Gaw Oblicon

OBLIGATIONS AND CONTRACTS
Q: If the title is a perfect sale, is prescription relevant?

Atty. Melencio Sta. Maria
A: No, because the sale is the source of title, not prescription. If the donation was
The Definitive Guide to the Sacred Text
perfectly valid, then prescription would be irrelevant for the same reason.
Made in 2018
Prescription is a special mode of acquisition that is TRUE and VALID, but the title is
not perfect – the title is only COLORABLE.
Note: Class notes are in red & important points, as stated by Dean Mel, are indicated
• Is a void sale or donation a colorable title? Yes, by jurisprudence.
by an *. New cases in his updated 2017 book are in purple.
• A donated property to B. B stayed there for 15 years. After 15 years, A died.
PRESCRIPTION The heirs of A, XYZ, told B they discovered that the notary in the deed of
donation is not really a notary & is merely an impostor, making the deed of
donation private.
LECTURE FROM DEAN MEL o Q1: Is the donation valid?
o A1: NO. The donation of property must be in a public instrument; if it is
There are two kinds of prescription – acquisitive and extinctive. not, it affects validity of the donation, making the donation void.
o Q2: Can the heirs get it back?
For acquisitive prescription, there are two kinds – ordinary and extraordinary. o A2: NO. The donation was colorable title, & there was good faith, there
Common to both types is that (1) both involve a period, and (2) both require was 10-year possession in the concept of owner. The heirs thus get
possession which is peaceful, uninterrupted, public, & in the concept of an owner. the property by reason of PRESCRIPTION.
• When it comes to extraordinary prescription, the period is 8 years for
movables, & 30 years for immovables. Prescription of Actions means prescription of civil actions. There is prescription of
• When it comes to ordinary prescription, the period is 4 years for movables & criminal cases in the RPC; but the Civil Code’s statute of limitations govern civil
10 years for immovables. But there are additional requirements for this type actions. When it comes to special proceedings, there is no prescription; SPECIAL
of prescription – that is, (1) good faith and (2) just title. PROCEEDINGS DO NOT PRESCRIBE (hence, intestate proceedings do not prescribe).
• This part is mostly memory work & memorizing the relevant periods.
For laches, despite prescription, there may still be laches. The requisites are (1) • HOWEVER, under Ang v. Fulton Insurance, a contract stipulation may extend
injury to plaintiff, (2) delay on the part of the plaintiff, (3) no knowledge or prescription or shorten it. IT’S ALLOWED.
information on the part of the defendant, and (4) injury to defendant. In laches,
there must be written demand every time. Or else, the period may be stale. Q: X, a creditor, was able to foreclose within 8 years out of the 10 years allowed by
• Look at the cases of Catholic Bishop and Nieto – they explain when laches law. But what is the prescriptive period in collecting the balance remaining after the
will apply to registered land though prescription will not apply. foreclosure sale, 2 years or another 10 years?
• Vital doctrine in Catholic Bishop: Registered land CANNOT be acquired by A: It’s another 10 years according to the SC.
prescription. Despite this, however, there may be laches. Laches may set in if
there is (1) colorable title, and (2) a lot of time has already passed. CASE: Callanta v. Carnacion
• BUT as said in Nieto, laches will not apply if even colorable title cannot be Q: A filed a case before the labor arbiter against B in the fourth year since her cause
demonstrated. of action had accrued for her remaining salaries. Labor Code only grants 3 years for
collecting money claims. So A went to the RTC & filed suit for damage to A’s
There are two kinds of interruption – natural and civil. For natural, if there is an property, against B. The amount sought, however, is EXACTLY the same as the
interruption for more than 1 year, there is natural interruption, for ANY CAUSE. amount before the labor arbiter. B filed a motion to dismiss, arguing the NLRC
• You can be kicked out for an unlawful reason, but if you stay out of the already decided the matter & it has already prescribed. Should the motion to dismiss
property for more than 1 year, there will be considered an interruption. be granted?
A: No. The case will prosper. The cause of action in the civil case is different from the
For civil interruption, it starts NOT from the filing of the suit, but the receipt of cause of action in the labor cause. In the labor case, it is backwages. In civil case, it
SUMMONS. But note that there are exceptions which are found in the Civil Code. is deprivation of property & violation of his rights. According to Article 1146, such an
action prescribes within 4 years.
Tacking in the period of the previous possessor
Remember: Period during which the obligee was prevented by a fortuitous event
Mode of acquisition are the titles – these could be donation, inheritance, sale, from enforcing his right is not reckoned against him.
occupation, prescription. • SC: ALL OF THE PERIOD BEFORE the fortuitous event is counted in this
1 | Katrina C. Gaw | Block C 2018

period. For example, if a storm is the fortuitous event, if the contract is • Other name: limitation of action
written, after the storm has passed, the obligee will have a fresh 10 new
years. Hence, the obligee will NOT just have the remaining period, but a brand Laches
new 10 years. (Providence Savings case) • Doctrine of stale demands
• Based upon grounds of public policy which requires, for the peace of society,
A demand letter, acknowledgment of debt, makes the period start ANEW. BUT when and the discouragement of stale claims
it comes to demand or acknowledgement, it must be in WRITING, or else the period • Applies independently of prescription
will not start anew. o Can be successfully interposed even if a shorter time had elapsed &
prescriptive period has not expired
Will the filing of a suit stop the prescriptive period? o Can bar the filing or prosecution of a suit
If the plaintiff had it dismissed himself through his own initiative, it is as if the • Requisites of laches (CDLI)
prescription was not interrupted; prescription continues to run even during the 1) Conduct on the part of the defendant, or of one under whom he claims,
pendency of the case. that causes INJURY to the plaintiff
If it is dismissed for reasons OTHER THAN the volition of the plaintiff, the period is o Giving rise to the situation of which complaint is made & for
interrupted, & the plaintiff will have a fresh 10-year period. which the complaint seeks a remedy
2) Delay in asserting the complainant’s rights
Q: A filed a case against B. A filed a petition for certiorari case in the CA. What A, o The complainant having knowledge or notice of the defendant’s
plaintiff, did is that he withdrew the case from above, and withdrew the case below conduct & having been afforded an opportunity to institute a suit
in the trial court, so that A can re-file the whole case. What happens to the period in 3) Lack of knowledge or notice on the part of the defendant that the
relation to A? complainant would assert the right on which he bases his suit
A: Even if it is at plaintiff’s initiative that the case was dismissed, SC still held it 4) Injury or prejudice to the defendant
would follow the rule on interruption because plaintiff did not withdraw to delay the o In the event relief is accorded to the complainant or the suit is
case, but to hasten proceedings. (Antonio v. Morales). not barred
LACHES PRESCRIPTION
CHAPTER 1. GENERAL PROVISIONS
Effect of delay Fact of delay
Article 1106. By prescription, one acquires ownership & other real rights through the A question of inequity founded on the condition of Matter of time
lapse of time in the manner & under the conditions laid down by law. the property or relation of the parties
In the same way, rights & actions are lost by prescription. Not statutory Statutory
Applies at equity Applies at law
Definition of Prescription Not based on fixed time Based on fixed time
• A statute of repose
• Object is to suppress fraudulent and stale claims from springing up at great CASE: Z.E. Lotho, Inc. v. Ice & Cold Storage
distances of time & surprising the parties or their representatives when the Lesson: Laches applies independently of prescription.
facts have become obscure from the lapse of time or the defective memory Facts: Plaintiff filed a complaint because respondent had been operating in
or death or removal of witnesses plaintiff’s franchise area since 1948, according to plaintiff’s knowledge. Plaintiff’s
material records of the period had already been lost & it made no genuine effort to
• An implied trust is subject to prescription in certain cases
stop the defendant before he filed suit in 1957. Is plaintiff’s claim barred by laches?
Held: Yes. Plaintiff had knowledge since 1948 & failed to assert its rights earlier,
Kinds of Prescription
thus making it difficult for respondent to controvert the correctness of the damages
1. Acquisitive
sought & to avoid further liability. Even if the prescriptive period of 10 years (for
• The acquisition of a right by the lapse of time (Art. 1106, par. 1)
written contracts) had not yet passed, & even if, assuming the use of the prescriptive
• Looking at the acts of the possessor (the claimant in possession) period of 4 years (for “injury to the rights of the plaintiff”) the period had already
• Other names: adverse possession & usucapcion passed, SC ruled that the case dismissed on the ground of laches.
2. Extinctive
• Rights and actions are lost by the lapse of time (Arts. 1106, par. 2 & CASE: Catholic Bishop of Balanga v. CA
1139)
• Looking at the neglect of the owner out of possession

Lesson: Even a registered landowner can lose his right to recover possession of his return of their property at any time as long as the possession was unauthorized or
registered property by reason of laches, even where prescription fails. However, merely tolerated, if at all.
there must be colorable title on the part of the defendant. The elements of laches were also not met in this case. Though the municipality
Facts: Alleged landowner questioned the donation of its representative to the donee, refused to vacate when requested by the Heirs of Nieto in Feb. 1994, the heirs, on
who already possessed the property peacefully & adversely for 49 years. He claims Dec. 1994, filed a complaint in court against the municipality already – there was
that the fact that the property is registered bars the effect of prescription. Is the therefore no delay in asserting their rights. Since that element is missing, there can
claim barred by laches? be no laches.
Held: Yes. There was laches for failure to act on the part of the donor.
CASE: Tagaytay Realty Co. v. Gacutan
CASE: Jack Arroyo v. Bocago Inland Development Lesson: Where the one party makes periodic written demands upon the other, this
Lesson: As a registered owner, petitioner has a right to eject any person illegally indicates his intent not to abandon his claim. Laches therefore cannot set against
occupying his property (for example, squatters). This right is imprescriptible and can him.
never be barred by laches.
CASE: Pangasinan v. Disonglo-Almaroza
Class Discussion Lesson: When Sec. 47, P.D. 1529 (governing property registration & certificates of
Q: An informal settler has been in your property for 50 years. Can he acquire title) states that registered land is imprescriptible, it refers to acquisitive prescription
property by extraordinary prescription if you did not assert you rights? – hence, registered land can never be acquired by adverse possession. However,
A: No, because there is no possession. Possession must have all the attributes registered land CAN be acquired by extinctive prescription.
concurring: uninterrupted, peaceful, public, in the concept of owner – but the latter Facts: In 1945, Leoncia & Aquilina (the former’s granddaughter) learned their house
requisite will not be met because an informal settler knows he does not own the in Tondo, Manila was completely ruined by WW2. They borrowed money from
property. There is thus no juridical possession. Conrado, a relative, so they could rebuild. In return, Leoncia entrusted the certificate
of title of a property in Laguna with Conrado. Conrado & his family occupied the
CASE: Heirs of Nieto v. Municipality of Meycuayan Laguna property & eventually, the name in the certificate was changed to Conrado’s.
Lessons: For laches & prescription to apply and bar the plaintiff from asserting rights In 1995, Aurora, descendant of Aquilina, filed a case to recover the property from
against the defendant, there must be colorable title on the part of the defendant. Conrado’s heirs. Will it prosper?
Without any colorable title recognized by law, the rule of laches & prescription will Held: No. All of the elements of laches are present in this case. First, Aurora & her
never apply to registered lands. Hence, the mode of acquisition by which the family entrusted the title of the property back in 1045. Second, it took 5 decades
possessor acquired the property must be shown. (1945 to 1996) for the family to make their claim (they only started writing demand
Facts: The municipality claimed to be the owner of a parcel of land, the certificate of letters against the heirs of Conrado in 1995). Third, Conrado’s heirs had lived all
title of which was in its possession. It set up a public market on the land. However, their lives on the property & were not aware that this claim would be made against
the certificate is under the name of Anacleto Nieto; Nieto had surrendered it on the them. Finally, Conrado’s heir would be prejudiced if the claim prospers.
assumption that the municipality would expropriate the property & then pay him for Furthermore, the action has prescribed. While it is true that registered land cannot
the lot. However, the municipality never paid Nieto or his heirs. When the heirs be acquired by acquisitive prescription, prescription cannot be a bar when there is
sought to recover the property from the municipality, the municipality asserted already extinctive prescription. In this case, the action fails not because Conrado &
laches, to bar the claim. Is their argument meritorious? his family have long occupied the property, but because Aurora & her predecessors
Held: No. The heirs are not barred by laches. In this case, the municipality failed to failed to institute their action within the prescriptive period provided in Art. 1144.
show the mode by which they acquired the property – whether this was by donation, Aurora argues that there was an implied trust made in this case because Conrado &
sale, or otherwise. Instead, what was shown was only that the certificate of title was The co-heirs obtained the property through fraud. This would give Aquilina’s heirs,
delivered to the municipality by Nieto on the belief that the property was to be including Aurora, 10 years from the time the property is registered to reclaim the
expropriated. property. The property was registered under Conrado’s name in 1965. They thus had
Those who occupy the land of another at the latter’s tolerance or permission, without only until 1975 to get the property back. Their failure to do so within that 10-year
any contract between them, are bound by the implied promise that the occupants period means that Aurora & her co-heirs can no longer seek relief from courts.
will vacate the property upon demand.
Furthermore, if the claimants’ possession is merely tolerated by its lawful owner, the Article 1107. Persons who are capable of acquiring property or rights by other legal
latter’s right to recover possession is never barred by laches. Even if it be supposed modes may acquire the same by means of prescription.
that the Heirs of Nieto were aware of the municipality’s occupation, & regardless of Minors & other incapacitated persons many acquire property or rights by
the length of time that has passed, the lawful owners have a right to demand the prescription, either personally or through their parents, guardians or legal
representatives.

o It must be shown that they cannot return to their domicile within
Examples of Other Legal Modes the period when prescription should have run
• Donation, sale, inheritance 4) State and its Subdivisions – unless not acting in their sovereign
capacity, or acting in a proprietary character
Acquisition of Minors o GR: Juridical persons are endowed by law with attributes of a
If through parents or guardian Completely valid natural person, & can be subject to prescription
If acquired personally, without Annullable or voidable o EXC: Prescription does NOT run against State & its subdivisions
assistance of parents or • BUT: When minor comes of age (e.g., turns o BUT: State or subdivision must be acting in sovereign capacity;
guardian 18), he can ratify the acquisition when it is running a business or acting in a proprietary capacity, it
can be subject to prescription.
Article 1108. Prescription, both acquisitive & extinctive, runs against: o CASE: Republic v. PNB – AFP filed a case for recovery of a sum of
(1) Minors & other incapacitated persons who have parents, guardians, or other money that PNB negligently paid to unauthorized persons. SC
legal representatives; ruled that prescription did not run, as this was a case against the
(2) Absentees who have administrators, either appointed by them before their State, acting through its instrumentality, the AFP.
disappearance, or appointed by the courts; o CASE: NDC v. Tobia – NDC is a GOCC filing a collection case. SC
(3) Persons living abroad, who have managers or administrators; ruled that action had already prescribed. Even if a GOCC is
(4) Juridical persons, except the State & its subdivisions. technically still an instrumentality of the government, it is the
Persons who are disqualified from administering their property have a right to claim State acting in a proprietary capacity. And even if it was made to
damages from their representatives whose negligence have been the cause of serve a public purpose, it is still a business corporation. Hence,
prescription. prescription can lie against a GOCC.
Rules in Art. 1108 Article 1109. Prescription does not run between husband & wife, even though there
• Prescription does not run against the ff.: (MAPSS) be a separation of property agreed upon in the marriage settlements or by judicial
decree.
1) Minors & incapacitated persons – unless they have parents,
guardians or other legal representatives Neither does prescription run between parents & children, during the minority or
insanity of the latter, & between guardian & ward during the continuance of the
o Ex. If A is insane & has no guardian, prescription does not run
against him; BUT if he has a guardian who takes care of his guardianship.
affairs, prescription can be applied against him
o GR: Prescription runs against them, because there is a Husband & Wife
presumption that they have parents who manage their affairs • GR: Prescription does not apply between the husband & wife unless the law
o CASE: Vda. De Alberto v. CA – An illegitimate child, represented by otherwise provides
his natural mother, filed for acknowledgement & partition more • EXC: Those provided by law
than 4 years after the surviving legitimate heirs executed a
partition already. SC ruled that the period had already prescribed, CASE: Pacio v. Billion
& there can be no claim of immunity for the illegitimate child Lesson: There is no prescription between husband & wife, whether acquisitive or
because he had a surviving parent (i.e., his mother). extinctive.
2) Absentees – unless they have administrators, either self-appointed Facts:
prior to disappearance, or court-appointed A husband made a donation to his 1st wife during their marriage, which is not
o Reason: He cannot manage his affairs because he can’t go back considered valid by law. The children of the 2nd wife filed a claim against the children
to his domicile of the 1st wife in order to recovery the donated property.
o BUT: If the absentee CAN go back to his domicile but intentionally The children of the 1st wife, hoping to resist the claims of the children of the 2nd wife,
does not want to return, prescription will lie against him claimed that, though the donation was void, their mother had already acquired the
o Art. 381, Civil Code: A judge, at the instance of an interested lot by prescription because she possessed the property for 29 years already
party, relative, or friend, may appoint a person to represent an Held: SC rejected the contention of the children of the 1st wife. There is no
absentee when he appointed no one or the power he has prescription between husband & wife.
conferred has expired
3) Persons living abroad – unless they have managers or administrators Exceptions for Husband & Wife Rules on Prescription (Family Code)
• Legal separation: Must be filed within 5 years from occurrence of the cause

• Annulment: Must be filed 5 years from the specific point provided by law acknowledges the correctness of a debt & promises to pay it after the same has
o Ex. If the ground is impotency, it must be filed 5 years from the prescribed & with full knowledge of the prescription, he thereby waives the benefit of
marriage ceremony prescription.
Facts:
Parent & Child • Feb. 10, 1940: A husband & wife obtain an agricultural loan from DBP,
• GR: No prescription between parent & child during the latter’s insanity or evidenced by a promissory note which states they will pay in 10 equal yearly
minority amortizations
o Reason: Natural bond of filiation – parents are the natural guardians • Even after the lapse of the 10-year period, the obligation remained unpaid
of the child without need of court appointment • April 11, 1961: The couple executed a 2nd promissory note expressly
• EXC: As provided by law, like those in the Family Code acknowledging the debt & promising to pay on or before June 15, 1961. The
o Ex. A husband may impugn the legitimacy of the child of his wife on note also said that upon failure to pay upon said date, DBP could foreclose
grounds provided by law within 1, 2, or 3 years from his knowledge of on the couple’s mortgage.
the birth of the child or its recording in the civil registry, depending on • Sept. 11, 1970: DBP filed a complaint demanding payment.
residence of husband & place of birth of child Given these facts, has the action against the couple prescribed?
Held: No. The couple waived their right to the prescription of their debt evidenced by
Guardian & Ward the 1st promissory note when they made the 2nd promissory note expressly
• GR: No prescription during the period of guardianship acknowledging their original debt. The 2nd note was not a mere acknowledgement of
• Reason: Gives adequate remedy to the ward for abuses of guardian a debt that has prescribed, but a new promise to pay the debt. The consideration of
the new promissory note is the pre-existing obligation under the 1st promissory note.
Article 1110. Prescription, acquisitive & extinctive, runs in favor of, or against a
married woman. CASE: Caltex v. Aguirre
Lesson: Even if the defendant waives prescription already obtained, for the plaintiff
Article 1111. Prescription obtained by a co-proprietor or co-owner shall benefit the to be able to use this waiver against him, it should have been given before a
others. decision on their dispute declaring that prescription has barred the action becomes
final & executory. Otherwise, the plaintiff cannot use the waiver against the
Co-Ownership defendant.
• When the ownership of an undivided thing or right (e.g. house, business) Facts: The case here was dismissed on the ground of prescription benefiting the
belongs to different persons defendant. The dismissal became final & executory. The defendant, however,
• Ex. A, B, & C co-own a particular land & all reside in the same. renounced the prescription he had already obtained. May the plaintiff, in a later
o If B also occupies a portion of land adjoining the co-owned property, & case, assert this waiver by the defendant?
acquires it by prescription through public, peaceful, continuous, Held: No. SC held that it could not consider the waiver as basis to reverse the rulings
adverse possession, his acquisition will benefit himself, A, & C. of the lower courts, as the dismissal of the complaint had already become final &
binding on both parties.
Examples of Co-Ownership
Article 1113. All things which are within the commerce of men are susceptible of
• Article 147/148 of Family Code – when a marriage is void or two persons live
prescription, unless otherwise provided. Property of the State or any of its
together as husband & wife, their property regime is co-ownership
subdivisions not patrimonial in character shall not be the object of prescription.
• When a person dies, those who inherit his estate co-own the properties of the
deceased prior to partition
CASE: Director of Forest Administration v. Fernandez
Lesson: Forestland cannot be acquired by prescription or registered.
Article 1112. Persons with capacity to alienate property may renounce prescription
Facts: An application was filed for the registration of a particular forest & timber on
already obtained, but not the right to prescribe in the future.
the ground of prescription. Will it be granted?
Prescription is deemed to have been tacitly renounced when the renunciation results
Held: No. Forestlands of the public domain cannot be acquired by prescription; their
from acts which imply the abandonment of the right acquired.
possession, however long, cannot ripen into private ownership. They are not
registrable & can never vest a person with title.
CASE: DBP v. Adil
Lesson: A debt that has already prescribed cannot be enforced by the creditor. But a CASE: Lovina v. Moreno
new contract assuming the prescribed debt is valid. Hence, where a party

Lesson: The ownership of a navigable stream or of its bed is not acquired by • Even if the land sought to be registered is public land, one can still be entitled
prescription. to a judicial confirmation of an imperfect title, if he has also satisfied the
requirements of the Public Land Act (CA No. 141 as amended by RA No.
CASE: Republic v. CA 1942). Sec. 48 of said Act enumerates as among the persons entitled to
Lessons: (1) A particular area adjacent to a bay, which was at times covered by judicial confirmation of imperfect title, the following:
water due to rain & not due to the rising of the tide, can be registered & subject to o Those who, by themselves or through their predecessors-in-interest,
prescription. have been in the open, continuous, exclusive, and notorious
(2) Only possession acquired & enjoyed in the concept of an owner can serve as the possession and occupation of agricultural lands of the public domain,
root of a title acquired by prescription. under bona fide claim of ownership, for at least 30 years immediately
Facts #1: A parcel of land by the bay is covered with water 4-5 months a year due to preceding the filing of the application for confirmation of title.
the rain. The Director of Lands refused to register the title to said land, claiming it is
part of the lakebed or foreshore land. The Director cited Article 74 of the Law of Things of Public Dominion (Republic v. CA)
Waters of 1866, which provides that a lakebed is the ground covered by the lake’s • Those which, under existing legislation, are not subject to private ownership
waters when at their highest ordinary depth. Is the part of the lakebed that is & are reserved for public purposes
submerged only during the rainy season property of public dominion that cannot be • The Civil Code lists the properties which are of public dominion:
registered? o Those intended for public use
Held #1: No. The phenomenon is not a regular daily occurrence in the case of the § Ex. Rivers, roads, canals, torrents, bridges constructed by the
lake & has nothing to do with high tides or low tides. Note that the law provides that State, etc.
lakebeds which are non-registrable are determined by the ground covered by the o Those which belong to the State without being for public use, for
lake’s water at their highest ordinary depth. The rise & ebbing is caused by the rainy public service or development of national wealth
season (which means that the depth during said season is not the ordinary depth of • Art. 502, Civil Code lists more: continuous & intermittent waters of springs,
the water, since the rainy season lasts only 4-5 months in a given year). Hence, the waters rising continuously or intermittently on lands of public domain, lakes,
part of the property submerged only during the rainy season may be registered & & lagoons
can be the subject of prescription.
The applicant could also trace his right of title to a public instrument of sale in favor Article 1114. Creditors and all other persons interested in making the prescription
of his father, from whom he inherited the land, & has tax declarations & tax receipts. effective may avail themselves thereof notwithstanding the express or tacit
Tax receipts are merely declarations of ownership, but become strong evidence of renunciation by the debtor or proprietor.
ownership acquired by prescription when accompanied by proof of actual
possession of the property. Sample Scenario
Facts #2: There were oppositors in this same case who were against the applicant’s
• Q: A owes B P50,000. C guarantees the indebtedness of B & waives his
registration with the Director of Lands, because they claimed that they had
benefit of excussion (which means that if A fails to pay B, B need not exhaust
reclaimed the land, & were in possession of the property for more than 20 years. Is
all remedies against A for collection before demanding that C pay in A’s
the fact of their reclamation & possession enough to vest them with ownership?
place). The time within which to pay & to make a demand prescribed but A
Held #2: No. First, reclaimed land does not automatically belong to the person
nevertheless waives the prescription such that B can still collect from A. If A
reclaiming the same – the person reclaiming must get permission from the country’s
fails to pay, hence prompting B to seek payment from C, can C still invoke
reclamation authority first. Since the oppositors failed to show they got the property
prescription even after A’s waiver?
authority, their claim fails. Possession must be in the concept of owner for it to be a
root of a title acquired by prescription. In this case, the oppositors entered the • A: Yes. C can still resist payment by invoking that the collection of A’s debt
property as lessees of the applicants (from Facts & Held #1). Their eventual refusal has already prescribed; C cannot be prejudiced by A’s waiver because of Art.
to pay rent cannot be argued as a claim of ownership. Their use of the land & their 1114.
non-payment of rentals were merely tolerated by the applicant & these did not ripen
the possession of the oppositors into one of ownership. Article 1115. The provisions of the present Title are understood to be without
prejudice to what in this Code or in special laws is established with respect to
Land Registration under the Torrens System (Republic v. CA) specific cases of prescription.
• NOT for the purpose of acquiring lands, but only for the registration of title
which the applicant already possesses over the land Provisions of the Civil Code with Special Rules for Prescription
• NOT a means of acquiring ownership • In case of conflict between a period provided in this Title & the period in
another portion of the Civil Code, the more specific provision will prevail.

• GR: Action on a written contract prescribes in 10 years, while actions on oral kind of case.
contracts prescribe in 6 years. 3. If the prescriptive period under the old The old prescriptive period will apply.
o BUT: Art. 1391 provides that the prescriptive period for annulling a law is still running upon the effectivity of
contract if it is defective due to fraud perpetuated by one of the the Civil Code and the remaining In the example given in Scenario No. 2, if
parties is 4 years from the time the fraud is discovered, which is the balance of such period since the the balance of the period which started
rule whether the contract is oral or written. effectivity of the Civil Code is shorter under the old law is 12 years counted
§ Because this special rule exists for the special situation of than that provided in the Civil Code for from the time of the effectivity of the
annulling a contract due to fraud, then it is this rule that will exactly the same situation Civil Code & the latter provides for 15
apply in fraud situations, not the 10-year, 6-year periods. years as the prescriptive period for
• BUT: If different statutes are involved providing for different prescriptive exactly the same case, the prescriptive
periods, & if the types of cause of action contemplated by these are period under the old law will prevail.
apparently conflicting, they do not exclude each other from being availed of
by the aggrieved parties. CHAPTER 2. PRESCRIPTION OF OWNERSHIP & OTHER REAL RIGHTS
CASE: Callanta v. Carnation Phil. Article 1117. Acquisitive prescription of dominion & other real rights may be ordinary
Held: Though the Labor Code provides that a claim for money in labor cases or extraordinary.
prescribes in 3 years, it will not bar the aggrieved party from availing of the 4-year Ordinary acquisition requires possession of things in good faith & with just title for
prescriptive period for “injury of the plaintiff” provided in Art. 1146 of the Civil Code, the period of time fixed by law.
where the claim is illegal dismissal, since illegal dismissal also results to an injury to
the plaintiff. Kinds of Acquisitive Prescription
• Ordinary – uninterrupted possession in good faith & with just title for the
Article 1116. Prescription already running before the effectivity of this Code shall be required statutory period
governed by laws previously in force; but if since the time this Code took effect the • Extraordinary – uninterrupted possession for the required statutory period,
entire period herein required for prescription should elapse, the present Code shall without good faith or just title on possessor’s part
be applicable, even though by the former laws a longer period might be required.
Ordinary Extraordinary
Rules on Transitory Period for Civil Code Requisites: Requisite: Within the statutory
*Effectivity Date of the Civil Code: Aug. 30, 1950 1. In good faith – a reasonable belief that the period of 30 years
Scenario Effect person from who the thing is received has been
1. If the prescriptive period provided The prescriptive period under the old law the owner thereof, & can transmit ownership
under the old law has already lapsed applies 2. With just title – adverse claimant comes into
before the effectivity of the Civil Code possession through one of the modes recognized
2. If the prescriptive period under the old The Civil Code prevails, provided that by law for the acquisition of ownership or other
law is still running upon the effectivity of such period counted from the effectivity real rights, but the grantor is not the owner or
the Civil Code, but the Civil Code of the Civil Code has already lapsed, cannot transmit any right *NOTE: There is no need for
provides for a different period for the although under the old law the period 3. Within the statutory period of 10 years good faith or just title.
same situation has not yet lapsed. Possession is for 10 years Possession is for 30 years
In either case, possession must be OPPU –
Ex. If under an old law previous to the 1. In the concept of Owner,
effectivity of the Civil Code, X has 30 2. Peaceful
years to file a particular suit and by the 3. Public
time the 1950 Civil Code takes effect his 4. Uninterrupted
remaining time, pursuant to the period
provided by the old law, is only 12 years, CASE: Godinez v. CA
he cannot file the case on the 12th or Lesson: When one is in holding the property in the concept of an Owner, Publicly,
even on the 11th year if the 1950 Civil Peacefully, & in an Uninterrupted manner (OPPU), possession of a piece of land for
Code provides only 10 years as more than the period of time prescribed by law, & acquired such land in good faith &
prescriptive period for exactly the same with just title, acquisitive prescription can apply despite a registered title.

Facts: Felix divided his lot, Lot 665, in favor of his 7 children. name of the possessor exclusively on May 12, 1934, & action
• The judge ordered the adjudication of the lot for a 1/6 share instead of the to recover said property prescribed after 10 years, thus barring
1/7 share through a clerical error. the petitioner’s plea, given that he filed his case in 1973.
• 5/7 of the land (Lot 665-A) was sold to the Igot spouses while 2/7 (Lot 665- § Registration of deed of sale in the Office of the Registry of
B) of the land remained with Felix’s heirs Deeds serves as constructive notice to the whole world of its
• 39 years later, the judge corrected the original clerical error, & title to the contents & interests, legal & equitable, included therein
land of Lot 665 was officially issued as OCT No. 8. 2. Public – there must be a notorious holding of the property known to the
The heirs of Felix once again claimed that Lot 665-A was theirs due to the title community
granted in OCT No. 8. Will the claim of the heirs of Felix prosper? o Possession must not be of surreptitious character; it must be in the
Held: No. The Igots had been in OPPU possession for more than half a century after concept of owner
they bought the land from the Magsumbols, who had bought the land from the heirs. 3. Peaceful – there must be no valid interference from others claiming or
The laws as well as common sense favored the Igots. OCT No. 8 did not nullify the asserting the right to the property for the period of time required by law for
original sale. acquisitive prescription to apply
4. Uninterrupted – possession must be continuous & unbroken, & not merely
Article 1118. Possession has to be in the concept of an owner, public, peaceful, & intermittent or occasional
uninterrupted.
Article 1119. Acts of possessory character executed by virtue of license or by mere
Requisites for Acquisitive Prescription by Possession (OPPU) tolerance of the owner shall not be available for the purposes of possession.
Possession must be –
1. In the concept of Owner (concepto de dueño)– possessor asserts dominion Possession by Consent of Owner
on the property to the exclusion of all others • That the possessor holds a property with the consent of the owner shows that
o Must be an adverse possession the possessor acknowledges that somebody else owns the property
o Acts of possessory character executed due to license or by mere • This produces no effect with respect to possession or prescription
tolerance of the owner are inadequate (e.g., as usufructuary, trustee,
an agent, lessee, or mortgagee) CASE: Coronado v. CA
o GR: Mere possession with a juridical title cannot ripen into ownership Lesson: When there is proof that a possessor expressly acknowledged the ownership
by acquisitive prescription of another, & he never categorically claims ownership over the property in question,
§ EXC: When juridical title is expressly repudiated & such he cannot have acquired said property by prescription.
repudiation has been communicated to the other party Facts: Monterola executed a deed of donation in favor of Coronado, acknowledging
o CASE: Ramirez v. CA – an antichretic creditor cannot ordinarily acquire that the boundary owner of the property conveyed to her was Juana. During the
by prescription the land surrendered to him by the debtor, because his lifetime of the late Monterola, Juana was always allowed to enter & reap the produce
possession is not in the concept of owner of said property. After Monterola died in 1970, Coronado prohibited Juana’s entry to
o CASE: Republic v. CA – the U.S. Navy’s possession of a property for the property. Were the actions of Coronado proper?
recreational purposes only, resembling commodatum,1 without actual Held: No. Even if Monterola was indeed in continuous possession of the said
claim of ownership & in the concept of a mere borrower, can never property for over 10 years, said possession cannot be the basis for prescription.
translate to acquisitive prescription because the holding of the Possession must be in the concept of owner, & must be adverse. Acts of possessory
property by the U.S. Navy was merely transient; hence, the original character performed by mere tolerance of the owner are clearly not in the concept of
owners remain the real owners of the contested property owner, & such possessory acts, no matter how long so continued, do not start the
o CASE: Ramos v. CA – SC ruled that acquisitive prescription had set in. running of the period of prescription.
In the case, the title was already in the possessor, who was in OPEC
since 1934, & who had undertaken acts clearly showing his claim of Article 1120. Possession is interrupted for the purposes of prescription, naturally or
ownership, such as paying taxes evidenced by tax declarations & civilly.
receipts for several years
§ SC further held that the period for acquisitive prescription Interruption
began to run upon the issuance of the certificate of title in the • Possession must be uninterrupted
• There must be a continuity in the holding of the property to strengthen the
adverse right of the possessor
1 He who lends to another a thing for a definite time, to be enjoyed and used under certain conditions,
without any pay or reward (i.e., loaning or borrowing a thing to another).

• Ways to Interrupt Prescription:

o Natural – if through any cause it shall cease for more than 1 year • Interrupted upon receipt of the possessor of the judicial summons after the
o Civil – produced by judicial summons to the possessor filing of the complaint
o When the possessor receives the judicial summons & the copy of the
Article 1121. Possession is naturally interrupted if through any cause it should cease complaint, because only then does the court acquire jurisdiction over
for more than 1 year. the person
The old possession is not revived if a new possession be exercised by the same • Does NOT start upon the filing of the complaint in court
adverse claimant.
Exceptions
Article 1122. If the natural interruption is for 1 year or less, the time elapsed shall be • Judicial summons shall be deemed not to have been issued, & will not give
counted in favor of prescription. rise to interruption, when:
1) Summons is void for lack of legal solemnities
Example for Natural Interruption o If the summons is served by a person not authorized by the court,
Q: A is in possession of an unregistered property in the concept of an owner in good it shall be deemed as not issued
faith & with a just title. The land used to be owned by B, but B became insolvent & 2) When the plaintiff desists from the complaint or allows the
the property was sold in a public auction to answer for B’s indebtedness to the proceedings to lapse
government. A was the highest bidder at the auction. A had already been in o Desistance – voluntarily having the case dismissed
possession of the land for 4 years. 3) When the possessor is absolved from the complaint
• Z appears and claims that the property is his. Z requests A to vacate the o Absolution – the complaint has not been fully substantiated to
premises so that A will not be entangled in a possible suit. A leaves to avoid support any adverse claim by the complainant
further complications. o Presumption of good faith on part of possessor if there is lack of
• HOWEVER, Z was a defrauder — it was actually M who previously purchased proof
the property from B before A made his purchase.
o When A learns this, he returns to the property after 2 years CASE: Heirs of Tanyag v. Gabriel
o A continues to stay in the said lot for 7 years, making his total time Lesson: A notice of adverse claim will not suffice as civil interruption for purposes of
spent actually living in the lot 11 years. prescription; there must be judicial summons. Judicial summons implies that the
o The law requires 10 years of adverse, public, peaceful & claimants filed a case in court against the possessors AND that there was already
uninterrupted possession in the case of real property. summons issued & received by the possessors.
M comes & asserts his claim, requesting that A leave the place. Can A invoke Facts: Petitioners’ adverse possession of the disputed property began in 1969, with
acquisitive prescription to counter M’s claim? the issuance of a tax declaration in their favor, which in turn cancelled the tax
A: No. When A left the property for 2 years, his subsequent possession of 7 years declaration of respondents. Furthermore, since then, petitioners were in actual
cannot be added to his previous 4 years. In effect, the period material for purposes possession of the property, with their caretaker living in a nipa hut on the premises
of prescription is the subsequent 7 years only. & planting vegetables in the lot. In 1979, respondents began to assert that they
• BUT: if A only left the place for 1 year or less, prescription would already have were the true owners of the property. In 1998, respondents even got a certificate of
set in — if he had left only for 1 year, he would already have stayed there for title in their favor. Are the actions of respondents enough to interrupt the
12 years in the eyes of the law. prescription that has set in favor of petitioners?
Held: No. There was never judicial summons that were sent to petitioners & it was
Article 1123. Civil interruption is produced by judicial summons to the possessor. already held in previous cases that judicial summons is necessary; a notice of
adverse claim would not be enough for civil interruption. So long as no action is filed
Article 1124. Judicial summons shall be deemed not to have been issued & shall not against the petitioners in court by respondents within the period for prescription,
give rise to interruption: then there is no civil interruption.
(1) If it should be void for lack of legal solemnities. In this case, from 1969 until the filing of the complaint by the petitioners (& NOT the
(2) If the plaintiff should desist from the complaint or should allow the respondents who argued in favor of civil interruption) in 2000, the petitioners had
proceedings to lapse. been in OPPU possession of the disputed property. That would mean the petitioners
(3) If the possessor should be absolved from the complaint. had been in possession for 301 years already. This means that the petitioner have
In all these cases, the period of the interruption shall be counted for the already acquired the property, & their right to it is not defeated by the respondents’
prescription. acts of declaring again the property for tax purposes in 1979 & obtaining the
certificate of title in 1998.
General Rule: Civil Interruption

Article 1125. Any express or tacit recognition which the possessor may make of the Facts: The petitioner acquired a registered property through a forged document. Said
owner’s right also interrupts possession. petitioner claimed acquisitive prescription against the heirs of the original owners.
Can the petitioner’s case prosper?
Recognition Held: No. The parcel of land in dispute is titled in the name of the late Bernardino
• Possession must always be in the concept of an owner to the exclusion of all Reyes, the father of both the petitioner Florentino & the private respondents. This
others fact, petitioners do not deny. Hence, even if they allege adverse possession that
o One cannot consider himself possessing a property adversely in the would ripen into ownership due to acquisitive prescription, their title cannot defeat
concept of an owner if he recognizes somebody else as having a the real rights of respondents who stepped into the shoes of their father as
superior right successors-in-interest. As it is, petitioners cannot even claim adverse possession as
they admit that the respondents continue to reside on the subject property.
CASE: Diñoso v. CA
Lesson: When there is a redemption period, acquisitive prescription only begins to *CASE: Catholic Bishop of Balanga v. CA
run after the expiry of said redemption period. Lesson: Although prescription will not apply to registered property, the doctrine of
Facts:The seller & the buyer executed a contract of sale in Apr. 6, 1940 giving the laches is applicable.
seller the right to repurchase the property on or before Apr. 6, 1950. The buyer Facts: The petitioner donated registered property to a person who, including his
immediately took possession of the property. successors-in-interest, took possession of the same adversely, continuously, publicly
In 1952, the buyer filed a suit for recovery, asserting ownership over the property. Is and peacefully for 49 years.
there already prescription in this case? Thereafter, the petitioner filed a case to recover the property contending that the
Held: No. The possession of the buyer under the sale a retro 2 did not actually donation is invalid, & that, in either case, the property is registered & hence not
become adverse until the expiration of the redemption period, since until then he susceptible to prescription. Will the claim of petitioner prosper?
recognized the superior right of the vendor to oust him, & his claim of ownership was Held: No. Even if there is no prescription due to the registered title, the petitioner
not absolute. Since the redemption period expired only in 1950, & the case was filed was guilty of laches. Laches is an impediment to the assertion or enforcement of a
in 1952, there was no acquisitive prescription yet. right which has become, under the circumstances, inequitable or unfair to permit.
In this case, 49 years had lapsed since the supposedly void donation & there is no
Article 1126. Against a title recorded in the Registry of Property, ordinary prescription explanation for the long delay. Even if petitioner is the registered owner under the
of ownership or real rights shall not take place to the prejudice of a 3rd person, Torrens system, he has lost his right to recover the possession by reason of laches.
except by virtue of another title also recorded; & the time shall begin to run from the
recording of the latter. BUT Recall - CASE: Heirs of Nieto v. Municipality of Meycuayan (in Art. 1106)
As to lands registered under the Land Registry Act, the provisions of that special law Lesson: Laches will not apply to registered land if the possessor did not obtain it
shall govern. through any apparent mode of acquisition to assert his claim or colorable title. In
that case, there was no evidence that the property was transferred to the person
CASE: Dimayuga v. CA claiming laches either through a donation or an expropriation, or that any
Lesson: No title to registered land in derogation to that of the registered owner shall compensation was paid by the municipality for the use of the property.
be acquired by prescription or adverse possession.
Facts: A couple acquired a 13-hectare household registered under the Torrens Article 1127. The good faith of the possessor consists in the reasonable belief that
System in 1928. The illegitimate children claimed 1/2 of the same on the ground the person from whom he received the thing was the owner thereof, & could
that they acquired it by acquisitive prescription having been in the property since transmit his ownership.
1948. Will the claim of the children prosper?
Held: No. No portion of the homestead, a registered land, may be acquired by Article 1128. The conditions of good faith required for possession in Articles 526,
prescription. 527, 528, & 529 of this Code are likewise necessary for the determination of good
faith in the prescription of ownership & other real rights.
CASE: Reyes v. CA
Lesson: There is no prescription when parcel of land is titled property; it belongs to Civil Code Provisions on Good Faith
the registered owner & his successors-in-interest. • Art. 526. Who is a possessor in good faith?
o One who is not aware that there exists in his title or mode of
acquisition any flaw which invalidates it.
o One who is aware of any flaw is in bad faith.

2 Sale with a right to repurchase

§ BUT: Mistake upon a doubtful or difficult question of law may latter fails to file a case within 10 years to defend his right, he cannot invoke good
be the basis of good faith. faith.
• Art. 527. Good faith is always presumed. Facts: Zacarias filed an Affidavit of Consolidation of ownership with the Registry of
o The one who alleges bad faith on the part of the possessor has the Deeds in 1945 & enjoyed OPPU possession of the litigated property. Sofia, the
burden of proving his allegations. person claiming to own the disputed lot in this case, only found out in a cadastral
• Art. 528. When is possession in good faith lost? survey conducted in 1955 that Zacarias was actually occupying the lot. Sofia filed a
o In the case & from the moment facts exist which show that the complaint, arguing that the same property was hers, in 1956. Can Sofia still claim
possessor is not unaware that he possesses the thing improperly or that there was no acquisitive prescription?
wrongfully Held: No. Contrary to Sofia’s claim, the period of prescription should be reckoned not
• Art. 529. It is presumed that possession continues to be enjoyed in the same merely from the time she came to know of the claim of Zacarias during the cadastral
character in which it was acquired, unless the contrary is provided survey in 1955, but from the date of registration of the Affidavit for Consolidation
with the Register of Deeds because registration of an instrument in the Office of the
CASE: Negrete v. CFI Marinduque Register of Deeds constitutes constructive notice to the whole world.
Lessons: (1) When the possessor is aware of any flaw in his possession, such as
when the deed of sale giving him his right to a property stated a different property Article 1129. For the purposes of prescription, there is just title when the adverse
from the one he possesses, he is in bad faith & cannot acquire by ordinary claimant came into possession of the property through one of the modes recognized
acquisition the property in question. by law for the acquisition of ownership or other real rights, but the grantor was not
(2) A deed of sale, to constitute a just title & to generate good faith for ordinary the owner or could not transmit any right.
acquisitive prescription, should refer to the same parcel of land which is adversely
possessed. Article 1130. The title for prescription must be true and valid.
Facts: A person claimed a particular property by virtue of ordinary acquisitive
prescription of 10 years based on a deed of sale which he knew involved a different Article 1131. For the purposes of prescription, just title must be proved; it is never
property. Is the property his by acquisitive prescription? presumed.
Held: No. The deed of sale covers a parcel of land patently different from the
disputed land owned as to area, location & boundary owners. To claim ordinary True & Valid Title
acquisitive prescription, one must have just title & be in good faith. • NOT actually “titulo verdadero y valido” – the equivalent of a title which is
If the possessor’s position were to be sustained, it would be easy for anyone to sufficient to transfer ownership without the necessity of the lapse of the
acquire ownership of an untitled land belonging to another person in 10 years on the prescriptive period
basis of a document of sale covering a distinct parcel executed by a person who is a • Actually refers to a colored title (titulo colorado)
stranger to the land. o When a person buys a thing, in good faith, from one whom he believes
to be the owner
CASE: Reyes v. CA o Acts for acquisition required by law are performed, but there is a flaw in
Lesson: Knowingly using a forged document to base one’s just title for purposes of that the grantor was not the owner & could not transmit the right
acquisitive prescription is an act of bad faith. • NOT merely a putative title – one which is supposed to have preceded the
Facts: The petitioners forged the deed of sale & simulated the signatures of the acquisition of a thing, although in fact it did not, as might happen when one is
private respondents. The land is titled. Can the petitioners now claim to have in possession of a thing in the belief that it had been bequeathed to him
acquired the property by ordinary acquisitive prescription?
Held: No. Petitioners cannot justify their ownership & possession of the subject CASE: Doliendo v. Biarnesa
parcel of land by ordinary acquisitive prescription, since they are in bad faith. Also, Lesson: Acquiring a property through a public auction, which was actually already
the forged deed containing respondents’ simulated signatures is a nullity & cannot sold by the owner to another person prior to the auction, unbeknownst to the buyer
serve as a just title. from the auction, is an example of just title.
Facts: A person bought property in a valid public auction & continued possession of
CASE: Magtira v. CA the property thereafter for more than 10 years.
Lesson: Good faith cannot be invoked if the claimant has actual or constructive Prior to the sale made in the public auction, there was a first purchaser of the
notice of the legal & valid rights of possession of another during the prescriptive property previous to the death of the original owner. The officer in charge still listed
period. Thus, if there is constructive notice (because of a title in the Registry of the property as one to sell in the public auction.
Deeds) that a possessor was occupying a lot that claimant argues is his, but the Held: Even if it be proved that the land in question was not lawfully included in the
list, still the defendant’s title by prescription must be sustained, since it is clear that

the sale at public auction did take place, that the transaction was in good faith, & Acquisitive Prescription for Movables
that the defendant bought the land from one whom he believed to have the right to Ordinary Extraordinary
sell. Requisites: Requisites:
1. Good faith 1. Uninterrupted possession
CASE: Solis v. CA 2. In the concept of owner, public, 2. Within the statutory period
Lesson: A donation propter nuptias is sufficient to create or establish just title of the adverse, & uninterrupted
possessors of the land as donees. 3. Within the statutory period
• Even a void donation may be the basis of a claim of ownership. Thus, 4 years 8 years
prescription can apply on void donations.
• The right given by ordinary acquisitive prescription is not dependent upon, & CASE: Dira v. Tanega
has no necessary connection, with the validity of the claim under which the Lesson: Good or bad faith is irrelevant in acquisitive prescription of movables if 8
possession is held. years have already passed.
*NOTE: This is different from the Catholic Bishop case, because there, the Facts: A & B were partners in a printing business. B borrowed money from A,
contention was more about the fact that the property was registered. If the property pledging some of his stocks to A, but neglected to pay his obligations, even after
is registered, prescription cannot apply, but laches can apply. demand. A thus conducted himself as the absolute owner of the printing equipment
of the partnership. A also assumed ownership of the stocks pledged by the
CASE: Faculan-Fudalan v. Spouses Ocial delinquent partner in connection with his obligations.
Lesson: (1) Occupation or use alone, no matter how long, cannot confer title by B filed a case for accounting of the partnership assets only after 14 years from the
prescription or adverse possession unless coupled with the element of hostility time A conducted himself as the owner of the shares & equipment. Can B still claim
towards the true owner (i.e., with possession under claim of title. the properties?
(2) A compromise agreement cannot be made the foundation that a possessor is in Held: No. SC rejected the claim of the delinquent partner that a trust relationship
good faith & has just title enough to acquire a lot by ordinary acquisitive prescription. existed between B & A, because A already acquired the movables by acquisitive
Facts: Baldomera claimed that her family had acquired ownership over the lot in prescription.
controversy by ordinary acquisitive prescription by merely occupying the lot. No
documentary evidence was shown that title was ever transferred to Baldomera or Article 559 & 1505 of the Civil Code
her ancestors. She also never denied that there was a tax declaration in the name of • Both statutes apply in the ff. cases: (LIP)
Fuderanan over the same property. However, Baldomera & the heirs of Fuderanan 1) The right of the owner to recover personal property Lost
executed a compromise agreement to settle their claims over the land, under which, 2) The right of the owner to recover that which he has been Illegally
Baldomera alleged, the heirs waived their rights over the land for a sum of P1,000. deprived
Can Baldomera claim ordinary acquisitive prescription? 3) The right of the owner over movables acquired in a Public sale, fair,
Held: No. Baldomera was not able to prove “just title” which is one of the market or merchant’s store
requirements for ordinary acquisitive prescription. There is no documentary proof or • Art. 559 – Possession of a movable property acquired in good faith is
other showing how title of the lot was transferred to Baldomera. equivalent to a title.
The compromise agreement cannot also be made her basis for claiming ordinary o If one who has lost any movable or has been unlawfully deprived
acquisitive prescription because the elements of good faith & just title would not be thereof may recover it from the person in possession of the same.
shown by this kind of agreement. A compromise agreement, by its nature, entails § If the possessor said movable lost is acquired it in good faith at
having the parties agreeing to something they may not actually want, for the sake of a public sale, the owner cannot obtain its return without
peace. It thus did not create or transmit ownership rights over the subject property. reimbursing the price paid therefor.
• Art. 1505 – When goods are sold by a person who is NOT the owner thereof,
Article 1132. The ownership of movables prescribes through uninterrupted without authority or consent of the owner, the buyer acquires no better title to
possession for 4 years in good faith. the goods than the seller had
The ownership of personal property also prescribes through uninterrupted o UNLESS the owner of the goods is, by his conduct, precluded from
possession for 8 years, without need of any other condition. denying the seller’s authority to sell
With regard to the right of the owner to recover personal property lost or of which he o HOWEVER, this Title shall not affect:
has been illegally deprived, as well as with respect to movables acquired in a public 1. The provisions of any factors’ acts, recording laws, or any other
sale, fair, or market, or from a merchant’s store, the provisions of Articles 559 & provisions of law enabling the apparent owner of goods to
1505 of this Code shall be observed. dispose of them as if he were the true owner thereof;

2. The validity of any contract of sale under statutory power of counted in favor of the adverse claimant.
sale or under the order of a court of competent jurisdiction;
3. Purchases made in a merchant’s store, or in fairs, or markets, Possession During Wartime When Civil Courts are Closed
in accordance with the Code of Commerce and special laws. • Possession of adverse claimant during wartime will not count in acquisitive
prescription
Article 1133. Movables possessed through a crime can never be acquired through o Because when the civil courts are closed, there is no way by which any
prescription by the offender. person claiming title over a certain property can file a case to recover
the same
Movables from a Crime • If there is a war BUT courts are functioning, possession of adverse claimant
• No one must benefit by illegal acts will be counted in his favor
• Ex. If A stole B’s car, A can never acquire title over the property, even if
prescription already lapsed, & even if B did not make a demand for the return Article 1137. Ownership & other real rights over immovables also prescribe through
of the car uninterrupted adverse possession thereof for 30 years, without need of title or of
good faith.
CASE: Tan v. CA
Lesson: When a movable possessed through a crime is passed on to another Extraordinary Prescription of Immovables
person, whether the latter is in good or bad faith, prescription begins to run. • 30 years of uninterrupted adverse possession
Furthermore, the act of possession must be through a crime, & not simply • No need for just title or good faith
unsubstantiated fraud & bad faith.
Facts: A claims that, through bad faith & fraud, he was led to assign his shares of CASE: Parcotilo v. Parcotilo
stocks in 1977 to 3 corporate entities. In 1987, A filed a case to reconvey the Lesson: Even if an invalid will was not executed with all the requisites for a valid will
shares. Can A still claim the shares? or donation, the said document can still supply the basis for extraordinary
Held: No. The action is barred by prescription; Article 1133 does not apply. There is prescription to begin to run.
nothing in this case that shows the bad faith was criminal. Facts: A man had adverse possession over a particular land by virtue of an invalid
*Note: The benefits of prescription may be denied to the offender, but if the thing will for 30 years.
was in the meanwhile passed to a subsequent holder, prescription begins to run (4 Held: Extraordinary prescription had set in despite the invalid will, as the man had
or 8 years, depending on existence of good faith). uninterrupted, adverse, continuous possession for 30 years.
Article 1134. Ownership and other rights over immovable property are acquired by CASE: Heirs of Amarente v. CA
ordinary prescription through possession of 10 years. Lesson: Alienable public land held by a possessor, personally or through his
predecessors-in-interest, openly & continuously for the prescribed statutory period of
Ordinary Prescription of Immovables 30 years under the Public Land Act, is converted into PRIVATE PROPERTY by the
• 10 years of possession by the adverse claimant merely lapse of time or completion of said period.
o Must be by virtue of a just & valid title Facts: Petitioners were forcibly driven off a property by the local barangay, which
o Must be in the concept of owner, uninterrupted, adverse, & public claimed that the land was agricultural land of the public domain.
Petitioners’ ancestor occupied the particular alienable public land, where he planted
Article 1135. In case the adverse claimant possesses by mistake an area greater, or several trees, & where his grandchildren (herein petitioners) had all grown up in,
less, than that expressed in his title, prescription shall be based on the possession. until the trees were already 70 years old, as demonstrated by the circumference of
their trunks. Can the local barangay claim that the property is still public land?
Actual Possession Held: No. The petitioners are already the owners of the lot, even before the formal
• Extent of property subject to the prescription shall be the one actually confirmation of their title to the property, because they acquired it by vested right.
possessed or held by the claimant The property has already been acquired by extraordinary acquisitive prescription as
o Regardless of size indicated or described in the title possession has exceeded 30 years.
• When someone buys or sells a property, they do so as they see it, in its actual
setting & in its physical metes & bounds, not by the lot number in the CASE: Faculan-Fudalan v. Spouses Ocial
certificate of title Facts: Baldomera claims that she & her family managed to obtain the property in
dispute by extraordinary acquisitive prescription. Baldomera & the heirs of
Article 1136. Possession in wartime, when the civil courts are not open, shall not be Fuderanan executed a compromise agreement to settle their claims over the land in

1994, under which, Baldomera alleged, the heirs of Fuderanan waived their rights previous owners of Lot A, B, & C should be tacked onto his
over the land for a sum of P1,000. Can Baldomera claim extraordinary acquisitive possession. Is his contention valid for Lot C?
prescription? § Held: No. For Lot A & B, there is no need to tack on possession
Held: No. Baldomera’s possession cannot yet have ripened into extraordinary because it was acquired ownership by assignment & by
acquisitive prescription because 30 years had not yet lapsed (again, the purchase; & such ownership naturally includes the right of
compromise was executed only in 1994 so 30 years from then would be 2024). possession. As for Lot C, however, it was never transferred by
Furthermore, the records reveal that there was an interruption of Baldomera’s any previous possessor, & was not part of the contract by
possession, when in 2001, the Spouses Ocial filed a complaint before the barangay assignment & purchase (which, again, only included Lots A &
captain & conciliation proceedings were held, although no settlement was reached. B). Hence, possession of Lots A & B cannot have the effect of
On the other hand, the heirs of Fuderanan had already acquired the property by allowing X to tack onto his possession of Lot C the possession
extraordinary acquisitive prescription when they were driven out of the lot, for they of any previous owner.
had already occupied the public land for 30 years. This also converted the property A deed does not of itself create privity between the grantor &
from public land, by their possession, into private land, even before their total was grantee as to land not described in the deed but occupied by
formally confirmed under the Public Land Act. the grantor in connection therewith, although the grantee
*See Art. 1311 for digest of other matters tackled in this case. enters into possession of the land not described & uses it in
connection with what was conveyed. Thus, where a grantor
Article 1138. In the computation of time necessary for prescription the ff. rules shall conveys a specific piece of property, the grantee may not tack
be observed: onto the period of his holding an additional piece of property
(1) The present possessor may complete the period necessary for prescription by the period of his grantor’s occupancy thereof to make up the
tacking his possession to that of his grantor or predecessor in interest; statutory period. His grantor did not convey such property or his
(2) It is presumed that the present possessor who was also the possessor at a interest therein, and there is no privity.
previous time, has continued to be in possession during the intervening time, § Ex. from case: A acquires 40 acres by deed & 40 acres by
unless there is proof to the contrary; purchase & adverse possession. Conveyance by him of the 40
(3) The first day shall be excluded & the last day included. acres acquired by deed would NOT carry with it the title to the
one acquired by purchase & adverse possession.
Rules for Computation of Time o Art. 1135 (on possession by mistake of an area greater or lesser than
(1) The present possessor may complete the period necessary for prescription by that expressed in the title) in relation to Art. 1138
tacking his possession to that of his grantor or predecessor in interest § Possession should be limited only to that of the successor-in-
o The words “grantor” & “predecessor in interest” connote a transfer in interest
a manner provided by law of property from one person to another (2) Presumption that the present possessor who was also the possessor at a
o Ex. B donated a property to A previous time, have continued to be in possession during the intervening
§ Previously, property was already in B’s possession for 8 years time, unless there is proof to the contrary.
§ A can make use of the 8 years for purposes of prescription o Presumption must proceed from a set of facts.
§ If A stays for another 3 years, his period of possession will § There must be a prior showing of the FACT that the person
already be 11 years presently possessing the property was the same who
o CASE: South City Homes, Inc. v. Republic possessed it before the intervening time.
§ Lesson: Tacking possession is allowed only when there is a o Ex.: X possessed the property in 1997. It was shown he also
privity of contract or relationship between the previous & possessed it in 1988.
present possessors. If there is no privity, the possession of the § It is presumed that he was in possession from 1989 to 1996.
new occupant is counted only from the time it actually began; it o Presumption can be destroyed if evidence can be adduced to show
cannot be lengthened by connecting it with the possession of that he was not in possession during the interval.
the former possessors. (3) First day shall be excluded & the last day included.
§ Facts: Possessor X acquired Lot A by purchase & Lot B by o Ex.: If a person possessed a property in Jan. 1, 1980 up to Jan. 15,
assignment in 1981. X wants to claim possession of a strip of 1990, then the counting of the period starts from Jan. 2, 1980 up to
land designated as Lot C, which is adjacent to, but not included Jan. 15, 1990.
in, Lots A & B. There was no previous owner of Lot C.
X continued to occupy Lot C, believing it was included in Lot A CHAPTER 3. PRESCRIPTION OF ACTIONS
& B. He claimed in a case in 1983 that the possession of the

Article 1139. Actions prescribe by the mere lapse of time fixed by law. claims that only a trust relationship was created in the intervening period. Can the
shares still be recovered?
Prescription of Actions (also known as the “statute of limitations”) Held: No. There has been extraordinary acquisitive prescription.
• GR: Law fixes the time within which an action may be filed
o If the prescribed time lapses, action cannot be filed anymore Other Rules Governing Prescription of Actions
• EXC: If parties agree to a different period by contract, the period the parties *Repeated discussion; see Art. 1132
agree on will prevail over the rules for prescription of actions. • Art. 559 – Possession of movable property in good faith is equal to title.
o But a person who loses his movable or is unlawfully deprived of it may
Application of Rules for Prescription of Actions recover it from the person in possession of the same
• Applies only in civil cases o But the owner has to reimburse the new possessor for the price he
• NOT in criminal cases or special proceedings paid if the movable was acquired (1) in good faith or (2) in a public
sale
Article 1140. Actions to recover movables shall prescribe 8 years from the time the • Art. 1505 – When goods are sold by a person who is NOT the owner thereof,
possession thereof is lost, unless the possessor has acquired the ownership by without authority or consent of the owner, the buyer acquires no better title to
prescription for a less period, according to Article 1132, & without prejudice to the the goods than the seller had
provisions of Articles 559, 1505, & 1133. o UNLESS the owner of the goods is, by his conduct, precluded from
denying the seller’s authority to sell
Rules on Movable Property o BUT: This Title shall not affect:
• GR: A person can recover lost personal or movable property which he claims (1) The provisions of any factors’ acts, recording laws, or any other
belong to him within 8 years. provisions of law enabling the apparent owner of goods to
dispose of them as if he were the true owner thereof;
• EXC: If all the requisites for ordinary acquisitive prescription of a movable
(2) The validity of any contract of sale under statutory power of
property are present, the possessor of the same becomes the owner after 4
sale or under the order of a court of competent jurisdiction;
years.
(3) Purchases made in a merchant’s store, or in fairs, or markets,
in accordance with the Code of Commerce and special laws.
CASE: Tan v. CA
• Art. 1133 – Movables possessed through crime can never be acquired by
*Repeated discussion; see Art. 1132
Lesson: There are 2 periods for purposes of extinctive prescription, vis-a-vis prescription.
movables: (1) 4 years, if possessor is in good faith; & (2) 8 years, in all other cases.
BUT when the movable is lost due to a crime, the offender can never acquire the Article 1141. Real actions over immovable prescribe after 30 years.
movable by prescription. The action to recover the movable from the criminal is This provision is without prejudice to what is established for the acquisition of
imprescriptible. But for the action to recover to be imprescriptible, then the act must ownership & other real rights by prescription.
be a crime – mere bad faith & abuse of right is not enough to make an act a crime.
Facts: Petitioner claims that he, through bad faith & fraud, was led to assign his Rules on Immovable Property
shares in 1977 to 3 corporate entities; he filed a case for reconveyance on 1987. • Prescriptive period – 30 years
Can petitioner still claim the property? o IF within 30 year period, all the requisites for ordinary acquisitive
Held: No. The action had already prescribed, because the petitioner had at most 8 prescription are already present in favor of possessor, the possessor
years to recover the property. Further, the assignment of shares was not proven to becomes the owner after 10 years
be criminal in character. It was, at most, in bad faith or abuse of right. o If it’s extraordinary acquisitive prescription, the right to sue prescribes
with the acquisition of the title
CASE: Dira v. Tanega
*Repeated discussion; see Art. 1132 Article 1142. A mortgage action prescribes after 10 years.
Lesson: Shares to a company are movables; bad faith or good faith is irrelevant in
extraordinary acquisitive prescription, & the right to recover property prescribes Mortgage
together with the title in such a case. • Secures a debt, so that if a debtor fails to pay the principal obligation, the
Facts: Partner X took possession of the shares of co-partner Y who refused to pay his creditor can foreclose on the mortgage by selling the same in a public sale or
obligations & participate in the partnership. X kept the uninterrupted, adverse bidding; the proceeds will pay off the principal debt & interest if any
possession, of the shares from 1947 to 1961. Y seeks to recover the shares, & o If there is any deficiency after the bidding, the creditor can still go
after the debtor

• Considered as an accessory contract
CASE: Espanol v. Philippine Veterans Association (PVA)
CASE: DBP v. Tomeldan Lesson: When it comes to laws or policies of government, right of action against
Lesson: A suit for recovery of the deficiency after the foreclosure of a mortgage is in them only begins when said laws or policies are declared by courts to be invalid.
the nature of a mortgage action & prescribes after 10 years after the date of Facts: PVA issued an administrative policy. As a result, the pension of a veteran’s
extrajudicial foreclosure. widow, which she received under RA65, was cancelled on Nov. 1, 1951.
Facts: The creditor extrajudicially foreclosed the property of the debtor on Sept. 15, • SC struck down said policy as invalid on June 27, 1973.
1967. The creditor then filed suit in Mar. 14, 1977 to claim the deficiency. The • Widow filed the complaint for collection on Feb. 25, 1974.
debtor claimed that the action already prescribed; was he correct? PVA claims the action has already prescribed. Has it prescribed?
Held: No. The action did not yet prescribe, because the prescriptive period was 10 Held: No. The contention that the action had already prescribed because it was filed
years from the time the cause of action accrued, which was on Sept. 16, 1967. The more than 10 years from the date of cancellation of the pension is without merit. It
prescriptive period to claim a deficiency starts to run after the mortgage property has was only when SC invalidated the questioned policy on June 27, 1973 that the
been foreclosed. petitioner in this case had a cause of action.
Article 1143. The ff. rights, among others specified elsewhere in this Code, are not Implied Trusts (Doctrines from Huang v. CA)
extinguished by prescription: • This is an example of an obligation created by law
(1) To demand a right of way, regulated in Article 649; • Art. 1450: A situation where a person, using his own funds, buys property on
(2) To bring an action to abate a public or private nuisance. behalf of another, who in the meantime may not have the funds to purchase
it — title to the property is for the time being placed in the name of the
Actions Which Do Not Prescribe (V-RN-QT-P; V Right Now, Cutie Pie!) trustee, the person who pays for it, until he is reimbursed by the beneficiary,
(1) To declare a contract null & Void the person for whom the trustee bought the land.
(2) To demand a Right of way, as regulated in Art. 649 • An implied trust, whether a constructive or resulting one, is normally NOT
(3) To abate a public or private Nuisance subject to prescription.
(4) To Quiet title initiated by a person having possession of the property o BUT: If the trustee openly & repudiates the trust, it is only from that
(5) Implied Trusts, unless when expressly repudiated by the trustee time when prescription can set in, because that is the time when
(6) To Partition a property among co-heirs (intestate) possession becomes adverse.
§ Period: 10 years from the repudiation of the trust
Article 1144. The ff. actions must be brought within 10 years from the time the right • Counted from date of registration of the deed or the date
of action accrues: of issuance of the certificate of title over the property
(1) Upon a written contract; • Before the period of prescription can start, it must be shown that:
(2) Upon an obligation created by law; 1) The trustee performed unequivocal acts of repudiation amounting to
(3) Upon a judgment. an ouster of the cestui que trust3
2) Such positive acts have been made known to the cestui que trust
Contracts in Writing 3) Evidence thereon is clear & convincing
• To fall under this article, agreement must be in writing
• Ex. Written contract of sale – barring applicability of laches, the purchaser Article 1145. The ff. actions must be commenced within 6 years:
has 10 years to file a case for delivery of the property (1) Upon an oral contract;
• Cause of action – accrues when a breach or violation of the contract occurs (2) Upon a quasi-contract.
Right of Action Oral Contracts

• Accrues when there exists a cause of action, which consists of 3 elements: • Must be commenced within 6 years from the time the cause of action
1) A right in favor of the plaintiff, by whatever means & under whatever accrues
law it arises or is created • Ex. A orally borrowed P2,000 from B to be paid on June 1, 1997
2) An obligation on the part of such defendant to respect such right o B failed to pay on the date despite demand from A
3) An act or omission on the part of such defendant violative of the right o A has 6 years from June 1, 1997 to file a case of collection against B
of the plaintiff
o It is only when this last element occurs that it can be said in law
3Cestui que trust – a person who has the equitable and beneficial interest in property the legal interest in
that a cause of action has arisen which is vested in a trustee

The restaurant had served the drinks to customers on Aug. 1989, damaging its
Quasi-Contracts reputation, as those who drank them suffered sickness.
• Certain lawful, voluntary & unilateral acts give rise to the juridical relation of Coca-Cola contends that action had prescribed, since the period should be 6 months
quasi-contracts such that no one shall be unjustly enriched at the expense of from the delivery of the thing sold pursuant to Article 1571 of the Civil Code. Is Coca-
another Cola correct?
• Governed by Book IV, Title XVII, Chapter 1 of Civil Code Held: No. The allegations in the complaint established a quasi-delict, the action of
• Ex. Solutio indebiti – when something is received when there is no right to which prescribes in 4 years.
demand it, & it has been delivered through mistake; this gives rise to the
obligation to return what has been unduly received CASE: Kramer, Jr. v. CA
o Ex. When a taxpayer mistakenly pays an amount which is not due, Lesson: Determination of administrative body not necessary for filing a case for
prescriptive period is 6 years as it is a quasi-contract of solution quasi-delict; the period for prescription still begins from the day the quasi-delict is
indebiti committed, regardless of the date of the issuance of the related administrative
ruling
Article 1146. The ff. actions must be instituted within 4 years: Facts: 2 vessels collided. The aggrieved party did not wait for the determination by
(1) Upon an injury to the rights of the plaintiff; the Board of Marine Inquiry (an administrative body) that the collision was caused by
(2) Upon quasi-delict. the fault or negligence of the other party before filing for damages & immediately
filed suit. It was argued that the action in court was premature because the
CASE: Virgilio Callanta v. Carnation Phil., Inc. administrative body should have been allowed to decide the issue first. Is the
Lesson: “Injury to rights of plaintiff” includes illegal dismissal cases filed by contention correct?
employees who were unjustly dismissed by employers. Held: No. The aggrieved party need not wait for the determination of the Board to file
Facts: Employee was illegally dismissed by his employer on June 1, 1979 & filed a suit. The part can immediately seek relief from the court by alleging negligence or
case with NLRC for illegal dismissal on July 5, 1982. NLRC dismissed the case on fault of the owners, agents, or personnel of the vessel.
the ground that it had prescribed, as the Labor Code provides that such claim should
be filed within 3 years. Has the action prescribed? CASE: Allied Banking Corp. v. CA
Held: No. The prescriptive period is 4 years, not 3. One’s employment is also Lesson: Tortious interference is a quasi-delict & action accrues from the time the act
considered a property right. Employee has 4 years from June 1, 1979 to file a case which causes the damage occurs (in this case, the order of the Central Bank).
for illegal dismissal. Facts: The debtor filed a third party complaint on June 17, 1987, alleging that “by
Also, the action cannot be barred by laches because the employer threatened to file reason of the tortious interference by the Central Bank with the affairs of GENBANK,
a case of estafa against the employee. This justifies the employee’s delay to file suit. he was prevented from performing his obligation under the loan such that he should
not be held liable.” The “tortious interference” was the Central Bank’s ordering
Quasi-Delict GENBANK on Mar. 25, 1980 to desist from doing business. Can the debtor still file
• Art. 2176: Whoever by act or omission causes damage to another, where the case?
there is no pre-existing contractual relation between them there being fault or Held: No. The complaint was barred by prescription, because cause of action
negligence, shall pay for the damage done. accrued on Mar. 25, 1980, & from then there were only 4 years left to file the case.
• Governed by Book IV, Title XVII, Chapter 2 of the Civil Code
Article 1147. The ff. actions must be filed within 1 year:
• Ex. The fault or negligence resulting in the liability of manufacturers &
(1) For forcible entry;
processors of foodstuffs, drinks, toilet articles & similar goods
(2) For defamation.
o They are liable for death or injuries caused by any noxious or harmful
substances used, although no contractual relations exist between them
CASE: Vda. de Borromeo v. Pogoy
& the consumer
Lesson: The period for filing actions for forcible entry is 1 year, & is counted from
demand to vacate the premises.
CASE: Coca-Cola Bottlers Philippines, Inc. v. CA
Facts: X wrote a letter against occupant Y on Aug. 28, 1982, demanding that the
Lesson: The prescriptive period for quasi-delict begins to run from the day the quasi-
latter vacate the property. Later, X filed the complaint for ejectment on Sept. 16,
delict occurred or is committed.
1982. X did not avail of the barangay conciliation process required, but justified
Facts: A restaurant filed a complaint on May 7, 1990 against Coca-Cola, because of
such omission by citing PD 1508, which allows the direct filing of an action in court
the reckless & negligent manufacture of some Coke bottles, which contained “fiber-
where the same may otherwise be barred by the Statute of Limitations. Are X’s
like matter & other foreign substances” in them.
actions of skipping barangay conciliation justified?

Held: No. The process under PD1508 for barangay conciliation only takes 60 days. X becomes final.
would have had ample time within which to bring his case before the court should
the conciliation fail, because there were at least 11 months between the letter- Actions Regarding Payment
demand & the complaint for ejectment. Hence, X should not have skipped the • Period begins to run from the last payment of the annuity or interest
barangay conciliation process.
Final Judgment
Article 1148. The limitations of action mentioned in Articles 1140 to 1142, & 1144 • The prescription period is not counted from the time the judgment was
to 1147 are without prejudice to those specified in other parts of this Code, in the rendered but from the time it became final
Code of Commerce, and in special laws. • Revival of Judgment – gives the creditor a new right of enforcement from the
date of revival
“Without Prejudice” o Prevents wily debtors who conceal assets to evade attachment until
• In proper cases, the prescriptive period in this chapter may be availed of statute of limitations sets in
notwithstanding other special provisions in the Civil Code, Code of Commerce
& special laws Article 1153. The period for prescription of actions to demand accounting runs from
o A statute of limitation extinguishes the remedy only. the day the persons who should render the same cease in their functions.
o Although the remedy to enforce a right may be barred, that right may The period for the action arising from the result of the accounting runs from the date
be enforced by some other available remedy when it is not barred. when said result was recognized by agreement of the interested parties.
• Ex. In CASE: Virginio Callanta v. Carnation Phil., Inc., SC applied prescription
period in Art. 1146 (4 years for injury to the rights of the plaintiff) for a case Actions in relation to Accounting
of illegal dismissal even if the Labor Code provided for a period of 3 years • Actions to demand accounting – from the day the person who should render
the same ceases in his functions
Article 1149. All other actions whose periods are not fixed in this Code or in other • Actions arising from the result of accounting – from the date when the result
laws must be brought within 5 years from the time the right of action accrues. was recognized by agreement of the interested parties
Article 1150. The time for prescription for all kinds of actions, when there is no CASE: Dira v. Tanega
special provision which ordains otherwise, shall be counted from the day they may Lesson: The right to demand accounting by one partner to another begins when the
be brought. other partner stops allowing the demanding partner to make use of the shares &
operates the business as his own.
CASE: Tolentino v. CA Facts: Partner X took possession of the shares of co-partner Y, who refused to pay
Lesson: (1) In civil cases, when there is no special provisions, the general rule for his obligations & participate in the partnership despite repeated demands. X kept
prescription is 5 years. All actions, unless an exception is provided, have a the uninterrupted, adverse possession, of the shares from 1947 to 1961, &
prescriptive period. managed the business on his own.
(2) The use of someone else’s surname is not a crime, & therefore is not Y seeks to recover the shares, & claims that only a trust relationship was created in
imprescriptible. the intervening period. Has the action prescribed?
Facts: C is the 2nd spouse of B. C filed an action in 1971 against A, B’s former Held: Yes. The action has prescribed in 1947, when X began to operate the business
spouse, to prevent A from using the surname of her husband. C knew about the use exclusively as his own.
of the name since 1951. Has the action prescribed?
Held: Yes. The mere fact that the supposed violation of C’s right is continuous, in Article 1154. The period during which the obligee was prevented by a fortuitous
that A constantly uses B’s name, does not change the principle that the moment the event from enforcing his right is not reckoned against him.
breach of duty occurs, the right of actions accrues & the action from that moment
can be legally instituted. Fortuitous Event
• Unseen event or seen event which is inevitable; an act of God
Article 1151. The time for the prescription of actions which have for their object the • When, due to some fortuitous event, prescription is interrupted, an entirely
enforcement of obligations to pay principal with interest or annuity runs from the last new one will commence when there is no longer a fortuitous event
payment of the annuity or of the interest. o In other words, past period is not resumed
o Opposite of “suspension” in this aspect
Article 1152. The period of prescription of actions to demand the fulfillment of
obligations declared by a judgment commences from the time the judgment CASE: Provident Savings Bank v. CA

Lesson: When prescription starts anew, it will be an entirely new one • Ex. A letter acknowledging the validity of a deed of sale & promising to
Facts: A loan was granted to debtors by a bank, collateralized by their properties. comply with its commitments interrupts the period & begins it anew
The bank was placed under receivership from 1972 until 1981 by the Monetary for another 10 years (written contract)
Board & was prohibited from transacting business, including foreclosing properties. • Payment interrupts the running of the prescription period.
The debtors failed to pay the obligation, but promised to; meanwhile, they sold the o But if acknowledgment is written BUT payment is not
property to a purchaser who assumed the mortgage. accompanied by communication signed by the payor, payment
• On Aug. 16, 1986, the purchaser informed the bank that he was the would not interrupt the running of the prescription period
judgment creditor & wanted to release the mortgage by paying the
indebtedness. He filed a case to compel the release. CASE: Ledesma v. CA
• On Aug. 21, 1986, the debtors wrote a letter to the bank asking if they could Lesson: A written extrajudicial demand wipes out the period that has already
pay their debt through payment received in the Deed of Sale. elapsed & starts anew the prescriptive period. Said period would commence anew
Has the action of the bank to foreclose on the mortgage already prescribed? from the receipt of the demand.
Held: No. The action for the bank to foreclose on the mortgage did not prescribe yet, • Same rule for a written acknowledgement of debt — the full period of
because of the Monetary Board prohibition between 1972-1981 (this was prescription commences to run anew from the date of interruption.
considered a fortuitous event). The prescriptive period ran anew in 1981. The bank • Also, when it comes to the filing of cases, the filing arrests the period of
thus had until 1991 to file a case to foreclose on the mortgage. suspension, & the interruption lasts until the time that the dismissal becomes
The express acknowledgement by the debtors of the debt also estopped them from final. Then, the full time for the prescription must be reckoned from the date
setting up prescription. of the cessation of the interruption.
o While case is pending, prescription is interrupted.
CASE: Tan v. CA Facts: Aug. 21, 1980 – RCBC filed a civil case against X to enforce the terms of a
Lesson: Martial Law & the period from Sept. 21 1972-Feb. 25 1986 cannot be seen Trust Receipt Agreement executed on April 1, 1974 which X failed to comply with
as a fortuitous event which tolled prescription for all obligations; effect of fortuitous • Mar. 3, 1981 - Summons could not be served to X, so case was dismissed
events on prescription must be seen from a case-to-case basis. without prejudice to any future proceedings
Facts: During the Marcos Regime, Tan was detained for several offenses, & during • Dec. 2, 1988 – RCBC filed another case against X for the same cause of
that time sold his shares in a particular bank in 1977, claiming he only did it due to action & subject matter
fraud & bad faith. Tan sought to recover the shares by filing suit for reconveyance in X contends that the second action filed by RCBC already prescribed. Is X correct?
1987, claiming legal standing based on fortuitous event. Has Tan’s action Held: No. The action did not prescribe, because the filing of the first action
prescribed? interrupted the period. The period began to run again on Mar 3. 1981, when the
Held: Yes. The effect of fortuitous events on an individual & on prescription should case was dismissed.
be seen on a case-to-case basis. In this case, while in detention, Tan was still able to
file multiple suits through his counsel. Thus, detention was not a fortuitous event CASE: Cabrera v. Tiano
that served as an impediment to a judicial challenge for Tan. Lesson: The commencement of a suit prior to the expiration of the applicable
limitation period interrupts the running of the statute, as to all parties to the action.
Article 1155. The prescription of actions is interrupted when they are filed before the The date of filing of summons is of no moment.
court, when there is a written extra-judicial demand by the creditors, & when there is Facts: The sale of property was made on July 2, 1947. The action was filed on June
any written acknowledgment of the debt by the debtor. 20, 1957. But summons was served upon the defendant only on July 2, 1957. Has
the action prescribed?
Interruption of Prescription Held: No. The fact that summons was only served on defendant on July 2, 1957,
1) When they are filed before the court which incidentally or coincidentally was the end of the 10-year period, is of no
• The dismissal or voluntary abandonment by the plaintiff of a civil moment, since the civil actions are deemed comment from the date of the filing of
action takes no time out of the period of prescription, because it the complaint with the Clerk of Court, without taking into account the issuance &
would be as if no action had been commenced at all service of summons.
• The prescriptive period is interrupted from the date of filing,
regardless of the date when the summons is received CASE: Olympia International v. CA
2) When there is a written extra-judicial demand by the creditors Lesson: While a civil action stops the running of the statute of limitations, the
3) When there is any written acknowledgment of the debt by the debtor dismissal or the voluntary abandonment by the plaintiff of a civil case leaves the
• Not all acts of acknowledgment of a debt interrupt prescription; the parties in exactly the same position as if no action had commenced at all. The
acknowledgment must be written

commencement of an action, by reason of its dismissal or abandonment, takes no CASE: PNB v. Osete
time out of the period. Lesson: For the acknowledgment of a debt to interrupt prescription, the
acknowledgment must be written. Payment, if not coupled with a communication
CASE: Tambunting v. Sps. Sumabat signed by a payor, would not interrupt the running of prescription.
Lesson: An action to enforce a right arising from a mortgage is to be enforced within
10 years from the time the right of action accrues. CASE: Ramos v. Condez
Facts: The debtors defaulted on their obligations in May 1977. They filed a civil case Facts: On June 25, 1952, defendant sold to plaintiff a piece of land. The same
to restrain the foreclosure of their properties, but the case was dismissed on Nov. 9, defendant, upon demand by the plaintiff, recognized the sale on Nov. 10, 1956, &
1977 for their failure to attend the hearing. promised to deliver the property. The action was filed by plaintiff on May 22, 1963.
• Mar. 16, 1979 – Debtors filed a case to question the amount of their Has the action prescribed?
accountability to the creditor; but the proceeding was void because the court Held: No. The defendant’s letter on Nov. 10, 1956 acknowledging the debt
had no jurisdiction interrupted the running of prescription. Hence, the action has not yet prescribed.
• 1995 – The creditors initiated foreclosure proceedings against the debtors
Can the 1995 case filed by the creditors prosper? CASE: Republic v. Banez
Held: No. The action has prescribed. The right of action of the creditors accrued from Doctrine: A letter sent by the agent, on behalf of the principal, acknowledging a debt,
the time in May 1977 when the debtors defaulted on their loan. It was from that binds the principal, & is enough to interrupt the prescriptive period. Likewise, a letter
time that the 10-year period commenced. The period was interrupted when the sent to the agent, making a demand, interrupts the prescriptive period.
debtors filed a civil case sometimes after May 1977. However, the period Facts #1: Hojilla (agent of respondents) sent a letter dated Aug. 15, 1984 to
commenced to run again on Nov. 9, 1977 when the case was dismissed. petitioner which stated that “the preparation of the advance survey plan &
engineer’s certificate has been submitted to the Regional Land Office & was
CASE: Camarines Sur IV Electric Cooperative v. Aquino approved by the Register of Deeds, & that “Atty. C is preparing the papers for
Facts: The first case here was filed in 2003. After the first case was dismissed for no submission to the local court.” Does this letter constitute acknowledgment on the
cause of action, it was appealed to the higher courts. Final judgment for this first part of Hojilla of the existence of a contract enough to interrupt the prescriptive
case was made only in 2009. In 2010, the second case was filed. Has the action period?
prescribed? Held #1: Yes. The letter updated petitioner on the status of the subject property’s
Held: No. The second case was filed within the prescriptive period. The prescriptive title, an obligation the parties agreed on by contract. It would thus be specious to
period was interrupted because it was not the plaintiff who had the case dismissed, argue that the contract was not acknowledged. Because Hojilla’s letter served as a
nor did the plaintiff abandon the case. written acknowledgment of the debt, it interrupted the prescriptive period & set the
same running anew.
CASE: Antonio, Jr. v. Morales In a contract of agency, the agent acts for & in behalf of the principal on matters
Lesson: Even if it is the plaintiff that causes the dismissal, there will still be an within the scope of the authority conferred upon him, such that, the acts of the
interruption if the case is dismissed precisely so that the plaintiff can file a different agent have the same legal effect as if they were personally done by the principal.
one to expedite the resolution of his case. For a plaintiff’s causing of a dismissal to Because there is an express authority granted upon Hojilla to represent the
cause the prescriptive period to run again, the dismissal must be because of the respondents, as evidenced by the SPA, Hojilla’s actions bind the respondents.
plaintiff’s inaction, negligence, inaction, lack of interest, or intent to abandon a Facts #2: Petitioner sent Hojilla respondents a letter which stated, “Under the
lawful claim. Only this type of dismissal, caused by the plaintiff, would bar agreement, X shall pay the whole of the purchase price when the certificate of title is
subsequent suit by prescription. issued. In view of this, demand is hereby made upon you & your principals to return
Facts: X filed an action on Dec. 16, 1995 based on an oral contract, which remained the properties withdrawn & to unlock the gates leading to the staff-houses within the
pending in the CA for more than 6 years. Feeling that the pendency of the CA case 15 days from receipt thereof, otherwise we will be constrained to institute the
would be indefinite, X had the case dismissed so he could re-file another case. CA necessary action to protect the interest of X.” Another letter by petitioner also
dismissed the case on June 11, 2004. Meanwhile, X re-filed the case before the demanded that respondents discontinue the construction, repair, demolition, &
RTC, this time on Sept. 23, 2002. Has X’s action prescribed? occupancy of several staff-houses, & this letter said, “Demand is hereby made upon
Held: No. While the first case was dismissed on X’s motion, the dismissal was not a you to discontinue such unauthorized acts & vacate the premises within 15 days
voluntary abandonment of his claim. He in fact had it dismissed to expedite the from receipt hereof.” Did these letters constitute a proper demand?
enforcement of his rights. Furthermore, delays in the first case before the CA were Held #2: Yes. Clearly, the letters called on respondents to return the property,
beyond his control since it was the CA that had the other party comment & which discontinue the construction, repair, demolition, & occupancy of several staff-
took a long while to make a decision on the case. houses, & unlock the gates, which is to enforce the obligations of respondents under
the contract. This is true even if the letter was not sent to the respondents, but to

Hojilla, their agent. A letter sent to the agent making a demand interrupts the TITLE I. – OBLIGATIONS
prescriptive period.
Facts #3: The contract between the parties said that the obligation to present the CHAPTER 1. GENERAL PROVISIONS
title to the property would be due “within a reasonable time.” When did the cause of
action accrue? Article 1156. An obligation is a juridical necessity to give, to do, or not to do.
Held #3: The cause of action accrued (hence giving rise to the right to make a
demand which could have the effect of interrupting the prescriptive period) at the Obligation
point when the reasonable time within which to present title had lapsed. Reasonable • A legal bond whereby constraint is laid upon a person or group of persons to
time means so much time as is necessary under the circumstances for a reasonable act or forebear on behalf of another person or group of persons
& diligent man to do, conveniently, what the contract or duty requires that should be • “Persons” – both natural & juridical
done, having a regard for the rights & possibility of loss, if any, to the other party. • Requisites for the existence of an obligation: (JOS)
This reasonable time was clarified in the subsequent letter sent by Hojilla dated Aug. 1) Juridical tie (vinculum juris) – the efficient cause established by the
15, 1984, in which the respondents acknowledged their remaining obligation to various sources of obligations (e.g. law, contracts, quasi-contracts)
petitioner. This letter gave rise to a cause of action that could be filed against the 2) Object – the prestations or conduct required to be observed (to give,
respondents; & since the debt arose from a written contract, the petitioners had 10 to do or not to do)
years, or until Aug. 15, 1994, to file the suit. The subsequent letters then 3) Subject-persons – viewed from demandability:
continuously renewed the prescriptive period, again, giving an opportunity to sue a. Active – obligee
again for another 10 years. b. Passive – obligor
SUMMARY CHARTS FOR PRESCRIPTION OF ACTIONS Article 1157. Obligations arise from:
[Taken from Crombonds] (1) The law
(2) Contracts
Summary of Prescription of Actions (3) Quasi-contracts
Art. 1140 Movables 8 years (4) Acts or omissions punished by law (delicts)
Art. 1141 Immovables 30 years (5) Quasi-delicts
Art. 1142 Mortgages 10 years
Art. 1143 Right of way, public or private nuisance None Sources
Art. 1144 Written contracts, obligations created by law, judgment 10 years • List is exclusive – no other sources of obligations
Art. 1145 Oral contract, quasi-contract 6 years • Kinds:
Art. 1146 Injury to the plaintiff, quasi-delict 4 years 1) Civil – give a right of action to compel their performance
Art. 1147 Forcible entry & detainer, defamation 1 year 2) Natural – not based on positive law, but on equity & natural law
Art. 1149 All other actions with no fixed periods 5 years o Does not grant a right of action to enforce their performance
*Arts. 1140-1142, 1144-1147 are without prejudice to those specified in other o BUT after voluntary fulfillment by the obligor, they authorize the
parts of the Code, the Code of Commerce, and in special laws (Art. 1148) retention of what has been delivered or rendered by reason
thereof
When Prescription Shall Begin to Run
Art. 1150 All kinds of actions where no From the day they may be brought CASE: Metrobank v. Rosales
provision provides otherwise Facts: A bank withheld the deposit of a depositor pursuant to a hold-out clause in
Art. 1151 Enforcement of obligation to pay From the time of last payment the contract between the bank & the depositor. The bank’s ground for withholding
Art. 1152 Enforcement of judgment From the time judgment became the deposit was that the depositor committed a fraudulent transaction. Was the
final bank allowed to withhold the deposit?
Demand accounting From the time the person Held: No. The hold-out clause (which allowed the bank to withhold the deposit) as
responsible ceases to perform provided in the contract was supposed to be PURELY for obligations owed by the
Art. 1153 depositor to the bank. This case did not fall under the hold-out clause because the
Bring action from the result of From the day result was recognized
accounting by agreement of interested parties depositor owed no obligation to the bank. There are only 5 sources of obligations
under the Civil Code & none of them were involved here. There was only an
BOOK IV: OBLIGATIONS AND CONTRACTS allegation that there was a fraudulent transaction involved, but no obligation owed
by the depositor was established. Though a criminal case was filed by the bank

against the depositor, this is not enough reason to hold-out the deposit of the • Once a contract is perfected, the parties are bound not only by what is
depositor as there is no final judgment of conviction which would make the depositor expressly stipulated, but also to all the consequences which, according to
liable under delict to the bank. Considering that the depositor is not liable under any their nature, may be in keeping with good faith, usage, & the law
of the 5 sources of obligations, there was no legal basis for the bank to issue the
hold-out order. CASE: Perla Compania de Seguros, Inc v. CA
Lesson: Contracts have the force of law between the parties, & the court cannot
Article 1158. Obligations derived from law are not presumed. Only those expressly change its stipulations & substitute the content with its own interpretation, even if
determined in this Code or in special laws are demandable, & shall be regulated by some provisions seem unfair, for as long as the essential requisites for validity are
the precepts of the law which establishes them; & as to what has not been foreseen, present.
by the provisions of this Book. Facts: There was an insurance contract which stipulated that the insurer’s liability for
all damages arising out of death or bodily injury by one person was limited to
Law P12,000. It also said that, before the insured enters into a contract with the injured
• Most important source of obligation party, the express written consent of the insurer must be obtained. CA substituted
• An exaction or command that is forced upon you; not dependent on the will of these provisions with their own interpretation of equity. Was CA correct to do so?
the parties Held: No. Contracts are the private laws between the contracting parties & should be
• Basis must be clear & cannot be presumed fulfilled according to the literal sense of their stipulations, for as long as the
o The payment of taxes must be specifically directed by tax statutes stipulations are clear & leave no room for doubt as to the intention of the parties.
o Parents & children are obliged to support each other
o Even a 1-page labor contract contains the entire Labor Code *CASE: Tiu v. Platinum Plans Phil.
o BUT: “Thou shalt not kill” – NOT an obligation as understood herein Lesson: (1) A non-involvement or non-complete clause is valid, so long as it sets
• Existing law enters into & forms part of a valid contract without need for the reasonable limitations as to time, trade, & place. It is also valid to stipulate
parties expressly making references thereto liquidated damages would be paid by the employee if the employee fails to comply
o A contract is understood to incorporate therein the provisions of law with the non-compete clause.
specifying the obligations of the parties under the contract (2) Liquidated damages awarded for violation of a non-compete clause may be
o All other forms of obligations also have underlying statutes governing reduced if unjustified; but if the employee did not show, that from the beginning, she
them intended to comply with the non-compete clause in good faith, the court can choose
not to reduce liquidated damages.
*Article 1159. Obligations arising from contracts have the force of law between the Facts: A contract between an employer & employee provided: “The employee
contracting parties and should be complied with in good faith. undertakes that during his engagement with the employer, & in case of separation
from the company, whether voluntarily or for cause, he shall not, for the next 2
Components of Obligations Arising from Contracts years, be involved with any company engaged in the same business or the same pre-
1) Complying in good faith – unwritten, but implied need industry as the employer. Any breach would make the employee liable to pay
2) Observing the stipulations in the contract – expressly written the employer P100,000 as liquidated damages.” Is such a contract valid?
Held: Yes. A non-involvement clause is valid & cannot be considered in restraint of
Contracts trade as long as there are reasonable limitations as to time, trade, & place. Here, the
non-involvement clause has a time limit of 2 years from the time of the end of the
• There are express, implied, oral, & written contracts
employment of the employee. Also, it is limited as to trade, since it only prohibits the
• A meeting of the minds between 2 persons whereby one binds himself, with employee from working in the pre-need company akin to the employer’s, & not all
respect to another, to give something or to render some service industries. And finally, because the employee here was the Senior AVP in charge of
o May involve more than 2 persons the employer’s HK & ASEAN operations, she was privy to highly confidential &
o May involve mutual & reciprocal obligations & duties between & sensitive information of the employer. To allow her to engage in a rival business
among the parties soon after she leaves would make the employer’s trade secrets vulnerable,
• “Force of law between contracting parties” – obligatory nature of a binding & especially given the highly competitive marketing environment.
valid agreement SC thus ultimately held that the employee must pay the employer P100,000 in
o Willful non-fulfillment may involve sanctions liquidated damages, as stipulated in the contract. While in some cases, the SC
o Binding between the parties so long as they are not contrary to law, equitably reduced these damages, SC held it would not in this case because it
morals, good customs, public policy, or public order appeared even from the start that the employee did not have even the least
intention to fulfill the non-involvement clause in good faith.

o Art. 2176 – defines quasi-delicts: “whoever by act or omission causes
Class Discussion damage to another, there being fault or negligence, is obliged to pay
Q: Is a non-compete or non-involvement clause, which stops a former employee from for the damage done.”
working in a competitor company, valid? § BUT: Art. 2177 – The plaintiff shall not be entitled to recover
A: Yes, so long as it is not unreasonable. For example, one for 6 years would still be damages twice for the same act or omission of the defendant
considered reasonable under current jurisprudence. even if the negligence may constitute an entirely different
cause of action
*CASE: Deiparine v. CA o Arts. 19-36 – give a person or persons cause of action for filing
Lesson acc. to M: In all contracts, when one is in bad faith, one has absolutely no damage suits (requires only preponderance of evidence).
remedy, even on equitable grounds – none whatsoever; zero! § Article 29 – When accused is acquitted because he is not
Facts: The contractor deviated from the plans & specifications of the building. After a proved guilty beyond reasonable doubt, civil action for the
testing, it was shown that there were real defects that impaired the strength of the same act may be instituted.
building. Can the contractor be made liable? • If the judgment of acquittal is based on reasonable
Held: Yes. Art. 19 of the Civil Code provides that “every person must, in the exercise doubt, the court shall so declare or it may be inferred
of his rights and in the performance of his duties, act with justice, give everyone his from the text of the decision.
due, and observe honesty and good faith.” Also, obligations arising from contract § Art. 30 – When a separate civil action is brought arising from a
have the force of law between the parties & must be complied with in good faith. criminal offense & no criminal proceedings are filed during the
pendency of the civil case, preponderance of evidence is
Article 1160. Obligations derived from quasi-contracts shall be subject to the sufficient to prove the act complained of.
provisions of Chapter 1, Title XVII, of this Book. § Art. 32 – Violation of enumerated constitutional rights can
make one liable for damages, whether or not the act
Quasi-contracts constitutes a criminal offense.
• Certain lawful, voluntary & unilateral acts to the end that no one shall be • EXC: When the crime is committed by a judge, unless
unjustly benefited or enriched at the expense of another his act is a violation of the Penal Code or other penal
• Ex. Solutio indebiti – obligation to return what was obtained by mistake; when statutes
something is received when there is no right to demand it & it was unduly § Art. 33 – An entirely separate & distinct action from the
delivered by mistake, the obligation to return it arises criminal case can be filed for civil damages in cases of:
• Defamaton
Class Discussion • Fraud
Q: Are quasi-contracts implied contracts? • Physical Injuries
A: No. In a contract, there is a meeting of the minds. In quasi-contracts, there is no § Art. 34 – When a member of a city or municipal police force
meeting of the minds. However, a quasi-contract is enforced like a contract to avoid refuses or fails to render aid or protection to any person in
unjust enrichment. case of danger to life or property, he can be made primarily
liable for damages.
Article 1161. Civil obligations arising from criminal offenses shall be governed by the • The municipality or city is also subsidiarily responsible.
penal laws, subject to the provisions of Article 2177, & of the pertinent provisions of o Title XVIII of the Civil Code – the rules covering damages
Ch. 2, Preliminary Title, on Human Relations, & of Title XVIII of this Book, regulating § Rules laid down in other laws shall likewise apply so long as
damages. they are not inconsistent with the Civil Code
Requisites of Obligations in Relation to Delicts Article 1162. Obligations derived from quasi-delicts shall be governed by the
1. Juridical Tie – crime committed provisions of Chapter 2, Title XVII of this Book & by special laws.
2. Prestation – to give damages
3. Subject – obligor (offender); obligee (victim) Quasi-delicts Defined
• The act or omission which causes damage to another, there being fault or
Civil Liability in Criminal Liability negligence & no pre-existing contractual relation
• Civil liability attaches to any individual who is found to be criminally liable • Those persons liable for quasi-delicts are obliged to pay for the damage done.
• Civil Code Statutes on Damages:
CHAPTER 2. NATURE & EFFECT OF OBLIGATIONS.

