You are on page 1of 65

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

What is the Meaning of obligation.

The term obligation is derived from the Latin word obligatio which means a
tying or binding. (1) It is a tie of law or a juridical bond by virtue of which
one is bound in favor of another to render something and this may consist
in giving a thing, doing a certain act, or not doing a certain act. (2) Manresa
de nes the term as a legal relation established between one party and
another, whereby the latter is bound to the fulllment of a prestation which
the former may demand of him. (8 Manresa 13.) (3) Article 1156 gives the
Civil Code de nition of obligation, in its passive aspect. Our law merely
stresses the duty of the debtor or obligor (he who has the duty of giving,
doing, or not doing) when it speaks of obligation as a juridical necessity.

Meaning of juridical necessity.

Obligation is a juridical necessity because in case of non-compliance, the


courts of justice may be called upon to enforce its fulllment or, in default
thereof, the economic value that it represents. In a proper case, the debtor
may also be made liable for damages, which represent the sum of money
given as a compensation for the injury or harm suffered by the creditor or
obligee (he who has the right to the performance of the obligation) for the
violation of his rights. In other words, the debtor must comply with his
obligation whether he likes it or not; otherwise, his failure will be visited with
some harmful or undesirable legal consequences. If obligations were not
made enforceable, then people can disregard them with impunity. If an
obligation cannot be enforced, it may be only a natural obligation.

Requisites of Obligations. An obligation has four essential requisites.


They are:

(1) A juridical or legal tie, which binds the parties to the obligation, and
which may arise from either bilateral or unilateral acts of persons;

(2) An active subject known as the obligee or creditor, who can demand the
ful llment of the obligation;
(3) A passive subject known as the obligor or debtor, against whom the
obligation is juridically demandable; and

(4) The fact, prestation or service which constitutes the object of the
obligation.

Concept of Prestation (BAR QUESTION)

A prestation is an obligation; more speci cally, it is the subject matter of an


obligation and may consist of giving a thing, doing or not doing a certain
act. The law speaks of an obligation as a juridical necessity to comply with a
prestation. There is a juridical necessity, for non-compliance can result in
juridical or legal sanction.

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

Obligations Arising from Law. Unlike other obligations, those derived


from law can never be presumed. Consequently, only those expressly
determined in the Civil Code or in special laws are demandable. These
obligations shall be regulated by the precepts of the law which establishes
them, and as to what has not been foreseen, by the provisions of Book IV of
the Civil Code.

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

Unlike other kinds of obligations, those arising from contracts are governed
primarily by the agreement of the contracting parties. This is clearly
deducible not only from the nature of contracts, but also from Art. 1169 of
the Code which declares that such obligations have the force of law between
the contracting parties and should be complied with in good faith.
Compliance in good faith means performance in accordance with the
stipulations, clauses, terms and conditions of the contract. Consequently, the
Code recognizes the right of such contracting parties to establish such
stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order or
public policy.41 Good faith must, therefore, be observed to prevent one party
from taking unfair advantage over the other party. In the case of Royal Lines,
Inc. vs. Court of Appeals, 143 SCRA 608 (1986), it was ruled that evasion by
a party of legitimate obligations after receiving the benets under the
contract would constitute unjust enrichment on his part. However, in default
of an agreement, the rules found in the Civil Code regulating such obligations
are applicable.

Art. 1160. Obligations derived from quasi-contracts shall be subject


to the provisions of Chapter 1, Title XVII, of this Book.

Obligations Arising from Quasi-Contracts. Quasi contracts are those


juridical relations arising from lawful, voluntary and unilateral acts, by virtue
of which the parties become bound to each other, based on the principle that
no one shall be unjustly enriched or beneted at the expense of another. The
most important of these juridical relations which are recognized and
regulated by the Civil Code are negotiorum gestio and solutio indebiti.
Negotiorum gestio is the juridical relation which arises whenever a person
voluntarily takes charge of the agency or management of the business or
property of another without any power or authority from the latter. In this
type of quasi-contract, once the gestor or ofcious manager has assumed
the agency or management of the business or property, he shall be obliged
to continue such agency or management until the termination of the affair
and its incidents, exercising such rights and complying with such obligations
as provided for in the Code. Solutio indebiti, on the other hand, is the
juridical relation which arises whenever a person unduly delivers a thing
through mistake to another who has no right to demand it. In this type of
quasi-contract, once the delivery has been made, the person to whom the
delivery is unduly made shall have the obligation to return the property
delivered or the money paid.

Art. 1385. Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore. Neither shall rescission take place
when the things which are the object of the contract are legally in the possession of
third persons who did not act in bad faith. In this case, indemnity for damages may
be demanded from the person causing the loss.

When rescission not allowed.

Under Article 1385:

(1) Mutual restitution is required in rescission and this presupposes that both
parties may be restored to their original situation. Hence, the remedy of rescission
cannot be availed of if the party who demands rescission cannot return what he is
obliged to restore under the contract. (par. 1.)

(2) Neither shall rescission take place, if the property is legally in the possession of a
third person who acted in good faith (par. 2.), that is to say, he acquired the
property and registered it in the Registry of Property unaware of the aw in his title
or mode of acquisition.
Art. 559. The possession of movable property acquired in good faith is equivalent to a title.
Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it
from the person in possession of the same. If the possessor of a movable lost or of which the owner
has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its
return without reimbursing the price paid therefor.

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

Art. 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors, when
the donor did not reserve suf cient property to pay all debts contracted before the
donation. Alienations by onerous title are also presumed fraudulent when made by
persons against whom some judgment has been rendered in any instance or some
writ of attachment has been issued. The decision or attachment need not refer to
the property alienated, and need not have been obtained by the party seeking the
rescission. In addition to these presumptions, the design to defraud creditors may
be proved in any other manner recognized by the law of evidence.

CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS

General Provisions

Art. 1231. Obligations are extinguished:

(1) By payment or performance;

(2) By the loss of the thing due;

(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;

(6) By novation.

Other causes of extinguishment of obligations, such as annulment,


rescission, ful llment of a resolutory condition and prescription,
are governed elsewhere in this Code.
By Jurado

Modes of Extinguishing Obligations. There are ten modes of extinguishing


obligations enumerated in the above article. This enumeration, however, is
not complete. There are others, such as: (1) renunciation or waiver by
the obligee or creditor; (2) compromise; (3) expiration of the
resolutory term or period; (4) death of one of the contracting
parties in purely personal obligations; (5) the will of one of the
contracting parties in certain contracts; or (6) the agreement of
both contracting parties or what is sometimes known as mutual
assent or dissent.

By De Lion

Causes of extinguishment of obligations. In addition to those enumerated in


Article 1231, other causes are:

(1) Death of a party in case the obligation is a personal one (Art.


1311, par. 1.);

(2) Mutual desistance or withdrawal; (3) Arrival of resolutory period


(Art. 1193, par. 2.);

(4) Compromise (Art. 2028.);

(5) Impossibility of ful llment (Art. 1266.); and

(6) Happening of a fortuitous event. (Art. 1174.)

Art. 1311. Contracts take effect only between the parties, their assigns and
heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by
provision of law. The heir is not liable beyond the value of the property he
received from the decedent.

If a contract should contain some stipulation in favor of a third person, he


may demand its fulllment provided he communicated his acceptance to the
obligor before its revocation. A mere incidental bene t or interest of a
person is not suf cient. The contracting parties must have clearl
Art. 1193. Obligations for whose fulllment a day certain has been xed,
shall be demandable only when that day comes. Obligations with a
resolutory period take effect at once, but terminate upon arrival of the day
certain. A day certain is understood to be that which must necessarily come,
although it may not be known when. If the uncertainty consists in whether
the day will come or not, the obligation is conditional and it shall be
regulated by the rules of the preceding Section.

Art. 2028. Compromise is a contract whereby the parties, by making


reciprocal concessions, avoid a litigation or put an end to one already
commenced.

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

Case

Milan v. Rio y Olabarrieta 45 Phil. 718

FACTS: A sold a half-interest in his motorboat to B. It was agreed that the


price to be paid by B would be used in installing a motor on the vessel. Later,
the vessel was destroyed by a fortuitous event. Issue: Is Bs obligation to pay
the price extinguished? HELD: B must still pay because his obligation to pay
is generic. This is so even if there is no more use of installing the motor since
the boat has already been destroyed by the fortuitous event. It should be
noted here that it is not the paying that has become impossible (for indeed,
it still is); it is merely the act to be performed after the paying that has
become impossible. Thus, the obligation or prestation (to pay) remains.

Art. 1174. Except in cases expressly speci ed by the law, or when it


is otherwise declared by stipulation or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which
though foreseen, were inevitable.

Case

Crane Sy Pauco v. Gonzaga 10 Phil. 646


FACTS: Pending the decision of a case against him, the carabaos of L were
attached by a sheriff. L gave a bond for their release, the condition being
that if L loses the case, L would deliver the animals. L lost, but was not able
to deliver the carabaos, because they had died due to cause not imputable
to L.

Issue: Are the bondsmen liable?

HELD: No, the bondsmen are not liable because the death of the carabaos
was fortuitous. Thus, the obligation to deliver the carabaos was extinguished.

SECTION 1. Payment or Performance


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

Elements of payment.

Under the common law doctrine and the same traditional in uence, the
elements of payment are analyzed into:

(1) persons, who may pay and to whom payment may be made;

(2) thing or object in which payment must consist;

(3) the cause thereof;

(4) the mode or form thereof;

(5) the place and the time in which it must be made;

(6) the imputation of expenses occasioned by it; and

(7) the special parts which may modify the same and the effects they
generally produce elements which are designated in Latin quis, quinam,
quid, causa, quo modo, ubi, quando, expensae, and pacta adjunta. (G.
Florendo, The Law of Obligations and Contracts [1936], p. 335, citing 8
Manresa 260-261.)

Burden of proving payment.

Burden of proof is the duty of a party to present evidence of the facts in


issue necessary to prove the truth of his claim or defense by the amount of
evidence required by law. (Dela Pea vs. Court of Appeals, 579 SCRA 396
[2009].)

Concept of Payment or Performance. Historically, the term payment


has three different acceptations. In its broadest sense, it consists in the ful
llment of the obligation either voluntarily or involuntarily, including its
extinguishment by any means or mode whatsoever; in its limited sense, it
consists in the normal and voluntary ful llment of the obligation by the
realization of the purposes for which it was constituted; in its more limited
sense, it consists in the ful llment of the obligation by the delivery of a sum
of money. The Civil Code has adopted the second. Hence, payment, as it is
understood in the Civil Code, means not only the delivery of money but also
the performance, in any other manner, of an obligation.

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

When debt considered paid.

A debt may refer to an obligation to deliver money, to deliver a thing (other


than money), to do an act, or not to do an act.

Case

PHILPPINE NATIONAL BANK v. CA and LORETO TAN G.R. No. 108630 April
2, 1996

FACTS: Private respondent Loreto Tan is the owner of a parcel of land


abutting the national highway. Expropriaton proceedings were instituted by
the government. Tan led a motion requesting the issuance of an order for
the release to him of the expropriation price of P32,480.00. PNB was required
by the trial court to release to tan the amount and deposited it by the
government. Petitioner, through its Assistant Manager Tagamolila, issued a
check and delivered the same to Sonia Gonzaga on the strength of the SPA,
without tans knowledge, consent and authority. RTC ordered petitioner and
Tagamolila to pay private respondent jointly and severally the amount worth
legal interests, damages and attorneys fees. Ca affirmed the decision.

ISSUE:
Whether the Special Power of Attorney authorized Sonia Gonzaga to receive
payment intended for private respondent

RULING:

There is no question that no payment had ever been made to private


respondent as to the check was never delivered to him. Under Article 1233 of
the Civil Code, a debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. The burden of proof of sad
payment lies with the debtor. The decision of the court of appeals is affirmed
with the modication that the award by the RTC of P5,000 as attorneys fees
is reinstated.

Art. 1234. If the obligation has been substantially performed in


good faith, the obligor may recover as though there had been a
strict and complete fulllment, less damages suffered by the
obligee.

ART. 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest
or objection, the obligation is deemed fully complied with.

Requisites for the application of Article 1235.

The requisites are:

(1) The obligee knows that the performance is incomplete or irregular; and

(2) He accepts the performance without expressing any protest or objection.

Case

SIMPLICIO PALANCA v.ULYSIUS GUIDES and LORENZO GUIDES G.R. No.


146365 February 28, 2005
FACTS:

In August 1983, petitioner Palanca executed a contract to sell a parcel of


land on installment with Jopson for P11,250. Jopson paid petitioner P1,650 as
downpayment, leaving a balance of P9600. In December 1983, Jopson
assigned ad transferred all her rights and interests over the property to
respondent Guides. Believing that she had fully paid the purchase prize,
respondent found out when she veried with the Register of Deeds that the
property in question was still in the name of de Leon. Petitioner stated that
she refused to execute the document of sale in favor of the respondent since
the latter failed with the said obligation- that he was not paid the complete
amount in the contract. RTC ruled in favor of the plaintiff and against
Palanca, ordering him to execute a Deed of Absolute Sale and the issuance of
TCT, reimburse plaintiff the amount paid n excess and for damages.

ISSUE:

Whether the petitioners claim of unpaid charges from the respondent


proper

RULING:

Petitioner was deemed to have waived his right to present evidence and
thus was unable to adduce evidence of such ination or uctuation. Even if
there were such, petitioner did not make a demand on respondent for the
satisfaction of the claim. When petitioner accepted respondents installment
payments despite the alleged charges, and without any showing that he
protested the irregularity of such payment, nor demanded the payment of
the alleged charges, respondents liability, if any for said charges is deemed
fully satised.
ART. 1236. The creditor is not bound to accept payment or
performance by a third person who has no interest in the fulllment
of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has
paid, except that if he paid without the knowledge or against the
will of the debtor, he can recover only insofar as the payment has
been benecial to the debtor.

Persons from whom the creditor must accept payment.

The creditor is bound to accept payment or performance from the


following:

(1) The debtor;

(2) Any person who has an interest in the obligation (like a guarantor); or

(3) A third person who has no interest in the obligation when there is
stipulation that he can make payment. (par. 1.)

Effect of payment by a third person.

The second paragraph of Article 1236 recognizes that payment or


performance may be made by any person not incapacitated, even without
the knowledge or against the will of the debtor, and although he has
absolutely no interest in the obligation. Such payment would produce an
enforceable right in favor of the paying third person.

(1) If made without the knowledge or against the will of debtor. The payer
can recover from the debtor only in so far as the payment has been
benecial to the latter. (par. 2.) In other words, the recovery is only up to the
extent or amount of the debt at the time of payment. Furthermore, the third
person is not subrogated to the rights of the creditor, such as those arising
from a mortgage, guarantee, or penalty. (Art. 1237; see Art. 1425.)

(2) If made with the knowledge of the debtor. The payer shall have the
rights of reimbursement and subrogation, that is, to recover what he has
paid (not necessarily the amount of the debt) and to acquire all the rights of
the creditor. (Arts. 1236, par. 2; 1237, 1302, 1303.)

Payment with/without the knowledge or against the will of the


debtor.

(1) The provision that the payor (or payer) can recover only insofar as the
payment has been bene cial to the debtor, when made without his
knowledge or against his will, is a defense that may be availed of only by the
debtor, not by the creditor, for it affects solely the rights of the former. Once
the creditor has accepted payment, his status and rights as such, become
automatically extinguished. (Rehabilitation Finance Corp. vs. Court of
Appeals, 94 Phil. 984 [1954].)

(2) If the third person pays with the knowledge of the debtor, the latter must
oppose the payment before or at the time the same was made, not
subsequently, in order that the rights of the payor may be subject to the
above provision. It is only fair that the effect of said payment be determined
at the time it was made, and that the rights then acquired by the payor be
not dependent upon, or subject to modication by subsequent unilateral acts
of the debtor. The question whether the payment was bene cial or not to
the debtor, depends upon the law, not upon his will.

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

Persons Who May Pay Obligation. The following may pay or perform
the obligation: rst, the debtor himself or his legal representative; and
second, any third person. The effect in both cases when the payment is
effected in accordance with the requisites prescribed by law is the
extinguishment of the obligation.

Idem; Payment by a third person. It is evident from the provisions of


Arts. 1236 to 1238 of the Code that a third person, whether he has an
interest in the obligation or not, and whether the payment was made with
the knowledge and consent of the debtor or not, may pay the obligation. Out
of this act expressly recognized by the law, there are several juridical effects
which necessarily follow. These effects are given in Arts. 1236 to 1237 of the
Code.

Art. 1236. The creditor is not bound to accept payment or performance by a


third person who has no interest in the ful llment of the obligation, unless
there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been bene cial to the
debtor.

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in
his rights, such as those arising from a mortgage, guaranty, or penalty.

These rules, however, cannot be applied to the case of a third


person who pays the redemption price in sales with right of
repurchase (pacto de retro). This is so because the vendor a retro is
not a debtor within the meaning of the law.

There are, however, two exceptions to the rule that the creditor is
not bound to accept payment or performance by a third person.

They are:

(1) When it is made by a third person who has an interest in the


fulllment of the obligation, such as a joint debtor, guarantor or
surety. Thus, where payment is made by a joint debtor in excess of
what he should pay for the benet of his co-debtor, such payment
cannot be considered as a payment unduly made under Art. 2154 of
the Civil Code, but as one made by a person interested in the
fulllment of the obligation in accordance with the provision of Art.
1236 of the said Code.

(2) When there is a stipulation to the contrary. In this case, the


creditor is deemed to have waived his right to refuse to deal with
strangers to the obligation.
Idem; id. Rights of third person. If a third person pays the
obligation with the knowledge and consent of the debtor, there are two rights
which are available to him. In the rst place, he can recover from the debtor
the entire amount which he has paid; and in the second place, he is
subrogated to all of the rights of the creditor. However, if the payment is
made without the knowledge or against the will of the debtor, there is only
one right which is available to him; he can recover only insofar as the
payment has been bene cial to the said debtor.

Idem; id.; id. Right of subrogation. If the payment was effected


with the knowledge and consent of the debtor, the third person who made
the payment shall be subrogated to all of the rights which the creditor could
have exercised, not only against the debtor, but even against third persons.
The right is expressly recognized in Art. 1302 of the Code; it can also be
deduced from the provision of Art. 1237. If the payment, however, was
effected without the knowledge or against the will of the debtor, the third
person who made the payment cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage, guaranty, or penalty.

It must be noted that the right of subrogation is not the same as the right of
reimbursement, although it includes the latter. Subrogation is a right
available to the third person or payor, whereby he is entitled, not only to
demand reimbursement from the debtor, but also to exercise all of the rights
which the creditor could have exercised against the debtor and against third
persons, such as those arising from a mortgage, a guaranty, or a penalty.
Reimbursement, on the other hand, is merely a simple personal action
available to the third person or payor against the debtor to recover from the
latter what he has paid insofar as the payment has been bene cial to the
said debtor.

Idem; id. Gratuitous payments. If the payment is made by a third


person who does not intend to be reimbursed by the debtor, the presumption
arises that such payment is a donation. Therefore, the debtors consent is
necessary, as in the case of the donee in ordinary donations. Once the
debtors consent is secured, then the rules on ordinary donations will apply.
If such consent, however, is not secured, the rules stated in Arts. 1236 and
1237 will still apply. As far as the creditor who has accepted the payment is
concerned, the debtors consent is immaterial; the payment is valid in any
case.
ART. 1239. In obligations to give, payment made by one who does
not have the free disposal of the thing due and capacity to alienate
it shall not be valid, without prejudice to the provisions of Article
1427 under the Title on Natural Obligations.

Capacity To Make Payment. It is, of course, essential that the person who
pays the obligation should have the necessary legal capacity to effect such
payment. This is especially true in obligations to give. In such case, it is
essential for the validity of the payment that the payor should have the free
disposal of the thing due and the capacity to alienate it. The absence of one
or the other will affect the validity of the payment.

Consequently, if the payment was effected by a person who does not have
the free disposal of the thing due and/or the capacity to alienate it, as in the
case of a minor or an insane person, such payment is not valid.41 In other
words, even if the creditor has already accepted it, it may still be annulled by
a proper action in court at the instance of the payor or his legal
representative, unless it falls within the purview of the exception expressly
provided for in Art. 1427 of the Code. However, from the viewpoint of the
obligation itself, a certain quali cation must be made. If an incapacitated
person offers to pay the obligation and the creditor refuses to accept the
payment because he is aware of the payors incapacity, the obligation still
subsists. Such creditor cannot be compelled to accept the payment; as a
result, consignation of the thing due is not possible.

Meaning of free disposal of thing due and capacity to alienate.

(1) Free disposal of the thing due means that the thing to be delivered must
not be subject to any claim or lien or encumbrance of a third person.

(2) Capacity to alienate means that the person is not incapacitated to enter
into contracts (Arts. 1327, 1329.) and for that matter, to make a disposition
of the thing due.
Free disposal of thing due and capacity to alienate required.

As a general rule, in obligations to give, payment by one who does not


have the free disposition of the thing due or capacity to alienate it is not
valid. This means that the thing paid can be recovered.

The exception is provided in Article 1427. The creditor cannot be


compelled to accept payment where the person paying has no capacity to
make it.

Art. 1427. When a minor between eighteen and twenty-one years of age,
who has entered into a contract without the consent of the parent or
guardian, voluntarily pays a sum of money or delivers a fungible thing in
fulllment of the obligation, there shall be no right to recover the same from
the obligee who has spent or consumed it in good faith.

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

Person to whom payment shall be made.

(1) Payment shall be made to:

(a) the creditor or obligee (person in whose favor the obligation has been
constituted);

(b) his successor in interest (like an heir or assignee); or

(c) any person authorized to receive it.

(2) The creditor referred to must be the creditor at the time the payment is
to be made not at the constitution of the obligation. Hence, if a person is
subrogated to the right of the creditor, payment should be made to the new
creditor. (Tuazon vs. Zamora & Sons, 2 Phil. 305 [1903].) (3) When payment
is made to the wrong party, the obligation is not extinguished as to the
creditor who is without fault or negligence even if the debtor acted in
outmost good faith and by mistake as to the person of the creditor or
through error induced by fraud of a third person. (Cembrano vs. City of
Butuan, 502 SCRA 494 [2006]; Allied Banking Corp. vs. Lim Sio Wan, 549
SCRA 504 [2008].)

Idem; id. Exceptions. There are, however, two exceptions to the rule
that payment made to a person other than those enumerated in Art. 1240 is
not valid. They are: rst, payment made to a third person, provided that it
has redounded to the benet of the creditor, and second, payment made to
the possessor of the credit, provided that it was made in good faith.

ART. 1241. Payment to a person who is incapacitated to administer


his property shall be valid if he has kept the thing delivered, or
insofar as the payment has been bene cial to him. Payment made
to a third person shall also be valid insofar as it has redounded to
the bene t of the creditor. Such bene t to the creditor need not be
proved in the following cases:

(1) If after the payment, the third person acquires the creditors
rights; Effect of payment to a third person.

