O B L I G A T I O N S and C O N T R A C T S

Prescription So what is “license” or “tolerance” in relation to possession?

When you say “license,” there is an express grant of

November 21, 2019- Borbe
authority given by the owner to the possessor to
exercise acts of possession over the property.
When we say, “Prescription,” there are two concepts that you
need to remember:
Examples would be “leasing the property,” so there is a
license. Or the possessor is paying some kind of toll fee. So
1. Prescription as a mode of acquisition or as a mode
there is an express grant.
of losing ownership.
When you say “tolerance,” we are referring to the
Because when you acquire ownership by means of
passive acquiescence by the owner of the property
prescription, it means that somebody else also loses
to the exercise of acts of possession by another.
ownership because you acquired it.
So, he knew that A was possessing the property but he
2. Prescription as a statute of limitations.
allowed A. So, when you say “by means of tolerance,” there is
an implied understanding there that once the owner would
This is the second concept. This is also called as Extinctive
already want to get the property, the possessor will vacate. So
or Liberatory Prescription, Prescription of Actions. You’re
there is that implied understanding. So when the tolerance
familiar with that. We are referring to the number of years
ends, the possessor would have to vacate. When the
or the period within which certain actions shall be
possession is by means of tolerance, it’s just tolerated. It’s just
instituted. Otherwise, if you fail to bring an action within
allowed. Again, however long that possession might be, it can
the period prescribed by law, your action is already barred
never ripen into ownership. You can never acquire the
by prescription. If you file, it can be dismissed on the
property by prescription.
ground of Prescription.
(2) PUBLIC
Going back to the first concept, “Prescription as a mode of
acquiring or losing ownership and other real rights.”
It must be known to the general public, especially to the owner
of the property. Possession which is clandestine or in secret, it
Acquisitive Prescription can never ripen into acquisitive prescription. You cannot
acquire it by prescription. You cannot own the property. It
What are the requisites before one can acquire property by must be public.
prescription? If you remember under Article 712 of the New
Civil Code, what are the modes of acquiring ownership? (3) PEACEFUL

1. Occupation; Possession which is acquired and maintained by means of

2. Intellectual creation; violence also cannot give rise to ownership. It cannot ripen
3. Donation; into ownership.
4. Succession;
5. Tradition in consequence of certain contracts; and (4) UNINTERRUPTED
6. Prescription.
There is a period prescribed by law within which the person
Art. 712. Ownership is acquired by occupation and by must possess the property under the conditions specified. So,
intellectual creation. we have ordinary prescription and extraordinary prescription.
It also depends what kind of property is the subject of
Ownership and other real rights over property are acquired prescription. If it’s real property, you need 10 years of
and transmitted by law, by donation, by estate and uninterrupted possession so that you can acquire the
intestate succession, and in consequence of certain property. 10 years with good faith and just title.
contracts, by tradition.
When it is extraordinary, meaning, you don’t have a just title,
They may also be acquired by means of prescription you’re not in good faith, but you have complied with all the
other conditions for acquisitive prescription, you need 30
years of uninterrupted possession.
Q: How do you acquire ownership by prescription? What are
the requisites?
When we say “uninterrupted,” does it mean that you have to
be in the property for 24 hours every day? We will discuss later
(1) IN THE CONCEPT OF AN OWNER – NOT LICENSE, NOT
what will be considered as interruption. Basta, the period must
TOLERANCE.
comply with 10 years for ordinary prescription with good faith
and just title, and then 30 years if you are in bad faith.
When you say “acquisition by means of prescription,” it
presupposes possession. You must possess the property.
(5) ADVERSE
Because without possession, sige lang ka’g tan-aw sa property,
you’ll never acquire it by prescription. You have to be in
The possessor does not acknowledge ownership by any other
possession in the concept of an owner. So when you say, “in
person. So he must clearly, definitely, and unequivocably
the concept of an owner,” it means you consider yourself as
notify the owner of the intention to avert an exclusive
the owner of the property. You exercise acts of ownership
ownership in himself. So that is what we mean by “adverse.”
over the property.
We mentioned ordinary prescription with just title and good
In relation to this, when the property is possessed merely by
faith. So, what do we mean by “good faith,” so that if coupled
means of license or tolerance, however long is your period of
with just title and complying with all the conditions of
possession, it can never ripen into ownership. You can never
acquisitive prescription, 10 years would be sufficient?
acquire it by prescription.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
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So as discussed in this case:
Abalos and Spouses Salazar, et al. vs. Heirs of Vicente Torio
(2011)
Possession in good faith consists in the reasonable belief
that the person from whom the thing is received has been
the owner thereof, and could transmit his ownership.
There is just title when the adverse claimant came into
possession of the property through one of the modes
recognized by law for the acquisition of ownership or other
real rights, but the grantor was not the owner or could not
transmit any right.
Possession in good faith:
So when you bought a property from A, you really believed
that A was the owner of the property, and there are no
circumstances which would lead you to think otherwise. For
example, A is selling a mansion and he is just a janitor. I’m not
saying that a janitor cannot afford a mansion. But if that is the
case, would you believe that A is really the owner of that
mansion? So, there should be no suspicious circumstances
which would make you doubt the ownership of the person.
Or for example, A is saying that he is the owner but when you
inspected the property, there are occupants and then they are
saying that “A is not the owner of this property, we are the
owner of this property.”
Just Title:
So there is a Deed of Sale or Deed of Donation for example. If
for example, X is the owner of the property and he executed a
Deed of Sale in favor of B and he delivered the property to B
pursuant to the Deed of Sale, there would be transfer of
ownership. However, it turned out that A is not the owner of
the property. So, A could not, in reality, transmit ownership
over the property because you cannot give what you do not
own.
However, that is a just title for the purpose of acquisitive
prescription. So if you believed in good faith that A was the
owner of the property at the time when he sold it and there
was a Deed of Sale executed in your favor, and then you
possessed the property publicly, adversely, in the concept of
an owner, peacefully for 10 years and there is no prohibition
under the law for you to acquire the property, then you can
acquire the property by prescription.
We mentioned, “uninterrupted.” Actually, this was asked in
the bar exam.
Q: How do you distinguish interruption from suspension
(tolling)?
When you say, “interruption,” it means cut-off.
Example, you have possessed the property for 8
years in good faith and with just title. Or, 29 years
without just title and in bad faith, but you have
complied with all the other conditions and there is
interruption. What is the consequence if there is
interruption? All the periods, all the number of years
that you have possessed the property will be back to
zero. Mawala siya tanan. What will happen? Can you
still acquire the property by prescription? Maybe, if
you will be able to again complete the period.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Because when you say, “interrupted,” you go back
to zero.
But when it is just tolled or suspended, it will continue to run
from when the suspension happened. So for example, on the
8th year, there was suspension, it could continue. So, dili ka
mubalik sa zero.
So that’s the distinction between suspension and interruption.
So again, it must be an uninterrupted period for the requisite
number of years required by law.
Q: When will there be an interruption of possession for the
purpose of prescription? There are three:
1. Natural Interruption
When through any cause, or for any reason,
possession should cease for more than one (1) year.
So wala na ka sa property for more than 1 year. If it is
less than 1 year, it will not be interrupted. It could be
suspended.
2. Civil Interruption
Produced by judicial summons to the possessor. So
for example, you are in possession of the property
for 8 years in good faith and with just title, and you
receive summons for a case filed against you for
recovery of possession, from that time, the period of
possession is interrupted. It cannot run anymore so
timely ang pagfile sa iyahang case against you, by
reason of which, summons was issued to the
possessor.
Exceptions:
a. If it should be void for lack of legal
solemnities;
b. If the plaintiff should desist from the
complaint or should allow the proceedings
to lapse;
c. If the possessor should be absolved from
the complaint.
In these cases, even if summons was given to the
possessor, it would not cause the interruption of the
period of prescription in his favor.
3. When there is any express or tacit recognition
which the possessor may make of the owner’s right.
Even if he had already possessed the property under
those conditions prescribed by law for 29 years and
then suddenly there was an act which could be
interpreted as a recognition of the ownership of the
real owner of the property. Here, the period of
prescription is also interrupted.
THERE ARE THINGS THAT MAY NOT BE ACQUIRED BY
PRESCRIPTION:
Even if the possessor has complied with all the requisites for
acquisitive prescription, he will never acquire ownership of
these:
1. Things not within the commerce of men.
You cannot acquire them by prescription even if you
say na, “Everyday, naga-gamit ko sa power sa sun, so
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akoa na na siya. I’m now the owner of the sun by
acquisitive prescription.”
2. Property of the State or any of its subdivisions not
patrimonial in character.
So when you say, “not patrimonial in character,”
meaning, those which are utilized by the State in its
sovereign capacity. Those properties which are
owned by the State, not in its private character. E.g.
bridge. You cannot own them, even if you have been
living under the bridge for 50 years, even if you have
a Deed of Sale.
3. Those protected by a Torrens Title.
So kung naa kay yuta nga titled, and then there are
occupants to that property, even if they have been in
possession for 100 years, they cannot acquire by
prescription. That’s the common situation that I
encountered in practice. Magreklamo ang client nga
naa daw nagpuyo sa iyahang property. Padalhan
nimo’g demand letter, isog kaayo. “Attorney, wala pa
ka na-anak, naa na mi diri!” Unya, titulado man ang
yuta, unsaon ko man na ron? You cannot acquire that
by prescription. They can always be ejected, but we
have to go through the process of filing a case.
4. Movables acquired through crimes.
Because for you to acquire property by acquisitive
prescription, the possession must be acquired and
maintained peacefully. So if that thing is acquired
through a crime, that thing cannot be acquired by
prescription.
5. Properties of spouses, parents, children, wards and
guardians, under the restrictions imposed by law
(Art. 1109, NCC).
Art. 1109. Prescription does not run between husband and
wife, even though there be a separation of property agreed
upon in the marriage settlements or by judicial decree.
Neither does prescription run between parents and
children, during the minority or insanity of the latter, and
between guardian and ward during the continuance of the
guardianship.
When you’re holding the property of your spouse, it goes
without territory. Bisan pa’g muingon ka nga separate property
na niya because it was donated to him during the marriage by
his parents, so technically it is his separate property, pero
nagpuyo man ka diha kay imong bana nagtrabaho sa abroad,
can you say that you have acquired it by prescription? No.
Because of the nature of relationship between these persons
involved.
Let’s discuss this case regarding prescription:
Mercado vs. Espinocilla (2012)
Doroteo Espinocilla owned a parcel of land, Lot No. 552,
with an area of 570 sq. m., located at Magsaysay Avenue,
Zone 5, Bulan, Sorsogon. After he died, his five children,
Salvacion, Aspren, Isabel, Macario, and Dionisia divided Lot
No. 552 equally among themselves. Later, Dionisia died
without issue ahead of her four siblings, and Macario took
possession of Dionisia’s share. In an affidavit of transfer of
real property dated November 1, 1948, Macario claimed
that Dionisia had donated her share to him in May 1945.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Allegation: There being no public document to prove
Dionisia’s donation, the RTC also held that Macario’s 1948
affidavit is void and is an invalid repudiation of the shares of
his sisters Salvacion, Aspren, and Isabel in Dionisia’s share.
Accordingly, Macario cannot acquire said shares by
prescription. The RTC further held that the oral partition of
Lot No. 552 by Doroteo’s heirs did not include Dionisia’s
share and that partition should have been the main action.
We affirm the CA ruling dismissing petitioner’s complaint
on the ground of prescription.
Prescription, as a mode of acquiring ownership and other
real rights over immovable property, is concerned with
lapse of time in the manner and under conditions laid down
by law, namely, that the possession should be in the
concept of an owner, public, peaceful, uninterrupted, and
adverse. Acquisitive prescription of real rights may be
ordinary or extraordinary. Ordinary acquisitive prescription
requires possession in good faith and with just title for 10
years. In extraordinary prescription, ownership and other
real rights over immovable property are acquired through
uninterrupted adverse possession for 30 years without
need of title or of good faith.
Here, petitioner himself admits the adverse nature of
respondents’ possession with his assertion that Macario’s
fraudulent acquisition of Dionisia’s share created a
constructive trust. In a constructive trust, there is neither a
promise nor any fiduciary relation to speak of and the so-
called trustee (Macario) neither accepts any trust nor
intends holding the property for the beneficiary (Salvacion,
Aspren, Isabel). The relation of trustee and cestui que trust
does not in fact exist, and the holding of a constructive
trust is for the trustee himself, and therefore, at all times
adverse. Prescription may supervene even if the trustee
does not repudiate the relationship.
Then, too, respondents’ uninterrupted adverse possession
for 55 years of 109 sq. m. of Lot No. 552 was established.
Macario occupied Dionisia’s share in 1945 although his claim
that Dionisia donated it to him in 1945 was only made in a
1948 affidavit. We also agree with the CA that Macario’s
possession of Dionisia’s share was public and adverse since
his other co-owners, his three other sisters, also occupied
portions of Lot No. 552. Indeed, the 1977 sale made by
Macario and his two daughters in favor of his son Roger
confirms the adverse nature of Macario’s possession
because said sale of 225 sq. m.23 was an act of ownership
over Macario’s original share and Dionisia’s share. In 1985,
Roger also exercised an act of ownership when he sold 114
sq. m. to Caridad Atienza. It was only in the year 2000, upon
receipt of the summons to answer petitioner’s complaint,
that respondents’ peaceful possession of the remaining
portion (109 sq. m.) was interrupted. By then, however,
extraordinary acquisitive prescription has already set in in
favor of respondents. That the RTC found Macario’s 1948
affidavit void is of no moment. Extraordinary prescription is
unconcerned with Macario’s title or good faith.
Accordingly, the RTC erred in ruling that Macario cannot
acquire by prescription the shares of Salvacion, Aspren, and
Isabel, in Dionisia’s 114-sq. m. share from Lot No. 552.
Moreover, the CA correctly dismissed petitioner’s
complaint as an action for reconveyance based on an
implied or constructive trust prescribes in 10 years from the
time the right of action accrues. This is the other kind of
prescription under the Civil Code, called extinctive
prescription, where rights and actions are lost by the lapse
of time. Petitioner’s action for recovery of possession
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having been filed 55 years after Macario occupied Dionisia’s
share, it is also barred by extinctive prescription.
Here, Macario acquired a property from Dionisia. It was Lot
No. 552. How did he acquire? It was alleged that Dionisia
executed an affidavit of donation in favor of Macario. So,
Macario possessed the property for how many years. He made
improvements on the property. He paid the taxes, he even
sold the property. Now, the heirs of Dionisia filed a case
against Macario and his successors-in-interest for recovery of
possession. According to them, there was no valid transfer of
Lot No. 552 from Dionisia to Macario.
Even if we consider the affidavit, that is not a valid document
to transfer ownership. When you say donation, it is a formal
contract.
There are requisites under the law:
(1) It must be in a public document; and
(2) the document must be acknowledged. So it is not
enough that it is through affidavit only.
An affidavit does not contain an acknowledgement. It’s just
subscribed and sworn to. It should be acknowledgement,
there should be acceptance by the donee.
The Supreme Court said that the document which Dionisia
executed in favor of Macario actually cannot be considered as
valid because it did not comply with the proper forms of a
donation. However, there are two reasons why Macario
cannot be compelled to return the property to the heirs of
Dionisia.
1. They are barred by extinctive prescription (more
than 10 years had already elapsed); and
2. Macario himself had already acquired the property
by acquisitive prescription.
The property here was not covered by a Torrens Title, so there
was no prohibition under the law for the acquisition. And the
Supreme Court said that –
Prescription, as a mode of acquiring ownership and other real
rights over immovable property, is concerned with lapse of
time in the manner and under conditions laid down by law,
namely, that the possession should be in the concept of an
owner, public, peaceful, uninterrupted, and adverse.
Acquisitive prescription of real rights may be ordinary or
extraordinary. Ordinary acquisitive prescription requires
possession in good faith and with just title for 10 years. In
extraordinary prescription, ownership and other real rights
over immovable property are acquired through uninterrupted
adverse possession for 30 years without need of title or of
good faith.
Here, what is the contention of the heirs of Dionisia? Why
should they be allowed to recover the property? According to
them, Macario was able to acquire the property from Dionisia
by means of fraud. So, under the law, when property is
acquired by means of fraud, there is created an implied or
constructive trust in favor of the real owner of the property.
So the one who acquired the property by fraud, under the law,
is actually holding the property in trust of the real owner, such
that the real owner or his successors-in-interest can still
recover the property. And being a trust, according to the heirs
of Dionisia, they can always recover the property at any time;
that they are not barred by prescription. The prescription they
are referring to here is the extinctive prescription or the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
statute of limitations. So there was a constructive or implied
trust.
The Supreme Court said – here, petitioner himself admits the
adverse nature of respondents’ possession with his assertion
that Macario’s fraudulent acquisition of Dionisia’s share
created a constructive trust. In a constructive trust, there is
neither a promise nor any fiduciary relation to speak of and the
so-called trustee (Macario) neither accepts any trust nor
intends holding the property for the beneficiary.
The relation of trustee and cestui que trust does not in fact
exist, and the holding of a constructive trust is for the trustee
himself, and therefore, at all times adverse. Prescription may
supervene even if the trustee does not repudiate the
relationship.
We have to distinguish an implied or constructive trust from
an express trust. When you say Express Trust, there is really an
agreement between the two parties. So we have the trustor,
trustee and beneficiary. The beneficiary could also be the
trustee. In that kind of relationship, the trustee is holding the
property in trust for the trustee. Meaning, there is a fiduciary
relationship.
So here, the trustee, however long he might be holding the
property, he cannot acquire the property by prescription,
unless the trustee repudiates the trust relationship and then
complied with all the conditions prescribed by law for
acquisitive prescription.
But this is not an express trust. This is an Implied or
Constructive Trust. There is no fiduciary relationship precisely
because the alleged trustee committed fraud against the
trustor. So how could there be a fiduciary relationship? The so-
called trustee in an implied or constructive trust does not hold
the property in favor of the trustor; he holds the property for
him and him alone.
This kind of trust prescribes; there is a prescriptive period. The
right of the owner of the property or the trustor to recover the
property from the so-called trustee in this Constructive or
Implied Trust, prescribes. So what is the prescriptive period? 10
years.
And another aspect of the case – even if we assume that the
transfer document executed between Macario and Dionisia
was not valid, but Macario did not acquire the property by
reason of the donation. He acquired the property by
acquisitive prescription. We only have to consider whether or
not he complied with all the requisites provided by law. So we
do not look at the affidavit of donation as a just title because
here, Macario had possessed the property for more than 30
years.
So even if he had no just title, even if he was in bad faith when
in fact he committed fraud allegedly in acquiring the property,
but did he comply with all the requisites provided for under
the law?
The Supreme Court said, yes. He was in possession of the
property in the concept of an owner; his possession was
adverse, in fact he executed a deed of sale (so meaning, when
you execute a sale, you are considering yourself to be the
owner of the property; you do not recognize ownership by any
other person); it was peaceful; it was public; and it was for an
uninterrupted adverse possession of 55 years. So according to
the Supreme Court, the heirs of Dionisia can no longer recover.
So again, there are two reasons:
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1. They are barred by extinctive prescription (more
than 10 years had already elapsed); and
2. Macario himself had already acquired the property
by acquisitive prescription.
So the two concepts of prescription were used by the
Supreme Court in this case. And these two concepts barred the
heirs of Dionisia from recovering the property.
Now, let’s go to another concept which is related to
prescription.
Laches
Miguel vs. Florendo Catalino (1968)
Despite the invalidity of Bacaquio’s sale to Catalino
Agyapao, the vendor Bacaquio suffered the latter to enter,
possess and enjoy the land in question without protest,
from 1928 to 1943. The appellants, in turn, while succeeding
the deceased, also remained inactive, without taking any
step to reivindicate the lot from 1944 to 1962, when the
present suit was commenced in court. Even granting
appellants' proposition that no prescription lies against
their father's recorded title, their passivity and inaction for
more than 34 years (1928-1962) justifies the defendant
appellee in setting up the equitable defense of laches in his
own behalf.

As a result, the action of plaintiffs-appellants must be

What do we mean by “laches?” I cannot forget this because
considered barred and the Court below correctly so held.
this was asked in our bar exams.
Courts cannot look with favor at parties who, by their
silence, delay and inaction, knowingly induce another to
Laches (estoppel by laches) – failure or neglect for
spend time, effort and expense in cultivating the land,
an unreasonable and unexplained length of time, to
paying taxes and making improvements thereon for 30
do that which, by exercising due diligence, could or
long years, only to spring from ambush and claim title when
should have been done earlier, it is negligence or
the possessor's efforts and the rise of land values offer an
omission to assert a right within a reasonable time,
opportunity to make easy profit at his expense. In Mejia de
warranting a presumption that the party entitled
Lucas vs. Gamponia, 100 Phil. 277, 281, this Court laid down
thereto either has abandoned it or declined to assert
a rule that is here squarely applicable:
it.
Upon a careful consideration of the facts and
So meaning, because you have neglected to assert your rights
circumstances, we are constrained to find, however, that
at the earliest possible opportunity when you should have
while no legal defense to the action lies, an equitable one
already exercised it, you are considered to have already
lies in favor of the defendant and that is, the equitable
abandoned your right.
defense of laches.
This concept of laches is actually different from prescription. If
We hold that the defense of prescription or adverse
you remember, laches is not present or cannot be found in any
possession in derogation of the title of the registered
codal provision. It does not exist in the New Civil Code or in the
owner Domingo Mejia does not lie, but that of the equitable
Code of Commerce, whatever. Wala. Because, it is a common
defense of laches. Otherwise stated, we hold that while
law principle. So, how do we distinguish prescription from
defendant may not be considered as having acquired title
laches?
by virtue of his and his predecessors' long continued
possession for 37 years, the original owner's right to
Prescription Laches
recover back the possession of the property and title
Fact of delay Effect of delay
thereto from the defendant has, by the long period of 37
years and by patentee's inaction and neglect, been
Just the fact that the period There might be instances
converted into a stale demand.
prescribed by law had when if we base on the law,
already lapsed, then there is the period has not yet
prescription. prescribed. But, because of
Bacaquio here sold his parcel of land to Catalino. Pursuant to
the neglect and the effect if
that sale, from 1928 to 1943, Catalino possessed the property.
we allow the plaintiff to
He enjoyed the property. He cultivated the property. In fact,
assert his rights, he could be
after the sale made by Bacaquio to Catalino, the child of
barred by laches.
Bacaquio also made another sale in favor of the child of
Matter of time Question of inequity of
Catalino. They just continued their possession and occupation,
permitting a claim to be
enjoyment of the property.
You just compute the enforced, this inequity
number of years. being founded on some
After more than 34 years, the heirs of Bacaquio filed a case for
change in the condition of
recovery of possession and declaration of nullity of the deed
the property or the relation
of sale made between Bacaquio and Catalino. On what basis?
of the parties
According to Bacaquio’s heirs, the sale was void because it did
not bear the requisite approval of the Executive Department
So it’s not just a matter of
(because Bacaquio here actually belonged to the indigenous
time. You have to determine
community, so dapat naa’y approval).
what would be the effect if
we allow the plaintiff to
Even now, kung mupalit ka’g yuta gikan sa Indigenous
assert his right.
Communities, muagi ka’g NCIP. It has to be approved.
Statutory Not statutory
Otherwise, the conveyance is null and void. So, that was also
the finding the of the Supreme Court here. There was no
It’s found under the New It cannot be found in any approval. It was true. However, could we allow the heirs of
Civil Code. codal provision.
Bacaquio to recover the property from the heirs of Catalino?
Applies at law Applies at equity
Based on a fixed time Not fixed time If the question is whether or not the right of action of Bacaquio
to recover the property had already prescribed, the Supreme
Court said, it did not yet prescribe. Because an action to

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declare a contract as null and void does not prescribe.
However, the Supreme Court said, even if it is not barred by
prescription, it is already barred by laches. Why? The Supreme
Court said –
Even granting appellants' proposition that no prescription lies
against their father's recorded title, their passivity and inaction
for more than 34 years (1928-1962) justifies the defendant
appellee in setting up the equitable defense of laches in his
own behalf. As a result, the action of plaintiffs-appellants must
be considered barred. Courts cannot look with favor at parties
who, by their silence, delay and inaction, knowingly induce
another to spend time, effort and expense in cultivating the
land, paying taxes and making improvements thereon for 30
long years, only to spring from ambush and claim title when
the possessor's efforts and the rise of land values offer an
opportunity to make easy profit at his expense.
So while no legal defense to the action lies, an equitable one
lies in favor of the defendant and that is, the equitable defense
of laches. So it was actually 37 years. So here, even if under the
law on prescription, the right to recover the land did not yet
prescribe, but under the equitable principle of laches, the
action was already barred. Why?
The Court did not just look at the number of years, but the
inequity that it would cause to the defendant who were
allowed by the plaintiffs to cultivate the land, spend money for
the improvement of the land, and the plaintiffs, knowing all
these, they just kept silent for 37 years and then suddenly
when the property is now very expensive, they would claim
back the land. So, the Supreme Court said – the equitable
defense of laches already barred the plaintiff here. So a
question of inequity.
But let’s also consider this case:
Agra, et al. vs. PNB (1999)
True, prescription is different from laches, but petitioners'
reliance on Nielson is misplaced. As held in the aforecited
case, laches is principally a question of equity. Necessarily,
"there is no absolute rule as to what constitutes laches or
staleness of demand; each case is to be determined
according to its particular circumstances. The question of
laches is addressed to the sound discretion of the court and
since laches is an equitable doctrine, its application is
controlled by equitable considerations." Petitioners,
however, failed to show that the collection suit against
herein sureties was inequitable. Remedies in equity address
only situations tainted with inequity, not those expressly
governed by statutes. Indeed, the petitioners failed to
prove the presence of all the four established requisites of
laches, viz:
1. Conduct on the part of the defendant or one
under whom he claims, giving rise to the situation
of which complaint is made and for which the
complainant seeks a remedy;
2. Delay in asserting the complainant's right, the
complainant having had knowledge or notice of
defendant's conduct and having been afforded an
opportunity to institute a suit;
3. Lack of knowledge or notice on the part of the
defendant that the complainant would assert the
right on which he bases his claim; and
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
4. Injury or prejudice to the defendant in the event
relief accorded to the complainant, or the suit is
not held barred.
Clearly, aside from the fact that the collection suit was filed
only after the lapse of seven years from the date the
obligation became due and demandable, petitioners failed
to adduce any showing of inequity. Hence, the rules on
equity cannot protect them.
What was involved here was a Contract of Loan. For 7 years,
the creditor did not send any demand letter, did not collect
from the debtor. And then, after 7 years, the creditor filed a
case for collection against the debtor. Ang defense ni debtor,
laches. Although under the law, the prescriptive period for
filing an action based on a written contract is 10 years, but
according to the debtor, the plaintiff is already barred by
laches because it was silent for 7 years. Is that correct?
The Supreme Court said – no. The Supreme Court also
explained - laches is principally a question of equity.
Necessarily, "there is no absolute rule as to what constitutes
laches or staleness of demand; each case is to be determined
according to its particular circumstances.
There are requisites that we must consider before we can say
that there is laches. There are four –
1. Conduct on the part of the defendant or one under
whom he claims, giving rise to the situation of which
complaint is made and for which the complainant
seeks a remedy;
2. Delay in asserting the complainant's right, the
complainant having had knowledge or notice of
defendant's conduct and having been afforded an
opportunity to institute a suit;
3. Lack of knowledge or notice on the part of the
defendant that the complainant would assert the
right on which he bases his claim; and
4. Injury or prejudice to the defendant in the event
relief accorded to the complainant, or the suit is not
held barred.
Are these requisites present in this case? The Supreme Court
said – no. Actually, there was no change here in the
circumstances of the parties which would make it inequitable
for the creditor to assert his right against the debtor at some
later point in time. From the beginning, the debtor was a
debtor. He owed money. And then, the creditor, after 7 years,
he collected.
This is not like in the case of Miguel vs. Florendo Catalino, that
there was a change in the circumstances because after the
property was bought, the defendant made improvements
over the property and then despite that, the plaintiff just
remained silent despite knowing that there were already
improvements made. Here, there were no changes in the
circumstances. It’s the same when they started.
So the Supreme Court said – aside from the fact that the
collection suit was filed only after the lapse of 7 years from the
date the obligation became due and demandable, petitioners
failed to adduce any showing of inequity. Hence, the rules on
equity cannot protect them.
So, if you are invoking laches as a defense, you should be able
to prove or point out to an inequity that would be caused to
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 O B L I G A T I O N S and C O N T R A C T S
the defendant if the plaintiff would be allowed to prosper in
his belated claim. So that is when you invoke laches.
Let’s discuss another case:
Sps. Aboitiz vs. Sps. Po (2017); Sps. Po vs. Sps Aboitiz
It is now well-settled that the prescriptive period to recover
property obtained by fraud or mistake, giving rise to an
implied trust under Art. 1456 of the Civil Code, is 10 years
pursuant to Art. 1144. This ten year prescriptive period
begins to run from the date the adverse party repudiates
the implied trust, which repudiation takes place when the
adverse party registers the land.
Registration of the property is a "constructive notice to the
whole world." Thus, in registering the property, the
adverse party repudiates the implied trust. Necessarily, the
cause of action accrues upon registration.
An action for reconveyance and annulment of title does not
seek to question the contract which allowed the adverse
party to obtain the title to the property. What is put on
issue in an action for reconveyance and cancellation of title
is the ownership of the property and its registration. It does
not question any fraudulent contract. Should that be the
case, the applicable provisions are Articles 1390 and 1391 of
the Civil Code.
Thus, an action for reconveyance and cancellation of title
prescribes in 10 years from the time of the issuance of the
Torrens title over the property.
How about estoppel and laches?
The defense of laches is based on equity. It is not based on
the title of the party invoking it, but on the right holder's
"long inaction or inexcusable neglect" to assert his claim.
This Court rules that the Spouses Po is not barred by laches.
There is no showing that they abandoned their right to the
property. The factual findings reveal that the Spouses Po
had their rights over the property registered in the
assessor's office. They testified that they introduced
improvements by cultivating fruit trees after they
purchased the lots. When the Spouses Po discovered that
Ciriaco executed a quitclaim renouncing his interest over
Lot No. 2807 in favor of Roberto, the Spouses Po executed
a Memorandum of Agreement with Ciriaco to protect their
interest in Lot No. 2835.
So here, what happened was, let’s say, A sold his share in the
property to B. And later on, the entire property itself which
includes the property previously sold to B, was again the
subject of another deed of sale. This time, in favor of X.
Because of that sale, X was able to register that property under
his name. So there was now a certificate of title issued in the
name of X. So here, when the Spouses Po (first buyer) learned
of the sale, they recorded their objection in the tax
declarations; they also filed a case.
You learned in your Land Registration, that when there is a
certificate of title issued, it becomes indefeasible after one (1)
year. It’s only the certificate of title which is indefeasible after
1 year. But, if there is a defect in the registration of that title
(e.g. in the name of X), the defrauded or aggrieved party can
still file a case, but not for the cancellation of the title (because
it is indefeasible), but for the recovery of possession or
reconveyance of the property.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
So here, the Spouses Po filed a case against Spouses Aboitiz
for reconveyance. Their ground was – there was constructive
or implied trust created when the very same property
(pertaining to the portion sold to them) was sold. That since it
was sold to them, it could no longer to be sold to another
person. So there was constructive trust. So the aggrieved
party has 10 years within which to file an action for
reconveyance. Asa mag-start ang prescriptive period? Under
this case, the registration of the property is a constructive
notice to the whole world. Thus, in registering the property,
the adverse party repudiates the implied trust. Necessarily,
the cause of action accrues upon registration.
So when the Spouses Aboitiz registered the entire property
under their name, which included the portion sold previously
to the Spouses Po, that started the 10-year prescriptive period
for reconveyance.
We also have to distinguish. Diba there was fraud allegedly. But
the Spouses were not questioning the contract which allowed
the adverse party to obtain the title to the property. What is
put in issue in an action for reconveyance and cancellation of
title is the ownership of the property and its registration.
So, again, kung muingon ka’g cancellation of title, limited lang
ta to one (1) year. If we say reconveyance because of
constructive or implied trust, ten (10) years. When you
question the contract because of fraud, the prescriptive
period is four (4) years. So, it depends upon the cause of
action. Because if they’re questioning the contract, the
applicable provisions would be Article 1390 and 1391 of the
New Civil Code.
ARTICLE 1390. The following contracts are voidable or
annullable, even though there may have been no damage
to the contracting parties:
1. Those where one of the parties is incapable of
giving consent to a contract;
2. Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a
proper action in court. They are susceptible of ratification.
(n)
ARTICLE 1391. The action for annulment shall be brought
within four years.
This period shall begin:
In cases of intimidation, violence or undue influence, from
the time the defect of the consent ceases.
In case of mistake or fraud, from the time of the discovery
of the same.
And when the action refers to contracts entered into by
minors or other incapacitated persons, from the time the
guardianship ceases.
So, how about estoppel and laches? The Supreme Court said
there was no estoppel here. Because the Spouses Po did not
abandon their right to the property. As soon as they learned of
the second sale, they registered in the assessor’s office the
deed of sale earlier executed in their favor.
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Extinctive Prescription RIGHTS NOT EXTINGUISHED BY PRESCRIPTION:

These actions can always be filed at any time. The law does not
We are referring again to the Statute of Limitations. We also
mention any prescriptive period.
call it Liberatory Prescription.
1. The right to demand right of way.
So, we don’t have to explain one-by-one kung unsa ang mga
prescriptive period for different types of cases. But again, the
If you are in an enclosed estate, diba in your Law on
New Civil Code provides for the prescriptive periods. For
Property, if you have no adequate outlet to a public
example, an action based on a written contract, we have 10
highway, alangan namang mulupad ka pagawas? You
years. So even if you have a cause of action but you did not
can always demand for a right of way.
institute any case for 10 years, your right of action is already
barred by prescription.
2. Right to demand compulsory or legal easement of
drainage.
In your Civil Procedure, you made a distinction between a
cause of action and right of action. Although you might still
The same thing.
have a cause of action, your right of action is already barred by
prescription.
3. Action to demand partition of co-ownership (as
long as no repudiation).
Q: When is the period of prescription interrupted?
Diba co-ownership is not favored by law? Because it
Be careful, we are talking here of the interruption of the
is burdensome. So, if there is reason to terminate a
EXTINCTIVE PRESCRIPTION. Earlier, we were talking of
co-ownership, the law will allow it. And the right of a
acquisitive prescription. So here, we are talking about the
co-owner to demand a partition does not prescribe.
State of Limitations.
There’s only one exception – when a co-owner has
already repudiated the co-ownership, that
1. When action is filed before the court (judicial
repudiation being known to the other co-owners,
demand).
and then after that, he has complied with all the
conditions prescribed by law for acquisitive
E.g. collection of sum of money based on a
prescription. The period will be 30 years because he
promissory note (10 years within which to file the
is necessarily in bad faith.
case). When do we start the 10 years? From the time
of the execution of promissory note? From the time
4. Action to declare contract null and void.
of demand? From the time of default? We will discuss
that when we go to Article 1169. When will be the
You know that this does not prescribe, although as
interruption? If there is a judicial demand. (E.g. On
we have discussed in the case of Miguel vs Catalino, it
the 5th year, nag-file ug case si creditor against the
can be barred by laches.
debtor, then the prescriptive period is already
interrupted.) When that is interrupted, dili najud na
5. Action to have a will probated.
siya mudagan. So bisan pa’g 10 years pa ang kaso
ninyo, dili na na siya mag-prescribe. Kay naputol na
You know this under your Law on Succession, you
siya katong nagfile ug case.
can always file a petition for the probate of a will. It
cannot be barred by prescription. It cannot even be
2. Written extra-judicial demand.
barred by laches.
Remember, it is WRITTEN. It will interrupt the
6. Action for quieting of title as long as plaintiff is in
prescriptive period. So kung nagpadala ka’g letter on
possession of property.
the first year pa lang nga nag-default siya, then the
period of prescription is already interrupted. So you
This is understandable.
have a lot of time to file your case in court later kung
dili siya mubayad.
7. Right to demand support (present and future).
(Remember, for the purpose of interrupting
8. Action to recover property expressly placed in trust
prescription, it should be a written extra-judicial
(unless there is repudiation).
demand. But for the purpose of placing the debtor in
default, it does not require that it should be a written
As distinguished from constructive or implied trust,
demand. Although lisod siya i-prove sa Court kung
which is 10 years. I already discussed this. Kani
nag-demand ba jud ka.)
(express trust), it does not prescribe except when
there is repudiation of the trust and after
3. Written acknowledgment of debt by the debtor.
repudiation, the trustee has completed the period of
prescription, coupled with all the other conditions
There’s no use of a demand because you already
for acquisitive prescription.
acknowledged the obligation. And therefore, from
that time that he acknowledged, it’s the same as the
9. Action to compel reconveyance of property with a
effect of a demand. The prescriptive period is also
Torrens Title (if registered owner is in bad faith).
interrupted.
We are talking here of the real owner, as against the
Q: What is the consequence if there is an interruption?
registered owner.
It is favorable to the aggrieved party. Because when there is
10. Action by registered owner of land covered by
interruption, it means he is not barred from instituting his case
Torrens Title to recover possession of land.
against the defendant.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE

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 O B L I G A T I O N S and C O N T R A C T S
If you are the registered owner, you can always
recover the property from the possessor even if that
possessor has complied with all the conditions of
acquisitive prescription. Because your property is
covered by a Torrens Title. So, it cannot be acquired
by prescription.
11. Action of buyer of land to compel seller to execute
proper deed of conveyance (provided the buyer is
still in possession).
Diba a Deed of Sale of real property is a consensual
contract. It is valid as long as there is consent. But
when we speak of enforceability, there has to be a
written document. It does not have to be a public
document. For validity, it only requires mutual
consent. For enforceability, it only requires a written
document. But you cannot register the title in your
name if you only have a private document. So you
can always compel the seller. If for example the seller
refuses to execute a notarized deed of sale, you can
compel him as long as you are in possession. So that
action does not prescribe.
So that will be all for Prescription. I don’t think in the Bar
Exams you will be asked about the prescriptive period for filing
an action. But maybe you can just go over those prescriptive
periods.
Let us now proceed to Obligations.
Obligations
So there are different kinds of obligations.
CLASSIFICATION OF OBLIGATIONS
A. Sanction (Can these obligations be enforced through court
action?)
• Civil (Enforced by Judicial Process) – YES
• Natural (Law) – Cannot be enforced by Judicial
Process, but based on Article 1423, once the debtor
voluntarily performs, the creditor is authorized to
retain what has been voluntarily delivered or paid. So
that is the law on Natural Obligations.
ARTICLE 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 fulfillment 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.
• Moral / Imperfect Obligations (conscience, morality,
law of church) – cannot be enforced by Judicial
Process; e.g. obligation to study
B. Subject Matter
• Real (obligation to give)
• Personal (obligation to do or not to do)
We have to know the kind of obligation involved because there
are several provisions under the New Civil Code which apply
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
only to real obligations, but do not apply to personal
obligations, and vice versa.
The most common distinction is found in the Constitution also.
That insofar as a personal obligation is concerned, you cannot
compel that by specific performance. For example, your
employee resigned, dili na siya gusto mag-trabaho sa imuha.
You cannot compel him by specific performance. That would
be tantamount to involuntary servitude which is proscribed
under the Constitution.
If it’s a real obligation (obligation to give), you can compel that
by specific performance.
C. Affirmativeness / Negativeness
• Positive/Affirmative (to give or to do)
• Negative (not to do)
D. Persons obliged
• Unilateral (e.g. commodatum) – only one of the
parties has an obligation.
• Bilateral (e.g. contract of sale) – both parties have
corresponding obligations. Sometimes, this is
confused with reciprocal obligations. Are they
synonymous with each other?
When you say bilateral, both parties have corresponding
obligations. The same with reciprocal, both parties have
corresponding obligations. Ang difference lang is the
performance. In reciprocal obligations, the performance must
be simultaneous. If one party is able, ready and willing to
comply with his obligation and the other is not, then there is
default. Even if there is no demand, there is already default.
But if it is not reciprocal but bilateral, it does not follow that it
should be simultaneous. So kung nag-perform si A, and wala
nag-perform si B, it does not mean that B is already in default.
There has to be a demand for there to be default. So basically,
that is the distinction between bilateral and reciprocal
obligations, as to the period of performance.
All reciprocal obligations are necessarily bilateral; but not all
bilateral obligations are reciprocal in nature.
ELEMENTS OF AN OBLIGATION
(1) Active subject. Who is the active subject? It is the creditor.
The party who can compel the performance.
(2) Passive subject. It is the debtor. The person from whom the
creditor can demand performance.
(3) Prestation or object. This is that which is to be given, to be
done or not to be done.
(4) Efficient cause. This is the legal tie that exists between the
parties. This is the reason why in case of non-performance by
the debtor, the creditor can compel by legal or judicial process.
(5) In some cases, form. The general rule is, there is no
particular form required for there to be a valid obligation. But
there are certain contracts where form is required for the
contract to be valid.
DIFFERENT KINDS OF PRESTATION
(1) To give (real obligation)
(2) To do (positive personal obligation)
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 O B L I G A T I O N S and C O N T R A C T S
(3) Not to do (negative personal obligation) (already includes
the obligation ‘not to give’)
Q: Nganong wala ma’y “not to give?”
Diba ang definition sa obligation is “to give, to do or not to do.”
Nganong wala ma’y “not to give?” Because it’s already included
in the obligation “not to do.” “Not to give” is actually a
personal obligation. But “to give” is a real obligation.
SOURCES OF OBLIGATIONS
ARTICLE 1157. Obligations arise from:
1. Law;
2. Contracts;
3. Quasi-contracts;
4. Acts or omissions punished by law; and
5. Quasi-delicts.
These are very basic concepts in Obligations and Contracts. So
it would be a mortal sin if you forget the sources of obligations.
There are only 5 sources. So, for example, there’s a case filed
against you, and you are being held liable for claims of
damages, the first thing that you need to know is, “what is the
source relied upon by this person claiming against me?” There
are only 5 sources. So if ang iyahang claim against you is not
based on any of these sources, wala siya’y cause of action. The
enumeration under Article 1157 is exclusive.
TAKE NOTE: These sources are exclusive. No obligation exists
if its source is not one of those enumerated in Art. 1157 (Navales
vs. Rias, 8Phil.508).
Although some authorities would say that if you really analyze
Article 1157, there are only two sources of obligations – (1) Law;
and (2) Contracts. Because quasi-contracts, delicts, and quasi-
delicts, they are all sourced from the law. (But for bar exam
purposes, cite the 5 sources under Article 1157.)
Let’s discuss the “Hold Out” clause. I think this was asked in
the bar exams 2 or 3 years ago.
Metropolitan Bank & Trust Company vs. Ana Grace Rosales
and Yo Yuk To (2014)
Respondents Rosales filed before the Regional Trial Court
(RTC) of Manila a Complaint for Breach of Obligation and
Contract with Damages against Petitioner Metrobank.
Respondents alleged that they attempted several times to
withdraw their deposits but were unable to because
Metrobank had placed their accounts under "Hold Out"
status. No explanation, however, was given by petitioner
as to why it issued the "Hold Out" order. Thus, they prayed
that the "Hold Out" order be lifted and that they be allowed
to withdraw their deposits. They likewise prayed for actual,
moral, and exemplary damages, as well as attorney’s fees.
Metrobank alleged that respondents have no cause of
action because it has a valid reason for issuing the "Hold
Out" order. It averred that due to the fraudulent scheme
of respondent Rosales, it was compelled to reimburse Liu
Chiu Fang the amount of US$75,000.00 and to file a criminal
complaint for Estafa against respondent Rosales.
RULING:
In cases of breach of contract, moral damages may be
recovered only if the defendant acted fraudulently or in bad
faith, or is “guilty of gross negligence amounting to bad
faith, or in wanton disregard of his contractual obligations.”
In this case, a review of the circumstances surrounding the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
issuance of the “Hold Out” order reveals that Metrobank
issued the “Hold Out” order in bad faith. First of all, the
order was issued without any legal basis. Second,
Metrobank did not inform respondents of the reason for
the “Hold Out.” Third, the order was issued prior to the
filing of the criminal complaint. Records show that the
“Hold Out” order was issued on July 31, 2003, while the
criminal complaint was filed only on September 3, 2003. All
these taken together lead us to conclude that Metrobank
acted in bad faith when it breached its contract with
respondents. As we see it then, respondents are entitled to
moral damages.
The “Hold Out” clause applies only if there is a valid and
existing obligation arising from any of the sources of
obligation enumerated in Article 1157 of the Civil Code, to
wit: law, contracts, quasi-contracts, delict, and quasi-delict.
In this case, Metrobank failed to show that respondents
have an obligation to it under any law, contract, quasi-
contract, delict, or quasi-delict. And although a criminal
case was filed by Metrobank against respondent Rosales,
this is not enough reason for petitioner to issue a “Hold
Out” order as the case is still pending and no final judgment
of conviction has been rendered against respondent
Rosales. In fact, it is significant to note that at the time
Metrobank issued the “Hold Out” order, the criminal
complaint had not yet been filed. Thus, considering that
respondent Rosales is not liable under any of the five
sources of obligation, there was no legal basis for petitioner
to issue the “Hold Out” order.
Rosales was a depositor in Metrobank. And then one day,
when she wanted to withdraw from her deposit, she could not
withdraw because allegedly, there was a “Hold Out” order.
And she was not given any explanation of the reason for the
“Hold Out” order. And so, she was constrained to file a case
against Metrobank. Metrobank, in its answer, said that the
reason why Rosales was not allowed to withdraw was because
of the “Hold Out” clause which was signed when she made an
initial deposit to the bank. According to Metrobank, Rosales
was involved in an act which caused damage to the bank. She
was allegedly involved in a fraudulent act which compelled the
bank to reimburse US$75,000.00 to a certain Liu Chiu Fang.
And then, Metrobank also said that it filed a case for estafa
against Rosales.
Was the bank justified in refusing to allow Rosales to withdraw
her deposit? What is the nature of the relationship between
the depositor and the bank? It’s actually a contract of loan. It’s
a loan by the depositor. The depositor is the creditor, and the
bank is the debtor. When the depositor would like to
withdraw, the bank has the obligation to release the fund. Was
the bank justified in refusing to release the funds?
The Supreme Court said that the bank actually was not
justified. How about the “Hold Out” Clause in the contract?
The Supreme Court said, the “Hold Out” Clause in the contract
will only apply if there is an obligation on the part of the
depositor that would allow the bank to invoke the “Hold Out”
Clause. And what would that obligation be? Necessarily, it
should come from any of the sources mentioned under Article
1157 of the New Civil Code.
So, was there a basis? The Supreme Court said, no. There was
no law. There was no contract. There was no delict, quasi-
delict, or quasi-contract which could be relied upon by the
bank as a source of Rosales’ obligation to justify the invocation
of the “Hold Out” Clause.
How about the fact that the bank filed a criminal case for
estafa? According to the Supreme Court, at the time when the
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bank refused to release the deposit of Rosales, it did not even
file yet a criminal case for estafa. And even if the bank already
filed, still, there was no conviction yet that would justify the
bank to refuse to release the deposit of Rosales. So, again, the
“Hold Out” Clause applies only if there’s a valid and existing
obligation arising from any of the sources of obligation
enumerated in Article 1157 of the New Civil Code.
So, at that time, considering that Rosales is not liable under
any of the 5 sources of obligation, there was no legal basis for
the bank to issue the “Hold Out” Order.
So, let’s discuss the different sources of obligations.
(1) LAW AS A SOURCE OF OBLIGATION
What are the mechanics insofar as the law as a source of
obligation is concerned?
ARTICLE 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.
If you invoke the law as a source of an obligation, it must be
very clearly spelled out in the law that you have this obligation.
You cannot say that, “Because the law says this, you have the
corresponding obligation to do or not to do this.”
Example would be in the case of –
The Office of the Solicitor General vs. Ayala Land
Incorporated, et al. (2009)
The OSG argues that respondents are mandated to provide
free parking by Section 803 of the National Building Code
and Rule XIX of the IRR.
According to Section 803 of the National Building Code:
SECTION 803. Percentage of Site Occupancy
(a) Maximum site occupancy shall be governed by the use,
type of construction, and height of the building and the use,
area, nature, and location of the site; and subject to the
provisions of the local zoning requirements and in
accordance with the rules and regulations promulgated by
the Secretary.
In connection therewith, Rule XIX of the old IRR, provides:
RULE XIX – PARKING AND LOADING SPACE
REQUIREMENTS
Pursuant to Section 803 of the National Building Code (PD
1096) providing for maximum site occupancy, the following
provisions on parking and loading space requirements shall
be observed:
1. The parking space ratings listed below are minimum off-
street requirements for specific uses/occupancies for
buildings/structures:
1.1 The size of an average automobile parking slot shall be
computed as 2.4 meters by 5.00 meters for perpendicular
or diagonal parking, 2.00 meters by 6.00 meters for parallel
parking. A truck or bus parking/loading slot shall be
computed at a minimum of 3.60 meters by 12.00 meters.
The parking slot shall be drawn to scale and the total
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
number of which shall be indicated on the plans and
specified whether or not parking accommodations, are
attendant-managed. (See Section 2 for computation of
parking requirements).
xxxx
1.7 Neighborhood shopping center – 1 slot/100 sq. m. of
shopping floor area The OSG avers that the aforequoted
provisions should be read together with Section 102 of the
National Building Code, which declares:
SECTION 102. Declaration of Policy
It is hereby declared to be the policy of the State to
safeguard life, health, property, and public welfare,
consistent with the principles of sound environmental
management and control; and to this end, make it the
purpose of this Code to provide for all buildings and
structures, a framework of minimum standards and
requirements to regulate and control their location, site,
design, quality of materials, construction, use, occupancy,
and maintenance.
The requirement of free-of-charge parking, the OSG argues,
greatly contributes to the aim of safeguarding "life, health,
property, and public welfare, consistent with the principles
of sound environmental management and control."
Adequate parking spaces would contribute greatly to
alleviating traffic congestion when complemented by quick
and easy access thereto because of free-charge parking.
Moreover, the power to regulate and control the use,
occupancy, and maintenance of buildings and structures
carries with it the power to impose fees and, conversely, to
control -- partially or, as in this case, absolutely -- the
imposition of such fees.
RULING:
The explicit directive of the afore-quoted statutory and
regulatory provisions, garnered from a plain reading
thereof, is that respondents, as operators/lessors of
neighborhood shopping centers, should provide parking
and loading spaces, in accordance with the minimum ratio
of one slot per 100 square meters of shopping floor area.
There is nothing therein pertaining to the collection (or
non-collection) of parking fees by respondents. In fact, the
term "parking fees" cannot even be found at all in the
entire National Building Code and its IRR. Obligations
derived from law are not presumed. Only those expressly
determined in the Civil Code or in special laws are
demandable, and shall be regulated by the precepts of the
law which establishes them.
The total prohibition against the collection by respondents
of parking fees from persons who use the mall parking
facilities has no basis in the National Building Code or its
IRR. The State also cannot impose the same prohibition by
generally invoking police power, since said prohibition
amounts to a taking of respondents’ property without
payment of just compensation.
The question here was the imposition against the Ayala Malls
to provide free-of-charge parking spaces. Is there an obligation
under the law compelling the owners of these malls to provide
free-of-charge parking spaces? According to the OSG, there is
a law which requires that, which is Section 803 of the National
Building Code, and Rule XIX of the Implementing Rules and
Regulations.
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 O B L I G A T I O N S and C O N T R A C T S
The requirement of free-of-charge parking, the OSG argues,
greatly contributes to the aim of safeguarding "life, health,
property, and public welfare, consistent with the principles of
sound environmental management and control." Adequate
parking spaces would contribute greatly to alleviating traffic
congestion when complemented by quick and easy access
thereto because of free-charge parking. Moreover, the power
to regulate and control the use, occupancy, and maintenance
of buildings and structures carries with it the power to impose
fees and, conversely, to control -- partially or, as in this case,
absolutely -- the imposition of such fees.
So mao daw ni siya ang basis why the State could impose upon
the mall owners the requirement of providing free-of-charge
parking spaces. Is that correct? The Supreme Court said –
There is nothing in the National Building Code or in its
Implementing Rules pertaining to the collection (or non-
collection) of parking fees. In fact, the term "parking fees"
cannot even be found at all in the entire National Building Code
and its IRR. Obligations derived from law are not presumed.
Only those expressly determined in the Civil Code or in special
laws are demandable, and shall be regulated by the precepts
of the law which establishes them.
It does not mean that if the law provides maximum sizes for
parking lots (e.g. 1 slot for every 100 meters), it does not mean
that it is free because the law does not say so. You cannot
presume from that provision. It has to be expressly provided
for. So the Supreme Court said, it has no basis in the National
Building Code or its Implementing Rules and Regulations.
How about the invocation by the OSG of the police power of
the State that as a form of regulation to alleviate traffic or to
make it easier for people to park their cars, you have to provide
free parking spaces? But the Supreme Court said that it is
actually tantamount to the exercise of the power of eminent
domain. Because you are taking away from these mall owners
portions of their properties. You cannot do that without
payment of just compensation. So that’s the ruling in relation
to Article 1158. You cannot presume. It has to be expressly
provided for under the law.
November 28, 2019- Murray
(2) CONTRACT AS A SOURCE OF OBLIGATION
ARTICLE 1305. A contract is a meeting of minds between
two persons whereby one binds himself, with respect to
the other, to give something or to render some service.
We are going to discuss contracts on the second part in this
subject since we are “Obligations and Contracts”. However,
let us discuss briefly contracts as a source of obligation. A
contract is defined under Article 1305 of the Civil Code. In
relation to contracts, the principle here to remember is that
when there is a contract between the parties: that is the law
between them. It has the obligatory force of law between
them BUT it does not mean that the contract is superior than
the law. It is for the reason that before the contract can be
valid and binding between the parties, it must first be in
accordance with the law.
What if there is no specific provision of law with respect to the
subject matter of the contract. Would the contract be valid?
Yes. It is still valid as long as it is not contrary to public policy,
good customs, etc…even if there is no specific provision of
law governing the subject matter.
(3) QUASI-CONTRACT AS A SOURCE OF OBLIGATION
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
– a juridical relation which arises from a lawful, voluntary
and unilateral act or acts executed by somebody for the
benefit of another and for which the former must be
indemnified to the end that no one shall be enriched or
benefited at the expense of another (Art. 2142)
Kind of contract created without the consent of one party but
whose missing consent is given by law.
When you say quasi-contract, by the term “quasi”: it seems
like a contract (murag MU daw). Why is it called quasi-
contract? Here, what we have is presumptive consent.
This is not the consent between the two parties but the
consent provided for by law. It is the law which supplies for
the missing consent that is why quasi-contract. Please
remember these three characteristics in order for quasi-
contracts to be valid.
Characteristics of Quasi-Contracts:
1. Lawful acts
2. Voluntary acts
3. Unilateral acts
Example. You have a neighbor, he went abroad for a vacation.
He did not leave the house in your custody as an administrator
or in any other voluntary arrangement. In fact you don’t speak
at all. Now, one day you saw smoke coming from your house.
Since your house is nearby, you are afraid that when his house
will totally set on fire, your property will be affected. So you
went to his house by climbing up his gate. In the process, you
were injured (nasamad) and there was a dog that bit you. Still
you have to save the house so you exhausted all means by
calling 911 and others. Eventually, the house was saved. Can
you claim from the neighbor for your expenses (i.e.
hospitalization, rabies injection). Can he refuse to pay
contending that in the first place he did not tell you to save the
house. What basis can you invoke?
Applying the three requisites:
1. Lawful act– YES.
2. Voluntary act – YES. Was it for your own volition? Were
you compelled to save it? No. It was because of your
own volition.
3. Unilateral acts – YES. Because if your neighbor before
you left told you to oversee his house, it could be that
you are an agent or an employee. You can ask for
compensation on the basis of the law on agency or
the labor code. However, in this case: you have no
prior contract with him. That was a unilateral act.
It is a quasi-contract. The above is actually an example of
Negotiorum Gestio.
2 principal kinds of Quasi-Contracts:
1. Negotiorum Gestio – Juridical relation
which takes place when somebody takes charge of
the agency or management of the business or
property of another without any power from the
latter. The owner of the business or property shall
reimburse the gestor for the necessary and useful
expenses incurred by the latter, and for the damages
suffered by him in the performance of his functions
as gestor.
Example. See example above.
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 O B L I G A T I O N S and C O N T R A C T S
2. Solutio Indebiti – (loosely called as
payment by mistake) a juridical relation which takes
place when somebody received something from
another without any right to demand for it, and the
thing was unduly delivered to him through mistake.
(Art. 2154)
Example: You rode a taxi and it was dark. Your fare is 95 pesos:
you paid a bill and you said KEEP THE CHANGE. Then you
discovered that instead of a 100 pesos bill which you intended
to give, you gave a 1000 pesos bill. (By reason of similarity).
Can you recover? Is it payment by mistake? Actually it is. There
is clearly no intention to keep the change here if the bill is 1,000
pesos if the supposed change is more expensive than the
supposed fare. This is an unusual case.
Comment: Common between the two is the concept of unjust
enrichment.
Distinguish Solutio Indebiti from Accion In Rem Verso
Now, there is also a concept in article 22 of the New Civil Code
which is oftentimes confused as solution indebti but it actually
is not. Accion in rem verso,
Accion in rem verso:
Art. 22. Every person who through an act of performance
by another, or any other means, acquires or comes into
possession of something at the expense of the latter
without just or legal ground, shall return the same to him.
At first glance you would think that this is solutio in debiti
because there is delivery of something without just or legal
ground and the obligation to return the same to him. What is
the distinction between accion in rem verso and solutio in
debiti?
- In solutio indebiti, payment was by mistake. In accion in rem
verso, there was no mistake.
Example 1. Debt was already paid but debtor misplaced proof
of payment. If pays with reservation and later on finds the
receipt, creditor has to return what he received.
Example 2. You already paid your debt to X because X has a
collector (an agent) so you coursed through the payment
through the collector. The next day, the principal/obligee went
to your house and again collected. We all know in the law on
agency that payment to the agent is payment to the principal.
Maybe the agent absconded with the money so the principal
did not know he already paid. Unfortunately, you misplaced
the receipt of your payment transaction to the agent so you
have nothing to evidence to the principal that you already
paid. To avoid trouble (since the neighbors are already looking
at you and a scandal is brewing up), you paid him even if you
know you already paid. Can you recover what you have paid?
Yes. Under the concept of accion in rem verso, not under the
concept of solutio indebiti. You did not pay by mistake, you
know that you already paid but you paid under the special
circumstances. The principal in this case actually have no legal
ground to retain the amount he collected.
• In Quasi-Contracts, there is no express consent given
by the other party. Consent needed is provided by law
through presumption. This is
called PRESUMPTIVE CONSENT
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
(4) DELICT OR ACT/OMISSIONS PUNISHED BY LAW AS
SOURCE OF OBLIGATION
• punished by the Revised Penal Code
• punished by special laws
When we speak of delict as a source of obligation, we are
actually referring to the civil aspect of the crime. The basis is
Article 100 of the RPC. Now, because of the principle under this
is there is a corresponding civil obligation for every criminal
liability.
Article 100, Revised Penal Code: “Every person criminally liable
for a felony is also civilly liable.”
• General rule: Whenever a criminal action is
instituted, the civil action for the civil liability is also
impliedly instituted together with the
criminal action. Civil liability must be enforced in the
criminal case where the accused is being prosecuted.
Example. When you file a case, you can file an affidavit-
complaint with the office of the fiscal. Example is for theft of
your cellphone. You don’t have to file a separate case in order
to recover the cellphone because together with that criminal
case, the civil aspect is also included. So for instance, in the
event that there is a finding of guilt in the accused, one of the
corresponding effects is actually restitution or return of the
cellphone. Or if the cellphone is no longer there, for
indemnification for the value of the property.
Except:
Meaning: When you filed a criminal case, it is purely
criminal and do not include the civil aspect.
1. When the offended party has filed the civil action
ahead of the criminal case.
2.When the offended party reserved the filing of a
separate civil action.
How? When you file the affidavit-complaint with the
prosecutor’s office, you mention there that you reserve. So if
the case goes into trial, the civil aspect is no longer included in
that trial because of the reservation.
3.When the offended party waived the civil liability.
Example. There is already a compromise agreement between
the accused and the complainant. If the accused already
apologized or returned the cellphone or its equivalent
monetary value, will it bar a criminal action? Theoretically it will
not bar, since you cannot compromise criminal liability. What
can be compromised is the civil aspect only. The real offended
party in a crime is the state (People of the Philippines). So the
consequence of the compromise in the civil aspect is that it will
no longer be included in the criminal action.
Although in reality, a compromise usually bars the criminal
action because there is a concomitant affidavit of desistance
on the part of the complainant who is usually the main witness
in that action. So the prosecution is left with no or insufficient
witness/es to pursue the action.
When we say delict as a source of obligation, again we are
referring to the civil liability arising from the crime itself.
However, before you can invoke the civil liability, there must
first be a conviction. It is not allowed that when the accused is
acquitted that the complainant would still be awarded
indemnities. It would be premised on the conviction of the
accused. This is because the law says every person “found
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criminally liable” meaning there is already a conviction of the
crime. So meaning, the civil liability (as compared to a civil
action were preponderance of evidence is sufficient), there is
also a need for proof beyond reasonable doubt again based on
the premise that conviction is a requirement in order for you
to be found civilly liable in the criminal action.
What if the accused is acquitted. Example, in our case of theft
of cellphone. If the accused is acquitted, can you still recover
the cellphone?
Effect of Acquittal in criminal case on the civil liability
• if based on reasonable doubt, civil liability
may be pursued if there is an independent civil
action allowed because guilt may be proved by
mere preponderance of evidence.
Example. Estafa. Accused is acquitted because you failed to
prove the elements of the crime beyond reasonable doubt.
Since there is a need to prove deceit etc. not just that money
is transferred from the complainant to the accused. Can you
recover? It depends. If there is an independent civil action
allowed for that. In your Persons you know that there is an
independent civil action allowed in case of defamation, fraud
etc right? So if it falls under that then you can still pursue a case
against the accused.
if based on the innocence of the accused, no
civil liability
if based on the declaration that no negligence can
be attributed to the accused, and the fact from
which the civil action might arise did not exist, no
civil liability.
if based on exempting circumstance, still civilly
liable
JOAQUIN, ET AL. vs. ANICETO
(G.R. NO. L-18719, OCTOBER 31, 1964)
While Pilar Joaquin was on the sidewalk of Aviles Street,
Manila, on April 27, 1960, a taxicab driven by
Felix Aniceto and owned by Ruperto Rodelas bumped
her. As a result, she suffered physical injuries.
Aniceto was charged with serious physical injuries through
reckless imprudence in the Municipal Court (now the City
Court) of Manila. He was subsequently found guilty and
sentenced to imprisonment. However, no ruling was made
on his civil liability to the offended party in view of the
latter's reservation to file a separate civil action
for damages for the injuries suffered by her.
Aniceto appealed the judgment of conviction to the Court
of First Instance of Manila. While the criminal case was thus
pending appeal, Pilar Joaquin, the injured party, filed this
case for damages in the Court of First Instance of Manila, in
accordance with the reservation which she had earlier
made. Felix Aniceto and Ruperto Rodelas, driver
and owner, respectively, of the taxicab were made party
defendants.
At the trial of this case, the plaintiff blocked all attempts
of Rodelas to prove that, as employer, he had exercised
due diligence in the selection and supervision of his
employee, on the ground that such a defense is not
available in a civil action brought under the Penal Code to
recover the subsidiary civil liability arising from the crime.
The lower court sustained plaintiff's objection. However, it
dismissed the case on the ground that in the absence of a
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
final judgment of conviction against the driver in the
criminal case, any action to enforce the
employer's subsidiary civil liability would be premature.
Such liability, the trial court added, may only be enforced on
proof of the insolvency of the employee. Hence, this
appeal.
The issue in this case is:
May an employee's primary civil liability for crime and his
employer's subsidiary liability therefor be proved in a
separate civil action even while the criminal case against
the employee is still pending?
It is now settled that for an employer to
be subsidiarily liable, the following requisites must be
present:
(1) That an employee has committed a crime in
the discharge of his duties;
(2) that said employee is insolvent and has not
satisfied his civil liability;
(3) that the employer is engaged in some kind of
industry.
Without the conviction of the employee, the employer
cannot be subsidiarily liable.
Can Article 33 above cited be made applicable to an
employer in a civil action for subsidiary liability? The
answer to this question is undoubtedly in the negative.
What this article 33 authorizes is an action against the
employee on his primary civil liability. It cannot apply to an
action against the employer to enforce his subsidiary civil
liability as stated above, because such liability arises only
after conviction of the employee in the criminal case. Any
action brought against him before the conviction of his
employee is premature.
In cases of negligence, the injured party or his heirs has the
choice, between an action to enforce the civil liability
arising from crime under Article 100 of the Revised Penal
Code and an action for quasi-delict under Articles 2176-2194
of the Civil Code. (See Barredo v. Garcia and Almario, 73
Phil. 607; Parker v. Panlilio, et al., 91 Phil. 1)
If he chooses an action for quasi-delict, he may
hold an employer liable for the negligent act of the
employee subject, however, to the employer's defense of
exercise of the diligence of a good father of the family. (Art.
2180, Civil Code)
On the other hand, should he choose to
prosecute his action under Article 100 of the Penal Code, he
can hold the employer subsidiarily liable only upon prior
conviction of the employee. While a separate
and independent civil action for damages may be brought
against the employee under Article 33 of the Civil Code, no
such action may be filed against the employer on the
latter's subsidiary civil liability because such liability is
governed not by the Civil Code but by the Penal
Code, under which conviction of the employee is a
condition sine qua non for the employer's subsidiary
liability. If the court trying the employee's liability adjudges
the employee liable, but the court trying the criminal action
acquits the employee, the subsequent insolvency of the
employee cannot make the employer subsidiary liable to
the offended party or to the latter's heirs.
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Discussion: The first issue here is: Can the plaintiff insist
subsidiary liability of the employer in a separate civil case as a
consequence of his reservation of the civil aspect of the crime?
The court ruled that NO. The invocation is PREMATURE. Why?
Because the subsidiary liability of the employer
based on the revised penal code is predicated on the
conviction of the accused. It is actually one of the
requisites of the subsidiary liability where the
accused “has committed a crime in the discharge of
his duties”. So take note of the requisites for the
subsidiary liability. Here, since the criminal case is still
pending, there is yet no determination whether he
really committed the crime or not.
The second issue here is: Can the plaintiff invoke Article 33 to
enforce subsidiary liability of the employer. No.
This article covers only a situation where an
employee can be sued in his primary civil liability. It
cannot apply to an action against the employer to
enforce his subsidiary civil liability.
In cases of fraud, defamation or physical injury, diba an
independent civil action can be instituted. Is the civil action
filed in this case covered under Article 33 of the New Civil
Code? The Supreme Court said that is another cause of action.
So the liability of the employer based on Article 33 is not only
subsidiary but primary. Here, his action is actually premised on
Article 100 of the Revised Penal Code. So, do not confuse the
two.
Also another distinction here is with regards civil liability
regarding quasi-delict and delict. So take note of the
differences as discussed in the case regarding the liability of
the employer and the defenses he can raise.
So BE CAREFUL OF THE REMEDY you will avail. On what cause
of action you are basing your action. Because they have
different consequences.
Effect of death of the criminal pending trial on his
civil liability
Those arising from the crime are extinguished but if there
can be an independent civil action, civil liability is not
extinguished, the action will be directed against the
administrator of the estate (fraud, physical injuries,
defamation).
PEOPLE OF THE PHILIPPINES vs. PARAS (G.R. No. 192912,
October 03, 2014)
Under Article 89, paragraph 1 of the Revised Penal Code,
as amended, the death of an accused pending his appeal
extinguishes both his criminal and civil liability ex delicto.
Said provision reads:
Art. 89. How criminal liability is totally extinguished. -
Criminal liability is totally extinguished:
1. By the death of the convict, as to the personal
penalties; and as to pecuniary penalties, liability
therefore is extinguished only when the death of the
offender occurs before final judgment.
The Court, in People v. Bayotas, enunciated the following
guidelines construing the above provision in case the
accused dies before final judgment:
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
1. Death of the accused pending appeal of his conviction
extinguishes his criminal liability as well as the civil liability
based solely thereon. As opined by Justice Regalado, in
this regard, "the death of the accused prior to final
judgment terminates his criminal liability and only the civil
liability directly arising from and based solely on the
offense committed, i.e., civil liability ex
delicto in senso strictiore."
2. Corollarily, the claim for civil liability survives
notwithstanding the death of accused, if the same may
also be predicated on a source of obligation
other than delict. Article 1157 of the Civil Code enumerates
these other sources of obligation from which the civil
liability may arise as a result of the same act or omission:
a) Law;
b) Contracts;
c) Quasi-contracts;
d) xxx;
3. Where the civil liability survives, as explained in Number
2 above, an action for recovery therefor may be pursued
but only by way of filing a separate civil action and subject
to Section 1, Rule 111 of the 1985 Rules on Criminal
Procedure as amended.
This separate civil action may be enforced either against
the executor/administrator or the estate of the accused,
depending on the source of obligation upon which the
same is based as explained above.
4. Finally, the private offended party need not fear a
forfeiture of his right to file this separate civil action by
prescription, in cases where during the prosecution of the
criminal action and prior to its extinction, the private-
offended party instituted together therewith the civil
action.
In such case, the statute of limitations on the civil liability
is deemed interrupted during the pendency of the criminal
case, conformably with provisions of Article 1155 of the Civil
Code, that should thereby avoid any apprehension on a
possible privation of right by prescription.
Thus, upon the death of the accused pending appeal of his
conviction, the criminal action is extinguished inasmuch as
there is no longer a defendant to stand as the accused; the
civil action instituted therein for the recovery of civil
liability ex delicto is ipso facto extinguished, grounded as it
is on the criminal action.
In this case, when the accused-appellant died on January
24, 2013, his appeal to this Court was still pending. The
Decision dated June 4, 2014 was thereafter promulgated as
the Court was not immediately informed of the accused-
appellant's death.
The death of the accused-appellant herein, thus,
extinguished his criminal liability, as well as his civil liability
directly arising from and based solely on the crime
committed.
Discussion: The landmark case here is actually the case of
People vs Bayotas (note, the Bayotas ruling is discussed
above).
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BERNARDO vs. PEOPLE OF THE PHILIPPINES (G.R. No.
182210, October 05, 2015)
An act or omission causing damage to another may give rise
to several distinct civil liabilities on the part of the
offender. If the conduct constitutes a felony, the accused
may be held civilly liable under Article 100 of the Revised
Penal Code (ex delicto). This particular civil liability due
the offended party is rooted on facts that constitute a
crime. Otherwise stated, civil liability arises from the
offense charged. It is not required that the accused be
convicted to be entitled to civil liability based on delict. As
long as the facts constituting the offense charged are
established by preponderance of evidence, civil liability
may be awarded. Moreover, the civil liability based
on delict is deemed instituted with the criminal
action unless the offended party waives the civil action,
reserves the right to institute it separately, or institutes the
civil action prior to the criminal action.
The same act or omission, however, may also give rise to
independent civil liabilities based on other sources of
obligation. Article 1157 of the Civil Code enumerates these
other sources of obligation from which the civil liability may
arise as a result of the same act or omission: (a) law (b)
contracts; (c) quasi-contracts, and (d) quasi-delicts. Among
these are the civil liabilities for intentional torts under
Articles 32 and 34 of the Civil Code and for quasi-
delicts under Article 2176 of Civil Code. For conduct
constituting defamation, fraud, and physical injuries, the
Civil Code likewise grants the offended party the right to
institute a civil action independently of the criminal action
under Article-33 of the Civil Code.
Thus, it is entirely possible for one to be free from civil
ability directly arising from a violation of the penal law and
to still be liable civilly based on contract or by laws other
than the criminal law. Such civil actions may proceed
independently of the criminal proceedings and regardless
of the result of the criminal action, subject however, to
the caveat that the offended party cannot recover
damages twice for the same act or omission.
Bernardo's civil liability may be enforced in the present case
despite her death.
As a general rule, the death of an accused pending appeal
extinguishes her criminal liability and the corresponding
civil liability based solely on the offense (delict). The death
amounts to an acquittal of the accused based on the
constitutionally mandated presumption of innocence in her
favor, which can be overcome only by a finding of guilt -
something that death prevents the court from making. In a
sense, death absolves the accused from any earthly
responsibility arising from the offense — a divine act that
no human court can reverse, qualify, much less disregard.
The intervention of death of the accused in any case is an
injunction by fate itself so that no criminal liability and the
corresponding civil liability arising from the offense should
be imposed on him.
The independent civil liabilities, however, survive death and
an action for recovery therefore may be generally pursued
but only by filing a separate civil action and subject to
Section 1, Rule 111 of the Rules on Criminal Procedure as
amended. This separate civil action may be enforced
against the estate of the accused.
In B.P. 22 cases, the criminal action shall be deemed to
include the corresponding civil actions. Instead of
instituting two separate cases, only a single suit is filed and
tried. This rule was enacted to help declog court dockets,
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
which had been packed with B.P. 22 because creditors used
the courts as collectors. As we observed in Hyatt v. Asia
Dynamic Electrix Corp.:
Because ordinarily no filing fee is charged in criminal cases
for actual damages, the payee uses the intimidating effect
of a criminal charge to collect his credit gratis and
sometimes, upon being paid, the trial court is not even
informed thereof. The inclusion of the civil action in the
criminal case is expected to significantly lower the number
of cases filed before the courts for collection based
on dishonored checks. It is also expected to expedite the
disposition of these cases. Instead of instituting two
separate cases, one for criminal and another for civil, only a
single suit shall be filed and tried. It should be stressed that
the policy laid down by the Rules is to discourage the
separate filing of the civil action.ch
As a necessary consequence of this special rule, the civil
liabilities arising from the issuance of a worthless check are
deemed instituted in a case for violation of B.P. 22; the
death of Bernardo did not automatically extinguish the
action. The independent civil liability based on contract,
which was deemed instituted in the criminal action for B.P.
22, may still be enforced against her estate in the present
case. We thus rule on the present action to determine
Bumanglag's civil liability.
Discussion: We know that in BP 22 cases, if you issue a
worthless check then the criminal action deems to include the
civil liabilities arising out of the issuance of the check. So when
a criminal action for BP 22 is filed and during the pendency of
the action, the accused died, what is the effect? In this case of
Bernardo, it will not automatically extinguish the action. The
action will still continue notwithstanding the death of the
accused but of course with respect only to the civil liabilities
arising from other sources other than that which springs from
the crime.
Remember Bernardo regarding the rule with regards BP 22
cases.
NCC, Art. 33. In cases of defamation, fraud, and physical
injuries a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the
injured party. Such civil action shall proceed independently of
the criminal prosecution, and shall require only a
preponderance of evidence.
There are also crimes without civil liability.
The general rule is that criminal liability includes civil liability.
However, do take note that there are crimes without civil
liability. Why is this so? Because in these crimes, there is no
offended party. Who is only offended is the state.
Examples are treason, rebellion, gambling, illegal
possession of firearms, prohibited drugs etc. (because
there is no privte offended party)
(5) Quasi-Delict as a Source of Obligation
- an act or omission which causes damage to another,
there being fault or negligence, and there is no pre-
existing contractual relation between the parties.
Effect of plaintiff’s own negligence:
1. If it is the proximate cause of his damage,
he cannot recover damages
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2. If it is merely contributory, the proximate
cause of the damage being that of the defendant, the
plaintiff may recover damages but the courts shall
mitigate the damages to be awarded (Art. 2179)
Based on the definition of a quasi-delict. The foundation of a
quasi-delict is NEGLIGENCE.
What is the definition of negligence?
It is the failure to observe that degree of diligence
which is required by the circumstances of persons,
place or time.
There really is no hard and fast rule regarding diligence but you
already know that there are certain degrees of diligence which
are corresponded in different situations.
General rule is bonus pater familias or ordinary diligence or
diligence of a good father of a family. However, there are
circumstances which require extraordinary diligence. In that
case, what if you observed only ordinary diligence, can you
invoke that? No, because it means you fell short of the degree
of diligence required and therefore based on the definition of
negligence, you are negligent.
“No Pre-Existing Contractual Relation”
The law says, there is no pre-existing contractual
relation between the parties. Are we saying that a
requirement is that there must be no contract so that
there can be a quasi-delict? In other words, if there is
a contract, there is no liability for quasi-delict? That is
not the definition. Meaning, the contractual
obligation lang is not required.
Example. You boarded a bus to Tagum, Then, while travelling,
there was a collision because the driver of the bus is negligent.
So there is negligence and there is damage, can you sue for
quasi-delict? But there is a contract between you and the bus:
a contract of carriage. Still you can sue for quasi-delict. It is not
a prohibition or legal impediment that if there is contract there
can be no liability for quasi-delict. Can there be liability also for
culpa-contractual? Yes. There is a breach of contract of