§ Banks must exercise the highest degree of diligence in the
Article 1163. Every person obliged to give something is also obliged to take care of it conduct of their affairs.
with the proper diligence of a good father of a family, unless the law or the § When the purchaser or mortgagee of a real property is a bank,
stipulation of the parties requires another standard of care. the rule on innocent purchasers is applied more strictly; since
they are really in the business of extending loans with
Determinate Object mortgages, it is presumed that banks are familiar with the rules
• Article involves prestation “to give” on land registration. Hence, banks are not allowed to simply
• “Something” – refers to a determinate object which is definite, known, & has rely on certificates of title & cannot assume that because a
already been distinctly decided & particularly specified as the matter to be title, on its face, is free of liens & encumbrances, they are
given from among the same things belonging to the same kind relieved from the responsibility of taking further steps to verify
• Ex. Computer with serial no. 7777 (not just any kind of computer) to title & inspect the properties to be mortgaged.
Class Discussion Class Discussion

Q1: X will give Y a fruit for P1. Is there a contract? This Article refers only to determinate things, because there is the obligation to take
A1: There is no contract. The object must at least be generic. The thing may not exist care of the thing as a good father of a family. If the thing were generic, the obligation
at the time of the execution of the contract, as long as it has a reasonable to take good care would not be required since the thing is replaceable and the
expectation of coming into being. obligation will always stand.
Q2: X will give Y a vehicle. Is there a contract?
A2: No. This is neither generic nor determinable. Class Discussion
Q3: X will give Y a car. Is there a contract? Three cases in civil law where negligence is presumed –
A3: Yes. 1. Common carrier
Q4: X has to deliver an apple to Y with X’s name on it & X’s spit, as promised. 2. In case of collision, the one who violates traffic rules will be considered
Lightning struck & the apple with the spit was destroyed. negligent
A4: The obligation is extinguished, because the apple was a specific object (X’s 3. Liability of teachers, administrators, and the school (Persons and Family
apple with his name & spit) that was destroyed by a fortuitous event. Relations)
In reverse to the above scenario, if the apple was just “an apple” then obligation is • Ex. Teacher’s back is turned. When she turns around, a student of
not extinguished, because it is generic. hers, who is a minor, has a pencil stuck in her eye. Because of the
presumption, the teacher is presumed negligent.
Good Father of a Family
• Once the determinate thing is specified as the object of the prestation, the Article 1164. The creditor has a right to the fruits of the thing from the time the
person whose duty is to give the object must take care of it obligation to deliver it arises. However, he shall acquire no real right over it until the
• Synonymous with “ordinary diligence” same has been delivered to him.
• If the law or contract does not state the diligence required, the diligence of a
good father of a family is required Explaining Art. 1164
o Varies if the law or stipulation requires another standard of care • The Article involves a prestation “to give”
§ In case of a contrary stipulation, it CANNOT be one • AFTER the right to deliver the object of the prestation has arisen in favor of
contemplating the relinquishment or waiver of the most the creditor, but PRIOR to actual delivery of the object, the creditor has no
ordinary diligence real right enforceable against the whole world over the object & its fruits. The
o Ex.: Common carriers – persons, corporations, firms or associations real right only accrues when the object is actually delivered. Prior to that, the
engaged in the business of carrying or transporting passengers or creditor only has personal right to demand against the debtor who has the
good or both, by land, water or air, for compensation, offering their obligation to give.
services to the public
§ Bound to observe “extraordinary diligence” in the vigilance over Real v. Personal Right
the goods & passengers Personal Right Real Right
§ Generally, negligence must be proven. But in cases requiring The power of one person to demand The power belonging to a person over a
extraordinary diligence, negligence is presumed. from another, as a definite passive specific thing, without a passive subject
o Ex. Banks (CASE – Prudential Bank v. Rapanot) subject, the fulfillment of a prestation to individually determined, against whom
give, to do, or not to do such right may be personally exercised

Begins when the right to deliver the Begins only when the object is actually Q: B sold Lot Z to C. After having done so, B then sold the same Lot Z to D. Who has
object of the prestation has risen in delivered to the person entitled to it; the real right over Lot Z?
favor of the creditor hence, prior to the delivery, there is no A: Neither C or D, because delivery was still not made to either.
real right yet for the future receiver. *Note: When it comes to real property, whoever registers it first has the better right.
Hence, delivery creates the real right.
Enforceable only against the debtor Enforceable & binding against the whole Class Discussion
under obligation to give world over the objects & its fruits in favor Q: In a contract of sale which has been perfected, is the property the buyer’s?
of the person to whom it should be given A: No. It is not the buyer’s until it is delivered.
With a passive, definite debtor No definite debtor; passive subject
Can be defeated by a 3rd person in good Will prejudice anybody claiming the Article 1165. When what is to be delivered is a determinate thing, the creditor, in
faith who has innocently acquired the same object of the prestation addition to the right granted him by Article 1170, may compel the debtor to make
property prior to the scheduled delivery the delivery.
• WON the right to the delivery has If the thing is indeterminate or generic, he may ask that the obligation be complied
accrued in favor of the creditor is with at the expense of the debtor.
irrelevant. If the obligor delays, or has promised to deliver the same thing to 2 or more persons
• The aggrieved creditor’s remedy who do not have the same interest, he shall be responsible for any fortuitous event
is only to go against the debtor until he has effected the delivery.
for damages (& in this sense still
has a demandable right) but the Generic & Determinate Objects
creditor cannot get the object • Provision involves the prestation “to give”; object can be determinate or
back from the innocent 3rd generic
person. • Generic – any object belonging to the same kind/class/species
o In the event of non-delivery, the creditor can have it accomplished in
Example from Book any legal way & charge the debtor
• On Feb. 1, A buys a mango orchard from X, to be delivered on Mar. 1. o Creditor can ask 3rd party to deliver the same thing of the same kind
o Scenario 1: On Mar. 1, A shall have the right to the fruits of the with all expenses paid by debtor
mango orchard. If the property is delivered only on Apr. 1, A can still • Determinate – an object that is definite, known, & has already been distinctly
ask for the fruits accruing since Mar. 1. decided & particularly specified as the matter to be given from among the
o Scenario 2: If X sells the fruits on Mar. 20 to B who does not know of same things belonging to the same kind
the previous sale to A & who immediately takes possession of the o Remedy in case of non-delivery is to file an action for specific
fruits, B shall have the better right over the fruits. A’s remedy is to performance to compel the debtor to make the delivery
seek damages from X. This is because there is still no delivery of the o If the debtor is guilty of delay, fraud, negligence or contravention in the
property to A on Mar. 20, so A has no real right over it. performance of the obligation, the creditor can seek damages
o Scenario 3: If the mango orchard has already been delivered to A, A
has a real right over the fruits. If X sells the fruits to B after delivery to Class Discussion
A, A can recover from B. B can seek damages from X. Q: For P50, X will give Y a fruit. Is there a contract?
A: NO. The object must be either generic or determinate. A fruit is neither, so no
Kinds of Fruits contract is formed. The fruit must at least be a species of its own—an apple, for
• Natural – things that naturally grow instance—to be considered generic.
• Civil – rentals
• Industrial – hard work, labor Fortuitous Events
• An event which could not be foreseen, or which though foreseen, was
Class Discussion inevitable
Q: X & Y signed a contract where Y will give X a pen. The contract is valid & • GR: Debtors are relieved from obligation “to give” if the object is lost through
perfected. Who owns it now? a fortuitous event
A: Still Y, because the pen was not yet delivered to X. • EXC: A fortuitous event will not excuse the obligor from the obligation:
1) If the obligor delays, or
Class Discussion

2) If he has promised to deliver the same thing to 2 or more persons who When Y demanded for his typewriter, X returned it with missing parts & without
do not have the same interest having it repaired. Y had another company fix the typewriter, then sued X to obligate
• In both exceptions, the obligor will be liable. He will either: him to pay for the repair. Is X liable, & if so, what for?
o Be liable for damages, or Held: Yes. X contravened the tenor of his obligation to Y because not only did he not
o Will be bound to replace the lost object of the prestation in cases repair the typewriter; he also returned it in shambles. Because of this, X is doubly
when the obligee agrees to the replacement liable in this case: he is liable & must pay for the cost of the execution of the
obligation, which is the cost of the labor expended on the repair of the typewriter.
Article 1166. The obligation to give a determinate thing includes that of delivering all But in addition, he is also liable for the cost of the missing parts, because he was
its accessions & accessories, even though they may not have been mentioned. also bound to return the typewriter in the same condition it was when he received it.
Explanation Class Discussion

• The principal always includes its accessories & accessions Note that there are four types of breach of contract (sources of liability):
• Accession – something produced by the object of an obligation (pregnant 1. Delay – according to Art. 1169, it must be tainted with negligence or malice;
dogs producing puppies) absent this, it may just be an inadvertent good faith mistake
• Accessories – something joined to the object (radio in a car) 2. Fraud
3. Negligence
4. Contravention of the tenor of the obligation
Article 1167. If the person obliged to do something fails to do it, the same shall be
executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the Article 1169. Those obliged to deliver or to do something incur in delay from the time
obligations. Furthermore, it may be decreed that what has been poorly done be the obligee judicially or extrajudicially demands from them the fulfillment of their
undone. obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
Article 1168. When the obligation consists in not doing & the obligor does what has
(1) When the obligation or the law expressly so declares;
been forbidden, it shall also be undone at his expense.
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is
Rules for Obligations To Do
to be rendered was a controlling motive for the establishment of the contract;
• The creditor can ask any 3rd person to perform the obligation due should the or
debtor fail to do it (3) When demand would be useless, as when the obligor has rendered it beyond
o Debtor will be liable for all the expenses thereof his power to perform.
• The words “at his cost” imply both the right to have somebody else perform In reciprocal obligations, neither party incurs in delay if the other does not comply or
the obligation & the right to charge the expenses to the debtor is not ready to comply in a proper manner with what is incumbent upon him. From
• When the debtor poorly undertook the obligation, the creditor has the right to the moment one of the parties fulfills his obligation, delay by the other begins.
have everything undone at the expense of the debtor
Provision Breakdown (as explained by M)
Rules for Obligations Not to Do • Par. 1 – general rule
• If the obligor performs the act despite the obligation not to do it, it can be • Par. 2 – exceptions
undone at 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. purchaser pays
Lesson: The remedies of a person who has hired another to do something, such as
to repair a typewriter, when such is done poorly or not done at all: carpenter in advance to go to his house & repair later)
1) Damages • Par. 3 – simultaneous; normal, everyday transactions (e.g. buying pens from
2) File a suit a store)
3) Have it executed at the other’s cost o When you buy something, it is immediately given to you
Facts: X was hired to repair Y’s typewriter.
Delay
• Also known as “default”
• Kinds of delay:

o Mora solvendi – delay or default committed by debtor
o Mora accipiendi – delay or default in acceptance committed by CASE: Macaslang v. Zamora
creditor, in which case, debtor can consign whatever is due to the Lesson: Words clearly requiring the performance of a prestation are enough, even if
creditor in court if the circumstances so warrant the usual words are not used.
• Delay must be either malicious or negligent Facts: The letter in this case stated, “This is to give notice that since the mortgage to
o If the delay was due only to inadvertence without malice or your property has long expired & the property is already in my name, I will be taking
negligence, the obligor is not liable under Art. 1170 over the occupancy of said property 2 months from the date of this letter.” There
was an argument that since the word “vacate” was not used, there was no demand
Requisites of Default to vacate. Is this contention correct?
1) Obligation is demandable & already liquidated Held: No. Though the word “vacate” was not used, the notice relayed the desire to
2) The debtor delays performance take possession of the property, giving the debtor no alternative except to vacate.
3) Creditor requires the performance judicially or extrajudicially The word “vacate” hence need not be used. In the Golden Gate Realty Co. v. IAC
• Default generally begins from the moment the creditor demands the case, the words “you either pay your unpaid rentals, or I will file a court case to have
performance of the obligation you thrown out of the property” were also held enough to constitute a demand to
vacate.
CASE: Selegna Management & Dev’t Co. v. UCPB
Lesson: A debt is liquidated when the amount is known or is determinable by CASE: UCPB v. Sps. Beluso
inspection of the terms & conditions of the relevant promissory notes & related Lesson: The inaccurateness of the amount in the demand letter will not nullify the
documentation. Failure to furnish a debtor a detailed statement of account does not document’s effect.
ipso facto result in an unliquidated obligation. Facts: The Spouses, debtors in this case, argued that the demand made by the bank
Facts: Petitioners executed a promissory note where they said their principal was much bigger than what they actually owed, making the demand invalid. Since
obligation was P103,909,710.82, with an interest of 21.75% p.a. In the agreement there was an invalid demand, there was no default; hence, the interests & penalties
between the petitioners & the creditor, it was said that any delay would be subject to had not begun to run. Is this argument tenable?
a penalty charge of 1% per month, from the due date until the obligation is paid in Held: No. Default commences upon extrajudicial or judicial demand. The excess
full. Is the obligation considered liquidated? amount in such a demand does not nullify the demand itself, which is valid with
Held: Yes. Based on the wording of the agreement itself, the amount of total respect to the proper amount. Hence, since there was a valid, albeit excessive
obligation is known, or, is at least, determinable – the penalty is essentially based on demand by the bank, the Spouses are in default with respect to the proper amount,
the total principal amount outstanding, to be computed from the date of &, therefore, the interests & penalties began to run at this point.
acceleration until the obligation is paid in full. Further, when petitioners made their
partial payment, they never requested a copy of their statement of account in order Necessity of Demand for There to Be Delay
to determine how much they needed to pay. Hence, the amount can be considered • GR: Delay begins from the moment the obligee demands performance of the
already liquidated. obligation & the obligor does not heed the demand.
o Demand is necessary even if a period has been fixed in the obligation
Demand • Ex. The object of the prestation was to be delivered on Mar. 20, 2017. The
• An obligor is liable for damages for delay not from the time the object is to be object becomes due & demandable on such date.
delivered, but from the time of extrajudicial (e.g., notice) or judicial demand o If extrajudicial demand was made on Mar. 15, 2017, the debtor would
(e.g., commencement of a suit) still be given up until Mar. 20 to comply; if he fails to do so, he can
o Damages for delay accrue from time of demand, not delivery date; only be declared in delay as Mar. 21, 2017.
hence, no demand, no delay • Why is demand necessary then? It is to put an obligor in a due &
o Ex.: X was supposed to deliver a house to Y on Nov. 19, but doesn’t. demandable obligation in delay, so that the obligor will already be liable for
Is X liable for delay? NO, because there must still be judicial or interests or damages for the period of delay.
extrajudicial demand first.
• Demand should be made ONLY AFTER the maturity date of an obligation Class Discussion
• Must be a DEMAND – If no express demand, there is no liability for damages Q: “You shall deliver the house on Mar. 10, 2018.” Are you in delay on Mar. 11?
o Ex. “We request for you to pay” is not a demand A: No, because there is no judicial or extrajudicial demand; but your creditor can
o Ex. Letters of reminder to pay are not demands already file a case on Mar. 11.
o Ex. A mere statement of fact that failure to fulfill the obligation will Q: Why then do you need to make extrajudicial demand?
cause the penalty to be imposed is not a categorical demand

A: To determine when the damages will begin to accrue in favor of the creditor. The o An action can be filed at anytime after the non-compliance of the
legal rate of interest will be computed from the day of delay. other party because the cause of action of will always start from such
time.
CASE: Buenaventura v. Metrobank o HOWEVER, damages or interest shall start to run only after judicial or
Facts: The creditor’s final demand letter was received on July 28, 1998, & gave the extrajudicial demand.
debtor 5 days from receipt of the letter to make payment. When is the obligation o Ex.: If the obligation is due on Mar. 1, 1998, the aggrieved party can
due? file suit for specific performance immediately after Mar. 1, 1998
Held: Aug. 3, 1998 – 5 days from receipt of the letter; it was only then that the § If, without any extrajudicial demand from the obligor, suit is filed
debtor was in default. on Apr. 15, 1998, damages will be reckoned only from Apr. 15
§ If, however, extrajudicial demand was made on Mar. 15 & suit
CASE: Selegna Management & Dev’t Co. v. UCPB subsequently field on Apr. 15, damages will be reckoned from
Lesson: Partial payment does not ipso facto mean an abandonment by the creditor Mar. 15.
of his prior demand. • EXC: 2 cases where an extrajudicial demand should first be made prior to
Facts: Debtors made a partial payment of P10 million on March 25, 1999. They filing a civil suit:
claimed that this partial payment forestalled the maturity of their loan. Is this 1) Ejectment cases – before a lessor ejects a lessee, the lessor must
correct? first make an extrajudicial demand for the lessee to vacate the
Held: No. Partial payment does not extinguish an obligation, especially since this premises
partial payment was made way past the due date of the debt. Art. 1235 provides o Without extrajudicial demand, suit will be dismissed
that when the obligee accepts the performance, knowing of its incompleteness, & 2) Consignment cases – the debtor must first make an extrajudicial
without expressing any protest, the obligation is deemed fully complied with. Thus, to demand for the creditor to accept payment
imply that creditors accept partial payment as complete performance of the o If creditor unjustifiably refuses to accept payment, the debtor
obligation, their acceptance must be made under circumstances that indicate their can now consign the amount in court to extinguish his
intent to consider the performance complete & to renounce their claim arising from obligation
the defect. Here, there are no circumstances indicating the creditor’s renunciation of o If there is no extrajudicial demand, the consignment case
the right to foreclose the mortgaged properties extrajudicially. On the contrary, the will be dismissed
creditor immediately asserted its right to file an application for extrajudicial § UNLESS tender of payment prior to consignment need
foreclosure after receiving partial payment. Clearly, the creditor did not intend to give not be made pursuant to the law
the debtors more time to meet their obligation.
“In Delay” means “In Default”
Applicability of Art. 1169; Applicability of Art. 2209 to Money • When the law uses the phrase “in delay”, it means “in default”
• Art. 1169 applies only in obligations to do something other than pay money; o Mere delinquency in payment does not necessary mean delay in the
in obligations to pay money, Art. 2209 applies. For money, the rules are – legal concept
o When the debtor is in delay, the indemnity for damages, absent any • To be in default – involves the beginning of a special condition or status
contrary stipulations, will be the payment of the interest agreed upon which has its own peculiar results & effects
o If there is no stipulation, the legal interest of 6% per annum will apply
§ The interest replaces the damages When Demand is Not Necessary
o Default begins after extrajudicial or judicial demand 1) When the obligation or the law expressly so declares
§ UNLESS the contract stipulates from what time interest will • Ex. When a promissory note providing payment shall be made on a
be counted; if the contracts stipulates time of payment of particular date without necessity of demand makes the debtor in
interest, it will be payable from such time, & not from the default upon his failure to pay on a particular date
date of the filing of the complaint • Ex. The law expressly declares that taxes be paid on a specific date
§ THUS if no interest is stipulated or a date is not given, 2) When time is of the essence in a particular contract
interest will begin to run only from demand • Ex.: In stock market transactions made in the stock exchange, time is
of the essence such that there is no need of demand before the
Extrajudicial Demands delivery of the shares of stock ought to be made by the seller.
• GR: Extrajudicial demand is not a prerequisite for filing an action • Ex.: If a contract stipulates that a special car is to be delivered to the
o Commencement of a suit is, in itself, a sufficient demand obligee to be used solely for a particular parade at a particular time,
such as an exhibit in a one-day car fair to be held on a particular date

• CASE: Bargaza v. CA contract. The buyer failed to pay the remaining amortization for a condominium. He
o Lesson: Time is of the essence when the supplier is aware that was given a notice of cancellation pursuant to the contract. The buyer argued that
that an item is to be used for a specific date for a specific there should have been a demand after the expiration of the grace period for him to
purpose be considered in default. Is his contention valid?
o Facts: A contract was entered into in time for the delivery of Held: No. A grace period is a right, not an obligation, of the debtor. When
materials on Dec. 22, 1990, in time to construct a niche for the unconditionally conferred, such as in this case, the grace period is effective without
petitioner’s wife’s grave. The wife had expressed that she further need of demand either calling for the payment of the obligation or for
wanted to be buried before Christmas day. The supplier, honoring the right. The grace period must not be likened to an obligation, the non-
despite knowing the timetable & having been paid, failed to payment of which, under Art. 1169, would generally still require judicial or
make the delivery despite pleas & earnest follow-ups of the extrajudicial demand before “default” can arise.
widower. As a result, the crypt could not be constructed on time In this case, the grace period under the contract to sell became ipso facto operative
for Christmas. Is the supplier liable? from the moment the due payments were not met at their stated maturities. On this
o Held: Yes. The supplier is liable for both the delay & the breach. score, the provisions of Art. 1169 would find no relevance whatsoever.
3) When demand would be useless, as when the obligor has rendered it The cancellation of the contracts to sell by the seller accords with the contractual
beyond his power to perform covenants of the parties, & it must be respected. Further, in a contract to sell, the
• Ex. A debtor promised to constitute his house as a collateral for a non-payment of the purchase price (which is normally the condition for the final sale)
particular loan which is payable at a particular date. But before the can prevent the obligation to convey title from acquiring any obligatory force.
debtor could make the mortgage, he donates the house to his friend.
o Demand from the creditor to constitute the house as a Class Discussion
collateral would now be useless. In this case, the debtor’s Q: Let’s say Mar. 10, you will deliver. You made a demand on Mar. 15. You gave a
obligation becomes immediately demandable considering that grace period of another 10 days because the debtor asked for it. After the grace
he loses his right to the period within which to pay the loan period, should you make another demand to make him in delay? Did you negate the
• *CASE: Megaworld v. Tanseco first delay by giving into the grace period?
o Facts: X bought a condominium from Y, a real estate developer. A: No. The first demand is sufficient. Such is the juridical requirement of the law.
After the expiry of the written grace periods (based on the
contract), Y still failed to deliver the condominium project (in Reciprocal Obligations
class, M adds the fact that the condominium is only half-built). • Those created & established at the same time, out of the same cause
Should there still be demand for delivery? • Results in the mutual relationship of creditor & debtor between the parties
o Held: No. There is no need for a demand, because at the time • In reciprocal obligations, the performance of one is conditioned upon the
the obligation was due, there was actually no condominium simultaneous fulfillment of the other
unit available for delivery – the unit itself was completed only o The obligation of one is a resolutory4 condition of the obligation of the
after 3 years. Further, the fact that the contractor gave notice other, the non-fulfillment of which entitles the other party to rescind
to the unit buyer to occupy the condominium after almost 3 the contract
years prior to the latter’s demand for the refund of the o Ex. A contract of loan – the promise of the borrower to pay is the
purchase price she had already fully paid was immaterial. consideration of the obligation of the bank to furnish the loan
o M: SC thus held that demand would not be necessary because o Ex. Contract of sale, lease
the obligor has made impossible for himself to fulfill his • Where one of the parties to a contract does not perform the undertaking
obligation. which he is bound to perform under the terms of the agreement, he is NOT
entitled to insist upon the performance of the other party
CASE: Bricktown Development Co. v. Tierra Development Co. o For failure of the other party to assume & perform the obligation
Lesson: Demand is no longer necessary after the expiration of the grace period given imposed upon him, the other party does not incur in delay
to the buyer, particularly when the contract between the buyer & seller provides a
date for the payment of an obligation, & a grace period in case the buyer fails to pay CASE: Binalbagan Tech., Inc. v. CA
within the provided date. This is because a grace period is a right, not an obligation,
& hence Art. 1169 would not apply.
Facts: The buyer of a condominium entered into a contract to sell with the real
estate developer which said that if he fails to pay within the stipulated period, he will 4Rights & obligations come into existence immediately upon agreement between the parties. If a resolutory
be given a grace period of 60 days, after which the developer could cancel the condition is fulfilled, the operation of the rights & obligations cease.

Facts: Buyer X purchased a house from seller Y (making only a partial payment). cardholder. The initial credit card membership agreement entered into between the
However, through no fault of seller Y, a third party-claimant, Z, through a court order, issuer & holder is just the agreement to provide a credit facility to the cardholder. It
evicted X from the said place. As a result, X was not able to take possession of the is the second relationship – when the credit card issuer approves the transaction –
property that he bought from the seller for 8 years. When the judicial decree of that involves 3 contracts: (a) the sales contract between the credit card holder & the
eviction was reversed by the court, allowing X to take possession of the property, Y merchant or the business establishment which accepted the credit card; (b) the loan
wanted the contract rescinded. Y argued that since X never paid the remaining agreement between the credit card issuer & the credit card holder; and lastly, (c) the
balance of the purchase price, the contract could be considered cancelled. Can Y promise to pay between the credit card issuer & the merchant or business
rescind the contract for X’s failure to pay? establishment.
Held: No. Even if the eviction was not Y’s fault, Y was not in a legal position to Facts: X, a credit card holder, argues: (1) that since his AMEX card has no pre-set
demand compliance of the prestation of X to pay the price. Y’s right to demand credit card limit, AMEX has the obligation to approve all his charge requests; & (2)
payment was suspended during that period. even if AMEX has no such obligation, at the very least, AMEX is obliged to act on his
charge requests within a specific period of time. Are X’s contentions correct?
*CASE: Agcaoili v. GSIS Held: No. (a) From the loan agreement perspective, the contractual relationship
Facts: GSIS & Agcaoili entered into a contract of sale of a government housing unit begins to exist only upon the meeting of the offer & acceptance of the parties
on the condition that Agcaoili should occupy the same within 3 days from receipt of involved. In more concrete terms, when cardholders use their credit cards to pay for
the notice. Failure to immediately occupy contractually allowed the GSIS to terminate their purchases, they merely offer to enter into loan agreements with the credit card
the contract. company. Only after the latter approves the purchase requests that the parties enter
Agcaoili, upon receipt of the notice, immediately went to the place & found a house into binding loan contracts. This view finds support in the reservation found in the
in a state of incompleteness that civilized occupation was not possible. Even the card membership agreement itself, which clearly states that AMEX reserves the right
basic amenities were non-existent. Agcaoili paid the 1st monthly installment, but to deny authorization for any requested charge. By so providing, AMEX made its
refused to make further payments until the housing unit was complete. GSIS position clear that it has no obligation to approve any & all charge requests made by
cancelled the award & told him to vacate the premises. Was GSIS correct to do so? its cardholders.
Held: No. GSIS had no right to rescind the same because it failed to do its part in the Since AMEX has no obligation to approve the purchase requests of its credit
obligation. It demanded the buyer’s immediate occupation, yet the basic amenities cardholders, X cannot claim that AMEX defaulted in its obligation. The 3 requisites
were not even ready. for a finding of default are: (a) that the obligation is demandable & liquidated; (b) the
To say, as the GSIS does, that this was what was intended by the parties, since the debtor delays performance; & (c) the creditor judicially or extrajudicially requires the
contract did not clearly impose upon it the obligation to deliver a habitable house, is debtors performance. Based on the above, the first requisite is no longer met
to advocate an absurdity, the creation of an unfair situation. By any objective because AMEX, by the express terms of the credit card agreement, is not obligated
interpretation of its terms, the contract can only be understood as imposing on the to approve X’s purchase request. Without a demandable obligation, there can be no
GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for finding of default.
his undertaking to pay the stipulated price. X also failed to make a demand. As established, the use of a credit card to pay for a
purchase is only an offer to the credit card company to enter a loan agreement with
CASE: Tanguilig v. CA the credit cardholder. Before the credit card issuer accepts this offer, no obligation
Facts: X & Y entered into a contract for the X’s construction of a windmill for relating to the loan exists between them. A demand is defined as the assertion of a
P60,000 with 1-year guaranty. After completion, X sued Y for non-payment of the legal right. A demand presupposes the existence of an obligation between the
balance. Y argued that he did not pay because the windmill collapsed due to defects parties. Thus, every time X used his AMEX credit card to pay for his purchases, what
in its construction within the 1-year guaranty period. X insisted that Y should bear his the stores transmitted to AMEX were his offers to execute loan contracts. These
own loss. Is X’s contention correct? obviously could not be classified as the demand required by law to make the debtor
Held: No. When the windmill failed to function properly, it became incumbent upon X in default, given that no obligation could arise on the part of AMEX until after AMEX
to institute the proper repairs in accordance with the guaranty in the contract. Thus, transmitted its acceptance of X’s offers. X’s insisting on and waiting for the charge
Y cannot be said to have incurred in delay; instead, it is X who should bear the purchases to be approved by AMEX is not the demand contemplated by Art. 1169.
expenses for the reconstruction of the windmill. Ultimately, it was held that Y should For failing to comply with the requisites of Art. 1169, X’s charge that AMEX is guilty
still pay X, but X must reconstruct the windmill in accordance with the 1-year of culpable delay in approving his purchase requests must fail.
guaranty. (b) Even assuming that AMEX had the right to review his credit card history before it
approved his purchase requests, X insists that AMEX had an obligation to act on his
*CASE: Panteleon v. AMEX Co. purchase requests, either to approve or deny, in a matter of seconds or in timely
Lesson: The creditor-debtor relationship between a credit card holder & issuer arises dispatch. But since having no pre-set spending limit in a credit card simply means
only after the credit card issuer has approved the specific purchase request of a that the charges made by the cardholder are approved based on his ability to pay, as

demonstrated by his past spending, payment patterns, & personal resources, every can be no applicability of delay yet at the time X was waiting for it to be good – this is
time X charges a purchase on his credit card, the AMEX still has to determine because there is no contract yet.
whether it will allow this charge, based on his past credit history. This right to review Q: Is this a violation of the abuse of right doctrine?
a cardholder’s credit history, although not specifically set out in the card A: No, because malice and bad faith on the part of the credit card company was not
membership agreement, is a necessary implication of AMEX’s right to deny proved.
authorization for any requested charge. Given this, & since the laws governing credit
cards requires authorization within a specific time limit, AMEX is not contractually or CASE: ASJ Co. v. Spouses Evangelista
legally bound to act on its cardholders’ purchase requests within any specific period Lesson: The right to retention exists in reciprocal obligations when one party is in
of time. The standard for measuring the time should therefore be based on fairness delay.
& reasonableness. Facts: X retained chicks & by-products that were supposed to be given to Y, because
BUT: Given that there is no strict time in which credit card companies must act on Y failed to pay the corresponding service fees. Was X’s retention justified?
purchase requests, they must still exercise their unlimited right to put off action on Held: Yes. Y was in delay in paying for the service fees, & only ever offered to
purchase requests without abusing their rights & causing injury to client & third partially satisfy their account. The Civil Code further provides that the creditor is
persons under Arts. 19-21 of the Civil Code. A right, though by itself legal because under no obligation to accept only a partial payment. More so, respondents cannot
recognized or granted by law as such, may nevertheless become the source of some substitute or apply as their payment the value of the chicks and by-products they
illegality owing to the abuse of right doctrine. When a right is exercised in a manner expect to derive because it is necessary that all the debts be for the same kind,
which does not conform with the norms enshrined in Art. 19 and results in damage generally of a monetary character. Needless to say, there was no valid application of
to another, a legal wrong is thereby committed for which the wrongdoer must be payment in this case.
held responsible. In the context of a credit card relationship, although there is Furthermore, it was Y who violated the very essence of reciprocity in contracts,
neither a contractual stipulation nor a specific law requiring the credit card issuer to consequently giving rise to X’s right of retention. This case is one among the species
act on the credit card holders offer within a definite period of time, these principles of non-performance of a reciprocal obligation. Reciprocal obligations are those which
provide the standard by which to judge AMEX’s actions. In this case, however, it was arise from the same cause, wherein each party is a debtor and a creditor of the
shown that the delays of AMEX were because X’s spending history did not match the other, such that the performance of one is conditioned upon the simultaneous
transaction which he sought approval for – his first single purchase was at fulfillment of the other. From the moment one of the parties fulfills his obligation,
US$13,826 which was not aligned with his spending history over the past 12 delay by the other party begins.
months, hence causing the delay as AMEX tried to verify. In this jurisdiction, good Since Y is guilty of delay in the performance of their obligations, they are liable to pay
faith is presumed & the burden of proving bad faith rests upon the party alleging it. X actual damages.
Although it took AMEX some time before it approved X’s charge requests, there is no
evidence to suggest that it acted with deliberate intent to cause X any loss or injury, CASE: Cortes v. CA
or acted in a manner that was contrary to morals, good customs, or public policy. SC Lesson #1: Mutual delay on the part of both parties cancels out the effects of
gave credence to AMEX’s claim that its review procedure was done to ensure default, such that it is as if no one is in default.
Pantaleons own protection as a cardholder and to prevent the possibility that the Lesson #2:There is nothing improper for the court to order the parties to comply with
credit card was being fraudulently used by a third person. their respective obligations.
Class Discussion (based on Panteleon v. AMEX) Article 1170. Those who in the performance of their obligations are guilty of fraud,
Q: X was going to pay using his credit card. X’s card was swiped and X spent 78 negligence, or delay, & those who in any manner contravene the tenor thereof, are
minutes waiting for his payment to come through. X called the credit card company liable for damages.
& demanded a notification for whether or not the payment came through. X got tired
of waiting and instead paid using cash. X then filed a case against the credit card Awarding of Damages
company for breach of contract, particularly on the ground of delay. Was X’s • Sources of Liability:
contention correct? o Fraud
A: One must examine the credit card transaction to decide if there is delay. When a o Negligence
customer gives his credit card to the store, the store will swipe to inform the bank. At o Delay
that point in time, is there already a contract between the customer and the bank? o Contravention of the tenor of the obligation
NO. That is only the negotiation stage. When the bank says that the credit card is • Measure of damages to be paid – under Art. 22015
good, the contract that is created is a contract of loan. The bank will first pay your
debt and then you will pay the bank back at the end of the month. Therefore, there
5 Article 2201. In contracts and quasi-contracts, the damages for which the obligor who acted in good faith is
liable shall be those that are the natural and probable consequences of the breach of the obligation, and

• If any of the 4 co-exist or aggravate the loss caused by a fortuitous event, the A: Yes, by express provision of the law. (Art. 2201)
obligor cannot be excused from being liable on his obligation
CASE: Bargaza v. CA
CASE: GF Equity v. Valenzona *Repeated case
Lesson: If the breach is in good faith, only damages in the amount of the reasonable Facts: A contract was entered into by a widower in time for the delivery of materials
& probable consequences of the breach, i.e., the actual damages, will be awarded to on Dec. 22, 1990, for the construction of a crypt for the his wife’s grave. The wife
the aggrieved party. had expressed that she wanted to be buried before Christmas day. The supplier,
Facts: The company terminated the services of the coach on the basis of a despite knowing the timetable & having been paid, failed to make the delivery
contractual provision which was later judicially declared void. What kind of damages despite pleas & earnest follow-ups of the widower for. The employees were also
are due from the company? feckless when reminded by the widower, indicating gross negligence on the part of
Held: Actual damages only – hence, the company is liable for the unearned income the owner. The things were delivered 2½ days later; as a result, the crypt could not
of the coach resulting from the termination. But it is not liable for all other damages, be constructed on time for Christmas. Is the supplier liable to pay moral & exemplary
like moral damages, since there was no bad faith. Complying with a stipulation that damages to the widower?
was later declared a nullity did not necessarily mean that the other party was in bad Held: Yes to both.
faith. • As for moral damages: The widower suffered wounded feelings, mental
anguish and serious anxiety while keeping watch on Christmas day over the
Class Discussion remains of his wife who could not be laid to rest on the date she herself had
A contract can have a void provision but the type of damages that will be paid to the chosen. There is no gainsaying the inexpressible pain and sorrow borne by
aggrieved party in the contract will only be actual if there is no bad faith. For the widower & his family caused by the ineptitude, cavalier behavior, & bad
example, if in a contract of employment, there is a void provision placed by the faith of the supplier & his employees in the performance of an obligation
employer, the employee, X, is entitled to damages if he is terminated based on that voluntarily entered into.
void provision, since that would mean that X was terminated wrongly. But X is only • As for exemplary damages: The lackadaisical and feckless attitude of the
entitled to actual damages – the salary X should have earned had he not been employees of the supplier, over which he exercised supervisory authority,
terminated. X is not entitled to moral damages because there is no bad faith. The indicates gross negligence in the fulfillment of his business obligations. The
provision in the contract was just declared void in a previous case; but the company supplier & his employees should have exercised fairness & good judgment in
merely followed the stipulation thinking at the time that it was correct. dealing with the widower who was then grieving over the loss of his wife.
Instead of commiserating with him, they contributed to petitioner's anguish by
CASE: PNB v. Spouses Racamora causing him to bear the agony resulting from his inability to fulfill his wife’s
Lesson: Moral damages are not recoverable simply because a contract is breached. dying wish.
They are recoverable only if the defendant acted fraudulently or in bad faith, or in
wanton disregard of his contractual obligations. Exemplary damages can likewise Class Discussion (based on RCBC case)
only be recovered if the guilty party acted in a wanton, fraudulent, reckless, Q: X just forgot to give 1 check out of many checks due. The contract says if he fails
oppressive, or malevolent manner. to pay each installment of his debt on the proper date, he is in delay. Should X be
Facts: PNB increased interest rates to a loan & foreclosed on mortgages. Should it considered in delay in accordance with the law such that he must pay damages?
as a result be liable for moral & exemplary damages? A: No. There was no negligence or malice that could lead to damages. This is not
Held: No. Bad faith cannot be imputed simply because the defendant acted with bad delay under the law; this was inadvertent delay & X was in good faith. Inadvertent
judgment or with attendant negligence. Bad faith is more than these; it pertains to a non-compliance will not lead to delay & damages, since there remains to be good
dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a faith, as shown by the fact that only 1 of many checks deposited had an issue.
breach of a known duty attributable to a motive, interest or ill will that partakes of
the nature of fraud. Proof of actions of this character is undisputably lacking in this Article 1171. Responsibility arising from fraud is demandable in all obligations. Any
case. waiver of an action for future fraud is void.
Class Discussion Fraud

Q: Can a contract be breached in good faith? • When a party complies with or performs an obligation fraudulently, he is
liable for damages
which the parties have foreseen or could have reasonably foreseen at the time the obligation was • Ex.: A buys a car from B worth P50,000. After the delivery of the car by B, A
constituted. paid B counterfeit money on due date. A is liable for damages.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for all damages which
may be reasonably attributed to the non-performance of the obligation.

o If the contract of sale stipulated that any fraudulent act by the other in • The omission of that diligence which is required by the nature of the
the performance of his obligation shall not be a ground for to file a suit obligation & corresponds with the circumstances of the persons, of the time
against the other for fraud is a void stipulation. & of the place
• BUT the dolo or fraud which is committed to induce a party to enter into a • The want of care required by the circumstances
contract is not covered in Art. 1171. • In the absence of stipulation, the diligence required is that of a good father of
o In such a case, the contract would be annullable a family (ordinary diligence)
• In Art. 1171, the contract is valid, but in the performance of the same, fraud • Relative or comparative, rather than an absolute term
is committed o Its application depends on the situation of the parties
o Liability can be regulated by the courts depending on the
*CASE: Banaga v. Majaduco circumstances
Lesson: Binding agreements previously made do not waive actions for future fraud. • General rule: negligence must always be proven
Facts: The parties, in the lower court, agreed that they would abide by & honor the • Tantamount to FRAUD when there is bad faith (gross negligence)
findings of the DENR’s survey team, a survey which would be the basis of the
resolution of their dispute. As it turns out, however, there was fraud inn the conduct Class Discussion
of the survey. Is X, one of the parties, bound by the survey because of X’s agreement Remember that negligence coupled with bad faith is equivalent to fraud. There is
in the lower court, & can X no longer appeal the decision based on the survey? bad faith in negligence when there is GROSS negligence.
Held: No – X can still appeal the decision based on the survey. While it is correct that
X bound herself to abide by the findings of the survey team, the waiver does not CASE: Syquia v. CA
include future fraud. Responsibility arising from fraud is demandable in all Lesson: Liability for negligence is dependent on the nature & circumstances of a
obligations. Any waiver of an action for future fraud is void. X brought up allegations situation; if one thing is done to prevent another evil, then there is no negligence.
of discrepancy and alterations in the lot data computations used in the survey when Facts: The personnel of a memorial park company, with the consent of the latter,
compared to data found in DENR records. X’s waiver cannot be taken to cover bore a hole on the grave of the deceased X during a rainy day to prevent the vault
allegations of fraud. from falling, consequently preventing the earth from caving in & filling-up the grave
However, the hole made possible the entry of more water & soil than was natural
Class Discussion had there been no hole, damaging the vault. Is the company liable to the relatives of
Fraud in Art. 1170 is fraud in the implementation or the fulfillment of the contract. X?
Note that in contract law, there are 3 forms of fraud: Held: No. The memorial company was not negligent. Had the company decided not
(1) Fraud as a source of liability in the implementation of the contract (Art. 1170) – to bore the hole, the vault would have been caved into the earth.
e.g., X bought a car from Y. X used fake pesos to pay Y. There is fraud in
implementation in this case. This would lead to damages. CASE: PNB v. CA
(2) Fraud in entering into the contract (Article 1344) – this type has two kinds Lesson: Banks must be extremely diligent with the accounts of their depositors.
• Serious – this type of fraud will make the contract annullable While a bank’s negligence may not have been attended with malice & bad faith,
• Fraud that is merely incidental, which will not annul the contract; there will nevertheless, if it caused serious anxiety, embarrassment, & humiliation to a
only be liability for damages (Tankeh v. DBP) depositor, the depositor can be awarded reasonable moral damages.
Facts: The bank negligently dishonored the check of the depositor. Can it be made
Article 1172. Responsibility arising from negligence in the performance of every kind liable?
of obligation is also demandable, but such liability may be regulated by the courts, Held: Yes. A bank is under obligation to treat the accounts of its depositors with
according to the circumstances. meticulous care whether such account consists only of a few hundred pesos or of
millions of pesos.
Article 1173. The fault or negligence of the obligor consists in the omission of that A customer’s check cannot be wrongfully refused payment without some
diligence which is required by the nature of the obligation & corresponds with the impeachment of his credit which must in fact be an actual injury, although he
circumstances of the persons, of the time & of the place. When negligence shows cannot, from the nature of the case, furnish independent & distinct proof thereof.
bad faith, the provisions of Articles 1171 & 2201, par. 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the Bad Faith
performance, that which is expected of a good father of a family shall be required. • A state of mind affirmatively operating with furtive design or with some
motive of ill will
Negligence • Not merely bad judgment or negligence

• Synonymous with fraud; involves a design to mislead or deceive another, not Q: If there was fortuitous event but you were negligent, will you still be held liable?
prompted by honest mistake as to one’s rights & duties A: Yes. For as long as one of the 4 sources of liability are present, whether before or
• Art. 1171 (on fraud) applies in cases where negligence concurs with bad faith during the occurrence of the fortuitous event, then you will be held liable despite the
o Pursuant to Art. 2201, par. 2 – obligor shall be responsible for all fortuitous event.
damages which may be reasonably attached to the non-performance
of the obligation CASE: Spouses Poon v. Prime Savings Bank
Lesson: The period during which a bank cannot do business due to insolvency is not
Mutual Negligence a fortuitous event, unless it is shown that the government’s action to place a bank
• If both parties are mutually negligent in performing their obligations, the fault under receivership & liquidation proceedings is tainted with arbitrariness, or that the
or negligence of one cancels out the fault or negligence of the author. regulatory body has acted without jurisdiction.
• If someone is advantaged somehow, there will just be reimbursement
pursuant to unjust enrichment. CASE: Tanguilig v. CA
• M: This concept is DIFFERENT from contributory negligence. Lesson: The negligence of a party can be “implied” given the circumstances, & from
there liability can arise even when coupled with fortuitous events.
Facts: The contractor constructed a windmill, which collapsed due to a typhoon. The
Article 1174. Except in cases expressly specified by the law, or when it is otherwise
contractor was sued for the destruction of the windmill, & he resisted liability by
declared by stipulation, or when the nature of the obligation requires the assumption
of risk, no person shall be responsible for those events which, could not be foreseen, invoking that the collapse was due to a fortuitous event. Is the contractor liable?
Held: Yes. SC ruled that the fact of the typhoon was not proven, due to there only
or which, though foreseen, were inevitable.
being proof of strong winds; also, windmills are constructed to withstand strong
winds (since precisely, there must be strong winds for a windmill to move). The
Fortuitous Events
windmill would not have collapsed had there not been an inherent defect in it.
• Events which could not be foreseen, or which though foreseen, were
inevitable
*CASE: Sia v. CA
• GR: Major casus est, cui humana infirmitas resistere non potest – “No one Lesson: Failing to inform a party of a fortuitous event the one is aware of that may
shall be liable for events which could not be foreseen, or which having been lead to an aggravation of said party’s loss, when given such a responsibility, is
foreseen were inevitable, with the exception of the cases expressly tantamount to negligence.
mentioned in the law or those in which the obligation so declares.” Facts: A bank failed to notify its client that there was flooding in a safety deposit box
• Nemo tenetur ad impossibilia – Nobody can be forced to do the impossible. containing the client’s valuable stamp collection. The bank already had 2 previous
• An Act of God – an accident due directly & exclusively to natural causes incidents of flooding in the same deposit box. The bank was supposedly guarded 24
without human intervention, which no amount of foresight, pains or care or hours a day. Is the bank liable for the fortuitous event?
reasonable expectation, could have been prevented Held: Yes. The bank was negligent & aggravated the injury of the petitioner, failing to
o When the effect, the cause of which is to be considered, is found to be exercise the prudence of a good father of a family.
in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is CASE: Dioquino v. Laureano
thereby humanized, as it were, and removed from the rules applicable Lesson: The essential element of a fortuitous event is that there is some
to the acts of God extraordinary circumstance independent of the will of the obligor. If such exists, then
o This is true even if the immediate cause of damage is the act of God there is no required diligence beyond what human care & foresight can provide.
Facts: X gave his car to Y, who was going to register the car. As Y drove the car to the
Elements of a Fortuitous Event (Nakpil v. CA) place of registration, some mischievous boys threw stones at the car of X, causing
1) The cause of the breach of the obligation must be independent of the will of damage to the car. Is Y liable for the acts of the mischievous boys?
the debtor. Held: No. The throwing of the stone was a fortuitous event which could not be
2) The event must be either unforeseeable or unavoidable. foreseen by Y, or which, though foreseen, was inevitable; Y cannot be held liable for
3) The event must be such as to render it impossible for the debtor to fulfill his damages.
obligation in a normal manner.
4) The debtor must be free from any participation in, or aggravation of the injury. CASE: Victorias Planters Assoc. Inc. v. Victorias Milling Co.
*BUT: If event concurs with fraud, negligence, delay, or violation in any manner of Lesson: A fortuitous event relieves the obligor from fulfilling a contractual obligation.
the tenor of the obligation, the obligor cannot escape liability. Parties cannot extend a previous contract by adding to the number of years written
Class Discussion

in the original contract agreed upon because a fortuitous event prevented fulfillment A: No, because the agreement was only until 1 year. The fortuitous event did not
of the original period. have the effect of extending that one year.
Facts: The contract between the parties stipulated that, in the event of a fortuitous
event, the period provided in the contract for the delivery of certain products shall be Generic Prestations & Fortuitous Events
suspended. The contract was suspended for 6 years due to the war. • When the object is generic (e.g. the payment of money), the debtor cannot
The central mill wanted to add 6 more years to the original contract to make up for avail of the benefit of a fortuitous event
the 6-year suspension period. Should this be allowed? o Ex. If the object is the payment of money as a consequence of a loan
Held: No. SC ruled that extending the contract 6 more years was not allowed given contract, debtor cannot avail of the benefit of fortuitous event even if
that the suspension was caused by a fortuitous event. The period of time when the the object for which the loaned money is used, such as the
contract was suspended CANNOT be deducted from the term of the contract construction of a factory, is wiped out by a typhoon
because, to add the said years upon the resumption of the contract would in effect • No fortuitous event as an excuse for money obligations
be an extension of the contract.
The stipulation that in the event of force majeure, the contract shall be deemed Exceptions to Rule on Fortuitous Events
suspended during said period, does not mean that the happening of those events • One can still be held liable for fortuitous events when:
stops the running of the period agreed upon. It only relieves the parties from the 1) The law so requires
fulfillment of their respective obligations during that time — the planters from o Art. 1165, par. 3 – when obligor delays, or promises to deliver the
delivering sugar cane and the central from milling it. same thing to 2 or more persons who do not have the same
To entitle the central to demand the fulfillment of the other party of their part in the interest
contract, the latter must have been ABLE to perform, but FAILED to do so, not o Art. 1268 – when the debt of a determinate thing proceeds from
prevented by a fortuitous event. a criminal offense, the debtor shall not be exempted from the
payment of its price, whatever may be the cause for the loss,
Class Discussion unless the thing having been offered by him to the person who
Q: If a contracts ends on Nov. 19, 1996, but for 2 months it was impossible to should receive it, the latter refused without justification to accept
perform the object of the contract because of a fortuitous event, when will the it
contract end? o Art. 552 – a possessor in bad faith shall be liable for
A: Still on Nov. 19, 1996. The requirement to comply to an obligation need not be deterioration or loss in every case, even if caused by a fortuitous
done during the period of a fortuitous event. event
o Art. 129 (6), Family Code – unless the owner had been
*CASE: Ace-Agro Development Co. v. CA indemnified from whatever source, the loss or deterioration of
Lesson: A contract of employment cannot be extended even if the laborer was not movables used for the benefit of the family, belonging to either
able to perform some tasks due to a fortuitous event. spouse, even due to fortuitous event, shall be paid to said spouse
Facts: X was engaged by Company Y to clean its bottles & repair wooden shells from the conjugal funds
inside its plant from Jan. 1, 1990 up to Dec. 31, 1990. o Article 1919 – if a depository, by force majeure or government
Due to the burning on Apr. 25, 1990 of the said plant, the work of X was suspended. order, loses the thing & receives money or another thing in its
X sought an extension of the contract period, refusing to work without such place, he shall deliver the sum or other thing to the depositor
extension. Should the extension be granted? o Article 1935 – the bailee6 of a commodatum is liable for the loss
Held: No. The period during which work was suspended did not justify an extension of the thing, even if it should be through a fortuitous event, when:
of the term. The contract was subject to a resolutory period which relieved the (1) He devotes the thing to any purpose different from that
parties of their respective obligations but did not stop the running of the period of for which it was loaned
their contract. (2) He keeps it longer than the period stipulated, or after
the accomplishment of the use for which the
Class Discussion commodatum has been constituted
Q: X was contracted to work for 1 year. In the middle of the year, lightning struck and
burnt the warehouse where X worked. X’s work was thus suspended. Later, X got
back to work, but sought an extension for the time when his work was suspended (2
months) so that in effect he would be working for 1 year and 2 months. Must his
request be granted?

6 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 returned without payment for
their use

(3) The thing loaned has been delivered with appraisal of its • Not regulated or prohibited by the Civil Code; the Usury Law is currently
value unless there is a stipulation exempting the bailee suspended
from responsibility in case of a fortuitous event • A special law may be passed in the future to regulate, prohibit, or allow
(4) He lends or leases the thing to a 3rd person who is not a usurious interest
member of his household
(5) In applicable situations, being able to save either the Article 1176. The receipt of the principal by the creditor, without reservation with
thing borrowed or his own thing, he chose to save the respect to the interest, shall give rise to the presumption that said interest has been
latter paid.
2) The parties expressly so stipulate The receipt of a later installment of a debt without reservation as to prior
o Ex. A contract provides that the obligor shall, within 10 days, installments, shall likewise raise the presumption that such installments have been
deliver a computer with serial number 2222 & shall be liable if paid.
the computer shall be destroyed by an Act of God for the value of
the same. Presumptions
3) When the nature of the obligation so requires (assumption of risk) • Presumptions always arise from a set of facts
o CASE: Republic v. Luzon Stevedoring • To have probative value, presumptions must be provided by law
§ Lesson: The mere difficulty to foresee the happening of an o Once facts are proven, then the presumption of law will attach
event is not the same as impossibility to foresee the o Will hold as true unless rebutted
same. An event must be impossible to foresee & avoid to
constitute a fortuitous event. When precautions are set up Presumptions in Art. 1176
by a company, it could be used as a sign that the event
• When an obligation consists in the payment of principal with interest
was, in fact, foreseeable
o Fact giving rise to presumption – payment of principal without
§ Facts: A towed barge, which usually traversed the river
reservation as to the interest
passing the Nagtahan bridge, rammed against one of the
o Presumption made – interest has already been paid
wooden piles of the bridge, smashing the post & causing
o Burden of proof – creditor must show interest has not been paid
the bridge to list. The river was swollen at the time & the
§ Can be rebutted by strong evidence to the contrary (e.g., it can
currents were swift due to heavy downpour in Manila.
be shown that the payment of the principal was made because
The barge owner contended that it should not be held
the debtor requested the creditor to apply the payment to the
liable for the damage on the bridge as such damage was
principal first)
caused by fortuitous event. He also contended that there
were many precautions taken & that the bridge’s • The payment of the later installment shall give rise to the presumption that
prior installments have already been paid
construction was misplaced. Should the owner be liable?
§ Held: Yes. The precautions the owner undertook o Fact giving rise to the presumption – payment of later installment
o Presumption made – prior installments have been paid
completely destroy his defense. For force majeure are
events that could not be foreseen, or which, though o Installment must clearly indicate that it indeed is the latest installment
o Burden of proof – creditor must overturn by showing clear & strong
foreseen, were inevitable. It is not enough that the event
should not have been foreseen or anticipated, as is evidence to the contrary
commonly believed, but it must be one impossible to § CASE: Manila Trading & Supply Co. v. Medina
foresee or to avoid. The fact that the owner took the • Lesson: Receipts should always explicitly state date of
precautions showed that he could foresee the risk. There payment to give rise to presumption that prior
was an assumption of risk, because it knew the perils of installments have been paid (e.g. “This payment is for
the swollen river & currents. Jan. 1945”).
• Facts: X made a purchase from Y, paying by installment.
Article 1175. Usurious transactions shall be governed by special laws. X presented numerous receipts to prove his payments,
some of which, according to the court, were partly
Usurious Transactions spurious & partly genuine.
X insists that, even if some receipts are spurious, the
• Higher interest rates than that normally set
receipts found to be genuine were allegedly made in Jan.
o Ex. A 35% per annum interest rate is not against the law, though it
1957, after the issuance of the spurious receipts; thus,
may be iniquitous in character

the presumption that the prior installments had been • BUT the creditor cannot bring those which are inherent in the person of the
paid already should arise. Is X’s contention correct? obligor
Held: No. SC held that this might have been true if such o Ex. Action for support – the creditor cannot file an action on behalf
receipts recited that they were issued for the of the obligor to claim support from the latter’s parents to satisfy
installments corresponding to the month of Jan., 1957; the indebtedness
but nowhere does that fact appear.
Also, it would just give rise to a presumption, which could Class Discussion
be overturned by clear evidence that the payments made Q: X borrowed money from Y. To secure the indebtedness, X mortgages his house.
do not correspond to the installments falling due on the But X was going to sell his lot to Z. Y files an injunction suit to stop X from selling the
dates of the genuine receipts. house. Will it prosper?
A: No. The contract between X & Y is merely a contract of loan. There must first be
Article 1177. The creditors, after having pursued the property in the possession of exhaustion. The first move of Y should be to demand from X extrajudicially or
the debtor to satisfy their claims, may exercise all the rights and bring all the actions judicially.
of the latter for the same purpose, save those which are inherent in his person; they
may also impugn the acts which the debtor may have done to defraud them. Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.
Protection of Creditors
• The law protects creditors Transmissibility
• Civil obligations are demandable & enforceable in the court of law • GR: Rights growing out of an obligation are transmissible
• Law gives all possible remedies to creditors to satisfy the obligations of the o Ex.: The transferee of an educational insurance plan, originally
obligor obtained by a transferor, acquires all the rights of the transferor under
o The creditor, after exhausting all the means to satisfy his claim, is said plan
given the opportunity to bring all actions which the obligor can § Transferee can avail of all the bonuses provided by the plan if
institute against his own debtors to protect & satisfy his claims against the child of the transferee graduates with distinction if such
said obligor right is provided in the contract
o Ultimately, if all else fails, contracts can be rescinded • BUT: The person who transmits the right CANNOT transmit greater rights than
he himself has by virtue of the obligation
• Successive measures (remedies) that must be taken by a creditor before he o Person to whom it is received also receives no greater rights than the
may bring an action for rescission of an allegedly fraudulent sale: transferor had at the time of the transmission of the rights
1) Exhaust the properties of the debtor through levying by attachment & • May be limited, or altogether prohibited by stipulation of the parties.
execution upon all the property of the debtor, except such as are o Ex.: A contract may stipulate that the assignment of any or all rights
exempt by law from execution granted is prohibited.
2) Exercise all the rights & actions of the debtor, save those personal to o Ex.: A less prohibitive provision – not allowed unless the parties
him (accion subrogatoria) consent
3) Seek rescission of the contracts executed by the debtor in fraud of • EXC: No transmission of a particular right can be made if the personal
their rights (accion pauliana) qualifications or circumstances of the transferor are the material ingredient
o Art. 1381 (1): a contract entered into by the debtor is in the obligation
rescissible if it were made in fraud of creditors when the latter o Ex.: An author who specializes in horror stories written in a very
cannot in any other manner collect the claim due them distinct style & who has been engaged by a publisher to write his (the
§ CASE: Adorable v. CA – Unless a debtor acted in fraud of author’s) kind of horror stories for his magazine cannot transmit his
his creditor, the creditor has no right to rescind a sale rights arising from such obligation to anybody else
made by the debtor to someone on the mere ground • Must be subject to the pertinent laws
that such sale will prejudice the creditor’s rights in o Ex.: If the law prohibits the alienation of homesteads within 5 years
collecting later on from the debtor from the issuance by the government of the patent, any transmission
§ Creditor’s right is still a personal right to receive of rights of dominion over the same within the prohibitory period shall
payment for the loan be void
§ A deed of sale would involve the transfer of a real right • General rule on real & personal rights
o Real rights – transmissible

o Personal rights – not transmissible Though there is nothing to indicate the 1st condition occurred,
the 2nd provides that payment shall be made “upon demand,”
Class Discussion & this demand was made much too late.
Q: A lessee to a condominium unit has children. The lessee dies. The lessor tries to 2) Conditional obligation – opposite of a pure obligation
eject the kids. Will the case prosper? • A condition – an act or event, other than a lapse of time, which, unless
A: No. Being a lessee is a real & not a personal right, making a contract of lease the condition is excused, must occur before a duty to perform a
transmissible. promise in the agreement arises or which discharges a duty of
performance that has already arisen
CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS o The performance depends upon a future or uncertain event or
upon a past event unknown to the parties
SECTION 1. – PURE & CONDITIONAL OBLIGATIONS.
Kinds of Conditions
Article 1179. Every obligation whose performance does not depend upon a future or 1) Resolutory Condition
uncertain event, or upon a past event unknown to the parties, is demandable at • Once the condition is established and acknowledged, the right
once. immediately exists; the obligation concomitant to the right can be
Every obligation which contains a resolutory condition shall also be demandable, demanded at once
without prejudice to the effects of the happening of the event. • Once the future or uncertain event happens which constitutes the
condition, it discharges the obligation
Special Notes o Obligation is extinguished by operation of law
• The end point of an obligation is extinguishment. o BUT such resolution can be made effective at some later date
o Ex.: If X gives Y a pen & Y gives X money, then there will be no more if the parties so stipulate in their contract, such as when the
obligation. parties stipulate that resolution becomes effective only from
• The law should really say “future & uncertain,” because for something that the date written notice thereof is sent
happens in the future to be a condition, it should be uncertain • Examples:
o When the contract provides that a purchaser can obtain a
Kinds of Obligations refund of their money for as long as the government continues
1) Pure obligation – an unqualified obligation which is demandable immediately to allow refunds of such a character
• Performance does not depend upon a future or uncertain event, or § In such a case, the purchaser can immediately ask for a
past event unknown to the parties refund
• Ex.: Bank depositor & bank § BUT: As soon as the government creates a law
• CASE: Pay v. Vda. de Palanca disallowing the refund, the purchaser can no longer do
§ Lesson: Action to demand compliance with an obligation so
prescribes if the creditor fails to make a demand within the o Reciprocal obligations – the obligation of one is a resolutory
proper prescriptive period & the contract contains the phrase condition of the obligation of the other, the non-fulfillment of
“upon demand.” which entitles the other party to rescind the contract
§ Facts: The debtor issued a promissory note to the creditor to o Contract of sale – when there is a breach, there is an option to
pay a sum of money payable upon receipt of a particular sum rescind
of money from the estate of a certain deceased person or upon o You have the right to drive. But the law states that a constant
demand. violator of traffic laws can have the right of his license revoked.
The case for collection on the basis of said note was filed 15 o When a person donates land to another on the condition that
years after the execution of the promissory note. Can the the latter would build upon the land a school, the condition
creditor still claim the sum owed? imposed is a resolutory condition
§ Held: No. The action can no longer prosper, since the § NOT suspensive in character – the school did not have
prescriptive period for filing the action based on a written to be constructed for the condition to be effective
document was 10 years & considering that the promissory § If there was no fulfillment, the donation may now be
note’s payment constituted a pure obligation & thus was revoked & all rights which the donee may have acquired
demandable at once. under it shall be deemed lost & extinguished
o Obligations where there is power to rescind are resolutory

2) Suspensive Condition § Obligation arises once it really rains the next day
• Can be demanded only upon the happening of the future or unknown o CASE: Javier v. CA
event or a past event unknown to the parties, which constitutes the § Lesson: When a contract is subject to a suspensive
condition condition, its birth or effectivity can take place only if &
• NOT demandable at once when the event which constitutes the condition
• Gives rise to the performance of the obligation happens or is fulfilled.
o If the condition does not take place, the parties would stand as § Facts: In consideration of rights to a timber license, the
if the conditional obligation never existed obligor undertook to pay the sum of P30,000 to the
• Examples: obligee as soon as the additional area for forest
o Contract to sell - where, in a purchase of property in concession has been obtained by the obligee &
installment, it is expressly provided in the contract that title approved by the government. The obligee never
remains vested on the seller until after the last payment of the obtained the additional area.
installment is made by the buyer. § Held: Obligor was not liable, as it involves the non-
§ There is no consent relative to the transfer of ownership happening of the suspensive condition—the approval by
yet, because the seller expressly reserve the transfer of the government of the new area.
title until the happening of the suspensive condition
• Seller – given the unilateral right to terminate *Differences Between Conditional Contract of Sale & Contract to Sell
the contract in case of non-payment of the price Conditional Contract of Sale Contract to Sell
§ Provides a positive suspensive condition, i.e., payment Payment Non-payment is a negative Payment is a positive
• Failure to pay is not a breach; it is simply an resolutory condition; payment suspensive condition
event which prevents the obligation of the owner is a suspensive condition
to convey title from acquiring binding force Effect of full Contract of sale is perfected Contract is not yet
§ Prior to the last payment, the purchaser has no title to payment of the considered perfected
the property. price (fulfillment
§ However, once the future event, which is the payment of of suspensive
the last installment, occurs, the obligation of the seller condition)
to execute the final deed of sale & to transfer title Presence of There is already consent, Consent to transfer is not
arises. It is from that time that the purchaser can Consent although conditioned on the present because the seller
demand transfer of the title. happening of a suspensive expressly reserves the
o Conditional contract of sale – where the seller may likewise condition – that is, payment transfer of title to the
reserve title to the property subject of the sale until the prospective buyer until the
fulfillment of a suspensive condition happening of the suspensive
§ Non-payment = negative resolutory condition condition
§ There is already consent regarding the transfer (unlike Transfer of If there was already previous Ownership will not
in a contract to sell), although it is conditioned upon the Ownership delivery of the property, automatically transfer to the
happening of a contingent event which may or may not ownership automatically buyer although the property
occur. transfers to the buyer by may have been previously
§ If the suspensive condition is not fulfilled, the perfection operation of law without any delivered to him. The
of the contract is abated further act by the seller prospective seller still has to
§ Further examples: convey title to the
• Contract to sell – There is a building being prospective buyer by
developed by Y. Y executes a contract to sell with entering into a contract of
X. This means that if building is finished sale
(suspensive condition), X & Y can negotiate for a
possible sale. After negotiations, there will be a Effect if Sold to a The fulfillment of the No double sale, since title
contract to sell. 3rd Person Not a suspensive condition will affect will only transfer to the buyer
o When an obligor promises to give an obligee a book if it rains Party to the the seller’s title thereto, & the after registration; a 3rd
the next day, which is an uncertain event Contract Despite seller will no longer have any person buying such property

Fulfillment of the title to transfer to 3rd person. despite the fulfillment of the 4. When in rescission, there is just cause not to rescind the contract, the court shall
Condition suspensive condition such fix a period
Art. 1544 (Civil Code) - such 2nd as the full payment of the 5. When the period depends upon the sole will of the debtor
buyer of the property cannot be purchase price, cannot be
a registrant in good faith who deemed a buyer in bad faith; Article 1181. In conditional obligations, the acquisition of rights, as well as the
may have: the prospective buyer cannot extinguishment or loss of those already acquired, shall depend upon the happening
• Had actual or constructive seek the relief of of the event which constitutes the condition.
knowledge of such defect reconveyance of the
in the seller’s title, or property. Suspensive v. Resolutory Conditions
• Was charged with the Suspensive Conditions Resolutory Conditions
obligation to discover the Also called a condition precedent Also called a condition subsequent
defect. Refers to an act or event, other than a Refers to an event, the existence of
Such 2nd buyer cannot defeat lapse of time, which must exist or occur which, by agreement of the parties,
the first buyer’s title. before a duty to perform a promised operates to discharge a duty of
Reconveyance 1st buyer can seek for 1st buyer cannot seek the performance arises; if the condition performance that has arisen
reconveyance, subject to relief of reconveyance of does not occur & is not excused, the
conditions under the law property promised performance need not be
rendered
Similarities between Pure & Resolutory Conditions Suspends efficacy of contract Demandable at once
• Both are demandable at once
Article 1182. When the fulfillment of the condition depends upon the sole will of the
Class Illustrations debtor, the conditional obligation shall be void. If it depends upon chance or upon
• Obligations with a Period – I’ll give you a pen when X dies. the will of a third person, the obligation shall take effect in conformity with the
• Obligations with a Condition – I’ll give you a pen if X dies on Monday. provisions of this Code.
Article 1180. When the debtor binds himself to pay when his means permit him to Suspensive Potestative Condition
do so, the obligation shall be deemed to be one with a period, subject to the • When the fulfillment of the suspensive condition in an obligation depends
provisions of Article 1197. upon the sole will of the debtor
o This type of condition is VOID
Meaning o Leads to the stipulation (only) being declared void
• By its nature, “means permit him to do so” is suspensive & potestative • Ex. I’ll pay you when I hold the book. The condition “when I hold the book” is
o If the law did not exist, it would be void void, but main obligation to pay subsists.
• When the debtor binds himself to pay when his means permit him to do so,
the law presumes that the debtor really intends to satisfy his obligation, but Birth of an Obligation through Potestative Condition
payment, on the part of the creditor, becomes an uncertain event • Article 1380 – When the birth of the new lease contract (renewal) depends
o Thus, the law classifies this as an obligation with a period upon the sole will of the lessee, the whole contract is INVALID & not just that
• Art. 1197 – The parties may ask the court to fix the duration of the period stipulation.
within which the payment is to be made especially when the period o HENCE: The entire contract could be declared void if it is the birth of
depends upon the will of the debtor the obligation depends on the sole will of the debtor
§ Ex. if the fulfillment of the suspensive conditions leads to the
Class Discussion “birth” of a new contract of lease, or a new contract of sale
When the court is allowed to fix the period:
1. When the debtor bind himself to pay when his means permits him to do so CASE: Lao Lim v. CA
2. When it involves a suspensive potestative condition which is void, but refers to the Lesson: A stipulation which states that a lessee will continue staying in the premises
fulfillment of the obligation as long as he wants, as long as he pays rent is void for being a suspensive
3. When the contract of the parties is vague, but it is clear there is intention to potestative condition that leads to the birth of the obligation, because it leaves to
create the period the lessees the sole power to determine the continuation of the lease. The entire
contract is therefore void.

Facts: A stipulation provides that the lease contract shall subsist “for as long as the • The potestative condition is not on its birth, but on its fulfillment—in this
defendant needs the premises & can meet & pay said increases.” The contract also situation, there is an acknowledgment of indebtedness already; it’s not just a
states that a renewal of the 3-year lease period constitutes a new contract of lease possibility.
although with the same terms & conditions as those in the expired lease. (1) Is the
stipulation valid? (2) Is the contract valid? CASE: Osmeña v. Ramos
Held: This stipulation & the entire obligation are both void. Lesson: Where there is an acknowledgment of indebtedness, there is not just the
(1) The stipulation is a purely potestative condition, leaving the effectivity of possibility of a birth of an obligation, but an actual obligation already — thus, a
leasehold rights to the exclusive will of the lessee. It is likewise a suspensive suspensive potestative condition in relation to said obligation may be void, but the
condition because the renewal of the said lease, which gives rise to a new lease obligation itself remains valid.
depends upon said condition. Facts: A promissory note stated: “On this date, I hereby promise that, if the house of
The said condition is not resolutory because it is not a condition that terminates the strong material in which I live in Q.C. is sold, I will pay my indebtedness to Don
lease contract. The lease contract is for a definite period of 3 years upon the Tomas Osmeña as set forth in this document.” Is the whole obligation void?
expiration of which the lease automatically terminates. If this condition were to be Held: No. The suspensive potestative condition is void, but the obligation to pay
allowed, the owner would never be able to discontinue it if the lessees kept paying. subsists.
(2) Furthermore, because the renewal or “birth” of the new lease also depends on
the debtor, the entire obligation & not just the stipulation is void. CASE: Security Bank & Trust Company v. CA
Lesson: Sometimes, the fact that the condition is a suspensive potestative condition
CASE: Trillana v. Quezon College is not so clear, as when the contract states that the condition is the “mutual
Lesson: When the condition is imposed upon the birth or creation of the obligation, agreement” of the parties, but in practice, it becomes dependent on the sole will of
the entire contract — & not just the stipulation — would be void. one party.
Facts: The full payment of the shares in a certain school was to be made only after Facts: A contractor spent more than the construction cost contemplated in the
the obligor harvested fish. Similar to the conditional contract of sale, no contract is contract. It applied with the owner to adjust the contract price. The owner did not act
created yet because the full payment awaits the debtor’s performance of the upon the adjustment on the ground that there was “no mutual agreement of both
harvesting of the fish. Is the condition & the obligation valid? parties” pursuant to the contractual provision. The provisions states:
Held: No. The condition & obligation itself is solely based on the will of the obligor. “If, at anytime prior to the completion of the work to be performed, increase
Thus, the whole obligation is void. in prices of construction materials or labor supervene through no fault on
the part of the contractor, or any act of the government and its
Resolutory Potestative Conditions instrumentalities which directly or indirectly affects the increase of the cost
• If a condition is both facultative & resolutory, it may be valid, though of the project, OWNER shall equitably make the appropriate adjustment on
dependent on the will of the debtor. mutual agreement of both parties.”
• Ex. If a person promises to put in the possession of his friend a house while Must the owner pay for the additional costs of construction?
he (the giver) is abroad but requires that the house be returned to his Held: Yes. SC ruled against the owner, requiring it to pay & fulfill its obligation. The
possession in the event that he returns to the Philippines, the condition is mutual agreement stipulated is in effect a condition dependent on the owner’s will,
valid as it is resolutory in nature. since the contractor would naturally give consent to such an agreement which would
allow him recovery.
CASE: Ducusin v. CA
Facts: The lease contract provides that “the term of the contract shall be on a Effect of Void Stipulation
month-to-month basis commencing on February 19, 1975 until terminated by • When a condition is declared void but the obligation subsists, the obligation
mutual agreement or terminated by the lessor on the ground that his children need will become one with a period. (Patente v. Omega)
the premises for their own use.” Is this valid? o Reason: converting it into a pure obligation may result in an
Held: Yes. The condition here is a resolutory condition dependent on the sole will of arrangement which was not in the contemplation of the parties
the debtor; hence it is valid. Also, the happening of the condition is not dependent • The creditor can ask the court to fix the period.
solely on the will of the lessor but on the happening of the condition dependent upon
the will of 3rd persons — the children. Class Discussion
Q: X & Y have an agreement, where X borrowed money from Y. X tells Y later that he
Potestative Condition Imposed on the Fulfillment of the Obligation is still unable to pay, & says, “I’ll pay you when I swim in the Pasig river.” Is this
• The condition alone is voided, but not the obligation valid?

A: The obligation still stands, but the condition is void. The obligation is transformed other factors validating the obligation, which is that I will also cease “when Y is
to one with a period. forced to stop or abandon its operations.”
The latter is a causal condition, dependent on chance, hazard or the will of a 3rd
Potestative Suspensive Condition v. Potestative Resolutory Condition person.
Potestative Suspensive Condition Potestative Resolutory Condition
Void as a general rule; there is no Valid, because resolutory conditions are CASE: Catungal v. Rodriguez
exception at all necessarily potestative Facts: The stipulation in a contract provided that the payment of the buyer of the
remainder of the price shall be made after the buyer has successfully negotiated a
Class Discussion right of way. Is the stipulation valid?
Q: But how about the obligation to which the condition is attached; is it necessary Held: Yes. The condition is neither on the perfection of the contract nor on the
void? validity of the entirety of the contract. It is imposed only on the buyer’s obligation to
A: It is void if the condition refers to the birth of the obligation. (Patente v. Omega) pay the remainder of the purchase price. It is thus a condition which is not purely
For example, X is indebted to Y for P1,000. X saw Y and said, “I’ll pay you; can I potestative, since it is not reliant on the sole will of the debtor, but also, the will of
restructure our obligation? I’ll pay you if I jump tomorrow.” Here, the condition is a the third persons who own the adjacent land, & from whom the road right of way is
suspensive potestative condition, the condition is void. But since the condition does to be negotiated, & whether or not these owners would allow the right of way. This
not affect the birth of the obligation (the debt itself), the debt remains valid. type of mixed condition is expressly allowed under Art. 1182.
Class Discussion Article 1183. Impossible conditions, those contrary to good customs or public policy,
Q1: Is a suspensive potestative condition ALWAYS void? and those prohibited by law shall annul [Note: make VOID] the obligation which
A1: Yes. depends upon them. If the obligation is divisible, that part thereof which is not
Q2: What’s an example of a valid potestative condition? affected by the impossible or unlawful condition shall be valid.
A2: (1) Article 1180 – when the debtor will pay when his means permit him to do so The condition not to do an impossible thing shall be considered as not having been
(2) All RESOLUTORY conditions (e.g. X will give Y a pen, provided that Y will always agreed upon.
stay in the Philippines)
Impossible Conditions
Mixed Obligations • The condition & the obligation will be void.
• Those which depend not only upon the will of the debtor, but also upon • Ex. An obligation to give money as a loan only if it snows in the Philippines is
chance & some other factors. void. The condition makes the prestation void.
• CASE: Romero v. CA • Also true of cases that are against (1) good customs, (2) public policy or are
o Facts: A contract stipulates that the downpayment made by the buyer (3) prohibited by law.
to the seller regarding the sale of the property shall be returned in the
event that the seller “shall not be able to remove the squatters from Condition Not to Do an Impossible Thing
the property” within 60 days from the execution of the contract. Is the • Useless stipulation
stipulation void?
o Held: No. This is not a potestative condition & is valid. It is a mixed Article 1184. The condition that some event happen at a determinate time shall
condition, dependent not only on the will of the debtor but on 3rd extinguish the obligation as soon as the time expires or if it has become indubitable
persons, like the squatters & the government. that the event will not take place.
CASE: Naga Telephone Inc. v. CA Extinguishment of Obligations with Time-Based Conditions

Lesson: When there are other causal conditions governing (chance, hazards or the • When the condition consists of some event that must happen at a particular
will of a 3rd person) a stipulation which is also potestative, it is a mixed condition, & it time, the obligation is extinguished should the condition not happen within
is valid. the said period.
Facts: X & Y stipulated that X can use the electrical posts of Y for as long as it • Ex. Y will give X a particular car (the prestation) if X is elected President on or
needed the post but the contract can nevertheless be terminated should Y be forced before 1998.
to stop or abandon operations. o Once Mr. X becomes the President on or before 1998, the obligor has
Held: The stipulation is valid. It is true that it is a potestative condition, since the to give the car.
condition depends on the sole will of X (“for as long as it is needed”), but there are • The same situation applies if there is doubt that the event will occur in the
given time.

o Same Ex. if X dies before he even files his candidacy, it is clear that his happened, the parties now must return to each other everything that has been given
becoming President will not happen anymore on or before 1998. This thus far.
will immediately extinguish the obligation to give the car.
CASE: Osmeña, III v. PSALM
Article 1185. The condition that some event will not happen at a determinate time Facts: There were two bidders, TVPI & SPC, for a project. It was agreed between
shall render the obligation effective from the moment the time indicated has PSALM & the bidding parties that should the losing bidder not exercise his “right to
elapsed, or if it has become evident that the event cannot occur. top” the winning bid, the winning bidder must enter into & faithfully comply with the
If no time has been fixed, the condition shall be deemed fulfilled at such time as asset purchase agreement. TVPI won the bid. Later, however, the SC declared the
may have probably been contemplated, bearing in mind the nature of the obligation. “right to top” provision void, such that SPC would never be able to exercise its “right
to top” under their agreement. What now happens to their agreement?
“Condition Will Not Happen” Held: The condition is deemed complied with by operation of law, & the obligation to
• Ex. Again, the condition is the election of X as President on or before 1998 & execute the purchase contracts in favor of TVPI is now due & demandable. In this
the prestation is the giving of a particular car by Y & the effect is the case, PSALM’s obligation to award the contract in TVPI’s favor was dependent on the
effectivity of the obligation when the condition does NOT happen. non-occurrence of an event: SPC’s legal & valid exercise of its right to top. The
o Once X does not become the President prior to 1998 or on 1998, Y approval of the sale to TVPI was conditional, & its consummation was dependent on
has to give the car. the non-exercise by SPC of its right to top. At this point however, that will never
o If X becomes President on or before 1998, then the car should not happen, since the provision on the right to top was declared void. Hence, it is simply
be given. deemed fulfilled by operation of law.
o If Mr. X dies before he even files his candidacy, it is clear that his
becoming president will not happen anymore on or before 1998. This *Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily
will immediately give rise to the obligation to give the car. prevents its fulfillment.
“No Time is Fixed” Class Discussion

• Ex. The condition is simply the non-election of Mr. X. Q: What is the implied term of the contract?
o If the law provides that elections are to be held on Aug. 1998 & Aug. A: Must be complied with in GOOD FAITH; otherwise, there are consequences such
1998 passes without X being elected, the condition is deemed as the doctrine of constructive fulfillment.
fulfilled.
Constructive Fulfillment: Act of Prevention
CASE: Wellex Group v. U-Land Airlines Co. • The good-faith obligation includes an implied term on the part of the said
Facts: The parties, X & Y, entered into a MOA which states that they would enter into parties not to impede, hinder, obstruct or prevent the fulfillment of the
a purchase of stock agreement within a 40-day period, & if nothing happened, they obligation.
would be released from their commitments. In the meantime, X delivered money to o Undertaking these preventive acts constitutes breach of contract.
Y, while Y delivered some stock to X. However, the parties ultimately failed to enter • Constructive fulfillment - If obligor voluntarily prevents the fulfillment of the
into an actual purchase of stock agreement within the period they agreed on. What condition in an obligation, the law states that the obligation shall be deemed
happens now? fulfilled.
Held: X is obligated to return the stock certificates to Y, while Y must return the • Ex. X will give to a school a brand new computer if the school will donates its
money to X. In this case, the parties agreed that the non-occurrence of the share old computer to charity.
purchase agreement would give rise to the obligation to both parties to free each o If X voluntarily destroys the old computer, the condition will be
other from their respective undertakings, including returning to each other all that considered as having been fulfilled. He is now bound to deliver a new
they received in pursuit of entering into the share purchase agreement. Based on computer to the school.
the provision of their agreement, X & Y would return to each other all that they had
received after the lapse of the 40-day period. Requisites for Application of Principle of Constructive Fulfillment (Lim v. DBP)
However, the parties continued their negotiations even after the 40-day period 1. The condition is suspensive
lapsed; they also made subsequent negotiations with the intention of entering into 2. The obligor actually prevents the fulfillment of the condition
the share purchase agreement. Ultimately, however, they still failed to do so. 3. He acts voluntarily
These facts show that the first & second circumstance in Art. 1185 occurred – the
obligation in this case thus arose (a) at the lapse of the indicated 40-day period, & *CASE: Lim v. Development Bank
(b) when it became evident that the event would not recur. Since the condition has

Facts: X was indebted to the bank, as evidenced by promissory notes that were due Consequently, the condition for the running of the period for the payment of the
on 1972 & 1976; these notes were subject to mortgages on particular property. purchase price of the shares of stock in Galleon by NDC, i.e., the execution of the
When X defaulted, the bank chose not to foreclose & instead entered into share purchase agreement, was deemed fulfilled by NDC, which prevented it from
negotiations with X to restructure the loans, & an agreement as to this was entered happening.
into between X & the bank. From 1989 to 1994, DBP gave several extensions for X
to pay the loan, but they never did. Hence, DBP cancelled the restructuring Class Discussion
agreement & foreclosed on the mortgaged properties of X. X now argues that DBP’s Q: There is a BUYER & a SELLER. Who is the debtor & who is the creditor?
cancellation of the restructuring agreement justifies the extinguishment of their loan A: The question is irrelevant if the obligation is a reciprocal obligation.
obligation under the principle of constructive fulfillment under Art. 1186. Is X’s • GR: All contracts are reciprocal, because both give each other something.
argument tenable? • Ex. Lessor & lessee, mortgagor & mortgagee (unless the lender is also the
Held: No. The principle does not apply, as a suspensive condition is not present in mortgagee, like a bank, which these days happens more often).
this case. It would be absurd for any bank to provide a suspensive condition in a
promissory note or restructuring agreement that will allow the debtor to be freed Article 1187. The effects of a conditional obligation to give, once the condition has
from the duty to pay the loan without paying it. Besides, since the restructuring been fulfilled, shall retroact to the day of the constitution of the obligation.
agreement was cancelled, it could not have novated or extinguished X’s obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties,
In the absence of such an agreement, there is no impediment for DBP to exercise its the fruits & the interests during the pendency of the condition shall be deemed to
right to foreclose the mortgaged properties. have been mutually compensated. If the obligation is unilateral, the debtor shall
appropriate the fruits & interests received, unless from the nature & circumstances
CASE: Tayag v. CA of the obligation it should be inferred that the intention of the person constituting
Lesson: In reciprocal obligations, both parties are the debtors & creditors of each the same was different.
other; thus, either one of them can carry out constructive fulfillment of the condition In obligations to do & not to do, the courts shall determine, in each case, the
& prevent the other from fulfillment of the obligation. retroactive effect of the condition that has been complied with.
Facts: As a condition of a contract of sale of real property, the buyer, X, was required
to pay the balance of a particular loan which was collateralized by the property Art. 1187 Applies to Suspensive Conditions
subject of the sale so that the said property can be delivered to him. • If the condition is resolutory, Art. 1187 is NOT relevant. Here, the fulfillment
The seller prematurely paid the loan, thereby preventing the buyer to fulfill the of the event extinguishes the obligation.
condition. The seller claims that Art. 1186 cannot apply, because they are the • Art. 1187 applies only to suspensive condition, where the efficacy of the
obligees while the proviso speaks of the obligor. Does Art. 1186 apply? obligation is merely suspended until the condition is fulfilled.
Held: Yes. In a reciprocal obligation like a contract of purchase, both parties are o When the suspensive condition occurs, the effect of a conditional
mutually obligors & also obligees. Any of the contracting parties may, upon non- obligation “to give” retroacts to the day of the constitution of the
fulfillment by the other privy of his part of the prestation, rescind the contract or obligation.
seek fulfillment. It is puerile for the sellers to say that they are the only obligees
• Ex. On Feb. 1996, X, the obligor, promises to give Y a specific car in the event
since they are also bound as obligors to permit X to assume the loan, & would also
it rains on the June 1, 1996. It rains on June 1, 1996.
be obliged to execute the final deed of sale.
o X must give Y the accessories of the car as of Feb. 1996.
o The obligor is duty bound to take care of the car & its accessories from
CASE: DBP v. Sta. Ines Melale Forest Productions Co.
the time the obligation has been constituted.
Facts: The period of payment was condition on the prior execution of a share
Unilateral Obligations
purchase agreement. However, the fulfillment of the condition was frustrated by the
• The debtor keeps the fruits & interests received
buyer (NDC), who failed to promptly submit its recommendation on the vital
information obtained from the documents given by the seller (Galleon). Does Art. o UNLESS from the nature & circumstances of the obligation it should
1186 apply? be inferred that the parties intended differently.
Held: Yes. NDC prevented the execution of the share purchase agreement – the o Ex. Following the same example provided above, if X’s car is chosen as
condition precedent to the transfer of Galleon’s shares to NDC – by deliberately a special car in a competition & wins a prize after Feb. 1996 but
delaying its review of Galleon’s financial assets. While Galleon submitted all its before June 1996, the prize obtained by X belongs to X.
documents early for review by NDC, the latter failed to take the review seriously,
Reciprocal Obligations
hence causing the delay. In fact, under their agreement, NDC had only 60 days to
prepare & sign the share purchase agreement, yet it was only 8 months after the • The fruits & interests during the pendency of the condition shall be deemed
agreement that the NDC director submitted his review on the transaction. to have been mutually compensated.

o Ex. X promises to give a mango orchard to Y & Y promises to give X
P50,000. Both obligations shall take effect only if it rains on June 1. Preserving Rights
§ Any fruit of the orchard & any interest on the money shall • The law allows the creditor to protect his interest even if the condition has not
mutually compensate each other. X will not get the interest on yet been fulfilled.
the money, & Pedro will not get the fruits of the orchard once o Thus, a creditor can file an injunction suit to stop the debtor from
the condition is fulfilled, even though technically their right to alienating his property, if it is supposed to be given to the creditor
the fruits & interest retroacts to the date the obligation has once a particular condition is fulfilled.
been constituted. • If, prior to the happening of the suspensive condition, the debtor pays the
creditor by mistake, the debtor can recover the payment.
Class Discussion o The obligation is not yet due & demandable.
Q: X is buying from Y a farm for P100,000 if it rains on Tuesday next month. They o The condition may not be fulfilled, in which case he will never be
signed a contract & it is perfected, but X & Y hold it in abeyance. Y’s farm is growing liable.
abundantly, but X’s money is decreasing in value. It rains on Tuesday. Who will have • CASE: Buot v. CA – While Art. 1188, par. 2 allows recovery if there were
a personal right to the fruits & instruments? payment by mistake in case of suspensive condition, recovery can likewise be
A: X technically has personal rights to the fruits. However, the law provides that in a made even if there was no mistake in order to prevent unjust enrichment on
reciprocal obligation, the fruits & interests during the pendency of the condition shall the part of the person who received the payment even if he had no right to it
be deemed mutually compensated. Thus, X & Y’s fruits & interests will compensate because the suspensive condition did not happen.
one another instead.
Class Discussion
*CASE: Vda. de Ouano v. Republic of the Philippines Q: An employer & employee enter into a contract. In their CBA, the employer agreed
Facts: A GOCC expropriated land to build an airport, on the condition that it will allow that an employee who had served continuously for 10 years until the age of 50. But
the owners to reacquire the land if the airport is not completed. The condition all the employees have the same birthdays, & all turn 50 at the same time. What can
happened, but for a long time the government did not allow the owners to reacquire the employee do to protect his right?
their properties as promised. The landowners file suit to get the properties back. A: The employee may, before the fulfillment of the condition, bring the appropriate
What expenses must be paid to which party, & what must be done with the fruits actions for the preservation of his right pursuant to Art. 1188.
earned over the property while it was with the GOCC?
Held: Justice & fair play requires that the GOCC return the properties to the Article 1189. When the conditions have been imposed with the intention of
landowners. Meanwhile, the landowners should also return the just compensation suspending the efficacy of an obligation to give, the following rules shall be observed
paid for them for the expropriation of their properties; they must likewise pay the in case of the improvement, loss, or deterioration of the thing during the pendency of
necessary expenses incurred by the GOCC & the monetary value of its services the condition:
managing the lots in question to the extent that they, as landowners, were benefited (1) If the thing is lost without the fault of the debtor, the obligation shall be
thereby. extinguished;
Also, in accordance with Art. 1187 on mutual compensation, the GOCC may keep (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
whatever income or fruits it may have obtained from the parcels of land damages; it is understood that the thing is lost when it perishes, or goes out
expropriated. In turn, the landowners need not require the accounting of interests of commerce, or disappears in such a way that its existence is unknown or it
earned by the amounts they received as just compensation. cannot be recovered;
Following Art. 1189, any improvements to the property’s value need not be paid to (3) When the thing deteriorates without the fault of the debtor, the impairment is
the GOCC by the landowners, since the value increase is merely a natural effect of to be borne by the creditor;
nature & time. (4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation & its fulfillment, with indemnity for
Obligations “To Do” & “Not To Do” damages in either case;
• The courts shall determine, in each case, the retroactive effect of the (5) If the thing is improved by its nature, or by time, the improvement shall inure
condition that has been complied with. to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right
Article 1188. The creditor may, before the fulfillment of the condition, bring the than that granted to the usufructuary.
appropriate actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case Suspensive Condition
of a suspensive condition.

• Art. 1189 speaks of the period pending the fulfillment of a suspensive • Choice of the remedies to be pursued, whether rescission or fulfillment plus
condition damages, belongs to the creditor, regardless of the degree of deterioration
• Usually entails a retroactive effect of personal rights caused by the debtor.
• While still unfulfilled, the obligation has not yet arisen & the determinate o Even if the object, through the fault of the debtor, has badly
thing is usually in the possession or control of the debtor deteriorated, the creditor can choose rescission plus damages,
although he can also still choose to fulfillment if he wants
Different Ways of Losing the Object o The debtor cannot say that the remedy chosen by the creditor should
1) It perishes. have been fulfillment plus damages or vice versa.
o Ex. When, during the pendency of the suspensive condition, the
object, a car, is hit by a bomb & explodes Improvements
2) It goes out of commerce. • If it improves (1) by nature or (1) by time, such shall inure to the benefit of the
o Ex. If the car has been discovered to have historical value & is creditor.
deemed a national treasure & the government prohibits the sale of • If it is improved at the expense of the debtor, his only right would be that of a
the car usufructuary.
3) It disappears in such a way that its existence is unknown or it cannot be o Usufruct – gives a right to enjoy the property of another with the
recovered. obligation of preserving its form & substance unless the title
o Ex. If the car is transported from Mindanao to Luzon by ship, & the constituting it or the law otherwise provides.
ship has been lost at sea & cannot be found
Article 1190. When the conditions have for their purpose the extinguishment of an
“Fault of the Debtor” obligation to give, the parties, upon the fulfillment of said conditions, shall return to
• To be understood in relation to the Sources of Liability (Article 1170), which each other what they have received.
constitute breach of the obligation, namely: (1) negligence; (2) delay; (3) In case of the loss, deterioration, or improvement of the thing, the provisions which,
fraud; & (4) contravention of the tenor of the obligation with respect to the debtor, are laid down in Article 1189 shall be applied to the party
who is bound to return.
Effect of Loss During Pendency of Suspensive Condition As for obligations to do and not to do, the provisions of the 2nd par. of Article 1187
• If lost without fault of debtor shall be observed as regards the effect of the extinguishment of the obligation.
o If the thing is determinate, the obligation is extinguished
o If the thing is generic, the obligation remains Fulfillment of Resolutory Condition
• If lost with fault of the debtor - debtor is liable for damages, whether or not • Extinguishes the obligation
the thing is generic or determinate • There must be restitution of what has been obtained
• Ex. X & Y promised that X (the debtor) will continue having possession over a
Deterioration During Pendency of Suspensive Condition particular car, provided that X will not watch TV.
Thing deteriorates without fault of Any impairment is to be borne by the creditor o If X watches TV, his right to the possession of the car is extinguished,
the debtor & the obligation of Y to allow X the possession is also extinguished.
Deterioration is caused by the The creditor can choose between o If, while the resolutory condition has not yet been fulfilled:
debtor (1) Rescission of the obligation; or 1) If car is destroyed without the fault of the debtor X, the
(2) Fulfillment obligation to return is extinguished.
*In either case, the creditor will get damages 2) If the car is lost through the fault of the debtor, he shall be
liable for damages.
Application of Rules on Deterioration 3) If the car deteriorates without the fault of the debtor, the
• Ex. During the pendency of the suspensive condition, the debtor uses the car, impairment is to be borne by the creditor.
which he is supposed to give to the creditor upon the happening of the 4) If the car deteriorates through the fault of the debtor, the
condition, in a racing event which causes its deterioration. obligee may choose between (1) rescission & (2) fulfillment,
o The creditor can seek rescission of the obligation & damages in the with indemnity for damages in either case.
amount equivalent to the deterioration of the car. 5) If the car is improved by its nature, or by time, the improvement
o If, however, the creditor believes that he can still make use of the car, shall inure to the benefit of the obligee.
the creditor can seek fulfillment with damages. 6) If the car improves at the expense of the debtor, he shall have
no other right than that granted to the usufructuary.

• In obligations to do & not to do, the court shall determine the effect of the • Ex. A property that was subject of a contract of sale was already transferred
extinguishment of the obligation. to the buyer. The buyer cancelled the deeds of sale, on the valid ground that
there was negation of the cause of the contract, as the properties turned out
Article 1191. The power to rescind obligations is implied in reciprocal ones, in case to be unsuitable for the purpose for which they were acquired without fault of
one of the obligors should not comply with what is incumbent upon him. the seller.
The injured party may choose between the fulfillment & the rescission of the o This cancellation of contract is NOT rescission in Art. 1911.
obligation, with the payment of damages in either case. He may also seek rescission, § No breach of faith on the part of any party.
even after he has chosen fulfillment, if the latter should become impossible. § The seller complied & the buyer did not suffer direct injury.
The court shall decree the rescission claimed, unless there be just cause authorizing • Applicable prescriptive period for rescission –
the fixing of a period. o 10 years if the contract is written
This is understood to be without prejudice to the rights of third persons who have o 6 years if the contract is oral
acquired the thing, in accordance with Article 1385 & 1388 & the Mortgage Law.
Class Discussion
Reciprocal Obligations Q1: Must you go to court if the power to rescind is always implied?
• Those that: A1: YES. There are no exceptions. It is the court that will revoke the contract.
o Arise from the same cause & Q2: What if there is an express power to rescind in the contract; can you rescind?
o In which each party is a debtor & a creditor of the other, such that the A2: YES. The notice given to the injuring party is the revocatory act.
obligation of one is dependent upon the obligation of the other But in certain cases, depending on the property involved, there is a special way to
• The obligation of one is a resolutory condition of the obligation of the other; rescind. For example, when it comes to real property, the rescission must be a
the non-fulfillment one of entitles the other to rescind. notarial rescission.
• In reciprocal obligations, the right to rescind is implied, which means that Q3: What kind of breach will give rise to the power to rescind?
such right need not be expressly provided for in the contract for the parties to A3: The breach must be substantial; hence, parties can go to court to question the
have it propriety of the rescission, & not the power to rescind, when there is an express
• Ex. In a contract of sale, the non-payment of the balance of the price by the stipulation allowing rescission. For example, delay is not necessarily a substantive
buyer gives rise to the seller’s right to rescind. breach. What makes delay is a substantive breach is only when time is of the
• In case of non-compliance, the aggrieved party has an implied power to essence.
rescind or resolve the contract.
o Termination in Art. 1911 is more appropriately called resolution & not CASE: Philippine Amusement Enterprises, Inc. v. Natividad
rescission (but they are used interchangeably here) Lesson: A mere causal breach does not justify rescission. The breach must be
serious & substantial.
Rescinding a Contract Facts: The lessee of a jukebox sought rescission of the contract of lease of the said
machine because “there were times” the machine did not work. Will the court grant
• In Art. 1191, resolution & rescission are used interchangeably, though they
the rescission?
technically do not mean the same thing
Held: No. Rescission is ordered only when the breach is substantial as to defeat the
• Rescinding – rather than just to terminate the contract & release the parties object of the parties in entering into the agreement. Occasional failure is not
from further obligations, it means to: frequent enough to render it unsuitable. There was also no claim of any damage on
o Abrogate the contract from the beginning &
the part of lessee, like a drop of income.
o Restore the parties to their relative positions as if no contract has
been made
CASE: Tan v. CA
• Similar to declaring the contract void at its inception Lessons: WON a breach is substantial depends upon the attendant circumstances
• GR: With rescission, one must always go to court if one wants damages • Slight delay when time is not of the essence is not considered substantial
o EXC: If there is a stipulation in the contract giving a party the unilateral breach.
power to rescind the contract • Where the fulfillment of the condition does not depend on the will of the
• Predicated on the breach of faith by any of the parties, violating reciprocity obligor, but on that of a 3rd person, the obligor’s part of the contract is
between them. complied with if he does all that is in his power & it then becomes incumbent
o Must be SERIOUS & SUBSTANTIAL upon the other contracting party to comply with all the terms of the contract.
o No breach of faith = no rescission

Facts: A buyer bought a piece of legally-obtained public land from a seller. The buyer Facts: The contract between X & Z provided –
tasked the seller with clearing the land & with cancelling the mortgage on the X shall, within 90 days from the signing of the contract, cause the completion of the
property in favor of DBP, giving the seller earnest money to cancel the mortgage. transfer of registration of title of the property subject of the contract, from Y to X’s
The seller failed to clear the lot for a few days & failed to cause the cancellation of name, at X’s own expense. Failure on the part of X to undertake the foregoing within
the prescribed period shall automatically authorize Y to undertake the same in
the mortgage as it took DBP some time to process the papers on the date set for the
behalf of X & charge the costs incidental to the monthly amortizations upon due
execution of the deed of sale, & were delayed for 12 days. He also failed to get the date.
DENR permit. HOWEVER, he already did everything to effect the cancellation. Notice The underlined provision was breached. Is this enough for a rescission of the
of levy & execution had already been filed by the seller, though it was not yet contract?
cancelled by the Registry of Deeds. DBP delayed the cancellation of the contract Held: No. Though X failed to perform his obligation to effect a transfer of the title of
until 12 days after it was due. Can the contract be rescinded? the subject land from Y to his name within the prescribed period, such failure did not
Held: No. There was substantial compliance on the part of the seller to clear the constitute a substantial breach that would entitle Z to rescind (or resolve) the
property; there can be no rescission. subject contract. To reiterate, for a contracting party to be entitled to rescission (or
There were only slight delays, & time was not of the essence in the contract. The resolution) in accordance with Art. 1191, the other contracting party must be in
interest in the land was already conveyed to the buyer. Even not yet getting the substantial breach of the terms of their contract. Here, it cannot be said that X’s
DENR permit cannot be considered as substantial breach. Prior approval by the failure to undertake their obligation underlined defeats the object of the parties in
DENR is required only in case of sale & encumbrance of public land: (1) during the entering into the subject contract, considering that the same provides Y contractual
pendency of the application by the purchaser & (2) before his compliance with the recourse in the event of X’s non-performance of the aforesaid obligation, that is, to
requirements of the law. The seller here also already properly conveyed title to cause such transfer themselves in behalf & at the expense of X.
buyer.
Remedy in Case of Non-Compliance
CASE: Velarda v. CA • Either fulfillment or rescission, with damages either way
Lesson: Even if delay is only slight & time is not of the essence, when the existing
• CASE: Areola v. CA
obligation is repudiated because the debtor imposes pre-conditions for payment, or
o Facts: X was insured under an insurance company. X had a rightful
makes it a qualified offer to pay, there can be rescission.
claim which the company did not comply with, because of an
Facts: The debtor delayed paying the obligation for 1 month. The debtor imposed
erroneously canceled insurance policy on the part of the company.
upon the creditor pre-conditions for the payment, making the payment a qualified
X was successful in seeking the enforcement of the erroneously
offer to pay. The debtor claims this slight delay is only a causal breach. Can there be
canceled insurance policy by seeking the reinstatement of the same.
rescission?
The insurance company argued that, because X sought the
Held: Yes. While a delay of 20 days, 1 week, or even a month may be causal
reinstatement of the same, X in effect chose the fulfillment of the
provided that time is not of the essence, the totality of the whole case shows that
obligation (as opposed to rescission) & thus the company need not be
the qualified offer to pay was a repudiation of the existing obligation, which was
paid damages. Is the company correct?
legally due & demandable under the contract of sale. The creditor was left with no
o Held: No. Whether the party demands fulfillment or rescission, he is
other legal option but to validly rescind the contract.
entitled to damages.
• Injured party may seek rescission even after he has chosen fulfillment, if the
CASE: Consolidated Industrial Gases v. Alabang Medical Center
Facts: A contract was entered into for the installation of a medical gas pipeline latter should become impossible.
system. Rescission was sought on the ground that no test run & seminar were • CASE: Ayson Simon v. Adamos
conducted, even if these were stipulated. Should rescission be granted? o Facts: The buyer of a lot filed a case against the seller for delivery.
Held: No. The provisions on the test run of & the seminar on the medical oxygen § HOWEVER, a case was previously filed by the heirs of the
system are not essential parts of the installation contracts as they do not constitute deceased original owner against the seller for delivery of the
a vital part of the centralized medical oxygen system. It thus cannot be said that the same properties to them.
failure to do them were substantial & fundamental violations as would defeat the § Both the heirs & the buyer won the cases against the seller.
very object of the parties in making the agreement. The buyer sought delivery. HOWEVER, the delivery to the buyer
had become impossible, because the properties were already
CASE: Nolasco v. Cuerpo validly possessed by the heirs.
Lesson: A substantial breach of a contract, unlike slight and casual breaches § The buyer filed another suit for rescission & damages. Is this
thereof, is a fundamental breach that defeats the object of the parties in entering allowed, even if the buyer already previously chose fulfillment?
into an agreement. o Held: Yes. The buyer was correct to file the rescission case, because
fulfillment had become impossible.

• BUT: The law does not authorize the injured party to rescind the obligation & out of or in relation to the contract, shall be settled by arbitration in Korea, in
at the same time seek partial fulfillment in the guise of recovering damages. accordance with the commercial arbitration rules in that country. If the contract is
o Thus, SC has disallowed the recovery of penalty charges stipulated in rescinded, can the parties go to Philippine courts for confirmation?
a contract which was also sought to be rescinded. Held: While the SC has held that the act of treating a contract as rescinded on
account of infractions by the other contracting party is valid, albeit provisional, as it
Express Contracts can be judicially assailed, this doctrine does not apply here on account of the valid
• The power to rescind can also be expressly stipulated in the contract. arbitration clause. Where an arbitration clause in a contract is availing, neither of
o Unilateral extrajudicial stipulation the parties can unilaterally treat the contract as rescinded since whatever infractions
• The law does not prohibit parties from entering into an agreement providing or breaches by a party or differences arising from the contract must be brought first
that the violation of the terms of the contract shall cause the cancellation, and resolved by arbitration, and not through an extrajudicial rescission or judicial
termination or rescission thereof even without court intervention. action.
• The stipulation is in the nature of a facultative7 resolutory condition
• HOWEVER, notice must always be given to the defaulter before rescission can Implied Power of Rescission
take effect. • The court shall decree the rescission claimed
• Still provisional, & subject to scrutiny & review by the courts o UNLESS there is just cause authorizing the fixing of a period.
o If the other party does not believe rescission to be justified, it can • CASE: Roman v. CA
result to judicial action o Facts: The contract stipulated that the buyer shall pay the purchase
o If the court, after due hearing, decides that the rescission was not price within 60 days from receipt of the notice that the properties
warranted, the responsible party will be sentenced to damages have already been titled. Notice was sent on Oct. 11, 1958. Payment
o In the contrary case, the resolution will be affirmed, & consequent however was not made. An action was filed for rescission.
indemnity will be awarded to the party prejudiced. § The buyer claimed that he was not given notice & prayed for a
• The party who deems the contract violated may consider it rescinded & act period within which to pay. Should a period be fixed?
accordingly, without previous court action, but it proceeds at its own risk. o Held: There would be no just cause for fixing a period. After institution
o Only final judgment of the court will conclusively settle whether the of the action against him, what the buyer should have done, which he
action taken was or was not correct in law. did not do, was to pay the seller within 60 days after service of
o BUT the party who believes itself injured need not file suit first & wait summons (the notice).
for a judgment before taking extra-judicial steps to protect its interest. • CASE: Central PH University v. CA
§ The law itself requires that he should exercise due diligence to o Facts: The donee failed to comply with the resolutory condition
minimize its own damages. provided in the deed of donation.
• If there is an express stipulation of rescission, any court decision adjudging o Held: There was no just cause for the fixing of a period, since a more
its propriety extrajudicially made is NOT the revocatory act of rescission but than reasonable period of 50 years had already been allowed the
merely declaratory or an affirmation of the revocation. donee to comply with the condition, even if the condition is
burdensome. The fixing of a period would be a mere technicality &
Requisites for Effectivity of Expressly Stipulated Rescission formality & would serve no purpose than to delay or lead to an
1. Agreement providing that the violation of the terms shall cause the rescission unnecessary and expensive multiplication of suits.
without court intervention
2. Notice to be given to defaulter Valid Rescission Means Mutual Restitution
• Creates an obligation to return the things which were the object of the
CASE: Korea Technologies Co. v. Lerma contract; there will be mutual restitution by the parties
Lesson: While as a general rule, there may be rescission of a contract when there is o Designed to restore parties to their former situations
an express stipulation therein which will be confirmed by courts, such rule is NOT • Can only be made when the one who demands the rescission can return what
applicable where there is a valid arbitration clause between the parties. When there he is obliged to return
is an arbitration clause, neither party can rescind the contract; it must first be • If one of the parties has already paid the price in a contract, but has not
brought to arbitration. received what should be delivered to him, he has nothing to restore.
Facts: The parties entered into a contract with an arbitration clause, which provided o He is entitled to the return of what he has paid.
that all disputes, controversies, or differences which may arise between the parties, • BUT: If the contract stipulates liquidated damages, the injuring party must
pay said damages, despite the rescission of the contract & subsequent
mutual restitution
7 Contingent; may or may not happen

Facts: The contract in this case said that if any one of the parties breaches the
Contract to Sell v. Contract of Sale contract, the obligation of the other shall continue; & while the works are continued,
• Contract to sell – the seller is given the unilateral right to terminate the there will be arbitration. Hence, the contract provided that the arbitration or
contract in case of non-payment of the purchase price; vendor remains the resolution of the dispute between the parties arising from a breach would not lead to
owner as long as the vendee has not fully complied with the purchase price the stoppage of works required in the contract. Is such a stipulation allowed?
o Termination is NOT a rescission under Art. 1191 but an Held: Yes. This is a valid stipulation & is an express waiver of the right to rescind the
enforcement of the contract contract. It would thus be wrong for the party constructing the works to implement a
§ Because title remains with the vendor & does not pass work stoppage.
to the vendee until full payment of price
§ If the vendor ejects the vendee for failure to meet the CASE: Spouses Francisco v. Deac Construction
condition, he is just enforcing the contract, not Lesson: Rescission under Art. 1191 is not predicated on injury to economic interests
rescinding it on the part of a party, but of breach of faith which is violative of the reciprocity
o Failure to pay is NOT a mere breach, causal, or serious between the parties.
§ It just PREVENTS the obligation of the vendor to convey Facts: The contractor already commenced the construction, but incipiently breached
title from applying obligatory force the contract already by not procuring a building permit & making unauthorized
o BUT: Even in a contract to sell, if the fraudulent transfer of corrections. Should the contract be rescinded?
ownership of the object of the sale prior to the final payment was Held: Only partially. SC held that since the construction was already 75% complete,
made, then there is a substantial breach which entitles the seller partial rescission only should be granted, particularly for the undelivered or
to the rescission of the contract. unfinished portion of the construction. Equitable considerations justify the rescission
• Contract of sale – non-payment is a negative resolutory condition of the portion of the obligation that has not been delivered.
o The vendor has lost ownership of the thing sold & cannot recover
it, unless the contract of sale is rescinded Class Discussion
GR: For rescission, you must always go to court if you want to claim damages
CASE: Palay, Inc. v. Clave EXC: If there is express stipulation in the contract
Lesson: There must always be notice before rescission, even when there is an • Unilateral power give to a party to rescind the contract
express stipulation of rescission “without notice” in a contract between two parties.
Facts: The parties entered into a contract to sell a parcel of land where it was Class Discussion
expressly stipulated that the seller “shall have the right to declare this contract Q1: What is the operative act that revokes the contract in court?
canceled & of no effect without notice” to the buyer in case the latter fails to pay his A1: The court decision; this is what gives the rescission finality.
installment. The seller did indeed cancel the contract without notice upon failure of Note that in reciprocal obligations, there is always an implied power to revoke. The
the buyer to pay the installment. Was the cancellation valid, given the provision in court’s decision is just the revocatory act.
the contract allowing for rescission without notice? Q2: What is the operative act of rescission in cases where there is express
Held: No. Cancellation is invalid, since there was no notice to the defaulter informing stipulation?
him of the termination. SC disregarded the stipulation allowing “no notice.” A2: The notice of the party. But the party can go to court still to determine if there
really was substantial breach. The court decision will affirm the validity of the
RA No. 6552: An Act to Provide Protection to Buyers of Real Estate on Installment decision made.
Payments
• Highlights importance of making a notice of cancellation regarding real estate Article 1192. In case both parties have committed a breach of the obligation, the
sold in installment liability of the first shall be equitably tempered by the courts. If it cannot be
o The actual cancellation of the contract shall take place 30 days from determined which of the parties first violated the contract, the same shall be
receipt by the buyer of notice of cancellation or demand for rescission deemed extinguished, & each shall bear his own damages.
of the contract by a notarial act &
o Upon full payment of the cash surrender value to the buyer Violation of Both Parties
• If the violation can be traced back to the parties & both of them committed
*CASE: F.F. Cruz & Co. v. HR Construction Co. the breach, 1st violator is penalized only if, in fact or by evidence, such 1st
Lesson: The right of rescission may be waived by agreement of the parties; thus, a violator can be determined.
party may waive the power to rescind. o The subsequent violator will not be held liable.

o The liability of the 1st violator shall be equitably tempered by the court issuance of the building permit, X also believed it was exempt from tax. Given all this
as the injury to the 2nd violator might not have been so great had it not uncertainty, the last portion of Art. 1192 is to be imposed.
for the subsequent infraction of the 2nd party-violator.
• When 1st violator cannot be determined – obligation shall be deemed CASE: Fong v. Duenas
extinguished, & each shall bear his own damages. Facts: X & Y entered into an oral joint venture agreement where they agreed to
o CASE: Camus vs. Price, Inc. incorporate a holding company for their business. X agreed to contribute P32.5M.
§ Facts: The lessor did not comply with his obligation to increase Later, he would inform Y that his contribution would be limited to P5M. It was also
the elevation of the lower portion of the lot. The lessee also did agreed that Y would incorporate the company & integrate his on-going business into
not comply with his obligation to cover the building with the company, valued at P32.5M. Y failed to incorporate the company & integrate his
insurance. It could not be determined with definiteness which on-going business. Both parties accused each other of breach of contract. Does Art.
party committed the 1st infraction of the terms of the contract. 1192 apply?
Who should be liable? Held: Yes. SC observed that it was not aware of the schedule & who was the 1st
§ Held: The parties are actually in pari delicto8 & the contract is infractor because the joint venture was only orally agreed upon. However, it was
deemed extinguished, with the parties suffering their clear that both X & Y contributed to the non-incorporation of the new company & the
respective losses. failure of the business plans. Given these, SC declared their contract
extinguishment, & held that both X & Y should bear their own damages. It thus did
CASE: Spouses Fernando v. Continental Airlines not award either party with damages.
Lesson: If both parties are at fault or in default in the performance of their respective
reciprocal obligations, they are both liable for damages. Class Discussion
Facts: X bought an airline ticket from Continental Airlines. X was given the right to Mutual negligence cancels out the contract, so that the contract is extinguished.
exchange his unused ticket for another, provided he pay an additional amount if any Note this is different from contributory negligence in tort.
is warranted. When X wanted the ticket exchanged, Continental Airlines wanted to BUT if one of the parties had an advantage somehow, the rule on unjust enrichment
charge him extra, but X refused. Instead, X sued Continental Airlines. Can the airline will take its course.
be made liable?
Held: No. The airline’s liability for damages for its refusal to issue a ticket to X is SECTION 2. – OBLIGATIONS WITH A PERIOD.
offset by X’s liability for his refusal to pay the amount not covered by the subject
tickets. Moreover, the contract between them remains – the airline is bound to issue Article 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
new tickets for X to be chosen by X, & X is obliged to pay whatever amount is not demandable only when that day comes.
covered by the value of the subject tickets. Obligations with a resolutory period take effect at once, but terminate upon arrival of
the day certain.
CASE: Goldloop Properties v. GSIS A day certain is understood to be that which must necessarily come, although it may
Facts: X & Y entered into an agreement where Y, as contractor, would construct & not be known when.
renovate certain buildings. After the construction, there would be a sharing in the If the uncertainty consists in whether the day will come or not, the obligation is
earnings in connection with the eventual sale of the properties. It was also agreed conditional, & it shall be regulated by the rules of the preceding Section.
that the owner of the building, X, will be given guaranteed payments at certain
phases of the construction & that Y will deliver the building free from all liens. Later, Obligations with a Period
the local government did not issue the building permit to the owner, on the ground • Period – designates a particular time which is certain to happen
that it had unpaid taxes. X protested that it was a GOCC, & hence, exempt from tax. o The moment when the obligation will either be effective or be
As a consequence of all this, construction ceased. On the other hand, Y failed to extinguished.
deliver certain portions of the guaranteed payments to X. Can there be restitution in
this case? Kinds of Periods
Held: Yes. Both parties must restitute whatever they have received from each other. • Suspensive period – gives rise to effectivity of obligation
However, both parties will not be awarded damages, because both breached their o Ex. On Dec. 1, 1997, X promises to sing at Y’s nightclub starting Mar.
respective obligations. At the same time, in this case, it was not determinable if X or 1, 1998.
Y was the first infractor. Though technically, X’s failure to pay tax caused the non- § While the obligation is constituted earlier, its effectivity only
commences on a certain future period of time, Mar. 1, 1998.
o CASE: Gaite vs. Fonacier

8 In equal fault

§ Facts: The contract provided that the balance of the purchase although it seems no precise date is fixed, it being sufficient that the time can be
price “will be paid from & out of the first letter of credit readily determined.
covering the first shipment of iron ores &/or the first amount
derived from the local sale of iron ore made by the Larap Article 1194. In case of loss, deterioration, or improvement of the thing before the
Mines Co., Inc.” Is this a condition or a period? arrival of the day certain, the rules in Article 1189 shall be observed.
§ Held: The stipulation is a suspensive period, NOT a
suspensive condition, because it expresses no contingency in Applicability of Art. 1189
the obligation to pay, even if there is no exact date given. • Applies to obligations subject to suspensive or resolutory periods.
• By the very terms of the contract, the existence of the
obligation to pay is recognized; only its maturity or Article 1195. Anything paid or delivered before the arrival of the period, the obligor
demandability is deferred. being unaware of the period or believing that the obligation has become due &
• Resolutory period – extinguishes the obligation demandable, may be recovered with the fruits & interests.
o Ex. X promises to sing at Y’s nightclub as soon as the contract is
signed on Dec. 1, 1997 up to Mar. 1, 1998 Payment by Mistake
§ Obligation to sing can be demanded at once by the obligee • In a suspensive period, the obligation to give will not take effect until the
but the obligation shall be extinguished on a day certain, Mar. arrival of the period.
1, 1998. • The creditor has no right to obtain the thing until the arrival of the period.
o UNLESS the debtor & the creditor, with full knowledge of the period,
A Day Certain decide to give & accept the thing to be delivered or the payment.
• That day which must necessarily come, although it may not be known when.
o If the uncertainty consists in whether the day will come or not, it is a Right to Recovery
condition. • Debtor’s right to recover includes the fruits & interest for said the period he
• Ex An obligor commits to deliver immediately a lollipop to his 6-year-old mistakenly paid.
nephew when the nephew’s temporary front tooth naturally falls off, it is not • Ex. X, on Oct. 1, promises to deliver to Y a mango orchard on Dec. 1.
known when the temporary tooth will fall-off or be removed but it is certain to However, on Nov. 1, X delivers the orchard believing that it is due &
happen. demandable on that date.
o The “condition” above refers to a period. o He can recover what he has delivered together with fruits and interest.
o BUT: If the stipulation is that the candy will be given when he passes o Prior to Dec. 1, Y obviously has no right to possess the mango orchard.
the entrance examination at the Ateneo, a condition exists because its o However, if Y is in the possession of the mango orchard by Dec. 1, X
happening is uncertain. can only recover the fruits & interest from the time he delivered the
property (Nov. 1) up to Dec. 1.
CASE: MIAA v. Olongapo Maintenance Services
Lesson: Courts cannot extend the life of a contract, as initially agreed upon by the Article 1196. Whenever in an obligation a period is designated, it is presumed to
parties, through an injunction. have been established for the benefit of both the creditor & the debtor, unless from
Facts: A lower court, through an injunctive relief, extended the life of a contract. Was the tenor of the same or other circumstances it should appear that the period has
the action of the court correct? been established in favor of one or of the other.
Held: No. Where a determinate period for a contract’s effectivity has been agreed
upon by the parties, the lapse of such period ends the contract & parties cease to be For the Benefit of Both Parties
bound by the terms thereof.
• Always presumed, absent any language showing that the period was set for
the debtor or creditor alone
CASE: City of Cebu v. Heirs of Rubi
• Ex. A lease agreement is deemed to have been made for the benefit of both
Lesson: The extension of a contract cannot be implied from the failure of one party
parties, not just the lessor or the lessee
to reply to the request for extension of another party.
Facts: The buyer requested for an extension to make payment from the seller; the
CASE: Abesamis v. Woodcraft Works, Inc.
seller did not act on the buyer’s request. Was there an extension?
Lesson: When a fortuitous event occurs prior to the arrival of the period in an
Held: No. There can be no implied extension of time to pay the price when the seller
obligation with a period, the loss cannot be borne by the debtor.
did not act on the buyer’s request for extension. The general rule is that an
agreement to extend the time for payment, to be valid, must be for a definite time,

Facts: X promised Y a shipment of logs, & promises he will make the shipment 2. If the 1st step is satisfied, the court must decide what period was probably
“before the end of July, but not earlier than Apr. with the option to make partial contemplated by the parties.
shipment depending on the availability of logs & vessels.” Y would furnish the vessel. • This period must not be arbitrary, & must be based on the nature &
A storm swept away almost all the logs awaiting shipment sometime in May. Y circumstances of the case.
demands damages from X because of the loss of the logs. Is X liable?
Held: No. The obligation is one with a period, intended for the benefit of both parties. CASE: Gregorio Araneta, Inc. v. Phil. Sugar Estates Development Co., Ltd.
The obligation between the parties was a reciprocal one – Y was to furnish the Lesson: (1) The court cannot fix a period merely because in its opinion it is
vessel & X the logs. The obligation being reciprocal & with a period, neither party reasonable; it must set the time that the parties are shown to have intended.
could demand performance nor incur in delay before the expiration of the period. (2) The period in an obligation with a period may be indefinite, as long as it is not
Consequently, when the typhoon struck in May, there was yet no delay on the part of uncertain.
X. Y must shoulder the corresponding loss. Facts: X bound himself to deliver a piece of land to Y, but both were aware that there
were squatters occupying the lot at the time. The court set a period of 2 years for the
Waiver obligation of X. Was the court’s setting of the period correct?
• The benefit of the period may be waived by the person in whose favor it was Held: No. There is no justification for setting the date of performance at any other
constituted time than that of the eviction of the squatters. The circumstances in the contract
• CASE: Abesamis v. Woodcraft Works, Inc. admit no other view, even if such period is indefinite.
o Facts: X bound himself to deliver logs to Y before the end of July 31. The parties knew that they must resort to legal processes to evict the squatters; they
However, X informed Y that he will make an earlier delivery of these realized that the duration of the suits to be brought would not be under their control.
subject portions of the shipment on July 25. X failed to make delivery. The conclusion is that the parties must have intended to defer the performance of
Is X liable? the obligations under the contract until the squatters were duly evicted.
o Held: Yes, X was made liable for the logs due on July 25, because he
waived his right to make use of the period by his explicit notice to Y of CASE: Radiowealth Finance Company v. Del Rosario
earlier delivery. Lesson: (1) The act of leaving the exact date in a promissory note blank does not
necessarily mean that the debtors were allowed to pay when they could. If this was
Class Discussion the intent of the parties, they should have so indicated in the note.
Q: X loans P10M from Y, payable at the year 2020, with interest of 10% per annum. (2) It is enough that the note specifies that payment shall be made, for example, in
5 years later, X wants to back out. X tells Y he wants to pay the P10M now, but Y equal installments for 12 months.
refuses. Is Y’s refusal justified? Facts: X owes Y some money, evidenced in a promissory note, to be paid in monthly
A: YES. A period is fixed for the benefit of both parties. Normal lenders (not banks) installments as agreed upon by the parties, though the exact dates were left blank.
often use have a penalty for pre-payment, though Congress did not allow this in Y allowed X to apply X’s promotion services in payment of X’s promissory note.
banks. Y made a demand for the payment when X’s check payment to Y bounced. X
contended that, since the date was left in blank, it signified that, before their debt
Article 1197. If the obligation does not fix a period but from its nature & the would be due, the court should first fix a period of payment considering that the
circumstances it can be inferred that a period was intended, the courts may fix the payment was dependent upon the sole will of X. Is X’s contention correct?
duration thereof. Held: No. X is liable to Y.
The courts shall also fix the duration of the period when it depends upon the will of • While the specific date on which each installment would be due was left
the debtor. blank, the note clearly provided that each installment should be payable each
In every case, the courts shall determine such period as may under the month.
circumstances have been probably contemplated by the parties. Once fixed by the • It also provided for an acceleration clause & a late payment penalty, which
courts, the period cannot be changed by them. showed the intention of the parties that the debt should be paid at a definite
date.
The Two-Step Process • X already tried to pay Y for the month, which further reveals their intentions.
1. The Courts must first determine that:
• The obligation does not fix a period, or No Changing of Period
• That the period is made to depend upon the will of the debtor • Once the court fixes a period, the parties cannot change it anymore.
But from the nature & circumstances it can be inferred that a period was
intended. Article 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless

he gives a guaranty or security for the debt; § Held: Yes. The obligor lost the right to make use of the period,
(2) When he does not furnish to the creditor the guaranties or securities which because he had impaired 1 of the security bonds by failing to
he has promised; renew it.
(3) When by his own acts he has impaired said guaranties or securities after • The obligee’s acceptance of the surety company’s bond
their establishment, & when through a fortuitous event they disappear, with full knowledge that on its face it would
unless he immediately gives new ones equally satisfactory; automatically expire within 1 year does not amount to a
(4) When the debtor violates any undertaking, in consideration of which the waiver of the renewal after the expiration date.
creditor agreed to the period; o NOTE: The debtor loses the benefit of the period even if the guaranties
(5) When the debtor attempts to abscond. or securities disappear through a fortuitous event
§ UNLESS new ones equally satisfactory are immediately given
Instances When Debtor Loses Right to Make Use of the Period § Ex. If the house used as collateral is hit by lightning, the debtor
1) When the debtor becomes insolvent, unless he gives a guaranty or security will still lose the right to the period unless he gives another
for the debt. house of the same quality as collateral
o If a debtor has been given up to Jan. 8 to pay his obligation & he 4) When the debtor violates any undertaking, in consideration of which the
becomes insolvent, the creditor need not wait up to Jan. 8, 1996 to creditor agreed to the period
demand payment o Ex. If X convinces Y to allow him to pay his indebtedness on May 7,
§ HOWEVER, if the debtor has asked a 3rd person to guarantee instead of Jan. 30 & Y agrees because X, who is a singer, promises to
his debt, or if the debtor puts up his house as collateral, he will sing in Y’s nightclub for 3 nights for only half the talent fee, & the
again have the benefit of the period debtor fails to sing as promised, the debtor loses his right to the
o Insolvency need not be judicially declared period & the creditor can immediately demand payment of the
2) When the debtor does not furnish the creditor the guaranties or securities he obligation
has promised o CASE: DBP v. Sta. Ines – The contract provided that the
o Usually, when the debtor fails to pay & the creditor has exhausted all commencement of the period of payment for the seller to acquire the
avenues to satisfy his claim without any favorable result, the creditor corporate shares would be based on the share purchase agreement;
can turn to the guarantor for payment this latter agreement, however, would only be executed after the buyer
§ If the guarantor has committed himself solidarily, the creditor has approved the valuations & its officer recommends it (this
can even go against the guarantor immediately without going recommendation was a principal consideration in entering into the
against the debtor. contract). The buyer, however, delayed in approving the valuations. SC
o Securities can take the form of real estate mortgages or pledges. held that the buyer lost the right to make use of the period under Art.
§ If the loan is collateralized through the mortgage of a house & 1198 (4) & the obligation became immediately demandable.
the debtor does not pay, the mortgage will be foreclosed. The o CASE: Allen v. Province of Albay – If, through the act of the owner in a
house will be sold in a public bidding & a sufficient amount of construction contract, the contractor has been prevented from
the proceeds to satisfy the indebtedness will go to the creditor. finishing the works on the contractual completion date, the owner is
3) When, by his own acts, the debtor impairs said guaranties or securities after deemed to have waived the time limit & the contractor is bound only
their establishment, & when through a fortuitous event they disappear, to finish the construction within a reasonable time.
unless he immediately gives new ones equally satisfactory § If there are liquidated damages provided for in the contract in
o CASE: Gaite v. Fonacier case of delay, a claim for such damages cannot be sustained;
§ Facts: Payment was secured through 2 security bonds — one § The liquidated damages can’t be restored & made applicable
with a mining company & another with a bonding company. to an unreasonable length of time.
• The obligor was obliged to pay the indebtedness from 5) When the debtor attempts to abscond
the time it received the proceeds of the sale of iron ore. o If the debtor attempts to flee from his obligations, or to move away to
• The obligor failed to renew the surety bond with the evade payment of his indebtedness, the debt can be demanded from
bonding company, prior to the arrival of the period for him immediately.
delivery, & did not replace it with an equivalent
guarantee. Class Discussion
Has the obligor lost the right to make use of the period? • In this provision, it does not matter if the period was fixed to benefit just the
debtor or both parties.

• In reciprocal obligations, the word “debtor” in this provision would be § The 1st & the last alternatives are possible & lawful while the
irrelevant, because the parties are the creditors & debtors of each other. 2nd, which is to fly to the moon, is impossible. The debtor
• Insolvency – the person still has assets, but his liabilities exceed his assets therefore has no right to choose this second alternative.
assuming that he pays of all his debts at the same time o Ex. If the alternatives are: to give opium, to sing a song or not to join
o Insolvent is required to leave with the Court all his properties the navy –
§ The 1st alternative is clearly unlawful, so the debtor has no right
SECTION 3. – ALTERNATIVE OBLIGATIONS. to choose this prestation.
o Ex. If the alternatives in a modeling contract are: to deliver the
Article 1199. A person alternatively bound by different prestations shall completely dresses, to act as model, or to engage in prostitution
perform one of them. § Not only is the last alternative illegal but it could not have been
The creditor cannot be compelled to receive part of one & part of the other the object of the prestation.
undertaking.
Article 1201. The choice shall produce no effect except from the time it has been
Complete Performance communicated.
• Partial performance of the different prestations cannot be considered
fulfillment of the obligation & cannot be done Right of Notification of Creditor
o UNLESS the creditor accepts such partial performance as complete • Communication to the creditor gives effect to the choice.
performance. o The manner of communication can vary, provided that it clearly
• Ex. If the debtor can either give a house & a car or paint two murals to satisfy conveys the unmistakable choice of the debtor.
his obligation, he cannot give the car & one mural. • When the alternatives are all possible, lawful or consistent with the object of
o The creditor cannot even be compelled to accept it; it is considered an the obligation, the creditor cannot oppose the choice.
incomplete satisfaction. • HOWEVER, if some of the prestations are impossible, unlawful or which could
o The debtor must choose to either deliver the house & car or the not have been the object of the obligation, the creditor can relay his objection
painting of two murals. so that the debtor will know
• The obligation will not be satisfied through partial fulfillment of several o BUT anyway, the debtor has no right to choose such proscribed
prestations. alternatives.
• If all but one of the alternatives become legally impossible to fulfill, the
obligation will no longer be alternative. Article 1202. The debtor shall lose the right of choice when among the prestations
o Ex. Where a loan was payable in PHP or USD, the alternative obligation whereby he is alternatively bound, only one is practicable.
ceased to exist when, at the time the amount became due during the
Japanese Occupation, payment in USD was prohibited. Only One Practicable
• GR: Whether only one, some, or a majority are practicable is irrelevant to the
Article 1200. The right of choice belongs to the debtor, unless expressly reserved by rights of the creditor.
the creditor. • If only one is practicable, the creditor has no right to complain, because it is
The debtor shall have no right to choose those prestations which are impossible, the debtor who will lose his right of choice.
unlawful, or which could not have been the object of the obligation. o The creditor must accept this single choice, unless it is unlawful or
inconsistent with the object of the obligation.
Debtor’s Choice • Practicable – capable of being done; feasible.
• The choice is given to the debtor by law o Prestations that are not “practicable” may also include lawful,
o EXCEPT when expressly reserved by or granted to creditor possible prestations but, because of some special attendant
o Any doubt as to who chooses must always be interpreted in favor of circumstances, they cannot be done.
the debtor • Ex. If the debtor has the following alternatives: to kiss a highly contagious
• Debtor cannot choose impossible or unlawful prestations, or those which leper, to sing a song, or not to pay taxes, it is clear that the last alternative is
could not have been the object of the obligation. not only impracticable but also unlawful. The 1st alternative, although not
o Ex. if for the accomplishment of the obligation, the debtor can either unlawful & not impossible, is still not practicable because it will endanger the
give a car, fly to the moon, or not join the army, he has all the 3 debtor’s health. In this case, the debtor loses his right of choice because only
prestations as alternatives, namely: to give, to do & not to do. one prestation is practicable which is to sing.

Article 1203. If through the creditor’s acts the debtor cannot make a choice • An obligor with alternative obligations can only be made liable for destroying
according to the terms of the obligation, the latter may rescind the contract with ALL alternatives; if he destroys 1 out of 3 options with malice, that is still OK,
damages. because at the end of the day it is that obligor’s choice anyway.
Rescission in Alternative Obligations Article 1205. When the choice has been expressly given to the creditor, the
• Ex. If the debtor has 3 alternatives: to give a particular car, to sing at a obligation shall cease to be alternative from the day when the selection has been
particular night club, or not to resign from his job, & the creditor burns the communicated to the debtor.
particular nightclub where he should sing, the debtor has effectively been Until then, the responsibility of the debtor shall be governed by the following rules:
prevented from making a choice from the 3 alternatives, due to the fault of (1) If one of the things is lost through a fortuitous event, he shall perform the
the creditor. obligation by delivering that which the creditor should choose from among
o The debtor can ask for the rescission with damages. the remainder, or that which remains if only one subsists;
o If, despite, the act of the creditor, the debtor still wants to maintain (2) If the loss of one of the things occurs through the fault of the debtor, the
the contract, the debtor can select from the remaining choices. creditor may claim any of those subsisting, or the price of that which, through
the fault of the former, has disappeared, with a right to damages;
Article 1204. The creditor shall have a right to indemnity for damages when, through (3) If all the things are lost through the fault of the debtor, the choice by the
the fault of the debtor, all the things which are alternatively the object of the creditor shall fall upon the price of any one of them, also with indemnity for
obligation have been lost, or the compliance of the obligation has become damages.
impossible. The same rules shall be applied to obligations to do or not to do in case one, some,
The indemnity shall be fixed taking as a basis the value of the last thing which or all of the prestations should become impossible.
disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded. Creditor’s Choice
• When the choice is given to the creditor, the conferment must be express.
Liability for Debtors o Once the creditor’s choice is communicated to the debtor, the
• The debtor will not be liable in any way for reducing the alternatives from 3 to obligation ceases to be alternative.
2, provided what remains are lawful, practicable, possible or consistent with o If the debtor has 3 alternative prestations, once he receives the
the object of the obligation. selection of the creditor, the debtor is bound to deliver the choice
o The debtor will also not even be liable for converting his alternative properly.
obligation to one where there is only 1 lawful & possible prestation. • The debtor is obliged to take care of it with the proper diligence of a good
o The debtor may even cause the loss of the thing, or render the service father of a family, unless the law or the stipulation of the parties requires
impossible. another standard of care.
• The debtor must be responsible for losing ALL alternative prestations to
entitle the creditor to damages. Pre-Selection Rules
• Ex. If the debtor has the ff. alternative prestations: to give a car worth 1) Thing is lost through fortuitous event – the debtor delivers that which the
P50,000 or to paint a portrait in a special canvass worth P25,000, the creditor should choose from among the remainder, or that which remains if
debtor will be liable for damages if he willfully destroys the car & willfully only one subsists.
destroys the special, rendering both alternatives impossible. o If the car, the truck, & the boat were lost because of a fortuitous
o If the special canvass were first destroyed & thereafter the car, event, the obligation is extinguished.
the damages to be paid to the creditor will be the value of the last o If only the car were lost, then the creditor can choose between the 2. If
thing which disappeared — the car worth P50,000. only the boat remains, then the obligation becomes simple & creditor
• The indemnity shall be fixed, taking as a basis the value of the last thing can demand the delivery.
which disappeared, or that of the service which last become impossible. 2) Thing is lost through the fault of the debtor – the creditor may claim any of
o Also, damages other than the value of the last thing or service those subsisting, or the price of that which, through the fault of the former,
may also be awarded. has disappeared, with a right to damages.
o If the debtor destroys the car, the creditor still has 3 choices, the
Class Discussion truck, the boat or the price of the car. In addition, the creditor shall be
• In alternative obligations, the prestations need not be the same, but they entitled to damages regardless of which alternative he chooses.
could be the same 3) Things are lost through the fault of the debtor - creditor can choose based on
the price of any one of them, also with indemnity for damages.

o If the car, the truck and the boat were all lost through the fault of the • The act of the debtor may constitute fraud & the whole contract may be
debtor, the creditor still has 3 choices: the price of the car, the price of annulled.
the truck, or the price of the boat. In all cases, the creditor shall be o If the creditor does not try to annul the contract & accepts the giving
entitled to damages. of the boat, he can no longer assail the contract as his acceptance
• The same rules shall be applied to obligations to do or not to do in case one, cured the defect of said voidable contract.
some, or all of the prestations should become impossible. o BUT: If the promise to the creditor relative to the 2 substitute cars
does not constitute the reason for which the creditor entered into the
Article 1206. When only one prestation has been agreed upon, but the obligor may contract, the debtor would not be liable for his bad faith if the principal
render another in substitution, the obligation is called facultative. obligation can still be performed.
The loss or deterioration of the thing intended as a substitute, through the • Once the substitution has been made, the obligor is liable for the loss of the
negligence of the obligor, does not render him liable. But once the substitution has substitute on account of his delay, negligence, or fraud.
been made, the obligor is liable for the loss of the substitute on account of his delay,
negligence or fraud. SECTION 4. JOINT & SOLIDARY OBLIGATIONS.
Facultative-Alternative Obligation Article 1207. The concurrence of two or more creditors or of two or more debtors in
• Ex. If the debtor is obliged to give a car, such prestation is the principal one & the same obligation does not imply that each one of the former has a right to
obligation. demand, or that each one of the latter is bound to render, entire compliance with the
o It becomes facultative if, in lieu of the car, he can undertake another prestation. There is solidary liability only when the obligation expressly so states, or
prestation like the painting of a mural. when the law or the nature of the obligation requires solidarity.
• Undertaking the substitute prestation is NOT mandatory in the event that the
principal prestation is NOT performed as the creditor only agrees that it may Solidary Obligation
be given as a substitute. • Gives anyone, some or all of the creditors the right to demand from anyone,
• BUT: If the substitute is given, the creditor cannot refuse it unless it is some or all of the debtors the satisfaction of the total obligation, not merely
unlawful. the share of each debtor in the debt
o BUT ALSO: There is nothing to prevent the parties from agreeing that • *Exists only:
the giving of the substitute prestation is mandatory in the event the o When the obligation expressly so states, or
principal obligation cannot be performed. o When the law (ex. when it comes to partners, torts) or the nature of
the obligation requires it.
Effect of Loss
• If the substitute is lost through the negligence of the debtor, it does not affect Class Discussion
the principal obligation & debtor will not be liable. The presumption is that an obligation with two or more debtors or creditors is a joint
• If there is bad faith on the part of the debtor, it depends: obligation.
o If the substitute prestation was one of the main reasons why the
creditor was induced the creditor to enter into the contract with the Surety v. Guarantor
debtor, but the latter did not really intend to constitute it as a Surety Guarantor
substitute, this could be an act of fraud on the part of the debtor, An insurer of debt; binds himself to An insurer of solvency; subsidiarily liable for
which could make the whole contract voidable. pay the obligation of the debtor when the debt of the debtor
• Ex. A debtor promises to give a particular car to the creditor. it becomes due
o The debtor negotiates so that he can give a boat to the creditor Becomes a solidary debtor Not considered solidarily or even jointly
instead of a particular car, which is preferred by the creditor. liable
o The creditor resists but he agrees on the promise of the debtor to give Creditor need not go against the GR: Can be required to pay the
not 1 but 2 cars of the same type, which the debtor represents as principal debtor first before the indebtedness of the principal debtor only
owned by him, as substitute prestation in the event that the principal creditor can collect from the surety, after the creditor has unsuccessfully
prestation is not performed. either the whole amount of the exhausted all means to collect from the
o Here, the creditor would not have agreed without this substitute indebtedness or for such amount as debtor
prestation. the surety was made liable by
o After the signing of the contract & before the fulfillment of the main contract BUT: By stipulation of the parties, the
prestation, the creditor learns that the debtor does not own the cars. guarantor can make himself solidarily liable

for the indebtedness o Where the contract reads “I promise,” or “I hereby bind myself,” & is
signed by 2 or more promisors
CASE: Sesbreño v. CA o Where it reads: “I promise to pay” & is signed by one person at the
Lesson: Custodianship does not equate to solidary liability. bottom & by another on the back thereof.
Facts: Y was indebted to Z. o An agreement between 3 creditors of a bankrupt, that it should have a
• X Co. issued a promissory note in favor of Y for the amount of P300K, 1/3 of any dividend paid on a claim filed by 2 of the debtors, has been
assigning such to Z as security for the payment of Y’s indebtedness to Z. held joint & several contract.
• The note was placed under the custody of Pilipinas Bank, which informed Z o Such expressions as “we or either of us,” or “we jointly and severally
via “Denominated Custodian Receipt” that it “possessed the promissory note promise”
& that upon Z’s written instructions, the bank would undertake physical
delivery of the above securities fully assigned to Z.” The Use of “I”
Does this make the bank a solidary debtor? • It counts as a solidary obligation when the debtors who were referred merely
Held: No. The bank’s statement does not make it a solidary debtor. There was no as “I” were not identified in the body or content of the document itself.
express assumption of solidary liability. The bank was just a custodian. • HOWEVER, if “I promise to pay” were worded differently in that it identified
the particular person referred to as “I,” then even if there were a number of
CASE: PNB v. Sta. Maria signatures in the note, the others cannot be held liable as solidary debtors
Lesson: A special power of attorney does not grant the attorney the authority to bind because only 1 person as identified expressly in the promissory note made
the principal solidarily with him on any loan the attorney might thereunder secure. the promise to pay.
Facts: The principal, in a special power of attorney, empowered his agent to borrow o The others who sign are witnesses & cannot even be held liable as
money & mortgage real estate to the creditor. The agent indeed borrowed money, joint debtors.
but executed a mortgage not on the account of his principal but in his own name. • Ex. The promissory note reads: “I, X, promise to pay J P1,000 on or before
The lower court ruled that this would make the obligation joint & several. Does this Jan. 1, 2003.” The signatures of X (the debtor) & J (the creditor) appear.
create a solidary obligation? o If, at the lower portion of this document, the signatures of M & N
Held: No. Such a scenario does not create a solidary obligation. This is because in appear, it can never be presumed that M & N also signed as solidary
the special power of attorney, the principal did not grant the agent the authority to debtor or creditor.
bind her solidarily with him on any obligation thereunder. o This is so because:
§ The law does not make such a presumption.
Express Stipulation for Solidary Liability § There is no fact in the wording of the document from where
• Parties can expressly stipulate solidary liability. such a presumption could arise.
• CASE: Pacific Banking Corp. v. IAC § The names of the only debtor & the only creditor were exactly
o Lesson: It is not the title of the document, but its contents, that identified in the body of the document, as Mr. X was identified
determine what type of obligation it is. in the body immediately preceding the word “I” & he signed it.
o Facts: The document was denominated as a “Guarantor’s Undertaking” § Even the nature of the obligation (simple loan) does not give
but the provision therein stated that the guarantor shall jointly & rise to a solidary obligation.
severally pay the bank for any & all indebtedness of the principal • Once the terms of an agreement have been reduced into writing, it is deemed
debtor. Is the guarantor solidarily liable, despite being just a guarantor? to contain all the terms agreed upon by the parties & no evidence of such
o Held: Yes. Since the undertaking expressly stipulated the joint & several terms other than the contents of the written agreement shall be admissible.
obligation of the debtor, the nature of the obligation was clearly
solidary. Effect of Judicial Decision
• The ff. phrases indicate that there is a solidary obligation: • Even if the parties stipulated in their contract that the obligation of the obligor
o *Individually & jointly liable is solidary but such contract was superseded by a judicial decision declaring
o *“Collectively,” “separately,” “distinctly,” “respectively” or “severally” the obligation to be merely joint, the said decision must be enforced in a joint
o Individually liable manner.
o Several obligation • ALSO, if a decision does not state that the obligation of the judgment debtors
o “Juntos o separadamente” is solidary, the writ of execution enforcing such a decision cannot be
o “Mancomun o insolidum” implemented in a solidary manner among the judgment debtors.
o Jointly & severally guaranteed
• The ff. scenarios also display solidary obligation: Law & Solidary Obligations

• Art. 94 & 121, last par., Family Code – If the ACP/CPG is insufficient to cover tortfeasors are those who command, instigate, promote, encourage, advise,
the liabilities for which the ACP/CPG is liable, the spouses shall generally be countenance, cooperate in, aid or abet the commission of a tort, or approve of it
solidarily liable for the unpaid balance with their separate properties after it is done, if done for their benefit. They are also referred to as those who act
• Art. 145, Family Code - If the property arrangement of the spouses is the together in committing wrong or whose acts, if independent of each other, unite in
separation of property, the liability of the spouses to creditors for family causing a single injury. Under Art. 2194 of the Civil Code, joint tortfeasors are
expenses shall be solidary. solidarily liable for the resulting damage. In other words, joint tortfeasors are each
• Art. 927, Civil Code – In inheritance, if 2 or more heirs take possession of the liable as principals, to the same extent and in the same manner as if they had
estate (of the deceased), they shall be solidarily liable for the loss or performed the wrongful act themselves.
destruction of a thing devised or bequeathed, even though only one of them
should have been negligent. *CASE: AFP Retirement & Separation Benefits System (AFPRSBS) v. Sanvictores
• Art. 1824, Civil Code – All partners are solidarily liable with the partnership Lesson: When two individuals sign a contract of sale as one singular “seller,” their
for everything chargeable to the partnership in cases in Article 1822 & 1823 obligation to the buyer is solidary.
of the Civil Code. Facts: AFRPRSBS & Prime East signed as “SELLER” in a contract of sale. Later,
• Art. 1894, Civil Code – 2 or more agents may agree to bind themselves however, AFRPRSBS resisted the claim of the buyer, & argued that it was Prime East
solidarily alone which should be held liable as seller. Is the contention of AFRPRSBS tenable?
o Art. 1895, Civil Code – If solidarity is agreed upon, each of the agents Held: No. The obligation in this case is solidary since AFRPRSBS & Prime East were
is responsible for the non-fulfillment of the agency, & for the fault or clearly referred to as “SELLER” in the contract of sale. They are thus considered as
negligence of his fellow agents, except in the latter case when the one seller in the contract.
fellow agents acted beyond the scope of their authority
Class Discussion
• Art. 1945, Civil Code – With respect to bailees in commodatum, when there
Q: AFP & Prime East signed as seller in the contract, while X signed as buyer. If they
are 2 or more bailees to whom a thing is loaned in the same contract, they
indicated themselves as “seller” and they are two people, is the liability joint or
are liable solidarily.
solidary?
• Art. 2146, Civil Code – In the quasi-contract negotiorum gestio, pertinently
A: The liability is solidary, by stipulation of the parties (SC case).
provides that the responsibility of 2 or more officious managers shall be
solidary, unless the management was assumed to save the thing or business
Nature of the Obligation & Solidarity
from imminent danger.
• Solidary obligations exist also if the nature of the obligation requires it
• Art. 2157 - The responsibilities of 2 or more payees, when there is payment
• Some provisions in the Preliminary Title, Ch. 2 on Human Relations of the
of what is not due, is solidary.
Civil Code, particularly Arts. 19-22, though not expressly providing for solidary
• Art. 2194 - The responsibility of two or more persons who are liable for quasi-
liability, nevertheless should give rise to solidary obligations if violated by 2 or
delict is solidary.
more persons.
CASE: Ruks Konsult & Construction v. Adworld Sign & Advertising Co.
CASE: R Transport Co. v. Yu
Lesson: Where several causes producing an injury are concurrent & each is an
Lesson: The liability of the driver of a vehicle & the owner is solidary, unless the
efficient cause without which the injury would not have happened, the injury may be
owner proves he exercised due diligence in the selection & supervision of his driver.
attributed to all or any of the causes & recovery may be had against any or all of the
responsible persons although under the circumstances of the case, it may appear
Article 1208. If from the law, or the nature or the wording of the obligations to which
that one of them was more culpable, & that the duty owed by them to the injured
the preceding article refers the contrary does not appear, the credit or debt shall be
person was not same. Those who cause the injury are called joint tortfeasors, & are
presumed to be divided into as many equal shares as there are creditors or debtors,
solidarily liable to the injured party.
the credits or debts being considered distinct from one another, subject to the Rules
Facts: Billboard X fell on Billboard Y (owned by Adworld). It was found upon
of Court governing the multiplicity of suits.
inspection that Billboard X’s lower structure did not have the proper foundation, &
that this lower part was first constructed by Transworld. At the same time, the upper
Joint Obligations
part of Billboard X also did not have proper foundations; this part was built by Ruks.
Both Ruks & Transworld relied on each other for the structural integrity of Billboard • Presumption of law – an obligation is always joint.
X. Who is liable? • In the absence of a finding of facts that debtors made themselves individually
Held: Both Transworld & Ruks are guilty of negligence in the construction of the liable for the debt incurred, they are obliged to pay only their share in the
billboard, & should be held liable for its collapse & the resulting damage to indebtedness.
Adworld’s billboard. As joint tortfeasors, they are solidarily liable to Adworld. Joint

o Creditors can only claim their share in the credit in proportion to own shall not be liable for his share.
& owe.
• It is only when the (1) law, or (2) the nature or (3) the wording of the Effect of Impossible Division
obligation clearly provides for solidary liability will the obligation be such. • If the division of the obligation is impossible & the obligation is joint, the
• Unless otherwise specified, the creditors & debtors in a joint obligation shall creditors must act collectively.
be entitled or shall make payment in equal proportions. • Ex. If the joint obligation is to give a house to 3 creditors, one of the creditors
o If A & B are indebted to C & D for P1,000: cannot undertake an act which will prejudice the others.
§ C can collect from A & B P250 each. o A waiver of the obligation cannot be made by any one of the creditors
§ D can likewise collect from A & B P250 each. UNLESS such waiving-creditor has been authorized by the others to
• If in the same P1,000 obligation, A owes only 1/3 of the indebtedness & B undertake such act.
owes 2/3 while creditor C owns 1/5 of the credit & D owns 4/5: o If there is no such authority & a waiver is to be made, ALL the creditors
o A is obliged to pay C only P66.67 & D only P266.67. must waive the obligation.
§ A owes only 1/3 of P1,000 which is P333.33. • If there are 3 debtors obliged to give a single house, all of the debtors must
§ C & D can collect only from that share of A. be sued if they renege on their obligation.
§ Since C only owns 1/5 of P333.33, he can only collect P66.67 o If 1 of the 3 debtors refuses to deliver the house, the obligation will be
from A. converted into a claim for damages.
§ Since D owns 4/5 of P333.33, he can only collect P266.67 § A joint indivisible obligation gives rise to indemnity for damages
from A. from the time any of the debtors does not comply with the
§ B is obliged to pay P133.33 to C & to D only P533.33. undertaking.
§ Following the same principle, B only owes 2/3 of the P1,000 § The debtors who were ready to fulfill their promises shall not
indebtedness which is P666.67. C & D can collect only from contribute to the indemnity beyond the corresponding portion of
that share of B. the value of the thing or service in which the obligation consists.
§ Since C only owns 1/5 of P666.67, he can only collect o Ex. If the house is worth P150,000, the creditors can file a case for
P133.33 from B. damages against the 3 debtors in the amount of P150,000. Each of the
§ Since D owns 4/5 of P666.67, he can only collect P533.33 debtors will be liable for P50,000.
from B. § The debtor who refuses to deliver or who is, in effect,
responsible for the suit by the creditor may be liable for
CASE: Spouses Ibanez v. James additional damages.
Lesson: Solidary obligations cannot be inferred in a compromise agreement; a § Those who were willing shall not contribute to the indemnity
statement that the obligation in said agreement is solidary must be express. beyond their corresponding debt.
Facts: Spouses Ibanez agreed to pay Francisco, Consuelo, & Ma. Consuelo a total
amount of P3M, with the initial payment of P2M to be sourced from a GSIS loan Where One Debtor is Insolvent
secured by the spouses while the remaining balance would be due 1 year from the • Since the obligation is joint, the debtors shall not be responsible for the share
date of the compromise agreement signed by the parties. The spouses Ibanez of a debtor who is insolvent.
executed a mortgage in favor of Consuelo & Ma. Consuelo, which was eventually
foreclosed & sold off, paying for the debts to the two. When Francisco ran after the Article 1210. The indivisibility of an obligation does not necessarily give rise to
Spouses Ibanez, they argued that the obligation they owed was solidary, & since solidarity. Nor does solidarity of itself imply indivisibility.
Consuelo & Ma. Consuelo were already paid, Francisco was paid too. Is the
obligation solidary? Solidary v. Indivisibility
Held: No. The presumption is always that a credit or debt is joint, unless the contract • Solidary - refers to the nature of the obligation attaching to the obligor &
(in this case, the compromise agreement) between the parties expressly states that obligee
they are solidarily liable or entitled to payment. Hence, Francisco can still run after • Indivisibility - refers to the nature of the object of the prestation
the Spouses Ibaniez, because not all stipulations in the agreement have been
complied with.
Article 1211. Solidarity may exist although the creditors & the debtors may not be
bound in the same manner & by the same periods & conditions.
Article 1209. If the division is impossible, the right of the creditors may be
prejudiced only by their collective acts, & the debt can be enforced only by
Creditors & Debtors Need Not be Bound in the Same Manner
proceeding against all the debtors. If one of the latter should be insolvent, the others
• A solidary obligation refers to the nature of the obligation.

o It can exist even if the creditors & debtors are not bound in the same • BUT: A solidary creditor should NOT do anything which may be prejudicial to
manner & by the same periods & conditions. the other solidary creditors.
o The creditor, for example, can collect an amount owed by solidary o Ex. If the solidary obligation has become due & the debtor decides to
debtors at the time when the periods imposed on the particular make complete payment to one of the solidary creditors, such solidary
debtors have been fulfilled. creditor must accept payment.
• Ex. If A, B, & C are solidarily indebted to D in the amount of P15,000, D can § Non-acceptance is prejudicial to the other solidary creditors, as
collect from anyone of the debtors the whole amount of the indebtedness. A it would lead to a delay on the part of the creditors for which
is required to pay only on Aug. 1, 1997, B only on May 1, 1998 & C they all may be liable.
immediately. o Ex. If one of the solidary creditors remits the obligation in favor of one
o If D demands payment from C on Jan. 6, 1997, he can pay only of the solidary debtors, the whole obligation is extinguished.
P5,000 which pertains to his share. The liability of A & B have not yet § The extinguishment can no longer be invalidated.
matured. § Their remedy is to collect their share of the indebtedness from
o On August 2, 1997, creditor D can still demand payment of the the solidary creditor who made the remission.
balance from C who can legally pay only P5,000 representing A’s § They can likewise ask for damages for what ever they may have
share considering that B’s liability has not yet matured. lost as a result of the remission, such as interest which should
have been earned had it not for the remission.
Class Discussion
Q: When can a solidary obligation be implemented as if it were joint? Article 1213. A solidary creditor cannot assign his rights without the consent of the
A: When each one of the solidary debtors have different periods of payment. Hence, others.
solidary debt can be enforced as JOINT in relation to obligations with a period (Art.
1211 & 1212). This just means that the creditor can collect from any of the solidary Mutual Trust
debtors – however, the creditor can collect only the share that is due. • Ideally, the relationship between & among solidary creditors is one of mutual
trust.
Article 1212. Each one of the solidary creditors may do whatever may be useful to • Thus, a solidary creditor cannot assign his rights without the consent of the
the others, but not anything which may be prejudicial to the latter. others.
All for One, One for All Class Discussion

• Even just one of the solidary creditors can file a suit for recovery of the entire Remember that a creditor owns the credit, while the debtor owes the debt, and a
indebtedness from the solidary debtors. credit is a property that you can actually sell. You can also inherit credits or
o But when he does something prejudicial to the other creditors, the collectibles. However, Art. 1213 serves to restrict the power of a creditor to sell or
action of said creditor is not necessarily void. assign his rights to the debt of a debtor to another.
• CASE: Quiombong v. CA
o Facts: Only one of the solidary creditors filed suit for collection against Article 1214. The debtors may pay any one of the solidary creditors; but if any
the solidary debtors. The debtors moved for the dismissal of the suit demand, judicial or extrajudicial, has been made by one of them, payment should be
on the ground that the other solidary creditor should have been made to him.
included in the case. Is the argument of the debtors tenable?
o Held: No. Recovery of the contract price was surely a useful act & can Payment to the Creditor Who Makes the Demand
be done even by one solidary creditor. • GR: A debtor may pay any of the solidary creditors.
§ The question as to who should sue on a solidary obligation for • BUT: If one of them makes an extrajudicial or judicial demand, payment must
the collection of the price was a personal issue between the be made to such creditor.
solidary creditors, & it did not matter who as between them filed
the complaint, since the debtors were liable to either of them for Two Views
the whole obligation. • Once a court case has been filed by one solidary creditor, the debtor cannot
• If one of the solidary creditors makes an extrajudicial demand for the debtor pay the other solidary creditor who is not included in the case.
to pay, this will benefit also the other creditors. • The effect of paying a different creditor has led to 2 views:
o The demand will make the prescriptive period for the fulfillment of the 1) If payment is made to a creditor who is not a party to the suit or did
obligation run anew. not make the demand, the payment is INVALID.

o Based on the view that, as soon as one of the creditors Illustrative Example
make the demand, the mutual representation of the • NOTE: The entire obligation is extinguished, not just the debt of the debtor
creditors with respect to each other momentarily ceases whose debt was expressly extinguished.
o When the case terminates & demanding-creditor accepts • A, B, & C are solidary debtors of D, E, & F in the amount of P1,500.
partial payment with a reservation as to the balance or, if • Novation: If A informs D that X is paying the debt provided that A is released
after extrajudicial demand, the demanding-creditor accepts from the obligation, & X & D agree to the change, there is a novation in the
partial payment with reservation as to the balance, the other person of A, one of the debtors.
creditors can now again seek payment from the debtor. o Because of this novation, not only A’s obligation, but also B’s & C’s are
2) The payment made to the other creditors is VALID (the Sta. Maria extinguished.
opinion). • Compensation: If A becomes the creditor of D, also for P1,500, & said
o Art. 1214 does not provide for invalidity, so the answer amount is also due, there is compensation between A & D.
should be what is most beneficial to the creditors. o The compensation extinguishes not only the obligation of A but also
o Payment to the demanding creditor must be seen as a B’s & C’s.
preference only. • Confusion: If D issues a promissory note to X in the amount of P1,500 & X
o If the non-demanding creditors accept the payment, the endorses it to A who endorses it to D, there is a merger.
demanding creditor will not be prejudiced because the case o The debt has been extinguished because of creditor D without
for collection pending in court will not necessarily be creditors E & F being benefited.
dismissed. There will still be interest, damages, or attorney’s
• So as not to prejudice the other solidary creditors, D must pay each of them
fees to talk of, unless the creditor waives them.
P500.
o The same should apply in extrajudicial demand.
o The creditor who may have executed any of these acts of novation,
o Consistent with Art. 1222 – where a solidarity debtor may
compensation, merger, or confusion, as well as he who collects the
avail himself of all the defenses which are derived from the
debt, shall be liable to the others for the share in the obligation
nature of the obligation & those personal to him, or pertain
corresponding to them.
to his own share.
Class Discussion
Class Discussion
• In Art. 1215, despite the prejudice to the unknowing creditor, the obligation is
Q: What are the powers of a solidary creditor?
nevertheless extinguished.
A: They are –
1. The power to select which among his solidary debtors he will file a case against • All other modes of extinguishment by one creditor will have the same effect
2. The power to decide how much he wants to collect from a particular debtor as those mentioned in Art. 1215, which will also still apply.
Article 1215. Novation, compensation, confusion, or remission of the debt, made by Article 1216. The creditor may proceed against any one of the solidary debtors or
any of the solidary creditors or with any of the solidary debtors, shall extinguish the some or all of them simultaneously. The demand made against one of them shall not
obligation, without prejudice to the provisions of Article 1219. be an obstacle to those which may subsequently be directed against the others, so
The creditor who may have executed any of these acts, as well as he who collects long as the debt has not been fully collected.
the debt, shall be liable to the others for the share in the obligation corresponding to
them. CASE: Imperial Insurance, Inc. v. David
Lesson: A solidary debtor of a deceased co-debtor can be proceeded against by the
Modes of Extinguishing an Obligation creditor for the enforcement of the debt, even if the creditor did not participate in
1) Novation – the change of creditors, debtors, or the principal condition of the the intestate proceedings.
contract Facts: A husband & wife bound themselves jointly & severally in favor of the obligee
o MUST clearly release the solidary obligation of debtors for a sum of money.
2) Compensation – when 2 persons, in their own right, are creditors & debtors When the husband died, the obligee demanded payment from the wife who resisted
of each other payment, claiming that the obligee’s claim is barred by its failure to file a claim in the
3) Confusion – the merger of the characters of the creditor & debtor in the same intestate proceeding of the deceased husband. Is the claim barred?
person Held: No. The obligee can properly claim from the wife, as the obligation is solidary. If
4) Remission – the condonation of an obligation husband & wife bound themselves jointly & severally, then in case of his death, her
liability is independent of & separate from her husband’s; she may be sued for the

whole debt. It is wrong to hold that the claim against her & her husband should be debtors, in proportion to the debt of each.
made in the decedent’s estate.
Creditor’s Choice
CASE: Guererro v. CA • Creditor can choose whom he will enforce payment
Lesson: Compromise is not the same as novation; thus when a compromise • Creditor may also choose which offer to accept when 2 or more solidary
agreement between the creditor & one solidary debtor fails, the creditor can still debtors offer him payment
seek payment from the other debtor. • Ex. A, B, & C are solidarily indebted to D for P1,500 on May 1.
Facts: The creditor filed a suit against one of the solidary debtors. The suit was o A, B & C offered to pay D on the due date.
compromised without novating the solidary debt. § D can choose whose payment to accept.
• The said solidary debtor defaulted in making payment, resulting in the o If D accepts payment from A, the obligation is totally extinguished.
creditor demanding payment from the other solidary debtor. § A then has the right to claim P500 each from B & C (their
• The other solidary debtor claimed that there was already a waiver by the respective shares in the indebtedness).
creditor to go against him considering that he already compromised the case o If A paid interest on the indebtedness, B & C must also share in the
with his other solidary debtor. payment of the interest.
Was there a waiver? § NOTE: If payment is made before the debt is due, no interest
Held: No. The fact that in the compromise agreement the creditor chose to go after for the intervening period may be demanded.
the 1st debtor did not imply waiver of its right to proceed against any of the solidary o If A pays the indebtedness on Feb. 1, no interest can be claimed by A
debtors or some or all of them simultaneously. for the period beginning Feb. 1 up to May 1, the due date of the
Demand made against one of them is not an obstacle to demands which may obligation.
subsequently be directed against the others so long as the debt or any part of it o If C cannot pay because he is insolvent, his share shall be borne by A
remains outstanding & unpaid. & B in proportion to the debt of each.
§ A is liable for P250 & so is B. Since A paid the entire obligation,
Partial Payment A can ask reimbursement of said P250 (C’s share) from B.
• The solidary creditor has a right not to accept partial payment from the
solidary debtors. *CASE: Republic Glass Co. v. Qua
o AND if he accepts partial payment from some, he is not prevented Lesson: Payment of any amount will not automatically result in reimbursement from
from claiming from those who have not yet paid the other co-debtors. If a solidary debtor pays the obligation in part, he can recover
• If a claim from one of the solidary debtors has been dismissed by a court on reimbursement from the co-debtors only in so far as his payment exceeded his
grounds other than the extinguishment of the whole obligation or share in the obligation. This is because if a solidary debtor pays an amount equal to
prescription, it does not necessarily mean that the solidary indebtedness his proportionate share in the obligation, then he in effect pays only what is due from
cannot be claimed against the other solidary debtors who were (1) not him. If the debtor pays less than his share in the obligation, he cannot demand
impleaded in the case or against those who were (2) impleaded but whose reimbursement because his payment is less than his actual debt.
liability was found by the court as proper. Q (based on case): A & B are solidarily indebted to X in the amount of P1,000. A, with
X’s consent, made a partial payment of P500, which represents A’s proportionate
*CASE: Republic Glass Co. v. Qua share in the debt. Can A demand a reimbursement of P250 from B, representing half
Lesson: (1) A creditor may choose to proceed only against some & not all of the of P500?
solidary debtors. (2) The creditor can also choose to collect part of the debt from A: No. However, if A pays P800, an amount exceeding his proportionate share, he
some of the solidary debtors, & the remaining debt from the others. can ask for reimbursement of P300, again because A’s share of the debt is P500. A
solidary debtor can only collect from his co-solidary debtor if what he paid is beyond
Article 1217. Payment made by one of the solidary debtors extinguishes the his share.
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept. Class Discussion
He who made the payment may claim from his co-debtors only the share which When a solidary debtor pays for the entire debt of his co-debtors & his own & has a
corresponds to each, with the interest for the payment already made. If the payment right to reimbursement from his fellow debtors, the debt of the debtors becomes
is made before the debt is due, no interest for the intervening period may be JOINT, not solidary.
demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his Class Discussion
share to the debtor paying the obligation, such share shall be borne by all his co-

Q: A, B, & C are solidarily indebted to X for P200. A told X that he would pay X o If the remission is done, the solidary creditor who made the remission
partially, P110, with reservation that the balance was still due. What happens next? shall be liable for the share which the other creditors should answer
A: A has paid more than his share & now has the right to collect from B & C. for damages which the other solidary creditors may suffer as a result
of the remission.
Article 1218. Payment by a solidary debtor shall not entitle him to reimbursement • Ex. A, B, & C are solidary creditors of X, who owes them P1,500 payable on
from his co-debtors if such payment is made after the obligation has prescribed or Dec. 30, 2001 with interest of 15% per annum. B condoned the debt on Apr.
become illegal. 1, 2001, just 1 day after it was incurred.
o B shall be liable to A for P500 & C for P500, plus damages equivalent
No Reimbursement for Payment Made by a Co-Debtor When – to the interest which A & C would have gotten had the obligation not
(1) Payment is made after the obligation has prescribed been condoned & had it been paid on Dec. 30; thus, interest from Apr.
(2) Payment is made after the obligation has become illegal 1-Dec. 30, 2001.
Illustrative Example: Prescription Article 1221. If the thing has been lost or if the prestation has become impossible
• An action based on a written agreement must be brought within 10 years without the fault of the solidary debtors, the obligation shall be extinguished.
from the time the cause of action accrues. If there was fault on the part of any one of them, all shall be responsible to the
• Ex. A & B, solidary debtors pursuant to a written loan agreement, are bound creditor, for the price & the payment of damages & interest, without prejudice to
to pay C on May 2, 2010. On the said date, the creditor makes a demand on their action against the guilty or negligent debtor.
them, but does not collect until after 12 years from the demand. If through a fortuitous event, the thing is lost or the performance has become
o The claim clearly has prescribed. impossible after one of the solidary debtors has incurred in delay through the judicial
• BUT: If A pays the creditor despite prescription, B can refuse to pay A his or extrajudicial demand upon him by the creditor, the provisions of the preceding
share because technically the debt has prescribed. paragraph shall apply.
Article 1219. The remission made by the creditor of the share which affects one of When Thing is Lost
the solidary debtors does not release the latter from his responsibility towards the • Obligation is extinguished & debtors are not liable when lost or when the
co-debtors, in case the debt had been totally paid by anyone of them before the prestation becomes impossible without their fault
remission was effected. • When there is fault or delay on the part of any of the solidary debtors before it
is lost or becomes impossible, all the solidary debtors will still be held liable.
Article 1220. The remission of the whole obligation, obtained by one of the solidary
debtors, does not entitle him to reimbursement from his co-debtors. Article 1222. A solidary debtor may, in actions filed by the creditor, avail himself of
all defenses which are derived from the nature of the obligation and of those which
Effects of Remission are personal to him, or pertain to his own share. With respect to those which
• Depends when the remission was in fact given by the creditor personally belong to the others, he may avail himself thereof only as regards that
• Ex. A, B, & C are solidary debtors of D in the amount of P1,500. A persuades part of the debt for which the latter are responsible.
D to condone the debt.
o A cannot collect reimbursement from B or C because the remission by Scenario
D of A’s debt extinguishes the entire obligation. • Ex. A, B & C are indebted to G in the amount of P1,500, but B shall only pay if
o BUT: If C, after the debt becomes due, pays the whole indebtedness & he passes the bar exam for lawyers in 1996 & C shall pay only on Jan. 2,
A only convinces D to condone the debt after C’s payment, remission 1997, & A when he reaches the age of 18.
has no effect. o If G sues B in 1996 after he passes the bar, B can set up the
§ By the time the remission was made, D’s credit has already defense that C’s obligation is subject to a period which has not
been extinguished. C can still claim from A, the latter’s share of yet arrived, & also the defense that A’s contract is voidable since
the indebtedness. he was a minor at the time he (A) contracted the solidary
obligation.
Only ONE Creditor in Art. 1219 o If B is successful in claiming said defenses, he will nevertheless
• Art. 1219 is applicable only when there is one creditor. pay the amount of P500 which pertains to his share because
• If there are many solidary creditors involved, remission of the debt by one of there is no impediment in collecting the same from him.
them without the consent of the others will be prejudicial to the other solidary
creditors & is now allowed. Class Discussion

Remember there is always a choice in delay & other faults of debtors: either (1) character of the prestation in each particular case.
specific performance, or (2) damages.
Indivisible Obligations
SECTION 5. – DIVISIBLE & INDIVISIBLE OBLIGATIONS. • An obligation which is not susceptible of partial performance
o Ex. A contract stipulating that an actor has to sing & dance
Article 1223. The divisibility or indivisibility of the things that are the object of simultaneously, is indivisible
obligations in which there is only one debtor & only one creditor does not alter or • An obligation to give definite things
modify the provisions of Ch. 2 of this Title. o Ex. An obligation to give a particular house.
Divisibility or Indivisibility Divisible Obligations

• The nature & effect of obligations do not affect the divisibility or indivisibility • When the obligation has for its object the execution of a certain number of
of the things that are the objects of the obligations in which there is only 1 days of work
debtor & 1 creditor. • When the object is the accomplishment of work by metrical units, or
analogous things, which by their nature are susceptible of partial
Article 1224. A joint indivisible obligation gives rise to indemnity for damages from performance
the time anyone of the debtors does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises shall not contribute to the Express Stipulation
indemnity beyond the corresponding portion of the price of the thing or of the value • Despite the nature of the obligation, the parties themselves may stipulate
of the service in which the obligation consists. whether or not the object or service shall, for purposes of their contract, be
divisible or indivisible.
Joint Debtors • The wording of the contract therefore will be material to show the
• Bound only to perform their respective portion in a particular indebtedness. characterization of the obligation
• Divisible obligation – easy to demand from each joint obligor payment of his • CASE: Government v. CFI
respective share o Lesson: Words like “in proportion” & “stages” are indicative of the
• Indivisible – each debtor must coordinate with the rest of the debtors for the divisible nature of the obligation.
fulfillment of the obligation o Facts: The compromise agreement stated, among others, that the
• Ex. If A, B & C are jointly bound to deliver a computer worth P30,000 to D & work was to be done in stages to be determined by the City Engineer;
the latter, on due date, demands payment from them, all of them must fulfill that the contractor was to advance the necessary amount needed for
the obligation. each stage of the work to be reimbursed by the City Government; &
o If A & B are ready to deliver but C, for no justifiable reason, refuses to that the contractor was to furnish the City Government a new
deliver, said debtors’ joint obligation is converted into a claim for performance bond in the amount required by law in proportion to the
damages on the part of D, who can file a case against all them for the remaining value or cost of the unfinished work of the construction per
amount of the computer. D can also demand for damages he suffered approved plans. What kind of obligation is in this agreement?
due to the non-delivery of the computer, such as exemplary damages, o Held: The provisions in the compromise agreement read together
moral damages, or attorney’s fees. clearly show a divisible obligation.
o BUT: A & B should not be held liable for these other damages as they § If the parties really intended the legal rate of 20% performance
were willing to deliver the computer. It will only be C who should bond to refer to the whole unfinished work, then the provisions
shoulder these other damages. should have required the contractor to submit & file a new
performance bond to cover the remaining value/cost of the
Article 1225. For the purposes of the preceding articles, obligations to give definite unfinished work of the construction. Using the words “in
things & those which are not susceptible of partial performance shall be deemed to proportion” significantly changed the meaning of the paragraph
be indivisible. to ultimately mean a performance bond equal to 20% of the
When the obligation has for its object the execution of a certain number of days of next stage of the work to be done.
work, the accomplishment of work by metrical units, or analogous things which by
their nature are susceptible of partial performance, it shall be divisible. Obligations “To Do” or “Not To Do”
However, even though the object or service may be physically divisible, an obligation • Divisibility or indivisibility shall be determined by the character of the
is indivisible if so provided by law or intended by the parties. prestation in each particular case
In obligations not to do, divisibility or indivisibility shall be determined by the

Class Discussion fraud & there is liquidated damages, and fraud is proven, the injuring party will be
An example of a divisible obligation – projects with phases (like subdivisions or liable under the general law on damages for FRAUD, which will supersede the
buildings of real estate developers) liquidated damages. BUT if it is a penalty & there is fraud, then ASIDE from the
penalty, in case of fraud, you will be entitled to damages. (Laureano v. Kilayco)
SECTION 6. OBLIGATIONS WITH A PENAL CLAUSE.
Effect of Imposition of Liquidated Damages
*Article 1226. In obligations with a penal clause, the penalty shall substitute the • GR: Imposition of the liquidated for breach of contract, such as in a building
indemnity for damages & the payment of interests in case of non-compliance, if contract, bars any award for additional damages at large for the same
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the breach.
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the • EXC: If the owner contracts the services of another to finish the construction,
obligation. the owner is entitled to reimbursement of the cost for contracting the other
The penalty may be enforced only when it is demandable in accordance with the contractor, in addition to liquidated damages.
provisions of this Code.
CASE: Baylen Co. v. CA
Penal Clause Lesson: Regardless of whether a clause is for liquidated damages or a penalty, said
• An accessory obligation the parties attach to a principal obligation to insure provision cannot go beyond the import of the stipulation providing it.
the performance thereof, by imposing on the debtor a special prestation • Hence: If the clause was made to apply only to a situation where the project
(generally consisting in the payment of a sum of money) in case the was completed & delivered beyond the date specified for completion &
obligation (1) is not fulfilled or (2) is irregularly or inadequately fulfilled delivery, the clause cannot be applied to an incomplete abandoned project
• If the principal obligation has been complied with, the penal clause has lost prior to the completion & delivery date.
its efficacy or enforceability
• Application may be governed by the parties CASE: Continental Cement Co. v. Asea Brown Boveri Inc.
o If there is nothing stipulated as to how it shall be applied, then the law Facts: X Co. wanted to claim damages against Y Co. for production loss, labor cost, &
applies: the penalty substitutes the indemnity for damages & interest rental of crane. However, X Co. & Y Co. already executed a contract with a penalty
in case of non-compliance clause providing for the amount of P987.25 for every day of delay. May X Co.’s
claims for the production loss, etc. still prosper?
Penalty v. Liquidated Damages Held: No. The penalty clause in the contract the two companies executed covered all
• CASE: Lambert v. Fox – there is no difference between them legally, though other damages. Other damages may only be obtained if the obligor refuses to pay
they may differ as a matter of language. In either case, the creditor is entitled the penalty or is guilty of fraud; however, these must still be proven through
to recover the sum stipulated without the necessity of proving damages. evidence.
o Later, SC would say that this is only true if there is no partial or
irregular compliance with the terms of the contract CASE: Pamintuan v. CA
• CASE: Laureano v. Kilayco – gave the differences between the two – Facts: The parties agreed that any violation of the provisions of the contract between
Penalty Liquidated Damages them would entitle the aggrieved party to collect liquidated damages in the sum of
It is a penalty that does not regard Pre-determined amount of actual P10,000. Fraud was committed in the performance of the contract on the part of the
the probably actual damages damages that might result from a seller. Does the provision in their contract bar recovery by the buyer of damages
resulting from the breach of contract breach, as calculated by the parties other than the P10,000?
Objective: To deter the obligor from Objective: To provide for the Held: No. SC held that the damages as a result of fraud may be proven & such
not complying with the agreement or, payment of actual anticipated & proven damages supersede liquidated damages. Citing Manresa, SC opined that in
if the violation has already occurred, liquidated damages, rather than case of fraud, the difference between the proven damages & the stipulated penalty
to penalize the obligor just to penalize breaches of a may be recovered.
contract
When Creditors in Obligations With a Penal Clause are Entitled to Damages
Supposed to be punitive Supposed to be compensatory
• The creditor in an obligation with a penal clause shall still be entitled to
Class Discussion damages when:
Penalty & liquidated damages are the same in effect but they are not the same. 1. The debtor is guilty of fraud;
Penalties are punitive. Liquidated damages are compensatory, making you whole 2. The debtor refuses to pay the penalty;
because of the damages you have suffered. This is important because if there is 3. When stipulated by the parties

obligation by paying the penalty, save in the case where this right has been expressly
When Penalty is Enforceable reserved for him. Neither can the creditor demand the fulfillment of the obligation &
• The penalty may be enforced only when it is demandable. the satisfaction of the penalty at the same time, unless this right has been clearly
o An obligor is in delay only upon judicial or extra-judicial demand unless granted him. However, if after the creditor has decided to require the fulfillment of
legally excused as provided by law. the obligation, the performance thereof should become impossible without his fault,
o Hence, the penalty may be claimed only when there is demand, the penalty may be enforced.
whether judicial or extrajudicial, unless the law, the stipulation of the
parties, or the nature of the contract (e.g., time is of the essence) Performance of the Principal Obligation
otherwise demands. • Penalty is merely an accessory obligation. It is not the principal obligation.
o The debtor CANNOT substitute the performance of the principal
CASE: Spouses Poon v. Price Savings Bank obligation by the mere payment of the penalty.
Lesson: The penalty clause may be in any form which is determined or liquidated. o HOWEVER, the parties can stipulate otherwise.
Facts: There was a stipulation in the lease contract which said: “Should the leased • Likewise the creditor CANNOT demand fulfillment of the obligation & payment
premises be closed, deserted, or vacated by the LESSEE, the LESSOR shall have the of the penalty at the same time.
right to terminate the lease without the necessity of serving a court order and to o Once the obligation has been complied with & extinguished, the penal
immediately repossess the leased premises. […] The LESSOR shall thereupon have clause has lost its raison d’etre.
the right to enter into a new contract with another party. All advanced rentals shall • GR: When the penalty is paid, the obligation is extinguished.
be forfeited in favor of the LESSOR.” Is the stipulation a penal clause? o EXC: the parties CAN stipulate that payment of the penalty &
Held: Yes. A provision is a penal clause if it calls for the forfeiture of any remaining satisfaction of the obligation can be demanded at the same time.
deposit still in the possession of the lessor, without prejudice to any other obligation • In the event that (1) the creditor demands fulfillment of the obligation & (2) it
still owing, in the event of the termination or cancellation of the agreement by has become impossible without his fault, the penalty may be enforced.
reason of the lessee’s violation of any of the terms and conditions thereof. This is a o Ex. A is to deliver a particular computer to B on May 7, 1997. It was
valid agreement. The clause is an accessory obligation meant to ensure the stipulated that in the event he fails to deliver on time, he shall be
performance of the principal obligation by imposing on the debtor a special liable for liquidated damages in the amount of P200,000. B demands
prestation in case of nonperformance or inadequate performance of the principal delivery of the particular computer on the due date but A fails to
obligation. Hence, the clause is a penal clause, even if it is note expressly referred to deliver. Thereafter, the computer is hit by lightning after his default. B
as one. can demand payment of the P200,000 penalty.
Class Discussion CASE: Heirs of Liong v. Castillo
A penalty may or may not extinguish the obligation, especially when the contract Lesson: The payment of the penalty cannot substitute the performance of the
says: “penalty for each & every day of delay” obligation unless there is a stipulation to the contrary.
Facts: The agreement between X & Y to transfer some property had a penal clause,
Class Discussion which stated that a party who violated any of the provisions therein would be liable
Q1: Is penalty a substitute for non-compliance? to pay a penalty of P50,000 with attorney’s fees incurred by the aggrieved party. Y
A1: Yes, as a general rule. And since the penalty clause substitutes for the general violated the contract, & the RTC ordered Y to execute & deliver their share of the
law on damages, the latter will be inoperative (as a general rule). property to X. The RTC also made Y pay P50,000 as liquidated damages, plus
Q2: Can creditors/debtors manipulate the penalty clause to their liking? attorney’s fees. Was the RTC correct in its imposition of liability to Y?
A2: Yes. Held: Yes. The P50,000 was validly required, & substitutes for moral & exemplary
Q3: Can a creditor manipulate the penalty clause in such a way as to make the damages in this case. In obligations with a penal clause, the penalty generally
debtor liable for both the penalty and the general law on damages? substitutes the indemnity for damages & the payment of interests in case of non-
A3: Yes. compliance. Usually incorporated to create an effective deterrent against breach of
the obligation by making the consequences of such breach as onerous as it may be
3 Exceptions to the General Rule on Penalties Replacing Damages possible, the rule is settled that a penal clause is not limited to actual &
1) When parties stipulate in the contract that both are still demandable; compensatory damages.
2) When there is fraud on the part of the person who must pay; & The RTC’s award of attorney’s fees in the sum of P50,000 is, however, proper. Aside
3) When the debtor refuses to pay the penalty. from the fact that the penal clause included a liability for said award in the event of
litigation over a breach, X was able to prove that he incurred said sum in engaging
*Article 1227. The debtor cannot exempt himself from the performance of the the services of a lawyer.

has been no performance, the penalty may also be reduced by the courts if it is
Class Discussion iniquitous or unconscionable.
DAMAGES are paid when the breach relates to an object; INTEREST is paid when the
breach relates to a contract where the main object is money (e.g., loan). Equitable Reduction
• A contract is a source of obligation.
*Article 1228. Proof of actual damages suffered by the creditor is not necessary in o Law between the parties
order that the penalty may be demanded. • GR: Neither the law nor the courts will extricate a party from an undesirable
contract he entered into with all the required formalities & with full
*Proof of Damages Not Necessary awareness of its consequences
• Because the particular penalty in the penalty clause is already specified & • EXC: PENALTIES
hence liquidated o If a penalty is unconscionable, the court may (1) temper, (2) reduce or,
• The person will perform the penalty in the agreement for as long as there is in some cases, (3) delete it.
irregular or no compliance with the principal obligation regardless of whether • Situations when court modified the penalty:
or not the person seeking it suffers damages o The court reduced the 25% penalty charge to cover the attorney’s fees
• CASE: Allen v. Province of Albay & collection fees, which was in addition to the 12% annual interest, to
o Lesson: If through the act of the owner in a contract, the contractor 10% for being manifestly exorbitant
will be prevented from finishing the works on the contractual o The court reduced a subdivision lot buyer’s liability from the stipulated
completion date: P12K to P1.5K after finding that he had partially performed his
1) The owner shall be deemed to have waived the time limit or the obligation to complete at least 50% his house within 2 years, having
time period done so a month after deadline.
2) The contractor is bound only to finish the construction within a
reasonable time CASE: Palmares v. CA
3) If there are liquidated damages provided for in case of delay, a Facts: There was a penalty interest of 3% per month on the total amount due but
claim for such damages cannot be sustained. unpaid in a contract. The total amount owed was P5,000 & there was partial
4) Neither could the liquidated damages be restored to be made payment of P8,600 on due date. There was also a heavy compensatory interest
applicable to an unreasonable length of time. separate from the penalty interest.
Held: The Court eliminated the penalty charge for being excessive & unwarranted
Class Discussion under the circumstances.
• GR: The principal obligation is extinguished when you pay the penalty.
• This rule on actual damages applies because the amount for the penalty has CASE: Ligutan v. CA
already been pre-determined Lesson: The question of whether a penalty is reasonable or iniquitous can be partly
• General Damages: subjective and partly objective. Its resolution would depend on such factors as, but
o Compensatory/actual damage – cost of object not necessarily confined to, (1) the type, extent, & purpose of the penalty, (2) the
o Moral damages – sleepless nights, anguish nature of the obligation, (3) the mode of breach & its consequences, (4) the
o Exemplary damages – extreme breach in bad faith supervening realities, (5) the standing & relationship of the parties, (6) & the like,
§ Moral & exemplary – bigger than actual damage the application of which is addressed to the sound discretion of the court. In RCBC v.
§ Bad faith – further damages CA, SC tempered the penalty charges after taking into account the debtor’s pitiful
• There CAN be breach of contract in good faith. In such a case, only actual situation and its offer to settle the entire obligation with the creditor. The stipulated
damages will be paid. penalty might likewise be reduced when a partial or irregular performance is made
by the debtor. The stipulated penalty might even be deleted such as when there has
Class Discussion been substantial performance in good faith by the obligor, when the penalty clause
Q: X wants to buy from Y for P500,000. The penalty clause in the contract says P1M. itself suffers from fatal infirmity, or when exceptional circumstances so exist as to
Y fails to deliver. Y argues that he is only liable for P1M. Is this true? warrant it.
A: No. Because of the penal clause, Y is liable to pay the full P1M, though the actual Facts: The stipulated interest in the contract was 15.189% per annum. Following a
loss is only P500,000. breach, the injured party sued. Was the 15.189% per annum excessive?
Held: No. The rationale for the payment of interest, quite often referred to as cost of
Article 1229. The judge shall equitably reduce the penalty when the principal money, is not exactly the same as that of a surcharge or a penalty. A penalty
obligation has been partly or irregularly complied with by the debtor. Even if there stipulation is not necessarily preclusive of interest, if there is an agreement to that

effect, the two being distinct concepts which may separately be demanded. What Held: No, this is unconscionable. SC reduced the annual interest to 12% penalty &
may justify a court in not allowing the creditor to impose full surcharges and collection charges to 6%, & attorney’s fees to 5%. It held that attorney’s fees are in
penalties, despite an express stipulation therefor in a valid agreement, may not the nature of liquidated damages, which under Art. 2227 of the Civil Code, shall be
equally justify the non-payment or reduction of interest. Indeed, the interest equitably reduced if they are unconscionable.
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank’s existence. Class Discussion
Q: The car is valued at P1,000 & the penalty for failure to deliver is P1M. Can the
Class Discussion debtor complain when he is in delay & made to pay the penalty?
Normally an interest rate of 30% per annum is void for being immoral. But there are A: NO. The amount is pre-determined damage. This would be the same if the car
cases when 3% per month is valid, as in the credit card case. value is P1M & the penalty is P1,000. BUT the debtor has a remedy – he can go to
the courts.
CASE: Jison v. CA
Lesson: When there has been partial or irregular compliance with a contract for Article 1230. The nullity of the penal clause does not carry with it that of the
special indemnification in the event of failure to comply with its terms, the courts will principal obligation.
rigidly apply the doctrine of strict construction & against the enforcement in its The nullity of the principal obligation carries with it that of the penal clause.
entirety of the indemnification where said indemnity is essentially a mere penalty
having for its principal object the enforcement of compliance with the contract Principal Obligation & Penal Clause
Facts: The contract price was originally P55K. • The penal clause, being merely an accessory obligation, does not invalidate
• The contract states that, in case the contract is cancelled, the amounts the principal obligation in the event that such penal clause is void or without
already paid shall be forfeited in favor of the vendor as liquidated damages. effect.
• The amount already paid, P47K, was forfeited as per the contract stipulation • The nullity of the principal obligation carries with it that of the penal clause.
when said contract was cancelled.
Held: While the resolution of the contract & the forfeiture of the amounts already CHAPTER 4 – EXTINGUISHMENT OF OBLIGATION
seen were seen as valid & binding, the Court reduced the penalty from P47K to
P23K. Furthermore, since the contract was cancelled, the lot reverts back to the GENERAL PROVISIONS
owner.
Article 1231. Obligations are extinguished:
Invalid Penalty Clause (1) By payment or performance;
• If the penalty clause, construed against the one enforcing it, is so (2) By the loss of the thing due;
unconscionable that its enforcement constitutes an undue deprivation or (3) By the condonation or remission of the debt;
confiscation of the property of the obligor, the courts can strike it down. (4) By the confusion or merger of the rights of creditor & debtor;
• CASE: Spouses Poon v. Prime Savings Bank – While SC held that the (5) By compensation;
forfeiture provision of a lease contract was a valid penalty clause & all (6) By novation.
unused rentals were forfeitable, SC reduced the amount of penalty, in Other causes of extinguishment of obligations, such as annulment, rescission,
consideration of public interest. fulfillment of a resolutory condition, & prescription, are governed elsewhere in this
o The forfeiture would heavily affect a delinquent bank, which in turn, Code.
would affect the right to recover of many innocent creditors & debtors
of said bank. Ways of Extinguishing an Obligation
(1) Payment or performance
CASE: Louh, Jr. v. BPI (2) Loss of the thing due
Lesson: 3.5% finance charge & 6% late payment charge monthly is unconscionable. (3) Condonation or remission of the debt
Furthermore, stipulated interest rates of 3% or higher per month are excessive, (4) Confusion or merger of the right of the creditor & debtor
iniquitous, & unconscionable. (5) Compensation
(6) Novation
CASE: MCMP Construction Co v. Monark (7) Annulment
Facts: Creditor charged the debtor a cumulative of 60% annually as interest, penalty, (8) Rescission – cancellation of the creditor due to substantial non-compliance
& collection fees, & 25% for attorney’s fees. Is this allowed? (breach of trust)
(9) Fulfillment of a Resolutory Condition

(10) Prescription • Write-offs are not one of the modes to extinguish obligations. In making a
write-off, only the creditor takes action by removing the uncollectible amount
Effect of Death of a Party from its books even without the approval or participation of the debtor.
• Does not extinguish an obligation unless said obligation is: • When there is a write-off, the legal relationship between debtor & creditor
o Personal in nature remains the same – the debtor continues to remain liable to the creditor to
o Intransmissible the full extent of the unpaid debt.
• Heirs – The lessor’s heirs who inherit the leased property from the deceased
lessor cannot set up the claim that the obligation to allow the property under SECTION 1. PAYMENT OR PERFORMANCE.
the lease contract in the possession of the lessee has been extinguished &
eject the lessee under the deceased lessor’s contract Article 1232. Payment means not only the delivery of money but also the
o Death of a party does not excuse non-performance of a contract which performance, in any other manner, of an obligation.
involves a property right
o Rights thereunder pass to the personal representatives of the Obligation to Pay
deceased • Not limited to the delivery of money
o Nonperformance is also not excused by death • Any manner of performing the obligation with the end in view of extinguishing
• Crime – When there is civil liability for the commission of a crime, the death it.
of the offender generally extinguishes the crime & the civil liability. o Ex. A buys a car from seller B. A can pay not only in money, but also In
o CASE: People v. Jose services, provided that B agrees.
§ Facts: The accused forcibly abducted & raped the victim & was • There are presumptions made by law in favor of payment.
convicted, with obligation to pay moral & exemplary damages. o The receipt of the principal by the creditor, without reservation with
He appealed the decision, but before the judgment of respect to the interest, gives rise to the presumption that said interest
conviction could become final, he died. What happens? has been paid.
§ Held: The case is dismissed & he & his heirs are relieved from o The receipt of a later installment of a debt, without reservation as to
all penalties. prior installments, gives rise to the presumption that such installments
o BUT: If the civil liability neither solely nor originally springs from the have been paid.
crime, the liability shall persist despite the extinction of the criminal o These presumptions can be rebutted by evidence.
liability. § If presumptions are overturned, the burden of proving there
§ CASE: Torrijos v. CA has been payment rests on the obligor.
• Facts: A person bought a property from the accused, & o The burden of proof to show payment once the debt has been fully
thereafter the accused again sold the property to established by evidence is on the debtor
another person. The accused was charged & convicted § CASE: Biala v. CA
of the crime of estafa & was made to pay damages. The • Lesson: Promissory notes in the hands of the creditor
accused died while the appeal was pending. Is the are proofs of debt rather than proofs of payment.
obligation to pay the damages extinguished? • Facts: X presented promissory notes showing Y’s debts.
• Held: No. While his criminal liability was extinguished, But there were no receipts or other satisfactory
his civil liability was not. His civil liability did not arise evidence to prove Y’s alleged payment to X. Y argued he
solely or originally from the crime itself, but from a was no longer indebted to X. Will Y’s argument be
contract of sale of property not implemented due to his sustained?
deceitful acts. • Held: No. The Court upheld Y’s indebtedness. The
burden of proof to show the obligation has been
CASE: Ruben Reyna v. Soria extinguished due to payment is on the debtor Y.
Lesson: The practice of companies making a “write-off” of certain uncollectible
accounts does not mean extinguishment of such written off obligations. *CASE: Royal Cargo Co. v. DFS Sports Unlimited
• A write-off is an accounting strategy used when an amount is uncollectible & Lesson: The debtor has the burden of proving payment; it is not the creditor’s burden
it is hence recorded as an uncollectible expense in the books of account of to prove non-payment. An invoice, being merely an itemized list of goods or services
the company. If later, the debt is recovered, the books will be adjusted to furnished by a seller to a buyer, specifying the price & terms of the sale (i.e., a bill of
reflect the amount to be collected as an asset. In turn, income will be costs) is not considered evidence of payment, even if the word “PAID” is stamped on
credited by the same amount of increase in the accounts receivable. top of said invoice; only a receipt is considered evidence of payment.

Facts: To prove payment, the buyer presented original copies of invoices, which were o If X pays Y to sing.
stamped with the word “PAID.” Is this sufficient evidence of payment, or does it raise § X pays Y with money.
a disputable presumption that the buyer has indeed discharged its obligations to the § Y’s singing is payment.
seller? o If X gives Y a piano, Y will give him P10,000.
Held: No. An “sales or commercial invoice” is defined as a written account of goods § Both parties are PAYING.
sold or services rendered indicating the prices charged therefor or a list by whatever § X pays through the piano.
name it is known which is used in the ordinary course of business evidencing sale § Y pays by giving P10,000.
and transfer or agreement to sell or transfer goods and services. On the other hand, • NOTE: Technically speaking, when X pays Y with a check, that is NOT
a “receipt” is a written acknowledgment of the fact of payment in money or other payment. When paying through a check, the MONEY is not yet delivered.
settlement between seller and buyer of goods, debtor or creditor, or person
rendering services, and client or customer. Article 1233. A debt shall not be understood to have been paid unless the thing or
From the above, an invoice, versus a receipt, may not be considered evidence of service in which the obligation consists has been completely delivered or rendered,
payment. Also, it does not mean that possession by a debtor of an invoice raises the as the case may be.
presumption that it has already paid its obligation. An invoice is simply a list sent to
a purchaser, factor, consignee, etc., containing the items, together with the prices *Complete Delivery
and charges, of merchandise sent or to be sent to him; a mere detailed statement of • FULL satisfaction of the debt or obligation
the nature, quantity and cost or price of the things invoiced. • Must comprise everything that is necessary to satisfy the obligation
consistent with the object of the same
CASE: Go Tong Electric Supply v. BPI Family Savings Bank o Ex. Determinate things must include the delivery of all accessories &
Lesson: (1) One who pleads payment has the burden of proving it; the burden thus accessions, even if not mentioned; payment of loan with stipulated
rests on the defendant. interest is only complete when money is given with interest
(2) When the creditor is in possession of the document of credit, proof of non- • Anything less may be considered a breach of the obligation
payment is not needed, for it is presumed.
• CASE: PNB v. CA
Facts: The plaintiff (the creditor in the case) was in possession of the Credit
o Lesson: Debtor must also be able to prove that payment was made to
Agreement promissory note, & comprehensive surety agreement. If such is the case,
the correct person or representative.
what presumption is raised?
o Facts: PNB paid an alleged attorney-in-fact of the creditor, but there
Held: There is a presumption that the obligation of the debtor has not been
was no proof that the alleged attorney-in-fact was the representative
extinguished.
of the creditor. Is the payment effective?
o Held: Payment was not effective. A check was never delivered to the
CASE: Multi-International Business Data System v. Martinez
creditor.
Lesson: (1) Although not exclusive, a receipt of payment is the best evidence of the
fact of payment.
CASE: Soliva v. Estate of Villalba
(2) BUT: The fact of payment may be established not only by documentary evidence,
Lesson: Non-payment is a resolutory condition that extinguishes the transaction
but also by parol evidence (i.e., oral testimony that payment was made).
existing for a time & discharges the obligations created thereunder.
CASE: Alonzo v. San Juan • Under Art. 1191, the remedy of the unpaid seller is to sue for collection or, in
Lesson: A receipt is different from a voucher. A receipt is a written & signed case of substantial breach, to rescind the contract.
acknowledgment that honey has or goods have been delivered. A voucher is a • Art. 1592 governs rescission in relation to the sale of immovables.
documentary record of a business transaction. The references to alleged check o Even if it was stipulated that upon failure to pay the price at the time
payments in the vouchers presented do not vest them with the character of receipts. agreed upon the rescission of the contract shall of right take place,
the vendee may pay, even after the expiration of the period, as long as
Class Discussion no demand for rescission of the contract has been made upon him
• Payment is an active mode of extinguishing an obligation. Some of the modes either judicially or by a notarial act.
o BUT: After the demand, the court may not grant him a new term.
are passive.
• In reciprocal obligations, both parties always pay. For example, both the buyer
Class Discussion
and seller are obligated to pay, since payment is defined as “delivery of sum
GR: Payment must always be complete.
of money,” OR “performance as agreed upon by the parties. For further
Exception:
examples –
1. By stipulation of the parties

2. Partially liquidated or partially unliquidated – the liquidated part can be paid • Examples:
ahead of the unliquidated part. o The difference between the value of the house as built & the value it
would have had had it been constructed strictly according to the
*Article 1234. [Doctrine of Substantial Performance.] If the obligation has been contract is the measure of damages in such a contract.
substantially performed in good faith, the obligor may recover as though there had o The defaulting party will be allowed to recover the contract price less
been a strict & complete fulfillment, less damages suffered by the obligee. the cost of correction of the defects of the unfinished work.
Obligor May “Recover” CASE: JM Tuason & Co. Inc. v. Javier

• Obligor may be paid, minus damages Lesson: The obligor may ask for a reasonable extension to pay all his obligations to
• The part that was not performed must not destroy the value or the purpose of the obligee.
the contract & there must be good faith Facts: The obligor had been religiously satisfying the monthly installments after the
execution of the contract for a period of almost 8 years. The total aggregate amount
Doctrine of Substantial Performance the obligor has paid to the obligee, when including interests, already exceeds the
• NOT complete performance original loan. Can the obligor pray for an extension of the term to pay the loan?
• Constitutes a breach of the obligation if not for the legal treatment that when Held: Yes. The obligor was allowed time to pay his debts, taking into account the
such occurs, the obligor may recover as though there had been strict & circumstances of his case.
complete fulfillment, less damages suffered by the obligee
o BUT: Breach should NOT be material enough to compel the obligee to Class Discussion
rescind the whole obligation GR: COMPLETE compliance is required.
o The part unperformed must NOT destroy the value or purpose of the EXC: Doctrine of Substantial Compliance (where there is a breach, but it is
contract substantially complete)
o It must also be done in good faith • If under Art. 1234 – Good faith – no waiver of damages
§ Conscious departure from the contract will not necessarily • If under Art. 1235 – Irregularity is accepted – waiver of damages
defeat recovery. The pertinent inquiry is not WON the breach
was willful but WON the behavior of the party in default Art. 1234 Art. 1235
comports with the standards of good faith & fair dealing. 1. Both apply when payment is incomplete.
§ Even an adverse conclusion on this point is not decisive but is 2. In both cases, the law will treat the payment as complete, although it is not.
to be weighed by other factors, such as the extent to which the There is no waiver of damages (because There is a waiver of damages.
owner will be deprived of a reasonably expected benefit & the of the phrase in the provision which
extent to which the builder may suffer forfeiture, in deciding states that obligor may recover, “less the
whether there has been substantial performance. damages suffered by the obligee”)
Technical breach which will not greatly This is “honest-to-goodness” substantial
CASE: Pagsibigan v. CA affect the object; there has been good compliance, because the breach is so
Lesson: There is substantial compliance when the debtor, due to the interest faith performance of the obligation (e.g., irregular & manifest, & yet there is no
charged, technically already paid much more than the actual debt. This can merit the a slight chip on a plate). protest or objection (e.g., a plate that is
release of a mortgage, or prevent a creditor from rescinding the contract. half-broken but still accepted).
Facts: The debtor had already paid the creditor more than the original amount of
loan, which had a security of mortgage, due to the imposition of a high interest rate *Article 1235. When the obligee accepts the performance knowing its
plus penalty charges. The debtor, as payment of the remaining balance of incompleteness or irregularity, & without expressing any protest or objection, the
P3,558.20, had in effect paid P8,650.00 in addition to the P1,000 it also paid. Can obligation is deemed fully complied with.
the mortgage securing the loan already be cancelled?
Held: Yes. The mortgage could be released because there was already substantial Waiver
compliance. However, the debtor was still required to pay some penalties. • The substantial compliance in Art. 1235 connotes the waiver of the obligee of
damages arising from the breach of the contract which resulted in the
Damages incompleteness or irregularity
• The obligor may recover as though there had been a strict & complete • By not expressing any protest or objection, the obligee accepts the
fulfillment, less damages suffered by the obligee. performance as fully complied with despite his knowledge of such irregularity.
o Obligor may be compensated for the work performed.

CASE: De Castro v. CA deemed to have waived his right to object to the irregular payments of the
Facts: An agent received only partial payment of his commission. Is this enough for purchaser?
Art. 1235 to apply? Held: Yes. The actuation of the sellers was clearly a waiver of his right to rescind the
Held: No. Art. 1235 does not apply to instances of mere “receipt.” There must be a contract. Also, on the basis of Article 1235, he was likewise estopped from reneging
showing that there was an “acceptance” of that payment to extinguish the their commitment on account of acceptance of benefits arising from overdue
obligation. accounts of the purchaser.
CASE: Esguerra v. Villanueva CASE: MIAA v. Avia Filipinas International

Lesson: The law does not require the protest of the creditor to be made in a Facts: The lease contract between X & Y (Y being the lessee) provided that Y could
particular manner or at a particular time. So long as the acts of the creditor, at the rent the premises until Aug. 31, 1991 for P6,580 per month; the contract also said
time of the incomplete payment by the debtor, or within a reasonable time that X could increase the rent based on government executive orders. After Aug. 31,
thereafter, evince that the former is not satisfied with said payment, the obligation is 1991, Y continued to stay in the premises on an implied lease, paying the same
still not fully extinguished. amount. Later, X demanded that Y pay P15,996.50 instead of the initial rent,
Facts: The debtor claimed that, because the creditor received his partial payments attempting to require Y to pay the said amount beginning Sep. 1, 1991 until Sep. 1,
of P800 & P1,400, the creditor was to be considered to have accepted the 1994. Can X demand that Y pay that increased amount starting Sep. 1, 1991?
incompleteness of the performance. Held: No. During the abovementioned period, Y continued to pay & X kept on
The day immediately following the first payment of P800, the creditor asked the receiving the original rental fee of P6,580 without any reservations or protests from
judge to issue the corresponding writs of execution in the case. the latter. Neither did X indicate in the official receipts it issued that the payments
Held: The debtor is wrong. The creditor patently manifested his dissatisfaction in made by Y constitute only partial fulfillment of the latter's obligations. Art. 1235
relation to the 1st payment of the P800 when he filed the case the next day. Even clearly states that when the obligee accepts the performance knowing its
the debtor impliedly acknowledged the dissatisfaction when, after the suit was filed incompleteness, & without expressing any protest, the obligation is deemed fully
against them already, they paid the creditor P1,400. Receipt is NOT the same as complied with. For failing to make any protest, X is estopped from seeking recovery
acceptance. of the amount claimed.
• Accepting – agreeing or acceding to an incomplete or irregular performance
CASE: MIAA v. Ding Velayo Sports Center
*CASE: Selegna v. UCPB Facts: The lessor refused to comply with the option of the lessee in the lease
Lesson: The objection or the protest need not be concurrent to the receipt of the contract to renew the lease, on the ground that the lessee breached certain
irregular payment. provisions in the contract pertaining to building certain improvements, such as
Facts: The debtor did not pay on maturity date, but later, the debtor made a partial parking, shopping mall, and sports facilities. Is the lessor correct in its assertions?
payment. After receiving this partial payment, the creditor foreclosed. Was the Held: No. While the lease expressly obligated the lessee to build certain
receipt of the partial payment a waiver of the right to extrajudicially foreclose on the improvements, the belated insistence by the lessor on compliance with the same
part of the creditor? appears to be a mere afterthought. Pars. 9 & 10 of the Contract of Lease likewise
Held: No. To imply that creditors accept partial payment as complete performance of expressly require the lessee to submit, for prior approval by the lessor, all
their obligation, their acceptance must be made under circumstances that indicate construction plans on the subject property; and to complete the contemplated
their intention to consider the performance complete & to renounce their claim improvements thereon within a year. The Contract of Lease was executed on May
arising from the defect. There are no circumstances here that indicate the creditor 14, 1976, & the 1-year period expired on May 14, 1977. Yet, the lessor did not
renounced his right to foreclose the properties extrajudicially. The fact that it had register any protest to the alleged incompleteness of in the performance by the
filed an application for extrajudicial foreclosure after receiving the partial payment lessee of its obligation to build & develop improvements on the subject property. In
shows that the creditor did not intend to give the debtor more time to pay the fact, upon the expiration of the original 25-year lease period in Feb. 1992, the lessor
obligation. was willing to accept as its own the improvements built on the subject property in
1992. The lessor only raised the issue of the purported irregularity of the said
CASE: Tayag v. CA improvements when it was brought to court for refusing to renew the lease.
Facts: The sellers accepted from the purchaser numerous payments in installment
of the purchase price of a particular piece of land after due date & posterior the No Objection to Invoice
grace periods provided in the contract without any protest as to the delayed • If a party fails to interpose any objection to the entries in an invoice furnished
payments. The purchaser filed a case for specific performance relative to the sale, & to him by the other party, such failure can be considered as implied
consigned at the same time the balance of the purchase price. Can the seller be acceptance & he will be liable to pay the amount stated

Class Discussion 1) 3rd Person Pays without Knowledge or Against the Will of the Debtor
Under Art. 1235, the creditor is deemed to have accepted the thing despite its • 3rd person can only recover from the debtor to the extent that the debtor has
irregularity. Hence, to determine if the provision applies, the key question is, did you been benefited.
accept, or did you merely receive? • As to what is beneficial to the debtor can be invoked only by such debtor &
If obligee says nothing about a defect upon acceptance, the obligation is deemed not the creditor.
fulfilled. BUT acceptance (agreeing with the payment) is not the same as receipt o WON it is beneficial to the debtor is determined by the law & not the
(receiving the object). Objection can be done reasonably after the receipt; the will of the debtor.
concurrence of the receipt & the objection is not necessary. o The beneficial effects must be determined at the time the payment
• Q: X owes Y P1M. X offers to pay P900K. Y can legally refuse it, but should was made.
he? • The 3rd person cannot compel the creditor to subrogate him in his rights,
• A: No. Y should just take it. But he MUST protest & say, “Give me the 900K, such as those arising from a mortgage, guaranty or penalty.
but you still owe me for the rest.” Y should give a receipt for the amount o Ex. A is indebted to B for P500,000 secured by a real estate mortgage
received & the balance that is still due. on the house of A, & X pays B the said indebtedness in the amount of
• Q: X owes Y P100K. X pays only P90K. Y did not protest during receipt, but P500,000 without the knowledge or against the will of A.
after seeing the missing money, Y went immediately to the sheriff to enforce § X can only recover the amount of P500,000 but he cannot
the mortgage. Was Y’s action proper despite Y not making any explicit compel the creditor to transfer the mortgage to him.
protest? § In case A does not pay X, X cannot foreclose on the mortgage
• A: Yes. This objection, evidenced by the enforcement of the mortgage, is valid to satisfy his claim.
even if it occurred after receipt of P90K. • BUT: If the third party who paid is interested in the obligation, such as a
Remember that a failure to interpose objection means estoppel within reasonable guarantor, surety, or co-debtor, legal subrogation is presumed.
time. o Such interested third party-payor can have the right even as to the
accessory obligations such as a mortgage.
Article 1236. The creditor is not bound to accept payment or performance by a 3rd o HOWEVER, the presumption is rebuttable.
person who has no interest in the fulfillment of the obligation, unless there is a • Legal subrogation – transfers to the person subrogated the credit with all the
stipulation to the contrary. rights thereto appertaining, either against the debtor or against 3rd persons,
Whoever pays for another may demand from the debtor what he has paid, except be they guarantors, or possessors of mortgages.
that if he paid without the knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor. 2) 3rd Person Pays the Creditor with the Knowledge of the Debtor, but Debtor Objects
• Effect is the same as in #1
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights, such 3) When 3rd Person Pays the Creditor with Knowledge & Consent of Debtor
as those arising from a mortgage, guaranty, or penalty. • 3rd person can recover from the debtor the amount paid to the creditor
• 3rd person can also compel the creditor to transfer to him any mortgage,
Article 1238. Payment made by a 3rd person who does not intend to be reimbursed guaranty or penalty – there is legal subrogation
by the debtor is deemed to be a donation, which requires the debtor’s consent. But • Ex. from No. 1: X can recover P500,000.
the payment is in any case valid as to the creditor who has accepted it. 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 the mortgage to
Payment Made by a 3rd Person satisfy his claim.
• Payment made by a third person & accepted by the creditor extinguishes the
obligation in ALL CASES as to the original creditor. 4) When the Creditor Accepts Payment Due to Contract
o The difference lies in the rights of the new creditor, depending on the • When the contract between the debtor & creditor states that a 3rd person can
knowledge of the debtor. With regard to the old creditor, the obligation make the payment, the effect is the same as #3.
is extinguished either way.
• The good faith or bad faith of 3rd person is immaterial. 5) When 3rd Person Pays the Creditor without Intending to be Reimbursed
• WON the one who paid completely acquires the rights of the creditor as • Obligation is extinguished WON the consent of the debtor is obtained.
against the debtor depends on WON the payment has been made without • However, payment will be treated as a donation, which requires the consent
knowledge or against the will of the debtor. of the debtor.

• Ex. A is indebted to B. X pays B the said indebtedness without intending to be construct the deep well, an agreement particularly to this effect should have been
paid back by A. This will be treated as a donation & hence A should accept entered into.
the payment made by X.
o If A does not consent, the obligation nevertheless will be extinguished CASE: Moreo-Lentfer v. Wolf
in so far as B is concerned. Lesson: Donations under Art. 1238 must comply with formal requisites for donation
provided under the Civil Code.
CASE: Osmena-Jalandoni v. Encomienda Facts: A beach house was fraudulently transferred to P; the house was really
Lesson: The debtor who knows that another has paid his obligation for him and who supposed to be sold to R, who actually paid the price. P invoked Art. 1238 in
does not repudiate it at any time, must corollarily pay the amount advanced by such claiming that payment made by R was actually intended to be a donation. Is P’s
third person. assertion correct?
Facts: The utilities & other expenses of J were paid by E, amounting to about P3M, & Held: No. Trying to apply Art. 1238 to this case is like forcing a square peg into a
J refused to reimburse E; J argued that that she had no loan from E. J also round hole. The absence of intention to be reimbursed, the qualifying circumstance
contended that the amounts she received from E were mostly provided & paid in Art. 1238, is negated by the facts of this case. R’s acts contradict any intention to
without her prior knowledge & thus she could not have consented to any loan donate the properties to P. When R learned that the sale of the beach house was in
agreement. She relied on the fact that E’s claims were not supported by any favor of P, he immediately filed a complaint for annulment of the sale and
documentary evidence. Can J completely not pay E for the expenses E paid? reconveyance of the property. P at that time claimed the beach house, together with
Held: No. J must pay E for the amounts paid by E on J’s behalf. As to the lack of the lease right, was donated to her. But R actually stayed in the beach house in the
evidence, the trial court merely found by no documentary evidence was offered concept of an owner and shouldered the expenses for its maintenance amounting to
showing J’s authorization or undertaking to pay the expenses. But the 2nd par. of Art. P200,000. Moreover, R is not related or even close to P. Obviously, R had trusted P
1236 provides: “Whoever pays for another may demand from the debtor what he to keep a time deposit account for him with Solid Bank for the purpose of making
has paid, except that if he paid without the knowledge or against the will of the the purchase of the cited properties.
debtor, he can recover only insofar as the payment has been beneficial to the P’s claim of donation rings hollow. A donation is a simple act of liberality where a
debtor.” person gives freely of a thing or right in favor of another, who accepts it. But when a
Clearly, J benefited from the purportedly unauthorized payments. Thus, even if she large amount of money is involved, equivalent to P3,297,800, then P’s claim of
asseverates that E’s payment of her bills was without her knowledge or against her liberality of the donor with more than a grain of salt. Furthermore, a donation must
will, she cannot deny the fact that the same still inured to her benefit and E must comply with the mandatory formal requirements set forth by law for its validity. Since
therefore be consequently reimbursed for it. Also, when J learned about the the subject of donation is the purchase money, Art. 7489 is applicable. Accordingly,
payments, she did nothing to express her repudiation of the same, within a the donation of money equivalent to P3,297,800 as well as its acceptance should
reasonable time. Even when she claimed that she was prepared with her own have been in writing. It was not. Hence, the donation is invalid for non-compliance
money, she still accepted the financial assistance & actually made use of it. While with the formal requisites prescribed by law.
she asserts to have been upset because of E’s supposedly intrusive actions, she
failed to protest and, in fact, repeatedly accepted money from her and further Class Discussion
allowed her to pay her utilities. She cannot, therefore, deny the benefits she reaped Q: A is the creditor, B is the debtor. X told A, the creditor, “I will pay for the
from said acts now that the time for restitution has come. indebtedness of B.” Is there subrogation? What are the rights of the parties?
A: If B consented & has knowledge that X will pay A, then there is complete
CASE: Tanguilig v. CA subrogation. This means that if B does not pay and X pays A, X will be entitled to all
Facts: X was supposed to pay Y because Y built a windmill for X. X claimed he made the securities, accessory obligations, etc. that was originally owed by B.
payment to another contractor who built the well to which the windmill system was If B does not consent and has no knowledge, or if B has knowledge but did not
connected & such payment must be credited as payment to Y. Is X correct? consent, X will be entitled to pay from B. However, X will only be allowed to collect to
Held: X is incorrect. The only contract that existed between X & Y was the the extent of the cost of the payment made by X.
construction of a windmill & therefore any payment to the contractor of the deep well
was ineffective payment to Y. *Article 1239. In obligations to give, payment made by one who does not have the
X cannot claim the benefit of the law concerning “payments made by a 3rd person.”
The provisions do not apply because no creditor-debtor relationship between Y (the
creditor) & the 3rd party has been established regarding the construction of the deep 9 Art. 748. The donation of a movable may be made orally or in writing. An oral donation requires the
well. Specifically, the 3rd party did not testify that he entered into a contract with Y simultaneous delivery of the thing or of the document representing the right donated.
for the construction of X’s deep well. If the 3rd party was really commissioned by Y to If the value of the personal property donated exceeds P5,000, the donation and the acceptance shall be
made in writing. Otherwise, the donation shall be void.

free disposal of the thing due & capacity to alienate it shall not be valid, without to Dori, who turned out to be the household help of X. Is Dori considered an agent of
prejudice to the provisions of Article 1427 under the Title on Natural Obligations. X?
Held: Yes. To extinguish said obligation, payment should be made to the proper
Incapacity person. Taking into consideration the busy schedule of Y, X advised the latter to
• GR: One has the free disposal of the thing due & capacity to alienate it only if leave the payment to a certain Dori, or to her trusted helper. This is an express
he is the owner of the thing or at least he was given authority by the owner to authority given to Dori to receive payment. Thus, as shown in the receipt signed by
use the property as payment for the obligation “to give.” Dori and pursuant to the authority granted to Dori, payment made to the latter is
• “Without prejudice to the provisions of Art. 1427” deemed payment to X.
o *When a minor below 18, who has entered into a contract without the
consent of the parent or guardian, voluntarily pays a sum of money or Rules on Payment
delivers a fungible thing in fulfillment of the obligation, there shall be • No consideration for good faith or bad faith
no right to recover the same from the obligee who has spent or o Payment to a stranger would be generally invalid even with good faith
consumed it in good faith. • CASE: Panganiban v. Cuevas - Payment made to a 3rd person, even through
• Minors do not have free disposal; contracts entered into by them are error & in good faith, shall not release the debtor of the obligation to pay &
annullable. will not deprive the creditor of his right to demand payment.
o Even if a minor owns something, especially one with significant value, o If it becomes impossible to recover what was unduly paid, any loss
he does not, on his own, have the free disposal of it without the resulting is borne by the deceived debtor, who is the only one
consent of his parents & the courts. responsible for his own acts unless there is a stipulation for the
wrongful payment.
Class Discussion • CASE: PNB v. CA - Where payment was made to one claiming to be the
Payment BY incapacitated person – NOT valid attorney-in-fact of the creditor but no evidence of his authority was presented,
- Effect is that the payment can be returned to the incapacitated person payment was not effected.
- EXCEPT: Art. 1427 (natural obligations)
*CASE: BPI v. CA
Article 1240. Payment shall be made to the person in whose favor the obligation has Lesson: The relationship between a bank & its depositor, was one of creditor &
been constituted, or his successors-in-interest, or any person authorized to receive debtor (the depositor being the creditor & the bank being the debtor), & any
it. withdrawal by the depositor was in effect payment of a debt by a bank.
§ Payment made by the creditor to the wrong party does not extinguish the
Payment should only be made to – obligation as to the creditor who is without fault or negligence, even if the
1) The creditor or the obligee debtor acted in utmost good faith & by mistake as to the person of the
2) His successors-in-interest creditor, or through error induced by fraud of a 3rd person.
3) Any person authorized to receive it – not only a person authorized by the Facts: BPI was aware of the dispute involving the ownership of a certain deposit;
same creditor, but also a person authorized by law, such as a guardian, despite this, it allowed the withdrawal of the said deposit by the heirs of the
executor or administrator of estate of a deceased, & assignee or liquidator of deceased.
a partnership or corporation, as well as any other who may be authorized to • They claimed the deposit was that of their deceased father.
do so by law • They also successfully obtained a judicial resolution from the probate court
allowing the withdrawal of the said money, although said resolution did not
CASE: Spouses De La Cruz v. Concepcion specifically order the bank to release the money.
Lesson: In general, a payment in order to be effective to discharge an obligation, • BPI, relying on the judicial resolution, released in good faith the money which
must be made to the proper person. Thus, payment must be made to the obligee turned out as belonging to another.
himself or to an agent having authority, express or implied, to receive the particular Is BPI liable if later it is found out that the funds were released to the wrong people?
payment. Payment made to one having apparent authority to receive the money will, Held: Yes. The debt herein was paid to persons who were not the creditors or at least
as a rule, be treated as though actual authority had been given for its receipt. successors-in-interest of the same, therefore no payment extinguished the obligation
Likewise, if payment is made to one who by law is authorized to act for the creditor, as the withdrawal was not proper.
it will work a discharge. Because the ownership of the deposit remained undetermined, BPI had no right to
Facts: X reminded Y of payments that had to be made by the latter. In the letter pay persons other than those in whose favor the obligation was constituted or whose
addressed to Y, X told Y to leave payment with a certain “Dori.” Y gave the payment right is indisputable. The payment of the money deposited with BPI that will

extinguish its obligation to the creditor-depositor is payment to the person of the • In paying an incapacitated person under a voidable contract, the capacitated
creditor or to one authorized by him or by law to receive it. person, who may have even acted in good faith, is at a disadvantage.
o Generally, the capacitated person CANNOT ask for the annulment of
Class Discussion the contract on the basis of the incapacity of the other party
To accept payment, & for said payment to be valid, it must be made under Special o In the event that the contract is annulled, the incapacitated person is
Power of Attorney (SPA). And the SPA must be very specific. A provision in the SPA not obliged to make restitution except in so far as he has been
allowing the agent “to mortgage” a lot would not be the same as allowing the agent benefited by the thing or price received by him.
“to buy” the same.
Class Discussion
*Article 1241. Payment to a person who is incapacitated to administer his property Q: X pays Y, a 13-year-old, P100,O00. Y heads to PAGCOR & spends all the money.
shall be valid if he has kept the thing delivered, or insofar as the payment has been When Y hits 18, is the payment valid?
beneficial to him. A: NO. Payment is only valid when it benefited the minor, or he has kept it.
Payment made to a 3rd person shall also be valid insofar as it has redounded to the
benefit of the creditor. Such benefit to the creditor need not be proved in the ff. Class Discussion
cases: Payment TO a minor is VOIDABLE. It is VALID ONLY IF it is kept by him after the age
(1) If after the payment, the 3rd person acquires the creditor’s rights; of majority (in which case it is ratified) OR if he has benefited from it. The law may
(2) If the creditor ratifies the payment to the 3rd person; say “valid,” but it is actually annullable (BUT when you answer questions as to this in
(3) If by the creditor’s conduct, the debtor has been led to believe that the 3rd the bar, you must answer what the law provides).
person had authority to receive payment.
Class Discussion
Rules for Payment to an Incapacitated Person Q: If the minor is not obliged to restitute, can the minor file a case?
• Incapacitated person – minor, insane A: Yes. This is because the minor has no obligation to restitute.
• GR: For an incapacitated person to be able to administer his property & *NOTE: The minor is obliged to restitute to the extent of his benefit.
transact business, he must have a court-appointed guardian handle his
affairs. Payment to Someone Who Is Not Creditor
o BUT: The father & mother shall be the legal guardian of the property of • Payment made to a stranger, (i.e., person who is not the creditor, his
the unemancipated common child without the necessity of a court successor-in-interest, or a person authorized to receive payment) is not
appointment. effective payment which will bind the creditor.
• Payment should be made to the guardians of the incapacitated person. If it is o HOWEVER, if such payment nevertheless benefits the creditor, it shall
made directly to the incapacitated person, said payment is voidable. be effective in so far as it has redounded to the benefit of the creditor.
• Payment made to a 3rd person is also valid if it redounds to the benefit of the • Ex. A is the debtor of B. A, instead of paying B directly, pays ½ of the
incapacitated person/creditor indebtedness to B’s brother, whom B never authorized to receive payment.
o BUT the benefit must be proven This payment is NOT valid.
• HOWEVER, if payment is made to an incapacitated person, it is effective in o HOWEVER, if the brother of B uses the money to pay B’s indebtedness
two situations: to somebody, then the payment will become valid. It will extinguish A’s
1) When he has kept the thing delivered indebtedness insofar as the payment has redounded to the benefit of
o If payment is made to a minor, he must keep it in his B which, in this case, is ½ of the indebtedness.
possession until he reaches the age of majority for such
payment to be valid. Exception to Proving Benefit of Creditor
o This act of still holding on to the thing delivered as payment at • The benefit to the creditor for payment made by the debtor to a 3rd person
the time when the person is already capacitated can be must always be proven except in 3 cases:
considered as ratification of the payment, curing the irregularity 1) If after payment, the 3rd person acquires the creditor’s rights.
of the same o Ex. A is indebted to B for P1,000. A does not pay B on due date
2) In so far as the payment is beneficial to him despite proper demand, such that the stipulated interest on
o If the minor uses the payment for activities beneficial to him the indebtedness accrues in the amount of P100.
(e.g. to pay school tuition fees), then the payment is valid to the § If A (the debtor) pays X (3rd person) the principal
extent that he has been benefited amount, such payment is not effective.