(2) If the creditor rati es the payment to the third person;

(3) If by the creditors conduct, the debtor has been led to believe
that the third person had authority to receive the payment.

Effect of payment to a third person

Payment to a third person or wrong party is not valid except insofar as it has
redounded to the bene t of the creditor. It is immaterial that the debtor
acted in utmost good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person if the creditor is without fault
or negligence. (Bank of the Phil. Islands vs. Court of Appeals, 232 SCRA 302
[1994].)

That the creditor was beneted by the payment made by the debtor to a
third person is not presumed and must, therefore, be satisfactorily
established by the person interested in proving this fact. In the absence of
such proof, the payment thereof in error and in good faith will not deprive
the creditor of his right to demand payment. (Panganiban vs. Cuevas, 7 Phil.
477 [1906].)
ART. 1244. The debtor of a thing cannot compel the creditor to
receive a different one, although the latter may be of the same
value as, or more valuable than that which is due. In obligations to
do or not to do, an act or forbearance cannot be substituted by
another act or forbearance against the obligees will.

Very prestation due must be complied with.

(1) The rst paragraph refers to a real obligation to deliver a specic thing. A
thing different from that due cannot be offered or demanded against the will
of the creditor or debtor, as the case may be.

(2) The second paragraph refers to personal (positive and negative)


obligations. The act to be performed or the act prohibited cannot be
substituted against the obligees will. (see Art. 1167.)

Art. 1167. If a person obliged to do something fails to do it, the same shall be
executed at his cost. This same rule shall be observed if he does it in
contravention of the tenor of the obligation. Furthermore, it may be decreed
that what has been poorly done be undone.

When prestation may be substituted.

Of course, substitution can be made if the obligee consents. In facultative


obligations, the debtor is given the right to render another prestation in
substitution. (Art. 1206.)

Article 1244 will not also apply in case of waiver by the creditor or
substitution is allowed by stipulation with the consent of the creditor. (see
Arts. 1245, 1291[1].)

ART. 1245. Dation in payment, whereby property is alienated to the


creditor in satisfaction of a debt in money, shall be governed by the
law of sales.
Special forms of payment.

There are four special forms of payment under the Civil Code, namely:

(1) dation in payment (Art. 1245.);

(2) application of payments (Art. 1253.);

(3) payment by cession (Art. 1255.); and

(4) tender of payment and consignation. (Arts. 1256-1261.) Strictly


speaking, application of payments is not a special form of payment.

Art. 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered.

Art. 1255. The debtor may cede or assign his property to his creditors in
payment of his debts. This cession, unless there is stipulation to the
contrary, shall only release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements which, on the effect of the
cession, are made between the debtor and his creditors shall be governed by
special laws.

Art. 1256. If the creditor to whom tender of payment has been made refuses
without just cause to accept it, the debtor shall be released from
responsibility by the consignation of the thing or sum due. Consignation
alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the place
of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

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

(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

Art. 1261. If, the consignation having been made, the creditor should
authorize the debtor to withdraw the same, he shall lose every preference
which he may have over the thing. The co-debtors, guarantors and sureties
shall be released.

Meaning of dation in payment.

Dation in payment (adjudication or dacion en pago) is the conveyance of


ownership of a thing by the debtor to creditor as an accepted equivalent of
performance of a monetary obligation.

It is a special form of payment because it is not the ordinary way of


extinguishing an obligation. A debt in money is satis ed, not by payment of
money (Art. 1244.), but by the transmission of ownership of a thing by the
debtor to the creditor.

ART. 1400. Whenever the person obliged by the decree of annulment


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

Effect of loss of thing to be returned.

(1)If the thing to be returned is lost without the fault of the person obliged
to make restitution (defendant), there is no more obligation to return
such thing. But in such a case, the other cannot be compelled to
restore what in virtue of the decree of annulment he is bound to return.
(Art. 1402)
(2)If it is lost through his fault, his obligation is not extinguished but is
converted into an indemnity for damages consisting of the value of the
thing at the time of the loss with interest from the same date and the
fruits received from the time the thing was given to him to the time of
its loss.

EXAMPLE:

S sold his plow carabao to B. On the petition of S, the contract was annulled
by the court. But the carabao died in the possession of B through his fault.
Under Article 1400, B must pay the value of the carabao at the time of its
death, with interest from the same date. If the carabao had given birth, the
young must also be delivered as the fruit of the said animal.

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

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

Extinguishment of action for annulment.

(1) If the person, who has a right to institute an action for annulment (Art.
1397.), will not be able to restore the thing which he may be obliged to
return in case the contract is annulled because such thing is lost through
his fraud or fault, his right to have the contract annulled is extinguished. If
the loss is not due to his fault or fraud, Article 1402 applies.

The action for annulment shall be extinguished only if the loss is through
the fault or fraud of the plaintiff.

(2) Under the second paragraph, the right of action is based upon the
incapacity of any one of the contracting parties. Whether the right of action
is based upon incapacity or not, the rule is the same. It is no longer
necessary that the fraud or fault on the part of the plaintiff (the incapacitated
person) resulting in the loss must have occurred after having acquired
capacity as under the old Code. This quali cation has been deleted in the
present article. The deletion has made the second paragraph redundant.

Art. 1380. Contracts validly agreed upon may be rescinded in the


cases established by law.

Rescissible Contracts in General. In a rescissible contract, all of the


essential requisites of a contract exist and the contract is valid, but by
reason of injury or damage to either of the contracting parties or to third
persons, such as creditors, it may be rescinded.3 A rescissible contract is,
therefore, a contract which is valid because it contains all of the essential
requisites prescribed by law, but which is defective because of injury or
damage to either of the contracting parties or to third persons, as a
consequence of which it may be rescinded by means of a proper action for
rescission.

Idem; Characteristics. Rescissible contracts, therefore, possess the


following characteristics: (1) Their defect consists in injury or damage either
to one of the contracting parties or to third persons.

(2) Before rescission, they are valid and, therefore, legally effective.

(3) They can be attacked directly only, and not collaterally.

(4) They can be attacked only either by a contracting party or by a third


person who is injured or defrauded.

(5) They are susceptible of convalidation only by prescription, and not by


rati cation.

Idem; Concept of rescission. Rescission is a remedy granted by law to the


contracting parties, and even to third persons, to secure the reparation of
damages caused to them by a contract, even if the same should be valid, by
means of the restoration of things to their condition prior to the celebration
of the contract.

Aquino vs. Taedo 31 Phil. 517

The records show that plaintiff purchased some lands from the defendant
and, as a consequence, took possession of the same and collected their
products. Subsequently, they dissolved the contract of sale, and, as a result
thereof, plaintiff returned the lands, while defendant bound himself to return
the part of the purchase price which plaintiff has paid. The question now is
whether or not the plaintiff is obliged to return to the defendant the products
of the lands which he had collected during his possession. The defendant
contends that he is obliged, invoking the provisions of Art. 1295 (now Art.
1385) of the Civil Code. The Supreme Court, however, ruled:
The rescission mentioned in the contract is not the rescission referred to in
Article 1295 (now Art. 1385). Although the plaintiff and the defendant
employed the word rescind, it has not, in the contract executed by them,
either the scope or the meaning of the word rescission to which Article 1295
(now Art. 1385) refers and which takes place only in the cases mentioned in
the preceding Articles, 1291 and 1292 (now Arts. 1381 and 1382).
Rescission, in the light of these provisions, is a relief which the law grants, on
the premise that the contract is valid, for the protection of one of the
contracting parties and third persons from all injury and damage that the
contract may cause, or to protect some incompatible and preferential right
created by the contract. Article 1295 (now Art. 1385) refers to contracts that
are rescissible in accordance with law in the cases expressly xed thereby,
but it does not refer to contracts that are rescinded by mutual consent and
for the mutual convenience of the contracting parties. The rescission in
question was not originated by any of the causes speci ed in Articles 1291
and 1292 (now Arts. 1381 and 1382), nor is it any relief for the purposes
sought by these articles. It is simply another contract for the dissolution of a
previous one, and its effects, in relation to the contract so dissolved, should
be determined by the agreement made by the parties, or by the application
of other legal provisions, but not by Article 1295 (now Art. 1385), which is
not applicable.

Requisites of rescission.

The following are the requisites in order that the remedy of rescission under
this Chapter may be availed of:

(1) The contract must be validly agreed upon (Art. 1380; see Onglengco vs.
Ozaeta and Hernandez, 70 Phil. 43 [1940].);

(2) There must be lesion or pecuniary prejudice or damage to one of the


parties or to a third person (Art. 1381.);

(3) The rescission must be based upon a case especially provided by law
(Arts. 1380, 1381, 1382.);

(4) There must be no other legal remedy to obtain reparation for the damage
(Art. 1383.);

(5) The party asking for rescission must be able to return what he is obliged
to restore by reason of the contract (Art. 1385, par. 1.);
(6) The object of the contract must not legally be in the possession of third
persons who did not act in bad faith (Ibid., par. 2.); and

(7) The period for ling the action for rescission must not have prescribed.
(Art. 1389.) It has been held that a contract for the sale of personal property
expressly providing that the owner may rescind it if the purchaser fails to
make the payments stipulated therein is not governed by Articles 1380, et
seq., but rather by Articles 1191 and 16003 of the Civil Code. (Guevarra vs.
Pascua, 12 Phil. 311 [1908]; see, however, Art. 1381[5].)

Art. 1381. The following contracts are rescissible:

(1) Those which are entered into by guardians whenever the wards
whom they represent suffer lesion by more than one-fourth of the
value of the things which are the object thereof; (2) Those agreed
upon in representation of absentees, if the latter suffer the lesion
stated in the preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in


any manner collect the claims due them;

(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and approval
of the litigants or of competent judicial authority;

(5) All other contracts specially declared by law to be subject to


rescission.7

Other instances. Some of the specic contracts subject to rescission are as


follows:

Art. 1098. A partition, judicial or extrajudicial, may also be rescinded on


account of lesion, when any one of the co-heirs received things whose value
is less, by at least one-fourth, than the share to which he is entitled,
considering the value of the things at the time they were adjudicated.
Art. 1470. Gross inadequacy of price does not affect a contract of sale,
except as it may indicate a defect in the consent, or that the parties really
intended a donation or some other act or contract. (n)

Art. 1659. If the lessor or the lessee should not comply with the obligations
set forth in Articles 1654 [referring to obligations of the lessor] and 1657
[referring to obligations of the lessee], the aggrieved party may ask for the
rescission of the contract and indemni cation for damages, or only the
latter, allowing the contract to remain in force.

Under Article 1539, the vendee may exercise the remedy of rescission, when
the lack in the area of the real estate sold be not less than one-tenth of that
stated or when the inferior value of the thing sold exceeds one tenth of the
price agreed upon. (see also Arts. 1526, 1534, 1539, 1542, 1556, 1560,
1567.)

Under Article 1599, where there is a breach of warranty by the seller, the
buyer may, at his election, rescind the contract of sale and refuse to receive
the goods or if the goods have already been received, return them or offer to
return them to the seller and recover the price or any part thereof which has
been paid. The refusal of the buyer to pay the remaining balance of the
agreed consideration on the alleged ground of vice or defect in the goods
sold, while at the same time possessing and enjoying the same, is untenable
both on the grounds of law and equity. (Embee Transportation vs. Camacho,
80 SCRA 77 [1977].)

See Articles 1189, No. 4, 1191, and 1382.

Rescission for breach of contract and rescission by reason of lesion


distinguished.

ART. 1382. Payments made in a state of insolvency for obligations to whose


fulllment the debtor could not be compelled at the time they were effected,
are also rescissible.

ART. 1383. The action for rescission is subsidiary; it cannot be instituted


except when the party suffering damage has no other legal means to obtain
reparation for the same.
An heir, therefore, may institute an action for the rescission of a rescissible
contract. As a rule, he may do so as a representative of the person who
suffers from lesion or of the creditor who is defrauded. Suppose, however,
that it can be established that the decedent, during his lifetime, entered into
a contract with another in order to defraud him of his legitime, can he
institute an action for the rescission of such contract after the death of the
decedent? It is clear that in this case the compulsory heir does not have any
right to institute the action as a representative of the decedent, since the
decedent himself does not have the right. It would, however, be possible for
him to institute the action in his own right under No. 3 of Art. 1381 of the
Civil Code. This was recognized in the case of Concepcion vs. Sta. Ana.
According to the Supreme Court:

The reason why a forced heir has the right to institute an action of
rescission is that the right to the legitime is similar to a credit of a creditor.
As Manresa correctly states in commenting on Article 1291 (now Art. 1381)
of the Civil Code: The rights of a forced heir to the legitime are undoubtedly
similar to a credit of a creditor insofar as the right to the legitime may be
defeated by fraudulent contracts, and are superior to the will of those bound
to respect them. In its judgment of October 28, 1897, the Supreme Court of
Spain held that the forced heirs instituted as such by their father in the
latters testament have the undeniable right to institute an action to annul
contracts entered into by the father to their prejudice. As it is seen the action
is called action of nullity, but it is rather an action of rescission taking into
account the purpose for which it is instituted and the confusion of ideas that
has prevailed in this matter.

Nature of action for rescission.

Rescission of contracts under Article 1383 should be distinguished from


rescission of reciprocal obligations under Article 1191. Although both
presuppose contracts validly entered into and subsisting and both require
mutual institution when proper, they are not entirely identical. (Ong vs. Court
of Appeals, 310 SCRA 1 [1999].)

(1) Rescission under article 1383 is not a principal remedy.7 It is only


subsidiary and can be availed of only if the injured party proves that he has
no other legal means aside from rescinding the contract to obtain
satisfaction for his claim or redress for the damage caused8 (see Art. 1177.)
even if the contract is covered by Article 1381. Thus, in a deed of sale with a
deed of mortgage to secure payment of the balance of the purchase price,
which grants to the vendor-mortgagee the right to foreclose in the event of
failure of the vendee-mortgagor to comply with any provision of this
mortgage, the action for rescission cannot be instituted in case of breach of
obligation, in view of the presence of the remedy of foreclosure accorded not
only by law but under the contract between the parties. (Suria vs.
Intermediate Appellate Court, 151 SCRA 661 [1987]; see Art. 1191.)

(2) If the damage is repaired, as in the case of lesion suffered by the ward or
absentee, rescission cannot take place.

(3) A rescissible contract may be assailed directly only by a proper action in


court, and not indirectly or collaterally by way of defense. An independent
action is necessary to prove that a contract is rescissible. It may not be
raised or set up in a summary proceeding through a motion. (Air France vs.
Court of Appeals, 245 SCRA 485 [1995].)

SUBSIDIARY NATURE

Must be the last remedy, of last resort (e.g., an accion pauliana, an action
to rescind contracts made in favour of creditors, and which has the ff.
requisites: a) a judgment, b) the issuance of a trial court of a writ of
execution for the satisfaction of the judgment, c) the failure of the sheriff to
enforce and satisfy the judgment of the court.)

A cause for action in a rescission can only be made in a proper and direct
action led for that purpose, and not on a mere motion incidental to another
case

- Air France v. Court of Appeals: Rescission is a relief which the law grants on
the premise that the contract is valid and for the protection of one of the
contracting parties and third persons from all injury and damage the contract
may cause, or to protect some incompatible and preferential right created by
the contract. An action for rescission may not be raised or set up in a
summary proceeding, through a motion, but in an independent civil action
and only after a full-blown trial

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


the damages caused.
Extent of rescission.

The entire contract need not be set aside by rescission if the damage can be
repaired or covered by partial rescission. The rescission shall only be to the
extent of the creditors unsatis ed credit. The policy of the law is to preserve
or respect the contract, not to extinguish it.

EXAMPLES:

(1) G, the guardian of M, a minor was authorized by the court to sell two
parcels of land valued at P200,000.00 each. G sold the two properties to B
for only P200,000.00. In this case, the entire contract need not be rescinded.
Rescission may properly be applied only to one parcel to cover the damage
caused by G. (see Art. 1381[1].) But if G or B is willing to pay the difference
of P200,000.00, rescission is precluded.

(2) S sold his only property, a parcel of land with an area of 3,000 square
meters, to B to defraud C, a creditor of S. If the value of 1/3 of the land is
suf cient to cover the damage caused to C, then the rescission shall only be
to that extent. The alienation with respect to the 2/3 portion is valid even if B
had acted in bad faith.

Under Article 1384, only the creditor who brought action for rescission
bene t from the rescission; those who are strangers to the action cannot
bene t from its effects. (Siguan vs. Lim, 318 SCRA 725 [1999].)

Art. 1385. Rescission creates the obligation to return the things


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

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss.

Once a contract is rescinded on the ground of lesion, there arises an


obligation on the part of both contracting parties to return to the other the
object of the contract, including fruits or interests. Consequently, rescission
is not possible, unless he who demands it can return whatever he may be
obliged to restore. Thus, where a guardian alienates certain properties of a
minor for P85,000 to a certain person, and subsequently, the minor, upon
reaching the age of majority, brings an action for the rescission of the
contract on the ground of lesion, the effect if rescission is granted would be
the restoration of things to their condition prior to the celebration of the
contract. But if the plaintiff cannot refund the amount including interest, the
action will certainly fail because positive statutory law, no less than uniform
court decisions, require, as a condition precedent to rescission, that the
consideration received should be refunded.

Effect of rescission.

(1)Obligation of mutual restitution. Rescission creates the obligation of


mutual restitution. There is no obligation to restore if nothing has been
received. When the court declares a contract rescinded, the parties
must return to each other (a) the object of the contract with its fruits
and (b) the price thereof with legal interest. For example, in a contract
of sale rescinded by the buyer, the seller has the obligation to return
the purchase price or amount received plus legal interest from the date
he received notice of rescission up to the date of the return.

The purpose of rescission is to place the parties as far as practicable in


their original situation, that is, the parties are restored to the status quo
ante. (see Barredo vs. Leao, 431 SCRA 106 [2004].). The law presumes
that the party who received the object of the contract has enjoyed the
fruits thereof while the other has used the money which is the price of the
object.

With respect to the fruits, the rules on possession govern. (see Art. 544, et
seq.) The word fruits, as used in Article 1385, should be deemed to
include not only natural, civil, and industrial fruits but also the accessions
and accessories of the things to be returned. (see Arts. 1164, 1166.)
The rule in Article 1385 has been applied to rescission of reciprocal
obligations under Article 1191. (Co vs. Court of Appeals, 312 SCRA 528
[1999]; Laperal vs. Solid Homes, Inc., 460 SCRA 375 [2005].) When it is no
longer possible to return the object of the contract, an indemnity for
damages operates as restitution. The important consideration is that the
indemnity for damages should restore to the injured party what was lost.
(Coastal Paci c Trading, Inc. vs. Southern Rolling Mills, Co., Inc., 497 SCRA
11 [2006].) (2) Abrogation of contract. When a rescission is granted, it
has the effect of abrogating the contract in all respects. The party seeking
rescission cannot ask performance as to part and rescission as to
remainder (Grace Park Engineering Co., Inc. vs. Dimaporo, 107 SCRA 266
[1981].) except as provided in Article 1384.

Article 1385 embodies the precept in Article 1398 in reference to


annulment of contracts. (Bucoy vs. Paulino, 23 SCRA 248 [1968].)

(3) Obligation of third person to restore. The clause he who demands


rescission applies also to a third person. Of course, if the third person has
nothing to restore, the article does not apply. The law does not require the
impossible. (Memorandum of the Code Commission, March 8, 1951, p.
20.) Thus, where a contract is rescinded on the ground that it has been
entered into in fraud of creditors, the plaintiff-creditor has no obligation to
return anything since he has received nothing.

Rescission different from mutual dissent.

Rescission must be distinguished from mutual dissent where the parties


agree to cancel their contract and mutually return the object and cause
thereof.

Article 1385 refers to contracts that are rescissible for causes speci ed in
Articles 1381 and 1382 but it does not refer to contracts that are dissolved
by mutual consent of the parties. Rather, the mutual restoration is in
consonance with the basic principle that when an obligation has been
extinguished or resolved, it is the duty of the court to require the parties to
surrender whatever they may have received from the other so that they may
be restored as far as practicable to their original situation. (Floro Enterprises,
Inc. vs. Court of Appeals, 249 SCRA 354 [1995].)
ART. 1386. Rescission referred to in Nos. 1 and 2 of Article 1381
shall not take place with respect to contracts approved by the
courts.

Contracts approved by the courts.

If a contract entered into in behalf of a ward or absentee has been approved


by the court, rescission cannot take place because it is valid whether there is
lesion or not.

The law presumes that the court is acting in the interests of the ward or
absentee when it approves the contract in spite of the lesion. (see Sec. 1,
Rule 95, Rules of Court.)

Art. 1387. All contracts by virtue of which the debtor alienates property by
gratuitous title are presumed to have been entered into in fraud of creditors,
when the donor did not reserve suf cient property to pay all debts
contracted before the donation.

Alienations by onerous title are also presumed fraudulent when made by


persons against whom some judgment has been rendered in any instance or
some writ of attachment has been issued. The decision or attachment need
not refer to the property alienated, and need not have been obtained by the
party seeking the rescission.

In addition to these presumptions, the design to defraud creditors may be


proved in any other manner recognized by the law of evidence.

When alienation presumed in fraud of creditors.

The general rule is that fraud is not presumed. As fraud is criminal in nature,
it must be proved by clear and preponderance of evidence. (Bobis vs.
Provincial Sheriff of Camarines Norte, 121 SCRA 28 [1983].)

(1) Instances not exclusive. Article 1387 establishes presumptions of fraud


in the case of alienation by the debtor of his property. (pars. 1 and 2.)
However, the instances mentioned are not exclusive of others that may be
proved in any other manner recognized by the law of evidence. (par. 3; see
Art. 1177.) The presumptions are disputable and may be rebutted by
contrary evidence. (infra.)

(2) Presumption not applicable in the absence of transfer. The


presumption in Article 1387 applies only when there has in fact been an
alienation or transfer, whether gratuitously or by onerous title. (Prov. Sheriff
of Pampanga vs. Court of Appeals, 22 SCRA 798 [1968].) The effect of the
presumption is to shift the burden to the one who alienated to prove that the
transfer was not fraudulently made. (Lim vs. Court of Appeals, 507 SCRA 38
[2006].)

(3) Only actual creditors can ask for rescission. Under the Civil Code (Arts.
1381[3], 1387.), only actual creditors can ask for the rescission of the
conveyance made by their debtors in favor of strangers. The waiver and
release made previously by the creditor of the credit he held against the
debtor operate to deprive the rescissory action of any legal basis. (see
Marsman Investments Ltd. vs. Phil. Abaca Development Co., 9 SCRA 783
[1963]; see Panlilio vs. Victorio, 35 Phil. 706 [1916].)

(4) Vendor, an indispensable party in action for rescission of sale. An


action for rescission of sale under Article 1387 cannot be nally determined
without the presence in court of the vendor. For any decision on the action or
claim for damage would affect him. He is entitled to be heard. (see Gigante
vs. Republic Savings Bank, 26 SCRA 328 [1968].)

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of
creditors shall indemnify the latter for damages suffered by them on account
of the alienation, whenever, due to any cause, it should be impossible for
him to return them.

If there are two or more alienations, the rst acquirer shall be liable rst, and
so on successively.

Meaning of bad faith.

Bad faith does not simply connote bad judgments or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It
means breach of a known duty through some motive or interest or ill-will. It
partakes of the nature of fraud. (Board of Liquidators vs. Heirs of M.M. Kalaw,
20 SCRA 987 [1967]; Ong Yiu vs. Court of Appeals, 91 SCRA 233 [1979].)

Bad faith is a state of mind indicated by acts and circumstances and can be
demonstrated, not only by direct proof, but also by circumstantial evidence.
(De Laig vs. Court of Appeals, 82 SCRA 294 [1978].)

Meaning of purchaser in good faith.

A purchaser in good faith is one who buys the property of another without
notice that some other person has a right to, or interest in, such property
and pays a full and fair price for the same, at the time of such purchase, or
before he has notice of the claim or interest of some other person in the
property. (De Recinto vs. Inciong, 77 SCRA 196 [1977].)

A partys mere refusal to believe that a defect exists or his willful closing of
his eyes to the possibility of the existence of a defect in his vendors title, will
not make him an innocent purchaser for value, if it afterwards develops that
the title was in fact defective. (Barrios vs. Court of Appeals, 78 SCRA 427
[1977]; J.M. Tuazon & Co., Inc. vs. Court of Appeals, 93 SCRA 146 [1979].)

Art. 1389. The action to claim rescission must be commenced within four
years. For persons under guardianship and for absentees, the period of four
years shall not begin until the termination of the formers incapacity, or until
the domicile of the latter is known.

Prescriptive Period. As a general rule, the action for the rescission of a


contract must be commenced within four years. Under No. 1 of Art. 1391,
this period must be counted from the time of the termination of the
incapacity of the ward; under No. 2, it must be counted from the time the
domicile of the absentee is known; under Nos. 3 and 4 and also under Art.
1382, it must be counted from the time of the discovery of the fraud. In
certain cases of contracts of sale which are specially declared by law to be
rescissible, however, the prescriptive period for the commencement of the
action is six months or even forty days, counted from the day of delivery.

Period for ling action for rescission. As a general rule, the action to rescind
contracts must be commenced within four (4) years from the date the
contract was entered into. The exceptions are:

(1) For persons under guardianship, the period shall begin from the
termination of incapacity; and

(2) For absentees, from the time the domicile is known.

Laches (see Title IV.) bars an action for rescission or annulment of a contract.
(see Art. 1391.)

Persons entitled to bring the action for rescission. The action for rescission
may be brought by: (1) the injured party or the defrauded creditor;

(2) his heirs, assigns, or successors in interest; or

(3) the creditors of the above entitled to subrogation (accion subrogatoria).


(see Art. 1177.)

CHAPTER 7

VOIDABLE CONTRACTS

Voidable Contracts in General. Voidable contracts may be de ned


as those in which all of the essential elements for validity are
present, although the element of consent is vitiated either by lack
of legal capacity of one of the contracting parties, or by mistake,
violence, intimidation, undue in uence, or fraud.

Idem; Characteristics. Voidable contracts possess the following


characteristics:

(1) Their defect consists in the vitiation of consent of one of the


contracting parties.
(2) They are binding until they are annulled by a competent court.

(3) They are susceptible of convalidation by ratication or by


prescription.

Their defect or voidable character cannot be invoked by third


persons.

Idem; Distinguished from rescissible contracts. Voidable and


rescissible contracts may be distinguished from each other in the
following ways:

(1) In a voidable contract the defect is intrinsic because it consists


of a vice which vitiates consent, while in a rescissible contract the
defect is external because it consists of damage or prejudice either
to one of the contracting parties or to a third person.

(2) In the former the contract is voidable even if there is no damage


or prejudice, while in the latter the contract is not rescissible if
there is no damage or prejudice.

(3) In the former the annulability of the contract is based on the


law, while in the latter the rescissibility of the contract is based on
equity. Hence, annulment is not only a remedy but a sanction, while
rescission is a mere remedy. Public interest, therefore,
predominates in the rst, while private interest predominates in
the second.

(4) The causes for annulment are different from the causes for
rescission.

(5) The former is susceptible of rati cation, while the latter is not.

(6) Annulment may be invoked only by a contracting party, while


rescission may be invoked either by a contracting party or by a third
person who is prejudiced.

Art. 1390. The following contracts are voidable or annullable, even


though there may have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to
a contract;

(2) Those where the consent is vitiated by mistake, violence,


intimidation, undue inuence or fraud.

These contracts are binding, unless they are annulled by a proper


action in court. They are susceptible of ratication.

It must be observed that in a voidable contract all of the essential


requisites for validity are present, although the requisite of consent
is defective because one of the contracting parties does not possess
the necessary legal capacity, or because it is vitiated by mistake,
violence, intimidation, undue in uence or fraud. Consequently, if
consent is absolutely lacking or simulated, the contract is
inexistent, not voidable.

Thus, there are only two (2) types of voidable contracts.

Meaning of annulment.

Annulment is a remedy as well as a sanction provided by law, for


reason of public interest, for the declaration of the inef cacy of a
contract based on a defect or vice in the consent of one of the
contracting parties in order to restore them to their original position
in which they were before the contract was executed.

Differences between action for annulment and action for rescission.

They are the following:

(1) The rst is based on vitiation of consent (Art. 1390.), while the
second, on lesion to one of the parties or to a third person (Art.
1381.);

(2) The rst may be brought only by a party to the contract (Arts.
1390, 1397.), while the second, also by a third person who suffered
damage by reason of the contract (Art. 1381.);
(3) The rst is a principal action (Art. 1390.), while the second is
merely subsidiary (Art. 1383.);

(4) The rst presupposes that the contract is legally defective (Art.
1390.), while the second, that the contract was validly entered into
(Art. 1380.);

(5) The rst seeks the imposition of sanction by law on the guilty
party for reason of public interest (Ibid.), while the second, is a
remedy allowed by law on ground of equity (see Art. 1383.);

(6) The rst is allowed even if the plaintiff has been indemni ed
(see Art. 1390.), while the second is barred by such indemni cation
(Arts. 1383, 1384.)

Art. 1391. The action for annulment shall be brought within four
years.

This period shall begin:

In cases of intimidation, violence or undue inuence, from the time


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

And when the action refers to contracts entered into by minors or


other incapacitated persons, from the time the guardianship ceases.

Period for ling action for annulment.

Direct court action is necessary to annul a voidable contract, and


until annulled or set aside by the court, a party cannot relieve
himself from the obligations arising therefrom. (see Art. 1410; Rio
Grande Rubber Estate Co., Inc. vs. Board of Liquidators, 104 Phil.
863 [1958].) A voidable contract may be collaterally attacked by way
of defense to an action under the contract.

A voidable contract, like unenforceable and void contracts (infra.),


may be attacked indirectly or collaterally by way of defense. Article
1391 presupposes, however, that no acquisitive prescription has set
in, for after the favorable effects of acquisitive prescription have set
in, rights of ownership over a property are rendered indisputable.
(Heirs of Placido Miranda vs. Court of Appeals, 255 SCRA 368
[1996].)
Art. 1392. Rati cation extinguishes the action to annul a voidable
contract.19

Meaning and effect of rati cation.

(1) Rati cation means that one under no disability voluntarily


adopts and gives sanction to some defective or unauthorized
contract, act, or proceeding which, without his subsequent sanction
or consent, would not be binding or him. It is this voluntary choice,
knowingly made, which amounts to a rati cation of what was
theretofore unauthorized and becomes the authorized act of the
party so making the rati cation. (see Maglucot-Aw vs. Maglucot,
329 SCRA 78 [2000]; Coronel vs. Constantino, 397 SCRA 128 [2003].)

(2) Rati cation cleanses the contract from all its defects from the
moment it was constituted. (Art. 1396.) The contract thus becomes
valid. (Art. 1390.) Hence, the action to annul is extinguished. (Art.
1392; Tan Ah Chan vs. Gonzalez, 52 Phil. 180 [1928].)

Art. 1393. Rati cation may be effected expressly or tacitly. It is


understood that there is a tacit rati cation if, with knowledge of
the reason which renders the contract voidable and such reason
having ceased, the person who has a right to invoke it should
execute an act which necessarily implies an intention to waive his
right.

Kinds of rati cation.

They are:

(1) Express. when the rati cation is manifested in words or in


writing; or

(2) Implied or tacit. It may take diverse forms, such as by silence


or acquiescence; by acts showing adoption or approval of the
contract; or by acceptance and retention of bene ts owing
therefrom. (Acuna vs. Batac Producers Cooperative Marketing
Assoc., Inc., 20 SCRA 526 [1967]; see Cadano vs. Cadano, 49 SCRA
33 [1973].) A seller of property cannot negotiate for an increase in
the price in one breath and in the same breath contend that the
contract of sale is void. (Francisco vs. Herrera, 392 SCRA 317
[2002].)

Requisites of ratication.

(1) The requisites for implied rati cation are the following:

(a) There must be knowledge of the reason which renders the


contract voidable;

(b) Such reason must have ceased; and

(c) The injured party must have executed an act which necessarily
implies an intention to waive his right.

Art. 1394. Rati cation may be effected by the guardian of the


incapacitated person.

Party who may ratify.

(1) A contract entered into by an incapacitated person may be rati


ed by:

(a) the guardian; or

(b) the injured party himself, provided, he is already capacitated.

As legal representatives of their wards, guardians have the power


to contract on their behalf. Hence, they may also ratify contracts
entered into by their wards. (see Art. 1407.)

Art. 1395. Rati cation does not require the conformity of the
contracting party who has no right to bring the action for
annulment.
Conformity of guilty party to rati cation not required.

Rati cation is a unilateral act by which a party waives the defect in


his consent. The consent of the guilty party is not required;
otherwise, he can conveniently disregard his contract by the simple
expedient of refusing to give his conformity.

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

Effect of rati cation retroactive.

Ratication purges the contract of all its defects (Art. 1390.) from
the moment it was executed. It extinguishes the action to annul.
(Art. 1392.) In other words, the effect of rati cation is to make the
contract valid from its inception subject to the prior rights of third
persons.

Art. 1397. The action for the annulment of contracts may be


instituted by all who are thereby obliged principally or subsidiarily.
However, persons who are capable cannot allege the incapacity of
those with whom they contracted; nor can those who exerted
intimidation, violence, or undue in uence, or employed fraud, or
caused mistake base their action upon these aws of the contract.

According to the Supreme Court, a person who is not a party obliged


principally or subsidiarily under a contract may exercise an action
for annulment of the contract if he is prejudiced in his rights with
respect to one of the contracting parties, and can show detriment
which would positively result to him from the contract in which he
has no intervention. Thus, where the remaining partners of a
partnership executed a chattel mortgage over the properties of the
partnership in favor of a former partner to the prejudice of creditors
of the partnership, the latter have a perfect right to le the action
to nullify the chattel mortgage.
Problem No. 2. Pedro sold a piece of land to his nephew Quintin, a
minor. One month later, Pedro died. Pedros heirs then brought an
action to annul the sale on the ground that Quintin was a minor and
therefore without legal capacity to contract. If you are the judge,
would you annul the sale? (1974 Bar Problem)

Answer If I am the judge, I will not annul the sale. The Civil Code
in Art. 1397 is explicit. Persons who are capable cannot allege the
incapacity of those with whom they contracted. True, Pedro who
sold the land to the minor Quintin is already dead, and it is his heirs
who are now assailing the validity of the sale. However, under the
principle of relativity of contracts recognized in Art. 1311 of the
Civil Code, the contract takes effect not only between the
contracting parties, but also between their assigns and heirs.

( Note: Another way of answering the above problem would be to


state the two requisites which must concur in order that a voidable
contract may be annulled. These requisites are: (a) that the plaintiff
must have an interest in the contract; and (b) that the victim or the
incapacitated party must be the person who must assert the same.
The second requisite is lacking in the instant case.)

Party entitled to bring an action to annul.

Two different requisites are required to confer the necessary


capacity to bring an action for annulment of a contract, to wit:

(1) The plaintiff must have an interest (see Art. 1311.) in the
contract; and

(2) The victim and not the guilty party or the party responsible for
the defect is the person who must assert the same. (8 Manresa 801;
Wolfson vs. Estate of Martinez, 20 Phil. 340 [1911].)
The guilty party, including his successors-in-interest, cannot ask for
annulment. This rule is sustained by the principle that he who
comes to court must do so with clean hands. Thus, a person who
employed fraud cannot base his action for annulment of a contract
upon such aw of the contract.

Right of successors-in-interest to bring action.

The successors-in-interest of a party to a voidable contract may sue


for the annulment of the contract. (Descutido vs. Baltazar, 1 SCRA
1174 [1961].)

The testamentary or legal heir continues in law as the juridical


personality of his predecessor in interest, who transmits to him
from the moment of his death such of his rights, actions and
obligations as are not extinguished thereby. Hence, he can bring an
action to annul a contract entered into by his predecessor in
interest in representation of the latter. But one (i.e., nephew or
niece) who is not alleged to be a compulsory or forced heir of the
deceased who, therefore, could dispose of his estate without further
limitations than those established by law, has no legal capacity to
challenge the validity of deeds of sale executed by the latter to
which the former was not a party as he is not principally or
subsidiarily bound thereby. (Velarde vs. Paez, 101 Phil. 376 [1957].)

Art. 1402. As long as one of the contracting parties does not restore
what in virtue of the decree of annulment he is bound to return, the
other cannot be compelled to comply with what is incumbent upon
him.

Effect of Failure to Make Restitution.


(see Art. 1400 and 1401)

Idem; Where loss is due to fault of plaintiff. However, if the loss of the
thing is due to the fraud or fault of the party who is entitled to institute the
proceedings, according to the rst paragraph of Art. 1401, the action for
annulment shall be extinguished. There are, therefore, three modes whereby
such action may be extinguished. They are: (1) prescription; (2) rati cation;
and (3) the loss of the thing which is the object of the contract through the
fraud or fault of the person who is entitled to institute the action.

Idem; Where loss is due to fortuitous event. If it is the plaintiff who cannot
return the thing because it has been lost through a fortuitous event, the
contract may still be annulled, but with this difference he must pay to the
defendant the value of the thing at the time of the loss, but without interest
thereon. According to Dr. Tolentino, if the plaintiff offers to pay the value of
the thing at the time of its loss as a substitute for the thing itself, the
annulment of the contract would still be possible, because, otherwise, we
would arrive at the absurd conclusion that an action for annulment would in
effect be extinguished by the loss of the thing through a fortuitous event.

(see Dumasug vs. Modelo, 34 Phil. 252 [1916].)

ART. 1403. The following contracts are unenforceable, unless they are
ratied:

(1) Those entered into the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from
the making thereof;
(b) A special promise to answer for the debt, default, or miscarriage of
another;

(c) An agreement made in consideration of marriage, other than a mutual


promise to marry;

(d) An agreement for the sale of goods, chattels, or things in action, at a


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

(e) An agreement for the leasing for a longer period than one year, or for the
sale of real property or of an interest therein; (f) A representation as to the
credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

Meaning of unenforceable contracts.

Unenforceable contracts are those that cannot be enforced in court or sued


upon by reason of defects provided by law until and unless they are rati ed
according to law.

CHAPTER 8

UNENFORCEABLE CONTRACTS

2004 bar exam-(Distinguis unenforceable contracts from annulable


contracts?

Ans. An unenforceable contract may be distinguished from a voidable


contract in the following ways:
(1) An unenforceable contract cannot be enforced by a proper action in
court, while a voidable contract can be enforced, unless it is annulled.

(2) The causes for the unenforceable character of the former are different
from the causes for the voidable character of the latter.

NOTE-Research for best answer,rather than Jurado.

Unenforceable Contracts in General. Unenforceable contracts are those


which cannot be enforced by a proper action in court, unless they are rati
ed, because, either they are entered into without or in excess of authority or
they do not comply with the statute of frauds or both of the contracting
parties do not possess the required legal capacity.1 As regards the degree of
defectiveness, they occupy an intermediate ground between voidable and
void contracts

Idem; Characteristics. Although they are essentially different from each


other, yet all unenforceable contracts possess the following characteristics:

(1) They cannot be enforced by a proper action in court;

(2) They are susceptible of rati cation;

(3) They cannot be assailed by third persons.

Art. 1403. The following contracts are unenforceable, unless they are ratied:

(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers;

(2) Those that do not comply with the Statute of Frauds as set forth in this
number. In the following cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some note or memorandum
thereof, be in writing, and subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
(a) An agreement that by its terms is not to be performed within a year from
the making thereof;

(b) A special promise to answer for the debt, default, or miscarriage of


another,

(c) An agreement made in consideration of marriage, other than a mutual


promise to marry;

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

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

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

(3) Those where both parties are incapable of giving consent to a contract.

Meaning of unenforceable contracts.

Unenforceable contracts are those that cannot be enforced in court or sued


upon by reason of defects provided by law until and unless they are rati ed
according to law.

Meaning of unenforceable contracts.

Unenforceable contracts are those that cannot be enforced in court or sued


upon by reason of defects provided by law until and unless they are rati ed
according to law.

Binding force of unenforceable contracts.

While rescissible and voidable contracts are valid and enforceable unless
they are rescinded or annulled, unenforceable contracts, although valid, are
unenforceable unless they are ratied.
The mere lapse of time cannot give effect to such a contract. The defect is of
a permanent nature and will exist as long as the unenforceable contract is
not duly rati ed by the person in whose name the contract was executed.

Kinds of unenforceable contracts.

Under Article 1403, the following contracts are unenforceable:

(1) Those entered into in the name of another by one without or acting in
excess of authority; (2) Those that do not comply with the Statute of Frauds;
and

(3) Those where both parties are incapable of giving consent.

Meaning of unauthorized contracts.

Unauthorized contracts are 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.

They are governed by Article 1317 and the principles of agency. (Art. 1404;
see Arts. 1868, 1869, 1881, 1882, 1883, 1900, 1901.)

Statute of Frauds.

The term statute of frauds is descriptive of statutes which require certain


classes of contracts to be in writing. This statute does not deprive the parties
of the right to contract with respect to the matters therein involved, but
merely regulates the formalities of the contract necessary to render it
enforceable. The effect of non-compliance is simply that no action can
proved unless the requirement is complied with.

Thus, they are included in the provisions of the New Civil Code regarding
unenforceable contracts, more particularly Art. 1403(2). (Rosencor
Development vs. Inquing, 354 SCRA 119 [2001]; Litonjua vs. Fernandez, 427
SCRA 478 [2004]; Torcuator vs. Bernabe, 459 SCRA 439 SCRA [2005];
Pealber vs. Ramos, 577 SCRA 509 [2009].) Evidence of the agreement
cannot be received without the writing or a secondary evidence of its
contents. (Swedish Match, AB vs. Court of Appeals, 441 SCRA 1 [2004].)

Purpose. The Statute of Frauds has been enacted not only to prevent
fraud and perjury in the enforcement of obligations depending for their
evidence on the unassisted memory of witness but also to guard against the
mistakes of honest men by requiring that certain agreements speci ed (Art.
1403, No. 2[a-f].) must be in writing signed by the party to be charged;
otherwise, they are unenforceable by action in court. (see Shoemaker vs. La
Tondea, Inc., 68 Phil. 24 [1939]; Rosencor Development Corporation vs.
Inquing, supra.) Unless they be in writing, there may be no palpable
evidence of the intention of the contracting parties and the court must
perforce rely upon no other evidence than the mere recollection or memory
of witnesses, which in many times faulty and unreliable. (see Facturan vs.
Sabanal, 81 Phil. 513 [1948].) Thus, by requiring that such agreements can
only be proved by a writing, the object is effectually attained since the
writing becomes its own interpreter.

A note or memorandum is not necessary for the enforceability of a contract


of partition as it is not one of the contracts mentioned in Article 1403 which
enumerates the limited instances when written proof of a contract is
essential for enforceability. (Tan vs. Lim, 296 SCRA 455 [1998].) this fucking
mean that only those enumerated under this article must comply with the
statute of fraud.

The Statute of Frauds and the rules of evidence do not require the
presentation of receipts in order to prove the existence of a recruitment
agreement and the procurement of fees in illegal recruitment cases. The
amounts may consequently be proved by the testimony of witnesses. (People
vs. Mercado, 304 SCRA 504 [1999].)

It is applicable only to executory contracts (where no performance has as yet


been made by both parties) and not to contracts which are totally
(consummated) or partially performed.

The reason is that partial performance, like the writing, furnishes reliable
evidence of the intention of the parties or the existence of the contract. A
contrary rule would result in injustice or unfairness to the party who has
performed his obligation (see Art. 1405; see Espiritu vs. CFI of Cavite, 47
SCRA 354 [1972].), for it would enable the other to keep the bene ts already
derived by him from the transaction, and at the same time evade the
obligations assumed or contracted by him thereby. So that when the party
concerned has pleaded partial performance, such party is entitled to a
reasonable chance to establish by parol evidence the truth of his allegations,
as well as the contract itself. The partial performance may be proved by
either oral or documentary evidence. (Carbonnel vs. Poncio, 103 Phil. 655
[1988]; also Paterno vs. Jao Yan, 1 SCRA 631 [1961]; Khan vs. Asuncion, 19
SCRA 996 [1991].)

Where the facts alleged in the complaint are constitutive of a consummated


contract of sale, oral evidence is not forbidden by the statute and may not be
excluded in court. (Inigo vs. Estate of Maloto, 21 SCRA 246 [1967]; Victoriano
vs. Court of Appeals, 194 SCRA 19 [1913].)

The defense of the Statute of Frauds is personal to the parties and cannot be
interposed by strangers to the contract. (Art. 1408.)

Problem A and B entered into a verbal contract whereby A agreed to


sell to B his only parcel of land for P20,000.00 and B agreed to buy at the
aforementioned price. B went to the bank, withdrew the necessary amount,
and returned to A for the consummation of the contract. A, however, had
changed his mind and refused to go through with the sale. Is the agreement
valid? Will an action by B against A for speci c performance prosper?
Reason. (1982 Bar problem)

Answer It must be observed that there are two questions which are asked.
They are:

(1) Is the agreement valid? The answer is yes. It is a time honored rule that
even a verbal agreement to sell land is valid so long as there is already an
agreement with respect to the object and the purchase price.