carriage. That is just one of the possible remedies he can
obtain. It depends on the party what is the basis of his cause
of action.
Vicarious Liability; In quasi-delicts, there is an assumptive form
of liability (Vicarious Liability).
The obligation is demandable not only for the
tortfeasor’s own fault or negligence but also in
certain cases, from those who are responsible for
the tortfeasor such as parents, guardians, teachers
or employers (Art. 2180 New Civil Code)
Q: What is the nature of the liability of the employer or others
vicariously liable?
The liability is primary and solidary. So he can be
sued alone, or the negligent employee can be sued
alone or they can be sued both. It depends on the
plaintiff but the bottomline is the liability is solidary.
You can recover the entire amount from anyone of
them.
PACIS vs. MORALES
(G.R. No. 169467, February 25, 2010)
This case involves the accidental discharge of a firearm
inside a gun store. Under PNP Circular No. 9, entitled the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
“Policy on Firearms and Ammunition Dealership/Repair,” a
person who is in the business of purchasing and selling of
firearms and ammunition must maintain basic security and
safety requirements of a gun dealer, otherwise his License
to Operate Dealership will be suspended or canceled.
Indeed, a higher degree of care is required of someone
who has in his possession or under his control an
instrumentality extremely dangerous in character, such as
dangerous weapons or substances. Such person in
possession or control of dangerous instrumentalities has
the duty to take exceptional precautions to prevent any
injury being done thereby. Unlike the ordinary affairs of life
or business which involve little or no risk, a business dealing
with dangerous weapons requires the exercise of a higher
degree of care.
As a gun store owner, respondent is presumed to
be knowledgeable about firearms safety and should have
known never to keep a loaded weapon in his store to avoid
unreasonable risk of harm or injury to others. Firearms
should be stored unloaded and separate from ammunition
when the firearms are not needed for ready-access
defensive use. With more reason, guns accepted by the
store for repair should not be loaded precisely because
they are defective and may cause an accidental discharge
such as what happened in this case.
Respondent was clearly negligent when he
accepted the gun for repair and placed it inside the drawer
without ensuring first that it was not loaded. The defective
gun should have been stored in a vault. Before accepting
the defective gun for repair, respondent should have made
sure that it was not loaded to prevent any untoward
accident. Respondent should never accept a firearm from
another person, until the cylinder or action is open and he
has personally checked that the weapon is completely
unloaded. For failing to insure that the gun was not loaded,
respondent himself was negligent. Furthermore, it was not
shown in this case whether respondent had a License to
Repair which authorizes him to repair defective firearms
to restore its original composition or enhance or upgrade
firearms.
Discussion: This is an example of the vicarious liability. The
firearm here is just placed in a drawer and the contention of
the employer is that he was not around during the time and
there is due diligence in selection of employees.
Would he be exonerated? Here, since this is a business dealing
with dangerous weapons: what should have been the degree
of diligence is extraordinary diligence and not just ordinary
diligence.
The gunshop owner is presumed to be knowledgeable with
firearms safety. The requirement is if you are accepting
firearms for repair so you should be careful since this is for
repair, there must be some defect and accidental firing may be
had. So for this reason, the guns for repair must be unloaded.
The employer is negligent by accepting the defective gun
without unloading it with gun and it must not just be stored in
a drawer and be stored in a vault.
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Quasi-Delict Distinguished from Crime
Discussion of the above table: Take note of the difference
between quasi-delicts and delicts regarding the employer.
Discussed in Crimes as a source of obligation particularly in the
case of JOAQUIN, ET AL. vs. ANICETO (G.R. NO. L-18719,
OCTOBER 31, 1964). Reiterated only by Mam.
Quasi-Delict distinguished from Culpa-
Contractual
Discussion of the above table:
1. Nature of negligence, in quasi-delict
meaning the negligence is really the cause
of action while in culpa contractual the
negligence is only incidental. What does it
mean? Negligence can only be one of the
reasons for a breach of contract. There are
other ways to breach a contract like delay,
fraud etc.
2. As to the second distinction, the defense of
a good father of a family is complete and
proper insofar as persons who are
vicariously liable but this is not a defense
available if the basis of the cause of action
is culpa-contractual.
3. The plaintiff has the burden of proof to
prove negligence on the part of the
defendant. In breach of contract,
negligence is actually presumed. Example,
if you boarded a bus going to tagum and
you only stopped in SPMC, then there is
already a breach. You don’t really need to
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
prove the negligence of the other
contracting party in the contract.
A SINGLE ACT OR OMISSION CAN GIVE RISE TO DIFFERENT
CAUSES OF ACTION
Example: P was a passenger in a bus driven by D and owned by
O. The bus was being tailed by a car driven by X. Eventually, D
and X were racing and were driving very fast at 160 km per
hour. Consequently, D bumped X which caused both vehicles
to turn turtle. P sustained several injuries as a result.
Under this scenario what actions may be filed by P and against
whom?
2. Against O:
• Civil case for breach of contract (culpa
contractual). He is primarily liable under this case. His
defense is if the driver was not negligent at all.
• Civil case for quasi-delict or tort (culpa aquiliana). He
is primarily and solidarily liable with his driver-
employee. His defense is if he exercised due diligence in the
selection and supervision of his employees.
• He is subsidiarily liable for the civil aspect if his
employee is convicted of the crime of reckless imprudence
resulting to physical injuries. His defense is if the employee
is not insolvent or that the incident occurred not in the
performance of duties.
Discussion: If P wants to file a case, against whom is this case
directed and what are the causes of action that he can base his
action on?
So, let us go the different sources of obligation.
1. Contract – yes. Because he has a contract of
carriage.
Against whom?
a. The carrier. Can he file that against the
driver? No. Because he has no contract
with the driver although he is liable. He can
file it against O.
2. Quasi-Contract – no. obviously there is no quasi-
contract here.
3. Delict – yes. Because it could fall as reckless
imprudence resulting to physical injuries.
Against whom?
a. The driver of the bus. Because he is the one
who is imprudent. He participated in the
act, actually he is the one negligent.
b. The owner of the Ferrari? Also yes, because
he is also a participant in the act.
The owner? No because the owner is not even present at the
time of the incident. So the take away here is that if your
source is delict, you cannot direct the action to the
employer/owner. Remember, he can only be held subsidiarily
and if the requisites as discussed in Joaqin are present and also
there must be prior conviction.
4. Quasi-Delict – yes.
Against whom
a. The owner of the bus (although he can
interpose the defense of due diligence in
selection or supervision of employees)
b. The owner of the ferrari
c. The driver of the bus
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5. Law – you can also invoke Article 33. Kasi here there
is physical injuries which is covered
Can you file all of these cases? Yes. Would it not constitute
forum shopping? Or splitting a cause of action? No. Because
each source of obligation is a different cause of action. So, the
effect is there is really nothing splitted, there is nothing
violated. Example of splitting of a cause of action is if a same
cause of action provides for alternative remedies.
The only limitation is you cannot recover twice for the same
act or omission. Otherwise, gawin na syang business,
magpabangga ka then mag-file ka apat na kaso para makakuha
ka sa tanan.
December 5, 2019-Vallente
Rules applicable in obligation to give a
determinate or specific thing
Going back, we discussed the different kinds of obligation.
So we have an obligation to give or a real obligation. We
have an obligation to do or not to do which are personal
obligations.
With respect to real obligations, we also have obligation to
give either a specific thing or generic thing.
Q: What is the distinction between a specific thing or a
generic thing?
When you say specific, it means it is specifically
described and particularly segregated from the rest.
So when you say a Honda Civic with Plate No. 13444,
is that generic or specific. Specific, kasi isa lang ang
Honda civic with that plate no. If you say Honda Civic
Red 2019 Model? That is generic because it is not
particularly segregated. Take note that the rules are
different if the thing is specific or generic.
Observe proper diligence of a good father of a family,
unless the law or the stipulation of the parties requires
another standard of care (Art. 1163)
Example. The debtor’s obligation is to give a Honda Civic with
plate no. 13444. So he has to observe due diligence in taking
care of that car until it has to be delivered to the creditor. So
what would be required of him ordinarily? If he still has 1 year
to deliver the car, so it means he would not change the oil or
park it safely where there is no flooding .
The ordinary diligence is if it is your car, what would you do?
Otherwise, it this is not stated as a requirement, the obligation
to give would be rendered illusory. The car is not there
anymore at the time that the thing has to be delivered. But if
the obligation is only to deliver a red Honda civic (generic), this
is not required. Why? Because the thing to be delivered is not
yet earmarked, you can always substitute or deliver the thing
of the same class. So it means you have to change the oil of all
the red Honda civics in the world?
Includes that of delivering all its accessions and
accessories, even though they may not have been
mentioned (Art. 1166).
Example. So, if that is a specific thing, for example, the car seat
is leather which is real. That is the agreement, to deliver the
specific car one year from now. You cannot replace the leather
with cloth, because you also have the obligation to deliver the
accessions and accessories of the car. The standard here is
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
medium quality, not inferior and not superior. Kung ano lang
din normally ang Makita mo dyan na car.
The creditor has a right to the fruits of the thing from
the time the obligation to deliver it arises. However, he
shall acquire no real right over it until the same has
been delivered to him (Art. 1164).
Another rule applicable only to obligation to give a specific
thing.
Article 1164. The creditor has a right to the fruits of the thing
from the time the obligation to deliver arises. However, he
shall acquire no real right over it until the same has been
delivered to him.
We are referring here to the right of the creditor to the fruits.
There are two periods to reckon:
1. The period starting from the time the obligation to
deliver arises until before delivery
2. From the time of delivery onwards
Period 1: From the time the obligation to deliver arises until
before the delivery
The creditor only has a personal right or jus in
personam or jus ad rem.
Personal right; jus in personam; jus adrem. It is a
right demandable by one person against another.
Example: The obligation is to deliver a specific parcel of land,
and there are mangoes from the land. At the time the
obligation was contracted, kung unsa man tong nakatanom at
the time the obligation was constituted, apil to siya sa dapat i-
deliver. Dili to pwede i-harvest ni debtor para pag deliver niya
wala na ang mga manga. Whatever fruits found in the land at
the time the obligation to deliver arises, the creditor has the
right over the fruits.
Q: What happens if the debtor harvested the fruits and sold
them to another person, Mr. X. Can the creditor proceed
against X?
No. He can only proceed against the debtor because
he only has a personal right, which is a right
demandable only to the person of the debtor.
Period 2: From the time of delivery
The creditor already acquires real right.
Real Right. It is the right which is demandable
against the whole world. It is the right that attaches
to thing.
Q: Same thing, what happens if the debtor harvested the fruits
and sold them to another person, Mr. X. Can the creditor
proceed now against X?
This time, yes. This is because upon delivery, the
creditor already has real right. Whoever is in
possession of the thing, the creditor can proceed
against the person.
Q: Why is it that before delivery, it is only a personal right and
upon delivery, it is already a real right?
Because it is delivery, in consequence of certain
contracts, that transfers ownership.
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Before we invoke in the right in Article 1164, we should know
as to when the obligation to deliver arises.
“from the time the obligation to deliver arises”- When does
the obligation to deliver arise?
1. If the obligation is based on law, quasi-contract,
delict, quasi-delict, it is the specific provision of the
law which governs.
Example: In an obligation to give support. Article 203 from the
Family Code says it starts from the date of demand.
2. If the obligation arises from contract, general rule is,
it is demandable upon the perfection of the contract.
2.1 Exception: But if the obligation is subject to a
suspensive obligation, the obligation to deliver arise
from the time of the fulfillment of the condition.
Example: “I will give this specific parcel of land to you if you
will pass the bar exam.” Here, the obligation to deliver will
arrive when the creditor passes the bar exam.
2.2 Another exception, if the obligation is subject to
a suspensive period, the obligation to deliver arises
from the arrival of the period.
Example: “I will give this parcel of land on your 18th birthday”.
The obligation to deliver arises upon the arrival of your 18th
birthday.
Very important to emphasize that this is only applicable to a
specific thing which is the subject of the obligation. For
example, my obligation is to deliver a 3-hectare parcel of land.
And I have 3 hectares from different places (Davao City, Digos,
Tagum). Ang sa Digos and Davao, planted pero sa Tagum, dili.
Kung ikaw ang creditor, you cannot say that all the fruits should
be delivered because prior to selection, the obligation is generic.
You will only know which lang is to be given at the time of
delivery. That’s why applicable lang ning Article 1164 to an
obligation to deliver a specific thing.
Delivery
It is delivery, in consequence of certain contracts, which
transfers ownership.
“in consequence of certain contracts”. Emphasis on “in
consequence of certain contracts” because naay delivery na
does not transfer ownership. Dapat delivery plus specific
contract. Example, delivery pursuant to a contract of sale.
CRUZADO vs. BUSTOS AND ESCALER (34 Phil 17) –
The case filed by the plaintiff is for accion reinvidicatoria.
When you say reinvidicatoria, it is an action to recover
ownership. According to the plaintiff, he already bought
the property from the defendant and despite payment, the
defendant did not deliver the land.
Held: That is not the proper remedy. Remedy when there is
no delivery is Complaint for Specific Performance and
Delivery because buyer is not yet the owner of the property
before delivery. Accion reivindicatoria is not proper
because such action presupposes ownership on the part of
the buyer.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Kinds of delivery
1. Real or Actual Tradition. The property is transferred
physically from the hands of the transferor to the
hands of the transferee.
2. Constructive Tradition
a) Tradicion Symbolica – eg. Keys to house
b) Tradicion Instrumental – execution of
public instrument
c) Tradition Longa Manu – pointing of the
object
d) Tradition Brevi Manu (possessor becomes
owner, thus no more actual delivery)
Example: You are leasing a house and lot then you bought the
land from the owner.
e) Tradicion Constitutum Possessorium
(possessor/owner loses ownership but
retains possession in some other capacity,
eg. lessee)
Example: I am the owner of this house and lot and I sold the
same to X. But I did not leave the house and lot since after the
execution of the deed of sale to X, I rented the house and lot.
I now have a lease contract. Even if X did not physically get the
possession of the house and lot, there is now a transfer of
ownership to X, through the possession of the now-lessee.
f) Tradicion by operation of law – non-owner
sells property and later acquires owner
Example: I am an administrator of this parcel of land. I sold to
X this land, misrepresented that I am the owner. X now is in
possession of the property by virtue of the deed of sale. But
later on, the real owner donated to me that land. By operation
of law, when the land was acquired by me, the transfer
ownership also followed to X. I am barred by estoppel to claim
ownership against the person to whom I sold the property.
g) Quasi-Tradicion (Art. 1501)
Article 1501. With respect to incorporeal property, the
provisions of the first paragraph of article 1498 shall
govern. In any other case wherein said provisions are not
applicable, the placing of the titles of ownership in the
possession of the vendee or the use by the vendee of his
rights, with the vendor's consent, shall be understood as a
delivery.
Example: Shares of stock, wala gi-deliver kay vendee ni vendor
ang papel representing the shares of stocks pero gina-enjoy n ani
vendee ang dividends. That is equivalent to delivery.
NORKIS DISTRIBUTORS, INC vs. COURT OF APPEALS
G.R. No. 91029
February 7, 1991
Nepales wanted to purchase a motorcycle from Norkis.
Nepales wanted to obtain a loan from DBP. Under the loan,
the motorcycle that he will get from Norkis shall be the
collateral for the loan. As a requirement for the release of
the loan, Nepales should execute a chattel mortgage.
Remember that you cannot be a mortgagor if you are not
the owner of the property. The registration was already
facilitated in the LTO under the name of Nepales. But
before Nepales could get the motorcycle, it met an accident
and was completely destroyed.
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The principal issue in this case is who should bear the loss
of the motorcycle. The answer to this question would
depend on whether there had already been a transfer of
ownership of the motorcycle to private respondent at the
time it was destroyed. (res perit domino)
Norkis concedes that there was no "actual" delivery of the
vehicle. However, it insists that there was constructive
delivery of the unit upon: (1) the issuance of the Sales Invoice
in the name of the private respondent and the affixing of his
signature thereon; (2) the registration of the vehicle on
November 6, 1979 with the Land Transportation Commission
in private respondent's name; and (3) the issuance of official
receipt for payment of registration fees.
Ruling: That argument is not well taken. As pointed out by
the private respondent, the issuance of a sales invoice does
not prove transfer of ownership of the thing sold to the
buyer. An invoice is nothing more than a detailed statement
of the nature, quantity and cost of the thing sold and has
been considered not a bill of sale (Am. Jur. 2nd Ed., Vol. 67,
p. 378).
In all forms of delivery, it is necessary that the act of
delivery whether constructive or actual, be coupled with
the intention of delivering the thing. The act, without the
intention, is insufficient (De Leon, Comments and Cases on
Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name
of private respondent, Norkis did not intend yet to transfer
the title or ownership to Nepales, but only to facilitate the
execution of a chattel mortgage in favor of the DBP for the
release of the buyer's motorcycle loan.
The Letter of Guarantee issued by the DBP, reveals that the
execution in its favor of a chattel mortgage over the
purchased vehicle is a pre-requisite for the approval of the
buyer's loan. If Norkis would not accede to that
arrangement, DBP would not approve private respondent's
loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of
effecting delivery, which gives legal effect to the act, is the
actual intention of the vendor to deliver, and its acceptance
by the vendee. Without that intention, there is no tradition
(Abuan vs. Garcia, 14 SCRA 759).
EQUATORIAL REALTY DEVELOPMENT, INC. vs. MAYFAIR
THEATER, INC.,
(G.R. No. 133879, November 21, 2001)
Mayfair was a lessee of a real property owned by Carmelo.
In the contract of lease between Carmelo and Mayfair,
Mayfair was given a right of first refusal. Carmelo sold the
property to Equatorial disregarding the right of first refusal.
A deed of sale was executed which was a public document
in this case. Supposedly, the execution of that public
document is equivalent to constructive delivery.
Delivery; Tradition Instrumental; Was there transfer of
ownership?
Ruling: From the peculiar facts of this case, it is clear that
Equatorial never took actual control and possession of the
property sold, in view of respondent's timely objection to
the sale and the continued actual possession of the
property. The objection took the form of a court action
impugning the sale which, as we know, was rescinded by a
judgment rendered by this Court in the mother case.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
It has been held that the execution of a contract of sale as
a form of constructive delivery is a legal fiction. It holds
true only when there is no impediment that may prevent
the passing of the property from the hands of the vendor
into those of the vendee. When there is such impediment,
"fiction yields to reality — the delivery has not been
effected."
The respondent's opposition to the transfer of the property
by way of sale to Equatorial was a legally sufficient
impediment that effectively prevented the passing of the
property into the latter's hands. This was the same
impediment contemplated in Vda. de Sarmiento v. Lesaca,
in which the Court held as follows:
"The question that now arises is: Is there any
stipulation in the sale in question from which we can
infer that the vendor did not intend to deliver outright
the possession of the lands to the vendee?
We find none. On the contrary, it can be clearly seen
therein that the vendor intended to place the vendee in
actual possession of the lands immediately as can be
inferred from the stipulation that the vendee 'takes
actual possession thereof . . . with full rights to dispose,
enjoy and make use thereof in such manner and form
as would be most advantageous to herself.' The
possession referred to in the contract evidently refers
to actual possession and not merely symbolical
inferable from the mere execution of the document.
“Has the vendor complied with this express
commitment? she did not. As provided in Article 1462,
the thing sold shall be deemed delivered when the
vendee is placed in the control and possession thereof,
which situation does not here obtain because from the
execution of the sale up to the present the vendee was
never able to take possession of the lands due to the
insistent refusal of Martin Deloso to surrender them
claiming ownership thereof. And although it is
postulated in the same article that the execution of a
public document is equivalent to delivery, this legal
fiction only holds true when there is no impediment
that may prevent the passing of the property from the
hands of the vendor into those of the vendee. x x x.”
The execution of a public instrument gives rise, therefore,
only to a prima facie presumption of delivery. Such
presumption is destroyed when the instrument itself
expresses or implies that delivery was not intended; or
when by other means it is shown that such delivery was not
effected, because a third person was actually in possession
of the thing. In the latter case, the sale cannot be
considered consummated.
Application of Article 1164
However, the point may be raised that under Article 1164 of
the Civil Code, Equatorial as buyer acquired a right to the
fruits of the thing sold from the time the obligation to
deliver the property to petitioner arose. That time arose
upon the perfection of the Contract of Sale on July 30, 1978,
from which moment the laws provide that the parties to a
sale may reciprocally demand performance. Does this
mean that despite the judgment rescinding the sale, the
right to the fruits belonged to, and remained enforceable
by, Equatorial?
Article 1385 of the Civil Code answers this question in the
negative, because "[r]escission creates the obligation to
return the things which were the object of the contract,
together with their fruits, and the price with its interest; x x
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x" Not only the land and building sold, but also the rental
payments paid, if any, had to be returned by the buyer.
The fact that Mayfair paid rentals to Equatorial
Another point. The Decision in the mother case stated that
"Equatorial x x x has received rents" from Mayfair "during
all the years that this controversy has been litigated." The
Separate Opinion of Justice Teodoro Padilla in the mother
case also said that Equatorial was "deriving rental income"
from the disputed property. Even herein ponente's
Separate Concurring Opinion in the mother case
recognized these rentals. The question now is: Do all these
statements concede actual delivery?
The answer is "No." The fact that Mayfair paid rentals to
Equatorial during the litigation should not be interpreted to
mean either actual delivery or ipso facto recognition of
Equatorial's title.
The CA Records of the mother case show that Equatorial —
as alleged buyer of the disputed properties and as alleged
successor-in-interest of Carmelo's rights as lessor —
submitted two ejectment suits against Mayfair. Filed in the
Metropolitan Trial Court of Manila, the first was docketed
as Civil Case No. 121570 on July 9, 1987; and the second, as
Civil Case No. 131944 on May 28, 1990. Mayfair eventually
won them both. However, to be able to maintain physical
possession of the premises while awaiting the outcome of
the mother case, it had no choice but to pay the rentals.
“Rental payments”
The rental payments made by Mayfair should not be
construed as a recognition of Equatorial as the new owner.
They were made merely to avoid imminent eviction. It is in
this context that one should understand the aforequoted
factual statements in the ponencia in the mother case, as
well as the Separate Opinion of Mr. Justice Padilla and the
Separate Concurring Opinion of the herein ponente.
At bottom, it may be conceded that, theoretically, a
rescissible contract is valid until rescinded. However, this
general principle is not decisive to the issue of whether
Equatorial ever acquired the right to collect rentals. What is
decisive is the civil law rule that ownership is acquired, not
by mere agreement, but by tradition or delivery. Under the
factual environment of this controversy as found by this
Court in the mother case, Equatorial was never put in actual
and effective control or possession of the property because
of Mayfair's timely objection.
As pointed out by Justice Holmes, general propositions do
not decide specific cases. Rather, "laws are interpreted in
the context of the peculiar factual situation of each case.
Each case has its own flesh and blood and cannot be
decided on the basis of isolated clinical classroom
principles.“
In short, the sale to Equatorial may have been valid from
inception, but it was judicially rescinded before it could be
consummated. Petitioner never acquired ownership, not
because the sale was void, as erroneously claimed by the
trial court, but because the sale was not consummated by a
legally effective delivery of the property sold.
Tradition instrumental, the execution of public document is
equivalent to constructive delivery.
However, here, even if they have already executed a deed of
sale to effect transfer of ownership, but there is an
impediment for the vendee to actual physical possession of
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
property. Ang tradition instrumental, that will only hold true if
there is no impediment for the buyer to acquire physical
possession. Kung nay impediment, fiction yields to reality.
Another possible impediment, paghuman nimo og palit, pag-
adto nimo sa area, daghan diay kayo nagpuyo. Di man lang ka
katamak sa gate. That constructive delivery is only a legal
fiction because in reality, you cannot acquire the property.
Another issue is that Mayfair paid rentals to Equatorial.
Mayfair is leasing the property but Carmelo refused to receive
the rental payments, so Mayfair paid it to Equatorial. Would
this be a recognition on the part of Mayfair that Equatorial is
already the owner because it paid its rentals to Equatorial?
No. The fact that Mayfair paid rentals to Equatorial during the
litigation should not be interpreted to mean either actual
delivery or ipso facto recognition of Equatorial's title. In the
first place, Mayfair’s obligation to pay rental did not cease.
Mayfair is impugning the sale of Carmelo to Equatorial, but in
the mean time, Mayfair is still a lessee over the property.
Kunng dili mubayad si Mayfair og rentals, they will have a
ground to eject Mayfair in the premises. Under the
circumstances, Mayfair had no choice but to pay the lease
rentals. It was merely to avoid imminent eviction.
Rules in obligation to give an indeterminate or
generic thing
Is there any difference against delivering a specific thing? Yes.
1. There is no obligation to observe due diligence
This is because you can just deliver any property
corresponding to the genus of the thing which is the
subject of the obligation.
Example: “An obligation to deliver a car”. Pwede ra red
car, any car.
2. There is no obligation to deliver fruits
Here, we are not sure what property will be delivered in
the first place. It could be that the property to be
delivered does not have fruits, so there is no obligation.
3. No obligation to deliver specific accessions and
accessories
Remedies in case of breaches of obligations
It would matter whether the obligation is real or personal. And
if it is a real obligation, it would matter if it involves, generic
things or a specific thing. What are the remedies of the
creditor?
I. IN REAL OBLIGATIONS
A. Non-delivery in an obligation to give
• If the subject matter is specific; the remedies are:
1. compel to perform (Art. 1165)
2. rescission (Art. 1380)
3. resolution (Art. 1191)
4. damages (Art. 1170)
• If the subject matter is generic
1. compel to perform (Art. 1165)
2. rescission (Art. 1380)
3. resolution (Art. 1191)
4. damages (Art. 1170)
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5. obligation may be complied at the expense
of debtor (substituted performance)
Substituted performance; The obligation may be complied
with at the expense of the debtor.
Example: “An obligation to deliver a red car”. Now the debtor
failed to perform his obligation, the creditor has a right to
demand that the obligation be complied with at the expense
of the debtor. Pwede siya magpa-deliver og another red car.
But it will be charged to the debtor. Theoretically, the debtor
can be compelled to pay the person who performed the
obligation in lieu of the debtor. (Substituted performance)
Q: Why is this remedy applicable only to real obligation
involving a generic thing?
This is because the subject can be substituted by
another as long as it belongs to the same genus or
class. If it is a specific thing, the debtor has the
obligation to deliver to the creditor the exact same
thing. It cannot be substituted.
II. Non-performance of a personal obligation
Article 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. (1098)
Q: What are violations that may be committed in a personal
obligation?
1. If a person obliged to do something fails to do it, the
same shall be executed at his cost (Art. 1167). –
Example: The debtor failed to perform to construct a 3-
storey mansion.
2. If he does it in contravention of the tenor of the
obligation (Art. 1167).
Example: Constructed a 2-storey building instead of
undertaking to construct a 3-storey building
3. If it is poorly done - it may be decreed that what has
been poorly done be undone (Art.1167).
Example: Constructed a 3-storey building but used
substandard materials.
HEIRS OF RAMON C. GAITE, CYNTHIA GOROSTIZA GAITE
and RHOGEN BUILDERS vs. THE PLAZA, INC. and FGU
INSURANCE CORPORATION
(G.R. No. 177685, January 26, 2011)
On July 16, 1980, The Plaza, Inc. (The Plaza), a corporation
engaged in the restaurant business, through its President,
Jose C. Reyes, entered into a contract with Rhogen Builders
(Rhogen), represented by Ramon C. Gaite, for the
construction of a restaurant building in Greenbelt, Makati,
Metro Manila for the price of P7,600,000.00. On July 28,
1980, The Plaza paid P1,155,000.00 less withholding taxes as
down payment to Gaite. Thereafter, Rhogen commenced
construction of the restaurant building.
In a letter dated September 10, 1980, Engineer Angelito Z.
Gonzales, the Acting Building Official of the Municipality of
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Makati, ordered Gaite to cease and desist from continuing
with the construction of the building for violation of
Sections 301 and 302 of the National Building Code (P.D.
1096) and its implementing rules and regulations.
On September 15, 1980, Engr. Gonzales informed Gaite that
the building permit for the construction of the restaurant
was revoked for non-compliance with the provisions of the
National Building Code and for the additional temporary
construction without permit. On September 19, 1980, the
Project Manager (Tayzon) in his Construction Memo #23
reported on his evaluation of Progress Billing #1 submitted
by Rhogen.
Tayzon stated that actual jobsite assessment showed that
the finished works fall short of Rhogen’s claimed
percentage of accomplishment and Rhogen was entitled to
only P32,684.16 and not P260,649.91 being demanded by
Rhogen
Further, he recommended that said amount payable to
Rhogen be withheld pending compliance with Construction
Memo #18, resolution of cases regarding unauthorized
withdrawal of materials from jobsite and stoppage of work
by the Municipal Engineer’s Office of Makati. On October
7, 1980, Gaite wrote Mr. Jose C. Reyes, President of The
Plaza regarding his actions/observations on the stoppage
order issued. On the permit for temporary structure, Gaite
said the plans were being readied for submission to the
Engineering Department of the Municipality of Makati and
the application was being resent to Reyes for his
appropriate action.
As to the notice for concrete pouring, Gaite said that their
construction set-up provides for a Project Manager to
whom the Pouring Request is first submitted and whose job
is to clear to whoever parties are involved (this could still be
worked out with the Building Inspector). Regarding the
safety devices for workers, Gaite averred that he had given
strict rules on this but in the course of construction some
workers have personal preferences. On the refusal of the
secretary and construction foreman to receive the
stoppage order dated September 10, 1980, Gaite took
responsibility but insisted it was not a violation of the
National Building Code. Likewise, questioning the authority
of the Building Inspector is not a violation of the Code
although Gaite denied he ever did so.
Lastly, on the construction plans used in the jobsite not
being in accordance with the approved plan, Gaite said he
had sent Engr. Cristino V. Laurel on October 3, 1980 to
Reyes’ office and make a copy of the only approved plan
which was in the care of Reyes, but the latter did not give it
to Engr. Laurel. Gaite thus thought that Reyes would
handle the matter by himself.
On the same day, Gaite notified Reyes that he is suspending
all construction works until Reyes and the Project Manager
cooperate to resolve the issue he had raised to address the
problem. This was followed by another letter dated
November 18, 1980 in which Gaite expressed his sentiments
on their aborted project and reiterated that they can still
resolve the matter with cooperation from the side of The
Plaza.
In his reply-letter dated November 24, 1980, Reyes asserted
that The Plaza is not the one to initiate a solution to the
situation, especially after The Plaza already paid the agreed
down payment of P1,155,000.00, which compensation so
far exceeds the work completed by Rhogen before the
municipal authorities stopped the construction for several
violations. Reyes made it clear they have no obligation to
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help Rhogen get out of the situation arising from non-
performance of its own contractual undertakings, and that
The Plaza has its rights and remedies to protect its interest.
On January 9, 1981, Gaite informed The Plaza that he is
terminating their contract based on the Contractor’s Right
to Stop Work or Terminate Contracts as provided for in the
General Conditions of the Contract. In his letter, Gaite
accused Reyes of not cooperating with Rhogen in solving
the problem concerning the revocation of the building
permits, which he described as a “minor problem.”
Additionally, Gaite demanded the payment of P63,058.50
from The Plaza representing the work that has already been
completed by Rhogen.
RULING:
A. Does Rhogen/Gaite have the right to rescind the
contract?
No. The construction contract between Rhogen and The
Plaza provides for reciprocal obligations whereby the
latter’s obligation to pay the contract price or progress
billing is conditioned on the former’s performance of its
undertaking to complete the works within the stipulated
period and in accordance with approved plans and other
specifications by the owner.
Pursuant to its contractual obligation, The Plaza furnished
materials and paid the agreed down payment. It also
exercised the option of furnishing and delivering
construction materials at the jobsite pursuant to Article III
of the Construction Contract. However, just two months
after commencement of the project, construction works
were ordered stopped by the local building official and the
building permit subsequently revoked on account of
several violations of the National Building Code and other
regulations of the municipal authorities.
Petitioners may not justify Rhogen’s termination of the
contract upon grounds of non-payment of progress billing
and uncooperative attitude of respondent The Plaza and its
employees in rectifying the violations which were the basis
for issuance of the stoppage order.
Having breached the contractual obligation it had expressly
assumed, i.e., to comply with all laws, rules and regulations
of the local authorities, Rhogen was already at fault.
Respondent The Plaza, on the other hand, was justified in
withholding payment on Rhogen’s first progress billing, on
account of the stoppage order and additionally due to
disappearance of owner-furnished materials at the jobsite.
In failing to have the stoppage and revocation orders lifted
or recalled, Rhogen should take full responsibility in
accordance with its contractual undertaking.
Such non-observance of laws and regulations of the local
authorities affecting the construction project constitutes a
substantial violation of the Construction Contract which
entitles The Plaza to terminate the same, without
obligation to make further payment to Rhogen until the
work is finished or subject to refund of payment exceeding
the expenses of completing the works.
Upon the facts duly established, the CA therefore did not
err in holding that Rhogen committed a serious breach of
its contract with The Plaza, which justified the latter in
terminating the contract. Petitioners are thus liable for
damages for having breached their contract with
respondent The Plaza. Article 1170 of the Civil Code
provides that those who in the performance of their
obligations are guilty of fraud, negligence or delay and
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
those who in any manner contravene the tenor thereof are
liable for damages.
In addition, Article 122 of the Articles of General Conditions
provides that the contractor shall not be entitled to receive
further payment “until the work is finished.” As the works
completed by Rhogen were not in accordance with
approved plans, it should have been executed at its cost
had it not relinquished the project in January 1981. The CA
thus did not err in sustaining the trial court’s order for the
return of the down payment given by The Plaza to Rhogen.
B. Is Rhogen/Gaite entitled to demand payment for
the work completed by Rhogen?
No. Under the principle of quantum meruit, a contractor is
allowed to recover the reasonable value of the thing or
services rendered despite the lack of a written contract, in
order to avoid unjust enrichment. Quantum meruit means
that in an action for work and labor, payment shall be made
in such amount as the plaintiff reasonably deserves. To
deny payment for a building almost completed and already
occupied would be to permit unjust enrichment at the
expense of the contractor.
Rhogen failed to finish even a substantial portion of the
works due to the stoppage order issued just two months
from the start of construction. Despite the down payment
received from The Plaza, Rhogen, upon evaluation of the
Project Manager, was able to complete a meager
percentage much lower than that claimed by it under the
first progress billing between July and September 1980.
Moreover, after it relinquished the project in January 1981,
the site inspection appraisal jointly conducted by the
Project Manager, Building Inspector Engr. Gregory and
representatives from FGU and Rhogen, Rhogen was found
to have executed the works not in accordance with the
approved plans or failed to seek prior approval of the
Municipal Engineer. Article 1167 of the Civil Code is explicit
on this point that if a person obliged to do something fails
to do it, the same shall be executed at his cost.
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.
Discussion: Plaza was engaged in a restaurant business. He
hired Gaite to construct the restaurant building. Ang ilahang
price kay P7.6 million and Plaza paid P1M. Pursuant to that,
Gaite already started the construction of the building.
Subsequently, there was a notice from the Engineer’s office to
cease and desist from continuing with the construction
because it was found out that there were several violations of
the National Building Code done by the contractor.
According to Rhogen, they already started with the
construction, so they should be paid for the value of the
performed construction. Plaza refused to pay.
The SC said that Rogen/Gaite is not entitled to the payment.
Rhogen failed to finish even a substantial portion of the works
due to the stoppage order issued just two months from the
start of construction. Here Plaza already made a
downpayment of P1M, but the value of the work was not even
equivalent to the amount. The work as not in the tenor of the
obligation. There were violations of the National Building Code
which was precisely the reason why the construction was
ordered to be stopped by the City government.
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“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.”
Here, because the constructions made by Gaite was not in
accordance with the agreed plan, the same shall be executed
at its cost. Thus, all cost of the construction in relation to that
ork which was not in accordance with the plan should be borne
by Rhogen. In addition, the SC also ordered the return of the
downpayment because the law says the same shall be
executed at your cost.
4. Negative Personal Obligation; The obligor does
what has been forbidden him
ARTICLE 1168. When the obligation consists in not doing,
and the obligor does what has been forbidden him, it shall
also be undone at his expense.
FAJARDO, JR. vs. FREEDOM TO BUILD, INC. (G.R. No.
134692. August 1, 2000)
Freedom To Build, Incorporated, an owner-developer and
seller of low-cost housing, sold to petitioner-spouses, a
house and lot designated Lot No. 33, Block 14, of the De la
Costa Homes in Barangka, Marikina, Metro Manila. The
Contract to Sell executed between the parties, contained a
Restrictive Covenant providing certain prohibitions, to wit:
"Easements. For the good of the entire community,
the homeowner must observe a two-meter
easement in front. No structure of any kind (store,
garage, bodega, etc.) may be built on the front
easement.
"x x x
"Upward expansion. A second storey is not
prohibited. But the second storey expansion must
be placed above the back portion of the house and
should not extend forward beyond the apex of the
original building.
"x x x
"Front expansion: 2nd Storey: No unit may be
extended in the front beyond the line as designed
and implemented by the developer in the 60 sq. m.
unit. In other words, the 2nd floor expansion, in
front, is 6 meters back from the front property line
and 4 meters back from the front wall of the house,
just as provided in the 60 sq. m. units."
The above restrictions were also contained in Transfer
Certificate of Title No. N-115384 covering the lot issued in
the name of petitioner-spouses.
The controversy arose when petitioners, despite repeated
warnings from respondent, extended the roof of their
house to the property line and expanded the second floor
of their house to a point directly above the original front
wall. Respondent filed before the Regional Trial Court,
wherein the RTC ordered petitioners to immediately
demolish and remove the extension of their expanded
housing unit that exceeds the limitations imposed by the
Restrictive Covenant, otherwise the Branch Sheriff of this
Court shall execute this decision at the expense of the
defendants.
Petitioners argue that for lack of a specific provision,
prescribing the penalty of demolition in the "Restrictive
Covenant" in the event of a breach thereof, the order to
demolish the structure should fail.
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
RULING:
This argument has no merit; Article 1168 of the New Civil
Code states:
“When the obligation consists in not doing and the
obligor does what has been forbidden him, it shall be
undone at his expense.“
This Court is not unaware of its ruling in Ayala Corporation
vs. Ray Burton Development Corporation, which has merely
adjudged the payment of damages in lieu of demolition.
In the aforementioned case, however, the elaborate
mathematical formula for the determination of
compensatory damages which takes into account the
current construction cost index during the immediately
preceding 5 years based on the weighted average of
wholesale price and wage indices of the National Census
and Statistics Office and the Bureau of Labor Statistics is
explicitly provided for in the Deed of Restrictions entered
into by the parties. This unique and peculiar circumstance,
among other strong justifications therein mentioned, is not
extant in the case at bar.
Discussion: Freedom To build was engaged in the business of
developing low cost housing. There was a contract to sell
executed between Freedom to Build and Fajardo. Didto sa
ilahang contract, there was what we call a restrictive
covenant. Naay limitation sa easement, upward and front
expansion. Spouses Fajardo violated the restrictive covenant.
Freedom to Build demanded from the spouses Fajardo that
they should remove the constructions in violation of their
restrictive covenant. Spouses Fajardo refused. Thus, Freedom
to Build filed a case against the spouses to immediately
demolish the extension of their expanded housing unit.
The RTC directed the demolition of the expansions. The
Spouses said that there is nothing in the restrictive covenant
which made mention of demolition. It is not one of the
penalties in the contract thus the Court has no authority to
order demolition.
The SC said that they are wrong because even if it is not
mentioned in the contract, it is mentioned in Article 1168 of the
NCC, “When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall also be
undone at his expense.” Demolition is a way of undoing what
was done by the debtor despite the prohibition.
The SC also said that the case of Ayala Corporation vs. Ray
Burton Development Corporation, which was cited in the
case, is not the same with this case. In the Ayala case, the
contract provided for a very complicated formula on how to
arrive at the amount of damages. The elaborate mathematical
formula for the determination of compensatory damages
which takes into account the current construction cost index
during the immediately preceding 5 years based on the
weighted average of wholesale price and wage indices of the
National Census and Statistics Office and the Bureau of Labor
Statistics is explicitly provided for in the Deed of Restrictions
entered into by the parties. This unique and peculiar
circumstance, among other strong justifications therein
mentioned, is not extant in the case at bar.
Just remember that even if the penalty of demolition is not
provided for in the contract, the law authorizes it pursuant to
Article 1168.
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refused. Instead, DBP directly paid some suppliers of
When shall the obligation be performed? Guariña Corporation over the latter's objection.

DBP found upon inspection of the resort project, its

If we look at Artcle 1169, it is generally upon demand.
developments and improvements that Guariña Corporation
had not completed the construction works. In a letter
ARTICLE 1169. Those obliged to deliver or to do something
dated February 27, 1978, and a telegram dated June 9, 1978,
incur in delay from the time the obligee judicially or
DBP thus demanded that Guariña Corporation expedite the
extrajudicially demands from them the fulfillment of their
completion of the project, and warned that it would initiate
obligation.
foreclosure proceedings should Guariña Corporation not do
so. Unsatisfied with the non-action and objection of
However, the demand by the creditor shall not be
Guariña Corporation, DBP initiated extrajudicial foreclosure
necessary in order that delay may exist:
proceedings.
(1) When the obligation or the law expressly so declare; or
A notice of foreclosure sale was sent to Guariña
(2) When from the nature and the circumstances of the
Corporation. The notice was eventually published, leading
obligation it appears that the designation of the time when
the clients and patrons of Guariña Corporation to think that
the thing is to be delivered or the service is to be rendered
its business operation had slowed down, and that its resort
was a controlling motive for the establishment of the
had already closed.
contract; or
(3) When demand would be useless, as when the obligor
DBP submits that the loan had been granted under its
has rendered it beyond his power to perform.
supervised credit financing scheme for the development of
a beach resort, and the releases of the proceeds would be
In reciprocal obligations, neither party incurs in delay if the
subject to conditions that included the verification of the
other does not comply or is not ready to comply in a proper
progress of works in the project to forestall diversion of the
manner with what is incumbent upon him. From the
loan proceeds; and that under stipulation No. 26 of the
moment one of the parties fulfills his obligation, delay by
mortgage contract, further loan releases would be
the other begins.
terminated and the account would be considered due and
demandable in the event of a deviation from the purpose
This is a very important provision. Here, it speaks of delay or
of the loan, including the failure to put up the required
default or mora. Delay in layman’s term, lahi pod na siya.
equity and the diversion of the loan proceeds to other
purposes.
Example: The obligation is to be performed on January 1, 2000.
But the debtor did not pay pag-abot sa January 1, 2000. Under
It assails the declaration by the CA that Guariña Corporation
the layman’s understanding, delay na na siya. But under the
had not yet been in default in its obligations despite
law, there is no delay when there is no demand. So even if
violations of the terms of the mortgage contract securing
nakabutang na sa contract, if you did not demand judicially or
the promissory note.
extrajudicially, the debtor is not in default.
Guariña Corporation counters that it did not violate the
Q: What is the consequence if the debtor is not yet in default?
terms of the promissory note and the mortgage contracts
because DBP had fully collected the interest
He is not liable for penalties, fortuitous event,
notwithstanding that the principal obligation did not yet fall
damages and interest. Although naay mga exceptions
due and become demandable.
ani.
RULING:
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) vs.
GUARIÑA AGRICULTURAL AND REALTY DEVELOPMENT
The submissions of DBP lack merit and substance.
CORPORATION
(G.R. No. 160758. January 15, 2014)
The agreement between DBP and Guariña Corporation was
a loan. Under the law, a loan requires the delivery of money
In July 1976, Guariña Corporation applied for a loan from
or any other consumable object by one party to another
DBP to finance the development of its resort complex
who acquires ownership thereof, on the condition that the
situated in Trapiche, Oton, Iloilo. On October 5, 1976,
same amount or quality shall be paid. Loan is a reciprocal
Guariña Corporation executed a real estate mortgage over
obligation, as it arises from the same cause where one party
several real properties in favor of DBP as security for the
is the creditor, and the other the debtor.
repayment of the loan.
The obligation of one party in a reciprocal obligation is
On May 17, 1977, Guariña Corporation executed a chattel
dependent upon the obligation of the other, and the
mortgage over the personal properties existing at the
performance should ideally be simultaneous. This means
resort complex and those yet to be acquired out of the
that in a loan, the creditor should release the full loan
proceeds of the loan, also to secure the performance of the
amount and the debtor repays it when it becomes due and
obligation. Prior to the release of the loan, DBP required
demandable.
Guariña Corporation to put up a cash equity of
P1,470,951.00 for the construction of the buildings and
By its failure to release the proceeds of the loan in their
other improvements on the resort complex.
entirety, DBP had no right yet to exact on Guariña
Corporation the latter's compliance with its own obligation
The loan was released in several instalments, and Guariña
under the loan. Indeed, if a party in a reciprocal contract like
Corporation used the proceeds to defray the cost of
a loan does not perform its obligation, the other party
additional improvements in the resort complex. In all, the
cannot be obliged to perform what is expected of it while
amount released totalled P3,003,617.49, from which DBP
the other's obligation remains unfulfilled. In other words,
withheld P148,102.98 as interest. Guariña Corporation
the latter party does not incur delay.
demanded the release of the balance of the loan, but DBP

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 O B L I G A T I O N S and C O N T R A C T S
It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the
creditor's interest in case of the default of the debtor. By its
nature, however, a mortgage remains an accessory
contract dependent on the principal obligation, such that
enforcement of the mortgage contract will depend on
whether or not there has been a violation of the principal
obligation.
While a creditor and a debtor could regulate the order in
which they should comply with their reciprocal obligations,
it is presupposed that in a loan the lender should perform
its obligation - the release of the full loan amount - before it
could demand that the borrower repay the loaned amount.
In other words, Guariña Corporation would not incur in
delay before DBP fully performed its reciprocal obligation.
Considering that it had yet to release the entire proceeds of
the loan, DBP could not yet make an effective demand for
payment upon Guariña Corporation to perform its
obligation under the loan.
According to Development Bank of the Philippines v.
Licuanan, it would only be when a demand to pay had been
made and was subsequently refused that a borrower could
be considered in default, and the lender could obtain the
right to collect the debt or to foreclose the mortgage.
Hence, Guariña Corporation would not be in default
without the demand.
Assuming that DBP could already exact from the latter its
compliance with the loan agreement, the letter dated
February 27, 1978 that DBP sent would still not be regarded
as a demand to render Guariña Corporation in default under
the principal contract because DBP was only thereby
requesting the latter "to put up the deficiency in the value
of improvements.”
Under the circumstances, DBP's foreclosure of the
mortgage and the sale of the mortgaged properties at its
instance were premature, and, therefore, void and
ineffectual.
Discussion: Guariña corporation applied for a loan from DBP.
The purpose of the loan is to finance the development of a
resort complex of Guariña Corporation. To secure the payment
of the loan, Guariña Corporation executed a real estate
mortgage over several of its properties in favor of DBP.
The contract of loan to which the mortgage was attached as
an accessory obligation, it was under what we call supervised
credit financing, meaning, DBP’s role is not only limited in
releasing the fund. DPB actually monitors the progress of the
construction of the resort complex. In addition, DBP required
Morilla to furnish an equity. Example kanang magloan ka og
P10M. The bank will not release the entire P10M. The debtor will
shoulder an equity percentage, let’s say 20%.
DBP monitored the construction. Now, DBP notice that the
construction was not progressing based on the time specified
in the contract. It wrote several letters to Guariña Corporation,
telling it to expedite the construction. Later on, DBP also told
Guariña to furnish additional equity because the construction
was not progressing in accordance with the schedule.
Later on, DBP no longer released the loan to Guariña, instead,
DBP directly released the loan to the suppliers. Eventually, DBP
stopped releasing the remaining balance of the loan.
Subsequently, it issued a notice of foreclosure of the REM
executed by Guariña. DBP initiated extrajudicial foreclosure
proceedings. A notice of foreclosure sale was sent to Guariña
Corporation.
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The notice was eventually published, leading the clients and
patrons of Guariña Corporation to think that its business
operation had slowed down, and that its resort had already
closed. Guariña then filed a case against DBP contesting the
foreclosure.
Ang defense ni DBP kay the loan has been granted under the
supervised credit financing scheme for the development of a
beach resort, and the releases of the proceeds would be
subject to conditions that included the verification of the
progress of works in the project to forestall diversion of the
loan proceeds; and that under Stipulation No. 26 of the
mortgage contract, further loan releases would be terminated
and the account would be considered due and demandable in
the event of a deviation from the purpose of the loan,
including the failure to put up the required equity and the
diversion of the loan proceeds to other purposes.
According to Guariña, it was not yet in default and it did not
violate the terms of the contract because DBP had already fully
collected the interest of the loan although it did not yet
released the remaining balance of the loan.
The SC said that DBP was wrong. The loan was not yet due and
demandable and Guariña was not yet in default. You have to
remember that the agreement between DBP and Guariña
Corporation was a contract of loan. In a contract of loan, there
is a reciprocal obligation. Under the law, a loan requires the
delivery of money or any other consumable object by one
party to another who acquires ownership thereof, on the
condition that the same amount or quality shall be paid.
Here, the obligation of the debtor to pay the loan is subject to
the release by the creditor of the full proceeds of the loan. If
the creditor has not yet fully released the loan, the obligation
of the debtor does not yet arise.
Guariña was not yet in default because in the first place, it was
the creditor who has not yet fulfilled its undertaking of
releasing the balance of the loan.
As to stipulation 26, the SC said, it is true that loans are often
secured by a mortgage constituted on real or personal
property to protect the creditor's interest in case of the
default of the debtor. By its nature, however, a mortgage
remains an accessory contract dependent on the principal
obligation, such that enforcement of the mortgage contract
will depend on whether or not there has been a violation of
the principal obligation. So the enforcement of a mortgage
contract will depend on WON there has been a violation of the
principal obligation, which is a loan.
While a creditor and a debtor could regulate the order in which
they should comply with their reciprocal obligations, it is
presupposed that in a loan the lender should perform its
obligation - the release of the full loan amount - before it could
demand that the borrower repay the loaned amount. In other
words, Guariña Corporation would not incur in delay before
DBP fully performed its reciprocal obligation.
There is another aspect here. The SC said okay let us assume
that DBP could exact from Guariña the payment of the
obligation but it is basic under Article 1169 that there is no
default when there is no demand. The question here is, was
there demand made by DBP? The SC examined the letter dated
February 27, 1978 that DBP sent. The SC said the letter would
still not be regarded as a demand to render Guariña
Corporation in default under the principal contract because
DBP was only thereby requesting the latter "to put up the
deficiency in the value of improvements.”
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Under the circumstances, DBP's foreclosure of the mortgage
and the sale of the mortgaged properties at its instance were
premature, and, therefore, void and ineffectual.
VAZQUEZ VS. AYALA CORPORATION
(G.R. NO. 149734, NOVEMBER 19, 2004)
The point of this petition is the alleged failure of Ayala
Corporation to offer the subject lots for sale to petitioners
within three (3) years from the execution of the MOA. It is
not that Ayala Corporation committed or intended to
develop the first phase of its amended development plan
within three (3) years. Whether it did or did not is actually
beside the point since the subject lots are not located in the
first phase anyway.
In order that the debtor may be in default it is necessary
that the following requisites be present:
(1) that the obligation be demandable and already
liquidated;
(2) that the debtor delays performance; and
(3) that the creditor requires the performance judicially or
extrajudicially.
Under Article 1193 of the Civil Code, obligations for whose
fulfillment a day certain has been fixed shall be demandable
only when that day comes. However, no such day certain
was fixed in the MOA. Petitioners, therefore, cannot
demand performance after the three (3) year period fixed
by the MOA for the development of the first phase of the
property since this is not the same period contemplated for
the development of the subject lots.
Since the MOA does not specify a period for the
development of the subject lots, petitioners should have
petitioned the court to fix the period in accordance with
Article 1197 of the Civil Code. As no such action was filed by
petitioners, their complaint for specific performance was
premature, the obligation not being demandable at that
point. Accordingly, Ayala Corporation cannot likewise be
said to have delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on
Ayala Corporation to develop the subject lots within three
(3) years from date thereof, Ayala Corporation could still
not be held to have been in delay since no demand was
made by petitioners for the performance of its obligation.
As found by the appellate court, petitioners' letters which
dealt with the three (3)-year timetable were all dated prior
to April 23, 1984, the date when the period was supposed
to expire. In other words, the letters were sent before the
obligation could become legally demandable.
Moreover, the letters were mere reminders and not
categorical demands to perform. More importantly,
petitioners waived the three (3)-year period as evidenced
by their agent, Engr. Eduardo Turla's letter to the effect
that petitioners agreed that the three (3)-year period
should be counted from the termination of the case filed by
Lancer. The letter reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April
23, 1981, it was undertaken by your goodselves to
complete the development of Phase I within three (3)
years. Dr. & Mrs. Vazquez were made to understand that
you were unable to accomplish this because of legal
problems with the previous contractor.
These legal problems were resolved as of February 19,
1987, and Dr. & Mrs. Vazquez therefore expect that the
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development of Phase I will be completed by February 19,
1990, three years from the settlement of the legal
problems with the previous contractor. The reason for
this is, as you know, that security-wise, Dr. & Mrs.
Vazquez have been advised not to construct their
residence till the surrounding area (which is Phase I) is
developed and occupied. They have been anxious to build
their residence for quite some time now, and would like
to receive assurance from your good selves regarding
this, in compliance with the agreement.
II. Option on the adjoining lots
We have already written your good selves regarding the
intention of Dr. & Mrs. Vazquez to exercise their option
to purchase the two lots on each side (a total of 4 lots)
adjacent to their "Retained Area". They are concerned
that although over a year has elapsed since the
settlement of the legal problems, you have not presented
them with the size, configuration, etc. of these lots. They
would appreciate being provided with these at your
earliest convenience.
Manifestly, this letter expresses not only petitioners'
acknowledgement that the delay in the development of
Phase I was due to the legal problems with GP
Construction, but also their acquiescence to the completion
of the development of Phase I at the much later date of
February 19, 1990.
More importantly, by no stretch of semantic interpretation
can it be construed as a categorical demand on Ayala
Corporation to offer the subject lots for sale to petitioners
as the letter merely articulates petitioners' desire to
exercise their option to purchase the subject lots and
concern over the fact that they have not been provided
with the specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria
Vazquez, dated January 23, 1984 and February 18, 1984 can
also not be considered categorical demands on Ayala
Corporation to develop the first phase of the property
within the three (3)-year period much less to offer the
subject lots for sale to petitioners. The letter dated January
23, 1984 reads in part:
You will understand our interest in the completion of the
roads to our property, since we cannot develop it till you
have constructed the same. Allow us to remind you of our
Memorandum of Agreement, as per which you
committed to develop the roads to our property "as per
the original plans of the company", and that
1. The back portion should have been developed before
the front portion – which has not been the case.
2. The whole project – front and back portions be
completed by 1984.
The letter dated February 18, 1984 is similarly worded. It
states:
In this regard, we would like to remind you of Articles 5.7
and 5.9 of our Memorandum of Agreement which states
respectively:…
Even petitioner Daniel Vazquez' letter dated March 5, 1984
does not make out a categorical demand for Ayala
Corporation to offer the subject lots for sale on or before
April 23, 1984. The letter reads in part:
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…and that we expect from your good selves compliance
with our Memorandum of Agreement, and a definite
date as to when the road to our property and the
development of Phase I will be completed.
At best, petitioners' letters can only be construed as mere
reminders which cannot be considered demands for
performance because it must appear that the tolerance or
benevolence of the creditor must have ended.
Discussion: There was a MOA between Ayala Corporation and
the petitioners. It involved the amendment development plan.
According to the petitioners, based on the MOA, Ayala
Corporation had 3 years within which to start the development
of the amendment development plan. Despite the lapse of the
3 years and repeated demands, Ayala was not able to start
with the development. The petitioners now averred that Ayala
corporation is now in default.
1. Ayala is not yet in default since the obligation has not
become due and demandable. There is no period indicated in
the contract.
Remember the requisites in order a debtor may be placed in
default:
1. that the obligation be demandable and already
liquidated;
2. that the debtor delays performance; and
3. that the creditor requires the performance judicially
or extrajudicially.
The Supreme Court examined the terms of the MOA and it held
that there is nothing in the MOA which says that Ayala
Corporation should start in 3 years. In fact, no period was fixed
in the MOA.
Q: What is the remedy when the contract intends a period but
did not specify?
The Supreme Court said that we apply Article 1197 of
the NCC.
Article 1197. If the obligation does not fix a period, but from
its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration
thereof.
The courts shall also fix the duration of the period when it
depends upon the will of the debtor.
In every case, the courts shall determine such period as may
under the circumstances have been probably contemplated
by the parties. Once fixed by the courts, the period cannot
be changed by them. (1128a)
Remember that you cannot demand when there is no period
mentioned in the contract. Under Article 1193 of the Civil Code,
obligations for whose fulfillment a day certain has been fixed
shall be demandable only when that day comes. However, no
such day certain was fixed in the MOA.
Therefore, Article 1197 is the remedy if a period was intended
but it is not indicated in the contract. Please remember kung
wala’y klaro sa contract na there is no period intended, the
court will not fix the period. The contract is immediately
demandable. Pero kung klaro sa contract na a period is
intended but was not fixed in the contract, Article 1197 is the
remedy, the court will have to fix the period. So you file to ask
the court to fix the period. Before that, if you file for specific
performance, your action is premature.
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
In this case, the court said as no such action was filed by
petitioners, their complaint for specific performance was
premature, the obligation not being demandable at that point.
That is the first requisite to place the debtor in default, the
obligation must already be due and demandable.
2. Now, assuming that the MOA imposes an obligation on
Ayala Corporation to develop the subject lots within three (3)
years from date thereof, Ayala Corporation could still not be
held to have been in delay since no demand was made by
petitioners for the performance of its obligation.
The demands here were made by the petitioners even before
the obligation become due and demandable. If we are to
consider the 3-year period, it would expire on April 23, 1984. So
dapat we wait for such expiration before we can actually
demand. Under Article 1169, you cannot demand from the
debtor the fulfillment of an obligation when it is not yet even
due and demandable. The letters sent to Ayala Corporation
were all dated prior to April 3, 1984. In other words, the letters
were sent before the obligation became demandable. So dili
diay okay sa obligations na early bird ka. Nganong magdemand
naman ka nga dili paman siya due and demandable. Kung
magkasuhay mo, ang imong demand before the obligation
became due and demandable, kadto imong demand, it will not
be considered as demand as contemplated by law.
3. Now assuming the letters were sent after the obligation
became due and demandable, are these letters in the nature
of demand? The SC examined the contents of the letters and
there is no demand. At best, petitioners' letters can only be
construed as mere reminders which cannot be considered
demands for performance because it must appear that the
tolerance or benevolence of the creditor must have ended.
Another lesson, dili pwede na buotan kayo ka. If you send a
demand letter, do not just say “we expect.” It should be very
clear that the debtor should really perform.
NO DEMAND, NO DELAY;
Demand can be judicial or extrajudicial. Example of
extrajudicial, when you send demand letters.
Q: What about verbal demand, can this be considered to place
the debtor in default?
Do you remember our discussion in prescription? To
interrupt the running of the prescriptive period, prescription
as a statute of limitation, It must be written. That is for
prescription. But under the law on default, there is actually no
mention that it must be a written extrajudicial demand for the
purpose of placing the debtor in default. But how can you
prove? Maybe you have witnesses or tape recording na
naningil ka or kita imong mga silingan na sige ka’g ayo bayai
imong utang. So naa nakay demand.
The law does not specify that an extrajudicial demand must be
in writing, unlike in prescription.
Exceptions to the No demand, No delay rule:
Even if there is no demand, the debtor is already in default
when:
1. When the obligation expressly so declares;
Example: Contract of loan. “The loan shall be paid on
December 21, 2019 without need of any further demand on the
part of the creditor.”
2. When the law expressly so declares;
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Example: Payment of taxes. Income tax, every April 15 of each
calendar year, we are supposed to file our ITR.
3. When from the nature and the circumstances of the
obligation it appears that the designation of the
time when the thing is to be delivered or the service
is to be rendered was a controlling motive for the
establishment of the contract;
Example: This means na time is of the essence. Even if there is
no demand, the debtor is already considered in default. Classic
example ani kay nagpatahi ka og wedding gown sa kasal. Unya
ang mananahi wala niya na deliver sa date sa kasal. The maker
cannot say that he is not in default.
RODRIGUEZ vs. BELGICA
(111 Phil 200)
Plaintiff and Defendants entered into a Compromise
Agreement wherein the Defendants undertook to pay to
the Plaintiff the amount of P35,000.00 within 70 days from
August 30, 1953, with money to be delivered from the sale
of mortgage of a 36% portion of a certain property. This
property is co-owned by the Plaintiff (86%) and the
Defendants (14%).
On November 19, 1955, after the lapse of the seventy (70)
day period stipulated in the compromise agreement, and
upon the failure of the defendants to pay, the plaintiffs
presented a motion praying that the defendants be ordered
to deliver to the plaintiffs the Certificates of the Titles so
that 14% of the property pertaining to the defendant could
be segregated.
An opposition was registered by the defendants,
contending that the inability to meet the obligation to pay
the P35,000.00 was due to the deliberate refusal of the
plaintiffs to grant the authority to defendant Porfirio
Belgica to negotiate the sale or mortgage of the 36%; and
that since the decision had created reciprocal obligations,
the refusal or failure on the part of one to comply did not
make the other in default. In the opposition, the
defendants prayed that the plaintiffs be ordered to grant
defendant Porfirio Belgica the authority to negotiate the
sale or mortgage of the 36%.
HELD: On the plaintiffs-appellees was imposed the
obligation of granting to defendants-appellants the
requisite authority to negotiate either the sale or mortgage
of the 36% interest in the property. This is understandable,
because on the face of the two certificates of the title
covering the properties, defendants owned only 14%, while
plaintiffs owned 86%. Without such authority executed by
plaintiffs in favor of the defendants, it was difficult, not to
say impossible for the latter to affect a negotiation.
This the plaintiffs the fully knew, because in the
compromise, they acknowledged that the amount of
P35,000.00 due to them would be paid within 70 days from
the August 30, 1953, with money to be delivered from the
sale of mortgage of the property. It was, therefore,
incumbent upon the plaintiffs "to grant authority" to
defendants to negotiate the sale or mortgage of the 36% of
the property. Considering that the reciprocal obligation has
been established by the compromise agreement, the
sequence in which the reciprocal obligations of the parties
are to be performed, is quite clear. The giving of the
authority to sell or mortgage precedes the obligation of the
defendants to pay P35,000.00 (Martinez vs. Cavives, 25 Phil.
581).
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Until this authority is granted by the plaintiff, the 70 day
period for payment will not commence to run. The plaintiffs
insinuated that defendant did not ask for the authority.
There was, however the statement or allegation by the
defendants to the effects that they made verbal request for
such authority but plaintiffs refused to give, a statement or
allegation discredited by the lower court. But even without
a request, from the very nature of the obligation assumed
by plaintiffs, demand by defendants that it be performed,
was not necessary (Article 1169, par. 2, Civil Code).
It is true that defendants' petition to compel the plaintiffs
to grant the authority repeatedly mentioned, was only filed
on December 1, 1955, after the expiration of the 70-day
period. It should, however, be observed that the actuations
or acts of the defendants have always been lulled by a sense
of an honest but insecure misunderstanding, as to the
scope and extent of the terms and conditions of the
compromise.
To show that defendants had not abandoned their
obligation to pay the sum of P35,000.00, on September 3,
1955, within the 70-day period which expired on November
8, 1955, they filed a motion to withdraw documents and
certificates of title to delimit the respective portions, in
order that they (defendants) might have an opportunity of
negotiating one-half or any portion to raise P35,000.00 to
which motion the plaintiffs agreed. While waiting for the
grant of authority to descend, like manna from Heaven, the
defendants were surprised to receive, on November 19,
1955, plaintiffs' motion to have the titles returned so that
the defendants' 14% could be segregated, as they
(plaintiffs) wanted to remain with the 86% of the
properties.
Discussion: There was a case between the plaintiff and
defendant but eventually they entered into a compromise
agreement. The tenor of the compromise agreement is that
the defendants will pay the Plaintiff the amount of P35,000.00
within 70 days from August 30, 1953, with money to be
delivered from the sale of mortgage of a 36% portion of a
certain property. This property is co-owned by the Plaintiff
(86%) and the Defendants (14%).
It was agreed that the plaintiff will sell or mortgage the
property. Now, more that 70 days had already lapsed but the
defendant failed to pay. The plaintiff moved for the execution
of the compromise agreement which would give him the
entire ownership of the property. According to the plaintiff,
the defendant was already be in default. But according to the
defendant, “how can I sell the property when you did not give
me the authorization to deal the entire property?”. But the
plaintiff said that the defendant failed to demand the
execution of the special power of attorney.
The Sc said that the obligation of the defendant to pay P35,000
within 70 days from the date specified was conditioned on the
sale or mortgage from the property. And the sale or mortgage
is also conditioned in the issuance of the plaintiff of the SPA.
So the obligation of the plaintiff preceded the obligation of the
defendant.
Now, on the contention of the plaintiff that there was no
demand from the defendant to execute an SPA, the SC said
that even without the request, from the very nature of the
obligation assumed by plaintiffs, demand on the defendant
was not necessary.
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4. When demand would be useless, as when the
obligor has rendered it beyond his power to
perform.
Example: The debtor already destroyed the thing or he has
delivered it to another person. It is very clear that even if the
demand was given to him at the time the obligation become
due and demandable, he would not be able to comply. In that
case, demand is no longer necessary.
5. When the debtor expressly admits that he has been
in default.
Mere asking for extension is not an admission of default.
In case of doubt whether the debtor is in delay, doubt shall be
resolved in his favor.
Reason: Because demand is essential and is the general rule.
UNIVERSITY OF MINDANAO, INC. vs. BANGKO SENTRAL
PILIPINAS, ET AL.
(G.R. No. 194964-65, January 11, 2016)
Before 1982, Guillermo B. Torres and Dolores P. Torres
incorporated and operated two (2) thrift banks: (1) First
Iligan Savings & Loan Association, Inc. (FISLAI); and (2)
Davao Savings and Loan Association, Inc. (DSLAI).
Guillermo B. Torres chaired both thrift banks. He acted as
FISLAI's President, while his wife, Dolores P. Torres, acted
as DSLAI's President and FISLAI's Treasurer.
Upon Guillermo B. Torres' request, Bangko Sentral ng
Pilipinas issued a P1.9 million standby emergency credit to
FISLAI.
On May 25, 1982, University of Mindanao's Vice President
for Finance, Saturnino Petalcorin, executed a deed of real
estate mortgage over University of Mindanao's property
in Cagayan de Oro City (covered by Transfer Certificate of
Title No. T-14345) in favor of Bangko Sentral ng Pilipinas.8
"The mortgage served as security for FISLAI's PI.9 Million
loan. It was allegedly executed on University of Mindanao's
behalf.
1990 when the loan became due per stipulation. FISLAI later
on suffered huge losses. It eventually failed to recover from
its losses and was liquidated on May 24, 1991.
1999 when respondent demanded payment.
The prescriptive period for actions on mortgages is ten (10)
years from the day they may be brought. Actions on
mortgages may be brought not upon the execution of the
mortgage contract but upon default in payment of the
obligation secured by the mortgage.
A debtor is considered in default when he or she fails to pay
the obligation on due date and, subject to exceptions, after
demands for payment were made by the creditor
However, the demand by the creditor shall not be
necessary in order that delay may exist:
(1) When the obligation or the law expressly so
declare; or
(2) When from the nature and the circumstances of
the obligation it appears that the designation of the
time when the thing is to be delivered or the service
is to be rendered was a controlling motive for the
establishment of the contract; or
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
(3) When demand would be useless, as when the
obligor has rendered it beyond his power to perform.
In other words, as a general rule, a person defaults and
prescriptive period for action runs when (1) the obligation
becomes due and demandable; and (2) demand for
payment has been made. The prescriptive period neither
runs from the date of the execution of a contract nor does
the prescriptive period necessarily run on the date when
the loan becomes due and demandable. Prescriptive
period runs from the date of demand, subject to certain
exceptions.
In other words, ten (10) years may lapse from the date of
the execution of contract, without barring a cause of action
on the mortgage when there is a gap between the period
of execution of the contract and the due date or between
the due date and the demand date in cases when demand
is necessary.
The prescriptive period for filing an action may run either (1)
from 1990 when the loan became due, if the obligation was
covered by the exceptions under Article 1169 of the Civil
Code; (2) or from 1999 when respondent demanded
payment, if the obligation was not covered by the
exceptions under Article 1169 of the Civil Code. In either
case, respondent's Complaint with cause of action based on
the mortgage contract was filed well within the prescriptive
period.
In other words, as a general rule, a person defaults and
prescriptive period for action runs when (1) the obligation
becomes due and demandable; and (2) demand for
payment has been made. The prescriptive period neither
runs from the date of the execution of a contract nor does
the prescriptive period necessarily run on the date when
the loan becomes due and demandable. Prescriptive
period runs from the date of demand, subject to certain
exceptions.
In other words, ten (10) years may lapse from the date of
the execution of contract, without barring a cause of action
on the mortgage when there is a gap between the period
of execution of the contract and the due date or between
the due date and the demand date in cases when demand
is necessary.
The prescriptive period for filing an action may run either (1)
from 1990 when the loan became due, if the obligation was
covered by the exceptions under Article 1169 of the Civil
Code; (2) or from 1999 when respondent demanded
payment, if the obligation was not covered by the
exceptions under Article 1169 of the Civil Code. In either
case, respondent's Complaint with cause of action based on
the mortgage contract was filed well within the prescriptive
period.
Discussion: One important issue in this case is WON the right
of Bangko Sentral ng Pilipinas to foreclose on the mortgage
had already prescribed. Kanus-a man magstart ang prescriptive
period? When you say foreclosure of mortgage, it will start
from the time the debtor is already in default. You cannot
foreclose a mortgage na nakabayad si debtor. He has to be in
default.
The prescriptive period for actions on mortgages is ten (10)
years from the day they may be brought. Actions on
mortgages may be brought not upon the execution of the
mortgage contract but upon default in payment of the
obligation secured by the mortgage.
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A debtor is considered in default when he or she fails to pay
the obligation on due date and, subject to exceptions, after
demands for payment were made by the creditor
The prescriptive period here is 10 years from the time the
debtor is placed in default. Now, when was the debtor placed
in default?
There are two periods here:
1. 1990 when the loan became due per stipulation. It
eventually failed to recover from its losses and was
liquidated on May 24, 1991.
2. 1999 when respondent demanded payment.
According to UM, the right of the BSP to foreclose on the
mortgage had already prescribed. The SC said The prescriptive
period for filing an action may run either (1) from 1990 when
the loan became due, if the obligation was covered by the
exceptions under Article 1169 of the Civil Code; (2) or from 1999
when respondent demanded payment, if the obligation was
not covered by the exceptions under Article 1169 of the Civil
Code. In either case, respondent's Complaint with cause of
action based on the mortgage contract was filed well within
the prescriptive period.
Where the loan was due alredy in 1990, if we are to consider
1990, kung wala ka nagdemand at all, the debtor will not be
placed in default. But here, there was actually a demand on
1999. Was that demand equivalent an act which would place
the debtor in default? Under the law, there is a need for
demand but there are exceptions. If your case falls under the
exceptions, the default occurs at the time the obligation
becomes due per agreement.
Here, the SC said that there was a circumstance that placed the
case under the exception. The circumstance referred here is
the liquidation in 1991. It was considered under the 4th
mentioned exception “when demand would be useless, as
when the obligor has rendered it beyond his power to
perform.” Because of the liquidation of FISLAI, even if there
was demand, it would be useless because it was already
liquidated. Therefore, you start counting at the time the
obligation became due per contract or at the most at the time
FISLAI was liquidated. The case here was filed in 1999. Whether
you count it from 1991 or 1999, the foreclosure filed by the BSP
was well within the prescriptive period.
Now what is the significance of the demand made in 1999? We
relate that to Article 1155 of the Civil Code.
Art. 1155. The prescription of actions is interrupted when
they are filed before the court, when there is a written
extrajudicial demand by the creditors, and when there is
any written acknowledgment of the debt by the debtor.
(1973a)
Ang effect atong demand sa 1999, it interrupted the
prescriptive period. In 1990, default na si debtor. Diha
magstart ang 10 years. Supposedly by 2000, dira na ang time na
nag lapse na ang time to file an action. Kung 11th year na, didto
pa nagfile og action, prescribed na. But because of the demand
in 1999, the running of the prescriptive period is suspended. So
and demand in 1999, it was not to place the debtor in default
kay 1991 palang in default na siya tungod kay naa siya sa
exception. Pero it had the effect of interrupting the
prescriptive period. BSP filed the action within the prescriptive
period.
Although in the end, the SC said the REM was not valid kay ang
nagpirma daw ato kay si Torres who was not authorized to sign.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Kinds of Default
January 9, 2020-Vallente
1. Mora Solvendi- Default on the part of the debtor/obligor
Effects of Mora Solvendi:
Obligor is liable for:
1. damages
2. fortuitous event
3. interest
2. Mora Accipiendi – default on the part of the creditor/oblige
Effects of Mora Accipiendi:
1. obligor in a crime is excused by fortuitous
event
2. obligee bears the loss by fortuitous event
Here, if the obligation is already due and demandable, and the
debtor tendered payment in full and there is no reason to
refuse the payment, and the creditor refused.
“obligor in a crime is excused by fortuitous event”. If the
obligation arises from a criminal offense, it will not be
extinguished by reason of a fortuitous event. If the debtor has
the obligation to return a particular cellphone to the creditor
because he was convicted of theft; tendered the cellphone to
the creditor but the latter refused; if that cellphone is lost by
reason of a fortuitous event, the obligation is now
extinguished. As a consequence, the creditor bears the risk of
loss.
3. Compensatio Morae- default on the part of both debtor and
creditor.
Effect of Compensation Morae:
Applies only in reciprocal obligations where
performance of the parties must be simultaneous.
Here, the default of one party neutralizes the default
of the other and their respective liabilities shall be
offset equitably.
Q: What is the consequence in a reciprocal obligation?
A is ready, able and willing to comply with his obligation but B
is not, B is automatically in default. There is no need for
demand to be made on B.
However, if both parties are not ready, able and willing to
comply with their respective obligations, then both of them
are in default. This is what we call compensation Morae. The
effect of that is the default of a is offset by the default of B. It
is as if there is no default and there is no right of relief between
each other.
SPS. NAMEAL AND LOURDES BONROSTRO vs. SPS. JUAN
AND CONSTACIA LUNA
(G.R. No.172346, July 24, 2013)
Clearly, the RTC arrived at the above-quoted conclusion
based on its mistaken premise that rescission is applicable
to the case. Hence, its determination of whether there was
substantial breach. As may be recalled, however, the CA, in
its assailed Decision, found the contract between the
parties as a contract to sell, specifically of a real property on
installment basis, and as such categorically declared
rescission to be not the proper remedy. This is considering
that in a contract to sell, payment of the price is a positive
suspensive condition, failure of which is not a breach of
contract warranting rescission under Article 1191 of the Civil
Code but rather just an event that prevents the supposed
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seller from being bound to convey title to the supposed
buyer. Also, and as correctly ruled by the CA, Article 1191
cannot be applied to sales of real property on installment
since they are governed by the Maceda Law.
The spouses Bonrostro want to be relieved from paying
interest on the amount of P214,492.62 which the spouses
Luna paid to Bliss as amortizations by asserting that they
were prevented by the latter from fulfilling such obligation.
They invoke Art. 1186 of the Civil Code which provides that
“the condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.”
However, the Court finds Art. 1186 inapplicable to this case.
The said provision explicitly speaks of a situation where it is
the obligor who voluntarily prevents fulfillment of the
condition. Here, Constancia is not the obligor but the
obligee. Moreover, even if this significant detail is to be
ignored, the mere intention to prevent the happening of
the condition or the mere placing of ineffective obstacles
to its compliance, without actually preventing fulfillment is
not sufficient for the application of Art. 1186. Two requisites
must concur for its application, to wit: (1) intent to prevent
fulfillment of the condition; and, (2) actual prevention of
compliance.
Tender of payment “is the manifestation by the debtor of a
desire to comply with or pay an obligation. If refused
without just cause, the tender of payment will discharge
the debtor of the obligation to pay but only after a valid
consignation of the sum due shall have been made with the
proper court.” “Consignation is the deposit of the [proper
amount with a judicial authority] in accordance with rules
prescribed by law, after the tender of payment has been
refused or because of circumstances which render direct
payment to the creditor impossible or inadvisable.”
“Tender of payment, without more, produces no effect.”
“[T]o have the effect of payment and the consequent
extinguishment of the obligation to pay, the law requires
the companion acts of tender of payment and
consignation.”
As to the effect of tender of payment on interest, noted
civilist Arturo M. Tolentino explained as follows:
When a tender of payment is made in such a form that the
creditor could have immediately realized payment if he had
accepted the tender, followed by a prompt attempt of the
debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will
be suspended from the date of such tender. But when the
tender of payment is not accompanied by the means of
payment, and the debtor did not take any immediate step
to make a consignation, then interest is not suspended
from the time of such tender. x x x x (Emphasis supplied)
Discussion: This case discussed what the effect of mora
accipiendi is. Here, the Spouses tendered payment of their
obligation to the creditor. According to the spouses, the
creditor refused to accept the payment without any justifiable
reason. The debt here bears interest. Now, the spouses
contends that since the creditor is in mora accipiendi, the
running of the interest should already be stopped from the
time that they tendered payment to the creditor.
Q: What is the effect of the tender of payment?
When a tender of payment is made in such a form
that the creditor could have immediately realized
payment if he had accepted the tender, followed by
a prompt attempt of the debtor to deposit the
means of payment in court by way of consignation,
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
the accrual of interest on the obligation will be
suspended from the date of such tender. But when
the tender of payment is not accompanied by the
means of payment, and the debtor did not take any
immediate step to make a consignation, then
interest is not suspended from the time of such
tender.
The running of the interest will not stop. But if there is tender
of payment and immediately followed by consignation, that is
the time that the running of the interest will stop.
Q: When shall the interest cease?
It shall cease from the time of tender.
In this case, there was no consignation so the running of the
prescriptive period did not stop.
SOLAR HARVEST INCORPORATED vs. DAVAO
CORRUGATED CARTON CORPORATION
(G.R. No. 176686, July 26, 2010)
The right to rescind a contract arises once the other party
defaults in the performance of his obligation. In
determining when default occurs, Article 1191 should be
taken in conjunction with Article 1169 of the same law.
In reciprocal obligations, as in a contract of sale, the general
rule is that the fulfillment of the parties’ respective
obligations should be simultaneous. Hence, no demand is
generally necessary because, once a party fulfills his
obligation and the other party does not fulfill his, the latter
automatically incurs in delay. But when different dates for
performance of the obligations are fixed, the default for
each obligation must be determined by the rules given in
the first paragraph of Article 1169, that is, the other party
would incur in delay only from the moment the other party
demands fulfillment of the former’s obligation. Thus, even
in reciprocal obligations, if the period for the fulfillment of
the obligation is fixed, demand upon the obligee is still
necessary before the obligor can be considered in default
and before a cause of action for rescission will accrue.
Discussion: As mentioned, in reciprocal obligations, there is no
need for demand to place the other party in default as long as
the one party is already willing, able and ready to fullfil his
obligation.
But the Supreme Court here added that “even in reciprocal
obligations, if the period for the fulfillment of the obligation
is fixed, demand upon the obligee is still necessary before the
obligor can be considered in default and before a cause of
action for rescission will accrue.”
Meaning it is possible that parties can vary the period of
performance. It coud be na in a contract of sale, the seller will
first deliver then the buyer will pay. If that is the case, dili mag-
apply ang general rule sa reciprocal obligation. If different
periods are fixed, the seller still has to make a demand upon
the buyer to place the latter in default.
PRICE STABILIZATION INC. vs. RELLORAZA, ET. AL.
(97 Phil 153)
If the debt is to be paid in installments, for example every
month, there is a need for a demand each month to place
the debtor in default for every monthly installment. Default
in one installment does not place the debtor in default for
the others which are not yet due and no demand has been
made.
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If there is an acceleration clause, a clause which states that
nonpay ment of one installment makes the balance due and
demandable, then nonpayment of one installment makes
all other installments due. However, demand is still
required to place the debtor in default.
Discussion:
1. If the debt is to be paid in installments:
Example, the loan is P1.2M. Each installment, is payable every
month. If payable for 12 months, P100,000 per month. When
the debt is payable in installment, each installment is
considered as different from the others. The January
installment is different from the February installment.
Although they consist of one obligation, the due date is
different for each installment.
Q: If the debtor does not pay the January installment, is he
already in default?
General rule, if there is no demand, there is no
default. If the creditor made a demand for the
January installment, then the debtor is in default for
the January installment. However, the debtor is still
not in default for the February installment.
2. If there is an acceleration clause:
Q: What is an acceleration Clause?
It is a clause in a loan or credit agreement where in
default of one installment, the rest of the
installments shall become due and demandable.
Example: The loan is P1.2M. Each installment, is payable every
month. If payable for 12 months, P100,000 per month. This
time with acceleration clause.
Q: If the debtor does not pay the January installment, what is
the effect?
If the creditor made a demand and the debtor fails to
pay despite the demand, the debtor is now in default
of the January installment but he is not yet in default
of the February, March and so on installment. The
consequence there is the default of the January
installment makes the other installments due and
demandable. Meaning, the creditor also has the right
to demand for the February to December
installments. When the creditor makes the demand
and the debtor does not pay, then the debtor is
already in default of all the other installments due.
When will the debtor be liable for damages in
an obligation?
Art. 1170. Those who in the performance of their obligations
are guilty of:
1. Fraud;
2. Negligence;
3. Delay; and
4. Contravention of the tenor of the obligation.
FRAUD
It is an intentional evasion of the faithful
performance of the obligation. Also called “dolo”.
When you say fraud, there is the element of being intentional
or deliberate.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
2 kinds of fraud:
(1) Fraud in the performance (dolo incidente) – fraud is
committed after the valid execution of the contract. Remedy
is claim for damages under 1170.
We are only referring here of the fraud in the performance
stage. When the obligation was created, there was no fraud.
But when the obligation is to be performed already, then there
is where fraud occurs.
Example: A and B agreed that A will buy from B one sack of 7-
toner rice to be delivered next week. Upon delivery, the top
portion of the rice kay 7-toner pero ang sa ilalom kay mais.
There is fraud in the performance. The remedy is to file for
damages. Kaning fraud na ginarefer sa Article 1170, this refers to
fraud in the performance.
(2) Fraud in the execution (dolo causante) – fraud is committed
at the time of the execution of the contract where the consent
of one party was obtained due to the employment of insidious
words or machinations. Refers to dolo causante or causal
fraud, in which, prior to or simultaneous with the execution of
a contract, one party secures the consent of the other by using
deception, without which such consent would not have been
given. Remedy is annulment of contract being a voidable one.
(note, also with damages)
Example: I have here a diamond ring. Tungod sa words na
gigamit, nisugot si buyer to buy the diamond ring. But pag pa-
appraise lubot sa baso ra diay. Here, it was really the fraud
which was the reason why the other party entered into the
contract. The remedy is annulment of contract, although also
with damages.
Article 1170 talks about fraud in the performance. According
to Justice J.B.L. Reyes, fraud in Art. 1170 means bad faith or
malice which refers to the performance of an obligation
already in existence. Deceit or dolo is the fraud referred to in
Art. 1338 which exists ahead of the contractual obligation.
Waiver of future fraud is void (Art. 1171) – it will render
obligation illusory.
You cannot stipulate in the contract that in case fraud is
committed by B, A waives the right of action against B. That is
void because that will render the obligation illusory. Chances
are, the obligor will not perform. Because his liability is already
waived.
Waiver of an action for damages based on fraud already
committed is allowed.
This is allowed because the other party already had every
opportunity to know the extent and consequence of the fraud.
Here, pwede niya i-waive.
NEGLIGENCE (culpa) in the performance of obligation
omission of that diligence required by the nature of
the obligation and commensurate with the demands
of the subsisting circumstances of time, place and
condition of the persons involved. Also called “culpa
contractual”
Diligence normally required is ordinary diligence or diligence of
a good father of a family; exceptions common carriers
requiring extraordinary diligence (Arts. 1998-2002)
Waiver in some cases allowed:
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Unlike fraud, there can be a waiver for liability for negligence. DELAY
However, you need to remember that in cases of:
Default or tardiness in the performance of the
1. Gross Negligence – can never be excused in advance obligation after it has become due and demandable.
for being contrary to public policy. Also called “mora”

Same effect in Fraud na it cannot be excused in advance but if Violation of the terms of the contract
it is already committed, it can be waived.
Act of contravening the tenor or terms or conditions
2. Simple Negligence – may in certain cases be excused
of the contract. Also called “violation.
or mitigated
This is also another source of damages under Article 1170. Take
As we said, pag-negligence, pwede as long as long as dili gross
note that ang liability is not only limited to fraud, negligence
negligence, liability by reason of negligence can be waived. But
and delay. Even if there is none of those mentioned, but there
in relation to contracts of adhesion:
is violation of the terms of the contract, the obligor can syill be
liable for damages.
CONTRACTS OF ADHESION
Example: Gusto ka muadto og Carmen, nisakay ka og bus og
Q: What is a contract of adhesion?
nagbayad ka sa imong fare. Pag-abot sa Panabo, gipanaog lang
ka sa driver og conductor kay dili nila feel imong itsura. There is
It is a contract where one of the parties has no power
no fraud, no negligence or delay but they violated the tenor of
to bargain or negotiate. He only has to agree or
their obligation because their obligation is to bring you to
reject the contract. The other party has full
Carmen. It was not complied with so the common carrier is
bargaining position.
liable for damages for violating the terms of the contract.
Examples: transportation contracts, employment contracts,
Kinds of damages that may be awarded: (MENTAL)
insurance contracts. Kung musakay ko og bus, dili man ka
muingon na I don’t ike this provision number 2, dili ko musakay
1) Moral – damages which include physical suffering,
kung dili ninyo usabon. Ang imoha lang option kay musakay o dili
mental anguish, fright, serious anxiety, besmirched
musakay.
reputation, wounded feelings, moral shock, social
humiliation, and similar injury.
Q: Are contracts of Adhesion valid?
2) Exemplary – refers to the corrective damages
Yes. But in case of doubt, when there are stipulation
imposed in addition to compensatory, moral,
such as limiting the liability of the party who drafted the
temperate or liquidated damages for the purpose of
contract, the doubt shall be resolved in favor of the party who
setting an example or correction for the public good.
has no bargaining power and strictly against the party who
drafted the contract.
3) Nominal – imposed not for the purpose of
indemnifying the loss suffered but merely to stress
the vindication of a right that had been violated.
Such stipulations regarding the exemption of future
negligence must be limited to cases where there is real
4) Temperate or Moderate – damages which are more
equality in the bargaining power of the contracting parties,
than nominal but less than compensatory damages,
and should not be allowed in the so-called CONTRACTS OF
and are imposed when the plaintiff is found to have
ADHESION (contract where the parties are manifestly in such
suffered pecuniary loss but its amount cannot by the
an inequality of positions that one could not freely bargain
nature of the case, be proved with certainty.
with the other in the determination of the terms of the
contract.
5) Actual or compensatory – refer to the adequate
compensation for the pecuniary loss suffered by the
In these kinds of contracts, the stipulation on negligence must
aggrieved party. Includes unrealized profits.
be strictly construed against the party situated in a higher or
more advantageous position.
6) Liquidated – damages agreed upon by the
contracting parties to be paid by them in case of
Example: Kanang sa ticket na naay stipulation limiting the
breach.
liability of the transportation company for loss baggage for the
amount of, example P500 unless the passenger declares a higher
value. Resolution/Rescission

Negligence distinguished from fraud
Negligence
No deliberate intention to cause
damage or injury even if the act
was done voluntarily
Liability may be mitigated or
reduced in certain situations
Waiver of an action to enforce
liability arising from future
negligence may be allowed in
certain situations
Fraud
There is deliberate intention or
plan to cause damage or injury
Liability cannot be mitigated or
reduced
Waiver of an action to enforce
liability arising from future fraud is
not allowed
ARTICLE 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there
be just cause authorizing the fixing of a period.

A transcription of the 2020 lectures of Atty. Yangyang- Espejo

BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE

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This is understood to be without prejudice to the rights of
third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law.
Master the concepts under this provision. The proper term is
actually resolution because there is another rescission in
article 1381, which is rescission proper.
1. Applies to reciprocal obligations. Both parties are
debtors and creditors of each other
Meaning both parties have corresponding obligation. There is
simultaneous performance.
2. Reciprocity must arise from identity of cause.
Obligations created at the same time.
Example: Contract of sale, Deposit and contract of loan. When
we say reciprocal, there is only one contract. In a contract of
sale, the seller is obligated to deliver and the buyer is obligated
to pay. It cannot be na there are 2 obligations and A is the
debtor in one of the obligation and he is a creditor of another
obligation. There must be only 1 cause.
3. Not applicable to contract to sell.
Basically, Article 1191 involves a reciprocal obligation and one
of the parties committed a breach. Because of the breach, the
other party can choose not to pursue the contract but to
rescind, terminate, cancel the contract by way of retaliation.
Q: What is the usual feature of a contract to sell?
In a contract to sell, there is no sale yet. The parties
merely agree to enter into a future sale. Usually, the
buyer will now start paying the purchase price but
the seller will reserve the ownership until full
payment.
Q: What happens if the property transfers possession to
despite not being done with payment?
Here, despite the delivery of the property to the
buyer, there is no transfer of ownership.
After the buyer fully pays, delivery does not transfer of
ownership. There must be another contract (Deed of sale). The
ownership shall start on the start of the execution of the DOS,
not on the contract to sell, even if there is prior delivery. It will
not retroact on the date of the contract to sell.
REYES vs. TUPARAN
(G.R. No. 188064, June 1, 2011)
The Court agrees with the ruling of the courts below that
the subject Deed of Conditional Sale with Assumption of
Mortgage entered into by and among the two parties and
FSL Bank on November 26, 1990 is a contract to sell and not
a contract of sale. The subject contract was correctly
classified as a contract to sell based on the following
pertinent stipulations:
8. That the title and ownership of the subject real
properties shall remain with the First Party until the full
payment of the Second Party of the balance of the
purchase price and liquidation of the mortgage
obligation of ₱2,000,000.00. Pending payment of the
balance of the purchase price and liquidation of the
mortgage obligation that was assumed by the
Second Party, the Second Party shall not sell, transfer
and convey and otherwise encumber the subject real
properties without the written consent of the First and
Third Party.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
9. That upon full payment by the Second Party of the
full balance of the purchase price and the assumed
mortgage obligation herein mentioned the Third Party
shall issue the corresponding Deed of Cancellation of
Mortgage and the First Party shall execute the
corresponding Deed of Absolute Sale in favor of the
Second Party.
Based on the above provisions, the title and ownership of
the subject properties remains with the petitioner until the
respondent fully pays the balance of the purchase price and
the assumed mortgage obligation. Thereafter, FSL Bank
shall then issue the corresponding deed of cancellation of
mortgage and the petitioner shall execute the
corresponding deed of absolute sale in favor of the
respondent.
Accordingly, the petitioner’s obligation to sell the subject
properties becomes demandable only upon the happening
of the positive suspensive condition, which is the
respondent’s full payment of the purchase price.
Without respondent’s full payment, there can be no breach
of contract to speak of because petitioner has no
obligation yet to turn over the title. Respondent’s failure
to pay in full the purchase price is not the breach of contract
contemplated under Article 1191 of the New Civil Code but
rather just an event that prevents the petitioner from being
bound to convey title to the respondent.
Discussion: Although the contract here is denominated as
deed of conditional sale with assumption of mortgage, the Sc
ruled that the contract is a contract to sell because of the
stipulations in the contract. Here, the stipulations in the
contract provides that the title shall remain with the seller until
the full payment of the purchase price. Clearly, this is a
contract to sell.
The obligation to sell the property arises only upon the
happening of the positive suspensive condition, the payment
of the full purchase price. Failure to pay the balance in a
contract to sell is not a breach. It is only a non-fulfillment of the
positive suspensive condition. Failure to pay in full the
purchase price is just an event that prevents the petitioner
from being bound to convey title to the respondent.
Article 1191 does not apply in contract to sell because there is
yet no reciprocal obligation and yet no breach.
SPS. NAMEAL AND LOURDES BONROSTRO vs. SPS. JUAN
AND CONSTACIA LUNA
(G.R. No.172346, July 24, 2013)
As may be recalled, the CA, in its assailed Decision, found
the contract between the parties as a contract to sell,
specifically of a real property on installment basis, and as
such categorically declared rescission to be not the proper
remedy.
This is considering that in a contract to sell, payment of the
price is a positive suspensive condition, failure of which is
not a breach of contract warranting rescission under Article
1191 of the Civil Code but rather just an event that prevents
the supposed seller from being bound to convey title to the
supposed buyer. Also, and as correctly ruled by the CA,
Article 1191 cannot be applied to sales of real property on
installment since they are governed by the Maceda Law.
Discussion: Here, the property is a house and lot sold on
installment basis. The SC said that Article 1191 does not apply
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to real property sold on installments because failure to pay the
the balance of a purchase price is only failure to fulfill a positive
suspensive condition and the sale of property in installment is
governed by the Maceda Law. There are remedies provided for
under the Maceda Law. It is not Article 1191 which will be
invoked.
4. Right to cancel or resolve is based on breach of
faith, not economic injury.
We are not talking here of economic injury or lesion. Lesion is
the basis for rescission under Article 1381 but that is not the
same with Article 1191.
Limitations on Right to Rescind (Implied Power to Rescind)
1st Limitation: Due process.
If there is already performance by the other party,
aggrieved party cannot declare on his own the
rescission. Judicial action must be resorted to.
Q: Can Parties stipulate that there can be rescission even
without going to court?
Yes. This no longer comes within the purview of Article 1191 but
under general laws on contracts.
Tacit resolutory Condition. In many decided cases, Article 1191,
the implied power to rescind, is also called as tacit resolutory
condition.
“Tacit”. It is tacit because it is not mentioned in the
obligation or contract but it exists by operation of
law because of Article 1191 and it can be invoked.
“Resolutory Condition”. Remember that a
resolutory condition is a condition the fulfillment of
which extinguishes or terminates an obligation.
Here, in Article 1191, it is similar to a resolutory
condition because the resolutory condition here is
the breach. Once there is breach, the contract or
obligation is extinguished or rescinded.
But if there is an express stipulation in the contract for an
extrajudicial rescission, it is no longer an implied power to
rescind but it becomes part of the provisions and stipulations
in a contract. Therefore, it will now be governed by the same
rules governing contracts.
UNIVERSITY OF THE PHILIPPINES VS DELOS ANGELES (35
SCRA 102)
FACTS: On November 2, 1960, UP and ALUMCO entered
into a logging agreement whereby the latter was granted
exclusive authority to cut, collect and remove timber from
the Land Grant for a period starting from the date of
agreement to December 31, 1965, extendible for a period of
5 years by mutual agreement.
On December 8, 1964, ALUMCO incurred an
unpaid account of P219,362.94. Despite repeated demands,
ALUMCO still failed to pay, so UP sent a notice to rescind
the logging agreement.
On the other hand, ALUMCO executed an instrument
entitled “Acknowledgment of Debt and Proposed Manner
of Payments. It was approved by the president of UP, which
stipulated the following:
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
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“5. In the event that the debtor fails to comply with any
of its promises, the Debtor agrees without reservation
that Creditor shall have the right to consider the Logging
Agreement rescinded, without the necessity of any
judicial suit.”
ALUMCO continued its logging operations, but
again incurred an unpaid account. On July 19,1965, UP
informed ALUMCO that it had, as of that date, considered
rescinded and of no further legal effect the logging
agreement, and that UP had already taken steps to have
another concessionaire take over the logging operation.
ALUMCO filed a petition to enjoin UP from conducting the
bidding. The lower court ruled in favor of ALUMCO, hence,
this appeal.
ISSUE: Can petitioner UP treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial
pronouncement to that effect?
RULING: Yes. In the first place, UP and ALUMCO had
expressly stipulated that upon default by the debtor, UP
has the right and the power to consider the Logging
Agreement of December 2, 1960 as rescinded without the
necessity of any judicial suit. As to such special stipulation
and in connection with Article 1191 of the Civil Code, the
Supreme Court, stated in Froilan vs. Pan Oriental Shipping
Co:
“There is nothing in the law that prohibits the parties
from entering into agreement that violation
of the terms of the contract would cause cancellation
thereof, even without court intervention. In other words,
it is not always necessary for the injured party to resort
to court for rescission of the contract.”
The limitation would no longer be the same as the limitation in
Article 1191. Kung express ang stipulation na ang extrajudicial
decision can rescind the contract, it shall be governed by the
rules on contracts. Therefore, just like any provision in the
contract, it shall be considered as valid and binding among the
contracting parties as long as it is not contrary to law, morals,
good customs, public order or public policy.
2nd limitation:
The right to rescind is subordinated to the rights of
3rd persons who acquired thing in good faith. This is
understood to be without prejudice to the rights of
third persons who have acquired the thing, in
accordance with articles 1385 and 1388 and the
Mortgage Law.
Example: A sold his land to B. The contract between A and B is
a deed of Absolute sale. A already delivered the land to B but
B only paid partially. The balance is to be paid in one year.
Despite the lapse of 1 year, B did not pay the balance. Despite
knowing that he was not able to pay the balance, B sold the
land to X. Is the sale by B to X valid?
Yes. This is a contract of Deed of Absolute Sale. When coupled
by delivery, the land ownership of the land is transferred to B.
Then B can sell the land to X.
Assuming X did not know that B has still an obligation to A.
Now, because of the nonpayment, A files for rescission under
1191.
Q: Is there breach?
A: Yes.
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Q: Is it a substantial breach?
A: yes.
Q: will the court decree rescission?
A: No. Chances are the court will not decree rescission because
the right to rescind under Article 1191 is subordinated to the
right of a 3rd person who acquired the thing in good faith.
In this case, si X na ang nakapalit sa yuta. He has no knowledge
of any defect in the title of B. If the Court will decree rescission,
ang consequence ana kay mutual restitution. But in this case,
restitution is already impossible because B can no longer give
the land to A because it is now in the hands of X who is an
innocent purchaser for value. Thus, rescission cannot be
decreed.
3rd limitation:
Court may order fixing of period instead of
rescission.
Eg. When default not willful or is excusable. Except:
If fixing the period would serve no other purpose but
to delay.
Example: In Construction agreement for 2 years, the
contractor should FULLY accomplish or finish the construction
of a building. After 2 years, ang na-accomplish ni constructor
kay 95%. Now, the owner files for rescission because of breach.
Usually in this cases, the court will just fix the period instead of
rescission kay 5% nalang man ang kulang.
But if the default is willful or fixing the period would serve no
other purpose but to delay, the court usually decree the
decision. Example, 2 years lang ang contract unya 20 years na,
wala gihapon nahuman. So fixing the period will serve no other
purpose but delay.
4th Limitation:
Casual or slight breaches will not justify rescission.
CONSOLIDATED INDUSTRIAL GASES, INC. vs. ALABANG
MEDICAL CENTER
(G.R. No. 181983, November 13, 2013)
FACTS: CIGI is a domestic corporation engaged in the
business of selling industrial gases (i.e., oxygen, hydrogen
and acetylene) and installing centralized medical and
vacuum pipeline system. Respondent AMC, on the other
hand, is a domestic corporation operating a hospital
business.
The herein legal controversy arose after the parties entered
into another agreement on October 3, 1996 this time for the
continuation of the centralized medical oxygen and
vacuum pipeline system in the hospital’s fourth & fifth
floors (Phase 2 installation project) at the cost of Two
Million Two Hundred Sixty-Seven Thousand Three Hundred
Forty-Four Pesos and 42/100 (P2,267,344.42).
This second contract followed the same terms and
conditions of the contract for the Phase 1 installation
project. CIGI forthwith commenced installation works for
Phase 2 while AMC paid the partial amount of One Million
Pesos (P1,000,000.00) with the agreement that the balance
shall be paid through progress billing and within fifteen (15)
days from the date of receipt of the original invoice sent by
CIGI.
On August 4, 1997, CIGI sent AMC Charge Sales Invoice No.
125847 as completion billing for the unpaid balance of
P1,267,344.42 for the Phase 2 installation project. When the
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
sales invoice was left unheeded, CIGI sent a demand letter
to AMC on January 7, 1998. AMC, however, still failed to pay
thus prompting CIGI to file a collection suit before the RTC
on September 15, 1998.
CIGI claimed that AMC’s obligation to pay the outstanding
balance of the contract price for the Phase 2 installation
project is already due and demandable pursuant to Article
II, page 4 of the contract stating that the project shall be
paid through progress billing within fifteen (15) days from
the date of receipt of original invoice.
In its Answer with Counterclaim, AMC averred that its
obligation to pay the balance of the contract price has not
yet accrued because CIGI still has not turned over a
complete and functional medical oxygen and vacuum
pipeline system. AMC alleged that CIGI has not yet tested
Phases 1 and 2 which constitute one centralized medical
oxygen and vacuum pipeline system of the hospital despite
substantial payments already made. As counterclaim, AMC
prayed for actual, moral and exemplary damages, and
attorney’s fees.
"Reciprocal obligations are those which arise from the
same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is
dependent upon the obligation of the other. They are to
be performed simultaneously, so that the performance of
one is conditioned upon the simultaneous fulfillment of
the other."
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the
moment one of the parties fulfils his obligation, delay by
the other begins.
Under the subject contracts, CIGI as contractor bound itself
to install a centralized medical oxygen and vacuum pipeline
system for the first to fifth floors of AMC, which in turn,
undertook to pay the contract price therefor in the manner
prescribed in the contract. Being reciprocal in nature, the
respective obligations of AMC and CIGI are dependent
upon the performance of the other of its end of the deal
such that any claim of delay or non-performance can only
prosper if the complaining party has faithfully complied
with its own obligation.
Here, CIGI complains that AMC refused to abide by its
undertaking of full payment. While AMC does not dispute
its liability to pay the balance of P1,267,344.42 being
claimed by CIGI, it asserts, however that the same is not yet
due because CIGI still has not turned over a complete and
functional medical oxygen and vacuum pipeline system.
CIGI is yet to conduct a test run of the installation and an
orientation/seminar of AMC employees who will be
involved in the operation of the system. CIGI, on the other
hand, does not deny that it failed to conduct the agreed
orientation/seminar and test run but it blames AMC for such
omission and asserts that the latter failed to heed CIGI’s
request for electrical facilities necessary for the test run.
CIGI also contends that its obligation is merely to provide
labor and installation.
Issue: Was there breach? Is rescission Proper?
RULING: 1. AS to breach. The Court finds that CIGI did not
faithfully complete its prestations and hence, its demand
for payment cannot prosper based on the following
grounds:
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(a) under the two installation contracts, CIGI was bound
to perform more prestations than merely supplying
labor and materials; and
(b) CIGI failed to prove by substantial evidence that it
requested AMC for electrical facilities as such, its failure
to conduct a test run and orientation/seminar is
unjustified.
It is hornbook doctrine in the law on contracts that the
parties are bound by the stipulations, clauses, terms and
conditions they have agreed to provided that such
stipulations, clauses, terms and conditions are not contrary
to law, morals, public order or public policy. In the present
case, we find no legal proscription infringed by the terms
and conditions of the contracts between AMC and CIGI. As
such, the said terms and conditions must be held to be the
law between them and the parties are bound to fulfill what
has been stipulated.
Both of the installation contracts clearly show that CIGI
undertook to carry out more prestations than merely
supplying labor and materials for the medical oxygen and
vacuum pipeline system. CIGI agreed also: (a) to perform a
pressure drop, leak testing, test run, painting/color coding
of the installed centralized medical oxygen, vacuum and
nitrous oxide pipeline system; and (b) to conduct
orientation, seminars and training for the AMC employees
who will be involved in the operation of the centralized
pipeline system before the formal turnover of the project.
In reciprocal obligations, before a party can demand the
performance of the obligation of the other, the former
must also perform its own obligation. For its failure to turn
over a complete project in accordance with the terms and
conditions of the installation contracts, CIGI cannot
demand for the payment of the contract price balance from
AMC, which, in turn, cannot legally be ordered to pay.
Otherwise, AMC will be effectively forced to accept an
incomplete performance contrary to Article 1248 of the Civil
Code which states that "(u)nless there is an express
stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation
consists.“
Considering that AMC’s obligation to pay the balance of the
contract price did not accrue, the stipulated interest
thereon also did not begin to run.
2. As to Rescission. The Court, however, finds that AMC has
no legal basis to demand the rescission of the installation
contracts.
"[R]escission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and
fundamental violations as would defeat the very object
of the parties in making the agreement. Whether a
breach is substantial is largely determined by the
attendant circumstances."
The provisions on the test run of and seminar on the
medical oxygen system are not essential parts of the
installation contracts as they do not constitute a vital
fragment/part of the centralized medical oxygen system.
Further, the allegedly defective and incomplete parts
cannot substantiate rescission. The photographs
submitted by AMC are not adequate to establish that
certain parts of the installed system are indeed defective
or incomplete especially so that the installation never
became operational.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Unless and until the medical oxygen and vacuum pipeline
actually runs, there is no way of conclusively verifying that
some of its parts are defective or incomplete. In addition,
AMC failed to allege much less show whether the alleged
defects and incomplete components were caused by
factory defect, negligence on the part of CIGI or ordinary
wear and tear.
At any rate, the parties have specified warranty clauses in
the subject contracts to answer for such contingency.
Since, as discussed above, the agreed test run and
orientation/seminar for both Phases 1 and 2 installation
projects were yet to be performed, both projects are not
yet complete and the one year warranty period has not yet
commenced to run.
In view of the fact that rescission is not permissible, the
installation contracts of the parties stand and the terms
thereof must be duly fulfilled. CIGI is obliged to comply with
its undertakings to conduct a test run and hold a
seminar/orientation of concerned AMC employees, after
which, turn over the system fully functional and operational
to AMC. Simultaneously with the turnover, AMC shall pay
the remaining balance of P1,267,344.42 to CIGI.
Also, the Court finds it proper that after CIGI has turned
over a complete and functional medical oxygen and
vacuum pipeline system, it must be given the opportunity
to inspect the allegedly defective and incomplete parts. The
results of such inspection will in turn determine which part
of the aforementioned warranty clauses shall govern.
5th limitation:
Remedy of rescission is alternative to specific
performance.
Take note that “Damages” is recoverable in both cases. Case:
Areola vs. CA (236 SCRA 643)
Effect: Filing of both rescission and specific performance can
be dismissed on ground of splitting cause of action or res
judicata.
Exceptions on the limitation that specific performance and
rescission are alternative remedies:
a. Even if specific performance was filed first, if
performance is no longer possible, you can file
rescission.
Example: When the property was already transferred to a
buyer in good faith. Para dili na magfile usab ang client
unya magbayad napod kay nadismiss ang una na kaso,
suggestion is you put both remedies in the prayer, not as
a cumulative action but alternative.
b. Even if rescission was filed first, if there is valid basis
for extension of performance of the obligation,
court will not decree rescission but will instead fix
period for fulfillment.
6th limitation:
Rescission can only be filed by the one who is not at
fault (injured party).
ALMIRA vs. COURT OF APPEALS [G.R. No. 115966. March
20, 2003.]
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FACTS: Respondent took possession of the property
subject of the Kasunduan and made various payments to
petitioners amounting to P58,500.00. However, upon
failure of petitioners to deliver to him a separate title to the
property in the name of Julio Garcia, he refused to make
further payments, prompting petitioners to file a civil
action before the Regional Trial Court of San Pedro,
Laguna, Branch 32, on May 13, 1991 for (a) rescission of the
Kasunduan, etc.
The tenor of the correspondence between petitioners and
respondent shows that the parties intended that a separate
title to the property in the name of Julio Garcia shall be
delivered to respondent as a condition for the latter's
payment of the balance of the purchase price.
Had the parties intended that petitioners deliver TCT No.
RT-1076 instead of a separate title in the name of Julio
Garcia to respondent, then there would have been no need
for petitioners to ask for partial sums on the ground that
this would be used to pay for the processing of the title to
the property. Petitioners had only to present the existing
title, TCT No. RT-1076, to respondent and demand the
balance of the purchase price.
This, petitioners did not do. Instead, they were content to
ask small sums from respondent on thirty-nine occasions
for two years before filing an action in court for rescission
of the Kasunduan another five years later. It is readily
discernible from the tenor of various receipts issued by
petitioners that the sums given by respondent on these
thirty-nine occasions were made upon request of
petitioners seeking respondent's indulgence.
ISSUE: whether rescission of the Kasunduan by petitioners
may prosper.
No. The power to rescind is only given to the injured party.
The injured party is the party who has faithfully fulfilled his
obligation or is ready and willing to perform with his
obligation. In the case at bar, petitioners were not ready,
willing and able to comply with their obligation to deliver a
separate title in the name of Julio Garcia to respondent.
Therefore, they are not in a position to ask for rescission of
the Kasunduan. Moreover, respondent's obligation to pay
the balance of the purchase price was made subject to
delivery by petitioners of a separate title in the name of
Julio Garcia within six (6) months from the time of the
execution of the Kasunduan, a condition with which
petitioners failed to comply.
It follows that, not having established that they were ready,
able and willing to comply with their obligation to deliver to
respondent a separate title in the name of Julio Garcia,
petitioners may not ask for rescission of the Kasunduan nor
recover damages.
The court did allow the rescission of the Ksunduan because the
petitioners were not considered as injured parties as they were
not ready or willing to comply with their obligation to deliver a
separate title of Julio Garcia.
RIGHT TO RESCIND UNDER ARTICLE 1191 (TACIT RESOLUTORY
CONDITION) VS RIGHT TO TERMINATE BASED ON A
RESOLUTORY PROVISION:
In contracts subject to resolutory conditions, these
are found in the contracts entered into by the
parties. These provisions are governed by the laws of
contract. Unlike the right to rescind in Article 1191 of
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
the Civil Code which has 6 limitations (as discussed),
the only limitation is that the contract should not be
contrary to law, morals, good customs, public order
or public policy.
DISTINCTIONS BETWEEN ARTICLE 1191 AND ARTICLE 1380
ARTICLE 1380. Contracts validly agreed upon may be
rescinded in the cases established by law.
Rescission can be found under Article 1191 and Article 1830.
Article 1380 is actually rescission proper. Article 1191 is more
accurately called as resolution.
Article 1191 talks about breach while Article 1830 contemplates
a valid contract but may be rescinded on account of lesion or
economic injury.
What are the contracts covered by Article 1830? They are
enumerated under Article 1831.
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 state in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them;
(accion pauliana)
(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.
The distinctions are laid down in the case of:
CONGREGATION OF THE RELIGIOUS OF THE VIRGIN MARY
AND/OR THE SUPERIOR GENERAL OF THE RELIGIOUS OF
THE VIRGIN MARY, REPRESENTED BY THE REVEREND
MOTHER MA. CLARITA BALLEQUE vs. EMILIO Q. OROLA,
ET. AL.
(G.R. No. 169790, April 30, 2008)
At the outset, we must distinguish between an action for
rescission as mapped out in Article 1191 of the Civil Code and
that provided by Article 1381 of the same Code. The articles
read:
Art. 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not
comply with what is incumbent upon him.
The injured party may choose between the fulfillment and
the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there
be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of
third persons who have acquired the thing, in accordance
with articles 1385 and 1388 and the Mortgage Law.
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Article 1191, as presently worded, speaks of the remedy of
rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term
"resolution."
The remedy of resolution applies only to reciprocal
obligations such that a party's breach thereof partakes of a
tacit resolutory condition which entitles the injured party to
rescission.
The present article, as in the Old Civil Code, contemplates
alternative remedies for the injured party who is granted
the option to pursue, as principal actions, either a rescission
or specific performance of the obligation, with payment of
damages in each case.
On the other hand, rescission under Article 1381 of the Civil
Code, taken from Article 1291 of the Old Civil Code, is a
subsidiary action, and is not based on a party's breach of
obligation.
Under Article 1383 of the Civil Code of the Philippines,
rescission can not be demanded except when the party
suffering damage has no other legal means to obtain
reparation, is predicated on a failure to distinguish between
a rescission for breach of contract under Article 1191 of the
Civil Code and a rescission by reason of lesion or economic
prejudice, under Article 1381, et seq. The rescission on
account of breach of stipulations is not predicated on injury
to economic interests of the party plaintiff but on the
breach of faith by the defendant, that violates the
reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned
without disclosing anywhere that the action for rescission
thereunder is subordinated to anything other than the
culpable breach of his obligations by the defendant. This
rescission is a principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his
promises when the other violates his. As expressed in the
old Latin aphorism: "Non servanti fidem, non est fides
servanda." Hence, the reparation of damages for the
breach is purely secondary.
On the contrary, in the rescission by reason of lesion or
economic prejudice, the cause of action is subordinated to
the existence of that prejudice, because it is the raison d'
etre as well as the measure of the right to rescind. Hence,
where the defendant makes good the damages caused, the
action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of
these two articles is limited to the cases of rescission for
lesion enumerated in Article 1381 of the Civil Code of the
Philippines, and does not apply to cases under Article 1191.
Summary of Distinctions:
1191 1380
Resolution Rescission
Reciprocal Obligations Not necessarily reciprocal
Principal action retaliatory in Subsidiary action
character
Alternative Remedies Last Remedy
Based on breach Based on lesion or economic injury
Prescriptive period is 10 years if Prescriptive period is 4 years
based on written contract
Note the distinction as to the prescription:
LALICON vs. NATIONAL HOUSING AUTHORITY
(G.R. No. 185440, July 13, 2011)
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
This case is about (a) the right of the National Housing
Authority to seek annulment of sales made by housing
beneficiaries of lands they bought from it within the
prohibited period and (b) the distinction between actions
for rescission instituted under Article 1191 of the Civil Code
and those instituted under Article 1381 of the same code.
ISSUE: Whether or not the NHA’s right to rescind has
prescribed; and
RULING:
Invoking the RTC ruling, the Lalicons claim that under
Article 1389 of the Civil Code the “action to claim rescission
must be commenced within four years” from the time of
the commission of the cause for it.
But an action for rescission can proceed from either Article
1191 or Article 1381. It has been held that Article 1191 speaks
of rescission in reciprocal obligations within the context of
Article 1124 of the Old Civil Code which uses the term
“resolution.” Resolution applies only to reciprocal
obligations such that a breach on the part of one party
constitutes an implied resolutory condition which entitles
the other party to rescission. Resolution grants the injured
party the option to pursue, as principal actions, either a
rescission or specific performance of the obligation, with
payment of damages in either case.
Rescission under Article 1381, on the other hand, was taken
from Article 1291 of the Old Civil Code, which is a subsidiary
action, not based on a party’s breach of obligation. The
four-year prescriptive period provided in Article 1389
applies to rescissions under Article 1381.
Here, the NHA sought annulment of the Alfaros’ sale to
Victor because they violated the five-year restriction
against such sale provided in their contract. Thus, the CA
correctly ruled that such violation comes under Article 1191
where the applicable prescriptive period is that provided in
Article 1144 which is 10 years from the time the right of
action accrues. The NHA’s right of action accrued on
February 18, 1992 when it learned of the Alfaros’ forbidden
sale of the property to Victor. Since the NHA filed its action
for annulment of sale on April 10, 1998, it did so well within
the 10-year prescriptive period.
SUBSIDIARY LIABILITIES OF CREDITORS:
a. Accion subrogatoria – exercise all the rights and
bring all the actions of the debtor save those which
are inherent in his person
(eg. Right to receive support, carry out an agency)
If you remember our discussion in Succession that when the
creditor is prejudiced and there is an heir who is the debtor;
and the debtor refuses to receive his inheritance or repudiates
it; and it could have been the only means that the debtor could
pay his debt – the creditor actually may petition the court for
the latter to accept the inheritance in behalf of the heir who
repudiates.
Save those which are inherent in his person- such as the right
to receive support. Support is indeispensable for the survival
of the debtor. The creditor cannot say “ako nalang dawat sa
imong pagkaon” because it will lead to the destruction of the
debtor.
b. Accion pauliana – impugn acts done to defraud
creditor
If the creditor is prejudiced by an act of the debtor, for
example, after the debtor contracted the obligation, he
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conveyed all his properties to his best friend leaving nothing
for himself or for his creditors. That alienation is presumed to
be “in fraud of creditors”; and the creditors can impugn or
rescind those transactions, alienations or conveyances –
accion pauliana.
c. Accion directa- Even if the creditor is not the
person with whom the debtor contracted, the
creditor can have a direct action against those
persons with whom the debtor transacted and dealt
with.
• Art. 1652 – subsidiary liability of the sublessee
to the lessor
Art. 1652. The sublessee is subsidiarily liable to the lessor for
any rent due from the lessee. However, the sublessee shall
not be responsible beyond the amount of rent due from
him, in accordance with the terms of the sublease, at the
time of the extrajudicial demand by the lessor.
The contract is between the lessor and the lessee. Generally,
in the contract of lease, if sublease is not specifically
prohibited, it is allowed. In that case, the lessor has a direct
action against the sublessee when there is nonpayment. It
provides subsidiary liability of the sub-lessee to the lessor.
• Art. 1608 – vendor may bring his action against
every possessor whose right is derived from the
vendee
Art. 1608. The vendor may bring his action against every
possessor whose right is derived from the vendee, even if
in the second contract no mention should have been made
of the right to repurchase, without prejudice to the
provisions of the Mortgage Law and the Land Registration
Law with respect to third persons. (1510)
Whoever is in possession of the property or thing sold can be
proceeded against by the vendor.
• Art. 1729 – laborers engaged by the contractor
have an action against the owner up to the
amount owing from the owner to the
contractor
Art. 1729. Those who put their labor upon or furnish
materials for a piece of work undertaken by the contractor
have an action against the owner up to the amount owing
from the latter to the contractor at the time the claim is
made. However, the following shall not prejudice the
laborers, employees and furnishers of materials:
(1) Payments made by the owner to the contractor
before they are due;
(2) Renunciation by the contractor of any amount due
him from the owner.
This article is subject to the provisions of special laws.
(1597a)
Example: You are the owner of the building and then you
contracted a contractor to undertake a construction. You do
not have any relationships to the employees of the contractor,
but the law says kung wala sila gibayaran sa sweldo – pwede sila
manigil sa owner, but only to up to the amount owing to the
owner to the contractor. Sa kato lang wala nabayad
• Art. 1893 – in agency, the principal may bring an
action against the substitute
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Art. 1892. The agent may appoint a substitute if the
principal has not prohibited him from doing so; but he shall
be responsible for the acts of the substitute:
(1) When he was not given the power to appoint one;
(2) When he was given such power, but without
designating the person, and the person appointed
was notoriously incompetent or insolvent.
All acts of the substitute appointed against the prohibition
of the principal shall be void. (1721)
Art. 1893. In the cases mentioned in Nos. 1 and 2 of the
preceding article, the principal may furthermore bring an
action against the substitute with respect to the obligations
which the latter has contracted under the substitution.
(1722a)
Even if the contract is only between the principal and the
agent, but the agent has another sub-contract with the
substitute; however by law, the principal may directly bring an
action against the substitute.
January 16, 2020-Devilleres
Debtor (remedies)
So now we go to the debtor. What are the possible remedies
of the debtor? If you are the debtor, what are the possible
excuses that may be invoked to release yourself from any
liability in the obligation?
So the most used excuse is Article 1174, the concept of
FORTUITOUS EVENTS.
Article 1174. Except in cases expressly specified by the law,
or when it is otherwise declared by stipulation, or when the
nature of the obligation requires the assumption of risk, no
person shall be responsible for those events which could
not be foreseen, or which, though foreseen, were
inevitable. (1105a)
Note: You have to remember the definition!
FORTUITOUS EVENT – it is an occurrence or
happening which cannot be forseen or even if forseen
is inevitable.*
You cannot avoid. It. It would really happen.
THINGS THAT WE NEED TO REMEMBER REGARDING
FORTUITOUS EVENTS:
Fortuitous event v. Force majeure
-If we are to apply them, there is really no distinction. But if the
question calls for, “how do you distinguish?”, of course the
examiner really calls for a distinction. So technically, these are
the distinctions:
FORTUITOUS EVENTS (Caso FORCE MAJEURE
Fortuito)
-Acts of God. (e.g. volcanic -Acts of man but without
eruption) the intervention of the
debtor (e.g. robbery)
Q: What is the rule if an obligation is not performed because
of a fortuitous event?
GENERAL RULE: The obligation is extinguished.
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*Before we can invoke the concept of fortuitous event, ALL
THE REQUISITES SHOULD BE PRESENT. If only 3 out of 4, then
we cannot invoke fortuitous events.
Remember these 4 requisites. So if the problem calls for a
determination of whether or not the obligation is excused
because of a fortuitous event, you have to cite these
requisites; and based on these requisites, you determine w/n
the event is fortuitous. This has been the consistent
enumeration in all the pieces of jurisprudence.
Under Article 1174 of the Civil Code, to exempt the obligor
from liability for a breach of an obligation due to an ―act
of Godǁ or force majeure, the following must concur:
(a) the cause of the breach of the obligation must be
independent of the will of the debtor;
(b) the event must be either unforseeable or unavoidable;
(c) the event must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner; and

REQUISITES: (d) thedebtor must be free from any participation in, or

aggravation of theinjury to the creditor.
a.) The cause of the breach must be independent of the
will of the obligor; Based on these requisites, the SC evaluated w/n the event
was really fortuitous. So here, the circumstances which
b.) The event must either be unforeseeable or constitute the fortuitous event according to the contractor,
unavoidable; e.g. shortage of supplies and cements, typhoons, power
failures and interruptions of water supply, are considered as
c.) The event must be such as to render impossible for fortuitous events. They may be characterized as force
the obligor to fulfill his obligation in a normal Majeure. In the present case, hardware stores did not have
enough cement available in their supplies or stocks at the
manner;
time of the construction in the 1990s. Likewise, typhoons,
power failures and interruptions ofwater supply all clearly
Example: It’s raining, so is it a fortuitous event? Is it
fall under force majeure. Since LCDC could not possibly
something beyond the control of the debtor? Is it
continue constructing the building under the circumstances
something which is avoidable? Can you stop the rain?
prevailing, it cannot be held liable for any delay that
You cannot stop it. But if your obligation is to deliver
resulted from the causes aforementioned.
a specific thing and nag-ulan, does it render it
impossible to fulfill the obligation in a normal
TIRE BLOWOUT is it considered a FE?
manner? Di lng ka gusto kay mabasa ka? Unsa mana,
magmelt ka kung mabasa ka or mudaghan ka kung
YOBIDO vs COURT OF APPEALS
mabasa ka? Although it is a natural phenomenon or
something which is beyond the control, but it is not
FACTS: In 1988, spouses Tumboy and their minor
fortuitous in the sense that the obligor is excused
children boarded a Yobido Liner bus bound for Davao
from his obligation.
City. The left front tire of the bus exploded. The
incident resulted in the death of Tito Tumboy and
d.) The obligor must be free from any participation or
physical injuries to other passengers.
aggravation of the injury to the obligee.
Leny and her children filed a complaint for breach of
-Even if the event is fortuitous, like a storm, xxx For example,
contract of carriage against Alberta Yobido, the owner
sakay kag barko unya typhoon signal number 5. Kung ikaw
kabalo naka na nay typhoon na muagi saimong path, mudayon of the bus and Crescensio Yobido, the bus driver. As an
answer to the complaint, they raised the defense of
paba ka? No, because you have to think of the safety of the
passengers, not only of your profits. Pero kung nidayon lng caso fortuito or fortuitous event.
gihapon despite of the storm signal number 5, and then
nagsink ang vessel, so the obligor is not free from any Tumboy asserted that the accident was brought about
by the driver‘s failure to excersie the diligence required
participation or aggravation because there was negligence
of the carrier in transporting passengers safely to their
here. Kay kung wala gipalarga ang barko, wala untay nahitabo.
destination. According to her, the bus left Mangagoy
So here the proximate cause is, nay bagyo pero kung wala
gipalarga ang barko, wala untay madisgrasya. at 3:00 o‘clock in the afternoon. The winding road it
Please remember this case: traversed was not cemented and was wet due
to the rain; it was rough with crushed rocks. The bus
which was full of passengers had cargoes on top. Since
Philippine Realty and Holding vs. Ley Construction and
it was ―running fast,ǁ she cautioned the driver to slow
Development Corporation
down but he merely stared at her through the mirror.
At around 3:30 p.m., in Trento, she heard something
Facts:
explode and immediately, the bus fell into a ravine.
Here, what was involved was a Construction Agreement.
For their part, the defendants tried to establish that
Usually in a CA, there is a period of time within which the
the accident was due to a fortuitous event. Abundio
contractor would finish the construction. Here, it was not
Salce, who was the bus conductor when the incident
finished on the time stipulated because according to the
happened, testified that the 42-seater bus was not full
contractor, there were fortuitous events that prevented
as there were only 32 passengers. He affirmed that the
the contractor from complying with his obligation in a
left front tire that exploded was a ―brand new tireǁ
normal manner.
that he mounted on the bus on April 21, 1988 or only
five (5) days before the incident.
Held:
ISSUE: WON the tire blow-out was a caso fortuito to
The SC again enumerated what were the requisites for a
exempt Yobido from liability.
fortuitous event.
RULING: No, the tire blow-out was not a caso fortuito.

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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE

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A fortuitous event is possessed of the following
characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to
comply with his obligations, must be independent of
human will; (b) it must be impossible to foresee the
event which constitutes the caso fortuito, or if it can
be foreseen, it must be impossible to avoid; (c) the
occurrence must be such as to render it impossible for
the debtor to fulfill his obligation in a normal manner;
and (d) the obligor must be free from any participation
in the aggravation of the injury resulting to the
creditor.
As Article 1174 provides, no person shall be responsible
for a fortuitous event which could not be foreseen, or
which, though foreseen, was inevitable. In other
words, there must be an entire exclusion of human
agency from the cause of injury or loss.
Under the circumstances of this case, the explosion of
the new tire may not be considered a fortuitous event.
There are human factors involved in the situation. The
fact that the tire was new did not imply that it was
entirely free from manufacturing defects or that it was
properly mounted on the vehicle. Neither may the fact
that the tire bought and used in the vehicle is of a
brand name noted for quality, resulting in the
conclusion that it could not explode within five days‘
use. Be that as it may, it is settled that an accident
caused either by defects in the automobile or through
the negligence of its driver is not a caso fortuito that
would exempt the carrier from liability for damages.
Moreover, a common carrier may not be absolved
from liability in case of force majeure or fortuitous
event alone. The common carrier must still prove that
it was not negligent in causing the death or injury
resulting from an accident.
DISCUSSION:
When you say tire explosion/blow-out, it would depend upon
the reason or the cause for the explosion. The cause of the
blowout, if due to a factory defect, improper mounting,
excessive tire pressure, that would not be considered as a
fortuitous event because it would not be an unavoidable
event. It could have been prevented by the exercise of due
diligence. The SC said here that there may have been adverse
conditions in the road that were enforceable which could
make the blowout caso fortuito.
For example: Nagatravel ka sa road unya nay mga tao na
nanglabay ug mga spikes sa dalan, so that is something which
is unforeseeable. Or, nakilatan ang imuhang ligid. So it is
something beyond the control of the common carries, hence a
fortuitous event. So, it will exempt the common carrier from
liability. So it depends kung unsa ang cause sa tire blowout.
In this case, no evidence was presented by defendant as to the
cause of the tire blowout, whether it was improper mounting
or lightening, wala. Basta na prove lng it was an explosion. The
case was for breach of contract of carriage. And as we already
discussed before, in that case, negligence of the part of the
defendant is presumed. The plaintiff does not have to prove
negligence on the part of the CC. it does not have to prove that
the tire exploded because of excessive pressure or improper
mounting such that there was negligence. The law presumes
it.
If the defendant wants to invoke the defense of fortuitous
event, it has the burden of proving that the cause was really
fortuitous (e.g. lightning struck the tire). In the absence of the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
cause of what was really the cause of the tire explosion, the
presumption stands.
So here, owing to the statutory presumption of negligence
against the carrier, and its obligation to exercise the utmost
diligence of a very cautious person as far a human foresight can
provide, it is the burden of the defendants to prove that the
cause of the blowout was a fortuitous event. It is not incumbent
for the plaintiff to prove that the cause of the blowout is not
caso fortuito.
For example, instead of filing a case for breach of CC, the
plaintiff filed a case for quasi-delict. There was no proof as to
what is the cause of the tire explosion. If you were the Judge,
how will you rule on that case? Remember if the case is for
culpa aquiliana or tort, the burden to prove negligence is on
the part of the plaintiff. So kng ingana na way proof kng unsay
reason for the tire blowout, meaning the plaintiff has not
discharged the BOP. Therefore, daog si defendant. But this is
a different case – kini kay is BREACH OF CONTRACT OF
CARRIAGE. Tip: So you have to think about your case kung asa
mo nay advantage.
FIRE
Real vs. Belo
Facts: Petitioner owned and operated the Wasabe Fastfood
stall located at the food center of Philippine Women‘s
University (PWU). Belo (respondent) owned and operated
the BS Masters fastfood stall, also located at the Food
Center of PWU.
In January 1995, a fire broke out at petitioner's Wasabe
Fastfood stall. The fire spread and gutted other fastfood
stalls in the area, including respondent's stall. An
investigation on the cause of the fire revealed that the fire
broke out due to the leaking fumes coming from the
Liquefied Petroleum Gas (LPG) stove and tank installed at
petitioner's stall. For the loss of his fastfood stall due to the
fire, respondent demanded compensation from petitioner.
Respondent alleged that petitioner failed to exercise due
diligence in the upkeep and maintenance of her cooking
equipments, as well as the selection and supervision of her
employees; that petitioner's negligence was the proximate
cause of the fire that gutted the fastfood stalls.
Issue: WON the fire was a fortuitous event.
RULING: Jurisprudence defines the elements of a
"fortuitous
event" as follows:
(a) the cause of the unforeseen and unexpected
occurrence must be independent of human will;
(b) it must be impossible to foresee the event which
constitutes the caso fortuito, or if it can be
foreseen, it must be impossible to avoid;
(c) the occurrence must be such as to render it
impossible for the debtor to fulfill his obligation in
a normal manner; and
(d) the obligor must be free from any participation in
the aggravation of the injury resulting to the
creditor.
Article 1174 of the Civil Code provides that no person shall
be responsible for a fortuitous event which could not be
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foreseen, or which, though foreseen, was inevitable. In
other words, there must be an entire exclusion of human
agency from the cause of injury or loss.
It is established by evidence that the fire originated from
leaking fumes from the LPG stove and tank installed at
petitioner's fastfood stall and her employees failed to
prevent the fire from spreading and destroying the other
fastfood stalls, including respondent's fastfood stall. Such
circumstances do not support petitioner's theory of
fortuitous event.
Discussion: Here a food stall owned by Belo was razed by fire.
The other adjacent stalls were also razed by the fire. A case
was filed for recovery of damages based on negligence because
by reason of the negligence of the defendant, the plaintiffs’
stalls were burned. According to the defendant, fire is a
fortuitous event so he should be excused from liability.
What is the rule? You have to determine what is the cause of
the fire. Kung it is really fortuitous which will fit the 4 requisites
mentioned, then the event is fortuitous. But if not, then the
defendant is liable. So here, the SC said: It is established by
evidence that the fire originated from leaking fumes from the
LPG stove and tank installed at petitioner's fastfood stall and her
employees failed to prevent the fire from spreading and
destroying the other fastfood stalls, including respondent's
fastfood stall. Such circumstances do not support petitioner's
theory of fortuitous event.
Here, there was negligence because they not only failed to
show that the LPG stove and tank were maintained in good
condition and checked for defects. Also, even if she was not
present during the incident and only her ees were there, but
as er, she should have presented evidence that she exercised
due diligence in the selection and supervision of her ees
which she failed to prove. That’s why she was liable for the
damages caused by the fire – which was the proximate cause
of the negligence of the ees, and over which the er also has
vicarious liability.
Metro Concast Steel Corporation v. Allied Bank
Corporation
GR no. 177921 | December 4, 2013
Facts: Metro Concast owed Allied Bank a P51 Million plus.
Metro Concast negotiated with Allied Bank for the payment
of its loan. It even owed for a sale to Allied Bank its
machineries and equipment, but the latter refused. So
Allied Bank advised Metro Concast to sell its equipment and
apply its proceeds to the loan.
So Metro Concast was able to meet with Peakstar Oil Corp
and the latter expressed interest in buying the scrap metal
of Metro Concast. They entered into a Memorandum of
Agreement, wherein Metro Concast agreed to sell Peakstar
these equipment, scrap metal etc. Metro Concast relied on
the proceeds on the sale to pay for the loan it had with
Allied Bank. However, Peakstar breached its obligation to
Metro Concast. So wala nadayon ang MoA and Metro
Concast was not able to pay Allied Bank.
In a case filed by Allied Bank against Metro Concast, the
latter alleged that the breach by Peakstar of its obligation
extinguished the obligation of Metro Concast. The failure to
perform of Metro Concast to perform its own obligation to
Allied Bank is a form of force majeure which is beyond their
a.) 1 The cause of the breach must be independent of the will of the obligor;
b.) The event must either be unforeseeable or unavoidable;
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
control. Since they lost their funds, they could not pay Allied
Bank.
Issue: Is the violation of Peakstar of the MoA considered a
fortuitous event?
Held: No. The SC cited here the 4 requisites of caso fortuito.
How about that event? Peakstar’s breach of its obligation
to Metro Concast arising from the MoA cannot be classified
as a fortuitous event under jurisprudential formulation.
While it may be argued that Pearkstar’s breach of the MoA
was unforeseen by petitioners, the same is clearly not
“impossible” not foresee or even an event which is
“independent of human will” Neither petitioners to pay
their loan obligations to Allied Bank and thus, negates the
former’s force majeure theory altogether.
Because even if Peakstar its obligations, Metro Concast can
still have other sources within which to pay, not only that.
And besides, it is not discussed in this case, but an
obligation to pay money can be extinguished by a
fortuitous event? No. Only an obligation to deliver a specific
thing can be extinguished. Money is generic. It can never be
extinguished. It can also be replaced by another. That can
be another reason.
DISCUSSION:
No fortuitous event here. The four (4) requisites that we have
discussed were not present – requisites (a) and (b)1.
Here also, another possible defense which is not mentioned in
the case, the obligation of MetroConcast to Allied Bank is a
loan which is money. And as you all know, an obligation to pay
money cannot be extinguished by fortuitous event because it
is generic – GENUS NEVER PERISHES. You can always find
another source of money. It’s not an obligation to deliver a
specific thing.
Let’s go to the exceptions. For example, you are the obligee
(creditor), and you are suing the debtor for specific
performance, delivery, collection of money. Then, the debtor
says, “My obligation is already extinguished because of
fortuitous event.” As the plaintiff, you need to point out that
not all the requisites are present. The event is not generally
considered fortuitous. So kung kulang tung upat ka requisites
(naay is aka wala), then the debtor is not excused from the
payment of the obligation. What is the debtor is able to prove
that all of the four (4) requisites are present? Are we now
saying na pilde na si creditor (plaintiff)? Despite the presence
of all four (4) requisites, it would still be possible that the
debtor is still liable if the case falls under the exceptions.
What are these exceptions?
EXCEPTIONS:
1.) When it is expressly specified by the law
So even if the 4 requisites of FE are present, if the law says that
the debtor is liable, he will still be liable.
INSTANCES WHEN THE LAW PROVIDES THAT DEBTOR IS
LIABLE:
a.) If the debtor is already in delay (default) – So
nauna ang default kaysa sa FE. So here, the
event will not exempt the debtor from liability.
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b.) When the obligor has promised the same thing
to 2 or more persons who do not have the same
interest – here the debtor is already in bad faith.
Like double sale à he sold the thing to A, and
then subsequently he sold the thing to B. Then
the thing was destroyed by reason of a FE. So
can he tell A (first buyer), I am now excused
from my obligation to deliver or to pay the
monetary value of the property because of a FE?
But here, we have to consider that even before
the FE happened he already sold the same
thing to another person. So even if there was
no FE, he would still be able to deliver the same
thing to A. Because he was already in BF – he
promised the thing to 2 or more persons who
do not have the same interest. So dili cya
excused.
c.) When the possessor is in bad faith and the
thing is lost or deteriorated due to a FE – so this
is actually the same as letter (b). There is bad
faith.
2.) When it is otherwise declared by stipulation
Even if the event is considered as fortuitous but there is
stipulation that the debtor is liable, he’s still liable. Let’s go
back to the case of LCDC tung Construction Agreement (CA)
na according to the contractor he was not able to complete
the construction on time because of lack of supply of cement,
power failures, typhoons, etc. SC: It was a fortuitous event.
However, in recent CAs, maybe learning from the case of
LCDC, usually naa nay stipulation na, “The contractor will
complete the construction within 365 days from the start of
construction. Any event of lack of supply, power faulires,
typhoons, etc. are already considered in the 365 days.” So
meaning, kng wa nimo nahuman during that period because of
power shortage etc. you are still liable because there is a
stipulation that despite that you are still liable.
3.) When the nature of the obligation requires the
assumption of risk (DOCTRINE CREATED RISK)
This is based on Article 1913 of the Mexican Code.
“When a person makes use of machinery,
instruments, apparatus or substances which are
dangerous in themselves, by reason of their speed, of
their explosive or inflammable nature, of the electric
power they carry, or of other analogous causes, he is
bound to indemnify for the injuries they may cause,
even if he does not act unlawfully, unless the injury is
caused by the inexcusable fault or neglect of the
victim”
COMMON EXAMPLE: Manufacturer and carrier or dynamites
When you have dynamites, unsa man ang usual na ma-
associate nato if naay dynamite? Explosion.
What if saimong bodega, without any negligence on your part
naay lightning or some kind of friction which cause the
dynamite to explode, and by reason of that not only was your
property damaged but also the adjacent properties. Will you
be excused because the cause of the damage was a FE (e.g.
Lightning or earthquake when there is presence of friction)?
Can you say that? No, because it is the nature of your business
requires the assumption of risk. It would be unfair to just leave
your neighbors as they are just because it was a FE. In the first
place, kung walay dynamite, there would be no explosion.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Kung flood unya nagamanufacture kag dynamite, way
connection ang flood sa damage sa dynamite so you would not
be liable.
So, let’s discuss this case of Jimmy Co v. CA. This is a good
example of the application of the exceptions.
CO v. CA
FACTS:
On July 18, 1990, petitioner entrusted his Nissan pick-up car
1988 model to private respondent - which is engaged in the
sale, distribution and repair of motor vehicles - for job repair
services and supply of parts.
Private respondent undertook to return the vehicle on July
21, 1990 fully serviced and supplied in accordance with the job
contract. After petitioner paid in full the repair bill in the
amount of P1,397.00, private respondent issued to him a gate
pass for the release of the vehicle on said date. But came July
21, 1990, the latter could not release the vehicle as its battery
was weak and was not yet replaced. Left with no option,
petitioner himself bought a new battery nearby and delivered
it to private respondent for installation on the same day.
However, the battery was not installed and the delivery of the
car was rescheduled to July 24, 1990 or three (3) days later.
When petitioner sought to reclaim his car in the afternoon of
July 24, 1990, he was told that it was carnapped earlier that
morning while being road-tested by private respondent‘s
employee along Pedro Gil and Perez Streets in Paco, Manila.
Private respondent said that the incident was reported to the
police.
Having failed to recover his car and its accessories or the
value thereof, petitioner filed a suit for damages against
private respondent anchoring his claim on the latter‘s alleged
negligence. For its part, private respondent contended that it
has no liability because the car was lost as a result of a
fortuitous event - the carnapping.
ISSUE: Who between the parties shall bear the loss of the
vehicle.
HELD:
It is a not a defense for a repair shop of motor vehicles to
escape liability simply because the damage or loss of a thing
lawfully placed in its possession was due to carnapping.
Carnapping per se cannot be considered as a fortuitous
event. The fact that a thing was unlawfully and forcefully
taken from another‘s rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous
event. To be considered as such, carnapping entails more
than the mere forceful taking of another‘s property. It must
be proved and established that the event was an act of God
or was done solely by third parties and that neither the
claimant nor the person alleged to be negligent has any
participation. In accordance with the Rules of evidence, the
burden of proving that the loss was due to a fortuitous event
rests on him who invokes it which in this case is the private
respondent.
However, other than the police report of the alleged
carnapping incident, no other evidence was presented by
private respondent to the effect that the incident was not
due to its fault. A police report of an alleged crime, to which
only private respondent is privy, does not suffice to
established the carnapping. Neither does it prove that there
was no fault on the part of private respondent
notwithstanding the parties‘ agreement at the pre-trial that
the car was carnapped. Carnapping does not foreclose the
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possibility of fault or negligence on the part of private
respondent.
Even assuming arguendo that carnapping was duly
established as a fortuitous event, still private respondent
cannot escape liability. Article 1165 of the New Civil Code
makes an obligor who is guilty of delay responsible even for
a fortuitous event until he has effected the delivery. In this
case, private respondent was already in delay as it was
supposed to deliver petitioner‘s car three (3) days before it
was lost. Petitioner‘s agreement to the rescheduled delivery
does not defeat his claim as private respondent had already
breached its obligation. Moreover, such accession cannot be
construed as waiver of petitioner‘s right to hold private
respondent liable because the car was unusable and thus,
petitioner had no option but to leave it.
Assuming further that there was no delay, still working
against private respondent is the legal presumption under
Article 1265 that its possession of the thing at the time it was
lost was due to its fault. This presumption is reasonable since
he who has the custody and care of the thing can easily
explain the circumstances of the loss. The vehicle owner has
no duty to show that the repair shop was at fault. All that
petitioner needs to prove, as claimant, is the simple fact that
private respondent was in possession of the vehicle at the
time it was lost. In this case, private respondent‘s possession
at the time of the loss is undisputed. Consequently, the
burden shifts to the possessor who needs to present
controverting evidence sufficient enough to overcome that
presumption. Moreover, the exempting circumstances -
earthquake, flood, storm or other natural calamity - when the
presumption of fault is not applicable do not concur in this
case. Accordingly, having failed to rebut the presumption and
since the case does not fall under the exceptions, private
respondent is answerable for the loss.
It must likewise be emphasized that pursuant to Articles 1174
and 1262 of the New Civil Code, liability attaches even if the
loss was due to a fortuitous event if ―the nature of the
obligation requires the assumption of riskǁ. Carnapping is a
normal business risk for those engaged in the repair of motor
vehicles. For just as the owner is exposed to that risk so is the
repair shop since the car was entrusted to it. That is why,
repair shops are required to first register with the
Department of Trade and Industry (DTI) and to secure an
insurance policy for the ―shop covering the property
entrusted by its customer for repair, service or maintenanceǁ
as a pre-requisite for such registration/ accreditation.
DISCUSSION:
The car repair shop here is not excused.
1.) First, delay (DEFAULT ON THE PART OF THE
OBLIGOR) – Before the carnapping occurred, the
repair shop was already in delay (3 days). It was
supposed to completely repair the vehicle before the
carnapping. The owner claimed to claim his vehicle,
but because it was not yet repaired, the owner
constrained to leave the vehicle with the repair shop.
The repair shop contended that the owner of the
vehicle agreed to leave the car, so he already waived
whatever liability he had for the delay because of his
consent. The SC said, no because the owner had no
choice. How can he get the car when it is not yet
repaired? He was really forced to leave the car in the
premises of the repair shop. That will not obliterate
the fact of delay.
2.) Second, even if you are to consider that the
carnapping is already a fortuitous event, if the nature
of the business requires the assumption of risk the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
debtor would still be liable (ASSUMPTION OF RISK).
Now carnapping is a normal business risk for those
engaged in the repair of motor vehicles. Normal
business risk na na siya.
That is precisely the reason why car repair shops are
required to register with the Department of Trade
and Industry and secure an insurance policy for the
vehicles entrusted by customers. Violation of these
statutory provisions constitute negligence per se.
The presumption of negligence applies. That is
another reason why the repair shop was considered
to be liable because it was also negligent.
[Kung halibawa, naay insurance ang repair shop.
Does it follow na exempt na rin siya from liability?
Meron siyang registration with DTI? With all the more
reason hindi siya excused, because kung ing-ana
nalang muingon siya “bahala nalang mo dira. Naa
bitaw ko insurance”. The proceeds should be used to
indemnify itself from its own liability to the owners
of the vehicles.]
Going back to what we have discussed, this DOCTRINE OF
FORTUITOUS EVENT as a legal excuse for the performance of
an obligation, applies only if the obligation is TO DELIVER A
SPECIFIC THING. A REAL OBLIGATION AND SECIFIC. Why?
Because you could not replace the thing with another. But if
the obligation is to deliver a generic or indeterminate thing,
even the thing of similar nature is lost or destroyed, it will not
extinguish the obligation of the debtor. For example in this
case of Gaisano Cagayan, Inc. v. Insurance Company of North
America…
GAISANO CAGAYAN, INC. vs INSURANCE CO. OF NORTH
AMERICA
FACTS:
Intercapitol Marketing Corporation (IMC) is the maker of
Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the
local distributor or products bearing trademarks owned by
Levi Strauss and Co.
IMCI and LSPI both obtained from respondent fire insurance
policies with book debt endorsements. It provides for
coverage on book debts in connection with ready-made
clothing materials which have been sold or delivered to
various customers and dealers insured everywhere in the
Philippines.
The policies defined book debts as unpaid account still
appearing in the Book of Account of the Insured 45 days after
the time of the loss covered by the said policy.
Petitioner is a customer and dealer of products of IMC and
LSPI.
In February 1991, Gaisano Superstore Complex in Cagayan de
Oro City, owned by petitioner, burned down.
Included in the items lost in the fire were the ready-made
clothing materials sold and delivered by IMC and LSPI.
ISSUE: WON the petitioner is liable for the unpaid accounts.
HELD:
Yes, petitioner is liable.
The insurance in this case is not for loss of goods by fire but
for petitioner‘s accounts with IMC and LSPI that remained
unpaid for 45 days after the fire. Petitioner‘s obligation is for
the payment of money. Where the obligation consists in the
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payment of money, the failure of the debtor to make the
payment even by reason of a fortuitous event shall not
relieve him of his liability.
The rule that the obligor should be held exempt from
liability when the loss occurs through a fortuitous event only
holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding hi
liable even in case of fortuitous event. It does not apply
when the obligation is pecuniary in nature.
DISCUSSION:
It is not relevant here w/n the fire was caused by a FE because
the obligation of Gaisano was not to return inventory but to
pay money. So GENUS NEVER PERISHES. So it does not apply
when the obligation is pecuniary in nature. This is based on the
principle that THE GENUS OF A THING NEVER PERISH – Genus
nunquam perit.
Kinds of civil obligations
1.) Pure and Simple Obligations – Obligations which are
immediately demandable. They do not depend upon
any future event or any period.
2.) Conditional Obligations – Those obligations whose
performance is dependent upon the fulfillment of an
obligation, or the extinguishment of which is
dependent upon the fulfillment of an obligation.
3.) Obligations Subject to a Term or Period –
Obligations whose fulfillment or extinguishment
would depend upon the arrival of the term or period.
*So we’re talking here of the kinds of civil obligations
according to the time of performance.
Now let’s go to CONDITIONS.
Conditions
What do we mean by a condition?
A CONDITION is a future or uncertain event upon
which the performance or extinguishment of an
obligation depends. It may also be a past event
which is unknown to the parties.
When you say CONDITION in relation to our discussion, we
have the element of FUTURITY AND UNCERTAINTY. So it will
happen in the future and it is unsure w/n it will happen.
How about the past event, what is the futurity here? When you
say past event as a condition, it is the future knowledge of the
past event where the futurity lies. E.g. There was a plane crash
and you’re not sure whether X survived in the plane crash. So
the event, the plane crash, is already a past event. So maybe X
died in that plane crash. But as of now, we don’t know yet w/n
X died. So it is the future knowledge of the past event where
the futurity lies.
DIFFERENT KINDS OF CONDITIONS:
1.) Suspensive Condition – The fulfillment of which
gives rise to an obligation.
2.) Resolutory Condition – The fulfillment of which
extinguishes an obligation.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
3.) Potestative Condition – Is a condition whose
fulfillment is dependent upon the will of the parties.
*
*So do not think na potestative, upon the debtor.
No, it could be the debtor or the creditor. Now
usually in potestative conditions and automatic na
muabot sa mind sa student na it is void, which is not
correct. Only that potestative condition which is
suspensive and at the same time dependent upon
the sole will of the debtor, that is void. Why?
Because it makes the obligation illusory.
For example: I will pay if I want to. So that is
potestative because it depends upon the will of the
debtor. It is also suspensive because the obligation
will be performed only if the condition is fulfilled.
That is, if he wants to. So if you’re the debtor, the
natural human reaction is that, “I don’t like an
obligation.” If there’s a way that I can avoid I would
avoid. So if the birth of the obligation depends upon
your will, then I will not will the obligation to arise at
all. So walay obligation. It becomes illusory.
But any other potestative condition e.g. potestative
resolutory on the part of the debtor, it is valid,
because the debtor maningkamot na cyan a mawala
ang iyang obligation. That’s why he will really comply
or fulfill the condition.
Potestative suspensive or resolutory on the part of
the CREDITOR – Valid.
NOTE: Only potestative suspensive on the part of
the DEBTOR is void. It is not only the condition that
is void but also the obligation.
4.) Casual Condition – It depends upon chance. E.g. I will
pay my debt if it rains today.
5.) Mixed Condition – This is dependent upon chance
and upon the will of the parties. This is also valid.
6.) Impossible Condition – That which is contrary to law,
public customs or public policy.*
*When you say impossible conditions that is
imposed upon obligations, what is the effect? We
discussed this in Succession. (Note: We distinguish
impossible conditions imposed in relation to Oblicon
and Succession).
a.) In relation to Oblicon: The conditional
obligation itself is void. The obligation itself is
void. Why? Because in an obligation, the
condition is part of the consideration. If the
consideration is tainted by impossibility or
illegality, it will affect the very existence of the
obligation.
b.) In relation to Sux: What if an institution is made
subject to an impossible condition? The effect is,
the condition is considered as not written. Give
effect to the institution. Why? Because in Sux,
the real consideration is the liberality or
generosity of the testator. Whereas in
obligations, it is not the generosity or liberality.
The obligation is onerous. In Sux, the institution
can survive without the condition because
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there’s a different consideration that supports
it.
Let’s go to the special rules applicable. So let’s go back to a
suspensive condition. Take note, under Article 1187…
Article 1187. The effects of a conditional obligation to give,
once the condition has been fulfilled, shall retroact to the
day of the constitution of the obligation. Nevertheless,
when the obligation imposes reciprocal prestations upon
the parties, the fruits and interests during the pendency of
the condition shall be deemed to have been mutually
compensated. If the obligation is unilateral, the debtor shall
appropriate the fruits and interests received, unless from
the nature and circumstances of the obligation it should be
inferred that the intention of the person constituting the
same was different.
If the condition (suspensive condition) is fulfilled, it will give
rise to the obligation. What are the effects if the suspensive
condition is fulfilled?
1.) The fulfillment retroacts to the date of the
constitution of the obligation – What do we mean by
that? It is as if the obligation existed at the time of
the constitution of the obligation. We already
discussed before the concept of a contract to sell. Is
that the same as a conditional contract of sale? They
are not the same. Although both are subject to a
suspensive condition. But in a contract to sell, it is an
agreement to enter into a future contract of sale.
There is no sale yet as of this time. That’s why there
is yet no reciprocal obligation and Article 1191 will not
apply in a contract to sell. Whereas, if it is a
conditional contract of sale, there is already a sale.
However, ceratin effects are suspended until the
fulfillment of a positive suspensive condition.
For example, January 1, 2019, A and B entered to a conditional
contract of sale over a parcel of land. So B the buyer will pay
50% down payment, and the balance will be paid within a
period of 1 year – January 2020. In the meantime, in the
conditional contract of sale, it is stipulated that upon down
payment the buyer is already entitled to possess the parcel of
land. However, the ownership of the property will be reserved
by the seller until full payment of the purchase price. So here,
nagdownpayment si B. so he is now placed sa possession of
the land. Is B already the owner because it is delivery that
transfers ownership? Not yet, because it is specified in the
conditional contract of sale that ownership is reserved by the
seller. Here, the suspensive condition is the full payment of
the purchase price.
What if B pays the balance within 1 year? Is there automatic
transfer of ownership to the buyer? Yes, because it is a
conditional contract of sale. There is already a sale. Only that
the effect of the transfer of ownership is suspended until the
fulfillment of the positive suspensive condition which is the full
payment of the purchase price. Is there a need to execute a
deed of absolute sale? No need because there is already a sale,
although the transfer of ownership is made subject to the full
payment of the purchase price. So upon full payment by B,
when will the rights of B over the land start? Halimbawa
nagbayad cya January 1, 2020. The deed of conditional sale was
executed January 1, 2019. When will the ownership of B start?
Pursuant to Article 1187, it shall retroact to the date of the
constitution of the obligation.
If it is a contract to sell, upon full payment by B, wala pay
transfer of ownership kay wala pamay sale upon which the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
delivery xx dapat partnet man gud na sale + delivery. So
delivery alone without the contract of sale will not transfer
ownership. But ang ownership matransfer lng kung naa nay
giexecute na deed of sale and there was prior delivery.
Ang contract to sell, it will not have a retroactive effect kay in
the first place wala cyay balikan na contract of sale. Didto cya
magstart at the time of execution of the deed of absolute sale.
Whereas, in a conditional contract of sale, naa nay sale kato
lng transfer of ownership is made subordinate to the payment
of the full purchase price. So Article 1187, applies to a
conditional contract of sale.
So unsa mn ang consequence ani? Like for example in case of
double sale. All things being equal. First buyer si B. second
buyer si X. si X nagfull payment na cya even before January 1,
2020. Dba si B nagfull payment cya January 1, 2020. Si X
gibaligya saiya June 2019 unya nagfullpayment na cya dayon.
But because of the retroactive effect under Article 1187, as
long as there is fulfillment of the condition, the effect of that
will retroact to the constitution of the obligation. Who has
the better right? It would be B. kay even if mas dugay cyan aka
full payment but still he fulfilled within the period specified.
The effect of that retroacts to the constitution of the
obligation. Of course, the answer would vary kung naa nay
registration. Lahi nana cyan a storya. All things being equal, B
would have a better right over X.
For example, what if A said, I will give to you B this parcel of
land if you pass the 2019 Bar Exam? So nag agree si B.
naningkamot tuod si B. Pero pagabot ug January, ginabaligya
naman ni A ang parcel of land kay wa cguro cyay confidence
kay B. Unsa may right ni B? Can he stop? Can he demand na
ideliver na total it’s just a matter of time na he will really pass
the bar exams. Naa bay right si B? Under Article 1188, he may
bring an action for the preservation of his rights prior to the
fulfillment of the condition.
Article 1188. The creditor may, before the fulfillment of the
condition, bring the appropriate actions for the preservation
of his right. The debtor may recover what during the same
time he has paid by mistake in case of a suspensive condition.
(1121a)
So he may bring an action for injunction to prevent
the same. Maghulat sa ta sa results sa bar exams.
Distinguish contract to sell from conditional
contract of sale
*Please read the case of Carascoso Jr. v. CA.
FERNANDO CARRASCOSO, JR. vs. COURT OF APPEALS (G.R.
No. 123672, December 14, 2005)
In a contract of sale, the title passes to the vendee upon the
delivery of the thing sold; whereas in a contract to sell,
ownership is not transferred upon delivery of the property
but upon full payment of the purchase price. In the former,
the vendor has lost and cannot recover ownership until and
unless the contract is resolved or rescinded; whereas in the
latter, title is retained by the vendor until the full payment of
the price, such payment being a positive suspensive condition
and failure of which is not a breach but an event that prevents
the obligation of the vendor to convey title from becoming
effective.
For in a conditional contract of sale, if the suspensive
condition is fulfilled, the contract of sale is thereby perfected,
such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto
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automatically transfers to the buyer by operation of law
without any further act having to be performed by the
seller. Whereas in a contract to sell, upon fulfillment of the
suspensive condition, ownership will not automatically
transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to
convey title to the prospective buyer by entering into a
contract of absolute sale.
A perusal of the contract adverted to in Coronel reveals
marked differences from the Agreement to Buy and Sell in
the case at bar. In the Coronel contract, there was a clear
intent on the part of the therein petitioners-sellers to transfer
title to the therein respondent-buyer. In the July 11, 1975
Agreement to Buy and Sell, PLDT still had to “definitely
inform Carrascoso of its decision on whether or not to finalize
the deed of absolute sale for the 1,000 hectare portion of the
property,” such that in the April 6, 1977 Deed of Absolute Sale
subsequently executed, the parties declared that they “are
now decided to execute” such deed, indicating that the
Agreement to Buy and Sell was, as the appellate court held,
merely a preparatory contract in the nature of a contract to
sell. In fact, the parties even had to stipulate in the said
Agreement to Buy and Sell that Carrascoso, “during the
existence of the Agreement, shall not sell, cede, assign and/or
transfer the parcel of land,” which provision this Court has
held to be a typical characteristic of a contract to sell.
Being a contract to sell, what was vested by the July 11, 1975
Agreement to Buy and Sell to PLDT was merely the beneficial
title to the 1,000 hectare portion of the property.
RULES THAT APPLY IN CASE OF IMPROVEMENT, LOSS OR
DETERIORATION
ARTICLE 1189. When the conditions have been
imposed with the intention of suspending the
efficacy of an obligation to give, the following rules
shall be observed in case of the improvement, loss
or deterioration of the thing during the pendency of
the condition:
(1) If the thing is lost without the fault of the
debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the
debtor, he shall be obliged to pay damages;
it is understood that the thing is lost when
it perishes, or goes out of commerce, or
disappears in such a way that its existence
is unknown or it cannot be recovered;
(3) When the thing deteriorates without the
fault of the debtor, the impairment is to be
borne by the creditor;
(4) If it deteriorates through the fault of the
debtor, the creditor may choose between
the rescission of the obligation and its
fulfillment, with indemnity for damages in
either case;
(5) If the thing is improved by its nature, or by
time, the improvement shall inure to the
benefit of the creditor;
(6) If it is improved at the expense of the
debtor, he shall have no other right than that granted
to the usufructuary. (1122)
Improvements, loss and deterioration
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
How about, improvements, loss or deterioration (ILD)? So
from the time nga nagtake ka ug bar exams, until nakapasar
ka, naay mga improvements, losses or deterioration? This will
only happen if nafulfill ang condition. Kay kung wala na fulfill,
wala tay storyahan na ILD. So what is the rule. We have Article
1189.
Article 1189. When the conditions have been imposed with
the intention of suspending the efficacy of an obligation to
give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the
pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the
obligation shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall
be obliged to pay damages; it is understood that the thing is
lost when it perishes, or goes out of commerce, or
disappears in such a way that its existence is unknown or it
cannot be recovered;
(3) When the thing deteriorates without the fault of the
debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the
creditor may choose between the rescission of the
obligation and its fulfillment, with indemnity for damages in
either case;
(5) If the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall
have no other right than that granted to the usufructuary.
(1122)
We’re talking here of a specific thing. Because if it is generic,
you cannot talk of ILD because it could be any property of the
same nature, kind or quality. So di jud ka kaingon na katong sa
Tagum jud imoha na nay fruits. It could be any land mao na ang
obligation to deliver a parcel of land. So specific thing.
1.)If the thing is lost without the fault of the debtor, the
obligation shall be extinguished – You apply here the
doctrine of fortuitous event.
2.) If the loss is by reason of the fault of the debtor, his
obligation is not extinguished. He shall be obliged to
pay damages;
LOSS – when it perishes, goes out of commerce, or is
disappears in such a way that its existence or unknown or
cannot be recovered.
Without the fault of the debtor, then the impairment is to be
borne by the creditor.
3.) When the thing deteriorates without the fault of the
debtor, the impairment is to be borne by the creditor;
4.) If it deteriorates through the fault of the debtor, the
creditor may choose between the rescission of the obligation
and its fulfillment, with indemnity for damages in either case;
5.) If the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor;
6.) If it is improved at the expense of the debtor, he
shall have no other right than that granted to the
usufructuary – which is, he can remove the
improvement if he can do so without
prejudice/causing damage to the property.
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Resolutory conditions. Of course you know na in a resolutory
condition na once the condition is fulfilled, the obligation is
extinguished. That is why, upon the time the obligation is
constituted and that obligation is subject to a resolutory
condition, it is immediately demandable. Demandable at once.
Mawala lng cya kng mafulfill ang condition.
Postestative condition. So it is dependent upon the will of one
of the parties. Void cya if suspensive and potestative on the
part of the debtor.
Examples:
a.) What if the obligation says, “I will pay if I want to.”?
It is void because it is dependent upon the sole will
of the debtor which will never be fulfilled.
b.) “I will pay if my niece permits me to do so.” Is that
potestative? Actually it is an expressed codal
provision. It is an obligation with a period.
c.) What’s the difference with, “I will pay if I want to”
from “I will pay if my means permit me to do so.”? Sa
first, even if the obligation is not recognized. Wala
pakoy obligation karon. Mubayad ko if ganahan ko.
But in the second, the obligation to pay is already
recognized. Only that, he is not sure when he can pay
his obligation – “if my means permit me to do so.” So
there is already certainty of obligation here. It’s only
that period of fulfillment. Here it is valid. It is deemed
to be an obligation with a period. When will he pay?
When will we know that he already has the means to
pay? In this kind of obligation, if you are the creditor
and you think that the debtor already has the means
kay nakadaog cyag lotto or naka payout cya, so how
do you enforce? Do you file an action for collection
diretso? No, you have to file an action to fix the
period. Even though the law says, “is deemed to be
with a period,” we don’t know yet what is the period.
That’s why you ask the court to fic the period. So any
action for collection or specific performance,
without previously fixing the period, will be
premature. So your action can be dismissed on that
ground.
Let’s discuss this case of Catungal v. Rodriguez. It is a good
illustration of what is a potestative condition, what will make
an obligation void if it is subject to a potestative condition.
Catungal v. Rodriguez
The Sps. Catungal sold a parcel of land to Rodriguez.
Actually what they entered into was a conditional deed of
sale. It was a contract to sell upgraded into a conditional
deed of sale. Ang ilahang sabot, the price would be P25M.
P500k downpayment upon signing of the agreement. The
balance of P24M shall be paid in 5 separate checks – so naay
specification. The 4 remaining checks, in the amount of
P5M each, will be paid when the vendee (Rodriguez), shall
have successfully negotiated a road right of way (RRW)
over the property kay naa cya sa sulod so dapat naa cyay
agi-anan. So mao to cya ilang agreement.
As usual, Sps. Catungal nangayo sila ug money from the
buyer but eventuallt the buyer refused to pay kay wala
padaw na comply ang condition for a successful
negotiation of a RRW. So nasuko si Sps. Catungal. They
informed Rodriguez that they were selling the property to
other interested buyers. So that’s why Rodriguez filed an
action for injunction against the spouses.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Defense of the Sps.: The obligation is void. Why? (2
arguments of the sps.):
a.) 1st argument: Because it is subject to a condition
which is potestative and suspensive on the part
of the debtor. In what sense? The balance (P5M),
will be payable only upon the successful
negotiation by the buyer of a RRW. So the buyer
here is the debtor, and the successful negotiation
of a RRW depends upon his sole will. So an
obligation which is dependent upon the sole will
of the debtor makes the conditional obligation
void, according to the sps.
b.) 2nd argument: Aside from that it also violates the
rule on mutuality of contracts. Under Article 1308
which says that: "[t]he contract must bind both
contracting parties; its validity or compliance
cannot be left to the will of one of them." So here,
according to the Sps., we are leaving it to the will
of Rodriguez the payment of the balance because
it will not be paid until he has successfully
negotiated a RRW. So what if he will not
negotiate? He will not pay the balance. So again,
it violates the rule on mutuality.
Held:
a.) So let’s go back to their first argument. That is
under Article 1182:
Art. 1182. When the fulfillment of the condition
depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends
upon chance or upon the will of a third person, the
obligation shall take effect in conformity with the
provisions of this Code.
Going back to the 1st paragraph, what do we mean by a
condition dependent upon the sole will of the debtor that
makes the conditional obligation void? So the SC said, we
have to make a distinction between a condition imposed
on the perfection of a contract and a condition imposed
merely on the performance of an obligation. Even if is a
condition which is dependent upon the sole will of the
debtor and it is imposed upon the performance –
potestative suspensive on the part of the debtor and
imposed upon the perfection of the contract – that is the
one which will make the conditional obligation void. But if
it is potestative suspensive on the part of the debtor, but is
a condition which is imposed merely on the performance of
the contract, that will not make the obligation void. The 2nd
merely gives the other party the option to refuse to
proceed with the sale or to waive the condition. So this is
evident in Article 1545 of the Civil Code.
Assuming for the sake of argument that the successful
negotiation of a RRW is potestative suspensive on the part
of the buyer, is this imposed on the perfection of the
contract or is this imposed on the perfection of the
obligation? The SC held that it is merely imposed on the
performance of the obligation. We have to take note that
they already agreed on the conditional sale. In fact, there
was already meeting of the minds so there was perfection
of the contract; and there was prior performance because
of the DP. We’re only talking of the balance of the purchase
price. Assuming for the sake of argument that it is
suspensive and potestative on the part of the debtor, it will
not make the conditional obligation void. It will merely give
the other party the option whether to proceed with the
contract or to waive the condition.
b.) Second, the condition that the buyer will pay the
balance of the purchase price upon successful
negotioation of a RRW is not even potestative on
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the part of the debtor. Actually, it is a MIXED
CONDITION. Why? There’s an element here which
is dependent on the will of the buyer because he
will have to negotiate. But he does not negotiate
with himself. He will have to negotiate with the
owners of the adjacent property. That is beyond
the control of the buyer. So we have a mixed
condition – dependent upon the debtor (buyer)
and the will of 3rd persons.
So, this is not the one mentioned in Article 1182.
Being a condition which is not void, the SC said
that as long as the condition is not yet fulfilled
then Rodriguez has no obligation to pay the
balance of the purchase price. In fact, it was also
the fault of the sps. why Rodriguez was not able
to make successful negotiations of a RRW
because the sps. made representations to the
adjacent owners which caused them to withdraw
from the negotiations. So here, just remember
what is the concept of a potestative condition,
how it will make a conditional obligation void.
Impossible condition. It’s not only the condition that is not
enforceable but it annuls the obligation which is dependent
upon this impossible condition. If the obligation is not to do an
impossible thing, then it is valid. In the first place, an impossible
condition shall not be done because it will annul the obligation.
Obligation with a period or a term – art. 1193
When you say period or term, it is a future and certain event
which must necessarily come although at times we may not
know when.
Examples:
a.) I will pay my debt December 31, 2020 à that is a term
or period. So maabot man jud nang December 31,
2020.
b.) I will pay my debt upon the death of X? is it a
condition or a period? As long as X is not immortal,
then it is a period because death is something that
will necessarily come.
c.) I will pay my debt if X dies on January 1, 2019? Is it a
period or a condition? Here it is a condition because,
although X will die, but we are not sure if he will die
on January 1, 2019. So FUTURUTY + CERTAINTY.
When the obligation is subject to a suspensive period, what is
the consequence? The debtor cannot be compelled to perform
prior to the arrival of the period. So 1195 says that if anything
paid mistakenly prior to the arrival of the period may be
recovered, with fruits and interests. Somewhat similar to the
concept of solutio indebiti (PAYMENT BY MISTAKE).
Article 1195. Anything paid or delivered before the
arrival of the period, the obligor being unaware of the
period or believing that the obligation has become due
and demandable, may be recovered, with the fruits
and interests. (1126a)
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Article 1195 v. Solutio Indebiti
Article 1195 Solutio Indebiti
There is really a payment There is really no obligation
of obligation although not to pay that amount, that’s
yet due. why it has to be returned.
What you can recover: Does not mention of fruits
Fruits + Interest and interest
If the obligation is subject to a period, if the debtor pays and
the creditor accepts, there’s no problem. They have waived
the period.
Another important concept in Article 1196:
Article 1196. Whenever in an obligation a period is
designated, it is presumed to have been established for the
benefit of both the creditor and the debtor, unless from the
tenor of the same or other circumstances it should appear
that the period has been established in favor of one or of the
other. (1127)
If the obligation is subject to a period, for whose benefit is the
period? Is it for the debtor, creditor or both? The law says, it is
presumed to have been established for the benefit of both
creditor and debtor, except if it appears otherwise. So unsa ang
effect?
Example:
a.) Obligation to pay P1M on December 31, 2020. So prior
to that period, the debtor cannot be compelled by
the creditor to pay in advance. Also prior to that,
kung si debtor gusto na mubayad kang creditor but
the creditor does not want to accept payment yet,
pwede gihapon because you cannot compel the
creditor also to accept advance performance or
advance payment. BOTH DEBTOR AND CREDITOR
AND BENEFIT OF THE PERIOD. Muingon ka na ngano
si creditor bisag bayaran na di pajud cya musugot?
Because he might be interested in the interest. Dba
kung naa kay loan (e.g. bank) if you will pay that in
full, like 5 yrs to pay the 2 yrs palang gusto na nimo
bayran in advance, actually naa pakay bayran ana na
murag some kind of penalty. So it’s not always right
to say na beneficial sa creditor ang advance
payment.
xxx except if it appears otherwise…
Example:
a.) The debt is payable on or before December 31, 2020.
Niadto si creditor kay debtor to collect. Can he
compel the debtor to pay? The debtor can say,
payable on or before December 31, 2020 – so meaning,
I can pay before or on. So whose benefit is that
period? It is for the benefit of the debtor. He can pay
before December 31, 2020 but he cannot be
compelled to pay if he does not want to because he
has until December 31, 2020 to pay. So that is an
example of the phrase, “except if it appears
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otherwise”. Here the period is only for the benefit of
the debtor.
In this case of Buce v. CA…
BUCE vs. COURT OF APPEALS (G.R. No. 136913, May 12,
2000)
The basic issue, as agreed upon by the parties, is the correct
interpretation of the contract provision "this lease shall be
for a period of fifteen (15) years effective June 1, 1979, subject
to renewal for another ten (10) years, under the same terms
and conditions."
The phrase "subject to renewal for another ten (10) years"
is unclear on whether the parties contemplated an
automatic renewal or extension of the term, or just an
option to renew the contract; and if what exists is the latter,
who may exercise the same or for whose benefit it was
stipulated.
In the case at bar, it was not specifically indicated who may
exercise the option to renew, neither was it stated that the
option was given for the benefit of herein petitioner. Thus,
pursuant to the Fernandez ruling and Article 1196 of the Civil
Code, the period of the lease contract is deemed to have
been set for the benefit of both parties. Renewal of the
contract may be had only upon their mutual agreement or
at the will of both of them. Since the private respondents
were not amenable to a renewal, they cannot be compelled
to execute a new contract when the old contract
terminated on 1 June 1994. It is the owner-lessor’s
prerogative to terminate the lease at its expiration. The
continuance, effectivity and fulfillment of a contract of lease
cannot be made to depend exclusively upon the free and
uncontrolled choice of the lessee between continuing the
payment of the rentals or not, completely depriving the
owner of any say in the matter. Mutuality does not obtain in
such a contract of lease and no equality exists between the
lessor and the lessee since the life of the contract would be
dictated solely by the lessee.
DISCUSSION:
This phrase, "this lease shall be for a period of fifteen (15) years
effective June 1, 1979, subject to renewal for another ten (10)
years, under the same terms and conditions" is the controversy
in this instant case. Is the renewal here automatic? Because
after the lapse, it is subject to renewal for another 10 yrs. But
if this is not automatic, who can exercise the right to renew? Is
it the lessor or the lessee?
The SC said here: “Pursuant to the Fernandez ruling and Article
1196 of the Civil Code, the period of the lease contract is deemed
to have been set for the benefit of both parties. Renewal of the
contract may be had only upon their mutual agreement or at the
will of both of them.” So it is not an automatic renewal. It has
to be agreed upon by both the lessor and the lessee.
Moreover, it cannot be exercised solely by the lessor or by the
lessee; it has to be based on their mutual agreement because
1196 says, “for the benefit of both of them.”
Article 1197. If the obligation does not fix a period, but from
its nature and the circumstances it can be inferred that a
period was intended, the courts may fix the duration
thereof. The courts shall also fix the duration of the period
when it depends upon the will of the debtor. In every case,
the courts shall determine such period as may under the
circumstances have been probably contemplated by the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
parties. Once fixed by the courts, the period cannot be
changed by them. (1128a)
Now under Article 1197, basically it says that based on the tenor
of the obligation, it appears that a period is intended but it
does not specify – the court can fix the period.
Example:
a.) In a contract of loan, A borrowed from B P10M. Ang
problema lng, inthat contract, wa nila nabutang kung
kanus-a bayaran. Wala may nakabutang na period, so
does it mean that it is a pure and simple obligation?
But ngano nagloan paka kung inig hatag immediately
demandable at once? “K ambi na ang P10M!” It
defeats the very purpose of the contract of loan. So
base on the nature itself of the contract which is a
loan, it is very clear that there is a period intended.
Karon kay wa may nakafix sa contract, the court can
fix the period.
How will the court fix the period? Ang usual question
here is, would it be allowed for the court to fix the
period? Dba the court cannot make a contract for the
parties? Here, the court will fix the period based on
what was intended by the parties. How will you
determine the intention of the parties at that time?
Well you have to base on the circumstances, on their
subsequent, prior and contemporaneous acts. Base
on that you will gather what was really the intention.
Kung kanus-a man jud ni? Here the court is not
making a new contract for the parties. Rather, the
court only implements what was the intention of the
parties.
January 31, 2020- Pableo
RADIOWEALTH FINANCE COMPANY vs. Spouses VICENTE
and MA. SUMILANG DEL ROSARIO (G.R. No. 138739, July 6,
2000)
Respondents, on the other hand, counter that the
installments were not yet due and demandable. Petitioner
had allegedly allowed them to apply their promotion
services for its financing business as payment of the
Promissory Note. This was supposedly evidenced by the
blank space left for the date on which the installments
should have commenced. In other words, respondents
theorize that the action for immediate enforcement of their
obligation is premature because its fulfillment is dependent
on the sole will of the debtor. Hence, they consider that the
proper court should first fix a period for payment, pursuant
to Articles 1180 and 1197 of the Civil Code.
This contention is untenable. The act of leaving blank the
due date of the first installment did not necessarily mean
that the debtors were allowed to pay as and when they
could. If this was the intention of the parties, they should
have so indicated in the Promissory Note. However, it did
not reflect any such intention.
On the contrary, the Note expressly stipulated that the
debt should be amortized monthly in installments of
P11,579 for twelve consecutive months. While the specific
date on which each installment would be due was left
blank, the Note clearly provided that each installment
should be payable each month.
Furthermore, it also provided for an acceleration clause and
a late payment penalty, both of which showed the intention
of the parties that the installments should be paid at a
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definite date. Had they intended that the debtors could pay
as and when they could, there would have been no need for
these two clauses.
Verily, the contemporaneous and subsequent acts of the
parties manifest their intention and knowledge that the
monthly installments would be due and demandable each
month. In this case, the conclusion that the installments
had already became due and demandable is bolstered by
the fact that respondents started paying installments on
the Promissory Note, even if the checks were dishonored
by their drawee bank. We are convinced neither by their
avowals that the obligation had not yet matured nor by
their claim that a period for payment should be fixed by a
court.
Discussion: We already discussed the application of period. In
the case of Radiowealth, the rule is if the obligation is subject
to a period, you have to wait for the arrival of the period
before you can enforce the obligation. There are certain cases
when the parties fail to indicate the period, but maybe they
intended a period. In that case, the court can fix the period,
taking into account the real intention of the parties and their
contemporaneous actions. But in Radiowealth, as we have
already explained, this is not the case when there's failure to
fix the period because here, there was really a period agreed
upon but it was just not written in the contract.
Article 1197 presupposes that they just agreed to a period pero
wala gyud nila gifix kung kanusa. But it is an obligation with a
period. Here, when the obligation is subject to a period, the
parties failed to specify and fix it or when they obligation is
subject to a period because "I will pay A if my means permit
me to do so", so that is also an obligation with a period, the
proper course of action of the creditor here is not immediately
to file an action for collection. He has to file a case for the fixing
of the period. Otherwise, without fixing the period - and this is
the nature of obligation - it can be dismissed on the ground of
prematurity.
It's also important to know what are these instances when
even if the parties already agreed on a period, meaning the
debtor cannot be compelled to pay before the arrival of the
period and the creditor cannot also be compelled to accept
prior to the arrival of the period.
When will the debtor lose the right to make
use of the period?
Art. 1198. The debtor shall lose every right to make use of
the period:
(1) When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or security
for the debt;
(2) When he does not furnish to the creditor the guaranties
or securities which he has promised;
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through a
fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in
consideration of which the creditor agreed to the period;
(5) When the debtor attempts to abscond.
This is an instructive case, though a very old case, the
principles here, you should remember.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Gaite v. Fonacier (1961)
In this particular case, Gaite transferred to Fonacier all his
rights and interests over 24,000 tons of iron ore. What is
important here is their agreement as to the payment of the
iron ore. The sum of P75,000.00 was a consideration for the
iron ore: P10,000.00 to be paid upon the signing of the
agreement. The balance, it says, "to be paid out of the first
Letter of Credit covering the first shipment of iron ores or the
first amount derived from the local sale of iron ore." To
secure the payment of the balance, Fonacier also promised to
execute a surety bond. The surety bond regarding the Far
Eastern Surety and Insurance Company expired, and still
there was no sale of the 24,000 tons of iron ore and the
balance of P65,000.00 was not also paid. Gaite demanded
from Fonacier and he *suretys* payment of the balance of
P65,000.00.
What was the defense of Fonacier? According to him, the
balance of P65,000.00 is subject to the condition that he
must be able to sell the iron ore. As of then, he has not yet
sold the iron ore so he argued that his obligation to pay the
balance has not yet arisen. He's saying that the payment of
the balance is subject to a suspensive condition. However,
according to Gaite, it's not a condition. It's a period. It's
subject to a suspensive period. The question is, what is the
nature of the agreement to pay the balance of P65,000.00
upon the shipment or sale of the iron ore? Is it a suspensive
condition or a suspensive period?
The Supreme Court said, "This is not a condition. It is just a
suspensive period or term. What characterizes a conditional
obligation is the fact that is efficacy or obligatory force is
subordinated to the happening of a future and uncertain
event." If the suspensive condition does not take place, the
parties will stand as if the condition and obligation have never
existed.
Here in the contract, the words do not express any
contingency of the buyer's the obligation. In fact the buyer
already recognized the obligation to pay the balance of the
P65,000.00. What is not sure here is when. There is no
uncertainty that the payment would have to be made sooner
or later. He would have to be paid only that it's not yet known
when. What is undetermined is the exact date at which it
would be made. By the very terms of the contract, the
existence to pay the obligation is already recognized. Only
the maturity or demand that is deferred.
Here, the Supreme Court also discussed the nature of a
contract of sale. A contract sale of sale is a commutative
contract. When you say commutative contract, both parties
are obliged to perform. They have corresponding
undertakings: the seller to deliver the subject matter, the
buyer will pay. Unless it is clearly expressed in the contract
that the obligation of one is subject to contingency - here, in
a commutative obligation, both parties have corresponding
obligations. It is not in the usual course of business that you
would give business without expecting something in return.
Hence, the contingent character of the obligation must
clearly appear.
In this agreement between Gaite and Fonacier, it does not
appear that Gaite assumed the risk of not being paid. In fact,
he required a surety so that he will be paid the balance. There
is no contingency assumed by Gaite in this contract. The fact
that the appelants did put up such bond indicated that they
have admitted the definite existence of their obligation to
pay the balance of P65,000
To consider the sale as a condition precedent leaves the
payment at the discretion of the debtor. To subordinate the
obligation to pay the remaining P65,000.00 would be
tantamount to leaving the payment at the discretion of the
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debtor. Here, such construction of contract should be
avoided.
The Supreme Court also used the rules on interpretation of
contracts. If you still remember, when there are doubts in the
incidental circumstances of a contract and the doubt refers
*inaudible*. If it's an onerous contract, how do you resolve
that doubt? If the doubt merely refers to the incidental
circumstances, not to the main or principal subject matter,
the main conditions, like the payment of the balance of the
purchase price? The doubt should be resolved, in case of
onerous contracts, "in favor of the greatest reciprocity of
interests." Meaning, in what interpretation would there be
greatest reciprocity of interests? Both parties are not placed
at a disadvantage; they both get something from the
contract. When you say "greatest reciprocity of interests", if
you interpret it as a suspensive condition, it would be
beneficial for the debtor because if the condition will not be
fulfilled, he will not pay, but it is not beneficial for the
creditor, the seller, who stands not being paid for what he
already delivered. If you interpret it as a suspensive term,
here, the seller/creditor will be paid. Although, again, because
of the term, it's not immediate. But he will be paid. The
debtor, the buyer here, he has the benefit of the period
although he will have to pay, but again, not immediately.
Based on this principle on the interpretation of contracts,
because the law now says we should resolve it in favor of the
greatest reciprocity of interest, we resolve it as a suspensive
period.
Do you still remember if it's a gratuitous contract, how do we
resolve the doubt? We resolve it in favor of the least
transmission of rights. Good that you still remember.
Here, the Supreme Court said that this is subject to a
suspensive period. What is the consequence if it's a
suspensive period? Meaning, the debtor will have to pay upon
the arrival of the period. In the meantime, the obligation
cannot yet be demanded. If that is the case, Fonacier had not
yet sold the iron ore, so does that mean that Gaite cannot yet
collect the P65,000 because the period did not yet arrive?
Here the Supreme Court also applied Article 1198 of the New
Civil Code. Although this is an obligation subject to a period,
but because Fonacier failed to renew the surety so pursuant
to paragraphs 2 and 3 of Article 1198, when he does not
furnish to the creditor the guaranties and securities which he
promised, or he impaired with his own act said guarantees or
securities, he loses the right to make use of the period. Here,
Fonacier would have deemed to have lost the benefit of the
period so the obligation immediately became due and
demandable.
Let's now go to the concept of Alternative or Facultative
obligations.
Alternative or facultative obligations
Do you still remember the concepts? Let's just distinguish so
that you'll remember.
ALTERNATIVE FACULTATIVE
Number of Several One prestation
prestations prestations but but deliver one
only one is due as substitute
Loss of one will Loss of the
not extinguish principal will
Effect of Loss obligation as extinguish the
long as there are obligation even
others remaining if the substitute
remains.
Belongs to the Belongs to the
Right of Choice debtor unless debtor
expressly given
to the creditor
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
1. As to number of prestations
In alternative obligations, there are several prestations due
but the delivery of any one of those prestations would be
sufficient to extinguish the entire obligation. You don't have
to deliver everything. You only deliver A, or B, or C - to deliver
a car, jewelry, or an expensive celphone. Either.
When it comes to facultative obligations, there is only one
prestation but it can be substituted by another. "My obligation
is to deliver a car but I may substitute it with jewelry." It is
facultative. There is only one obligation.
2. As to effect of loss
In an alternative obligation, the loss of one - if we're talking of
specific things, a specific car, a specific jewelry, a specific
celphone. When the obligation is to deliver a specific thing and
it is lost without the fault of the debtor, the obligation is
extinguished. But if it's an alternative obligation, the loss of
any one will not extinguish the obligation as long as there are
others which remain.
If it is a facultative obligation, if the obligation is principally to
deliver a specific car and if by reason of a fortuitous event, that
car is lost, even if you promise to deliver a substitute, the
obligation is extinguished. Why? Because the loss of the
principal extinguishes the obligation. But if the substitute is
the one that is lost, it would not affect the obligation to deliver
the principal in that facultative obligation.
3. As to the right of choice
In an alternative obligation, what is the general rule? Who has
the right of choice? The debtor. But it can be expressly given
to the creditor. Puwede nga sa ilahang agreement, "Sige, ikaw
nalang, Creditor ang magpili." But principally, it is the debtor.
In a facultative obligation, the choice always belongs to the
debtor. It is not given to the creditor.
Now, let's go to Alternative Obligations.
Rule in case of loss by reason of debtor’s
fault (in alternative obligations):
If the choice belongs to the debtor:
1. If there are others available, no liability;
2. If all are lost, damages based on the value of the
thing which last disappeared;
Choice belongs to the creditor:
1. If there are others available, creditor has the
right to claim any of those which remains or the
price of the one which disappeared, with right
to damages;
2. If all are lost, damages based on the value of any
of the thing which disappeared, plus damages.
When there is loss, walay tayong question kung ang loss ay
specific thing. Even if there is loss by reason of fortuitous
event, as long as there is any thing that is left, the obligation is
not extinguished. What if it's the fault of the debtor? Does any
one of the things, nawala because of the fault of the debtor:
specific car, specific jewelry, specific celphone - mao na siya ang
obligation ni debtor. Now, with all malice, the debtor
destroyed the car deliberately, is he liable to the creditor? We
have to consider who has the right of choice. As we said,
generally, in an alternative obligation, the choice belongs to
the debtor. If the choice belongs to the debtor, bahala siya if
he destroys it because he could always choose the other one.
Meaning, by destroying the car, he has chosen to deliver either
the jewelry or celphone. If he destroyed the jewelry, still he's
not liable because he has the right of choice. Maybe he just
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wanted to deliver the celphone. But here, the obligation now
becomes an obligation to deliver that specific celphone. If he
destroys the celphone, then that's the time when he is liable
to the creditor.
Regarding the value of the damages, if he destroyed
everything, even if he has the right of choice, he will be liable
to the creditor. What is the basis of the damages? The law says
the value of the last thing that disappeared. On my example,
katong celphone kay human to ang nabilin na last because by
the time he already destroyed the car and the jewelry, his
obligation becomes a simple obligation to deliver the specific
celphone. That would be the basis of the damages.
If the choice belongs to the creditor, what happens if the
debtor deliberately, through his fault, destroyed any one of
the things due? The law says the creditor has the right to claim
any of those which remains or the price of the one which
disappeared. If the debtor destroyed the car, but there's still
the celphone and the jewelry, because the creditor has the
right of choice, he may choose the value of any of those things,
even the value of the one that was lost with damages.
Why with damages? Because he has the right of choice. The
debtor destroyed the car, so his right to choose was impaired.
Maybe he would have liked to get the car, but that is no longer
possible. So he can claim the price of any one, not necessarily
the last that disappeared. Again, if all are lost, the value of any
one of the things that disappeared plus damages. Dili gihapon
based on the value of the thing that was last lost because he
has the right of choice.
Let's now go to Joint and Solidary Obligations.
Joint or solidary obligations
Art.1207. The concurrence of two or more creditors or of
two or more debtors in one and the same obligation does
not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render,
entire compliance with the prestation. There is a solidary
liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires
solidarity. (1137a)
Art. 1208. If from the law, or the nature or the wording of
the obligations to which the preceding article refers the
contrary does not appear, the credit or debt shall be
presumed to be divided into as many equal shares as
there are creditors or debtors, the credits or debts being
considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.
(emphasis and underscoring supplied)
Do you remember the concepts? These would only be
applicable if there is concurrence of two - two ha, minimum -
or more debtors in one and the same obligation or two or
more creditors in one and the same obligation or both,
meaning two or more debtors or two or more creditors.
1. Presumption is joint unless otherwise indicated by
the law or nature of obligation (Art. 1207)
What is the rule when there is concurrence of debtors or
creditors, or both? What is the nature of that obligation? What
is the general rule? The obligation is joint.
What do we mean by joint? Each debtor is liable only for his
specific share in the obligation. Each creditor is entitled only to
his specific share in the obligation, or his proportionate share.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Let’s say we have debtors A, B, C. We have creditors X and Y.
A, B, and C borrowed P300,000 from X and Y. If the obligation
is silent as to what is the nature of their liabilities, it is joint.
Meaning, A is only liable for his proportionate share in the
debt. If the debt is P300,000, pila ang share ni A diha? Divided
by three, kay tulo man sila kabuok. So P100,000.
X, how much is the credit of X here? P150,000 because there
are only two creditors.
2. Each credit is distinct from one another, therefore a
joint debtor cannot be required to pay for the share
of another with debtor, although he may pay if he
wants to (Art. 1209)
In the same example, how much can X collect from A?
P100,000. Pero pila supposedly ang macollect ni X? P150,000.
But remember that this is a joint obligation. Ang liability ni A na
P100,000, it is not owing to one creditor alone. It is owing to
all creditors. As to A, if X goes to him for collection, he can only
collect P50,000. Why? Kay ang butang ni A na P100,000, kay X
diha P100,000, kay Y, P100,000.
But if you ask again how much can X collect? Only P150,000
because they are only two. How can he collect P150,000, he
should go against A - P50,000; B - P50,000; and C - P50,000.
That is the nature of a joint obligation.
Art. 1209. If the division is impossible, the right of the
creditors may be prejudiced only by their collective acts,
and the debt can be enforced only by proceeding against
all the debtors. If one of the latter should be insolvent, the
others shall not be liable for his share. (1139)
3. Insolvency of a joint debtor: others are not liable
for his share (Art. 1209)
Each debtor is only liable for his own share in the debt. He is
not responsible for the share of the other debtors. If one of
the debtors becomes insolvent, he is not liable. He does not
shoulder the insolvency of the insolvent debtor. To each his
own. As I always tell my students, mga bulanan na ang naa sa
joint obligation. Ato-ato. Mas ayo na na siya kay you don't have
to worry about the insolvency of the others.
Let's go to Solidary Obligations.
Solidary obligation
When will there be a Solidary Obligation? When there is a
stipulation that they are solidarily liable or the law says it is a
solidary obligation, or the nature of the obligation requires
solidarity.
For example, stipulation, when will it become a solidary
obligation? A, B, and C in their promisory note. The other
would be X and Y solidarily, so naka-mention na ang word sa
'solidary'. In solidum. How about jointly and severally? Unsa
meaning ana? Still, it is solidary. Remember those terms which
will make an obligation solidary. What if in the prmosory note
signed by A, B, and C it is stated "I promise to pay X and Y
P300,000 one (1) month from today." What is the nature of
that obligation? Solidary, because of the use of the word "I".
Meaning, they are only acting as one. Any one of them is the
mutual agent of the other – that is the concept of solidary
obligation, there is mutal agency.
If it is stated, "We promise to pay X and Y P300,000 one (1)
month from today" signed by A, B, and C – what is that
obligation? Joint, because of the use of the word "we".
It's not just a matter of choice. Words have a legal
consequence. Sobrang sweet pamingawon ng "I" kung mag-
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uyab ang nangutang, so ‘I’ meaning together. Acting together, against A, P100,000 lang ang ilahang puwedeng makolekta
solidary obligation. What is the consequence pag solidary? from A.
Any one of the debtors can be held liable for the entire
obligation. And anyone of the creditors can demand the Now let's go to the defenses available to the solidary debtor.
fulfillment of the entire obligation. X can go to C alone and
collect the P300,000. But if X collects from C the P300,000, Defenses available to the solidary debtor
what is now the obligation of X? Once X collects the P300,000
from any one of A, B, and C, he would have to give to Y his
There are three kinds of defenses. Defenses derived from the
share. Ang mga debtors naman, if it is C who paid the entire
nature of the obligation, defenses personal to the debtor
P300,000, he has the right to demand reimbursement from A
himself, and defenses personal to the others solidary debtors.
nd B of their respective shares. P100,000 from A, P100,000
from B, and the other P100,000 is his own share.
1. Defenses derived from the nature of the obligation
(e.g. Prescription, payment, statute of frauds)
Q: What if one of the debtors becomes insolvent?
When we say defenses derived from the nature of the
The insolvency of one would be shouldered by the remaining
obligation, it arises out of the obligation. It can be invoked by
solidary debtors. If C becomes solvent, X goes to A for
any one of them and it is a total and complete defense, like
collection, A cannot say, "I'm gonna pay you only P100,000,
prescription. Bisan asa pa siya muadto, he can always invoke
because C is now insolvent.” A cannot say that. In a solidary
prescription. He will not pay because the debt has already
obligation, again, all for one, one for all. What will happen? He
prescribed, or is already paid, or is not enforceable because it
would have to pay the whole P300,000. What are his rights? In
is not in writing in violation of the Statute of Frauds. If X goes
the meantime, he can collect from B his share – pila ang share
to A or B or C for collection, any one of them can invoke this
ni B? Kung nagbayad sa iyo P300,000 kay nainsolvent si C, pila
defense.
ang bayaran ni B kay A? P150,000. Magtabang si B ug shoulder
sa insolvency ni C. When C's financial condition improves, both
2. Defenses personal to the debtor himself
of them can demand from C reimbursement.
(e.g.minority)
Now, the law says "each solidary creditor may do whatever
For example, at the time when the contract of loan was
may be useful for the others but not anything prejudicial to
executed, A was a minor, or he was insane. Now, X goes to A
them." We're talking of the creditors. Again, because there is
for collection. It is a solidary obligation. When you say solidary,
mutual agency, so they can do things binding against the
supposedly si A, he can be made liable for the entire obligation,
others but not that which is prejudicial. Can X condone the
but he will now defend, "I was a minor at that time when the
P300,000?
debt was contracted, so that contract is voidable. It can be
annulled.” Can the creditor say, "Okay, you're a minor when
Q: What if there is condonation by one of the creditors?
the debt was contracted, but this is a solidary obligation.
You're liable for the entire amount. Let's just deduct your
Will it be valid if X says, "Hey A, B, and C! I am now condoning
share of P100,000, and we'll collect from you the share of B
your debt?" Will it be effective? Will the obligation be
and C.” Would that be possible? No because you cannot
extinguished? Well, as to the debtors, yes, because X has
separate your minority. You can't say, "As to my share, I was a
authority to speak for and behalf of Y. But because the law
minor and insane; but as to his share, dili ko insane, dili ko
says X, as a creditor, cannot do something which is prejudicial
minor." No, it's a total defense in so far as the debtor himself
to the others, even if he condoned, he would still have to give
– who was a minor, an insane – is personal to him. Total
Y his share.
defense.
The law says, "However, any novation, compensation,
3. Defenses personal to the other solidary debtors
confusion or remission of debt executed by any solidary
(insanity)
creditor shall extinguish the obligation without prejudice to his
liability for the shares of the other solidary creditors.” What if in the same situation, A was a minor or insane at the
time the obligation was contracted, but X goes to C for
Q: What if there's a Mixture? collection. Can C invoke the minority of A? Can he say, "I will
not pay because A was a minor. One of my solidary debtors
A, B, and C are joint debtors; X and Y are solidary creditors, is it was a minor." Actually, he can still invoke that defense, but not
possible? Yes, puwede ang mixture. Joint solidary. If the credit as a total defense, but only in so far as the share of A is
is P300,000, when we say joint, the liability of A is P100,000. concerned. Because even if it's a solidary obligaiton,
How much can Y collect from C? He can collect P100,000. Why? ultimately, if C pays the entire P300,000, makademand man
Because the maximum of C's liability is P100,000. siya reimbursement from B ug A, pero kung si A minor at that
time dili siya maka-demand because ma-invoke na ni A ang
Baliktaron nato. Solidary debtors, joint creditors. How much minority. Unfair on the part of C, so he can invoke the minority
can be collected from A? Solidary man siya. The entire defense which is supposedly personal to A, but only as a partial
P300,000. How much can X collect? I am not saying from who defense. I-deduct ko diha ang share ni A, and then pay the
but how much can X collect? P150,000, because they are joint P200,000. When C pays the P200,000, he will have to demand
creditors. How much can X collect from A? The share of X is reimbursement only from B of B's share of P200,000. That is
P150,000 as a joint creditor. But because they're solidary the nature of defenses available to the solidary debtor. Pag
debtors, how much X collect from A? Yes, P150,000. It cannot joint, iya-iya na gyud siya, so ang defense sa isa, dili ma-avail sa
be P300,000. Why? Kay ang right ni X is only P150,000. He uban.
cannot exceed his proportionate share. But as we said,
because this is solidary on the part of the debtors, A can be In relation to a joint and solidary obligation, we have this case
made liable for the entire P300,000. of Marsman Drysdale Land, Inc. Vs. Philippine Geoanalytics,
Inc. nd Gotesco Properties, Inc.
How is that possible if X and Y jointly filed an action for
collection against A alone, they can get the entire P300,000
from A. Joint pud ni sila, even if X and Y will jointly file the case

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Marsman Drysdale Land, Inc. vs. Philippine Geoanalytics,
Inc. nd Gotesco Properties, Inc. (2010)
In this case, Marsman and Gotesco entered into a joint
venture agreement (JVA). The purpose of their JVA was
for the construction and development of an office
building on the land owned by Marsman. Under their joint
venture agreement, this was their stipulation: they would
contribute P420M each, Marsman in the form of the land
and Gotesco, cash. Now to conduct a soil analysis of the
land where they can construct the building, they hired the
services of PGI. PGI provided site service soil exploration,
laboratory testing, seismic study and engineering. It
pursued the services for which PGI was engaged, and
later on, there were problems and PGI billed Marsman
and Gotesco for the services. The total amount, P284,000
and P250,000. Now, both Marsman and Gotesco did not
pay, that's why PGI filed a case for collection. In that case,
Marsman had this defense: it's obligation under the JVA
was merely to contribute the land; it was Gotesco who
was liable for the cash portion of the project, so that will
include the services of PGI; therefore, PGI should only
pursue the collection suit against Gotesco and Marsman
should not be impleaded for it has no liability pursuant to
the JVA.
Now, according to the Supreme Court, "you are jointly
liable, Marsman and Gotesco." The JVA is only an
agreement between yourselves. PGI is not a party to your
agreement. Both of you contracted the services of PGI
and under the law, when there is concurrence of two or
more debtors in one and the same obligation, in the
absence of any agreement as to solidarity, your
obligation is joint." Here, both Marsman and Gotesco are
jointly liable for the obligation to PGI.
Let's go this case of Spouses Ibañez vs. James Harper.
Spouses Ibañez vs. James Harper (2017)
Here, the spouses agreed to pay Francisco, Ma. Consuela,
and Consuela P3M, the initial payment of P2M to be
sourced from the proceeds of a GSIS loan and secured by
the Sps. Ibanez while the remaining balance would be
paid within one (1) year from the date of their
compromise agreement. Here, the spouses obtained a
loan and also executed a real estate mortgage over their
Puerto Azul property in favor of Ma. Consuelo and
Consuelo. Here, Francisco pursued the collectiona against
the spouses but according to the spouses, they have
already paid, that they in fact executed a real estate
mortgage, and that they assigned the proceeds of their
GSIS loan. But the Supreme Court noted that they only
executed the real estate mortgage and assign the
proceeds of the GSIS loan in favor of Ma. Consuelo and
Consuelo. Remember, Ma. Consuelo, Consuelo, and
Francisco are not solidary debtors. Therefore, the
payment to one or two of them will not inure to the
benefit of all. They're merely joint creditors. Thus, the
payment which they made to Ma. Consuelo and Consuelo
did not effect a payment in favor of Francisco.
The Supreme Court said the payment to Consuelo and Ma.
Consuelo will not have the effect of discharging the
obligation with respect to Francisco. That's another
asepct of a joint obligation.
Let's go to indivisible obligations.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Indivisible obligations
What are indivisible obligations? Are they similar to solidary
obligations?
When you say solidary obligations, we refer to the
juridical tie that binds the parties. But when we say
indivisible obligations, we are referring to the
subject matter of the obligation, whether it is
capable of partial performance.
Again, subject matter ang indivisibility while solidarity refers to
the tie.
Q: Can there be a joint obligation, at the same time, indivisible?
Or should all indivisible obligations be solidary? Example of an
indivisible obligation to deliver a car. Although physically, you
can divide the car, but in so far as obligations are concerned,
when you undertake to deliver a car, you have to deliver it as a
whole. Otherwise, you will defeat the very purpose of the
obligation. You'll enjoy the integrity of the car. It has to be
delivered as a whole, so it is an indivisible obligation.
What if A, B, and C promised to deliver a car to X? If such is
without any stipulation as to the nature of the obligation, it is
joint. But because it is for the delivery of the car, it is indivisible.
Can X go to A to compel A to deliver him the car? It is a joint
obligation, di ba, so any one of them can be held liable only for
his proportionate share in the obligation. X can go against any
one of the debtors but only as to his proportionate share in the
debt. Can X go to A to demand for the delivery of the car? No,
it will not be effective, because A's obligation is only joint, so
he's only liable for 1/3 of the car.
How can X effect the delivery of the entire car to him? He must
demand from A, B, and C because their obligation is only joint.
But if A, B, and C solidarily obliged themselves to deliver a car
to X, then X can go to A alone for the delivery of the entire car.
That's solidary, and at the same time, indivisible. Solidarity is
not synonymous with indivisibility.
Going back, what if A, B, and C are merely jointly liable but their
obligation is to deliver a car to X – if A and B are ready to deliver
the car, but C is not, still, the delivery of the entire car cannot
be effected since 1/3 of that is the obligation of C, but C is not
ready. Even if X files a case against A, B, and C for the delivery
of the car, di gihapon kay may isa di man capable. Wala na bay
remedy si creditor? Magwait nalang ba siya kung kanusa
puwede si C maka-contribute para mapalit ang car? In case of
default of any one of the joint debtors in an indivisible
obligation, the obligation is now converted into a monetary
obligation. Instead of delivering the car, ang equivalent value
nalang sa car. In that case, macompel gihapon ni creditor si A ug
si B to give their share. Ang kay C, that's another story. At least,
dili siya matambong nga hulaton pa gyud na capable na ang
tanan so the obligation shall be converted into a monetary
obligation.
As for the liability for damages kay di ba naa may default? When
there's default, there's already liability for damages. Who will
be liable for damages in my example? X goes to A, B, and C for
the delivery of the car – assuming P300,000 ang value sa car –
but C is not ready. The obligation is now converted to a
monetary obligation. A and B would have to give P100,000
each but C, because he's the one in default, he would still be
liable for P100,000 plus damages. Iyaha lang because that's a
joint obligation.
Q: What if it's a solidary obligation and also indivisible?
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A, B and C promised to deliver a car to X, so any one of them
can be held liable for the entire car. X goes to A, asking for the
delivery of the car. A is not ready. There's now default. Naay
damages. In a solidary obligation, as long as the obligation is
not fully satisfied, the creditor can go against some or all of
them successively or simultaneously, as long as the debt is not
fully satisfied. Nag-default man si A, niadto karon si X kay B to
compel the delivery of the car, plus damages, kay naa naman
default. Can B refuse to pay the damages kay, 'Dili man ako ang
nag-default, actually si A man.
Kung sa akoa ka nag-una nagcollect, siguro walay default pero
giuna man ka kay A.' Dili ba siya liable for damages? It is a
solidary obligation. He can be compelled to pay the damages.
But sa reimbursement na sa ilahang tulo - so nagbayad na si B
sa car plus damages, let's say P10,000 nga damages. As a
solidary debtor who paid, B can demand reimbursement from
the others. So P100,000 each from A and C. But how about the
damages, share ba nilang tulo?
No. As between the debtors themselves, it is only A
who is duly liable, so B can demand the entire
amount of damages from A. Didto lang sa creditor
dili sila puwede mabalibad, but between themselves,
they can already make the one who is truly liable for
the default liable alone in shouldering the entire
amount of damages.
Now let's go this case of Sps. Lam v. Kodak regarding the
nature of an indivisible obligation.
Sps. Lam v. Kodak (2016)
Here, the Lam spouses entered into an agreement with
Kodak for the sale of three (3) units of the Kodak Minilab
system for P1.7M per unit. Mao ni ang terms: “This
confirms our verbal agreement for Kodak Phils., Ltd. to
provide Colorkwik Laboratories, Inc. with three (3) units
Kodak Minilab System 22XL . . . for your proposed outlets
in Rizal Avenue (Manila), Tagum (Davao del Norte)..." And
then, it says "Said Minilab Equipment packages will avail a
total of 19% multiple order discount59." And then there's
a NO DOWNPAYMENT clause. Payable in forty-eight (48)
installments. Secured with post-dated checks.
Kodak was able to deliver one (1) unit of the Minilab
equipment in Tagum. The Lam spouses issued post-dated
checks amounting to P35,000 each for twelve (12) months
as payment for the first delivered unit. There were
problems between the parties along the way. Later on,
the Spouses Lam ordered to stop payment the checks.
Kodak, of course, complained. According to Kodak, there
was a breach on the part of the Spouses Lam. But
according to the Spouses Lam, "No, you were the one
who committed the breach. Why? You undertook to
deliver three (3) units, but you failed to deliver the other
two (2) units. You only delivered one (1). Pursuant to that,
we have the right to stop the payment of the checks."
But according to Kodak, "No. Those checks are only for
one (1) unit. Each unit is separate and distinct from the
others. Our failure to deliver the remaining two (2) units
will not affect your obligation to pay the one (1) unit
which was already delivered to you."
Both parties exercised their right to rescind the contract.
We'll also discuss this in rescission. In relation to our
discussion, what is the nature of the agreement for the
delivery of the three (3) Minilab equipment? Is it
indivisible or is it divisible?
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
According to the Supreme Court, the letter-agreement
contained an indivisible obligation. Why? Based on the
contract, the intention was for there to be a single
transaction covering all three (3) units of the Minilab
equipment. The obligation of Kodak was to deliver all
products purchased under a package and in turn, Spouses
Lam's obligation was to pay the total purchase price
payable in installments.
Now, the intention to bind themselves to an indivisible
obligation can be further discerned through their direct
acts in relation to the package deal. There was only one
agreement covering all three (3) units of the Minilab
equipment and their accessories. The letter-agreement
specified only one (1) purpose for the buyer, which was to
buy these units for three (3) different outlets. If they
intended to have a divisible contract, they could have
entered into separate agreements for each Minilab
equipment instead of only one (1) package deal. Also, the
19% multiple order discount to all the three (3) acquired
units. Also, the NO DOWNPAYMENT clause applied to the
three (3) units. By the very designation of the item in the
contract, they were collective referred to as "The Minilab
Equipment Package". Here, it was clearly an indivisible
obligation.
Katong indication sa contract na they will be placed in
three (3) different locations, the Supreme Court said that
they are mere incidents of the execution of the
obligation. Here, the intention was to create an indivisible
contract.
Let's go to an obligation with a penal clause.
Obligations with a penal clause
Article 1226. In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and the
payment of interests in case of noncompliance, if there is
no stipulation to the contrary. Nevertheless, damages
shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable
in accordance with the provisions of this Code. (1152a)
Article 1228. Proof of actual damages suffered by the
creditor is not necessary in order that the penalty may be
demanded. (n)
Article 1229. The judge shall equitably reduce the penalty
when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable. (1154a)
Article 1230. The nullity of the penal clause does not carry
with it that of the principal obligation.
The nullity of the principal obligation carries with it that of
the penal clause. (1155)
We have this case of Ragasa Enterprises, Inc. v. Banco de Oro.
DM Ragasa Enterprises, Inc. v. Banco de Oro, Inc. (2018)
You're familiar with a penal clause, but I think we already
discussed this already on your first year because – First
Year pa ba mu noong year 2018? (Classmates are shocked
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with Ma’am’s question J) So anong year mo ani?
(Hahaha) They have additional discussion of what's a
penal clause.
As we have already learned, the Supreme Court said, "A
penal clause is an accessory obligation which the parties
attach to a principal obligation for the purpose of
ensuring the performance thereof by imposing on the
debtor a special prestation which is generally consisting
on the payment of the sum of money in case the
obligation is not fulfilled, or is irregularly or inadequately
fulfilled." Before, ang imohang first year siguro ang
ginaingon is duha ang purpose sa penal clause: penalty
and damages.
But in this case, the Supreme Court said, a penal clause
has a threefold purpose:
1) A coercive or one of guaranty - this is to urge the debtor
to the fulfillment of the main obligation under pain of the
paying the penalty. Funcion coercitiva o de garantia.
2) To serve as liquidated damages - this is to evaluate in
advance the damages that may be occasioned by the
noncompliance of the obligation. Funcion liquidatoria. Di
ba, you are familiar with the concept of liquidated
damages? In the contract, you just stipulate that in case
of breach, the aggrieved party is entitled to recover, say,
P1M from the guilty party. Here, you don't have to prove
the amount of damages. You only have to prove na there
was a breach of the obligation and this is the party who is
responsible for the breach.
3) For a strictly penal purpose, which is to punish the
debtor for non-fulfillment of the main obligation.
Funcion estrictamente penal. I don't know, maybe this will
be asked. Every time I say, sa Bar Review, kanang the day
before, "Unta maggawas ni." Nagawas gyud siya. Maybe
this will be asked.
When considered as a reparation and compensation, the
question as to the appropriate amount of damages is
resolved once and for all because the simulated indemnity
represents a legitimate estimate made by the contracting
parties of the damages caused by the non-fulfillment or
breach of the obligation. Proof of actual damages is
consequently not necessary in order that the stipulated
penalty may be demanded. That's what we learned. When
it's a penal clause, you don't have to prove the amount of
damages. But the Supreme Court clarified that.
When the purpose here is for reparation or
compensation, you don't have to prove the amount of
damages because when the parties agreed on that
amount, and the purpose is for reparation or
compensation, they already made computations of the
probable amount of damages that they could suffer. They
agree to reflect that in the contract.
When considered as a punishment, the question of
damages is not yet resolved, in as much as the right of
damages besides the penalty still subsists. Kung
punishment daw ang purpose gyud, kinahanglan ka pa
mag-prove as to the amount of damages because that
question of damages is not yet resolved. That is damages
plus penalty. If the injured party decided to recover the
damages actually suffered by him in addition to the
penalty, he must prove such damages. Again, this is that
situation when aside from the penalty, the party
agrrieved still has the right to recover damages.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
As to source, we have legal as when provided for by law
and conventional when it is provided by stipulation of
the parties.
According to demandability, we have subsidiary,
meaning, when only the penalty may be enforced. There
are cases when only the penalty may be enforced. Or it
may be complementary when both the principal
obligation and penalty may be enforced, like sa loan, sa
default nimo sa loan obligation. You're not saying na
because there's a penal clause, you cannot anymore
enforce the principal obligation. We cannot say na, "I-
forego nalang nato ang payment sa principal loan and we
will just demand for interest because it's the penalty."
That is complementary, both the principal obligation and
the penalty may be enforced.
According to purpose, we have cumulative. This is when
damages may be collected in addition to the penalty. And
reparatory, when the penalty substituted the indemnity
for damages. Ang reparatory, murag siyang subsidiary.
Ang cumulative, murag siyang complementary.
What happened in this case? Ragasa and Equitable
Banking Corporation entered into a contract of lease.
Ragasa was the lessor and Equitable was the lessee.
Subject of the contract, a building owned by Ragasa. The
contract was for a period of five (5) years, starting
February 01, 1998 up to January 31, 2003. Monthly rental,
P122,607. These are the pertinent provisions of the lease
contract. Number 2 provision: the term of this lease shall
be for a period of five (5) years, commencing on February
01, 1998. Number 4 says, "Failure to pay two (2)
consecutive monthly rentals within the first five (5) days
of any month shall automatically terminate this contract
without need of any further notice to the tenant."
Number 7 says, "Payment of three (3) months advance
rental and three (3) months deposit." Supposedly, the
deposit should be refunded to the tenant upon the
expiration or termination of the lease." Number 8 says,
"The full deposit of three (3) months advance shall be
forfeited in favor of the lessor upon non-compliance of
the term of the contract of lease by the tenant and cannot
be applied to rental." Letter N also mentions, "Penalty of
50% of the monthly rental for every month of the delay of
payment of the monthly rental." Letter P says, “Breach
or noncompliance of any of the provisions of this
contract, especially non-payment of two (2) consecutive
monthly rentals, the tenant shall vacate the premises
quietly and peacefully without need of any judicial
proceedings. If he does not vacate the premises, the
tenant agreed that the lessor has no liability whatsoever
due to the conducting of the same." Number 10, "In case
of a court litigation due to non-compliance of any of the
provisions, the aggrieved party shall be paidcno less than
P50,000.00 for attoney's fees and other damages that
the honorable court may allow. The cost of litigation shall
be borne or paid by the party in-default and it shall bear
interest 14% per annum."
Equitable paid the three (3) months advance/deposit.
Equitable later on entered into a merger with the
Philippine Commercial International Bank (PCI Bank). We
have now the Equitable PCI Bank. It would also merge
with Banco de Oro (BDO), who is now the respondent. As
a result of the merger, the Equitable Bank closed and
joined the branches of its constituent banks which were
in close proximity with each other. Equitable Bank felt
that it had to terminate its lease contract with Ragasa
because it no longer needed the building. Equitable sent
a notice to Ragasa informing him that it was pre-
terminating the lease contract.
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Ragasa said, "First, you have to pay for the monthly
rentals, for the remaining term of the lease from July 1 --
because Ragasa did not agree with the pre-termination. If
you want to pursue, you should still pay the balance of the
remaining life of the contract. That would be P3.1M,
because there is no provision in the lease contract for pre-
termination."
According to Equitable, "Our only liability for pre-
terminating the contract is the forfeiture of the security
deposit pursuant to Item 8(n) of the lease contract." The
bank went ahead witht he pre-termination and it vacated
the building without heeding the demand of Ragasa.
Eventually, a case was field in court. Ragasa filed a
complaint for collection of sum of money amounting to
P3.1M, representing the montly rentals under the
remaining life of the lease contract and damages.
Ragasa's argument states that under the lease contract,
the forfeiture of the bank security deposit does not
exempt it from payment of the rentals for the remaining
term of the lease because the bank's act of pre-
terminating the contract was a major breach of its terms.
Also, Item 8(n) expressly provides that the security
deposit shall not be applied to the rentals.
Sa Equitable naman na argument, "Item 8(n) of the lease
contract is actually a penalty clause which in line with Art.
1226 of the Civil Code takes the place of damages or
interest in case of breach. Hence, for breaching the lease
contract by pre-terminating the same, the bank is liable to
forfeit the security deposit in favor of Ragasa but would
not be liable for rentals corresponding to the remaining
life of the contract. The bank is also not liable for the
penalty at the rate of 3% under Item 8(n) of the lease
contract because the bank paid the due rentals the due
rentals up to the time it pre-terminated the same.
Did the bank commit a breach of the lease contract? The
Supreme Court said "Yes, because the contract must be
complied with in good faith." It is provided in the conract
na the lease contract is for a period of five (5) years,
commencing on February 1. There is no right to
preterminate pursuant to the contract. By serving upon
Ragasa of the Notice of Pre-Termination and vacating the
premises, it breached Item 2 of the lease contract.
Is the bank still liable to pay the rentals for the remaining
duration of the contract? Here, the Supreme Court said
“No.” Why? Because there is a stipulation in Item 8(b) of
the lease contract saying na, "Breach or non-compliance
of any provision of the contract will be the termination of
the contract." There was breach on the part of the bank,
therefore, it resulted to the termination of the contract.
To require the bank to still pay the balance of the lease
rentals for the remaining time would be tantamount to
specific performance, which is incompatible with the
automatic termination or rescission stipulated in Item 4 of
the contract. Generally, if the lessor or the lessee should
not comply with their obligations, the aggrieved party
may ask for either the rescission of the contract and
indemnification for damages, or only the latter allowing
the contract to remain in force.
But the Supreme Court said, "Entitlement to rentals after
the termination of the lease pursuant to the automatic
rescission clause of the contract could still be possible in
case the bank or the lessee did not vacate the premises.
In that case, the lessee would be liable for damages
equivalent to the rentals for the duration of its possession
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
from the termination of the lease until it vacates the
premises. But here, that is not the situation."
What is the nature of Item 8(n) of the lease contract
which says that, "Full deposit shall be forfeited in favor of
the lessor upon non-compliance of the term of the
contract of lease and cannot be applied to rental." The
Supreme Court said that Item 8(n) is a penalty or a penal
clause. The Supreme Court explained what is the nature
of this penal clause. This Item 8(n) is an accessory
obligation or prestation to the principal obligation of
lease specifies the stipulated amount of damages, the full
deposit to be awarded to the injured party in case of the
breach of the term or period. As to its source, this item is
conventional.
Is it reasonable, the amount of three (3) months advance,
three (3) months deposit, di ba usually sa penal clause, it
cannot be enforced if it is iniquituous and
unconscionable. Is it iniquituous and unconscionable? The
Supreme Court said, "The amount of the liquidated
damages is contractual between the parties, and the
courts would intervene only to equitably reduce the
liquidated damages whether intended as penalty of
indemnity if they're iniquitous or unconscionable." Here,
if the amount is susbtantial, then the compulsion to
perform it may be greater. The obligor may not,
however, be made to accept a very stiff penalty. The
amount is discretionary upon the parties, provided that
it will pass the test of unconscionability or
excessiveness. In this case, the parties agreed on the
specific amount of penalty. The Court will not even
second guess whether it is substantial enough to ensure
the compliance of the lease period. The Court will simply
prove that it is reasonable. So reasonable ba?
As to the effect of the penal clause, under Art. 1226 of the
Civil Code, "The penalty shall substitute the indemnity for
damages and the payment of interest in case of non-
compliance, if there is no stipulation to the contrary."
That is the general rule. When there is non-compliance,
you just recover the penal clause. You cannot recover
damages anymore, unless there is a stipulation na
"Without prejudice to the right of the aggrieved party to
damages." Nevertheless - there's an exception - the
damages shall be paid if the the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the
obligation.
In this particular case, the question is what is the nature if
it's a penal clause? Is Item 8(n) intended for a strictly penal
purpose or a punishment on the guilty party? If it is, then
Item 8(n) is both complementary and cumulative. If it is
not, then it is subsidiary and preparatory. Again, the
Supreme Court said, "If it is intended that the party can
still recover for damages over and above the penalty, it
must be stipulated." We already mentioned that. Item
8(n) does not expressly make the reservation for
additional claim for damages and interest occassioned by
the breach of the lease period. It just says in case of
breach, ma-forfeit if you rely only on Item 8(n). However,
there is another provision to this contract that is tiggered
by default in Item 8(n), which is Item 10, saying "In event
of a court litigation is resorted to, there is payment of not
less than P15,000 and other damages that the court may
allow." The Supreme Court said, being provisions on
default, we have to read Item 8(n) and Item 10 together
and simultaneously. It means, under the contract, aside
from the forfeiture of the full amount of deposit
mentioned in Item 8(n), actually, the aggrieved party can
still recover other than damages pursuant to Item 10 in
case of litigation, not less than P15,000 plus 14% per
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annum. Here, if we relied on the contract, it's saying na
aside from the penalty, the aggrieved party can also
recover damages.
Can Item 10 pass as the stipulation to the contrary or the
express agreement required in Art. 1226? Yes. When Item
10 provides "on other damages that the court may allow
recoverable in case of any of non-compliance of any
provision of the lease contract, this only means what it
says: that the aggrieved party can be awarded damages
in addition to the penalty, which the forfeiture of the
deposit." Construed together, Items 8(n) and Item 10
form a compelementary and cumulative penal clause, and
it is a punishment enforced witht the penal.
The Supreme Court also gave the requisites for the
demandability of the penal clause:
1. That the total non-fulfillment of the obligation
or the defective fulfillment to the fault of the
debtor.
2. That the penalty may be enforced in accordance
with the provisions of the law. As to the second
requisite, that penalty's demandable when the
debtor is in default in regard to obligations that
are positive, where demand may be necessary
unless it's excused. With regard to negative
obligations, when the act is done contrary to
that which is prohibited.
Here, Equitable actually violated the contract, but the
question is can the bank insist on paying only the penalty?
Can the debtor insist, "I will just pay the penalty and then
I will no longer comply with the principal obligation." It is
under Art. 1227. "The debtor cannot exempt himself from
the performance of the obligation by paying the penalty
saved in the case where his right has been expressly
reserved for him. Neither can the creditor demand the
fulfillment of the obligation and the satisfaction of the
penalty at the same time unless his right has been clearly
granted him."
Can Equitable insist only in paying the penalty? The
Supreme Court said, "There is nothing in the lease
contract which provides that the bank may exempt itself
from the performance of any provision therein, including
the term or period by simply paying the penalty." Items
8(n) and 10 do not contain any such exception. However,
even if theoretically under the lease contract, the bank
cannot exempt itself from performing the obligation by
paying the penalty and the liability of the bank is only
limited to the fofeiture of the security deposits but also
payment of litigation expenses and other damages, the
Supreme Court said, "Even as Items 8(n) and 10 are
considered as strictly penal or punishment, Ragasa as the
injured party is nonetheless required to prove the other
damages that it actually suffered before it can get
entitiled thereto.
You remember our discussion? If the purpose of the penal
clause is to penalize and then you claim for damages, you
still have to prove the amount of damages. Here, Item
8(n) already fixed the amount as a penalty, kay mamatog
man security deposits which were forfeited. But when the
contract says in Item 10 na "plus other than damages",
here, even if we're talking of a penal clause, there is a
need to prove the other damages it actually suffered
before it can get entitled thereto.
So duha ang component sa penal clause stipulated in that
contract. One, liquidated compensation katong forfeiture
sa security deposit. The other one is for punishment
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
katong payment of litigation expenses of not less than
P15,000 and other damages. "That portion, the Supreme
Court said, "You have to prove it. Because you did not
mention the amount in the contract. A review of the
records shows that Ragasa presented nothing to prove
the other amount of damages being claimed. Ragasa
simply insisted that the bank should be liable for the
amount representing the monthly rentals for the time it
terminated the contract until the end of the contract. The
Supreme Court said, "It's not possible, because you
cannot have both rescission and specific performance at
the same time. The bank already vacated the premises, so
there's no basis for the award."
In conclusion, Ragasa is not entitled to the rental for the
expired period. It's only entitled to forfeiture of the full
deposit pursuant to Item 8(n) and P15,000 as attorney's
fees pursuant to Item 10. The other damages, he has to
prove. This is a case illustrating the nature of a penal
clause.
February 6, 2020- Borbe
Extinguishment of Obligations
ARTICLE 1231.
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, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code.
Payment or Performance
When you say “payment,” you pay if it is a sum of money, or
you deliver if it is a thing. And it could be a specific or generic
thing.
It is “performance” if it is an obligation to do.
ARTICLE 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.
We all know that to be a valid payment, it must be the very
same thing which is due. If it is money, it must be a legal
tender. It must be paid at the time when it is due and
demandable; and it must be full and complete.
DE CASTRO vs. CA (G.R. No. 115838, July 18, 2002)
The word accept, as used in Article 1235 of the Civil Code,
means to take as satisfactory or sufficient, or agree to an
incomplete or irregular performance. Hence, the mere
receipt of a partial payment is not equivalent to the
required acceptance of performance as would extinguish
the whole obligation.
There is thus clear distinction between acceptance and
mere receipt. In this case, it is evident that Artigo merely
received the partial payment without waiving the balance.
Thus, there is no estoppel to speak of.
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An agent demanded from the principal the payment of his
commissions. The principal made payments, but those
payments were not in full. But still, they were received by the
agent. Still, the agent persisted in claiming the entire amount
of the commissions. Now, eventually, a case was filed.
According to the principal debtor, there was already full
payment because applying Article 1235, it was already fully
satisfied. The agent, knowing that the amount given was not
the full amount demanded, but still he received, it is equivalent
to full payment.
So here, there was no statement at all by the agent that he was
accepting the amount given to him as full and complete
payment of his commissions. The mere fact that he received
the money, did not mean that he accepted.
So, mere receipt of a partial payment is not equivalent to the
required acceptance of performance as would extinguish the
whole obligation. In fact, he persisted in claiming the balance.
So that means he did not accept. He just received the amount.
So there must be a distinction between acceptance and mere
receipt. So he merely received the partial payment without
waiving the balance. So there was no estoppel.
ARTICLE 1236. The creditor is not bound to accept payment
or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to
the contrary.
Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the
debtor.
This is very important. To whom shall you pay if you are the
debtor? To the creditor. If you are a creditor, from whom shall
you receive payment? From debtor.
If you are the creditor, under Article 1236, you are not bound
to accept payment from a third person. So if a third person
insists on paying the debt of the debtor, you can refuse. But
can you choose to accept? Yes, also, under Article 1236.
Q: What if the debtor objects to the payment?
For example, A is courting B. So, nagpasikat siya kay B. Si B,
daghan utang. A offered na siya magbayad sa mga utang ni B,
amounting to P10 Million. Of course si B, kay naa man siya’y
delikadesa, dili siya musugot.
But gi-offer ni A to the creditor. The creditor can refuse, but he
can also accept even over the objection of the debtor. So now,
gidawat ni creditor. What will happen? With respect to the
obligation, it is already extinguished. The debt of B to the
creditor is extinguished by that payment.
Now what are the rights of A? Halimbawa, gi-basted siya ni B.
Can he recover the payment?
Under Article 1236, “Whoever pays for another may demand
from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he
can recover only insofar as the payment has been beneficial to
the debtor.”
So we have to make a distinction.
¾ If the debtor consented to the payment made by the
third person to the creditor, what are the rights of the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
third person? There’s actually subrogation. It could be a
change in the person of the creditor, because the new
creditor is the third person who paid. So there is
subrogation. Meaning, the third person shall acquire all
the rights of the old creditor in that obligation.
¾ But if the payment was without the knowledge or
against the will of the debtor, there will be no
subrogation. But the third person can still demand for
beneficial reimbursement from the debtor.
“Beneficial reimbursement” means only to the extent that the
debtor benefited from the payment.
Example:
P10M ang gibayad ni third person kay creditor. But the real
debt of the debtor is only P8M, because the debtor already
paid P2M. Pero gidawat ni creditor ang P10M. So now, how
much can the third person demand from the debtor as
beneficial reimbursement? Only P8Million, because it was only
P8M which inured to the benefit of the debtor. How about the
remaining P2M, from whom shall the third person claim? From
the creditor. On what basis? Under the principle of quasi-
contract, solution indebiti, payment by mistake.
If for example the entire debt had already prescribed, how
much can the third person demand from the debtor? None.
Because it did not inure to the benefit at all of the debtor. In
fact, the creditor himself can no longer collect that amount
from the debtor because of prescription.
DOMINION INSURANCE CORPORATION vs. CA
(G.R. No. 129919, February 6, 2002)
Rodolfo S. Guevarra instituted a case for sum of money
against defendant Dominion Insurance Corporation.
Plaintiff sought to recover thereunder the sum of
P156,473.90 which he claimed to have advanced in his
capacity as manager of defendant to satisfy certain claims
filed by defendant’s clients.
Issues:
1. Whether respondent Guevarra acted within his
authority as agent for petitioner; and
2. Whether respondent Guevarra is entitled to
reimbursement of amounts he paid out of his
personal money in settling the claims of several
insured.
Held:
1. No. The instruction of petitioner as the principal could
not be any clearer. Respondent Guevarra was authorized to
pay the claim of the insured, but the payment shall come
from the revolving fund or collection in his possession.
Having deviated from the instructions of the principal, the
expenses that Guevarra incurred in the settlement of the
claims of the insured may not be reimbursed from
petitioner Dominion. This conclusion is in accord with
Article 1918.
2. However, while the law on agency prohibits respondent
Guevarra from obtaining reimbursement, his right to
recover may still be justified under the general law on
obligations and contracts. Article 1236, second paragraph,
Civil Code, provides: “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,
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he can recover only insofar as the payment has been
beneficial to the debtor.” In this case, when the risk insured
against occurred, petitioner’s liability as insurer arose. This
obligation was extinguished when respondent Guevarra
paid the claims and obtained Release of Claim Loss and
Subrogation Receipts from the insured who were paid.
Thus, to the extent that the obligation of the petitioner has
been extinguished, respondent Guevarra may demand for
reimbursement from his principal. To rule otherwise would
result in unjust enrichment of petitioner.
“The principal is not liable for the expenses incurred by the
agent in the following cases:
“(1) If the agent acted in contravention of the principal’s
instructions, unless the latter should wish to avail himself of
the benefits derived from the contract; “xxx xxx xxx”
This case is a good illustration of Article 1236.
Here, Guevarra was an agent of Dominion Insurance
Corporation. Under the policy of the company, the agents
cannot pay the claims of the clients of the Insurance Company,
unless the amount shall be taken from the revolving fund in
the hands of the agent. They cannot pay out of their own
pocket.
Here, Guevarra plaid claims against Dominion Insurance in the
amount of P156,000 plus. But he said, and it was proved that
those amounts were taken, not from the revolving funds, but
from his own funds. So, of course, Dominion Insurance refused
to reimburse Guevarra. Because, according to Dominion, “That
is against our policy. You violated the policy of our company.”
So, the question here is – can Guevarra demand
reimbursement from Dominion Insurance for those amounts
which he paid to the clients of Dominion Insurance?
The Supreme Court said, on the basis of the law on agency,
Guevarra cannot recover. But his right to recover may still be
justified under the general law on obligations and contracts.
ARTICLE 1238. Payment made by a third person who does
not intend to be reimbursed by the debtor is deemed to be
a donation, which requires the debtor's consent. But the
payment is in any case valid as to the creditor who has
accepted it.
What if a third person pays the debt of the debtor, but the
third person does not intend to be reimbursed? So, generous
siya. The law says, it is deemed to be a donation, which
requires the debtor’s consent. But the payment is in any case
valid as to the creditor who has accepted it.
So for example, katong illustration nako before, si B naa’y
suitor, “I’m paying the P10 Million debt. Don’t worry, just
forget about it.” Meaning, he does not intend to be
reimbursed.
First Situation: What if B objected? So meaning, wala niya gi-
acept. Under the law on donation, when will there be a valid
donation? First, it has to be accepted by the donee. So kung si
B, in my example, did not accept, but still the third party went
on to pay the creditor, it’s still a valid payment. But is it a valid
donation? No, because of the absence of acceptance.
So what will happen? Kung magchange ang mind ni third
person kay gi-basted siya, he can ask for beneficial
reimbursement from the debtor.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Second Situation: What if B accepted? Let’s discuss first the
case of Lentferr vs. Wolff.
VICTORIA MOREÑO-LENTFER, GUNTER LENTFER and
JOHN CRAIGIE YOUNG CROSS vs. HANS JURGEN WOLFF
(G.R. No. 152317, November 10, 2004)
The petitioners are Gunter Lentfer, a German citizen; his
Filipina wife, Victoria Moreño-Lentfer; and John Craigie
Young Cross, an Australian citizen, all residing in Sabang,
Puerto Galera, Oriental Mindoro. Respondent Hans Jurgen
Wolff is a German citizen, residing in San Lorenzo Village,
Makati City.
Petitioners alleged that with respondent, on March 6, 1992,
they engaged the notarial services of Atty. Rodrigo C.
Dimayacyac for: (1) the sale of a beach house owned by
petitioner Cross in Sabang, Puerto Galera, Oriental
Mindoro, and (2) the assignment of Cross' contract of lease
on the land where the house stood. The sale of the beach
house and the assignment of the lease right would be in the
name of petitioner Victoria Moreño-Lentfer, but the total
consideration of 220,000 Deutschmarks (DM) would be
paid by respondent Hans Jurgen Wolff. A promissory note
was executed by said respondent in favor of petitioner
Cross.
According to respondent, however, the Lentfer spouses
were his confidants who held in trust for him, a time deposit
account in the amount of DM 200,000 at Solid Bank
Corporation. Apprised of his interest to own a house along
a beach, the Lentfer couple urged him to buy petitioner
Cross' beach house and lease rights in Puerto Galera.
Respondent agreed and through a bank-to-bank
transaction, he paid Cross the amount of DM 221,700 as
total consideration for the sale and assignment of the lease
rights. However, Cross, Moreño-Lentfer and Atty.
Dimayacyac surreptitiously executed a deed of sale
whereby the beach house was made to appear as sold to
Moreño-Lentfer for only P100,000. The assignment of the
lease right was likewise made in favor of Moreño-Lentfer.
Upon learning of this, respondent filed a Complaint
docketed as Civil Case No. R-4219 with the lower court for
annulment of sale and reconveyance of property with
damages and prayer for a writ of attachment.
HELD: Article 1238 of the New Civil Code provides:
ART. 1238. Payment made by a third person who does
not intend to be reimbursed by the debtor is
deemed to be a donation, which requires the debtor's
consent. But the payment is in any case valid as to the
creditor who has accepted it.
Petitioners posit that in a contract of sale, the seller is the
creditor, who in this case is Cross, and the buyer is the
debtor, namely Moreño-Lentfer in this case. Respondent is
the third person who paid the consideration on behalf of
Moreño-Lentfer, the debtor. Petitioners insist that
respondent did not intend to be reimbursed for said
payment and debtor Moreño-Lentfer consented to it. Thus,
by virtue of Article 1238, payment by respondent is
considered a donation.
Trying to apply Art. 1238 to the instant case is like forcing a
square peg into a round hole. The absence of intention to
be reimbursed, the qualifying circumstance in Art. 1238, is
negated by the facts of this case.
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Respondent's acts contradict any intention to donate the
properties to petitioner Moreño-Lentfer. When respondent
learned that the sale of the beach house and assignment of
the lease right were in favor of Victoria Moreño-Lentfer, he
immediately filed a complaint for annulment of the sale and
reconveyance of the property with damages and prayer for
a writ of attachment.
Respondent actually stayed in the beach house in the
concept of an owner and shouldered the expenses for its
maintenance and repair amounting to P200,000 for the
entire period of his stay for ten weeks. Moreover, the
appellate court found that respondent is not related or
even close to the Lentfer spouses. Obviously, respondent
had trusted the Lentfer spouses to keep a time deposit
account for him with Solid Bank for the purpose of making
the purchase of the cited properties.
Petitioner Moreño-Lentfer's claim of either cash or
property donation rings hollow. A donation is a simple act
of liberality where a person gives freely of a thing or right in
favor of another, who accepts it. But when a large amount
of money is involved, equivalent to P3,297,800, based on
the exchange rate in the year 1992, we are constrained to
take the petitioners' claim of liberality of the donor with
more than a grain of salt.
Petitioners could not brush aside the fact that a donation
must comply with the mandatory formal requirements set
forth by law for its validity. Since the subject of donation is
the purchase money, Art. 748 of the New Civil Code is
applicable. Accordingly, the donation of money equivalent
to P3,297,800 as well as its acceptance should have been in
writing. It was not. Hence, the donation is invalid for non-
compliance with the formal requisites prescribed by law.
Here, we have the Spouses Lentferr. They were introduced to
a German citizen, Wolff. Wolff wanted to acquire a beachfront
property in the Philippines. So, the Spouses Lentferr facilitated
the purchase of that property. Foreigners cannot acquire
properties in the Philippines, so it should be a lease of the land
and a purchase of the building.
Wolff sent money to the Spouses; the amount is equivalent to
more or less P3M. So, Wolff was very happy when he learned
that he already had a property. So he went to the Philippines
and then occupied the property. So, he made improvements
and renovations on the building.
Later on, he learned that the property was actually named
under the Spouses. So, he was very mad because it was not
their agreement. The Spouses refused to transfer the property
in his name or to return the money. So, he filed an annulment
of sale and reconveyance of property and damages and prayer
for writ of attachment.
According to the Spouses, “We admit that we did not have
that amount on our own. But when Wolff deposited in our
account the amount of P3M, it was actually intended to be a
donation. And pursuant to Article 1238, the payment to the
seller of the property was valid. And because it was a donation,
you cannot recover from us either the money or the property
which we bought from the money which you donated.” So
that was the defense of the Spouses. Would that be correct?
The Supreme Court said, if it is really a donation, under Article
1238, it requires the consent of the debtor. And then, under
Article 748, which is the law on donation, you also have to
comply with the formalities. If it is a donation of personal
property and the amount exceeds P5,000, both the donation
and acceptance must be in writing for the donation to be valid.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
It was more than P5,000, it was around P3Million so the
Supreme Court said that there is nothing in record that there
was a written document, even a private one, evidencing the
donation and acceptance.
So, assuming for the sake of argument that there was really an
intention on the part of Wolff to donate the amount, but
donation is a formal contract. It requires the observance of the
formalities for that donation to be valid.
The Spouses also were not able to present any evidence that
they had a close relationship with Wolff that would justify his
donation of that amount. But again, even if there was such
intent, we have to follow the formalities under Article 748.
So, even if indeed there is a donation, even if the third person
did not intend to be reimbursed, and even if the debtor
consented to the donation, we have to follow the forms under
the law on donation for there to be no more right of recovery
on the part of the third person. Bisan pa’g gidawat niya but the
amount is more than P5,000, then wala’y written document, it
is not valid.
If the property involved is real property, it has to be in a public
document – both the donation and acceptance.
OSMEÑA-JALANDONI vs. ENCOMIENDA
(G.R. No. 205578, March 01, 2017)
Encomienda narrated that she met petitioner Georgia
Osmeña-Jalandoni in Cebu on October 24, 1995, when the
former was purchasing a condominium unit and the latter
was the real estate broker. Thereafter, Encomienda and
Jalandoni became close friends. On March 2, 1997,
Jalandoni called Encomienda to ask if she could borrow
money for the search and rescue operation of her children
in Manila, who were allegedly taken by their father, Luis
Jalandoni. Encomienda then went to Jalandoni's house and
handed P100,000.00 in a sealed envelope to the latter's
security guard. While in Manila, Jalandoni again borrowed
money for several errands.
On April 1, 1997, Jalandoni borrowed P1 Million from
Encomienda and promised that she would pay the same
when her money in the bank matured. Thereafter,
Encomienda went to Manila to attend the hearing of
Jalandoni's habeas corpus case before the CA where
P100,000.00 more was requested. On May 26, 1997, now
crying, Jalandoni asked if Encomienda could lend her an
additional P900,000.00. Encomienda still acceded, albeit
already feeling annoyed. All in all, Encomienda spent
around P3,245,836.02 and $6,638.20 for Jalandoni.
When Jalandoni came back to Cebu on July 14, 1997, she
never informed Encomienda. Encomienda then later gave
Jalandoni six (6) weeks to settle her debts. Despite several
demands, no payment was made. Jalandoni insisted that
the amounts given were not in the form of loans. When
they had to appear before the Barangay for conciliation, no
settlement was reached.
But a member of the Lupong
Tagapamayapa of Barangay Kasambagan, Laureano
Rogero, attested that Jalandoni admitted having borrowed
money from Encomienda and that she was willing to return
it. Jalandoni said she would talk to her lawyer first, but she
never came back. Hence, Encomienda filed a complaint.
For her defense, Jalandoni claimed that there was never a
discussion or even just an allusion about a loan. She
confirmed that Encomienda would indeed deposit money
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in her bank account and pay her bills in Cebu. But when Dation in Payment
asked, Encomienda would tell her that she just wanted to
extend some help and that it was not a loan. When
ARTICLE 1245. Dation in payment, whereby property is
Jalandoni returned to Cebu, Encomienda wanted to fetch
alienated to the creditor in satisfaction of a debt in money,
her at the airport but the former refused. This allegedly
shall be governed by the law of sales.
made Encomienda upset, causing her to eventually demand
payment for the amounts originally intended to be
Do not forget the concepts in payment.
gratuitous.
There is a monetary obligation. And then later on, the debtor
Encomienda said they did not agree on a loan. She did not
could not pay the money. So instead, he offers property,
consent to the payments. The sole issue in this case is
something which is in kind. And the creditor accepts. That is
whether or not Encomienda is entitled to be reimbursed for
dation in payment.
the amounts she defrayed for Jalandoni.
It is governed by the Law on Sales, because the money which
Incredible, highly unusual, and contrary to common
was borrowed by the debtor before, now becomes equivalent
experience, unless the benefactor is a billionaire
to the purchase price of the property which the debtor
philanthropist who usually spends his days distributing his
delivers to the creditor later on when the debt is already due
fortune to the needy. It is a notable fact that Jalandoni was
and demandable.
married to one of the richest hacienderos of Iloilo and
belong to the privileged and affluent Osmeña family, being
TAKE NOTE: There has to be acceptance by the creditor.
the daughter of the late Senator Sergio Osmeña, Jr. Clearly
then, Jalandoni is not one to be convincing object of
Dili pwede nga naa ka’y utang na P1 Million and the next day,
anyone's charitable acts, especially not from someone like
nagdala na ka’g Ferrari sa balay sa creditor. Ibilin nimo didto sa
Encomienda who has not been endowed with such wealth
atubangan sa iyahang balay, plus ang susi. Is it already
and powerful pedigree.
equivalent to dation in payment? No. Because one of the
requisites of a valid dation in payment is – the payment must
Jalandoni insists that she never borrowed any amount of
consist in the very same thing which is due.
money from Encomienda. During the entire time that
Encomienda was sending her money and paying her bills,
So you cannot compel the creditor to accept something which
there was not one reference to a loan. Jalandoni also
is not the one that is due. So kung money ang due, even if you
contends that the amounts she received from Encomienda
deliver a Ferrari (which could be more valuable), the creditor
were mostly provided and paid without her prior
can refuse. So, there has to be consent on the part of the
knowledge and thus she could not have consented to any
creditor for the dation in payment to be effective. Once that
loan agreement.
happens, it is equivalent to a novation. The obligation is now
novated.
But the second paragraph of Article 1236 of the Civil Code
provides:
Concept: Does it mean that once the creditor accepts the thing
Xxx
in payment of obligation, the debt is already totally
extinguished? Let is discuss the case of:
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
TAN SHUY VS. SPOUSES MAULAWIN (G.R. No. 190375,
can recover only insofar as the payment has been
February 8, 2012)
beneficial to the debtor.
Dation in payment extinguishes the obligation to the extent
Clearly, Jalandoni greatly benefited from the purportedly
of the value of the thing delivered, either as agreed upon by
unauthorized payments. Thus, even if she asseverates that
the parties or as may be proved, unless the parties by
Encomienda'is payment of her household bills was without
agreement express or implied, or by their silence consider
her knowledge or against her will, she cannot deny the fact
the thing as equivalent to the obligation, in which case the
that the same still inured to her benefit and Encomienda
obligation is totally extinguished. The subsequent
must therefore be consequently reimbursed for it. Also,
arrangement between Tan Shuy and Guillermo can thus be
when Jalandoni learned about the payments, she did
considered as one in the nature of dation in payment. There
nothing to express her objection to or repudiation of the
was partial payment every time Guillermo delivered copra
same, within a reasonable time.
to petitioner, chose not to collect the net proceeds of his
copra deliveries, and instead applied the collectible as
In case of loans between friends and relatives, the absence
installment payments for his loan from Tan Shuy. We
of acknowledgment receipts or promissory notes is more
therefore uphold the findings of the trial court, as affirmed
natural and real. In a similar case, the Court upheld the CA's
by the CA, that the net proceeds from Guillermos copra
pronouncement that the existence of a contract of loan
deliveries amounted to ₱378,952.43. With this partial
cannot be denied merely because it was not reduced in
payment, respondent remains liable for the balance
writing. Surely, there can be a verbal loan. Contracts are
totaling ₱41,047.57
binding between the parties, whether oral or written. The
law is explicit that contracts shall be obligatory in whatever
form they may have been entered into, provided all the
For example, the debt is P10M, and you delivered a Pajero. It
essential requisites for their validity are present. The
"display of Christian help" is not inconsistent with the does not follow that the debt is already extinguished. It is only
existence of a loan. Encomienda immediately offered a extinguished to the extent of the value of the thing delivered.
helping hand when a friend asked for it. But this does not If the Pajero is just worth P3M, then that is the only amount of
mean that she had already waived her right to collect in the the debt that is extinguished.
future.
As to the value, how do you prove that it is the value? It is
either, “as agreed upon”, or “as may be proved.” Unless the
parties, express or implied, they already considered it as the
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full payment of the entire P10M, either by their agreement, or
by their silence. So, for example, si creditor, after delivery of
Pajero, wala na pud naninigil, it means he considers it as full
equivalent of obligation.
In this particular case, Tan Shuy was abuyer of copras, and
Guillermo was a farmer who produced copras. So Gulliermo
borrowed an amount of money, and then of course kay buyer
man pud si Tan Shuy, so ang ginabuhat ni Guillermo, iyahang
gina-deliver the produce sa warehouse in Tan Shuy. There
were also acknowledgement receipts issued for those
deliveries. And then, later on, Tan Shuy demanded the entire
obligation from Guillermo. Guillermo said, “I already paid. I
delivered copras to you. That is already dation in payment,
because you accepted the copras, you issued receipts, but you
did not give me money for my copras. So meaning, those
copras were considered as payment for my obligation.”
The Supreme Court said, “The net proceeds from the copras
delivered amounted to P378,952.43.” According to the general
rule in dation in payment, kay wala man sila’y agreement, the
debt is only extinguished equivalent to the value of the copras
delivered. There was no total extinguishment. Deducting that
from the amount of the debt, there’s still a balance of
₱41,047.57. So that is the concept of dation in payment.
ARTICLE 1249. The payment of debts in money shall be
made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed, or
when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance.
What is the rule when it comes to payment of money? The
general rule is – payment shall be made in legal tender. Here in
the Philippines, it’s the Philippine Peso. So, the creditor can
actually refuse if you pay in dollars, because that is not legal
tender. But, if there’s a stipulation to pay in another currency,
then that is the governing currency.
What is important in Article 1249 would be the 2nd paragraph.
Even if you pay by means of promissory note, “I hereby
promise to pay X or order, P1 Million within 30 days from
today,” that does not extinguish the debt of debtor.
As to checks, would that be equivalent to payment in cash?
Would that extinguish the obligation if you already paid in
check? No.
So general rule, payment by means of check does not
extinguish the obligation. It will only extinguish obligation
when:
1. The check has already been encashed;
2. Through the fault of creditor, their value had been
impaired.
In the meantime, if the debtor paid in check, for example,
gidawat ni creditor, unless gi-encash ni creditor, the creditor
cannot file a collection suit against the debtor. His remedy is to
encash the check.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
PAPA vs. VALENCIA (G.R. No. 105188, January 23, 1998)
Petitioner argues that respondent Court of Appeals erred in
concluding that the alleged sale of the subject property had
been consummated. He contends that such a conclusion is
based on the erroneous presumption that the check (in the
amount of P40,000.00) had been cashed, citing Art. 1249 of
the Civil Code, which provides, in part, that payment by
checks shall produce the effect of payment only when they
have been cashed or when through the fault of the creditor
they have been impaired. Petitioner insists that he never
cashed said check; and, such being the case, its delivery
never produced the effect of payment. Petitioner, while
admitting that he had issued receipts for the payments,
asserts that said receipts, particularly the receipt of PCIB
Check No. 761025 in the amount of P40,000.00, do not
prove payment. He avers that there must be a showing that
said check had been encashed. If, according to petitioner,
the check had been encashed, respondent Peñarroyo
should have presented PCIB Check No. 761025 duly
stamped received by the payee, or at least its microfilm
copy.
Petitioner finally avers that, in fact, the consideration for
the sale was still in the hands of respondents Valencia and
Peñarroyo, as evidenced by a letter addressed to him in
which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr.
Ramon Papa, Jr., heir of Mrs. Angela M. Butte to pay you
the aforementioned amount of P75,000.00 for the release
and cancellation of subject property’s mortgage. The
money is with me and if it is alright with you, I would like to
tender the payment as soon as possible. x x x.
We find no merit in petitioner’s arguments.
After more than ten (10) years from the payment in part by
cash and in part by check, the presumption is that the check
had been encashed. As already stated, he even waived the
presentation of oral evidence.
Granting that petitioner had never encashed the check, his
failure to do so for more than ten (10) years undoubtedly
resulted in the impairment of the check through his
unreasonable and unexplained delay.
While it is true that the delivery of a check produces the
effect of payment only when it is cashed, pursuant to Art.
1249 of the Civil Code, the rule is otherwise if the debtor is
prejudiced by the creditor’s unreasonable delay in
presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for payment,
and if he from whom it is received sustains loss by want of
such diligence, it will be held to operate as actual payment
of the debt or obligation for which it was given.
Here, there was a contract of sale involving a real property.
Now, the buyer paid by means of check. The check was in the
amount of P40,000 pesos. And then, years passed, more than
10 years, the buyer demanded from the seller the delivery of
the owner’s copy of the tile. But the seller said, “You did not
yet pay the purchase price in full. So pursuant to our
agreement, I am not yet obliged to deliver the owner’s copy of
the tile.” And the buyer said, “I paid diba, by means of check.”
So the seller invoked Article 1249, that payment by means of
check is not equivalent to an extinguishment of an obligation,
that it does not produce the effect of payment until it has been
encashed. “So prove first that we encashed the check.”
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According to the seller, the buyer should present the PCIB
check duly stamped by the payee as received, to prove that it
was really encashed. So here, the buyer could no longer
present the check because it was more than 10 years. So, wala
gyud siya’y mapakita.
Now, the Supreme Court said, “After more than ten (10) years
from the payment in part by cash and in part by check, the
presumption is that the check had been encashed.” “Granting
that petitioner had never encashed the check, his failure to do
so for more than ten (10) years undoubtedly resulted in the
impairment of the check through his unreasonable and
unexplained delay.
EVANGELISTA vs. SCREENEX, INC. (G.R. No. 211564,
November 20, 2017)
It is a settled rule that the creditor's possession of the
evidence of debt is proof that the debt has not been
discharged by payment. It is likewise an established tenet
that a negotiable instrument is only a substitute for money
and not money, and the delivery of such an instrument does
not, by itself, operate as payment. Thus, in BPI v. Spouses
Royeca, we ruled that despite the lapse of three years from
the time the checks were issued, the obligation still
subsisted and was merely suspended until the payment by
commercial document could actually be realized.
However, payment is deemed effected and the obligation
for which the check was given as conditional payment is
treated discharged, if a period of 10 years or more has
elapsed from the date indicated on the check until the date
of encashment or presentment for payment. The failure to
encash the checks within a reasonable time after issue, or
more than 10 years in this instance, not only results in the
checks becoming stale but also in the obligation to pay
being deemed fulfilled by operation of law.
Kanus-a ba gyud mahimong equivalent to payment ang
pagbayad by means of check? When do we consider that the
value of the check had already been impaired? When will the
check become stale? 6 months from the date of the check.
Does it follow that if the check has already become stale, its
value has already been impaired in the obligation has already
been extinguished?
So in this case, the Supreme Court said, “It is a settled rule that
the creditor's possession of the evidence of debt is proof that
the debt has not been discharged by payment.” So for
example, kung naa pa sa creditor ang promissory note or naa
pa sa iyaha ang check, wala pa na-encash, so wala pa na-
extinguish ang obligation. The debt has not been discharged
by payment.
In the case of BPI v. Spouses Royeca, the Supreme Court
reiterated its ruling na despite the lapse of three (3) years from
the time the checks were issued, the obligation still subsisted
and was merely suspended until the payment by commercial
document could actually be realized. So here, even if wala niya
na-encash ang check, naa lang sa iyahang kamot for three (3)
years, it did not yet extinguish the obligation. Because by the
fact nga naa pa sa kamot ni creditor ang check, it means wala
pa na-encash ang check.
But does it now give us the application of the impairment of
the check that it’s not equivalent to payment? Still, no. Three
(3) years lang. The obligation still subsisted.
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Actually, there’s already prescription here. Because an
obligation arising from the written contract, the right of action
prescribes in 10 years.
How about credit card? Is credit card considered legal tender?
MANDARIN VILLA vs. CA (G.R. No. 119850, June 20, 1996)
Private respondent, Clodualdo de Jesus, a practicing lawyer
and businessman, hosted a dinner for his friends at the
petitioner's restaurant the Mandarin Villa Seafoods Village,
Greenhills, Mandaluyong City. After dinner the waiter
handed to him the bill in the amount of P2,658.50. Private
respondent offered to pay the bill through his credit card
issued by Philippine Commercial Credit Card Inc.
(BANKARD). This card was accepted by the waiter who
immediately proceeded to the restaurant's cashier for card
verification. Ten minutes later, however, the waiter
returned and audibly informed private respondent that his
credit card had expired. Private respondent remonstrated
that said credit card had yet to expire on September 1990,
as embossed on its face. The waiter was unmoved, thus,
private respondent and two of his guests approached the
restaurant's cashier who again passed the credit card over
the verification computer. The same information was
produced, i.e., CARD EXPIRED. Private respondent and his
guests returned to their table and at this juncture,
Professor Lirag, another guest, uttered the following
remarks: "Clody [referring to Clodualdo de Jesus], may
problema ba? Baka kailangang maghugas na kami ng
pinggan?" Thereupon, private respondent left the
restaurant and got his BPI Express Credit Card from his car
and offered it to pay their bill. This was accepted and
honored by the cashier after verification. Petitioner and his
companions left afterwards.
HELD: Petitioner contends that it cannot be faulted for its
cashier's refusal to accept private respondent's BANKARD
credit card, the same not being a legal tender. It argues
that private respondent's offer to pay by means of credit
card partook of the nature of a proposal to novate an
existing obligation for which petitioner, as creditor, must
first give its consent otherwise there will be no binding
contract between them. Petitioner cannot seek refuge
behind this averment.
We note that Mandarin Villa Seafood Village is affiliated
with BANKARD. In fact, an "Agreement" entered into by
petitioner and BANKARD dated June 23, 1989, provides
inter alia:
"The MERCHANT shall honor validly issued PCCCI credit
cards presented by their corresponding holders in the
purchase of goods and/or services supplied by it provided
that the card expiration date has not elapsed and the card
number does not appear on the latest cancellation bulletin
of lost, suspended and cancelled PCCCI credit cards and, no
signs of tampering, alterations or irregularities appear on
the face of the credit card."
While private respondent may not be a party to the said
agreement, the above-quoted stipulation conferred a favor
upon the private respondent, a holder of credit card validly
issued by BANKARD. This stipulation is a stipulation pour
autri and under Article 1311 of the Civil Code private
respondent may demand its fulfillment provided he
communicated his acceptance to the petitioner before its
revocation. In this case, private respondent's offer to pay
by means of his BANKARD credit card constitutes not only
an acceptance of the said stipulation but also an explicit
communication of his acceptance to the obligor.
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In addition, the record shows that petitioner posted a logo
inside Mandarin Villa Seafood Village stating that "Bankard
is accepted here. This representation is conclusive upon the
petitioner which it cannot deny or disprove as against the
private respondent, the party relying thereon. Petitioner,
therefore, cannot disclaim its obligation to accept private
respondent's BANKARD credit card without violating the
equitable principle of estoppel.
Atty. De Jesus had dinner with his friends in Mandarin. And he
offered to pay through his credit card. It was denied. So he
convinced to try again, denied gihapon. And then his friends
were telling him, “Manghugas na ba ta ug plato ani?” LOL. So
he was so embarrassed by that. Then, luckily, when he offered
his BPI credit card, it was honored. But he was so embarrassed
so he filed the case.
Liable ba for damages ang Mandarin? According to Mandarin,
it was not liable for damages because credit cards are not legal
tender. It’s not like cash na pag nagbayad ka, the creditor
cannot refuse. Here, it’s just a credit card.
Is credit card considered legal tender? No, because they’re not
even currencies. Pag muingon ka’g legal tender gani, pag
mabayad ka, dapat dawaton.
However, Mandarin is obliged to accept the credit card. There
were two reasons given by the Supreme Court.
(1) The application of the law on privity on contracts,
stipulation pour autri. The contract entered into (1) between
the credit card holder and the bank (Bankard), and (2) there’s
also a contract between the bank and Mandarin. In the
contract between Mandarin and Bankard, there was a
stipulation that Mandarin will honor all subsisting and
unexpired credit cards issued by Bankard. So, that stipulation
is in favor of the holders of Bankard Credit cards. And that
stipulation is deemed accepted once the credit card holder
offers the credit card in payment of the obligation. By that
time, it’s equivalent to his communication of his acceptance of
the benefit in his favor under the contract between Mandarin
and Bankard.
So when Atty. De Jesus offered his credit card for payment,
Mandarin was bound to accept the credit card.
(2) Estoppel. Because in the establishment of Mandarin, at the
front door, there is notice that “Bankard Credit Cards are
accepted here.” So the Supreme Court said that this
representation is conclusive upon the petitioner.
Extraordinary Inflation or Deflation
ARTICLE 1250. In case an extraordinary inflation or deflation
of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an
agreement to the contrary.
What is the rule? So here, we have a case when the obligation
was entered into, and then the obligation is to be performed
over a period of time. But in the intervening period, there is an
extraordinary inflation or deflation. By reason of that, it would
be unjust to still enforce the tenor of the old obligation.
Example:
For example, year 1900, lessor and lessee entered into a
contract of lease for 50 years. So, 1950 mahuman. 10 hectares
for P1,000. Maybe in the year 1900, ang P1000, dako na siya.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
But overtime, naa’y nahitabo na extraordinary inflation or
deflation, so the value of the currency has been significantly
reduced. It would be unjust on the part of the lessor, kung
sauna, ang P1000, makapalit na siya ug kotse, but because of
the extraordinary inflation or deflation, bisan ligid dili na
makapalit ang P1000. So, kung i-value nato na siya, for you to
be able to buy a car which a P1,000 could buy in 1900, it would
already need P1Million later because of the extraordinary
inflation or deflation. So that is actually the real value of the
currency.
But wala man mo’y adjustment sa inyuhang contract of lease.
It still says, P1,000. So sa part sa lessor, he could not demand
the true value of his property which would now be equivalent
to P1 Million. Dapat, P1,000 lang gihapon.
That is why we have Article 1250. There shall be a readjustment
and the basis shall be the value of the currency at the time of
the establishment of the obligation. So kung pila ang value ana
katong 1900, that would be the basis for the readjustment,
unless there is an agreement to the contrary.
EQUITABLE PCI BANK vs. NG SHEUNG NGOR
(G.R. No. 171545, December 19, 2007)
Extraordinary inflation exists when there is an unusual
decrease in the purchasing power of currency (that is,
beyond the common fluctuation in the value of currency)
and such decrease could not be reasonably foreseen or was
manifestly beyond the contemplation of the parties at the
time of the obligation. Extraordinary deflation, on the other
hand, involves an inverse situation. For extraordinary
inflation (or deflation) to affect an obligation, the following
requisites must be proven:
1. that there was an official declaration of
extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);
2. that the obligation was contractual in nature; and
3. that the parties expressly agreed to consider the
effects of the extraordinary inflation or
deflation.
Despite the devaluation of the peso, the BSP never
declared a situation of extraordinary inflation. Moreover,
although the obligation in this instance arose out of a
contract, the parties did not agree to recognize the effects
of extraordinary inflation (or deflation). The RTC never
mentioned that there was such stipulation either in the
promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at
the exchange rate fixed by the BSP on the date of maturity.
It would still be hard for you to determine if indeed, the
situation calls for the application of Article 1250 because
there’s already an extraordinary inflation or deflation. You can
memorize this definition. But for the purpose of answering a
problem presented to you, how do you know if there is already
an extraordinary inflation or deflation?
You have to remember these three requisites:
1. That there was an official declaration of
extraordinary inflation or deflation from the
Bangko Sentral ng Pilipinas (BSP);
So mao lang gyud na siya. So even in those that
there’s an erosion in the value of the Peso or
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devaluation, it will not be considered as
extraordinary inflation or deflation, unless declared
by the Bangko Sentral. Not congress; not even the
Office of the President.
2. That the obligation was contractual in nature; and
Meaning, you can apply Article 1250 only when the
obligation arises from contract. Remember, there
are five sources of obligations. Katong upat, dili mag-
apply ang Article 1250.
3. That the parties expressly agreed to consider the
effects of the extraordinary inflation or deflation.
It should be stipulated in the contract, that in case of
extraordinary inflation or deflation, they will agree to
re-adjustment of the value of currency.
Remember, this is not the same as Article 1191
(implied power to rescind) where it is deemed
written in the contract. Article 1250 is not deemed
written. It must be stipulated in the contract for it to
be applicable.
So here, the Supreme Court said that even if there was a
devaluation of the Peso, there was never a declaration of the
BSP. And although the obligation arises from a contract, there
was nothing in the contract which mentions that Article 1250
must be applicable.
So here, ang contention man gud was, they wanted to readjust
the value of their dollar-denominated loans. Here, because of
the devaluation of the Peso, dako na ang dollar compared the
Peso. So they wanted to fix the value of the exchange rate,
equivalent to the value at the time when the obligation was
contracted. Because they invoke extraordinary inflation or
deflation. But there was no declaration by the BSP; and there
was no stipulation in the contract to apply Article 1250.
APO FRUITS CORPORATION and HIJO PLANTATION, INC.
vs. COURT OF APPEALS and LAND BANK OF THE
PHILIPPINES
(G.R. No. 164195, December 19, 2007)
The constitutional limitation of “just compensation” is
considered to be the sum equivalent to the market value of
the property, broadly described to be the price fixed by the
seller in open market in the usual and ordinary course of
legal action and competition or the fair value of the
property as between one who receives, and one who
desires to sell, it being fixed at the time of the actual taking
by the government. Thus, if property is taken for public use
before compensation is deposited with the court having
jurisdiction over the case, the final compensation must
include interests on its just value to be computed from the
time the property is taken to the time when compensation
is actually paid or deposited with the court. In fine,
between the taking of the property and the actual
payment, legal interests accrue in order to place the owner
in a position as good as (but not better than) the position
he was in before the taking occurred.
x x x This allowance of interest on the amount found
to be the value of the property as of the time of the taking
computed, being an effective forbearance, at 12% per
annum should help eliminate the issue of the constant
fluctuation and inflation of the value of the currency over
time. Article 1250 of the Civil Code, providing that, in case
of extraordinary inflation or deflation, the value of the
currency at the time of the establishment of the obligation
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
shall be the basis for the payment when no agreement to
the contrary is stipulated, has strict application only to
contractual obligations. In other words, a contractual
agreement is needed for the effects of extraordinary
inflation to be taken into account to alter the value of the
currency.
Here, you remember the concept of Eminent Domain or
Expropriation. So here, this was the application of the
Comprehensive Agrarian Reform Program. Agricultural lands,
in excess of 5 hectares, the excess shall be taken by the
government, exercising its right of expropriation.
The excess would be given to qualified agrarian reform
beneficiaries. So this is what happened in Apo Fruits in Tagum.
Actually, they offered their land to the government under the
Voluntary Offer to Sell. Ang question lang diri, ang valuation sa
land. