee merely
complied with. exercised a right of option and had no obligation to pay said price
o Involves the performance of an obligation, not merely a
right or a privilege CASE: Badayos v. CA
o Mere sending of letter by the vendee expressing the • Lesson: Redemption contracts also cannot be consigned.
intention to pay, without the accompanying payment, does • Facts: X was trying to exercise his right of redemption.
not extinguish the obligation • Held: In the exercise of the right of redemption, consignation is not
o Valid tender of payment is also different from consignment necessary for the reason that the relationship that existed between
! A mere tender of payment is NOT sufficient for a vendor and vendee a retro, was not one of debtor-creditor.
seller to deliver the property & execute the deed of o The vendor a retro is exercising a right, not discharging an
absolute sale. obligation, hence a mere tender of payment is sufficient to
! It is consignation which is essential in order to preserve the right of a vendor.
extinguish petitioner’s obligation to pay the
balance of the purchase price. CASE: Far East Bank & Trust Co.
o Consequently, for a contract to sell, performance may be • Lesson: A check is not tender, but creditor may nonetheless be
effected not by tender of payment alone but by both tender estopped from claiming that there was no payment if he accepts it.
& consignation.
• Facts: The court was asked to rule on whether or not a check can
be considered valid tender of payment.
Consignation
• Held: For a valid tender of payment, it is necessary that there be (1)
• Act of depositing the thing due with the court or judicial authorities
a fusion of intent, ability & capability to make good such offer,
whenever the creditor cannot accept or refuses to accept payment
which must be (2) absolute & must (3) cover the amount due.
& it generally requires a prior tender of payment.
o Though a check is not legal tender, & a creditor may validly
• An ordinary court case refuse to accept it if tendered as payment, one who
• Cases When Consignation is Not Necessary: accepts a fully funded check after the debtor’s
(1) Option contract manifestation that it had been given to settle an obligation

↓
(2) Legal redemption is estopped from later on denouncing the efficacy of such
(3) Sale with right to repurchase tender of payment.
• Explanation for Exemptions:
o Consignation is not necessary because these cases involve Requisites of Law for Effective Tender of Payment & Consignation:
an exercise of a right or privilege (to buy, redeem, or • If one is missing, consignation will not be effective.
repurchase) rather than the discharge of an obligation • The debtor must show that:
o Tender of payment would be sufficient to preserve the right 1) That there was a debt due.
or privilege.

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 2) That the consignation of the obligation had been made to make a private
because the creditor to whom tender of payment was settlement
made refused to accept it, or because he was absent or Extrajudicial Judicial
incapacitated, or because several persons claimed to be Not yet considered Sufficient equivalent to
entitled to receive the amount due delivery of property delivery of property
3) That previous notice of the consignation had been given to
the person interested in the performance of the obligation CASE: De Mesa v. CA
(1st notice). • Lesson: It is valid notice when the court allows the debtor to
o Without this 1st notice, the consignation as consign of multiple installments & send one notice informing the
payment is void creditor of all the installments in the court.
o Gives the creditor the opportunity to reconsider his • Facts:
unjustified refusal & to accept payment thereby o The debtor in the trial court filed a motion to allow it to just
avoiding consignation & subsequent litigation consign all future quarterly installments (12th to 20th) without
o Essential to the validity of the consignation need of formal tender of payment and service of notices to
4) That the amount due was placed at the disposal of the the creditor who was duly notified of such motion.
court. o The creditor now argues that there was no notice to her of
5) That after the consignation had been made the person debtor’s consignation of the amounts for the 12th to 20th
interested was notified thereof (2nd notice). quarterly installments.
o Enables the creditor to withdraw the goods or • Held: Court ruled that the circumstances of the case & the order of
money deposited. the court granting the motion can be considered substantial
o Unjust for him to suffer the deterioration, compliance with the requirement of notice to the creditor.
depreciation or loss of such goods or money due to
lack of knowledge of the consignation When Consignation without Tender of Payment Produces the Same Effect:
1) When the creditor is absent or unknown, or does not appear at the
Tender of Payment place of payment
• Tender of payment must be distinguished from consignation. o If A is indebted to B for P1,000 payable on April 11, 1997
o Tender is the antecedent of consignation; an act at Manila Hotel, & on said date, A is ready to pay, but B is
preparatory to the consignation, which is the principal not at the Manila Hotel, then consignation can immediately
o That from which are derived the immediate consequences be made in court without need of looking for B & tendering
which the debtor desires or seeks to obtain. payment.
o An extrajudicial, private settlement before proceeding to 2) When the creditor is incapacitated to receive the payment at the
the solemnities of consignation (which is judicial) time it is due
• Must be made in lawful currency. 3) When, without just cause, the creditor refuses to give a receipt
• Tender of a check is NOT valid tender of payment o A receipt is proof of payment.
o Payment in check may be acceptable as valid if no prompt ! Debtor must protect himself with receipt, which he
objection to said payment is made, BUT the fact that in can demand from the creditor upon payment as
previous years payment in check was accepted does not evidence of the fact of payment.
place its creditor in estoppel from requiring the debtor to o HOWEVER, if there is just cause for the creditor not to issue
pay his obligation in cash. the receipt, tender of payment must still be made.
! Ex. If the debtor insists that the creditor issue a
Tender of Payment Consignment receipt for the full amount of indebtedness & the
Act precedent to The principal act which creditor refuses to issue such a receipt because
consignment, an attempt extinguishes the obligation there was no full payment, there is justifiable

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 ground for the creditor not to issue the receipt. ! In the meantime the redemption period was about to
Therefore, tender of payment is still necessary. expire. X, therefore, did the most prudent thing under
4) When two or more persons claim the same right to collect the circumstances by filing the action & depositing the
o There is no use tendering payment to any of the 2 or more redemption money in court.
persons who claim the right to collect because it may turn ! Y bewails this step as “unduly dragging him to an
out that the person to whom payment is given might not be expensive & protracted litigation.”
lawfully entitled to the payment • Y has nobody to blame but himself, because all
5) When the title of the obligation has been lost Y had to do the 1st time was to withdraw the
o To protect the debtor, he may immediately go to court if amount deposited, without going through the
title is lost contesting the validity of the deposit just
o It is better for the court to declare that the obligation has because there had been no unjustified refusal
been extinguished than just pay the creditor without to accept the said tender.
recovering the title to the debt or at least without declaring
or annotating in the said title that the debt is already Art. 1260.
ineffective because of the payment Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.
Art. 1259. Before the creditor has accepted the consignation, or before a judicial
The expenses of consignation, when properly made, shall be charged declaration that the consignation has been properly made, the debtor may
against the creditor. withdraw the thing or the sum deposited, allowing the obligation to remain
in force.
Creditor Pays for Consignation
• The creditor pays expenses of consignation because it was his Court Ruling
failure to accept payment that led to the consignation • Once there is already a finding that the consignation is proper, the
• CASE: Miranda v. Reyes Expenses include: preservation of the goods debtor is released from the obligation.
When consignation o Facts: pending litigation o He can ask the court to order the cancellation of the
deemed properly made
1. When the creditor
! X (the debtor) tendered payment of the price for obligation.
accepts the thing or redeeming the property to the Y a few days before the • The court will order that the creditor accepts the money or thing
sum deposited without period of redemption was to expire consigned as payment.
objection ! Y immediately accepted the tender & sent his letter of • The consignation has a retroactive effect.
2. When the creditor acceptance by mail o The payment is deemed to have been made at the time of
questions the validity of ! X, still waiting for the reply, filed a case for
the consignation, and
the deposit of the money in court or when it was placed at
the court declares that
consignation the disposal of the judicial authority
it has been properly ! Y, instead of just withdrawing the money deposited in
made court, filed an answer claiming that there was no need CASE: Gambas v. Tan
3. When the creditor of consignation as X accepted the tender and • Lesson: Partial acceptance is considered as rejection by the
neither accepts nor consequently litigated the case creditor in a consignment case; the debtor can withdraw his
questions the validity of
o Held: Consignation was VALID.7
the consignation, and
payment before the creditor accepts.
! It is true that Y sent his letter of acceptance on Sept. • Facts:
the court orders the
cancellation of the 24, but it was not received by X until Sept. 29. o The debtor filed a case for consignation & deposited the
obligation amount of money offered as payment to the creditor who
previously refused to accept.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! o The court granted the withdrawal of the amount deposited
7The law must be reasonably interpreted & the realities of the situation in each case taken into upon motion of the debtor.
account so that the purpose of the law may not be defeated.

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Article 1260 Effects of improper consignation
Withdrawal by debtor of thing or sum deposited • if the consignation was improperly made, the obligation remains
• the observance of all the requisites of consignation operates as a because the consignation is not effective as payment
valid payment; hence the debtor can move for the cancellation of • if at the time of the consignation the debt was already due, and
the obligation by court the requisites for consignation are absent, the debtor is in default
• the debtor, however, may withdraw as a matter of right the thing
or sum deposited Q: Suppose on the the essential requisites for consignation is not
1. Before the creditor has accepted the consignation present, may the debtor ask for the cancellation of the obligation?
2. Before a judicial declaration that the consignation has been A: YES, provided the creditor does not object.
properly made, as he is still the owner of the same.
Q: How can the creditor prevent the debtor from exercising the
Effects if consignation has been duly made RIGHT to withdraw the thing consigned?
1. The debtor may ask the judge to order the cancellation of the A: By immediately accepting the consignation with or without
obligation reservation
2. The running of interest is suspended
3. However, it should be observed that before the creditor
ACCEPTS, or before the judge declares that the consignation
has been PROPERLY MADE, the obligation REMAINS.

Risk of loss
• The creditor bears the loss if:
1. Consignation is judicially approved
2. If all the requisites are present
3. if the creditor has signified his acceptance
• otherwise, it is the debtor who bears the burden
 o The creditor, aware of the said withdrawal, filed an answer o In this case, both debtor & creditor, in effect, agreed to
stating that the money was not enough, & that he was revive the indebtedness.
willing to accept the money as partial payment. He also • The creditor, due to his consent, will lose preference to the thing
sought the nullification of the withdrawal as he was not previously deposited to specifically pay-off his debt.
given notice of the same. o Anybody who has an interest in it can also go after it & the
• Held: The withdrawal was proper. Art. 1260, par. 2 gives the creditor cannot anymore say that it has been precisely
depositor the right to withdraw the amount deposited at any time consigned to answer for the credit in his favor.
before the creditor accepts it. • Moreover, the solidary debtors, guarantors & sureties [of the
o Such right is clear in this case, because the statement of debtor] shall be released as they likewise benefit from the
the creditor came late, &, what is more, the acceptance extinguishment of the obligation & the debtor cannot unilaterally
was partial. This last consideration renders unnecessary to revive the obligation without their consent.
discuss the effect of failure to give the creditor any notice o DOES NOT APPLY to joint obligations
of withdrawal, since the statement was practically a
rejection of the offer of payment. SECTION 2. – LOSS OF THE THING DUE.

With Reservation Art. 1262. Loss of Determinate Things.

• An acceptance with reservation is valid, as long as it is done prior to An obligation which consists in the delivery of a determinate thing shall be
the withdrawal of the amount by the debtor. extinguished if it should be lost or destroyed without the fault of the debtor,
o The creditor’s acceptance of the consigned amount but and before he has incurred in delay.
with an express reservation that he is not admitting the When by law or stipulation, the obligor is liable even for fortuitous events,
correctness of the obligation & therefore he is also the loss of the thing does not extinguish the obligation, & he shall be
reserving his right to claim the balance in accordance with responsible for damages. The same rule applies when the nature of the
what is prayed for in his answer & counterclaims is valid. obligation requires the assumption of risk.
• The reservation did NOT completely extinguish the obligation.
o If there is no reservation made, it means that the creditor Effect of Loss
waives his other claims under the contract. • Determinate object - the debtor shall be excused from performing
Effect of Declaration of Court his obligation if such thing is lost without his fault.
• Upon the declaration of the court that the consignation is valid, the • H0WEVER, if it is (1) his fault or if it has been (2) lost after the
debtor cannot anymore claim that he is the owner of the said debtor has incurred in delay, the debtor shall answer for the
amount. He cannot withdraw it anymore. resulting damages. Thing is lost when it perishes, or goes out of commerce, or diapers in
such a way that its existence is unknown or it cannot be recovered
Art. 1261. CASE: Fed. of United Namarco Distributors Inc. v. NAMARCO
If, the consignation having been made, the creditor should authorize the • Lesson: Don’t delay, because if you do, you pay for any loss,
debtor to withdraw the same, he shall lose every preference which he may damage or deterioration of the object of the prestation.
have over the thing. The co-debtors, guarantors and sureties shall be • Facts:
released. o X (the debtor) promised to deliver 2,000 boxes of oranges
to Y. Y demanded the boxes from X when they were due in
Finding of Court & Creditor’s Actions May 1, 1995, but X refused for no valid reason.
• When the court has found proper consignation & the obligation has o Y filed a case ordering X not to dispose of the boxes & kept
been cancelled, creditor MUST obtain from the court the payment. asking for the boxes to be delivered to him.
• However, if the obligation having been extinguished, the debtor o When at last X decided to deliver, after already being in
decides to withdraw the thing deposited with the creditor’s consent, delay, the oranges in 1,500 boxes began to spoil. Y
there is thus nothing which the creditor can obtain from the court. refused to accept these boxes.
When loss of the thing will extinguish an When loss of the thing will not extinguish liability
Since consignation is for the benefit of the creditor, obligation to give: 1. when the law provides
89 | Katrina Gaw | Block C 2018 he may authorize the debtor to withdraw the deposit 1. The obligation is to deliver a specific thing
2. when the stipulation provides
after he has accepted the same or after the court has 3. when the nature of the obligation requires the
2. Loss of the thing is without the fault of the assumption of risk
issued an order cancelling the obligation debtor 4. When the obligation to deliver a specific thing arises
3. The debtor is not guilty delay from a crime
 o X claims that under their contract, Y was supposed to bear • HOWEVER, if it is considered as a complete loss, then the rules
the expenses for handling & storage. Thus, Y should under Art. 1262 & 1263 must apply.
shoulder the burden of the 1,500 boxes. o Ex. If the debtor’s obligation is to deliver a specific
• Held: X bears the risk of the loss, because he was in delay. computer, consisting of the CPU with specific drives &
particular hard disks together with a very specialized
Fortuitous Event & Assumption of Risk screen peculiarly made for the said computer, with a
• As discussed in Art. 1174. special keyboard made to respond only to said screen, &
• Because the thing is lost already, damages can be obtained from the said screen is lost through a fortuitous event before
the debtor. the debtor has incurred in delay, there is clearly a partial
o Ex. If the specific & particular car to be delivered by the loss which renders the computer system totally useless. In
debtor is worth P500,000, & it is lost through a fortuitous this case, the debtor can go to court and declare that the
event, but the parties stipulate that the debtor, even partial loss has extinguished his obligation to deliver the
under such circumstances, will still be liable, the creditor computer.
cannot insist on the delivery of the specific car because it
has already been lost, but he can seek damages in the Art. 1265.
amount of P500,000, the value of the car. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the
Art. 1263. Loss of Generic Things. contrary, & without prejudice to the provisions of Art. 1165. This
In an obligation to deliver a generic thing, the loss or destruction of anything presumption does not apply in case of earthquake, flood, storm, or other
of the same kind does not extinguish the obligation. natural calamity.

Generic Thing Loss during Possession of Debtor

• Cannot really be lost or destroyed unless the whole class of said • General rule: presumption that the loss of the thing is due to the
thing is destroyed; the obligation subsists despite the loss or fault of the debtor who possesses it.
destruction of one thing in the said class. o The presumption arises from the fact that it was lost while
the obligation continues to o Ex. If the debtor is bound to deliver a ball without any it is in the possession of the debtor.
exist because a generic specification, he may deliver any kind of ball. If he buys o If the debtor is NOT in the possession of the thing when it
thing does not perish unless one & subsequently loses it through a fortuitous event, his is lost, the presumption does not arise.
the generic thing is • If the presumption applies, the debtor MUST prove that the loss is
delimited or if the generic
obligation is not extinguished. The debtor simply has to buy
thing has been segregated another ball. not through his fault or it has been caused by a fortuitous event.
o HOWEVER, he is still liable for a fortuitous event if:
Art. 1264. Partial Loss Tantamount to Total Loss. ! It has been so stipulated by the parties
The courts shall determine whether, under the circumstances, the partial ! The law so states
loss of the object of the obligation is so important as to extinguish the ! The nature of the obligation involves an
obligation. assumption of risk
! The obligor delays
Partial Loss ! The obligor has promised the same thing to 2 or
• If the loss is complete, Articles 1262 & 1263 will apply. more persons who do not have the same interest.
• If the loss is partial & the circumstances so warrant, the court may • The presumption does NOT apply even if the loss happens at the
consider it as a complete loss which extinguishes the obligation. time the thing is in the possession of the debtor if, at the time of
o Only happens if the partial loss is so important so as to the loss, an earthquake, storm, or other natural calamity exists.
totally affect the whole object of the obligation.
Art. 1266.

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 Modification of Contract NOT Covered
• the court shall either release or not release a party from a contract, but it
cannot modify the terms thereof and order the parties to comply with the
contract as modified by it

The debtor in obligations to do shall also be released when the prestation • Difficulty alone does not excuse the debtor from fulfilling his
becomes legally or physically impossible without the fault of the obligor. prestation.
o Subjective impossibility - a promissor’s duty is never
CASE: PNCC v. CA discharged by the mere fact that the supervening events
• Lesson: Art. 1266 applies only to obligations “to do” deprive him of the ability to perform, if they do not also
• Facts: deprive other persons of the ability to render such a
o The lessee in a lease contract sought its release from performance.
paying the rentals & from the said contract itself invoking • Art. 1267 - a new norm providing that when the service has become
Art. 1266. so difficult as to be manifestly beyond the contemplation of the
o The lessee claimed that, due to the change in political parties, the obligor may be released therefrom, in whole or in part.
climate after the EDSA revolution & change in financial o Still within the rule on impossibility of performance,
condition, it was not able to use the property for the although it may not be necessarily be impossible.
purpose for which it intended to utilize it, i.e., to use the • Enunciates doctrine of unforeseen events
leased premises as a site of a rock crushing plant
• Held: Lessee cannot rely on Art. 1266, because it applies only in Requisites for Application of Art. 1267
obligations “to do” & not “to give” 1) The prestation has become so difficult to render
o Additionally, the unforeseen event & causes mentioned by 2) The service has become manifestly beyond the contemplation of
the lessee are not the impossibilities contemplated the parties.
*These requirements must exist together.
Obligations “To Do”
• When the prestation becomes legally or physically impossible Illustrative Example
without the fault of the obligor, it shall be considered a loss which • An obligor is bound to deliver 40 cases of mangoes from the
extinguishes the obligation. Philippines to South Africa by ship at the cost of $30,000 on or
Natural Impossibility v
o Legal impossibility - If the obligor is bound to build a fence before April 11, 1997.
Impossibility in Fact along the property of the obligor & the said property is • The usual route in going to South Africa has been suddenly closed
• Natural Impossibility: expropriated by the government which bars everybody from prompting the obligor to look & eventually pass through another
The thing to be done cannot entering the same, route, which is likewise closed, again leaving the obligor with no
by any means be o Physical impossibility - a debtor was bound to do a concert other choice but to attempt passing through another alternative
accomplished; renders & to provide musical bands exclusively in a particular route 4 times longer than the usual route, & which route could be
contract void
• Impossibility in fact:
Music Hall & the parties contracted on the basis of the traversed by its vessel without damaging itself & without entailing
only improbable or out of continued existence of the said Music Hall, which burned enormous additional and unreasonable cost (i.e., the obligor would
the power of the obligor; down, without the fault of either the debtor or the creditor, have to charter other vessels for the continuing voyage), & also
does not render contract before the concert could begin. The obligation of the without subjecting the fruits to possible harm as they would most
void debtor to render a concert has become physically likely spoil along such a long trip.
impossible to perform & therefore the same was • The obligation in this case has clearly become so difficult to do & is
extinguished. manifestly beyond their contemplation. The obligation should be
deemed extinguished.
Art. 1267.
When the service has become so difficult as to be manifestly beyond the Rebus Sic Stantibus
contemplation of the parties, the obligor may also be released therefrom, in • The basis of Art. 1267
whole or in part. o Under this theory, the parties stipulate in the light of
certain prevailing conditions
Difficulty Beyond Contemplation of Parties

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 o Once these conditions cease to exist, the contract also consideration, X agreed to install free of charge 10
ceases to exist telephone connections to Y.
• Change in conditions which can extinguish obligations o At the time of the execution of the contract, it was the
• HOWEVER, Art. 1267 is NOT an absolute application of this theory, contemplation of the parties that the posts were only to be
because such would endanger the security of contractual relations used in Naga City because, at that time the capability of Y
o The parties to the contract must be presumed to have was very limited. This was so even if at that time there
assumed the risks of unfavorable developments. were many subscribers in Naga City for telephone lines,
• It is therefore only in absolutely exceptional changes of who cannot be served because of this contemplated
circumstances that equity demands assistance for the debtor. limited capability.
o After 11 years of the effectivity of the contract, the contract
CASE: PNCC v. CA became so burdensome to Y. This fact was shown by the
• Lesson: Rebus sic stantibus does not apply to turmoil in Marcos era following: the telephone cables strung by X had become
& EDSA Revolution; only in absolutely exceptional circumstacnes heavier with the increase in the volume of their
• Facts: The lessee in a lease contract sought its release from paying subscribers, worsened by the fact that their linemen bore
the rentals & from the said contract itself invoking Art. 1266 & holes through the posts at which points those posts were
rebus sic stantibus, claiming that, due to the change in political broken during typhoons, & that a post costs as much as
climate after the EDSA revolution & change in financial condition, it P2,630. While there was an increased use of the posts,
was not able to use the property for the purpose for which it there was no corresponding increase in the telephone
intended to utilize it, i.e., to use the leased premises as a site of a connections to Y. X also began using Y’s telephone posts
rock crushing plant outside Naga City. The contract became so one-sided to
the prejudice of Y.
• Held: Rebus sic stantibus does not apply here; the petitioners were
o X contends that, because the contract did not involve the
quite aware of all the political turmoil when they entered into the
rendition of service or a personal prestation & it was not
contract in Nov. 18, 1985, days after Marcos declared Martial Law.
for future service with future unusual change, Art. 1267
o Also, anent petitioner’s alleged poor financial condition,
should not apply & therefore the ruling in the Occena vs.
mere pecuniary inability to fulfill an engagement does not
Jabson should be followed.
discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance. • Held: Art. 1267 was applicable & the obligation was extinguished.
The continued enforcement of the contract had manifestly gone
CASE: Naga Telephone City, Inc. v. CA beyond the contemplation of the parties so much so that the Y
should be released from the contract to avoid X’s unjust
• Lesson:
enrichment at Y’s expense.
o To fall under Art. 1267, it is not a requirement that the
o A reading of Art. 1267 will show that the term “service”
contract be for future service with future unusual change.
should be understood as referring to the “performance” of
Considering the practical needs & the demands of equity &
the obligation
good faith, the disappearance of the basis of a contract
o The use of the telephone lines is the “service”
gives rise to a right to relief in favor of the party prejudiced.
contemplated in Art. 1267
o Art. 1267 cannot be used to modify contracts, only to
o In Occena, the Court did not allow Art. 1267 to apply to a
extinguish them.
petition praying for modification of terms in a contract by
• Facts:
fixing the proper shares that should pertain to them out of
o Petitioner X & respondent Y entered into a contract where
the gross proceeds from the sales of subdivided lots. Here,
they agreed that X shall use the electrical posts of Y in
the parties did not want to be released from the obligation,
Naga City free of charge, but the contract can be
but for the contract to be modified. The case was
terminated if Y is forced to stop its business. As

92 | Katrina Gaw | Block C 2018

 dismissed for lack of cause of action, as Art. 1267 is for • If A stole a watch from B & was criminally charged for said offense,
extinguishment, & not modifications of contracts. & the watch was lost through a fortuitous event, A must still pay the
price of the watch.
CASE: Magat, Jr. v. CA o The loss will not excuse him from being responsible; he did
• Lesson: When one cannot perform a particular obligation because not have the right to possess the same in the first place.
of government prohibition or non-issuance by the government of • If A however offered back the watch to B, & the latter refused to
the permit due to certain supervening events, the obligation can accept, the risk of loss of the watch would be on B except if there
also be deemed extinguished with Art. 1267 as basis. was justifiable reason not to accept it as, for example, it had
• Facts: already been severely damaged.
o X won a bidding to operate taxis with radio transceivers.
For this purpose, X ordered certain transceivers through Y. Art. 1269.
Y ordered from Japan. The obligation having been extinguished by the loss of the thing, the creditor
o It was agreed that the radio transceivers will be delivered shall have all the rights of action which the debtor may have against 3rd
within 60-90 days notice from X of the assigned radio persons by reason of the loss.
The rights of action of the debtor are transferred to the
frequency taking note of government regulations. creditor from the moment the obligation is extinguished, to
! The radio frequency was assigned but later the Rights of Action Open to Creditor protect the interest of the latter by reason of loss
government, because of the imposition of martial • If A buys a house from G, & the house, which is insured, is
law, denied the application for a permit to import accidentally burned by a fortuitous event prior to the demand for its
the radio transceivers. delivery by A, the obligation of G to deliver the house is
o Due to this denial, X was likewise unable to obtain the extinguished.
necessary letter of credit. X did not continue with the o However, in the event that A has already paid the price of
contract. the house, he can seek reimbursement of the insurance
• Held: Court rejected the case of Y for breach of contract. proceeds due from the insurance company.
o X testified that a permit to import the transceivers from
Japan was denied by the Radio Control Board. He stated SECTION 3. – CONDONATION OR REMISSION OF THE DEBT.
that he & Y personally went to the Radio Control Office, &
were denied a permit to import. They also went to the Art. 1270.
Office of the President, where Secretary Zamora explained Condonation or remission is essentially gratuitous, and requires the
that radios were “banned like guns because of martial acceptance by the obligor. It may be made expressly or impliedly.
law.” X testified that this prevented him from securing a One & the other kind shall be subject to the rules which govern inofficious
letter of credit from the Central Bank. donations. Express condonation shall, furthermore, comply with the forms of
o X’s inability to secure a letter of credit & to comply with his donation.
obligation was a direct consequence of the denial of the
permit to import. For this X cannot be faulted. Condonation or Remission of a Debt — Must be accepted by debtor
• An act of liberality; a donation of the obligee’s credit in favor of the
Art. 1268. debtor
When the debt of a thing certain & determinate proceeds from a criminal • Connotes that there is a previous demandable obligation but the
offense, the debtor shall not be exempted from the payment of its price, creditor decides not to enforce the debtor’s prestation anymore.
whatever may be the cause for the loss, unless the thing having been o Requires the implied or express consent of the obligor. In
offered by him to the person who should receive it, the latter refused effect
without justification to accept it. • Governed by the rules on inofficious donation
Requisites of condonation/remission
Criminal Offense Rules on Inofficious Donation 1. Must be gratitious
2. Must be accepted by the obligor
3. The parties must have capacity
93 | Katrina Gaw | Block C 2018
4. It must not be inofficious
5. If made expressly, it must comply with the forms of
donations
 Q: Can the creditor renounce his credit even against the will of the debtor?
A: YES. Art 6: rights may be waived unless the waiver is contrary to law etc

• A donation is inofficious if it turns out that the thing or amount o Said persons cannot renounce their right during the
donated (remitted or condoned) encroaches or infringes on the lifetime of the donor, either by express declaration, or by
legitime or successional rights of the heirs of the condoning consenting to the donation.
creditor. o The donees, devisees & legatees, who are not entitled to
• To “combat” inofficious donation, one must prove payment & not the legitime & the creditors of the deceased can neither
condonation, because payment is not revocable as inofficious ask for the reduction nor avail themselves thereof.
donation • Art. 773 - If, there being 2 or more donations, the disposable
• Ex. A creditor condones the debt of a debtor in the amount of P50K. portion is not sufficient to cover all of them, those of the more
o Later on, the creditor gives birth to a child at a time when recent date shall be reduced with regard to the excess.
her properties are worth only P10,000. • Art. 760 - Every donation inter vivos, made by a person having no
o Her over-all estate (including the remitted P50,000) at the children or descendants, legitimate or legitimated by subsequent
time of the birth of the child is therefore P60,000. marriage, or illegitimate, may be revoked or reduced as provided in
Effects of in officious
remission: ! The legitime of the child is 1/2 of the estate the next article, by the happening of any of these events:
• no one can give more which, in this case, is P30,000. (1) If the donor, after the donation, should have legitimate
than that which he can ! The free portion which can be given to any person or legitimated or illegitimate children, even though they be
give by will, otherwise not necessarily an heir is also P30,000. posthumous;
excess shall be in o Thus, since the child will only get P10,000 because this is (2) If the child of the donor, whom the latter believed to be
officious and shall be the only existing property out of an estate of P60,000, the dead when he made the donation, should turn out to be
reduced by the court
remission in favor of the debtor is inofficious to the extent living;
of P20,000. The remission clearly infringes on the legitime (3) If the donor should subsequently adopt a minor child.
of the child. • Art. 761 - In cases referred to in the preceding article, the donation
o The debtor must therefore be made to pay P20,000 out of shall be revoked or reduced insofar as it exceeds the portion that
the P50,000 remitted debt. Hence, the child shall get may be freely disposed of by will, taking into account the whole
P20,000 + P10,000, completing his legitime. estate of the donor at the time of the birth, appearance or adoption
of a child.
Related Provisions – Inofficious Donations • Art. 762 - Upon the revocation or reduction of the donation by the
• Art.750 – The donation may include all the present property of the birth, appearance or adoption of a child, the property affected shall
donor, or part thereof, provided he reserves, in full ownership or in be returned, or its value if the donee has sold the same.
usufruct, sufficient means to support himself & all relatives who, at o If the property is mortgaged, the donor may redeem the
the time of the acceptance of the donation, are by law entitled to be mortgage, by paying the amount guaranteed, with a right to
supported by the donor. recover the same from the donee.
o Without such reservation, the donation shall be reduced on o When the property cannot be returned, it shall be
petition of any person affected. estimated at what it was worth at the time of the donation.
• Art.771 - Donations which in accordance with Art. 752, are • Art. 763 - The action for revocation or reduction on the grounds set
inofficious, bearing in mind the estimated net value of the donor’s forth in Art. 760 shall prescribe after 4 years from:
property at the time of his death, shall be reduced with regard to o The birth of the 1st child, or from his legitimation,
the excess recognition or adoption or
o BUT the reduction shall not prevent the donations from o From the judicial declaration of filiation, or
taking effect during the life of the donor o From the time information was received regarding the
o NOR shall it bar the donee from appropriating the fruits. existence of the child believed dead.
• Art. 772 - Only those who at the time of the donor’s death have a o This action cannot be renounced, & is transmitted, upon
right to the legitime & their heirs & successors in interest may ask the death of the donor, to his legitimate & illegitimate
for the reduction of inofficious donations. children & descendants.

94 | Katrina Gaw | Block C 2018

 Presumption in case document of indebtedness voluntarily delivered by creditor
1. Presumption implied remission: delivery of the private doc is a voluntary act of creditor
2. Contrary evidence: evidence is admissible to show otherwise, as when it was delivered only for examination
3. Extent of remission: joint obligation - share of the debtor who is in possession of the doc / solidary - total obligation
4. Presumption applicable only to private document
If B later voluntarily gives it to A, such delivery implies a
o
Rules on Forms of Donations renunciation of the debt.
• Art.748 - The donation of a movable may be oral or in writing. o HOWEVER, in the event that the remission of the P1,000 is
o Oral donation - requires simultaneous delivery of the thing claimed to be void because it is inofficious, the heirs of A
or of the document representing the right donated. can show that A’s possession of the promissory note is
o If the value of the personal property donated exceeds NOT a result of a remission made by A but a result of A’s
P5,000, the donation & the acceptance shall be made in payment of the obligation.
writing. Otherwise, the donation shall be void. • In case of PAYMENT, the promissory note is always taken by the
• Art. 749 - In order that the donation of an immovable may be valid, debtor.
it must be made in a public document, specifying
o The property donated & CLASS DISCUSSION
o The value of the charges which the donee must satisfy. • Donations take effect during the lifetime of the donor & the donee
o The acceptance may be made in the same deed of gets the fruits during the period in which he holds the property
donation or in a separate public document, but it shall not
take effect unless it is done during the lifetime of the Art. 1272.
donor. Whenever the private document in which the debt appears is found in the
o If the acceptance is made in a separate instrument, the possession of the debtor, it shall be presumed that the creditor delivered it
donor shall be notified thereof in an authentic form, & this voluntarily, unless the contrary is proved.
step shall be noted in both instruments.
Presumption in Art. 1272
Art. 1271. • Document evidencing the debt in the possession of the debtor
The delivery of a private document evidencing a credit, made voluntarily by gives rise to the refutable presumption that such document has
the creditor to the debtor, implies the renunciation of the action which the been delivered by the creditor voluntarily.
former had against the latter. • However, this presumption can be overturned by clear evidence to
If in order to nullify this waiver it should be claimed to be inofficious, the the contrary. NOTE: if the instrument of credit is still in the creditor’s hands, this is
debtor & his heirs may uphold it by proving that the delivery of the evidence that the debt has not yet been paid
document was made in virtue of payment of the debt. Art. 1273.
The renunciation of the principal debt shall extinguish the accessory
Private Document Evidencing a Credit obligations; but the waiver of the latter shall leave the former in force.
• Promissory note – the most common private document evidencing
a credit Principal & Accessory Obligations
o A promissory note in the hands of the creditor is proof of • Existence of the accessory obligation depends on the existence of
indebtedness rather than proof of payment. the principal obligation.
• If a creditor delivers a promissory note to the debtor, the creditor, in o BUT the existence of the principal obligation does NOT
effect, furnishes the debtor the evidence which could prove the depend on the accessory obligation.
indebtedness of such debtor in his favor. ! If the principal obligation is extinguished, it carries
o Implies that the creditor is no longer interested in the debt. with it the extinguishment of the accessory
o The law provides that such act will be considered a obligation but not vice-versa.
renunciation. • Ex. If A is indebted to B, & the indebtedness is guaranteed by X, & B
o The presumption created is that the debt was condoned, told X that he will not anymore claim on X’s guarantee as the said
NOT that there was payment creditor is renouncing the same, X is released but the principal
• Ex. A owes B P1,000, evidenced by a promissory note executed by obligation of A still subsists.
A, which is in the possession of B. o B can still collect from A.
dow
Ex: A
and Bowes (#100,000, evidenced by private
found Q:In both
cas e s , can the
presumption be rebutted?
95 | Katrina Gaw | Block C 2018 found possession Dow A,
in a
1. Dow in 2.

debtor
A:joint
of
solidary
debtor A: YES. can be overcome
by superior contrary evidence
is WHOLE
is A's debt -
Presumption
Presumption
is remitted
been remitted obligation
has
 o However, if B renounces the indebtedness of A, B cannot o Ex. A son owes his father P10,000. His father dies leaving
go against X because the latter’s guarantee, being an as part of his estate, inherited by the son, the amount of
accessory obligation, is extinguished with that of the P10,000 owed by the son to his father.
principal obligation. • CASE: Chittick vs. Court of Appeals
o Facts: A woman filed a complaint against her father for
Art. 1274. support in arrears & for her share in the conjugal
It is presumed that the necessary obligation of pledge has been remitted partnership. After the she was substituted in the case by
when the thing pledged, after its delivery to the creditor, is found in the her children upon her death, the father likewise died.
possession of the debtor, or of a 3rd person who owns the thing. o Held: Chittick children as heirs of the creditor (their
mother) are also the heirs of the debtor (their grandfather),
Pledge the obligation sued upon had been extinguished by the
• Involves a movable property constituted by the owner of such merger in their persons of the character of creditor &
property who has free disposal of it, to secure the fulfillment of a debtor of the same obligation.
principal obligation
• Such contract is perfected only upon the delivery of the thing Art. 1276. Guarantee & Merger.
pledged to the creditor. Merger which takes place in the person of the principal debtor or creditor
o A pledge is an accessory contract. benefits the guarantors. Confusion which takes place in the person of any of
o A person may even pledge his property not for his own the latter does not extinguish the obligation.
indebtedness but for the indebtedness of another person.
• In a contract of pledge, the creditor must be in possession of the Guarantee
thing pledged. • An indebtedness by a debtor & guaranteed by a 3rd person is
o If it is in possession of the debtor or of the 3rd person who extinguished if there is a merger of the characters of debtor &
owns it, there is a presumption that the accessory creditor.
obligation has been condoned or remitted. However, this is o The extinguishment of the principal obligation extinguishes
a refutable presumption. the accessory obligation of guarantee.
o Guarantee – when a guarantor binds himself to pay the
CLASS DISCUSSION remaining indebtedness of a debtor after the creditor has
• Movable security – pledge exhausted all other available remedies.
• Real estate security – mortgage • HOWEVER, the ff. merely extinguishes the accessory obligation:
• With securities, if D cannot pay his debt to C, the pledge/mortgage o Merger of the persons of guarantor & creditor
will be sold at public auction & proceeds given to C o Merger of the characters of debtor & guarantor

SECTION 4. – CONFUSION OR MERGER OF RIGHTS Art. 1277. Confusion & Joint Obligations.
Confusion does not extinguish a joint obligation except as regards the share
Art. 1275. Confusion or Merger of Rights. corresponding to the creditor or debtor in whom the two characters concur.
The obligation is extinguished from the time the characters of creditor &
debtor are merged in the same person. Joint Obligations
consolidation of ownership
• Joint debtors owe the creditor only their share in the whole
Confusion or Merger indebtedness & the creditor can only collect from each debtor his
• The obligation is extinguished from the time the characters of share in the total indebtedness.
creditor & debtor are merged in the same person. • If A, B & C jointly owe X P3,000 & there is a merger of the
of valid of Merger
characters of X & C, the obligation is extinguished in so far as the
Requisites a
merger: Revocability
for the confusion ceases.
1.
take
Must place between principal debtor and creditor i fthe reason

is revived
and definite the obligation
2. be
Must complete
96 | Katrina Gaw | Block C 2018
 P1,000 share of C in the indebtedness is concerned but not as to o Hence, if A owes B P2,000, & B, in turn, owes A P2,000, &
the rest. both indebtedness are due without any 3rd person claiming
o X can still collect P1,000 each from A & B. the same, the obligation is extinguished.
o If they mutually owe each other the unequal amounts, then
Solidary Obligations (same example as above) there is compensation up to the extent that the amounts
• If the obligation is solidary & there is merger of the characters of are covered by their mutual outstanding obligations.
C & X, the obligation is extinguished.
o HOWEVER, if A pays the whole indebtedness to X prior to
the merger of the characters of C & X, A can still collect Requisites for Legal Compensation:
from X & likewise from B their respective shares in the 1) Each one of the obligors is bound principally & each of them is at
indebtedness which is P1,000 each the same time a principal creditor of the other
o The obligors must be mutual creditors & debtors of each other
SECTION 5. – COMPENSATION. o CASE: Soriano v. General de Tabacos de Filipina
! Facts:
Art. 1278. • X extended a crop loan to Y who secured payment
Compensation shall take place when 2 persons, in their own right, are of the loan by, among others, the sugarcane crops
creditors & debtors of each other. that would be planted & harvested.
• X, after receipt of some export sugar from Y,
Art. 1279. shipped the same to the United States for X’s own
In order that compensation may be proper, it is necessary: account & benefit.
(1) That each one of the obligors be bound principally, & that he be at o Later on, X resisted the claim of Y to be
the same time a principal creditor of the other; credited an amount of P51,528.01,
(2) That both debts consist in a sum of money, or if the things due are representing the amount of the sugar it
consumable, they be of the same kind, & also of the same quality if delivered to X.
the latter has been stated; • X invoked automatic compensation because Y was
(3) That the two debts be due; X’s debtor due to his crop loan account, & at the
(4) That they be liquidated & demandable; same time a creditor of X for the proceeds of the
(5) That over neither of them there be any retention or controversy, sale of Y’s sugar.
commenced by 3rd persons & communicated in due time to the ! Held: The parties were NOT mutual debtors & creditors
debtor. of each other considering the fact that, by X’s own
admission, the sugar was sold not for the account of Y
Compensation but for the account of X & therefore X could not have
• At least 2 contracts are involved been a debtor of Y.
• Can be total or partial o CASE: Republic v. Mambulao Lumber Co.
o Unlike with payment, which generally must be complete ! Lesson: No set-off is admissible against demands for
• Compensation – by operation of law taxes levied for general or local governmental
• Mode of extinguishing an obligation whereby the parties are purposes.
mutually debtors & creditors of each other. ! Facts: A company contended that the reforestation
o If they owe each other exactly the same amount & the charges collected under RA 115 & not used in the
requisites under Art. 1279 are present, they do not have to area subject of its timber license, could be applied in
make actual payment to each other, i.e. they do not have compensation of the sum due from it as forest charges
to hand money or the things due to each other, as payment ! Held: The reforestation charges were in the nature of
is made by operation of law. taxes & can never be refunded even if the they were