(2) Will an action by B against A for speci c performance prosper? The


answer is no, unless it is rati ed. The reason is obvious. The agreement,
being an agreement of sale of real property, is covered by the Statute of
Frauds. It cannot, therefore, be enforced by a court action because it is not
evidenced by any note or memorandum or writing properly subscribed by
the party charged.

Carbonnel vs. Poncio, et al. 103 Phil. 655

The records show that plaintiff purchased from defendant Poncio a parcel of
land; that she paid part of the agreed price with the understanding that she
will pay the balance upon the execution of the deed of conveyance; that
defendant refused to execute the deed in spite of repeated demands; and
that defendant sold the land to his co-defendants who knew of the rst sale.
Defendants, however, contend that plaintiffs claim is unenforceable under
the Statute of Frauds.
Held: It is well settled in this jurisdiction that the Statute of Frauds is
applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil. 512),
not to contracts that are totally or partially performed. (Almirol, et al. vs.
Monserrat, 48 Phil. 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil. 387;
Diana vs. Macalibo, 74 Phil. 70) The reason is simple. In executory contracts
there is a wide eld for fraud because unless they be in writing there is no
palpable evidence of the intention of the contracting parties. The statute has
precisely been enacted to prevent fraud. (Moran, Comments on the Rules of
Court, Vol. III, 1957 ed., p. 178) However, if a contract has been totally or
partially performed, the exclusion of parol evidence would promote fraud or
bad faith, for it would enable the defendant to keep the bene ts already
derived by him from the transaction in litigation, and, at the same time,
evade the obligations, responsibilities or liabilities assumed or contracted by
him thereby. So that when the party concerned has pleaded partial
performance, such party is entitled to a reasonable chance to establish by
parol evidence the truth of his allegation, as well as the contract itself.

Problem Can an oral sale of land be judicially enforced as between the


contracting parties, if the land has not been delivered but the buyer has paid
ten percent (10%) of the purchase price? (1974 Bar problem)

Answer Yes, an oral sale of land where the land has not been delivered but
the buyer has paid ten percent (10%) of the purchase price may be judicially
enforced. Well-settled is the rule that the Statute of Frauds by virtue of which
oral contracts are unenforceable by court action is applicable only to those
contracts which are executory and not to those which have been
consummated either totally or partially. The reason is obvious. In effect,
there is already a rati cation of the contract because of acceptance of
bene ts. As a matter of fact, this reason is now embodied in the New Civil
Code. According to Art. 1405 of said Code, contracts infringing the Statute of
Frauds are rati ed by the failure to object to the presentation of oral
evidence to prove the same, or by the acceptance of bene ts under them.

Problem O verbally leased his house and lot to L for two years at a
monthly rental of P250.00 a month. After the rst year, O demanded a
rental of P500.00 claiming that due to the energy crisis, with the sudden
increase in the price of oil, which no one expected, there was also a general
increase in prices. O proved an in ation rate of 100%. When L refused to
vacate the house, O brought an action for ejectment. O denied that they
had agreed to a lease for two years. Question No. 1 Can the lessee testify
on a verbal contract of lease? Reason. (1981 Bar problem)

Answer Yes, the lessee L may testify on the verbal contract of lease.
Well-settled is the rule that the Statute of Frauds by virtue of which oral
contracts (such as the contract in the instant case) are unenforceable by
court action is applicable only to those contracts which have not been
consummated, either totally or partially. The reason for this is obvious. In
effect, there is already a rati cation of the contract by acceptance of bene
ts. Here L has been paying to O a monthly rental of P250.00 for one year.
The case is, therefore, withdrawn from the coverage of the Statute of Frauds.

( Note: The above answer is based on Arts. 1403, No. 2 and 1405 of the Civil
Code, and on decided cases.) Question No. 2

Assuming that O admits the two-year contract, is he justi ed in increasing


the rental? Why? (1981 Bar problem) Answer

Yes, O is justi ed in increasing the monthly rental. Since it is admitted that


the contract of lease is for a de nite term or period of two years, it is crystal
clear that the case is withdrawn from the coverage of the new rental law.
Now during the hearing of the case, O was able to prove an in ation rate
of 100%. Therefore, an increase is justied.

ILLUSTRATIVE CASES:

1. Verbal contract of sale of land is adduced to show the lawful


possession of applicants entitling them to have their title thereto
registered.

Facts: X, etc., presented evidence that they have been in possession of


the parcel of land in question since the year 1912 when Y, before his
death, delivered to them said land pursuant to a verbal contract of sale
for the price of P1,500.00 payable by installments, of which X, etc., had
then paid to Y P500.00 and the latter delivered to them the documents
pertaining to the land; and that since their possession and before
them, that of Y, under a claim of ownership, had been exclusive and
continuous, they were entitled to have their title over said parcel of
land registered, as applied for in the registration proceeding.

Issue: May X, etc., introduce evidence of the alleged verbal contract of


sale?
Held: Yes. The contract was not covered by the Statute of Frauds
because the contract was partially executed. Furthermore, the verbal
contract was adduced not for the purpose of enforcing performance
thereof, but as the basis of the lawful possession of the applicants (X,
etc.) entitling them to have the land thereby sold registered in their
own names. (Almirol and Cario vs. Monserrat, 48 Phil. 67 [1925].)

2. Verbal agreement sought to be enforced refers not to a sale but to a


promise to convey real property for services rendered.

Facts: In his complaint, X alleged as a cause of action that in 1952 the


defendants availed themselves of his services as an intermediary with
the Deudors to work for the amicable settlement of a civil case and
notwithstanding his having performed his services, as in fact a
compromise agreement was entered into, the defendants had refused
to convey to him the 3,000 square meters of land which the
defendants had promised to do within 10 years from the signing of the
agreement. In their motion to dismiss, the defendants alleged that the
alleged agreement about Xs services was unenforceable under the
Statute of Frauds, there being nothing in writing about it. The trial
court dismissed the complaint.

Issue: Is the Statute of Frauds applicable?

Held: No. It is elementary that the Statute refers to speci c kinds of


transactions and that it cannot apply to any that is not enumerated
therein. In the instant case, what X is trying to enforce is the delivery
to him of 3,000 square meters of land which he claims defendants
promised to do in consideration of his services as mediator or
intermediary in effecting a compromise of the civil case between the
defendants and the Deudors. In no sense may such alleged contract be
considered as being a sale of real property or of any interest therein.
Indeed, not all dealings involving interest in real property come under
the Statute. (Cruz vs. J.M. Tuazon & Co., Inc. and G. Araneta, Inc., 76
SCRA 543 [1977].)

Note: Marriage settlements (also called ante-nuptial contracts) are


agreements entered into the future spouses before the celebration of
marriage and in consideration thereof, for the purpose of xing the
conditions of their property relations both with respect to their present
and future property. (See Arts. 74-76, Family Code.)

Donations propter nuptias or donations by reason of marriage are


those which are made before its celebration, in consideration of the
same and in favor of one or both of the future spouses. (Art. 82, Ibid.)

Both are agreements made in consideration of marriage and are,


therefore, covered by the Statute of Frauds.

Agreements entered into involved both an agreement in consideration


of marriage and a mutual promise to marry.
Facts: D (daughter of F) and F, on one side, and S (son of G) and G, on
the other hand, agreed on the marriage between D and S, provided,
that S and G would improve the formers house, spend for the
wedding, etc. S and G brought action against D and F to recover
damages resulting from heir refusal to carry out their promises. S and
G alleged that they made the improvements but D and F refused to
carry out the previously agreed marriage. The agreement was not in
writing.

Issue: May the agreement be proved orally?

Held: It depends. In this case, there are actually two agreements. For
breach of the mutual promise to marry, S may sue D for damages,
even if the promise was orally made. The agreement between G and S
and the defendants D and F is in consideration of the marriage
between D and S; and being oral, is unenforceable. Evidently, as to G
and F, the action cannot be maintained on the theory of mutual
promise to marry.

Neither may it be regarded as action by G against D on a mutual


promise to marry. S may continue his action against D for such
damages as may have resulted from her failure to carry out their
mutual matrimonial promises. (Cabague vs. Auxilio, 92 Phil. 295
[1952]; see Hermosisima vs. Court of Appeals, 109 Phil. 629 [1960].)

(4) Agreement for sale of goods, etc. at price not less than P500.00.
EXAMPLES:

(1) X and Y mutually promised to buy and sell a piano at a price of


P4,000.00. This contract must be in writing to be enforceable against either
party unless there is delivery or partial or full payment, in which case, it is
taken out of the operation of the Statute of Frauds and the contract may be
enforced even if it was made orally.

(2) If Y denies a contract of sale of goods worth P500.00 but X claims the
price is only P450.00 (which is less than P500.00), oral evidence of the sale is
admissible inasmuch as the true agreement claimed is not covered by the
Statute.

Sufciency of note or memorandum.

(1) No particular form of language or instrument is necessary to constitute


a note or memorandum in writing under the Statute of Frauds. Any
document or writing, formal or informal, written either for the purpose
of furnishing evidence of the contract or for another purpose, which
states all the essential elements of the contract with reasonable
certainty, and which is signed by the party to be charged or his
lawfully authorized agent, is a suf cient note or memorandum in
writing suf cient to satisfy the requirements of the statute. A
memorandum may be written as well with lead pencil as with pen and
ink. It may also be made on a printed form. (see 37 C.J.S. 653-654;
Jimenez vs. Rabot, 38 Phil. 378 [1918].)

Sufciency of an agents authority to sell real property where the property


is not precisely described.

Facts: S wrote to his sister R to sell one of three parcels of land belonging
to the former. R sold one parcel to B but R failed to forward the proceeds
to S. The letter did not describe the parcel to be sold. S brought action to
recover the land in question.

Issue: Is the letter sufcient to bind S in the sale made to B?

Held: Yes. The present case relates to the sufciency of the authorization
to sell not to the sufciency of the contract or conveyance. The letter
which S executed contains a proper description of the property which he
purported to convey. The law does not require for the effectiveness of an
authority to sell that the property to be sold should be precisely
described. It is sufcient if the authority is so expressed as to determine
without doubt the limits of the agents authority. The purpose of a power
of attorney is to substitute the mind and hand of the agent for the mind
and hand of the principal; and if the character and extent of the power is
so far dened as to leave no doubt as to the limits within which the agent
is authorized to act, and he acts within those limits, the principal cannot
question the validity of his act. (Jimenez vs. Rabot, supra.)

ART. 1404. Unauthorized contracts are governed by Article 1317 and the
principles of agency in Title X of this Book.

ART. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2


of Article 1403, are ratied by the failure to object to the presentation of
oral evidence to prove the same, or by the acceptance of benets under
them.

Modes of rati cation under the Statute. The ratication of contracts


infringing the Statute of Frauds may be effected in two ways:

(1) by failure to object to the presentation of oral evidence to prove the


contract. The failure to so object amounts to a waiver and makes the
contract as binding as if it had been reduced to writing. (see Domalagan
vs. Bolifer, 33 Phil. 471 [1916]; Conlu vs. Araneta, 15 Phil. 587 [1910].)
Cross examination of a witness testifying orally on the contract with
respect to matters inadmissible under the Statute amounts to failure to
object (Abrenica vs. Gonda, 34 Phil. 739 [1916]; Tongco vs. Vianzon, 50
Phil. 698 [1927].); and

(2) by acceptance of benets under the contract. In this case, the contract
is no longer executory and, therefore, the Statute does not apply. This rule
is based upon the familiar principle that one who has enjoyed the benets
of a transaction should not be allowed to repudiate its burdens. (see
Rodriguez vs. Court of Appeals, 29 SCRA 419 [1969].) It is also an
indication of a partys consent to the contract as when he accepts partial
payment or delivery of the thing sold thereby precluding him from
rejecting its binding effect. (Clarin vs. Relona, 127 SCRA 512 [1984].)
ART. 1406. When a contract is enforceable under the Statute of Frauds,
and a public document is necessary for its registration in the Registry of
Deeds, the parties may avail themselves of the right under Article 1357.

Right of a party where contract enforceable.

For the application of this provision, there must be a valid agreement and
the agreement must not infringe the Statute of Frauds.

(1) Accordingly, a party to an oral sale of real property cannot compel the
other to put the contract in a public document for purposes of registration
because it is unenforceable (Art. 1403[2, e].) unless, of course, it has
been rati ed. (Art. 1405.)

(2) Similarly, the right of one party to have the other execute a public
document is not available in a donation of realty when it is in a private
instrument because the donation is void. (Art. 1356.)

Art. 1414. When money is paid or property delivered for an illegal


purpose, the contract may be repudiated by one of the parties before the
purpose has been accomplished, or before any damage has been caused
to a third person. In such case, the courts may, if the public interest will
thus be subserved, allow the party repudiating the contract to recover the
money or property.

Article 1414 is one instance (the other is Art. 1416.) when the law allows
recovery by one of the parties even though both of them have acted
contrary to law. (Report of the Code Commission, p. 27.)

The following are the requisites for the application of this article:

(1) The contract is for an illegal purpose;

(2) The contract is repudiated before the purpose has been accomplished
or before any damage has been caused to a third person; and
(3) The court considers that public interest will be subserved by allowing
recovery. The underlying reasons for the rule permitting a recovery when
the agreement is still merely executory, are the encouragement of the
abandonment of illegal agreements and the prevention of the violation of
the law. (12 Am. Jur. 733.)

EXAMPLE: In consideration of P10,000.00 paid by X to Y, the latter


promised to hide Z, who is accused of murder. Before Y could hide Z, X
changed his mind. In this case, the court may allow X to recover the
P10,000.00 given to Y.

ART. 1415. Where one of the parties to an illegal contract is incapable of


giving consent, the courts may, if the interest of justice so demands, allow
recovery of money or property delivered by the incapacitated person.

Recovery by an incapacitated person.

This article is another exception to the in pari delicto rule in Articles 1411-
1412. Recovery can be allowed if one of the parties is incapacitated and
the interest of justice so demands.

It is not necessary that the illegal purpose has not been accomplished or
that no damage has been caused to a third person. (see Art. 1414.)

ART. 1416. When the agreement is not illegal per se but is merely
prohibited, and the prohibition by the law is designed for the protection of
the plaintiff, he may, if public policy is thereby enhanced, recover what he
has paid or delivered.

Recovery where contract not illegal per se.

Article 1416 is another exception to the rule that where both parties are
in pari delicto, they will be left where they are without relief.

Recovery is permitted provided:

(1) The agreement is not illegal per se but is merely prohibited;


(2) The prohibition is designed for the protection of the plaintiff; and

(3) Public policy would be enhanced by allowing the plaintiff to recover


what he has paid or delivered.

Under the doctrine of pari delicto, the parties have no action against each
other when they are both at fault. (Art. 1412[1].) The rule, however, has
been interpreted as applicable only where the fault on both sides is, more
or less, equivalent. It does not apply where one party is literate or
intelligent and the other one is not. (Mangayao vs. Lasud, 11 SCRA 158
[1964].)

Art. 1418. When the law xes, or authorizes the xing of the maximum
number of hours of labor, and a contract is entered into whereby a laborer
undertakes to work longer than the maximum thus xed, he may demand
additional compensation for service rendered beyond the time limit.

ART. 1419. When the law sets, or authorizes the setting of a minimum
wage for laborers, and a contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled to recover the de ciency.

Recovery of amount of wage less than minimum xed.

If an employee or worker receives less than the minimum wage rate, he


can still recover the de ciency with legal interest (see Art. 128, Pres.
Decree No. 442, as amended.), and the employer shall be criminally
liable. (see Arts. 278, 279, Ibid.)

Art. 1420. In case of a divisible contract, if the illegal terms can be


separated from the legal ones, the latter may be enforced.

Effect of illegality where contract indivisible/divisible.


(1) Where the consideration is entire and single, the contract is indivisible
(or entire) so that if part of such consideration is illegal, the whole
contract is void and unenforceable.

(2) Where the contract is divisible (or severable) that is, the consideration
is made up of several parts, and the illegal ones can be separated from
the legal portions, without doing violence to the intention of the parties,
the latter may be enforced. This rule, however, is subject to the contrary
intention of the parties. (see Borromeo vs. Court of Appeals, 47 SCRA 65
[1972]; Litonjua vs. L & R Corporation, 328 SCRA 796 [2000].)

A possible exception to the rule that a void contract is void in its wholeif
the contract is divisible and the legal terms can be separated from the illegal
ones, the former may be enforced. For example, a contract of loan is valid
even though the collateral is in the nature of a pactum commissorium, which
is void

ART. 1421. The defense of illegality of contracts is not available to third


persons whose interests are not directly affected.

WHO CAN ALLEGE THE ILLEGALITY OF A CONTRACT

Parties to the contract

Any third party who is directly prejudiced, even if such a person is not a
party

ART. 1422. A contract which is the direct result of a previous illegal


contract, is also void and inexistent.

Void contract cannot be novated.

This provision is based on the requisites of a valid novation. (see


comments and examples under Art. 1298.) An illegal contract is void and
inexistent and cannot, therefore, give rise to a valid contract.

For example, a contract of repurchase is dependent on the validity of the


contract of sale. If the latter is itself void because the seller is not the
owner, the former is also void because it presupposes a valid contract of
sale between the same parties. One can repurchase only what he has
previously sold. (Nool vs. Court of Appeals, 276 SCRA 149 [1997].)

Art. 1423. Obligations are civil or natural. Civil obligations give a right of
action to compel their performance. Natural obligations, not being based
on positive law but on equity and natural law, do not grant a right of
action to enforce their performance, but after voluntary ful llment by the
obligor, they authorize the retention of what has been delivered or
rendered by reason thereof. Some natural obligations are set forth in the
following articles.

3 They are: rst, natural obligations are based on equity and natural law,

Civil obligations and natural obligations distinguished.

Enumeration not exclusive.

Note that Article 1423 says Some natural obligations, x x x. This


indicates that the enumeration in the Code is not exclusive. Thus, if the
borrower pays interest agreed upon orally, the provisions on natural
obligations apply. (see Art. 1960.) Under the law, no interest shall be due
unless it has been expressly stipulated in writing. (Art. 1956; see Art.
1175.)

ART. 1424. When a right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily performs the contract
cannot recover what he has delivered or the value of the service he has
rendered.

Performance after civil obligation has prescribed.


Problem A borrowed from B P1,000 which amount B failed to collect.
After the debt has prescribed, A voluntarily paid B who accepted the
payment. After a few months, being in need of money, A demanded the
return of the P1,000 on the ground that there was a wrong payment, the
debt having already prescribed, B refused to return the amount paid. May
A succeed in collecting if he sues B in court? Reason out your answer.
(1970 Bar problem)

Answer A will not succeed in collecting the P1,000 if he sues B in


court. The case is expressly covered by Art. 1424 of the Civil Code which
declares that when a right to sue upon a civil obligation has lapsed by
extinctive prescription, the obligor who voluntarily performs the contract
cannot recover what he has delivered or the value of the service he has
rendered.

Because of extinction prescriptive, the obligation of A to pay his debt of


P1,000 to B became a natural obligation. While it is true that a natural
obligation cannot be enforced by court action, nevertheless, after
voluntary ful llment by the obligor, under the law, the obligee is
authorized to retain what has been paid by reason thereof. (Art. 1423,
Civil Code.)

Art. 1425. When without the knowledge or against the will of the debtor, a
third person pays a debt which the obligor is not legally bound to pay
because the action thereon has prescribed but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid.

EXAMPLE:

In the above example, if T pays C after the debt has prescribed without the
knowledge or consent of D, but D nevertheless reimburses T, D cannot
recover what he has paid.

A owes B P700,000. But the debt soon prescribes. Later C, against the
consent of A, pays B the P700,000. A here does not have to reimburse C
because he (A) has not at all been bene ted by the transaction. However, A
later voluntarily reimburses C. May A now recover what he has given to C?
ANS.: No more. This is the express provision of the law.

Payment With Debtors Consent

If payment is made with the consent of the debtor, a civil obligation arises.

Art. 1426. When a minor between eighteen and twentyone years of age who
has entered into a contract without the consent of the parent or guardian,
after the annulment of the contract voluntarily returns the whole thing or
price received, notwithstanding the fact that he has not been bene ted
thereby, there is no right to demand the thing or price thus returned.

Restitution by minor after annulment of contract.

When a contract is annulled, a minor is not obliged to make any restitution


except insofar as he has been bene ted by the thing or price received by
him. (Art. 1399.) However, should he voluntarily return the thing or price
received although he has not been bene ted thereby, he cannot recover
what he has returned.

Take note that this article applies only if the minor who has entered into a
contract without the consent of his parent or guardian is between 18 and 21
years of age.1 The law considers that at such age, a minor has already a
conscious idea of what is morally just or unjust.

EXAMPLE:

S, a minor 18 years old, sold for P100,000.00 his car to B without securing
the consent of his parents. He lost P20,000.00 to a pickpocket although he
was able to deposit the P80,000.00 in a bank.

If the contract is annulled, S is obliged to return only P80,000.00. However,


he has the natural obligation to return P100,000.00. If he voluntarily returns
the whole amount, there is no right to demand the same.
Art. 1427. When a minor between eighteen and twentyone years of age, who
has entered into a contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing in ful llment of
the obligation, there shall be no right to recover the same from the obligee
who has spent or consumed it in good faith.

Delivery by minor of money or fungible thing in ful llment of obligation.

By the decree of annulment, the parties, as a general rule, are obliged to


make mutual restitution. (Art. 1398.) However, the obligee who has spent or
consumed in good faith the money or consumable2 thing voluntarily paid or
delivered by the minor, is not bound to make restitution.

Although Article 1427 speaks of fungible thing, nevertheless it may also


apply to things that are non-consumable when they have been lost without
fault of the obligee or in case of alienation by him to a third person who did
not act in bad faith. The obligee shall be liable for damages if he is guilty of
fault or bad faith at the time of spending or consumption.

Note again that this article is applicable only if the minor is between 18 and
21 years of age

Art. 1428. When, after an action to enforce a civil obligation has failed, the
defendant voluntarily performs the obligation, he cannot demand the return
of what he has delivered or the payment of the value of the service he has
rendered.

Art. 1429. When a testate or intestate heir voluntarily pays a debt of the
decedent exceeding the value of the property which he received by will or by
the law of intestacy from the estate of the deceased, the payment is valid
and cannot be rescinded by the payer.

Art. 1430. When a will is declared void because it has not been executed in
accordance with the formalities required by law, but one of the intestate
heirs, after the settlement of the debts of the deceased, pays a legacy in
compliance with a clause in the defective will, the payment is effective and
irrevocable.

Art. 1431. Through estoppel an admission or representation is rendered


conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.

Concept of Estoppel. Using the above article as basis, estoppel may be


de ned as a condition or state by virtue of which an admission or
representation is rendered conclusive upon the person making it and cannot
be denied or disproved as against the person relying thereon.

Art. 1432. The principles of estoppel are hereby adopted insofar as they are
not in con ict with the provisions of this Code, the Code of Commerce, the
Rules of Court and special laws.