§ BUT: If there is concrete proof that interest has not yet o Whether the creditor willfully, unintentionally or negligently allowed a
been paid, & later B (the real creditor) empowers X to 3rd person to possess the credit does not matter in so far as the
also collect the interest of P100 for himself (X) & not for debtor who paid in good faith is concerned.
B, then the benefit to the creditor need not be proven. • The risk is always on the creditor provided payment is made by the debtor in
o The fact that X acquires the creditor’s right to collect the good faith.
interest is enough to show that payment to the 3rd person X o If payment is made to a person who is not in possession of the credit,
benefited the creditor B. The P1,000 principal indebtedness the debtor will not be released from his obligation regardless of
therefore must be considered extinguished. If A pays the whether or not payment was made in good faith.
interest to X, the totality of the obligation is extinguished.
2) When the creditor ratifies the payment to the originally unauthorized CASE: National Power Co. (NPC) v. Ibrahim
3rd person (ratification). Facts: On the basis of a final judgment, NPC paid the winner (Mangondato) of said
o Creditor need not be benefited. final judgment rental fees & expropriation indemnity & not the alleged true owner,
o In the same example, if B, after learning that payment was Ibrahim & Maruhom. Is the payment valid?
made to X approves of the payment to the latter, the debt is Held: Yes, the payment to Mangondato extinguished the obligation of NTC,
extinguished. regardless of who turns out to be the true owner who is entitled to payment for the
3) When, by the creditor’s conduct, the debtor has been led to subject land. This is true regardless of who among Mangondato & Ibrahim &
believe that the 3rd person has authority to receive the payment Maruhom are the true owners of the property. If it turns out that Mangondato &
(estoppel). Ibrahim own the property, it can be said that payment to Mangondato would be akin
o In the same example, if B tells A that he can transact any to a payment made in “good faith” to a person in “possession of credit” per Art.
business or any of his concerns with X, including the P1,000 1242 that, just the same, extinguishes NPC’s obligation to pay for the rental fees
indebtedness,& later A pays X the indebtedness, the obligation and expropriation indemnity due for the subject land.
is extinguished, as B cannot disclaim the payment to X. By his Art. 1242 contemplates a situation where a debtor pays a “possessor of credit” i.e.,
representation to A, B is estopped from claiming that X had no someone who is not the real creditor but appears, under the circumstances, to be
authority to accept payment. the real creditor. In such scenario, the law considers the payment to the “possessor
of credit” as valid even as against the real creditor taking into account the good faith
Class Discussion of the debtor.
Q: A is the creditor, B is the debtor. B paid X. What are the rights of the parties? Borrowing the principles behind Art. 1242, SC held that Mangondato — being the
A: There is no extinguishment of the obligation of B to A, even if this is made in good winner of the first judgment as well as the registered owner of the subject land at
faith. BUT there are exceptions to the rule: the time — may be considered as a “possessor of credit” with respect to the rental
• The obligation of B to A will be extinguished if it benefited A. fees and expropriation indemnity adjudged due for the subject land, if the Ibrahims
• Article 1241 – If after payment, the third person acquires the creditor’s right and Maruhoms turn out to be the real owners. Hence, NPC’s payment to
• Article 1241 – If the creditor ratifies the payment made to the third person Mangondato of the fees and indemnity due still validly extinguished its obligation to
• Article 1241 – If by the conduct of the creditor, the debtor was made to pay for the same even as against the Ibrahims and Maruhoms.
believe that the third person had authority to receive payment
• See also the case of BPI v. CA – payment in this case made to a third person Article 1243. Payment made to the creditor by the debtor after the latter has been
is not valid because the court only made a provisional determination of judicially ordered to retain the debt shall not be valid.
ownership which did not fully determine the rights of the parties
• Holder of the evidence of indebtedness – if you pay the person who holds the Payment After Judicial Order to the Contrary
evidence of indebtedness (e.g., a bearer instrument), this will also extinguish • To prevent any transaction which might be intended to defraud said creditors,
the obligation. the debtor is prohibited from paying a particular creditor during the
effectivity of a court order prohibiting him to make such payment to that
Article 1242. Payment made in good faith to any person in possession of the credit particular creditor.
shall release the debtor. • In the event that the debtor makes such payment, it shall not extinguish
the obligation as the law considers such payment as invalid.
Possession of Credit
• A person in possession of the credit is presumed to own the credit. Article 1244. The debtor of a thing cannot compel the creditor to receive a different
o A debtor who pays the possessor in good faith is released from the one, although the latter may be of the same value as, or more valuable than that
debt. which is due.

In obligations to do or not to do, as act or forbearance cannot be substituted by Facts: The debtor assigned to the creditor its receivables from the Special Fund
another act or forbearance against the obligee’s will. Import Payments due from the National Treasury of the Philippines to be applied as
payment of the amount of P4,072,683.13 it owed to the creditor.
No Substitution • The amount actually received from the Special Fund by the debtor was more
• A debtor cannot pay by giving a particular car if the agreement is to give a than P4,072,683.13.
particular jeep even if the car is more expensive than the jeep. • Their Deed of Assignment said:
• Likewise, if one has been engaged to sing for one night in exchange for an o Debtor has outstanding obligation of P4,072,683.13, plus any
airplane ticket, the obligor cannot fulfill the obligation by dancing for one applicable interest on overdue account.
week even if such dancing is worth more than the singing. o Debtor hereby irrevocably assigns & transfers to the creditor any & all
funds paid by the Special Fund Import Payments, including all rights &
*Article 1245. Dation in payment, whereby property is alienated to the creditor in benefits accruing to the same, plus any applicable interest charges, &
satisfaction of a debt in money, shall be governed by the law on sales. other avturbo fuel lifting & deliveries that the debtor may from time to
time receive from creditor.
Dation in Payment (Dacion en Pago) • After the creditor sought the excess of the amount obtained, the debtor
• It is a contract where the debtor offers another thing to the creditor, who released some of the excess minus P510,550.63, which the debtor claimed
accepts it as the equivalent of payment for the outstanding debt as interest on the indebtedness.
o PURPOSE – to transfer ownership of the thing • CA ruled that this was a dacion en pago case which completely extinguished
o This is a form of objective novation the obligation of the debtor & that the P510,550.63 should be returned.
• As a mode of extinguishing obligation, dacion en pago requires the common Was the CA correct?
consent of the parties Held: No. SC reversed the CA. The obligation was not totally extinguished, as the
o This is because dation in payment is akin to a contract of sale, where contract between the parties contemplated other obligations.
the creditor is buying a property from the debtor, the payment of which • There are 3 obligations in this case based on the contract:
is charged against the debtor’s debt o The outstanding obligation of P4,072,683.13
o Hence, the elements of a valid contract of sale, namely, consent, o The applicable interest charges on overdue accounts
object certain, & cause or consideration, must be present o The other avturbo fuel lifting & deliveries that the debtor may from
• NOT mortgage or security - mere repossession of certain machinery & time to time receive from creditor
equipment for purposes of securing payment of an obligation & not for the • Had the parties intended to limit the debtor’s obligation to P4,072,682.13,
purpose of transferring ownership is NOT dation in payment they should have said so, & there would have been no need for them to
qualify the statement of the amount with clauses.
Requisites for Valid Dation in Payment (Caltex v. IAC) o The literal meaning of the Deed of Assignment should control.
(1) There must be performance of the prestation in lieu of payment (animo • Furthermore, even after the payment of money, the creditor continued to
solvendi) charge the debtor for interest & the debtor made requests to lower the
o May consist in the delivery of a corporeal thing, a real right, or a credit interest, which shows that to the minds of both parties, the debt subsisted.
against the 3rd person
(2) There must be some difference between the prestation due & that which is CASE: Spouses Estanislao v. East West Bank
given in substitution (aliud pro alio) Facts: In a deed of assignment, the debtors transferred certain movables (units of
(3) There must be an agreement between the creditor & debtor that the heavy equipment) to the creditor-bank; the creditor-bank expressly acknowledged
obligation is immediately extinguished by reason of the performance of a the transfer of the heavy equipment as “full payment” of the indebtedness. The bank
prestation different from that due. now asserts that it may still enforce the original obligation because signatures of its
representatives do not appear on the deed of assignment. Can the bank still make
CASE: Caltex v. IAC further claims?
Lesson: Dation in payment is not necessarily the total extinguishment of an Held: No, the deed of assignment is “full payment” of the obligation of the debtors,
obligation — it extinguishes the obligation only up to the value of the thing delivered. as expressly stipulated in the deed itself. The deed of assignment was a perfected
The obligation is totally extinguished only when the parties, by agreement, express or agreement which extinguished the debtor’s total outstanding obligation to the bank.
implied, or by their silence, consider the thing as equivalent to the obligation, in The nature of the assignment was a dacion en pago whereby property is alienated to
which case the obligation is totally extinguished. the creditor in the satisfaction of a debt in money. Since the agreement was
consummated by the delivery of the last unit of heavy equipment under the deed,
the debtors are deemed to have been released from all their obligations to the bank.

Held: This stipulation is void. The intent of the creditor appears to be evident, for the
CASE: Tan Shuy v. Spouses Maulawin debtor is obliged to dispose of the collateral at the pre-agreed consideration
Facts: A debtor, instead of collecting payment of copra deliveries due from his amounting to practically the same amount as the loan. In effect, the creditor
creditor, applied such collectibles to his loan in favor of his creditor. Does the loan acquires the collateral in the event of non-payment of the loan. This is within the
subsist in this case? concept of pactum commissorium. Such stipulation is void.
Held: No. The arrangement is in the nature of dacion en pago & thus extinguished
the obligation to the extent that payment was made. CASE: DBP v. CA
Facts: The debtor executed a deed of assignment of leasehold rights of certain
*Dacion en Pago v. Pactum Commissorium properties.
Dacion en Pago Pactum Commisorium Held: These are simply mortgages.
Transfer of Before the creditor becomes The parties agree, generally in • NOT dacion en pago because the leasehold rights were not designed to
Ownership the owner of the collateralized one single contract, that, in the extinguish the obligation, but merely to constitute a security;
of Property property, an intervening event that the debtor fails to • NOT pactum commissorium, as they did not provide for the automatic
After Default agreement subsequent & pay the debt, the mortgaged or ownership of the properties in case of non-payment;
independent from the original pledged property of the debtor • NOT payment by cession because there was only one creditor.
contract of the parties is shall automatically be
executed to have the property appropriated or owned by the Class Discussion
collateralized in the original creditor. The triumvirate:
agreement as payment of the 1. Dacion en pago – novation of the object of the contract
debt, thereby extinguishing the • Here, there is novation – an intervening agreement between the object to be
obligation. changed
• Ex. A is the borrower, B is the creditor. The collateral of the loan is the house
Validity Valid & provided for by law Void (Art. 2088 of the Civil and lot. If A says, “Can I negotiate and enter into an agreement where a
Code): “The creditor cannot different collateral will be foreclosed instead?” This is dacion.
appropriate the things given by 2. Pactum commissorium (automatic ownership of collateral) – void
way of pledge or mortgage, or 3. Extrajudicial or judicial foreclosure
dispose of them. Any stipulation
to the contrary is void.” Any Article 1246. When the obligation consists in the delivery of an indeterminate or
property made as a security to generic thing, whose quality & circumstances have not been stated, the creditor
a loan must 1st undergo public cannot demand a thing of superior quality. Neither can the debtor deliver a thing of
bidding. inferior quality. The purpose of the obligation & other circumstances shall be taken
in consideration.
Elements of Pactum Commisorium
1) There must be a debtor-creditor relationship between the parties; Delivery with Generic Objects
2) The property of the debtor was used as security for the loan, either as a • If an obligor, who is not rich, is bound to deliver any rented car to be used at a
mortgage or pledge; & very simple wedding ceremony & the obligee knows his financial capacity,
3) There was automatic appropriation of the property upon failure of the debtor such obligee cannot demand that the obligor deliver a multi-million Rolls
to pay the obligation as provided in their agreement. Royce which could only be rented at such amount which the obligor cannot
afford.
CASE: Bustamante v. Rosel
• On the other hand, the obligor cannot deliver a car which is so old that it
Lesson: One example of pactum commisorium is when the debtor & creditor agree to
would not start unless it is pushed.
sell the mortgage to the creditor himself & such is as stipulation in their original loan
agreement.
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by
Facts: A debtor & creditor entered into a loan agreement where it was stipulated
the payment shall be for the account of the debtor. With regard to judicial costs, the
that, in case of the default of the debtor, the creditor has the option to buy the
Rules of Court shall govern.
collateral for a total consideration of P200,000 inclusive of the borrowed amount &
interest thereon.
Extrajudicial & Judicial Costs

• The creditor usually benefits from the obligation. It is always in his favor that
the debtor gives, does some service or not do some service. *Article 1249. The payment of debts in money shall be made in the currency
• Debtor pays for the extrajudicial expenses for the payment or performance of stipulated, & if it is not possible to deliver such currency, then in the currency which
the obligation, unless the parties otherwise stipulate. is legal tender in the Philippines.
• With respect to judicial cost, the Rules of Court shall apply. The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
Article 1248. Unless there is an express stipulation to that effect, the creditor cannot been cashed, or when through the fault of the creditor they have been impaired.
be compelled partially to receive the prestation in which the obligation consists. In the meantime, the action derived from the original obligation shall be held in
Neither may the debtor be required to make partial payments. abeyance.
However, when the debt is in part liquidated & in part unliquidated, the creditor may
demand & the debtor may effect the payment of the former without waiting for the Currency
liquidation of the latter. • Uniform Currency Act (RA 529) – It was prohibited to use foreign currency in
connection with certain contracts in PH. Though the stipulation for the use of
CASE: Nasser v. Cuevas foreign currency is void, the contract is nevertheless valid.
Lesson: A creditor cannot be compelled partially to receive the prestations in which o Has been repealed by RA 8183
the obligation consists unless there is an express stipulation to that effect. • RA 8183 – effective on July 6, 1996
Facts: On the basis of a compromise agreement, a number of obligors agreed to pay o All monetary obligations shall be settled in PH currency, which is legal
a lawyer his legal fees by way of real property & cash. tender in the Philippines.
For this purpose, it was expressly stipulated that a charging lien for attorney’s fees o BUT: Parties may agree that the transaction shall be settled in any
would be established on the properties to secure payment of the legal fees other currency at the time of payment.
“provided that upon full payment of the corresponding liability of a party, the lien on
his/her share is extinguished.” Negotiable Instruments: Promissory Notes
Upon demand of the lawyer for payment, the obligors contended that the • Promissory note - a document where a promise to pay is made by the debtor
aforequoted clause gave them the right to pay in installment. to the creditor
Held: This interpretation is wrong. The clause simple means that the lien will be o An unconditional promise in writing made by one person to another,
extinguished when the heirs pay, & do not expressly grant the right to pay in partial signed by the maker, engaging to pay on demand or at a fixed or
installments. determinable future time, a sum certain in money to order or to bearer
Partial Payment – When Allowed Class Discussion

1) If there is an express stipulation by the parties allowing the same or Promissory Notes – a negotiable instrument; if a completely random stranger picks
2) If the debt is partially liquidated and partially unliquidated. this up, he can have the amount already
o Ex. A debtor is bound to perform an obligation by paying the amount of • There are always at least 2 parties in a promissory note
P1,000 & by also delivering whatever money he will get from the • Can be endorsed at the back to other persons, making the debtor liable to
estate of his already deceased father. pay said 3rd person
§ The creditor may demand & the debtor may pay the P1,000 • FRONT
without waiting for the determination of the amount of o “I promise to pay X P1,000 on May 1, 2015.”
money the debtor will get from the deceased father’s estate. o Signature of debtor (maker of the note)
o “To order” or “To bearer”
No Express Stipulation – Still Allowed • BACK: “Endorsed to M”
• Even if there is no express stipulation, partial payment can likewise be
effective if the creditor accepts it & benefits from it. Negotiable Instruments: Bills of Exchange
• A creditor cannot be considered in delay if he refuses to accept partial • Bills of exchange - an unconditional order in writing addressed by one person
performance because, unless otherwise provided by law or stipulated by the to another signed by the person giving it, requiring the person to whom it is
parties, a creditor cannot be compelled to accept partial performance. addressed to pay on demand or at a fixed or determinable future time a sum
o BUT: The creditor will incur in delay if he does not accept such partial certain in money to order to bearer
performance if: o Check – a bill of exchange drawn on a bank payable on demand
(1) Good faith necessitates acceptance or § Not considered legal tender or valid tender of payment
(2) The creditor abuses his right in not accepting.

§ An offer to pay in check may be refused by the obligee or • Checks – must be presented within a reasonable time after its issue;
creditor otherwise, the drawer will be discharged from liability thereon to the extent of
§ BUT: If payment by way of a fully-funded check was offered & the loss caused by the delay.
the obligee accepts the check as payment after the obligor o Normal banking practice - a check becomes stale if it has not been
manifests that it was given to settle an obligation, he shall be presented to the bank for a period of 6 months from the date of the
estopped from later on denouncing the efficacy of such said check.
payment. (*Far East Bank & Trust Co. v. Diaz Realty) o HOWEVER, if a creditor allows his checks to become stale, it does not
mean that the debtor who drew the check will necessarily be
Class Discussion discharged from his debt, or that his obligation will be extinguished.
Far East Bank case – For checks to constitute as payment – § It is only when the creditor does not present the check for
1. Parties must so stipulate payment & thereafter the bank upon which the check has been
2. The check must be funded drawn collapses or fails to the point that it cannot meet
demands for payment, will the debtor be discharged.
Negotiable Instruments & Substitution for Money § If the bank is still in good credit & is able to pay the check, if
• Specific rule of law - in fulfillment of an obligation by payment of money, only the drawer, at the date of the check or at the time of the
payment in cash will extinguish the obligation presentment of it for payment & dishonor, has withdrawn his
o Thus, if promissory notes, bills of exchange or checks are given to pay funds, the drawer would remain liable to pay the check,
a debt, such debt will NOT be extinguished unless these mercantile notwithstanding the lapse of time.
documents are encashed.
• Negotiable instruments – only a substitute for money, & not money itself Class Discussion
Q: X gave Y a check. Y kept it in his drawer for a year & forgot about it. The bank
Class Discussion dishonored the check when Y tried to deposit it. What are Y’s remedies?
Checks are another form of negotiable instruments A: Y can still ask X for money, following prescriptive period requirements (within 10
• Type of bill of exchange years for written, 6 years for oral)
• Debtor – drawer Q: So what does the law mean about the creditor impairing the check?
• Creditor – payee A: The phrase only applies if check was issued by a 3rd person.
• Bank – drawee
Cashier’s/Manager’s Check *CASE: National Federation Marketing v. NAMARCO
Lesson: The clause of Art. 1249 relative to the impairment of the negotiable
• Drawer is the drawee
character of the commercial paper by the fault of the creditor, is applicable ONLY to
• Not legal tender
instruments executed by third persons and delivered by the debtor to the creditor,
• Considered as good as cash, though it is not cash and does NOT apply to instruments executed by the debtor himself and paid to the
• Checks take 3 days to process (before it turns into actual cash, or payment) creditor.
• Usually stale in 6 months
GR: Payment must be in cash to be considered as legal payment Class Discussion
EXC: Check can be considered payment if parties so stipulate, but the check must be • Staleness of a check is not the impairment contemplated by the law. The
fully funded. impairment contemplated by the law will EXTINGUISH the obligation. A mere
stale check will not extinguish the obligation. Hence, if the creditor makes the
*Impairment by the Creditor deposit after the 6-month period and as a result the check bounces, the
• “When through the fault of the creditor they have been impaired” check is not considered impaired by the creditor.
o Applicable only to instruments executed by 3rd persons & delivered by • The impairment contemplated by law is actually indorsement. Hence, there is
the debtor to the creditor impairment when A issues a check to pay X, & X, instead of encashing the
§ Ex. Someone else’s account suddenly runs out; process of check, uses this check to pay C.
endorsement • If C holds on to the check for 2 years after the check was given by X, & only
o DOES NOT apply to instruments executed by the debtor (as drawer) then does C attempt to encash the check, when A already withdrew all the
himself & delivered to the creditor. money in the count, the obligation is extinguished due to impairment by the
creditor. (National Federation Marketing v. NAMARCO case)

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated If the debtor changes his domicile in bad faith or after he has incurred in delay, the
should supervene, the value of the currency at the time of the establishment of the additional expenses shall be borne by him.
obligation shall be the basis of payment, unless there is an agreement to the These provisions are without prejudice to venue under the Rules of Court.
contrary.
Place of Payment
Extraordinary Inflation • The parties can agree as to where the payment shall be made.
• Applies only in contractual obligations • If there is no stipulation & the obligation is to give a determinate thing,
o Q: A & B entered into a contract in 1916. B did not pay. Case took a payment shall be made in the place where the thing is located at the time of
long time to be resolved. After 25 years, the decision of the SC the constitution of the obligation.
became final. A would like to collect, and argues that the P10,000 • In any other case, the place of payment is the domicile of the debtor.
owed from 1916 is now P1B due to extraordinary inflation. Should A o Domicile - For the exercise of civil rights & the fulfillment of civil
be paid 1B? obligations, the domicile of natural persons is the place of their
o A: NO. The extraordinary inflation will not be considered UNLESS habitual residence.
agreed upon by the parties. • The additional expenses attendant in making payment shall be borne by the
• *Exists when there is a decrease or increase in the purchasing power of the debtor if:
PH currency which is unusual or beyond the common fluctuation in the value o He changes his domicile in bad faith, such as if the change was made
of said currency & such decrease or increase could not have been reasonably precisely for the creditor not to locate him, or
foreseen or was manifestly beyond the contemplation of the parties at the o After he has incurred in delay.
time of the establishment of the obligation.
o Ex. Hyperinflation of the German mark, from 4.2 to 62 to the USD Class Discussion
within a year Place of Payment:
• Mere decline in purchasing power is not inflation 1) Agreement, or if none;
• *There MUST be an official declaration by competent authorities, such as the 2) If the property is determinate – place where thing is found at obligation’s
Central Bank, Dept. of Finance of BSP constitution
• NOT applicable to Art. 1250: cases involving (1) tort & (2) expropriations by 3) If the property is generic – house of debtor
the government of property in the exercise of eminent domain powers
o In eminent domain, the value at establishment of the obligation is the SUBSECTION 1. - APPLICATION OF PAYMENTS.
value of the peso at the time of the taking of the property, as this is
when the obligation of the Government to pay arises *Article 1252. He who has various debts of the same kind in favor of one & the
• Value of the currency – purchasing power of money same creditor, may declare at the time of making the payment, to which of them the
o Also know as “par value,” “legal exchange rate,” or “par of exchange” same must be applied. Unless the parties so stipulate, or when the application of
• Par value - the amount it takes one currency (for example, based on gold) to payment is made by the party for whose benefit the term has been constituted,
buy a unit in another currency (also based on gold) that is, how pieces of the application shall not be made as to debts which are not yet due.
one unit (or their gold content) are necessary to equal the gold content of the If the debtor accepts from the creditor a receipt in which an application of payment
other unit is made, the former cannot complain of the same, unless there is a cause for
o Value as officially defined in terms of gold or, under the silver invalidating the contract.
standard, where there was such a standard, in terms of silver.
o The ‘par of exchange’ therefore applies only between countries having Arts. 1252-1254
a fixed metallic content for their currency unit. It would be possible to • Apply to a person owing several debts of the same kind to a single creditor
define a currency’s par value in terms of another currency such as the • Like in alternative obligations, the choice as to which debt the payment is to
dollar or pound sterling, but usage confines the meaning of par to the be applied is given to the debtor.
official value in terms of gold. o The debtor must make a declaration as to which debt should the
payment be applied.
Article 1251. Payment shall be made in the place designated in the obligation. • Must conform to the general rules of payment from Arts. 1232-1251
There being no express stipulation & if the undertaking is to deliver a determinate o Art. 1233 – Payment must be completely delivered
thing, the payment shall be made wherever the thing might be at the moment the o Art. 1248 – The creditor cannot be compelled partially to receive the
obligation was constituted. prestation in which the obligation consists
In any other case the place of payment shall be the domicile of the debtor.

§ If the debtor makes a declaration as to the particular debt Held: Yes. If the debtor fails to exercise his right to choose to which of his several
(from among a number of debts) to which his payment is to be debts a payment is to be applied, the right passes to the creditor, who may make
applied, the creditor can validly refuse such application if the such application as he chooses.
payment is to be applied to a debt which will only partially pay a The bank’s choice also coincides with Art. 1253, which states that if a debt produces
particular indebtedness. interest, payment of the principal shall not be deemed to have been made until the
interests are covered.
Class Discussion
Q: X has 3 debts, P1,000, P5,000 & P10,000. X gives Y P1,000 & asks Y to apply CASE: Sinamban v. China Banking Co.
this to the P5,000. Can Y say no? Lesson: (1) Where there are 2 sets of debtors who signed promissory notes as
A: Yes, because applying the P1,000 to P5,000 would only be partial performance, solidary co-maker, the rule on application of payments will not apply, considering
which the creditor can validly object to. that the choice as to who will pay belongs to the creditor & not to the debtor.
(2) Art. 1252 also contemplates a situation of a debtor with several debts due & not
Debts Not Yet Due to a situation where each solidary debt is imputable to several debtors.
• Application of payment cannot be made on debts not yet due
o Unless the parties agree or Class Discussion
o When the application of payment is made by the party, which may Q: A is the creditor, B is the debtor. B has three debts to A – Debt 1, 2, and 3. Who is
either be the debtor or the creditor, for whose benefit the term has given by law the option to choose which account will be first paid?
been constituted. A: Debtor. But the choice of the debtor is directory. You cannot make the creditor
• Ex. A is indebted to B in the amount of P1,000, P2,000, & P900 which will wait.
not earn interest if paid on Jan. 2, 1997 but will earn interest from Feb. 2, Q: Is that mandatory? What if the debtor takes too long to choose which debt? What
1997, the latter date being the 2nd due date if the debtor chooses not to pay if creditor, due to waiting too long, decides to apply the debt to Debt 3?
on Jan. 2, 1997. A: Yes, the creditor can choose. (Spouses Juan Chuy-Tan v. China Banking Co.) So
o Clearly the period prior to Jan. 2, 1997 is for the benefit of the debtor. while the debtor has the choice under the law, if the debtor dilly-dallies, the creditor
Thus, if he decides to give B P500 before Jan. 2, 1997, the choice of can choose. This is based on the second paragraph of the law.
application belongs to him. *Note that the creditor is allowed to reject the debtor’s choice.
o If the creditor is agreeable to being partially paid, the debtor can apply **Mel’s advice: If you are the creditor, just accept all money and just work out the
the P500 to the P1,000, P2,000, or P900 depending on his choice balance later.
even if the indebtedness is not yet due.
o It is clear that in such a case, whether he pays it on or before Jan. 2, Receipt
1997 will not make any difference in so far as the debtor or creditor is • Gives rise to doctrine of substantial compliance – presumption that payment
concerned because no interest is imposed. has been made
o To avoid this, creditors should also state in the receipt on what
*CASE: Spouses Chuy Tan v. China Banking Co. account the payment is considered applied & also state, “balance is
Lesson: The right of a debtor to apply payment is merely directory in nature & must still existing & demandable”
be promptly exercised, lest such right pass on to the creditor. That is why the • Estoppel - If the debtor accepts from the creditor a receipt in which an
provision says the debtor “may” declare at the time of making payment which debt application of payment is made, the debtor cannot complain of the same,
his payment is to be applied to, & also why the same provision allows the creditor to unless there is a cause for invalidating the contract.
apply the payment where the debtor fails to elect to do so. The debtor’s right in this o The debtor must not only merely receive the receipt but he must
case is hence waivable. accept the receipt.
If neither the creditor nor debtor exercises the option, the court will apply the • Ex. A is indebted to B for P1,000, P2,000, & P900. A pays B P500 without
payment in accordance with justice & equity in a specific case, taking into mentioning as to which debt the P500 will be applied. B, the creditor, is
consideration all circumstances. agreeable to any partial payment, & issues a receipt indicating therein that
Facts: The debtor in this case defaulted on one of its many loans; as a result, the the P500 shall be applied to the P1,000 debt, & A readily accepts the said
property mortgaged under the debtor’s loan was foreclosed & sold in a public sale. receipt.
The debtor failed to specify which loan the proceeds of the sale should be applied to. o A cannot later complain that the P500 should have been applied to
The creditor-bank thus chose to apply the proceeds of the sale to the interest & the P2,000 debt unless there exists a cause to invalidate the contract
penalties first, & not the principal loan just yet. Is the action of the creditor-bank in connection with the indebtedness in the amount of P1,000.
valid?

• However, if the indebtedness has been obtained through fraud or Facts: M obtained from ECC a loan payable in weekly installments & subject to
intimidation which is a cause to annul the contract, the debtor is not annual interest with monthly penalties & attorney’s fees in case of non-payment. A
estopped from questioning the application. chattel mortgage was also executed stipulating that “the motor vehicle shall stand
as a security for all other obligations of every kind already incurred or
Class Discussion which hereafter may be incurred. The payment of this first loan was acknowledged
Q: B gives A P500 as partial payment, without declaring the application of the P500. by both parties. Subsequently, M obtained a second loan with the same terms and
B has debts of P1,000, P2,000, and P3,000. Where will the P500 be applied? conditions as the first loan.
A: It will first be applied to the most onerous one. Since none of them are more • When the second loan matured, there still remained an unpaid balance.
onerous, the P500 will be applied to all debts, pro rata. Value of money alone, for Because of liquidity issues, M asked ECC if he could pay the unpaid balance
purposes of application of payment, will NOT define which one is more onerous. by daily installments until the loan is paid; the ECC agreed. Months after the
Examples of more onerous: those with a higher interest, the one with collaterals, the maturity of the loan, M had already paid a total amount greater than that of
one with acceleration clause. the principal.
• Despite this, ECC filed a complaint for foreclosure of the chattel mortgage on
Article 1253. If the debt produces interest, payment of the principal shall not be the ground that M failed to pay the principal of the second loan despite
deemed to have been made until the interests have been covered. demand. It was also prayed that the unpaid balance plus
accrued penalties and interests be paid because, allegedly, M’s failure to pay
Interest to be Paid First upon maturity triggered the imposition of monthly penalties & attorney’s fees.
• Art. 1253 is merely directory & not mandatory. Issue #1: M, citing Arts. 1176 & 1235, argued that ECC was mistaken when it
• Although interest only attaches to the principal, the payment of both principal credited his daily payments against the interest instead of the principal. Is M’s
& interest, in effect, constitutes two payments by the debtor. contention correct?
• Art. 1176: The receipt of the principal by the creditor without reservation with Held #1: No. ECC acted according to the law when it credited the daily payments
respect to the interest, shall give rise to the presumption that the interest has against the interest instead of the principal. Since the doubt in the present case
been paid pertains to the application of the daily payments in an interest-bearing loan, Art.
o This presumption is rebuttable 1253 shall apply. Only when there is a waiver of interest shall Art. 1176 become
relevant.
CASE: Marquez v. Elisan Credit Co. Under this analysis, ECC properly credited the daily payments to the interest & not to
Lesson: The presumption under Art. 1176 does not resolve the question of WON the the principal because: (1) the debt produces interest, i.e., the promissory note
amount received by the creditor is a payment for the principal or interest. Under this securing the second loan provided for payment of interest; (2) a portion of the
Art., the amount received by the creditor is the payment for the principal, but a doubt second loan remained unpaid upon maturity; & (3) ECC did not waive the payment of
arises on WON the interest is waived because the creditor accepts the payment for interest.
the principal without reservation with respect to the interest. Art. 1176 resolves this Issue #2: M also alleges that ECC waived the interest on the loan. Is M correct?
doubt by presuming that the creditor waives the payment of interest because he Held #2: No. The fact that the official receipts did not indicate whether the payments
accepts payment for the principal without any reservation. were made for the principal or the interest does not prove that the ECC waived the
On the other hand, the presumption under Art. 1253 resolves doubts involving interest.
payment of interest-bearing debts. It is a given under this Art. that the debt produces There were actually two forms of interest involved in this case – one was the
interest. The doubt pertains to the application of payment; the uncertainty is on stipulated interest for default (or monthly penalty) which was at 10% per month, &
whether the amount received by the creditor is payment for the principal or the one was the stipulated monetary interest of 26% p.a. Art. 1253 covers both types of
interest. Art. 1253 resolves this doubt by providing a hierarchy: payments shall first interests. As Tolentino opines: “the interest for default arises because of non-
be applied to the interest; payment shall then be applied to the principal only after performance by the debtor, & to allow him to apply payment to the capital without
the interest has been fully paid. first satisfying such interest, would be to place him in a better position than a debtor
Correlating the two provisions, the rule under Art. 1253 that payments shall first be who has not incurred in delay.”
applied to the interest and & to the principal shall govern if two facts exist: (1) the In Swagman Hotels and Travel v. CA, SC applied Art. 1253 in resolving WON the
debt produces interest (e.g., the payment of interest is expressly stipulated) and (2) debtor has waived the payments of interest when he issued receipts describing the
the principal remains unpaid. payments as “capital repayment.” In that case, it held that the creditor would not
The exception is a situation covered under Art. 1176, i.e., when the creditor waives have signed the receipts describing the payments made by the debtor as “capital
payment of the interest despite the presence of (1) & (2) above. In such case, the repayment” if the obligation to pay the interest was still subsisting. There was
payments shall obviously be credited to the principal. therefore a novation of the terms of the three promissory notes in that the interest
was waived.

In Swagman, it was clearly established that the creditors accepted the payment of Lesson: When a surety makes the payment, it cannot claim the applicability of Art.
the principal. The creditors were deemed to have waived the payment of interest 1253 & thereby raise the presumption in said provision.
because they issued receipts expressly referring to the payment of the principal Facts: A surety bound himself solidarily liable to the extent of P5,000 only & paid
without any reservation with respect to the interest. As a result, the interests due such an amount to the creditor when the debtor defaulted.
were deemed waived. It was immaterial whether the creditors intended to waive the The creditor still claimed interest from the debtor who resisted paying such interest
interest or not. The law presumed such waiver because the creditors accepted the on the ground that, in accepting payment of the principal from the surety in the
payment of the principal without reservation with respect to the interest. amount only of P5,000, the creditor waived his right to Art. 1253. Is this argument
Swagman is to be distinguished from the case at bar. In the present case, it was not tenable?
proven that ECC accepted the payment of the principal. The silence of the receipts Held: No. The creditor is still entitled to the interest. Art. 1253 is not applicable here,
on whether the daily payments were credited against the unpaid balance of the as the liability of the surety does not extend beyond the terms of the agreement. The
principal or the accrued interest does not mean that the respondent waived the provision on application of payment cannot be made applicable to a person whose
payment of interest. There is no presumption of waiver of interest without any obligation as a mere surety is both contingent & singular. The surety’s liability is
evidence showing that the ECC accepted the daily installments as payments for the confined to such obligation, & he is entitled to have all payments made applied
principal. exclusively to said application and to no other.
Ideally, ECC could have been more specific by indicating on the receipts that the
daily payments were being credited against the interest. Its failure to do so, however, Article 1254. When the payment cannot be applied in accordance with the preceding
should not be taken against it. ECC had the right to credit the daily payments against rules, or if application cannot be inferred from other circumstances, the debt which
the interest applying Art. 1253. is most onerous to the debtor, among those due, shall be deemed to have been
It bears stressing also that M was already in default. Under the promissory note, the satisfied.
petitioner waived demand in case of non-payment upon due date. The stipulated If the debts due are of the same nature & burden, the payment shall be applied to
interest and interest for default have both accrued. The only logical result, following all of them proportionately.
Art. 1253, is that the daily payments were first applied against either or both the
stipulated interest & interest for default.10 Application of the Debt in Other Cases
• If there is no indication which debt is to to be paid first, it will be applied to
Contracts Involving Installment Payments the most onerous debt.
• In a contract involving installment payments with interest chargeable against o Most onerous - the indebtedness which exacts the heavier burden
the remaining balance of the obligation, it is the duty of the creditor to inform from among many.
the debtor of: § NOT based on the amount of the debts
o The amount of interest that falls due & § Ex. A debt with interest as opposed to simple debt
o That he is applying the installment payments to cover said interest. § Ex. A debt with an acceleration clause enabling the creditor to
• Otherwise, the creditor cannot apply the payments to the interest & then hold demand payment of the whole obligation if the debtor defaults
the debtor in default for non-payment of installments on the principal. in even one amortization or installment is more onerous than a
debt payable in installment but without an acceleration clause.
CASE: Pagsibigan v. CA • Acceleration clause – payment made in installments; if
Lesson: The right to apply payment to the interest first can be waived. there’s a failure to pay 1, then the entire amount can be
Facts: The creditor, in receiving numerous partial payments from the debtor, applied demanded
the said payments to the principal, interest & penalties with the principal getting the § A debt secured by a mortgage is more onerous than one
bulk of the application. Even in some of the recent partial payments, the said without security.
payments were applied to the principal despite the fact that the creditor knew that • Examples:
interest was still due. Was there a waiver of Art. 1253? o A owes G a due debt of P30,000 with an interest rate of 12% per
Held: Yes. The creditor waived his rights under Art. 1253. annum, another due debt of P22,000 without interest but secured by
his silver watch, & lastly P24,000 collateralized by A’s house &
*CASE: Magdalena Estates, Inc. v. Rodriguez payable in equal installment with the first installment already due &
with an acceleration clause.
§ If A makes a payment of P600 without any indication where the
10 Direct quote from case (which was also in the book): “Moreover, Art. 1253 is viewed as having an
obligatory character & not merely suppletory. It cannot be dispensed with except by mutual agreement. The latter amount should be applied & the creditor agrees to any
creditor may oppose an application of payment made by the debtor contrary to this rule.” Note that earlier in partial payment, it will be applied to the most onerous debt
the book, a case is cited which states that Art. 1253 is directory, & not mandatory; hence, the relegation of which in this case is the P24,000 because, aside from the
this statement of the SC in the footnotes.

imposition of an interest rate it has an acceleration clause Facts: The debtor & creditor signed a deed of assignment providing that as soon as
which will make the whole amount due. the condominium unit was named in the name of the debtor, a deed of real estate
o CASE: Espina v. CA – Between indebtedness resulting from unpaid mortgage would be executed to secure the debt. Is this cession in payment?
back rentals for the condominium unit a debtor was occupying, or to Held: No. The deed of assignment here did not involve two or more creditors nor did
his obligation arising from his contract to pay the purchase price of it involve all the properties of the debtor. It was essentially just a mortgage.
such condominium unit which he decided to buy, the unpaid back
rentals are more onerous. Creditors’ Agreement
• If the debts due are of the same nature & burden, the payment shall be • Creditors MUST agree to the cession.
applied to all of them proportionately. o Among the creditors, they must likewise agree as to which debt will be
o Ex. A owes B 3 due debts each of which amounts to P30,000, a paid 1st or as to the proportioning of the payment of the money
payment of P9,000.00 by A, without any indication as to where it is to obtained through cession for the payment of debt.
be applied & where the creditor agrees to partial payment, shall be • If there is no agreement, the applicable law on preference of credit will apply.
equally applied to each of the debts. Hence, each debt will be reduced • The creditors will administer the totality of the ceded property without the
by P3,000 each. ownership being transferred to them.
o But if A owes B 3 due debts of P10,000.00, P20,000.00 & P30,000 & o Authorized to sell or alienate the property for purpose of obtaining
the creditor agrees to partial payment, a payment of P6,000 will be enough money to pay off their respective debts.
applied in the proportion of 1:2:3. Thus, P1,000 will be applied to the o Cession thus deals only with possession, & not ownership
P10,000 debt; P2,000 to the P20,000 debt; and P3,000 to the
P30,000 debt. Extinguishment
• Once cession is made, the obligation of the debtor shall only be extinguished
SUBSECTION 2. – PAYMENT BY CESSION. up to the extent that the proceeds are able to satisfy the claims of the
creditors.
Article 1255. The debtor may cede or assign his property to his creditors in payment o It is possible that the money obtained from the alienation of the
of his debts. This cession, unless there is stipulation to the contrary, shall only property is not enough to satisfy the claims of the creditors.
release the debtor from responsibility for the net proceeds of the thing assigned. The • If so, the creditors can still demand payment for the deficiency. The
agreements which, on the effect of the cession, are made between the debtor & his agreements on the effect of the cession made between the debtor & his
creditors shall be governed by special laws. creditors shall be governed by special laws.
o Ex. Insolvency Law - if applicable, shall place the assets of the debtor
Cession for judicial liquidation for the purpose of paying off his obligations.
• Refers to a situation where the debtor owes 2 or more creditors
o At least, there must be as many debts as there are creditors Class Discussion
o There can be more debts than the number of creditors when, from Cession presupposes the ff.:
among the many creditors, the debtor may owe any of them 2 or more • Debtor is under financial difficulties
debts. • There are 2 or more creditors
• Also extinguishes debt in an extrajudicial way • There are as many debts due as there are creditors (the minimum rule)
• Presupposes financial difficulties on the part of the debtor Insolvency & Cession are not the same
o Ceding or assigning property – refers to ALL of the properties of the • Insolvency – requires a court proceeding; whatever the court decides, that’s
debtor which are susceptible of & not exempted by law from being it. The creditors can no longer get the remaining amounts.
alienated • Cession – no proceeding; creditors pay among themselves
o NOT only the cession of one or a number of properties o Transfer is only of possession, not of title
• Family home - generally exempted by law from being executed or sold o ALL properties are transferred
o HOWEVER, it may be sold provided that it strictly follows the o The creditors can still get the remaining amount of debt from debtor
requirements of law, such as the procurement of the written consent
to the sale of the person who constituted the home as a family home SUBSECTION 3. – TENDER OF PAYMENT.11
& the latter’s spouse & a majority of the beneficiaries of legal age of
the family home.
CASE: Yulim International Co. v. International Exchange Bank

11 This Subsection applies in all instances when there is tender of payment.

*Article 1256. If the creditor to whom tender of payment has been made refuses • There must be notice before consignment--“I demand that you accept my
without just cause to accept it, the debtor shall be released from responsibility by payment, & if you do not, I will take this to court.
the consignation of the thing or sum due. o BUT: If you staple a check as payment, this is not counted, as
Consignation alone shall produce the same effect in the ff. cases: payment is the delivery of money.
(1) When the creditor is absent or unknown, or does not appear at the place of
payment; Cases When Consignation is Not Necessary
(2) When he is incapacitated to receive the payment at the time it is due; (1) Option contract
(3) When, without just cause, he refuses to give a receipt; (2) Legal redemption
(4) When 2 or more persons claim the same right to collect; (3) Sale with right to repurchase
(5) When the title of the obligation has been lost. • Explanation for Exemptions:
o Consignation is not necessary because these cases involve an
Article 1257. In order that the consignation of the thing due may release the obligor, exercise of a right or privilege (to buy, redeem, or repurchase) rather
it must first be announced to the persons interested in the fulfillment of the than the discharge of an obligation
obligation. o Tender of payment would be sufficient to preserve the right or
The consignation shall be ineffectual if it is not made strictly in consonance with the privilege.
provisions which regulate payment. o Provisions on consignment are NOT applicable when there is no
obligation to pay.
Article 1258. Consignation shall be made by depositing the things due at the
disposal of judicial authority, before whom the tender of payment shall be proved, in CASE: Vda. De Quirino v. Palarca
a 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 notified Facts: The lessee was given “the right & option to buy the leased premises for
thereof. P12,000.” Must there be consignment as provided under Art. 1256?
Held: No. The consignation in Art. 1256 is inapplicable. Said provision refers to
Tender of Payment & Consignation consignation as one of the means for the payment or discharge of a “debt,” whereas
• Applies in all contracts where there is an obligation to pay the lessee was not indebted to the lessor for the price of the leased premises. The
• CASE: Adelfa Properties v. CA – In a contract to sell, the requisites of a valid lessee merely exercised a right of option and had no obligation to pay said price
tender must be complied with. The mere sending of letter by the buyer
expressing the intention to pay, without the accompanying payment, does not CASE: Badayos v. CA
extinguish the obligation to pay the balance of the purchase price. Lesson: Redemption contracts also cannot involve consignation.
o A mere tender of payment is not sufficient to compel the seller to Facts: X was trying to exercise his right of redemption. Does this involve
deliver the property & execute the deed of sale; it is consignation consignment?
which will extinguish the buyer’s obligation to pay the balance of the Held: No. In the exercise of the right of redemption, consignation is not necessary.
purchase price the relationship that existed between vendor & vendee a retro was not one of
o Consequently, for a contract to sell, performance may be effected not debtor-creditor. The vendor a retro is exercising a right, not discharging an
by tender of payment alone but by both tender & consignation. obligation, hence a mere tender of payment is sufficient to preserve the right of a
vendor.
Consignation
• Act of depositing the thing due with the court or judicial authorities whenever Class Discussion
the creditor cannot accept or refuses to accept payment • NOTE: Payment must be in cash; so checks, negotiable instruments are not
• *NOTE: Before there can be consignation, the debtor must first offer to pay considered payment.
(i.e., there must be prior tender of payment) • This is different from the rule on the right to repurchase – here, tender of a
• An ordinary court case check is enough to demonstrate the exercise of a right.
o BUT the repurchase is NOT YET CONSIDERED PAID (so watch out for
Class Discussion what the question really is).
Consignment – an ordinary court case o Ex. In an execution sale where there is a right of redemption, the
tender of a check is enough to demonstrate the exercise of the right to
• 2nd notice – case has been filed against you
redeem within the reglementary period, but the amount will not yet be
• One of the instances when extrajudicial demand is a requisite
considered paid.

o An extrajudicial, private settlement before proceeding to the
*CASE: Far East Bank & Trust Co. v. Diaz Realty solemnities of consignation (which is judicial)
Lesson: A check is not tender, but creditor may nonetheless be estopped from • Must be made in lawful currency.
claiming that there was no payment if he accepts it. • Tender of a check is NOT valid tender of payment
Facts: The court was asked to rule on whether or not a check can be considered o Payment in check may be acceptable as valid if no prompt objection to
valid tender of payment. said payment is made, BUT the fact that in previous years payment in
Held: For a valid tender of payment, it is necessary that there be (1) a fusion of check was accepted does not place its creditor in estoppel from
intent, ability, & capability to make good such offer, which must be (2) absolute & requiring the debtor to pay his obligation in cash.
must (3) cover the amount due.
Though a check is not legal tender, & a creditor may validly refuse to accept it if Tender of Payment v. Consignation
tendered as payment, one who accepts a fully funded check after the debtor’s Tender of Payment Consignation
manifestation that it had been given to settle an obligation is estopped from later on Act precedent to consignment, an The principal act which extinguishes the
denouncing the efficacy of such tender of payment. attempt to make a private settlement obligation
Extrajudicial Judicial
Requisites of Law for Effective Tender of Payment & Consignation Not yet considered delivery of property Sufficient equivalent to delivery of property
• If one is missing, consignation will not be effective.
• The debtor must show that: CASE: PNB v. Chan
1) That there was a debt due. Facts: Instead of depositing the money representing rental payments with the court
2) That the consignation of the obligation was made because the creditor for consignation, PNB, the debtor, merely opened a non-drawing savings account at
to whom tender of payment was made – its Paco Branch. There, it deposited monthly rentals. Was this proper?
a. Refused to accept it; Held: No. Consignation is necessarily judicial. It is not allowed in venues other than
b. He was absent; the court. Consequently, PNB’s obligation to pay rent remained subsisting, as the
c. He was incapacitated; or deposit of the rentals cannot be considered to have the effect of consignation.
d. Because several persons claimed to be entitled to receive the
amount due CASE: De Mesa v. CA
3) That previous notice of the consignation had been given to the person Lesson: It is valid notice when the court allows the debtor to consign multiple
interested in the performance of the obligation (1st notice). installments & send one notice informing the creditor of all the installments in the
o Without this 1st notice, the consignation as payment is void court.
o Gives the creditor the opportunity to reconsider his unjustified Facts: The debtor in the trial court filed a motion to allow it to just consign all future
refusal & to accept payment thereby avoiding consignation & quarterly installments (12th to 20th) without need of formal tender of payment and
subsequent litigation service of notices to the creditor who was duly notified of such motion.
o Essential to the validity of the consignation The creditor now argues that there was no notice to her of debtor’s consignation of
4) That the amount due was placed at the disposal of the court. the amounts for the 12th to 20th quarterly installments. Was there proper notice?
5) That after the consignation had been made the person interested was Held: Yes. SC ruled that the circumstances of the case & the order of the court
notified thereof (2nd notice). granting the motion can be considered substantial compliance with the requirement
o Enables the creditor to withdraw the goods or money of notice to the creditor.
deposited.
o Unjust for him to suffer the deterioration, depreciation or loss When Consignation without Tender of Payment Produces the Same Effect:
of such goods or money due to lack of knowledge of the 1) When the creditor is absent or unknown, or does not appear at the place of
consignation payment
o Ex. If A is indebted to B for P1,000 payable on Apr. 11, 1997 at Manila
Tender of Payment Hotel, & on said date, A is ready to pay, but B is not at the Manila
• Tender of payment must be distinguished from consignation. Hotel, then consignation can immediately be made in court without
o Tender is the antecedent of consignation; an act preparatory to the need of looking for B & tendering payment.
consignation, which is the principal 2) When the creditor is incapacitated to receive the payment at the time it is
o That from which are derived the immediate consequences which the due
debtor desires or seeks to obtain. 3) When, without just cause, the creditor refuses to give a receipt
o A receipt is proof of payment.

Debtor must protect himself with the receipt, which he can
§ § Y has nobody to blame but himself for the litigation
demand from the creditor upon payment as evidence of the expenses, because all Y had to do the 1st time was to
fact of payment. withdraw the amount deposited, without going through the
o BUT: If there is just cause for the creditor not to issue the receipt, contesting the validity of the deposit just because there had
tender of payment must still be made. been no unjustified refusal to accept the said tender.
§ Ex. If the debtor insists that the creditor issue a receipt for the
full amount of indebtedness & the creditor refuses to issue one Article 1260. Once the consignation has been duly made, the debtor may ask the
because there was no full payment, there is justifiable ground judge to order the cancellation of the obligation.
on the creditor’s part. Tender of payment is still necessary. Before the creditor has accepted the consignation, or before a judicial declaration
4) When two or more persons claim the same right to collect that the consignation has been properly made, the debtor may withdraw the thing or
o There is no use tendering payment to any of the 2 or more persons the sum deposited, allowing the obligation to remain in force.
who claim the right to collect because it may turn out that the person
to whom payment is given might not be lawfully entitled to the Court Ruling
payment • Once there is already a finding that the consignation is proper, the debtor is
5) When the title of the obligation has been lost released from the obligation.
o To protect the debtor, he may immediately go to court if title is lost o He can ask the court to order the cancellation of the obligation.
o It is better for the court to declare that the obligation has been • The court will order that the creditor accepts the money or thing consigned as
extinguished than just pay the creditor without recovering the title to payment.
the debt or at least without declaring or annotating in the said title • The consignation has a retroactive effect.
that the debt is already ineffective because of the payment o The payment is deemed to have been made at the time of the deposit
of the money in court or when it was placed at the disposal of the
Article 1259. The expenses of consignation, when properly made, shall be charged judicial authority.
against the creditor.
CASE: Gambas v. Tan
Creditor Pays for Consignation Lesson: Partial acceptance is considered as rejection by the creditor in a
• The creditor pays expenses of consignation because it was his failure to consignment case; the debtor can withdraw his payment before the creditor accepts.
accept payment that led to the consignation Facts: The debtor filed a case for consignation & deposited the amount of money
• CASE: Miranda v. Reyes offered as payment to the creditor who previously refused to accept.
o Facts: X (the debtor) tendered payment of the price for redeeming the • The court granted the withdrawal of the amount deposited upon motion of
property to Y a few days before the period of redemption was to the debtor.
expire. • The creditor, aware of the said withdrawal, filed an answer stating that the
§ Y immediately accepted the tender & sent his letter of money was not enough, & that he was willing to accept the money as partial
acceptance by mail. payment. He also sought the nullification of the withdrawal as he was not
§ X, still waiting for the reply, filed a case for consignation given notice of the same.
§ Y, instead of just withdrawing the money deposited in court, filed Was the withdrawal proper?
an answer claiming that there was no need of consignation as X Held: Yes. Art. 1260, par. 2 gives the depositor the right to withdraw the amount
accepted the tender & consequently litigated the case. deposited at any time before the creditor accepts it.
Was there a valid consignation? Such right is clear in this case, because the statement of the creditor came late, &,
o Held: Yes. Consignation was valid.12 what is more, the acceptance was partial. This last consideration renders
§ It is true that Y sent his letter of acceptance on Sep. 24, but unnecessary to discuss the effect of failure to give the creditor any notice of
it was not received by X until Sep. 29. In the meantime, the withdrawal, since the statement was practically a rejection of the offer of payment.
redemption period was about to expire. X did the most
prudent thing under the circumstances by filing the action & With Reservation
depositing the redemption money in court. • An acceptance with reservation is valid, as long as it is done prior to the
withdrawal of the amount by the debtor.
o CASE: Riesenback v. CA – The creditor’s acceptance of the consigned
amount but with an express reservation that he is not admitting the
12 The law must be reasonably interpreted & the realities of the situation in each case taken into account so
that the purpose of the law may not be defeated.

correctness of the obligation & therefore he is also reserving his right

to claim the balance in accordance with what is prayed for in his When one of many solidary co-debtors are released, said release will necessarily
answer & counterclaims is valid. apply to the other solidary co-debtors.
• The reservation did NOT completely extinguish the obligation.
o If there is no reservation made, it means that the creditor waives SECTION 2. – LOSS OF THE THING DUE.
his other claims under the contract.
Article 1262. An obligation which consists in the delivery of a determinate thing shall
Effect of Declaration of Court be extinguished if it should be lost or destroyed without the fault of the debtor, and
• Upon the declaration of the court that the consignation is valid, the debtor before he has incurred in delay.
cannot anymore claim that he is the owner of the said amount. He cannot When by law or stipulation, the obligor is liable even for fortuitous events, the loss of
withdraw it anymore. the thing does not extinguish the obligation, & he shall be responsible for damages.
The same rule applies when the nature of the obligation requires the assumption of
Class Discussion risk.
Q: When is payment considered made in consignation?
A: It is considered made as of the time of the filing of the consignation case in court Effect of Loss
with the deposit of the money, based on jurisprudence. It is NOT considered to have • Determinate object - the debtor shall be excused from performing his
been consigned upon finality of the decision of the consignation case, but before obligation if such thing is lost without his fault.
that, with a filing. • BUT: if it is (1) his fault or if it has been (2) lost after the debtor has incurred
Q: Can the debtor make a withdrawal of the consigned money in court without notice in delay, the debtor shall answer for the resulting damages.
to the defendant-creditor, in accordance with the 3-day notice rule for hearings?
A: YES. The 3-day notice rule is not applicable in a withdrawal of money in a CASE: Fed. of United Namarco Distributors Inc. v. NAMARCO
consignation case. Lesson: Do not delay, because if you do, you pay for any loss, damage or
Q: Now, a decision is made, can the debtor still withdraw? deterioration of the object of the prestation.
A: NO, unless the creditor agrees to the withdrawal. When the creditor allows the Facts: X (the debtor) promised to deliver 2,000 boxes of oranges to Y. Y demanded
withdrawal, the debt is resurrected. The money again becomes generic. the boxes from X when they were due in May 1, 1995, but X refused for no valid
reason.
Article 1261. If, the consignation having been made, the creditor should authorize Y filed a case ordering X not to dispose of the boxes & kept asking for the boxes to
the debtor to withdraw the same, he shall lose every preference which he may have be delivered to him. When at last X decided to deliver, after already being in delay,
over the thing. The co-debtors, guarantors and sureties shall be released. the oranges in 1,500 boxes began to spoil. Y refused to accept these boxes.
X claims that under their contract, Y was supposed to bear the expenses for handling
Finding of Court & Creditor’s Actions & storage. Thus, Y should shoulder the burden of the 1,500 boxes. Is X’s contention
• When the court has found proper consignation & the obligation has been correct?
cancelled, creditor MUST obtain from the court the payment. Held: No. X bears the risk of the loss, because he was in delay.
• However, if the obligation having been extinguished, the debtor decides to
withdraw the thing deposited with the creditor’s consent, there is thus Fortuitous Event & Assumption of Risk
nothing which the creditor can obtain from the court. • As discussed in Article 1174.
o In this case, both debtor & creditor, in effect, agreed to revive the • Because the thing is lost already, damages can be obtained from the debtor.
indebtedness. o Ex. If the specific & particular car to be delivered by the debtor is
• The creditor, due to his consent, will lose preference to the thing previously worth P500,000, & it is lost through a fortuitous event, but the parties
deposited to specifically pay-off his debt. stipulate that the debtor, even under such circumstances, will still be
o Anybody who has an interest in it can also go after it & the creditor liable, the creditor cannot insist on the delivery of the specific car
cannot anymore say that it has been precisely consigned to answer for because it has already been lost, but he can seek damages in the
the credit in his favor. amount of P500,000, the value of the car.
• Moreover, the solidary debtors, guarantors, & sureties of the debtor shall be
released as they likewise benefit from the extinguishment of the obligation & Article 1263. In an obligation to deliver a generic thing, the loss or destruction of
the debtor cannot unilaterally revive the obligation without their consent. anything of the same kind does not extinguish the obligation.
o DOES NOT APPLY to joint obligations
Generic Thing
Class Discussion

• Cannot really be lost or destroyed unless the whole class of said thing is § The obligor delays
destroyed; the obligation subsists despite the loss or destruction of one thing § The obligor has promised the same thing to 2 or more persons
in the said class. who do not have the same interest.
o Ex. If the debtor is bound to deliver a ball without any specification, he • The presumption does NOT apply even if the loss happens at the time the
may deliver any kind of ball. If he buys one & subsequently loses it thing is in the possession of the debtor if, at the time of the loss, an
through a fortuitous event, his obligation is not extinguished. The earthquake, storm, or other natural calamity exists.
debtor simply has to buy another ball.
Article 1266. The debtor in obligations to do shall also be released when the
Article 1264. The courts shall determine whether, under the circumstances, the prestation becomes legally or physically impossible without the fault of the obligor.
partial loss of the object of the obligation is so important as to extinguish the
obligation. CASE: PNCC v. CA
Lesson: Art. 1266 applies only to obligations “to do.” It has no application to
Partial Loss prestations “to give” such as a certificate of title to a real property free from liens &
• If the loss is complete, Arts. 1262 & 1263 will apply. encumbrances.
• If the loss is partial & the circumstances so warrant, the court may consider it Facts: The lessee in a lease contract sought its release from paying the rentals &
as a complete loss which extinguishes the obligation. from the said contract itself invoking Art. 1266. The lessee claimed that, due to the
o Only happens if the partial loss is so important so as to totally affect change in political climate after the EDSA revolution & change in financial condition,
the whole object of the obligation. it was not able to use the property for the purpose for which it intended to utilize it,
• BUT: If it is considered as a complete loss, then the rules under Arts. 1262 & i.e., to use the leased premises as a site of a rock crushing plant. Can lessee rely on
1263 must apply. Art. 1266 for release from its liabilities?
o Ex. If the debtor’s obligation is to deliver a specific computer, Held: No. Lessee cannot rely on Art. 1266, because it applies only in obligations “to
consisting of the CPU with specific drives & particular hard disks do” & not “to give.” Additionally, the unforeseen event & causes mentioned by the
together with a very specialized screen peculiarly made for the said lessee are not the impossibilities contemplated by the law.
computer, with a special keyboard made to respond only to said
screen, & the said screen is lost through a fortuitous event before the Obligations “To Do”
debtor has incurred in delay, there is clearly a partial loss which • When the prestation becomes legally or physically impossible without the
renders the computer system totally useless. In this case, the debtor fault of the obligor, it shall be considered a loss which extinguishes the
can go to court and declare that the partial loss has extinguished his obligation.
obligation to deliver the computer. o Legal impossibility - If the obligor is bound to build a fence along the
property of the obligor & the said property is expropriated by the
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be government which bars everybody from entering the same,
presumed that the loss was due to his fault, unless there is proof to the contrary, & o Physical impossibility - a debtor was bound to do a concert & to
without prejudice to the provisions of Article 1165. This presumption does not apply provide musical bands exclusively in a particular Music Hall & the
in case of earthquake, flood, storm, or other natural calamity. parties contracted on the basis of the continued existence of the said
Music Hall, which burned down, without the fault of either the debtor
Loss during Possession of Debtor or the creditor, before the concert could begin. The obligation of the
• GR: Presumption that the loss of the thing is due to the fault of the debtor debtor to render a concert has become physically impossible to
who possesses it. perform & therefore the same was extinguished.
o The presumption arises from the fact that it was lost while it is in the
possession of the debtor. Article 1267. When the service has become so difficult as to be manifestly beyond
o If the debtor is NOT in the possession of the thing when it is lost, the the contemplation of the parties, the obligor may also be released therefrom, in
presumption does not arise. whole or in part.
• If the presumption applies, the debtor MUST prove that the loss is not
through his fault or it has been caused by a fortuitous event. Difficulty Beyond Contemplation of Parties
o HOWEVER, he is still liable for a fortuitous event if: • *Art. applies to obligations “to do” & NOT obligations to give
§ It has been so stipulated by the parties • Difficulty alone does not excuse the debtor from fulfilling his prestation.
§ The law so states o Subjective impossibility - a promissor’s duty is never discharged by the
§ The nature of the obligation involves an assumption of risk mere fact that the supervening events deprive him of the ability to

perform, if they do not also deprive other persons of the ability to • It is therefore only in absolutely exceptional changes of circumstances that
render such a performance. equity demands assistance for the debtor.
• Art. 1267 - a new norm providing that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the CASE: PNCC v. CA
obligor may be released therefrom, in whole or in part Lesson: Rebus sic stantibus does not apply to turmoil in Marcos era & EDSA
o Still within the rule on impossibility of performance, although it may Revolution; only in absolutely exceptional circumstances.
not be necessarily be impossible. Facts: The lessee in a lease contract sought its release from paying the rentals &
• Enunciates doctrine of unforeseen events from the said contract itself invoking Article 1266 & rebus sic stantibus, claiming
that, due to the change in political climate after the EDSA revolution & change in
*Requisites for Application of Art. 1267 (Rebus Sic Stantibus) (Tagaytay Realty Co. financial condition, it was not able to use the property for the purpose for which it
v. Gacutan) intended to utilize it, i.e., to use the leased premises as a site of a rock crushing
1) The event or change in circumstance could not have been foreseen at the plant. Does rebus sic stantibus apply here?
time of the execution of the contract. Held: No. Rebus sic stantibus does not apply here; the petitioner was aware of all
2) The prestation has become extremely difficult to render (implying that it could the political turmoil when they entered into the contract in Nov. 18, 1985, days after
still be done, but it would be extremely difficult & almost impossible). Marcos declared Martial Law.
3) It must not be due to the acts of any of the parties. Also, anent petitioner’s alleged poor financial condition, mere pecuniary inability to
4) The contract is for a future prestation.13 fulfill an engagement does not discharge a contractual obligation, nor does it
*These requirements must exist together. constitute a defense to an action for specific performance.
Illustrative Example *CASE: Spouses Poon v. Prime Savings Bank

• An obligor is bound to deliver 40 cases of mangoes from the Philippines to Facts: The lessee (a bank) & lessor entered into a contract of lease for 10 years. The
South Africa by ship at the cost of $30,000 on or before Apr. 11, 1997. lessee was engaged in various unsound business practices for which it was already
• The usual route in going to South Africa has been suddenly closed prompting issued several warnings by the BSP. Furthermore, the closure of the business was
the obligor to look & eventually pass through another route, which is likewise already something the lessors previously raised as a concern. Eventually, the lessee
closed, again leaving the obligor with no other choice but to attempt passing had to close business, 3.5 years into the 10-year life of the contract of lease. Can
through another alternative route 4 times longer than the usual route, & the lessee now invoke rebus sic stantibus as a defense for its premature termination
which route could be traversed by its vessel without damaging itself & without of the contract of lease?
entailing enormous additional and unreasonable cost (i.e., the obligor would Held: No. The 1st & 3rd requisites for the application of the principle – i.e., that the
have to charter other vessels for the continuing voyage), & also without event could not have been foreseen, & it must not be due to any act of the parties in
subjecting the fruits to possible harm as they would most likely spoil along the case – are not present here. The closure of the lessee’s business was not an
such a long trip. unforeseen event. As the lease was long-term, it was not lost on the parties that
• The obligation in this case has clearly become so difficult to do & is such an eventuality might occur, as it was in fact covered by the terms of their
manifestly beyond their contemplation. The obligation should be deemed Contract. Also, the closure was not independent of the lessee’s will.
extinguished.
CASE: Tagaytay Realty Co. v. Gacutan
*Rebus Sic Stantibus Facts: Petitioner did not comply with its obligation to complete the construction of
• The basis of Art. 1267 the subdivision project, including amenities, within 1 year from the issuance of the
o Under this theory, the parties stipulate in the light of certain prevailing license. It argued it did so because of the worsening economic conditions at the
conditions time, & invoked rebus sic stantibus. Is the principle applicable?
o Once these conditions cease to exist, the contract also ceases to exist Held: No. The requisites did not concur herein because the difficulty of performance
under Art. 1267 should be such that one party would be placed at a disadvantage by
• Change in conditions which can extinguish obligations
the unforeseen event. Mere inconvenience, or unexpected impediments, or
• HOWEVER, Art. 1267 is NOT an absolute application of this theory, because
increased expenses did not suffice to relieve the debtor from a bad bargain. And,
such would endanger the security of contractual relations
secondly, the unilateral suspension of the construction had preceded the worsening
o The parties to the contract must be presumed to have assumed the
of economic conditions in 1983; hence, the latter could not reasonably justify the
risks of unfavorable developments.
petitioner's plea for release from its statutory and contractual obligations to its lot
buyers, particularly the respondent. Besides, the petitioner had the legal obligation
to complete the amenities within one year from the issuance of the license (under
13 But see: Naga Telephone Co. v. CA (discussed below).

Sec. 20 of PD No. 957), or within 2 years from July 15, 1976 (under the express Lesson: When one cannot perform a particular obligation because of government
undertaking of the petitioner). Hence, it should have complied with its obligation by prohibition or non-issuance by the government of the permit due to supervening
July 15, 1978 at the latest, long before the worsening of the economy in 1983. events, the obligation can also be deemed extinguished under Art. 1267.
Facts: X won a bidding to operate taxis with radio transceivers. For this purpose, X
CASE: Naga Telephone City, Inc. v. CA ordered certain transceivers through Y. Y ordered from Japan.
Lesson: (1) To fall under Art. 1267, it is not a requirement that the contract be for • It was agreed that the radio transceivers will be delivered within 60-90 days
future service with future unusual change. Considering the practical needs & the notice from X of the assigned radio frequency taking note of government
demands of equity & good faith, the disappearance of the basis of a contract gives regulations.
rise to a right to relief in favor of the party prejudiced. • The radio frequency was assigned but later the government, because of the
(2) Art. 1267 cannot be used to modify contracts, only to extinguish them. imposition of martial law, denied the application for a permit to import the
Facts: Petitioner X & respondent Y entered into a contract where they agreed that X radio transceivers. Due to this denial, X was likewise unable to obtain the
shall use the electrical posts of Y in Naga City free of charge, but the contract can be necessary letter of credit. X did not continue with the contract.
terminated if Y is forced to stop its business. As consideration, X agreed to install Can Y sue X for breach of contract?
free of charge 10 telephone connections to Y. Held: No. X testified that a permit to import the transceivers from Japan was denied
• At the time of the execution of the contract, it was the contemplation of the by the Radio Control Board. He stated that he & Y personally went to the Radio
parties that the posts were only to be used in Naga City because, at that time Control Office, & were denied a permit to import. They also went to the Office of the
the capability of Y was very limited. This was so even if at that time there President, where Secretary Zamora explained that radios were “banned like guns
were many subscribers in Naga City for telephone lines, who cannot be because of martial law.” X testified that this prevented him from securing a letter of
served because of this contemplated limited capability. credit from the Central Bank.
• After 11 years of the effectivity of the contract, the contract became so X’s inability to secure a letter of credit & to comply with his obligation was a direct
burdensome to Y. This fact was shown by the following: the telephone cables consequence of the denial of the permit to import. For this X cannot be faulted.
strung by X had become heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen bore holes through the Article 1268. When the debt of a thing certain & determinate proceeds from a
posts at which points those posts were broken during typhoons, & that a post criminal offense, the debtor shall not be exempted from the payment of its price,
costs as much as P2,630. While there was an increased use of the posts, whatever may be the cause for the loss, unless the thing having been offered by him
there was no corresponding increase in the telephone connections to Y. X to the person who should receive it, the latter refused without justification to accept
also began using Y’s telephone posts outside Naga City. The contract became it.
so one-sided to the prejudice of Y.
• X contends that, because the contract did not involve the rendition of service Criminal Offense
or a personal prestation & it was not for future service with future unusual • If A stole a watch from B & was criminally charged for said offense, & the
change, Article 1267 should not apply & therefore the ruling in the Occena watch was lost through a fortuitous event, A must still pay the price of the
vs. Jabson should be followed. watch.
Does Art. 1267 apply? o The loss will not excuse him from being responsible; he did not have
Held: Yes. Art. 1267 was applicable & the obligation was extinguished. The the right to possess the same in the first place.
continued enforcement of the contract had manifestly gone beyond the • If A however offered back the watch to B, & the latter refused to accept, the
contemplation of the parties so much so that the Y should be released from the risk of loss of the watch would be on B except if there was justifiable reason
contract to avoid X’s unjust enrichment at Y’s expense. not to accept it as, for example, it had already been severely damaged.
• A reading of Art. 1267 will show that the term “service” should be understood
as referring to the “performance” of the obligation Article 1269. The obligation having been extinguished by the loss of the thing, the
• The use of the telephone lines is the “service” contemplated in Article 1267 creditor shall have all the rights of action which the debtor may have against 3rd
• In Occena, the Court did not allow Article 1267 to apply to a petition praying persons by reason of the loss.
for modification of terms in a contract by fixing the proper shares that should
pertain to them out of the gross proceeds from the sales of subdivided lots. Rights of Action Open to Creditor
Here, the parties did not want to be released from the obligation, but for the • If A buys a house from G, & the house, which is insured, is accidentally
contract to be modified. The case was dismissed for lack of cause of action, burned by a fortuitous event prior to the demand for its delivery by A, the
as Article 1267 is for extinguishment, & not modifications of contracts. obligation of G to deliver the house is extinguished.
CASE: Magat, Jr. v. CA

o BUT: If A has already paid the price of the house, he can seek • Art. 771 - Donations which in accordance with Article 752, are inofficious,
reimbursement of the insurance proceeds due from the insurance bearing in mind the estimated net value of the donor’s property at the time of
company. his death, shall be reduced with regard to the excess
o BUT the reduction shall not prevent the donations from taking effect
SECTION 3. – CONDONATION OR REMISSION OF THE DEBT. during the life of the donor
o NOR shall it bar the donee from appropriating the fruits.
*Article 1270. Condonation or remission is essentially gratuitous, and requires the • Art. 772 – Only those who at the time of the donor’s death have a right to the
acceptance by the obligor. It may be made expressly or impliedly. legitime & their heirs & successors in interest may ask for the reduction of
One & the other kind shall be subject to the rules which govern inofficious donations. inofficious donations.
Express condonation shall, furthermore, comply with the forms of donation. o Said persons cannot renounce their right during the lifetime of the
donor, either by express declaration, or by consenting to the donation.
Condonation or Remission of a Debt o The donees, devisees & legatees, who are not entitled to the legitime
• An act of liberality; a donation of the obligee’s credit in favor of the debtor & the creditors of the deceased can neither ask for the reduction nor
• Connotes that there is a previous demandable obligation but the creditor avail themselves thereof.
decides not to enforce the debtor’s prestation anymore. • Art. 773 – If, there being 2 or more donations, the disposable portion is not
o Requires the implied or express consent of the obligor. sufficient to cover all of them, those of the more recent date shall be reduced
• Governed by the rules on inofficious donation with regard to the excess.
• Art. 760 – Every donation inter vivos, made by a person having no children or
Rules on Inofficious Donation descendants, legitimate or legitimated by subsequent marriage, or
• A donation is inofficious if it turns out that the thing or amount donated illegitimate, may be revoked or reduced as provided in the next article, by the
(remitted or condoned) encroaches or infringes on the legitime or happening of any of these events:
successional rights of the heirs of the condoning creditor. (1) If the donor, after the donation, should have legitimate or legitimated
• To “combat” inofficious donation, one must prove payment & not or illegitimate children, even though they be posthumous;
condonation, because payment is not revocable as inofficious donation (2) If the child of the donor, whom the latter believed to be dead when he
• Ex. A creditor condones the debt of a debtor in the amount of P50K. made the donation, should turn out to be living;
o Later on, the creditor gives birth to a child at a time when her (3) If the donor should subsequently adopt a minor child.
properties are worth only P10,000. • Art. 761 – In cases referred to in the preceding article, the donation shall be
o Her over-all estate (including the remitted P50,000) at the time of the revoked or reduced insofar as it exceeds the portion that may be freely
birth of the child is therefore P60,000. disposed of by will, taking into account the whole estate of the donor at the
§ The legitime of the child is 1/2 of the estate which, in this case, time of the birth, appearance or adoption of a child.
is P30,000. • Art. 762 – Upon the revocation or reduction of the donation by the birth,
§ The free portion which can be given to any person not appearance or adoption of a child, the property affected shall be returned, or
necessarily an heir is also P30,000. its value if the donee has sold the same.
o Thus, since the child will only get P10,000 because this is the only o If the property is mortgaged, the donor may redeem the mortgage, by
existing property out of an estate of P60,000, the remission in favor of paying the amount guaranteed, with a right to recover the same from
the debtor is inofficious to the extent of P20,000. The remission the donee.
clearly infringes on the legitime of the child. o When the property cannot be returned, it shall be estimated at what it
o The debtor must therefore be made to pay P20,000 out of the was worth at the time of the donation.
P50,000 remitted debt. Hence, the child shall get P20,000 + • Art. 763 – The action for revocation or reduction on the grounds set forth in
P10,000, completing his legitime. Art. 760 shall prescribe after 4 years from:
o The birth of the 1st child, or from his legitimation, recognition or
Related Provisions – Inofficious Donations adoption or
• Art. 750 – The donation may include all the present property of the donor, or o From the judicial declaration of filiation, or
part thereof, provided he reserves, in full ownership or in usufruct, sufficient o From the time information was received regarding the existence of the
means to support himself & all relatives who, at the time of the acceptance of child believed dead.
the donation, are by law entitled to be supported by the donor. o This action cannot be renounced, & is transmitted, upon the death of
o Without such reservation, the donation shall be reduced on petition of the donor, to his legitimate & illegitimate children & descendants.
any person affected.

Rules on Forms of Donations Donations take effect during the lifetime of the donor & the donee gets the fruits
• Art. 748 – The donation of a movable may be oral or in writing. during the period in which he holds the property.
o Oral donation - requires simultaneous delivery of the thing or of the
document representing the right donated. Class Discussion
o If the value of the personal property donated exceeds P5,000, the If the debtor is in possession of the evidence of indebtedness without there being a
donation & the acceptance shall be made in writing. Otherwise, the reason for it, what are the presumptions?
donation shall be void. 1. That the creditor voluntarily delivered it to him
• Art. 749 – In order that the donation of an immovable may be valid, it must 2. There is NO PRESUMPTION that the obligation has been paid; there is instead a
be made in a public document, specifying presumption that the obligation has been CONDONED
o The property donated & • The difference: In condonation, the rule on inofficiousness will apply
o The value of the charges which the donee must satisfy.
o The acceptance may be made in the same deed of donation or in a Article 1272. Whenever the private document in which the debt appears is found in
separate public document, but it shall not take effect unless it is done the possession of the debtor, it shall be presumed that the creditor delivered it
during the lifetime of the donor. voluntarily, unless the contrary is proved.
o If the acceptance is made in a separate instrument, the donor shall be
notified thereof in an authentic form, & this step shall be noted in both Presumption in Article 1272
instruments. • Document evidencing the debt in the possession of the debtor gives rise to
the refutable presumption that such document has been delivered by the
*Article 1271. The delivery of a private document evidencing a credit, made creditor voluntarily.
voluntarily by the creditor to the debtor, implies the renunciation of the action which • However, this presumption can be overturned by clear evidence to the
the former had against the latter. contrary.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor & his
heirs may uphold it by proving that the delivery of the document was made in virtue Article 1273. The renunciation of the principal debt shall extinguish the accessory
of payment of the debt. obligations; but the waiver of the latter shall leave the former in force.
Private Document Evidencing a Credit Principal & Accessory Obligations

• Promissory note – the most common private document evidencing a credit • Existence of the accessory obligation depends on the existence of the
o A promissory note in the hands of the creditor is proof of indebtedness principal obligation.
rather than proof of payment. o BUT the existence of the principal obligation does NOT depend on the
• If a creditor delivers a promissory note to the debtor, the creditor, in effect, accessory obligation.
furnishes the debtor the evidence which could prove the indebtedness of § If the principal obligation is extinguished, it carries with it the
such debtor in his favor. extinguishment of the accessory obligation but not vice-versa.
o Implies that the creditor is no longer interested in the debt. • Ex. If A is indebted to B, & the indebtedness is guaranteed by X, & B told X
o The law provides that such act will be considered a renunciation. that he will not anymore claim on X’s guarantee as the said creditor is
o The presumption created is that the debt was condoned, NOT that renouncing the same, X is released but the principal obligation of A still
there was payment subsists.
• Ex. A owes B P1,000, evidenced by a promissory note executed by A, which is o B can still collect from A.
in the possession of B. o BUT: If B renounces the indebtedness of A, B cannot go against X
o If B later voluntarily gives it to A, such delivery implies a renunciation because the latter’s guarantee, being an accessory obligation, is
of the debt. extinguished with that of the principal obligation.
o BUT: In the event that the remission of the P1,000 is claimed to be
void because it is inofficious, the heirs of A can show that A’s *Article 1274. It is presumed that the necessary obligation of pledge has been
possession of the promissory note is NOT a result of a remission made remitted when the thing pledged, after its delivery to the creditor, is found in the
by A but a result of A’s payment of the obligation. possession of the debtor, or of a 3rd person who owns the thing.
• In case of PAYMENT, the promissory note is always taken by the debtor.
Pledge
Class Discussion • Involves a movable property constituted by the owner of such property who
has free disposal of it, to secure the fulfillment of a principal obligation

• Such contract is perfected only upon the delivery of the thing pledged to the Guarantee
creditor. • An indebtedness by a debtor & guaranteed by a 3rd person is extinguished if
o A pledge is an accessory contract. there is a merger of the characters of debtor & creditor.
o A person may even pledge his property not for his own indebtedness o The extinguishment of the principal obligation extinguishes the
but for the indebtedness of another person. accessory obligation of guarantee.
• In a contract of pledge, the creditor must be in possession of the thing o Guarantee – when a guarantor binds himself to pay the remaining
pledged. indebtedness of a debtor after the creditor has exhausted all other
o If it is in possession of the debtor or of the 3rd person who owns it, available remedies.
there is a presumption that the accessory obligation has been • The ff. merely extinguishes the accessory obligation:
condoned or remitted. However, this is a refutable presumption. o Merger of the persons of guarantor & creditor
o Merger of the characters of debtor & guarantor
Class Discussion
• Movable security – pledge Article 1277. Confusion does not extinguish a joint obligation except as regards the
• Real estate security – mortgage share corresponding to the creditor or debtor in whom the two characters concur.
• With securities, if D cannot pay his debt to C, the pledge/mortgage will be
sold at public auction & proceeds given to C Joint Obligations
• Joint debtors owe the creditor only their share in the whole indebtedness &
Class Discussion (M: This is my favorite question) the creditor can only collect from each debtor his share in the total
If a promissory note is in the possession of the debtor, the presumption is that it has indebtedness.
been delivered to him & the obligation is condoned & therefore, extinguished. • If A, B, & C jointly owe X P3,000 & there is a merger of the characters of X &
If the thing pledged is in the possession of the debtor, then the OBLIGATION OF C, the obligation is extinguished in so far as the P1,000 share of C in the
PLEDGE (accessory obligation) is deemed remitted, NOT the principal debt. indebtedness is concerned but not as to the rest.
o X can still collect P1,000 each from A & B.
SECTION 4. – CONFUSION OR MERGER OF RIGHTS
Solidary Obligations (same example as above)
Article 1275. The obligation is extinguished from the time the characters of creditor • If the obligation is solidary & there is merger of the characters of C & X, the
& debtor are merged in the same person. obligation is extinguished.
o HOWEVER, if A pays the whole indebtedness to X prior to the merger of
Confusion or Merger the characters of C & X, A can still collect from X & likewise from B
• The obligation is extinguished from the time the characters of creditor & their respective shares in the indebtedness which is P1,000 each
debtor are merged in the same person.
o Ex. A son owes his father P10,000. His father dies leaving as part of SECTION 5. – COMPENSATION.
his estate, inherited by the son, the amount of P10,000 owed by the
son to his father. Article 1278. Compensation shall take place when 2 persons, in their own right, are
• CASE: Chittick v. CA creditors & debtors of each other.
o Facts: A woman filed a complaint against her father for support in
arrears & for her share in the conjugal partnership. After the she was Article 1279. In order that compensation may be proper, it is necessary:
substituted in the case by her children upon her death, the father (1) That each one of the obligors be bound principally, & that he be at the same
likewise died. What happens to the obligation? time a principal creditor of the other;
o Held: Chittick’s children, as heirs of the creditor (their mother), are (2) That both debts consist in a sum of money, or if the things due are
also the heirs of the debtor (their grandfather), the obligation sued consumable, they be of the same kind, & also of the same quality if the latter
upon had been extinguished by the merger in their persons of the has been stated;
character of creditor & debtor of the same obligation. (3) That the two debts be due;
(4) That they be liquidated & demandable;
Article 1276. Merger which takes place in the person of the principal debtor or (5) That over neither of them there be any retention or controversy, commenced
creditor benefits the guarantors. Confusion which takes place in the person of any of by 3rd persons & communicated in due time to the debtor.
the latter does not extinguish the obligation.
Compensation

• At least 2 contracts are involved Is compensation proper?
• Can be total or partial § Held: No. The parties were NOT mutual debtors & creditors of
o Unlike with payment, which generally must be complete each other considering the fact that, by X’s own admission, the
• Compensation – by operation of law sugar was sold not for the account of Y but for the account of X
• Mode of extinguishing an obligation whereby the parties are mutually debtors & therefore X could not have been a debtor of Y.
& creditors of each other. o CASE: Republic v. Mambulao Lumber Co.
o If they owe each other exactly the same amount & the requisites § Lesson: No set-off is admissible against demands for taxes
under Art. 1279 are present, they do not have to make actual levied for general or local governmental purposes.
payment to each other, i.e., they do not have to hand money or the § Facts: A company contended that the reforestation charges
things due to each other, as payment is made by operation of law. collected under RA 115 & not used in the area subject of its
o Hence, if A owes B P2,000, & B, in turn, owes A P2,000, & both timber license, could be applied in compensation of the sum
indebtedness are due without any 3rd person claiming the same, the due from it as forest charges. Is compensation proper?
obligation is extinguished. § Held: No. The reforestation charges were in the nature of taxes
o If they mutually owe each other the unequal amounts, then there is & can never be refunded even if the they were not actually
compensation up to the extent that the amounts are covered by their used in the area subject of its timber license, &, because they
mutual outstanding obligations. were taxes, the reforestation charges were not debts for
purposes of legal compensation to make the parties therein
Class Discussion mutual creditors & debtors of each other.
Q: X only paid 100,000 of the 200,000 subscribed stocks to a bank, callable at any
time. X, as a depositor of the bank, is also a creditor of the bank. X has a deposit of 2) Both debts consist in a sum of money, or if the things due are consumable,
100,000 in the bank. The bank called the callable shares. X argued that the deposit they be of the same kind, & also of the same quality if the latter has been
is a legal compensation. Is this correct? stated
A: No, the investment made in the bank will not compensate with deposits made in o There can be no compensation if one debt involves the payment of
the bank. (Jurisprudence) money & the other the delivery of a particular thing.
Aside from this, taxes also cannot be compensated. o HOWEVER, there can be compensation involving things that are
determined such as any computer, but not a specific determinate
Class Discussion thing such as a computer with serial number 10325.
Loans that can be compensated = mutuum § “Consumable” means “fungible” (generic)
• There is NO COMPENSATION in deposits o CASE: Ong v. CA
§ Facts: Compensation is sought for an obligation of a debtor to
• Support cannot be compensated
deliver a sum of money to a creditor & another obligation of
• Crime cannot be compensated
creditor to deliver zippers to the debtor. Can there be
compensation?
Requisites for Legal Compensation
§ Held: No. The debts, even admitting that the delivery of the
1) Each one of the obligors is bound principally & each of them is at the same
zippers to the debtor is a debt, do not both consist in a sum of
time a principal creditor of the other
money nor are they of the same quality & kind.
o The obligors must be mutual creditors & debtors of each other
o CASE: Soriano v. General de Tabacos de Filipina
3) The 2 debts are due
§ Facts: X extended a crop loan to Y who secured payment of the
o The debts need not be incurred at the same time.
loan by, among others, the sugarcane crops that would be
o A debt cannot be demanded if it is not yet due.
planted & harvested.
§ BUT: The parties can agree that compensation can be made
• X, after receipt of some export sugar from Y, shipped the even as to the debts which are not yet due.
same to the US for X’s own account & benefit. o CASE: Perez v. CA
o Later on, X resisted the claim of Y to be credited an § Facts: A finance company was indebted to an investor with
amount of P51,528.01, representing the amount respect to 2 debts due originally on Aug. 6, 1974 & Aug. 13,
of the sugar it delivered to X. 1974 respectively.
• X invoked automatic compensation because Y was X’s
debtor due to his crop loan account, & at the same time
a creditor of X for the proceeds of the sale of Y’s sugar.

• The debts were rolled-over so that their maturity dates useful expenses. It was stipulated that the interest would not
were extended to Oct. 4, 1974 & Oct. 11, 1974, stop accruing “until the expenses are fully paid.”
respectively. • Meanwhile, Y also owed X P59,500, for rentals payable.
• The finance company was the creditor with respect to a • X now claims there should be legal compensation for
certain obligation to mature on Aug. 5, 1994 as against the P40,797.54 debt, so that they would owe only
company X to whom the 2 credits of the investor, which P18,702.46.
were to mature on Oct. 4 & 11, 1974 respectively, were Can there be compensation?
assigned on Sep. 9, 1974. § Held: No. There can be no compensation, because the amount
Is there legal compensation in this case? is not liquidated. Since there was still legal interest to be paid
§ Held: No. Both debts have to be due & demandable for “until the expenses are fully paid,” there is still some debt
compensation to take place. which is not liquidated.
• On the respective dates of maturity, specifically, Aug. 6 & o CASE: Miailhe v. Halili
Aug. 13, 1974, respectively, the investor was still the § Facts: SC reduced the liability in favor of the X resulting, among
holder of those bills, it can be safely assumed that it was others, in an excess amount of P2,004.28, which consequently
he who had asked for the roll-overs on the said dates. became payable to Y.
Company X was bound by the roll-overs since the o X did not want to return the said amount on the ground
assignment to it was made only on Sept. 9, 1974. The that he had the right to retain the same considering
inevitable result of the roll-overs of the principals was that, in another case, which was on appeal, the lower
that the debts were not yet due & demandable as of the court had rendered judgment against Y & in favor of X
date of their assignment by the investor to Company X on for the sum of P2,004.28.
Sept. 9, 1974, nor as of Oct. 3, 1974 when Company X Can there be compensation?
surrendered the Bills to the finance company. § Held: No. There can be no compensation because the amount
o CASE: PNB Madecor v. Uy of P2,004.28 awarded to X in another case was still under
§ Facts: One of the debts was payable only upon demand & there litigation & therefore still being disputed. It was a requirement
was no demand made. Can there be legal compensation? for compensation to take place that the amount involved be
§ Held: No. There can be no legal compensation because the certain & liquidated.
debt is not yet due. o CASE: Phil. Trust Co. v. Roxas
o CASE: Union Bank v. DBP § Lesson: Where the loan obligation & amount are still being
§ Lesson: Even if both parties in a contract of lease are mutual disputed before the CA, there can be no legal compensation for
creditor & debtors of one another, compensation cannot take lack of compliance with the 4th requisite.
place between the lessor & lessee if the lessee’s obligation to
pay the lessor rent is contingent on a prior payment by a third 5) Over neither of them there be any retention or controversy, commenced by
party to the lessee. 3rd persons & communicated in due time to the debtor.
o Due time – the period before legal compensation was supposed to
Class DIscussion take place, considering that legal compensation operates so long as
Q: A owes B P1K. B owes A P1K. Both are payable on March 1. Can compensation the requisites concur, even without any conscious intent on the part of
arrive at March 5? the parties.
A: No. There must be a demand for payment for them to be considered due & § A controversy communicated to the parties after that time
demandable. CANNOT undo the compensation that had taken place by force
of law, lest the law concerning legal compensation be for
4) The debts are liquidated & demandable. naught.
o The debt must be determined & certain. o Ex. A owes B P1,000, due on May 3, 1999. B is likewise indebted to A
§ Compensation cannot take place where one of the debts is not in the same amount due on May 23, 1999. Legal compensation
liquidated, as when there is a running interest still to be paid therefore could set in on May 23, 1999.
thereon. § D filed suit against A & obtained a favorable resolution from the
o CASE: Compania Maritima v. CA court garnishing all money & credits of A, including the
§ Facts: X owed Y the sum of P40,797.54. There was legal indebtedness of B in A’s favor. If it were only on June 1, 1999
interest payable from Feb. 3, 1951 on said debt, representing that B was able to know of the garnishment, legal compensation

has already set in. D cannot anymore make use of the credits of • Hence, if A owes Z P2,000 & Z owes A P500, compensation can occur but
A against B to satisfy A’s obligation in his (D’s) favor. only on a partial basis. Z’s indebtedness will be extinguished, but A’s
§ BUT: If B were notified on May 20, 1999, there can be no indebtedness will subsist but partially extinguished to the extent of P500,
compensation of the mutual debts of A & B against each other reducing liability to of P1,500.
as the controversy commenced by D, a 3rd person, was duly
communicated at a time before legal compensation could set in. CASE: Mondragon Personal Sales v. Sola
Lesson: Legal compensation may be partial.
Class Scenario Facts: X owed Y P125K based on a contract of services where Y provided X with
Q: Company X owes Y P10,000 which Company X borrowed from Y. Y, on the other bodega facilities. On the other hand, Y owed X P1.9M based on a franchise
hand, owes X for a share of stocks from Y that he hasn’t paid fully yet. Can there be distributorship agreement. When X stopped paying for the bodega services, Y locked
compensation? up the bodega. Later, Y asked for rescission of the contract. Can the contract for
A: NO. A person buying stocks from a company is not indebtedness on the part of the bodega services be rescinded?
buyer of the stocks. Thus, there can be no legal compensation, because the law Held: No. There has already been partial legal compensation in this case. Hence,
defines it as a situation where 2 persons “are mutually creditors & debtors of each there is no basis for Y to ask for rescission especially since Y was the one to first
other.” breach the contract when he padlocked the bodega. In a previous letter, Y
acknowledged that he was indebted to X.
Class Discussion Hence, in this case, compensation is proper to the extent of the 125K X owes Y,
The contract should at least be voidable for compensation to take place. since Y owes P1.9M to X.
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor Article 1282. The parties may agree upon the compensation of debts which are not
may set up compensation as regards what the creditor may owe the principal debtor. yet due.
Guarantor When Not Yet Due

• A person who promises to pay the creditor in the event that the principal • GR: Compensation can only occur when the debts are due & demandable
debtor fails to pay the indebtedness. (legal compensation)
o Before the creditor can go against a guarantor, the creditor must first • BUT: The parties may agree upon the compensation of debts which are not
exhaust all possible ways to collect the debt from the principal debtor yet due. (Contractual compensation)
§ UNLESS the guarantor binds himself solidarily with the • Hence, if A owes Z P1,000 due on Apr. 11 & Z is indebted to A in the same
principal debtor. amount but due on May 7, there can be no compensation on Apr. 11.
o If the creditor goes against the guarantor, the latter can resist o BUT: Z & A can agree that, even if May 7 has not yet arrived, their
payment by invoking compensation between the creditor & the mutual indebtedness compensate each other so that their respective
principal debtor. obligations are extinguished.
• “Notwithstanding the provisions of the preceding article”
o Even if the guarantor & the principal creditor are not mutual debtors & Article 1283. If one of the parties to a suit over an obligation has a claim for
creditors of each other, the obligation of the guarantor can be damages against the other, the former may set it off by proving his right to said
extinguished by invoking compensation in so far as the principal damages and the amount thereof.
debtor is concerned.
o EXC to GR: Here, the 1st element is missing Judicial Set-Off
• Happens when one of the parties to a suit over an obligation has a claim for
Article 1281. Compensation may be total or partial. When the two debts are of the damages against the other
same amount, there is a total compensation. • A files a collection case against B for P1,000.
o B can file a counterclaim in the same amount claiming damages
Total & Partial Compensation arising from the same or different transaction & requesting the court
• Total compensation - when the mutual debts of the parties to each other are to just set-off the damages.
equal. o If the court agrees, then there can be compensation.
• Partial compensation - when the debts are not equal, in which case, the
debts are extinguished to the concurrent amount. CASE: Ong v. CA

Lesson: For judicial set-off to apply, the amount of damages or the claim sought to o Ex. X owes Z P1,000 due on Apr. 12. Z is likewise indebted to X in the
be compensated must be duly proven. same amount due on May 6. On Apr. 14, Z assigned his credit to O
Facts: X owed Y money, & X deposited zippers with Y, though it was not shown that Y with the consent of X who does not make any reservation as to his
had asked for the zippers or even needed it for business. Can there be judicial set- right of compensation which could occur on May 6.
off? § On May 7, O demands payment from X the amount of P1,000
Held: No. X has not proved the right to any damage as a result of the claimed which has been assigned to him by Z. X CANNOT resist
retention of the zippers by Y. There was also no proof of the amount of such payment by claiming that the amount of indebtedness of Z in
damages as X could not even say how many of the zippers had been earlier his favor may be applied in compensation of the said amount
withdrawn by him. of P1,000 assigned by Z to O.
§ BUT: If at the time X gives his consent to the assignment, he
Article 1284. When one or both debts are rescissible or voidable, they may be reserves his right to the compensation, he can validly invoke
compensated against each other before they are judicially rescinded or avoided. that the obligation has been extinguished through
compensation.
Rescissible Debt o CASE: Perez v. CA
• Valid up to the time it is rescinded or annulled § Facts: A finance company issued to an investor 2 promissory
• If all the requisites for a valid compensation are present before a contract is notes to mature originally on Aug. 6 & Aug. 13, 1974,
rescinded, the compensation can occur by operation of law respectively. The commercial papers were rolled-over so that
• Ex. If A is indebted to B for P1,000 & the latter is likewise indebted to A for their maturity dates were extended to Oct. 4 & Oct. 11, 1974
the same amount which are both due & demandable, compensation will respectively.
occur even if the loan obtained by B from A was procured through force & • The same finance corporation was the creditor with
intimidation, therefore making the same voidable, for as long as such debt respect to a certain obligation to mature on Aug. 5, 1994
has not yet been annulled. as against Company X to whom the 2 credits of the
investor, which were to mature on Oct. 4 & 11, 1974,
*Article 1285. The debtor who has consented to the assignment of rights made by a respectively, were assigned on Sept. 9, 1974.
creditor in favor of a third person, cannot set up against the assignee the Compensation was being claimed on the basis of the Art.
compensation which would pertain to him against the assignor, unless the assignor 1285, par. 3. Can there be compensation?
was notified by the debtor at the time he gave his consent, that he reserved his right § Held: No, applying Art. 1285, par. 1. The debtor cannot claim
to the compensation. that he had no knowledge of the assignment in view of the
If the creditor communicated the cession to him but the debtor did not consent special nature of money market transactions
thereto, the latter may set up the compensation of debts previous to the cession, but • The impersonal character of the money market device
not of subsequent ones. overlooks the individuals or entities concerned.
If the assignment is made without the knowledge of the debtor, he may set up the o “Implied” knowledge of free assignment (& consent)
compensation of all credits prior to the same & also later ones until he had • The issuer of a commercial paper in the money market
knowledge of the assignment. necessarily knows in advance that it would be
expeditiously transacted & transferred to any
Cession investor/lender without need of notice to said issuer.
• In this Article, this involves transfer of title, like a sale or donation • In practice, non-notification is given to the borrower or
• Valid even without consent of debtor issuer of commercial paper of the sale or transfer to the
• Another exception to the rule that only the principal creditors & debtors can investor.
claim from each other 2) When the creditor communicated the cession to the debtor but the debtor did
• There is a novation — a change in the person of the creditor not consent thereto, the latter may set up the compensation of debts
previous to the cession, but not of subsequent ones
o X owes Y P1,000 due on Apr. 12 & P2,000 due on May 10. Y also
3 Cases When the Debtor Assigns His Credit to a 3rd Person
1) When the debtor has consented to the assignment of rights made by a owes X P1,000 due on May 6 & P2,000 due on May 9.
§ On May 7, Y assigns all his credits to O but X does not consent
creditor in favor of a 3rd person, the debtor cannot set up against the
assignee the compensation which would pertain to him against the assignor, to the assignment.
§ On June 1, O demands payment from X of the 1st P1,000 & the
unless the assignor was notified by the debtor at the time he gave his
consent, that he reserved his right to the compensation 2nd P2,000 assigned to him by Y. X can resist payment of the

P1,000 on the ground that compensation has taken place Q: A is the creditor, B is the debtor. A, as assignor, assigns his credit to X (the
because the 1st debts became due before the cession, but he assignee). Is B’s consent needed for A’s assignment to X?
cannot set up compensation as to the P2,000 which has A: No.
become due after the cession. Q: If this is conventional subrogation and not assignment of credit, is B’s consent
3) When the assignment is made without the knowledge of the debtor, he may needed?
set up the compensation of all credits prior to the same & also later ones A: Yes. Conventional subrogation and assignment of credit are NOT the same. In
until he has knowledge of the assignment. conventional subrogation, the consent of all parties must be obtained for the validity
o Ex. from 2nd case: If X is informed by Y only on May 15 that he has of the arrangement.
assigned all his credits to O, & the latter demands payment of the 1st Q: Given the scenario of assignment, where A and B are mutual creditors and
P1,000 & the 2nd P2,000 on June 1, X can invoke that all the debtors of one another, can B assert compensation as against X in relation to his
indebtedness was extinguished because compensation has set in. credit as against A?
o CASE: Sesbreño v. CA A: If there is consent by B, there will be no compensation. B cannot invoke
§ Lesson: It is the time that the debtor learns of the assignment compensation as against X, unless B, at the time of assignment, reserves his right to
that is determinative, rather than the time it is actually the compensation.
assigned. Q: When there is knowledge but no consent on the part of B, will compensation lie?
o Art. 1626 – “The debtor who, before having knowledge A: Compensation will lie only as to those PRIOR to the cession.
of the assignment, pays his creditor shall be released Q: What if there is no knowledge?
from the obligation.” A: Compensation will happen as to transactions BEFORE and AFTER the cession,
o If a man pays his debt before notice of the assignment, BUT before knowledge. In short, compensation will happen as to anything before
the law exonerates him. It is the duty of the person who knowledge.
has acquired a title by transfer to give his debtor notice
to demand payment of debt. Article 1286. Compensation takes place by operation of law, even though the debts
§ Facts: Philfinance was indebted to Delta, evidenced by may be payable at different places, but there shall be an indemnity for expenses of
promissory note 1. The latter was likewise indebted to the exchange or transportation to the place of payment.
former evidenced by promissory note 2. Philfinance assigned
promissory note 1 to Sesbreño, one of Philfinance’s creditors, Operation of Law
who only notified Delta of such assignment after the • If all the requisites under Art. 1279 are present, compensation takes place by
indebtedness of Delta in favor of Philfinance & the operation of law.
indebtedness of Philfinance in favor of Delta both became o The parties need not notify each other that they intend to have their
mutually due. Despite the said maturities of said debts, debts compensated.
Sesbreño decided to claim from Delta on the basis of the • Indemnity for expenses of exchange or transportation to the place of payment
assigned credit made to him by Philfinance. Can Sesbreño still can arise only if there is partial compensation.
make the claim? o Ex. If A owes B P1,000 payable in Davao but B owes A P500 in
§ Held: No. Sesbreño could no longer claim from Delta because Marikina, then there is only partial compensation. A has to go to
he notified Delta of his rights as assignee after compensation Marikina for him to receive the payment of B for the balance of P500.
had taken place by operation of law, even if he received the A, the creditor, should be reimbursed by the debtor the amount of
promissory note 1 prior to the co-terminal maturity date. transportation expenses A has incurred in going to Marikina because,
o “Co-terminal maturity” means maturity on the same under Art. 1247, the extrajudicial expenses required for payment shall
date, giving way to compensation be for the account of the debtor, unless it is otherwise stipulated.
o No man is bound to remain a debtor: he may pay to him • BUT: If there is complete compensation, the parties need not do anything as
with whom he contracted to pay; & if he pays before the obligations are completely extinguished.
notice that his debt has been assigned, the law holds o Ex. If A owes B P1,000 payable in Davao & B owes A the same amount
him exonerated, for the reason that it is the duty of the payable in Marikina & both are due, A and B do not have to go to the
person who has acquired a title by transfer to demand places of payment as the compensation here is complete and
payment of the debt, to give his debtor notice. therefore both obligations are totally extinguished.
Class Discussion Article 1287. Compensation shall not be proper when one of the debts arises from a
depositum or from the obligations of a depository or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support with the bank even if, under the law, a person who opens a deposit
due by gratuitous title, without prejudice to the provisions of par. 2 of Article 301. account in a bank is technically a creditor of that bank
Article 1288. Neither shall there be compensation if one of the debts consists in civil Article 1289. If a person should have against him several debts which are
liability arising from a penal offense. susceptible of compensation, the rules on the application of payments shall apply to
the order of the compensation.
No Compensation in the ff. cases even if there is Technically a Loan
1) Debts arising from a depositum or from the obligations of a depository Rules on Application of Payment
o A deposit is constituted from the moment a person receives a thing • If A owes X P3,000 due on April 11, 1997, & X owes A P3,000 without
belonging to another, with the obligation of safely keeping it & of interest, & another P3,000 with interest at 12% per annum in case of non-
returning the same payment, all due on April 11, 1997, there can be compensation.
o Ex. If A owes B P1,000 due on Apr. 11, & A deposited with B P1,000 o If X does not designate the indebtedness to which compensation will
only for safekeeping to be returned on Apr.11, 1977, there can be no apply, it will be applied to the most onerous debt which is the interest-
compensation come Apr. 11, 1997 as the obligation of B to return the bearing P3,000 debt. This is the most onerous because the payment
P1,000 arises from the obligations of a depository of the interest is necessarily most burdensome.
2) Debts arising from the obligations of a bailee in commodatum.
o The bailee in commodatum acquires the use of the thing loaned but Article 1290. When all the requisites mentioned in Article 1279 are present,
not its fruits compensation takes effect by operation of law, & extinguishes both to the
o Bailee is obliged to pay the ordinary expenses for the use & concurrent amount, even though the creditors and debtors are not aware of the
preservation of the thing loaned compensation.
o Bailee cannot retain the thing loaned on the ground that the bailor
owes him something, even though it may be by reason of expenses. Compensation: Automatic Extinguishment
o BUT: The bailee has the right of retention for damages mentioned in • Most expedient way of extinguishing an obligation
Art. 1951 • Automatic & occurs even though the creditors & debtors are not aware of the
3) Debts arising from duty to support. compensation
o Compensation cannot likewise apply if the other obligation is one of
support to the other party CASE: Mindanao Portland Cement v. CA
§ Ex. A father, who is required to give support to his son, cannot Lesson: Civil liabilities arising from civil obligations in 2 different suits featuring the
claim that he need not give the support considering that his same persons can compensate one another.
son owes him the same amount of money. Facts: A creditor was able to obtain in a civil case an award of attorney’s fees in the
o BUT: Support in arrears can be compensated or renounced (Art. 301, amount of P10,000 from the debtor, & the latter was also able to obtain a judgment
par. 1 of the Civil Code) in another civil case for attorney’s fees in the same amount from the former. Is there
§ Ex. If the father has not given his son P4,000 which is compensation?
equivalent to the previous 4 months of unremitted financial Held: Yes. Compensation has taken place.
support, but the same son owes the father P4,000, there can
be compensation CASE: Pioneer Insurance & Surety Co. v. CA
§ NOTE: The application of Art. 301, par. 2 is doubtful because it Lesson: The stipulation in the indemnity agreement allowing the surety to recover
has already been deleted by the New Family Code even before it paid the creditor is enforceable. In accordance therewith, the surety
4) Debts consisting of a civil liability arising from a penal offense may demand from the indemnitors even before paying the creditors.
o Ex. If A is indebted to B by virtue of a contract of loan & B is indebted Facts: In Sept. 8, 1987, X, a surety company, issued general warehousing bonds in
to A by virtue of an award of civil damages in favor of A as a result of favor of the Bureau of Customs for importation of raw materials in the total amount
B’s conviction in inflicting physical injuries on A, there can be no of P6,500. The bonds were issued on behalf of Company Y & its president, Z.
compensation. • To secure X against any & all damages & losses of whatever kind which X
o A criminal violation of the Trust Receipt Law which makes the obligor may incur as a consequence of its becoming a surety upon the bonds, Z & Y
financially & civilly liable to the contracting bank to the extent executed jointly & severally in favor of X indemnity agreements for said
indicated in the Trust Receipt contract cannot be extinguished by a bonds, promising to pay their debts to the Bureau.
claim of compensation of the amount of deposit which the obligor has • The indemnities was to be paid to X as soon as demand is received from the
Bureau or as soon as it becomes liable to make payment of any sum under

the terms of the bond, its renewal, extensions or substitutions whether the causing X’s liability to the Bureau of Customs cannot refuse the set-
said sum has actually been paid or not off.
• Y & Z failed to pay for their debt; thus the Bureau demanded payment from X o Consequently, legal compensation can take place between X, Y & Z,
the amount of P6,390,259. This amount eventually reached P9,031,000 in that is, X can partially set-off the insurance proceeds in the amount of
1983. P1,144,744.49 against its liability under the warehousing bonds
• In response to X’s demand letter, Y & Z promised to pay. The Bureau agreed which has been computed in the amount of P9,031,000.00 as of
with Y & Z for monthly installment payments of their obligation on condition 1983.
that Y & Z will make an initial payment of P500,000 & thereafter P400,000 • From the records, it is seen that the last demand letter of the Bureau of
monthly until fully paid pursuant to the 1st endorsement by the Bureau, dated Customs asking the petitioner to pay the value of the bonds was on 1981.
Sept. 22, 1976. However, other than the initial payment of P500,000 did not The records are silent on whether or not the Bureau of Customs sued either
pay. of the parties to enforce liability under the warehousing bonds. It may be
• In 1979, a fire gutted the Y’s factory destroying materials insured with X in noted that the petitioner admits its liability under the warehousing bonds.
the amount of P1,144,744. Y demanded from X payment of the proceeds of Since the issue is legal compensation & in order to avoid any miscarriage of
the insurance policy but X refused to pay claiming that said proceeds must be justice, the Court refers the issue on the enforcement of liability under the
applied by way of partial compensation against its liability with the Bureau bonds to the Bureau of Customs.
arising from the warehousing bonds.
• Y argued that they were not the creditors of X & the demands to pay made by SECTION 6. – NOVATION.
the Bureau did not create any liability & even if they did, the liability under the
warehousing bonds in favor of the Bureau of Customs was the liability of X, LECTURE FROM DEAN MEL
that petitioner did not pay the Bureau & Y has nothing to reimburse.
Is there legal compensation here? 2 Kinds of Novation
Held: Yes. There is legal compensation. 1. Objective novation – deals with change in the object or change in the principal
• X owes Y the amount representing the proceeds of the insurance policy. Y & condition
Z, however, try to negate their liability by claiming that they have no more • Express – by stipulation, it can be effected at present or in the future
liability because of the fortuitous event. At the same time however, Y & Z • Implied – the test is the incompatibility, in every point (this relates to the
admit liability when they argued that X was released from the same upon object, consent, and cause of the contract)
their agreement with the Bureau of Customs to make staggered payments. o Ex. If you shorten the period, there is novation
Finally, Y & Z argue that since X has not made any payment yet regarding the o Ex. If there is extension of period, there is no novation
amount demanded by the Bureau of Customs, there is nothing for which the o Ex. If there is a change in the accessory obligation (i.e, from mortgage
X should be reimbursed. to pledge), there is no novation because the principal obligation does
o It is needless to emphasize that at the time the fire occurred, Y & Z not change
with X had already incurred liability on the warehousing bonds with the o Ex. The court renders a decision that there must be right of
Bureau of Customs, as Y & Z failed to comply with the provisions of redemption. But after the decision, the parties enter into a
their undertaking. It is therefore, clear that as far as the P9,031,000 compromise that there will just be payment of P300,000. This is
is concerned, X, Y & Z were already liable to the Bureau when the fire considered novation.
happened. o Ex. If the change is to make a debt that was to be paid in lump sum to
o Neither can Y & Z claim that X was released from liability when they one by installment, there is no novation.
made arrangements with the Bureau of Customs for staggered 2. Subjective novation – change in debtor or change in the creditor (subrogation)
payments since the facts will bear out that other than the P500,000 • Expromission – there is a change of the debtor without the knowledge or
payment, no further payment was made by Y & Z, leading the Bureau against the consent of the old debtor, but with the agreement that the old
of Customs to go after X again. debtor’s obligation will be extinguished
• Clearly, X can demand reimbursement from the respondents even before it • Delegacion – the old debtor recommends a new debtor to replace him, and
has actually paid its obligation to the Bureau of Customs. the creditor agrees
o It can, in principle, be held liable under the warehouse bonds even
• What happens when there is insolvency? What if the new debtor becomes
before actual payment to the Bureau of Customs. The liability has
insolvent? Will it resurrect the obligation of the old debtor?
been fixed. What remains is simply its liquidation. The respondents o GR: There will be no revival of the old debtor’s obligation.
who defaulted on the agreement to make staggered payments thereby
o EXC: Delegacion, when the new debtor’s insolvency is known to the

o There was nothing to show the unequivocal intent of the parties to
old debtor, who recommended the new debtor
novate the 3 loan agreements when they consolidated
o The new promissory note still states “secured by REM (real estate
Q: A is the creditor. B is the debtor. X tells A, “When the debt of B becomes due, I will
mortgage)”
pay.” A says to B, “If your debt becomes due, X will pay.” The debt became due. A
o The new agreement merely restructured the previous 3 loans
collected from B. Is that collection proper?
A: Yes. In that scenario, there is no categorical, clear, and unmistakable agreement • No Subjective Novation:
that B’s obligation has been extinguished. X became only an ADDITIONAL DEBTOR, o The bare fact of the from a partnership to a corporation, without
and, at the most, a solidary debtor. sufficient evidence, either testimonial or documentary, that the
Q: Is novation presumed? debtors were expressly released from their obligations, did not make
A: NO, except in legal subrogation. the new corporate personality, a 3rd person or new debtor within the
context of a subjective novation.
o If at all, the new company only became a co-debtor or surety. Without
express release of the debtor from the obligation, any third party who
Article 1291. Obligations may be modified by: may thereafter assume the obligation shall be considered merely as
(1) Changing their object or principal conditions; co-debtor or surety.
(2) Substituting the person of the debtor;
(3) Subrogating a 3rd person in the rights of the creditor. Kinds of Novation
1) Subject – occurs when there is a change of either the person of the debtor,
Novation or of the creditor in an existing obligation
• *Civil Code refers to extinctive (not modificatory) novation o The old debtor MUST be released expressly from the obligation, &
o Extinguishes the totality of the contract 3rd person or new debtor assumes his place in the relation
• NEVER presumed; parties must be expressly agreed that the previous § No novation without such release as the 3rd person who
obligation is extinguished & the new one replaces it has assumed the debtor’s obligation becomes merely a
o EXC: It may be implied where there is total incompatibility in all co-debtor or surety
aspects, on every point 2) Objective – occurs when there is a change of the object or principal
• Unlike the other forms of extinguishment, it is a juridical act with a dual conditions of an existing obligation
function: o The new obligation MUST expressly declare that the old obligation
o It extinguishes the obligation is thereby extinguished, or that the new obligation be on every
o It creates a new one in lieu of the old point incompatible with the new one
3) Mixed – when the change of the object or principal conditions of an
*CASE: Ajax Marketing & Development Co. v. CA obligation occurs at the same time with the change of either the person of
Lessons: (1) To effect an objective novation it is imperative that the new obligation the debtor or creditor
expressly declare that the old obligation is thereby extinguished, or that the new
obligation be on every point incompatible with the new one. No Form Necessary
(2) To effect a subjective novation by a change in the person of the debtor it is • GR: No form of words or writing is necessary to give effect to a novation
necessary that the old debtor be released expressly from the obligation, & the 3rd • Ex. An oral lease agreement can validly novate a contract to sell provided that
person or new debtor assumes his place in the relation. it can be shown that:
(3) There is no novation without such release as the 3rd person who has assumed o The intent to novate was present &
the debtor’s obligation becomes merely a co-debtor or surety. o The terms are truly incompatible in every respect
Facts: Petitioners’ 3 debts (secured by continuing real estate mortgages also
intended to secure future indebtedness, including renewals & extensions) were *CASE: SM Systems Co. v. Camerino
consolidated into 1 debt with the original debtors incorporating themselves into a Lesson: Judgments can be novated by subsequent compromise agreements.
corporation for purposes of the consolidated debt. Facts: Farmers, in a compromise agreement executed subsequent to a final
The original debtors claimed that there was novation considering the resulting judgment, waived their right to redemption & agreed to be paid P300,000. This was
consolidation, & the change in the person of the debtor; they also claimed the not the tenor of the final judgment. Is the agreement valid?
mortgaged property had been discharged. Was there novation? Held: Yes. This simply constitutes a novation of the said judgment.
Held: No. There was no subjective or objective novation.
• No Objective Novation: Article 1292. In order that an obligation may be extinguished by another which

substitute the same, it is imperative that it be so declared in unequivocal terms, or Lesson: An extension of deadline for a loan is not novation.
that the old & the new obligations be on every point incompatible with each other. Facts: The creditor granted an extension of the deadline for the loan, among other
new conditions, in a newly executed contract. The debtor now claims there has been
2 Distinct, Successive Contracts novation. Is there novation?
• ALL parties must consent Held: No. An obligation to pay a sum of money is NOT novated in a new instrument
• No novation unless 2 distinct & successive binding contracts take place, with by changing the term of payment & adding other obligations not incompatible with
the later one designed to replace the preceding convention. the old one. The new terms must be completely irreconcilable to be called novation.
• There is NO novation when:
o A subsequent contract is designed to novate a previous contract, but *CASE: Guerrero v. CA
not all parties to the original contract consented to or are made Lesson: There is no novation when a new agreement is executed between the
parties in the subsequent contract creditor & 1 of the solidary debtors regarding the payment of a solidary debt. The
o Modifications are introduced before a bargain becomes obligatory. creditor can definitely still go after the other solidary debtors.
• Ex. Dacion en pago is a form of novation in which a change takes place in the Facts: X, Y & Z executed an agreement of counter-guaranty in favor of a surety
object (originally a payment in money, substituted for something else) corporation binding themselves solidarily for any claim the surety may have against
involved in the original contract. them.
• Upon default in the payment of the obligation, the surety corporation sued X
Kinds of Novation & consequently obtained a favorable judgment on the basis of a compromise
• Express - It so expressly declares in certain terms agreement directing X to pay the whole obligation
o “Expressly” - the contracting parties incontrovertibly disclose that their • Upon failure to satisfy the judgment, the surety corporation filed a case
object in executing the new contract is to extinguish the old one against Y for the collection of the same amount of money
o Ex. If an old promissory note is replaced by a new promissory note • Y resisted on the ground that the previous judgment in the civil case against
which expressly states that the new note is meant “to cancel” the old X novated the contract of indemnity & released Y from its obligation.
one Was there novation?
o Ex. If a contract to sell of a condominium unit was executed after the Held: There was no novation. The agreement of “counter-guaranty” is not irrevocably
lessor & the lessee executed their lease contract, the former does irreconcilable with the compromise agreement.
NOT necessarily novate the latter absent any clear expression of the The choice of the creditor to first attempt to get payment from just X does not mean
intention to novate that the debt of Y & Z had been novated.
• Implied - When the old obligation is completely incompatible with the new
obligation in every aspect *CASE: Magdalana Estates, Inc. v. Rodriguez
o No specific form required Lesson: An obligation to pay a sum of money is not novated, in a new instrument
o Irreconcilabe incompatibility between the old & new obligation wherein the old is ratified by:
o Acts which are too clear & unequivocal to be mistaken • Changing only the terms of payment & adding other obligations not
o Test of incompatibility – WON the 2 obligations can stand together, incompatible with the old one, or
each one having its independent existence • Wherein the old contract is merely supplemented by the new one
o Changes must be essential in nature & not merely accidental Facts: X bought a property from Y, & issued a promissory note with interest. X also
§ Must take place in any of the essential elements of the procured a bond from a surety company for the payment of the principal.
obligation, such as its object, cause or principal conditions • Y accepted without reservation the agreement set forth in the surety bond
thereof which however did not make provisions on the interest.
• OTHERWISE, the change would be merely modificatory • X contended that the surety bond novated his obligation with respect to the
& insufficient to extinguish the original obligation interest.
Was there novation?
4 Essential Elements of Novation Held: No. The mere fact that the creditor receives a guaranty or accepts the
1) A previous valid obligation payments from a 3rd person who has agreed to assume the obligation, when there is
2) The agreement of all the parties to the new contract (consent) no agreement that the 1st debtor shall be released form responsibility, does not
3) The extinguishment of the old contract constitute a novation, & the creditor can still enforce the obligation against the
4) Validity of the new one original debtor.
The surety is just an accessory obligation of the promissory note.
*CASE: Garcia, Jr. v. CA

*CASE: Cochingyan v. R&B Surety & Insurance Co. o The later contract contained conditions, “positive covenants” &
Lesson: Where the parties to the new obligation expressly recognize the continuing “negative covenants” not found in the earlier obligation. As an
existence & validity of the old one, & where, in other words, the parties expressly example of a positive covenant, the Borrower undertook “from time to
negated the lapsing of the old obligation, there can be no novation. The issue of time & upon request by the Lender, (to) perform such further acts
implied novation is not reached at all. &/or execute & deliver such additional documents as may be
Facts: In a trust agreement, the trustor bound itself to pay to the creditor-beneficiary necessary or proper to effectively carry out the provisions & purposes
whatever amount the debtors have to pay to the creditor-beneficiary. of this Loan Agreement.”
The principal loan involved in the trust agreement was previously secured by a bond o Likewise, SIMC agreed that it would not create any mortgage or
issued by a surety company. Did the trust agreement novate the surety agreement? encumbrance on any asset owned or hereafter acquired, nor would it
Held: No, because since it did not expressly terminate the obligation under the participate in any merger or consolidation.
surety. Was there novation?
The trust merely brought in other persons to assume the same obligation directly, Held: Yes. The original loan agreement was novated by a new one, as evidenced by
since the trustor in this case was already previously bound subsidiarily when it the acts of the parties & the terms of the new agreement.
secured the bond issued by the surety.
It is not unusual in business for a stranger to a contract to assume obligations Article 1293. Novation which consists in substituting a new debtor in the place of the
thereunder (e.g., a contract of suretyship or guarantee). The legal effect is the original one, may be made even without the knowledge or against the will of the
increase of the number of persons liable to the obligee, & not the extinguishment of latter, but not without the consent of the creditor. Payment by the new debtor gives
the liability of the 1st debtor. him the rights mentioned in Article 1236 & 1237.
CASE: Fortune Motors Inc. v. CA Article 1294. If the substitution is without the knowledge or against the will of the
Lesson: A surety & financing agreement, where the financing agreement merely debtor, the new debtor’s insolvency or non-fulfillment of the obligation shall not give
details the nuances of the surety, cannot novate one another. rise to any liability on the part of the original debtor.
Facts: A surety agreement was executed between petitioners & respondents, with
the respondent-surety absolutely, unconditionally & solidarily guaranteeing the full, Subjective Novation
faithful and prompt performance, payment & discharge of all obligations of • The creditor MUST always be aware of the novation.
petitioners; there were no qualifications or conditions therein. o Ex. An assignment of a lease contract by the lessee to a 3rd party must
A new financing agreement was executed, & now the petitioners claim that the new get the consent of the lessor because such assignment would involve
financing agreement contain onerous obligations not contemplated in the surety the transfer, not only of rights but also of obligations. It constitutes
undertakings, thus changing the principal term thereof & effecting a novation. Was novation by substitution of the person of one of the parties, namely
there novation? the lessee-debtor.
Held: No. The financing agreement merely detailed the obligations of one of the • The old debtor need not know, though this carries certain effects.
parties without changing the nature of the previous agreement. The agreements can
stand together without conflict because one is accessory to the other. CASE: Bangayan v. CA
Lesson: An assignment of a lease contract by the lessee must have the lessor’s
CASE: Security Bank & Trust v. Cuerva consent, because such assignment involves the transfer not only of rights but also of
Facts: There was a 1980 credit accommodation, followed by a 1989 loan obligations. It constitutes novation by the substitution of the person of one of the
agreement. In the terms of the 1989 agreement, it was stated that it would be parties – the lessee-debtor.
applied “to liquidate the principal portion of the Borrower’s present total outstanding
indebtedness in the Lender (the “Indebtedness”) while the 2nd Loan shall be applied CASE: Gaw v. IAC
to liquidate the past due interest & penalty portion of the indebtedness.” Lesson: The change in the principal object or conditions, the substitution of the
• There was also testimony of an officer of the bank that the proceeds of the person of the debtor, the subrogation of a 3rd person in the rights of the creditor
1989 Loan Agreement were used “to pay-off” the original indebtedness. must all involve a clear & manifest intent to extinguish the old obligation & to
• Several incompatibilities between the 1989 Agreement & the 1980 original release the debtor from such old obligation.
obligation: Facts: X entered into an exclusive dealership agreement with a Company Y to sell the
o While the 1980 credit accommodation stipulated that the amount of Y’s product.
loan was not to exceed P8 million, the 1989 Agreement provided that • X entered into a co-terminous marketing agreement with Z for the latter to
the loan was P12.2 million. The periods for payment were also market the products & to obtain funds to fulfill the deposit required by
different. company Y. Such deposit, upon being tendered by Z, was refused by Y for fear

that it might violate the exclusive dealership agreement with X. Y said that it o Without knowledge or consent of X, O commits to pay the
would accept provided it be made under the name of X. indebtedness of X.
• X argued that the new agreement between X & Z was Z’s attempt “to step § Should it become due, Y can still claim from X the said
into the shoes” of X, & novation exists. indebtedness on due date, despite O’s commitment, because
Is there novation? there is no novation.
Held: No. The co-terminous marketing agreement did not novate the dealership § There is nothing in the commitment of O that clearly shows the
agreement. intention of O to release X from his obligation. O only became
Though the agreement between X & Z is related to the agreement between X & Y, as an additional debtor.
the term of the former is co-terminous with the latter, the new agreement was o BUT: If Y agrees that the obligation of X is to be extinguished upon
merely an “attempted novation.” O’s making the commitment to pay the indebtedness of X, there is a
Not only was X not released from complying with the terms and conditions of the novation.
dealership agreement but he was, in a sense, already implementing the latter. § If O later on makes a partial payment of P500, Y cannot go
Novation SHOULD create a new obligation. against X for the balance, as his obligation has already been
extinguished in so far as Y is concerned.
CASE: Odiamar v. Odiamar Valencia • O can demand reimbursement from X, not of the
Lesson: (1) For a change in the debtor, the change must also clearly release the old whole P1,000, but only P500, the amount which
debtor from the obligation. benefited X, pursuant to Art. 1236 par. 2.14
(2) Novation is never presumed, & the animus novandi (intent to novate), whether § If O pays the whole amount, then he can recover the full
wholly or partially, must appear by express agreement of the parties, or by their acts amount from X.
that are too clear to be mistaken. o BUT: In all these cases, if the original indebtedness of X to Y is
Facts: Spouses X & Y were indebted to Z. When the Spouses were already dead, B, secured by a mortgage on the house of X & the payment of the
child of X & Y, manifested a desire to shoulder the debt of P2.1M that her parents indebtedness of X is made by O, he CANNOT compel X to subrogate
owed to Z. Later, in a dispute regarding this debt, Z argued that novation applied him in his rights, such as those arising from mortgage, guaranty or
against B & that B should now be solely liable to shoulder the P2.1M debt of her penalty.
parents; thus, it would be correct on Z’s part to run after B instead of going to the § Hence, if X fails to reimburse O, the latter cannot make use
estate. Is Z correct? of the mortgage which has been constituted on the
Held: No. To constitute novation by substitution of debtor, the former debtor must be indebtedness, pursuant to Art. 1237 of the Civil Code.15
expressly released from the obligation & the new debtor must assume the former’s o In the event that after O commits to pay the indebtedness of X which,
place in the contractual relations. upon agreement with Y releases X from his obligation with Y, O
The fact that the creditor accepts payments from a third person, who has assumed becomes insolvent or does not pay Y the indebtedness upon demand
the obligation, will result merely in the addition of debtors & not novation. by Y on due date, Y can no longer go against the original debtor, X, to
Here, the intent to novate was not satisfactorily shown. At best, B only manifested a claim the debt, as the latter’s obligation has already been
desire to shoulder the debt of her parents, which does not amount to novation. It is extinguished through novation.
wrong to hold B liable for the debts of Spouses X & Y on account of novation.
*CASE: Ever Electrical Manufacturing Inc. v. PBCOM
Novation through Debtor Facts: V committed to pay the indebtedness of E in favor of PBCOM, anchored on the
• Novation through the replacement of the old debtor by a new debtor may be contractual stipulation that V “has offered to assume full liability to undertake
with or without the initiative of the old debtor. payment of all past due accounts of E.” Is there novation?
• Delegacion - If the old debtor, to extinguish his obligation, suggests to the Held: No, considering that in the same contract, there was a phrase that “there is
creditor that he be substituted by a new debtor of his choice & the creditor nothing to be construed from the above-stated stipulation that E is released from its
agrees obligation.” V is merely an additional person who would ensure that the loan of E to
• Expromission - If the old debtor is substituted without the knowledge or PBCOM would be paid.
consent of the old debtor & the obligation is extinguished
• In both delegacion & expromission, the consent of the creditor is
14 “Whoever pays for another may demand from the debtor what he has paid, except that if he paid without
indispensable. the knowledge of the debtor or against his will, he can recover only insofar as the payment has been
beneficial to the debtor.”
Illustrative Example 15 “Whoever pays on behalf of the debtor without the knowledge or against the will of the debtor, cannot
• X is indebted to Y in the amount of P1,000. compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or
penalty.”

matures, the indebtedness of Z would have already been paid. This is
Article 1295. The insolvency of the new debtor, who has been proposed by the made because Z has no cash to pay the P12,000 obligation to X.
original debtor & accepted by the creditor, shall not revive the action of the latter § On the 11th month, X & Y decide to consolidate the P100,000
against the original obligor, except when said insolvency was already existing & of loan with the other P700,000 loan which X owes in favor of Y
public knowledge, or known to the debtor, when he delegated his debt. &, in so doing, they expressly agreed in the consolidation-
document that the loan of P100,000 shall in effect cease & be
Insolvency of New Debtor integrated in the P700,000 with a lower interest rate & payable
• When there is delegacion, the obligation of the old debtor to make payment is for a longer period of time without any collateral.
completely extinguished. § Z did not consent to this arrangement as it would clearly
o In the event that the new debtor is insolvent, the creditor cannot go prejudice him. Z’s mortgage therefore may subsist for the
against the old debtor to collect the debt. remaining month attached to the principal new obligation. X
will still accept the mortgage of Z as payment of P1,000 for the
2 Cases When the Creditor Can Still Go Against the Old Debtor last month, thereby extinguishing Z’s obligation
1) When the insolvency of the new debtor has already been existing & of public
knowledge at the time of the delegation by the old debtor Article 1297. If the new obligation is void, the original one shall subsist, unless the
2) When the insolvency of the new debtor is known to the old debtor when he parties intended that the former relation should be extinguished in any event.
delegates his debt
*NOTE: In both cases – Subsequent Void Obligation
1) The creditor must NOT know that the new debtor is insolvent; otherwise, he • A subsequent void obligation intended to novate an old one has no legal
would be considered in estoppel effect & will be considered as not having been agreed upon in the first place.
2) The insolvency must have existed at the time the old debtor delegated his The original obligation shall subsist.
debt. o BUT: If in coming up with the new but void obligation, the parties agree
that it shall in any event extinguish the old obligation, then such old
Class Discussion obligation will not be revived.
Q: A is the original creditor; B is the original debtor. X tells A that he will pay B’s • Ex. If X is bound to give Y a car & this is novated by binding X to give instead
debts. B agrees. However, A nevertheless collects from B. Is there novation? his future inheritance from his father’s death to Y, the latter new obligation is
A: NO. X becomes merely a co-debtor of B. There is no categorical extinguishment of void because, according to the law, future inheritance cannot be the object of
the liability of B. Thus, there is no novation. a contract. This new void obligation will not be deemed to have been entered
into & the old obligation will be revived.
Article 1296. When the principal obligation is extinguished in consequence of a o BUT: If the parties agree that the act of entering into the new but void
novation, accessory obligations may subsist only insofar as they may benefit 3rd obligation will in any event extinguish the old one, then it will not be
persons who did not give their consent. revived.
Effect on Accessory Obligations Article 1298. The novation is void if the original obligation was void, except when
• The accessory always follows the principal. If the principal is extinguished, the annulment may be claimed only by the debtor, or when ratification validates acts
accessory goes with it. which are voidable.
o All accessory obligations such as those arising from a contract of
mortgage, guarantee, and pledge are likewise extinguished. Void or Voidable Novation
• BUT: The law likewise says that the accessory obligation may subsist only • Novation of a principal obligation definitely presupposes a previously existing
insofar as they may benefit third persons who do not give their consent. obligation which is valid.
o Ex. X borrows P100,000 from Y to be paid after 12 months. The loan • If the previously existing obligation is void, a subsequent obligation intending
is secured by a real estate mortgage of Z’s house. The mortgage is to to novate it shall likewise be void
be effective only for 12 months. In constituting his house as security o UNLESS it is clear that such subsequent one can stand on itself &
for the loan of X, Z agrees to be paid by X the amount of P1,000 for as without any reference to the old one.
long as the loan secured by the mortgage exists. However, instead of • If the original obligation is merely voidable, it means that it is valid up to the
paying Z the said amount, X will just apply the P1,000 to the P12,000 time it is annulled. Hence, it CAN be novated before it is annulled.
indebtedness of Z in X’s favor such that by the time the 12-month loan o Ex. If, through force & intimidation, X was obliged to give Y a car &
later the prestation was novated, again through force & intimidation,

in such a way that X is now obliged to give Y not a car but a house, it is
only X who can file a case for annulment of the obligation. Article 1301. Conventional subrogation of a third person requires the consent of the
§ If X does not do so, the new obligation may be given effect. original parties & of the third person.
§ Also, if, after the obligation was novated, X asks for an increase
in the price of the house & Y agrees, then the obligation is Conventional Subrogation & Consent
ratified because of the act of X. • Conventional subrogation must be agreed upon by the debtor, new creditor &
the old creditor. It is therefore contractual.
Article 1299. If the original obligation was subject to a suspensive or resolutory o For the substitution of the creditor to be legally complete in all
condition, the new obligation shall be under the same condition, unless it is aspects, all parties must agree to the same.
otherwise stipulated. • If the debtor does not agree & the 3rd party makes payment to the creditor,
such third party can demand payment from the debtor up to the extent the
Illustrative Example latter has been benefited, but cannot compel the creditor to subrogate him
• If X is bound to give Y a house only if he passes his law course & thereafter (3rd party) in his rights, such as those arising from mortgage, guaranty, or
the obligation is novated such that X instead is bound to give Y a car without penalty
any statement as to the suspensive condition, it shall be deemed that the
giving of the car is likewise subject to Y passing his law course. Article 1302. It is presumed that there is legal subrogation:
o In order not to subject the obligation to the previous suspensive (1) When a creditor pays another creditor who is preferred, even without the
condition, there must be an express statement to that effect in the debtor’s knowledge;
new obligation as novated. (2) When a 3rd person, not interested in the obligation, pays with the express or
tacit approval of the debtor;
Class Discussion (3) When, even without the knowledge of the debtor, a person interested in the
Q: X will give Y a ballpen if it rains next month. However, the 2 decide to novate the fulfillment of the obligation pays, without prejudice to the effects of confusion
contract so it says, “X will give Y the ballpen” without mentioning the condition. Will as to the latter’s share.
the condition still apply?
A: Yes. Thus, the parties must agree & always read the 1st & 2nd contract. GR: Novation is NOT Presumed
EXC: Art. 1302
Article 1300. Subrogation of a 3rd person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in 3 Cases When Legal Subrogation is Presumed
this Code; the latter must be clearly established in order that it may take effect. 1) When a creditor pays another creditor who is preferred, even without the
debtor’s knowledge
Subrogation o Under our law, claims for the unpaid price of movables sold, on said
• The transfer of all the rights of the creditor to a 3rd person, who substitutes movables, so long as they are in the possession of the debtor, up to
him in all his rights the value of the same is a preferred credit.
• Types of subrogation: § Any creditor who owns such credit is a preferred creditor & if
o Legal subrogation - that which takes effect by mandate of law & does another creditor pays off the unpaid purchase price of the
not proceed from an agreement of the parties movable, such paying creditor will be presumed to have been
§ The law that is the basis of the subrogation must be clearly subrogated to the rights of the creditor who originally owned
identified & invoked to enforce the rights pertinent thereto. the credit
o Conventional subrogation - must be clearly established by the 2) When a 3rd person, not interested in the obligation, pays with the express or
unequivocal terms of the substituting obligation or by the evident tacit approval of the debtor
incompatibility of the new and old obligations on every point. o The debtor, in effect, agrees to the payment & hence there exists
• Both kinds principally involve the change in the person of the creditor something similar to a conventional subrogation
o Ex. X is indebted to B for P10,000 secured by a mortgage on X’s o CASE: Chempil v. CA
house. For consideration paid to B, Y, with the consent of X, assumes § Facts: The petitioner bought some shares from the debtor in
the credit with the stipulation that X’s obligation against B is exchange for money; the shares, however, which were owned
extinguished such that B can no longer collect from X. Y becomes the by the debtor, were being kept by a bank to satisfy the debtor’s
new creditor who can enforce the claim, & if X cannot pay, Y can debt. The petitioner claimed that he was subrogated to the
foreclose on the mortgage. rights of the creditor when he paid the indebtedness of the

debtor to the bank. The money used for payment belonged to Article 1303. Subrogation transfers to the person subrogated the credit with all the
the debtor. Was there subrogation? rights thereto appertaining, either against the debtor or against 3rd persons, be they
§ Held: No. There is no subrogation. The exact wording of the guarantors or possessors of mortgages, subject to stipulation in a conventional
contract between the petitioner & the debtor stated that there subrogation.
was to be an order of preference for the money the debtor
would give petitioner, & 1st on the list was the use of the money Effects of Subrogation
to pay the creditor, as soon as the SC ruled on just how much • Generally, 3rd person “steps into the shoes” of the creditor & becomes the
the debtor owed the creditor. The debtor merely paid his debt new creditor.
to the bank via the petitioner, as if the petitioner were a 3rd • BUT: In conventional subrogation, the parties may stipulate the nature, limits,
party agent. Thus, the bank remained the creditor & no extent & scope of the subrogation provided these are not contrary to law,
subrogation took place. morals, good customs, public order, or public policy.
• Furthermore, the petitioner claimed to be the
subrogated new debtor under Art. 1302 (2), but SC said CASE: Liam v. UCPB
it was not actually a disinterested party, because the Lesson: An assignment of credit must be distinguished from subrogation –
extinguishment of the debtor’s debt served as the Assignment of Credit Subrogation
petitioner’s payment for the shares. 1. The process of transferring the right of 1. The process by which the third party
3) When, even without the knowledge of the debtor, a person interested in the the assignor to the assignee who would pays the obligation of the debtor to the
fulfillment of the obligation pays, without prejudice to the effects of confusion then have the right to proceed against creditor with the latter's consent.
as to the latter’s share. the debtor. 2. The paying third party steps into the
o A person interested in the fulfillment of the obligation is one who will 2. It may be done either gratuitously or shoes of the original creditor as
be affected by payment of the debtor. onerously; in the latter case, it has an subrogee of the latter. It results in a
§ Ex. A guarantor, surety or solidary debtor will be effect similar to a sale. subjective novation of the contract in
released if the principal obligation of the debtor is paid. that a third person is subrogated to the
o Ex. A is indebted to M. The loan was secured by a real estate mortgage rights of the creditor.
constituted by X on his own property for the benefit of A’s debt. In the The consent of the debtor is not Requires an agreement among the three
event X pays M, the presumption of legal subrogation will arise in favor necessary in order that it may fully parties concerned – the original creditor,
of X even if such payment was made without the consent of A. Since produce legal effects. the debtor, & the new creditor. It is a
there is merger of the characters of the creditor & the mortgagor, the Instead, notice must be sent to the new contractual relation based on the
real estate mortgage is extinguished. debtor, as the assignment takes effect mutual agreement among all the
o CASE: Figuera v. Ang only from the time he has knowledge necessary parties
§ Facts: An assignee of a business paid the necessary utility bills thereof. A creditor may, therefore, validly
incurred by the business. Not doing so would have resulted in assign his credit and its accessories
the utilities being cut off and the business coming to a halt. without the debtor's consent.
The assignee contended that the amount she paid should be Facts: A developer transferred to a bank its receivables due from a condominium-
deducted from the amount payable to the assignor for the buyer, to pay off the developer’s indebtedness to the bank. The condominium-buyer
business bought by the assignee from the assignor. The later sued both the bank & the developer for them to honor the “contract to sell” she
assignor objected on the ground that the payment of the utility entered into, by giving her the right of preference in relation to the units sold. The
bill was made without her consent & thus, was separable from developer, however, argued that the buyer had no cause of action because the buyer
the obligation of the assignee with respect to the business. Is agreed to the substitution of the developer by the bank. Is the developer correct?
the assignor correct? Held: No. The bank should not be part of the dispute. What happened was not
§ Held: No. Art. 1302 (3) applies. The assignee is a person subrogation where the bank assumed all the rights & obligations of the developer,
interested in the fulfillment of the obligation to pay the utility but an assignment of credit which merely transferred the collectibles of the
bill & thus, even without the assignor’s consent, her payment developer to the bank & nothing more.
subrogated her to the rights of the utility company to collect The absence of the buyer’s consent to the transaction between the developer & the
from the assignor. And since the assignee still had a balance to bank is another indicator that this was an assignment of credit, since there, the
pay the assignor with respect to the business, SC allowed legal consent of the debtor is not essential. What the law requires is merely notice to him.
compensation of the mutual obligations. The purpose of said notice is only to inform the debtor that from the date of
assignment, payment should be made to the assignee & not the original creditor.

It must also be noted that in the assignment, there were no changes made to the 1) Negotiation - covers the period from the time the prospective contracting
“contract to sell” between the developer & the buyer. Hence, there was no novation parties indicate interest in the contract to the time the contract is concluded
by subrogation in this case. 2) Perfection - takes place upon the concurrence of the essential elements
thereof
Article 1304. A creditor, to whom partial payment has been made, may exercise his o A contract which is consensual as to perfection is established upon a
right for the remainder, & he shall be preferred to the person who has subrogated in mere meeting of the minds, i.e., the concurrence of offer &
his place in virtue of the partial payment of the same credit. acceptance, on the object & on the cause thereof
o Real contract – a contract which requires for its perfection, in addition
Preferred Creditor to consent, the delivery of the object of the agreement, as in a pledge
• The provision contemplates a situation where a debt has been partially paid or commodatum
by a 3rd person, with the consent of the debtor. o Solemn contract - compliance with certain formalities prescribed by
• If there is no consent of the debtor, the only right of the third party who made law, e.g. donation of real property, is essential in order to make the act
the payment is to be reimbursed of the amount he has partially paid pursuant valid, the prescribed form being thereby an essential element thereof
to Art. 1236. 3) Consummation - begins when the parties perform their respective
o Art. 1237 - Whoever pays on behalf of the debtor without the undertakings under the contract
knowledge or against the will of the latter, cannot compel the creditor 4) Extinguishment
to subrogate him his rights, such as those arising from mortgage,
guaranty, or penalty. *Article 1306. The contracting parties may establish such stipulations, clauses,
• In the event partial payment is made by a 3rd person which extinguishes the terms & conditions as they may deem convenient, provided they are not contrary to
debtor’s obligation to pay the creditor up to the extent of said partial law, morals, good customs, public order, or public policy.
payment, the creditor can still demand from the debtor the balance of the
obligation. *Autonomy in Contracts
o In the meantime, the 3rd party who made the partial payment can • Freedom to stipulate terms & conditions is the essence of the contractual
likewise demand from the debtor what he has paid to the creditor. system, provided such stipulations are not contrary to law, morals, good
o In the event that the creditor & the 3rd party demands from the debtor customs, public order, or public policy
at the same time the payment of what is due them, the creditor will be o This freedom prohibits a party from coercing or intimidating or unduly
preferred. He will be paid first as the law states that he is preferred. influencing another to enter into a contract
• In order for the court to declare a contract void for being against public policy,
TITLE II. – CONTRACTS. it must be shown that the contract, as to the consideration or thing to be
done, has a tendency to injure the public, is against the public good, or
CHAPTER ONE: GENERAL PROVISIONS contravenes some established interest of society, or is inconsistent with
sound policy & good morals which tends to undermine the security of
Article 1305. A contract is a meeting of minds between 2 persons whereby one individual rights, whether of personal liability or of private property
binds himself, with respect to the other, to give something or to render some service.
Class Discussion
Contract Q: If you violate a law is it necessary void?
• A juridical convention manifested in legal form, by virtue of which 1 or more A: No. This is only when the law violated is mandatory or prohibitive.
persons bind themselves in favor of another or others, or reciprocally, to the Q: What if it is against morals?
fulfillment of a prestation to give, to do or not to do. A: Surely, it will be void. An example would be unconscionable interest rates.
o BUT: There are cases where, although there is a meeting of the minds,
the contract still cannot be legally enforced because it lacks some of CASE: Azcuna, Jr. v. CA
the required formalities mandated by law for enforceability (e.g., Lesson: Even contracts that seem unfair, though are freely entered into, are
Statute of Frauds) protected by the law.
• Also defined as an agreement whereby at least 1 of the parties acquires a Facts: A lease contract provided that, if the lessee does not vacate the premises on
right, either in rem (real right) or in personam (personal right), in relation to due date, the lessee shall be charged P1,000 per day as damages without prejudice
some person, thing, act or forbearance to other remedies which the lessor is entitled to. There is no evidence of undue
influence or force. Is the contract valid?
Stages of Contracts

Held: Yes. After entering into such an agreement, petitioner cannot thereafter turn CASE: Manila Bay Club Assoc. v. CA
his back on his word with a plea that on him was indicted a penalty shocking to the Lesson: Contracts are respected as the law between the contracting parties, & they
conscience & impressed with inequity as to call for the relief sought on the part of a may establish such stipulations as they may want to include.
judicial tribunal. Facts: Because of the failure of the petitioner to comply with the insurance clause of
the lease contract, the lessor terminated the lease pursuant to a provision in the
CASE: Pakistan Int’l Airlines (PIA) v. Ople same lease contract stipulating that failure to comply with any provision of the
Lesson: The principle of autonomy in contracts is not absolute. Laws are always contract shall allow the lessor to rescind the same. Is the stipulation valid?
deemed written into contracts; therefore, contracts cannot circumvent the force & Held: Yes. It was meant to ensure strict compliance with the mandatory provisions of
effect of the law. the contract, as expressed by the language used in its drafting, such as “the building
Facts: PIA invokes par. 5 & 6 of its contract of employment with ex-employees X & Y, must be insured and the insurance premium must be for the account of the
arguing that its relationship with them was governed by the provisions of its contract LESSEE.”
rather than by the Labor Code.
• Par. 5 of that contract set a term of 3 years for that relationship, extendible CASE: Phil. Am. General Insurance Co. v. Mutuc
by agreement between the parties Lesson: When a party is free to choose whether to accept the stipulation of a
• Par. 6 - notwithstanding any other provision in the contract, PIA had the right contract, even if there may seem to be some adhesion, & chooses to sign it, he is
to terminate the employment agreement at any time by giving one-month’s bound by his consent.
notice to the employee or, in lieu of such notices, one-month’s salary. Facts: X, after agreeing that his bond may be renewed or extended without
Is the contract valid? notification, which was stipulated by the company that hired him to ensure his
Held: No. Parties may not contract away applicable provisions of law especially those faithful performance, claimed that such provision was void because it is a contract
which are mandatory & prohibitory16 & dealing with matters heavily impressed with of adhesion; the lower court held him liable for the bond. Is the contract valid?
public interest. The law relating to labor & employment is clearly such an area. Held: Yes. X was not at all compelled to agree to it. X was free to act either way.
The contract is in direct contravention with laws on security of tenure found in the
Labor Code, & leaves the employment of X & Y at the option of PIA. CASE: Teves v. People’s Homesite & Housing Co.
Lesson: In the absence of express legislation or constitutional prohibited, a court, in
*CASE: Industrial Personnel & Management Services v. De Vera order to declare a contract void for being against public policy, must find that the
Lesson: GR: Philippine law applies even to overseas employment contracts. Even if contract, as to the consideration or the thing to be done –
an OFW is employed abroad, he still has his rights to security of tenure, human • Has a tendency to injure the public,
conditions of work, & a living wage under the Philippine Constitution. • Is against the public good,
EXC: In the following cases, when foreign law can govern an overseas contract – • Contravenes some established interest in society, or
(1) It is expressly stipulated that the foreign law will apply in the contract; • Is inconsistent with sound policy or good morals which tends to undermine
(2) Foreign law must be proven before the courts pursuant to Philippine rules on the security of individual rights, whether of personal liability or of private
evidence; property
(3) Foreign law stipulated is not contrary to law, morals, good customs, public
order, or public policy; & CASE: De Leon v. CA
(4) Processed through the POEA Lesson: The continued existence of a marriage cannot be made the basis of a
Before an employer may invoke applicability of a foreign law to an overseas contract.
employment contract, the 4 requisites must be shown. Facts: The parties, who were husband & wife, stipulated that “in consideration for a
• For (1), if no stipulation exists, then Philippine labor law will apply in peaceful & amicable termination of relations between the undersigned & her lawful
accordance with the principle of lex loci contractus (i.e., the law to be applied husband,” the husband would give some properties to the wife & monthly support
is the one in the place where the contract was made). for the children, & the wife would agree to a judicial separation of property plus the
• For (2), if this is lacking, then the doctrine of processual presumption amendment to the divorce proceedings initiated by the wife in the US to conform to
operates. This doctrine means that when a foreign law is not pleaded, or even the agreement. Is the agreement valid?
if pleaded, is not proved, the presumption is that the foreign law is the same Held: No. The agreement is contrary to law, Filipino morals & public policy because
as that of our own the consideration of the agreement is the termination of the marriage by the parties
which they cannot do on their own & without any legal basis.
Laws Affecting Contracts

16 Art. 5, Civil Code: Acts executed against mandatory or prohibitory laws shall be void, except when the law
itself authorizes its validity.

• Only laws existing at the time of the execution of a contract are applicable o Civil Code’s nominate contracts: sale, barter or exchange, lease,
thereto partnership, agency, loan, deposit, aleatory contracts, compromises,
o Later statutes do not govern said contract unless the latter is guaranty, pledge, mortgage & antichresis.
specifically intended to have a retroactive effect. o Special laws - insurance, real estate mortgage, & charter party
• A later law which enlarges, abridges or in any manner changes the intent of 4) Customs of the place – rules of conduct by repetition of acts uniformly
the parties to the contract impairs the contract itself & cannot be given observed as a social rule, legally binding & obligatory
retroactive effect without violating the constitutional prohibition against o Must be proved as a fact according to the rules of evidence
impairment of contracts
o However, while a contract is deemed to be the law between the Kinds of Innominate Contracts
contracting parties, non-impairment of contracts or vested rights 1) Do ut des –the parties mutually give each other a certain thing
clauses will have to yield to the State’s police power, which is deemed 2) Facio ut facias – the parties mutually render a service
written into every contract 3) Do ut facias; facias ut des - a mixed prestation such that one party gives
something & the other party does something
CASE: Ortigas v. CA o CASE: Dizon v. Gaborro
Lesson: Some laws, especially involving State police power, have a retroactive effect § Facts: A contract was entered into whereby the respondent
& can extinguish contractual stipulations. assumed to pay the indebtedness of petitioner to certain
Facts: The contract of sale provided that the property shall only be used for banks, and in consideration therefor, respondent was given the
residential purposes. But the buyer subsequently built a commercial edifice in possession, enjoyment & use of certain lands until petitioner
consonance with a later zoning ordinance classifying the area as a commercial zone. can reimburse fully the respondents the amounts paid by the
Was there violation of the contract on the part of the buyer? latter to the banks, to accomplish the following ends: (a)
Held: No. The restrictions of the contract of sale were deemed extinguished by the payment of the bank obligations; (b) make the lands productive
retroactive effect of the zoning ordinance. for the benefit of the possessor; (c) assure the return of the
land to the petitioner thus rendering equity & fairness to all
Class Discussion parties concerned. What kind of contract is this?
1. Violation of a law generally does NOT make a contract void § Held: This was an innominate contract “to give & to do”, which
2. The law violated must be mandatory or prohibitory to make the contract void mixed the obligations & principally uses antichresis17 between
the parties
Article 1307. Innominate contracts shall be regulated by the stipulations of the o *CASE: Corpus v. CA
parties, by the provisions of Titles I & II of this Book, by the rules governing the most § Facts: An agreement as to legal fees between a lawyer & his
analogous nominate contracts, & by the customs of the place. client were not reduced into writing, but there were indicators
that payment was contemplated by the parties. Was payment
Innominate Contracts justified?
• Those which are not specifically governed by any Civil Code provision or § Held: Yes. Payment was justified by virtue of the innominate
special law, but which likewise involve the fulfillment or accomplishment of contract of facio ut des (I do & you give) which is based on the
some prestations principle that “no one shall unjustly enrich himself at the
expense of another.”
Innominate contracts are governed by the ff.:
1) Stipulation of the parties Class Discusssion
o The parties may have some arrangements which they feel should bind Contract of a piece of work, mutuum, commodatum, depositum – there are
them but which do not have any exact legal provisions in the Civil nominate contracts
Code to govern the nature of the obligation appertaining to it
2) Provisions on obligations & contracts in Title I & II of the Civil Code *Article 1308. The contract must bind both contracting parties; its validity or
o Parties can stipulate any provision, term & condition that will govern compliance cannot be left to the will of one of them.
the enforceability of their agreement provided they are not contrary to
law, morals, good customs, public order, or public policy Mutuality of Contracts
3) Rules governing the most analogous nominate contracts.
17 A contract whereby a debtor pledges (i.e., conveys possession but not title) real property to a creditor,
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.

• A contract violates mutuality when it leaves the validity or compliance of the ground for termination thereof by the lessor, removes the contract from the
contract entirely to the will of one of the contracting parties application of Art. 1308.
• Violate this & the contract is void • Taylor v. Uy Tieng Piao: this Court ruled that now Art. 1308 creates no
impediment to the insertion in a contract for personal service of a resolutory
*CASE: GF Equity v. Valenzona condition permitting the cancellation of the contract by one of the parties.
Lesson: The ultimate purpose of the mutuality principle is to nullify a contract Such a stipulation does not make either the validity of the fulfillment of the
containing a condition which makes its fulfillment or pre-termination dependent contract dependent upon the will of the party to whom is conceded the
exclusively upon the uncontrolled will of one of the contracting parties. privilege of cancellation; for where the contracting parties have agreed that
Facts: The contract says, such option shall exist, the exercise of the option is as much in the fulfillment
“If at any time during the contract, the COACH, in the sole opinion of the of the contract as any other act which may have been the subject of
CORPORATION, fails to exhibit sufficient skill or competitive ability to coach the agreement.
team, the CORPORATION may terminate this contract.”
On the basis of this provision, the coach was terminated. Was the termination of Class Discussion
the coach proper? Q: Contract says: “If in the opinion of the corporation, you are no longer fit to be a
Held: No. The termination of the coach on the basis of that provision was not proper coach…” Is this violative of Art. 1308?
since the same is against the attribute of mutuality of contracts. A: Yes. It is so subjective on the part of one party.
Art. 1308 was phrased to emphasize the principle that the contract must bind both Q: Contract says: “If out of 10 games, you lost 7 games, the corporation shall
parties. This is based on the principle that obligations arising from contracts have termination you.” Is this allowed?
the force of law between the contracting parties and secondly, that there must be A: Yes, because there is an objective standard (unlike the one in GF Equity).
mutuality between the parties based on their essential equality to which is
repugnant to have one party bound by the contract leaving the other free therefrom. CASE: Garcia v. Rita Legarda, Inc.
Its ultimate purpose is to render void a contract containing a condition which makes Lesson: A contract expressly giving to one party the right to cancel the same if a
its fulfillment dependent exclusively upon the uncontrolled will of one of the resolutory condition therefor agreed upon — similar to the one under consideration —
contracting parties. is not fulfilled, is valid, the reason being that when the contract is thus cancelled, the
In the case at bar, the contract incorporates the right of GF Equity to pre-terminate agreement of the parties is in reality being fulfilled.
the contract that if the coach, in the sole opinion of the corporation, fails to exhibit Facts: A contract to sell a real property stipulated that the vendor was given the right
sufficient skill or competitive ability to coach the team, the corporation may to unilaterally rescind or terminate the contract in the event the other party failed to
terminate the contract. The assailed condition transgresses the principle of pay any of the required installments of the purchase price. In particular, the contract
mutuality of contracts. It leaves the determination of whether Valenzona failed to reads:
exhibit sufficient skill or competitive ability to coach Alaska team solely to the “In case of default in the payment of installments by the vendee, he shall have
opinion of GF Equity. Whether Valenzona indeed failed to exhibit the required skill or (1) “a month of grace”, & (2) should said month of grace expire without the
competitive ability depended exclusively on the judgment of GF Equity. In other vendee paying his arrears, he shall have another “period of 90 days” to pay “all
words, GF Equity was given an unbridled prerogative to pre-terminate the contract the amounts he should have paid,” etc., then the vendor “has the right to
irrespective of the soundness, fairness or reasonableness, or even lack of basis of declare this contract cancelled & of no effect.”
its opinion. Is the stipulation valid?
To sustain the validity of the assailed paragraph would open the gate for arbitrary Held: Yes. The above stipulation merely gives the vendor “the right to declare this
and illegal dismissals. The stipulation being violative of the mutuality principle contract cancelled & of no effect” upon fulfillment of the conditions therein set forth.
underlying Art. 1308, it is void. It does not leave the validity or compliance of the contract entirely to the will of one
The nullity of the stipulation notwithstanding, GF Equity was not precluded from the of the contracting parties.
right to pre-terminate the contract. The pre-termination must have legal basis,
however, if it is to be declared justified. GF Equity failed, however, to advance any CASE: Allied Banking Co. v. CA
ground to justify the pre-termination. It simply invoked the assailed provision which Facts: A stipulation in a lease contract stated the contract “may be renewed for a
is void. While GF Equity’s act of pre-terminating Valenzona’s services cannot be like term at the option of the lessee.” Is this allowed?
considered willful as it was based on a stipulation, albeit declared void, it, in doing Held: Yes. It does not go against the attribute of mutuality of contracts. Such right on
so, failed to consider the abuse of rights principle enshrined in Art. 19. the part of the lessee is part of the consideration in the contract; the lessor is free to
*Instances cited by the SC where Art. 1308 was not violated – give or not to give the option to the lessee. The clause likewise means that, once the
• Jespajo Realty v. CA: The express provision in the lease agreement of the lessee exercises the option to renew, all the terms & conditions of the old contract
parties that violation of any of the terms of the contract shall be sufficient are renewed and not only the period.

Contract of Adhesion CASE: Serra v. CA
• One wherein a party, usually a corporation, prepares the stipulations in the Lesson: Not all contracts of adhesion are void. There must be a showing that it is
contract, while the other party merely affixes his signature or his “adhesion” highly inequitable for such contract to be invalidated.
thereto. Facts: A CPA-Lawyer assails the validity of the contract he entered into. Is the
• These types of contracts are as binding as ordinary contracts. stipulation valid?
o The party who adheres to the contract is free to reject it entirely. Held: Yes. Since the petitioner was already a CPA-Lawyer, he should have been more
• BUT: Courts will not hesitate to rule out blind adherence to terms where facts cautious in his transactions, particularly where it concerns valuable properties.
& circumstances will show that it is basically one-sided.
o Generally, contracts of adhesion are valid, except when they are highly *4 Cases When the Court Can Intervene into Contract of 2 Persons
inequitable GR: Courts cannot intrude into or change the stipulations of parties; the court can
only resolve conflicts arising from the contract.
*CASE: PNB v. CA EXC: The courts can intervene in the ff. situations –
Lesson: (1) Contracts dependent on the sole will of one of the parties are generally 1) If the contract is inequitable, when the determination of the performance was
void, especially contracts of adhesion where the parties are not in equal footing. left to the will of a 3rd person, the court can adjust it.
(2) Constant increases of interest at the will of the creditor are contrary to law (they 2) If there is a penal clause that is iniquitous, the court can remove it or reduce
make potestative contracts). the penalty.
Facts: PNB & the debtor entered into a loan agreement stipulating, among others, 3) Rebus sic stantibus – when there is an absolute, exceptional change of
that PNB was authorized to increase the stipulated 18% interest per annum within circumstances
the limits prescribed by law at any time depending on whatever policy PNB may 4) If there is reason for the court to fix a period
adopt in the future provided that the interest rate on the note shall be a. When a suspensive potestative condition is void, but the obligation on
correspondingly decreased in the event that the applicable maximum interest rate is which it hinges is still valid
reduced by law or by the Monetary Board. PNB indeed increased the rates to 32%, b. When the debtor binds himself to pay “when his means permit him to
then subsequently to 41% & then finally to 48% within the year over the objection of do so”
the debtor c. When one party seeks rescission, but the court finds just cause to fix a
Held: The stipulation is void. P.D. 116 specifically provides that increases in interest period
rates shall be made “once every twelve months” & furthermore such increases d. When from the nature & circumstances of the obligation, it is obvious
violated the mutuality of contracts. It would have invested the loan agreement with that a period was intended by the parties
the character of a contract of adhesion, where the parties do not bargain on equal e. When the period is dependent on the sole will of the debtor
footing, the weaker party’s (the debtor) participation being reduced to the alternative
“take it or leave it”. Such contract is a veritable trap for the weaker party whom the Article 1309. The determination of the performance may be left to a 3rd person,
courts of justice must protect against abuse and imposition. whose decision shall not be binding until it has been made known to both
contracting parties.
Q: Contract says: “Interest rate shall be increased when commercial rate increases.”
Does this violate Art. 1308? Article 1310. The determination shall not be obligatory if it is evidently inequitable.
A: Yes. It is unfair because it does not take into consideration future decreases; this In such case, the courts shall decide what is equitable under the circumstances.
is potestative and hence void. There is no essential equality in the transaction; there
is no estoppel because the contract is essentially void and violates Art. 1308. 3rd Party Intervention
• The parties may constitute a 3rd party to determine the performance of the
CASE: Philippine Savings Bank v. Spouses Castillo contract. The decision becomes effective when both contracting parties
Facts: The promissory note here had an escalation & a corresponding de-escalation already have knowledge of the decision.
clause in relation to interest. Is the clause in the note void? o It will not be binding if only one of the parties knows of the decision.
Held: No. But nevertheless, the validity of the escalation close does not give the • When one agrees to let a 3rd person decide, there is already a contract.
bank the unbridled right to unilaterally adjust interest rates. The adjustments should However, what remains is to figure out how something is to be done.
still be subject to the mutual agreement of the parties. In light of the absence of o Cause, object, & consent are already present; just the MANNER is not
consent on the part of the debtors to the modification of the interest rates, the yet settled.
adjusted rates cannot bind them notwithstanding the inclusion of a de-escalation • This determination MUST not destroy the nature of mutuality of the contract
clause in the loan agreement. between the principal parties based on their essential equality.

o The court shall decide what is equitable under the circumstances.
• Q: Can a solidary creditor assign his credit to another person?
o The court cannot decide to invalidate, but can fix the manner
• A: Yes, but only with the consent fo the others.
• Ex. A & B enter into a contract whereby A will sing in the nightclub of B for 2
2. By the stipulation of the parties
days. The contract stipulates that, for 2 days, A is to be paid P5,000 for such
3. By nature
number of songs to be determined by X 2 days before the performance, &
any violation renders the contract ineffectual entitling B not to pay A any
Exceptions to Relativity: (The people in this list are not the listed parties, visible or
consideration as a penalty. They sign the contract. Later, X makes a
invisible, but they are affected negatively or positively)
determination that A is to sing 20 songs, selected by X continually without a
1. Tort interference
break starting from 6PM-2AM; &, if the nightclub is filled with people, A will
give an encore 3 times divided into 30 minutes each time. A shall only sing • Q: A & B have a contract where A sings in the nightclub. C asks A, hey how
those specifically requested by the audience, & in case he does not know the much do you earn a day in B’s nightclub? A says P50. C says that’s too
song, his fee is to be reduced. X notified A two days before the performance cheap! Is that enough to put C in bad faith?
that the latter will sing 15 English rock songs & 5 Norwegian songs which • A: No. C will only be liable (1) if he is in bad faith & (2) he gains from it & (2)
obviously A does not know. C’s intention is to gain from it. Hence, there must be malice or C cannot be
o This is clearly a situation where the performance is so inequitable. In made liable.
fact the contract itself & not merely the determination of its 2. Contracts pour autrui (Art. 1311) - e.g. credit card & insurance contracts
performance is almost left to the will of the third party & it greatly 3. Contracts creating real rights (Art. 1312), 3rd persons who come into possession
favors the nightclub owner. of the object of the contract are bound thereby – e.g., real rights and mortgages,
o A can go to court which will decide what is equitable under the because the latter will attach to real property
circumstances. Court intervention is necessary in order that the intent • Q: Can a contract stipulate that the mortgagor cannot sell the property
of the parties will not be rendered nugatory by the inequitable terms while the contract is effective?
and conditions of a third party. • A: No. By express stipulation of the law, that is a void contract.
4. Contracts intended to defraud creditors (Art. 1318) – a rescission case can be
*Article 1311. Contracts take effect only between the parties, their assigns & heirs, filed (accion pauliana)
except 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 heir is not Relativity of Contracts
liable beyond the value of the property he received from the decedent. • Generally, contracts take effect only between the immediate parties to the
If a contract should contain some stipulation in favor of a 3rd person, he may same.
demand its fulfillment provided he communicated his acceptance to the obligor • General rules:
before its revocation. A mere incidental benefit or interest of a person is not o Contracts are transmissible to heirs & assignees; they are the
sufficient. The contracting parties must have clearly & deliberately conferred a favor “invisible parties”
upon a 3rd person. o A stranger cannot invoke the contract of another for his own interest
or for a source of an alleged prejudice.
DEAN MEL’S LECTURES o A party cannot impose an obligation or liability to one who, under its
terms, is a stranger to the said contract.
Relativity of contracts – binds the contract between the parties. o Real rights are transmissible, personal rights are not.
In contracts, there are invisible and visible parties. The visible parties are the
principal parties themselves, but the invisible parties are the assigns and heirs. CASE: Integrated Packaging Corp. v. CA
Hence, if the principal party (lessee) dies, can the lessor eject the heirs? No, Lesson: Contracts can only bind the parties who entered into it, & it cannot favor or
because they are the invisible parties (DKH v. CA) prejudice a 3rd person, even if he is aware of such contract & has acted with
The general rule is that rights are transmissible. knowledge thereof.
The exceptions are: Facts: A company was in default in paying its supplier, & sued the same supplier
1. Those provided by law to be intransmissible allegedly for causing damage to it in that it was not able to comply with its contract
• Q: Can you sublease without consent of the lessor? with Philacor because the supplier failed to deliver the materials which were
• A: Yes. supposed to be used by the company for the orders of Philacor. Can the company
• Q: Can you assign to another party a property leased? get damages?
• A: NO, by express provision of the law. Held: No. SC did not award damages to the company. Not only because the non-
delivery of the materials by the supplier was justified due to the non-payment by the

company of the deliveries, but also because the supplier has absolutely nothing to *CASE: DKH Holdings Corp. v. CA
do with the contract between the company & Philacor. Lesson: The death of a party does not excuse non-performance of a contract which
• The contract between the company & the supplier did not have a direct involves a property right, & the rights & obligations thereunder pass to the personal
bearing in the contract between the company & Philacor. representatives of the deceased. Similarly, non-performance is not excused by the
o The papers in the 2 contracts are different. death of the party when the other party has a property interest in the subject matter
o The demand by Philacor was made after the supplier filed its of the contract.
complaint in court. Facts: The heir of the lessor refused to honor the lease contract entered into by the
deceased lessor contending that, though he inherited the property from the
CASE: Games & Garments Developers v. Allied Banking deceased lessor, he was not a party to the lease contract. Was the heir’s action
Lesson: Contracts take effect only between the parties who execute them. Where correct?
there is no privity of contract, there is likewise no obligation or liability to speak of. Held: No. The heir must honor the contract because in inheriting the property, he
Facts: The bank merely facilitated the sale of the property & provided financing for acquired all the rights & obligations of the deceased lessor with respect to the
the deed of sale. Can the bank be made liable later on when the balance of the property.
purchase price is sought? As the successor of his deceased mother, the heir only succeeds to whatever rights
Held: No. The bank in this case was neither a party to the deed of sale nor an his mother had & what is valid & binding against her is valid & binding against him.
assignee thereof. Even if the bank employees assisted in the execution of the deed
of sale of the property between the buyer & seller, this did not make the bank a party Transmission of Rights & Obligations
to the deed & liable therefor. • May likewise be agreed upon by the parties.
o Ex. A contract may provide that, in the event a contractor fails to finish
CASE: Spouses Pontigon v. Heirs of Sanchez the house on time, another contractor may assume his place in the
Lesson: The principle of relativity of contracts extends to the principal parties’ contract subject to the same terms & conditions.
assigns & heirs. Hence, heirs are bound by extrajudicial settlements signed by their • If the transferee is the heir, he shall not be held liable beyond the value of the
deceased parent while the parent was still alive. Assigns & heirs are not deemed property he received from the decedent.
third parties to the contract within the contemplation of the law. There is furthermore o Ex. if the deceased left the heir a property which, however, was a
no distinction on whether the contract is oral or written, or in a public or private collateral for a debt which the deceased incurred during his lifetime,
instrument (& hence, whether notarized or not notarized). the creditor can go against the property to pay off the indebtedness of
the deceased. If the property is not sufficient to satisfy the debt, the
Relativity & Real Property creditor cannot personally go against the heir to collect the deficiency.
• Principal parties include heirs & assigns
• Under certain conditions, the law operates to effect the transfer of an action Contracts cannot take effect with respect to theirs or assigns when:
from one person to another without any concurring act on the part of the (1) The nature of the contract does not allow transmission.
parties or indeed without their assent. o Ex. A contract which binds a person to sing in a particular nightclub
• Usual ways interests in land are transferred: because of the special way he sings his songs is not transmissible
o Marriage because his hiring was personal & his abilities cannot be exactly
o Death duplicated by any person. Plus, the audience may have bought the
• Through the principle of relativity, real property rights are transferred. tickets to the show precisely because that particular singer will sing.
o With real property, upon its transfer, covenants may be annexed to the o Where acts stipulated in a contract require the exercise of special
contract which run with the land & one who subsequently acquires an knowledge, genius, skill, taste, ability, experience, judgment,
interest therein takes it subject to the benefits and obligations of such discretion, integrity, or other personal qualification of one or both
covenants. parties, the agreement is of a personal nature, & terminates on the
§ The period of a contract of lease is binding upon the heirs of death of the party who is required to render such service
the lessor § A good measure of determining whether a contract terminates
§ Likewise, a sublessee is bound by the terms of the principal upon the death of one of the parties is whether it is of such a
contract of the lessor & the lessee character that it may be performed by the promissor’s personal
§ If the predecessor was duty-bound to reconvey land to another, representative.
& at his death the reconveyance had not been made, the heirs § Contracts to perform personal acts which cannot be as well
can be compelled to execute the proper deed for reconveyance performed by others are discharged by the death of the
promissory.

o Conversely, where the service or act is of such a character that it may CASE: Marmont Resort Hotel v. Guiang
as well be performed by another, or where the contract, by its terms, Lesson: In a contract pour autrui, the parties must give way to the benefit that will be
shows that performance by others was contemplated, death does not granted to the 3rd party.
terminate the contract or excuse non-performance Facts: A memorandum of agreement (MOA) was entered into between Marmont
(2) The parties stipulate that no transmission of rights is allowed Hotel & Maris Trading for the installation of a complete water supply facility.
o Ex. Parties to a contract of lease can stipulate that the lease contract • The installation encroached on the property of X with the X’s permission.
cannot be subleased & a sublease without the consent of the lessor • The encroachment eventually prompted Maris Trading & X to enter into a 2nd
shall allow the lessor to terminate the lease MOA stipulating that, for valuable monetary consideration & the fact that the
(3) The law provides non-transmission installation & the drilling of the water facility for the benefit of Marmont Hotel
o In a contract of voluntary deposit, the depositary cannot deposit the were made in the property of X with his consent, X shall cede their possessory
thing with a 3rd person, unless there is a stipulation to the contrary rights over the property to Maris Trading.
o Art. 1649: In lease, the lessee cannot assign the lease without the • X, however, refused to let Marmont Hotel use the water facility in his property.
consent of the lessor, unless there is a stipulation to the contrary Can X be held liable?
Held: Yes. X can be held liable for refusing Marmont Hotel, because it is clear that
Contracts Pour Autrui Marmont was to benefit from the 2nd MOA. In fact, said stipulations appear to have
• Relates to Art. 1312, 2nd par. - If a contract should contain some stipulation been designed precisely to benefit Marmont &, thus, partake of the nature of
in favor of a 3rd person, although he is not a party to the contract, he may stipulations pour autrui.
demand its fulfillment provided he communicate his acceptance to the Marmont was not a party to that 2nd MOA, but X could not have prevented Maris
obligor before its revocation. Trading from entering the property possessory rights it already acquired. That X
o A mere incidental benefit or interest of a person is not sufficient. remained in physical possession of that particular bit of lane, is of no moment: they
o There must be a clear intent to benefit the 3rd person. did so simply upon the sufferance of Maris Trading.
Requisites of a Contract Pour Autrui CASE: Coquia v. Fieldman’s Insurance Co.

1) There must be a stipulation in favor of a 3rd person. Lesson: Certain types of insurance contracts are also contracts pour autrui.
o It is unnecessary that the 3rd person be always named in the contract. Facts: On Dec. 1, 1961, Fieldman’s issued, in favor of the insured, a common carrier
2) The stipulation must be a part, not the whole of the obligation. accident insurance policy, covering the period from Dec.1, 1961-Dec. 1, 1962. It
o The benefit must only be a part of the contract contained in one of its was stipulated in said policy that Fieldman’s would indemnify the insured in the
stipulations & should not constitute the whole contract. event of accident caused by car accidents against all sums which the insured will
§ Ex. Letter of credit in commercial transactions in favor of the become legally liable, including death of any person in the vehicle.
exporter is the result of a stipulation pour autrui. • While the policy was in force, a taxicab of the insured, driven by Coquia, met
• In a letter of credit transaction, the importer & a bank a vehicular accident at Pangasinan & died.
enters into an agreement where the bank pays an o The insured filed therefore a claim for P5,000 to which Fieldman’s
exporter in another country for goods ordered & replied with an offer to pay P2,000, by way of compromise. The
delivered to the importer. The exporter-beneficiary insured rejected the same & made a counter-offer for P4,000, but
therefore benefits from the stipulation in a contract Fieldman’s did not accept it.
between the importer & the bank. • On Sept.18, 1962 the insured & Coquia’s parents filed a complaint against
3) The contracting parties must have clearly & decidedly conferred a favor upon the Fieldman’s to collect the proceeds of the afore-mentioned policy.
a 3rd person, NOT a mere incidental benefit or interest. • In its answer, Fieldman’s admitted the existence thereof, but pleaded lack of
4) Neither of the contracting parties bears the legal representation or cause of action because the Coquias have no contractual relations with
authorization of the 3rd party. Fieldman’s.
5) The favored party must have communicated his acceptance of said Can Fieldman’s be held to the Conquias?
stipulation to the obligor before its revocation. Held: Yes. This is a contract pour autrui, because it was executed by Fieldman’s &
o GR: It is not necessary for the 3rd party to make a formal acceptance the insured to favor 3rd persons—the drivers of insured. The stipulations of the
prior to bringing of the suit. The assent of the beneficiary will be contract reveal such intent:
presumed. • It promised to indemnify the insured in the event of an accident which the
§ The commencement of an action to enforce a promise is insured will become legally liable to pay in respect to death, bodily injury of its
sufficient as an acceptance. drivers.

• Fieldman’s also stated that it would indemnify the personal representatives o X said he was not given the right of first refusal promised to him.
of the driver if he dies. • The lower courts ruled that X failed to show that he demanded his right of
• Fieldman’s may, at its option, make the payable directly to the heirs or first refusal from Y before Y sold the property to Z, & that, anyway, if the
claimants. stipulation was indeed a contract pour autrui, X failed to inform the obligor of
This character being is manifest by the fact that the deceased driver paid 50% of the his acceptance.
corresponding premiums, which were deducted from his weekly commissions. Under Should X’s case prosper?
these conditions, it is clear that the Coquias, as the sole heirs of the deceased, have Held: No. The petition is devoid of merit. Assuming that X is correct in claiming that
a direct cause of action against Fieldman’s &, since they could have maintained this this is a stipulation pour autrui, it is unrebutted that he did not communicate his
action by themselves, without the assistance of the insured, it goes without saying acceptance whether expressly or impliedly. He insists however, that the stipulation
that they could & did properly join the latter in filing the complaint. has not yet been revoked, so that his present claim is still timely.
BUT the sale of subject property to some other person or entity constitutes in effect
CASE: Mandarin Villa Inc. v. CA a revocation of the grant of the right of first refusal to X.
Lesson: A credit card holder’s use of a credit card is a sign of acceptance of the
stipulation, communicated to the obligor — the establishment that should process & *Exceptions to Relativity
accept the payment through credit card. 1) Tort interference
Facts: The owner of a restaurant refused to honor a credit card for the purpose of 2) Contracts pour autrui
payment from a customer on the ground that its machine validating such credit card 3) Contracts creating real rights, 3rd persons who come into possession of the
indicated that the latter had expired, when in fact it had not expired as clearly object of the contract are bound thereby
indicated in the card itself. 4) Contracts intended to defraud creditors
The owner would have known such fact had it merely followed the rules it agreed
upon with the credit card company providing that, in cases of expiration of the credit Article 1312. In contracts creating real rights, 3rd persons who come into possession
card as indicated in the machine, the restaurant owner should examine the card of the object of the contract are bound thereby, subject to the provisions of the
itself & follow certain other procedures. Can the restaurant owner be held liable? Mortgage Law & the Land Registration Law.
Held: Yes. The restaurant owner is liable for damages due to his negligence, as this
is a contract pour autrui. The restaurant is affiliated with the credit card company & Real Rights & 3rd Persons
they signed an agreement so that the card’s holders could use their cards to pay in • Another example of when a 3rd person not a party to a contract is affected or
establishments. may be subject to its provisions.
The holder’s offer to pay by means of his credit card constitutes not only an o Ex. A lease of real estate recorded in the Registry of Property between
acceptance of the said stipulation but also an explicit communication of his a lessor & lessee shall bind a subsequent buyer who purchases &
acceptance to the obligor. comes into the possession of the contract’s object which is the
property leased. The latter is bound to honor the contract entered into
CASE: Young v. CA by the former lessor.
Lesson: The favored party must also communicated acceptance of the right of first § A sublessee is also bound by the contract of the lessor and the
refusal to the obligor, lest the right be revoked by operation of law. lessee. If the lessor terminates the lease contract for a valid
Facts: X owns a piece of land & a building. It rents out several rooms in the building, cause, the sublessee can be ejected from the leased premises
including one room to Y. X received an order from the City Engineer to demolish the even if he is not a party to the lease contract.
building. Y filed an action to annul the demolition order. § If the lessor was successful in judicially ejecting the lessee, the
• As an incident to this case, the parties executed a compromise agreement following can likewise be ejected despite the fact that they
provides that Y & all persons claiming rights under him bind themselves to were not made parties to the ejectment suit:
voluntarily & peacefully vacate the premises which they are occupying as 1. Trespassers, squatters, or agents of the defendant-
lessees which are the subject of the demolition order & to surrender lessee fraudulently occupying the property to frustrate
possession thereof to X within 60 days from written notice, subject to the the judgment;
proviso that should X decide to sell the subject property, “Y would have the 2. Guest or other occupants of the premises with the
right of first refusal.” permission of the defendant-lessee;
2 years later, X sold the property by way of dacion to Z. The land was subdivided into 3. Transferees pendente lite;
2 parcels, both in the name of Z. Z sold half the property to B & half to C. 4. Sub-lessees;
• X filed a case for the annulment of the sale to C & for specific performance & 5. Co-lessees;
damages against Y & Z.

6. Members of the family, relatives & other privies of the • Another example of when a 3rd person not a party to a contract is affected.
defendant-lessee. • Art. 1381 (3) - a contract shall be rescissible if it is undertaken in fraud of
o Ex. A property mortgaged as a collateral of a debt & recorded in the creditors when the latter cannot in any other manner collect the claim due
Registry of Property shall bind any subsequent possessor-owner of the them.
same. o In such a case, even if the creditor is not a party to the contract
intended to defraud him, he is given legal personality by law to
CASE: Estate of Llenado v. Llenado terminate the contract.
Lesson: (1) The rights & obligations pass to the heirs of the deceased and the heir of
the deceased lessor is bound to respect the period of the lease. The same principle Article 1314. Any 3rd person who induces another to violate his contract shall be
applies to the option to renew the lease. As a general rule, covenants to renew a liable for damages to the other contracting party.
lease are not personal but will run with the land. Consequently, the successors-in-
interest of the lessee are entitled to the benefits, while that of the lessor are Inducing Others to Violate Contracts
burdened with the duties and obligations, which said covenants conferred and • Could be referred to as “tort interference”
imposed on the original parties. o Malice on part of the 3rd party
(2) The provisions of a lease contract which was transmitted to the heirs must be o Legal rights of the plaintiff are interfered with
exercised; otherwise, it can be lost. • While a contract between 2 parties cannot impose on a stranger a liability in
Facts: In a 1978 Agreement, Romeo, as lessee, agreed to transfer his rights & accordance with the terms of the contract without said stranger’s consent, a
interests under the lease with option to renew in favor of Orlando, the latter’s heirs, stranger does owe to the parties to the agreement a duty not to interfere with
successors, & assigns. When Orlando died in 1983, the right was transmitted to his its performance
heirs. The lot, however, was subsequently sold in 1987. Do the heirs have a right at o A contract confers certain rights on the person with whom it is made,
this present stage to argue that they should still be entitled to lease the property? & not only binds the parties, but also imposes on all the world, in a
Held: No. When Orlando died on Nov. 7, 1983, the lease contract was set to expire sense, the duty of respecting the contractual obligation.
26 days later or on Dec. 3, 1983, unless renewed by Orlando’s heirs for another 4
• Not only to contract of services; applies to any case where a person
years. While the option to renew is an enforceable right, it must necessarily be first
maliciously persuades another to break a contract with a 3rd person
exercised to be given effect.
• Measure - If the persuasion be used for the indirect purpose of injuring the
A clause relative to the renewal of the lease agreement at the option of the lessee
plaintiff, or benefiting the defendant, at the expense of the plaintiff, it is a
gives the latter an enforceable right to renew the contract in which the clause is
found for such time as provided for. The agreement is understood as being in favor malicious act, which, in law & in fact, is a wrongful act & thus an actionable
act of injury issued from it.
of the lessee, & the latter is authorized to renew the contract and to continue to
occupy the leased property after notifying the lessor to that effect. A lessor’s o BUT no liability ordinarily attaches where the party sought to be
charged in damages was acting in the lawful exercise of some distinct
agreement to renew gives a privilege to the tenant, but is nevertheless an executory
contract, & until the tenant has exercised the privilege by way of some affirmative right.
o MOREOVER, if none of the legal rights of the plaintiff are interfered
act, he cannot be held for the additional term. In the absence of a stipulation in the
lease requiring notice of the exercise of an option or an election to renew to be given with, an action for damages cannot be maintained.
within a certain time before the expiration of the lease, which of course, the lessee • An action for damages is NOT the sole remedy.
must comply with, the general rule is that a lessee must exercise an option or o In a proper case one may properly be enjoined from in any way
election to renew his lease and notify the lessor thereof before, or at least at the procuring the violation of lawful & valid contract.
time of the expiration of his original term, unless there is a waiver or special o While the one who violates his contract may be personally liable to the
circumstances warranting equitable relief. other party thereto for its breach, the party guilty of such breach may,
The election of the option to renew in this case cannot be inferred from Orlando’s nevertheless, recover against the one who induces him to violate his
heirs continued occupation of the lot even after his death. Since the lessor is contract when the latter, by such acts & persuasion, intended to injure
contesting the right of the heirs to stay on the land, the latter had the burden to the other contracting party or to coerce him into adopting a line of
prove that Orlando or any of the heirs exercised their right to renew the lease. Since business against his will & judgment.
there is no evidence of this overt act, then the lease had already expired. • Ex. If A was contracted by B to be the resident painter in his studio for 1 year
& C maliciously induces B to dishonor the contract so that he can go to C’s
Article 1313. Creditors are protected in cases of contracts intended to defraud them. studio, C can be liable for damages under Article 1314.
Creditors Damages
• The compensation awarded for the damage suffered.

o Damage – the loss, hurt or harm which results from injury Held: No. SC rejected this contention, but also did not award damages.
• One is liable in an action for damages for a non-trespassory invasion of In this case, Trendsetter Marketing asked the lessor to execute lease contracts in its
another’s interest in the private use & enjoyment of assets if: favor, & as a result Trendsetter deprived Company X of the latter’s property right.
(1) The other has property rights & privileges with respect to the use or Clearly, the 3 elements of tort interference are present in this case. However,
enjoyment interfered with nothing on record imputes deliberate wrongful motives or malice on Z, thus there
(2) The invasion is substantial can be no award of damages, absent clear evidence of malice.
(3) The defendant’s conduct is a legal cause of the invasion, & The contracts were nullified & there was a permanent injunction against the
(4) The invasion is either intentional & unreasonable or unintentional & implementation of the contract between Z & Y.
actionable under general negligence rules.
• Law of torts is concerned with the duty to respect the property of others, & a Article 1315. Contracts are perfected by mere consent, & from that moment the
cause of action ex delicto may be predicated upon an unlawful interference parties are bound not only to the fulfillment of what has been expressly stipulated
by one person of the enjoyment by the other of his private property. but also to all the consequences which, according to their nature, may be in keeping
o This may pertain to a situation where a 3rd person induces a party to with good faith, usage and law.
violate his undertaking under a contract.
• In PH tort law, there must always be MALICE, with intent to cause harm or Article 1316. Real contracts, such as deposit, pledge & commodatum, are not
injury to a party. perfected until the delivery of the object of the obligation.
o Where there was no malice in the interference of a contract, & the
impulse behind one’s conduct lies in a proper business interest rather Perfected Contracts
than in wrongful motives, a party cannot be a malicious interferer. • A contract is the law between the parties. Any non-fulfillment of the contract
o Where the alleged interferer is financially interested, & such interest will make the violator liable.
motivates his conduct, it cannot be said that he is an officious or • The law likewise states that the parties are bound to fulfill all the
malicious intermeddler. consequences which, according to their nature, may be in keeping with good
faith, usage, & the law.
Elements of Tort Interference o The parties are bound to exercise the diligence of a good father of a
(1) Existence of a valid contract family with respect to the thing sought to be delivered unless there is
(2) Knowledge on the part of the 3rd person of the existence of contract; & another standard of care stipulated by the parties or required by a law.
(3) Interference of the 3rd person is without legal justification or excuse o There is an implied obligation to do the act contracted with reasonable
(4) Malice (in PH) care in order that the person or property of others may not be injured
by any force which he sets in motion or by any agent or agency for
CASE: Song Pin Bun v. CA which he is responsible.
Lesson: Intervening in another’s contract for business interests does not lead to o They are likewise obliged to deliver with the determinate thing which is
damages if it lacks malice or a desire to cause injury to another; it can, however, the object of the contract all its accessions & accessories even though
lead to permanent injunction. they may not have been mentioned.
Facts: Company X leased property from the lessor Y. After the lease expired, the o They shall be liable for fortuitous event in case of delay.
company still occupied the premises. When the managing partner of Company X
died, the son, Z, of the said managing partner took possession of the premises for Delivery & Perfection
his own company, Trendsetter Marketing, using the leased premises as warehouse • GR: A contract is perfected by mere consent of the parties.
for his textile business. o Ex. A contract of sale is consensual & is perfected once agreement is
• X asked Z & Trendsetter Marketing to vacate the premises. They refused & reached between the parties on the subject matter & the
instead asked the lessor for the execution of formal contracts of lease with consideration.
his own corporation. The lessor agreed. The lease contracts were executed. o However, ownership over the object of the contract of sale is
• X sued for the nullification of the lease contracts on the ground of contractual transferred only upon actual or constructive delivery.
interference under Article 1314. X won but did not order Y & Z to pay • EXC: There are contracts which are perfected, not by mere consent alone, but
damages. They were only ordered to pay attorney’s fees. by the delivery of the object of the contract. These are real contracts such as
Trendsetter & Z contend that since no award of damages were imposed & the lower deposit, pledge & commodatum.
court did not rule that Trendsetter caused damage, the contract between o An accepted promise to deliver something by way of commodatum is
Trendsetter & the lessor should not be annulled & there should be no permanent binding upon the parties, but the commodatum itself shall be
injunction. Is their contention correct? perfected upon the delivery of the object of the contract (Art. 1934).

§ The bailee in commodatum acquires the use of the thing o The father & the mother shall be the legal guardian of the property of
loaned but not its fruits. Hence, if he does not have the object the unemancipated common child without the necessity of a court
which he is entitled to make use, there can never be appointment.
perfection. The contract can not be implemented. § In case of disagreement, the father’s decision shall prevail
o A contract of pledge is constituted by the owner of the object to be unless there is a judicial order to the contrary.
pledged to secure a loan. o Parents can enter into contract with respect to properties of their
§ In a pledge, it is indispensable that the thing pledged be placed children even without court approval if this will involve only simple
in the possession of the creditor, or of a 3rd person by common acts of administration like repairs of properties owned by the children.
agreement. This transfer of possession is a requirement of law § BUT: With respect to acts of dominion like selling, encumbering
under Art. 2093. Hence, before a contract of pledge can be or alienating the properties of their children, court authority is
perfected, the object pledged must first be delivered. needed; otherwise the contract shall be considered void.
o Delivery is also required before a contract of deposit is perfected o Where the value of the property or the annual income of the child
because, under Art. 1962, a deposit is constituted from the moment a exceeds P50,000, the parent concerned is required to furnish a bond
person receives a thing belonging to another, with the obligation & in such amount as the court may determine, but not less than 10% of
principal purpose of safely keeping it & of returning the same. the value of the property or annual income, to guarantee the
performance of the obligations prescribed for general guardians.
Article 1317. No one may contract in the name of another without being authorized • BUT: A contract entered into in the name of another would be unenforceable
by the latter, or unless he has by law a right to represent him. unless it is ratified by the person on whose behalf it was executed, before it is
A contract entered into in the name of another by one who has no authority or legal revoked by the contracting party, when it is executed by:
representation, or who has acted beyond his powers, shall be unenforceable, unless o One who ostensibly might have but who, in reality, had no real
it is ratified, expressly or impliedly, by the person on whose behalf it has been authority or legal representation, or
executed, before it is revoked by the other contracting party. o One who, having such authority, acted beyond his powers
Agency CASE: Yao Kai Sin v. CA

• A contract where a person binds himself to render some service or to do Lesson: A corporate officer or agent may represent & bind the corporation in
something in representation or on behalf of another, with the consent or transactions with 3rd persons to the extent that authority to do so has been
authority of the latter conferred upon him, & this includes powers which have been intentionally conferred,
o The principal of the agent must comply with all the obligations which & also such powers as, in the usual course of the particular business, are incidental
the agent may have contracted within the scope of his authority. to, or may be implied from, the powers intentionally conferred, powers added by
• When the agent has exceeded his power (ultra vires), the principal is not custom & usage, as usually pertaining to the particular officer or agent, & such
bound except when he ratifies it expressly or tacitly. apparent powers as the corporation has caused persons dealing with the officer or
o Such would make the contract unenforceable agent to believe that it has conferred.
o Even when the agent exceeded his authority, the principal is solidarily Facts: The president & chairman of Corporation X entered into a contract with
liable with the agent if the former allowed the latter to act as though Corporation Y, but such president & chairman had no authority under the law or the
he had full powers. corporate by-laws to enter into such agreement.
• In the execution of the agency, the agent shall act in accordance with the • The by-laws of Corporation X state that it is the Board of Directors that
instructions of the principal. “enters into” agreements, & the president & chairman “executes & signs,” for
o In default thereof, he shall do all that a good father of a family would & in behalf of the corporation, all agreements the corporation may enter into
do, as required by the nature of the business. Corporation Y, in making its claims, said that the president & chairman had been
• When a sale of a piece of land or any interest therein is through an agent, vested with “apparent authority.” Is the contract enforceable?
the authority of the latter shall be in writing; otherwise, the sale shall be Held: No. The contract is unenforceable. The president & chairman was not
void. empowered by the by-laws of Corporation X to enter the agreement between
• Examples in the Family Code: Corporation X & Y. The president merely signs the agreement after the Board has
o Parents & those exercising parental authority have the right and duty approved it.
to represent their unemancipated children in all matters affecting their A corporation can act only through its officers & agents, “all acts within the powers of
interests. said corporation may be performed by agents of its selection; &, except so far as
limitations or restrictions may be imposed by special charter, by-laws, or statutory
provisions, the same general principles of law which govern the relation of agency

for a natural person govern the officer or agent of a corporation, of whatever status
or rank, in respect to his power to act for the corporation. *CASE: Regal Films v. Concepcion
Agents when once appointed, or members acting in their stead, are subject to the Lesson: Ratification of the acts of an agent who had no authority to act should
same rules, liabilities & incapacities as are agents of individuals & private persons. always be made before the revocation of the other party.
Corporation Y did not provide enough evidence that Corporation X had clothed its Facts: The agent of a certain movie actor entered into an agreement with Regal
president & chairman with apparent authority as evidenced by similar acts executed Films designed to constitute as an addendum to the original agreements between
in its favor or in favor of other parties. the movie actor & Regal Films so that the lawsuit between the movie actor & Regal
Films will finally be settled.
Supplement to Corporate Agency Cases • The movie actor disavowed the addendum, contending that, by the time the
• Although an officer or agent acts without, or in excess of, his actual authority agent transacted the addendum, she was not anymore his agent.
if he acts within the scope of an apparent authority with which the • In the preliminary conference in court, Regal Films intimated to the movie
corporation has clothed him by holding him out or permitting him to appear actor that it was willing to release him from the original contracts instead of
as having such authority, the corporation is bound thereby in favor of a pursuing the addendum. Thereupon, the movie actor surprisingly manifested
person who deals with him in good faith in reliance on such apparent to the court that he was accepting the addendum. On the basis of this
authority, as where an officer is allowed to exercise a particular authority with acceptance, a decision by way of a compromise agreement was entered by
respect to the business, or a particular branch of it, continuously & publicly, the court. Regal Films filed a counterclaim against the movie actor.
for a considerable time. Can the compromise agreement be enforced?
• If a private corporation intentionally or negligently clothes its officers or Held: No. The compromise agreement cannot be enforced. There was no ratification.
agents with apparent power to perform acts for it, the corporation will be • Consent is manifested by the meeting of the offer & the acceptance upon the
estopped to deny that such apparent authority is real, as to innocent 3rd thing & the cause which are to constitute the agreement.
persons dealing in good faith with such officers or agents. o The offer, however, must be certain & the acceptance seasonable &
o This apparent authority may result from: absolute; if qualified, the acceptance would merely constitute a
(1) The general manner by which the corporation holds out an counter-offer.
officer or agent as having power to act or, in other words, the • At the first instance, the addendum was flatly rejected by the movie actor on
apparent authority with which it clothes him to act in general, the theses (a) that he did not give his consent thereto nor authorized anyone
or to enter into the agreement, and (b) that it contained provisions grossly
(2) The acquiescence in his acts of a particular nature, with actual disadvantageous to him. The outright rejection of the addendum made
or constructive knowledge thereof, whether within or without known to the other ended the offer. When respondent later filed his
the scope of his ordinary powers. Manifestation, stating that he was, after all, willing to honor the addendum,
• Examples where apparent authority led to corporate liability: there was nothing to accept.
o CASE: Francisco v. GSIS – GSIS validly accepted the offer of • Verily, consent could be given not only by the party himself but by anyone duly
compromise made by the plaintiff. The terms of the compromise authorized and acting for & in his behalf. But by respondent’s own admission,
telegram the plaintiff sent were clear, & the General Manager of GSIS the addendum was entered into without his knowledge & consent.
signed it with his name & the GSIS Board Secretary informed the • There was no ratification because the actor did not ratify the contract before
plaintiff that the compromise had been accepted. the revocation of Regal Films
o CASE: Board of Liquidators v. Kalaw – The practice of the corporation
has been to allow its general manager to negotiate & execute Class Discussion
contracts in its copra trading activities for & in NACOCO’s behalf Ratification must come before the other party rejects the offer.
without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all Supplement to Compromise Case
corporate contacts, but that board itself, by its acts & through • Compromise – an agreement between 2 or more persons who, for preventing
acquiescence, practically laid aside the by-law requirement of prior or putting an end to a lawsuit, adjust their respective positions by mutual
approval. consent in the way they feel they can live with.
o Reciprocal concessions are the very heart & life of every compromise
Ratification of Unenforceable Contract agreement, where each party approximates and concedes in the hope
• Can be ratified expressly or impliedly by the person on whose behalf it has of gaining balanced by the danger of losing.
been executed, before it is revoked by the other contracting party • It is, in essence, a new contract.
• Ratification must always come BEFORE revocation.

CHAPTER II. – ESSENTIAL REQUISITES OF A CONTRACT. A: No, Y is in pari delicto since this is the second type of void contract (ostensible,
but void because of the law). Hence, the pari delicto doctrine applies.
GENERAL PROVISIONS.
SECTION 1. – CONSENT.
Article 1318. There is no contract unless the ff. requisites concur:
1. Consent of the contracting parties; Article 1319. Consent is manifested by the meeting of the offer & the acceptance
2. Object certain which is the subject matter of the contract; upon the thing & the cause which are to constitute the contract. The offer must be
3. Cause of the obligation which is established. certain & the acceptance absolute. A qualified acceptance constitutes a counter-
offer.
Requisites of a Contract Acceptance made by letter or telegram does not bind the offerer except from the
• All 3 requisites must be present. time it came to his knowledge. The contract, in such a case, is presumed to have
• Absence of any one of the requisites creates an inexistent contract. It been entered into in the place where the offer was made.
produces no effect.
o *CASE: Modina v. CA – Inexistent contracts can be invoked by any Article 1320. An acceptance may be express or implied.
person whenever juridical effects founded thereon are asserted
against him. Consent & Offer
§ Ex. A transferor can recover the object of such contract by • Consent –The concurrence of the wills of the offerer & the acceptor as to the
accion reinvidicatoria18 & any possessor may refuse to deliver it thing & the cause which constitute a contract.
to the transferee, who cannot enforce the transfer. • Offer – a manifestation of a willingness to enter into a bargain so made as to
o The rule on pari delicto as between the parties does not apply in cases justify another person in understanding that his assent to that bargain is
of inexistent contracts. invited & will conclude it
§ If there is an ostensible contract with all the elements present o Must be so complete that its absolute acceptance forms an
ostensibly, there is pari delicto. agreement with all the terms necessary & intended by the parties
o There can be no agreement until its terms are settled; an offer which
Class Discussion is not complete is merely a step in the negotiations.
A “no contract” situation is significant, as explained by the SC in Modina v. CA. The • Making an offer – means inviting an acceptance which, if given, will finally
relevance is in the doctrine of in pari delicto. The doctrine of pari delicto states that if create the contract
both parties are equally guilty, they have no remedy against each other. In Modina, o The offer empowers the person offered to create a contract
SC distinguished two kinds of void contract – • Negotiation – formally initiated by an offer
1. Void and inexistent contract – one element is missing o Policitacion – an imperfect promise; merely an offer
2. Ostensible contract, but void – all elements are present, but because of some o *CASE: Laudico v. Arias – Public advertisements or solicitations are
provision of law, it is void ordinarily just invitations or proposals; these relations, until a contract
To which kind of contract does pari delicto apply? Only in ostensible contracts that is perfected, are not considered binding commitments. The offer, at
are void (hence, only in the second type). this stage, may be withdrawn; the withdrawal is effective immediately
after its manifestation, & not necessarily when the offeree learns of
Class Discussion the withdrawal.
Q: X wants to get a visa in the U.S. X has no proof of ownership of real property. X • Until a contract is perfected, there are no binding agreements
goes to friend Y and says, “Can you pretend the property you own in Forbes belongs o Any time before perfection, the parties may stop
to me? Just sign the notarized deed of sale.” Y says OK. After X gets his visa, Y goes o Withdrawal is effective immediately after manifestation, & not when
to him and says, “Can I get my property back?” X says “No, since you already gave the offeree learns of the withdrawal
me the property!” Can Y get the contract declared void?
A: Yes, because the contract is absolutely simulated and false under the first type of Class Discussion’’
contract (void & inexistent). Q: Can the offeree publish the acceptance on the newspaper & assume constructive
Q: X buys shabu from Y. Shabu is prohibited under the law, of course. X never paid Y knowledge?
back for the shabu. Can Y run after X in court? A: NO. There must be actual knowledge.
Acceptance
18 Action to recover ownership over real property. • No acceptance – no concurrence of will & no consent

• CASE: Salonga v. Farrales • Failure to comply with the 1st condition (imposed on the perfection of a
o Lesson: The essence of consent is the conformity of the parties on the contract) results in the failure of a contract
terms of the contract, the acceptance by one, of the offers made by • Failure to comply with the 2nd (imposed on the performance of an obligation)
the other. In a bilateral contract (e.g. contract to sell), where there is merely gives the other party options &/or remedies to protect interests.
merely an offer by one party, without the acceptance of the other, (2) An acceptance may be express or implied, & this can be inferred from the
there is no consent. contemporaneous & subsequent acts of the contracting parties.
o Facts: By way of compromise, X attempted to sell land to Y, which Y Facts: The company accepted the bid of a particular supplier based on the latter’s
rejected. proposals & stated in its letter of acceptance that the awarding of the project to the
o Held: There is no contract. Consent is an essential element of the said supplier was subject to certain basic terms and conditions such as: 1) payment
existence of a contract, & when it is wanting, the contract is non- shall be on a progress billing basis with a guarantee bond; 2) the project shall be
existent. undertaken pursuant to the attached specifications; 3) all materials that will be used
• Acceptance must be absolute. in the project shall be brand new; 4) the project must commence immediately and
o May be express or implied completed within 20 working days; 5) the supplier must submit a performance bond
o Except where a formal acceptance is so required, although the & a contractor’s all-risk insurance; 6) there is a warranty of 1 year against defective
acceptance must be affirmatively & clearly made & must be evidenced material and/or workmanship. Was there an acceptance despite the conditions?
by some acts or conduct communicated to the offeror, it may be made Held: Yes. The “terms & conditions” in the letter of acceptance were not tantamount
either in a formal or an informal manner to a qualified acceptance. The terms are imposed on the performance of the
o May be shown by acts, conduct, or words of the accepting party that obligation, rather than the perfection of the contract.
clearly manifest a present intention or determination to accept the Even assuming that the company’s acceptance was conditional, there was also
offer to buy or sell implied acceptance on the supplier’s part when they submitted (1) the performance
o Acceptance may be shown by the acts, conduct or words of a party bond & (2) the contractor’s all-risk insurance.
recognizing the existence of the contract of sale.
• Acceptance must be unconditional. Time of Knowledge if Acceptance is by Letter or Telegram
o Must be identical to the terms of the offer • Acceptance by letter or telegram does not bind the offerer except from the
o Qualified acceptance - variation from the proposal either by way of time it came to his knowledge
omission, addition or alteration o Ex. If A offered to B his property & B, through telegram, sent his
§ Considered as a counter-offer acceptance but, before A actually received the telegram, he informs B
§ NOT acceptance; neither party is bound of the revocation of his offer, no contract can be perfected.
§ BUT an acceptance is not conditional if the acceptor expresses
dissatisfaction with the offer, yet gives his unqualified assent, CASE: Tan v. Planters Product
or if he adds immaterial words. Lesson: The essence of consent is the agreement of the parties on the terms of the
o Both the modified acceptance & an unconditional assent after such contract. It is the concurrence of the minds of the parties on the object & cause
modified acceptance are in effect nothing more than counter which constitutes the contract. The area of agreement must extend to all points that
propositions that must be assented to by the original offerer before the parties deem material; otherwise, there is no consent at all.
any binding obligation is fastened on the parties. Facts: One of the parties asserted that the non-commercial provisions of a lease
§ In case the original proponent accedes to the modification contract were not material to its execution, & therefore their non-consideration
imposed & gives notice to that effect, the contract is should not negate the creation of the contract. Is this correct?
concluded. Held: No. If the parties consider material other provisions, though ordinarily not
• It is not necessary in every instance that an express significant, to arrive at the perfection of the contract, those other stipulations must
assent to the modified acceptance be shown. likewise be agreed upon by the parties.
o If the parties proceed with their contract as if the condition of the
acceptance were a part of it, this is as effectual as an acceptance as if Class Discussion
the changes had been formally assented to. Q: Is there such a thing as constructive acceptance, i.e., an acceptance not
personally known to the offeror, as when it was just published in a newspaper of
CASE: Jardine Davies v. CA general circulation?
Lesson: (1) Distinguishing between a condition imposed on the perfection of a A: NO. Acceptance must be personally and actually known to the offeror.
contract & a condition imposed merely on the performance of an obligation – Q: Is there such a thing as constructive withdrawal of offer? For example, A offered B
his car for P10,000 by snail mail. B accepted the sale.