97 | Katrina Gaw | Block C 2018

 not actually used in the area subject of its timber ! Held: There is no legal compensation, as both debts
license, &, because they were taxes, the reforestation have to be due & demandable for compensation to
charges were not debts for purposes of legal take place.
compensation to make the parties therein mutual • On the respective dates of maturity, specifically,
creditors & debtors of each other Aug. 6 & Aug. 13, 1974, respectively, the investor
2) Both debts consist in a sum of money, or if the things due are was still the holder of those bills, it can be safely
consumable, they be of the same kind, & also of the same quality if assumed that it was he who had asked for the roll-
the latter has been stated overs on the said dates. Company X was bound by
o There can be no compensation if one debt involves the the roll-overs since the assignment to it was made
payment of money & the other the delivery of a particular thing. only on Sept. 9, 1974. The inevitable result of the
o HOWEVER, there can be compensation involving things which roll-overs of the principals was that the debts were
are determined such as any computer, but not a specific not yet due & demandable as of the date of their
determinate thing such as a computer with serial number assignment by the investor to Company X on Sept.
10325. 9, 1974, nor as of Oct. 3, 1974 when Company X
! “Consumable” means “fungible” (generic) surrendered the Bills to the finance company.
o CASE: Ong v. CA o CASE: PNB Madecor v. Uy
! Facts: Compensation is sought for an obligation of a ! Facts: One of the debts was payable only upon
debtor to deliver a sum of money to a creditor & demand & there was no demand made
another obligation of creditor to deliver zippers to the ! Held: There can be no legal compensation because
debtor. the debt is not yet due
! Held: The debts, even admitting that the delivery of the
zippers to the debtor is a debt, do not both consist in a CLASS SCENARIO
sum of money nor are they of the same quality & kind • Facts: A owes B P1K. B owes A P1K. Both are payable on March 1.
3) The 2 debts are due Can compensation arrive at March 5?
o The debts need not be incurred at the same time. • Answer: NO. There must be a demand for payment for them to be
o A debt cannot be demanded if it is not yet due. considered due & demandable.
! HOWEVER, the parties can agree that compensation
can be made even as to the debts which are not yet 4) The debts are liquidated & demandable.
due. o The debt must be determined & certain.
o CASE: Perez v. CA ! Compensation cannot take place where one of the
! Facts: debts is not liquidated, as when there is a running
• A finance company was indebted to an investor interest still to be paid thereon.
with respect to 2 debts due originally on Aug. 6, o CASE: Compania Maritima v. CA
1974 & Aug. 13, 1974 respectively ! Facts:
• The debts were rolled-over so that their maturity • X owed Y the sum of P40,797.54. There was
dates were extended to Oct. 4, 1974 & Oct. 11, legal interest payable from Feb. 3, 1951 on
1974, respectively. said debt, representing useful expenses. It
• The finance company was the creditor with was stipulated that the interest would not
respect to a certain obligation to mature on Aug. stop accruing “until the expenses are fully
5, 1994 as against company X to whom the 2 paid.”
credits of the investor, which were to mature on • Meanwhile, Y also owed X P59,500, for
Oct. 4 & 11, 1974 respectively, were assigned on rentals payable.
Sept. 9, 1974

98 | Katrina Gaw | Block C 2018

 • X now claims there should be legal garnishment, legal compensation has already set in. D
compensation for the P40,797.54 debt, so cannot anymore make use of the credits of A against B
that they would owe only P18,702.46. to satisfy A’s obligation in his (D’s) favor.
! Held: There can be no compensation, because the ! HOWEVER, if B were notified on May 20, 1999, there
amount is not liquidated. Since there was still legal can be no compensation of the mutual debts of A & B
interest to be paid “until the expenses are fully paid,” against each other as the controversy commenced by
there is still some debt which is not liquidated. D, a 3rd person, was duly communicated at a time
o CASE: Miailhe v. Halili before legal compensation could set in
! Facts:
o SC reduced the liability in favor of the X SCENARIO
resulting, among others, in an excess amount • Facts: Company X owes Y P10,000 which Company X borrowed
of P2,004.28, which consequently became from Y. Y, on the other hand, owes X for a share of stocks from Y
payable to Y. that he hasn’t paid fully yet. Can there be compensation?
o X did not want to return the said amount on • Answer: NO. A person buying stocks from a company is not
the ground that he had the right to retain the indebtedness on the part of the buyer of the stocks. Thus, there
same considering that, in another case, which can be no legal compensation, because the law defines it as a
was on appeal, the lower court had rendered situation where 2 persons “are mutually creditors & debtors of each
judgment against Y & in favor of X for the sum other.”
of P2,004.28.
! Held: There can be no compensation because the CLASS DISCUSSION
amount of P2,004.28 awarded to X in another case • The contract should at least be voidable for compensation to take
was still under litigation & therefore still being place
disputed. It was a requirement for compensation to
take place that the amount involved be certain & Article 1280.
liquidated. Notwithstanding the provisions of the preceding article, the guarantor may
5) Over neither of them there be any retention or controversy, set up compensation as regards what the creditor may owe the principal
commenced by 3rd persons & communicated in due time to the debtor.
debtor.
o Due time – the period before legal compensation was Guarantor
supposed to take place, considering that legal compensation • Exception to general rule; here, the 1st element is missing (principal
operates so long as the requisites concur, even without any creditors & debtos to each other)
conscious intent on the part of the parties. • A person who promises to pay the creditor in the event that the
! A controversy communicated to the parties after that principal debtor fails to pay the indebtedness.
time CANNOT undo the compensation that had taken o Before the creditor can go against a guarantor, the creditor
place by force of law, lest the law concerning legal must first exhaust all possible ways to collect the debt from
compensation be for naught. the principal debtor
o Ex. A owes B P1,000, due on May 3, 1999. B is likewise ! UNLESS the guarantor binds himself solidarily with
indebted to A in the same amount due on May 23, 1999. Legal the principal debtor.
compensation therefore could set in on May 23, 1999. o If the creditor goes against the guarantor, the latter can
! D filed suit against A & obtained a favorable resolution resist payment by invoking compensation between the
from the court garnishing all money & credits of A, creditor & the principal debtor.
including the indebtedness of B in A’s favor. If it were • “Notwithstanding the provisions of the preceding article”
only on June 1, 1999 that B was able to know of the

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 o Even if the guarantor & the principal creditor are not • Happens when one of the parties to a suit over an obligation has a
mutual debtors & creditors of each other, the obligation of claim for damages against the other
the guarantor can be extinguished by invoking • A files a collection case against B for P1,000.
compensation in so far as the principal debtor is o B can file a counterclaim in the same amount claiming
concerned. damages arising from the same or different transaction &
requesting the court to just set-off the damages.
Art. 1281. o If the court agrees, then there can be compensation.
Compensation may be total or partial. When the two debts are of the same • CASE: Ong v. CA
amount, there is a total compensation. o Lesson: For judicial set-off to apply, the amount of
damages or the claim sought to be compensated must be
Total & Partial Compensation duly proven
• Total compensation - when the mutual debts of the parties to each o Facts: X owed Y money, & X deposited zippers with Y,
other are equal. though it was not shown that Y had asked for the zippers
• Partial compensation - when the debts are not equal, in which case, or even needed it for business.
the debts are extinguished to the concurrent amount. o Held: X has not proved the right to any damage as a result
• Hence, if A owes Z P2,000 & Z owes A P500, compensation can of the claimed retention of the zippers by Y. There was also
occur but only on a partial basis. Z’s indebtedness will be no proof of the amount of such damages as X could not
extinguished, but A’s indebtedness will subsist but partially even say how many of the zippers had been earlier
extinguished to the extent of P500, reducing liability to of P1,500. withdrawn by him.

Art. 1282. Art. 1284.

The parties may agree upon the compensation of debts which are not yet When one or both debts are rescissible or voidable, they may be
due. compensated against each other before they are judicially rescinded or
avoided.
When Not Yet Due
• General rule - compensation can only occur when the debts are due Rescissible Debt
& demandable (legal compensation) • Valid up to the time it is rescinded or annulled.
o HOWEVER, the parties may agree upon the compensation • If all the requisites for a valid compensation are present before a
of debts which are not yet due. (contractual compensation) contract is rescinded, the compensation can occur by operation of
• Hence, if A owes Z P1,000 due on April 11, 1997 & Z is indebted to law.
A in the same amount but due on May 7, 1997, there can be no • Ex. If A is indebted to B for P1,000 & the latter is likewise indebted
compensation on April 11, 1997. to A for the same amount which are both due & demandable,
o HOWEVER, Z & A can agree that, even if May 7, 1997 has compensation will occur even if the loan obtained by B from A was
not yet arrived, their mutual indebtedness compensate procured through force & intimidation, therefore making the same
each other so that their respective obligations are voidable, for as long as such debt has not yet been annulled.
extinguished.
Art. 1285. Assignment of Rights by Debtor & Effect on Compensation.
Art. 1283. The debtor who has consented to the assignment of rights made by a
If one of the parties to a suit over an obligation has a claim for damages creditor in favor of a third person, cannot set up against the assignee the
against the other, the former may set it off by proving his right to said compensation which would pertain to him against the assignor, unless the
damages and the amount thereof. assignor was notified by the debtor at the time he gave his consent, that he
reserved his right to the compensation.
Judicial Set-Off

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If the creditor communicated the cession to him but the debtor did not • The same finance corporation was the creditor
consent thereto, the latter may set up the compensation of debts previous with respect to a certain obligation to mature on
to the cession, but not of subsequent ones. Aug. 5, 1994 as against Company X to whom the 2
If the assignment is made without the knowledge of the debtor, he may set credits of the investor, which were to mature on
up the compensation of all credits prior to the same & also later ones until Oct. 4 & 11, 1974, respectively, were assigned on
he had knowledge of the assignment. Sept. 9, 1974.
• Compensation was being claimed on the basis of
Cession the Art. 1285, par. 3.
• In this Art., this involves transfer of title, like a sale or donation ! Held: There can be no compensation, applying Art.
• Valid even without consent of debtor 1285, par. 1. The debtor cannot claim that he had no
• Another exception to the rule that only the principal creditors & knowledge of the assignment in view of the special
debtors can claim from each other nature of money market transactions
• There is a novation—a change in the person of the creditor • The impersonal character of the money market
3 Cases When the Debtor Assigns His Credit to a 3rd Person device overlooks the individuals or entities
1) When the debtor has consented to the assignment of rights made concerned.
by a creditor in favor of a 3rd person, the debtor cannot set up o “Implied” knowledge of free assignment
against the assignee the compensation which would pertain to him (& consent)
against the assignor, unless the assignor was notified by the debtor • The issuer of a commercial paper in the money
at the time he gave his consent, that he reserved his right to the market necessarily knows in advance that it would
compensation be expeditiously transacted & transferred to any
o Ex. X owes Z P1,000 due on Apr. 12, 1997. Z is likewise investor/lender without need of notice to said
indebted to X in the same amount due on May 6, 1997. On Apr. issuer.
14, 1997, Z assigned his credit to O with the consent of X who • In practice, non-notification is given to the
does not make any reservation as to his right of compensation borrower or issuer of commercial paper of the sale
which could occur on May 6, 1997. or transfer to the investor.
! On May 7, 1997, O demands payment from X the 2) When the creditor communicated the cession to the debtor but the
amount of P1,000 which has been assigned to him by debtor did not consent thereto, the latter may set up the
Z. X CANNOT resist payment by invoking that the compensation of debts previous to the cession, but not of
amount of indebtedness of Z in his favor may be subsequent ones
applied in compensation of the said amount of P1,000 o X owes Y P1,000 due on Apr. 12, 1997 & P2,000 due on May
assigned by Z to O. 10, 1997. Y also owes X P1,000 due on May 6, 1997 &
! HOWEVER, if at the time X gives his consent to the P2,000 due on May 9, 1997.
assignment, he reserves his right to the compensation, ! On May 7, 1997, Y assigns all his credits to O but X
he can validly invoke that the obligation has been does not consent to the assignment.
extinguished through compensation. ! On June 1, 1997, O demands payment from X of the
o CASE: Perez v. CA first P1,000 & the 2nd P2,000 assigned to him by Y. X
! Facts: can resist payment of the P1,000 on the ground that
• A finance company issued to an investor 2 compensation has taken place because the 1st debts
promissory notes to mature originally on Aug. 6 & became due before the cession, but he cannot set up
Aug. 13, 1974, respectively. The commercial compensation as to the P2,000 which has become
papers were rolled-over so that their maturity due after the cession.
dates were extended to Oct. 4 & Oct. 11, 1974
respectively.

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 3) When the assignment is made without the knowledge of the debtor, for the reason that it is the duty of the person
he may set up the compensation of all credits prior to the same & who has acquired a title by transfer to
also later ones until he has knowledge of the assignment. demand payment of the debt, to give his
o Ex. from 2nd case: If X is informed by Y only on May 15, 1997 debtor notice.
that he has assigned all his credits to O, & the latter demands
payment of the 1st P1,000 & the 2nd P2,000 on June 1, 1997, Art. 1286.
X can invoke that all the indebtedness have been extinguished Compensation takes place by operation of law, even though the debts may
because compensation has set in. be payable at different places, but there shall be an indemnity for expenses
o CASE: Sesbreño v. CA of exchange or transportation to the place of payment.
! Lesson: It is the time that the debtor learns of the
assignment that is determinative, rather than the time Operation of Law
it is actually assigned. • If all the requisites under Art. 1279 are present, compensation
o Art. 1626 – “The debtor who, before having takes place by operation of law.
knowledge of the assignment, pays his o The parties need not notify each other that they intend to
creditor shall be released from the have their debts compensated.
obligation.” • Indemnity for expenses of exchange or transportation to the place
o If a man pays his debt before notice of the of payment can arise only if there is partial compensation.
assignment, the law exonerates him. It is the o Ex. If A owes B P1,000 payable in Davao but B owes A
duty of the person who has acquired a title by P500 in Marikina, then there is only partial compensation.
transfer to give his debtor notice to demand A has to go to Marikina for him to receive the payment of B
payment of debt. for the balance of P500. A, the creditor, should be
! Facts: Philfinance was indebted to Delta, evidenced by reimbursed by the debtor the amount of transportation
promissory note 1. The latter was likewise indebted to expenses A has incurred in going to Marikina because,
the former evidenced by promissory note 2. under Article 1247, the extrajudicial expenses required for
Philfinance assigned promissory note 1 to Sesbreño, payment shall be for the account of the debtor, unless it is
one of Philfinance’s creditors, who only notified Delta otherwise stipulated.
of such assignment after the indebtedness of Delta in • BUT if there is complete compensation, the parties need not do
favor of Philfinance & the indebtedness of Philfinance anything as the obligations are completely extinguished.
in favor of Delta both became mutually due. Despite o Ex. If A owes B P1,000 payable in Davao & B owes A the
the said maturities of said debts, Sesbreño decided to same amount payable in Marikina & both are due, A and B
claim from Delta on the basis of the assigned credit do not have to go to the places of payment as the
made to him by Philfinance. compensation here is complete and therefore both
! Held: Sesbreño could no longer claim from Delta obligations are totally extinguished.
because he notified Delta of his rights as assignee
after compensation had taken place by operation of Art. 1287.
law, even if he received the promissory note 1 prior to Compensation shall not be proper when one of the debts arises from a
the co-terminal maturity date. depositum or from the obligations of a depository or of a bailee in
o “Co-terminal maturity” means maturity on the commodatum.
same date, giving way to compensation Neither can compensation be set up against a creditor who has a claim for
o No man is bound to remain a debtor: he may support due by gratuitous title, without prejudice to the provisions of par. 2
pay to him with whom he contracted to pay; of Art. 301.
and if he pays before notice that his debt has
been assigned, the law holds him exonerated, Art. 1288.

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Neither shall there be compensation if one of the debts consists in civil o A criminal violation of the Trust Receipt Law which makes
liability arising from a penal offense. the obligor financially & civilly liable to the contracting bank
No Compensation in the ff. cases even if there is Technically a Loan: to the extent indicated in the Trust Receipt contract cannot
1) Debts arising from a depositum or from the obligations of a be extinguished by a claim of compensation of the amount
depository of deposit which the obligor has with the bank even if,
o A deposit is constituted from the moment a person under the law, a person who opens a deposit account in a
receives a thing belonging to another, with the obligation of bank is technically a creditor of that bank
safely keeping it & of returning the same
o Ex. If A owes B P1,000 due on Apr. 11, & A deposited with Art. 1289.
B P1,000 only for safekeeping to be returned on Apr.11, If a person should have against him several debts which are susceptible of
1977, there can be no compensation come Apr. 11, 1997 compensation, the rules on the application of payments shall apply to the
as the obligation of B to return the P1,000 arises from the order of the compensation.
obligations of a depository
2) Debts arising from the obligations of a bailee in commodatum. Rules on Application of Payment
o The bailee in commodatum acquires the use of the thing • If A owes X P3,000 due on April 11, 1997, & X owes A P3,000
loaned but not its fruits without interest, & another P3,000 with interest at 12% per annum
o Bailee is obliged to pay the ordinary expenses for the use & in case of non-payment, all due on April 11, 1997, there can be
preservation of the thing loaned compensation.
o Bailee cannot retain the thing loaned on the ground that o If X does not designate the indebtedness to which
the bailor owes him something, even though it may be by compensation will apply, it will be applied to the most
reason of expenses. onerous debt which is the interest-bearing P3,000 debt.
o However, the bailee has the right of retention for damages This is the most onerous because the payment of the
mentioned in Art. 1951 interest is necessarily most burdensome.
3) Debts arising from duty to support.
o Compensation cannot likewise apply if the other obligation Art. 1290.
is one of support to the other party When all the requisites mentioned in Art. 1279 are present, compensation
! Ex. A father, who is required to give support to his son, takes effect by operation of law, & extinguishes both to the concurrent
cannot claim that he need not give the support amount, even though the creditors and debtors are not aware of the
considering that his son owes him the same amount of compensation.
money.
o HOWEVER: Support in arrears can be compensated or Automatic Extinguishment
renounced (Art. 301, par. 1 of the Civil Code) • Most expedient way of extinguishing an obligation.
! Ex. If the father has not given his son P4,000 which is • Automatic & occurs even though the creditors & debtors are not
equivalent to the previous four months of unremitted aware of the compensation
financial support, but the same son owes the father
P4,000, there can be compensation in his case. CASE: Mindanao Portland Cement v. CA
! The application of Art. 301, par. 2 doubtful because it • Lesson: Civil liabilities arising from civil obligations in 2 different
has already been deleted by the New Family Code suits featuring the same persons can compensate one another.
4) Debts consisting of a civil liability arising from a penal offense • Facts: A creditor was able to obtain in a civil case an award of
o Ex. If A is indebted to B by virtue of a contract of loan & B is attorney’s fees in the amount of P10,000 from the debtor, & the
indebted to A by virtue of an award of civil damages in latter was also able to obtain a judgment in another civil case for
favor of A as a result of B’s conviction in inflicting physical attorney’s fees in the same amount from the former
injuries on A, there can be no compensation.
• Held: Compensation has taken place.

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 warehousing bonds in favor of the Bureau of Customs was
CASE: Pioneer Insurance & Surety Co. v. CA the liability of X, that petitioner did not pay the Bureau & Y
• Lesson: The stipulation in the indemnity agreement allowing the has nothing to reimburse.
surety to recover even before it paid the creditor is enforceable. In • Held: There is legal compensation.
accordance therewith, the surety may demand from the o X owes Y the amount representing the proceeds of the
indemnitors even before paying the creditors. insurance policy. Y & Z, however, try to negate their liability
• Facts: by claiming that they have no more liability because of the
o In Sept. 8, 1987, X, a surety company, issued general fortuitous event. At the same time however, Y & Z admit
warehousing bonds in favor of the Bureau of Customs for liability when they argued that X was released from the
importation of raw materials in the total amount of same upon their agreement with the Bureau of Customs to
P6,500. The bonds were issued on behalf of Company Y & make staggered payments. Finally, Y & Z argue that since
its president, Z. X has not made any payment yet regarding the amount
o To secure X against any & all damages & losses of demanded by the Bureau of Customs, there is nothing for
whatever kind which X may incur as a consequence of its which the X should be reimbursed.
becoming a surety upon the bonds, Z & Y executed jointly ! It is needless to emphasize that at the time the
& severally in favor of X indemnity agreements for said fire occurred, Y & Z with X had already incurred
bonds, promising to pay their debts to the Bureau. liability on the warehousing bonds with the
! The indemnities shall be paid to X as soon as Bureau of Customs, as Y & Z failed to comply with
demand is received from the Bureau or as soon the provisions of their undertaking. It is therefore,
as it becomes liable to make payment of any sum clear that as far as the P9,031,000 is concerned,
under the terms of the bond, its renewal, X, Y & Z were already liable to the Bureau when
extensions or substitutions whether the said sum the fire happened.
has actually been paid or not ! Neither can Y & Z claim that X was released from
o Y & Z failed to pay for their debt; thus the Bureau liability when they made arrangements with the
demanded payment from X the amount of P6,390,259. Bureau of Customs for staggered payments since
This amount eventually reached P9,031,000 in 1983. the facts will bear out that other than the
! In response to X’s demand letter, Y & Z promised P500,000 payment, no further payment was
to pay. The Bureau agreed with Y & Z for monthly made by Y & Z, leading the Bureau of Customs to
installment payments of their obligation on go after X again.
condition that Y & Z will make an initial payment o Clearly, X can demand reimbursement from the
of P500,000 & thereafter P400,000 monthly until respondents even before it has actually paid its obligation
fully paid pursuant to the 1st endorsement by the to the Bureau of Customs.
Bureau, dated Sept. 22, 1976. However, other ! It can, in principle, be held liable under the
than the initial payment of P500,000 did not pay. warehouse bonds even before actual payment to
o In 1979, a fire gutted the Y’s factory destroying materials the Bureau of Customs. The liability has been
insured with X in the amount of P1,144,744. Y demanded fixed. What remains is simply its liquidation. The
from X payment of the proceeds of the insurance policy respondents who defaulted on the agreement to
but X refused to pay claiming that said proceeds must be make staggered payments thereby causing X’s
applied by way of partial compensation against its liability liability to the Bureau of Customs cannot refuse
with the Bureau arising from the warehousing bonds. the set-off.
o Y argued that they were not the creditors of X & the ! Consequently, legal compensation can take place
demands to pay made by the Bureau did not create any between X, Y & Z, that is, X can partially set-off the
liability & even if they did, the liability under the insurance proceeds in the amount of

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 P1,144,744.49 against its liability under the thereby extinguished, or that the new obligation be on
warehousing bonds which has been computed in every point incompatible with the new one.
the amount of P9,031,000.00 as of 1983. o To effect a subjective novation by a change in the person
o From the records, it is seen that the last demand letter of of the debtor it is necessary that the old debtor be
the Bureau of Customs asking the petitioner to pay the released expressly from the obligation, & the 3rd person or
value of the bonds was on 1981. The records are silent on new debtor assumes his place in the relation.
whether or not the Bureau of Customs sued either of the o There is no novation without such release as the 3rd person
parties to enforce liability under the warehousing bonds. It who has assumed the debtor’s obligation becomes merely
may be noted that the petitioner admits its liability under a co-debtor or surety.
the warehousing bonds. Since the issue is legal • Facts:
compensation & in order to avoid any miscarriage of o Petitioners’ 3 debts (secured by continuing real estate
justice, the Court refers the issue on the enforcement of mortgages also intended to secure future indebtedness,
liability under the bonds to the Bureau of Customs. including renewals & extensions) were consolidated into 1
debt with the original debtors incorporating themselves
SECTION 6. - NOVATION. into a corporation for purposes of the consolidated debt.
o The original debtors claimed that there was novation
Art. 1291. Novation. considering the resulting consolidation, & the change in
Obligations may be modified by: the person of the debtor; they also claimed the mortgaged
(1) Changing their object or principal conditions; property had been discharged.
(2) Substituting the person of the debtor; • Held: There was no subjective or objective novation.
(3) Subrogating a 3rd person in the rights of the creditor. o No Objective Novation:
! There was nothing to show the unequivocal intent
Novation of the parties to novate the 3 loan agreements
• Extinctive (not modificatory) novation when they consolidated
o Extinguishes the totality of the contract ! The new promissory note still states “secured by
• It is NEVER presumed; must be expressly agreed about by the REM (real estate mortgage)”
parties that the previous obligation is extinguished & the new one ! The new agreement merely restructured the
replaces it previous 3 loans
• Must be EXPRESS o No Subjective Novation:
o Exception – implied – total incompatibility in all aspects, ! The bare fact of the from a partnership to a
on every point corporation, without sufficient evidence, either
• Changing their object – objective testimonial or documentary, that the debtors were
• Substituting the person of the debtor – subjective expressly released from their obligations, did not
• Unlike the other forms of extinguishment, it is a juridical act with a make the new corporate personality, a 3rd person
dual function: or new debtor within the context of a subjective
o It extinguishes the obligation novation.
o It creates a new one in lieu of the old ! If at all, the new company only became a co-
debtor or surety. Without express release of the
CASE: Ajax Marketing & Development Co. v. CA debtor from the obligation, any third party who
• Lessons: may thereafter assume the obligation shall be
o To effect an objective novation it is imperative that the new considered merely as co-debtor or surety.
obligation expressly declare that the old obligation is
Kinds of Novation

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 1) Subject - occurs when there is a change of either the person of the • No novation unless two distinct & successive binding contracts take
debtor, or of the creditor in an existing obligation place, with the later one designed to replace the preceding
o The old debtor MUST be released expressly from the convention.
obligation, & 3rd person or new debtor assumes his place in • There is NO novation when:
the relation o A subsequent contract is designed to novate a previous
! No novation without such release as the 3rd contract, but not all parties to the original contract
person who has assumed the debtor’s obligation consented to or are made parties in the subsequent
becomes merely a co-debtor or surety contract
2) Objective - occurs when there is a change of the object or principal o Modifications are introduced before a bargain becomes
conditions of an existing obligation obligatory.
o The new obligation MUST expressly declare that the old • Ex. Dacion en pago is a form of novation in which a change takes
obligation is thereby extinguished, or that the new place in the object (originally a payment in money, substituted for
obligation be on every point incompatible with the new one something else) involved in the original contract.
3) Mixed - when the change of the object or principal conditions of an
obligation occurs at the same time with the change of either the Kinds of Novation
person of the debtor or creditor person
t
object
or principal obligation • Express - It so expressly declares in certain terms
o “Expressly” - the contracting parties incontrovertibly
No Form Necessary disclose that their object in executing the new contract is
• General rule: No form of words or writing is necessary to give effect to extinguish the old one
to a novation o Ex. If an old promissory note is replaced by a new
• Ex. An oral lease agreement can validly novate a contract to sell promissory note which expressly states that the new note
provided that it can be shown that: is meant “to cancel” the old one
o The intent to novate was present & o Ex. If a contract to sell of a condominium unit was
o The terms are truly incompatible in every respect executed after the lessor & the lessee executed their lease
contract, the former does NOT necessarily novate the latter
CLASS DISCUSSION absent any clear expression of the intention to novate
• From lump sum to installment – no novation • Implied - When the old obligation is completely incompatible with
• From mortgage to pledge – no novation, since these are just the new obligation in every aspect
accessories o No specific form required
• Shortening a period of lease – novation o Irreconcilabe incompatibility between the old & new
• Granting extension to original lease – no novation, because the obligation
contract has expired o Acts which are too clear & unequivocal to be mistaken
• Quinto v. People – incompatibility – just in the essential elements • Test of incompatibility – Whether or not the 2 obligations can stand
of the contract (object, principal condition, cause & consent) together, each one having its independent existence
o Changes must be essential in nature & not merely
Article 1292. Requisites of Novation. accidental
In order that an obligation may be extinguished by another which substitute o Must take place in any of the essential elements of the
the same, it is imperative that it be so declared in unequivocal terms, or obligation, such as its object, cause or principal conditions
that the old & the new obligations be on every point incompatible with each thereof
other. ! OTHERWISE, the change would be merely
modificatory in nature & insufficient to extinguish
2 Distinct, Successive Contracts the original obligation
• ALL parties must consent

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4 Essential Elements of Novation • Lesson: An obligation to pay a sum of money is not novated, in a
1) A previous valid obligation new instrument wherein the old is ratified by:
2) The agreement of all the parties to the new contract (consent) o Changing only the terms of payment & adding other
3) The extinguishment of the old contract obligations not incompatible with the old one, or
4) Validity of the new one o Wherein the old contract is merely supplemented by the
new one
CASE: Garcia, Jr. v. CA • Facts:
• Lesson: An extension of deadline for a loan is not novation. o X bought a property from Y, & issued a promissory note
• Facts: The creditor granted an extension of the deadline for the with interest. X also procured a bond from a surety
loan, among other new conditions, in a newly executed contract. company for the payment of the principal.
The debtor now claims there has been novation. o Y accepted without reservation the agreement set forth in
• Held: No novation. An obligation to pay a sum of money is NOT the surety bond which however did not make provisions on
novated in a new instrument by changing the term of payment & the interest.
adding other obligations not incompatible with the old one. o X contended that the surety bond novated his obligation
o The new terms must be completely irreconcilable to be with respect to the interest.
called novation. • Held: No novation.
o The mere fact that the creditor receives a guaranty or
CASE: Guerrero v. CA accepts the payments from a 3rd person who has agreed to
• Lesson: There is no novation when a new agreement is executed assume the obligation, when there is no agreement that
between the creditor & 1 of the solidary debtors regarding the the 1st debtor shall be released form responsibility, does
payment of a solidary debt. The creditor can definitely still go after not constitute a novation, & the creditor can still enforce
the other solidary debtors. the obligation against the original debtor
• Facts: o The surety is just an accessory obligation of the promissory
o X, Y & Z executed an agreement of counter-guaranty in note.
favor of a surety corporation binding themselves solidarily
for any claim the surety may have against them CASE: Cochingyan v. R&B Surety & Insurance Co.
o Upon default in the payment of the obligation, the surety • Lesson: Where the parties to the new obligation expressly recognize
corporation sued X & consequently obtained a favorable the continuing existence & validity of the old one, & where, in other
judgment on the basis of a compromise agreement words, the parties expressly negated the lapsing of the old
directing X to pay the whole obligation obligation, there can be no novation. The issue of implied novation
o Upon failure to satisfy the judgment, the surety corporation is not reached at all.
filed a case against Y for the collection of the same • Facts:
amount of money o In a trust agreement, the trustor bound itself to pay to the
o Y resisted on the ground that the previous judgment in the creditor-beneficiary whatever amount the debtors have to
civil case against X novated the contract of indemnity & pay to the creditor-beneficiary
therefore released Y from its obligation o The principal loan involved in the trust agreement was
• Held: There was no novation. The agreement of “counter-guaranty” previously secured by a bond issued by a surety company
is not irrevocably irreconcilable with the compromise agreement. • Held: The trust agreement did NOT novate the surety agreement,
o The choice of the creditor to first attempt to get payment since it did not expressly terminate the obligation under the surety.
from just X does not mean that the debt of Y & Z had been o The trust merely brought in other persons to assume the
novated. same obligation directly, since the trustor in this case was
already previously bound subsidiarily when it secured the
CASE: Magdalana Estates, Inc. v. Rodriguez bond issued by the surety.

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 o It is not unusual in business for a stranger to a contract to o Several incompatibilities between the 1989 Agreement &
assume obligations thereunder (e.g. a contract of the 1980 original obligation:
suretyship or guarantee). The legal effect is the increase of ! While the 1980 credit accommodation had
the number of persons liable to the obligee, & not the stipulated that the amount of loan was not to
extinguishment of the liability of the 1st debtor exceed P8 million, the 1989 Agreement provided
that the loan was P12.2 million. The periods for
CASE: Fortune Motors Inc. v. CA payment were also different.
• Lesson: A surety & financing agreement, where the financing ! The later contract contained conditions, “positive
agreement merely details the nuances of the surety, cannot novate covenants” & “negative covenants” not found in
one another. the earlier obligation. As an example of a positive
• Facts: covenant, the Borrower undertook “from time to
o A surety agreement was executed between petitioners & time & upon request by the Lender, (to) perform
respondents, with the respondent-surety absolutely, such further acts &/or execute & deliver such
unconditionally & solidarily guaranteeing the full, faithful additional documents as may be necessary or
and prompt performance, payment & discharge of all proper to effectively carry out the provisions &
obligations of petitioners; there were no qualifications or purposes of this Loan Agreement.”
conditions therein. ! Likewise, SIMC agreed that it would not create any
o A new financing agreement was executed, & now the mortgage or encumbrance on any asset owned or
petitioners claim that the new financing agreement contain hereafter acquired, nor would it participate in any
onerous obligations not contemplated in the surety merger or consolidation.
undertakings, thus changing the principal term thereof & • Held: The original loan agreement was novated by a new one, as
effecting a novation. evidenced by the acts of the parties & the terms of the new
• Held: The financing agreement merely detailed the obligations of agreement.
one of the parties without changing the nature of the previous
agreement. Art. 1293. Subjective Novation.
o They can stand together without conflict because one is Novation which consists in substituting a new debtor in the place of the
accessory to the other. original one, may be made even without the knowledge or against the will of
the latter, but not without the consent of the creditor. Payment by the new
CASE: Security Bank & Trust v. Cuerva debtor gives him the rights mentioned in Art. 1236 & 1237.
• Lesson: The case provides several indicators for novation.
• Facts: Art. 1294. Novation without Consent of Original Debtor.
o There was a 1980 credit accommodation, followed by a If the substitution is without the knowledge or against the will of the debtor,
1989 loan agreement. In the terms of the 1989 the new debtor’s insolvency or non-fulfillment of the obligation shall not give
agreement, it was stated that it would be applied “to rise to any liability on the part of the original debtor.
liquidate the principal portion of the Borrower’s present
total outstanding indebtedness in the Lender (the Subjective Novation
“Indebtedness”) while the 2nd Loan shall be applied to • The creditor MUST always be aware of the novation.
liquidate the past due interest & penalty portion of the o Ex. An assignment of a lease contract by the lessee to a 3rd
indebtedness.” party must get the consent of the lessor because such
o There was also testimony of an officer of the bank that the assignment would involve the transfer, not only of rights
proceeds of the 1989 Loan Agreement were used “to pay- but also of obligations. It constitutes novation by
off” the original indebtedness. substitution of the person of one of the parties, namely the
lessee-debtor.

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 • The old debtor need not know, though this carries certain effects. Illustrative Example
• X is indebted to Y in the amount of P1,000.
CASE: Gaw v. IAC o Without knowledge or consent of X, O commits to pay the
• Lesson: The change in the principal object or conditions, the indebtedness of X.
substitution of the person of the debtor, the subrogation of a 3rd ! Should it become due, Y can still claim from X the
person in the rights of the creditor must all involve a clear & said indebtedness on due date, despite O’s
manifest intent to extinguish the old obligation & to release the commitment, because there is no novation.
debtor from such old obligation. ! There is nothing in the commitment of O that
• Facts: clearly shows the intention of O to release X from
o X entered into an exclusive dealership agreement with a his obligation. O only became an additional debtor.
Company Y to sell the Y’s product. o However, if Z agrees that the obligation of X is to be
o X entered into a co-terminous marketing agreement with Z extinguished upon O’s making the commitment to pay the
for the latter to market the products & to obtain funds to indebtedness of X, there is a novation.
fulfill the deposit required by company Y. ! If O later on makes a partial payment of P500, Y
o Such deposit, upon being tendered by Z, was refused by Y cannot go against X for the balance, as his
for fear that it might violate the exclusive dealership obligation has already been extinguished in so far
agreement with X. Y said that it would accept provided it be as Z is concerned.
made under the name of the petitioner. • O can demand reimbursement from X, not
o X argued that the new agreement between X & Z was Z’s of the whole P1,000, but only P500, the
attempt “to step into the shoes” of X, & novation exists. amount which benefited X, pursuant to
• Held: The co-terminous marketing agreement did not novate the Art. 1236 par. 2.8
dealership agreement. ! If O pays the whole amount, then he can recover
o Though the agreement between X & Z is related to the the full amount from X.
agreement between X & Y, as the term of the former is co- o HOWEVER, in all these cases, if the original indebtedness
terminous with the latter, the new agreement was merely of X to Y is secured by a mortgage on the house of X & the
an “attempted novation.” payment of the indebtedness of X is made by O, he
o Not only was X not released from complying with the terms CANNOT compel X to subrogate him in his rights, such as
and conditions of the dealership agreement but he was, in those arising from mortgage, guaranty or penalty.
a sense, already implementing the latter. ! Hence, if X fails to reimburse O, the latter cannot
o Novation SHOULD create a new obligation. make use of the mortgage which has been
constituted on the indebtedness, pursuant to Art.
Novation through Debtor 1237 of the Civil Code.9
• Novation through the replacement of the old debtor by a new o In the event that after O commits to pay the indebtedness
debtor may be with or without the initiative of the old debtor. of X which, upon agreement with Y releases X from his
• Delegacion - If the old debtor, to extinguish his obligation, suggests obligation with Y, O becomes insolvent or does not pay Z
to the creditor that he be substituted by a new debtor of his choice the indebtedness upon demand by Y on due date, Y can no
& the creditor agrees longer go against the original debtor, X, to claim the debt,
• Expromission - If the old debtor is substituted without the
knowledge or consent of the old debtor & the obligation is !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
extinguished 8 “Whoever pays for another may demand from the debtor what he has paid, except that if he paid without

the knowledge of the debtor or against his will, he can recover only insofar as the payment has been
• In both delegacion & expromission, the consent of the creditor is beneficial to the debtor.”
indispensable. 9 “Whoever pays on behalf of the debtor without the knowledge or against the will of the debtor, cannot

compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or
penalty.”!

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 as the latter’s obligation has already been extinguished o All accessory obligations such as those arising from a
through novation. contract of mortgage, guarantee, and pledge are likewise
extinguished.
Article 1295. Insolvency of the New Debtor. • HOWEVER, the law likewise says that the accessory obligation may
The insolvency of the new debtor, who has been proposed by the original subsist only insofar as they may benefit third persons who do not
debtor & accepted by the creditor, shall not revive the action of the latter give their consent.
against the original obligor, except when said insolvency was already o Ex. X borrows P100,000 from Y to be paid after 12 months.
existing & of public knowledge, or known to the debtor, when he delegated The loan is secured by a real estate mortgage of Z’s house.
his debt. The mortgage is to be effective only for 12 months. In
constituting his house as security for the loan of X, Z
Insolvency of New Debtor agrees to be paid by X the amount of P1,000 for as long as
• When there is delegacion, the obligation of the old debtor to make the loan secured by the mortgage exists. However, instead
payment is completely extinguished. of paying Z the said amount, X will just apply the P1,000 to
o In the event that the new debtor is insolvent, the creditor the P12,000 indebtedness of Z in his favor (X’s) such that
cannot go against the old debtor to collect the debt. by the time the 12-month loan matures, the indebtedness
of Z would have already been paid. This is made because Z
2 Cases When the Creditor Can Go Against the Old Debtor has no cash to pay the P12,000 obligation to X.
1) When the insolvency of the new debtor has already been existing & ! On the 11th month, X & Y decide to consolidate
of public knowledge at the time of the delegation by the old debtor the P100,000 loan with the other P700,000 loan
2) When the insolvency of the new debtor is known to the old debtor which X owes in favor of Y &, in so doing, they
when he delegates his debt expressly agreed in the consolidation-document
*NOTE: In both cases, the creditor must NOT know that the new that the loan of P100,000 shall in effect cease &
debtor is insolvent; otherwise, he would be considered in estoppel be integrated in the P700,000 with a lower
o Also, in both cases, the insolvency must have existed at the interest rate & payable for a longer period of time
time the old debtor delegated his debt without any collateral.
! Z did not consent to this arrangement as it would
CLASS SCENARIO clearly prejudice him. Z’s mortgage therefore
• Facts: A is the original creditor; B is the original debtor. X tells A that may subsist for the remaining month attached to
he will pay B’s debts. B agrees. However, A nevertheless collects the principal new obligation. X will still accept the
from B. Is there novation? mortgage of Z as payment of P1,000 for the last
• Answer: NO. X becomes merely a co-debtor of B. There is no month, thereby extinguishing Z’s obligation
categorical extinguishment of the liability of B. Thus, there is no
novation. Article 1297. Effect of Void New Obligation on Old Obligation.
If the new obligation is void, the original one shall subsist, unless the parties
Article 1296. Accessory Obligations. intended that the former relation should be extinguished in any event.
When the principal obligation is extinguished in consequence of a novation,
accessory obligations may subsist only insofar as they may benefit 3rd Subsequent Void Obligation
persons who did not give their consent. • A subsequent void obligation intended to novate an old one has no
legal effect & will be considered as not having been agreed upon in
Effect on Accessory Obligations the first place. The original obligation shall subsist.
• The accessory always follows the principal. If the principal is o HOWEVER, if in coming up with the new but void obligation,
extinguished, the accessory goes with it. the parties agree that it shall in any event extinguish the
old obligation, then such old obligation will not be revived.

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 • Ex. If X is bound to give Y a car & this is novated by binding X to give • If X is bound to give Y a house only if he passes his law course &
instead his future inheritance from his father’s death to Y, the latter thereafter the obligation is novated such that X instead is bound to
new obligation is void because, according to the law, future give Y a car without any statement as to the suspensive condition,
inheritance cannot be the object of a contract. This new void it shall be deemed that the giving of the car is likewise subject to Y
obligation will not be deemed to have been entered into and the old passing his law course.
obligation will be revived. o In order not to subject the obligation to the previous
o HOWEVER, if the parties agree that the act of entering into suspensive condition, there must be an express statement
the new but void obligation will in any event extinguish the to that effect in the new obligation as novated.
old one, then the latter will not be revived.
CLASS SCENARIO
Article 1298. Void & Voidable Novation. • Facts: X will give Y a ballpen if it rains next month. However, the 2
The novation is void if the original obligation was void, except when decide to novate the contract so it says, “X will give Y the ballpen”
annulment may be claimed only by the debtor, or when ratification validates without mentioning the condition. Will the condition still apply?
acts which are voidable. • Answer: YES, according to Art. 1299. Thus, the parties must agree
& always read the 1st & 2nd contract.
Void or Voidable Novation
• Novation of a principal obligation definitely presupposes a Art. 1300. Subrogation.
previously existing obligation which is valid. Subrogation of a 3rd person in the rights of the creditor is either legal or
• If the previously existing obligation is void, a subsequent obligation conventional. The former is not presumed, except in cases expressly
intending to novate it shall likewise be void mentioned in this Code; the latter must be clearly established in order that it
o UNLESS it is clear that such subsequent one can stand on may take effect.
itself & without any reference to the old one.
• If the original obligation is merely voidable, it means that it is valid Subrogation
up to the time it is annulled. Hence, it CAN be novated before it is • The transfer of all the rights of the creditor to a 3rd person, who
annulled. substitutes him in all his rights
o Ex. If, through force & intimidation, X was obliged to give Y • Types of subrogation:
a car & later the prestation was novated, again through o Legal subrogation - that which takes effect by mandate of
force & intimidation, in such a way that X is now obliged to law & does not proceed from an agreement of the parties
give Y not a car but a house, it is only X who can file a case ! The law which forms the basis of the subrogation
for annulment of the obligation. must be clearly identified & invoked to enforce the
! If X does not do so, then the new obligation may rights pertinent thereto.
be given effect. o Conventional subrogation - must be clearly established by
! Also, if, after the obligation was novated, X asks the unequivocal terms of the substituting obligation or by
for an increase in the price of the house & Y the evident incompatibility of the new and old obligations
agrees, then the obligation is ratified because of on every point.
the act of X. • Both kinds of subrogation principally involve the change in the
person of the creditor
Art. 1299. Suspensive or Resolutory Condition. o Thus, if X is indebted to B for P10,000 secured by a
If the original obligation was subject to a suspensive or resolutory condition, mortgage on X’s house. For consideration paid to B, Y, with
the new obligation shall be under the same condition, unless it is otherwise the consent of X, assumes the credit with the stipulation
stipulated. that X’s obligation against B is extinguished such that B
can no longer collect from X, Y becomes the new creditor
Illustrative Example

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 who can enforce the claim, & if X cannot pay, Y can subrogated to the rights of the creditor who
foreclose on the mortgage. originally owned the credit
2) When a 3rd person, not interested in the obligation, pays with the
Art. 1301. Consent of All Parties in Conventional Subrogation. express or tacit approval of the debtor
Conventional subrogation of a third person requires the consent of the o The debtor, in effect, agrees to the payment & hence there
original parties & of the third person. exists something similar to a conventional subrogation
o CASE: Chempil v. CA
Conventional Subrogation & Consent ! Facts: The petitioner bought some shares from the
• Conventional subrogation must be agreed upon by the debtor, new debtor in exchange for money; the shares,
creditor & the old creditor. It is therefore contractual. however, which were owned by the debtor, were
o For the substitution of the creditor to be legally complete in being kept by a bank to satisfy the debtor’s debt.
all aspects, all parties must agree to the same. The petitioner claimed that he was subrogated to
• If the debtor does not agree & the 3rd party makes payment to the the rights of the creditor when he paid the
creditor, such third party can demand payment from the debtor up indebtedness of the debtor to the bank. The
to the extent the latter has been benefited, but cannot compel the money used for payment belonged to the debtor
creditor to subrogate him (3rd party) in his rights, such as those ! Held: There is no subrogation. The exact wording
arising from mortgage, guaranty, or penalty of the contract between the petitioner & the
debtor stated that there was to be an order of
Art. 1302. preference for the money the debtor would give
It is presumed that there is legal subrogation: petitioner, & 1st on the list was the use of the
(1) When a creditor pays another creditor who is preferred, even money to pay the creditor, as soon as the SC ruled
without the debtor’s knowledge; on just how much the debtor owed the creditor.
(2) When a 3rd person, not interested in the obligation, pays with the The debtor merely paid his debt to the bank via
express or tacit approval of the debtor; the petitioner, as if the petitioner were a 3rd party
(3) When, even without the knowledge of the debtor, a person agent. Thus, the bank remained the creditor & no
interested in the fulfillment of the obligation pays, without prejudice subrogation took place.
to the effects of confusion as to the latter’s share. • Furthermore, in the case, the petitioner
claimed to be the subrogated new debtor
General Rule: Novation is NOT Presumed under Art. 1302(2), but SC said it was not
• Exception: Art. 1302 actually a disinterested party, because the
extinguishment of the debtor’s debt
3 Cases When Legal Subrogation is Presumed served as the petitioner’s payment for the
1) When a creditor pays another creditor who is preferred, even shares.
without the debtor’s knowledge 3) When, even without the knowledge of the debtor, a person
o Under our law, claims for the unpaid price of movables interested in the fulfillment of the obligation pays, without prejudice
sold, on said movables, so long as they are in the to the effects of confusion as to the latter’s share.
possession of the debtor, up to the value of the same is a o A person interested in the fulfillment of the obligation is
preferred credit. one who will be affected by payment of the debtor.
! Any creditor who owns such credit is a preferred ! Ex. A guarantor, surety or solidary debtor will
creditor & if another creditor pays off the unpaid be released if the principal obligation of the
purchase price of the movable, such paying debtor is paid.
creditor will be presumed to have been o Ex. A is indebted to M. The loan was secured by a real
estate mortgage constituted by X on his own property for

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 the benefit of A’s debt. In the event X pays M, the o In the event that the creditor & the 3rd party demands from
presumption of legal subrogation will arise in favor of X the debtor at the same time the payment of what is due
even if such payment was made without the consent of A. them, the creditor will be preferred. He will be paid first as
Since there is merger of the characters of the creditor & the law states that he is preferred.
the mortgagor, the real estate mortgage is extinguished.
TITLE II. – CONTRACTS.
Art. 1303. Effects of Subrogation.
Subrogation transfers to the person subrogated the credit with all the rights CHAPTER ONE: GENERAL PROVISIONS
thereto appertaining, either against the debtor or against 3rd persons, be
they guarantors or possessors of mortgages, subject to stipulation in a Art. 1305. Definition of Contracts.
conventional subrogation. A contract is a meeting of minds between 2 persons whereby one binds
himself, with respect to the other, to give something or to render some
Effects of Subrogation service.
• Generally, 3rd person “steps into the shoes” of the creditor &
becomes the new creditor. Contract
o HOWEVER, in conventional subrogation, the parties may • A juridical convention manifested in legal form, by virtue of which 1
stipulate the nature, limits, extent & scope of the or more persons bind themselves in favor of another or others, or
subrogation provided these are not contrary to law, morals, reciprocally, to the fulfillment of a prestation to give, to do or not to
good customs, public order, or public policy. do.
o HOWEVER, there are cases where, although there is a
Art. 1304. Preferred Creditor. meeting of the minds, the contract still cannot be legally
A creditor, to whom partial payment has been made, may exercise his right enforced because it lacks some of the required formalities
for the remainder, & he shall be preferred to the person who has mandated by law for enforceability (e.g. Statute of Frauds)
subrogated in his place in virtue of the partial payment of the same credit. • Also defined as an agreement whereby at least 1of the parties
acquires a right, either in rem (real right) or in personam (personal
Preferred Creditor right), in relation to some person, thing, act or forbearance
• The provision contemplates a situation where a debt has been
partially paid by a 3rd person, with the consent of the debtor. Stages of Contracts
• If there is no consent of the debtor, the only right of the third party 1) Negotiation - covers the period from the time the prospective
who made the payment is to be reimbursed of the amount he has contracting parties indicate interest in the contract to the time the
partially paid pursuant to Art. 1236. contract is concluded
o Art. 1237 - Whoever pays on behalf of the debtor without 2) Perfection - takes place upon the concurrence of the essential
the knowledge or against the will of the latter, cannot elements thereof
compel the creditor to subrogate him his rights, such as o A contract which is consensual as to perfection is
those arising from mortgage, guaranty, or penalty. established upon a mere meeting of the minds, i.e., the
• In the event partial payment is made by a 3rd person which concurrence of offer & acceptance, on the object & on the
extinguishes the debtor’s obligation to pay the creditor up to the cause thereof
extent of said partial payment, the creditor can still demand from the o Real contract – a contract which requires for its perfection,
debtor the balance of the obligation. in addition to consent, the delivery of the object of the
o In the meantime, the 3rd party who made the partial agreement, as in a pledge or commodatum
payment can likewise demand from the debtor what he has o Solemn contract - compliance with certain formalities
paid to the creditor. prescribed by law, e.g. donation of real property, is
Termination of pre-existing contact
• to terminate a contact, there must be delivery of money, or rendering some act
• contract may be superseded by a compromise agreement
113 | Katrina Gaw | Block C 2018 1. By stipulation of the parties
2. By stipulation, at option of one party: but if acted in bad faith, the party may be held liable for damages
3. By one party with conformity of the other: the parties enter into another contract for the dissolution of
the previous one
 Limitation to the freedom to contract:
Contract v Agreement 1. Law: law in force at the time of the contract was made generally governs its interpretation &
Contract v Obligation • Contract: agreements enforceable through appplication
• Contract: one of the sources of obligations legal proceedings 2. Police Power: Public welfare is superior than private rights
• Obligation: legal ties that exists after the • Agreement: broader than contact bc it does not • Paras: morals (right or wrong), good customs (social confirmation), public order (includes public safety),
contract has been made have all the elements of a contract public policy (against public good)
essential in order to make the act valid, the prescribed • Lesson: The principle of autonomy in contracts is not absolute.
form being thereby an essential element thereof Laws are always deemed written into contracts; therefore, contracts
3) Consummation - begins when the parties perform their respective cannot circumvent the force & effect of the law.
undertakings under the contract • Facts:
4) Extinguishment o Petitioner PIA invokes par. 5 & 6 of its contract of
employment with ex-employees X & Y, arguing that its
Art. 1306. Autonomy of Contracts. relationship with them was governed by the provisions of
The contracting parties may establish such stipulations, clauses, terms & its contract rather than by the Labor Code.
conditions as they may deem convenient, provided they are not contrary to ! Par. 5 of that contract set a term of 3 years for
law, morals, good customs, public order, or public policy. that relationship, extendible by agreement
between the parties
Autonomy in Contracts ! Par. 6 - notwithstanding any other provision in the
• Freedom to stipulate terms & conditions is the essence of the contract, PIA had the right to terminate the
contractual system, provided such stipulations are not contrary to employment agreement at any time by giving one-
Right to enter into law, morals, good customs, public order, or public policy month’s notice to the employee or, in lieu of such
contracts and right to o This freedom prohibits a party from coercing or notices, one-month’s salary.
choose with whom one intimidating or unduly influencing another to enter into a • Held: Parties may not contract away applicable provisions of law
desires to contract contract especially those which are mandatory & prohibitory10 & dealing with
• In order for the court to declare a contract void for being against matters heavily impressed with public interest. The law relating to
public policy, it must be shown that the contract, as to the labor & employment is clearly such an area.
consideration or thing to be done, has a tendency to injure the o The contract is in direct contravention with laws on regular
public, is against the public good, or contravenes some established employees & security of tenure found in the Labor Code, &
interest of society, or is inconsistent with sound policy & good leaves the employment of X & Y at the option of PIA.
morals which tends to undermine the security of individual rights,
whether of personal liability or of private property CASE: Manila Bay Club Assoc. v. CA
• Lesson: Contracts are respected as the law between the
CASE: Azcuna, Jr. v. CA contracting parties, & they may establish such stipulations, clauses,
• Lesson: Even contracts that seem unfair, though are freely entered terms & conditions as they may want to include
into, are protected by the law. • Facts: Because of the failure of the petitioner to comply with the
• Facts: A lease contract provided that, if the lessee does not vacate insurance clause of the lease contract, the lessor terminated the
the premises on due date, the lessee shall be charged P1,000 per lease pursuant to a provision in the same lease contract stipulating
day as damages without prejudice to other remedies which the that failure to comply with any provision of the contract shall allow
lessor is entitled to. There is no evidence of undue influence or the lessor to rescind the same
force. • Held: The stipulation is valid. It was meant to ensure strict
• Held: After entering into such an agreement, petitioner cannot compliance with the mandatory provisions of the contract, as
thereafter turn his back on his word with a plea that on him was expressed by the language used in its drafting, such as “the
indicted a penalty shocking to the conscience & impressed with building must be insured and the insurance premium must be for
inequity as to call for the relief sought on the part of a judicial the account of the LESSEE.”
tribunal.
CASE: Phil. Am. General Insurance Co. v. Mutuc
CASE: Pakistan Int’l Airlines v. Ople
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
10 Art. 5, Civil Code: Acts executed against mandatory or prohibitory laws shall be void, except when the law

itself authorizes its validity.

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 • Lesson: When a party is free to choose whether to accept the • Lesson: Some laws, especially involving State police power, have a
stipulations of a contract, even if there may seem to be some retroactive effect & can extinguish contractual stipulations.
adhesion, & chooses to sign it, he is bound by his consent. • Facts: The contract of sale provided that the property shall only be
• Facts: X, after agreeing that his bond may be renewed or extended used for residential purposes. But the buyer subsequently built a
without notification, which was stipulated by the company that commercial edifice in consonance with a later zoning ordinance
hired him to ensure his faithful performance, claimed that such classifying the area as a commercial zone.
provision was null & void because it is a contract of adhesion; the • Held: The restrictions of the contract of sale were deemed
lower court held him liable for the bond. extinguished by the retroactive effect of the zoning ordinance.
• Held: The contract is valid. X was not at all compelled to agree to it.
X was free to act either way. CLASS DISCUSSION
• Violation of a law generally does NOT make a contract void
CASE: De Leon v. CA o The law violated must be mandatory or prohibitory to make
• Lesson: The continued existence of a marriage cannot be made the the contract void
basis of a contract.
• Facts: The parties, who were husband & wife, stipulated that “in Art. 1307. Innominate Contracts.
consideration for a peaceful & amicable termination of relations Innominate contracts shall be regulated by the stipulations of the parties, by
between the undersigned & her lawful husband,” the husband the provisions of Titles I & II of this Book, by the rules governing the most
would give some properties to the wife & monthly support for the analogous nominate contracts, & by the customs of the place.
children, & the wife would agree to a judicial separation of property
plus the amendment to the divorce proceedings initiated by the Innominate Contracts
wife in the United States to conform to the agreement • Those which are not specifically governed by any Civil Code
• Held: The agreement is contrary to law, Filipino morals & public provision or special law, but which likewise involve the fulfillment or
policy because the consideration of the agreement is the accomplishment of some prestations
termination of the marriage by the parties which they cannot do on
their own & without any legal basis. Innominate contracts are governed by the ff.:
1) Stipulation of the parties
Laws Affecting Contracts o The parties may have some arrangements which they feel
• Only laws existing at the time of the execution of a contract are should bind them but which do not have any exact legal
applicable thereto provisions in the Civil Code to govern the nature of the
o Later statutes do not govern said contract unless the latter obligation appertaining to it
is specifically intended to have a retroactive effect. 2) Provisions on obligations & contracts in Title I & II of the Civil Code
• A later law which enlarges, abridges or in any manner changes the o Following OBLICON general rules, parties can stipulate any
intent of the parties to the contract impairs the contract itself & provision, term & condition that will govern the
cannot be given retroactive effect without violating the enforceability of their agreement provided they are not
constitutional prohibition against impairment of contracts contrary to law, morals, good customs, public order, or
o However, while a contract is deemed to be the law public policy
between the contracting parties, non-impairment of 3) Rules governing the most analogous nominate contracts.
contracts or vested rights clauses will have to yield to the o Civil Code’s nominate contracts: sale, barter or exchange,
State’s police power, which is deemed written into every lease, partnership, agency, loan, deposit, aleatory
contract contracts, compromises, guaranty, pledge, mortgage &
antichresis.
CASE: Ortigas v. CA o Special laws - insurance, real estate mortgage, & charter
party

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 4) Customs of the place – rules of conduct by repetition of acts Mutuality of Contracts
uniformly observed as a social rule, legally binding & obligatory • A contract violates mutuality when it leaves the validity or
o Must be proved as a fact according to the rules of evidence compliance of the contract entirely to the will of one of the
contracting parties
Kinds of Innominate Contracts: • Violate this & the contract is void
1) Do ut des –the parties mutually give each other a certain thing
2) Facio ut facias – the parties mutually render a service CASE: Garcia v. Rita Legarda, Inc.
3) Do ut facias; facias ut des - a mixed prestation such that one party • Lesson: A contract expressly giving to one party the right to cancel
gives something & the other party does something the same if a resolutory condition therefor agreed upon — similar to
o CASE: Dizon v. Gaborro the one under consideration — is not fulfilled, is valid, the reason
! Facts: A contract was entered into whereby the being that when the contract is thus cancelled, the agreement of
respondent assumed to pay the indebtedness of the parties is in reality being fulfilled
petitioner to certain banks, and in consideration • Facts: A contract to sell a real property stipulated that the vendor
therefor, respondent was given the possession, was given the right to unilaterally rescind or terminate the contract
enjoyment & use of certain lands until petitioner in the event the other party failed to pay any of the required
can reimburse fully the respondents the amounts installments of the purchase price. In particular, the contract reads:
paid by the latter to the banks, to accomplish the o In case of default in the payment of installments by the
following ends: (a) payment of the bank vendee, he shall have (1) “a month of grace”, & (2) should
obligations; (b) make the lands productive for the said month of grace expire without the vendee paying his
benefit of the possessor; (c) assure the return of arrears, he shall have another “period of 90 days” to pay
the land to the petitioner thus rendering equity & “all the amounts he should have paid,” etc., then the
fairness to all parties concerned vendor “has the right to declare this contract cancelled &
! Held: This was an innominate contract “to give & of no effect.”
to do”, which mixed the obligations & principally • Held: Stipulation is valid. The above stipulation merely gives the
uses antichresis11 between the parties vendor “the right to declare this contract cancelled & of no effect”
o CASE: Corpus v. CA upon fulfillment of the conditions therein set forth. It does not leave
! Facts: An agreement as to legal fees between a the validity or compliance of the contract entirely to the will of one
lawyer & his client were not reduced into writing, of the contracting parties.
but there were indicators that payment was
contemplated by the parties. CASE: Allied Banking Co. v. CA
! Held: Payment was justified by virtue of the
• Facts: A stipulation in a lease contract stated the contract “may be
innominate contract of facio ut des (I do & you
renewed for a like term at the option of the lessee”
give) which is based on the principle that “no one
• Held: It does not go against the attribute of mutuality of contracts.
shall unjustly enrich himself at the expense of
Such right on the part of the lessee is part of the consideration in
another.”
the contract. The clause likewise means that, once the lessee
exercises the option to renew, all the terms & conditions of the old
Art. 1308. Mutuality of Contracts.
contract are renewed and not only the period.
The contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them.
Contract of Adhesion
• One wherein a party, usually a corporation, prepares the
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! stipulations in the contract, while the other party merely affixes his
11 A contract whereby a debtor pledges (i.e., conveys possession but not title) real property to a creditor, signature or his “adhesion” thereto.
allowing the use and occupation of the pledged property, in lieu of interest on the loan; pay your
indebtedness first before the interest of your collateral.
• These types of contracts are as binding as ordinary contracts.
Contract binds both contracting parties
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1. Principle of mutuality of contract
2. Fulfillment or extinguishment of contract: fulfillment or extinguishment that depends on
the uncontrolled will of one party is VOID
 o The party who adheres to the contract is free to reject it 4 Cases When the Court Can Intervene into Contract of 2 Persons
entirely. 1) If the contract is inequitable, when the determination of the
• HOWEVER, courts will not hesitate to rule out blind adherence to performance was left to the will of a 3rd person, the court can adjust
terms where facts & circumstances will show that it is basically one- it.
sided. 2) If there is a penal clause that is iniquitous, the court can remove it
o Generally, contracts of adhesion are valid, except when or reduce the penalty.
they are highly inequitable 3) Rebus sic stantibus – when there is an absolute, exceptional
change of circumstances
CASE: PNB v. CA 4) If there is reason for the court to fix a period
• Lesson: Contracts dependent on the sole will of one of the parties a. When a suspensive potestative condition is void, but the
are generally void, especially contracts of adhesion where the obligation on which it hinges is still valid
parties are not in equal footing. b. When the debtor binds himself to pay “when his means
o Constant increases of interest at the will of the creditor are permit him to do so”
contrary to law (they make potestative contracts) c. When one party seeks rescission, but the court finds just
• Facts: PNB & the debtor entered into a loan agreement stipulating, cause to fix a period
among others, that PNB was authorized to increase the stipulated d. When from the nature & circumstances of the obligation, it
18% interest per annum within the limits prescribed by law at any is obvious that a period was intended by the parties
time depending on whatever policy PNB may adopt in the future e. When the obligation is dependent on the sole will of the
provided that the interest rate on the note shall be correspondingly debtor
decreased in the event that the applicable maximum interest rate Art. 1309.
is reduced by law or by the Monetary Board. PNB indeed increased The determination of the performance may be left to a 3rd person, whose
the rates to 32%, then subsequently to 41% & then finally to 48% decision shall not be binding until it has been made known to both
within the year over the objection of the debtor contracting parties. • not dependent on potestative condition
• 3rd persons shall bind parties only after the parties were informed
• Held: The stipulation is void. P.D. 116 specifically provides that
increases in interest rates shall be made “once every twelve Art. 1310.
months” & furthermore such increases violated the mutuality of The determination shall not be obligatory if it is evidently inequitable. In
contracts. It would have invested the loan agreement with the such case, the courts shall decide what is equitable under the
character of a contract of adhesion, where the parties do not circumstances.
bargain on equal footing, the weaker party’s (the debtor)
participation being reduced to the alternative “take it or leave it”. 3rd Party Intervention
Such contract is a veritable trap for the weaker party whom the • The parties may constitute a 3rd party to determine the
courts of justice must protect against abuse and imposition. performance of the contract. The decision becomes effective when
both contracting parties already have knowledge of the decision.
CASE: Serra v. CA o It will not be binding if only one of the parties knows of the
• Lesson: Not all contracts of adhesion are void. There must be a decision.
showing that it is highly inequitable for such contract to be • When one agrees to let a 3rd person decide, there is already a
invalidated. contract. However, what remains is to figure out how something is
• Facts: A CPA-Lawyer assails the validity of the contract he entered to be done.
into. o Cause, object & consent are already present; just the
• Held: Stipulation is valid. Since the petitioner was already a CPA- MANNER is not yet settled.
Lawyer, he should have been more cautious in his transactions, • This determination MUST not destroy the nature of mutuality of the
particularly where it concerns valuable properties. contract between the principal parties based on their essential
equality.

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 o The court shall decide what is equitable under the o Contracts are transmissible to heirs & assignees; they are
circumstances. the “invisible parties”
o The court cannot decide to invalidate, but can fix the o A stranger cannot invoke the contract of another for his
manner own interest or for a source of an alleged prejudice.
• Ex. A & B enter into a contract whereby A will sing in the nightclub o A party cannot impose an obligation or liability to one who,
of B for 2 days. The contract stipulates that, for 2 days, A is to be under its terms, is a stranger to the said contract.
paid P5,000 for such number of songs to be determined by X 2 o Real rights are transmissible, personal rights are not.
days before the performance, & any violation renders the contract
ineffectual entitling B not to pay A any consideration as a penalty. CASE: Integrated Packaging Corp. v. CA
They sign the contract. Later, X makes a determination that A is to • Lesson: Contracts can only bind the parties who entered into it, & it
sing 20 songs, selected by X continually without a break starting cannot favor or prejudice a 3rd person, even if he is aware of such
from 6PM-2AM; &, if the nightclub is filled with people, A will give an contract & has acted with knowledge thereof.
encore 3 times divided into 30 minutes each time. A shall only sing • Facts: A company was in default in paying its supplier, & sued the
those specifically requested by the audience, & in case he does not same supplier allegedly for causing damage to it in that it was not
know the song, his fee is to be reduced. X notified A two days able to comply with its contract with Philacor because the supplier
before the performance that the latter will sing 15 English rock failed to deliver the materials which were supposed to be used by
songs & 5 Norwegian songs which obviously A does not know. the company for the orders of Philacor.
o This is clearly a situation where the performance is so • Held: The Court did not award damages to the company. Not only
inequitable. In fact the contract itself & not merely the because the non-delivery of the materials by the supplier was
determination of its performance is almost left to the will of justified due to the non-payment by the company of the deliveries,
the third party & it greatly favors the nightclub owner. but also because the supplier has absolutely nothing to do with the
o A can go to court which will decide what is equitable under contract between the company & Philacor.
the circumstances. Court intervention is necessary in order o The contract between the company & the supplier did not
that the intent of the parties will not be rendered nugatory have a direct bearing in the contract between the company
by the inequitable terms and conditions of a third party. & Philacor.
! The papers in the 2 contracts are different.
Art. 1311. Relativity of Contracts. ! The demand by Philacor was made after the
Contracts take effect only between the parties, their assigns & heirs, except supplier filed its complaint in Court.
in case where the rights & obligations arising from the contract are not
transmissible by their nature, or by stipulation, or by provision of law. The Relativity & Real Property
heir is not liable beyond the value of the property he received from the • Principal parties include heirs & assigns
decedent. • Under certain conditions, the law operates to effect the transfer of
If a contract should contain some stipulation in favor of a 3rd person, he may an action from one person to another without any concurring act on
demand its fulfillment provided he communicated his acceptance to the the part of the parties or indeed without their assent.
obligor before its revocation. A mere incidental benefit or interest of a • Usual ways interests in land are transferred:
person is not sufficient. The contracting parties must have clearly & o Marriage
deliberately conferred a favor upon a 3rd person. o Death
• Through the principle of relativity, real property rights are
Relativity of Contracts
transferred.
• Generally, contracts take effect only between the immediate parties o With real property, upon its transfer, covenants may be
to the same. Cases when strangers or 3rd persons affected by contract annexed to the contract which run with the land & one who
• General rules: 1. Stipulation favors 3rd person
subsequently acquires an interest therein takes it subject
2. Creating real rights
3. Entered into to defraud creditors to the benefits and obligations of such covenants.
4. Contracts which have been violated at the inducement of the 3rd person
5. Creating status (e.g. the resulting status of marriage shall be respected, even by strangers)
118 | Katrina Gaw | Block C 2018 6. In the quasi-contract of negotorium bestie, the owner is bound in a proper case, by contracts entered into by the gestor
7. In “collective contracts” where the majority rules over the minority
8. Where the situation contemplated in Article 1729 obtains
 ! The period of a contract of lease is binding upon Contracts cannot take effect with respect to theirs or assigns when:
the heirs of the lessor (1) The nature of the contract does not allow transmission.
! Likewise, a sublessee is bound by the terms of the o Ex. A contract which binds a person to sing in a particular
principal contract of the lessor & the lessee nightclub because of the special way he sings his songs is
! If the predecessor was duty-bound to reconvey not transmissible because his hiring was personal & his
land to another, & at his death the reconveyance abilities cannot be exactly duplicated by any person. Plus,
had not been made, the heirs can be compelled to the audience may have bought the tickets to the show
execute the proper deed for reconveyance precisely because that particular singer will sing.
o Where acts stipulated in a contract require the exercise of
CASE: DKH Holdings Corp. v. CA special knowledge, genius, skill, taste, ability, experience,
• Lesson: The death of a party does not excuse non-performance of a judgment, discretion, integrity, or other personal
contract which involves a property right, & the rights & obligations qualification of one or both parties, the agreement is of a
thereunder pass to the personal representatives of the deceased. personal nature, & terminates on the death of the party
Similarly, non-performance is not excused by the death of the party who is required to render such service
when the other party has a property interest in the subject matter ! A good measure of determining whether a
of the contract. contract terminates upon the death of one of the
• Facts: The heir of the lessor refused to honor the lease contract parties is whether it is of such a character that it
entered into by the deceased lessor contending that, though he may be performed by the promissor’s personal
inherited the property from the deceased lessor, he was not a party representative.
to the lease contract. ! Contracts to perform personal acts which cannot
• Held: The heir must honor the contract because in inheriting the be as well performed by others are discharged by
property, he acquired all the rights & obligations of the deceased the death of the promissory.
lessor with respect to the property. o Conversely, where the service or act is of such a character
o As the successor of his deceased mother, the heir only that it may as well be performed by another, or where the
succeeds to whatever rights his mother had & what is valid contract, by its terms, shows that performance by others
& binding against her is valid & binding against him. was contemplated, death does not terminate the contract
or excuse non-performance
Transmission of Rights & Obligations (2) The parties stipulate that no transmission of rights shall be allowed
• May likewise be agreed upon by the parties. o Ex. Parties to a contract of lease can stipulate that the
o Ex. A contract may provide that, in the event a contractor lease contract cannot be subleased & a sublease without
fails to finish the house on time, another contractor may the consent of the lessor shall allow the lessor to
assume his place in the contract subject to the same terminate the lease
terms & conditions. (3) The law provides non-transmission
• If the transferee is the heir, he shall not be held liable beyond the o In a contract of voluntary deposit, the depositary cannot
value of the property he received from the decedent. deposit the thing with a 3rd person, unless there is a
o Ex. if the deceased left the heir a property which, however, stipulation to the contrary
was a collateral for a debt which the deceased incurred o Art. 1649: In lease, the lessee cannot assign the lease
during his lifetime, the creditor can go against the property without the consent of the lessor, unless there is a
to pay off the indebtedness of the deceased. If the property stipulation to the contrary
is not sufficient to satisfy the debt, the creditor cannot
personally go against the heir to collect the deficiency. Contracts Pour Autrui
• Relates to Art. 1312, 2nd par. - If a contract should contain some
stipulation in favor of a 3rd person, although he is not a party to the

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 contract, he may demand its fulfillment provided he communicate o A memorandum of agreement (MOA) was entered into
his acceptance to the obligor before its revocation. between Marmont Hotel & Maris Trading for the
o A mere incidental benefit or interest of a person is not installation of a complete water supply facility.
sufficient. o The installation encroached on the property of X with the
o There must be a clear intent to benefit the 3rd person. X’s permission.
o The encroachment eventually prompted Maris Trading & X
Requisites of a Contract Pour Autrui: to enter into a 2nd MOA stipulating that, for valuable
1) There must be a stipulation in favor of a 3rd person. monetary consideration & the fact that the installation &
o It is unnecessary that the 3rd person be always named in the drilling of the water facility for the benefit of Marmont
the contract. Hotel were made in the property of X with his consent, X
2) The stipulation must be a part, not the whole of the obligation. shall cede their possessory rights over the property to
o The benefit must only be a part of the contract contained Maris Trading.
in one of its stipulations & should not constitute the whole o X, however, refused to let Marmont Hotel use the water
contract. facility in his property.
! Ex. Letter of credit in commercial transactions in • Held: X can be held liable for refusing Marmont Hotel, because it is
favor of the exporter is the result of a stipulation clear that Marmont was to benefit from the 2nd MOA. In fact, said
pour autrui. stipulations appear to have been designed precisely to benefit
• In a letter of credit transaction, the Marmont &, thus, partake of the nature of stipulations pour autrui
importer & a bank enters into an o Marmont was not a party to that 2nd MOA, but X could not
agreement where the bank pays an have prevented Maris Trading from entering the property
exporter in another country for goods possessory rights it already acquired. That X remained in
ordered & delivered to the importer. The physical possession of that particular bit of lane, is of no
exporter-beneficiary therefore benefits moment: they did so simply upon the sufferance of Maris
from the stipulation in a contract between Trading.
the importer & the bank.
3) The contracting parties must have clearly & decidedly conferred a CASE: Coquia v. Fieldman’s Insurance Co.
favor upon a 3rd person, NOT a mere incidental benefit or interest. • Lesson: Certain types of insurance contracts are also considered
4) Neither of the contracting parties bears the legal representation or contracts pour autrui.
authorization of the 3rd party. • Facts:
5) The favored party must have communicated his acceptance of said o On Dec. 1, 1961, Fieldman’s issued, in favor of the
stipulation to the obligor before its revocation. insured, a common carrier accident insurance policy,
o General rule – It is not necessary for the 3rd party to make covering the period from Dec.1, 1961-Dec. 1, 1962.
a formal acceptance prior to bringing of the suit. The ! It was stipulated in said policy that Fieldman’s
assent of the beneficiary will be presumed. would indemnify the insured in the event of
! The commencement of an action to enforce a accident caused by car accidents against all sums
promise is sufficient as an acceptance. which the insured will become legally liable,
including death of any person in the vehicle.
CASE: Marmont Resort Hotel v. Guiang o While the policy was in force, a taxicab of the insured,
• Lesson: In a contract pour autrui, the parties must give way to the driven by Coquia, met a vehicular accident at Pangasinan
benefit that will be granted to the 3rd party. & died.
• Facts: ! The insured filed therefore a claim for P5,000 to
which Fieldman’s replied with an offer to pay
P2,000, by way of compromise. The insured

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 rejected the same & made a counter-offer for card as indicated in the machine, the restaurant owner
P4,000, but Fieldman’s did not accept it. should examine the card itself & follow certain other
o On Sept.18, 1962 the insured & Coquia’s parents filed a procedures
complaint against the Fieldman’s to collect the proceeds of • Held: The restaurant owner is liable for damages due to his
the afore-mentioned policy. negligence, as this is a contract pour autrui. The restaurant is
o In its answer, Fieldman’s admitted the existence thereof, affiliated with the credit card company & they signed an agreement
but pleaded lack of cause of action because the Coquias so that the card’s holders could use their cards to pay in
have no contractual relations with Fieldman’s. establishments.
• Held: This is a contract pour autrui, because it was executed by o The holder’s offer to pay by means of his credit card
Fieldman’s & the insured to favor 3rd persons—the drivers of constitutes not only an acceptance of the said stipulation
insured.. but also an explicit communication of his acceptance to
o The stipulations of the contract reveal such intent: the obligor.
! It promised to indemnify the insured in the event
of an accident which the insured will become CASE: Young v. CA
legally liable to pay in respect to death, bodily • Lesson: The favored party must also communicated acceptance of
injury of its drivers. the right of first refusal to the obligor, lest the right be revoked by
! Fieldman’s also stated that it would indemnify the operation of law.
personal representatives of the driver if he dies. • Facts:
! Fieldman’s may, at its option, make the payable o X owns a piece of land & a building. It rents out several
directly to the heirs or claimants. rooms in the building, including one room to Y.
o This character being is manifest by the fact that the o X received an order from the City Engineer to demolish the
deceased driver paid 50% of the corresponding premiums, building. Y filed an action to annul the demolition order.
which were deducted from his weekly commissions. Under ! As an incident to this case, the parties executed a
these conditions, it is clear that the Coquias, as the sole compromise agreement provides that Y & all
heirs of the deceased, have a direct cause of action persons claiming rights under them bind
against Fieldman’s &, since they could have maintained themselves to voluntarily & peacefully vacate the
this action by themselves, without the assistance of the premises which they are occupying as lessees
insured, it goes without saying that they could & did which are the subject of the demolition order & to
properly join the latter in filing the complaint. surrender possession thereof to X within 60 days
from written notice, subject to the proviso that
CASE: Mandarin Villa Inc. v. CA should X decide to sell the subject property, “Y
• Lesson: A credit card holder’s use of a credit card is a sign of would have the right of first refusal.”
acceptance of the stipulation, communicated to the obligor—the o 2 years later, X sold the property by way of dacion to Z. The
establishment that should process & accept the payment through land was subdivided into 2 parcels, both placed in the
credit card. name of Z.
• Facts: The owner of a restaurant refused to honor a credit card for ! Z sold half the property to B & half to C.
the purpose of payment from a customer on the ground that its o X filed a case for the annulment of the sale to C & for
machine validating such credit card indicated that the latter had specific performance & damages against Y & Z.
expired, when in fact it had not expired as clearly indicated in the ! X said he was not given the right of first refusal
card itself. promised to him.
o The owner would have known such fact had it merely o The lower courts ruled that X failed to show that he
followed the rules it agreed upon with the credit card demanded his right of first refusal from Y before Y sold the
company providing that, in cases of expiration of the credit property to Z, & that, anyway, if the stipulation was indeed

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 a contract pour autrui, X failed to inform the obligor of his a) Trespassers, squatters, or agents of the
acceptance. defendant-lessee fraudulently occupying the
• Held: The petition is devoid of merit. property to frustrate the judgment;
o Assuming that X is correct in claiming that this is a b) Guest or other occupants of the premises with
stipulation pour autrui, it is unrebutted that he did not the permission of the defendant-lessee;
communicate his acceptance whether expressly or c) Transferees pendente lite;
impliedly. He insists however, that the stipulation has not d) Sub-lessees;
yet been revoked, so that his present claim is still timely. e) Co-lessees;
! BUT the sale of subject property to some other f) Members of the family, relatives & other privies
person or entity constitutes in effect a revocation of the defendant-lessee.
of the grant of the right of first refusal to X. o Ex. A property mortgaged as a collateral of a debt &
recorded in the Registry of Property shall bind any
Exceptions to Relativity: subsequent possessor-owner of the same.
1) Tort interference
2) Contracts pour autrui Art. 1313.
3) Contracts creating real rights, 3rd persons who come into Creditors are protected in cases of contracts intended to defraud them.
possession of the object of the contract are bound thereby
4) Contracts intended to defraud creditors Creditors
• Another example when a 3rd person not a party to a contract is
Art. 1312. affected.
In contracts creating real rights, 3rd persons who come into possession of • Art. 1381(3) - a contract shall be rescissible if it is undertaken in
the object of the contract are bound thereby, subject to the provisions of the fraud of creditors when the latter cannot in any other manner
Mortgage Law & the Land Registration Law. collect the claim due them.
o In such a case, even if the creditor is not a party to the
Real Rights & 3rd Persons He can sue to rescind the contract intended to defraud him, he is given legal
contract to prevent fraud
• Another example when a 3rd person not a party to a contract is personality by law to terminate the contract.
affected or may be subject to its provisions.
o Ex. A lease of real estate recorded in the Registry of Art. 1314. Tort Interference.
Property between a lessor & lessee shall bind a Any 3rd person who induces another to violate his contract shall be liable for
subsequent buyer who purchases & comes into the damages to the other contracting party.
possession of the contract’s object which is the property
leased. The latter is bound to honor the contract entered Inducing Others to Violate Contracts
into by the former lessor. • Could be referred to as “tort interference”
! A sublessee is also bound by the contract of the o Malice on part of the 3rd party
lessor and the lessee. If the lessor terminates the o Legal rights of the plaintiff are interfered with
lease contract for a valid cause, the sublessee can • While a contract between 2 parties cannot impose on a stranger a
be ejected from the leased premises even if he is liability in accordance with the terms of the contract without said
not a party to the lease contract. stranger’s consent, a stranger does owe to the parties to the
! If the lessor was successful in judicially ejecting agreement a duty not to interfere with its performance
the lessee, the following can likewise be ejected o A contract confers certain rights on the person with whom
despite the fact that they were not made parties to it is made, & not only binds the parties, but also imposes
the ejectment suit: on all the world, in a sense, the duty of respecting the
contractual obligation.

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 • Not only to contract of services; applies to any case where a person unlawful interference by one person of the enjoyment by the other
maliciously persuades another to break a contract with a 3rd person of his private property.
• Measure - If the persuasion be used for the indirect purpose of o This may pertain to a situation where a 3rd person induces
injuring the plaintiff, or benefiting the defendant, at the expense of a party to violate his undertaking under a contract.
the plaintiff, it is a malicious act, which, in law & in fact, is a • In PH tort law, there must always be MALICE, with intent to cause
wrongful act & thus an actionable act of injury issued from it. harm or injury to a party.
o BUT no liability ordinarily attaches where the party sought o Where there was no malice in the interference of a
to be charged in damages was acting in the lawful exercise contract, & the impulse behind one’s conduct lies in a
of some distinct right. proper business interest rather than in wrongful motives, a
o MOREOVER, if none of the legal rights of the plaintiff are party cannot be a malicious interferer.
interfered with, an action for damages cannot be o Where the alleged interferer is financially interested, &
maintained. such interest motivates his conduct, it cannot be said that
• An action for damages is NOT the sole remedy. he is an officious or malicious intermeddler.
o In a proper case one may properly be enjoined from in any
way procuring the violation of lawful & valid contract. A Elements of Tort Interference
o While the one who violates his contract may be personally (1) Existence of a valid contract
liable to the other party thereto for its breach, the party (2) Knowledge on the part of the 3rd person of the existence of
guilty of such breach may, nevertheless, recover against contract; &
the one who induces him to violate his contract when the (3) Interference of the 3rd person is without legal justification or excuse
latter, by such acts & persuasion, intended to injure the (4) Malice (in PH)
other contracting party or to coerce him into adopting a
line of business against his will & judgment. CASE: Song Pin Bun v. CA
• Ex. If A was contracted by B to be the resident painter in his studio • Lesson: Intervening in another’s contract for business interests
for 1 year & C maliciously induces B to dishonor the contract so does not lead to damages if it lacks malice or a desire to cause
that he can go to C’s studio, C can be liable for damages under Art. injury to another; it can, however, lead to permanent injunction.
1314. • Facts:
o Company X leased property from the lessor Y. After the
Damages lease expired, the company still occupied the premises.
• The compensation awarded for the damage suffered. When the managing partner of Company X died, the son,
o Damage – the loss, hurt or harm which results from injury Z, of the said managing partner took possession of the
• One is liable in an action for damages for a non-trespassory premises for his own company, Trendsetter Marketing,
invasion of another’s interest in the private use & enjoyment of using the leased premises as warehouse for his textile
assets if: business.
(1) The other has property rights & privileges with respect o X asked Z & Trendsetter Marketing to vacate the
to the use or enjoyment interfered with premises. They refused & instead asked the lessor for the
(2) The invasion is substantial execution of formal contracts of lease with his own
(3) The defendant’s conduct is a legal cause of the corporation. The lessor agreed. The lease contracts were
invasion, & executed.
(4) The invasion is either intentional & unreasonable or o X sued for the nullification of the lease contracts on the
unintentional & actionable under general negligence rules. ground of contractual interference under Art. 1314. X won
• Law of torts is concerned with the duty to respect the property of but did not order Y & Z to pay damages. They were only
others, & a cause of action ex delicto may be predicated upon an ordered to pay attorney’s fees.

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 o Trendsetter & Z contend that since no award of damages o They are likewise obliged to deliver with the determinate
were imposed & the lower court did not rule that thing which is the object of the contract all its accessions &
Trendsetter caused damage, the contract between accessories even though they may not have been
Trendsetter & the lessor should not be annulled & there mentioned.
should be no permanent injunction. o They shall be liable for fortuitous event in case of delay.
• Held: SC rejected this contention, but also did not award damages.
o In this case, Trendsetter Marketing asked the lessor to Delivery & Perfection
execute lease contracts in its favor, & as a result • Generally, a contract is perfected by mere consent of the parties.
Trendsetter deprived Company X of the latter’s property o Ex. A contract of sale is consensual & is perfected once
right. Clearly, the 3 elements of tort interference are agreement is reached between the parties on the subject
present in this case. However, nothing on record imputes matter & the consideration.
deliberate wrongful motives or malice on Z, thus there can o However, ownership over the object of the contract of sale
be no award of damages, absent clear evidence of malice. is transferred only upon actual or constructive delivery.
o The contracts were nullified & there was a permanent • There are also contracts which are perfected, not by mere consent
injunction against the implementation of the contract alone, but by the delivery of the object of the contract. These are
between Z & Y. real contracts such as deposit, pledge & commodatum.
o An accepted promise to deliver something by way of
Art. 1315. commodatum is binding upon the parties, but the
Contracts are perfected by mere consent, & from that moment the parties commodatum itself shall be perfected upon the delivery of
are bound not only to the fulfillment of what has been expressly stipulated the object of the contract (Art. 1934).
but also to all the consequences which, according to their nature, may be in ! The bailee in commodatum acquires the use of
keeping with good faith, usage and law. the thing loaned but not its fruits. Hence, if he
does not have the object which he is entitled to
Art. 1316. make use, there can never be perfection. The
Real contracts, such as deposit, pledge & commodatum, are not perfected contract can not be implemented.
until the delivery of the object of the obligation. o A contract of pledge is constituted by the owner of the
object to be pledged to secure a loan.
Perfected Contracts ! In a pledge, it is indispensable that the thing
• A contract is the law between the parties. Any non-fulfillment of the pledged be placed in the possession of the
contract will make the violator liable. creditor, or of a 3rd person by common agreement.
• The law likewise states that the parties are bound to fulfill all the This transfer of possession is a requirement of law
consequences which, according to their nature, may be in keeping under Art. 2093. Hence, before a contract of
with good faith, usage & the law. pledge can be perfected, the object pledged must
o The parties are bound to exercise the diligence of a good first be delivered.
Classification of contracts
father of a family with respect to the thing sought to be o Delivery is also required before a contract of deposit is
acc to perfection
1. Concensual contract delivered unless there is another standard of care perfected because, under Art. 1962, a deposit is constituted
2. Real contract stipulated by the parties or required by a law. from the moment a person receives a thing belonging to
3. Solemn Contract
o There is an implied obligation to do the act contracted with another, with the obligation & principal purpose of safely
Stages of Contract reasonable care in order that the person or property of keeping it & of returning the same.
1. Preparation/Negotiation others may not be injured by any force which he sets in
2. Perfection or birth Art. 1317.
3. Consummation/Termination
motion or by any agent or agency for which he is
responsible. No one may contract in the name of another without being authorized by the
latter, or unless he has by law a right to represent him.

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A contract entered into in the name of another by one who has no authority of their children, court authority is needed;
or legal representation, or who has acted beyond his powers, shall be otherwise the contract shall be considered void.
unenforceable, unless it is ratified, expressly or impliedly, by the person on o To protect the interest of the children, the law requires that
whose behalf it has been executed, before it is revoked by the other where the value of the property or the annual income of
contracting party. the child exceeds P50,000, the parent concerned shall be
required to furnish a bond in such amount as the court
Agency may determine, but not less than 10% of the value of the
• A contract where a person binds himself to render some service or property or annual income, to guarantee the performance
to do something in representation or on behalf of another, with the of the obligations prescribed for general guardians.
consent or authority of the latter • However, a contract entered into in the name of another would be
o The principal of the agent must comply with all the unenforceable unless it is ratified by the person on whose behalf it
obligations which the agent may have contracted within was executed, before it is revoked by the contracting party, when it
the scope of his authority. is executed by:
• When the agent has exceeded his power (ultra vires), the principal o One who ostensibly might have but who, in reality, had no
is not bound except when he ratifies it expressly or tacitly. real authority or legal representation, or
o Such would make the contract unenforceable o One who, having such authority, acted beyond his powers
o Even when the agent exceeded his authority, the principal
is solidarily liable with the agent if the former allowed the CASE: Yao Kai Sin v. CA
latter to act as though he had full powers. • Lesson: A corporate officer or agent may represent & bind the
• In the execution of the agency, the agent shall act in accordance corporation in transactions with 3rd persons to the extent that
with the instructions of the principal. authority to do so has been conferred upon him, & this includes
o In default thereof, he shall do all that a good father of a powers which have been intentionally conferred, & also such
family would do, as required by the nature of the business. powers as, in the usual course of the particular business, are
• When a sale of a piece of land or any interest therein is through an incidental to, or may be implied from, the powers intentionally
agent, the authority of the latter shall be in writing; otherwise, the conferred, powers added by custom & usage, as usually pertaining
sale shall be void. to the particular officer or agent, & such apparent powers as the
• Examples in the Family Code: corporation has caused persons dealing with the officer or agent to
o Parents & those exercising parental authority have the believe that it has conferred.
right and duty to represent their unemancipated children in • Facts:
all matters affecting their interests. o The president & chairman of Corporation X entered into a
o The father & the mother shall be the legal guardian of the contract with Corporation Y, but such president & chairman
property of the unemancipated common child without the had no authority under the law or the corporate by-laws to
necessity of a court appointment. enter into such agreement.
! In case of disagreement, the father’s decision o The by-laws of Corporation X state that it is the Board of
shall prevail unless there is a judicial order to the Directors that “enters into” agreements, & the president &
contrary. chairman “executes & signs,” for & in behalf of the
o Parents can enter into contract with respect to properties corporation, all agreements the corporation may enter into
of their children even without court approval if this will o Corporation Y, in making its claims, said that the president
involve only simple acts of administration like repairs of & chairman had been vested with “apparent authority”
properties owned by the children. • Held: The contract is unenforceable. The president & chairman was
! However, with respect to acts of dominion like not empowered by the by-laws of Corporation X to enter the
selling, encumbering or alienating the properties agreement between Corporation X & Y. The president merely signs
the agreement after the Board has approved it.

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 o A corporation can act only through its officers & agents, o CASE: Francisco v. GSIS – GSIS validly accepted the offer
“all acts within the powers of said corporation may be of compromise made by the plaintiff. The terms of the
performed by agents of its selection; &, except so far as compromise telegram the plaintiff sent were clear, & the
limitations or restrictions may be imposed by special General Manager of GSIS signed it with his name & the
charter, by-laws, or statutory provisions, the same general GSIS Board Secretary informed the plaintiff that the
principles of law which govern the relation of agency for a compromise had been accepted.
natural person govern the officer or agent of a corporation, o CASE: Board of Liquidators v. Kalaw - The practice of the
of whatever status or rank, in respect to his power to act corporation has been to allow its general manager to
for the corporation negotiate & execute contracts in its copra trading activities
o Agents when once appointed, or members acting in their for & in NACOCO’s behalf without prior board approval. If
stead, are subject to the same rules, liabilities & the by-laws were to be literally followed, the board should
incapacities as are agents of individuals & private persons. give its stamp of prior approval on all corporate contacts,
o Corporation Y did not provide enough evidence that but that board itself, by its acts & through acquiescence,
Corporation X had clothed its president & chairman with practically laid aside the by-law requirement of prior
apparent authority as evidenced by similar acts executed approval.
in its favor or in favor of other parties.
Ratification of Unenforceable Contract
Supplement to Corporate Agency Cases • Can be ratified expressly or impliedly by the person on whose
• Although an officer or agent acts without, or in excess of, his actual behalf it has been executed, before it is revoked by the other
authority if he acts within the scope of an apparent authority with contracting party
which the corporation has clothed him by holding him out or • Ratification must always come BEFORE revocation.
permitting him to appear as having such authority, the corporation
is bound thereby in favor of a person who deals with him in good CASE: Regal Films v. Concepcion
faith in reliance on such apparent authority, as where an officer is • Lesson: Ratification of the acts of an agent who had no authority to
allowed to exercise a particular authority with respect to the act should always be made before the revocation of the other party.
business, or a particular branch of it, continuously & publicly, for a • Facts:
considerable time. o The agent of a certain movie actor entered into an
• If a private corporation intentionally or negligently clothes its agreement with Regal Films designed to constitute as an
officers or agents with apparent power to perform acts for it, the addendum to the original agreements between the movie
corporation will be estopped to deny that such apparent authority is actor & Regal Films so that the lawsuit between the movie
real, as to innocent 3rd persons dealing in good faith with such actor & Regal Films will finally be settled.
officers or agents. o The movie actor however disavowed the agreement
o This apparent authority may result from: entered into by the agent contending that, by the time the
(1) The general manner by which the corporation agent transacted the addendum, she was not anymore his
holds out an officer or agent as having power to agent.
act or, in other words, the apparent authority with o In the preliminary conference in court, Regal Films
which it clothes him to act in general, or intimated to the movie actor that it was willing to release
(2) The acquiescence in his acts of a particular him from the original contracts instead of pursuing the
nature, with actual or constructive knowledge addendum. Thereupon, the movie actor surprisingly
thereof, whether within or without the scope of his manifested to the court that he was accepting the
ordinary powers. addendum. On the basis of this acceptance, a decision by
• Examples where apparent authority led to corporate liability: way of a compromise agreement was entered by the court.
o Regal Films filed a counter-case against the movie actor.

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 • Held: The compromise agreement cannot be enforced. (3) Cause of the obligation which is established.
o Consent is manifested by the meeting of the offer & the
acceptance upon the thing & the cause which are to Requisites of a Contract
constitute the agreement. • All 3 requisites must be present.
! The offer, however, must be certain & the • Absence of any one of the requisites creates an inexistent contract.
acceptance seasonable & absolute; if qualified, It produces no effect.
the acceptance would merely constitute a counter- o Inexistent contracts can be invoked by any person
offer. whenever juridical effects founded thereon are asserted
o At the first instance, the addendum was flatly rejected by against him.
the movie actor on the theses (a) that he did not give his ! Ex. A transferor can recover the object of such
consent thereto nor authorized anyone to enter into the contract by accion reinvidicatoria12 & any
agreement, and (b) that it contained provisions grossly possessor may refuse to deliver it to the
disadvantageous to him. The outright rejection of the transferee, who cannot enforce the transfer.
addendum made known to the other ended the offer. o The rule on pari delicto as between the parties does not
When respondent later filed his Manifestation, stating that apply in cases of inexistent contracts.
he was, after all, willing to honor the addendum, there was ! If there is an ostensible contract with all the
nothing to accept. elements present ostensibly, there is pari delicto.
o Verily, consent could be given not only by the party himself
but by anyone duly authorized and acting for & in his SECTION 1. – CONSENT.
behalf. But by respondent’s own admission, the addendum
was entered into without his knowledge & consent. Art. 1319. Definition of Consent.
o There was no ratification because the actor did not ratify Consent is manifested by the meeting of the offer & the acceptance upon
the contract before the revocation of Regal Films the thing & the cause which are to constitute the contract. The offer must
be certain & the acceptance absolute. A qualified acceptance constitutes a
Supplement to Compromise Case counter-offer.
• Compromise – an agreement between 2 or more persons who, for Acceptance made by letter or telegram does not bind the offerer except
preventing or putting an end to a lawsuit, adjust their respective from the time it came to his knowledge. The contract, in such a case, is
positions by mutual consent in the way they feel they can live with. presumed to have been entered into in the place where the offer was made.
o Reciprocal concessions are the very heart & life of every
compromise agreement, where each party approximates Art. 1320.
and concedes in the hope of gaining balanced by the An acceptance may be express or implied.
danger of losing.
• It is, in essence, a new contract. Consent
• Consent – The concurrence of the wills of the offerer & the
CHAPTER II. – ESSENTIAL REQUISITES OF A CONTRACT. acceptor as to the thing & the cause which constitute a contract.

GENERAL PROVISIONS. Offer

• Offer – a manifestation of a willingness to enter into a bargain so
Article 1318. Requisites of a Contract. made as to justify another person in understanding that his assent
There is no contract unless the ff. requisites concur: to that bargain is invited & will conclude it
(1) Consent of the contracting parties; • must be certain,: definite, complete, intentional = if 3 elements are present, offer is valid
(2) Object certain which is the subject matter of the
contract; !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
12 Action to recover ownership over real property.

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 o Must be so complete that its absolute acceptance will form o Acceptance may be shown by the acts, conduct or words of
an agreement containing all the terms necessary & a party recognizing the existence of the contract of sale.
intended by the parties • Acceptance must be unconditional.
o There can be no agreement until its terms are settled; an o Must be identical to the terms of the offer
offer which is not complete is merely a step in the o Qualified acceptance - variation from the proposal either by
negotiations. way of omission, addition or alteration
• Making an offer – means inviting an acceptance which, if given, will ! Considered as a counter-offer
finally create the contract ! NOT acceptance; neither party is bound
o The offer empowers the person offered to create a contract ! BUT an acceptance is not conditional if the
• Negotiation – formally initiated by an offer acceptor expresses dissatisfaction with the offer,
o Policitacion – an imperfect promise; merely an offer yet gives his unqualified assent, or if he adds
! Ex. Public advertisements or solicitations are just immaterial words.
invitations or proposals o Both the modified acceptance & an unconditional assent
• Until a contract is perfected, there are no binding agreements after such modified acceptance are in effect nothing more
o Any time before perfection, the parties may stop than counter propositions that must be assented to by the
o Withdrawal is effective immediately after manifestation, & original offerer before any binding obligation is fastened on
not when the offeree learns of the withdrawal the parties.
! In case the original proponent accedes to the
Acceptance modification imposed & gives notice to that effect,
• No acceptance – no concurrence of will & no consent the contract is concluded.
• CASE: Salonga v. Farrales • It is not necessary in every instance that
o Lesson: The essence of consent is the conformity of the an express assent to the modified
parties on the terms of the contract, the acceptance by acceptance be shown.
one, of the offers made by the other. In a bilateral contract o If the parties proceed with their contract as if the condition
(e.g. contract to sell), where there is merely an offer by one of the acceptance were a part of it, this is as effectual as
party, without the acceptance of the other, there is no an acceptance as if the changes had been formally
consent. assented to.
o Facts: By way of compromise, X attempted to sell land to Y,
which Y rejected. CASE: Jardine Davies v. CA
o Held: There is no contract. Consent is an essential element • Lesson:
of the existence of a contract, & when it is wanting, the o Distinguishing between a condition imposed on the
contract is non-existent. perfection of a contract & a condition imposed merely on
absolute (unqualified, unconditional, without
• Acceptance must be absolute. variation of the offer)
the performance of an obligation –
o May be express or implied • if subject to a condition, contract is not perfected ! Failure to comply with the 1st condition (imposed
o Except where a formal acceptance is so required, although on the perfection of a contract) results in the
the acceptance must be affirmatively & clearly made & failure of a contract
must be evidenced by some acts or conduct ! Failure to comply with the 2nd (imposed on the
communicated to the offeror, it may be made either in a performance of an obligation) merely gives the
formal or an informal manner other party options &/or remedies to protect
o May be shown by acts, conduct, or words of the accepting interests.
party that clearly manifest a present intention or o An acceptance may be express or implied, & this can be
determination to accept the offer to buy or sell inferred from the contemporaneous & subsequent acts of
Exceptions:
the contracting parties.
Complex offer:
• as long as the changes are not substantial (e.g. including currencies,
•
changing terms to vendor vendee etc.)
128 | Katrina Gaw | Block C 2018 • consequential variation DOES NOT affect the validity of the contract
• amplified acceptance: delivery of sugar and it was accepted. Kung
may additional sugar ka jan, I am also willing to buy that in the same
price. Here, the acceptance is valid.
 • Facts: The company accepted the bid of a particular supplier based
on the latter’s proposals & stated in its letter of acceptance that Art. 1321.
the awarding of the project to the said supplier was subject to The person making the offer may fix the time, place, & manner of
certain basic terms and conditions such as: 1) payment shall be on acceptance, all of which must be complied with.
a progress billing basis with a guarantee bond; 2) the project shall
be undertaken pursuant to the attached specifications; 3) all Offerer’s Options
materials that will be used in the project shall be brand new; 4) the • The offerer can indicate:
project must commence immediately and completed within 20 o The manner of acceptance (integrated into price)
working days; 5) the supplier must submit a performance bond & a o The time when acceptance is to be made
contractor’s all-risk insurance; 6) there is a warranty of 1 year o The place where it should be made
against defective material and/or workmanship • The offerer will not be bound by an acceptance made by the
• Held: The “terms & conditions” in the letter of acceptance were not acceptor in any other manner than that specified by the offerer,
tantamount to a qualified acceptance. The terms are imposed on unless the offerer acquiesces in the change.
the performance of the obligation, rather than the perfection of the
contract. CASE: Matias v. CA
o Even assuming that the company’s acceptance was • Lesson: Haggling over exorbitant prices means there is still no
conditional, there was also implied acceptance on the acceptance of the offer; it is the offerer who has the right to make
supplier’s part when they submitted (1) the performance offers which the other party could accept.
bond & (2) the contractor’s all-risk insurance • Facts: A subsequent new owner of a leased Hacienda offered to sell
to the lessee the property subject of the lease. The offer was
Time of Knowledge ignored by the lessee who instead filed a suit to compel the new
• Acceptance by letter or telegram does not bind the offerer except subsequent owner to sell the property in an amount & in a manner
from the time it came to his knowledge which the lessee feels reasonable.
o Ex. If A offered to B his property & B, through telegram, o During the early stages of the negotiations, the lessees
sent his acceptance but, before A actually received the have already been in arrears in the payment of rentals,
telegram, he informs B of the revocation of his offer, no which delinquency lasted up to the time of the
contract can be perfected. consummation of the sale of the Hacienda.
• Held: The Court rejected the lessee’s appeal.
CLASS DISCUSSION o Instead of discussing with the new owner the terms &
• The offer must be certain; the acceptance must be absolute conditions they wish to impose on the projected sale, the
lessees insist on their claim that the price of the lots are
SCENARIO exorbitant; & that their right to purchase the lot at a price
• Q: Can the offeree publish the acceptance on the newspaper & fixed in the complaint was disregarded.
assume constructive knowledge? o Lessees’ insistence as to the price of the lot rests on the
• A: NO. There must be actual knowledge. false assumption that the fixing of the price of the lot they
wanted to purchase is one of the rights granted to them by
SCENARIO law.
• Facts: X tells Y, “Sign the bottom for acceptance.” Y signs & X says,
“OK!” Is there already a contract? Contract of Sale
• Answer: YES. • Manner of payment of the purchase price – part of the price; an
• Additional: If there is no signature, but Y is given the item of the essential element before a valid & binding contract of sale can exist
same, is there a contract? o Parties must also meet on the terms or conditions of the
• Answer: YES. price, otherwise there is no sale

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 • An agreement on the manner of payment goes into the price o Ex. A letter of acceptance may be sent by mail, but if,
o A disagreement on the manner of payment is tantamount before such mail is received & read by the offeror, either
to a failure to agree on the price. the offeror or the acceptor died, there is still no contract
• Even if the parties have agreed as to the object of the sale & the because the offer has become ineffective.
purchase price but still has to agree on the manner of how & when
the downpayment & the installments are to be paid, the contract is CASE: Villanueva v. CA
NOT perfected & there is no contract of sale. • Lesson: The insolvency of a bank & the consequent appointment of
a receiver restrict the bank’s capacity to act especially in relation to
Art. 1322. its property
An offer made through an agent is accepted from the time acceptance is • Facts:
communicated to him. o A person offered to a particular bank the purchase of a
certain foreclosed property.
Contract of Agency o The offer was accepted by the bank through a board
• A person binds himself to render some service or to do something resolution which however was not relayed to the person
in representation or on behalf of another, with the consent or making the offer.
authority of the latter. o The person was able to know of the acceptance only after
• The principal must comply with all the obligations which the agent the bank was placed under receivership by the Central
may have contracted within the scope of his authority. Bank as said bank became insolvent
o When the agent has exceeded his power, the principal is • Held: The offer became ineffective; no contract was created
not bound except when he ratifies it expressly or tacitly. because the purported contract of sale never reached the stage of
o If the offer is made through an agent, acceptance of the perfection.
offer can be made to such an agent. o Corollarily, he cannot invoke the resolution of the bank
o HOWEVER, when a sale of a piece of land or any interest approving his bid as basis for his alleged right to buy the
therein is through an agent, the authority of the latter shall disputed properties.
be in writing, otherwise the sale shall be void.
Art. 1324.
Art. 1323. When the offerer has allowed the offeree a certain period to accept, the
An offer becomes ineffective upon the death, civil interdiction, insanity, or offer may be withdrawn at any time before acceptance by communicating
insolvency of either party before acceptance is conveyed. such withdrawal, except when the option is founded upon a consideration,
as something paid or promised.
Ineffective Offer – When Either Party, Before Conveying Acceptance:
1) Dies Option Contract
2) Suffers civil interdiction • An option is a contract granting a privilege to buy or sell at a
3) Becomes insane determined price within an agreed time
4) Becomes insolvent • Also called the “option period”

Ineffective Offers Explained An Option Contract Founded on a Separate Consideration:

• There is no contract not simply because there is no acceptance but, • A privilege existing only in one party — the buyer.
more importantly, because the offer has become ineffective. o For a separate consideration paid, he is given the right to
o When an offer is ineffective, nothing can be accepted. decide to purchase or not, a certain merchandise or
• “Before acceptance is conveyed” – before acceptance has come to property, at any time within the agreed period, at a fixed
the actual knowledge of the offeror. price.

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 • This being his prerogative, the buyer may not be compelled to made, before the offeror’s coming to know of such fact, by
exercise the option to buy before the time expires. communicating that withdrawal to the offeree.
• Jurisprudence demonstrating an “option” contract founded on a o The right to withdraw must not be exercised whimsically or
separate consideration: arbitrarily; otherwise it could give rise to a damage claim
o There was a lease contract with the option to buy where under Art. 19, which ordains that “every person must, in
“the consideration for the lessor’s obligation to sell the the exercise of his rights & in the performance of his
leased premises to the lessee, should the lessee choose to duties, act with justice, give everyone his due, & observe
exercise his option to purchase the same, is the obligation honesty & good faith.”
of the lessee to sell to the lessor the building &/or 2) If the period has a separate consideration
improvements constructed &/or made by the former, if he o A contract of “option” is deemed perfected; it would be a
fails to exercise his option to buy said premises.” (Vda. de breach of that contract to withdraw the offer during the
Quirino v. Palarca) agreed period.
o The lessee is to initiate the transferring of the building ! The option is an independent contract by itself, &
and/or improvements on the property to petitioner, should must be distinguished from the projected main
respondent bank fail to exercise its option within the agreement (subject matter of the option)
period stipulated. (Serra v. CA) o If, in fact, the optioner-offeror withdraws the offer before its
• Consideration in an option contract – anything of value, unlike in acceptance (thus “exercising the option”) by the optionee-
sale where it must be the price certain in money or its equivalent offeree, the latter may NOT sue for specific performance
on the proposed contract (“object” of the option) since it
Earnest Money has failed to reach its own stage of perfection.
• Considered as part of the price in a contract of sale ! The optioner-offeror, however, renders himself
o Can be a proof of the perfection of the contract of sale. liable for damages for breach of the option.
o HOWEVER, it is NOT the giving of the earnest money per o In these cases, care should be taken of the real nature of
se, but the proof of the concurrence of all the essential the consideration given
elements of the contract of sale which establishes the o Ex. If the consideration has been intended as part
existence of a perfected sale. of the consideration for the main contract with a
• If the buyer & the seller agreed that an “earnest deposit” should be right of withdrawal on the part of the optionee, the
made by the seller merely to guarantee that the buyer will not back main contract could be deemed perfected
out from the sale, such earnest deposit is NOT earnest money that o Ex. An earnest money in a contract of sale can
can be considered as proof of the perfection of the contract. evidence its perfection (Art. 1482, Civil Code).

Effect of Non-Purchase in Option Period Art. 1325. Business Advertisements.

Unless it appears otherwise, business advertisement of things for sale are
• Upon the expiration of the option period & the person given such
not definite offers, but mere invitations to make an offer.
option does not manifest his acceptance, the offeror may offer the
intended contract to somebody else.
Advertisements of Things for Sale
o Any contract perfected with such other person shall be
done in good faith. • Generally, advertisement of things for sale – mere invitations to
make an offer.
Rules When There is an Option Period: • Ex. If a seller advertises that he intends to sell his house to any
1) If the period is not itself founded upon a consideration willing purchaser, it is an invitation for the purchaser to make an
o The offeror is still free & has the right to withdraw the offer offer as to how he intends to buy the house. The offer of the
(1) before its acceptance or, (2) if an acceptance has been purchaser should of course include all the essential requirements
to make a valid contract such as the price of the house. The phrase

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 “unless it appears otherwise” connotes that the advertisement may o Only the minor can invoke the ground that a contract is
constitute an offer which is certain. annullable because, at the time it was entered into, he was
still a minor.
Art. 1326. Advertisements for Bidders. • Misrepresentation must be PASSIVE, not active
Advertisements for bidders are simply invitations to make proposals, & the • When the defect of the contract consists in the incapacity of one of
advertiser is not bound to accept the highest or lowest bidder, unless the the parties, the incapacitated person is NOT obliged to make any
contrary appears. restitution except insofar as he has been benefited by the thing or
price received by him.
Ads to Bid o Ex. If a person of age bought property from a minor & the
• A person who entertains an advertisement to bid does not latter received the purchase price, the person of age
automatically become the other party to a contract. cannot file a case to annul the contract on the ground that
o He is only allowed to make his proposals or his offer. the other party is a minor.
o If he makes his bid, he thereby makes an offer which is ! If the minor, upon coming of age, timely files a
not binding unless it is accepted. case to annul the contract, he is not obliged to
o Offeror still has the right to set time, place & manner return that part of the purchase price which he
• Ex. When a company starts the process of a bidding & disseminates had spent which did not redound to his benefit,
the document denominated the “Terms Conditions of the Bidding” such as losses from gambling, but he is obliged to
to the bidders, the dissemination of the said documents constitutes pay or reimburse the other party for amounts
an “advertisement” to bid in the project. which he has spent for his benefit like payment of
o The bid proposals or quotations submitted by the tuition fees in school.
prospective suppliers are the offers.
o The favorable reply of the company to one of the CASE: Braganza v. De Villa Abrille
prospective suppliers is the acceptance. • Lesson: Minors who misrepresent their age can set up minority as
their defense as long as their misrepresentation is PASSIVE, & not
Art. 1327. active.
The ff. cannot give consent to a contract: • Facts: 2 minors signed a promissory note, without telling the
(1) Unemancipated minors; creditor their ages. The debtor sought to enforce the promissory
(2) Insane or demented persons, & deaf-mutes who do not know how note against them, stating that:
to write. o The minors misrepresented themselves.
o The minors only interposed their objection in 1951, when
Minors one of them turned 18 in 1947, thus the 4-year
• Emancipation takes place by the attainment of majority age, at the prescription period in the Civil Code should apply13
age of 18. • Held: SC ruled that the minors can set up the defense of minority to
o Leads to termination of parental authority over the person resist the claim, overruling Mercado v. Espiritu, which held that
& property of the child, who shall be qualified & minors who misrepresent their ages cannot be absolved from the
responsible for all acts of civil life, save the exceptions contract they entered into.
established by existing laws in special cases o Despite the failure of the minors disclose their minority in
• Contracts entered into by an unemancipated person is annullable. the same promissory note they signed, it does not follow as
o HOWEVER, persons who are capable cannot allege the a legal proposition, that they will not be permitted
incapacity of those with whom they contracted to annul the
contract.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
13 The provisions of Article 1301 of the Civil Code are quoted to the effect that “an action to annul a contract

by reason of minority must be filed within 4 years” after the minor reached majority age.

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 thereafter to assert it. They had no juridical duty to disclose effect of the contract, it is thereby rendered voidable at the
their inability. option of the party so afflicted.
o In Mercado v. Espiritu, there was ACTIVE • The agreement cannot be avoided by the other party or a 3rd
misrepresentation, because the minor was required to give person; the privilege is personal.
his age in a form & he lied about it; in this case, the minors o BUT it is generally true that when the insane person is not
were not asked about their age, & thus they did not under a guardian & the other contracting party has no
outright misrepresent themselves. reasonable cause to believe him otherwise insane, the
o As for the prescription, there is reason to doubt the agreement is valid if equitable & beneficial to such insane
pertinency of the 4-year period fixed by Art.1301 where person, & it has been so far executed that the other party
minority is set up only as a defense to an action, without cannot be placed in status quo.
the minors asking for any positive relief from the contract. • A person of unsound mind is liable on his contract for necessities.
They have not filed in this case an action for annulment. Deaf-Mutes + Inability to Read & Write
They interposed an excuse from liability. • Contracts entered into by deaf-mutes who do not know how to write
o However, the minors here were paid for the loan to the is also annullable.
extent they were benefited during WW2. o The law is clear that being a deaf-mute alone is not enough
to make the contract voidable.
Insane or Demented Persons • For the contract to be annullable, the deaf-mute must likewise not
• Likewise annullable & valid up to the time they are rendered know how to write.
ineffective by the courts.
o The law presumes that the contract has been entered into Art. 1328.
by competent persons. To annul a contract, it is always Contracts entered into during a lucid interval are valid. Contracts agreed to
important to prove the insanity of the other party at the in a state of drunkenness or during a hypnotic spell are voidable.
time of the perfection of the contract.
• 3 Classes of Mental Incapacity: Lucid Interval
o Idiots – insane from birth • That period of time when an insane person acts with reasonable
o Lunatics – someone sane at one time, but who from some understanding, comprehension & discernment with respect to what
cause or another has lost use of his reason he is doing
o Those who are not legally totally incapacitated, but are o Contract is VALID when entered into during a lucid interval
mentally weak – all forms of mental weakness which do • However, where one is shown to have been mentally deranged at a
not render the person affected totally incapable of recent period anterior to the execution of the contract, that
transacting business or managing his affairs. condition is presumed to continue
• The insanity must have a direct bearing on the agreement. o Burden of proof - on the other party, to show that the
o A monomania or delusion unconnected with the subject- agreement was entered into during a lucid interval or after
matter of the contract does not destroy its binding force. recovery
o If the person’s ailment is mere mental weakness from o PROVIDED that the derangement is not caused by a
whatever cause, but it does NOT totally destroy the ability temporary ailment, such as fever, fits or the like
to comprehend the nature & effect of the transaction, such
does NOT furnish ground for the avoidance of a contract State of Drunkenness
entered into by such persons in the absence of evidence • The intoxication is of such a character as to perpetuate an undue
showing fraud, duress or undue influence. advantage over the drunken person.
o BUT if the insane delusion is so connected with the • An agreement other than for necessities, made by a person when
subject-matter of the agreement as to render one of the so drunk as to be incapable of understanding its nature & effect, is
parties thereto incapable of understanding the nature or voidable at the intoxicated person’s option

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 • One or more of the influences mentioned below should have been • Annullable contracts (Art. 1390):
operative at the time the minds of the parties met on the terms of o Mistake (in the substance of the thing or principal
the contract condition), violence, intimidation, undue influence & fraud,
because there is no real assent, due to acts of duress or
Situations When Contract during Drunkenness is Voidable: other reasons
1) When it appears that the drunkenness was brought about by the • Where duress is exerted on one of the parties of such a kind as to
opposite party overcome his will & compel a formal assent to an undertaking when
o If one party to a transaction procures the intoxication of he does not really agree to it, the agreement is not binding
the other & then takes advantage of his condition to obtain o UNLESS the other deals with him in good faith, in
the contract or conveyance it will be voidable at the ignorance of the improper influence & in the belief that the
intoxicated person’s option, notwithstanding the degree of party is acting voluntarily.
drunkenness may not have been excessive
2) That a fraudulent advantage was taken of it Art. 1331. Mistakes.
o Mere intoxication unmixed with any inequitable conduct on In order that mistake may invalidate consent, it should refer to the
the part of the other party to the agreement is insufficient substance of the thing which is the object of the contract, or to those
to invalidate a contract entered into, unless it is complete conditions which have principally moved one or both parties to enter into
drunkenness the contract.
3) That the drunkenness was so complete as to deprive the party of Mistakes as to the identity or qualifications of one of the parties will vitiate
his reason of an agreeing mind consent only when such identity or qualifications have been the principal
o Intoxication which merely prevents the party from giving cause of the contract.
proper attention to what he is doing or from fully realizing A simple mistake of account shall give rise to its correction.
the nature of his acts is insufficient to invalidate a
contract. Mistake
• General rule: BOTH must be mistaken; but there are exceptions
Hypnotic Spell • For mistake to make a contract voidable, it must either refer to:
• A contract entered into during a hypnotic spell is likewise voidable. 1) The substance of the thing which is the object of the
• Hypnosis – an artificially induced state, resembling sleep, but contract
characterized by exaggerated suggestibility & continued o Affects SUBSTANCE, not object—if there’s no
responsiveness to the voice of the hypnotist object, there’s no consent
o Ex. Where the contract for the sale of a cow was
Art. 1329. entered into, both parties believing her to be
The incapacity declared in Art. 1327 is subject to the modifications barren, which turned out to be untrue, it was held
determined by law, & is understood to be without prejudice to special that mistake was not as to the mere quality of the
disqualification established in the laws. animal sold, but went to the very nature of the
thing & that the vendor had a right to rescind the
Art. 1330. agreement.
A contract where consent is given through mistake, violence, intimidation, 2) Those conditions which principally induced the parties to
undue influence, or fraud is voidable. enter into a contract.
o The conditions must not be mere incidents to the
Freedom of Will consideration
• To create a contract, the meeting of the mind must be free, o Ex. If A lent money to X only because he was
voluntary, willful & with a reasonable understanding of the various informed that it was the special request of Z to A,
obligations the parties intend to be bound. who owed Z a favor which A wanted to reciprocate,

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 & only because there was an apparent assurance o When the identity of one of the parties is a material
from Z that he will be a solidary debtor; & X knew element of the contract, a mistake in respect thereto
that, had it not been for the request of Z & his invalidates the agreement.
engagement as a solidary debtor, the loan would • Ex. Y contracts with X believing him to be M.
not have been consummated; & it eventually o Y, the offerer, has in contemplation a definite person with
turned out that there was no request & no whom he intends to contract.
assurance coming from Z who, in reality merely • One has the right to select the person with whom he wishes to
vouched for the credit worthiness of X, the said contract, especially where the nature of the transaction is such that
loan agreement can be annulled by A on the it is important that performance be had by a particular individual,
ground that there was an invalid consent as the as agreements with a painter, writer, or which call for the
conditions which principally moved both parties to performance of any act requiring skill such as the one sought to be
enter into the contract was a mistake. contracted with is supposed to possess. In such cases one may
• A unilateral mistake in the making of an agreement, of which the contract with whomever he may choose & the sufficiency of his
other party is entirely ignorant & to which he in no way contributes, reasons for so doing is immaterial.
will not afford ground for its avoidance or rescission • Thus, where one sends an order for goods or other proposal to
o UNLESS it is such a mistake as goes to the substance of another, a 3rd person cannot without the knowledge of the one
the agreement itself sending the order or making the proposal become a party to the
agreement by accepting such proposal.
CASE: Spouses Heizrich & Betty Theis v. CA
• Lesson: Mistake in Art. 1331 involves either (1) ignorance, which is Mistake of Account
the absence of knowledge with respect to a thing & (2) mistake • A simple mistake of account shall give rise to its correction. A
properly speaking, which is a wrong conception about said thing, or simple accounting error does not go into the essentials of a
a belief in the existence of some circumstance, fact, or event, which contract.
in reality does not exist
• Facts: Art. 1332.
o The seller, via a deed of sale, sold to the buyer a property When one of the parties is unable to read, or if the contract is in a language
which was however not the one appearing in the deed of not understood by him, & mistake or fraud is alleged, the person enforcing
sale. The mistake was not the fault of the parties but was the contract must show that the terms thereof have been fully explained to
due to mistake in the survey made on the property. the former.
o The seller, upon learning of this, immediately offered the
buyer another property instead or a refund of money Presumptions in Contracts
double the amount paid for the property, but which offer • The parties are presumed to have understood the terms of the
was unreasonably refused by the buyers prompting the contract they voluntarily signed, especially when there is proof that
seller to file for annulment of the contract based on they are educated.
mistake o Courts are not authorized to extricate parties from the
• Held: Contract can be invalidated on the basis of Art. 1331 as it necessary consequences of their acts, & the fact that the
involved mistake as to the substance of the thing & seller was in contractual stipulations may turn out to be financially
good faith. He simply made a misconception about the lot. disadvantageous will not relieve parties thereto of their
obligations.
Mistake as to Identity or Qualifications o They cannot disavow the agreement due to supposed
• Mistake as to the identity or qualifications of one of the parties misunderstanding of its terms.
vitiates consent only when it is the principal cause of the contract. • HOWEVER, Art. 1332 provides that, when one of the parties is
unable to read, or if the contract is in a language not understood by

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 him, & mistake or fraud is alleged, the person enforcing the • Held: SC sustained the cause of the illiterate. Since the deed of
contract must show that the terms thereof have been fully partition is null, the reconstituted title & transfer titles arising
explained to the former. therefrom are void as well.
• To invoke Art. 1332, one must have the ff. conditions: o The sister knew that there was no other way to obtain the
o He must be unable to read or partition of the subject property than having her brother
o He must not understand the language of the contract. sign a deed of partition, making the latter believe that the
• He must first prove such fact or circumstance. Only after sufficiently deed pertained to the three other lots. The scheme was
adducing evidence proving the fact that he cannot read or that he simple enough considering that the brother was illiterate.
does not understand the language of the contract will the burden of o The fact that the brother protested the transfer of the title
proof shift to the one enforcing the contract to show that the terms shows that the brother did not actually understand the
thereof have been explained to the person who is unable to read or contents of the contract, as the sister claimed.
who does not understand the language of the contract. Art. 1333.
There is no mistake if the party alleging it knew the doubt, contingency or
CASE: Lustan v. CA risk affecting the object of the contract.
• Lesson: Where a party to a contract is illiterate or cannot read or
cannot understand the language in which the contract is written, Contracts with Risk or Doubt
the burden is on the party interested in enforcing the contract to • Involves a mistake of FACT, not a mistake in law
prove that the terms thereof are fully explained to the former in a • Where the parties to an agreement indicate an intention to be
language understood by him bound irrespective of the existence of certain facts & take the risk
• Facts: The dispute was whether or not the Deed of Definite Sale of their non-existence, the validity of their agreement is not at all
was in reality an equitable mortgage wherein the subject property dependent upon the existence of such facts.
was merely intended to secure an existing debt by way of mortgage. o Where the parties are conscious that the existence of
• Held: The document was an equitable mortgage based on the clear particular facts is doubtful & make their agreement on this
evidence supporting such contract & based on the finding that the assumption, the non-existence of such facts does not
illiterate owner of the same was made to understand that the deed affect the validity of the agreement, the risk of their
of sale signed by her merely evidenced an indebtedness to the existence being taken by the parties.
creditor • The view is taken that if the parties are conscious of their ignorance
o The contents of the same were not read nor explained to as to the existence of some facts, the non-existence of such facts is
her so that she may intelligently formulate in her mind the of no consequence; this is said to be predicated upon common
consequences of her conduct & the nature of the rights experience that if people contract under such circumstances, they
she was ceding in favor of the petitioner. usually intend to abide by the resolution either way of the known
uncertainty, & have insisted on, & received, consideration for taking
CASE: Arriola v. Mahilum that chance.
• Lesson: In case one of the parties to a contract is unable to read & • Ex. A seller, not knowing the nature of the stone he found, sold it to
fraud is alleged, the person enforcing the contract must show that a purchaser for only $1 after they discussed their ignorance as to
the terms thereof have been fully explained to the former. the quality & nature of the stone which they surmised to be
• Facts: A sister of an illiterate man was able to have a document probably a Topaz. It turned out to be a Diamond worth about
signed by the latter on the misrepresentation that properties other $1,000.
than his property awarded by a cadastral court to him will be o The contract cannot be annulled or rescinded as there was
partitioned among the heirs of their parent. It turned out however legally no mistake as to the nature of the stone because
that the document included such property. The property was when they transacted the purchase, there was conscious
therefore fraudulently distributed to the other heirs. The illiterate uncertainty & that the parties took the risk that it could
filed suit to recover his property alleging fraud & misrepresentation.

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 have been some other valuable object capable of being 2) Intimidation – reasonable & well-grounded fear of an imminent &
sold at a higher price. grave evil upon his person or property, or upon the person or
property of his spouse, descendants or ascendants, to give his
Art. 1334. consent
Mutual error as to the legal effect of an agreement when the real purpose of o To determine the degree of the intimidation, the age, sex &
the parties is frustrated, may vitiate consent. condition of the person shall be borne in mind.
o The threats & circumstances must be of a character as to
Mutual Mistakes excite the reasonable apprehensions of a person of
• A unilateral mistake of law as to the legal effect of an agreement is ordinary courage, & that the agreement be made under the
generally not a ground to annul a contract. influence of such threats or menace; the threat must be
o In such a situation, the document embodying the tangible & direct
agreement is drafted the way the parties have intended it o CASE: Vda. de Lacson v. Granada
to be such that only its legal effect is different from what ! Facts: It was contended that a contract entered
the parties have assumed. into during the Japanese occupation should be
• HOWEVER, a mistake of law may vitiate consent if the ff. requisites nullified because one of the parties was
are present: constrained to enter the contract & to accept
1) The mistake as to the legal effect of the agreement Japanese currency for fear that, if he would not do
must be mutual so, he might endanger his life
2) Such mutual mistake frustrates the real purpose of the ! Held: There was legally no intimidation enough to
parties. annul the contract. The duress must be more than
• Ex. If A leases to B a property where the latter will construct a four- the “general feeling of fear” on the part of the
story building but it turned out that such building cannot be erected occupied over the show of might by the occupant.
in the said city because of an ordinance prohibiting the same, the There must be specific acts or instances of such
contract can be annulled. nature & magnitude as to have, of themselves,
inflicted fear upon the subject thereof that his
Art. 1335. execution of the questioned deed or act can not
There is violence when in order to wrest consent, serious or irresistible force be considered voluntary.
is employed. o CASE: Laperal v. Rogers
There is intimidation when one of the contracting parties is compelled by a ! Facts: A person was directly told by the Japanese
reasonable & well-grounded fear of an imminent & grave evil upon his military authorities that he should sell his house &
person or property, or upon the person or property of his spouse, warned him that his refusal to sell would be
descendants or ascendants, to give his consent. considered as a sign of hostility to the Japanese.
To determine the degree of the intimidation, the age, sex & condition of the Fearing for his life, he sold the house.
person shall be borne in mind. ! Held: The contract can be annulled as the consent
A threat to enforce one’s claim through competent authority, if the claim is was coerced by direct intimidation & does not fall
just or legal, does not vitiate consent. within the purview of “collective” or “general”
duress
Annullable Contracts & Conditions Defined
1) Violence – serious & irresistible, leading to total absence of free will Threat through Competent Authority
o Ex. If A coerces B into a contract by continually beating him • A threat to enforce one’s claim through competent authority, if the
until he signs the contract, A, in effect, imposes his will on claim is just or legal, does not vitiate consent
B & therefore, no valid consent is obtained from B. • Ordinarily, the institution or threatened institution of a civil suit, or
ordinary legal proceedings to enforce a legal demand does not

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 constitute duress, even though it may be made in a period of • CASE: De Leon v. CA
business depression o Facts: The mother claims that she was intimidated into
o Ex.: Threat to commence legal proceedings for the removal entering a letter agreement by the estranged wife of her
of a dam, or for the collection of a debt contracted during son because the said wife threatened to bring her son to
infancy, to foreclose a chattel, or mortgage, to sue out a court for support, to scandalize their family by filing
writ of attachment or levy executions, or a threat by an baseless suits &, by agreeing to the agreement, the wife
officer to arrest an execution debtor and take him to jail would pardon the said mother’s son for possible crimes of
unless he secures the debt, the officer having in his adultery &/or concubinage subject to the transfer of
possession at the time legal process requiring him to take certain properties.
the debtor into custody, has in each of the foregoing o Held: This did not constitute intimidation. Here, the Court
instances been held not to have been procured through listed the requisites of legal intimidation.
duress, etc.
• HOWEVER, if a civil proceeding actually begun or threatened is Requisites for Intimidation as Vitiated Consent
wrongful & oppressive in its nature & brought or threatened with (1) That the intimidation must be the determining cause of the
the intention of coercing the adverse party & does in fact coerce contract, or must have caused the consent to be given;
such party into the payment of money or the formation of a (2) That the threatened act must be unjust or unlawful;
contract, such payment or contract is made under duress & may be (3) That the threat be real & serious, there being an evident
avoided. disproportion between the evil & the resistance which all men can
o Ex. A threat to institute receivership proceedings against a offer, leading to the choice of the contract as the lesser evil;
certain company at a time when it would ruin the (4) That it produces a reasonable & well-grounded fear from the fact
company’s business & affect the reputation of the that the person from whom it comes has the necessary means or
defendant, constitutes such duress as will avoid the ability to inflict the threatened injury.
defendant’s contract to pay a specified sum of money in
order to save the business of the company & his own CLASS SCENARIO
reputation. • Facts: X pokes a gun at Y to sign a contract. Y is a world champion
o Ex. A bond given, or money paid from being falsely in running.
attached to release property seized in attachment • Answer: There is no “irresistible” force because Y can run away
proceedings oppressively instituted or conducted may be
cancelled or recovered. Art. 1336.
o Ex. When an invalid and unfounded claim for a lien upon Violence or intimidation shall annul the obligation, although it may have
real property is filed & the necessities of the defendant’s been employed by a 3rd person who did not take part in the contract.
business require that this lien be immediately discharged,
payment under such circumstances was made under Violence or Intimidation
duress & that it might be recovered. • May emanate not only from any of the contracting parties but also
• A threatened civil action may also amount to duress where the from 3rd persons not a party to the contract.
parties are not on an equal footing. o The contracting party who is not the subject of the violence
o Ex. Threats made against a person of inferior intellect, or or the intimidation may not even know that the other party
an aged weakened in body & mind to the effect that has been coerced.
certain civil proceedings will be instituted, have been held • Ex. If A is coerced to enter into a contract with X because G
such duress as will avoid a contract induced thereby. threatens to kill all the children of A if he does not do so, such
Threatening litigation while the defendant is ill, or to contract may be annulled whether or not X knew of the intimidation.
continue litigation when the circumstances are oppressive
has been held to amount to duress Art. 1337.

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There is undue influence when a person takes improper advantage of his • Lesson: When the undue influence is caused by executive officials
power over the will of another, depriving the latter of a reasonable freedom performing their official functions, the contract is not only voidable;
of choice. The ff. circumstances shall be considered the confidential, family, it’s void.
spiritual and other relations between the parties, or the fact that the person • Facts: A consultancy agreement was obtained from a government
alleged to have been unduly influenced was suffering from mental agency because of the use of influence of executive officials.
weakness, or was ignorant or in financial distress. • Held: This contract is not just voidable—it is null & void.
o Any agreement entered into because of the actual or
Undue Influence supposed influence which the party has, engaging him to
• When a person takes improper advantage of his power over the will influence executive officials in the discharge of their
of another, depriving the latter of a reasonable freedom of choice. duties, which contemplates the use of personal influence
• The ff. circumstances shall be considered: the confidential, family, and solicitation rather than an appeal to the judgment of
spiritual & other relations between the parties, or the fact that the the official on the merits of the object sought is contrary to
person alleged to have been unduly influenced was suffering from public policy. Consequently, the agreement, assuming that
mental weakness, or was ignorant or in financial distress. However, the parties agreed to the consultancy, is null & void as
not all influence is prohibited by law. against public policy. Therefore, it is unenforceable before
o Undue influence - must amount to fraud or coercion. a court of justice.
! The grantor must be overreached & deceived by
some false representation, stratagem or by Art. 1338.
coercion, physical or moral. There is fraud when, through insidious words or machinations of one of the
o Generally, solicitations, entreaties, fair argument & contracting parties, the other is induced to enter into a contract which,
persuasion, or appeals to the emotions or affections will without them, he would not have agreed to.
NOT amount to undue influence
! UNLESS they overcome the will of the person & Fraud
take away his ability to act as a free agent • Presumption: Good faith & knowledge; arm’s length transaction
o Exception: When there is a duty to disclose
CASE: Banez v. CA • Generally, either at law or in equity, is a false representation of a
• Lesson: Solicitation, importunity, argument & persuasion are not material fact made by word or conduct with knowledge of its
undue influence, & a contract is not to be set aside merely because falsehood or in reckless disregard of its truth
one party used these means to the consent of the others. Influence o In order to induce & actually inducing another to act
obtained by persuasion or argument or by appeals to the affections thereon to his injury.
is not prohibited either in law or morals & is not obnoxious even in • There must always be damage or injury in cases of fraud.
courts of equity. Such may be termed “due influence.” • Ex. if A, an expert jeweler & in order to be able to sell his glass
• Facts: The respondent contended that the letter of a senator unduly figurine, told X that such figurine is made of Diamond from South
influenced PHHC to approve the transfer of rights of a certain Africa &, on such false representation, X bought the figurine, the
property not to him but to another person. contract of sale can be annulled by X.
• Held: There was no undue influence enough to annul a contract. • Ex. In a lawyer-client relationship, the lawyer must disclose if the
o Regardless of whether or not the letter by the senator was former client is the enemy of the current client.
in fact given to PHHC, the evidence shows that the PHHC
used evaluation, inspections & recommended the transfer CASE: Rivero vs. Court of Appeals
of the rights to the other person & the letter had little to no • Facts:
bearing. o A nephew of an old illiterate sickly woman took advantage
of her predicament by making her believe that the
CASE: Marubeni Corp. v. Lirag

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 “Kasulatan Sa Ganap na Bilihan” was a contract of • The law recognizes the practice in trade that there are usual
mortgage. exaggerations employed by the parties to consummate a particular
o Knowing that the old woman merely wanted to borrow transaction.
money secured by the mortgage of the property, again took • If a party is induced by such usual exaggerations, there may be
advantage of the desperate condition of the illiterate fraud amounting to active misrepresentation.
woman by making her sign the Kasulatan where it o If it is within the means of the other party to investigate the
appeared thereon that he was the buyer of the property, truthfulness of such exaggeration & he does not do so,
• Held: The contract was annullable because the consent of the old there is no fraud despite the exaggerations.
woman was obtained thru fraudulent misrepresentation of the
nephew that the contract she was signing was one of mortgage. Art. 1341.
A mere expression of an opinion does not signify fraud, unless made by an
Art. 1339. expert & the other party has relied on the former’s special knowledge.
Failure to disclose facts, when there is a duty to reveal them, as when the
parties are bound by confidential relations, constitutes fraud. Opinions
• Generally not regarded as a representation of the facts
Disclosing Facts o If the opinion is wrong, it is not seen as deceitful or
• Each party is not duty-bound to make known to the other any facts insidiously inducing a party to enter into a contract.
both within their knowledge or within their opportunity to know. • There are times when, without really having any special knowledge
o The mere fact that one of the parties has superior as to the object of the contract, a person expresses an opinion
knowledge of the value of the property subject of the about the same. At the same time, the other party to whom the
transaction than the other party is not per se fraud. opinion was relayed may equally have his own thoughts &
• There is only fraud when, under the special & peculiar observation that would affect his judgment
circumstances of each case: o In such cases, the expression of an opinion will not vitiate
o When a legal or equitable duty is imposed upon the consent.
dominant party to reveal certain facts material to the • LOQUITOR – thing speaks for itself
transaction o NOT fraudulent if one says his car can fly, because people
! Ex. An animal breeder has a duty to disclose to an know cars can’t fly
ordinary buyer that the particular cow the buyer
wants to buy is suffering from a disease not Representation v. Opinion
detectable to the naked eye. • An illustration of the difference between opinion & representation is
o When there is a confidential relationship between the found in the difference between the vendor of property saying that
parties. it is worth so much, & his saying that he gave so much for it.
! Ex. Also, a lawyer, because of his confidential & o Opinion – “It is worth so much”
trust relationship with his client, is duty bound to ! The buyer may adopt if he will
reveal facts important to the transaction; o Representation “He gave so much for it”
otherwise, non-disclosure will constitute fraud. ! An assertion of fact which, if false to the
knowledge of the seller, is fraudulent
Art. 1340.
The usual exaggerations in trade, when the other party had an opportunity Opinion Representation
to know the facts, are not in themselves fraudulent. No Fraud Fraud
“This is good oil land” “The oil business is profitable”
Usual Exaggerations “This building is beautiful” “This building is fireproof”
“This patent is a valuable “This is the only patent that

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 improvement.” works in the market.” • Misrepresentation is, in the main, inclusive of the term fraud.
Practically every fraud is a misrepresentation, but every
Expert misrepresentation is not fraudulent.
• If the opinion is given by one who is thoroughly knowledgeable or is • Thus a misrepresentation as to the subject-matter of or parties to a
an expert in the field such that he knows for a fact that his opinion contract may be innocently made, &, if so, it does not amount to
will turn out to be false & still induces the other party to enter into fraud, but is a misrepresentation.
the contract on the basis of such false opinion, fraud can be • Misrepresentations may be made without the knowledge of its
invoked to annul the contract. falsity & therefore completely done in good faith. In such a case it
o In such a case, the opinion will be considered as a fact. may constitute merely an error (mistake).

Art. 1342. Misrepresentation by a 3rd Person. Art. 1344.

Misrepresentation by a 3rd person does not vitiate consent, unless such In order that fraud may make a contract voidable, it should be serious &
misrepresentation has created substantial mistake & the same is mutual. should not have been employed by both contracting parties.
Incidental fraud only obliges the person employing it to pay damages.
Misrepresentation by a 3rd Person
• Vitiates consent only if it created substantial mistake & the same is Seriousness of Fraud
mutual • There must be an intention to injure & that damage or injury in fact
• CASE: Rural Bank of Caloocan v. CA resulted.
o Lesson: A contract may be annulled on the ground of • The parties must not be in pari delicto.
vitiated consent if deceit by a 3rd person, even without o They must not have been mutually guilty of fraud.
connivance or complicity with one of the contracting • It must not be dolo incidente which is accidental & collateral fraud
parties, resulted in mutual error on the part of the parties which does not necessarily bear on the decision of the party
to the contract. defrauded to enter into the contract.
o Facts: A person induced an elderly woman to co-sign a • It must be dolo causante which refers to the very cause why the
promissory note as debtor & to mortgage her property, other party entered into the contract.
without said woman knowing the nature of the contract.
The same person successfully misrepresented to the bank Art. 1345.
the qualification of the elderly woman to induce the bank Simulations of a contract may be absolute or relative. The former takes
to grant the loan. place when the parties do not intend to be bound at all; the latter, when the
o Held: The loan agreement signed by the elderly woman can parties conceal their true agreement.
be annulled on the ground of mistake in the giving of
consent by the parties. Simulations
! The promissory note between the bank & the • The characteristic of simulation is the fact that the apparent
elderly woman is invalidated on the ground of contract is not really desired nor intended to produce legal effects
substantial mistake between the parties. nor in any way alter the juridical situation of the parties.
o Thus, a person, in order to place his property beyond the
Art. 1343. Misrepresentation in Good Faith. reach of his creditors, simulated a transfer of it to another,
Misrepresentation made in good faith is not fraudulent but may constitute he does not really intend to divest himself of his title &
error. control of the property, hence the deed of transfer is but a
sham.
Misrepresentation in Good Faith
Kinds of Simulation

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 1) Absolute simulation – when the parties do not intend to be bound • Facts:
at all by the same o A party assigned his timber license to another for a
o Renders the contract null & void consideration of P120,000, but the Deed of Assignment
o The apparent contract is not really desired or intended to dated Feb. 15, 1966 stated that, for such amount of
either produce legal effects or in any way alter the juridical money, the assignee shall transfer his shares of stock in a
situation of the parties corporation to be known as Timberwealth Corporation.
2) Relative simulation – binds parties to their real agreement o The assignment was eventually implemented but the
o Valid, when it does not prejudice a 3rd person & is not assignee did not fully pay the consideration.
intended for any purpose contrary to law, morals, good o To claim the balance, the assignor sued the assignee who
customs, public order or public policy binds contended that the contract was null & void because the
corporation was never set up & there was no transfer to
CASE: Umali v. CA him of the shares of stock.
• Lesson: Absolute or relative simulation can be proved by the acts of • Held: The assignee should be held liable considering that the
the parties that reveal their true intentions. assignment was a relatively simulated contract which, though
• Facts: containing a false consideration, was not null & void per se
o There was a Sales Agreement & attached Chattel Mortgage
executed between X & Y. CASE: JR Blanco v. Quasha
o It was contended that the failure of Y to pay the • Facts:
consideration proved that the contract was absolutely o The owner of the property entered into a contract of sale of
simulated & therefore null & void. her property with a company payable in equal annual
• Held: The contract is not absolutely simulated. installments of P25,000 per year.
o The subsequent act of Y in receiving & making use of the o Simultaneously, the company & the said owner entered
tractor, subject matter of the Sales Agreement and Chattel into a contract of lease of the same property whereby the
Mortgage, and the simultaneous issuance of a surety bond owner would lease the property from the company for 25
in favor of X, concomitant with the execution of the years for a monthly rental of P2,083.34 or P25,000.08 per
Agreement of Counter Guaranty with the Chattel/Real year.
Estate Mortgage, lead to the conclusion that petitioners o The totality of the agreement was called a Sale-Lease-Back
had every intention to be bound by these contracts. The Agreement.
occurrence of these series of transactions between o It is contended that the sale-lease-back agreement was
petitioners & private respondents is a strong indication simulated & therefore void because no actual
that the parties actually intended, or at least expected, to consideration passed from the buyer to the seller.
exact fulfillment of their respective obligations from one • Held: SC rejected this claim.
another. o Although no actual exchange of money was made, yet the
payment was effected between vendee & vendor by
Art. 1346. mutual agreement whereby the monthly rental which was
An absolutely simulated or fictitious contract is void. A relative simulation, due the vendor was paid from the annual installment of
when it does not prejudice a 3rd person & is not intended for any purpose P25,000 due from the vendee pursuant to the lease
contrary to law, morals, good customs, public order or public policy binds contract executed between them. The court found nothing
the parties to their real agreement. wrong with this arrangement for the same is not contrary to
law, morals, good customs, or public policy, but rather for
CASE: Javier v. CA the convenience of both parties.
• Lesson: A relatively simulated contract binds the parties to their
real agreement. CASE: Pua v. CA

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Article 1345 & 1346 • Relatively Simulated:
Simulation of Contract Although a deed of sale was made, the parties really intended a
• process of intentionally deceiving others by producing the donation but they wanted to conceal the existence of the donation
appearance of contract that really does not exist (absolute (simulation of the NATURE of the contract); or a true sale at a
simulation) or which is different from the true agreement (relative different price has really been agreed upon (simulation of the
simulation) CONTENT or TERMS of the contract)
NOTE: 3rd persons should not be prejudiced; therefore, as to
Requisites for Simulation them, the apparent contract is the one valid.
• An outward declaration of will different from the will of the parties REASON: The contracting parties are in estoppel, and they should
• The false appearance must have been intended by mutual be penalized for their deception
agreement
• The purpose is to deceive third persons
Absolutely Simulated Contract v. Illegal Contract
Kinds of Simulated Contracts • Rodriguez v. Rodriguez:
• Absolutely Simulated (fictitious contracts): 1. Simulation: contract is not desired to produce an illegal effect
1. The parties do not intend to be bound or in any way alter the juridical situation of the parties
2. Effect: Contract is VOID 2. Illegal: intended to be real and effective, and entered in such
• Relatively Simulated (Disguised Contracts) form as to circumvent a prohibited act
1. The parties conceal their true agreement
2. Effect: The parties are bound to the real or true agreement
except —
a. If the contract should prejudice a third person
b. If the purpose is contrary to law, morals, good customs,
public order, or public policy

Examples
• Absolutely Simulated:
As a joke, A and B executed a deed of sale although they did not
intend to be bound at all by the contract. Thus, the contract is
inexistent and VOID.
 • Facts: It was proven that the person who allegedly entered into the selling of RTW, to have money on hand in the amount of P10,000
contract was not even conceived at the time the contract was at the time of the sale. Aside from the fact that a family friend
executed. testified that the illegitimate daughters had no source of income at
• Held: The contract was definitely absolutely simulated. the time of the sale, they likewise did not even present any single
witness to prove that the seller received the purchase price.
CASE: Velasquez v. CA
• Facts: SECTION 2. – OBJECT OF CONTRACTS
o A debtor was lured by the creditor to make it appear that
the debtor sold to the creditor the collateralized property of Art. 1347.
the debtor. All things which are not outside the commerce of men, including future
o The creditor told the debtor that this scheme was things, may be the object of a contract. All rights which are not
necessary so that the creditor can borrow money from a intransmissible may also be the object of contracts.
certain bank & make use of the property as collateral. No contract may be entered into upon future inheritance except in cases
o After the loan was obtained, the creditor was supposed to expressly authorized by law.
execute a reconveyance of the property to the debtor who All services which are not contrary to law, morals, good customs, public
would then assume the loan from the bank and use the order or public policy may likewise be the object of a contract.
proceeds of the loan to pay off his loan to the creditor.
o In the implementation of the scheme, 3 documents were Object of Contracts
executed on the same day: 1) a deed of cancellation of the • To qualify as an object for purposes of a contract to exist, the object
mortgage made by the debtor to the creditor; 2) a deed of must at LEAST be generic – determinate as to its kind
sale of the property from the debtor to the creditor; and 3) o Also, it can be an expectancy
a document purporting to re-sell the property to the debtor. • Any property or service can be the object of a contract provided that
o It was contended by the creditors that the sale of the it is within the commerce of man.
property was authentic after the debtor filed a case to o Not within commerce of men – lands of the public domain,
annul all the said documents. like the Luneta Park, a river, or even a fishpond that forms
• Held: The contract of sale was clearly simulated to facilitate the at tributary leading to the Agno River (for the latter, its
transaction with the bank as there was absolutely no consideration conversion to a fish pond doesn’t change the fact that it’s
at all & the parties clearly did not intend to be bound by the deed of public property)
sale & its accompanying documents. o Within the commerce of men – lands acquired by private
appropriation & acquisitive prescription
CASE: Francisco v. Francisco-Alfonso • A service to assassinate a particular dignitary cannot be the object
• Facts: The 2 illegitimate daughters claimed that they bought the 2 of a contract because it is contrary to law & public order.
properties in 1983 from their deceased father via a “Kasulatan sa • In a contract of sale, things having a potential existence may be the
Ganap na Bilihan” for P25,000 but evidence showed that, even object of such contract; & the efficacy of the sale of a mere hope or
with what they claimed as their respective jobs at that time, they expectancy is deemed subject to the condition that the thing will
could not possibly have any income to be able to have such amount come to existence.
of money at the time of the sale. o Hence, all future puppies of a particular pregnant dog can
• Held: SC declared the contract as void for being simulated because be the object of a contract although the puppies are not
there was no consideration for the same. It was impossible for one yet born.
of the illegitimate daughters to have money on hand in the amount o HOWEVER, the sale of a vain hope or expectancy is void.
of P15,000 just selling goto or lugaw at the time of the sale. • Rights are also the object of contracts, provided they are
Likewise, the Supreme Court said that it was incredible for the transmissible.
other illegitimate daughter, who was engaged in the buying &

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Article 1347 Human Blood is Not an Object of Contract
Object of a Contract • human blood, like other parts of the human body, cannot be
• thing or a service considered object of contracts because they are outside the
commerce of men.
Requisites of THINGS as objects of contract • the extraction, collection, and selling of human blood by any
1. The thing or service must be within the commerce of man individual or agency (e.g. People’s Blood Bank) is an aspect of the
2. Must be transmissible (political rights or personal rights like medical profession and should not be considered taxable entity
parental authority cannot be subject of a contract) for business tax purposes.
3. Must not be contrary to law, morals, good customs, public
order, or public policy (future inheritance; future things may be
the object of a contract; thus the future harvest of sugar cane
in a specific field may be sold)
4. Must not be impossible
5. Must be determinate as to its kind or determinable without the
need of a new contract between parties

Requisites of THINGS as objects of contract

1. The thing must be within the commerce of men, that is, it can
legally be the subject of commercial transaction
2. It must not be impossible, legally or physically
3. It must be determinate or determinable without the need of a
new contract between the parties

Requisites of SERVICES as object of contract

1. Must be within the commerce of men
2. It must not be impossible, physically or legally
3. it must be determinate or capable of being made determinate
 Impossibility may be:
1. Because of the nature of the transaction or because of the law
2. Absolute (NO ONE can do it)
3. Relative (particular debtor cannot comply)

o Ex. One can sell leasehold rights over a property provided • One cannot be bound to do the impossible. Hence, a contract
that there is no contractual & legal stipulation prohibiting requiring a person to become a monkey on a particular date is
its transmissibility. impossible.
• Future things that can be reasonably ascertained can be the object
of a contract. Art. 1349. Quantity Need Not Be Determinate.
o But future inheritance cannot be the object of a contract The object of every contract must be determinate as to its kind. The fact
because its extent, amount & quantity cannot be that the quantity is not determinate shall not be an obstacle to the
determined. existence of the contract, provided it is possible to determine the same,
o Future inheritance – any property or right not in existence without the need of a new contract between the parties.
or capable of determination at the time of the contract,
that a person may in the future acquire by succession Determinable as to its Kind (Generic)
! Indeed one cannot determine with certainty how • The object must be one that can be ascertained with reasonable
much inheritance one would get from his father, certainty as to its kind.
mother, or any person from whom he is called o A contract engaging a certain person to perform a deed,
upon to succeed or to inherit. without specifying what deed it is, does not make the
! It may happen that the father, at the time of his service determinable & is thus void.
death, may have some debts to pay. Under the ! But a contract engaging a person to sing in his
rules of succession, these obligations have to be nightclub identifies the kind of deed to be
paid 1st to the creditors before the exact amount performed & is valid.
of the inheritance is determined & distributed. o A contract requiring an obligor to deliver a fruit is void.
! But, if the contract is to deliver a kind of fruit such
CASE: Blas v. Santos as a mango or guava, the contract is valid.
• Lesson: An agreement by a spouse to give his share in the conjugal • The fact that the quantity is not determinate shall not be an
property is not considered future inheritance & can be the object of obstacle to the existence of the contract, provided it is possible to
a contract. determine the same, without the need of a new contract between
• Facts: The wife agreed to give whatever her share in the conjugal the parties.
partnership property to her heirs once the husband dies o A contract which engages a person to supply all the ice
• Held: The agreement is not upon a future inheritance, & is valid. It which a restaurant needs is valid because the quantity of
is not an obligation or promise made by the maker to transmit ½ of ice is easily ascertainable without the need for a new
her share in the conjugal properties acquired with her husband, contract.
which properties are declared to be conjugal properties in the will
of the husband. CLASS SCENARIO
o The promise does not refer to any properties that the • Facts: A & B are brothers. A says, “I’ll pay you with my inheritance.”
maker would inherit upon the death of the husband. The • Answer: NOT ALLOWED.
document refers to existing properties which she will o Inheritance can be the object of the contract, but not
receive by operation of law on the death of her husband, future inheritance. So if your parent dies today, you can
because it is her share in the conjugal assets. waive your right to your share without need of writing.

Art. 1348. SECTION 3. – CAUSE OF CONTRACTS.

Impossible things or services cannot be the object of contracts.
Art. 1350. Cause Defined.
Impossible Things In onerous contracts the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other; in

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Article 1349 Liberality as cause in contracts of beneficence
Object of the Contract • The liberality of the benefactor is deemed cause only in those
• Object must be determinate or determinable contracts that are of pure beneficence, that is to say, contracts
• If the object is NOT DETERMINATE OR DETERMINABLE, the designed solely and exclusively to procure the welfare of the
contract is void beneficiary
• Phil. Long Distance Tel. Co. v. Jeburian
Example -Bonuses granted to employees to excite their zeal and efficiency,
1. If A promised to give B this (blank), it is clear that there can be with consequent benefit to the employer, do not constitute
no obligation here donation having liberality for a consideration
2. But if A sold to B the future (2006) harvest in A’s field for a
definite price, the contract is VALID

Article 1350
Bar Question
• If a particular piano is sold for P500,000, what is the object and
what is the cause?
1. According to Manresa:
• Seller: Object = Piano / Cause = Price
• Buyer: Object = Price / Cause = Piano
2. According to others:
• Seller: Object = Piano / Cause = Price
• Buyer: Object = Piano / Cause = delivery of the piano

Classification of Contracts as to Cause

• Onerous: the prestation or promise of a thing or service by the
other (e.g. contract of sale)
• Remuneratory: the past service or benefit which by itself is a
recoverable debt
• Gratuitous: cause is merely liability of the benefactor (e.g. pure
donation)
remuneratory ones, the service or benefit which is remunerated; & in the compromise was the mutual waiver & abandonment of
contracts of pure beneficence, the mere liberality of the benefactor. the parties of their claims against each other
3) Remuneratory Contracts - the cause is the service or benefit which
Cause is remunerated
• Essential or more proximate purpose which the contracting parties o When a doctor agreed to diagnose a patient, the cause for
have in view at the time of entering into the contract engaging the doctor is for him to look at the patient &
• May or may not be tangible diagnose him. The fee to be received by the doctor for his
• It can take different forms, such as a prestation or promise of a diagnosis is the cause of the contract as far as the doctor
thing or service by another. is concerned.
• It can be the giving of a sum of money, an object or even an 4) Contracts of Pure Beneficence - the mere liberality of the
expectation of profits from a subdivision project. benefactor is the cause of the contract; it does not involve any
material thing but rather it involves only the generosity of the
CASE: Dihiansan v. CA benefactor
• Lesson: o A scholarship contract given by a school where an indigent
will not pay anything for his education in the said school
• Facts:
has for its cause the liberality & generosity of the
o A corporation decided to sell its property along an avenue
benefactor-school
& gave the persons living near the said property a
preferential right to buy the same. One of the persons
Art. 1351. Motive Defined.
given such right, X, was approached by Y who requested
The particular motives of the parties in entering into a contract are different
that he be allowed to buy the property with a commitment
from the cause thereof.
to re-sell the same to the X who was originally given the
preferential right. X agreed and an agreement was signed
Motive
embodying this commitment.
o This scheme was done because, clearly, the corporation • Motive is different from cause.
will not sell the property to any other person except those o Cause is the essential reason for the contract
given a preferential right. Instead of re-selling to X, the Y o Motive is the particular reason for a contracting party which
sold it to another. It was contended that the contract does not affect the other party & which does not preclude
between X & Y who requested to buy the property was the existence of a different consideration
without consideration & therefore null & void. • Ex. There is a contract of sale of a valuable relic.
• Held: There was no lack of consideration—the consideration is the o Cause – payment of the purchase price on the part of the
preferential right of X to buy the property from the owner. The seller & the delivery of the thing sold on the part of the buyer
contract stipulated that Y would re-sell the property back to X. This o Motive - the seller was motivated by some expectation of
contract is the law between the parties. profit while the buyer was motivated to purchase the relic by
Kinds of Contracts the beauty & rarity of the relic.
1) Onerous Contracts – the cause is understood to be, for each ! The motivation of the parties is independent from
contracting party, the prestation or promise of a thing or service by the cause of the contract & therefore does NOT
the other form an essential part of it.
2) Reciprocal Contracts - the obligation or promise of each party is the
consideration for that of the other CASE: PNCC v. CA
o CASE: Republic vs. Cloribel - where a compromise • Lesson: As a general principle, the motive of a party in entering into
agreement designed to terminate the case between a contract does not affect the validity nor existence of the contract:
litigating parties to a suit was entered into, the cause of an exception is when the realization of such motive has been made
a condition upon which the contract is made to depend

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 • Facts: The lessee sought to release itself from paying rentals & latter that he would be unduly favored with a renewal of
from the whole contract itself; the lessee contended that the the Management Contract. Thus, it came to pass that by
purpose for which it entered the contract did not materialize transferring 60% of the shares in his company to
• Held: With regard to the non-materialization of the petitioner’s Romualdez, petitioner Enrique Razon was able to secure
particular purpose in entering into the contract of lease, i.e., to use an 8-year contract with respondent PPA & for 6 years
the leased premises as a site of a rock crushing plant, the same will before its cancellation benefit from the proceeds thereof.
not invalidate the contract. The cause in a contract of lease is the o He may be deemed to be a participant in the unlawful
use or enjoyment of a thing. purpose if, with knowledge thereof, he does anything which
facilitates the carrying out of such purpose
Cause = Motive o Elementary in the law of contracts is the principle that no
• There are certain situations where the cause is equated to the judicial action is necessary for the annulment of a void
motive—when it is clear that the motive predetermines the cause contract. Any such action would be merely declaratory.
Thus, it was well within the rights of PPA to unilaterally
CASE: E. Razon v. PPA cancel & treat as avoided the Management Contract & no
• Lesson: Motives may be regarded as cause when they arbitrariness may be attached to its exercise of this right.
predetermine the purpose of the contract
o In this case, both contracts are void CASE: Uy v. CA
• Facts: • Lesson: Where the motive stems from an implied condition of the
o The Management Contract under consideration was contract, & both parties knew of such motive & implication, the
executed by & between E. Razon, Inc. represented by its motive can also become synonymous with the cause.
President, Enrique Razon, & respondent PPA, represented • Facts: The National Housing Authority purchased certain lots &
by E.S. Baclig, Jr. thereafter cancelled the Deeds of Sale relative thereto considering
o At the petitioners’ own admission, E. Razon, Inc. was then that the lots turned out to be unsuitable for its housing project.
60%-controlled by Romualdez, with Razon nearly serving • Held: The dismissal was sustained against a claim for damages.
just as a “puppet”; Romualdez, as brother-in-law of then- o The cancellation was valid as it was based on the negation
President Marcos, was, by the Anti-Graft & Corruption Law, of the cause arising from the realization that the lands,
prohibited from intervening, directly or indirectly, in any which were the object of the sale, were not suitable for
transaction with the government. housing. For NHA, the cause was the acquisition of the
o The Management Contract is thus void for being against land. For the seller, the cause was to obtain the price. The
the law. motive of the NHA, which was known to the seller, was to
o E. Razon tried to escape liability by stating he was forced use said lands for housing.
by Romualdez to sell the shares to the latter, with no o It is clear that NHA would not have entered into the
monetary consideration. contract were the lands not suitable for housing. In other
• Held: While the general rule is that the causa of the contract must words, the quality of the land was an implied condition for
not be confused with the motives of the parties, this case squarely the NHA to enter into the contract. On the part of the NHA,
fits into the exception that the motives may be regarded as causa therefore, the motive was the cause for its being a party to
when it predetermines the purpose of the contract. the sale.
o For Romualdez, the motive was to be able to contract with
the government, which he was then prohibited by law from Art. 1352.
doing, & on Razon’s part, to be able to renew his nearly- Contracts without cause, or with unlawful cause, produce no effect
expired management contract. For it is scarcely disputable whatsoever. The cause is unlawful if it is contrary to law, morals, good
that Enrique Razon would not have transferred said shares customs, public order or public policy.
of stock to Romualdez without an assurance from the

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 Requisites for cause:
1. It must exist at the time the contract is entered into
2. It must be lawful
3. It must be true or real
Lack of Cause thereto to be paid unto the creditor” upon the termination
• If there is no cause, no contract is perfected, as there can be no of the agreement.
meeting of the minds. o The debtor failed to pay & a case was filed.
• This is also true if the cause is unlawful. o By way of summary judgment, decision was rendered
If there is no cause, o A contract to engage a party to steal is unlawful as it is
ordering the defendant-debtor to pay the principal amount
the contract is VOID against the law. of P10,000 & the additional amount of P6,000. The latter
o A contract between a husband & wife to have their amount was contested as being usurious.
respective paramours is contrary to morals. • Held: The Court ruled the additional P6,000 was valid as liquidated
o A contract to foment riots is contrary to public order. damages suffered by plaintiff.
o A contract waiving the right of an employee to receive what o The Usury Law was suspended
is due him under the law is contrary to public policy. o Under Art. 1354, in P6,000 agreement of the parties, “it is
presumed that it exists & is lawful, unless the debtor
Art. 1353. proves the contrary.”
The statement of a false cause in contracts shall render them void, if it o No evidentiary hearing having been held, it has to be
should not be proved that they were founded upon another cause which is concluded that defendants had not proven that the P6,000
true and lawful. obligation was illegal.

False Cause Art. 1355.

• Generally, a false cause in a contract makes the contract void. Except in cases specified by law, lesion or inadequacy of cause shall not
o A contract of sale, which states that the price of the object invalidate a contract, unless there has been fraud, mistake or undue
for sale is P500 when in fact no such price has been paid influence.
at all, is void.
• HOWEVER, when a contract, though stating a false consideration, CASE: Auyong Hian v. CTA
has in fact a real consideration, the contract is NOT void. • Lesson: Generally, an inadequate cause will not invalidate a
o If a contract is relatively simulated in terms of cause, it is contract, absent a showing that said cause is against the law or
VALID. obtained through fraud, mistake or undue influence.
o When a contract stating the consideration of a ball pen is • Facts: The contract involving tobacco was assailed as invalid due to
P1,000 but it is only sold for P500 which the seller inadequacy of price. X claimed that they should be P7M, but the
accepted, the contract is valid. contract between X & Y ‘s contract stipulated it was only P1.5M.
o At the least, the contract is a relatively simulated one. Yet, the invoice value of tax with the BIR is only P227K for tax
purposes.
Art. 1354. • Held: The appraisal was made with a competent appraiser; also, X,
Although the cause is not stated in the contracts, it is presumed that it there is now law that would apply in X’s case to address the
exists & is lawful, unless the debtor proves the contrary. inadequacy of the cause.

CASE: Liam v. Olympic Sawmill Co. CASE: Penaco v. Rueva

• Lesson: The debtor must produce evidence that a cause is not • Lesson: A valuable consideration, however small or nominal, if
stated in the contract; the law presumes that there is a valid cause. given or stipulated in good faith is, in the absence of fraud,
• Facts: sufficient. A stipulation in consideration of $1 is just as
o A loan of P10,000 was entered into &, subsequently, effectual a consideration as a larger sum stipulated for or paid.
another loan agreement was executed increasing the • Facts: The inadequacy of cause was invoked to invalidate the
original amount of the previous loan by P6,000 “to answer contract.
for attorney’s fees, legal interest & other cost incident
Lesion: inadequacy of cause, like insufficient price for a thing sold
147 | Katrina Gaw | Block C 2018 GR: Lesion or inadequacy of price does not invalidate a contract
Exception: fraud, mistake, or undue influence
 o X contends that the consideration is for the house only Art. 1356.
since the lot on which it is constructed is public land Contracts shall be obligatory, in whatever form they may have been entered
which they cannot sell, & in view of the inadequacy of into, provided all the essential requisites for their validity are present.
the price, the building alone having an assessed value However, when the law requires that a contract be in some form in order
of P1,500 & the land is too cheap for P5,000 that it may be valid or enforceable, or that a contract be proved in a certain
• Held: way, that requirement is absolute & indispensable. In such cases, the right
o Indeed, the lot on which the building sold a retro is of the parties stated in the following article cannot be exercised.
constructed is public land & X has no right to sell it.
What is sought to be transferred, however, is not the Forms of Contracts
ownership of the land, but the rights, interests & • Generally, forms aren’t that important for contracts
participation of X “as public land claimants thereof by o Certain contracts require certain forms to be enforceable
virtue of the decision of the Bureau of Lands,” which ! In such cases, the form becomes absolute &
rights could be waived, transferred or alienated. indispensible
! By its contract, X had undertaken to effect • In the matter of formalities, the PH system still follows:
legal transfer of all his rights over the lot to Y o Spanish Civil Code of 1889 &
a retro & his assigns upon the consolidation o “Ordamiento de Alcala” - upholding the spirit & intent of the
of the title over the building in the vendee, & parties over formalities
whether or not the herein Y is qualified to
acquire that land of the public domain Contracts Which Must Have Some Form:
claimed by X depends upon the Director of 1) Contracts which the law requires to be in some particular form
Lands. For this reason the land should be (writing) in order to make them valid & enforceable (solemn
raised in the administrative proceedings. contracts).
o The inadequacy of the price is not sufficient proof that o Non-observance renders the contract void & of no effect
the consideration of P1,000 was for the house alone. o Ex. Donation of immovable property (Art. 749) must be in a
The vendee a retro could not have possibly bought the public instrument so the donation is valid, i.e., existing or
house alone without securing from the vendors a retro binding.
a specific & fixed arrangement regarding the lot on o Donation of movables worth more than P5,000.00 which
which the house is built, otherwise, he could be must be in writing, “otherwise the donation shall be void”
ejected therefrom at the will of the vendors a retro. (Art. 748)
o Contracts to pay interest on loans (mutuum) that must be
CLASS SCENARIO: “expressly stipulated in writing” (Art. 1956)
• Facts: A issued a check worth P100,000 to B. According to B, it was o Agreements in Art. 1744, 1773, 1847 & 2134, Civil Code.
a check because A bought something from him. According to A, it 2) Contracts that the law requires to be proved by some writing
was a donation to B. (memorandum) of its terms, as in those covered by the old Statute
• Answer: A (the debtor) must prove his side. of Frauds, now Art. 1403(2) of the Civil Code.
o Non-compliance therewith will not permit, upon the
CLASS SCENARIO: objection of a party, the contract, although otherwise valid,
• Facts: I will buy this lot for 1 centavo. Is it valid? to be proved or enforced by action
• Answer: YES. IT is valid, not void. It could be rescinded, but it is still o Their existence generally not being provable by mere oral
valid. testimony (unless wholly or partly executed), these
contracts are exceptional in requiring a writing embodying
CHAPTER 3. FORMS OF CONTRACTS. the terms thereof for their enforceability by action in court.

When form is important:

1. For validity
148 | Katrina Gaw | Block C 2018 2. For enforceability
3. For convenience
 This Article only applies when form is needed only for convenience, not validity or enforceability
Before the parties may be compelled to execute the needed form, the contract should be:
1. Perfected
2. Enforceable under the Statute of Frauds

CASE: Dauden-Hernaez v. De Los Angeles • A party, who desires to have his contract reduced in the particular
• Lesson: A contract for an actress’ services for a movie are valid in form required by law, can file an action to compel the other party to
any form, as they are not required to be in a certain way comply with such form.
• Facts: A movie actress filed a suit to recover her compensation for • If the requirement of law is directory only & has no bearing validity
her services as a leading lady in 2 movies. The producers resisted or enforceability, the parties can enforce the contract &, at the
such claim on the ground that the contract was void as there was same time, demand that it be reduced in the form required by law.
no written agreement to the same.
• Held: SC ruled in favor of the actress. The contract between them is CASE: Zaide v. CA
not one of the exceptions to the general rule. • Lesson: An unregistered deed of sale is still valid.
• Facts: A deed of sale was so far defective as to render it
CASE: Cenido v. Apacionado unregistrable in the Registry of Property. It did not set forth the
• Lesson: Formalities intended for greater efficacy or convenience or name of the vendee’s husband & was for this reason refused
to bind third persons, if not done, would not adversely affect the registration by the Register of Deeds.
validity or enforceability of the contract between the contracting • Held: The contract is valid. The defect was unsubstantial & did not
parties themselves. invalidate the deed. The legal dispositions are clear. Though
• Facts: There is a written contract of sale of real property, not in a defective in form, the sale was valid; & the parties could compel
public instrument. each other to do what was needful to make the document of sale
• Held: Contract is valid; the requisites of a contract were proven. The registrable.
written contract of sale for real property is an example of a o If the agreement concerns “the sale of land or of an
formality, which must be in writing to bind 3rd persons. interest therein,” the law requires not only that “the same,
Nevertheless, it is enforceable & valid. or some note or memorandum thereof, be in writing, &
subscribed by the party charged” in order that it may be
CASE: Deloso v. Sandiganbayan enforceable by action, but also that the writing be in the
• Lesson: Leasing of property generally need not be reduced into form of a “public document.”
writing; it is valid when an oral contract is later written down.
• Facts: The contract was assailed as anomalous on the ground that CASE: Cenido v. Apacianado
it was originally made orally & then later reduced into writing. The • Lesson: Private conveyance of real property is valid, but must be
written information & the Sandiganbayan ruled that certain tractors registered to bind 3rd parties.
were given to lessees in a municipality “without any compensation • Facts: The petitioner is assailing the validity of a private conveyance
for their use.” However, all the witnesses testified that the lessees of real property denominated as “Pagpapatunay” as between the
were aware of the obligations & agreed to be bound to all the terms parties.
and conditions which the Municipality may impose. • Held: It may be valid, but the Court also said that the question as to
• Held: The contract is valid & the testimony of the witnesses was whether the it is sufficient to transfer & convey title to the land for
considered the oral contract. purposes of original registration or the issuance of a real estate tax
declaration in the new owner’s name is another matter altogether.
Art. 1357. For greater efficacy of the contract, convenience of the parties & to
If the law requires a document or other special form, as in the acts & bind 3rd persons, the new owner has the right to compel vendor or
contracts enumerated in the ff. article, the contracting parties may compel his heirs to execute the necessary document to properly convey the
each other to observe that form, once the contract has been perfected. This property.
right may be exercised simultaneously with the action upon the contract.
Art. 1358.
Compelling to Make a Written Contract The ff. must appear in a public document:

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 (1) Acts & contracts which have for their object the creation, • Public Instrument – execution = delivery
transmission, modification or extinguishment of real rights over • Private instrument – demand = delivery
immovable property; sales of real property or of an interest therein
are governed by Art. 1403, No. 2 & 1405; CLASS SCENARIO
(2) The cession, repudiation or renunciation of hereditary rights or of • Facts: A & B are brothers. When their dad died, A told B orally that
those of the conjugal partnership of gains; he waives his inheritance to B. Is this valid?
(3) The power to administer property, or any other power which has for • Answer: Yes. It is valid between the parties.
its object an act appearing or which should appear in a public o Can it be enforced as against 3rd parties?
document, or should prejudice a 3rd person; ! No, since it’s not in a public instrument.
(4) The cession of actions or rights proceeding from an act appearing o If A puts it in a piece of paper, it is valid, but still will have
in a public document. no efficacy because it’s a private, not public instrument.
All other contracts where the amount involved exceeds P500 must appear
in writing, even a private one. But sales of goods, chattels or things in action CHAPTER 4. REFORMATION OF INSTRUMENTS.
are governed by Art. 1403, No. 2 & 1405.
Art. 1359.
Effect of Non-Compliance Form of convenience
When, there having been a meeting of the minds of the parties to a
• The failure to put in a public or private document or writing the contract, their true intention is not expressed in the instrument purporting to
transactions or matters in Art. 1358 will NOT make the contract embody the agreement, by reason of mistake, fraud, inequitable conduct or
unenforceable or void, but it needs to be in writing to bind 3rd accident, one of the parties may ask for the reformation of the instrument to
persons. the end that such true intention may be expressed.
o Valid between parties even if not in public document If mistake, fraud, inequitable conduct, or accident has prevented a meeting
o Writing in a public instrument always gives GREATER of the minds of the parties, the proper remedy is not reformation of the
EFFICACY to a contract instrument but annulment of the contract.
• Ex. A contract of sale is a consensual contract, which means that
the sale is perfected by mere consent. No particular form is Reformation
required for its validity. • You can only reform INSTRUMENTS, not contracts
o HOWEVER, under Art. 1498, when the sale is made • Applies only to written contracts contained in an instrument or a
through a public instrument, the execution thereof is series of instruments
equivalent to the delivery of the thing. o When the terms of an agreement have been reduced to
! Delivery may either be actual (real) or writing, it is considered to be containing all the terms
constructive. agreed upon & there can be, between the parties & their
Electronic Commerce Act • Thus, delivery of a parcel of land may be successors-in-interest, no evidence of such terms other
• gives legal recognition to any kind of done by placing the vendee in control &
electronic data msg and document in than the contents of the written agreement
possession of the land (real) or by ! EXCEPT when the instrument fails to express the
the context of non-/commercial activities
embodying the sale in a public instrument true intent & agreement of the parties thereto, in
(constructive). which case, one of the parties may bring an action
for the reformation of the instrument to the end
Art. 1358(2) – CPG that such true intention may be expressed
• The Family Code has amended this provision in the Civil Code • Connotes a valid contract & meeting of the minds
• According to Family Code, you CANNOT waive your share of the CPG o The embodied contract just does not conform to the
during your marriage contract
• What is reformed is the instrument, not the contract itself, in order
Real & Personal Rights in Relation to Public & Private Documents for the instrument to express their real agreement
Reformation
150 | Katrina Gaw | Block C 2018 • where a written instrument already executed is allowed by law to be reformed
or construed to express to the real intention of the parties
 o Rationale: It would be inequitable to allow the enforcement • BUT if these factors prevent the meeting of the minds of the
of a written instrument which does not reflect the real parties, the remedy is annulment & not reformation
meeting of the minds. The rigor of legalistic rule that a • An action for reformation is a personal right (in personam) even
written instrument should be the final & inflexible criterion when real estate is involved
of the rights & obligations of the parties is thus tempered o JDNOM – in rem proceeding
to forestall the effect of mistake, fraud, inequitable o Legal Separation – in personam proceeding
conduct, or accident
• Prescriptive period - within 10 years from the time the cause of Action for Declaratory Relief
action accrues, since the suit is based on a written document. • The special civil action for reformation
o Cause of action – accrues from the knowledge of the The purpose is to secure an authoritative statement of the rights &
ground for reformation or from the date of the execution of obligations of the parties for their guidance in the enforcement
the instrument embodying the contract if the cause or thereof, or compliance therewith.
causes for reformation were already known at the time of o NOT to settle issues arising from an alleged breach thereof
the execution of the said instrument embodying the • It may be entertained only BEFORE the breach or violation of the
contract law or contract to which it refers
o CASE: Rosello-Bentir v. Leanda o Ex. An action for reformation instituted after the lessor
! Facts: It was contended that, at the time of the allegedly breached the contract with the lessee giving the
execution of the contract on May 5, 1968, there lessee a right of first refusal to buy the leased premises, &
was a verbal agreement between lessor & lessee which right of first refusal was the subject of the action for
that the lessee will be given the right of first reformation, cannot prosper
refusal should the lessor decide to sell his
property. The lessee only filed the case for Art. 1360.
reformation on May 15, 1992 to reflect such The principles of the general law on the reformation of instruments are
intention of the parties. hereby adopted insofar as they are not in conflict with the provisions of this
! Held: Action had prescribed already; the period Code.
began running on May 5, 1968.
• May be barred by laches Art. 1361. Mistake.
When a mutual mistake of the parties causes the failure of the instrument
2 Requisites for Reformation: to disclose their real agreement, said instruments may be reformed.
1) That the instrument embodying the contract does not reveal the
true intention of the parties Mistake as Cause for Reformation
2) The existence of an actual contract entered into by the parties • Mistake must be mutual & must generally involve factual matters.
*NOTE: Failure to prove these two matters may lead to the creation of o There must be a prior meeting of the minds between the
an entirely new contract not within the contemplation of the parties parties.
o There must have been a valid existing agreement to which
Reformation due to Mistake, Fraud, Inequitable Conduct or Accident the erroneous document can be made to match or
• Reformation may be cause by: harmonize.
o Mistake o The proof of mutual mistake MUST be of the clearest &
o Fraud most satisfactory character.
o Inequitable Conduct ! The amount of evidence necessary to impugn a
o Accident fact in a document is always more than a mere
• Burden of proof (onus probandi) is upon the party who insists that preponderance of evidence
the contract needs to be reformed.

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CASE: Gonzalez Mondragon v. Santos If one party was mistaken & the other acted fraudulently or inequitably in
• Lesson: Contracts solemnly & deliberately entered into may not be such a way that the instrument does not show their true intention, the
overturned by inconclusive proof or by reason of mistake of one of former may ask for the reformation of the instrument.
the parties to which the other in no way has contributed.
• Facts: One of the parties to a contract contended that there was a Unilateral Mistakes & Reformation
mistake relative to the documentation of the contract because the • If the mistake is unilateral, it must be shown that the other party
real intent of the parties was for the sale by the hectare & not for a has acted fraudulently or inequitably resulting in the drafting of a
sum in gross as stated in the document of sale, but there was no document which does not correspond to the actual contract agreed
convincing evidence that the mistake was mutual. upon by the parties.
• Held: Reformation denied. An alleged defect in a contract perfectly • Also, a party may have known the facts of the case but is ignorant
valid & binding on its face, must be conclusively proved. The validity of or has been mistaken as to the legal consequences of the same.
& fulfillment of contracts can not be left to the will of one of the • Generally, mistake or ignorance of the law is not a ground for
parties reformation because parties must, as a rule, submit to the legal
ramifications of their written contracts clearly pursuant to their true
CASE: Atilano v. Atilano intent and meaning.
• Lesson: Where a mutual mistake involves a real property, it is o But, where, on account of misplaced confidence, &
possible as in this case that the parties are in possession of the because of some artifice or deception fraudulently
correct properties, but mistakenly placed the wrong lots in the practiced upon him by the other party, a material part of
contract. BUT if they are both already in possession, there is no the contract was omitted from the writing, or he was
need for reformation. otherwise misled, equity will decree a reformation
• Facts: There was a mutual mistake in the designation of the
particular lands owned by 2 brothers; Brother 1 was supposed to Art. 1363.
get Lot A & Brother 2 was getting Lot E, according to the contract, When one party was mistaken & the other knew or believed that the
but Brother 1 lived in Lot E & Brother 2 in Lot A. They have both instrument did not state their real agreement, but concealed that fact from
lived in said lots for more than 30 years. the former, the instrument may be reformed.
• Held: The remedy for correcting property designation is reformation.
However, if the correct properties were already in the possession of Knowledge of One Party
the persons to whom they should rightfully belong, there was no • Knowledge by one party of the other’s mistake regarding the
more need for reformation because the parties actually already expression of the agreement is equivalent to mutual mistake.
implemented the true intention of the contract. • Reformation of the contract can be sought by the injured party.
o When one sells or buys real property i.e. a piece of land,
one sells or buys the property as he sees it, in its actual Art. 1364.
setting & by its physical metes and bounds, & not by the When through the ignorance, lack of skill, negligence or bad faith on the
mere lot number assigned to it in the certificate of title. part of the person drafting the instrument or of the clerk or typist, the
o It must be assumed that the brothers had seen the instrument does not express the true intention of the parties, the courts
properties & are each living where they intended to live. may order that the instrument be reformed.
o The parties have retained possession of their respective
properties conformably to the real intention of the parties Person Drafting the Instrument
to that sale, & all they should do is to execute mutual • There can be reformation if the person typing the instrument is not
deeds of conveyance. able to come up with a correct written document due to:
o Failure to follow instructions
Art.1362. o Ignorance, lack of skill, negligence or bad faith
• The mistake will be deemed to be mutual
neither is responsible for the mistake,
party
152 | Katrina Gaw | Block C 2018
either may
party ask for reformation
 • Hence, if the typist wrongly types the amount of consideration in a Void Agreement
written instrument embodying the contract of sale, the instrument • Reformation implies a prior agreement between the parties. If such
may be reformed to conform to the real consideration agreed upon. prior agreement is void, it cannot be given legal effect.
o An instrument embodying the void agreement cannot be
CASE: Huibonhoa v. CA made to conform to such void agreement which is non-
• Lesson: Where one party is aware of the oversight in the drafting of existent as to its legal effect.
the contract, there can be no reformation.
• Facts: There was a failure to prove what costly mistake allegedly Art. 1367.
suppressed the intention of the parties prompting the petitioner to
↑
When one of the parties has brought an action to enforce the instrument, he
admit that there was an oversight in the drafting of the contract by cannot subsequently ask for its reformation.
her counsel.
• Held: SC rejected the propriety of reformation because, by such A party seeking to enforce an agreement necessarily acknowledges that the
admission of the petitioner, oversight may not be attributed to all instrument embodies the contract intended by the parties and therefore, he
the parties to the contract & therefore, it cannot be considered a is estopped from filing a case for reformation alleging that the contract does
valid reason for the reformation of the same contract. not contain the true intent of the parties. basis:estoppel,
waiver, ratification
or

Art.1365. Art. 1368.

If 2 parties agree upon the mortgage or pledge of real or personal property, Reformation may be ordered at the instance of either party or his
but the instrument states that the property is sold absolutely or with a right successors in interest, if the mistake was mutual; otherwise, upon petition
of repurchase, reformation of the instrument is proper. of the injured party, or his heirs & assigns.
reformation else, the true intention t he would be
is
proper, or of
parties
CASE: Palileo v. Cosio Austrated. prevail for
True intention must complied the contract be
must with Persons with Legal Standing to Initiate Reformation
good faith
• Lesson: In reforming instruments, courts do not make another
in
• If the mistake is mutual, either party or his successor-in-interest
contract for the parties. They merely inquire into the intention of the may file the action
parties &, having found it, reform the written instrument in order • If the cause for reformation is on some other grounds, such as
that it may express the real intention of the parties. fraud or vitiated consent, the injured party or his heirs & assigns
• Facts: The parties to a contract intended that the house subject of are the only persons given legal standing to sue
the agreement was to be a collateral for a particular loan but the
agreement apparently states that the house was the subject of a Art. 1369.
conditional sale of residential building. The procedure for the reformation of instruments shall be governed by rules
• Held: Reformation allowed. of court to be promulgated by the Supreme Court.

Art. 1366. Procedure for Reformation

There shall be no reformation in the ff. cases: • Special civil action for declaratory relief
(1) Simple donations inter vivos wherein no condition is imposed; • Rule 63 of the 1997 New Rules of Civil Procedure (promulgated by
(2) Wills; SC) – in an action for declaratory relief, any person interested
(3) When the real agreement is void. under a deed, will, contract or other written instrument, or whose
rights are affected by a statute, executive order or regulation,
Wills & Donations ordinance or any other governmental regulation may, before breach
• Any disposition in a will or unconditional donation is an act of or violation thereof, bring an action in the appropriate Regional Trial
liberality. There is no prior drafting where the parties mutually agree Court to determine any question of construction or validity arising,
or have a meeting of the minds. & for the declaration of his rights & duties, thereunder.
Donation:conditional:reformation may be resorted

donation:reformation is much in order

Onerous very

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 o If before the final termination of the case, a breach or o Important task is really ascertaining the intent of the parties
violation of an instrument should take place, the action • The title of a contract does not necessarily determine its true nature
may thereupon be converted into an ordinary action, & the o Ex. The fact that a document is entitled “Exclusive Option to
parties shall be allowed to file such pleadings as may be Purchase” does not control where the text thereof shows it is a
contract to sell.
necessary or proper.
• The LITERAL MEANING of the stipulations must prevail.
o Thus, parties must always carefully examine the terms of a
contract thoroughly before signing the same
CLASS DISCUSSION
• Who can seek reformation? CASE: Conde v. CA
o Both parties & successors-in-interest, because mutual • Lesson: If the contract is plain & unequivocal in its terms, one is ordinarily
mistake is the general rule bound thereby, especially if it is in a language he understands. It is the duty
of every contracting party to know a contract’s contents before he signs it.
• Facts: The contract was written in the dialect known to X, & the
CHAPTER 5. INTERPRETATION OF CONTRACTS. encumbrance of the property subject of the contract was inscribed in the
title. However, X claims that he only signed the contract to show his non-
Art. 1370. If the terms of a contract are clear & leave no doubt upon the intention of objection to the repurchase constituting the lien & that he never received
the contracting parties, the literal meaning of its stipulations shall control. the amount of P165 from Y.
If the words appear to be contrary to the evident intention of the parties, the latter • Held: X must be held bound by the clear terms of the Memorandum of
shall prevail over the former. Repurchase that he signed, where he acknowledged the receipt of P165 &
assumed the obligation to maintain the repurchasers in peaceful
Purpose of Interpretation possession should they be “disturbed by other persons.” It was executed in
• Figuring out the intent of the parties the Visayan language which he understood.
• GENERALLY, contracts should not be interpreted; the words should be
applied as they are (LITERAL interpretation) CASE: Santi v. CA
o Interpretation is just for checking the proper way to implement a • Lesson: The word “extendable” does not mean automatic extension, but
contract where the parties have conflicting views extension subject to the will of the parties.
• It is the agreement of the parties which must be enforced • Facts: The stipulation reads, regarding the period of a contract of lease,
• As opposed to reformation that “said period of lease being extendable for another period of 20 years.”
o Interpretation - the determination of the meaning attached to the • Held: The words are clear that the lessor’s intention is not to automatically
words written or spoken which make the contract extend the lease contract but to give her time to think whether to extend
o Reformation - that remedy in equity by means of which a written the lease. If the intent of the parties were to provide for an automatic
instrument is made or construed so as to express or conform to extension of the lease contract, then they could have easily provided for a
the real intention of the parties straight 40 years contract instead of 20.
• Statutory construction can apply as a guide
o CASE: Finnan General Assurance Corporation v. CA CASE: Fernandez v. CA
! Facts: The insurance policy procured by the insured did • Lesson: Where a contract is renewable “at the option of both parties,” both
not include murder as incidents exempting the parties must assent to the renewal.
insurance company from liability in case of the death of • Facts: X & Y entered into a contract of lease, & agreed that the lease,
the inured. which was scheduled to end on 1 July 1983, would be “renewable for
! Held: SC applied “expresso unius exclusio alterius” —the another 10 years at the option of both parties under such terms,
mention of one thing implies the exclusion of another conditions & rental reasonable at that time” & that, upon expiration of the
thing–to make the insurance company pay the lease, whatever improvements were then existing thereon should
beneficiaries arising from the death of the insured. automatically belong to the lessor without having to pay the lessee.
• General rule: The literal meaning of the words in a contract control. o Before the end of the period, X informed Y that he no longer
o Look at the text, and then wanted to renew the lease. Y, on the other hand, wanted the
o Look at the words in context (not in isolation) lease renewed.

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 • Held: The parties should mutually agree on a new contract which may not • Interpreter must be placed in the same situation as the parties at the time
be the same as the original, under terms, conditions & rental reasonable at of the writing of the contract
that time. It follows therefore that Y cannot renew the lease by his
unilateral act of exercising his option. Simply stated, the option must be SCENARIO
mutually & consensually exercised, & not unilaterally as was erroneously Q: When a contract states that installments shall be paid monthly & the obligation is
done by Y. P1M, how much should the debtor pay per month?
A: This contract is vague; however, if the debtor pays equally every month & the
CASE: Buce v. CA creditor makes no objections, then the payments will be made by equal installments,
• Lesson: Where a contract does not stipulate who has the option to renew, due to the acts of the parties.
it is implied that it will be renewed by mutual agreement of both parties;
the phrase “subject to renewal” means the creation of an entirely new CASE: Pingol v. CA
contract. • Lesson: Those contemporaneous & subsequent events are demonstrative
• Facts: A contract of lease stipulated –“This lease shall be for a period of 15 acts which present the true intent of the parties, which control the
years effective June 1, 1979, subject to renewal for another 10 years, interpretation of their contract.
under the same terms & conditions.” • Facts:
o One party interpreted the provision as allowing automatic renewal o There was a dispute as to whether the purchase agreement was
while the other party contended that there was an option to a contract to sell or an absolute sale.
renew. o The contract reads: “the VENDEE agrees that in case of default in
• Held: There was nothing in the contract that showed that the parties the payment of the installments due the same shall earn a legal
intended automatic renewal. The fact that the lessee was allowed to make rate of interest, & to which the VENDOR likewise agrees.”
improvements on the property was not indicative of the intention to o Pursuant to the deed, the vendor delivered actual & constructive
automatically renew the lease. Since the contract was also unclear as to possession, the vendee constructed a building thereon, there was
who may exercise the option to renew, it should be interpreted in a way to submission to the Land Registry of the division done to the lands,
benefit both parties—thus, by mutual agreement. & the vendee continuously possessed the land until his death.
o “Renewal of a contract” - the death of the old one and the birth or • Held:
emergence of a new one. In such a case, there is an obligation to o A deed of sale is absolute in nature although denominated as a
execute a new lease contract for the additional term. “Deed of Conditional Sale” where there is no stipulation in the
o “Extension of the period of lease” - operates of its own force to deed that title to the property sold is reserved in the seller until
create an additional term. the full payment of the price, nor is there a stipulation giving the
vendor the right to unilaterally resolve the contract the moment
CASE: Universal Textile Mills, Inc. v. NLRC the buyer fails to pay within a fixed period.
• Lesson: A court may not make a new contract for the parties or rewrite o The acts of the parties, contemporaneous & subsequent to the
their contract under the guise of construction. In other words, the contract, clearly show that an absolute deed of sale was
interpretation or construction of a contract does not include its intended, by the parties & not a contract to sell.
modification or the creation of a new or different one. It must be construed o The contract here being one of absolute sale, the ownership of
and enforced according to the terms employed, and a court has no right to the subject lot was transferred to the buyer upon the actual and
interpret the agreement as meaning something different from what the constructive delivery thereof.
parties intended as expressed by the language they saw fit to employ. ! Constructive delivery - made upon the execution of the
• Facts: A quasi-judicial body (NLRC) misread & therefore misapplied the deed of sale
provisions of a collective bargaining agreement ! Actual delivery - when the private respondents took
• Held: The NLRC cannot remake a contract by eviscerating it, by deleting possession of and constructed a building on said lot
from it words placed there by the parties. No court, no interpreter and CASE: Rapanut v. CA
applier of a contract, has such a prerogative. • Facts:
o The controversial stipulation reads: “The VENDOR/MORTGAGEE
Art. 1371. In order to judge the intention of the contracting parties, their (X) is willing to sell said portion of her lot to the
contemporaneous & subsequent acts shall be principally considered. VENDEE/MORTGAGOR (Y) for a total price of P37,485 payable in
monthly installments of P500 with an interest of 10% per annum
Interpreting Through Acts of Parties on the remaining balance until the full amount is paid.”

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 o X’s view is that the 10% interest must be paid every year & are o X also wrote a letter explicitly asking for a reduction of the
not included in the payments already made. Y posits that the interest, thus proving there was such interest to be paid
P500 monthly installments include the 10% interest.
• Held: The Court looked at the subsequent acts of the parties. CASE: Javier v. CA
o The Deed of Conditional Sale with Mortgage provides for the date • Lesson: Where the parties to a contract have given it a practical
of payment of the P500 monthly installments, that is, not later construction by their conduct as by acts in partial performance, such
than the fifth of every month, & of the P1,000 semi-annual construction may be considered by the court in construing the con-tract,
installment, that is, on June 30 & Dec. 31. The Supplemental determining its meaning and ascertaining the mutual intention of the
Agreement was likewise specific that petitioner shall pay private parties at the time of contracting.
respondent “monthly installments, of P500 with an interest of • Facts: Petitioners contend that the deed of assignment conveyed to them
10% per annum on the remaining balance until the full amount is the shares of stocks of private respondent in Timber-wealth Corporation, as
paid. stated in the deed itself. Since said corporation never came into existence,
o A liberal interpretation of the contract in question is that at the no share of stocks was ever transferred to the petitioners, hence the said
end of each year, all the installment payments made shall be deed is null and void for lack of cause or consideration.
deducted from the principal obligation. The 10% interest on the • Held: SC ruled that the true cause or consideration of said deed was the
balance is then added to whatever remains of the principal. transfer of the forest concession of private respondent to petitioners for
Thereafter, petitioner shall pay the monthly installments on the P120,000; this was evident through their subsequent and
stipulated dates. In other words, the interests due are added to contemporaneous acts.
and paid like the remaining balance of the principal. Thus, it o Both parties knew the stocks did not yet exist
appears the parties intended that petitioner pay the monthly o Petitioners, after the execution of the deed of assignment,
installments at predetermined dates, until the full amount, assumed the operation of the logging concession of private
consisting of the purchase price & the interests on the balance, is respondent.
paid. o The statement of advances to respondent pre- pared by
o Additionally, the acts of X show the real intent of the contract— petitioners stated: “P55,186 advances to L.A. Tiro be applied to
though X could have rescinded the contract based on their succeeding shipments. Based on the agreement, we pay
stipulations due to failure to pay, he never made an attempt to do P10,000 after every shipment. We had only 2 shipments.”
so; X accepted Y’s payments religiously for 4 years without o Petitioners entered into a Forest Consolidation Agreement with
protest other holders of forest concessions on the strength of the
questioned deed of assignment.
CASE: Caltex v. IAC
• Facts: Reasonableness, Not Just Words
o X, a party to a deed of assignment, contended that the obligation • Analysis & construction should not be limited to the wIfords used in the
was limited only to the particular amount indicated in the deed of contact, as they may not accurately reflect the parties’ true intent.
assignment notwithstanding the fact that said deed provided that o Carefully consider the reasonableness of the result obtained
the assignee (Y) shall be entitled to all funds which the assignor • Parties have reasonable leeway in terms of their contractual agreement,
(X) may be entitled from a certain administrative decision in since contracts should not be harsh & iniquitous
payment of X’s outstanding obligation plus any applicable interest • Import of a word depends on context, considering the entire provision
charges on overdue account. X also claimed that the contract o If a provision demands mandatory application, even the word
meant that the obligation would be totally extinguished. “may” can be interpreted as “shall”
• Held: The subsequent act of the parties showed that they did not intend to o If it demands directory application, “shall” could mean “may” as
extinguish the obligation based on the contract alone. well
o After the execution of the Deed of Assignment on July 31, 1980,
petitioner continued to charge respondent with interest on its Art. 1372. However general the terms of a contract may be, they shall not be
overdue account up to Jan. 31, 1981, pursuant to the Deed of understood to comprehend things that are distinct & cases that are different from
Assignment which provides for X’s obligation for “applicable those upon which the parties intended to agree.
interest charges on overdue account.” The charges for interest
were made every month and not once did X question or take Generality of Terms
exception to the interest.

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 • Noscitur a sociis - general & unlimited terms are restrained and limited by Payments, including all its rights & benefits accruing out of the
particular terms that follow same, that ASSIGNOR might be entitled to, pursuant to the
• Ejusdem generis - a general term joined with a specific one will be deemed decision in BOE Case No. 80-123, in payment of ASSIGNOR’s
to include only things that are like, of the same genus as, the specific one outstanding obligation plus any applicable interest charges on
• Depending on the intent of the parties & reasonableness, the Court can overdue account & other avturbo fuel lifting & deliveries that
broaden or narrow down certain terms—they can even make the plural into ASSIGNOR may from time to time receive from the ASSIGNEE, &
singular. ASSIGNEE does hereby accepts such assignment in its favor.”
• Noscitur a sociis & ejusdem generis are opposites of one another • Held: It can be seen that the Deed of Assignment speaks of three (3)
obligations — (1) the outstanding obligation of P4M as of June 30, 1980;
Art. 1373. If some stipulation of any contract should admit of several meanings, it (2) the applicable interest charges on overdue accounts; & (3) the other
shall be understood as bearing that import which is most adequate to render it avturbo fuel lifting & deliveries that the Assignor may from time to time
effectual. receive from the Assignee. As aptly argued by Assignee, if it were the
intention of the parties to limit Assignor’s obligation to P4M, they should
CASE: Lao Lim v. CA have so stated & there would have been no need for them to qualify the
• Lesson: The compromise agreement should be understood as bearing that statement of said amount with the clause “as of June 30, 1980 plus any
import which is most adequate to render it effectual. Where the instrument applicable interest charges on overdue account” & the clause “& other
is susceptible of 2 interpretations, one which will make it invalid and illegal avturbo fuel lifting & deliveries that ASSIGNOR may from time to time
and another which will make it valid and legal, the latter interpretation receive from the ASSIGNEE.”
should be interpreted. o The stipulations of the contract must be interpreted together to
• Facts: The contract stipulated: “The term of the lease shall be renewed give the intention of the parties full effect.
every 3 years retroacting from Oct. 1979 to Oct. 1982; after which the
above-named rental shall be raised automatically by 20% every 3 years for Art. 1374. The various stipulations of a contract shall be interpreted together,
as long as defendant needed the premises & can meet and pay the said attributing to the doubtful ones that sense which may result from all of them taken
increases, the defendant to give notice of his intent to renew 60 days jointly.
before the expiration of the term.”
CASE: Ruiz v. Sheriff of Manila
• Held: Though the provision can be interpreted as involving a suspensive
potestative condition, said condition is subject to the word “renewed”— • Facts:
which means mutual agreement of the parties. The contract of lease o The contract states: “WHEREAS, the parties of the FIRST PART,
should be construed as providing for a definite period of 3 years; the jointly & severally, has/have applied for & jointly & severally
automatic increase of rentals by 20% will take effect only if the parties obtained from the party of the SECOND PART, a loan in the sum
decide to renew the lease of P15,000 to be amortized at the rate of not less than P300
including interest on unpaid balance, at the rate of 8% per
Disfavor of Interpretation Leading to Loss of Rights annum, said interest & capital amortization to be effected at the
end of each month. Failure to pay 2 successive monthly
• Construction of the terms of a contract leading to impairment or loss of
amortizations will cause this loan to be automatically due &
right is not favored
payable in its entirety. Notwithstanding the foregoing, this loan
o Conservation & preservation, not waiver, abandonment or
shall not run for more than 5 years.”
forfeiture of a right, is the rule.
o Appellants claim that despite the acceleration clause, they had 5
years from Jan. 18, 1961 within which to pay their mortgage debt
CASE: Caltex v. IAC
because of the phrase “notwithstanding the foregoing” in the last
• Lesson: Provisions in the contract must be given a construction as will give
sentence. Since the 5-year period had not yet expired when the
effect to them
mortgage was foreclosed, said foreclosure, they point out, was
• Facts: The contract states – premature.
o “ASSIGNOR has an outstanding obligation with ASSIGNEE of P4M
• Held: The entirety of the contract must be taken into account and not just
as of June 30, 1980, plus any applicable interest on overdue
the last 2 sentences. The acceleration clause & the last sentence must be
account
read together. It only means that while the appellants can pay as little as
o “In consideration of the foregoing premises, ASSIGNOR by virtue
P300/mo., as long as they do not fail to pay at least some sum per month—
of these presents, does hereby irrevocably assign & transfer unto
ASSIGNEE any & all funds &/or Refund of Special Fund

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 otherwise, after 2 months of failing to pay, the entire debt will become due sentence is again qualified by its succeeding portion which
& demandable. provides that “this mortgage shall stand as security for all
indebtedness of the mortgagor(s) &/or debtor(s), or any one of
CASE: Fernandez v. CA them, at any & all times outstanding . . .”
• Facts: The issue involved is the interpretation of the phrase “renewable for o The 4th par. states: “All such withdrawals, & payments, whether
another 10 years at the option of both parties under such terms & evidenced by promissory notes or otherwise, shall be secured by
conditions & rental reasonable at that time.” this mortgage” which manifestly shows that the parties principally
• Held: SC rejected the position that the word “renewable” means that the intended to constitute the real estate properties as continuing
lessee can unilaterally renew the contract & that therefore the phrase “at securities for additional advancements which the mortgagee may,
the option of the parties” was just a superfluity upon application, extend. It is well settled that mortgages given to
o The use of either “extendible” or “renewable” should be given secure future advancements or loans are valid & legal contracts,
NOT sacramental significance. The task of the ascertaining the & that the amounts named as consideration in said contracts do
intention of the contracting parties is to be discharged by looking not limit the amount for which the mortgage may stand as
to the words they used to project that intention in their contract, security if from the instrument the intent to secure future & other
all the words not just a particular word or two, & words in context indebtedness can be gathered.
not words standing alone.
CASE: Home Development Mutual Fund v. CA
CASE: China Banking Corp. CA • Facts: The consultancy agreement reads – “This agreement takes effect
• Facts: Petitioners aver that the additional loans extended in favor of private on Jan. 1, 1985 to Dec. 31, 1985: Provided, that either party who desires
respondents in excess of P6.5M & P3.5M— amounts respectively to terminate the contract may serve the other party a written notice at
stipulated in the July 1989 & Aug. 10, 1989 mortgage contracts — are also least 30 days in advance.”
secured by the same collaterals or real estate properties, citing as bases o It was the contention of the petitioner that the 1st clause was
the introductory paragraph of the mortgage contracts, as well as the independent from the 2nd clause such that after Dec. 31, 1985,
stipulations stated therein under the 1st & 2nd par. Respondents for their the contract is deemed terminated. Hence, the notice of
part argue that the additional loans are clean loans (without mortgages), termination given to the respondent 9 days after Dec. 31, 1985
relying on some isolated parts of the same introductory par. & 1st par. of was compliance in good faith with above-mentioned agreement.
the contracts, & also of the 3rd par. Petitioner likewise contended that, even before the expiration of
• Held: The parties’ intent is to constitute the real estate properties as the contract, it had served the respondent notice on Dec. 26,
continuing securities liable for future obligations beyond the amounts of 1985. It was shown however by concrete evidence that, since
P6.5M & P3.5M. 1981, the practice of the petitioner & the respondent was that,
o While the “whereas” clause provides: “The mortgagee has without renegotiation, the consultancy contract was continuously
granted, & may from time to time hereafter grant to the renewed so that the respondent continued to serve the
mortgagors credit facilities not exceeding P6.5M only” yet in the petitioner even after the expiry date with the renewal-contract
same clause it provides that “the mortgagee had required the signed in the first few months of the year.
mortgagor(s) to give collateral security for the payment of any & • Held: The petitioner failed to comply with the 30-day notice requirement
all obligations theretofore contracted/incurred & which may for terminating the contract & therefore, also considering the yearly
thereafter be contracted/incurred by the mortgagor(s) &/or practice of petitioner & respondent in the implementation & renewal of
debtor(s), or any one of them, in favor of the mortgagee,” their consultancy agreement, the said agreement must be deemed
qualifying the initial part & showing that the collaterals or real renewed. The 1st clause relating to the term of the contract must be
estate properties serve as securities for future obligations. The 1st construed together with the 2nd clause on the 30-day notice-requirement.
par., which ends with the clause, “the idea being to make this Thus, the 30-day notice should be given prior to the expiration date of the
deed a comprehensive & all embracing security that it is” contract on Dec. 31, 1985.
supports this qualification. o The requirements of contract as to notice — as to the time of
o The 2nd par. provides: “The mortgagee may take further advances giving, form & manner of service thereof — must be strictly
& all sums whatsoever advanced by the mortgagee shall be observed because in an obligation where a period is designated,
secured by this mortgagee;” & although it was stated that “the it is presumed to be for the benefit of both parties.
said credit shall extend to any account which shall, within the
said limit of P6.5M exclusive of interest,” this part of the 2nd

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 o The unilateral termination of the contract in question by the ! BUT they may NOT be used to contradict nor vary the
herein petitioners is violative of the principle of mutuality of plain meaning of the contract
contracts. o It can be used to explain what is doubtful - explains the meaning
& intention of the parties to a written/oral contract, which could
Art. 1375. Words which may have different significations shall be understood in that not be done without the aid of this extrinsic evidence
which is most in keeping with the nature & object of the contract. • An express contract is always admissible to supersede, vary or control, a
usage or custom; for the latter may always be waived at the will of the
NOTE: Usage or customs must always defer to intent of the parties. parties
o To do so would be like allowing presumptions & implications to
CASE: Pasay City Gov’t v. CFI Manila dictate the content of the formal & deliberate declaration of the
• Lesson: “In proportion” in divisible obligations implies paying a parties
performance bond that covers only a particular stage of the project,
whereas the word “to cover” implies that the whole amount remaining for Art. 1377. The interpretation of obscure words or stipulations in a contract shall not
the entire project is involved. favor the party who caused the obscurity.
• Facts:
o A compromise agreement said that the project was to be done in Ambiguous Words in a Contract
stages & that, in acc. with par. 1(B), the contractor was to submit • Words or stipulations that are susceptible to different interpretations
“a new performance bond in the amount required by pertinent causing ambiguity shall be construed against the person who chose to use
law, rules & regulations, in proportion to the remaining value/cost such ambiguous words or phrases.
of the unfinished work of the construction as per approved • This is based on the maxim verba accipiuntur fortius contra proferentem.
specifications.” • Contra proferentem rule – against the profferer; against the person who
o There was a dispute as to whether the amount of the drafted the contract
performance bond covered the whole unfinished project or only o If there is an ambiguity which all the other methods of
the next stage of work to be done construction have failed to resolve so that there are two
• Held: The parties to the compromise contemplated a divisible obligation alternative meanings to certain words, the court may construe
necessitating therefore a performance bond “in proportion” to the the words against the party who put forward the document & give
uncompleted work. effect to the meaning more favorable to the other party
o What is crucial in par. 1(B) are the words, “in proportion.” If the
parties really intended the legal rate of 20% performance bond to CASE: Capitol Insurance v. Sadong
refer to the whole unfinished work, then the provision should • Facts: There was an ambiguity as to the scope of the mortgage contract
have required the contractor to submit & file a new performance drafted by the lawyer of the insurance company which led to a
bond to cover the remaining value/cost of the unfinished work of corresponding ambiguity in its application.
the construction. • Held: If the mortgage contract as actually drafted seems to be vague or
o Using the words in proportion then significantly changed the ambiguous, the doubt must be resolved against the party whose lawyer
meaning of the paragraph to ultimately mean a performance prepared the document.
bond equal to 20% of the next stage of work to be done.
CASE: Nacu v. CA
Art. 1376. The usage or customs of the place shall be borne in mind in the • Facts: The dispute involved the application of a real estate mortgage to
interpretation of the ambiguities of a contract, & shall fill the omission of stipulations another loan, as the Bank intended the 1982 real estate mortgage to be
which are ordinarily established. applied to the 1983 loan transaction.
• Held: If the parties intended the 1982 real estate mortgage to apply to the
Contracts, Usage & Custom 1983 loan transaction, the Bank should have required petitioners to
• An express contract embodying in clear terms the intention of the parties execute the proper loan documents clearly constituting upon the same
CANNOT be varied nor contradicted by evidence of usage or custom. property a real estate mortgage. The Bank failed to do this & must
o Custom or usage is used to explain the meaning of words & therefore suffer the consequences.
phrases used when they do not necessarily exclude the operation
of such custom or usage Art. 1378. When it is absolutely impossible to settle doubts by the rules established
in the preceding articles, & the doubts refer to incidental circumstances of a

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gratuitous contract, the least transmission of rights & interests shall prevail. If the • Held: The parties likely intended the latter view of their stipulation on
contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interest, as it was the least onerous; for if the parties had intended that
interests. during the grace period, interest consisting of 12% per annum plus another
If the doubts are cast upon the principal object of the contract in such a way that it 12% per annum (equivalent to 1% per month), or a total of 24% per
cannot be known what may have been the intention or will of the parties, the annum, was payable, then they could have simply said so. Instead, the
contract shall be null and void. parties distinguished between interest at the rate of 12% per annum & the
1% a month penalty charge.
Rule of Thumb – Greater Reciprocity of Rights for Reciprocal Obligations
• Ex. Y (lessors) enters into a lease contract with X (lessee), where it states CASE: Gaite v. Fonacier
that all improvements made by X will be owned by Y. X built a swimming • Lesson: In onerous contracts, the rules of interpretation would incline the
pool, a monument of himself, & a tower. At the end of the lease, Y says, “All scale in favor of “the greater reciprocity of interest”
this is mine.” X, however, wants Y to pay for all the improvements. The • Facts: Gaite transferred to Fonacier all his goodwill, rights & interest on the
contract between them does not talk of payment. Does X have a right to be improvements he made on the area subject of a mining claim & the
paid? 24,000 tons of iron already extracted, all for a consideration of P75,000,
o Since the contract does not make a statement, use the rule of P10,000 of which was paid upon the signing of the agreement.
thumb in reciprocal obligations. Thus, X will be paid for the o According to par. B of the agreement, the balance of P65,000 will
improvements. be paid from & out of the first letter of credit covering the 1st
shipment of iron ores & of the first amount derived from the local
CASE: Central Philippine University v. CA sale of iron ore made by the Larap Mines & Smelting Co., Inc.
• Facts: The deed of donation to the donee required as a condition that the o There was a dispute as to whether par. B provides a suspensive
donee was to construct a medical school on the property donated. period or a suspensive condition
o The donee did not comply with the condition but contended that • Held: Greater reciprocity obtains if the buyer’s obligation is deemed to be
the donation should nevertheless be made effective considering actually existing, with only its maturity (due date) postponed or deferred,
the length of time the donor did not seek the enforcement of the than if such obligation were viewed as non-existent or not binding until the
condition ore was sold.
• Held: SC ruled in favor of the donor & revoked the donation for non- o The sale of the ore to Fonacier was a sale on credit, & not an
compliance. Since the deed of donation is basically a gratuitous one, aleatory contract where the transferor, Gaite, would assume the
doubts referring to incidental circumstances of such contract should be risk of not being paid at all; & that the previous sale or shipment
resolved in favor of the least transmission of rights & interests. of the ore was not a suspensive condition for the payment of the
balance of the agreed price, but was intended merely to fix the
CASE: Castelo v. CA future date of the payment.
• Lesson: If the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests Art. 1379. The principles of interpretation stated in Rule 123 (now Rule 130) of the
• Facts: Under the terms of the stipulation, respondent was bound, & Rules of Court shall likewise be observed in the construction of contracts.
entitled, to pay the balance of P163,408 on or before 31 Dec. 1982
without incurring any liability for any interest & penalty charges. During the Rule 130 of the New Rules of Court
grace period of 6 months, that is, from 1 Jan. 1983 to 30 June 1983, • Sec.10. Interpretation of a writing according to its legal meaning.
respondent vendee was given the right to pay the said balance or any o The language of a writing is to be interpreted according to the
portion that had remained unpaid provided that “interest at the rate of legal meaning it bears in the place of its execution, unless the
12% per annum shall be charged & 1% penalty charge shall be imposed on parties intended otherwise.
the remaining diminishing balance.” • Sec. 11. Instrument construed so as to give effect to all provisions.
o The question is whether, during the period of 1 Jan. 1983 to 30 o In the construction of an instrument where there are several
June 1983, 12% interest per annum plus 1% penalty charge a provisions or particulars, such a construction is, if possible, to be
month was payable “on the remaining diminishing balance,” or adopted as will give effect to all.
whether during the period, only 12% per annum interest was • Sec. 12. Interpretation according to intention; general and particular
payable while the 1% per month penalty charge would in addition provisions.
begin to accrue on any balance remaining unpaid as of 1 July o In the construction of an instrument, the intention of the parties
1983. is to be pursued; and when a general and a particular provision

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 are inconsistent, the latter is paramount to the former. So a
particular intent will control a general one that is inconsistent CHAPTER 6. RESCISSIBLE CONTRACTS
with it.
• Sec. 13. Interpretation according to circumstances. Art. 1380. Rescissible Contracts Defined.
o For the proper construction of an instrument, the circumstances Contracts validly agreed upon may be rescinded in the cases established by law.
under which it was made, including the situation of the subject
thereof & of the parties to it, may be shown, so that the judge Rescissible contracts cannot be
collaterally attacked -> file
an action rescind
to

may be placed in the position of those whose language he is to • Valid, but may be subsequently terminated on legal grounds
interpret. void
• Not principally premised on a breach of trust by the other party, but on
not
• Sec. 14. Peculiar signification of terms. some economic damage as a result of inequitable conduct by one party
o The terms of a writing are presumed to have been used in their • BUT, if the contract is in fraud of creditors, as well as completely simulated
primary & general acceptation, but evidence is admissible to because there is absolutely no consideration, it is void.
show that they have a local, technical, or otherwise peculiar
signification, & were so used & understood in the particular CASE: Dilag v. CA
instance, in which the agreement must be construed accordingly. • Lesson: A contract in fraud of creditors but completely simulated is
• Sec. 15. Written words control printed. considered void & not merely rescissible.
o When an instrument consists partly of written words & partly of a • Facts:
printed form, & the two are inconsistent, the former controls the o A deed of sale was entered into by the Dilag spouses & children
latter. in 1974 during the pendency of Civil Case No. 8714 in which
• Sec. 16. Experts and interpreters to be used in explaining certain writings. Arellano, a creditor, was seeking for a money judgment against
o When the characters in which an instrument is written are the spouses.
difficult to decipher, or the language is not understood by the o However, the Dilag spouses remained to be the registered owners
court, the evidence of persons skilled in deciphering the & executed a real deed of sale only in 1981, when title was
characters, or who understand the language, is admissible to actually transferred to the children. Furthermore, during the
declare the characters or the meaning of the language. entire period covered, the actual possessor of the land was
• Sec. 17. Of two constructions, which preferred. Diancin, who the spouses leased the property to. Diancin,
o When the terms of an agreement have been intended in a however, gave way & handed the property to Arellano when the
different sense by the different parties to it, that sense is to latter obtained the money judgment in 1979 in his favor. The
prevail against either party in which he supposed the other Dilag children are now asserting their rights over the disputed lot.
understood it • Held: The first deed of sale executed in 1974 was evidently fictitious & was
o When different construction of a provision are otherwise equally executed in fraud of creditor Arellano, as the children relied on the 1981
proper, that is to be taken which is the most favorable to the deed of sale to uphold their claim. The first deed of sale was, therefore,
party in whose favor the provision was made. void. The spouses continued to be the ones who executed acts of
• Sec. 18. Construction in favor of natural right. ownership, including renting out to Diancin.
o When an instrument is equally susceptible of 2 interpretations,
one in favor of natural right & the other against it, the former is to Art. 1191 (Rescinding Reciprocal Art. 1380 (Rescissible Contracts)
be adopted. Obligations)
• Sec. 19. Interpretation according to usage. Monetary damage is not essential There is damage to a party
o An instrument may be construed acc. to usage, in order to Based on breach of trust (sources of Financial, economic, quantifiable
determine its true character. liability) damage

“Invalid” Contracts Art. 1381. Cases of Rescissible Contracts.

• “Invalid” contract is an imprecise term The ff. contracts are rescissible:
• Specific names in designating defective contracts, namely: (1) Those which are entered into by guardians whenever the wards whom they
o Rescissible (Art. 1380, et seq.) represent suffer lesion by more than ¼ of the value of the things which are
o Voidable (Art. 1390, et seq.) the object thereof;
o Unenforceable (Art. 1403, et seq.) (2) Those agreed upon in representation of absentees, if the latter suffer the
o Void or inexistent (Art. 1409, et seq.) lesion stated in the preceding number;

161 | Katrina Gaw | Block C 2018

 his house X. When however the creditor
his creditor. sold
A to
To defraud
his credit, somebody A
lent enough money.
wanted collect
to

be rescinded, because here, the creditor

the house should not
sale of
A:the the
collect claim due him.
to
can

(3) Those undertaken in fraud of creditors, when the latter cannot in any other • In this case, there was no showing that the
manner collect the claim due them; land involved was the only property the
(4) Those which refer to things under litigation if they have been entered into debtors had which the creditor could pursue
by defendant without knowledge & approval of the litigants or of competent • The creditor also did not annotate the title to
judicial authority; protect his interests
(5) All other contracts specially declared by law to be subject to rescission.
CASE: Marsman Investment Ltd. v. Phil. Abaca Development Co. (PADCO)
Guardians & the Property of His Ward • Facts: The company involved, Marsman, waived the debts of the debtor
• Lesion – implies economic damage PADCO.
• When there is court approval, any action is VALID • Held: There can be no rescission, because the phrase “in fraud of
o Any act of ownership or disposition undertaken by the guardian creditors” necessarily refers to actual creditors of the debtor.
on behalf of his ward without court approval is void o Until & unless those releases are set aside, the corporation
• Rescissible – when guardian performs acts of administration (e.g. buying ceased to be creditors of the transferor PADC0, & were thereafter
materials for fixing the roof) which were not actually necessary, making deprived of any interest in assailing the validity of the transfer of
such purchase useless, & the lesion suffered is more than ¼ of the value its properties
of the things which are the object of the contract o Only actual creditors can ask for the rescission of the conveyance
made by their debtors in favor of strangers
Absentees
• The absence of a person may be declared: Things Under Litigation
o In 2 years - without any news about the absentee or since the • Rescissible if they have been entered into by the defendant without the
receipt of the last news knowledge & approval of the litigants or of competent judicial authority.
o In 5 years - in case the absentee has left a person in charge of o Ex. In a replevin suit where plaintiff seeks to recover personal
the administration of his property property from the defendant, the latter, during the pendency of
• When a person disappears from his domicile, his whereabouts being the suit, cannot sell in bad faith the property being litigated to any
unknown, the judge, at the instance of an interested party, relative or 3rd person. If he does & the transferee also acts in bad faith, the
friend, can appoint a person to represent him when necessary contract is rescissible
o Administrator or representative – manages the properties of the • CASE: Litonjua v. LR Corporation
absentee o Lesson: Right of first refusal is an example of a rescissible
• Same rules governing guardians govern administrators contract.
o Facts: The creditor lent the money to the debtor who, in turn,
Contracts in Fraud of Creditors collateralized his property to secure the loan.
• When a contract is entered into in bad faith by the parties, purposely to o Held: The failure of the debtor to recognize the stipulated right of
Accion Pauliana first refusal contained in the loan-mortgage agreement in favor of
evade due obligations in favor of creditors who have no other way to collect
-remedy for their debts the creditor makes any sale of the property to a 3rd person
• CASE: Bobis v. Provincial Sheriff of Camarines Norte rescissible at the instance of the creditor.
fraudulent ! Right of first refusal - in the event debtor decides to sell
o Facts: It was contested that the sale in this case was fraudulent
alienation due to inadequate price. his property, he must first offer the same to the creditor
o Held: There was no proof that the parties to the contract entered first
real transfer of ! The consideration for the loan-mortgage includes the
into the obligation to defraud the creditor. Fraud is not presumed.
-

3rd
property toa
It must be proved by clear preponderance of evidence. There consideration for the right of first refusal
that
person,
two
must be a showing of all these requisites concurring: ! To deprive the creditor of this right of first refusal will
was meant
to
1) Both contracting parties acting maliciously & with fraud prejudice the creditor in his substantial interests to be
defraud the 2) Their purpose is to prejudice creditors able to own the property.
creditors,
so it's
3) The creditors are deprived by the transaction of all ! A contract of sale entered into in violation of a right of
transfer means by which they may effect collection of their first refusal of another person, while valid, is rescissible
a valid
claims.

Before
* a creditor prior the
to alienation can file an action rescind,
to his credit
due
mustalready be and demandable t he
at
162 | Katrina Gaw | Block C 2018
the filing of Accion Pauliana
time of
Art. 1382. Payments made in a state of insolvency for obligations to whose 3)
The failure of the sheriff to enforce & satisfy the judgment of the
fulfillment the debtor could not be compelled at the time they were affected, are also court.
rescissible. 4) The creditor has exhausted the property of the debtor.
• CASE: Goquilay v. Sycip
Insolvent Debtor refers to contracts thatare due (suspensive condition)
yet
not
o The fraud charged not being one used to obtain a party’s consent
• A debtor whose liabilities already exceed his assets and who can barely pay to a contract (i.e., not deceit or dolus in contrahendo), if there is
off his debts fraud at all, it can only be a fraud of creditors that gives rise to a
• If such debtor pays off a creditor whose credit has not yet become due, rescission of the offending contract.
that payment can be rescinded. o If there is no allegation, or evidence, that Goquilay cannot obtain
o Prior judicial declaration of insolvency of the debtor NOT reparation from the heirs of the deceased, the present suit to
necessary rescind is not maintainable
• CASE: De La Paz vs. Garcia ! EVEN IF fraud actually did exist
o Facts: The transfer of property was made after an insolvency
proceeding was filed with the competent court, and such transfer Art. 1384. Rescission shall be only to the extent necessary to cover the damages
was also claimed as in fraud of creditors. caused.
o Held: The transfer was not rescissible under the Civil Code but
void under the Insolvency Law. Partial Rescission only the creditor who has asked for rescission
• Since rescission presupposes a valid contract, it need not be rescinded
Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when totally
the party suffering damage has no other legal means to obtain reparation for the • Remedy shall be only up to the extent necessary to cover the damages
same. caused.
o Ex. A is indebted to X for P5,000 &, to defraud X, A transfers his 2
Cause of Action for Rescission only subsidiary and may only be availed by injured party houses, each worth P5,000, to B who is also in bad faith.
• Proper & direct action filed for that purpose & not on a mere motion Rescission can be had only with respect to 1 house worth P5,000
incidental to another case (no collateral attack allowed) because it is only up to this amount that X has been damaged.
• Cannot be summary proceeding; it must be full-blown trial
o Cannot be done by mere motion of defender Art. 1385. Rescission creates the obligation to return the things which were the
• Rescission – a relief the law grants on the premise that the contract is object of the contract, together with their fruits, & the price with its interest;
valid, for the protection of one of the contracting parties & 3rd persons from consequently, it can be carried out only when he who demands rescission can return
all injury & damage the contract may cause, or to protect some whatever he may be obliged to restore.
incompatible & preferential right created by the contract. Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of 3rd persons who did not act in bad faith.
Last Remedy In this case, indemnity for damages may be demanded from the person causing the
• If there are other means to claim reparation, such other means must be loss.
availed of first
• Accion pauliana (a separate, independent action) is a last resort; even filing Restitution Following Rescission
court cases must first be undertaken • Parties shall be placed in the same position where they were before they
o When implementation of decision of court case fails, one can entered into the assailed contract.
rescind o Objective: To restore the parties to their original position
• The date of the decision of the trial court is immaterial. • RETURN: The object subject of the rescissible contract + fruits or interest,
o The credit of the plaintiff antedates that of the fraudulent if any
alienation by the debtor of his property. • If the object of the contract cannot be restored because of loss, damages
o The decision of the trial court against the debtor will retroact to may be claimed from the person responsible for the loss.
the time when the debtor became indebted to the creditor. o A party cannot rescind & at the same time retain the
• Requisites on an action for rescission: consideration, or a part of the consideration. One cannot have
1) A judgment; the benefits of rescission without assuming its burdens.
2) The issuance by the trial court of a writ of execution for the • HOWEVER, if object is with person in good faith, there can be no restitution,
satisfaction of the judgment; & only damages from the party who caused the controversy
before action for rescission can be brought:
Requisites
return what has been received
163 | Katrina Gaw | Block C 2018 able to
Plaintiff be
must
faith
good
.
in
in the legal possession of 3rd person
is n ot
2. Object other legal remedy
no
3.
be
Must
within proper prescriptive
period
be
must brought
4. Action
 If
sold of land in fraud As
of creditors. B took legal possession. no other means
A a
piece be rescinded?
the sale B
to

found the
exact
to
satisfaction the
of credits owing the creditors, may
are
the possession
in good faith, rescission take
can't place because the of
object the is
contract legally in

.If B was

who did n oac

t t in bad faith
of a 3rd person
faith, rescission is proper
B
If was in bad
2.

oEx. If a father, with the intent to defraud his creditors, sold the If the debts are not yet due, it shall be presumed
!
property to his son for a valuable consideration but below the fair fraudulent because the only requirements of the law are
market value of the same, such a sale is valid & not even that the debts are contracted prior to the donation, &
rescissible if the son was without any knowledge of the ulterior that there is no reservation of sufficient property to pay
motive of his father to defraud his creditors. all debts contract before the donation. The maturity of
! Mere inadequacy of price does not invalidate a contract. the debts is not a requirement.
! For the son therefore the consideration can still be ! The presumption can be controverted by convincing
considered a fair price. In short, the son was clearly in evidence that the donation was not in fraud of creditors.
good faith and therefore the contract of sale cannot be • When alienation by onerous title has been made “by persons against
rescinded. whom some judgment has been rendered in any instance or some writ of
• Good faith is always presumed unless contrary evidence is adduced attachment has been issued.”
o Purchaser in good faith - one who buys the property of another o The presumption can be rebutted by convincing evidence to the
without notice that someone else has a right or interest in such a contrary.
property & pays a full & fair price at the time of the purchase or o An alienation made during the pendency of a suit is not enough.
before he has notice of the claim or interest of some other person There must already be a decision or a writ of attachment.
in the property o Ex. A is able to obtain a writ of attachment against debtor B. The
attachment effectively places his property in Mandaluyong under
Art. 1386. Rescission referred to in Nos. 1 & 2 of Art. 1381 shall not take place with the custody of the court so that, in the event A wins the case,
respect to contracts approved by the courts. such property, if necessary, can be sold to pay the judgment debt.
Approval by the courts implies that the parties were given their day in court to justify ! Subsequently B sells his property in Laguna to Z. There
to the court the necessity & reasonableness of the contract to be entered into. BEFOREjudgment is a presumption of a fraudulent alienation even if the
Hence, once judicially approved, such contract cannot anymore be the subject of Laguna property is not the subject of the attachment.
rescission. :xfraud
• Attachment need not refer to the property
alienated.
Court Approval of Contracts AFTER judgment ! A can seek the rescission of the sale by B to Z of the
Implies that the parties were given their day in court to justify to the court property in Laguna.
-- fraud
•
the necessity and reasonableness of the contract to be entered into. ! Also, if a decision has been rendered against B in favor
• Once judicially approved, such contract cannot be the subject of rescission. of another creditor X, & B sells the property in Laguna to
M, there is also a presumption of fraudulent
Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous transaction, & A can file a case to rescind the sale even
title are presumed to have been entered into in fraud of creditors, when the donor if the decision has not been obtained by him but by X.
did not reserve sufficient property to pay all debts contracted before the donation.
Alienations by onerous title are also presumed fraudulent when made by persons CASE: Provincial Sheriff of Pampanga v. CA
against whom some judgment has been rendered in any instance or some writ of ! Facts:
attachment has been issued. The decision or attachment need not refer to the o An action for recovery was filed by X, Y & Z against B & C.
property alienated, & need not have been obtained by the party seeking the o At the same time, B was a furniture dealer under the Modern
rescission. Furniture Store, which burned down, together with its contents.
In addition to these presumptions, the design to defraud creditors may be proved in ! As a result, B surrendered his license to operate the
any other manner recognized by the law of evidence. store.
! B’s brother, D, put up a new store on the same site, also
Rebuttable Presumptions of Art. 1387 called Modern Furniture Store
• Presumptions can only exist from facts or a set of facts. • D secured new license & privilege tax for the
o Ex. B is indebted to D for P10,000, E for P7,000, & F for store
P13,000. All of the debts are due. B has money in the bank in the • On the same date of payment of tax, B verbally
amount of P60,000. B donates P55,000 to X. transferred Modern Furniture Store to his
Gratuitous ! The donation is presumed to be fraudulent as he has brother D
Alienation
not reserved sufficient property to pay all debts o The trial court rendered judgment against B & C, affirmed by CA.
contracted before the donation.

164 | Katrina Gaw | Block C 2018

 for rescission:4
Prescriptive period yrs of
from termination incapacity
EXCEPT:persons
under guardianship- 4 yrs
domicile is known
4 yrs from the time
absentees
-

! A writ of execution was issued; the Provincial Sheriff • NOTE: In all cases, aggrieved party must have unsuccessfully exhausted all
levied pieces of furniture found in Modern Furniture possible remedies to enforce the obligation or to recover what has been
Store lost
! D filed a 3rd-party claim with the sheriff, saying the • NOTE: Another term for the action to rescind contracts made in favor of
property did not belong to B, but to himself creditors (accion pauliana)
o D filed a case to be declared the owner of the furniture levied & 1) Those under guardianship - from the time the incapacity terminates & the
damages against X, Y & Z plus the sheriff, & a writ of preliminary incapacity aggrieved party has unsuccessfully exhausted all other legal remedies.
injunction to stop the sale terminates o Ex. For a minor, the period begins from the time he reaches 18
! Held: Art. 1387 applies only when there has in fact been an alienation or years old & has unsuccessfully exhausted all legal remedies
transfer, whether gratuitously or by onerous title 2) Absentees - From the time learns of the contract & said absentee has
o D’s store is entirely new & different from his brother B’s, as D’s unsuccessfully exhausted all other legal remedies
store had completely new content despite the same name & learns o Domicile of natural persons - place of habitual residence
style, since B’s things were burned down contract o Judicial persons - place where their legal representative is
o There was no transfer, as a matter of fact, thus, there was no established or where they exercise their principal function
actual fraud—D owns the properties in question 3) In fraud of creditors - From the time of the discovery of the fraud & after he
discovery has unsuccessfully exhausted all other legal remedies
Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, 4) Contracts entered into without the knowledge & approval of the litigants or
shall indemnify the latter for damages suffered by them on account of the alienation, knowledge
of competent judicial authority - from the time of knowledge of the
of transactio
whenever, due to any cause, it should be impossible for him to return them. transaction & unsuccessful exhaustion of all other legal remedies
If there are 2 or more alienations, the 1st acquirer shall be liable 1st, & so on
successively. CHAPTER 7. VOIDABLE CONTRACTS.

Bad Faith Acquirer of Property Alienated in Fraud of Creditors Art. 1390.

• Liable to the creditor for damages, if it should be impossible for the The ff. contracts are voidable or annullable, even though there may have been no
transferee to return the subject property. damage to the contracting parties:
o The knowledge of the evasive & fraudulent designs of the debtor (1) Those where one of the parties is incapable of giving consent to a contract;
makes the said transferee’s acquisition tainted with bad faith. (2) Those where the consent is vitiated by mistake, violence, intimidation,
• If the transferee in bad faith transfers the property to a subsequent buyer undue influence or fraud.
who is likewise in bad faith, the latter shall have the obligation to return These contracts are binding, unless they are annulled by a proper action in court.
said property if it is still possible to do so. If not, he shall be liable for They are susceptible of ratification.
damages.
o However, if such buyer is in good faith, his purchase is valid, Voidable Contracts -> not void ab initio
making it impossible for the 1st transferee to return the property, • Valid until annulled
in which case such 1st transferee shall be liable for damages. • Any defect or infirmity causing its annullable nature can be cured by the
party aggrieved or injured by ratification
SCENARIO • Effects of annulment operate prospectively
Q: A is the creditor of B. B mortgaged a property for the debt he owed A. B did not o Do NOT retroact to the time the contract was made
pay, so A tried to foreclose on the property of B. B, however, had already sold the • Grounds enumerated are already explained under Art. 1327-1344.
property, back when he had not yet received the summons for foreclosure. Is B guilty • Damage need not exist.
of fraud?
A: No. There is no writ of attachment or judgment yet. Art. 1391. Prescriptive Periods for Annulment.
The action for annulment shall be brought within 4 years.
Art. 1389. The action to claim rescission must be commenced within 4 years. This period shall begin:
For persons under guardianship & for absentees, the period of 4 years shall not In cases of intimidation, violence or undue influence, from the time the defect of the
begin until the termination of the former’s incapacity, or until the domicile of the consent ceases.
latter is known. In case of mistake or fraud, from the time of the discovery of the same.
And when the action refers to contracts entered into by minors or other
Different Grounds & Beginning of Cause of Action incapacitated persons, from the time the guardianship ceases.

165 | Katrina Gaw | Block C 2018

 action has prescribed, the contract
prescription:if
the can
Effect
of
be aside
set
no
longer

! In voidable contracts, judicial demand is necessary to

Start of Periods interrupt the period
1. Intimidation, violence or undue influence (IVU) – from the time the defect
of the consent ceases CASE: Mialilhe v. CA
o Ex. B wants to lease his property to A. • Lesson: For intimidation & force, the period begins 4 years from the time
! He coerces A to enter into said lease contract by continually the intimidation ceases, & this period is not stopped by extrajudicial
threatening A with serious bodily injury. demand; one must go immediately to the courts
• A is excused from not filing a case for annulment while • Facts:
the threat is still existing o X claimed that, during the Marcos era, he was intimidated &
! If B finally reforms & stops the threats, the 4-year period for forced to enter into a contract with DBP, a government bank, that
A to annul the contract will commence from the cessation of led to the forced conveyance of his property to DBP
the threat o X made several extrajudicial demands for the return of his
o CASE: Rodriguez v. Rodriguez property
! Facts: X filed a case for annulment against Y on the ground o X filed suit to recover the property on March 23, 1990
of duress, 28 years after the intimidation is claimed to have • Held: Action has prescribed. Marcos left the Philippines on Feb. 24, 1986;
occurred, & 9 years after Y died. this X should have filed suit on or before Feb. 24, 1990.
! Action is already barred by prescription. o Since there had been no annulment of the contract yet, there was
2. Mistake or fraud – from the time of the discovery of the same no determinate duty for DBP to heed the demand to reconvey
o Ex. A, an expert jeweler, induces B in 1990 to buy a ring, knowingly
misrepresenting to B that it was made in diamond when it was made Art. 1392.
only of crystal. Ratification extinguishes the action to annul a voidable contract.
! If B discovers the fraud in 1997, the 4-year period shall start
only from 1997. Art. 1393.
3. Minors or other incapacitated persons – from the time the guardianship Ratification may be effected expressly or tacitly. It is understood that there is a tacit
ceases ratification if, with knowledge of the reason which renders the contract voidable &
o Ex. B is A’s guardian. such reason having ceased, the person who has a right to invoke it should execute
! During A’s minority, though obtaining a court order to sell the an act which necessary implies an intention to waive his right.
property of his ward, B fraudulently transferred ‘s property to
a 3rd party. Ratification
! A cannot take action yet because B is the one taking charge • The act of curing the defect which made the contract annullable
of his affairs. However, A must file a case against B within 4 • Ex. If A is coerced by B to lease B’s property.
years from the time: o Express ratification –After B stops the coercion, A writes a letter
o A reaches the age of majority, &/or to B stating that A will continue the lease.
o The guardianship has ceased o Tacit ratification – After B stops, A willingly & continuously pays
the rentals for the subject leased premises to be able to live in
Extrajudicial Demand the same
• Generally, extrajudicial demand of creditor shall interrupt the running of o In both cases, if A files an action to annul the agreement based
the prescriptive period on force, it will not prosper even if it is within the 4 years.
o HOWEVER, this only applies to a determinate conduct that can be
demanded CASE: Francisco v. GSIS
• If a contract of sale is alleged as voidable, & aggrieved party who was • Lesson: There can be no ratification by a corporation of acts performed by
coerced or fooled (creditor-seller) makes an extrajudicial demand for the an officer if he has not been given apparent authority by the corporation, or
reconveyance of the property prior to the filing of the suit, the prescriptive if his acts are not later validated by the corporation.
period is NOT interrupted • Facts:
! Reason: a voidable contract is valid until annulled by o X, the plaintiff, sent a letter of compromise to GSIS, which GSIS
the courts; debtor-buyer thus has no obligation to acede validly accepted.
to a demand until the courts annul it of ratification:
Effects of ratification: Requisites
must be voidable for the
Contract
know the
1. reason

Action
annul
to
is extinguished Person ratifying
must
1. 2.
voidable
cleansed its defect being
contract
166 | Katrina Gaw | Block C 2018
of
2. is
Contract exist
not
must
the beginning 3. Cause
from be made expressly
4 ratification must

5. Person ratifying
be
must the injured party
 ! The terms of the offer were clear, & over the signature • Ex. If an insane person entered into a contract with a carpenter to repair
of GSIS’s general manager, X was telegraphically the roof of his house, this contract can be annulled, as it was entered into
informed that her proposal was accepted. by an incapacitated person.
! It was sent by the GSIS secretary & the manager never o The guardian can make an express or tacit ratification of the
disowned the same. repair, especially if it redounds to the benefit of the ward
o In a letter remitting the payment of P30,000 advanced by X’s
father, X quoted verbatim the telegraph of acceptance. Art. 1395.
o This was in itself notice to the corporation of the terms of the Ratification does not require the conformity of the contracting party who has no right
allegedly unauthorized telegram. Notwithstanding this notice, to bring the action for annulment.
GSIS pocketed the amount and kept silent about the telegram.
• Held: The Court found sufficient evidence of apparent authority through the Ratification as a Unilateral Act
conduct & actuations of the corporations concerned. This silence, taken • Generally done by the injured party, not by the party causing injury
together with the unconditional acceptance of 3 other subsequent • The consent of the injuring party is not required because such party
remittances from plaintiff, constitutes a binding ratification of the original normally desires the effectivity of the contract anyway from its inception
agreement.
Art. 1396.
CASE: Liquidators v. Kalaw Ratification cleanses the contract from all its defects from the moment it was
• Lesson: The apparent authority of the one in a supposedly annullable constituted.
contract will serve as a barrier to further corporate action later, even if the
by-laws of a corporation require a different process. Effects of Ratification rights of innocent3rd persons not
must be prejudiced
• Facts: • Transforms the contract completely as one without infirmity
o Kalaw entered into a contract with NACOCO with only the general • Cures the defect which initially made the contract voidable
maanger’s consent & without prior board approval. • Retroacts to the day when the contract was entered into
o The practice of NACOCO has been to allow the general manager
to negotiate & execute contracts for & in NACOCO’s behalf Art. 1397.
without prior board approval. The action for the annulment of contracts may be instituted against all who are
o The by-laws, however, required the board to give their stamp of thereby obliged principally or subsidiarily. However, persons who are capable cannot
prior approval in all corporate acts. allege the incapacity of those with whom they contracted; nor can those who exerted
• Held: The Kalaw contracts are valid corporate acts, because the board intimidation, violence, or undue influence, or employed fraud, or caused mistake
itself, by its acts and through acquiescence, practically laid aside the by- base their action upon these laws of the contract.
law requirement of prior approval.
Parties in Annulment
Tacit Ratification • Strangers to a contract cannot sue either or both of the contracting parties
Ex.A
minor bought 1) Person who has the right to invoke ratification has knowledge of the reason to annul & set it aside.
which renders the contract voidable
but the
sold same,
land,
21
after reaching
yrs old; o The existence of an interest in a particular contract that is the
2) The reason has ceased basis of one’s right to sue for nullification
by
voluntary performance 3) Person executes an act which necessarily implies an intention to waive his • Art. 1311: Contracts take effect only between the parties, their assigns and
ninivanan areen right heirs, except in cases:
o Where the rights and obligations arising from the contract are not
him
to

Art. 1394. transmissible by their nature, or

Ratification may be effected by the guardian of the incapacitated person. o By stipulation or
o By provision of law.
Guardian & Ratification The heir is not liable beyond the value of the property he received from the
• Guardian –administers the person & properties of the ward decedent.
o Must see to it that they are protection • EXCEPTION (Ibañez v. HSBC, as explained in Malabanan v. Gaw Ching): He
o Everything undertaken affecting the ward is for the latter’s best who is not the party obligated principally or subsidiarily in a contract may
interest perhaps be entitled to exercise an action for nullity, if:
• Ratification can be made by the guardian of an incapacitated person. 1) He is prejudiced in his rights with respect to one of the parties

167 | Katrina Gaw | Block C 2018

 2) He can show the detriment which positively would result to him from otherwise any right to the property, the subject thereof. On the contrary,
the contract in which he had no intervention. Marta voluntarily disposed of it. No creditors are defrauded; there are
o A contract that affects a stranger to the said contract can be none. No legitimes are impaired. Therefore, plaintiff has no cause of action
nullified only to the extent that such nullification is absolutely to annul or to rescind the sale.
necessary to protect the plaintiff’s lawful rights.
! No need to set aside the entire contract. CASE: Concepcion v. Sta. Ana
• Lesson: Only testamentary
CASE: Malabanan v. Gaw Ching • Facts:
• Lesson: A person leasing the property from a lessor does not fall under the o X was the only surviving legitimate brother of Y, who died without
exception of 3rd parties who can filed an action for annulment of any issue & without leaving a will.
contract the lessor may enter into with a 3rd person. o In Y’s lifetime, she sold & conveyed three parcels of land for a
• Facts: fictitious consideration to Z, who secured transfer certificate of
o X & Y executed a sale of X’s property to Y. title of said lands issued under Y’s name; Z has held possession
! Gaw Ching wishes to intervene, invoking his right of of the property since Y’s death.
preemption in respect of the house & lot involved. o X claims this is causing him damage & contracts hould be
! Gaw Ching leased the lot from X for many years annulled.
alraeady. • Held: In this case, Y never transmitted to X any right arising from the
• Held: Gaw Ching does not fall in the exception to the general rule that contract with Z. X is just an intestate heir.
strangers in a contract cannot file an action to annul it. o Action to annul a contract entered into whenever they are tainted
o X thrice offered the land to Gaw Ching but the latter had refused with the vice which invalidate them, may be brought not only by
to buy. Since Gaw Ching did not accept the offer to sell & did not any person principally bound, but also by his heir to whom the
buy the land, he suffered no prejudice by the sale of the same right & obligation arising from the contract are transmitted.
piece of land to Y. No fraud was thus worked upon him Hence, if no such rights, actions or obligations have been
notwithstanding his insinuation that the sale of the land to Y had transmitted to the heir, the latter cannot bring an action to annul
preceded the offer to himself. the contract in representation of the contracting party who made
o The fact that Gaw Ching had been lessee was simply not enough it.
basis for a right to bring an action to set aside the contract of sale ! The testamentary or legal heir continues in law as the
between X & Y. A lessee, it is elementary, cannot attack the title juridical personality of his predecessor-in-interest, who
of his lessor over the subject matter of the lease. transmits to him from the moment of his death such of
his rights, actions & obligations as are not extinguished
CASE: Armentia v. Patriarca thereby.
• Lesson: Generally, an intestate14 heir is not contemplated as one of the o In this case, Y voluntarily made the sale to Z, which X cannot now
parties that can be considered principally involved; only forced15 or protest. As Y had no forced heir, she was free to dispose of her
testamentary heirs are. Thus, intestate heirs cannot file actions to annul property as she wished, even without any consideration, unless
contracts entered into by the original owner & 3rd parties. she is in fraud of her creditors (which she is not)
• Facts: o A voluntary conveyance, without any consideration whatever, is
o X was the brother of deceased Y; X is an intestate, rather than a prima facie good as between the parties, & such an instrument
forced heir. can not be declared fraudulent as against creditors in the
o Y was free to dispose her properties the way she liked, because absence of proof, that there was at the time of the execution of
she had no ascendants or descendants. the conveyance a creditor who could be defrauded by the
• Held: Plaintiff is not a forced heir. He is not obliged principally or conveyance
subsidiarily under the contract. Y did not transmit to him by devise or
CASE: Bañez v. CA
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! • Lesson: A squatter to a property cannot be considered a stranger with a
14 Someone who inherits the properties of the deceased who has left no will.
15 An heir who cannot be disinherited except for good causes recognized by law & whose share
substantial right to a third party contract even if he occupies the property
in his ancestor's estate cannot be impaired by the will of the ancestor or even by gifts made they live in, for he acquired possession in bad faith & his rights are not
inter vivos. prejudiced.
! • Facts:

168 | Katrina Gaw | Block C 2018

 Effects of annulment: are excused from their obligations
been complied with, the parties
contracts yet
has not
Ifthe there be mutual restitution of:
performed,
must
been
has
the contract
If
already
2.
fruits
with
a. the thing,
interes t
with
b. the price,

o X entered into & built his house upon PHHC’s land without the Art. 1399.
consent of the latter. When the defect of the contract consists in the incapacity of one of the parties, the
o PHHC executed a deed of sale in favor of Y & there were incapacitated person is not obliged to make any restitution except insofar as he has
subsequent transfers of ownership. been benefited by the thing or price received by him.
o X is suing because his rights, he claims, are substantially affected
by PHHC’s actions. Decree of Annulment
• Held: X has no right over the property, being a mere trespasser. Only • Contracting parties must return to their original position
strangers those whose rights are prejudiced & who can prove the • Ex. for things - In a contract of sale of a car, the (1) car must be returned to
detriment which they would positively suffer can interfere with a contract the owner-seller & the (2) purchase money with the corresponding (3)
between 2 stranger parties. interest must be returned to the buyer.
• Ex. for services - If the contract involves some service like the tutoring of a
Those Estopped particular child, the value of the tutoring must be paid to the tutor by way of
• Action for annulment cannot be filed by the person who caused the defect damages.
in the contract.
o The one who committed fraud cannot annul the contract on the Incapacity as Defect
ground that there was fraud. He is estopped from asserting the • When the defect consists in the incapacity of one of the parties, the
grounds which were principally initiated by him. incapacitated person is not obliged to make any restitution except insofar
o A litigant cannot come to court with “unclean hands.” as he has been benefited by the thing or price received by him
• Annulment cannot likewise be filed by the person who is capacitated to • Ex.: A minor entered into a contract of loan with a bank.
enter into the contract if the ground is the incapacity of the other party. o If part of the proceeds of the contract entered have been
o If a minor & person of age entered into a contract of sale of a uselessly spent by the minor, the bank cannot recover such
particular car, the person of age cannot file a case to annul the uselessly spent money even if a court decrees that the obligation
contract based on the fact that the other contracting party was a should be annulled. The minor has no obligation to restore such
·

minor. money.
o The minor, however can file a case upon reaching the age of o HOWEVER, the bank can recover from the minor such part of the
majority because it is at this time when the guardianship of the proceeds which turns out to be beneficial to him like money spent
parents ceases. to enroll in a school.
• However, if the case filed is NOT for annulment of contract but for the o It must be noted that the bank cannot even file a case against
enforcement of the contract, the party who is capacitated may file such the minor.
action against the minor. The minor’s liability will depend on the kind of ! It can only recover by way of a counterclaim in a
misrepresentation the child made, & the extent of the child’s benefit: complaint for annulment filed by the minor when he
o Active misrepresentation - the minor deliberately & intentionally reaches the age of majority.
undertakes to inform the other party & expressly declares in the
contract that he is of majority age, when in fact he is not of age Art. 1400.
! The minor will be liable to pay whatever his obligation is Whenever the person obliged by the decree of annulment to return the thing cannot
under the contract as if his liability is that of a person do so because it has been lost through his fault, he shall return the fruits received &
who is of age. the value of the thing at the time of the loss, with interest from the same date.
o Passive misrepresentation - the minor was able to enter into the
contract without doing anything to declare his true age, such When Thing is Lost
minor shall be liable only up to the extent that he has been • When the object cannot be returned, because it was lost by the person
benefited by the contract. obliged to return it due to the fault of the said person, the (1) value of the
object at the time of the loss, (2) its fruits & (3) interest from time of loss
Art. 1398. shall be given instead to satisfy the order of restitution.
An obligation having been annulled, the contracting parties shall restore to each • Ex. A is compelled by B to have an exchange of their respective cars. The
other the things which have been the subject matter of the contract, with their fruits, contract is subsequently annulled. A & B must return what each of them
and the price with its interest, except in cases provided by law. has received from each other.
In obligations to render service, the value thereof shall be the basis for damages.

169 | Katrina Gaw | Block C 2018

 o If A cannot return the car obtained by way of the exchange • If one of them cannot restore to the other what he has received from the
because he lost it, he shall undertake restitution by paying B an said other, such other person cannot be compelled to return what he, in
amount equivalent to the value of the car plus interest, if any. turn, has received.
o HOWEVER, if one of the parties is incapacitated, he is not obliged
Art. 1401. to return what he has received except insofar as he has been
The action for annulment of contracts shall be extinguished when the thing which is benefited by the thing or price received by him (Art. 1399).
the object thereof is lost through the fraud or fault of the person who has a right to
institute the proceedings. CHAPTER 8. UNENFORCEABLE CONTRACTS.
If the right of action is based upon the incapacity of any one of the contracting
parties, the loss of the thing shall not be an obstacle to the success of the action, Art. 1403. The ff. contracts are unenforceable, unless they are ratified:
unless said loss took place through the fraud or fault of the plaintiff. (1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
Doctrine of Unclean Hands powers;
• General rule: action is extinguished if object is lost through fault or fraud of (2) Those that do not comply with the Statute of Frauds as set forth in this
the one who has a right to institute the proceedings number. In the ff. cases an agreement hereafter made shall be
o Ex. If A coerced B to sell to him a car, B can seek the annulment unenforceable by action, unless the same, or some note or memorandum
of the sale. thereof, be in writing, & subscribed by the party charged, or by his agent;
! HOWEVER, if B lost the car by intentionally destroying it, evidence, therefore, of the agreement cannot be received without the
he cannot file the annulment case as such right will be writing, or a secondary evidence of its contents:
considered extinguished. a. An agreement that by its terms is not to be performed within a
! Self-reflection: If B lost the car by his own fault, he also year from the making thereof;
cannot file the case for annulment anymore. b. A special promise to answer for the debt, default, or miscarriage
• BUT: If it is based upon the incapacity of any of the parties – loss shall not of another;
be an obstacle to the success of the action, unless the loss is due to the c. An agreement made in consideration of marriage, other than a
fault or fraud of the plaintiff mutual promise to marry;
o Reason – an incapacitated person is not obliged to make any d. An agreement for the sale of goods, chattels or things in action,
restitution except when it has benefited him (Art. 1399) at a price not less than P500, unless the buyer accept & receive
o Ex.: If an incapacitated person, such as a deaf-mute who cannot part of such goods & chattels, or the evidences, or some of them,
read & write, purchases a car & later he files a case to annul the of such things in action, or pay at the time some part of the
contract of sale, the mere fact that the car has been lost will not purchase money; but when a sale is made by auction & entry is
abate the proceedings for annulment. made by the auctioneer in his sales book, at the time of the sale,
! The incapacitated person is not obliged to make any of the amount & kind of property sold, terms of sale, price, names
restitution EXCEPT when it has benefited him. Hence, of the purchasers & person on whose account the sale is made, it
since the object of the contract has been lost, no is a sufficient memorandum;
benefit can accrue in his favor. e. An agreement for the leasing for a longer period than 1 year, or
! HOWEVER, if the incapacitated person loses the car for the sale of real property or of an interest therein;
through his own fault, then the case will be dismissed. f. A representation as to the credit of a third person.
• W/N you are incapacitated, if you lose the property through your own fault, (3) Those where both parties are incapable of giving consent to a contract.
* you do not have the right to file an action for annulment anymore.
Art. 1404. Unauthorized contracts are governed by Art. 1317 & the principles of
Art. 1402. agency in Title X of this Book.
As long as one of the contracting parties does not restore what in virtue of the
decree of annulment he is bound to return, the other cannot be compelled to comply Unenforceable Contracts in This Chapter
with what is incumbent upon him. • The unenforceable contracts in this chapter - A contract may have ALL the
requisites for perfection but may still be unenforceable.
Restitution contracts be
cannot sued
Contracts without Authority Unenforceable
• Requires the return by the parties of what each has received from the ratified
enforced until
other. • Discussed under Art. 1317, upon or

kinds of unenforceable contracts (near absolute mullity)

. Unauthorized
170 | Katrina Gaw | Block C 2018 the statute of Frauds
Those that fail to
with
2.
comply
to
consent a contract
an incapable of giving
3, parties
both
 o Non-authority is also governed by the principles of agency in Art. • In case both parties are incapacitated, & the guardians of one of them
1868-1932 of the Civil Code. ratifies the contract, the same shall be transformed into an annullable
• If a contract has been entered into without authority, it cannot be enforced. contract.
• If ratification is by the parents or guardian of both parties, the contract
Another case of an unenforceable contract is when a contract is entered into by shall be valid, without any defect or infirmity at all.
parties who are both incapacitated to enter into a contract. Hence, if a contract is
entered into by a minor and by a deaf-mute who cannot read and write, such Art. 1408. Unenforceable contracts cannot be assailed by 3rd persons.
contract is unenforceable. If only one is incapacitated, the contract will only be
voidable. Unassailable by 3rd Parties
• It is useless for a 3rd person to assail an unenforceable contract since it
Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Art. cannot be executed anyway
1403, are ratified by the failure to object to the presentation of oral evidence to
prove the same, or by the acceptance of benefits under them. CHAPTER 9. VOID & INEXISTENT CONTRACTS.

Art. 1406. When a contract is enforceable under the Statute of Frauds, & a public Art. 1409. The ff. contracts are inexistent and void from the beginning:
document is necessary for its registration in the Registry of Deeds, the parties may (1) Those whose cause, object or purpose is contrary to law, morals, good
avail themselves of the right under Art. 1357. customs, public order or public policy;
(2) Those which are absolutely simulated or fictitious;
Compelling the Other Party (3) Those whose cause or object did not exist at the time of the transaction;
• When an agreement in Art. 1403(2) is in writing & therefore enforceable, & (4) Those whose object is outside the commerce of men;
the law requires registry in the Registry of Property, the contracting parties (5) Those which contemplate an impossible service;
may compel each other to observe the form required once the contract has (6) Those where the intention of the parties relative to the principal object of
been perfected. the contract cannot be ascertained;
o They may do so simultaneously with the action upon the contract. (7) Those expressly prohibited or declared void by law.
• CASE: Almirol vs. Monserrat These contracts cannot be ratified. Neither can the right to set up the defense of
o Facts: By virtue of a verbal sale, the applicant came into actual illegality be waived.
Ratification of contracts possession of the land. The applicant sought the registration of
the statute of frauds:
infringing the the subject lot already in his possession. The opposition claimed CASE: De Leon v. CA
to
:failure to object evidence that oral proof of the contract cannot be adduced in court where • Lesson: The continued existence of a marriage cannot be made the basis
of oral
presentation the registration was being questioned. of a contract; such a contract is void.
of benefits o Held: Parol evidence of sale is adduced not for the purpose of
2. acceptance
• Facts: The parties, who were husband & wife, stipulated that “in
them
(thus,
the
enforcing performance thereof, but on the basis of the lawful consideration for a peaceful & amicable termination of relations between
under
not apply possession of the applicant, entitling him to have the land
does the undersigned & her lawful husband,” the husband would give some
statute
thereby sold registered in his name. Thus, the statute of fraud is properties to the wife & monthly support for the children, & the wife would
executed/partially not applicable. agree to a judicial separation of property plus the amendment to the
to
contracts)
performed A mere tenant in the subject property cannot invoke the doctrine in the
• divorce proceedings initiated by the wife in the United States to conform to
Almirol case. the agreement
• Held: The agreement is contrary to law, Filipino morals & public policy
Art. 1407. In a contract where both parties are incapable of giving consent, express because the consideration of the agreement is the termination of the
or implied ratification by the parent, or guardian, as the case may be, of one of the marriage by the parties which they cannot do on their own & without any
contracting parties shall give the contract the same effect as if only one of them legal basis.
were incapacitated.
If ratification is made by the parents or guardians, as the case may be, of both CASE: Gardner v. CA
contracting parties, the contract shall be validated from the inception. • Lesson: An absolutely simulated contract is void.
• Facts: A contract purporting to be a sale of land was really without
Incapacitation of Both Parties & Ratification consideration. Said contract was intended merely to protect a party to a
joint venture for the cash advances he was to make for the realty
subdivision that the parties wanted to put up.
Absolute simulated:wid
171 | Katrina Gaw | Block C 2018
simulated:binding
Relatively
 • Held: The contract was absolutely simulated and therefore null and void. • Lesson: Contracts obtained through the influence of higher executive
officials in government are void for being against public policy.
CASE: Prudential Bank v. Panis • Facts: A consultancy agreement was obtained from a government agency
• Lesson: A contract which violates a law is void. through the use of influence of executive officials.
• Facts: A grantee of a government sales patent mortgaged the same within • Held: The contract is void. Any agreement entered into because of the
the prohibition provided by the Public Land Act that no encumbrance or actual or supposed influence which the party has, engaging him to
alienation should be made of the property subject of the patent within 5 influence executive officials in the discharge of their duties, which
years from the issuance thereof contemplates the use of personal influence and solicitation rather than an
• Held: The mortgage was null and void for being in violation of law. appeal to the judgment of the official on the merits of the object sought is
contrary to public policy.
CASE: Maharlika Publishing Corp. v. Tagle
• Lesson: Public order & public policy dictates that a public official cannot Further Examples of Void Contracts
participate in a bidding for foreclosed property, as it gives rise to suspicions • A stipulation in a contract prohibiting a mortgagor to sell the property
of insider information. mortgaged is void.
• Facts: The wife of a GSIS official, acting for her husband who was an o Art. 2130 of the Civil Code, which provides that “a stipulation
influential Division Chief of the GSIS, was allowed to bid on a foreclosed forbidding the owner from alienating the immovable mortgaged
property, and she eventually won the bidding. shall be void.”
• Held: The bidding and the contract of sale resulting therefrom as null and o HOWEVER, a stipulation prohibiting the re-mortgage to another of
void as they violated Art. 1491 prohibiting public officers and employees the same property already mortgaged to the creditor-mortgagee is
from purchasing property under their administration in an auction sale. valid.
• The non-payment of the purchase price of a valid contract of sale is not
CASE: Cui v. Arellano University among the instances where the law declares a contract null and void.
• Lesson: Scholarships are not just a business scheme; they are part of o At most, the non-payment gives a cause of action for rescission or
public policy in order to award students who deserve the merit. Thus, it specific performance.
cannot be waived because a student is transferring schools.
o Under the principles relating to the doctrine of public policy, as Effect of a Void Contract
applied to the law of contracts, courts of justice will not recognize • Defect is permanent & incurable – no ratification
or uphold a transaction which in its object, operation, or o A void agreement will not be rendered operative by the parties’
tendency, is calculated to be prejudicial to the public welfare, to alleged partial or full performance of their respective prestations.
sound morality, or to civic honesty. • It produces no legal effects at all.
• Facts: A student scholar, who decided to move to another school, was • Scenario: A & V enter into a contract for the sale of opium. A delivers but V
required to refund the amount of his free tuition, which he initially got from does not want to initially pay.
a scholarship granted to him by the school on the basis of a contract. He o The later payment of V does not make the contract valid. It is still
had signed said contract, which stated: “In consideration of the scholarship void.
granted to me by the University, I hereby waive my right to transfer to • CASE: Arsenal v. IAC
another school without having refunded to the University the equivalent of o Lesson: A void contract can never be ratified, even if a new one is
my scholarship cash.” executed to fix the old one. Further, equity or estoppel cannot
• Held: The refund cannot be properly demanded because the waiver was give validity to a void contract.
against public policy. The scholarship is based on the memorandum issued ! The original owners of a homestead remain the rightful
by the Director of Private Schools; a contract of waiver is in direct violation owners despite the fact that they themselves granted
of the memorandum. In determining a public policy of the State, courts are the homestead to someone else or that they
limited to a consideration of: acknowledged the grantee as the rightful owner.
o The Constitution, o Facts:
o The judicial decisions, ! Respondent, in 1957, bought from grantee-petitioners a
o The statutes, and homestead patent a property subject of the patent
o The practice of government officers. within the prohibitory period provided by law, which
therefore made the same void as being against public
CASE: Marubeni Corporation v. Lirag policy.

172 | Katrina Gaw | Block C 2018

 ! Respondent was in possession of the said property even o If both parties have no fault or are not guilty, the restoration of
up to 1974 when the case was filed. what was given by each of them to the other is consequently in
! The original owners in this case want the land back, but order
they never disaffirmed the contracts executed between
them and the respondent. More than that, they Art. 1411. When the nullity proceeds from the illegality of the cause or object of the
expressly sustained the title of the latter in court and contract, & the act constitutes a criminal offense, both parties being in pari delicto,
failed to show any interest in recovering the land. they shall have no action against each other, & both shall be prosecuted. Moreover,
o Held: The Supreme Court refused to award the property to the the provisions of the Penal Code relative to the disposal of effects or instruments of
said individual even if another contract was executed after the a crime shall be applicable to the things or the price of the contract.
prohibitory period ratifying the previous sale. Neither can the This rule shall be applicable when only one of the parties is guilty; but the innocent
infirmity be cured by equity because the individual himself one may claim what he has given, & shall not be bound to comply with his promise.
transgressed the law.
! In cases where the homestead has been the subject of Void Contracts due to Criminal Activities
void conveyances, the law still regards the original • Ex dolo malo non oritur actio & in pari delicto potior est conditio
owner as the rightful owner subject to escheat defendentis.
proceedings by the State. The land is awarded back to o The law will not aid either party to an illegal agreement; it leaves
the original owner even if he was equally guilty with the the parties where it finds them.
vendee in circumventing the law. • Ex. If A & B enter into a contract whereby A is to kidnap X & to place X in
! Pari delicto doctrine may not be invoked, since it would the custody of B, and the car to be used for the kidnapping shall thereafter
run counter to a fundamental policy of the State, that be given to A as the latter’s payment, the cause of the contract is clearly
the forfeiture of a homestead is a matter between the void & even constitutes a criminal offense.
State and the grantee or his heirs. Until the State had o If A is successful in kidnapping X, & B does not give the car, A has
taken steps to annul the grant and asserts title to the no action against B for the delivery of the car.
homestead the purchaser is, as against the vendors or o If B already delivers the car & A does not fulfill his obligation, B
his heirs, no more entitled to keep the land than any has no right to go against A.
intruder. o Both are in pari delicto & both shall be prosecuted for
kidnapping. The car will be disposed of as an instrument of the
Art. 1410. The action or defense for the declaration of the inexistence of a contract crime in accordance with the Revised Penal Code.
does not prescribe. • Art. 1411 & 1412 are NOT APPLICABLE to inexistent contracts
o In pari delicto doctrine only applies to contracts with illegal
Judicial Declaration consideration or subject matter, whether the attendant facts
• There is no need to judicially declare a void contract void; the judicial constitute an offense or misdemeanor, or whether the
decision merely confirms it. consideration involved is merely rendered illegal.
• It can be filed at anytime and has no prescriptive period, even as a o If a contract has absolutely no consideration at all, or there is
defense. total absence of consent, or there is absence of an object, such
• Ex. If A and B enter into a contract, where it is stipulated that, for a contract is inexistent & therefore the rule on pari delicto will not
valuable consideration to be given by B, A is to construct a 3-storey apply.
building in 3 days, such a contract is void because it contemplates an
impossible service. Art. 1412. If the act in which the unlawful or forbidden cause consists does not
o B can just treat it as void even without a court action making constitute a criminal offense, the ff. rules shall be observed:
such contract void. (1) When the fault is on the part of both contracting parties, neither may
o HOWEVER, B can file a case to declare that the contract is void so recover what he has given by virtue of the contract, or demand the
that he can get back what he has given as valuable consideration performance of the other’s undertaking;
to A. (2) When only one of the contracting parties is at fault, he cannot recover what
• Laches does not apply when resisting an imprescriptible legal right he has given by reason of the contract, or ask for the fulfillment of what
• Restitution generally applies has been promised him. The other, who is not at fault, may demand the
return of what he has given without any obligation to comply with his
promise.

173 | Katrina Gaw | Block C 2018

 paraphernal property of the mother to conjugal property. This would vest
CASE: Lita Enterprises, Inc. v. IAC half interest on the husband & evade the prohibition against donations
• Lesson: Though certain schemes such as the kabit system may not be from one spouse to another during coverture.
criminal, they may be considered against public policy; any contract based o The wife, contending that the sale was a circumvention of the
on such a scheme is inexistent & the parties, if both at fault, shall be in said prohibition and therefore void according to law, filed a case
pari delicto. for the nullification of the transactions.
• Facts: The parties herein operated under an arrangement, known as the • Held: The wife could no longer recover. While the Court did not consider the
“kabit system,” whereby a person who has been granted a certificate of transactions simulated, it regarded the same as a circumvention of the
convenience allows another person who owns motor vehicles to operate legal prohibition against donations between spouses. However, all the
under such franchise for a fee. However, a certificate of public convenience parties were guilty, & thus no one was entitled to recover.
is a special privilege conferred by the government.
• Held: The contract is void & inexistent, & the parties can claim no reliefs as When Only One Party is At Fault
they are in pari delicto. The system is seen as the root of corruption in • The one at fault – cannot recover what he has given, or ask fulfillment of
many government transportation offices, & though it is not criminal, it is what was promised to him
void for being against public policy. • The one without fault – may demand the return of what he has given
without any obligation to comply with his promise
CASE: Heirs of Marciana Avila v. CA unsecured
• Lesson: Parties to an illegal contract that are contrary to law will not be Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be 140 loans

able to recover what they have given, nor can they ask for fulfillment. recovered by the debtor, with interest thereon from the date of the payment. 12% sewe
• Facts: A teacher bought property in violation of the Administrative Code
12% / month
prohibiting public officials from purchasing property sold by the Usury Law 2-

pawnshops
government for non-payment of taxes. • Under the Usury Law, in case of usurious interest, the whole interest will be
• Held: The contract was void because it was contrary to law. The teacher, as recoverable.
a party to an illegal transaction cannot recover what she gave by reason of • Ex. In a loan of P1,000, with interest of 20% per annum or P200 for one
the contract or ask for the fulfillment of what had been promised her year, if the borrower pays said P200, the whole P200 is the usurious
pursuant to Article 1412 of the Civil Code. interest, not just that part thereof in excess of the interest allowed by law.
o The whole P200 is void, since payment of said interest is illegal.
CASE: Compania General De Tabacos de Filipinas (Tabaclera) v. CA o Effect of Art. 1413 – adds that the wrongly paid interest can be
• Lesson: Parties who enter into a contract to evade creditors are also in pari recovered “with interest thereon from the date of payment
delicto & cannot have claims against one another. • HOWEVER, this does not lead to forfeiture of the principal
• Facts: Buyer Tabaclera & a seller of certain sugar quota, which was
previously mortgaged to certain banks, entered into a contract of sale Art. 1414. When money is paid or property delivered for an illegal purpose, the
purposely intending to negate the lawful rights & claim of the banks. contract may be repudiated by one of the parties before the purpose has been
o The banks, however, had already foreclosed on the mortgage. accomplished, or before any damage has been caused to a third person. In such
o Tabaclera then claimed that it should be reimbursed of what it case, the courts may, if the public interest will thus be subserved, allow the party
gave the seller in the event that it was ordered to reconvey the repudiating the contract to recover the money or property.
sugar quota to the banks.
• Held: Tabaclera & the seller cannot recover, because they are both in pari CASE: De Leon v. CA
delicto. They both had the common intention of negating the banks & • Lesson: When the parties repudiate a void contract before it is
acting in bad faith, even if what they did is not contrary to any express accomplished, the courts may choose to allow the repudiating party to
provision of law. recover the money.
• Facts: The parties entered into a void contract, as the consideration was
CASE: Rodriguez v. Rodriguez the termination of marital relationship. The husband’s mother, who already
• Lesson: Family members who enter into transactions to evade taxes, previously gave P380,000 to the wife pursuant to the void contract,
though this would not be illegal per se, are in pari delicto & cannot recover resisted the attempt by the wife to enforce the other provisions of the
whatever they lost. agreement on the ground that the contract was void.
• Facts: A mother sold property to her daughter; the daughter then sold the be had even in Pari Delicto:

property to her father. These transactions were done to for convert the Recovery can

has been
yet
not
accomplished
1. Purpose
caused 3rd person
been any
174 | Katrina Gaw | Block C 2018 has not
2. damage
 o The lower court ruled that no enforcement can be made because • The excess from the limit shall be recoverable
the parties are in pari delicto, & therefore the mother cannot
recover the P380,000. Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of
• Held: The mother can recover the P380,000, as the letter-agreement she & hours of labor, and a contract is entered into whereby a laborer undertakes to work
the wife entered into was repudiated before its purpose was accomplished. longer than the maximum thus fixed, he may demand additional compensation for
service rendered beyond the time limit.
Art. 1415. Where one of the parties to an illegal contract is incapable of giving
consent, the courts may, if the interest of justice so demands, allow recovery of Overtime Pay
money or property delivered by the incapacitated person. • Now governed by the Labor Code of the Philippies
• If an employer and employee enter into a contract where the employee
Incapacity as an Exception to Pari Delicto Rule shall work only 8 hours a day for a specified compensation, such employee
• Ex. A is a minor and he enters into a contract with B, whereby B sells to A cannot be forced to work beyond the said time
prohibited drugs. o If he is required to do so, he should be paid for the extra time
o The court may allow the minor to recover the money he paid B in
purchasing the illegal drugs. However, this is within the discretion Art. 1419. When the law sets, or authorizes the setting of a minimum wage for
of the court. laborers, & a contract is agreed upon by which a laborer accepts a lower wage, he
shall be entitled to recover the deficiency.
Art. 1416. When the agreement is not illegal per se but is merely prohibited, & the
prohibition by the law is designed for the protection of the plaintiff, he may, if public Minimum Wage
policy is thereby enhanced, recover what he has paid or delivered. • Ex. If according to law A is to receive P200 a day, & he enters into an
employment contract providing that he is to get P150 a day, the contract is
CASE: Ras v. Sua void
• Lesson: A disregard or violation of the conditions of the land grant in o A can demand the difference of P50.
RA477 & the Public Land Act does not produce automatic reversion of the
property to the State, nor work to defeat the grantee’s right to recover the Art. 1420. In case of a divisible contract, if the illegal terms can be separated from
property he had previously disposed of or encumbered. the legal ones, the latter may be enforced.
• Facts: A property acquired from the government pursuant to a law
designed to give land to the landless was, in violation of the spirit of said Divisible Contracts
law, leased to 3rd parties. Said parties then refused to have the property • If a void provision in a contract directly affects the entirety of the contract,
reconveyed to the possession of the owner-grantee despite violation of the the contract can be considered void.
lease agreement. o HOWEVER, if the provision is independently separable from the
o In their defense, the 3rd-party possessors claimed that other provisions, such provision alone shall be considered void.
repossession cannot be made because the parties were in pari • Ex. In a contract of loan secured by a collateral of the debtor’s property
delicto and that the proper party to file the suit was the which, as stipulated in the contract, shall automatically be owned by the
government who granted the land to the owner. creditor in the event of non-payment of the debt, the loan itself is valid but
• Held: SC ruled that the property should be returned to the owner-grantee, the security is void.
as here it would be favorable to the interests of public policy. The o This is pactum commissorium; for the forfeiture to be valid in
contentions of the 3rd-party possessors are premised on the incorrect case of non-payment the collateral must be foreclosed & sold at
assumption that upon the plaintiff’s violation of RA 477 he automatically auction to the highest bidder.
loses his rights over the land and said rights immediately revert to the
State. Art. 1421. The defense of illegality of contracts is not available to 3rd persons whose
interests are not directly affected.
Art. 1417. When the price of any article or commodity is determined by statute, or by
authority of law, any person paying any amount in excess of the maximum price Mutuality of Contracts & Void Contracts
allowed may recover such excess. • General rule: There can only be mutuality of obligations in a contract which
affects the parties involved therein.
When Law Provides Highest Amount o Exception: If a 3rd person is greatly prejudiced as his interest is
• It is illegal to charge the buyer higher than the statutory ceiling directly affected, he may file a case for the nullification of a

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 contract or set the same as a defense even if said prejudiced Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive
person is not a party to the void contract. prescription, the obligor who voluntarily performs the contract cannot recover what
! Ex. If A & B enter into a contract of sale of real property, he has delivered or the value of the service he has rendered.
where A sells a particular land which he does not own to
B for an illegal consideration, such a contract is void. Paying Despite Extinctive Prescription
• If the particular land area sold encroaches on • Ex. The prescriptive period to file a case based on a written agreement is
the property of X, a 3rd person, he can seek 10 years from the time the right of action accrues. If a creditor, by virtue of
the nullification of such contract as it directly a written loan contract, does not collect the amount of the loan after 10
affects his interest. years from the time it should be paid, such creditor can no longer collect
from the debtor.
Art. 1422. A contract which is the direct result of a previous illegal contract, is also o However, if the debtor, despite the lapse of the period & knowing
void & inexistent. that the debt has already prescribed, pays the creditor, such
debtor can no longer recover such payment.
Void Contract & Subsequent Inexistent Contract
• If a subsequent contract proceeds from an inexistent contract, the Art. 1425. When without the knowledge or against the will of the debtor, a 3rd person
subsequent contract is likewise void. pays a debt which the obligor is not legally bound to pay because the action thereon
has prescribed, but the debtor later voluntarily reimburses the 3rd person, the obligor
Contract 3rd Persons Restitution Damages cannot recover what he has paid.
Void May assail Generally, no No
restitution 3rd Person Paying Against Will of Debtor
Rescissible May assail There is restitution Yes • Ex. A is indebted to Z but the collection of such debt has already
Unenforceable Only parties can assail No execution yet; N/A prescribed.
no application o If M pays the debt to Z, &, later on, A voluntarily reimburses M,
Voidable May assail There is restitution No such payment shall be considered valid & A cannot recover such
amount from Z on the ground that M should not have paid him.

TITLE III. – NATURAL OBLIGATIONS. Art. 1426. When a minor between 18 & 21 years of age who has entered into a
contract without the consent of the parent or guardian, after the annulment of the
Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to contract voluntarily returns the whole thing or price received, notwithstanding the
compel their performance. Natural obligations, not being based on positive law but fact that he has not been benefited thereby, there is no right to demand the thing or
on equity & natural law, do not grant a right of action to enforce their performance, price thus returned.
but after voluntary fulfillment by the obligor, they authorize the retention of what has
been delivered or rendered by reason thereof. Some natural obligations are set forth Art. 1427. When a minor between 18 & 21 of age, who has entered into a contract
in the ff. articles. without the consent of the parent or guardian, voluntarily pays a sum of money or
delivers a fungible thing in fulfillment of the obligation, there shall be no right to
Rationale of Natural Obligations (1947 Code Commission) recover the same from the obligee who has spent or consumed it in good faith.
• On the part of the payor – give rise to a moral, rather than legal, duty to pay
or perform, but the person thus performing feels that in good conscience Minors & Payment
he should comply with his undertaking which is based on moral grounds • An incapacitated person is not obliged to make any restitution except
civil obligation
be enforced o He should not be allowed by law to take back what he has rightly insofar as he has been benefited by the thing or price received by him.
can

by
action
court done • A person who is “between 18 & 21 years of age” is not anymore a minor
• On the part of the payee - under the laws in force, the payee is obliged to because the age of majority today, pursuant to RA 6809 is 18.
natural obligation: return the amount received by him because the payor was not legally o HOWEVER, if ever the law is still to apply, it means that a minor,
creditor keep what bound to make the payment; this is unfair to the payee, who deserves to
can
who voluntarily makes payment or restitution of what he has
the debtor
has delivered
be paid obtained by contract even though he has no legal obligation to
voluntarily • Equity, morality & natural justice are the foundation of natural law make payment or restitution, can no longer recover what he has
returned.
until the voluntary •
*
Examples of natural obligations in Title III are NOT exclusive
delivery
or performance in case
the
voluntary fulfillment
is already
the debtor,
then *
done, then the creditor is allowed by law
by
is nothing to keep the thing
there 176 | Katrina Gaw | Block C 2018
to be enforced
Art. 1428. When, after an action to enforce a civil obligation has failed, the (1) Against government suing in its capacity as sovereign or asserting
defendant voluntarily performs the obligation, he cannot demand the return of what governmental rights
he has delivered or the payment of the value of the service he has rendered. (2) When a law or public policy will be violated
(3) Against government owing to the mistakes or errors of its officers
Defendant Performing Obligation Despite Failure of Civil Action o Any error made by a tax official in the assessment of
• Ex. If A is indebted to B for P1,000 & a civil suit is filed to collect the taxes does not have the effect of relieving the taxpayer
amount but such suit is dismissed, A need not pay the said amount but, if from the full amount of liability as fixed by law.
he voluntarily makes payment, he can no longer recover such payment. (4) To questions of law
o Estoppel applies only to questions of fact
Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent o If an act, conduct or misrepresentation of the party
exceeding the value of the property which he received by will or by the law of sought to be estopped is due to ignorance founded on
intestacy from the estate of the deceased, the payment is valid and cannot be innocent mistake, estoppel will not arise
rescinded by the payer.
CASE: Republic v. Go Bon Lee
Voluntary Payment of Heir in Excess of Inherited Property • Lesson: Government is never estopped by mistakes on the part of its
• Ex. A is indebted to X for P10,000. A later dies, with M as his heir who is agents
entitled only to P5,000 from the estate of A. If M voluntarily pays X • Facts: The government, in 1951, filed a petition to cancel the certificate of
P10,000, M can no longer recover such an amount. naturalization of a Chinese who was granted naturalization in a court in
Cebu in 1941 & who took his oath of allegiance in 1942. The Chinese man
Art. 1430. When a will is declared void because it has not been executed in claimed that his case could no longer be reopened due to estoppel.
accordance with the formalities required by law, but one of the intestate heirs, after • Held: The doctrine of estoppel or of laches does not apply against the
the settlement of the debts of the deceased, pays a legacy in compliance with a Government suing in its capacity as Sovereign or asserting governmental
clause in the defective will, the payment is effective & irrevocable. rights

Legacy Paid in a Defective Will Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in
• Ex. M provided in his holographic will that his car shall go to his driver X. conflict with the provisions of this Code, the Code of Commerce, the Rules of Court &
Later, the holographic will turns out to be partly type-written & therefore it special laws.
is void as such will should be wholly hand-written by the testator.
o If, despite the nullity of the will, M’s heir, Z, still voluntarily gives Art. 1433. Estoppel may be in pais or by deed.
the legacy of the car to X, it shall be valid & cannot be revoked
anymore. Estoppel by Deed
• Estoppel by deed is a bar which precludes one party to a deed & his privies
TITLE IV. – ESTOPPEL. from asserting as against the other party & his privies any right or title in
derogation of the deed, or from denying the truth of any material facts
Art. 1431. Through estoppel an admission or representation is rendered conclusive asserted in it.
upon the person making it, & cannot be denied or disproved as against the person o Technical in nature
relying thereon. o May conclude a party without reference to the moral equities of
his conduct.
Estoppel & Its Application • When a man has entered into a solemn engagement by deed, he shall not
• The doctrine of estoppel having its origin in equity, its application depends be permitted to deny any matter which he has asserted therein.
on the special circumstances of each case • Aim: To prevent circuity of actions, & to compel party to fulfill their
o However, in each case, estoppel must be determined after contracts.
carefully considering the material facts of the case lest injustice • Where estoppel by deed arises, it is generally limited to an action on the
may result deed itself; in a collateral action, there is ordinarily no estoppel.
• Estoppel cannot be sustained by mere argument or doubtful inference; it
must be clearly proved in all its essential elements by clear, convincing & Estoppel in Pais (Equitable Estoppel)
satisfactory evidence.
• Estoppel is not applicable:

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