A: GR: A must read the acceptance before it is considered accepted (it is actual revocation or withdrawal of the offeror is the first to reach the offeree. The
knowledge that counts). acceptance by the offeree of the offer after knowledge of the revocation or
EXC: withdrawal of the offer is inefficacious. The termination of the contract when the
1. When the offeror made a clear manifestation that he is withdrawing his offer negotiations of the parties terminate and the offer and acceptance concur, is largely
(Laudico v. Arias – like mailing the withdrawal in the post office; that is constructive a question of fact to be determined by the trial court.
knowledge on the part of the acceptor). Thus, if the acceptee sends by mail the offer Facts: On Mar. 16, X handed over a Mar. 14 offer letter to Y, which stated that if Y
accepting, while the offeror sends out the withdrawal. If the offeror reads the accepted the terms, he had to affix his signature at the bottom. Y asked for time to
acceptance first, there is no contract, because withdrawal of offer can be think about whether or not he wanted the offer. On Apr. 4, however, X withdrew the
CONSTRUCTIVE. letter so he could sell the same property to Z. On Apr. 7, however, Y sent a copy of
Withdrawals are effective immediately after manifestation and not necessarily when the letter with his signature, expressing his acceptance of X’s offer. Can Y still claim
the offeree learns of the withdrawal. But as the GR, the offeror must have there was a perfected contract between himself & X, & hence, the property should
knowledge. be given to him & not Z?
2. Malbarosa v. CA Held: No. The contract is perfected only from the time an acceptance of an offer is
Q: X gave Y an offer with details. X said, “If you consent to the terms above, you must made known to the offeror. If an offeror prescribes the exclusive manner in which
sign the conforme below.” X and Y saw each other in the supermarket. Y said, “You acceptance shall be indicated by the offeree, an acceptance of the offer in the
know what? I accept everything in the offer sheet!” Is there a contract? manner prescribed will bind the offeror. On the other hand, an attempt on the part of
A: NO, there is no contract. According to Art. 1321, the offeror may state the time, the offeree to accept the offer in a different manner does not bind the offeror as the
place, and MANNER OF ACCEPTANCE, all of which must be complied with. BUT it is absence of the meeting of the minds on the altered type of acceptance.
different if the offeror already benefited from the contract. Y’s argument that he was not accorded by X reasonable time to accept or reject his
Q: If the contract says, “You must sign the conforme below” without indicating the offer does not persuade. It must be noted that there was not time frame fixed by X
time in which to accept, what is the time? for Y to accept or reject the offer. When the offer has not fixed a period for the
A: The time is immediate. offeree to accept the offer, & the offer is made to a person present, the acceptance
Q: X tells Y, “Sign the bottom for acceptance.” Y signs & X says, “OK!” Is there must be made immediately. Because Y did not immediately accept the offer on Mar.
already a contract? 16, X had the right to withdraw the offer, which X did in this case on Apr. 4.
A: Yes. Y claims he actually signed the letter on Mar. 28, & in his mind this constituted his
Q: If there is no signature, but Y is given the item provided in the stipulations of the acceptance, but unless & until X received a copy of the letter, it cannot be argued
contract, is there a contract that a contract had already been perfected between X & Y.
A: Yes.
CASE: Matias v. CA
Article 1321. The person making the offer may fix the time, place, & manner of Lesson: Haggling over exorbitant prices means there is still no acceptance of the
acceptance, all of which must be complied with. offer; it is the offerer who has the right to make offers which the other party could
accept.
Offerer’s Options Facts: A subsequent new owner of a leased Hacienda offered to sell to the lessees
• The offerer can indicate: the property subject of the lease. The offer was ignored by the lessees who instead
o The manner of acceptance (integrated into price) filed a suit to compel the new subsequent owner to sell the property in an amount &
o The time when acceptance is to be made in a manner which the lessee feels reasonable. During the early stages of the
o The place where it should be made negotiations, the lessees have already been in arrears in the payment of rentals,
• The offerer will not be bound by an acceptance made by the acceptor in any which delinquency lasted up to the time of the consummation of the sale of the
other manner than that specified by the offerer, unless the offerer acquiesces Hacienda. Can the lessees insist on their desired price?
in the change. Held: No. Instead of discussing with the new owner the terms & conditions they wish
to impose on the projected sale, the lessees insist on their claim that the price of the
*CASE: Malbarosa v. CA lots are exorbitant; & that their right to purchase the lot at a price fixed in the
Lesson: An offer made inter praesentes must be accepted immediately. If the parties complaint was disregarded. Lessees’ insistence as to the price of the lot rests on the
intended that there should be an express acceptance, the contract will be perfected false assumption that the fixing of the price of the lot they wanted to purchase is one
only upon knowledge by the offeror of the express acceptance by the offeree of the of the rights granted to them by law.
offer. An acceptance which is not made in the manner prescribed by the offeror is
not effective but constitutes a counter-offer which the offeror may accept or reject. Contract of Sale
The contract is not perfected if the offeror revokes or withdraws its offer and the

• Manner of payment of the purchase price – part of the price; an essential o Ex. A letter of acceptance may be sent by mail, but if, before such mail
element before a valid & binding contract of sale can exist is received & read by the offeror, either the offeror or the acceptor
o Parties must also meet on the terms or conditions of the price, died, there is still no contract because the offer has become
otherwise there is no sale ineffective.
• An agreement on the manner of payment goes into the price
o A disagreement on the manner of payment is tantamount to a failure Class Discussion
to agree on the price. Q: A sent offer sheet to B. B received offer sheet to A. Before A got it, B became
• Even if the parties have agreed as to the object of the sale & the purchase insane. Then A got the acceptance. Is there a contract?
price but still have not agreed on the manner of how & when the A: No. By legal effect, there is no offer.
downpayment & the installments are to be paid, the contract is NOT
perfected & there is no contract of sale. CASE: Villanueva v. CA
Lesson: The insolvency of a bank & the consequent appointment of a receiver
Article 1322. An offer made through an agent is accepted from the time acceptance restrict the bank’s capacity to act especially in relation to its property.
is communicated to him. Facts: A person offered to a particular bank the purchase of a certain foreclosed
property. The offer was accepted by the bank through a board resolution which
Contract of Agency however was not relayed to the person making the offer. The person was able to
• A person binds himself to render some service or to do something in know of the acceptance only after the bank was placed under receivership by the
representation or on behalf of another, with the consent or authority of the Central Bank as said bank became insolvent. Is the offer still effective?
latter. Held: No. The offer became ineffective; no contract was created because the
purported contract of sale never reached the stage of perfection.
• The principal must comply with all the obligations which the agent may have
Corollarily, the offeror cannot invoke the resolution of the bank approving his bid as
contracted within the scope of his authority.
basis for his alleged right to buy the disputed properties.
o When the agent has exceeded his power, the principal is not bound
except when he ratifies it expressly or tacitly.
Article 1324. When the offerer has allowed the offeree a certain period to accept,
o If the offer is made through an agent, acceptance of the offer can be
made to such an agent. the offer may be withdrawn at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a consideration, as something
o HOWEVER, when a sale of a piece of land or any interest therein is
paid or promised.
through an agent, the authority of the latter shall be in writing,
otherwise the sale shall be void.
Option Contract
*Article 1323. An offer becomes ineffective upon the death, civil interdiction, • An option is a contract granting a privilege to buy or sell at a determined price
insanity, or insolvency of either party before acceptance is conveyed. within an agreed time
• Also called the “option period”
Class Discussion
“Conveyed” in Art. 1323 means “actually read;” recall there is no constructive An Option Contract Founded on a Separate Consideration
acceptance. • A privilege existing only in one party — the buyer.
o For a separate consideration paid, he is given the right to decide to
Ineffective Offer – When Either Party, Before Conveying Acceptance purchase or not, a certain merchandise or property, at any time within
1) Dies the agreed period, at a fixed price.
2) Suffers civil interdiction • This being his prerogative, the buyer may not be compelled to exercise the
3) Becomes insane option to buy before the time expires.
4) Becomes insolvent • Jurisprudence demonstrating an “option” contract founded on a separate
consideration:
Ineffective Offers Explained o CASE: Vda. de Quirino v. Palarca – There was a lease contract with the
• There is no contract not simply because there is no acceptance but, more option to buy where “the consideration for the lessor’s obligation to
importantly, because the offer has become ineffective. sell the leased premises to the lessee, should the lessee choose to
o When an offer is ineffective, nothing can be accepted. exercise his option to purchase the same, is the obligation of the
• “Before acceptance is conveyed” – before acceptance has come to the lessee to sell to the lessor the building &/or improvements
actual knowledge of the offeror.

constructed &/or made by the former, if he fails to exercise his option A: NO, unless X explicitly tells Y it should be refundable. Because in an option, you
to buy said premises.” pay for the PERIOD.
o CASE: Serra v. CA – The lessee is to initiate the transferring of the Q: If the offeror violates the option contract, can offeree file case for specific
building and/or improvements on the property to petitioner, should performance for the contract?
respondent bank fail to exercise its option within the period stipulated. A: No. The only thing that can be had is damages.
• Consideration in an option contract – anything of value, unlike in sale where
it must be the price certain in money or its equivalent *Article 1325. Unless it appears otherwise, business advertisement of things for
sale are not definite offers, but mere invitations to make an offer.
Class Discussion
An option is a separate contract where the object is the PERIOD; the period may be Advertisements of Things for Sale
with consideration or with no consideration (ex. reservation fees for condominiums). • Generally, advertisement of things for sale – mere invitations to make an
offer.
Rules When There is an Option Period (Ang Yu Asuncion v. CA) • Ex. If a seller advertises that he intends to sell his house to any willing
1) If the period is not itself founded upon a consideration purchaser, it is an invitation for the purchaser to make an offer as to how he
o The offeror is still free & has the right to withdraw the offer intends to buy the house. The offer of the purchaser should of course include
1. Before its acceptance or, all the essential requirements to make a valid contract such as the price of
2. If an acceptance has been made, before the offeror’s coming the house. The phrase “unless it appears otherwise” connotes that the
to know of such fact, by communicating that withdrawal to the advertisement may constitute an offer which is certain.
offeree.
o The right to withdraw must not be exercised whimsically or arbitrarily; Class Discussion
otherwise it could give rise to a damage claim under Art. 19, which An invitation for the reader to make an offer.
ordains that “every person must, in the exercise of his rights & in the BUT: If the advertisement is SO DETAILED (with object clearly described, place of
performance of his duties, act with justice, give everyone his due, & payment and manner of payment indicated, super complete), the advertisement is in
observe honesty & good faith.” itself the offer.
2) If the period has a separate consideration
o A contract of “option” is deemed perfected; it would be a breach of Earnest Money
that contract to withdraw the offer during the agreed period. • DIFFERENT from an option contract
§ The option is an independent contract by itself, & must be • Considered as part of the price in a contract of sale
distinguished from the projected main agreement (subject o Can be a proof of the perfection of the contract of sale.
matter of the option) o HOWEVER, it is NOT the giving of the earnest money per se, but the
o If, in fact, the optioner-offeror withdraws the offer before its proof of the concurrence of all the essential elements of the contract
acceptance (thus “exercising the option”) by the optionee-offeree, the of sale which establishes the existence of a perfected sale.
latter may NOT sue for specific performance on the proposed contract • Ex. If the buyer & the seller agreed that an “earnest deposit” should be made
(“object” of the option) since it has failed to reach its own stage of by the seller merely to guarantee that the buyer will not back out from the
perfection. sale, such earnest deposit is NOT earnest money that can be considered as
§ The optioner-offeror, however, renders himself liable for proof of the perfection of the contract.
damages for breach of the option.
o In these cases, care should be taken of the real nature of the Effect of Non-Purchase in Option Period
consideration given
• Upon the expiration of the option period & the person given such option does
o Ex. If the consideration has been intended as part of the consideration
not manifest his acceptance, the offeror may offer the intended contract to
for the main contract with a right of withdrawal on the part of the
somebody else.
optionee, the main contract could be deemed perfected
o Any contract perfected with such other person shall be done in good
o Ex. An earnest money in a contract of sale can evidence its perfection
faith.
(Art. 1482, Civil Code).
Article 1326. Advertisements for bidders are simply invitations to make proposals, &
Class Discussion
the advertiser is not bound to accept the highest or lowest bidder, unless the
Q: X pays reservation fee for a condominium at P15,000 to Y. If X decides not to buy
contrary appears.
it anymore, can he get the P15,000 back?

Ads to Bid • The minors misrepresented themselves.
• A person who entertains an advertisement to bid does not automatically • The minors only interposed their objection in 1951, when one of them turned
become the other party to a contract. 18 in 1947, thus the 4-year prescription period in the Civil Code should
o He is only allowed to make his proposals or his offer. apply.19
o If he makes his bid, he thereby makes an offer which is not binding Can the minors set up the defense of minority to block the claim of the creditor?
unless it is accepted. Held: Yes. SC ruled that the minors can set up the defense of minority to resist the
o Offeror still has the right to set time, place & manner claim, distinguishing this case from Mercado v. Espiritu, which held that minors who
• Ex. When a company starts the process of a bidding & disseminates the misrepresent their ages cannot be absolved from the contract they entered into.
document denominated the “Terms Conditions of the Bidding” to the bidders, • Despite the failure of the minors disclose their minority in the same
the dissemination of the said documents constitutes an “advertisement” to promissory note they signed, it does not follow as a legal proposition, that
bid in the project. they will not be permitted thereafter to assert it. They had no juridical duty to
o The bid proposals or quotations submitted by the prospective disclose their inability.
suppliers are the offers. • In Mercado v. Espiritu, there was ACTIVE misrepresentation, because the
o The favorable reply of the company to one of the prospective suppliers minor was required to give his age in a form & he lied about it; in this case,
is the acceptance. the minors were not asked about their age, & thus they did not outright
misrepresent themselves.
Article 1327. The ff. cannot give consent to a contract: • As for the prescription, there is reason to doubt the pertinency of the 4-year
(1) Unemancipated minors; period fixed by Art. 1301 where minority is set up only as a defense to an
(2) Insane or demented persons, & deaf-mutes who do not know how to write. action, without the minors asking for any positive relief from the contract.
They have not filed in this case an action for annulment. They interposed an
Minors excuse from liability.
• Emancipation takes place by the attainment of majority age, at the age of 18. • However, the minors here were paid for the loan to the extent they were
o Leads to termination of parental authority over the person & property benefited during WW2.
of the child, who shall be qualified & responsible for all acts of civil
life, save the exceptions established by existing laws in special cases Class Discussion
• *Contracts entered into by an unemancipated person are annullable. • Active misrepresentation: Writing that you are 26 when you are actually 15;
o HOWEVER, persons who are capable cannot allege the incapacity of you would not have standing to annul the contract.
those with whom they contracted to annul the contract. • “Unemancipated minor” in Art. 1327 applies only to PASSIVE
o Only the minor can invoke the ground that a contract is annullable MISREPRESENTATION.
because, at the time it was entered into, he was still a minor.
• *When the defect of the contract consists in the incapacity of one of the Insane or Demented Persons
parties, the incapacitated person is NOT obliged to make any restitution • Likewise annullable & valid up to the time they are rendered ineffective by
except insofar as he has benefited from the thing or price received by him. the courts.
o Ex. If a person of age bought property from a minor & the latter o The law presumes that the contract has been entered into by
received the purchase price, the person of age cannot file a case to competent persons. To annul a contract, one must prove the insanity
annul the contract on the ground that the other party is a minor. of the other party at the time of the perfection of the contract.
§ If the minor, upon coming of age, timely files a case to annul • 3 Classes of Mental Incapacity:
the contract, he is not obliged to return that part of the o Idiots – insane from birth
purchase price which he had spent which did not redound to o Lunatics – someone sane at one time, but who from some cause or
his benefit, such as losses from gambling, but he is obliged to another has lost use of his reason
pay or reimburse the other party for amounts which he has o Those who are not legally totally incapacitated, but are mentally weak
spent for his benefit like payment of tuition fees in school. – all forms of mental weakness which do not render the person
affected totally incapable of transacting business or managing his
*CASE: Braganza v. De Villa Abrille [M: Distinguish this from Mercado] affairs.
Lesson: Minors who misrepresent their age can set up minority as their defense as • The insanity must have a direct bearing on the agreement.
long as their misrepresentation is PASSIVE, & not active.
Facts: 2 minors signed a promissory note, without telling the creditor their ages. The
debtor sought to enforce the promissory note against them, stating that:
19The provisions of Art. 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.

o A monomania or delusion unconnected with the subject matter of the State of Drunkenness
contract does not destroy its binding force. • The intoxication is of such a character as to perpetuate an undue advantage
o If the person’s ailment is mere mental weakness, but it does NOT over the drunken person.
totally destroy the ability to comprehend the nature & effect of the • An agreement other than for necessities, made by a person when so drunk as
transaction, such is NOT a ground for the avoidance of a contract to be incapable of understanding its nature & effect, is voidable at the
entered into by such persons in the absence of evidence showing intoxicated person’s option
fraud, duress, or undue influence. • One or more of the influences mentioned below should have been operative
o BUT: If the insane delusion is so connected with the subject matter of at the time the minds of the parties met on the terms of the contract
the agreement as to render one of the parties thereto incapable of
understanding the nature or effect of the contract, it is thereby Situations When Contract during Drunkenness is Voidable
rendered voidable at the option of the party so afflicted. 1) When it appears that the drunkenness was brought about by the opposite
• The agreement cannot be avoided by the other party or a 3rd person; the party
privilege is personal. o If one party to a transaction procures the intoxication of the other &
o BUT it is generally true that when the insane person is not under a then takes advantage of his condition to obtain the contract or
guardian & the other contracting party has no reasonable cause to conveyance it will be voidable at the intoxicated person’s option,
believe him otherwise insane, the agreement is valid if equitable & notwithstanding the degree of drunkenness may not have been
beneficial to such insane person, & it has been so far executed that excessive
the other party cannot be placed in status quo. 2) That a fraudulent advantage was taken of it
• A person of unsound mind is liable on his contract for necessities. o Mere intoxication unmixed with any inequitable conduct on the part of
the other party to the agreement is insufficient to invalidate a contract
Deaf-Mutes and Inability to Write entered into, unless it is complete drunkenness
• Contracts entered into by deaf-mutes who do not know how to write are also 3) That the drunkenness was so complete as to deprive the party of his reason
annullable. of an agreeing mind
o The law is clear that being a deaf-mute alone is not enough to make o Intoxication which merely prevents the party from giving proper
the contract voidable. attention to what he is doing or from fully realizing the nature of his
• For the contract to be annullable, the deaf-mute must likewise not know acts is insufficient to invalidate a contract.
how to write.
Hypnotic Spell
Class Discussion • A contract entered into during a hypnotic spell is likewise voidable.
For deaf-mutes, it’s NOT read and write. It’s WRITE ONLY. Don’t get confused by this! • Hypnosis – an artificially induced state, resembling sleep, but characterized
I’ll mark you as wrong if you do. by exaggerated suggestibility & continued responsiveness to the voice of the
hypnotist
Article 1328. Contracts entered into during a lucid interval are valid. Contracts
agreed to in a state of drunkenness or during a hypnotic spell are voidable. *Article 1329. The incapacity declared in Article 1327 is subject to the modifications
determined by law, & is understood to be without prejudice to special
Lucid Interval disqualification established in the laws.
• That period of time when an insane person acts with reasonable
understanding, comprehension, & discernment with respect to what he is Article 1330. A contract where consent is given through mistake, violence,
doing intimidation, undue influence, or fraud is voidable.
o Contract is VALID when entered into during a lucid interval
• However, where one is shown to have been mentally deranged at a recent Freedom of Will
period anterior to the execution of the contract, that condition is presumed • To create a contract, the meeting of the mind must be free, voluntary, willful
to continue & with a reasonable understanding of the various obligations the parties
o Burden of proof is on the other party to show that the agreement was intend to be bound.
entered into during a lucid interval or after recovery • A contract obtained through duress or mistake is annullable.
o PROVIDED that the derangement is not caused by a temporary • Where duress is exerted on one of the parties of such a kind as to overcome
ailment, such as fever, fits, or the like his will & compel a formal assent to an undertaking when he does not really
agree to it, the agreement is not binding.

o UNLESS the other deals with him in good faith, in ignorance of the as the conditions which principally moved both parties to enter
improper influence, & in the belief that the party is acting voluntarily. into the contract was a mistake.
• A unilateral mistake in the making of an agreement, of which the other party
Class Discussion is entirely ignorant & to which he in no way contributes, will not afford ground
Payment by a minor is VOID & therefore recoverable by that minor unless natural for its avoidance or rescission
obligations kick in (where it is consumed or spent by the other party in good faith, o UNLESS it is such a mistake as goes to the substance of the
under Art. 1239; Art. 1427). agreement itself
• Ex. Minor gives old guy payment for money that old guy gave him. Old guy, in
good faith, uses the money to buy a mango & consumes it. This is already CASE: Spouses Heizrich & Betty Theis v. CA
non-recoverable by the minor because of natural obligations. Lesson: Mistake in Art. 1331 involves either (1) ignorance, which is the absence of
Payment to a minor is VOIDABLE, and therefore is valid until made void. That is Art. knowledge with respect to a thing & (2) mistake properly speaking, which is a wrong
1241; & that is unless (1) he has kept the thing delivered until he hits 18 or (2) it conception about said thing, or a belief in the existence of some circumstance, fact,
has benefited him. It is ratifiable & hence voidable. or event, which in reality does not exist.
These provisions are the “subject to the modifications determined by law.” Facts: The seller, via a deed of sale, sold to the buyer a property which was not the
one appearing in the deed of sale. The mistake was not the fault of the parties but
*Article 1331. In order that mistake may invalidate consent, it should refer to the was due to mistake in the survey made on the property.
substance of the thing which is the object of the contract, or to those conditions The seller, upon learning of this, immediately offered the buyer another property
which have principally moved one or both parties to enter into the contract. instead or a refund of money double the amount paid for the property, but which
Mistakes as to the identity or qualifications of one of the parties will vitiate consent offer was unreasonably refused by the buyers prompting the seller to file for
only when such identity or qualifications have been the principal cause of the annulment of the contract based on mistake. Can the contract in this case be
contract. invalidated?
A simple mistake of account shall give rise to its correction. Held: Yes. The contract can be invalidated on the basis of Art. 1331 as it involved
mistake as to the substance of the thing & seller was in good faith. He simply made
Mistake a misconception about the lot.
• General rule: BOTH must be mistaken; but there are exceptions
• For mistake to make a contract voidable, it must either refer to: *Mistake as to Identity or Qualifications
1) The substance of the thing which is the object of the contract • Mistake as to the identity or qualifications of one of the parties vitiates
o Affects SUBSTANCE, not object — if there’s no object, there’s consent only when it is the principal cause of the contract.
no consent o When the identity of one of the parties is a material element of the
o Ex. Where the contract for the sale of a cow was entered into, contract, a mistake in respect thereto invalidates the agreement.
both parties believing her to be barren, which turned out to be • Ex. Y contracts with X believing him to be M.
untrue, it was held that mistake was not as to the mere quality o Y, the offerer, has in contemplation a definite person with whom he
of the animal sold, but went to the very nature of the thing & intends to contract.
that the vendor had a right to rescind the agreement. • One has the right to select the person with whom he wishes to contract,
2) Those conditions which principally induced the parties to enter into a especially where the nature of the transaction is such that it is important that
contract. performance be had by a particular individual
o The conditions must not be mere incidents to the consideration o Ex. Agreements with a painter, writer, or which call for the
o Ex. If A lent money to X only because he was informed that it performance of any act requiring skill such as the one sought to be
was the special request of Z to A, who owed Z a favor which A contracted with is supposed to possess
wanted to reciprocate, & only because there was an apparent • In such cases one may contract with whomever he may choose & the
assurance from Z that he will be a solidary debtor; & X knew sufficiency of his reasons for so doing is immaterial.
that, had it not been for the request of Z & his engagement as • Thus, where one sends an order for goods or other proposal to another, a 3rd
a solidary debtor, the loan would not have been consummated; person cannot without the knowledge of the one sending the order or making
& it eventually turned out that there was no request & no the proposal become a party to the agreement by accepting such proposal.
assurance coming from Z who, in reality merely vouched for the
credit worthiness of X, the said loan agreement can be *CASE: Roman Catholic Church v. Pante
annulled by A on the ground that there was an invalid consent Lesson: For mistake as to the qualification of one of the parties to vitiate consent, 2
requisites must concur:

1. The mistake must be either with regard to the identity or with regard to the former.
qualification of one of the contracting parties; &
2. The identity or qualification must have been the principal consideration for Presumptions in Contracts
the celebration of the contract. • The parties are presumed to have understood the terms of the contract they
Facts: The Church agreed to sell a piece of property only to the occupant of the voluntarily signed, especially when there is proof that they are educated.
same. The property is a 32 sqm. strip of rural land used as a passageway from the o Courts are not authorized to extricate parties from the necessary
house of a certain Pante to the municipal road. Pante wanted to buy 32 sqm. lot. consequences of their acts, & the fact that the contractual stipulations
The Church agreed, believing Pante was the occupant. As it turns out, however, may turn out to be financially disadvantageous will not relieve parties
Pante was not the occupant per se. The Church filed suit to annul the sale on the thereto of their obligations.
ground of mistake & Pante’s fraud & misrepresentation as to his occupancy. Will it o They cannot disavow the agreement due to supposed
prosper? misunderstanding of its terms.
Held: No. Contrary to the Church’s contention, the actual occupancy of a buyer over • BUT: Art. 1332 provides that, when one of the parties is unable to read, or if
the land does not appear to be a necessary qualification that the Church requires the contract is in a language not understood by him, & mistake or fraud is
before it could sell its land. First of all, nobody could actually reside on or occupy the alleged, the person enforcing the contract must show that the terms thereof
lot, for it was only a 2x16-meter strip of rural land used as a passageway. have been fully explained to the former.
Given the size of the lot, it could serve no other purpose than as a mere • To invoke Art. 1332, one must have the ff. conditions:
passageway; it is unthinkable to consider that a 2x16-meter strip of land could be o He must be unable to read or
mistaken as anyone’s residence. Pante also could not have successfully o He must not understand the language of the contract.
misrepresented himself as the actual occupant of the lot; this was a fact that the • He must first prove such fact or circumstance. Only after sufficiently adducing
Church (which has a parish chapel in the same barangay where the lot was located) evidence proving the fact that he cannot read or that he does not understand
could easily verify had it conducted an ocular inspection of its own property. The the language of the contract will the burden of proof shift to the one enforcing
surrounding circumstances actually indicate that the Church was aware that Pante the contract to show that the terms thereof have been explained to the
was using the lot merely as a passageway. person who is unable to read or who does not understand the language of
The above facts establish that there could not have been a deliberate, willful, or the contract.
fraudulent act committed by Pante that misled the Church into giving its consent to
the sale of the subject lot in his favor. That Pante was not an actual occupant of the CASE: Lustan v. CA
lot he purchased was a fact that the Church either ignored or waived as a Lesson: Where a party to a contract is illiterate or cannot read or cannot understand
requirement. In any case, the Church was by no means led to believe or do so by the language in which the contract is written, the burden is on the party interested in
Pantes act; there had been no vitiation of the Churchs consent to the sale of the lot enforcing the contract to prove that the terms thereof are fully explained to the
to Pante. former in a language understood by him.
Facts: The dispute was whether or not the Deed of Sale was in reality an equitable
Class Discussion of Roman Catholic Church v. Pante mortgage wherein the subject property was merely intended to secure an existing
Q: The Church will only sell property to occupants. The property involved is only a debt by way of mortgage. What is the nature of the document?
passageway. The Church and the buyer agreed already to the sale. But the Church Held: The document was an equitable mortgage based on the clear evidence
said, “Oh yeah, we have a qualification that we can only sell to occupants.” Is the supporting such contract & based on the finding that the illiterate owner of the same
contract now annullable? was made to understand that the deed of sale signed by her merely evidenced an
A: No. Based on the circumstances of the case, the provision is directory only. This is indebtedness to the creditor.
because the passageway cannot be occupied in the first place, since it is precisely The contents of the same were not read nor explained to her so that she may
that, A PASSAGEWAY. While there are qualifications, it is not mandatory for the intelligently formulate in her mind the consequences of her conduct & the nature of
creation of that right. the rights she was ceding in favor of the petitioner.
Mistake of Account CASE: Lim v. CA
• A simple mistake of account shall give rise to its correction. A simple Facts: A deed of confirmation of extrajudicial partition was supposedly executed in
accounting error does not go into the essentials of a contract. English by an elderly woman, who was illiterate & did not know how to speak English.
The deed was executed by Atty. Tan, lawyer & CPA, but it was not notarized & there
Article 1332. When one of the parties is unable to read, or if the contract is in a was no proof that the deed was explained to the elderly woman. Is there fraud in this
language not understood by him, & mistake or fraud is alleged, the person enforcing case?
the contract must show that the terms thereof have been fully explained to the

Held: Yes. Considering the circumstances, the burden was on respondents (the
persons claiming the deed was valid) to prove that the content of the deed was CASE: Calicap-Asmeron v. DBP
explained to the illiterate before she signed it. In this regard, evidence that the Lesson: An alleged lack of legal & technical knowledge does not vitiate consent
respondents submitted failed to discharge that burden. where it is shown that the party understands English & the deed of sale is simply
worded as it is.
CASE: Arriola v. Mahilum Facts: The petitioner in this case argued that she did not give her full consent to the
Lesson: In case one of the parties to a contract is unable to read & fraud is alleged, deed of conditional sale she signed because she did not have a full grasp of the
the person enforcing the contract must show that the terms thereof have been fully legal & technical terms there. Is her argument tenable?
explained to the former. Held: No. First, she did not specify what parts were difficult to understand.
Facts: A sister of an illiterate man was able to have a document signed by the latter Furthermore, the stipulations of the deed itself were simply worded for even a
on the misrepresentation that properties other than his property awarded by a person with slight knowledge of English could easily understand. Furthermore, the
cadastral court to him will be partitioned among the heirs of their parent. It turned petitioner was not illiterate. Her testimonies in court revealed she had no difficulty in
out however that the document included such property. The property was therefore written or spoken English, the language in which the contract was written.
fraudulently distributed to the other heirs. The illiterate filed suit to recover his Art. 1332 was made to acknowledge the fact that there are still many illiterates in
property alleging fraud & misrepresentation. Will the illiterate’s case prosper? the country, & that the documents are usually drawn up in English or Spanish It is
Held: Yes. SC sustained the cause of the illiterate. Since the deed of partition is null, thus part of the state’s policy of promoting social justice.
the reconstituted title & transfer titles arising therefrom are void as well.
The sister knew that there was no other way to obtain the partition of the subject Article 1333. There is no mistake if the party alleging it knew the doubt, contingency,
property than having her brother sign a deed of partition, making the latter believe or risk affecting the object of the contract.
that the deed pertained to the three other lots. The scheme was simple enough
considering that the brother was illiterate. Contracts with Risk or Doubt
The fact that the brother protested the transfer of the title shows that the brother did • Involves a mistake of FACT, not a mistake in law
not actually understand the contents of the contract, as the sister claimed. • Where the parties to an agreement indicate an intention to be bound
irrespective of the existence of certain facts & take the risk of their non-
CASE: Swift Foods v. Spouses Mateo existence, the validity of their agreement is not at all dependent upon the
Lesson: Being a novice in a business is no excuse for negligently performing a existence of such facts.
contract. o Where the parties are conscious that the existence of particular facts
Facts: X & Y entered into a warehousing agreement, where X would store the goods is doubtful & make their agreement on this assumption, the non-
of Y. In a stipulation it was said that X could only release the goods with clearance existence of such facts does not affect the validity of the agreement,
from Y. But X released goods without Y’s consent. When asked to explain his the risk of their existence being taken by the parties.
actions, X admitted not reading, much less understanding, the warehousing • If the parties are conscious of their ignorance as to the existence of some
agreement. He simply followed verbal instructions given to him by sales personnel of facts, the non-existence of such facts is of no consequence; this is said to be
Y. But what the sales personnel asked him to do was a clear breach of the contract predicated upon common experience that if people contract under such
between X & Y. Can X be considered negligent? circumstances, they usually intend to abide by the resolution either way of
Held: Yes. Newness in a particular business cannot be an excuse for violating the the known uncertainty, & have insisted on, & received, consideration for
clear terms of an agreement. X admitted to being a successful businessman in other taking that chance.
forms of business, & hence should have known the dangers of deviating from the • Ex. A seller, not knowing the nature of the stone he found, sold it to a
clear terms of one’s contract. X should not have deviated from the procedure in the purchaser for only $1 after they discussed their ignorance as to the quality &
contract in the absence of any amendment thereon. Ordinary diligence required X to nature of the stone which they surmised to be probably a Topaz. It turned out
inquire with the head office whether or not the instructions of the sales personnel to be a Diamond worth about $1,000.
were authorized. His total reliance on their word, contrary to the terms of the o The contract cannot be annulled or rescinded as there was legally no
contract, is a clear act of negligence for which he could be made liable to pay mistake as to the nature of the stone because when they transacted
damages. the purchase, there was conscious uncertainty & that the parties took
Worse, X admitted that he totally ignored the terms of the warehousing agreement, the risk that it could have been some other valuable object capable of
since he never read it. Unless a contracting party cannot read or does not being sold at a higher price.
understand the language in which an agreement is written, he is presumed to know
the import of his contract & is bound thereby. Not alleging any of the following, X has
Article 1334. Mutual error as to the legal effect of an agreement when the real
no excuse for his actions.
purpose of the parties is frustrated, may vitiate consent.

fear” on the part of the occupied over the show of might by the
Mutual Mistakes occupant. There must be specific acts or instances of such
• A unilateral mistake of law as to the legal effect of an agreement is generally nature & magnitude as to have, of themselves, inflicted fear
not a ground to annul a contract. upon the subject thereof that his execution of the questioned
o In such a situation, the document embodying the agreement is drafted deed or act can not be considered voluntary.
the way the parties have intended it to be such that only its legal o CASE: Laperal v. Rogers
effect is different from what the parties have assumed. § Facts: A person was directly told by the Japanese military
• HOWEVER, a mistake of law may vitiate consent if the ff. requisites are authorities that he should sell his house & warned him that his
present: refusal to sell would be considered as a sign of hostility to the
1) The mistake as to the legal effect of the agreement must be mutual Japanese. Fearing for his life, he sold the house. Is there
2) Such mutual mistake frustrates the real purpose of the parties. ground enough to annul the contract?
• Ex. If A leases to B a property where the latter will construct a four-story § Held: Yes. The contract can be annulled as the consent was
building but it turned out that such building cannot be erected in the said city coerced by direct intimidation & does not fall within the
because of an ordinance prohibiting the same, the contract can be annulled. purview of “collective” or “general” duress.
Article 1335. There is violence when in order to wrest consent, serious or irresistible Threat through Competent Authority
force is employed. • A threat to enforce one’s claim through competent authority, if the claim is
There is intimidation when one of the contracting parties is compelled by a just or legal, does not vitiate consent
reasonable & well-grounded fear of an imminent & grave evil upon his person or • GR: The institution or threatened institution of a civil suit, or ordinary legal
property, or upon the person or property of his spouse, descendants, or ascendants, proceedings to enforce a legal demand does not constitute duress, even
to give his consent. though it may be made in a period of business depression
To determine the degree of the intimidation, the age, sex, & condition of the person o Ex.: Threat to commence legal proceedings for the removal of a dam,
shall be borne in mind. or for the collection of a debt contracted during infancy, to foreclose a
A threat to enforce one’s claim through competent authority, if the claim is just or chattel, or mortgage, to sue out a writ of attachment or levy
legal, does not vitiate consent. executions, or a threat by an officer to arrest an execution debtor and
take him to jail unless he secures the debt, the officer having in his
Annullable Contracts & Conditions Defined possession at the time legal process requiring him to take the debtor
1) Violence – serious & irresistible, leading to total absence of free will into custody, has in each of the foregoing instances been held not to
o Ex. If A coerces B into a contract by continually beating him until he have been procured through duress, etc.
signs the contract, A, in effect, imposes his will on B & therefore, no • EXC: If a civil proceeding actually begun or threatened is wrongful &
valid consent is obtained from B. oppressive in its nature & brought or threatened with the intention of
2) Intimidation – reasonable & well-grounded fear of an imminent & grave evil coercing the adverse party & does in fact coerce such party into the payment
upon his person or property, or upon the person or property of his spouse, of money or the formation of a contract, such payment or contract is made
descendants or ascendants, to give his consent under duress & may be avoided.
o To determine the degree of the intimidation, the age, sex, & condition o Ex. A threat to institute receivership proceedings against a certain
of the person shall be borne in mind. company at a time when it would ruin the company’s business &
o The threats & circumstances must be of a character as to excite the affect the reputation of the defendant, constitutes such duress as will
reasonable apprehensions of a person of ordinary courage, & that the avoid the defendant’s contract to pay a specified sum of money in
agreement be made under the influence of such threats or menace; order to save the business of the company & his own reputation.
the threat must be tangible & direct o Ex. A bond given, or money paid from being falsely attached to release
o CASE: Vda. de Lacson v. Granada property seized in attachment proceedings oppressively instituted or
§ Facts: It was contended that a contract entered into during the conducted may be cancelled or recovered.
Japanese occupation should be nullified because one of the o Ex. When an invalid and unfounded claim for a lien upon real property
parties was constrained to enter the contract & to accept is filed & the necessities of the defendant’s business require that this
Japanese currency for fear that, if he would not do so, he might lien be immediately discharged, payment under such circumstances
endanger his life. Can the contract be annulled? was made under duress & that it might be recovered.
§ Held: No. There was legally no intimidation enough to annul the • A threatened civil action may also amount to duress where the parties are not
contract. The duress must be more than the “general feeling of on an equal footing.

o Ex. Threats made against a person of inferior intellect, or an aged choice. The ff. circumstances shall be considered: the confidential, family, spiritual
weakened in body & mind to the effect that certain civil proceedings and other relations between the parties, or the fact that the person alleged to have
will be instituted, have been held such duress as will avoid a contract been unduly influenced was suffering from mental weakness, or was ignorant or in
induced thereby. Threatening litigation while the defendant is ill, or to financial distress.
continue litigation when the circumstances are oppressive has been
held to amount to duress Undue Influence
• CASE: De Leon v. CA • When a person takes improper advantage of his power over the will of
o Facts: The mother claims that she was intimidated into entering an another, depriving the latter of a reasonable freedom of choice.
agreement by the estranged wife of her son because the said wife • The ff. circumstances shall be considered: the confidential, family, spiritual, &
threatened to bring her son to court for support, to scandalize their other relations between the parties, or the fact that the person alleged to
family by filing baseless suits &, by agreeing to the agreement, the have been unduly influenced was suffering from mental weakness, or was
wife would pardon the said mother’s son for possible crimes of ignorant or in financial distress. However, not all influence is prohibited by
adultery &/or concubinage subject to the transfer of certain law.
properties. Is there intimidation? o Undue influence - must amount to fraud or coercion.
o Held: No. This did not constitute intimidation. Here, the Court listed § The grantor must be overreached & deceived by some false
the requisites of legal intimidation. representation, stratagem or by coercion, physical or moral.
o GR: Solicitations, entreaties, fair argument & persuasion, or appeals
Requisites for Intimidation as Vitiated Consent to the emotions or affections will NOT amount to undue influence
(1) That the intimidation must be the determining cause of the contract, or must § EXC: They overcome the will of the person & take away his
have caused the consent to be given; ability to act as a free agent
(2) That the threatened act must be unjust or unlawful;
(3) That the threat be real & serious, there being an evident disproportion CASE: Banez v. CA
between the evil & the resistance which all men can offer, leading to the Lesson: Solicitation, importunity, argument & persuasion are not undue influence, &
choice of the contract as the lesser evil; a contract is not set aside merely because one party used these means to the
(4) That it produces a reasonable & well-grounded fear from the fact that the consent of the others. Influence obtained by persuasion or argument or by appeals
person from whom it comes has the necessary means or ability to inflict the to the affections is not prohibited either in law or morals & is not obnoxious even in
threatened injury. courts of equity. Such may be termed “due influence.”
Facts: The respondent contended that the letter of a senator unduly influenced
Class Discussion PHHC to approve the transfer of rights of a certain property not to him but to another
Q: X pokes a gun at Y to sign a contract. Y is a world champion in running. Is there person. Was there undue influence enough to annul a contract?
force enough to vitiate Y’s consent to the contract? Held: No. Regardless of whether or not the letter by the senator was in fact given to
A: No. There is no “irresistible” force because Y can run away. PHHC, the evidence shows that the PHHC used evaluation, inspections, &
recommended the transfer of the rights to the other person & the letter had little to
Article 1336. Violence or intimidation shall annul the obligation, although it may no bearing.
have been employed by a 3rd person who did not take part in the contract.
CASE: Marubeni Corp. v. Lirag
Violence or Intimidation Lesson: When the undue influence is caused by executive officials performing their
• May emanate not only from any of the contracting parties but also from 3rd official functions, the contract is not only voidable; it’s void.
persons not a party to the contract. Facts: A consultancy agreement was obtained from a government agency because of
o The contracting party who is not the subject of the violence or the the use of influence of executive officials. Is the contract voidable?
intimidation may not even know that the other party has been Held: This contract is not just voidable; it is void. Any agreement entered
coerced. intobecause of the actual or supposed influence which the party has, engaging him
• Ex. If A is coerced to enter into a contract with X because G threatens to kill to influence executive officials in the discharge of their duties, which contemplates
all the children of A if he does not do so, such contract may be annulled the use of personal influence and solicitation rather than an appeal to the judgment
whether or not X knew of the intimidation. of the official on the merits of the object sought is contrary to public policy.
Consequently, the agreement, assuming that the parties agreed to the consultancy,
Article 1337. There is undue influence when a person takes improper advantage of is null & void as against public policy.
his power over the will of another, depriving the latter of a reasonable freedom of

*Article 1338. There is fraud when, through insidious words or machinations of one Hence, good faith & knowledge is presumed. The exception to this is when there is a
of the contracting parties, the other is induced to enter into a contract which, without duty to disclose.
them, he would not have agreed to.
CASE: Talampas v. Moldex Realty
Fraud Lesson: Innocent non-disclosure of facts, when no duty to reveal them exists, does
• Generally, either at law or in equity, fraud is a false representation of a not amount to fraud.
material fact made by word or conduct with knowledge of its falsehood or in Facts: The contractor & owner entered into a contract for the contractor to develop
reckless disregard of its truth in order to induce & actually inducing another the owner’s property. The owner terminated the contract because there was no DAR
to act thereon to his injury. conversion clearance that was obtained; hence, the project in general could not
• There must always be damage or injury in cases of fraud. push through. The contractor sued the owner for premature termination, & argued
• Ex. if A, an expert jeweler, to be able to sell his glass figurine, told X that such that fraud was involved. He claimed that the owner deliberately failed to inform him
figurine is made of diamonds from South Africa &, on such false of the lack of DAR clearance, for he would not have contracted with the owner had
representation, X bought the figurine, X can annul the contract of sale. he known beforehand that the project lacked such a clearance. Is his argument
tenable?
CASE: Rivero vs. Court of Appeals Held: No. The owner was not under any legal or contractual obligation to disclose the
Facts: A nephew of an old illiterate sickly woman took advantage of her predicament project’s conversion clearance status to the contractor; nor was it shown that the
by making her believe that the “Kasulatan Sa Ganap na Bilihan” was a contract of presence of such a clearance was a consideration for the contractor’s entry into the
mortgage. Knowing that the old woman merely wanted to borrow money secured by contract with the owner. Innocent non-disclosure of facts cannot amount to fraud.
the mortgage of the property, the nephew again took advantage of the desperate
condition of the illiterate woman by making her sign the Kasulatan where it Article 1340. The usual exaggerations in trade, when the other party had an
appeared thereon that he was the buyer of the property. Is the contract valid? opportunity to know the facts, are not in themselves fraudulent.
Held: The contract is annullable. The woman’s consent was obtained thru fraudulent
misrepresentation that the contract she was signing was one of mortgage. Usual Exaggerations
• The law recognizes the practice in trade that there are usual exaggerations
*Article 1339. Failure to disclose facts, when there is a duty to reveal them, as when employed by the parties to consummate a particular transaction.
the parties are bound by confidential relations, constitutes fraud. • If a party is induced by such usual exaggerations, there may be fraud
amounting to active misrepresentation.
Disclosing Facts o If it is within the means of the other party to investigate the
• Each party is not duty-bound to make known to the other any facts both truthfulness of such exaggeration & he does not do so, there is no
within their knowledge or within their opportunity to know. fraud despite the exaggerations.
o The mere fact that one of the parties has superior knowledge of the
value of the property subject of the transaction than the other party is *Article 1341. A mere expression of an opinion does not signify fraud, unless made
not per se fraud. by an expert & the other party has relied on the former’s special knowledge.
• There is only fraud under special & peculiar circumstances, as:
o When a legal or equitable duty is imposed upon the dominant party to Opinions
reveal certain facts material to the transaction • Generally not regarded as a representation of the facts
§ Ex. An animal breeder has a duty to disclose to an ordinary o If the opinion is wrong, it is not seen as deceitful or insidiously
buyer that the particular cow the buyer wants to buy is inducing a party to enter into a contract.
suffering from a disease not detectable to the naked eye. • There are times when, without really having any special knowledge as to the
o When there is a confidential relationship between the parties. object of the contract, a person expresses an opinion about the same. At the
§ Ex. A lawyer, because of his confidential & trust relationship same time, the other party to whom the opinion was relayed may equally
with his client, is duty bound to reveal facts important to the have his own thoughts & observation that would affect his judgment
transaction; otherwise, non-disclosure will constitute fraud. o In such cases, the expression of an opinion will not vitiate consent.
Class Discussion Class Discussion

GR: Does one have duty to disclose facts? NO. LOQUITOR – i.e., when a thing speaks for itself.
EXC: Unless there is a duty to disclose or reveal them (as in a principal-agency It is therefore NOT fraudulent if one says his car can fly, because people know cars
relationship). can’t fly.

parties. The promissory note between the bank & the elderly woman is
Representation v. Opinion (Example) invalidated on the ground of substantial mistake between the parties.
• An illustration of the difference between opinion & representation is found in
the difference between the vendor of property saying that it is worth so much, *Article 1343. Misrepresentation made in good faith is not fraudulent but may
& his saying that he gave so much for it. constitute error.
o Opinion – “It is worth so much”
§ The buyer may adopt if he will Misrepresentation in Good Faith
o Representation “He gave so much for it” • Misrepresentation is, in the main, inclusive of the term fraud. Practically
§ An assertion of fact which, if false to the knowledge of the every fraud is a misrepresentation, but every misrepresentation is not
seller, is fraudulent fraudulent.
• Thus a misrepresentation as to the subject-matter of or parties to a contract
Opinion v. Representation may be innocently made, &, if so, it does not amount to fraud, but is a
Opinion Representation misrepresentation.
No Fraud Fraud • Misrepresentations may be made without the knowledge of its falsity &
“This is good oil land.” “The oil business is profitable.” therefore completely done in good faith. In such a case it may constitute
“This building is beautiful.” “This building is fireproof.” merely an error (mistake).
“This patent is a valuable “This is the only patent that works in the
improvement.” market.” Class Discussion
• Misrepresentation in bad faith = FRAUD
Expert • Misrepresentation in good faith = Not fraud, but still annullable on the basis
• If the opinion is given by one who is thoroughly knowledgeable or is an expert of mistake
in the field such that he knows for a fact that his opinion will turn out to be
false & still induces the other party to enter into the contract on the basis of *Article 1344. In order that fraud may make a contract voidable, it should be serious
such false opinion, fraud can be invoked to annul the contract. & should not have been employed by both contracting parties.
o In such a case, the opinion will be considered as a fact. Incidental fraud only obliges the person employing it to pay damages.
*Article 1342. Misrepresentation by a 3rd person does not vitiate consent, unless Seriousness of Fraud
such misrepresentation has created substantial mistake & the same is mutual. • There must be an intention to injure & that damage or injury in fact resulted.
• The parties must not be in pari delicto.
There must be substantial mistake o They must not have been mutually guilty of fraud.
The same must be MUTUAL • It must not be dolo incidente which is accidental & collateral fraud which
He joked he would make this a question! does not necessarily bear on the decision of the party defrauded to enter into
the contract.
Misrepresentation by a 3rd Person • It must be dolo causante which refers to the very cause why the other party
• Vitiates consent only if it created substantial mistake & the same is mutual entered into the contract.
• CASE: Rural Bank of Caloocan v. CA o The deceit must be serious or sufficient to impress & lead an
o Lesson: A contract may be annulled on the ground of vitiated consent ordinarily prudent person to error. If the allegedly fraudulent actions
if deceit by a 3rd person, even without connivance or complicity with do not deceive a prudent person, given the circumstances, the deceit
one of the contracting parties, resulted in mutual error on the part of here cannot be considered sufficient basis to nullify the contract.
the parties to the contract. o In order for the deceit to be considered serious, it is necessary and
o Facts: A person induced an elderly woman to co-sign a promissory essential to obtain the consent of the party imputing fraud. To
note as debtor & to mortgage her property, without said woman determine whether a person may be sufficiently deceived, the
knowing the nature of the contract. The same person successfully personal conditions and other factual circumstances need to be
misrepresented to the bank the qualification of the elderly woman to considered.
induce the bank to grant the loan. Can the loan agreement be
annulled?
o Held: Yes. The loan agreement signed by the elderly woman can be DEAN MEL’S LECTURE ON TYPES OF FRAUD
annulled on the ground of mistake in the giving of consent by the

may not serve as the basis to annul the contract, which exhibits dolo causante.
1. There can be fraud in the BIRTH of the contract – this is the type of fraud which
However, the party alleging the existence of fraud may prove the existence of dolo
makes the contract annullable. There are two types of fraud in the birth of the
incidente.
contract as found in Art. 1344.
Facts: Woodhouse entered into a contract with Halili to organize a partnership for
• The first type is one that is serious and substantial misrepresentation. This
the bottling & distribution of soft drinks. The partnership did not push through, &
would make the contract voidable.
Halili sued Woodhouse in order to execute the partnership. Woodhouse filed a
• The second type is incidental fraud in relation to the birth of the contract. This counterclaim, in which he argued that Halili had defrauded him because the latter
will only entitle the defrauded party to DAMAGES. This will not make the claimed to be the owner of the franchise of a soft drink bottling corporation, when in
contract voidable. fact he was not. Is the fraud committed against Woodhouse causal fraud?
2. There is ANOTHER type of fraud in Art. 1170. The fraud here is in the Held: No. However, incidental fraud was involved. Halili did actually represent to
IMPLEMENTATION of the contract. The remedy here is Art. 1191, which is rescission defendant that he was the holder of the exclusive franchise. Woodhouse was made
or specific performance, with damages. to believe, and he actually believed, that plaintiff had the exclusive franchise. The
record abounds with circumstances indicative that the fact that the principal
So what are the three types of fraud? consideration, the main cause that induced Woodhouse to enter into the partnership
1. Fraud at the time of birth that is serious and substantial. (dolo causante) agreement with Halili, was the ability of Halili to get the exclusive franchise to bottle
2. Fraud at the time of birth that is incidental. (dolo incidente) and distribute for the defendant or for the partnership. Woodhouse was, therefore,
3. Fraud as a source of liability at implementation stage of the contract. (Art. 1170) led to the belief that plaintiff had the exclusive franchise, but that the same was to
be secured for or transferred to the partnership. Halili no longer had the exclusive
The quantum of evidence needed to prove fraud: clear and convincing evidence franchise, or the option thereto, at the time the contract was perfected. But while he
(which is above preponderance of evidence). had already lost his option thereto (when the contract was entered into), the
principal obligation that he assumed or undertook was to secure said franchise for
*CASE: Tankeh v. DBP the partnership, as the bottler and distributor for the Mission Dry Corporation. If
Lesson: Differences between dolo causante & dolo incidente – Halili was guilty of a false representation, this was not the causal consideration, or
Dolo Causante (Causal Fraud) Dolo Incidente (Incidental Fraud) the principal inducement, that led Woodhouse to enter into the partnership
Makes a contract voidable Entitles the party to damages agreement.
Involves misrepresentations or deceptions Involves fraud that is not serious in But, on the other hand, this supposed ownership of an exclusive franchise was
of a serious character employed by one character & without which the other actually the consideration or price Halili gave in exchange for the share of 30%
party & without which the other party party would still have entered into the granted him in the net profits of the partnership business. Woodhouse agreed to
would not have entered into the contract contract give Halili 30% share in the net profits because he was transferring his exclusive
Must involve the very cause why the other Collateral or incidental to the contract franchise to the partnership.
party entered into the contract Halili had never been a bottler or a chemist; he never had experience in the
Both must be proved by clear & convincing evidence, i.e., a standard less than proof production or distribution of beverages. As a matter of fact, when the bottling plant
beyond reasonable doubt (for criminal cases) & greater than preponderance of being built, all that he suggested was about the toilet facilities for the laborers.
evidence (for civil cases). Hence, while the representation that Halili had the exclusive franchise did not vitiate
Woodhouse’s consent to the contract, it was used by Halili to get from Woodhouse a
Examples of Causal Fraud from Jurisprudence share of 30% of the net profits; in other words, by pretending that he had the
• When the seller, who had no intention to part with her property, was “tricked exclusive franchise and promising to transfer it to Woodhouse, he obtained the
into believing” that what she signed were papers pertinent to her application consent of the latter to give him (Halili) a big slice in the net profits. This is the dolo
for the reconstitution of her burned certificate of title, not a deed of sale; incidente, because it was used to get the other party's consent to a big share in the
profits, an incidental matter in the agreement. Hence, while the contract remains
• When the signature of the authorized corporate officer was forged; or
valid, Halili is liable to pay damages to Woodhouse for the incidental fraud.
• When the seller was seriously ill, and died a week after signing the deed of
sale raising doubts on whether the seller could have read, or fully CASE: Spouses Tongson v. Emergency Pawnshop Bula
understood, the contents of the documents he signed or of the Facts: The Spouses Tongson owned a lot in Davao which they sold to Napala for
consequences of his act. P3M. When Napala gave the Spouses a check to pay for the property, it bounced,
leading to this judicial action. Later, claiming that their consent to the contract of
*CASE: Woodhouse v. Halili sale was vitiated, the Spouses pointed out that Napala’s fraudulent representations
Lesson: If there is fraud in the performance of the contract, then this fraud will give
of sufficient funds to pay for the property induced them into signing the contract of
rise to damages. If the fraud did not compel the imputing party to give his consent, it

sale. Such fraud, according to the Spouses, renders the contract of sale void. On the intend to divest himself of his title & control of the property, hence the
contrary, Napala insisted that the Spouses willingly consented to the sale of the deed of transfer is but a sham.
subject property making the contract of sale valid. Napala maintains that no fraud
attended the execution of the sales contract. Was there causal fraud in this case *Absolute v. Relative Simulation
enough to make the sale void? Absolute Relative
Held: No. There is no causal fraud in this case to justify the annulment of the There is a colorable contract but it has Parties state a false cause in the
contract of sale. It is clear from the records that the Spouses agreed to sell their no substance as the parties have no contract to conceal their real agreement.
property to Napala who offered to pay P3M therefor. Contrary to the Spouses intention to be bound by it.
Tongson’s belief that the fraud employed by Napala was “already operational at the The contract is void (lacks the element The contract is valid, when it does not
time of the perfection of the contract of sale,” the misrepresentation by Napala that of consent); parties are not bound, & prejudice a 3rd person & is not intended
the postdated PNB check would not bounce on its maturity hardly equates to dolo may recover from each other what they for any purpose contrary to law, morals,
causante. Napala’s assurance that the check he issued was fully funded was not the gave under the contract. good customs, public order or public
principal inducement for the Spouses Tongson to sign the Deed of Absolute Sale. policy; parties are still bound by their
Even before Napala issued the check, the parties had already agreed to the sale real agreement.
transaction. The Spouses Tongson were never tricked into selling their property to The apparent contract is not really Parties intend to be bound by their real
Napala. On the contrary, they willingly accepted Napala’s offer to purchase the desired or intended to either produce agreement.
property at P3M. In short, there was a meeting of the minds as to the object of the legal effects or in any way alter the
sale as well as the consideration therefor. juridical situation of the parties.
However, while no causal fraud attended the execution of the sales contract, there is
fraud in its general sense, which involves a false representation of a fact, when CASE: Umali v. CA
Napala inveigled the Spouses to accept the postdated check on the representation Lesson: Absolute or relative simulation can be proved by the acts of the parties that
that the check would be sufficiently funded at its maturity. In other words, the fraud reveal their true intentions.
surfaced when Napala issued the worthless check to the Spouses, which is definitely Facts: There was a Sales Agreement & attached Chattel Mortgage executed
not during the negotiation and perfection stages of the sale. Rather, the fraud between X & Y. It was contended that the failure of Y to pay the consideration proved
existed in the consummation stage of the sale when the parties are in the process of that the contract was absolutely simulated & therefore null & void. Is this argument
performing their respective obligations under the perfected contract of sale. Hence, tenable?
there is no causal fraud in this cause. Held: No. The contract is not absolutely simulated. The subsequent act of Y in
BUT: The Spouses already transferred title of their property to Napala, while Napala receiving & making use of the tractor, subject matter of the Sales Agreement and
failed to fulfill his end of their bargain. While they did not file an action for the Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of X,
rescission of the sales contract, the Spouses specifically prayed in their complaint concomitant with the execution of the Agreement of Counter Guaranty with the
for the annulment of the sales contract, for the immediate execution of a deed of Chattel/Real Estate Mortgage, lead to the conclusion that petitioners had every
reconveyance, and for the return of the subject property to them. The Spouses intention to be bound by these contracts. The occurrence of these series of
likewise prayed “for such other reliefs which may be deemed just and equitable in transactions between X & Y is a strong indication that the parties actually intended,
the premises.” In view of such prayer, and considering Napala’s substantial breach or at least expected, to exact fulfillment of their respective obligations from one
of their obligation under the sales contract, the rescission of the sales contract is but another.
proper and justified. Accordingly, respondents must reconvey the subject property to
the Spouses, who in turn shall refund the initial payment of P200,000 less the costs Article 1346. An absolutely simulated or fictitious contract is void. A relative
of suit. simulation, when it does not prejudice a 3rd person & is not intended for any purpose
contrary to law, morals, good customs, public order or public policy binds the parties
Article 1345. Simulations of a contract may be absolute or relative. The former takes to their real agreement.
place when the parties do not intend to be bound at all; the latter, when the parties
conceal their true agreement. CASE: Javier v. CA
Lesson: A relatively simulated contract binds the parties to their real agreement.
Simulations Facts: A party assigned his timber license to another for a consideration of
• When the apparent contract is not really desired nor intended to produce P120,000, but the Deed of Assignment dated Feb. 15, 1966 stated that, for such
legal effects nor in any way alter the juridical situation of the parties. amount of money, the assignee shall transfer his shares of stock in a corporation to
o Ex. When a person, in order to place his property beyond the reach of be known as Timberwealth Corporation. The assignment was eventually
his creditors, simulated a transfer of it to another, he does not really implemented but the assignee did not fully pay the consideration.

To claim the balance, the assignor sued the assignee who contended that the Held: No. The contract of sale was clearly simulated to facilitate the transaction with
contract was void because the corporation was never set up & there was no transfer the bank as there was absolutely no consideration at all & the parties clearly did not
to him of the shares of stock. Are the assignee’s contentions correct? intend to be bound by the deed of sale & its accompanying documents.
Held: No. The assignee should be held liable considering that the assignment was a
relatively simulated contract which, though containing a false consideration, was not CASE: Francisco v. Francisco-Alfonso
void. Facts: The 2 illegitimate daughters claimed that they bought the 2 properties in
1983 from their deceased father via a “Kasulatan sa Ganap na Bilihan” for P25,000
CASE: JR Blanco v. Quasha but evidence showed that, even with what they claimed as their respective jobs at
Facts: The owner of the property entered into a contract of sale of her property with a that time, they could not possibly have any income to be able to have such amount
company payable in equal annual installments of P25,000 per year. of money at the time of the sale. Is the contract absolutely simulated?
• Simultaneously, the company & the said owner entered into a contract of Held: Yes. SC declared the contract as void for being simulated because there was
lease of the same property whereby the owner would lease the property from no consideration for the same. It was impossible for one of the illegitimate daughters
the company for 25 years for a monthly rental of P2,083.34 or P25,000.08 to have money on hand in the amount of P15,000 just selling goto or lugaw at the
per year. time of the sale. Likewise SC said that it was incredible for the other illegitimate
• The totality of the agreement was called a Sale-Lease-Back Agreement. daughter, who was engaged in the buying & selling of RTW, to have money on hand
It is contended that the sale-lease-back agreement was simulated & therefore void in the amount of P10,000 at the time of the sale. Aside from the fact that a family
because no actual consideration passed from the buyer to the seller. Is this claim friend testified that the illegitimate daughters had no source of income at the time of
correct? the sale, they also did not present a single witness to prove that the seller received
Held: No. Although no actual exchange of money was made, the payment was the purchase price.
effected between vendee & vendor by mutual agreement whereby the monthly rental
which was due the vendor was paid from the annual installment of P25,000 due CASE: Reyes v. Asuncion
from the vendee pursuant to the lease contract executed between them. There is Lesson: The burden of proving the alleged simulation of a contract falls on those
nothing wrong with this arrangement for the same is not contrary to law, morals, who impugn its regularity & validity. A failure to discharge this duty will result in the
good customs, or public policy, but rather for the convenience of both parties. upholding of the contract. The primary consideration in determining whether a
contract is simulated is the intention of the parties as manifested by the express
CASE: Pua v. CA terms of the agreement itself, as well as the contemporaneous & subsequent
Facts: It was proven that the person who allegedly entered into the contract was not actions of the parties. The most striking index of simulation is not the filial
even conceived at the time the contract was executed. Is this contract valid? relationship between the purported seller & buyer, but the complete absence of any
Held: No, it is void. The contract was definitely absolutely simulated. attempt in any manner on buyer’s to assert rights of dominion over the property.
CASE: Velasquez v. CA SECTION 2. – OBJECT OF CONTRACTS

Facts: A debtor was lured by the creditor into making it appear that the debtor sold
to the creditor the collateralized property of the debtor. Article 1347. All things which are not outside the commerce of men, including future
• The creditor told the debtor that this scheme was necessary so that the things, may be the object of a contract. All rights which are not intransmissible may
creditor can borrow money from a certain bank & make use of the property also be the object of contracts.
as collateral. No contract may be entered into upon future inheritance except in cases expressly
• After the loan was obtained, the creditor was supposed to execute a authorized by law.
reconveyance of the property to the debtor who would then assume the loan All services which are not contrary to law, morals, good customs, public order or
from the bank and use the proceeds of the loan to pay off his loan to the public policy may likewise be the object of a contract.
creditor.
• In the implementation of the scheme, 3 documents were executed on the Object of Contracts
same day: 1) a deed of cancellation of the mortgage made by the debtor to • To qualify as an object for purposes of a contract to exist, the object must at
the creditor; 2) a deed of sale of the property from the debtor to the creditor; LEAST be generic – determinate as to its kind
and 3) a document purporting to re-sell the property to the debtor. • Any property or service can be the object of a contract provided that it is
It was contended by the creditor that the sale of the property was authentic after the within the commerce of man.
debtor filed a case to annul all the said documents. Was the sale of the property o Ex. of those not within commerce of man – lands of the public domain,
authentic? like the Luneta Park, a river, or even a fishpond that forms at tributary

leading to the Agno River (for the latter, its conversion to a fish pond will A: No. While inheritance can be the object of the contract, future inheritance cannot.
not change the fact that it is public property) So if your parent dies today, you can waive your right to your share without need of
o Ex. of within the commerce of man – lands acquired by private writing.
appropriation & acquisitive prescription
• A service to assassinate a particular dignitary cannot be the object of a Class Discussion
contract because it is contrary to law & public order. When one speaks of generic property, it need not exist at the time of perfection, but
• In a contract of sale, things having a potential existence may be the object of it should not be a vain hope; there must be a reasonable expectation that it will
such contract; & the efficacy of the sale of a mere hope or expectancy is exist.
deemed subject to the condition that the thing will come to existence.
o Hence, all future puppies of a particular pregnant dog can be the Article 1348. Impossible things or services cannot be the object of contracts.
object of a contract although the puppies are not yet born.
o HOWEVER, the sale of a vain hope or expectancy is void. Impossible Things
• Rights are also the object of contracts, provided they are transmissible. • One cannot be bound to do the impossible. Hence, a contract requiring a
o Ex. One can sell leasehold rights over a property provided that there is person to become a monkey on a particular date is impossible.
no contractual & legal stipulation prohibiting its transmissibility.
• Future things that can be reasonably ascertained can be the object of a Article 1349. The object of every contract must be determinate as to its kind. The
contract. fact that the quantity is not determinate shall not be an obstacle to the existence of
o BUT: Future inheritance cannot be the object of a contract because its the contract, provided it is possible to determine the same, without the need of a
extent, amount & quantity cannot be determined. new contract between the parties.
o Future inheritance – any property or right not in existence or capable
of determination at the time of the contract, that a person may in the Determinable as to its Kind (Generic)
future acquire by succession • The object must be one that can be ascertained with reasonable certainty as
§ One cannot determine with certainty how much inheritance one to its kind.
would get from his father, mother, or any person from whom he o A contract engaging a certain person to perform a deed, without
is called upon to succeed or to inherit. specifying what deed it is, does not make the service determinable &
§ It may happen that the father, at the time of his death, may is thus void.
have some debts to pay. Under the rules of succession, these § But a contract engaging a person to sing in his nightclub
obligations have to be paid 1st to the creditors before the exact identifies the kind of deed to be performed & is valid.
amount 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 as a mango
CASE: Blas v. Santos or guava, the contract is valid.
Lesson: An agreement by a spouse to give his share in the conjugal property is not • The fact that the quantity is not determinate shall not be an obstacle to the
considered future inheritance & can be the object of a contract. existence of the contract, provided it is possible to determine the same,
Facts: The wife agreed to give whatever her share in the conjugal partnership without the need of a new contract between the parties.
property to her heirs once the husband dies. Is this valid? o A contract which engages a person to supply all the ice which a
Held: Yes. The agreement is not upon a future inheritance. It is not an obligation or restaurant needs is valid because the quantity of ice is easily
promise made by the maker to transmit ½ of her share in the conjugal properties ascertainable without the need for a new contract.
acquired with her husband, which properties are declared to be conjugal properties
in the will of the husband. SECTION 3. – CAUSE OF CONTRACTS.
The promise does not refer to any properties that the maker would inherit upon the
death of the husband. The document refers to existing properties which she will Article 1350. In onerous contracts the cause is understood to be, for each
receive by operation of law on the death of her husband, because it is her share in contracting party, the prestation or promise of a thing or service by the other; in
the conjugal assets. remuneratory ones, the service or benefit which is remunerated; & in contracts of
pure beneficence, the mere liberality of the benefactor.
Class Discussion
Q: A & B are brothers. A says, “I’ll pay you with my inheritance.” Allowed? Cause
• Essential or more proximate purpose which the contracting parties have in
view at the time of entering into the contract

• May or may not be tangible Motive Cause
• It can take different forms, such as a prestation or promise of a thing or The particular reason for a contracting The essential reason for the contract
service by another. party which does not affect the other party
• It can be the giving of a sum of money, an object, or even an expectation of & which does not preclude the existence of
profits from a subdivision project. a different consideration
In a contract of sale of a valuable relic, the In a contract of sale of a valuable
CASE: Dihiansan v. CA seller was motivated by some expectation relic, cause is the payment of the
Facts: A corporation decided to sell its property along an avenue & gave the persons of profit while the buyer was motivated to purchase price on the part of the
living near the said property a preferential right to buy the same. purchase the relic by the beauty & rarity of seller & the delivery of the thing sold
• One of the persons given such right, X, was approached by Y who requested the relic. on the part of the buyer
that he be allowed to buy the property with a commitment to re-sell the same
to X, who was originally given the preferential right. X agreed and an Relationship Between Cause & Motive
agreement was signed embodying this commitment. • GR: The motivation of parties is independent from the cause of the contract &
• This scheme was done because the corporation will not sell the property to therefore does NOT form an essential part of it.
any other person except those given a preferential right. • EXC: There are certain situations where the cause is equated to the motive —
• Instead of re-selling to X, however, Y sold the preferential right to another. when it is clear that the motive predetermines the cause.
It was contended that the contract between X & Y who requested to buy the property
was without consideration & therefore void. Is this contention tenable? CASE: PNCC v. CA
Held: No. There was consideration in this case — the preferential right of X to buy the Lesson: As a general rule, the motive of a party in entering into a contract does not
property from the owner. The contract stipulated that Y would re-sell the property affect the validity nor existence of the contract: an exception is when the realization
back to X. of such motive has been made a condition upon which the contract is made to
depend.
Kinds of Contracts Facts: The lessee sought to release itself from paying rentals & from the whole
1) Onerous Contracts – the cause is understood to be, for each contracting contract itself; the lessee contended that the purpose for which it entered the
party, the prestation or promise of a thing or service by the other contract, i.e., to use the leased premises as a site of a rock crushing plant, did not
2) Reciprocal Contracts – the obligation or promise of each party is the materialize. Is the contention of the lessee tenable?
consideration for that of the other Held: No. While the particular purpose for why the lessee entered into the contract of
o CASE: Republic v. Cloribel – where a compromise agreement designed lease did not materialize, the same will not invalidate the contract. The cause in a
to terminate the case between litigating parties to a suit was entered contract of lease is the use or enjoyment of a thing. The lessee still got to enjoy the
into, the cause of the compromise was the mutual waiver & property. Hence, the general rule, rather than the exception, applies here.
abandonment of the parties of their claims against each other
3) Remuneratory Contracts – the cause is the service or benefit which is CASE: E. Razon v. PPA
remunerated Lesson: A contract entered into in order to obtain something, when such would be in
o Ex. When a doctor agreed to diagnose a patient, the cause for violation of law, is void for lack of lawful cause.
engaging the doctor is for him to look at the patient & diagnose him. Facts: The Management Contract under consideration was executed by & between
The fee the doctor receives for his diagnosis is the cause of the E. Razon, Inc. represented by its President, Razon, & PPA, represented by E.S. Baclig,
contract as far as the doctor is concerned. Jr. At the time, E. Razon, Inc. was 60%-controlled by Romualdez, with Razon merely
4) Contracts of Pure Beneficence – the mere liberality of the benefactor is the serving as a “puppet”; Romualdez, as brother-in-law of then-President Marcos, was,
cause of the contract; it does not involve any material thing but rather it by the Anti-Graft & Corruption Law, prohibited from intervening, directly or indirectly,
involves only the generosity of the benefactor in any transaction with the government. PPA cancelled & treated as avoided the
o Ex. A scholarship contract given by a school where an indigent will not Management of the Contract that was executed, precisely because Razon was
pay anything for his education in the said school has for its cause the merely a puppet, & hence the contract entered into violated provisions of law which
liberality & generosity of the benefactor-school. prohibited Romualdez from intervening in the government transaction. Did the PPA
err in treating as cancelled the Management Contract?
Article 1351. The particular motives of the parties in entering into a contract are Held: No. Verily, the transfer of the shares of stock of E. Razon, Inc. representing
different from the cause thereof. 60% equity to persons fronting for Romualdez was void. The invalidity springs not
from vitiated consent nor absolute want of monetary consideration, but for its having
Motive v. Cause had an unlawful cause — that of obtaining a government contract in violation of law.

While the general rule is that the causa of the contract must not be confused with o A contract between a husband & wife to have their respective
the motives of the parties, this case squarely fits into the exception that the motives paramours is contrary to morals.
may be regarded as causa when it predetermines the purpose of the contract. o A contract to foment riots is contrary to public order.
• For Romualdez, the motive was to be able to contract with the government, o A contract waiving the right of an employee to receive what is due him
which he was then prohibited by law from doing, & on Razon’s part, to be able under the law is contrary to public policy.
to renew his nearly-expired management contract. For it is scarcely
disputable that Razon would not have transferred said shares of stock to Article 1353. The statement of a false cause in contracts shall render them void, if it
Romualdez without an assurance from the latter that he would be unduly should not be proved that they were founded upon another cause which is true and
favored with a renewal of the Management Contract. Thus, it came to pass lawful.
that by transferring 60% of the shares in his company to Romualdez, Razon
was able to secure an 8-year contract with respondent PPA & for 6 years False Cause
before its cancellation benefit from the proceeds thereof. • GR: A false cause in a contract makes the contract void.
• He may be deemed to be a participant in the unlawful purpose if, with o Ex. A contract of sale, which states that the price of the object for sale
knowledge thereof, he does anything which facilitates the carrying out of such is P500 when in fact no such price has been paid at all, is void.
purpose • HOWEVER, when a contract, though stating a false consideration, has in fact
• No judicial action is necessary for the annulment of a void contract. Any such a real consideration, the contract is NOT void.
action would be merely declaratory. Thus, it was within the rights of PPA to o If a contract is relatively simulated in terms of cause, it is VALID.
unilaterally cancel & treat as avoided the Management Contract & no o Ex. When a contract stating the consideration of a pen is P1,000 but it
arbitrariness may be attached to its exercise of this right. is only sold for P500 which the seller accepted, the contract is valid.
CASE: Uy v. CA Article 1354. Although the cause is not stated in the contracts, it is presumed that it
Lesson: Where the motive stems from an implied condition of the contract, & both exists & is lawful, unless the debtor proves the contrary.
parties knew of such motive & implication, the motive can also become synonymous
with the cause. CASE: Liam v. Olympic Sawmill Co.
Facts: The National Housing Authority (NHA) purchased certain lots & thereafter Lesson: The debtor must produce evidence that a cause is not stated in the contract;
cancelled the Deeds of Sale relative thereto considering that the lots turned out to the law presumes that there is a valid cause.
be unsuitable for its housing project. The seller sued for damages. Should the case Facts: A loan of P10,000 was entered into &, subsequently, another loan agreement
prosper? was executed increasing the original amount of the previous loan by P6,000 “to
Held: No. The case was dismissed. The cancellation was valid as it was based on the answer for attorney’s fees, legal interests & other costs incident thereto to be paid
negation of the cause arising from the realization that the lands, which were the unto the creditor” upon the termination of the agreement.
object of the sale, were not suitable for housing. For NHA, the cause was the • The debtor failed to pay & a case was filed.
acquisition of the land. For the seller, the cause was to obtain the price. But the • By way of summary judgment, decision was rendered ordering the defendant-
motive of the NHA, which was known to the seller, was to use said lands for housing. debtor to pay the principal amount of P10,000 & the additional amount of
It is clear that NHA would not have entered into the contract were the lands not P6,000. The latter amount was contested as being usurious.
suitable for housing. In other words, the quality of the land was an implied condition Was the imposition by the court of the additional amount valid?
for the NHA to enter into the contract. On the part of the NHA, therefore, the motive Held: Yes. The additional P6,000 was valid as liquidated damages suffered by
was the cause for its being a party to the sale. plaintiff. Under Art. 1354, thought the cause of a contract is not stated, it is
presumed to exist & is presumed lawful. Though the cause of the P6,000 agreement
Article 1352. Contracts without cause, or with unlawful cause, produce no effect was not stated, it is presumed to exist under Art. 1354. Furthermore, since there is
whatsoever. The cause is unlawful if it is contrary to law, morals, good customs, no more usury law, then that is no longer an issue here as well. Since defendants
public order or public policy. had not proven that the P6,000 obligation was illegal, it is deemed valid.
Lack of Cause Article 1355. Except in cases specified by law, lesion or inadequacy of cause shall
• If there is no cause, no contract is perfected, as there can be no meeting of not invalidate a contract, unless there has been fraud, mistake, or undue influence.
the minds.
• This is also true if the cause is unlawful. CASE: Auyong Hian v. CTA
o A contract engaging a party to steal is unlawful as it is against the law.

Lesson: Generally, an inadequate cause will not invalidate a contract, absent a
showing that said cause is against the law or obtained through fraud, mistake, or Article 1356. Contracts shall be obligatory, in whatever form they may have been
undue influence. entered into, provided all the essential requisites for their validity are present.
Facts: The contract involving tobacco was assailed as invalid due to inadequacy of However, when the law requires that a contract be in some form in order that it may
price. X claimed that the tobacco’s worth was P7M, but the contract between X & Y be valid or enforceable, or that a contract be proved in a certain way, that
stipulated that the tobacco was only worth P1.5M. What is the real value of the requirement is absolute & indispensable. In such cases, the right of the parties
imported tobacco? stated in the following article cannot be exercised.
Held: The value is P1.5M as provided in the contract. While X makes various
arguments as to inadequate consideration, inadequate consideration will not Forms of Contracts
invalidate a contract, as provided for under Art. 1355. X has not shown that his • GR: Forms is not important for contracts
situation falls under the exception in Art. 1355, as no law supports his cause. o EXC: Certain contracts require certain forms to be enforceable
§ In such cases, the form becomes absolute & indispensible
CASE: Penaco v. Rueva • In the matter of formalities, the PH system still follows “Ordamiento de
Lesson: A valuable consideration, however small or nominal, if given or stipulated in Alcala” – upholding the spirit & intent of the parties over formalities
good faith is, in the absence of fraud, sufficient. A stipulation in consideration of $1
is just as effectual a consideration as a larger sum stipulated for or paid. Contracts Which Must Have Some Form
Facts: X is the seller of a house & lot. He invoked the inadequacy of the 1) Contracts which the law requires to be in some particular form (writing) in
consideration paid for the properties, amounting to P1,000, to invalidate the order to make them valid & enforceable (solemn contracts).
contract of sale. More specifically, X contended that the consideration is for the o Non-observance renders the contract void & of no effect
house only since the lot on which it is constructed is public land which could not be o Ex. Donation of immovable property must be in a public instrument so
sold. He further argued that the building alone had an assessed value of P1,500 & the donation is binding. (Art. 749)
the land’s value is at P5,000. Should the contract be invalidated? o Donation of movables worth more than P5,000.00 which must be in
Held: No. Indeed, the lot on which the building sold a retro is constructed is public writing, “otherwise the donation shall be void.” (Art. 748)
land & X has no right to sell it. What is sought to be transferred, however, is not the o Contracts to pay interest on loans (mutuum) that must be “expressly
ownership of the land, but the rights, interests, & participation of X “as public land stipulated in writing” (Art. 1956)
claimants thereof by virtue of the decision of the Bureau of Lands,” which rights o Agreements in Arts. 1744, 1773, 1847 & 2134, Civil Code.
could be waived, transferred, or alienated. 2) Contracts that the law requires to be proved by some writing (memorandum)
By its contract, X had undertaken to effect legal transfer of all his rights over the lot of its terms, as in under Art. 1403 (2) of the Civil Code.
to Y a retro & his assigns upon the consolidation of the title over the building in the o Non-compliance therewith will not permit, upon the objection of a
vendee, & whether or not Y is qualified to acquire that land of the public domain party, the contract, although otherwise valid, to be proved or enforced
claimed by X depends upon the Director of Lands. For this reason the land issue by action
should be raised in the administrative proceedings. o Their existence generally not being provable by mere oral testimony
The inadequacy of the price is not sufficient proof that the consideration of P1,000 (unless wholly or partly executed), these contracts are exceptional in
was for the house alone. The vendee a retro could not have possibly bought the requiring a writing embodying the terms thereof for their enforceability
house alone without securing from the seller a specific & fixed arrangement by action in court.
regarding the lot on which the house is built, otherwise, he could be ejected
therefrom at the will of the vendors a retro. CASE: Dauden-Hernaez v. De Los Angeles
Lesson: A contract for an actress’ services for a movie are valid in any form, as they
Class Discussion are not required to be in a certain way.
Q: A issued a check worth P100,000 to B. According to B, it was a check because A Facts: A movie actress filed a suit to recover her compensation for her services as a
bought something from him. According to A, it was a donation to B. leading lady in 2 movies. The producers resisted such claim on the ground that the
A: A (the debtor) must prove his side. contract was void as there was no written agreement to the same. Is the contention
of the producers valid?
Class Discussion Held: No. The contract is not one of the exceptions to the general rule.
Q: I will buy this lot for 1 centavo. Is it valid?
A: YES. It is valid, not void. It could be rescinded, but it is still valid. CASE: Cenido v. Apacionado
CHAPTER 3. FORMS OF CONTRACTS.

Lesson: Formalities intended for greater efficacy or convenience or to bind 3rd
inheritance to you.” This was only oral. Is the contract valid if not in a
persons, if not done, would not adversely affect the validity or enforceability of the
public instrument?
contract between the contracting parties themselves.
o A: Yes.
Facts: There is a written contract of sale of real property, not in a public instrument.
o Q: Is it valid if not in writing?
Is the contract still valid despite it not being in a public instrument?
o A: Yes. Just that it has no greater efficacy except as to A & B; however,
Held: Yes. The requisites of a contract were proven. While a contract of sale of real
the sale will not be registrable in the Register of Deeds. BUT note that
property must be in writing for enforceability under the Statute of Frauds, it need not
there can be no advance waiver of inheritance, or else it will be void.
be in a public instrument for purposes of validity.
• Enforceability: Valid but unenforceable
CASE: Deloso v. Sandiganbayan • Validity: Void
Lesson: Leasing of property generally need not be reduced into writing; it is valid
when an oral contract is later written down. Article 1357. If the law requires a document or other special form, as in the acts &
Facts: The contract was assailed as anomalous on the ground that it was originally contracts enumerated in the ff. article, the contracting parties may compel each
made orally & then later reduced into writing. The Sandiganbayan ruled that certain other to observe that form, once the contract has been perfected. This right may be
tractors were given to lessees in a municipality “without any compensation for their exercised simultaneously with the action upon the contract.
use.” However, all the witnesses testified that the lessees were aware of the
obligations & agreed to be bound to all the terms & conditions which the Compelling to Make a Written Contract
Municipality may impose. Is the contract valid? • A party, who desires to have his contract reduced in the particular form
Held: Yes. The contract is valid. The fact that the lease agreements were not initially required by law, can file an action to compel the other party to comply with
reduced into writing, this having been done sometime later by the municipal council such form.
through a resolution adopted for the purpose, does not make the transactions • If the requirement of law is directory only & has no bearing validity or
anomalous, nor preclude the generation of the contractual relation between lessor & enforceability, the parties can enforce the contract &, at the same time,
lessee. Leasing is not one of those cases required by law to be in writing to be valid. demand that it be reduced in the form required by law.
CASE: Cruz v. Gruspe CASE: Zaide v. CA
Lesson: Courts will not look at the title of the document, but its contents, since the Lesson: An unregistered deed of sale is still valid.
denomination or title given by the parties to a document is not conclusive of the Facts: A deed of sale was so far defective as to render it unregistrable in the Registry
nature of its contents. of Property. It did not set forth the name of the vendee’s husband & was for this
Facts: A joint affidavit of undertaking was signed by Cruz & Leonardo, which provided reason refused registration by the Register of Deeds. Despite this, is the contract still
that they promised to pay for the damaged car of Gruspe. In the event that they valid?
could not replace the car within the period stipulated in the contract, they would pay Held: Yes. The defect was unsubstantial & did not invalidate the deed. Though
the cost of fixing Gruspe’s car in the total amount of P350K, with interest at 12% per defective in form, the sale was valid; & the parties could compel each other to do
month. There is now an issue as to whether or not the document is actually an what was needed to make the document of sale registrable.
“affidavit” or a “contract.” Is it a contract? The law provides that if an agreement concerns “the sale of land or of an interest
Held: Yes. Though it is titled an affidavit, courts will look beyond the title of a therein,” “the same, or some note or memorandum thereof, be in writing, &
document if the denomination given by the parties is reflective of its contents. What subscribed by the party charged” in order that it may be enforceable by action. Also,
is really involved here, based on the contents of the “affidavit,” is a contract. the writing must be in the form of a “public document.” Given this, the parties may
compel one another, under Art. 1357, to observe this proper form. Despite this,
LECTURES FROM DEAN MEL though, the contract is still valid as between the parties.
GR: Forms are not obligatory CASE: Cenido v. Apacianado

EXC: When law requires it for – Lesson: The private conveyance of real property is valid, but must be registered to
• Greater efficacy: the contract is perfectly valid & enforceable, but only bind 3rd parties.
perfected between two persons, & has no greater efficacy to affect third Facts: The petitioner is assailing the validity of a private conveyance of real property
persons (e.g., the following shall be in a public instrument: real rights in denominated as “Pagpapatunay” as between the parties. Is the contract valid even if
relation to its transmission, extinguishment, etc.) it is not found in a public instrument?
o Q: A told B, his sibling, as to real property inherited, “I am waiving my Held: Yes. However, the question of whether it is sufficient to transfer & convey title
to the land for purposes of original registration or the issuance of a real estate tax

declaration in the new owner’s name is another matter altogether. For greater • Under the Family Code, one’s share of the CPG or ACP CANNOT be waived
efficacy of the contract, convenience of the parties & to bind 3rd persons, the new during one’s marriage, except in case of judicial separation of property
owner has the right to compel vendor or his heirs to execute the necessary • If the waiver takes place upon a judicial separation of property, or after the
document to properly convey the property. marriage has been dissolved, the same must appear in a public instrument
Article 1358. The ff. must appear in a public document: Power to Administer Property (Art. 1358 (3))
(1) Acts & contracts which have for their object the creation, transmission, • A general power of attorney is required to grant a person called an agent the
modification or extinguishment of real rights over immovable property; sales power to administer property of another, called the principal.
of real property or of an interest therein are governed by Article 1403, No. 2 • BUT: Even a private document will bind the principal & agent such that the
& 1405; principal cannot refuse payment of the agent’s fee on the ground that the
(2) The cession, repudiation, or renunciation of hereditary rights or of those of power of attorney was not in a public document.
the conjugal partnership of gains; • Effect of it not being in a public document – it will not bind third persons
(3) The power to administer property, or any other power which has for its object o Ex. If the power was to administer the apartment of the of the
an act appearing or which should appear in a public document, or should principal, the lessees are not mandated to honor the private general
prejudice a 3rd person; power of attorney to pay their rentals to the agent purporting to act for
(4) The cession of actions or rights proceeding from an act appearing in a public & on behalf of the principal-lessor.
document. Class Discussion
All other contracts where the amount involved exceeds P500 must appear in writing, Q: A & B are brothers. When their dad died, A told B orally that he waives his
even a private one. But sales of goods, chattels or things in action are governed by inheritance to B. Is this valid?
Article 1403, No. 2 & 1405. A: Yes. It is valid between the parties.
Q: Can it be enforced as against 3rd parties?
Effect of Non-Compliance A: No, since it’s not in a public instrument. If A puts it in a piece of paper, it is valid,
• The failure to put in a public or private document or writing the transactions but still will have no efficacy because it’s a private, not public instrument.
or matters in Article 1358 will NOT make the contract unenforceable or void,
but it needs to be in writing to bind 3rd persons. CHAPTER 4. REFORMATION OF INSTRUMENTS.
o Valid between parties even if not in public document
o Writing in a public instrument always gives GREATER EFFICACY to a Article 1359. When, there having been a meeting of the minds of the parties to a
contract contract, their true intention is not expressed in the instrument purporting to embody
• Ex. A contract of sale is a consensual contract, which means that the sale is the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of
perfected by mere consent. No particular form is required for its validity. the parties may ask for the reformation of the instrument to the end that such true
o BUT: Under Art. 1498, when the sale is made through a public intention may be expressed.
instrument, the execution thereof is equivalent to the delivery of the If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the
thing. minds of the parties, the proper remedy is not reformation of the instrument but
§ Delivery may either be actual (real) or constructive. annulment of the contract.
• Thus, delivery of a parcel of land may be done by
placing the vendee in control & possession of the land Reformation
(real) or by embodying the sale in a public instrument • Reformation applies only to written contracts contained in an instrument or a
(constructive). series of instruments
o GR: When the terms of an agreement have been reduced to writing, it
CASE: Pontigon v. Heirs of Sanchez is considered to be containing all the terms agreed upon & there can
Lesson: The transfer of the title of the property as inheritance to the heirs via an be, between the parties & their successors-in-interest, no evidence of
extrajudicial settlement, which was not notarized & therefor not in a public such terms other than the contents of the written agreement
instrument as required by Art. 1358, was not a nullity & was therefor binding among § EXC: When the instrument fails to express the true intent &
the heirs. agreement of the parties thereto, one of the parties may bring
an action for the reformation of the instrument to the end that
Cession, Repudiation, Renunciation of Rights in a CPG (Art. 1358 (2)) 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
o The embodied contract just does not conform to the contract

• What is reformed is the instrument, not the contract itself, in order for the o Legal Separation – in personam proceeding
instrument to express their real agreement
o *One can only reform INSTRUMENTS, not contracts Class Discussion
o Rationale: It would be inequitable to allow the enforcement of a Q: What if there was never a meeting of the minds in a contract?
written instrument which does not reflect the real meeting of the A: There is no reformation where there is no meeting of the minds. The remedy is
minds. The rigor of legalistic rule that a written instrument should be declaration of nullity.
the final & inflexible criterion of the rights & obligations of the parties
is thus tempered to forestall the effect of mistake, fraud, inequitable Action for Declaratory Relief
conduct, or accident • The special civil action for reformation
• Prescriptive period - within 10 years from the time the cause of action • The purpose is to secure an authoritative statement of the rights &
accrues, since the suit is based on a written document. obligations of the parties for their guidance in the enforcement thereof, or
o Cause of action accrues from the knowledge of the ground for compliance therewith.
reformation or from the date of the execution of the instrument o NOT to settle issues arising from an alleged breach thereof
embodying the contract if the causes for reformation were already • It may be entertained only BEFORE the breach or violation of the law or
known at the time of the execution of the said instrument embodying contract to which it refers
the contract o Ex. An action for reformation instituted after the lessor allegedly
o CASE: Rosello-Bentir v. Leanda breached the contract with the lessee giving the lessee a right of first
§ Facts: It was contended that, at the time of the execution of the refusal to buy the leased premises, & which right of first refusal was
contract on May 5, 1968, there was a verbal agreement the subject of the action for reformation, cannot prosper
between lessor & lessee that the lessee will be given the right
of first refusal should the lessor decide to sell his property. The Class Discussion
lessee only filed the case for reformation on May 15, 1992 to Q: Who can file the action for reformation?
reflect such intention of the parties. Will the action prosper? A: The one in good faith (the injured party). The one in bad faith has no remedy.
§ Held: No. The action prescribed already; the period began
running on May 5, 1968. Article 1360. The principles of the general law on the reformation of instruments are
• *Action may be barred by laches hereby adopted insofar as they are not in conflict with the provisions of this Code.
*2 Requisites for Reformation (Emilio v. Rapal) Article 1361. When a mutual mistake of the parties causes the failure of the
1) That the instrument embodying the contract does not reveal the true instrument to disclose their real agreement, said instruments may be reformed.
intention of the parties
2) The existence of an actual contract entered into by the parties (or, there was Mistake as Cause for Reformation
a meeting of the minds of the parties to the contract) • Mistake must be mutual & must generally involve factual matters.
3) The failure of the instrument to express the true intention of the parties is o There must be a prior meeting of the minds between the parties.
due to mistake, fraud, inequitable conduct, or accident o There must have been a valid existing agreement to which the
erroneous document can be made to match or harmonize.
Reformation due to Mistake, Fraud, Inequitable Conduct or Accident o The proof of mutual mistake MUST be of the clearest & most
• Reformation may be cause by: satisfactory character.
o Mistake § The amount of evidence necessary to impugn a fact in a
o Fraud document is always more than a mere preponderance of
o Inequitable Conduct evidence
o Accident
• Burden of proof (onus probandi) is upon the party who insists that the CASE: Gonzalez Mondragon v. Santos
contract needs to be reformed. Lesson: Contracts solemnly & deliberately entered into may not be overturned by
• BUT if these factors prevent the meeting of the minds of the parties, the inconclusive proof or by reason of mistake of one of the parties to which the other in
remedy is annulment & not reformation no way has contributed.
• An action for reformation is a personal right (in personam) even when real Facts: One of the parties to a contract contended that there was a mistake relative
estate is involved to the documentation of the contract because the real intent of the parties was for
o JDNOM – in rem proceeding the sale by the hectare & not for a sum in gross as stated in the document of sale,

but there was no convincing evidence that the mistake was mutual. Can there be former, the instrument may be reformed.
reformation?
Held: No. An alleged defect in a contract perfectly valid & binding on its face must be Knowledge of One Party
conclusively proved. The validity & fulfillment of contracts cannot be left to the will of • Knowledge by one party of the other’s mistake regarding the expression of
one of the parties. the agreement is equivalent to mutual mistake.
• Reformation of the contract can be sought by the injured party.
CASE: Atilano v. Atilano
Lesson: Where a mutual mistake involves a real property, it is possible as in this Article 1364. When through the ignorance, lack of skill, negligence, or bad faith on
case that the parties are in possession of the correct properties, but mistakenly the part of the person drafting the instrument or of the clerk or typist, the instrument
placed the wrong lots in the contract. BUT if they are both already in possession, does not express the true intention of the parties, the courts may order that the
there is no need for reformation. instrument be reformed.
Facts: There was a mutual mistake in the designation of the particular lands owned
by 2 brothers; Brother 1 was supposed to get Lot A & Brother 2 was getting Lot E, Person Drafting the Instrument
according to the contract, but Brother 1 lived in Lot E & Brother 2 in Lot A. They have • There can be reformation if the person typing the instrument is not able to
both lived in said lots for more than 30 years. Can there be reformation?
come up with a correct written document due to:
Held: No. The remedy for correcting property designation is reformation. However, if o Failure to follow instructions
the correct properties were already in the possession of the persons to whom they o Ignorance, lack of skill, negligence or bad faith
should rightfully belong, there was no more need for reformation because the parties
• The mistake will be deemed to be mutual
actually already implemented the true intention of the contract.
• Hence, if the typist wrongly types the amount of consideration in a written
• When one sells or buys real property, i.e., a piece of land, one sells or buys
instrument embodying the contract of sale, the instrument may be reformed
the property as he sees it, in its actual setting & by its physical metes and
to conform to the real consideration agreed upon.
bounds, & not by the mere lot number assigned to it in the certificate of title.
• It must be assumed that the brothers had seen the properties & are each
CASE: Huibonhoa v. CA
living where they intended to live. Lesson: Where one party is aware of the oversight in the drafting of the contract,
• The parties have retained possession of their respective properties there can be no reformation.
conformably to the real intention of the parties to that sale, & all they should Facts: There was a failure to prove what costly mistake allegedly suppressed the
do is to execute mutual deeds of conveyance. intention of the parties prompting the petitioner to admit that there was an oversight
in the drafting of the contract by her counsel. Can there be reformation?
Article 1362. If one party was mistaken & the other acted fraudulently or inequitably Held: No. SC rejected the propriety of reformation because, by such admission of the
in such a way that the instrument does not show their true intention, the former may petitioner, oversight may not be attributed to all the parties to the contract &
ask for the reformation of the instrument. therefore, it cannot be considered a valid reason for the reformation of the same
contract.
Unilateral Mistakes & Reformation
• If the mistake is unilateral, it must be shown that the other party has acted Class Discussion
fraudulently or inequitably resulting in the drafting of a document which does GR: BOTH parties must be mistaken. BOTH parties must be in good faith.
not correspond to the actual contract agreed upon by the parties. EXC: Even if only 1 party is mistaken (in good faith), reformation is still allowed to
• Also, a party may have known the facts of the case but is ignorant of or has reform, if
been mistaken as to the legal consequences of the same. • The other party is in fraud with bad faith
• GR: Mistake or ignorance of the law is not a ground for reformation because • The other party is engaging in inequitable conduct with bad faith
parties must, as a rule, submit to the legal ramifications of their written It can also be that everyone was in good faith but there was a typographical error
contracts clearly pursuant to their true intent and meaning. (accidental, but in good faith).
o EXC: Where, on account of misplaced confidence, & because of some
artifice or deception fraudulently practiced upon him by the other Summary of When Reformation is Allowed
party, a material part of the contract was omitted from the writing, or Person A Person B
he was otherwise misled, equity will decree a reformation Mistake in good faith Mistake in good faith
Fraud, with bad faith
Article 1363. When one party was mistaken & the other knew or believed that the Inequitable conduct, with bad faith
instrument did not state their real agreement, but concealed that fact from the

Typographical error but both are in good faith • If the mistake is mutual, either party or his successor-in-interest may file the
action
Article 1365. If 2 parties agree upon the mortgage or pledge of real or personal • If the cause for reformation is on some other grounds, such as fraud or
property, but the instrument states that the property is sold absolutely or with a right vitiated consent, the injured party or his heirs & assigns are the only persons
of repurchase, reformation of the instrument is proper. given legal standing to sue
CASE: Palileo v. Cosio Class Discussion

Lesson: In reforming instruments, courts do not make another contract for the Q: Who can seek reformation?
parties. They merely inquire into the intention of the parties &, having found it, A: Both parties & successors-in-interest.
reform the written instrument in order that it may express the real intention of the
parties. Article 1369. The procedure for the reformation of instruments shall be governed by
Facts: The parties to a contract intended that the house subject of the agreement rules of court to be promulgated by the Supreme Court.
was to be a collateral for a particular loan but the agreement apparently states that
the house was the subject of a conditional sale of residential building. Procedure for Reformation
Held: Reformation allowed. • Special civil action for declaratory relief
• Rule 63 of the 1997 New Rules of Civil Procedure – in an action for
*Article 1366. There shall be no reformation in the ff. cases: declaratory relief, any person interested under a deed, will, contract or other
(1) Simple donations inter vivos wherein no condition is imposed; written instrument, or whose rights are affected by a statute, executive order
(2) Wills; or regulation, ordinance, or any other governmental regulation may, before
(3) When the real agreement is void. breach or violation thereof, bring an action in the appropriate RTC to
determine any question of construction or validity arising, & for the
Wills & Donations declaration of his rights & duties, thereunder.
• Any disposition in a will or unconditional donation is an act of liberality. There o If before the final termination of the case, a breach or violation of an
is no prior drafting where the parties mutually agree or have a meeting of the instrument should take place, the action may thereupon be converted
minds. into an ordinary action, & the parties shall be allowed to file such
pleadings as may be necessary or proper.
Void Agreement
• Reformation implies a prior agreement between the parties. If such prior Class Discussion
agreement is void, it cannot be given legal effect. No reformation in –
o An instrument embodying the void agreement cannot be made to 1. Pure donations
conform to such void agreement which is non-existent as to its legal 2. Wills
effect. 3. Void contracts
4. When the contract has already been violated
Article 1367. When one of the parties has brought an action to enforce the 5. When one of the parties has brought an action to enforce the instrument, he
instrument, he cannot subsequently ask for its reformation. cannot subsequently ask for its reformation (estoppel)
Estoppel CHAPTER 5. INTERPRETATION OF CONTRACTS.

• A party seeking to enforce an agreement necessarily acknowledges that the
instrument embodies the contract intended by the parties and therefore, he LECTURES FROM DEAN MEL
is estopped from filing a case for reformation alleging that the contract does
not contain the true intent of the parties. GR: Literal interpretation
BUT: There are cases where the words are so vague that they clash with the
Article 1368. Reformation may be ordered at the instance of either party or his intention of the parties.
successors in interest, if the mistake was mutual; otherwise, upon petition of the • Intention will always prevail. The problem is, intention is in the mind; how will
injured party, or his heirs & assigns. you figure out the intent of the parties since it’s inside their heads?
o Look at the text
*Persons with Legal Standing to Initiate Reformation o Then look at the context

• Figuring out the intent of the parties
• Tools:
o Prior contemporaneous or subsequent acts • GR: contracts should not be interpreted; the words should be applied as they
§ Q: The contract is worded, “Payment shall be paid in equal are (LITERAL interpretation)
monthly installments.” When exactly at every month? o Interpretation is just for checking the proper way to implement a
§ A: Evidence was presented that in actuality, it was being paid contract where the parties have conflicting views
on every 15th of the month. SC held that that was the date, o It is only when the contract is vague or ambiguous that courts can
even if such date is not so stipulated in the contract. This is the resort to the interpretation of its terms to determine the intent of the
prior contemporaneous or subsequent acts that the case law parties
provides. § A contract is vague or ambiguous if it is susceptible of two
o Statutory construction (e.g., ejusdem generis) reasonable alternative interpretations
o For vague words, meaning that will make it most effectual • Ultimately, it is the agreement of the parties which must be enforced
§ Ex. The first installment shall be made at the time of its initial • Statutory construction can apply as a guide
execution. Is this execution, meaning, as of the writing of the o CASE: Finnan General Assurance Corporation v. CA
contract, or as of the time of the implementation of the § Facts: The insurance policy procured by the insured did not
contract? The more common understanding is that execution include murder as incidents exempting the insurance company
pertains to the implementation or enforcement of the contract. from liability in case of the death of the inured.
o Nature of the contract § Held: SC applied “expresso unius exclusio alterius” —
o Do not interpret paragraphs in isolation; you must interpret them the mention of one thing implies the exclusion of
holistically another thing — to make the insurance company pay the
o Contra proferendem rule – whoever causes the obscurity in the beneficiaries arising from the death of the insured.
contract, interpretation shall be against him who wrote it • GR: The literal meaning of the words in a contract control.
o Usage and custom in relation to the transaction involved o Look at the text, and then
o Rules of Court – e.g., engage expert testimony o Look at the words in context (not in isolation)
o Important task is really ascertaining the intent of the parties
Supposing all of the above are applied, and yet the intent still cannot be ascertained, • The title of a contract does not necessarily determine its true nature
the rule of thumb is if the contract is ONEROUS, you interpret it along the lines of the o Ex. The fact that a document is entitled “Exclusive Option to Purchase”
greater reciprocity of rights; if the contract is GRATUITOUS, the least transmission if does not control where the text thereof shows it is a contract to sell.
rights • The LITERAL MEANING of the stipulations must prevail.
• Q: Lessor & lessee entered into a contract which provides, “All improvements o Thus, parties must always carefully examine the terms of a contract
made by the lessee shall belong to the lessor and shall be owned by him at thoroughly before signing the same
the time of the termination of the lease.” The lessee made a swimming pool,
a garage, some landscaping, & a third floor to the house. Then, the lease CASE: International Exchange Bank v. Spouses Briones
terminated. The lessor thanked the lessee for all the improvements. But the Facts: The promissory note with chattel mortgage provided that the creditor was
lessee demanded payment from the lessor. The lessor argued that the constituted by the debtors as their “attorney-in-fact with full power & authority to file,
contract between them did not provide for payment. The lessee then said prosecute, compromise, & settle insurance claims, to sign, execute, & deliver the
that the opposite was not provided for either. The lessor and lessee tried to corresponding papers, receipts, & document to the insurance company, & to collect
apply all the rules of interpretation but none applied. Given that, should the from the latter the proceeds of insurance to the extent of its interests.” Can the
lessee be reimbursed? appointment of the creditor as the agent of the debtors be contested?
• A: Yes. The contract is ONEROUS and it should be interpreted along the lines Held: No. The creditor, by the clear terms of the contract, the creditor was made the
of greater reciprocity of rights. agent of the debtors in their insurance claims.
CASE: Tan v. Planters Products, Inc.

Article 1370. If the terms of a contract are clear & leave no doubt upon the intention Facts: X & Y entered into a lease contract. The contract provided –
of the contracting parties, the literal meaning of its stipulations shall control. The LESSEE has the option to renew his leasehold interest in the leased premises for an
If the words appear to be contrary to the evident intention of the parties, the latter additional 10 years at the expiration of the term of his lease under such terms and
shall prevail over the former. conditions as may be agreed upon by the parties provided that the LESSEE shall give the
LESSOR, prior to the expiration of the term of this Lease, 180 days notice, in writing, of his
Purpose of Interpretation desire to procure such new Lease.

In an action in court, Y argued that X should be compelled to renew the contract
based on their original lease agreement; Y said that the parties were able to reach CASE: Santi v. CA
agreement on all commercial terms of the contract (e.g., rent, variable fee) & were Lesson: The word “extendable” does not mean automatic extension, but extension
only in disagreement about non-commercial terms (e.g., the repair of the middle subject to the will of the parties.
dock facilities); given this, there should be renewal. X countered that the original Facts: The stipulation reads, regarding the period of a contract of lease, that “said
contract’s wording was explicit that the parties must agree to ALL terms before there period of lease being extendable for another period of 20 years.” Does this make the
would be renewal. Is X correct? provision automatically extendable?
Held: Yes. The renewal of the original lease is subject to "terms and conditions as Held: No. The words are clear that the lessor’s intention is not to automatically
may be agreed upon by the parties." The stipulation is couched in general and extend the lease contract but to give her time to think whether to extend the lease. If
mutual terms. It is clear that the renewal of the lease is not automatic. The parties the intent of the parties were to provide for an automatic extension of the lease
will still negotiate and bargain on the terms and conditions of the new contract. contract, then they could have easily provided for a straight 40 years contract
These terms and conditions are not specified. Thus, they may include commercial instead of 20.
terms, such as rent and escalation clause, as well as non-commercial terms such as
covenants to fix and repair the leased premises. The only term that cannot be CASE: Fernandez v. CA
negotiated or bargained under the new contract is the period of renewal of the lease Lesson: Where a contract is renewable “at the option of both parties,” both parties
which is fixed in the original lease at 10 years. All other terms and conditions are must assent to the renewal.
subject to negotiation. Facts: X & Y entered into a contract of lease, & agreed that the lease, which was
The evident intention of X & Y is for the new lease contract to be perfected only upon scheduled to end on 1 July 1983, would be “renewable for another 10 years at the
mutual agreement on all terms and conditions of the new lease, & not just upon option of both parties under such terms, conditions & rental reasonable at that time”
mere notice. This means that there must be an agreement on both the commercial & that, upon expiration of the lease, whatever improvements were then existing
and non-commercial terms of the new lease contracts. This is clear from the general thereon should automatically belong to the lessor without having to pay the lessee.
language of the renewal clause. If the parties intended differently, they could have Before the end of the period, X informed Y that he no longer wanted to renew the
simply deleted the phrase "under such terms and conditions as may be agreed upon lease. Y, on the other hand, wanted the lease renewed. Can there be renewal
by the parties," which would automatically renew the original contract for another without mutual agreement?
period of ten years upon mere notice to PPI. Alternatively, they could have included a Held: No. The parties should mutually agree on a new contract which may not be the
stipulation in the original lease contract which would limit the terms and conditions same as the original, under terms, conditions & rental reasonable at that time. It
that the parties may validly negotiate in order for the contract to be renewed. follows therefore that Y cannot renew the lease by his unilateral act of exercising his
option. Simply stated, the option must be mutually & consensually exercised, & not
Reformation v. Interpretation unilaterally as was erroneously done by Y.
Interpretation Reformation
The determination of the meaning That remedy in equity by means of which CASE: Buce v. CA
attached to the words written or spoken a written instrument is made or Lesson: Where a contract does not stipulate who has the option to renew, it is
which make the contract construed so as to express the real implied that it will be renewed by mutual agreement of both parties; the phrase
intention of the parties “subject to renewal” means the creation of an entirely new contract.
Facts: A contract of lease stipulated: “This lease shall be for a period of 15 years
CASE: Conde v. CA effective June 1, 1979, subject to renewal for another 10 years, under the same
Lesson: If the contract is plain & unequivocal in its terms, one is ordinarily bound terms & conditions.” One party interpreted the provision as allowing automatic
thereby, especially if it is in a language he understands. It is the duty of every renewal while the other party contended that there was an option to renew. Was the
contracting party to know a contract’s contents before he signs it. provision intended to allow for automatic renewal?
Facts: The contract was written in the dialect known to X, & the encumbrance of the Held: No. There was nothing in the contract that showed that the parties intended
property subject of the contract was inscribed in the title. However, X claims that he automatic renewal. The fact that the lessee was allowed to make improvements on
only signed the contract to show his non-objection to the repurchase constituting the the property was not indicative of the intention to automatically renew the lease.
lien & that he never received the amount of P165 from Y. Is X’s argument tenable? Since the contract was also unclear as to who may exercise the option to renew, it
Held: No. X must be held bound by the clear terms of the Memorandum of should be interpreted in a way to benefit both parties — thus, by mutual agreement.
Repurchase that he signed, where he acknowledged the receipt of P165 & assumed • “Renewal of a contract” - the death of the old one and the birth or emergence
the obligation to maintain the repurchasers in peaceful possession should they be of a new one. In such a case, there is an obligation to execute a new lease
“disturbed by other persons.” It was executed in the Visayan language which he contract for the additional term.
understood.

• “Extension of the period of lease” - operates of its own force to create an contemporaneous & subsequent acts shall be principally considered.
additional term.
Interpreting Through Acts of Parties
CASE: Universal Textile Mills, Inc. v. NLRC • The reasons & surrounding circumstances behind a contract’s execution are
Lesson: A court may not make a new contract for the parties or rewrite their contract of paramount importance to place the Interpreter in the same situation as the
under the guise of construction. In other words, the interpretation or construction of parties at the time of the writing of the contract.
a contract does not include its modification or the creation of a new or different one.
It must be construed and enforced according to the terms employed, and a court Class Discussion
has no right to interpret the agreement as meaning something different from what Q: When a contract states that installments shall be paid monthly & the obligation is
the parties intended as expressed by the language they saw fit to employ. P1M, how much should the debtor pay per month?
Facts: A quasi-judicial body (NLRC) misread & therefore misapplied the provisions of A: This contract is vague; however, if the debtor pays equally every month & the
a collective bargaining agreement. Is this allowed? creditor makes no objections, then the payments will be made by equal installments,
Held: No. The NLRC cannot remake a contract by eviscerating it, by deleting from it due to the acts of the parties.
words placed there by the parties. No court, no interpreter and applier of a contract,
has such a prerogative. CASE: Pingol v. CA
Lesson: Those contemporaneous & subsequent events are demonstrative acts
CASE: Century Properties Inc. v. Babiano which present the true intent of the parties, & control the interpretation of their
Facts: Babiano was employed by Century Properties Inc. (CPI). In the employment contract.
contract, the following provision, entitled the “Confidentiality of Documents and Non- Facts: There was a dispute as to whether the purchase agreement was a contract to
Compete Clause,” was provided: sell or an absolute sale. Pursuant to the deed, the vendor delivered actual &
In order to ensure strict compliance herewith, you shall not work for whatsoever capacity, constructive possession, the vendee constructed a building thereon, there was
either as an employee, agent or consultant with any person whose business is in direct submission to the Land Registry of the division done to the lands, & the vendee
competition with the company while you are employed and for a period of one year from
continuously possessed the land until his death. Was there a contract to sell or an
date of resignation or termination from the company.
xxx absolute sale?
Finally, if undersigned breaches any terms of this contract, forms of compensation Held: It was an absolute sale. The acts of the parties, contemporaneous &
including commissions and incentives will be forfeited. subsequent to the contract, clearly show that an absolute deed of sale was
Can Babiano’s commissions be forfeited if he violates this clause while still being intended, by the parties & not a contract to sell. The contract here being one of
employed with CPI? absolute sale, the ownership of the subject lot was transferred to the buyer upon the
Held: Yes. The contracting parties indisputably wanted the said clause to be effective actual and constructive delivery thereof. There was constructive delivery when the
even during the existence of the employer-employee relationship between Babiano deed of sale was executed, & actual delivery when the vendee’s possession of the
and CPI, thereby indicating their intention to be bound by such clause by affixing property began.
their respective signatures to the employment contract. To allow Babiano to freely
move to direct competitors during and soon after his employment with CPI would CASE: Radiowealth Finance Co. v. Spouses Del Rosario
make the latter's trade secrets vulnerable to exposure, especially in a highly Facts: The parties in the case did not indicate a date of payment in the space
competitive marketing environment. As such, it is only reasonable that CPI and provided in the promissory note. It was hence contended that, before the obligation
Babiano agree on such stipulation in the latter's employment contract in order to became due & demandable, a period should have been fixed by the court. Is this
afford a fair and reasonable protection to CPI. Indubitably, obligations arising from correct?
contracts, including employment contracts, have the force of law between the Held: No. First, the act of leaving blank the due date of the first installment did not
contracting parties and should be complied with in good faith. The lower courts thus necessarily mean that the debtors were allowed to pay when they could. If this were
erred in limiting the "Confidentiality of Documents and Non-Compete Clause" only to the intent of the parties, this should have been indicated in the promissory note.
acts done after the cessation of the employer-employee relationship or to the "post- However, it did not reflect such intention.
employment" relations of the parties. As clearly stipulated, the parties wanted to On the contrary, the Note expressly stipulated that the debt should be amortized
apply said clause during the pendency of Babiano’s employment, and CPI correctly monthly in installments of P11,579 for 12 consecutive months. While the specific
invoked the same before the labor tribunals to resist the former's claim for unpaid date on which each installment would be due was left blank, the Note clearly
commissions on account of his breach of the said clause while the employer- provided that each installment should be payable each month.
employee relationship between them still subsisted. Furthermore, it also provided for an acceleration clause and a late payment penalty,
both of which showed the intention of the parties that the installments should be
Article 1371. In order to judge the intention of the contracting parties, their

paid at a definite date. Had they intended that the debtors could pay as and when Held: No. The subsequent act of the parties showed that they did not intend to
they could, there would have been no need for these two clauses. extinguish the obligation based on the contract alone.
Verily, the contemporaneous and subsequent acts of the parties manifest their • After the execution of the Deed of Assignment on July 31, 1980, Y continued
intention and knowledge that the monthly installments would be due and to charge X with interest on its overdue account up to Jan. 31, 1981,
demandable each month. In this case, the conclusion that the installments had pursuant to the Deed of Assignment which provides for X’s obligation for
already became due and demandable is bolstered by the fact that the debtors “applicable interest charges on overdue account.” The charges for interest
started paying installments on the promissory note, even if the checks were were made every month and not once did X question or take exception to the
dishonored by their drawee bank. Their avowals that the obligation had not yet interest.
matured & their claim that a period for payment should be fixed by a court are thus • X also wrote a letter explicitly asking for a reduction of the interest, thus
not persuasive. proving there was such interest to be paid.
CASE: Rapanut v. CA CASE: Javier v. CA

Facts: The controversial stipulation reads: “The VENDOR/MORTGAGEE (X) is willing Lesson: Where the parties to a contract have given it a practical construction by their
to sell said portion of her lot to the VENDEE/MORTGAGOR (Y) for a total price of conduct as by acts in partial performance, such construction may be considered by
P37,485 payable in monthly installments of P500 with an interest of 10% per the court in construing the contract, determining its meaning, & ascertaining the
annum on the remaining balance until the full amount is paid.” mutual intention of the parties at the time of contracting.
X’s view is that the 10% interest must be paid every year & are not included in the Facts: Petitioners contend that the deed of assignment conveyed to them the shares
payments already made. Y posits that the P500 monthly installments include the of stocks of respondent in Timberwealth Corporation, as stated in the deed itself.
10% interest. Whose view is correct? Since said corporation never came into existence, no share of stocks was ever
Held: X. The Court looked at the subsequent acts of the parties. transferred to the petitioners, hence the said deed is null and void for lack of cause
• The Deed of Conditional Sale with Mortgage provides for the date of payment or consideration. Are petitioners correct?
of the P500 monthly installments, that is, not later than the fifth of every Held: No. SC ruled that the true cause or consideration of said deed was the transfer
month, & of the P1,000 semi-annual installment, that is, on June 30 & Dec. of the forest concession of respondent to petitioners for P120,000; this was evident
31. The Supplemental Agreement was likewise specific that Y shall pay X through their subsequent and contemporaneous acts.
“monthly installments, of P500 with an interest of 10% per annum on the • Both parties knew the stocks did not yet exist.
remaining balance until the full amount is paid. • Petitioners, after the execution of the deed of assignment, assumed the
• A liberal interpretation of the contract in question is that at the end of each operation of the logging concession of respondent.
year, all the installment payments made shall be deducted from the principal • The statement of advances to respondent prepared by petitioners stated:
obligation. The 10% interest on the balance is then added to whatever “P55,186 advances to L.A. Tiro be applied to succeeding shipments. Based
remains of the principal. Thereafter, Y shall pay the monthly installments on on the agreement, we pay P10,000 after every shipment. We had only 2
the stipulated dates. In other words, the interests due are added to and paid shipments.”
like the remaining balance of the principal. Thus, it appears the parties • Petitioners entered into a Forest Consolidation Agreement with other holders
intended that Y pay the monthly installments at predetermined dates, until of forest concessions on the strength of the questioned deed of assignment.
the full amount, consisting of the purchase price & the interests on the
balance, is paid. Reasonableness, Not Just Words
• Additionally, the acts of X show the real intent of the contract — though X • Analysis & construction should not be limited to the words used in the
could have rescinded the contract based on their stipulations due to failure to contract, as they may not accurately reflect the parties’ true intent.
pay, he never made an attempt to do so; X accepted Y’s payments religiously o Carefully consider the reasonableness of the result obtained
for 4 years without protest. • Parties have reasonable leeway in terms of their contractual agreement,
since contracts should not be harsh & iniquitous
CASE: Caltex v. IAC
• Import of a word depends on context, considering the entire provision
Facts: X, a party to a deed of assignment, contended that the obligation was limited
o If a provision demands mandatory application, even the word “may”
only to the particular amount indicated in the deed of assignment notwithstanding
can be interpreted as “shall”
the fact that said deed provided that the assignee (Y) shall be entitled to all funds
o If it demands directory application, “shall” could mean “may” as well
which the assignor (X) may be entitled from a certain administrative decision in
payment of X’s outstanding obligation plus any applicable interest charges on
Article 1372. However general the terms of a contract may be, they shall not be
overdue account. X also claimed that the contract meant that the obligation would
understood to comprehend things that are distinct & cases that are different from
be totally extinguished. Is X correct?
those upon which the parties intended to agree.

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

Held: No. SC rejected the position that the word “renewable” means that the lessee *CASE: Home Development Mutual Fund v. CA
can unilaterally renew the contract & that therefore the phrase “at the option of the Facts: The consultancy agreement reads – “This agreement takes effect on Jan. 1,
parties” was just a superfluity. The use of either “extendible” or “renewable” should 1985 to Dec. 31, 1985: Provided, that either party who desires to terminate the
be given NOT sacramental significance. The task of the ascertaining the intention of contract may serve the other party a written notice at least 30 days in advance.”
the contracting parties is to be discharged by looking to the words they used to It was the contention of the petitioner that the 1st clause was independent from the
project that intention in their contract, all the words not just a particular word or two, 2nd clause such that after Dec. 31, 1985, the contract is deemed terminated. Hence,
& words in context not words standing alone. the notice of termination given to the respondent 9 days after Dec. 31, 1985 was
compliance in good faith with above-mentioned agreement. Petitioner likewise
CASE: China Banking Corp. v. CA contended that, even before the expiration of the contract, it had served the
Facts: Petitioners aver that the additional loans extended in favor of private respondent notice on Dec. 26, 1985. It was shown however by concrete evidence
respondents in excess of P6.5M & P3.5M — amounts respectively stipulated in the that, since 1981, the practice of the petitioner & the respondent was that, without
July 1989 & Aug. 10, 1989 mortgage contracts — are also secured by the same renegotiation, the consultancy contract was continuously renewed so that the
collaterals or real estate properties, citing as bases the introductory paragraph of the respondent continued to serve the petitioner even after the expiry date with the
mortgage contracts, as well as the stipulations stated therein under the 1st & 2nd renewal-contract signed in the first few months of the year. Did petitioner comply
par. Respondents for their part argue that the additional loans are clean loans with the notice requirement in the contract?
(without mortgages), relying on some isolated parts of the same introductory par. & Held: No. The petitioner failed to comply with the 30-day notice requirement for
1st par. of the contracts, & also of the 3rd par. Are the mortgages to be applied to all terminating the contract & therefore, also considering the yearly practice of
debts? petitioner & respondent in the implementation & renewal of their consultancy
Held: Yes. The parties’ intent is to constitute the real estate properties as continuing agreement, the said agreement must be deemed renewed. The 1st clause relating to
securities liable for future obligations beyond the amounts of P6.5M & P3.5M. the term of the contract must be construed together with the 2nd clause on the 30-
• While the “whereas” clause provides: “The mortgagee has granted, & may day notice-requirement. Thus, the 30-day notice should be given prior to the
from time to time hereafter grant to the mortgagors credit facilities not expiration date of the contract on Dec. 31, 1985.
exceeding P6.5M only” yet in the same clause it provides that “the mortgagee The requirements of contract as to notice — as to the time of giving, form & manner
had required the mortgagor(s) to give collateral security for the payment of of service thereof — must be strictly observed because in an obligation where a
any & all obligations theretofore contracted/incurred & which may thereafter period is designated, it is presumed to be for the benefit of both parties.
be contracted/incurred by the mortgagor(s) &/or debtor(s), or any one of The unilateral termination of the contract in question by the herein petitioners is
them, in favor of the mortgagee,” qualifying the initial part & showing that the violative of the principle of mutuality of contracts.
collaterals or real estate properties serve as securities for future obligations.
The 1st par., which ends with the clause, “the idea being to make this deed a Article 1375. Words which may have different significations shall be understood in
comprehensive & all embracing security that it is” supports this qualification. that which is most in keeping with the nature & object of the contract.
• The 2nd par. provides: “The mortgagee may take further advances & all sums
whatsoever advanced by the mortgagee shall be secured by this mortgagee;” CASE: Pasay City Gov’t v. CFI Manila
& although it was stated that “the said credit shall extend to any account Lesson: “In proportion” in divisible obligations implies paying a performance bond
which shall, within the said limit of P6.5M exclusive of interest,” this part of that covers only a particular stage of the project, whereas the word “to cover”
the 2nd sentence is again qualified by its succeeding portion which provides implies that the whole amount remaining for the entire project is involved.
that “this mortgage shall stand as security for all indebtedness of the Facts: A compromise agreement said that the project was to be done in stages &
mortgagor(s) &/or debtor(s), or any one of them, at any & all times that, in acc. with par. 1 (B), the contractor was to submit “a new performance bond
outstanding...” in the amount required by pertinent law, rules & regulations, in proportion to the
• The 4th par. states: “All such withdrawals, & payments, whether evidenced by remaining value/cost of the unfinished work of the construction as per approved
promissory notes or otherwise, shall be secured by this mortgage” which specifications.”
manifestly shows that the parties principally intended to constitute the real There was a dispute as to whether the amount of the performance bond covered the
estate properties as continuing securities for additional advancements which whole unfinished project or only the next stage of work to be done. Does the bond
the mortgagee may, upon application, extend. It is well settled that mortgages cover the whole unfinished project?
given to secure future advancements or loans are valid & legal contracts, & Held: No. The parties to the compromise contemplated a divisible obligation
that the amounts named as consideration in said contracts do not limit the necessitating therefore a performance bond “in proportion” to the uncompleted
amount for which the mortgage may stand as security if from the instrument work. What is crucial in par. 1 (B) are the words, “in proportion.” If the parties really
the intent to secure future & other indebtedness can be gathered. intended the legal rate of 20% performance bond to refer to the whole unfinished
work, then the provision should have required the contractor to submit & file a new

performance bond to cover the remaining value/cost of the unfinished work of the Held: No. Customarily, in the absence of a contrary agreement, the submission by an
construction. individual seller to the buyer of the following papers would complete a sale of real
Using the words in proportion then significantly changed the meaning of the estate: (1) owner’s duplicate copy of the Torrens title; (2) signed deed of absolute
paragraph to ultimately mean a performance bond equal to 20% of the next stage of sale; (3) tax declaration; and (3) latest realty tax receipt. The buyer can retain the
work to be done. amount for the capital gains tax and pay it upon authority of the seller, or the seller
can pay the tax, depending on the agreement of the parties.
CASE: Allied Banking Co. v. Yujuico The buyer has more interest in having the capital gains tax paid immediately since
Lesson: The use of terms in a contract will be governed primarily by the contents & this is a pre-requisite to the issuance of a new Torrens title in his name.
intent of the parties. Hence, while a contract uses the word “guarantor,” who is Nevertheless, as far as the government is concerned, the capital gains tax remains a
merely secondarily liable, if the contents of the contract show that his liability is liability of the seller since it is a tax on the seller’s gain from the sale of the real
solidary & direct, such obligor will be liable as such (i.e., as a surety). estate. Payment of the capital gains tax, however, is not a prerequisite to the
transfer of ownership to the buyer. The transfer of ownership takes effect upon the
Article 1376. The usage or customs of the place shall be borne in mind in the signing and notarization of the deed of absolute sale.
interpretation of the ambiguities of a contract, & shall fill the omission of stipulations The recording of the sale with the proper Registry of Deeds and the transfer of the
which are ordinarily established. certificate of title in the name of the buyer are necessary only to bind third parties to
the transfer of ownership. As between the seller and the buyer, the transfer of
*Contracts, Usage, & Custom [M: said he will ask a lot of questions based on cases ownership takes effect upon the execution of a public instrument conveying the real
from the usage or custom portions] estate. Registration of the sale with the Registry of Deeds, or the issuance of a new
• An express contract embodying in clear terms the intention of the parties certificate of title, does not confer ownership on the buyer. Such registration or
CANNOT be varied nor contradicted by evidence of usage or custom. issuance of a new certificate of title is not one of the modes of acquiring ownership.
o Custom or usage is used to explain the meaning of words & phrases In this case, the seller was ready, able and willing to submit to the buyer all the
used when they do not necessarily exclude the operation of such papers that customarily would complete the sale, and to pay as well the capital gains
custom or usage tax. On the other hand, the buyer’s condition that a new TCT be first issued in his
§ BUT they may NOT be used to contradict nor vary the plain name before he pays the balance, representing 94.58% of the purchase price, is not
meaning of the contract customary in a sale of real estate. Such a condition, not specified in the contract to
o It can be used to explain what is doubtful - explains the meaning & sell as evidenced by the Receipt, cannot be considered part of the omissions of
intention of the parties to a written/oral contract, which could not be stipulations which are ordinarily established by usage or custom. What is
done without the aid of this extrinsic evidence increasingly becoming customary is to deposit in escrow the balance of the purchase
• An express contract is always admissible to supersede, vary or control, a usage price pending the issuance of a new certificate of title in the name of the buyer. The
or custom; for the latter may always be waived at the will of the parties seller suggested this solution but unfortunately, it drew no response from the buyer.
o To do so would be like allowing presumptions & implications to dictate
the content of the formal & deliberate declaration of the parties CASE: MWSS v. Hon. Daway
Lesson: Based on previous SC rulings on the nature of letters of credit and the
CASE: Ligon v. CA customs and usage developed over the years in the banking and commercial
Lesson: Since the true intent of the parties when they executed the compromise practice of letters of credit, SC held that except when a letter of credit specifically
agreement can be ascertained, the same binds them without the need of extraneous stipulates otherwise, the obligation of the banks issuing letters of credit are solidary
evidence such as accepted banking & financial practices. with that of the person or entity requesting for its issuance, the same being a direct,
primary, absolute, & definite undertaking to pay the beneficiary upon the
CASE: Chua v. CA presentation of the set of documents required therein.
Facts: The contract to sell provided for the forfeiture of the “earnest money” upon
failure to pay the balance of the price “provided all papers are in proper order.” The CASE: Bank of America v. CA
contract did not specify what was meant by the word “papers.” The lower court held Lesson: Letters of credit are documents used in international commerce, & hence it
that the buyer was justified in refusing to pay the balance, since not “all papers” is often true that there is a lack of national law directly covering letters of credit.
were in “proper order” because documents pertaining to capital gains tax & the new Hence, in interpreting the rules surrounding these instruments, SC often relies on
certificate of title to the land hat not yet been submitted. The lower court further commercial usage & practice & international commercial credit regulatory rules such
ordered the seller to submit first the said documents before the sale could be as the Uniform Customs & Practice for Documentary Credits (UCP) issued by the
considered consummated as prayed for by the buyer. Is this interpretation correct? International Chamber of Commerce.

CASE: Magellan Manufacturing v. CA
Lesson: When it comes to transshipment, SC also makes use of commercial usage & CASE: BPI v. De Reny Fabric Industries
custom in the industry. Hence, in this case, it was held that it is a well-known Facts: Can a bank be blamed for goods lost, which are represented by a document
commercial usage that transshipment of freight without legal excuse, however of credit it issues?
competent and safe the vessel into which the transfer is made, is a violation of the Held: No. BPI provided that banks, in providing financing in international business
contract and an infringement of the right of the shipper, and subjects the carrier to transactions such as those entered into here, do not deal with the property to be
liability if the freight is lost even by a cause otherwise excepted. It is highly exported or shipped to the importer, but deal only with documents. The Bank
improbable to suppose that the shipping company in this case, having been engaged introduced in evidence a provision contained in the UCP which confirms this.
in the shipping business for so long, would be unaware of such a custom of the trade The existence of a custom in international banking and financing circles negating
as to have undertaken such transshipment without the shipper’s consent and any duty on the part of a bank to verify whether what has been described in letters of
unnecessarily expose themselves to a possible liability. credits or drafts or shipping documents actually tallies with what was loaded aboard
ship, having been positively proven as a fact, the appellants are bound by this
CASE: Nakpil v. CA established usage. They were, after all, the ones who tapped the facilities afforded
Facts: PBA, the owner, & United, the contractor, were arguing about who was in by the Bank in order to engage in international business.
charge of providing a supervisor for the constructing project. Which of the two
companies should be in charge of this? CASE: Werr International Co. v. Highlands Prime Inc. (HPI)
Held: United. Ordinary practice should be that the contractor equips the jobsite with Facts: HPI was a developer that hired Werr for a construction project. Under the
architects & engineers whose training & expertise make them more qualified to contract with Werr, the latter had the obligation to complete the project on Feb. 19,
provide efficient supervision of the construction. 2006 or pay liquidated damages. The contract itself states –
41.5. Considering the importance of the timely completion of the WORKS on the
CASE: Lichauco v. Armstrong OWNER'S commitments to its clients, the CONTRACTOR agrees to pay the OWNER
Lesson: In determining the rate provided in the contract for mixed goods did not liquidated damages in the amount of 1/10th of 1% of the amount of the Contract price for
every day of delay (inclusive of Sundays and holidays).
apply to a contract stipulating for the carrying of rice, rice flour & broken rice, SC
Werr was granted several extensions, the final one being on Oct. 27. At this point,
relied on the commercial custom of the Saigon-HK trade where the transaction
the work was only 93.18% accomplished. The CIAC, administrative authority for the
happened. SC made reference to commentaries by the Chief Justice of HK & opined:
construction industry, held that Werr incurred only 9.327 days of delay. It cited Art.
“It will be remembered that the contracts in question were made with reference to
1376 & opined that in the construction industry, the industry practice was that
the Saigon-Hongkong trade. The custom, therefore, of that trade should govern in
liquidated damages did not accrue after achieving substantial compliance. It held
the interpretation of the contracts in question. It is the duty of the courts, so far as is
that delay should be counted from Oct. 27 until the projected date of substantial
possible in compliance with the express provisions of law, to adopt that
completion. On appeal, the CA reversed this aspect of the CIAC decision & held that
interpretation given to contracts by the merchants themselves by actual practice.”
delay should be computed from Oct. 27 until Nov. 28 (33 days) since the contract
should prevail over industry practice. Was the CA correct?
*CASE: William Golangco Construction Co. v. PCIB
Held: No, but neither was Werr.
Lesson: With respect to construction contracts, the adoption of a one-year guarantee
period for the contractor to make good any defect in materials & workmanship is • As to CA: It was wrong for the CA to hold that industry practice be rejected
“established usage.” because liquidated damages is provided in the agreement, autonomy of
contracts prevails, and industry practice is completely set aside. Contracting
CASE: H.R. Andreas v. BPI parties are free to stipulate as to the terms and conditions of the contract for
Lesson: The necessity of pleading a custom depends on the type of custom involved as long as they are not contrary to law, morals, good customs, public order or
public policy. Corollary to this rule is that laws are deemed written in every
• If a custom is general in character, and therefore presumed to be known by
contract. SC has already previously held that substantial compliance exists as
the parties, the rule is that such custom may be proved without being
a concept in the construction industry, & has even provided that the
specially pleaded. This is particularly true when a general custom is offered in
threshold for substantial compliance is 95% in previous jurisprudence.
evidence to throw light upon a contract, the terms of which are obscure, and
Considering the foregoing, it is wrong to immediately dismiss the application
which is dependent upon evidence of such general custom to make it plain.
of industry practice on the sole ground that there is an existing agreement as
• If the custom is local in character, the party who proposes to rely upon it
to liquidated damages. As expressly stated under Arts. 1234 & 1376, and in
should aver it in his pleadings, and a local custom or usage applying to a
jurisprudence, the construction industry's prevailing practice may supplement
special or particular class of business may not be proven to explain even the
any ambiguities or omissions in the stipulations of the contract.
ambiguous terms of a contract, unless the existence of such custom or usage
o In this case, clause 41.5 is undoubtedly a valid stipulation. However,
is pleaded.
while clause 41.5 requires payment of liquidated damages if there is

delay, it is silent as to the period until when liquidated damages shall Facts: There was an ambiguity as to the scope of the mortgage contract drafted by
run. The agreement does not state that liquidated damages is due the lawyer of the insurance company which led to a corresponding ambiguity in its
until termination of the project; neither does it completely reject that it application. Can doubts in the contract be interpreted against the insurance
is only due until substantial completion of the project. This omission in company?
the agreement may be supplemented by the provisions of the Civil Held: Yes. If the mortgage contract as actually drafted seems to be vague or
Code, industry practice, & the CIAP Document No. 102 (the document ambiguous, the doubt must be resolved against the party whose lawyer prepared the
on substantial compliance in the construction industry). Hence, the document.
industry practice that substantial compliance excuses the contractor
from payment of liquidated damages applies to the Agreement. CASE: Nacu v. CA
• As to Werr: Werr, as contractor, urged for the application of the construction Facts: The dispute involved the application of a real estate mortgage to another
industry practice that liquidated damages do not accrue after the date of loan, as the Bank intended the 1982 real estate mortgage to be applied to the 1983
substantial completion of the project. But SC rejected this claim of Werr & loan transaction. Can the Bank insist on its intent?
found that while this industry practice may supplement the agreement, Werr Held: No. If the parties intended the 1982 real estate mortgage to apply to the 1983
cannot benefit from it. Werr relies on an industry document CIAP Document loan transaction, the Bank should have required petitioners to execute the proper
No. 102, but the document itself requires that the contractor completes 95% loan documents clearly constituting upon the same property a real estate mortgage.
of the work for there to be substantial completion of the project. Also, in The Bank failed to do this & must therefore suffer the consequences.
those cases where SC applied the industry practice to supplement the
contracts and excused payment from liquidated damages under Art. 1234, Article 1378. When it is absolutely impossible to settle doubts by the rules
the contractors there actually achieved 95% completion of the project. established in the preceding articles, & the doubts refer to incidental circumstances
o Here, there is no dispute that Werr failed to prove that it completed of a gratuitous contract, the least transmission of rights & interests shall prevail. If
95% of the project before or at the time of the termination of the the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity
contract. As found by CIAC, it failed to present evidence as to what of interests.
accomplishment it achieved from the time of the last billing until the If the doubts are cast upon the principal object of the contract in such a way that it
termination of the contract. What was admitted as accomplishment cannot be known what may have been the intention or will of the parties, the
at the last billing is 93.18%. For this reason, even if the rule that no contract shall be null and void.
liquidated damages shall run after the date of substantial completion
of the project is adopted, Werr cannot claim benefit for it failed to Rule of Thumb – Greater Reciprocity of Rights for Reciprocal Obligations
meet the condition precedent, i.e., the contractor has successfully • *Ex. Y (lessors) enters into a lease contract with X (lessee), where it states
proven that it actually achieved 95% completion rate. that all improvements made by X will be owned by Y. X built a swimming pool,
a monument of himself, & a tower. At the end of the lease, Y says, “All this is
Article 1377. The interpretation of obscure words or stipulations in a contract shall mine.” X, however, wants Y to pay for all the improvements. The contract
not favor the party who caused the obscurity. between them does not talk of payment. Does X have a right to be paid?
o Since the contract does not make a statement, use the rule of thumb
Ambiguous Words in a Contract in reciprocal obligations. Thus, X will be paid for the improvements.
• Words or stipulations that are susceptible to different interpretations causing
ambiguity shall be construed against the person who chose to use such CASE: Central Philippine University v. CA
ambiguous words or phrases. Facts: The deed of donation to the donee required as a condition that the donee
• This is based on the maxim verba accipiuntur fortius contra proferentem. construct a medical school on the property donated.
• Contra proferentem rule – against the profferer; against the person who The donee did not comply with the condition but contended that the donation should
drafted the contract nevertheless be made effective considering the length of time the donor did not
o If there is an ambiguity which all the other methods of construction seek the enforcement of the condition. Can the donation be revoked for failure to
have failed to resolve so that there are two alternative meanings to comply with the condition?
certain words, the court may construe the words against the party who Held: Yes. SC ruled in favor of the donor & revoked the donation for non-compliance.
put forward the document & give effect to the meaning more favorable Since the deed of donation is basically a gratuitous one, doubts referring to
to the other party. incidental circumstances of such contract should be resolved in favor of the least
transmission of rights & interests.
CASE: Capitol Insurance v. Sadong
CASE: Castelo v. CA

Lesson: If the contract is onerous, the doubt shall be settled in favor of the greatest • Ex. If the object of the contract is a particular house of the seller in Q.C., & he
reciprocity of interests. owns 2 houses in the said locality, the contract will be considered void if it
Facts: Under the terms of the stipulation, respondent was bound, & entitled, to pay cannot be determined which house is really the object of the contract.
the balance of P163,408 on or before 31 Dec. 1982 without incurring any liability
for any interest & penalty charges. During the grace period of 6 months, that is, from Article 1379. The principles of interpretation stated in Rule 123 [now Rule 130] of
1 Jan. 1983 to 30 June 1983, respondent vendee was given the right to pay the said the Rules of Court shall likewise be observed in the construction of contracts.
balance or any portion that had remained unpaid provided that “interest at the rate
of 12% per annum shall be charged & 1% penalty charge shall be imposed on the Rule 130 of the New Rules of Court
remaining diminishing balance.” • Sec. 10. Interpretation of a writing according to its legal meaning.
The question is whether, during the period of 1 Jan. 1983 to 30 June 1983, 12% o The language of a writing is to be interpreted according to the legal
interest per annum plus 1% penalty charge a month was payable “on the remaining meaning it bears in the place of its execution, unless the parties
diminishing balance,” or whether during the period, only 12% per annum interest intended otherwise.
was payable while the 1% per month penalty charge would in addition begin to • Sec. 11. Instrument construed so as to give effect to all provisions.
accrue on any balance remaining unpaid as of 1 July 1983. o In the construction of an instrument where there are several
Held: The parties likely intended the latter view of their stipulation on interest, as it provisions or particulars, such a construction is, if possible, to be
was the least onerous; for if the parties had intended that during the grace period, adopted as will give effect to all.
interest consisting of 12% per annum plus another 12% per annum (equivalent to • Sec. 12. Interpretation according to intention; general and particular
1% per month), or a total of 24% per annum, was payable, then they could have provisions.
simply said so. Instead, the parties distinguished between interest at the rate of 12% o In the construction of an instrument, the intention of the parties is to
per annum & the 1% a month penalty charge. be pursued; and when a general and a particular provision are
inconsistent, the latter is paramount to the former. So a particular
CASE: Gaite v. Fonacier intent will control a general one that is inconsistent with it.
Lesson: In onerous contracts, the rules of interpretation would incline the scale in
• Sec. 13. Interpretation according to circumstances.
favor of “the greater reciprocity of interest.”
o For the proper construction of an instrument, the circumstances under
Facts: Gaite transferred to Fonacier all his goodwill, rights & interest on the
which it was made, including the situation of the subject thereof & of
improvements he made on the area subject of a mining claim & the 24,000 tons of
the parties to it, may be shown, so that the judge may be placed in the
iron already extracted, all for a consideration of P75,000, P10,000 of which was
position of those whose language he is to interpret.
paid upon the signing of the agreement.
• Sec. 14. Peculiar signification of terms.
• According to par. B of the agreement, the balance of P65,000 will be paid
o The terms of a writing are presumed to have been used in their
from & out of the first letter of credit covering the 1st shipment of iron ores &
primary & general acceptation, but evidence is admissible to show
of the first amount derived from the local sale of iron ore made by the Larap
that they have a local, technical, or otherwise peculiar signification, &
Mines & Smelting Co., Inc.
were so used & understood in the particular instance, in which the
• There was a dispute as to whether par. B provides a suspensive period or a agreement must be construed accordingly.
suspensive condition.
• Sec. 15. Written words control printed.
Held: Greater reciprocity obtains if the buyer’s obligation is deemed to be actually
o When an instrument consists partly of written words & partly of a
existing, with only its maturity (due date) postponed or deferred, than if such
printed form, & the two are inconsistent, the former controls the latter.
obligation were viewed as non-existent or not binding until the ore was sold.
• Sec. 16. Experts and interpreters to be used in explaining certain writings.
The sale of the ore to Fonacier was a sale on credit, & not an aleatory contract where
o When the characters in which an instrument is written are difficult to
the transferor, Gaite, would assume the risk of not being paid at all; & the previous
sale or shipment of the ore was not a suspensive condition for the payment of the decipher, or the language is not understood by the court, the evidence
of persons skilled in deciphering the characters, or who understand
balance of the agreed price, but was intended merely to fix the future date of the
payment. the language, is admissible to declare the characters or the meaning
of the language.
Doubts as to Principal Object • Sec. 17. Of two constructions, which preferred.
• If there are doubts as to the principal object of the contract, in such a way o When the terms of an agreement have been intended in a different
sense by the different parties to it, that sense is to prevail against
that it cannot be known what was the will of the parties, the contract shall be
void. either party in which he supposed the other understood it

o When different construction of a provision are otherwise equally the Agreement is clearly in favor of UCPB. Thus, the excluded amount
proper, that is to be taken which is the most favorable to the party in referred to receivables.
whose favor the provision was made.
• Sec. 18. Construction in favor of natural right. “Invalid” Contracts
o When an instrument is equally susceptible of 2 interpretations, one in • “Invalid” contract is an imprecise term when used in relation to contracts in
favor of natural right & the other against it, the former is to be the Civil Code
adopted. • Specific names in designating defective contracts, namely:
• Sec. 19. Interpretation according to usage. o Rescissible (Art. 1380, etc.)
o An instrument may be construed acc. to usage, in order to determine o Voidable (Art. 1390, etc.)
its true character. o Unenforceable (Art. 1403, etc.)
o Void or inexistent (Art. 1409, etc.)
CASE: Spouses Chin Kong Wong Choi v. UPCB
Facts: The Agreement between Primetown and UCPB provided that Primetown, in CHAPTER 6. RESCISSIBLE CONTRACTS
consideration of P748,000,000 given to it by UCPB, “assigned, transferred,
conveyed and set over unto [UCPB] all Accounts Receivables accruing from Article 1380. Contracts validly agreed upon may be rescinded in the cases
[Primetown’s Kiener] x x x together with the assignment of all its rights, titles, established by law.
interests and participation over the units covered by or arising from the Contracts to
Sell from which the Accounts Receivables have arisen.” Rescissible Contracts
• Valid, but may be subsequently terminated on legal grounds
The Agreement further stipulated that “x x x this sale/assignment is limited to the • Not principally premised on a breach of trust by the other party, but on some
Receivables accruing to [Primetown] from the [b]uyers of the condominium units in x economic damage as a result of inequitable conduct by one party
x x [Kiener] and the corresponding Assignment of Rights and Interests arising from • BUT, if the contract is in fraud of creditors, as well as completely simulated
the pertinent Contract to Sell and does not include except for the amount not because there is absolutely no consideration, it is void.
exceeding 30,000,000.00, either singly or cumulatively any and all liabilities which
[Primetown] may have assumed under the individual Contract to Sell.” Should the CASE: Dilag v. CA
provision be construed in favor of UCPB or Primetown? Lesson: A contract in fraud of creditors but completely simulated is considered void
Held: UCPB. & not merely rescissible.
• The Agreement conveys the straightforward intention of Primetown to “sell, Facts: A deed of sale was entered into by the Dilag spouses & children in 1974
assign, transfer, convey and set over” to UCPB the receivables, rights, titles, during the pendency of Civil Case No. 8714 in which Arellano, a creditor, was
interests and participation over the units covered by the contracts to sell. It seeking for a money judgment against the spouses.
explicitly excluded any and all liabilities and obligations, which Primetown However, the Dilag spouses remained the registered owners of the lot & executed a
assumed under the contracts to sell. The intention to exclude Primetown’s real deed of sale only in 1981, when title was actually transferred to the children.
liabilities and obligations is further shown by Primetown’s subsequent letters Furthermore, during the entire period covered, the actual possessor of the land was
to the buyers, which stated that “this payment arrangement shall in no way Diancin, who the spouses leased the property to. Diancin, however, gave way &
cause any amendment of the other terms and conditions, nor the handed the property to Arellano when the latter obtained the money judgment in
cancellation of the Contract to Sell you have executed with [Primetown].” It is 1979 in his favor. The Dilag children are now asserting their rights over the disputed
a basic rule that if the terms of a contract are clear and leave no doubt upon lot. Can the Dilag children rightfully claim the lot is theirs through the first deed of
the intention of the parties, the literal meaning shall control. The words sale?
should be construed according to their ordinary meaning, unless something Held: No. The first deed of sale executed in 1974 was evidently fictitious & was
in the assignment indicates that they are being used in a special sense. executed in fraud of creditor Arellano, as the children relied on the 1981 deed of
Furthermore, in order to judge the intention of the contracting parties, their sale to uphold their claim. The first deed of sale was, therefore, void. The spouses
contemporaneous and subsequent acts shall be principally considered. continued to be the ones who executed acts of ownership, including renting out to
• It was not clear whether the “amount not exceeding 30,000,000” in the Diancin.
Agreement referred to receivables or liabilities. Under the Rules of Court,
when different constructions of a provision are otherwise equally proper, that Rescission in Art. 1191 v. Art. 1380
is to be taken which is the most favorable to the party in whose favor the Art. 1191 (Rescinding Reciprocal Art. 1380 (Rescissible Contracts)
provision was made. The Agreement’s whereas clauses provided that Obligations)
Primetown desired to settle its obligation with UCPB. Therefore, the tenor of Monetary damage is not essential There is damage to a party

Based on breach (sources of liability) Financial, economic, quantifiable Contracts in Fraud of Creditors
damage • When a contract is entered into in bad faith by the parties, purposely to evade
due obligations in favor of creditors who have no other way to collect their
Class Discussion debts
Article 1380 must involve ECONOMIC DAMAGE (up to the extent of the damage). • CASE: Bobis v. Provincial Sheriff of Camarines Norte
This is different from Article 1191 – here, there is a resolution, based on breach of o Facts: It was contested that the sale in this case was fraudulent due to
trust; you end the contract because of the grounds of (1) fraud, (2) delay, etc. inadequate price. Is this enough to invalidate the sale?
o Held: No. There was no proof that the parties to the contract entered
*Article 1381. The ff. contracts are rescissible: into the obligation to defraud the creditor. Fraud is not presumed. It
(1) Those which are entered into by guardians whenever the wards whom they must be proved by clear preponderance of evidence. There must be a
represent suffer lesion by more than ¼ of the value of the things which are showing of all these requisites concurring:
the object thereof; 1) Both contracting parties acting maliciously & with fraud
(2) Those agreed upon in representation of absentees, if the latter suffer the 2) Their purpose is to prejudice creditors
lesion stated in the preceding number; 3) The creditors are deprived by the transaction of all means by
(3) Those undertaken in fraud of creditors, when the latter cannot in any other which they may effect collection of their claims.
manner collect the claim due them; In this case, there was no showing that the land involved was the only
(4) Those which refer to things under litigation if they have been entered into by property the debtors had which the creditor could pursue. The creditor
defendant without knowledge & approval of the litigants or of competent also did not annotate the title to protect his interests.
judicial authority [object is under the custody of the court];
(5) All other contracts specially declared by law to be subject to rescission. CASE: Marsman Investment Ltd. v. Phil. Abaca Development Co. (PADCO)
Facts: The company involved, Marsman, waived the debts of the debtor PADCO &
Guardians & the Property of His Ward released PADCO from its obligations. Years later, Marsman filed an action for
• Lesion – implies economic damage rescission, citing the fact that it was a creditor of PADCO. Can there be rescission?
• When there is court approval, any action is VALID Held: No. There can be no rescission. Until & unless those waivers of the debts are
o Any act of ownership or disposition undertaken by the guardian on set aside, the corporation ceased to be a creditor of PADC0, & was thereafter
behalf of his ward without court approval is void deprived of any interest in assailing the validity of the transfer of its properties. Only
• Rescissible – when guardian performs acts of administration (e.g., buying actual creditors can ask for the rescission of the conveyance made by their debtors
materials for fixing the roof) which were not actually necessary, making such in favor of strangers.
purchase useless, & the lesion suffered is more than ¼ of the value of the
things which are the object of the contract Things Under Litigation
• Rescissible if they have been entered into by the defendant without the
Class Discussion knowledge & approval of the litigants or of competent judicial authority.
Guardians can only do acts of administration, not acts of dominion. If there is no o Ex. In a replevin suit where plaintiff seeks to recover personal property
order from the court to sell and the guardian sells, then the guardian is in bad faith. from the defendant, the latter, during the pendency of the suit, cannot
sell in bad faith the property being litigated to any 3rd person. If he
Absentees does & the transferee also acts in bad faith, the contract is rescissible
• The absence of a person may be declared:
o In 2 years - without any news about the absentee or since the receipt CASE: Ada v. Baylon
of the last news Lesson: (1) The rescission of a contract under Art. 1381 (4) requires the
o In 5 years - in case the absentee has left a person in charge of the concurrence of the following elements:
administration of his property 1) The defendant, during the pendency of the case, enters into a contract which
• When a person disappears from his domicile, his whereabouts being refers to the thing subject of litigation;
unknown, the judge, at the instance of an interested party, relative, or friend, 2) The said contract entered into was without knowledge & approval of the
can appoint a person to represent him when necessary litigants or of a competent judicial authority.
o Administrator or representative – manages the properties of the Where these 2 concur, it is the duty of the court to order the rescission of the
absentee contract.
• Same rules governing guardians govern administrators (2) It should be stressed that the defendant in such a case is not absolutely
proscribed from entering into a contract which refer to things under litigation. If, for

instance, a defendant enters into a contract which conveys the thing under litigation Important Pointers for Art. 1381
during the pendency of the case, the conveyance would be valid, there being no • All defendants under Art. 1381 must be in bad faith; if one of the persons is
definite disposition yet coming from the court with respect to the thing subject of not in bad faith, that person cannot be made liable.
litigation. After all, notwithstanding that the subject thereof is a thing under litigation, • The action is subsidiary; exhaust all remedies of the person initially in bad
such conveyance is but merely an exercise of ownership. faith before you can do anything else or before you can rescind the contract
This is true even if the defendant effected the conveyance without the knowledge
and approval of the litigants or of a competent judicial authority. The absence of Article 1382. Payments made in a state of insolvency for obligations to whose
such knowledge or approval would not precipitate the invalidity of an otherwise valid fulfillment the debtor could not be compelled at the time they were affected, are also
contract. Nevertheless, such contract, though considered valid, may be rescinded at rescissible.
the instance of the other litigants pursuant to Art. 1381 (4).
Facts: During the pendency of a case, the respondent donated a property to Insolvent Debtor
Florante. The petitioners sought the rescission of this donation, for the same • A debtor whose liabilities already exceed his assets & who can barely pay off
property donated to Florante was the subject of a pending partition case with the his debts.
RTC. Furthermore, the respondent in the partition case did not inform or seek the • If such debtor pays off a creditor whose credit has not yet become due, that
approval of petitioners or the RTC before making the donation to Florante. May the payment can be rescinded.
donation be rescinded? o Prior judicial declaration of insolvency of the debtor is NOT necessary.
Held: Yes. Although the gratuitous conveyance of the said parcels of land in favor of
• CASE: De La Paz vs. Garcia
Florante was valid, the donation inter vivos of the same being merely an exercise of
o Facts: The transfer of property was made after an insolvency
ownership, respondent’s failure to inform and seek the approval of the petitioners or
proceeding was filed with the competent court, and such transfer was
the RTC regarding the conveyance gave the petitioners the right to have the said
also claimed as in fraud of creditors.
donation rescinded pursuant to Article 1381 (4).
o Held: The transfer was not rescissible under the Civil Code but void
Also, the assertion that rescission may only be had after the RTC had finally
under the Insolvency Law.
determined that the proper partitioning of the properties in the partition case. The
petitioners’ right to institute the action for rescission pursuant to Art. 1381 (4) is not
Class Discussion
preconditioned upon the RTC’s determination as to the ownership of the said parcels
Once a petition for insolvency is filed, any disposition or payment is void. The
of land. The right to ask for the rescission of a contract under Article 1381 (4) is not
demarcation is the filing of the insolvency case. Prior to filing, it is rescissible. After,
contingent upon the final determination of the ownership of the thing subject of
it is void.
litigation.
Article 1383. The action for rescission is subsidiary; it cannot be instituted except
Other Contracts Subject to Rescission Under the Law
when the party suffering damage has no other legal means to obtain reparation for
• *CASE: Litonjua v. LR Corporation
the same.
o Lesson: Right of first refusal is an example of a rescissible contract.
o Facts: The creditor lent the money to the debtor who, in turn,
Action for Rescission
collateralized his property to secure the loan.
o Held: The failure of the debtor to recognize the stipulated right of first • Rescission – a relief the law grants on the premise that the contract is valid,
refusal contained in the loan-mortgage agreement in favor of the for the protection of one of the contracting parties & 3rd persons from all
creditor makes any sale of the property to a 3rd person rescissible at injury & damage the contract may cause, or to protect some incompatible &
the instance of the creditor. preferential right created by the contract
§ Right of first refusal - in the event debtor decides to sell his • Action for rescission is also called accion pauliana
property, he must first offer the same to the creditor first • Accion pauliana requires a proper & direct action filed for that purpose & not
§ The consideration for the loan-mortgage includes the on a mere motion incidental in another case (an action for rescission cannot
consideration for the right of first refusal be collaterally raised in a proceeding which pertains to a separate action)
§ To deprive the creditor of this right of first refusal will prejudice • Also cannot be raised in a summary proceeding; it must be full-blown trial
the creditor in his substantial interests to be able to own the o Cannot be done by mere motion of defender
property.
§ A contract of sale entered into in violation of a right of first Remedy of Last Resort
refusal of another person, while valid, is rescissible • If there are other means to claim reparation, such other means must be
availed of first before resorting to an action for rescission.

• Accion pauliana (a separate, independent action) is a remedy last of resort;
filing of separate court cases must first be undertaken Article 1384. Rescission shall be only to the extent necessary to cover the damages
o When implementation of decision of court case fails, one can rescind caused.
• The date of the decision of the trial court is immaterial.
o What is important is that the credit of the plaintiff antedates that of Partial Rescission
the fraudulent alienation by the debtor of his property. • Since rescission presupposes a valid contract, it need not be rescinded totally
o After all, the decision of the trial court against the debtor will retroact • Remedy shall be only up to the extent necessary to cover the damages
to the time when the debtor became indebted to the creditor. caused.
• Requisites for an action for rescission: o Ex. A is indebted to X for P5,000 &, to defraud X, A transfers his 2
1) A judgment; houses, each worth P5,000, to B who is also in bad faith. Rescission
2) The issuance by the trial court of a writ of execution for the can be had only with respect to 1 house worth P5,000 because it is
satisfaction of the judgment; & only up to this amount that X has been damaged.
3) The failure of the sheriff to enforce & satisfy the judgment of the court.
4) The creditor’s exhaustion of the property of the debtor. Article 1385. Rescission creates the obligation to return the things which were the
• CASE: Goquilay v. Sycip object of the contract, together with their fruits, & the price with its interest;
o Lesson: An action for rescission is subsidiary & can be instituted only consequently, it can be carried out only when he who demands rescission can return
when the party suffering damage has no other legal means to obtain whatever he may be obliged to restore.
reparation for the same. If there is no allegation, or evidence, of Neither shall rescission take place when the things which are the object of the
exhaustion of other remedies on the part of a creditor, then said contract are legally in the possession of 3rd persons who did not act in bad faith.
creditor cannot maintain an action for rescission, EVEN IF fraud In this case, indemnity for damages may be demanded from the person causing the
actually did exist. loss.
Situation 1 *Restitution Following Rescission

Q: A, guardian, through acts of fraud, damaged the ward, B, for more than ¼. A is • Parties shall be placed in the same position where they were before they
thus liable to the extent of the excess of that ¼. A bought & paid for roof proofing entered into the assailed contract.
materials from a supplier where there was lesion for more than ¼. B reaches the o Objective: To restore the parties to their original position
age of 18. Who should B sue first, the supplier, or A? • RETURN: The object subject of the rescissible contract + fruits or interest, if
A: A first; seek damages from A first. If thereafter A, guardian does not have money, any
then only then can there be rescission of the contract with the supplier, since that is • If the object of the contract cannot be restored because of loss, damages
subsidiary. may be claimed from the person responsible for the loss.
o A party cannot rescind & at the same time retain the consideration, or
Situation 2 a part of the consideration. One cannot have the benefits of rescission
Q: Judgment creditor wins. Judgment debtor does not pay. Judgment creditor files a without assuming its burdens.
motion for the issuance of writ of execution. First, the sheriff levies on personal • HOWEVER, if object is with person in good faith, there can be no restitution,
property; in the absence thereof, the sheriff tried real property. After that, however, only damages from the party who caused the controversy
there was no more property of the judgment debtor. What is the second to the o Ex. If a father, with the intent to defraud his creditors, sold the
endpoint? property to his son for a valuable consideration but below the fair
A: Sheriff informs the court in his return that no property is leviable. market value of the same, such a sale is valid & not even rescissible if
Q: What is the next step? the son was without any knowledge of the ulterior motive of his father
A: Accion subrogatoria; the creditor will collect from the debtor of the debtor. If not to defraud his creditors.
available, then rescission is the next step. This is called “accion pauliana.” § Mere inadequacy of price does not invalidate a contract.
Note that the accion pauliana can only be direct; it cannot be collateral. A separate § For the son therefore the consideration can still be considered
case will have to be filed. a fair price. In short, the son was clearly in good faith and
Q: What is the prescriptive period for accion pauliana? therefore the contract of sale cannot be rescinded.
A: 4 years from the exhaustion of everything because the action is subisidiary. • Good faith is always presumed unless contrary evidence is adduced
Q: What if the buyer of the judgment debtor is in good faith; can the judgment o Purchaser in good faith - one who buys the property of another without
creditor run after the buyer?
notice that someone else has a right or interest in such a property &
A: NO, because buyer is in good faith.

pays a full & fair price at the time of the purchase or before he has o An alienation made during the pendency of a suit is not enough. There
notice of the claim or interest of some other person in the property must already be a decision or a writ of attachment.
o Ex. A is able to obtain a writ of attachment against debtor B. The
Article 1386. Rescission referred to in Nos. 1 & 2 of Article 1381 shall not take place attachment effectively places his property in Mandaluyong under the
with respect to contracts approved by the courts. custody of the court so that, in the event A wins the case, such
Approval by the courts implies that the parties were given their day in court to justify property, if necessary, can be sold to pay the judgment debt.
to the court the necessity & reasonableness of the contract to be entered into. § Subsequently B sells his property in Laguna to Z. There is a
Hence, once judicially approved, such contract cannot anymore be the subject of presumption of a fraudulent alienation even if the Laguna
rescission. property is not the subject of the attachment.
• Attachment need not refer to the property alienated.
Court Approval of Contracts § A can seek the rescission of the sale by B to Z of the property in
• Implies that the parties were given their day in court to justify to the court the Laguna.
necessity and reasonableness of the contract to be entered into. § Also, if a decision has been rendered against B in favor of
• Once judicially approved, such contract cannot be the subject of rescission. another creditor X, & B sells the property in Laguna to M, there
is also a presumption of fraudulent transaction, & A can file a
Article 1387. All contracts by virtue of which the debtor alienates property by case to rescind the sale even if the decision has not been
gratuitous title are presumed to have been entered into in fraud of creditors, when obtained by him but by X.
the donor did not reserve sufficient property to pay all debts contracted before the
donation. CASE: Provincial Sheriff of Pampanga v. CA
Alienations by onerous title are also presumed fraudulent when made by persons Facts: An action for recovery was filed by X, Y & Z against B & C. At the same time, B
against whom some judgment has been rendered in any instance or some writ of was a furniture dealer under the Modern Furniture Store, which burned down,
attachment has been issued. The decision or attachment need not refer to the together with its contents. As a result, B surrendered his license to operate the store.
property alienated, & need not have been obtained by the party seeking the • B’s brother, D, put up a new store on the same site, also called Modern
rescission. Furniture Store. D secured new license & privilege tax for the store.
In addition to these presumptions, the design to defraud creditors may be proved in • On the same date of payment of tax, B verbally transferred Modern Furniture
any other manner recognized by the law of evidence. Store to his brother D.
• The trial court rendered judgment against B & C, affirmed by CA. A writ of
Rebuttable Presumptions of Art. 1387 execution was issued; the Provincial Sheriff levied pieces of furniture found in
• Presumptions can only arise from facts or a set of facts. Modern Furniture Store.
o *Ex. B is indebted to D for P10,000, E for P7,000, & F for P13,000. All • D filed a 3rd-party claim with the sheriff, saying the property did not belong to
of the debts are due. B has money in the bank in the amount of B, but to himself.
P60,000. B donates P55,000 to X. • D filed a case to be declared the owner of the furniture levied & damages
§ The donation is presumed to be fraudulent as he has not against X, Y & Z plus the sheriff, & a writ of preliminary injunction to stop the
reserved sufficient property to pay all debts contracted before sale.
the donation. Will Art. 1387 apply in this case?
§ If the debts are not yet due, it shall be presumed fraudulent Held: No. Art. 1387 applies only when there has in fact been an alienation or
because the only requirements of the law are that the debts transfer, whether gratuitously or by onerous title. D’s store is entirely new &
are contracted prior to the donation, & that there is no different from his brother B’s, as D’s store had completely new content despite the
reservation of sufficient property to pay all debts contract same name & style, since B’s things were burned down. There was no transfer, as a
before the donation. The maturity of the debts is not a matter of fact, thus, there was no actual fraud — D owns the properties in question.
requirement.
§ The presumption can be controverted by convincing evidence Class Discussion
that the donation was not in fraud of creditors. Q: A is creditor, while B is debtor. A filed a case against B on Mar. 1, 2017. Learning
• When alienation by onerous title has been made “by persons against whom that a case was filed against him, B sold to X his house (on Mar. 10, 2017), with X
some judgment has been rendered in any instance or some writ of knowing the scheme of B. For a 10M house, X only paid P1M to facilitate the
attachment has been issued.” transfer. On Mar. 6, 2017, a writ of attachment was issued by the court. If the sale
o The presumption can be rebutted by convincing evidence to the occurred on Mar. 3, instead of Mar. 10, will there be a presumption of fraud?
contrary.

A: NO, because the sale occurred merely after the filing. The presumption of fraud & the aggrieved party has unsuccessfully
will attach if there is disposition AFTER a writ of attachment is issued or AFTER a exhausted all other legal remedies
decision is issued.
Q: What if it happened on Mar. 10; would there be a presumption of fraud? Ex. For a minor, the period begins from
A: NONE, because under jurisprudence, if in between the sale and writ of attachment the time he reaches 18 years old & has
involving immovable property, there must be a REGISTRATION OF THE WRIT OF unsuccessfully exhausted all legal
ATTACHCMENT. If there is NO REGISTRATION OF THE WRIT OF ATTACHMENT, even if remedies
it occurred after the attachment, there is still no presumption of fraud. There must Absentees From the time the domicile of the
hence be registration before the assumption of fraud can arise. absentee is known, the absentee learns
of the contract & said absentee has
Class Discussion unsuccessfully exhausted all other legal
Note that the presumption of fraud can be rebutted. remedies to be able to recover what
was lost
Article 1388. Whoever acquires in bad faith the things alienated in fraud of creditors,
shall indemnify the latter for damages suffered by them on account of the alienation, Note
whenever, due to any cause, it should be impossible for him to return them. 1. Domicile of natural persons - place of
If there are 2 or more alienations, the 1st acquirer shall be liable 1st, & so on habitual residence
successively. 2. Judicial persons - place where their
legal representative is established or
Bad Faith Acquirer of Property Alienated in Fraud of Creditors where they exercise their principal
• Liable to the creditor for damages, if it should be impossible for the function
transferee to return the subject property. In fraud of creditors From the time of the discovery of the
o The knowledge of the evasive & fraudulent designs of the debtor fraud & after he has unsuccessfully
makes the said transferee’s acquisition tainted with bad faith. exhausted all other legal remedies
• If the transferee in bad faith transfers the property to a subsequent buyer Contracts entered into without the From the time of knowledge of the
who is likewise in bad faith, the latter shall have the obligation to return said knowledge & approval of the litigants or transaction & unsuccessful exhaustion
property if it is still possible to do so. If not, he shall be liable for damages. of competent judicial authority of all other legal remedies
o However, if such buyer is in good faith, his purchase is valid, making it
impossible for the 1st transferee to return the property, in which case CHAPTER 7. VOIDABLE CONTRACTS.
such 1st transferee shall be liable for damages.
*Article 1390. The ff. contracts are voidable or annullable, even though there may
Class Discussion have been no damage to the contracting parties:
Q: A is the creditor of B. B mortgaged a property for the debt he owed A. B did not (1) Those where one of the parties is incapable of giving consent to a contract;
pay, so A tried to foreclose on the property of B. B, however, had already sold the (2) Those where the consent is vitiated by mistake, violence, intimidation, undue
property, back when he had not yet received the summons for foreclosure. Is B guilty influence or fraud.
of fraud? These contracts are binding, unless they are annulled by a proper action in court.
A: No. There is no writ of attachment or judgment yet. They are susceptible of ratification.
Article 1389. The action to claim rescission must be commenced within 4 years. Voidable Contracts
For persons under guardianship & for absentees, the period of 4 years shall not • Valid until annulled
begin until the termination of the former’s incapacity, or until the domicile of the • Any defect or infirmity causing its annullable nature can be cured by the party
latter is known. aggrieved or injured by ratification
• Effects of annulment operate prospectively
Different Grounds & Beginning of Cause of Action o Do NOT retroact to the time the contract was made
*NOTE: In all cases, aggrieved party must have unsuccessfully exhausted all • Grounds enumerated are already explained under Article 1327-1344.
possible remedies to enforce the obligation or to recover what has been lost. • *Damage need not exist.
Those under guardianship From the time the incapacity terminates
Class Discussion: Rundown of Grounds for Annulment

1. Deaf-mute who cannot write (remember, again, that “read & write” is not the § During A’s minority, though obtaining a court order to sell the
qualifier) property of his ward, B fraudulently transferred A’s property to
2. Minor a 3rd party.
3. Fraud § A cannot take action yet because B is the one taking charge of
4. Intimidation his affairs. However, A must file a case against B within 4 years
5. Violence from the time:
6. Undue influence • A reaches the age of majority, &/or
7. Drunkenness • The guardianship has ceased
8. Hypnotism
9. Mistake Extrajudicial Demand
10. Persons suffering from civil interdiction • GR: Extrajudicial demand of creditor shall interrupt the running of the
11. Incompetents under guardianship prescriptive period
12. Insane or demented persons o HOWEVER, this only applies to a determinate conduct that can be
demanded
*Article 1391. The action for annulment shall be brought within 4 years. • If a contract of sale is alleged as voidable, & the aggrieved party who was
This period shall begin: coerced or fooled (creditor-seller) makes an extrajudicial demand for the
In cases of intimidation, violence or undue influence, from the time the defect of the reconveyance of the property prior to the filing of the suit, the prescriptive
consent ceases. period is NOT interrupted
In case of mistake or fraud, from the time of the discovery of the same. o Reason: A voidable contract is valid until annulled by the courts;
And when the action refers to contracts entered into by minors or other debtor-buyer thus has no obligation to acede to a demand until the
incapacitated persons, from the time the guardianship ceases. courts annul it
o In voidable contracts, judicial demand is necessary to interrupt the
Start of Periods running of the prescriptive 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 the
§ He coerces A to enter into said lease contract by continually intimidation ceases, & this period is not stopped by extrajudicial demand; one must
threatening A with serious bodily injury. go immediately to the courts.
• A is excused from not filing a case for annulment while Facts: X claimed that, during the Marcos era, he was intimidated & forced to enter
the threat is still existing into a contract with DBP, a government bank, that led to the forced conveyance of
§ If B finally reforms & stops the threats, the 4-year period for A his property to DBP. X made several extrajudicial demands for the return of his
to annul the contract will commence from the cessation of the property. X filed suit to recover the property on Mar. 23, 1990. Will the action still
threat prosper?
o CASE: Rodriguez v. Rodriguez Held: No. The action has prescribed. Marcos left the Philippines on Feb. 24, 1986;
§ Facts: X filed a case for annulment against Y on the ground of this X should have filed suit on or before Feb. 24, 1990. Since there had been no
duress, 28 years after the intimidation is claimed to have annulment of the contract yet, there was no determinate duty for DBP to heed the
occurred, & 9 years after Y died. demand to reconvey.
§ Held: Action is already barred by prescription.
2. Mistake or fraud – from the time of the discovery of the same Class Discussion
o Ex. A, an expert jeweler, induces B in 1990 to buy a ring, knowingly GR: When you make a written extrajudicial demand, the prescriptive period will start
misrepresenting to B that it was made in diamond when it was made to run anew.
only of crystal. EXC: In annulment, this rule does not apply. (Mialilhe v. CA)
§ If B discovers the fraud in 1997, the 4-year period shall start
only from 1997. Article 1392. Ratification extinguishes the action to annul a voidable contract.
3. Minors or other incapacitated persons – from the time the guardianship
ceases Article 1393. Ratification may be effected expressly or tacitly. It is understood that
o Ex. B is A’s guardian. there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable & such reason having ceased, the person who has a right to invoke

it should execute an act which necessary implies an intention to waive his right. 2) The reason has ceased
3) Person executes an act which necessarily implies an intention to waive his
Ratification right
• The act of curing the defect which made the contract annullable
• Ex. If A is coerced by B to lease B’s property. CASE: Spouses Viloria v. Continental Airlines
o Express ratification –After B stops the coercion, A writes a letter to B Lesson: Implied ratification can take diverse forms, such as by silence or
stating that A will continue the lease. acquiescence; by acts showing approval or adoption of the contract; by acceptance
o Tacit ratification – After B stops, A willingly & continuously pays the & retention of benefits flowing therefrom.
rentals for the subject leased premises to be able to live in the same Facts: The Spouses Viloria claimed that their consent in buying the airplane ticket
o In both cases, if A files an action to annul the agreement based on was vitiated & therefore the contract was annullable. At the same time, however,
force, it will not prosper even if it is within the 4 years. they used their right under the same contract to purchase new tickets. Is the
position of the spouses tenable?
CASE: Francisco v. GSIS Held: No. The Spouses impliedly ratified the contract when they exercised their right
Lesson: There can be no ratification by a corporation of acts performed by an officer to use the subject tickets for the purchase of new ones. Ratification extinguishes the
if he has not been given apparent authority by the corporation, or if his acts are not action to annul a voidable contract.
later validated by the corporation. It is to be noted also that, simultaneous to asking for a refund on the ground of
Facts: X, the plaintiff, sent a letter of compromise to GSIS, which GSIS validly vitiated consent, the Spouses seek a refund based on the airline’s supposed bad
accepted. The terms of the offer were clear, & over the signature of GSIS’s general faith in reneging on its undertaking to replace the subject tickets. In doing so,
manager, X was telegraphically informed that her proposal was accepted. It was sent Spouses Viloria are actually asking for a rescission of the subject contracts based on
by the GSIS secretary & the manager never disowned the same. contractual breach. Resolution, the action referred to in Art. 1191, is based on the
• In a letter remitting the payment of P30,000 advanced by X’s father, X quoted defendant’s breach of faith, a violation of the reciprocity between the parties, & a
verbatim the telegraph of acceptance. claim for a reimbursement in view of the other party’s failure to comply with his
• This was in itself notice to the corporation of the terms of the allegedly obligations under the contract is one for rescission or resolution.
unauthorized telegram. Notwithstanding this notice, GSIS pocketed the However, annulment under Article 1390 and rescission under Article 1191 are 2
amount and kept silent about the telegram. inconsistent remedies.
Was there ratification on the part of the corporation? Resolution (Art. 1191) Annulment (Art. 1390)
Held: Yes. The Court found sufficient evidence of apparent authority through the All the elements to make the contract One of the essential elements to a
conduct & actuations of the corporations concerned. This silence, taken together valid are present formation of a contract, which is
with the unconditional acceptance of 3 other subsequent remittances from plaintiff, consent, is absent
constitutes a binding ratification of the original agreement. Defect is in the consummation stage of Defect is already present at the time of
the contract when the parties are in the the negotiation and perfection stages of
CASE: Liquidators v. Kalaw process of performing their respective the contract
Lesson: The apparent authority of the one in a supposedly annullable contract will obligations
serve as a barrier to further corporate action later, even if the by-laws of a Accordingly, by pursuing the remedy of rescission under Art. 1191, the Vilorias had
corporation require a different process. impliedly admitted the validity of the subject contracts, forfeiting their right to
Facts: Kalaw entered into a contract with NACOCO with only the general maanger’s demand their annulment. A party cannot rely on the contract and claim rights or
consent & without prior board approval. obligations under it and at the same time impugn its existence or validity. Indeed,
• The practice of NACOCO has been to allow the general manager to negotiate litigants are enjoined from taking inconsistent positions.
& execute contracts for & in NACOCO’s behalf without prior board approval.
• The by-laws, however, required the board to give their stamp of prior approval Class Discussion
in all corporate acts. Just like rescission, voidable contracts are subject to ratification.
Are the Kalaw contracts valid acts?
Held: Yes. The Kalaw contracts are valid corporate acts, because the board itself, by Article 1394. Ratification may be effected by the guardian of the incapacitated
its acts and through acquiescence, practically laid aside the by-law requirement of person.
prior approval.
Tacit Ratification Guardian & Ratification
1) Person who has the right to invoke ratification has knowledge of the reason • Guardian – administers the person & properties of the ward
which renders the contract voidable o Everything undertaken for the ward is for the latter’s best interest

• Ratification can be made by the guardian of an incapacitated person. Q: Can a 3rd person file case for annulment?
• Ex. If an insane person entered into a contract with a carpenter to repair the A: GR: NO.
roof of his house, this contract can be annulled, as it was entered into by an EXC: Injury or damage or prejudice; then that 3rd person can file a case for
incapacitated person. annulment.
o But also, the guardian can make an express or tacit ratification of the Q: A (debtor) borrowed money from B (creditor). A & B entered into a contract of
repair, especially if it redounds to the benefit of the ward mortgage, under which the house and lot of A was mortgaged. This was entered into
by force and intimidation. Can a mortgagor sell his property under mortgage?
Article 1395. Ratification does not require the conformity of the contracting party A: Yes.
who has no right to bring the action for annulment. Q: If the contract stipulates that he cannot sell the property, is that valid?
A: No.
Ratification as a Unilateral Act Q: A, so he would no longer have problems, sold the mortgaged property to C. If A
• Generally done by the injured party, not by the party causing injury does not pay, but now C owns the house and lot, can B still foreclose the house and
• The consent of the injuring party is not required because such party normally lot?
desires the effectivity of the contract anyway from its inception A: Yes, because this is a real right (one of the exceptions to the principle of relativity).
Q: Can C file a case for annulment of contract of mortgage?
A: Yes, because he suffers prejudice and is affected. Hence, though he is a 3rd
Article 1396. Ratification cleanses the contract from all its defects from the moment
person, he can file the case for annulment.
it was constituted.
CASE: Malabanan v. Gaw Ching
Effects of Ratification
Lesson: A person leasing the property from a lessor does not fall under the exception
• Transforms the contract completely as one without infirmity of 3rd parties who can filed an action for annulment of any contract the lessor may
• Cures the defect which initially made the contract voidable enter into with a 3rd person.
• Retroacts to the day when the contract was entered into Facts: X & Y executed a sale of X’s property to Y. Gaw Ching wishes to intervene,
invoking his right of preemption in respect of the house & lot involved. Gaw Ching
Article 1397. The action for the annulment of contracts may be instituted against all leased the lot from X for many years already. Can Gaw Ching intervene?
who are thereby obliged principally or subsidiarily. However, persons who are Held: No. Gaw Ching does not fall in the exception to the general rule that strangers
capable cannot allege the incapacity of those with whom they contracted; nor can in a contract cannot file an action to annul it.
those who exerted intimidation, violence, or undue influence, or employed fraud, or • X thrice offered the land to Gaw Ching but the latter had refused to buy. Since
caused mistake base their action upon these laws of the contract. Gaw Ching did not accept the offer to sell & did not buy the land, he suffered
no prejudice by the sale of the same piece of land to Y. No fraud was thus
Theory of Relativity vis-à-vis Art. 1397 worked upon him notwithstanding his insinuation that the sale of the land to
• GR: Strangers to a contract cannot sue either or both of the contracting Y had preceded the offer to himself.
parties to annul & set it aside, because contracts take effect only between • The fact that Gaw Ching had been lessee was simply not enough basis for a
the parties, their assigns, & heirs. right to bring an action to set aside the contract of sale between X & Y. A
o Ex. Under the law, heirs are not liable beyond the value of the property lessee, it is elementary, cannot attack the title of his lessor over the subject
he received from the decedent. matter of the lease.
• EXC (Ibañez v. HSBC, as explained in Malabanan v. Gaw Ching): He who is not
the party obligated principally or subsidiarily in a contract may perhaps be CASE: Armentia v. Patriarca
entitled to exercise an action for nullity, if: Lesson: Generally, an intestate20 heir is not contemplated as one of the parties that
1) He is prejudiced in his rights with respect to one of the parties can be considered principally involved; only forced21 or testamentary heirs are. Thus,
2) He can show the detriment which positively would result to him from intestate heirs cannot file actions to annul contracts entered into by the original
the contract in which he had no intervention owner & 3rd parties.
o A contract that affects a stranger to the said contract can be Facts: X was the brother of deceased Y; X is an intestate, rather than a forced heir
nullified only to the extent that such nullification is absolutely under the law on succession. Y was free to dispose her properties the way she liked,
necessary to protect the plaintiff’s lawful rights.
§ No need to set aside the entire contract.
20Someone who inherits the properties of the deceased who has left no will.
21An heir who cannot be disinherited except for good causes recognized by law & whose share in his
Class Discussion ancestor's estate cannot be impaired by the will of the ancestor or even by gifts made inter vivos.

because she had no ascendants or descendants. Does X have standing to annul a
contract entered into by Y with another disposing Y’s property? Those Estopped
Held: No. X is not a forced heir. He is not obliged principally or subsidiarily under the • Action for annulment cannot be filed by the person who caused the defect in
contract. Y did not transmit to him by devise or otherwise any right to the property, the contract.
the subject thereof. On the contrary, Y voluntarily disposed of it. No creditors are o The one who committed fraud cannot annul the contract on the
defrauded; there are none. No legitimes are impaired. Therefore, X has no cause of ground that there was fraud. He is estopped from asserting the
action to annul or to rescind the sale. grounds which were principally initiated by him.
o A litigant cannot come to court with “unclean hands.”
CASE: Concepcion v. Sta. Ana • Annulment cannot likewise be filed by the person who is capacitated to enter
Facts: X was the only surviving legitimate brother of Y, who died without issue & into the contract if the ground is the incapacity of the other party.
without leaving a will. In Y’s lifetime, she sold & conveyed three parcels of land for a o Ex. If a minor & person of age entered into a contract of sale of a
fictitious consideration to Z, who secured transfer certificate of title of said lands particular car, the person of age cannot file a case to annul the
issued under Y’s name; Z has held possession of the property since Y’s death. contract based on the fact that the other contracting party was a
X claims this is causing him damage & contract should be annulled. Can X get the minor.
conveyances annulled? o The minor, however can file a case upon reaching the age of majority
Held: No. In this case, Y never transmitted to X any right arising from the contract because it is at this time when the guardianship of the parents
with Z. X is just an intestate heir. ceases.
• An action to annul a contract entered into whenever they are tainted with the • BUT: If the case filed is NOT for annulment of contract but for the
vice which invalidate them, may be brought not only by any person principally enforcement of the contract, the party who is capacitated may file such
bound, but also by his heir to whom the right & obligation arising from the action against the minor. The minor’s liability will depend on the kind of
contract are transmitted. Hence, if no such rights, actions or obligations have misrepresentation the child made, & the extent of the child’s benefit:
been transmitted to the heir, the latter cannot bring an action to annul the o Active misrepresentation - the minor deliberately & intentionally
contract in representation of the contracting party who made it. undertakes to inform the other party & expressly declares in the
o The testamentary or legal (forced) heir continues in law as the juridical contract that he is of majority age, when in fact he is not of age
personality of his predecessor-in-interest, who transmits to him from § The minor will be liable to pay whatever his obligation is under
the moment of his death such of his rights, actions & obligations as the contract as if his liability is that of a person who is of age.
are not extinguished thereby. o Passive misrepresentation - the minor was able to enter into the
• In this case, Y voluntarily made the sale to Z, which X cannot now protest. As contract without doing anything to declare his true age, such minor
Y had no forced heir (& only an intestate heir, X), she was free to dispose of shall be liable only up to the extent that he has been benefited by the
her property as she wished, even without any consideration, unless she is in contract.
fraud of her creditors (which she is not).
• A voluntary conveyance, without any consideration whatever, is prima facie Class Discussion
good as between the parties, & such an instrument cannot be declared Recall the distinction between active & passive misrepresentation earlier discussed.
fraudulent as against creditors in the absence of proof, that there was at the his representation is PASSIVE representation, NOT active representation (if it were
time of the execution of the conveyance a creditor who could be defrauded by active, he cannot file a case to annul the contract).
the conveyance. • Ex. “I, A, 26 years old …” but A is 17 & thus a minor – active
misrepresentation
CASE: Bañez v. CA • Ex. “I accept the terms of this contract …” without stating age, A being 17 & a
Lesson: A squatter to a property cannot be considered a stranger with a substantial minor – passive misrepresentation
right to a 3rd party contract even if he occupies the property they live in, for he
acquired possession in bad faith & his rights are not prejudiced. Article 1398. An obligation having been annulled, the contracting parties shall
Facts: X entered into & built his house upon PHHC’s land without the consent of the restore to each other the things which have been the subject matter of the contract,
latter. PHHC executed a deed of sale in favor of Y & there were subsequent transfers with their fruits, & the price with its interest, except in cases provided by law.
of ownership. X is suing because his rights, he claims, are substantially affected by In obligations to render service, the value thereof shall be the basis for damages.
PHHC’s actions. Can X get the contract of PHHC & Y annulled?
Held: No. X has no right over the property, being a mere trespasser. Only strangers Article 1399. When the defect of the contract consists in the incapacity of one of the
those whose rights are prejudiced & who can prove the detriment which they would parties, the incapacitated person is not obliged to make any restitution except
positively suffer can interfere with a contract between 2 stranger parties. insofar as he has been benefited by the thing or price received by him.

unless said loss took place through the fraud or fault of the plaintiff.
Decree of Annulment
• Contracting parties must return to their original position *Doctrine of Unclean Hands
• Ex. for things - In a contract of sale of a car, the (1) car must be returned to • GR: Action is extinguished if the object is lost through fault or fraud of the one
the owner-seller & the (2) purchase money with the corresponding (3) interest who has a right to institute the proceedings
must be returned to the buyer. o Ex. If A coerced B to sell to him a car, B can seek the annulment of the
• Ex. for services - If the contract involves some service like the tutoring of a sale.
particular child, the value of the tutoring must be paid to the tutor by way of § BUT: If B lost the car by intentionally destroying it, he cannot
damages. file the annulment case as such right will be considered
extinguished.
Incapacity as Defect • BUT: If it is based upon the incapacity of any of the parties – loss shall not be
• When the defect consists in the incapacity of one of the parties, the an obstacle to the success of the action, unless the loss is due to the fault or
incapacitated person is not obliged to make any restitution except insofar as fraud of the plaintiff
he has been benefited by the thing or price received by him o Reason – an incapacitated person is not obliged to make any
• Ex.: A minor entered into a contract of loan with a bank. restitution except when it has benefited him (Art. 1399)
o If minor uselessly spent part of the proceeds, the bank cannot recover o Ex.: If an incapacitated person, such as a deaf-mute who cannot write,
such uselessly spent money even if a court decrees that the obligation purchases a car & later he files a case to annul the contract of sale,
is annulled. The minor has no obligation to restore such money. the mere fact that the car has been lost will not abate the proceedings
o BUT: The bank can recover from the minor such part of the proceeds for annulment.
which was beneficial to him, like money spent to enroll in a school. § The incapacitated person is not obliged to make any restitution
o It must be noted that the bank cannot even file a case against the EXCEPT when it has benefited him. Hence, since the object of
minor. the contract has been lost, no benefit can accrue in his favor.
§ It can only recover by way of a counterclaim in a complaint for § HOWEVER, if the incapacitated person loses the car through
annulment filed by the minor when he reaches the age of his own fault, then the case will be dismissed.
majority. • WON you are incapacitated, if you lose the property through your own fault,
you do not have the right to file an action for annulment anymore.
Article 1400. Whenever the person obliged by the decree of annulment to return the
thing cannot do so because it has been lost through his fault, he shall return the Class Discussion
fruits received & the value of the thing at the time of the loss, with interest from the GR: If the thing is lost through fortuitous event, the case can continue
same date. EXC: If the thing is lost through fault or fraud
When Thing is Lost Article 1402. As long as one of the contracting parties does not restore what in
• When the object cannot be returned, because it was lost by the person virtue of the decree of annulment he is bound to return, the other cannot be
obliged to return it due to the fault of the said person, the (1) value of the compelled to comply with what is incumbent upon him.
object at the time of the loss, (2) its fruits & (3) interest from time of loss
shall be given instead to satisfy the order of restitution. Restitution
• Ex. A is compelled by B to have an exchange of their respective cars. The • Requires the return by the parties of what each has received from the other.
contract is subsequently annulled. A & B must return what each of them has • If one of them cannot restore to the other what he has received from the said
received from each other. other, such other person cannot be compelled to return what he, in turn, has
o If A cannot return the car obtained by way of the exchange because he received.
lost it, he shall undertake restitution by paying B an amount o BUT: If one of the parties is incapacitated, he is not obliged to return
equivalent to the value of the car plus interest, if any. what he has received except insofar as he has been benefited by the
thing or price received by him (Art. 1399).
Article 1401. The action for annulment of contracts shall be extinguished when the
thing which is the object thereof is lost through the fraud or fault of the person who CHAPTER 8. UNENFORCEABLE CONTRACTS.
has a right to institute the proceedings.
If the right of action is based upon the incapacity of any one of the contracting *Article 1403. The ff. contracts are unenforceable, unless they are ratified:
parties, the loss of the thing shall not be an obstacle to the success of the action, (1) Those entered into in the name of another person by one who has been given

no authority or legal representation, or who has acted beyond his powers;22 • The Statute mandates that for certain executory contracts to be enforceable
(2) *Those that do not comply with the Statute of Frauds as set forth in this in court, the only evidence that can be submitted is written proof (e.g., notes
number. In the ff. cases an agreement hereafter made shall be or memoranda)
unenforceable by action, unless the same, or some note or memorandum o ALSO: These writings need not be in one document; it can be in 2 or
thereof, be in writing, & subscribed by the party charged, or by his agent; more notes which, taken together or by reference with other writings,
evidence, therefore, of the agreement cannot be received without the writing, must clearly reveal all essential requisites of a contract & also the
or a secondary evidence of its contents: signatures of the parties charged or their agent
a. An agreement that by its terms is not to be performed within a year • No particular form of language or instrument is necessary to constitute a
from the making thereof; memorandum or note in writing; any document or writing, formal or informal,
b. A special promise to answer for the debt, default, or miscarriage of written either for the purpose of furnishing evidence of the contract or for
another; another purpose, which satisfies all the requirements of the statute as to
c. An agreement made in consideration of marriage, other than a mutual contents and signature, a sufficient memorandum or note.
promise to marry; • “Paper Connected” Rule – ANY document can be combined with another
d. An agreement for the sale of goods, chattels, or things in action, at a document as proof
price not less than P500, unless the buyer accept & receive part of o The rule has been applied to allow the consideration together, when
such goods & chattels, or the evidences, or some of them, of such properly connected, of a letter & an order of court, a letter & order for
things in action, or pay at the time some part of the purchase money; goods, a letter & a deposition, letters or telegrams & undelivered
but when a sale is made by auction & entry is made by the auctioneer deeds, wills, correspondence & related papers, a check & a letter, a
in his sales book, at the time of the sale, of the amount & kind of receipt & a check, deeds & a map, a memorandum of agreement & a
property sold, terms of sale, price, names of the purchasers & person deed, a memorandum of sale & an abstract of title, a memorandum of
on whose account the sale is made, it is a sufficient memorandum; sale and a will, a memorandum of sale & a receipt, & a contract, deed,
e. An agreement for the leasing for a longer period than 1 year, or for the and instructions to a depository in escrow.
sale of real property or of an interest therein; o The number of papers connected to make out a memorandum is
f. A representation as to the credit of a third person. immaterial.
(3) Those where both parties are incapable of giving consent to a contract.
LECTURE FROM DEAN MEL
Article 1404. Unauthorized contracts are governed by Article 1317 & the principles
of agency in Title X of this Book.
The Statute of Frauds is the most important aspect of unenforceable contracts.
Unenforceable Contracts in This Chapter
When one states that a contract is “within Statute of Frauds,” he means that the
• A contract may have ALL the requisites for perfection but may still be contract CANNOT be enforced.
unenforceable. IF one says the contract is “removed” from the Statute of Frauds, that means the
contract can already be enforced.
Contracts without Authority
• Discussed under Art. 1317 To be removed from the Statute of Frauds, it must be either:
o Non-authority is also governed by the principles of agency in Arts. 1. In writing, & subscribed by the person charged
1868-1932 of the Civil Code. • Need not be in one document; it may be in a series of documents, so long
• If a contract has been entered into without authority, it cannot be enforced. as all the parts of the conract (cause, object, consent) can be seen
2. In the executory stage; i.e., it is about to be executed
Contracts Where Both Parties Are Incapable of Giving Consent Partial execution removes it from Statute of Frauds
• Ex. If a contract is entered into by a minor & by a deaf-mute who cannot read
& write, such contract is unenforceable. Scenario #1
o BUT: If only one is incapacitated, the contract will only be voidable. Q: X made an ad which is complete in all details. Y approached X, “Are you X?” X said
“Yes!” Y said, “I accept!” Is there a perfected contract?
Non-Compliance with the Statute of Frauds A: YES, except there is a specific manner of consenting provided.
• The Statute is designed to prevent forgery Q: X changed his mind the week after. Y tried to enforce. Will the case prosper?
A: YES, it will prosper. This is because it was NOT subscribed by the person charged.
22 In relation to this, Regal Films v. Concepcion was repeated in discussion (see p. 124 for the case).

Q: Y asked X to sign the contract. X signed the contract. Then a week after X decided • Exhibit S – Checks for the price of the lot
to rescind. Is this already enforceable? All these show the elements of a perfected contract of sale.
A: No, because both X and Y are charged. Y should have also signed the contract.
Statute of Frauds Applies Only to Executory Contracts
Scenario #2 • The Statute of Frauds does NOT apply when the contract has already been
Q: The document states: “I, Juan, will buy Lot A for P1M; signed Juan dela Cruz.” Is it totally or partially performed.
removed from the Statute of Frauds? • Ex. A contract of sale of real property in installment is not within the Statute
A: No, because BOTH Juan and the seller should have signed not just Juan. of Frauds, even if it is not in writing, if the first installment has already been
Q: The document states: “I, Juan, after receiving the amount of P1M, will sell Lot A paid, since this is already partial performance on the part of the buyer.
for P1M; signed Juan dela Cruz.” Seller has already accepted payment, but buyer did
not sign. Is this already enforceable? *CASE: Babao v. Perez
A: YES, because it has been partially executed AS SEEN IN THE DOCUMENT ITSELF. Lesson: (1) Partial performance of an oral contract which supposedly would fall
Scenario #3 within the Statute of Frauds removes the same from the Statute.
Q: A is the owner. B is the contractor. A said to B, “Construct for me a building. (2) BUT: For an oral agreement partially performed to be enforceable, the
Please start the construction 2 years from now.” This contract was oral. The agreement must be certain, definite, clear, unambiguous & unequivocal in its terms.
consideration is P1B. A already paid B P500M. Is the transaction still within the Also, the oral contract must be fair, reasonable, and just in its provisions for equity to
Statute of Fraud or already removed? enforce it on the ground of part performance.
A: For this particular ground (contracts that will be performed beyond 1 year), partial Facts: B allegedly bound himself to convert a 156 hectare parcel of forest land into a
execution means COMPLETE FULFILLMENT by 1 party of his obligation. P1B should farm with “bananas, bamboo trees, coconuts, rice, & other crops,” & administer the
have already been paid! Partial payment of P1B is not enough. (Babao v. Perez) – same during the lifetime of P, while P bound herself to give S ½ of the land as
“BUT NOTHING LESS THAN FULL PERFORMANCE BY ONE PARTY WILL SUFFICE.” improved, with all the improvements thereon upon S’s death. Is this oral agreement,
partially performed, enforceable?
Scenario #4 Held: No. The agreement suffers from vagueness. It does not say, for example, if B
Q: A is the creditor; B is the debtor. X told A in front of B, “If B doesn’t pay, I’ll pay. should plant ½ hectare of coconuts, or rice, & another ½ of corn. No sane property
This is my special promise to you.” B did not pay. So A filed a case for specific owner would enter into such an agreement because the time, effort, & money that it
performance against X. Will it prosper? takes to plant coconut trees is more than that for bananas & bamboos. On the part
A: NO, because the special promise is subsidiary. There must be exhaustion first with of S, her end of the bargain is also incapable of execution; how was she supposed to
B before A can go after X. deliver ½ at her death? Testimonies of witnesses also varied as to what exactly S
said; one party heard S say that B should plant only coconut trees, because “the
land would eventually fall in his hands.”
CASE: Paredes v. Espino There can be no part performance until there is a definite and complete agreement
Facts: D wrote P a letter stating that he (D) accepted P’s offer as to the price & between the parties. All the essential terms of the contract must be established by
object of the contract. This was followed up by telegrams between the two. Is the competent proof, and shown to be clear and unambiguous. This clearness and
agreement here enforceable? definiteness must extend to both the terms and subject matter of the contract.
Held: Yes. The documents presented constitute adequate memoranda of the The rule that the court will not specifically enforce a contract for the sale of land
transaction & removed it from the Statute of Frauds. unless its terms have been definitely understood and agreed upon by the parties,
and established by evidence, is especially applicable to oral contracts sought to be
CASE: Limektai Sons Milling Co. v. CA enforced on the ground of part performance. Its terms must be so clear and
Facts: The contract of sale of a real property in this case was not written down in a complete as to allow no reasonable doubt respecting its enforcement according to
deed of sale. Can it still be enforceable? the understanding of the parties.
Held: Yes. Despite there being no deed of sale, there are abundant notes &
memoranda which evidence the elements of a perfected contract of sale. Partial Performance – Examples of How Manifested
• Exhibit P – A letter authorizing the sale of the property & giving a price • When improvements are made on the subject property pursuant to the
therefor contract
• Exhibit B – An authority to sell the property for a given price • When rentals are paid
• Exhibit C – An authority to allow the buyer to enter the premises & make an • When a buyer takes possession on the basis of a verbal contract to purchase
inspection the property
• Exhibit E – A letter confirming the transaction • Payment of taxes and relinquishment of rights

• Tender of payment coupled with other acts indicating partial performance o Hence: To remove the case from the Statute of Frauds, all that is
required is complete performance within 1 year by 1 party, no matter
CASE: Paterno v. Jao Yan how many years may lapse before the agreement is performed by the
Facts: X & Y originally entered into a written contract of lease, where Y was the other.
lessee. However, they subsequently modified the agreement orally. In an action § BUT: Nothing less than full performance by one party will
related to this modified oral agreement, Y sought to present evidence of partial suffice
performance. Can this be accepted? o If the contract stipulates that it will be executed immediately upon
Held: Yes. Since there is partial performance in this case, the oral contract is signing, although it has been reset to another date by agreement of
removed from the Statute of Frauds. Where an oral contract of sale has been the parties so that it can be finished only beyond 1 year, the contract
partially executed by payment of the price, oral testimony is admissible to evidence is removed from the Statute.
the existence of the contract. The taking of possession by the lessee and the making o If initially, a contract should have been finished within 1 year, but it
of valuable improvements and the like, on the faith of the oral agreement, may could only be finished beyond the 1-year period, the contract is
operate to take the case out of the prohibition of the Statute of Frauds as well. removed from the Statute of Frauds.
2. Special promise to answer for the debt, default, or miscarriage
CASE: Read Drug & Chemical Co. v. Nattans of another
Lesson: A parol agreement of a landlord to extend a lease for a specified term of o “Special promise” – applies to express & tacit promises in fact made,
years & a specified rental, provided that the tenant made certain extensive repairs & not in cases where the duties are created by law without promissory
to the property, is enforceable under the Statute of Frauds, where the tenant fully assent
performed his part of the agreement. o A promise is not within this clause of the Statute unless there is an
obligation of some 3rd person to the promisee, either already existing
Enumeration of Contracts Within Statute of Frauds or subsequently exisiting
• These grounds are exclusive § Also, the promise must be made to the promisee, NOT the
o Hence, a right of first refusal, a right given to a person to be preferred debtor
in the sale of a property in case the owner decides to sell the same, is o “Debt, default and miscarriages” – includes ALL legal obligations
not included under which a person can come, contractual or non-contractual,
o The setting up of boundaries is not included requiring a money payment or any other kind of performance
o The oral partitioning of real property is not included o The commitment of the promisor to pay the debt of another should
o An agreement creating a right-of-way is not included NOT immediate discharge the debtor from his debt at the time of the
making of the promise; if that is the case, then there is novation which
Contracts Within the Statute of Frauds will not fall under the Statute.
1. An agreement which, by its terms, is not to be performed within o The promise must be in the nature of a collateral or subsidiary
1 year from the making thereof obligation, & NOT an original one.
o Ex. An agreement orally entered into in 1987 for a person to § Hence, if one merely promises to pay the obligation of another
commence a painting in 1989 must be in writing to be enforceable once a debt becomes due, this would not be within the Statute
o Ex. A contract which stipulates a certain type of activity will be of Frauds, as that would in effect be an indemnity agreement
commenced within the year from the making of a contract, but it can where the promisor is also an original & principal debtor.
only be fully accomplished after one year from the same § Ex. If S promises C to answer for P’s debt, whether S’s promise
§ Thus: If the parties agree on Jan. 1997 for a building's is simultaneously made with the inception of P’s obligation or
construction to be commenced on Nov. 1997, but it will be for a separate consideration, S’s obligation is collateral to P’s &
finished on Jan. 1998 within the Statute of Frauds as a general rule.
o BUT: If a contract is entered into where one party fully completed his • BUT: If no obligation exists between P & C, S’s promise
undertaking within 1 year & the other party could only finish beyond 1 is original & not within the Statute, because he is not
year, the said contract is removed from the Statute of Frauds really answering for another’s default.
§ Ex. In the building example, if one party already fully paid the o In joint obligations, there is no “special promise,” so that would not fall
builder the complete consideration for the construction of the under the Statute of Frauds, since each person answers for their own
same 6 months after making the contract, the contract is obligation.
removed from the Statute of Frauds

o *In solidary obligations, it depends on whether or not the promisor commercial credit. From the testimony of B, it was clear that
knew that only one of the solidary debtors would truly be benefited by when the agreement for the delivery of lumber was made, the
the payment. credit was extended not to B but to D. The precise language in
§ If both promisors are the buyers or borrowers, they both which the verbal agreement was made does not appear from
become debtors & their oral promises are binding without the evidence, and while it is true that P to the agreement as
needing to comply with the Statute of Frauds. one whereby defendant “guaranteed” payment for the lumber,
§ *BUT: If one of several promisors is to benefit, the other the evidence shows that the word was not used by this witness
lending credit as security, & this is known to all parties in its technical sense, and that he did not mean thereby to say
involved, the one lending credit is answering for the debt of that D guaranteed payment by the B, but rather that after
another within the statute. This is just as true where the satisfying P as to his own financial responsibility, D obligated
promise of one who lends his credit is in terms conditioned himself to pay for the lumber.
upon default by the one for whose benefit the consideration o When one advances debt at the request of another (on his promise to
inures. repay it) to pay the debt of a third party, not being made at all upon his
§ *Class Discussion: As a general rule, when there is solidary credit, the liability of the party on whose request & promise it was
liability, this would not fall within the Statute of Frauds. made is original & not collateral, & not within the Statute of Frauds.
HOWEVER, If a 3rd party is an accommodation party & all 3. Agreement made in consideration of marriage other than a
parties to the main transaction know that that is so, the mutual promise to marry
arrangement falls within the Statute of Frauds. o Ante-nuptial agreements & marriage settlements must be in writing
o Suretyshhips & promises of guaranty are within the Statute of Frauds. § Family Code further requires that these be (1) signed by the
§ Ex. P & S agree to be solidarily liable to C for $200 in 6 months. parties & (2) executed before marriage
P is to own the horse with the knowledge of C. In this case, the § Under the Family Code, failure to satisfy this requisite makes
promises are solidary, S is just a surety since it is P who will the contract VOID.
truly benefit. S’s defense of the Statute of Frauds would apply. o A mutual promise to marry does not fall within the Statute because a
o CASE: Reiss v. Memije breach of such promise per se is not actionable.
§ Facts: D entered into a contract with B for the repair of a 4. Agreement for the sale of goods, chattels, & things in action, at
house. B undertook to bring the necessary materials. However, a price not less than P500
B had no commercial standing in the community so he was not o Ex. A contract to sell a fountain pen worth P5,000 must be in writing to
able to purchase the materials needed. D, who had better be enforceable
commercial standing, went with B to P’s lumberyard & after o BUT: If one already paid for the pen, the contract is partially performed
satisfying P as to his financial capacity, D entered into an already & hence removed from the Statute
agreement whereby P would deliver the needed materials to o ALSO: In an auction sale, the recording of the sale in the sales book is
D’s house for B’s use. However, balance for the lumber that enough memorandum to remove the contract from the Statute
was brought to D’s house remained. P thus sued D for payment 5. Agreement for the leasing of property for a period longer than 1
for the lumber. All this happened orally. Is the promise of D to year
answer for the lumber enforceable? o Ex. A contract of lease for 2 years must be in writing to be enforceable
§ Held: Yes. The true test as to whether a promise is within the 6. Sale of real property or any interest therein
Statute lies in the answer to the question whether the promise o A sale of real estate must be in writing to be enforceable, BUT it need
is an original or a collateral one. If the promise is an original or not be notarized or in a public instrument to be enforceable
an independent one; that is, if the promisor becomes thereby o Notarization is needed only to bind 3rd persons & so that the Registry
primarily liable for the payment of the debt, the promise is not of Deeds will accept the deed for registration
within the Statute. But, on the other hand, if the promise is o Ex. from Class Discussion – Interest in a co-ownership of a piece of
collateral to the agreement of another & the promisor becomes real property falls within the Statute of Frauds; if a person sells his
thereby merely a surety, the promise must be in writing. 1/3 interest in a property, that also has to be in writing.
Taking into consideration all the circumstances of the case at 7. Representation as to the credit of a 3 rd person
bar, SC held that the credit for the lumber was extended solely o A representation of the creditworthiness of another which turns out to
and exclusively to D under the verbal agreement had with him, be untrue may be a cause of action for damages if the same were
and therefore, that the provisions of the statue did not require given in bad faith
that it should be made in writing. D admitted that B had no

o But an untrue representation made in good faith, with the other party • If the only purpose of the suit is to prove lawful possession of a real property
having all the opportunity to investigate the truth of the same, will lead for purposes of registration, the absence of written evidence to prove such
to no damages being awarded real interest over the real property in order to prove violation of the Statute
o Ex. If A represents to G that X is a millionaire, but X is without cash as cannot be invoked.
of the moment & G lends X money, such representation by A must be
in writing. Class Discussion
A contract is no longer unenforceable under the Statute of Frauds if:
Class Discussion 1. There is partial execution
Representation of credit – THIS IS ACTUALLY NOT A CONTRACT 2. Failure to object to the presentation of oral evidence to prove the same
Q: X says to Y, “A is rich! Lend A money!” Y lent money to A because of X. As it turns 3. There is acceptance of benefits under them
out, A is poor. Y sued X. Will case prosper?
A: No, Statute of Frauds. Otherwise, it would be so quick for people to say! This Article 1406. When a contract is enforceable under the Statute of Frauds, & a public
would be defraudation. document is necessary for its registration in the Registry of Deeds, the parties may
Q: Is the contract of loan between A and Y annullable? avail themselves of the right under Article 1357.
A: It will be annullable only if A & Y are in good faith & are mutually mistaken.
Compelling the Other Party
Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article • When an agreement in Art. 1403 (2) is in writing & therefore enforceable, &
1403, are ratified by the failure to object to the presentation of oral evidence to the law requires registry in the Registry of Property, the contracting parties
prove the same, or by the acceptance of benefits under them. may compel each other to observe the form required once the contract has
been perfected.
CASE: Limektai Sons Milling v. CA o They may do so simultaneously with the action upon the contract.
Lesson: Contracts infringing the Statute of Frauds are ratified when the defense fails • CASE: Almirol vs. Monserrat
to object, or asks questions on cross-examination. In this case, counsel for o Facts: By virtue of a verbal sale, the applicant came into actual
respondents examined petitioner’s witnesses on the contract itself & other details of possession of the land. The applicant sought the registration of the
the contract. Even assuming that parol evidence was initially admissible, the same subject lot already in his possession. The opposition claimed that oral
became competent and admissible because of the cross-examination, which elicited proof of the contract cannot be adduced in court where the
evidence proving the evidence of a perfected contract. The cross-examination on the registration was being questioned. Doe the Statute apply?
contract is deemed a waiver of the defense of the Statute of Frauds. o Held: No. Parol evidence of sale is adduced not for the purpose of
enforcing performance thereof, but on the basis of the lawful
CASE: Rodriguez v. CA possession of the applicant, entitling him to have the land thereby
Facts: A particular sale was questioned & only receipts were introduced as evidence sold registered in his name. Thus, the Statute of Frauds is not
to prove the sale, without showing from those receipts of the basic elements of a applicable.
contract. However, oral evidence was given in the proceedings & the other party • A mere tenant in the subject property cannot invoke the doctrine in the
failed to object to said evidence. Does the case fall within the Statute of Frauds? Almirol case.
Held: No. There was already ratification because of the failure to object to the
presentation of oral evidence which proved the sale & acceptance of consideration. Article 1407. In a contract where both parties are incapable of giving consent,
express or implied ratification by the parent, or guardian, as the case may be, of one
Benefits Already Received of the contracting parties shall give the contract the same effect as if only one of
• If benefits have already been obtained from the agreement, the Statute of them were incapacitated.
Frauds will no longer be a defense If ratification is made by the parents or guardians, as the case may be, of both
• Ex. If A sold to G a real property, & A was already given the purchase price, contracting parties, the contract shall be validated from the inception.
the contract of sale of real property can be enforced even if the same is not
in writing. Incapacity of Both Parties & Ratification
• In case both parties are incapacitated, & the guardians of one of them
When Statute of Frauds Can be Invoked ratifies the contract, the same shall be transformed into an annullable
• The Statute can only be invoked in case of violation of contracts or specific contract.
performance • If ratification is by the parents or guardian of both parties, the contract shall
be valid, without any defect or infirmity at all.

declared void).
*Article 1408. Unenforceable contracts cannot be assailed by 3rd persons. (3) Art. 1414, repudiation of the implementation of the contract. But if
public interest so requires, the repudiator can get the money bank.
Unassailable by 3rd Parties • Q: A gives B 1,000 to beat C up. Is there a contract?
• It is useless for a 3rd person to assail an unenforceable contract since it • A: Yes. This is an ostensible but void contract.
cannot be executed anyway
• Q: Can it be enforced?
CHAPTER 9. VOID & INEXISTENT CONTRACTS. • A: No, because it falls under Art. 1411 (crime).
• Q: Do A & B have any remedy against each other?
• A: No, because they are in pari delicto. If B beats C up & later
LECTURE FROM DEAN MEL claims the money from A, B cannot do so, because of the in pari
delicto doctrine. It is the same if A already paid B, and B doesn’t
From the list of void contracts, you must determine which are technically inexistent & beat C up – A will not be able to get a refund from B.
which are ostensible, but void. • NOTE: But if public interest so requires, the repudiator can get
the money bank. For example, in the same example, A is a PWD
As for those technically inexistent, one of the elements is missing (hence making it who needs money back to fund food expenses.
technically inexistent). (4) Art. 1415 – Incapacitated (not allowed) – but if it will serve the
• Ostensibly simulated interest of justice, the person may require.
• Cause or object does not exist at time of transaction (5) Art. 1416 – Merely prohibited (e.g., the kabit system) – if for public
• Intention of the parties relative to the principal object of the contract cannot policy, he can still recover
be ascertained – e.g., X told sell Y that he would sell to Y his boat, Isabelle. It (6) Art. 1417 – Overpricing which is against the law – the buyer can
turns out that X has 3 boats named Isabelle. recover
As for those which are ostensible but void, all the elements are existent, but they are (7) Art. 1418 – Labor (below minimum wage) – recovery can be made by
still void under the law. worker
• Whose cause, object or purpose is contrary to law, morals, good customs, (8) Art. 1419 – Labor (as regards hours of work) – recovery can be made
public order or public policy by worker
• Expressly prohibited or declared void by law
Object is outside the commerce of men; impossible service – could be both Note: In void contracts, restitution will apply EXCEPT where the case is criminal.
These distinctions are important for determining the applicability of the “in pari In void contracts, there is no –
delicto” doctrine, & WON it should apply or not apply. 1. Prescription
• GR: In void contracts, pari delicto will NOT apply; if you enter into a void 2. Laches
contract, each of the parties has a remedy against the other & either can still
file an action to have the cause declared void. Third parties can file a case to declare a contract void if they can show interest,
• EXC: In some cases, pari delicto will apply & the parties will not have rights prejudice, or injury.
against each other; these include those in Art. 1411 (where the cause or the
object is illegal & criminal) or Art. 1412 (where it is civil, not criminal, but with *Article 1409. The ff. contracts are inexistent and void from the beginning:
a “forbidden cause”). In both these cases, both parties must know it is void. (1) Those whose cause, object or purpose is contrary to law, morals, good
They will have no remedy against each other. customs, public order or public policy;
• EXC to EXC: (2) Those which are absolutely simulated or fictitious;
(1) In Art. 1412, if one is in bad faith, & one is in good faith, the one in (3) Those whose cause or object did not exist at the time of the transaction;
good faith can still run after the one in bad faith. (4) Those whose object is outside the commerce of men;
(2) Art. 1413 (usurious interest IF there is a usury law; but still, around (5) Those which contemplate an impossible service;
33-35% interest p.a. is void according to the SC not because it is (6) Those where the intention of the parties relative to the principal object of the
against the law, but because it is against morals) – in these cases, the contract cannot be ascertained;
WHOLE INTEREST will be void. All of this is true even if both parties (7) Those expressly prohibited or declared void by law.
know that the interest to the loan or contract, which they both sign, is These contracts cannot be ratified. Neither can the right to set up the defense of
void (hence, the debtor may still file a case to have the whole interest illegality be waived.

CASE: Gardner v. CA
CASE: De Leon v. CA Lesson: An absolutely simulated contract is void.
Lesson: The continued existence of a marriage cannot be made the basis of a Facts: A contract purporting to be a sale of land was really without consideration.
contract; such a contract is void. Said contract was intended merely to protect a party to a joint venture for the cash
Facts: The parties, who were husband & wife, stipulated that “in consideration for a advances he was to make for the realty subdivision that the parties wanted to put
peaceful & amicable termination of relations between the undersigned & her lawful up.
husband,” the husband would give some properties to the wife & monthly support Held: The contract was absolutely simulated and therefore null and void.
for the children, & the wife would agree to a judicial separation of property plus the
amendment to the divorce proceedings initiated by the wife in the United States to CASE: Prudential Bank v. Panis
conform to the agreement Lesson: A contract which violates a law is void.
Held: The agreement is contrary to law, Filipino morals & public policy because the Facts: A grantee of a government sales patent mortgaged the same within the
consideration of the agreement is the termination of the marriage by the parties prohibition provided by the Public Land Act that no encumbrance or alienation
which they cannot do on their own & without any legal basis. should be made of the property subject of the patent within 5 years from the
issuance thereof.
CASE: Pena v. De Los Santos Held: The mortgage was null and void for being in violation of law.
Lesson: A person who obtains title to a property from a seller whose title is void does
not acquire any right pertinent to the same property. CASE: Maharlika Publishing Corp. v. Tagle
Facts: Atty. X obtained a piece of real property through a prohibited sale – he got the Lesson: Public order & public policy dictates that a public official cannot participate
property from a litigation in which he took part, which is prohibited under Art. 1491 in a bidding for foreclosed property, as it gives rise to suspicions of insider
(5) of the Civil Code. The sale was executed while the property was still the subject of information.
litigation. Atty. X sold the same property to Y. Does Y acquire any right over the Facts: The wife of a GSIS official, acting for her husband who was an influential
property? Division Chief of the GSIS, was allowed to bid on a foreclosed property, and she
Held: No. Since the property conveyed to Atty. X was still the object of litigation, the eventually won the bidding.
deeds of conveyance executed by the latter are deemed inexistent. Under Art. 1409, Held: The bidding and the contract of sale resulting therefrom as null and void as
contracts which are expressly prohibited or declared void by law are considered they violated Article 1491 prohibiting public officers and employees from purchasing
inexistent and void from the beginning. This being so, Atty. X could not have property under their administration in an auction sale.
transferred a valid title in favor of Y over the lot.
Furthermore, there is no need to bring a separate action for the declaration of the CASE: Cui v. Arellano University
conveyance as void. A void contract is one which has no force and effect from the Lesson: Scholarships are not just a business scheme; they are part of public policy in
very beginning. Hence, it is as if it has never been entered into and cannot be order to award students who deserve the merit. Thus, it cannot be waived because a
validated either by the passage of time or by ratification. student is transferring schools.
Also, the need to bring a separate action for declaration of nullity applies only if the Under the principles relating to the doctrine of public policy, as applied to the law of
void contract is no longer fully executory. Contrary to Y’s stance, the deeds of contracts, courts of justice will not recognize or uphold a transaction which in its
conveyance made in favor of Atty. X in 2005 cannot be considered as executory object, operation, or tendency, is calculated to be prejudicial to the public welfare, to
because at that time the judgment award ceding the subject lot to J & R (Atty. X’s sound morality, or to civic honesty.
clients who originally owned the lot) was not yet implemented. A writ of execution Facts: A student scholar, who decided to move to another school, was required to
was issued only in 2008. If the void contract is still fully executory, no party need refund the amount of his free tuition, which he initially got from a scholarship
bring an action to declare its nullity; but if any party should bring an action to enforce granted to him by the school on the basis of a contract. He had signed said contract,
it, the other party can simply set up the nullity as a defense. which stated: “In consideration of the scholarship granted to me by the University, I
There is also no estoppel here, since the act is against public policy. The rationale hereby waive my right to transfer to another school without having refunded to the
advanced for Art. 1491 (5) is that public policy disallows the transactions in view of University the equivalent of my scholarship cash.”
the fiduciary relationship involved, i.e., the relation of trust and confidence and the Held: The refund cannot be properly demanded because the waiver was against
peculiar control exercised by these persons. It is founded on public policy because, public policy. The scholarship is based on the memorandum issued by the Director
by virtue of his office, an attorney may easily take advantage of the credulity and of Private Schools; a contract of waiver is in direct violation of the memorandum. In
ignorance of his client and unduly enrich himself at the expense of his client. The determining a public policy of the State, courts are limited to a consideration of: (1)
principle of estoppel runs counter to this policy and to apply it in this case will be the Constitution, (2) the judicial decisions, (3) the statutes, and (4) the practice of
tantamount to sanctioning a prohibited and void transaction. government officers.

CASE: Marubeni Corporation v. Lirag • Jurisprudence establishes that a 24% p.a. stipulated interest rate is not
Lesson: Contracts obtained through the influence of higher executive officials in considered unconscionable; thus, the 23% p.a. interest rate imposed in the
government are void for being against public policy. loan in this case is not excessive or unconscionable.
Facts: A consultancy agreement was obtained from a government agency through • Jurisprudence establishes that as to penalty charges, a 1% surcharge on the
the use of influence of executive officials. principal loan for every month of default is valid. This surcharge or penalty
Held: The contract is void. Any agreement entered into because of the actual or stipulated in a loan agreement in case of default partakes of the nature of
supposed influence which the party has, engaging him to influence executive liquidated damages under Art. 2227, and is separate and distinct from
officials in the discharge of their duties, which contemplates the use of personal interest payment. Also referred to as a penalty clause, it is expressly
influence and solicitation rather than an appeal to the judgment of the official on the recognized by law. It is an accessory undertaking to assume greater liability
merits of the object sought is contrary to public policy. on the part of an obligor in case of breach of an obligation. The obligor would
CASE: Prudential Bank v. Rapanot then be bound to pay the stipulated amount of indemnity without the
Lesson: Since Sec. 18 of PD 957 prohibited the mortgage of a condominium unit by necessity of proof on the existence and on the measure of damages caused
a developer without the written approval of the NHA, the violation of the law makes by the breach.
any mortgage by a developer void.
CASE: Spouses Jonsay v. Solidbank
CASE: Gullermo v. Phil. Information Agency Lesson: In the recent cases of Mallari v. Prudential Bank & Spouses Villanueva v. CA,
Lesson: A contract entered into with the government without an appropriation law SC did not consider unconscionable the contractual interest rates of 23-24% per
funding the project & a certificate of appropriation & fund availability required by the annum. In Mallari, the Court upheld the loans obtained between 1984 and 1989
Administrative Code is void. which bore interest from 21-23% per year; in Spouses Villanueva, the loans secured
in 1994 carried interest of 24% per year were upheld. In Advocates for Truth in
*CASE: Spouses Abella v. Spouses Abella Lending v. BSP Monetary Board, the SC that in the later 1990s, the banks' prime
Lesson: An unconscionable rate of interest is void for being contrary to morals. A lending rates which they charged to their best borrowers ranged from 26% to 31%.
monthly interest rate of 2.5% (translating to 30% annual interest) is unconscionable.
The willingness of the parties to enter into a relation with an unconscionable interest CASE: Aujero v. Phil. Communications Satellite Corp.
rate is inconsequential to the validity of the stipulated rate. Lesson: Not all waivers and quitclaims are invalid as against public policy. If the
The imposition of an unconscionable rate of interest on a money debt, even if agreement was voluntarily entered into and represents a reasonable settlement, it is
knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a binding on the parties and may not later be disowned simply because of a change of
repugnant spoliation and an iniquitous deprivation of property, repulsive to the mind. It is only where there is clear proof that the waiver was wangled from an
common sense of man. It has no support in law, in principles of justice, or in the unsuspecting or gullible person, or the terms of settlement are unconscionable on
human conscience nor is there any reason whatsoever which may justify such its face, that the law will step in to annul the questionable transaction. But where it
imposition as righteous and as one that may be sustained within the sphere of is shown that the person making the waiver did so voluntarily, with full
public or private morals. The imposition of an unconscionable interest rate is void for understanding of what he was doing, and the consideration for the quitclaim is
being “contrary to morals, and the law.” credible and reasonable, the transaction must be recognized as a valid and binding
In determining whether the rate of interest is unconscionable, the mechanical undertaking.
application of pre-established floors would be wanting. The lowest rates that have Facts: An employee wanted a declaration that a deed of quitclaim & release he
previously been considered unconscionable need not be an impenetrable minimum. signed was null & void, because he got a lesser retirement benefit than what he
What is more crucial is a consideration of the parties’ contexts. Moreover, interest believed was a proper amount on account of pressure & “dire necessity.” Should his
rates must be appreciated in light of the fundamental nature of interest as prayer be granted?
compensation to the creditor for money lent to another, which he or she could Held: No. While the law looks with disfavor upon releases and quitclaims by
otherwise have used for his or her own purposes at the time it was lent. It is not the employees who are inveigled or pressured into signing them by unscrupulous
default vehicle for predatory gain. As such, interest need only be reasonable. It ought employers seeking to evade their legal responsibilities, a legitimate waiver
not be a mechanism for the creditor's unjust enrichment at the expense of another. representing a voluntary settlement of a laborer's claims should be respected by the
courts as the law between the parties.
CASE: Spouses Mallari v. Prudential Bank However, in this case, the employee bewailed claimed that he was coerced but failed
Lesson: Interest rates at 23% per annum (at less than 2% interest per month) & a to coerced present evidence of the coercion. That the petitioner was all set to return
12% penalty charge are not unconscionable. to his hometown and was in dire need of money would likewise not qualify as undue
pressure sufficient to invalidate the quitclaim. "Dire necessity" may be an acceptable
ground to annul quitclaims if the consideration is unconscionably low and the

employee was tricked into accepting it, but is not an acceptable ground for annulling o Facts: Respondent, in 1957, bought from grantee-petitioners a
the release when it is not shown that the employee has been forced to execute it. homestead patent a property subject of the patent within the
Finally, the employee here is not an ordinary laborer. He is mature, intelligent and prohibitory period provided by law, which therefore made the same
educated with a college degree, who cannot be easily duped or tricked into void as being against public policy.
performing an act against his will. As no proof was presented that the said quitclaim § Respondent was in possession of the said property even up to
was entered into through fraud, deception, misrepresentation, the same is valid and 1974 when the case was filed.
binding. § The original owners in this case want the land back, but they
never disaffirmed the contracts executed between them and
CASE: Irao v. By the Bay Inc. the respondent. More than that, they expressly sustained the
Facts: In the lease contract here being assailed by the lessee, it was stipulated that title of the latter in court and failed to show any interest in
if the lessee failed to comply with any of the terms of the lease, the lessor would recovering the land.
have the right to enter & retake possession of the leased property, without necessity o Held: SC refused to award the property to the said individual even if
of filing suit in court. Is such a stipulation valid? another contract was executed after the prohibitory period ratifying
Held: Yes. Contractual stipulations empowering the lessor and/or his representative the previous sale. It also held that the infirmity could not be cured by
to repossess the leased property extrajudicially from a lessee, as in the present equity because the individual himself transgressed the law.
case, have been held to be valid. Being the law between the parties, they must be § In cases where the homestead has been the subject of void
respected. The lessee cannot thus feign ignorance that the repossession of the conveyances, the law still regards the original owner as the
leased property by the lessor was the appropriate legal measure that the lessee also rightful owner subject to escheat proceedings by the State. The
authorized under their contract. land is awarded back to the original owner even if he was
equally guilty with the vendee in circumventing the law.
Further Examples of Void Contracts § Pari delicto doctrine may not be invoked, since it would run
• A stipulation in a contract prohibiting a mortgagor to sell the property counter to a fundamental policy of the State, that the forfeiture
mortgaged is void. of a homestead is a matter between the State and the grantee
o Art. 2130, which provides that “a stipulation forbidding the owner or his heirs. Until the State had taken steps to annul the grant
from alienating the immovable mortgaged shall be void.” and asserts title to the homestead the purchaser is, as against
o HOWEVER, a stipulation prohibiting the re-mortgage to another of the the vendors or his heirs, no more entitled to keep the land than
same property already mortgaged to the creditor-mortgagee is valid. any intruder.
• The non-payment of the purchase price of a valid contract of sale is not
among the instances where the law declares a contract null and void. Article 1410. The action or defense for the declaration of the inexistence of a
o At most, the non-payment gives a cause of action for rescission or contract does not prescribe.
specific performance.
Judicial Declaration
Effect of a Void Contract • There is no need to judicially declare a void contract void; the judicial
• Defect is permanent & incurable – no ratification decision merely confirms it.
o A void agreement will not be rendered operative by the parties’ alleged • It can be filed at anytime and has no prescriptive period, even as a defense.
partial or full performance of their respective prestations. • Ex. If A and B enter into a contract, where it is stipulated that, for a valuable
• It produces no legal effects at all. consideration to be given by B, A is to construct a 3-storey building in 3 days,
• Ex. A & V enter into a contract for the sale of opium. A delivers but V does not such a contract is void because it contemplates an impossible service.
want to initially pay. o B can just treat it as void even without a court action making such
o The later payment of V does not make the contract valid. It is still void. contract void.
• CASE: Arsenal v. IAC o HOWEVER, B can file a case to declare that the contract is void so that
o Lesson: A void contract can never be ratified, even if a new one is he can get back what he has given as valuable consideration to A.
executed to fix the old one. Further, equity or estoppel cannot give • Laches does not apply when resisting an imprescriptible legal right
validity to a void contract. • Restitution generally applies
§ The original owners of a homestead remain the rightful owners o If both parties have no fault or are not guilty, the restoration of what
despite the fact that they themselves granted the homestead was given by each of them to the other is in order
to someone else or that they acknowledged the grantee as the
rightful owner. Article 1411. When the nullity proceeds from the illegality of the cause or object of

the contract, & the act constitutes a criminal offense, both parties being in pari a fee. However, a certificate of public convenience is a special privilege conferred by
delicto, they shall have no action against each other, & both shall be prosecuted. the government.
Moreover, the provisions of the Penal Code relative to the disposal of effects or Held: The contract is void, & the parties can claim no reliefs as they are in pari
instruments of a crime shall be applicable to the things or the price of the contract. delicto. The system is seen as the root of corruption in many government
This rule shall be applicable when only one of the parties is guilty; but the innocent transportation offices, & though not criminal, it is void for being against public policy.
one may claim what he has given, & shall not be bound to comply with his promise.
CASE: Heirs of Marciana Avila v. CA
Void Contracts due to Criminal Activities Lesson: Parties to an illegal contract that are contrary to law will not be able to
• Ex dolo malo non oritur actio & in pari delicto potior est conditio defendentis. recover what they have given, nor can they ask for fulfillment.
o The law will not aid either party to an illegal agreement; it leaves the Facts: A teacher bought property in violation of the Administrative Code prohibiting
parties where it finds them. public officials from purchasing property sold by the government for non-payment of
• Ex. If A & B enter into a contract whereby A is to kidnap X & to place X in the taxes.
custody of B, and the car to be used for the kidnapping shall thereafter be Held: The contract was void because it was contrary to law. The teacher, as a party
given to A as the latter’s payment, the cause of the contract is clearly void & to an illegal transaction cannot recover what she gave by reason of the contract or
even constitutes a criminal offense. ask for the fulfillment of what had been promised her pursuant to Article 1412 of the
o If A is successful in kidnapping X, & B does not give the car, A has no Civil Code.
action against B for the delivery of the car.
o If B already delivers the car & A does not fulfill his obligation, B has no CASE: Compania General De Tabacos de Filipinas (Tabaclera) v. CA
right to go against A. Lesson: Parties who enter into a contract to evade creditors are also in pari delicto &
o Both are in pari delicto & both shall be prosecuted for kidnapping. The cannot have claims against one another.
car will be disposed of as an instrument of the crime in accordance Facts: Buyer Tabaclera & a seller of certain sugar quota, which was previously
with the Revised Penal Code. mortgaged to certain banks, entered into a contract of sale purposely intending to
• Arts. 1411 & 1412 are NOT APPLICABLE to inexistent contracts negate the lawful rights & claim of the banks.
o In pari delicto doctrine only applies to contracts with illegal • The banks, however, had already foreclosed on the mortgage.
consideration or subject matter, whether the attendant facts • Tabaclera then claimed that it should be reimbursed of what it gave the seller
constitute an offense or misdemeanor, or whether the consideration in the event that it was ordered to reconvey the sugar quota to the banks.
involved is merely rendered illegal. Held: Tabaclera & the seller cannot recover, because they are both in pari delicto.
o If a contract has absolutely no consideration at all, or there is total They both had the common intention of negating the banks & acting in bad faith,
absence of consent, or there is absence of an object, such contract is even if what they did is not contrary to any express provision of law.
inexistent & therefore the rule on pari delicto will not apply.
CASE: Rodriguez v. Rodriguez
Article 1412. If the act in which the unlawful or forbidden cause consists does not Lesson: Family members who enter into transactions to evade taxes, though this
constitute a criminal offense, the ff. rules shall be observed: would not be illegal per se, are in pari delicto & cannot recover whatever they lost.
(1) When the fault is on the part of both contracting parties, neither may recover Facts: A mother sold property to her daughter; the daughter then sold the property to
what he has given by virtue of the contract, or demand the performance of her father. These transactions were done to for convert the paraphernal property of
the other’s undertaking; the mother to conjugal property. This would vest half interest on the husband &
(2) When only one of the contracting parties is at fault, he cannot recover what evade the prohibition against donations from one spouse to another during
he has given by reason of the contract, or ask for the fulfillment of what has coverture.
been promised him. The other, who is not at fault, may demand the return of The wife, contending that the sale was a circumvention of the said prohibition and
what he has given without any obligation to comply with his promise. therefore void according to law, filed a case for the nullification of the transactions.
Held: The wife could no longer recover. While the Court did not consider the
CASE: Lita Enterprises, Inc. v. IAC transactions simulated, it regarded the same as a circumvention of the legal
Lesson: Though certain schemes such as the kabit system may not be criminal, they prohibition against donations between spouses. However, all the parties were guilty,
may be considered against public policy; any contract based on such a scheme is & thus no one was entitled to recover.
inexistent & the parties, if both at fault, shall be in pari delicto.
Facts: The parties herein operated under an arrangement, known as the “kabit When Only One Party is At Fault
system,” whereby a person who has been granted a certificate of convenience • The one at fault – cannot recover what he has given, or ask fulfillment of
allows another person who owns motor vehicles to operate under such franchise for what was promised to him

• The one without fault – may demand the return of what he has given without prohibition by the law is designed for the protection of the plaintiff, he may, if public
any obligation to comply with his promise policy is thereby enhanced, recover what he has paid or delivered.
Article 1413. Interest paid in excess of the interest allowed by the usury laws may be CASE: Ras v. Sua
recovered by the debtor, with interest thereon from the date of the payment. Lesson: A disregard or violation of the conditions of the land grant in RA477 & the
Public Land Act does not produce automatic reversion of the property to the State,
Usury Law nor work to defeat the grantee’s right to recover the property he had previously
• Under the Usury Law, in case of usurious interest, the whole interest will be disposed of or encumbered.
recoverable. Facts: A property acquired from the government pursuant to a law designed to give
• Ex. In a loan of P1,000, with interest of 20% per annum or P200 for one year, land to the landless was, in violation of the spirit of said law, leased to 3rd parties.
if the borrower pays said P200, the whole P200 is the usurious interest, not Said parties then refused to have the property reconveyed to the possession of the
just that part thereof in excess of the interest allowed by law. owner-grantee despite violation of the lease agreement.
o The whole P200 is void, since payment of said interest is illegal. In their defense, the 3rd-party possessors claimed that repossession cannot be made
o Effect of Art. 1413 – adds that the wrongly paid interest can be because the parties were in pari delicto and that the proper party to file the suit was
recovered “with interest thereon from the date of payment the government who granted the land to the owner.
• HOWEVER, this does not lead to forfeiture of the principal Held: SC ruled that the property should be returned to the owner-grantee, as here it
would be favorable to the interests of public policy. The contentions of the 3rd-party
Article 1414. When money is paid or property delivered for an illegal purpose, the possessors are premised on the incorrect assumption that upon the plaintiff’s
contract may be repudiated by one of the parties before the purpose has been violation of RA 477 he automatically loses his rights over the land and said rights
accomplished, or before any damage has been caused to a third person. In such immediately revert to the State.
case, the courts may, if the public interest will thus be subserved, allow the party
repudiating the contract to recover the money or property. Article 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
CASE: De Leon v. CA allowed may recover such excess.
Lesson: When the parties repudiate a void contract before it is accomplished, the
courts may choose to allow the repudiating party to recover the money. When Law Provides Highest Amount
Facts: The parties entered into a void contract, as the consideration was the • It is illegal to charge the buyer higher than the statutory ceiling
termination of marital relationship. The husband’s mother, who already previously • The excess from the limit shall be recoverable
gave P380,000 to the wife pursuant to the void contract, resisted the attempt by the
wife to enforce the other provisions of the agreement on the ground that the Article 1418. When the law fixes, or authorizes the fixing of the maximum number of
contract was void. hours of labor, and a contract is entered into whereby a laborer undertakes to work
The lower court ruled that no enforcement can be made because the parties are in longer than the maximum thus fixed, he may demand additional compensation for
pari delicto, & therefore the mother cannot recover the P380,000. service rendered beyond the time limit.
Held: The mother can recover the P380,000, as the letter-agreement she & the wife
entered into was repudiated before its purpose was accomplished. Overtime Pay
• Now governed by the Labor Code
Article 1415. Where one of the parties to an illegal contract is incapable of giving • If an employer and employee enter into a contract where the employee shall
consent, the courts may, if the interest of justice so demands, allow recovery of work only 8 hours a day for a specified compensation, such employee cannot
money or property delivered by the incapacitated person. be forced to work beyond the said time
o If he is required to do so, he should be paid for the extra time
Incapacity as an Exception to Pari Delicto Rule
• Ex. A is a minor and he enters into a contract with B, whereby B sells to A Article 1419. When the law sets, or authorizes the setting of a minimum wage for
prohibited drugs. laborers, & a contract is agreed upon by which a laborer accepts a lower wage, he
o The court may allow the minor to recover the money he paid B in shall be entitled to recover the deficiency.
purchasing the illegal drugs. However, this is within the discretion of
the court. Minimum Wage
Article 1416. When the agreement is not illegal per se but is merely prohibited, & the

• Ex. If according to law A is to receive P200 a day, & he enters into an Void v. Rescissible v. Unenforceable v. Voidable
employment contract providing that he is to get P150 a day, the contract is Contract Is damage Ratifiable? Can third Is there Can the action Can
an integral persons restitution? to assail there be
void. Thus, A can demand the difference of P50. part of the assail? prescribe? laches?
cause of
Article 1420. In case of a divisible contract, if the illegal terms can be separated action?
from the legal ones, the latter may be enforced. Void No No Yes GR: Yes No No
EXC: Cases
where pari
Divisible Contracts delicto
• If a void provision in a contract directly affects the entirety of the contract, the applies
Rescissible Yes Yes Yes Yes Yes Yes
contract can be considered void. Unenforceable No Yes No No Yes Yes
o HOWEVER, if the provision is independently separable from the other Voidable No No Yes Yes Yes Yes
provisions, such provision alone shall be considered void.
• Ex. In a contract of loan secured by a collateral of the debtor’s property TITLE III. – NATURAL OBLIGATIONS.
which, as stipulated in the contract, shall automatically be owned by the
creditor in the event of non-payment of the debt, the loan itself is valid but Article 1423. Obligations are civil or natural. Civil obligations give a right of action to
the security is void. compel their performance. Natural obligations, not being based on positive law but
o This is pactum commissorium; for the forfeiture to be valid in case of on equity & natural law, do not grant a right of action to enforce their performance,
non-payment the collateral must be foreclosed & sold at auction to the but after voluntary fulfillment by the obligor, they authorize the retention of what has
highest bidder. been delivered or rendered by reason thereof. Some natural obligations are set forth
in the ff. articles.
Article 1421. The defense of illegality of contracts is not available to 3rd persons
whose interests are not directly affected. Rationale of Natural Obligations (1947 Code Commission)
• On the part of the payor – give rise to a moral, rather than legal, duty to pay
Mutuality of Contracts & Void Contracts or perform, but the person thus performing feels that in good conscience he
• GR: There can only be mutuality of obligations in a contract which affects the should comply with his undertaking which is based on moral grounds
parties involved therein. o He should not be allowed by law to take back what he has rightly
• EXC: If a 3rd person is greatly prejudiced as his interest is directly affected, he done
may file a case for the nullification of a contract or set the same as a defense • On the part of the payee – under the laws in force, the payee is obliged to
even if said prejudiced person is not a party to the void contract. return the amount received by him because the payor was not legally bound
o Ex. If A & B enter into a contract of sale of real property, where A sells to make the payment; this is unfair to the payee, who deserves to be paid
a particular land which he does not own to B for an illegal • Equity, morality & natural justice are the foundation of natural law
consideration, such a contract is void. • Examples of natural obligations in Title III are NOT exclusive
§ If the particular land area sold encroaches on the property of
X, a 3rd person, he can seek the nullification of such contract *Article 1424. When a right to sue upon a civil obligation has lapsed by extinctive
as it directly affects his interest. prescription, the obligor who voluntarily performs the contract cannot recover what
he has delivered or the value of the service he has rendered.
Article 1422. A contract which is the direct result of a previous illegal contract, is
also void & inexistent. Paying Despite Extinctive Prescription
• Ex. The prescriptive period to file a case based on a written agreement is 10
Void Contract & Subsequent Inexistent Contract years from the time the right of action accrues. If a creditor, by virtue of a
• If a subsequent contract proceeds from an inexistent contract, the written loan contract, does not collect the amount of the loan after 10 years
subsequent contract is likewise void. from the time it should be paid, such creditor can no longer collect from the
debtor.
o However, if the debtor, despite the lapse of the period & knowing that
the debt has already prescribed, pays the creditor, such debtor can no
longer recover such payment.

*Article 1425. When without the knowledge or against the will of the debtor, a 3rd • Ex. A is indebted to X for P10,000. A later dies, with M as his heir who is
person pays a debt which the obligor is not legally bound to pay because the action entitled only to P5,000 from the estate of A. If M voluntarily pays X P10,000,
thereon has prescribed, but the debtor later voluntarily reimburses the 3rd person, M can no longer recover such an amount.
the obligor cannot recover what he has paid.
Article 1430. When a will is declared void because it has not been executed in
3rd Person Paying Against Will of Debtor accordance with the formalities required by law, but one of the intestate heirs, after
• Ex. A is indebted to Z but the collection of such debt has already prescribed. the settlement of the debts of the deceased, pays a legacy in compliance with a
o If M pays the debt to Z, &, later on, A voluntarily reimburses M, such clause in the defective will, the payment is effective & irrevocable.
payment shall be considered valid & A cannot recover such amount
from Z on the ground that M should not have paid him. Legacy Paid in a Defective Will
• Ex. M provided in his holographic will that his car shall go to his driver X.
*Article 1426. When a minor between 18 & 21 years of age who has entered into a Later, the holographic will turns out to be partly type-written & therefore it is
contract without the consent of the parent or guardian, after the annulment of the void as such will should be wholly hand-written by the testator.
contract voluntarily returns the whole thing or price received, notwithstanding the o If, despite the nullity of the will, M’s heir, Z, still voluntarily gives the
fact that he has not been benefited thereby, there is no right to demand the thing or legacy of the car to X, it shall be valid & cannot be revoked anymore.
price thus returned.
TITLE IV. – ESTOPPEL.
*Article 1427. When a minor between 18 & 21 of age, who has entered into a
contract without the consent of the parent or guardian, voluntarily pays a sum of Article 1431. Through estoppel an admission or representation is rendered
money or delivers a fungible thing in fulfillment of the obligation, there shall be no conclusive upon the person making it, & cannot be denied or disproved as against
right to recover the same from the obligee who has spent or consumed it in good the person relying thereon.
faith.
Minors & Payment Estoppel & Its Application

• An incapacitated person is not obliged to make any restitution except insofar • The doctrine of estoppel having its origin in equity, its application depends on
as he has been benefited by the thing or price received by him. the special circumstances of each case
• A person who is “between 18 & 21 years of age” is not anymore a minor o However, in each case, estoppel must be determined after carefully
because the age of majority today, pursuant to RA 6809 is 18. considering the material facts of the case lest injustice may result
o HOWEVER, if ever the law is still to apply, it means that a minor, who • Estoppel cannot be sustained by mere argument or doubtful inference; it
voluntarily makes payment or restitution of what he has obtained by must be clearly proved in all its essential elements by clear, convincing &
contract even though he has no legal obligation to make payment or satisfactory evidence.
restitution, can no longer recover what he has returned. • Estoppel is not applicable:
(1) Against government suing in its capacity as sovereign or asserting
Article 1428. When, after an action to enforce a civil obligation has failed, the governmental rights
defendant voluntarily performs the obligation, he cannot demand the return of what (2) When a law or public policy will be violated
he has delivered or the payment of the value of the service he has rendered. (3) Against government owing to the mistakes or errors of its officers
o Any error made by a tax official in the assessment of taxes
Defendant Performing Obligation Despite Failure of Civil Action does not have the effect of relieving the taxpayer from the full
• Ex. If A is indebted to B for P1,000 & a civil suit is filed to collect the amount amount of liability as fixed by law.
but such suit is dismissed, A need not pay the said amount but, if he (4) To questions of law
voluntarily makes payment, he can no longer recover such payment. o Estoppel applies only to questions of fact
o If an act, conduct or misrepresentation of the party sought to
Article 1429. When a testate or intestate heir voluntarily pays a debt of the decedent be estopped is due to ignorance founded on innocent mistake,
exceeding the value of the property which he received by will or by the law of estoppel will not arise
intestacy from the estate of the deceased, the payment is valid and cannot be
rescinded by the payer. Class Discussion
Estoppel deals with conclusions of FACT, not conclusions of law.
Voluntary Payment of Heir in Excess of Inherited Property

Q: If X, in a birth certificate, checks the box “legitimate” but it turns out X is derogation of the deed, or from denying the truth of any material facts
legitimate, is X bound by the ticked box? asserted in it.
A: NO. Legitimacy and illegitimacy is a conclusion of law, not a mistake of fact. o Technical in nature
o May conclude a party without reference to the moral equities of his
CASE: Republic v. Go Bon Lee conduct.
Lesson: Government is never estopped by mistakes on the part of its agents. • When a man has entered into a solemn engagement by deed, he shall not be
Facts: The government, in 1951, filed a petition to cancel the certificate of permitted to deny any matter which he has asserted therein.
naturalization of a Chinese who was granted naturalization in a court in Cebu in • Aim: To prevent circuity of actions, & to compel party to fulfill their contracts.
1941 & who took his oath of allegiance in 1942. The Chinese man claimed that his • Where estoppel by deed arises, it is generally limited to an action on the deed
case could no longer be reopened due to estoppel. itself; in a collateral action, there is ordinarily no estoppel.
Held: The doctrine of estoppel or of laches does not apply against the Government
suing in its capacity as Sovereign or asserting governmental rights. *Estoppel in Pais (Equitable Estoppel)
• A situation where, because of something which he has done or omitted to do,
*CASE: SM Land v. BCDA a party is denied the right to plead or prove an otherwise important fact.
Lesson: Estoppels against the public are not favored. They should not be invoked • It is the principle by which a party who knows or should know the truth is
except in a rare and unusual circumstances, and may not be invoked where they absolutely precluded, both at law & in equity, from denying, or asserting the
would operate to defeat the effective operation of a policy adopted to protect the contrary of, any material fact which by his words or conduct, affirmative or
public. Nevertheless, the government must not be allowed to deal dishonorably or negative, intentionally or culpable negligence, he has induced another, who
capriciously with its citizens, and must not play an ignoble part or do a shabby thing; was excusably ignorant of the true facts & who had a right to rely upon such
and subject to limitations, the doctrine of equitable estoppel may be invoked against word or conduct, to believe & act upon them thereby, as a consequence
public authorities as well as against private individuals. reasonably anticipated, changing his position in such a way that he would
Facts: SM was repeatedly assured by the BCDA, a government entity, that it will suffer injury if such denial or contrary assertion was allowed.
respect SM’s rights. As a result, SM incurred large expenses & went through much
• Rests upon facts & circumstances of a particular case
trouble. Can the government be held in estoppel?
Held: Yes. BCDA cannot find solace in the general rule that the State is not barred by
Class Discussion
estoppel by the mistakes or errors of its officials or agents. Clearly, estoppel against
• One example of when estoppel in pais is involved is when there is estoppel in
the government can be invoked in this case. This is in view of the fact that despite
relation to a written instrument.
BCDA’s repeated assurances that it would respect SM’s rights as an original
proponent, and after putting the latter to considerable trouble and expense, BCDA • Estoppel only affects parties thereto and their successors-in-interest.
went back on its word to comply with its obligations under their agreement and
instead ultimately cancelled the same. BCDA’s capriciousness becomes all the more Essential Elements of Estoppel in Pais
evident in its conflicting statements as regards whether or not SM’s proposal would (1) Conduct amounting to false representation or concealment of material facts
be advantageous to the government. or at least calculated to convey the impression that the facts are otherwise
than, & inconsistent with, those which the party subsequently attempts to
Class Discussion assert;
GR: Government is not subject to estoppel (2) Intent, or at least expectation that this conduct shall be acted upon, or at
EXC: SM Landing v. BCDA (grave injustice) least influenced by the other party;
(3) Knowledge, actual or constructive of the actual facts.
Article 1432. The principles of estoppel are hereby adopted insofar as they are not in
conflict with the provisions of this Code, the Code of Commerce, the Rules of Court & Essential Elements of Estoppel by Conduct/Deed
special laws. (1) There must have been a representation or concealment of material facts;
(2) The representation must have been with knowledge of the facts;
(3) The party to whom it was made must have been ignorant of the truth of the
Article 1433. Estoppel may be in pais or by deed.
matter; &
(4) It must have been made with the intention that the other party would act
Estoppel by Deed
upon it.
• Estoppel by deed is a bar which precludes one party to a deed & his privies
from asserting as against the other party & his privies any right or title in Article 1434. When a person who is not the owner of a thing sells or alienates &
delivers it, & later the seller or grantor acquires title thereto, such title passes by

operation of law to the buyer or grantee. (4) The party defrauded must have acted in accordance with the
misrepresentation.
Illustrative Example
• If A, who is not the owner of a car sells the same to B, the sale is 3rd Party Fraudulence
unenforceable because A has no authority to sell the property. • Ex. A & B have a contract of lease where A, the lessee, has been given a
o BUT: If A himself delivers the property to B, & later A buys the same preferential right to buy the property in the event that B, the lessor, decides
from the real owner N, A cannot claim the property as his on the to sell the property.
ground that when he sold it to B, he was not the owner of the same. o A approaches Z, and tells him that the property is his (A’s) already
o B shall be preferred by the law, which will treat the sale as completely because he (A) has already exercised his preferential right, & that only
valid even though at the time it was actually made, the seller is not the the documentation is to be done. A also tells Z that the property is
owner. being eyed by a corporation, which intends to buy the same.
§ This representation is made to entice Z to buy the property and
CASE: Estoque v. Pajuimala then later resell it to said corporation, thereby giving him
Facts: A co-owner sold a land which he co-owned 2 other owners. The next day, that enormous profit.
co-owner completely acquired the property from the other 2 owners. Such sale was o However, the real owner, in fact, has not yet offered the property for
assailed as invalid because the seller could not have sold the interest of the other sale such that A could not have exercised his preferential right. Also
co-owners without their consent. there is really no corporation intending to buy the property.
Held: The sale was valid because the vendor, the next day, acquired the entire o Because A is a seasoned real estate broker, Z relied on A’s fraudulent
property from her co-owners & became the sole owner. representation and buys the property.
o Later on, A cannot assert a claim on the property contending that the
Article 1435. If a person in representation of another sells or alienates a thing, the sale is unenforceable for not having the consent of the true owner, B,
former cannot subsequently set up his own title as against the buyer or grantee. at the time it was sold.
Agent Article 1438. One who has allowed another to assume apparent ownership of
• If A constituted B as his agent to sell a car & the car was in fact sold by B, A personal property for the purpose of making any transfer of it, cannot, if he received
cannot later on claim that he was the owner to invalidate the transaction. the sum for which a pledge has been constituted, set up his own title to defeat the
pledge of the property, made by the other to a pledgee who received the same in
Article 1436. A lessee or a bailee is estopped from asserting title to the thing leased good faith & for value.
or received, as against the lessor or bailor.
Pledge
Lessee & Bailee • A thing pledged must be placed in the possession of the creditor, or of a 3rd
• Lessee - acknowledges the fact that he is not the owner of the property & he person by common agreement.
has only the peaceful possession thereof under such terms & conditions as o A pledge is constituted by the absolute owner of the thing pledged to
the owner & the lessee have mutually agreed. secure the fulfillment of a principal obligation.
• Bailee in commodatum - merely acquires the use of the thing loaned but not o The person constituting the thing must have free disposal of his
its fruits. A bailee likewise acknowledges the fact that he is not the owner of property, or, in the absence thereof, he must be legally authorized for
the non-consumable object delivered to him for his use for a certain period of the purpose.
time with the obligation to return the same at the expiration of said period. • Ex. A does not want to be known as the owner of a Mercedes Benz. He tells
everybody that said car is owned by B. B knows of this representation of A &
Article 1437. When in a contract between 3rd persons concerning immovable goes along with it. A even gives B the authority to sell, encumber or alienate
property, 1 of them is misled by a person with respect to the ownership or real right the property. A instructs B to obtain a loan; B decides to pledge the property
over the real estate, the latter is precluded from asserting his legal title or interest for said loan, which he obtains from X. The proceeds of the loan however
therein, provided all these requisites are present: goes to A who, in the first place, instructed B to obtain the loan.
(1) There must be fraudulent representation or wrongful concealment of facts o As pledgee, X now is in possession of the car. The loan becomes due.
known to the party estopped; X warns B that if no payment is made, the pledge will be foreclosed.
(2) The party precluded must intend that the other should act upon the facts as Learning of this legal threat by X, A cannot resist the foreclosure by
misrepresented; claiming that the pledge of the car is invalid because B does not
(3) The party misled must have been unaware of the true facts; & actually own it. A is estopped.

the transaction by operation of law as matters of equity, independently of the
Article 1439. Estoppel is effective only as between the parties thereto or their particular intention of the parties
successors-in-interest. o Resulting Trust - raised or created by the act or construction of law,
but in its more restricted sense it is a trust raised by implication of law
Mutuality in Estoppel & presumed always to have been contemplated by the parties, the
• GR: An equitable estoppel must be mutual & reciprocal intention as to which is to be found in the nature of their transaction,
o Unless both parties to a transaction are bound by an estoppel, neither but not expressed in the deed or instrument of conveyance
is bound. § Ex. Article 1448-1455, Civil Code
• CASE: Castrillo v. CA o Constructive Trust - a trust “raised by construction of law, or arising by
o Facts: Isabel sold her 1/3 share of Lot No. 188 to Dimaranan in 1932 operation of law; not created by any words, either expressly or
at the time when she was not yet the owner thereof. impliedly evincing a direct intention to create a trust, but by the
§ Isabel acquired ownership only when her sister, Crispina, construction of equity in order to satisfy the demands of justice. It
executed a formal deed of sale in her favor in 1934, covering does not arise by agreement or intention but by operation of law.
an area of 252 sqm., thereby rendering unquestionable the § Ex. If a person obtains legal title to property by fraud or
ownership of Dimaranan. concealment, courts of equity will impress upon the title a so-
§ The heirs of Crispina assailed the lower court’s application of called constructive trust in favor of the defrauded party. A
estoppel provided for in Article 1434. constructive trust is not a trust in the technical sense.
o Held: Estoppel can be applied. If anybody at all may be heard to
challenge the application of the doctrine of estoppel in favor of Imprescriptibility of Express Trusts
Dimaranan, it is only the party against whom it may be invoked — in • A trustee can never acquire by prescription the ownership of the property
this case, the vendor, Isabel, from whom they acquired the disputed entrusted to him
property. Crispina having conveyed the same to Isabel, neither she nor o Property held in trust can be recovered by the beneficiary regardless
her successors may raise the point to their advantage. For them to do of the lapse of time
so would in effect be to deny the rights of Isabel. • An action to compel a trustee to convey property registered in his name in
trust for the benefit of the cestui que trust does not prescribe
TITLE V. – TRUSTS. • The defense of prescription cannot be set up in an action to recover property
held by a person in trust for the benefit of another
CHAPTER 1. GENERAL PROVISIONS. • HOWEVER, acquisitive prescription may bar the action of the beneficiary
against the trustee in an express trust for the recovery of the property held in
Article 1440. A person who establishes a trust is called the trustor; one in whom trust where:
confidence is reposed as regards property for the benefit of another person is known (1) The trustee has performed unequivocal acts of repudiation amounting
as the trustee; & the person for whose benefit the trust has been created is referred to an ouster of the cestui que trust;
to as the beneficiary. (2) Such positive acts of repudiation have been made known to the cestui
que trust; &
Article 1441. Trusts are either express or implied. Express trusts are created by the (3) The evidence thereon is clear & conclusive
intention of the trustor or of the parties. Implied trusts come into being by operation
of law. Prescription & Implied Trusts
• Resulting Trusts – the rule of imprescriptibility of the action to recover
Trust Defined property held in trust might apply as long as the trustee has not repudiated
• Trust - the right enforceable solely in equity, to the beneficial enjoyment of the trust
property, the legal title to which is vested in another • Constructive Trusts – prescription may supervene such an implied trust
o But the word ‘trust’ is frequently employed to indicate duties, • Either way, action may be barred by laches
relations, and responsibilities which are not strictly technical trusts. • CASE: Salvatierra v. CA
• Express Trusts - those created by the direct & positive acts of the parties, by o Lesson: An action for reconveyance of registered land based on an
some writing, deed, or will, or by words either expressly or impliedly evincing implied trust may be barred by laches. The prescriptive period for such
an intention to create a trust actions is 10 years from the date the right of action accrued.
• Implied Trusts - those which, without being expressed, are deducible from the § The registration of an instrument in the Register of Deeds
nature of the transaction as matters of intent, or which are super-induced on constitutes constructive notice to the whole world. Thus, the

discovery of the fraud is deemed to have taken place at the Delfin & Felimon in order to merely accommodate them in securing a loan from the
time of registration. Such registration is deemed to be a GSIS. She likewise stated clearly that she was retaining her ownership over the
constructive notice that the alleged fiduciary or trust subject property and articulated her wish to have her heirs share equally therein.
relationship has been repudiated. Hence, while in the beginning, an implied trust was merely created between Felisa,
as trustor, & Bella, Delfin, & Felimon, as both trustees & beneficiaries, the execution
Express v. Implied Trusts of the September 21, 1970 letter settled, once & for all, the nature of the trust
Express Trusts Implied Trusts established between them as an express one, their true intention irrefutably extant
Created by the intention of the trustor or Comes into being by operation of law thereon.
the parties Bella's attempt to thwart the express trust established in this case by claiming that
Created by direct & positive acts of the Those which, without being expressed, she affixed her signature on the September 21, 1970 letter only "to appease" her
parties, by some writing, deed, will or by are deducible from the nature of the mother, Felisa, and that she could afford to sign the letter since the title covering the
words evidencing intention to create a transaction by operation of law as subject property was in their name as owners anyway, does not hold water. The
trust matters of equity, independent of the mere issuance of the certificate of title in the name of any person does not foreclose
particular intention of the parties the possibility that the real property may be under co-ownership with persons not
When intention to establish a trust is If the intent to establish a trust is to be named in the certificate or that the registrant may only be a trustee or that other
clear taken from circumstances or other parties may have acquired interest subsequent to the issuance of the certificate of
matters indicative of such intent title," as in this case. Registration does not vest title; it is merely the evidence of
such title.
CASE: Go v. Estate of De Buenaventura (2) As to the issue of prescription, there has been no prescription yet. In this case,
Facts: Felisa, in 1960, transferred a property she owned to her daughter Bella, her the repudiation of the express trust happened when the property was sold to Go in
son-in-law, Delfin, & Felimon, to assist the 3 of them in procuring a GSIS loan. Her 1997. The case to reconvey the property was filed in the same year, only a few
title to the property was cancelled & a new one was issued in the names of Bella & months after the sale of the property to Go.
Felimon. When Felisa died, the heirs of Felisa registered their adverse claim on the (3) As to Go being a purchaser in good faith, it was held that he was not. A purchaser
new title with Bella & Felimon’s names. Later, however, in 1997, the annotation was in good faith is one who buys the property of another without notice that some other
cancelled by the heirs of Felimon & by way of sale, the property was transferred to person has a right to, or an interest in, such property and pays a full and fair price for
Go. During the trial, it was shown to the court that Felisa had written a letter in 1970 the same at the time of such purchase, or before he has notice of some other
where she said she was transferring the title of the property to Bella & Felimon for person's claim or interest in the property. Corollary thereto, when a piece of land is in
their acquiring of a GSIS loan. (1) Was there a trust agreement created in this case? the actual possession of persons other than the seller, the buyer must be wary and
If so, what kind? (2) Has the action to reconvey prescribed? (3) Is Go a purchaser in should investigate the rights of those in possession. Without making such inquiry,
good faith? one cannot claim that he is a buyer in good faith. When a man proposes to buy or
Held: There was an express trust in this case. deal with realty, his duty is to read the public manuscript, that is, to look and see
(1) Under Art. 1444, no particular words are required for the creation of an express who is there upon it and what his rights are. A want of caution and diligence, which
trust, it being sufficient that a trust is clearly intended. It is possible to create a trust an honest man of ordinary prudence is accustomed to exercise in making
without using the word "trust" or "trustee." Conversely, the mere fact that these purchases, is in contemplation of law, a want of good faith. The buyer who has failed
words are used does not necessarily indicate an intention to create a trust. The to know or discover that the land sold to him is in adverse possession of another is a
question in each case is whether the trustor manifested an intention to create the buyer in bad faith.
kind of relationship which to lawyers is known as trust. It is immaterial whether or Go admitted in his testimony that 2 months had lapsed before the sale could be
not he knows that the relationship which he intends to create is called a trust, and consummated because his lawyer advised him to request Bella, one of the sellers, to
whether or not he knows the precise characteristics of the relationship which is cancel the encumbrance annotated on the title of the subject property. He also
called a trust. claimed that he had no knowledge about the details of such annotation, and that he
Further, a trust may have a constructive or implied nature in the beginning, but the was aware that individuals other than the sellers (the other heirs of Felisa) were in
registered owner's subsequent express acknowledgement in a public document of a possession of the subject property.
previous sale of the property to another party effectively converted the same into an Such knowledge of the existence of an annotation on the title covering the subject
express trust. property and of the occupation thereof by individuals other than the sellers negates
Taking the contents of the letter into consideration, SC differed from the finding of any presumption of good faith on the part of Go when he purchased the subject
the lower courts that an implied trust was established; instead, SC held that an property. A person who deliberately ignores a significant fact which would create
express trust was duly proved in this case. The words of Felisa in the 1970 letter suspicion in an otherwise reasonable man is not an innocent purchaser for value, as
absolutely declared her intention of transferring the title over the property to Bella, in this case.

placing it in the name of the Spouses Ramos. When the transaction was done &
Article 1442. The principles of the general law of trusts, insofar as they are not in Penalber sought the turning over of the property to her, the Spouses Ramos refused.
conflict with this Code, the Code of Commerce, the Rules of Court & special laws are During trial proper, when Penalber was explaining their verbal agreement, there was
hereby adopted. no objection raised. Can the fact that the express trust was not in writing still be
raised before the SC?
Class Discussion Held: No. The requirement in Art. 1443 that the express trust concerning an
Must trusts be in writing for – immovable or an interest therein be in writing is merely for purposes of proof, not for
1. Validity? No. It can still be valid though it is only proven by parol evidence. the validity of the trust agreement. Art. 1443 is in the nature of a statute of frauds.
2. Enforceability? Yes. The statute does not deprive the parties of the right to contract with respect to the
3. Greater efficacy? Yes. matters therein involved, but merely regulates the formalities of the contract
But a failure to write down the trust agreement does NOT affect the validity of the necessary to render it enforceable. The effect of non-compliance is simply that no
trust agreement. action can be proved unless the requirement is complied with. Oral evidence of the
contract will be excluded upon timely objection. But if the parties to the action,
CHAPTER 2. EXPRESS TRUSTS. during the trial, make no objection to the admissibility of the oral evidence to
support the contract covered by the statute, and thereby permit such contract to be
*Article 1443. No express trusts concerning an immovable or any interest therein proved orally, it will be just as binding upon the parties as if it had been reduced to
may be proved by parol evidence. writing.
Despite this holding, however, SC ultimately did not grant the petition of Penalber,
Express Trusts & Parol Evidence because the transaction itself did not seem to support her claim that there was an
• Parol evidence – oral evidence express trust.
• To prove an express trust over immovable properties or any interest therein,
there must always be a showing of some documents proving the same Article 1444. No particular words are required for the creation of an express trust, it
• CASE: Pascual v. Meneses being sufficient that a trust is clearly intended.
o Facts: Certain properties were claimed by different persons. Some of
the heirs contended that there was allegedly an express trust over No Particular Words
some of the real estates constituted by some claimant as co-owners • For as long as the intention to establish a trust is very clear from the proofs,
who, however, did not present any documentary proof of the same. whether by some writing or deed or will or by words, an express trust is
o Held: For immovables, there must be a document. Mere oral evidence created.
is not enough.
• CASE: Ramos v. Ramos Article 1445. No trust shall fail because the trustee appointed declines the
o Lesson: An express trust must be proven by clear, satisfactory, & designation, unless the contrary should appear in the instrument constituting the
convincing evidence. It cannot rest on vague & uncertain evidence or trust.
on loose, equivocal or indefinite declarations.
o Facts: The evidence showed that the properties claimed to be held in Declining Trustee
trust was actually the subject of a partition. • An express trust must be implemented even if the trustee appointed declines
o Held: The plaintiffs did not prove any express trust in this case. The the designation.
expediente of the intestate proceeding, Civil Case No. 217, particularly o In case of refusal to accept the trust by the trustee, the court will
the project of partition, the decision and the manifestation as to the appoint a trustee.
receipt of shares negatives the existence of an express trust. Those • HOWEVER, if the appointment of the trustee is a material provision, the
public documents prove that the estate of Martin Ramos was settled trustor can provide that a refusal of the trustee to accept the trust shall result
in that proceeding and that adjudications were made to his seven in the failure or nullification of the same.
natural children.
Article 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust
*CASE: Quirino v. Ramos imposes no onerous condition upon the beneficiary, his acceptance shall be
Lesson: Art. 1443 is an evidentiary rule; if the oral testimony of an alleged express presumed, if there is no proof to the contrary.
trust is offered without objection, the testimony as to the trust will be admissible.
Facts: There was a verbal trust agreement between the Spouses Ramos & Penalber, Acceptance by Beneficiary
where Penalber had told the Spouses Ramos that she was purchasing a lot but • Trust property is designed to benefit a cestui que trust or a beneficiary.

o If the beneficiary does not want the trust, the trustor will not be • A trust will not be created when for the purpose of evading the law prohibiting
estopped from deciding on another beneficiary. one from taking or holding real property, one takes conveyance thereof in the
• The acceptance of the beneficiary may be express or implied name of a 3rd person
• If the trust imposes no onerous condition upon the beneficiary, his o Ex. When, under a homestead law, a certain person is disqualified
acceptance shall be presumed, if there is no proof to the contrary. from obtaining a homestead patent over a certain property, it cannot
o Onerous condition - one which the beneficiary is required to perform to be contended that the actual possessor of the property is merely a
make the trust effective or is one which should be done for as long as trustee of the disqualified person who claims to be the real beneficiary
the trust exists. of the homestead patent.
§ No onerous condition - an act of gratuity or liberality; therefore § The alleged trust is of doubtful validity since it would promote a
the acceptance of the beneficiary shall be presumed. direct violation of the Public Land Act as regards the
acquisition of a homestead patent.
CHAPTER 3. IMPLIED TRUSTS. § A homestead applicant is required by law to occupy & cultivate
the land for his own benefit, & not for the benefit of someone
Article 1447. The enumeration of the ff. cases of implied trust does not exclude else.
others established by the general law of trust, but the limitation laid down in Article • If there is an express intention to create a trust, the trust is express & not
1442 shall be applicable. implied, even if the situations falls under any of the provisions in this chapter.
o Ex. If a document exists clearly involving a situation under Art. 1453
Class Discussion but the same document states that the trustor is constituting an
Express trust’s source of obligation – contract express trust to the beneficiary, such trust will not be considered an
Implied trust’s source of obligation – the LAW; here, the law recognizes the implied implied, but express.
consent of the parties to enter into the contract
*CASE: Spouses Inalvez v. Bayang Nool
Resulting Trusts v. Constructive Trusts Lesson: Co-ownership is a form of trust and every co-owner is a trustee for the
Resulting Trusts Constructive Trusts others. Before the partition of a land or thing held in common, no individual or co-
Based on the equitable doctrine that Created by the construction of equity in owner can claim title to any definite portion thereof. All that the co-owner has is an
valuable consideration & not legal title order to satisfy the demands of justice & ideal or abstract quota proportionate share in the entire land or thing. Should a co-
determines equitable title or interest; prevent unjust enrichment owner alienate or mortgage the co-owned property itself, the alienation or mortgage
presumed to always have been shall remain valid but only to the extent of the portion which may be allotted to him
contemplated by the parties in the division upon the termination of the co-ownership. In case of foreclosure, a
Arise from circumstances of the Arise contrary to intention against one sale would result in the transmission only of whatever rights the seller had over of
consideration involved in a transaction who, by fraud, duress or abuse of the thing sold.
whereby one person thereby becomes confidence, obtains or hold the legal
invested with legal title but is obligated right to property, which he ought not, in CASE: Clemente v. CA
in equity to hold his legal title for the equity, & good conscience, to hold Lesson: Resulting trusts arise from the nature or circumstances of the consideration
benefit of another involved in a transaction whereby one person becomes invested with legal title but is
Hence: In constructive trusts, consent is obligated in equity to hold his title for the benefit of another. It is founded on the
not relevant. The trust will be rammed equitable doctrine that valuable consideration and not legal title is determinative of
into you by the court. equitable title or interest and is always presumed to have been contemplated by the
1. 1448 1. 1450 parties. Since the intent is not expressed in the instrument or deed of conveyance, it
2. 1449 2. 1454 is to be found in the nature of the parties’ transaction. Resulting trusts are thus
3. 1451 3. 1455 describable as intention-enforcing trusts. An example of a resulting trust is Art. 1453
4. 1452 4. 1456 of the Civil Code.
5. 1453
*NOTE: Enumeration of types of implied trusts & categories taken from Estate of CASE: Policarpio v. CA
Cabacungan v. Laigo. Lesson: A constructive trust (aka maleficio, a trust ex delicto, a trust de son tort, an
involuntary trust) does not arise on every moral wrong in acquiring or holding
When There is No Trust property or on every abuse of confidence in business or other affairs; ordinarily such
a trust arises & will be declared only on wrongful acquisitions or retentions of

property of which equity takes cognizance. It has been broadly ruled that a breach of § However, if he does not do so, the law nevertheless considers
confidence although in business or social relations, rendering an acquisition or it an implied trust.
retention of property by one person unconscionable against another, raises a o If B is the legitimate or illegitimate child of X, no trust is implied by law,
constructive trust. it being disputably presumed that a gift has been made to B by X.
A constructive trust is substantially an appropriate remedy against unjust
enrichment. It is raised by equity in respect of property, which has been acquired by CASE: Padilla v. CA
fraud, or where although acquired originally without fraud, it is against equity that it Facts: A mortgagor sold the mortgaged property to a 3rd party who did not know that,
should be retained by the person holding it. by the time he bought it, it was already foreclosed & consolidated in favor of the
Facts: A representative of the tenants of an apartment, instead of negotiating the mortgagee. The mortgagee later allowed the reselling of the property to the original
sale of the apartment for & on behalf of the tenants as he was tasked to do under owner, but it was the 3rd-party-buyer who paid the price in order that his purchase of
their association, bought the property for himself to the detriment of the tenants. the same will push through.
Held: There is a constructive trust in this situation & the representative acted in Subsequently, the original owners confirmed their sale to the 3rd-party buyer.
breach of the trust reposed in him by his co-tenants; the representative must Held: An implied trust exists. The sale to the 3rd-party buyers was purely a matter of
execute a conveyance to the particular tenant. form, as they were the mortgage debtors. They should be considered implied
trustees under an implied or resulting trust for the benefit of the real owner.
CASE: Estate of Cabacungan v. Laigo
Lesson: A trust will follow the property through all changes in its state and form as CASE: Gabutan v. Nacalaban
long as such property, its products or its proceeds, are capable of identification, Lesson: (1) Parol evidence can be used to prove an implied trust since it is not
even into the hands of a transferee other than a bona fide purchaser for value, or dependent on an express agreement nor required to be evidenced in writing; the
restitution will be enforced at the election of the beneficiary through recourse parol evidence, however, must be trustworthy.
against the trustee or the transferee personally. This is grounded on the principle in (2) Art. 1448 provides in part that there is an implied trust when property is sold, &
property law that ownership continues and can be asserted by the true owner the legal estate is granted to one party (the trustee) but the price is paid by another
against any withholding of the object to which the ownership pertains, whether such for the purpose of having the beneficial interest of the property (the beneficiary). The
object of the ownership is found in the hands of an original owner or a transferee, or trust created here, which is also referred to as a purchase money resulting trust,
in a different form, as long as it can be identified. Accordingly, the person to whom is occurs when there is (1) an actual payment of money, property or services, or an
made a transfer of trust property constituting a wrongful conversion of the trust equivalent, constituting valuable consideration; (2) & such consideration must be
property and a breach of the trust, when not protected as a bona fide purchaser for furnished by the alleged beneficiary of a resulting trust.
value, is himself liable and accountable as a constructive trustee. The liability Facts: M’s money was used to buy a property, but the title was placed in G’s name. G
attaches at the moment of the transfer of trust property and continues until there is is one of M’s sons. M purchased the property because F wanted to build a pharmacy
full restoration to the beneficiary. Thus, the transferee is charged with, and can be on it. According to the testimonies in the case, it was really M’s practice to put her
held to the performance of the trust, equally with the original trustee, and he can be properties in the name of her children, though it was she who really financed their
compelled to execute a reconveyance. purchasing. M’s heirs filed a an action for reconveyance to get the property back
from N, to whom the certificate of title that had G’s name on it had transferred to. N
Article 1448. There is an implied trust when property is sold, & the legal estate is argued that G was the true owner of the property. (1) Are N’s contentions tenable?
granted to one party but the price is paid by another for the purpose of having the (2) Has the action prescribed? (3) Can C, who got the property from N, be a buyer in
beneficial interest of the property. The former is the trustee, while the latter is the good faith?
beneficiary. However, if the person to whom the title is conveyed is a child, legitimate Held: (1) No. The testimony was able to establish the existence of the trust in this
or illegitimate, of the one paying the price of the sale, no trust is implied by law, it case. The action for reconveyance is thus proper. An action for reconveyance is a
being disputably presumed that there is a gift in favor of the child. legal and equitable remedy granted to the rightful landowner, whose land was
wrongfully or erroneously registered in the name of another, to compel the registered
Illustrative Example owner to transfer or reconvey the land to him.
• A sold to B his shares of stock in a corporation. While the property is in the (2) No. An action for reconveyance based on an implied or a constructive trust
name of B, it is X who pays the property so that he can make use of the prescribes 10 years from the alleged fraudulent registration or date of issuance of
benefits of the shares of stock like the dividends. the certificate of title over the property. However, an action for reconveyance based
o B is the trustee while X is the beneficiary. on implied or constructive trust is imprescriptible if the plaintiff or the person
o If X expressly tells A & B that he intends to create a trust-relationship enforcing the trust is in possession of the property. In effect, the action for
from the transaction, it is clearly an express trust. reconveyance is an action to quiet the property title, which does not prescribe. The
reason is that the one who is in actual possession of the land claiming to be its

owner may wait until his possession is disturbed or his title is attacked before taking Implied Trust in Sale of Property
steps to vindicate his right. His undisturbed possession gives him a continuing right • Ex. A wanted to buy the property of Z. X made the payment using his own
to seek the aid of a court of equity to ascertain and determine the nature of the money for the benefit of A. The money was a loan to A.
adverse claim of a third party and its effect on his own title, which right can be o When the purchase was made, the property was placed under the
claimed only by one who is in possession. name of X. This was done so that X will have an assurance that the
The fact of actual possession of G of the property, during the lifetime of M & even debt of A can be paid.
after her death, is an undisputed and established fact. Thus, the complaint for o In this case, the trustee is the lender (X).
reconveyance is imprescriptible. It follows, with more reason, that G, etc. cannot be § A can later redeem the property by paying X the money
held guilty of laches as the said doctrine, which is one in equity, cannot be set up to paid for the property. Thereafter, A can compel X to
resist the enforcement of an imprescriptible legal right. convey the property.
(3) No. C, who got the property from N, is a buyer in bad faith & cannot be entitled to
the property. The title in the first place was under G’s name, not N’s. Furthermore, C Article 1451. When land passes by succession to any person & he causes the legal
was aware that the heirs of M were possessing the property. Hence, C was not in title to be put in the name of another, a trust is established by implication of law for
good faith. the benefit of the true owner.
CASE: Bautista v. Bautista Implied Trust in Succession

Facts: In the business, as a practice, the co-owners would together finance the • Ex. A is the only compulsory heir of M who dies. After payment of the debt of
purchasing of property, but would just title the property in the name of one person. Is M, the net estate of M should go to A.
an implied trust created in this case? o However, if A causes the title to the estate to be placed in the name of
Held: Yes. Although a certificate of title is the best proof of ownership of a piece of Z, an implied trust is created for the benefit of A.
land, the mere issuance of the same in the name of any person does not foreclose
the possibility that the real property may be under co-ownership with persons not Article 1452. If 2 or more persons agree to purchase property & by common consent
named in the certificate or that the registrant may only be a trustee or that other the legal title is taken in the name of one of them for the benefit of all, a trust is
parties may have acquired interest subsequent to the issuance of the certificate of created by force of law in favor of the others in proportion to the interest of each.
title. The principle that a trustee who puts a certificate of registration in his name
cannot repudiate the trust by relying on the registration is one of the well-known Implied Trust in Co-Ownership
limitations upon a title. This case also involved a trust under Art. 1448. • Ex. A, B and C are co-owners of a particular land in equal parts but, by
A trust, which derives its strength from the confidence one reposes on another
agreement of all of them, the whole of the property is registered under the
especially between families, does not lose that character simply because of what name only of C.
appears in a legal document.
o In this case, C is the trustee of the respective 1/3 shares of A & B, the
other co-owners.
Article 1449. There is also an implied trust when a donation is made to a person but
it appears that although the legal estate is transmitted to the donee, he Article 1453. When property is conveyed to a person in reliance upon his declared
nevertheless is either to have no beneficial interest or only a part thereof.
intention to hold it for, or transfer it to another or the grantor, there is an implied
trust in favor of the person whose benefit is contemplated.
Example of a Donation that is an Implied Trust
• Ex. A donation of a lot & the apartment on it was made by M to N. Property Conveyed in Reliance Upon His Declared Intention to Hold it For Another
o Despite the donation, M was still to get all the rentals of the • Ex. A told B that the property sold should be in his name because he shall
apartment.
only hold it for the benefit of X, the real owner. An implied trust is created in
• This is an implied trust where the trustee is the donee & the beneficiary is the favor of X.
donor. This is a case of a resulting trust.
Article 1454. If an absolute conveyance of property is made in order to secure the
Article 1450. If the price of a sale of property is loaned or paid by one person for the performance of an obligation of the grantor toward the grantee, a trust by virtue of
benefit of another & the conveyance is made to the lender or payor to secure the law is established. If the fulfillment of the obligation is offered by the grantor when it
payment of the debt, a trust arises by operation of law in favor of the person to becomes due, he may demand the reconveyance of the property to him.
whom the money is loaned or for whom it is paid. The latter may redeem the
property & compel a conveyance thereof to him. An Absolute Conveyance to Secure Performance of Obligation

• Ex. M is indebted to N. A particular property was conveyed to N by M to Article 2142. Certain lawful, voluntary, & unilateral acts give rise to the juridical
secure such indebtedness. N holds the property only in trust for M. N is the relation of quasi-contract to the end that no one shall be unjustly enriched or
trustee. benefited at the expense of another.
o Upon payment of the debt, M can demand that the property be
returned to his name. Quasi-Contracts
• NOT an implied contract
Article 1455. When any trustee, guardian or other person holding a fiduciary o No meeting of them minds between the parties (M: And yet, the
relationship uses trust funds for the purchase of property & causes the conveyance obligations are enforced just like a contract).
to be made to him or to a 3rd person, a trust is established by operation of law in • A juridical relation is created by a quasi-contract so that no one shall be
favor of the person to whom the funds belong. unjustly enriched at the expense of another
Trustee’s Use of Funds Held in Trust Class Discussion

• Ex. N constituted B as the trustee of his funds for the benefit of X. Quasi-contract is not an implied contract because there is no meeting of the minds
o B, using the trust fund, purchased property & placed it under his name (e.g., solutio indebiti).
or under the name of X.
o A trust is created; the trustee is either B or X & the trust is in favor of Article 2143. The provisions for quasi-contracts in this Chapter do not exclude other
Z. quasi-contracts which may come within the purview of the preceding article.
Article 1456. If property is acquired through mistake or fraud, the person obtaining it Quasi-Contracts Explicitly Found in its Chapter in the Civil Code
is, by force of law, considered a trustee of an implied trust for the benefit of the (1) The obligation incident to the officious management of the affairs of other
person from whom the property comes. persons (gestion de negocios ajenos)
(2) The recovery of what has been improperly paid (cobro de lo indebido)
Property Acquired Through Mistake or Fraud
• Ex. A fraudulently made X sign an alleged loan agreement which actually Quasi-Contracts Not Limited to Those in Civil Code
turned out to be an absolute sale of X’s property. • There are many quasi-contractual obligations, but it would be impractical for
o The sale is voidable; a trust is deemed created by force of law. the Code to enumerate them all
o The trustee is A; A is merely holding the property for the benefit of X. • The Code concentrates on 2 without attempting to exclude the other kinds
• CASE: Gonzales v. Jimenez • The 2 are explicitly in the Code because:
o Facts: The buyer bought a property from the seller who subsequently o They are not considered in the other parts of the Code
fraudulently caused the issuance of a patent & a certificate of title to o They are the most conspicuous of the quasi-contracts
his son over the same property. • Other quasi-contracts, according to Jorge Giorgi (Italian jurist) —
o Held: The situation falls under Article 1456 & therefore an implied o Payments made upon an existing consideration which fails;
trust is created in favor of the buyer. The seller & his son are deemed o Payments wrongly made upon a consideration which is contrary to law,
to hold the property in trust for the benefit of the buyer who is the or opposed to public policy;
person prejudiced by the fraudulent act. o Payments made upon a vicious consideration or obtained by illicit
means
Article 1457. An implied trust may be proved by oral evidence.
SECTION 1. NEGOTIORUM GESTIO.
Oral Evidence
• An implied trust can be proven by oral evidence - it is deducible from the Article 2144. Whoever voluntarily takes charge of the agency or management of the
nature of the transactions as matters of intent or which are super-induced on business or property of another, without any power from the latter, is obliged to
the transaction by operation of law, independently of the particular intention continue the same until the termination of the affair & its incidents, or to require the
of the parties person concerned to substitute him, if the owner is in a position to do so. This
juridical relation does not arise in either of these instances:
TITLE XVII. – EXTRA-CONTRACTUAL OBLIGATIONS (1) When the property or business is not neglected or abandoned;
(2) If in fact the manager has been tacitly authorized by the owner;
CHAPTER 1. QUASI-CONTRACTS In the first case, the provisions of Article 1317, 14︎ 3 (1) & 1404 regarding
unauthorized contracts shall govern.

In the second case, the rules on Agency in Title X of this Book shall be applicable.
Class Discussion
Negotiorum Gestio This is LEGAL TRESPASSING.
• Not performed for profit • GR: Once you enter, you must preserve it until the real owner comes back.
• Ex. A abandons his property, a mango plantation, & his business therein. B The preserver is called the officious manager. He intrudes so that the
decides to manage the business & the property so that the business will earn abandoned or neglected property is preserved.
upon harvest time. B does this without any authority from A. • The preserver’s degree of diligence is that of a good father of a family.
o B therefore becomes an officious manager without expectation of any • If the preserver delegates the job of preserving to a third person, he is
profit or remuneration. B must continue managing the property or the solidarily liable with said third person as regards the preservation of the
business until it is terminated. He can also require A to have him (B) property.
substituted if A is in a position to do so. • If the preserver intrudes & conducts risky undertakings even for fortuitous
o If the property is not abandoned, all acts of A unauthorized & any event, the preserver will be liable for destruction EXCEPT if the destruction is
contract entered into by him shall be generally unenforceable. imminent; if he does not give someone more competent than him to preserve
o If B were authorized, the law on agency shall apply. the property, the preserver would be liable.
CASE: Sison & Azarraga v. Balgos Article 2145︎ . The officious manager shall perform his duties with all the diligence of
Lesson: The ff. are circumstances under which one may undertake to carry out a a good father of a family, & pay the damages which through his fault or negligence
business matter for another (Manresa) may be suffered by the owner of the property or business under management.
(1) That they relate to determined things or affairs The courts may, however, increase or moderate the indemnity according to the
(2) That there be no administrator or representative of the owner who is charged circumstances of each case.
with the management thereof;
(3) That there is no express or tacit mandate on the part of the owner, for it very Degree of Diligence for Officious Manager
often may happen even without his knowledge; • A good father of a family - the ordinary degree of care which a reasonable &
(4) That the actor be inspired by the beneficent idea of averting losses & prudent person will do given the same circumstances
damages to the owner or interested party through the abandonment of the • If he causes damage to the property of the owner, he shall be liable to such
things that belong to him or of the business in which he may be interested; owner
that administration is not for profit, or with the avaricious idea of gain. • An officious manager is in a sense an intruder in the business or the property
Facts: The guardian of certain minors died without paying the redemption price on of the owner.
behalf of the minors with respect to a certain property to which the said minors were o BUT: If his intrusion is with the objective of preserving & taking care of
entitled. the property without any intent to gain, a quasi-contract is created.
• The uncle of the said minors took upon himself to deposit the redemption • The officious manager cannot escape liability by stating that there was no
price in court so that the period to redeem will not prescribe. obligation on his part to take over the property or business in the first place.
• The authority of the said uncle to do so was questioned. o Once he takes over, he has the responsibility to take care of it.
Held: There was a quasi-contract created; therefore the act of the uncle in preserving • If the owner suffers damage due to the negligence or fault of the officious
the property of the minors was valid. The uncle’s actions were for the benefit of the manager, the court can increase or moderate the indemnity according to the
kids. circumstances.
• Art. 1893: The owner of property or a business who avails himself of the
advantages of the administration of another, even when he has not expressly Article 2146. If the officious manager delegates to another person all or some of his
ratified it, shall be liable for the obligations contracted for his benefit. duties, he shall be liable for the acts of the delegate, without prejudice to the direct
o He shall indemnify the administrator for the necessary expenses obligation of the latter toward the owner of the business.
which he may have in charge of his duties. The responsibility of 2 or more officious managers shall be solidary, unless the
o The same obligation shall pertain to said owner when the object of management was assumed to save the thing or business from imminent danger.
said administration should have been to avoid any imminent or
manifest damage, even when no profit results therefrom.
Delegation of Management
• The minor, although usually incapable of contracting or binding himself,
• The officious manager can delegate the management of the properties to
cannot disavow the efficacy of the contracted obligation when it redounds to another.
his benefit, because of the principle that no one may enrich himself to the
o BUT: He will be responsible for the acts of the said delegate.
prejudice of another.

• Such person to whom the management has been delegated shall likewise be (2) If by his intervention he prevented a more competent person taking up the
directly responsible to the owner. management.
• The liability of 2 or more officious managers is solidary.
o The owner can seek the full amount of damages from anyone of the Further Liability For Fortuitous Events
officious managers. • The officious manager has no business taking over the abandoned property
or business of somebody if he has no knowledge or is not competent to
Article 2147. The officious manager shall be liable for any fortuitous event: undertake the management.
(1) If he undertakes risky operations which the owner was not accustomed to o Ex. If a teacher takes on the farming business of another, he shall be
embark upon; liable for any damage caused by a fortuitous event because he
(2) If he has preferred his own interest to that of the owner; should have known that he cannot undertake something which he
(3) If he fails to return the property or business after demand by the owner; has no competence in.
(4) If he assumed the management in bad faith. § IF another person who is competent to take over the farming
business decides to manage the same & the said teacher
Rules for Fortuitous Events prevents him from doing so on the ground that he has been
• GR: The happening of a fortuitous event affecting an obligation excuses the there first, such teacher will be liable if the property is
person charged from performing the obligation. destroyed by a fortuitous event.
• In case of negotiorum gestio, Article 2148 does NOT excuse the officious § HOWEVER, if the teacher manages the farming business to
manager from liability due to fortuitous event. save it from imminent danger, he will not be liable for
damages caused by a fortuitous event.
Situations Where Officious Manager is Liable for Fortuitous Events
1) When the officious manager undertakes risky operations which the owner is Article 2149. The ratification of the management by the owner of the business
not accustomed to embark upon. produces the effects of an express agency, even if the business may not have been
• Ex. If the business of the owner is simply providing a warehouse for successful.
dolls, & the officious manager decides to allow the storing of highly
inflammable materials in the warehouse, the officious manager shall Ratification = Express Agency
be liable if the warehouse is burned due to a fortuitous event, such as • Ratification - the owner agrees to whatever the officious manager has done.
the striking of lightning. o Cures even the defects which the officious manager has committed
2) When the officious manager has preferred his own interest to that of the • If ratification happens, the law on agency applies—even if the business is not
owner. successful, such agency by virtue of ratification shall be recognized.
• Ex. The officious manager takes over the business of the owner of
warehousing goods. In the meantime, the officious manager also Article 2150. Although the officious management may not have been expressly
stores some of his goods in the warehouse. In the event that a flood ratified, the owner of the property or business who enjoys the advantages of the
occurs, and he first saves his goods, before the goods of the owner & same shall be liable for obligations incurred in his interest, & shall reimburse the
the latter’s clients, from being destroyed, the officious manager will be officious manager for the necessary & useful expenses & for the damages which the
liable for the loss due to the fortuitous event. latter may have suffered in the performance of his duties.
3) When the officious manager fails to return the property or business after The same obligation shall be incumbent upon him when the management had for its
demand by the owner. purpose the prevention of an imminent & manifest loss, although no benefit may
• Once the owner demands the return of the business, the officious have been derived.
manager should readily return it. He has no right to keep it for himself.
4) When the officious manager assumes the management in bad faith. Reimbursement to Officious Manager
• Ex. The officious manager takes over the warehousing business of the • The owner must always reimburse the officious manager for all expenses
owner so that he can get the clients of the owner for his (officious which have inured to the benefit or advantage of the owner.
manager’s) own warehousing business. o Ex. If the officious manager pays taxes on the property so that it will
not be foreclosed, the owner must reimburse the officious manager.
Article 2148. Except when the management was assumed to save the property or • Even if no benefit has been derived but the officious manager takes over to
business from imminent danger, the officious manager shall be liable for fortuitous save the property or business from imminent loss, the officious manager
events︎ : should also be reimbursed for obligations incurred for the owner’s interest,
(1) If he is manifestly unfit to carry on the management; including useful & necessary expenses.

• CASE: Benedicto v. Board of Administrators
Article 2151. Even though the owner did not derive any benefit & there has been no o Facts:
imminent and manifest danger to the property or business, the owner is liable as § After People Power I, the properties & assets of Broadcast City
under the 1st par. of the preceding article, provided: were abandoned, & no one was looking after them.
(1) The officious manager has acted in good faith, & § When the PCGG was created, its chairman, Sen. Jovito
(2) The property or business is intact, ready to be returned to the owner. Salonga, requested the Ministry of National Defense & the
Ministry of Information to sequester Broadcast City pending
Good Faith & Intact clarification of its uncertain financial condition & its legal &
• WON there is benefit & WON there is imminent danger, the officious manager beneficial ownership.
should be reimbursed for useful & necessary expenses & of payment made in § E.O. 11 – Cory Aquino created a Board of Administrators to
furtherance of the owner’s interest if: manage Broadcast City & said that the Board:
o The officious manager has acted in good faith & • Would exercise “all the powers imposed on trustees
o The property or business is intact, ready to be returned to the owner. under the principles of the general law on trust &
§ The very fact that the property is intact means that the officious officious managers under the law on extra- contractual
manager has prudently & with due diligence managed the obligations”
property. • Would have an existence coterminous with the
investigation of the seized assets by the PCGG & the
Article 2152. The officious manager is personally liable for contracts which he has final disposition of the seized assets.
entered into with 3rd persons, even though he acted in the name of the owner, & • Would hold office “at the pleasure of the President.”
there shall be no right of action between the owner & 3rd persons. These provisions § Pet. filed an action against PCGG to annul the sequestration &
shall not apply: to recover management of Broadcast City.
(1) If the owner has expressly or tacitly ratified the management; or • PCGG & Pet. entered into an agreement to reorganize
(2) When the contract refers to things pertaining to the owner of the business. the Board of Broadcast City & allow the Pet. to nominate
2/3 of the members of the Board.
3rd Persons & Officious Manager § The Board of Administrators refused to relinquish management
• If the officious manager decides to manage the property or business, & for & operation to the newly organized Board.
this reason, he buys some decorations to be placed in the property, such o Held: The role of the Board of Administrators has become functus
officious manager shall be the only one responsible for the payment of such oficio. In negotiorum gestio, the authority of the officious manager of a
decorations even if he acts in the name of the owner. business is extinguished when the owner demands its return.
o The seller of the decorations has no right of action against the owner
in the event the officious manager does not pay for them. Withdrawal of Officious Manager
• BUT: The owner shall pay for said purchases if he expressly or tacitly ratifies • The officious manager can withdraw, putting an end to his management.
the act of the officious manager. • BUT: He must require the person concerned or the owner to substitute him if
o Ex. If the buying and selling of decoration is the very object of the the owner is in a position to do so (Article 2144).
business of the owner, the owner shall be liable. o If the owner is not in a position to do so, he must continue & only
withdraw upon the termination of the affair & its incidents.
Article 2153. The management is extinguished:
(1) When the owner repudiates it or puts an end thereto; Death, Civil Interdiction, Insanity, or Insolvency
(2) When the officious manager withdraws from the management, subject to the • Death – the duty to be officious manager naturally ceases
provisions of Art. 2144; • Civil interdiction – an accessory penalty to a principal penalty as
(3) By the death, civil interdiction, insanity or insolvency of the owner or the punishment for the commission of a crime; deprives the offender, during
officious manager. the time of his sentence, of the rights of:
o Parental authority or guardianship, either as to the person or
Repudiation property of the ward
• The management is extinguished if the owner repudiates it (puts an end to it). o Marital authority
• The owner still has the power of dominion over his property or his business. o Management of his own property
Hence his decision must prevail over that of the officious manager. If owner o Disposal of such property by any act or any conveyance inter
does not want the officious manager, this decision should prevail. vivos

• Insanity – deprives the person of reason • Meanwhile, FACETS heard about the delay due to the failure of the 1st telex,
• Insolvency – deprives the person of the financial liquidity to manage his & asked FNSB to instead use another Phil. bank, PCIB instead.
affairs as his liabilities surpass his assets o FNSB, also unaware that PNB had successfully asked Y to send the
$10,000, instructed PCIB to pay the same amount to X.
SECTION 2. – SOLUTIO INDEBITI o On Sept. 1980, X received a 2nd $10,000.
• Y debited the amount to FNSB for the 2nd $10,000 effected through PCIB.
Article 2154. If something is received when there is no right to demand it, & it was o FNSB then discovered that Y had made a duplication of the
unduly delivered through mistake, the obligation to return it arises. remittance, & asked for the credit of its account in the amount of
$10,000; Y complied with the request.
Requisites of Solutio Indebiti (City of Cebu v. Piccio) • Y asked X for the return of the extra $10,000, but X refused to pay.
(1) When he who paid was not under the obligation to do so; & o RTC ruled that the payment was not made by mistake, but by
(2) The payment was made by reason of an essential mistake in fact. negligence, & thus X was not unjustly enriched.
• Before SC, X argues that it had the right to demand & retain the 2nd $10,000,
CASE: Velez v. Balzaraza because even after the 2 $10,000s are credited to X’s receivables, FACETS
Lesson: When there is no intention to charge interest or rentals & there is only a still owes X $49,324. Thus, there was no unjust enrichment. Also, the
principal, any payment made in excess of said principal must be returned to the employees of FNSB were just negligent.
obligor. Solutio indebiti exists when: Does solutio indebiti apply here?
(1) There is no right to collect these excess sums; & Held: Yes. X must return the 2nd $10,000 paid by mistake.
(2) The amounts have been paid through mistake The contract of X is with FACETS. It is FACETS & not Y that is indebted to X. On the
Facts: The defendants paid money which did not constitute either payment of rentals other hand, the contract for the transmittal of dollars FACETS to X was entered into
or interest & therefore was not due. by Y with FNSB.
• The parties in their contracts never intended that either rents or interest X, although referred to as the payee, was not privy to the contract of remittance of
should be paid dollars. Neither was Y a party to the contract of sale between X & FACETS. There
• When these payments were made, they were intended by defendants to be being no contractual relation between them, X had no right to apply the 2nd $10,000
applied to the principal, but they already overpaid the amounts loaned to remittance delivered by mistake by Y to the outstanding accounts of FACETS.
them. • On the issue of negligence, FACETS sent only 1 remittance. FNSB only
Held: This is a situation of solution indebiti; the plaintiff must return the excess requested that Y remit $10,000; this is the only remittance requested by
payments made by the defendants. FNSB as per instruction of FACETS.
• Lawmakers have used the principle that “no one shall be unjustly enriched at o The mistake was actually due to the remittance having the same
the expense of another” to shape laws in the Civil Code & in the conflict of reference invoice number, 26380.
rights o Y made the remittance on the wrong assumption that X did not receive
the 1st remittance.
CASE: Adres v. Manufactureres Hanover & Trust Corp. • X invokes the equitable principle that when one of 2 innocent persons must
Facts: X is engaged in the manufacture of ladies garments, children’s wear, etc. suffer by the wrongful act of a 3rd person, the loss must be borne by the one
under the name “Irene Wearing Apparel.” Among X’s foreign buyers is Facets whose negligence was the proximate cause of the loss.
Funwear, Inc. (FACETS). o GR: Principles of equity (or common law) cannot be applied if there is
• FACETS would from time to time remit certain amounts of money in payment a statutory provision of law specifically applicable to a case.
to X for the products it purchased. • Y’s suit was filed well within the 6 years prescriptive period for actions based
• In Aug. 1980, FACETS instructed the FNSB bank to transfer $10,000 to X; the upon a quasi-contract, so the defense of prescription also cannot apply.
FNSB bank informed its local partner bank, PNB.
• Acting on said instruction, PNB told Y, the respondent Manufacturers Hanover Class Discussion
& Trust Corp., to effect the transfer of the $10,000. What’s the difference between natural obligation and solutio indebiti?
o However, the payment was not effected immediately because the Payment is needed in both.
payee designated in the telex for the transfer was only “Wearing In both cases, payment was not due.
Apparel (no Irene).” BUT in solutio indebiti, you do not know if it is due or not.
§ When PNB asked for a follow-up, Y sent another telex which In natural obligation, YOU KNOW IT’S NOT DUE, AND YET YOU PAID.
was correctly forwarded to X; thus, X received the $1O,000.
CASE: Sebastian Siga-An v. Villanueva

Lesson: In the case, it was established that respondent paid interest to Debt Not Due
petitioner. Respondent was under no duty to make such payment since there was • Ex. A debtor pays a creditor prematurely because he is not sure whether the
no express stipulation in writing that there would be interest on the loan. Hence, the debt is already due. The creditor accepts it. The debtor can recover what he
payment was clearly a mistake. Since petitioner received something when there was has paid prior to the due date of the debt provided that the demand for
no right to demand it, he has an obligation to return it. reimbursement is NOT made after the debt has become due.
Article 2155. Payment by reason of a mistake in the construction or application of a Article 2157. The responsibility of 2 or more payees, when there has been payment
doubtful or difficult question of law may come within the scope of the preceding of what is not due, is solidary.
article.
Solidary Obligation of Multiple Payees Under Solutio Indebiti
Mistake Due to Difficult Provision of Law • Ex. A is indebted to B and C for P2,000. The obligation is of a solidary nature
• GR: Solutio indebiti invokes only a mistake of fact such that A can pay only to one of them the whole obligation, and the debt is
• EXC: Art. 2155 – A mistake of law is allowed if the mistake is brought about considered paid as to both.
by the construction or application of a doubtful or difficult question of law o If A pays B the amount of P2,000, the debt is considered paid. It is up
to C to claim from B his share of the credit which is P1,000.
CASE: Gonzalo Puyat & Sons Inc. v. City of Manila o If there is payment by mistake, A can recover what he paid from B or
Lesson: When multiple laws overlap, making it difficult to determine the taxes which C. This is true, even if in the meantime, C has not yet obtained his
one must pay, the tax payments made by mistake in the interpretation of said laws P1,000.
are recoverable.
• The taxpayer has no voice in the imposition of the burden. He has the right to Article 2158. When the property delivered or money paid belongs to a 3rd person, the
presume that the taxing power has been lawfully exercised. He should not be payee shall comply with the provisions of Article 1984.
required to know more than those in authority over him, nor should he suffer
loss by complying with what he bona fide believes to be his duty as a good Payment Made Belongs to 3rd Person
citizen. • Art. 1984 - The depositary cannot demand that the depositor prove his
Facts: The appellee (Gonzalo) paid taxes which were not due by mistake, as it was ownership of the thing deposited.
actually exempted; the mistake in payment was, among others, the result of a o NEVERTHELESS, should he discover that the thing has been stolen &
complicated correlation & application of various municipal & national laws. who its true owner is, he must advise the latter of the deposit.
• Appellee: This is solution indebiti, because the payments could not have been § If the owner, in spite of such information, does not claim it
voluntary. within the period of 1 month, the depositary shall be relieved of
o At most, they were paid “mistakenly and in good faith” & “without all responsibility by returning the thing deposited to the
protest in the erroneous belief that it was liable thereof.” depositor.
o Voluntariness is incompatible with protest & mistake. o If the depositary has reasonable grounds to believe that the thing has
Held: Solutio indebiti should apply. not been lawfully acquired by the depositor, the former may return the
• Gonzalo is exempted from the payment of the tax in question, as manifested same.
from the reply of the City Treasurer stating that sales of manufactured • Ex. A is obliged to pay B his obligation by giving B a watch. Despite the fact
products at the factory site are not taxable either under the Wholesalers’ that the payment is not yet due, A gives B the watch which turns out to be
Ordinance or under the Retailers’ Ordinance. stolen from X.
o The taxes were paid, through mistake. The appellant City of Manila, at o At the time of his receipt of the watch, B has no obligation to ask A
the very start, notwithstanding the Ordinance imposing the Retailer’s questions as to who owns the watch.
Tax, had no right to demand payment thereof. § HOWEVER, if B later finds out that X really owns the watch, B
• Gonzalo did not voluntarily make the payment, as Manila avers, but paid must advise X that he (B) is in possession of his (X’s) watch. X
believing it was due. must claim the watch within one month from the advice.
o In such situation, the amount paid, even without protest, is • If X does not claim the watch, B is excused from all
recoverable. liability if, A, because of solutio indebiti, claims back the
watch, & B gives back the watch to A.
Article 2156. If the payer was in doubt whether the debt was due, he may recover if o HOWEVER, if at the time A gives the watch of B, the latter has
he proves that it was not due. reasonable grounds to believe that it has been acquired unlawfully, B
can return the same to A.

• Ex. A is obliged to give B a house on Jan. 1, 1997. Believing that it was due
Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal on Aug. 1, 1996, A delivered the house on said date. B likewise did not know
interest if a sum of money is involved, or shall be liable for fruits received or which that the house was still due on Jan. 1, 1997. B was in good faith.
should have been received if the thing produces fruits. o On Nov. 1996, the house was rented in the amount of P2,000/hour by
a movie producer for a particular motion picture &, while shooting, the
Bad Faith Acceptance of Undue Payment kitchen was accidentally burned. After the shooting of the motion
• If the creditor knows that the payment is not yet due & payment is tendered picture, B was paid the rent in the amount of P30,000 for 15 hours.
to him, he must inform the debtor that payment is not yet due. o On Dec. 1996, A discovered that the house was not yet due &
o Should the creditor accept such premature payment, he is in bad demanded its return. B can return the house & pay the amount of the
faith. kitchen which has been impaired, because he (B) has been benefited
§ He shall be liable for interest from the time he accepts by the house when he had it rented.
payment up to the time he returns it upon demand of the
debtor. Article 2161. As regards the reimbursement for improvements & expenses incurred
by him who unduly received the thing, the provisions of Title V of Book II shall govern.
CASE: Spouses Abella v. Spouses Abella
Lesson: (1) When a debtor is made to pay unconscionable interest rates & these Rules for Reimbursement Incurred by the One who Unduly Received the Thing
rates are reduced, so that the debtor has now given the creditor amounts in excess • Art. 546 - Necessary expenses shall be refunded to every possessor; but only
of what he owes, there is solutio indebiti & the creditor must reimburse the debtor the possessor in good faith may retain the thing until he has been reimbursed
under said quasi-contract. therefor.
In this case, as respondents had already fully paid the principal and all conventional o Useful expenses shall be refunded only to the possessor in good faith
interest that had accrued, they were no longer obliged to make further payments. with the same right of retention, the person who has defeated him in
Any further payment they made was only because of a mistaken impression that the possession having the option of refunding the amount of the
they were still due. Accordingly, petitioners are now bound by a quasi-contractual expenses or of paying the increase in value which the thing may have
obligation to return any and all excess payments delivered by respondents. acquired by reason thereof.
(2) SC also posited that the holding in Nacar – which provides that “when an • Art. 547 - If the useful improvements can be removed without damage to the
obligation, not constituting a loan or forbearance of money, is breached, an interest principal thing, the possessor in good faith may remove them, unless the
on the amount of damages awarded may be imposed at the discretion of the court person who recovers the possession exercises the option under par. 2 of the
at the rate of 6% per annum” – is applicable to obligations arising from quasi- preceding article.
contracts such as solutio indebiti. However, since in this case, the excess payment • Art. 548. - Expenses for pure luxury or mere pleasure shall not be refunded to
was made by mistake & no bad faith was shown, SC did not hold petitioners liable the possessor in good faith; but he may remove the ornaments with which he
for the 6% interest. has embellished the principal thing if it suffers no injury thereby, & if his
successor in the possession does not prefer to refund the amount expended.
CASE: Sebastian Siga-An v. Villanueva • Art. 549 - The possessor in bad faith shall reimburse the fruits received &
Lesson: In this case where the person who accepted undue payment did it in an those which the legitimate possessor could have received, and shall have a
oppressive manner (by first filing 5 BP 22 cases against the debtor, pestering the right only to the expenses mentioned in par. 1 of Art. 546 & in Art. 443.
debtor to pay interest & threatening to block her transactions if she would not pay o The expenses incurred in improvements for pure luxury or mere
interest, forcing her to pay interest even if the loan never stipulated interest pleasure shall not be refunded to the possessor in bad faith; but he
payments to begin with), SC awarded moral damages, exemplary damages, & may remove the object for which such expenses have been incurred,
attorney’s fees, as well as legal interest at 6% per annum, to the debtor, on top of provided that the thing suffers no injury thereby, & that the lawful
the return of the excess the debtor paid. possessor does not prefer to retain them by paying the value they may
have at the time he enters into possession.
Article 2160. He who in good faith accepts an undue payment of a thing certain & • Art. 550 - The costs of litigation over the property shall be borne by every
determinate shall only be responsible for the impairment or loss of the same or its possessor.
accessories & accessions insofar as he has thereby been benefited. If he has • Art. 551 - Improvements caused by Nature or time shall always inure to the
alienated it, he shall return the price or assign the action to collect the sum. benefit of the person who has succeeded in recovering possession.
• Art. 552 - A possessor in good faith shall be liable for the deterioration or loss
Acceptance Not Knowing it Was Due
of the thing possessed, except in cases in which it is proved that he has
acted with fraudulent intent or negligence, after the judicial summons.

o A possessor in bad faith shall be liable for deterioration or loss in
every case, even if caused by fortuitous event. SECTION 3. – OTHER QUASI-CONTRACTS
• Art. 553 - One who recovers possession shall not be obliged to pay for
improvements which have ceased to exist at the time he takes possession of Article 2164. When, without the knowledge of the person obliged to give support, it
the thing. is given by a stranger, the latter shall have a right to claim the same from the former,
unless it appears that he gave it out of piety & without intention of being repaid.
Article 2162. He shall be exempt from the obligation to restore who, believing in
good faith that the payment was being made of a legitimate & subsisting claim, Art. 206, Family Code
destroyed the document, or allowed the action to prescribe, or gave up the pledges, • Art. 2164 was adopted by the Family Code
or cancelled the guaranties for his right. He who paid unduly may proceed only
against the true debtor or the guarantors with regard to whom the action is still CASE: De Marcaida v. Redfern
effective. Lesson: For one to recover under this provision, it must be proven —
(1) That support has been furnished a dependent of one bound to give support
3rd Person in an Obligation & Solutio Indebiti Situation but who fails to do so;
• Ex. A is indebted to B in the amount of P1,000. It is an oral contract of loan & (2) That the support was supplied by a stranger;
hence it prescribes in 6 years from the time it falls due. (3) That the support was given without the knowledge of the person charged with
o X is the guarantor of the indebtedness. As guarantor, X will only pay B the duty.
if B has unsuccessfully exhausted all efforts to collect from A upon the (4) That the support is given with the expectation of recovering it.
maturity of the debt. Facts: A spouse borrowed a sum of money on different occasions from her sister.
o The debt becomes due & A fails to pay B. B has not yet exhausted all The sister & her husband then sued the husband of the borrowing spouse for
efforts to collect from A. reimbursement.
o Believing that he is principally liable also for the debt, X pays B on the Held: The sister & her husband were not able to obtain reimbursement, due to the
5th year since the debt has become due. B also believed in good faith absence of the 1st & 2nd requisite.
that he could collect from X & hence accepts the payment from X. In • For the 1st – It was not shown that the wife ever complained to her husband
the meantime, more than 6 years have already lapsed since the debt for support or that her husband actually denied her support; in fact, the
has become due. B does not demand from A anymore because he has husband gave an contradictory testimony that he instructed his agent to
already been paid by X on the 5th year. furnish his wife with any reasonable sum she needed, yet the wife never took
§ Here, X paid B by mistake. X cannot recover the money paid by advantage of said offer. Also, the husband’s support lessened because of
mistake from B because, if this is allowed, B cannot anymore some financial issues he faced, which is a valid reason under the law.
recover payment from A as B’s cause of action against A has
prescribed. X can only recover from A, the true debtor. Article 2165. When funeral expenses are borne by a 3rd person, without the
§ Since a quasi-contract of solutio indebiti exists from the time X knowledge of those relatives who were obliged to give support to the deceased, said
made the payment on the 5th year, he has 6 years from such relatives shall reimburse the 3rd person, should the latter claim reimbursement.
payment within which to file an action against A, the principal
debtor. This is because a quasi-contract prescribes after 6 Obligation to Pay Funeral Expenses
years from the time the cause of action accrues, the action to • The ff. are obliged to support each other:
collect from A is still effective. 1) Spouses;
2) Legitimate ascendants & descendants;
Article 2163. It is presumed that there is a mistake in the payment if something 3) Parents & their legitimate children & the legitimate & illegitimate
which had never been due or had already been delivered was delivered; but he from children of the latter (grandchildren);
whom the return is claimed may prove that the delivery was made out of liberality. 4) Parents & their illegitimate children & the legitimate & illegitimate
children of the latter;
Presumption of Mistake in Payment 5) Legitimate brothers & sisters, whether of full or half-blood.
• A debtor who pays in solutio indebiti may recover what he has paid by • Whenever 2 or more persons are obliged to give support, the liability shall
mistake. devolve upon the ff. persons in the ff. order:
o HOWEVER, the person to whom the payment has been made can 1) Spouse;
show that such payment is a gift or donation by showing the proper 2) Descendants in the nearest degree;
evidence like a valid deed of donation. 3) Ascendants in the nearest degree; &

4) The brothers and sisters. Government & Services to Unwilling Citizens
• Ex. A was the daughter of X & Y. A died. G, a stranger, was the one who • Ex. A municipal ordinance prohibits the throwing of spoiled food outside of
shouldered the expenses for A’s funeral. the house in a waste can without any plastic bag. X does not abide by the
o If G did this benevolent act as an act of charity, X & Y need not said ordinance & continually throws spoiled food in a wooden garbage
reimburse him. container in his house. To prevent the spread of disease, the municipal
o If G intended to be reimbursed, he can only be paid after demanding government can put the spoiled food inside a plastic bag first & then provide
payment from X & Y. X with a garbage can at his expense even if he does not want to.
Article 2166. When the person obliged to support an orphan, or an insane or other Article 2170. When by accident or other fortuitous event, movables separately
indigent person unjustly refuses to give support to the latter, any 3rd person may pertaining to 2 or more persons are commingled or confused, the rules on co-
furnish support to the needy individual, with right of reimbursement from the person ownership shall be applicable.
obliged to give support. The provisions of this article apply when the father or mother
of a child under 18 years of age unjustly refuses to support him. Movables Commingling
• The commingling here is unintentional & the result of an accident or
Art. 207 of the Family Code fortuitous event.
• Adopts this provision; only adds that a parent shall also be liable if he fails to
give support to the child when urgently needed. Article 2171. The rights and obligations of the finder of lost personal property shall
be governed by Article 719 & 720.
Article 2167. When through an accident or other cause a person is injured or
becomes seriously ill, & he is treated or helped while he is not in a condition to give Arts. 719 & 720 of the Civil Code
his consent to a contract, he shall be liable to pay for the services of the physician or • Art. 719: Whoever finds a movable, which is not treasure, must return it to its
other person aiding him, unless the service has been rendered out of pure previous possessor. If the latter is unknown, the finder shall immediately
generosity. deposit it with the mayor of the city or municipality where the finding has
taken place.
When a Person is in an Accident & is Helped o The finding shall be publicly announced by the mayor for 2
• Ex. A is bumped by a car & is seriously injured. He becomes unconscious. X consecutive weeks in the way he deems best.
sees A and brings him to the hospital. A’s injuries need immediate treatment o If the movable cannot be kept without deterioration, or without the
but, since he is in coma, he cannot give his consent. The doctor nevertheless expenses which considerably diminish its value, it shall be sold at
treats his injuries lest it becomes more serious. public auction 8 days after publication.
o When A recovers, he has the obligation to pay the services of the o 6 months from the publication having elapsed without the owner
doctor unless the latter does not want to be paid. having appeared, the thing found, or its value, shall be awarded to the
finder. The finder and the owner shall be obliged, as the case may be,
Article 2168. When during a fire, flood︎ , storm or other calamity, property is saved to reimburse the expenses.
from destruction by another person without the knowledge of the owner, the latter is • Art. 720: If the owner should appear in time, he shall be obliged to pay, as a
bound to pay the former just compensation. reward to the finder, 1/10 of the sum or of the price of the thing found.
Calamity & Saving of Property by Another Article 2172. The right of every possessor in good faith to reimbursement for
• Ex. The house of A starts to catch fire but A is not in the house. When the necessary & useful expenses is governed by Article 546.
garage of the house is already on fire, B︎ goes inside the burning garage &
pushes the car of A out of the same without the knowledge of A. The car is Article 546 of the Civil Code
saved from destruction. • Necessary expenses – refunded to every possessor
o A is bound to pay B just compensation unless B does not want to o BUT: Only the possessor in good faith may retain the thing until he has
accept it. been reimbursed therefor.
• Useful expenses – refunded only to the possessor in good faith with the same
Article 2169. When the government, upon the failure of any person to comply with right of retention, the person who has defeated him in the possession having
health or safety regulations concerning property, undertakes to do the necessary the option of refunding the amount of the expenses or of paying the increase
work, even over his objection, he shall be liable to pay the expenses. in value which the thing may have acquired by reason thereof.

Article 2173. When a 3rd person, without the knowledge of the debtor, pays the debt,
the rights of the former are governed by Article 1236 & 1237.
Article 2174. When in a small community a majority of the inhabitants of age decide
upon a measure for protection against lawlessness, fire, flood, storm or other
calamity, any one who objects to the plan & refuses to contribute to the expenses
but is benefited by the project as executed shall be liable to pay his share in the
expenses.
Small Communities & Order

• Ex. The people of a certain barrio decide to engage a security force to protect
their community because of rampant lawlessness. For this reason, the people
agree to contribute to the expenses of this security force. G however refuse to
make any contribution. In the event that the security force apprehend robbers
intending to rob the house of G, G should pay his share in the expenses for
the community’s engagement of the security force to protect the people from
criminals.
Article 2175. Any person who is constrained to pay the taxes of another shall be
entitled to reimbursement from the latter.
Another Person Pays Another’s Tax

• Ex. A is the neighbor of G whose property is about to be forfeited to the
government because of unpaid real estate taxes.
o A can pay the taxes but G must reimburse him.

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OBLIGATIONS AND CONTRACTS

Q: If the title is a perfect sale, is prescription relevant?

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without any pay or reward (i.e., loaning or borrowing a thing to another).

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Right of Action Oral Contracts

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Class Discussion Class Discussion

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Explanation Class Discussion

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Class Discussion Fraud

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CASE: Naga Telephone Inc. v. CA Extinguishment of Obligations with Time-Based Conditions

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“No Time is Fixed” Class Discussion

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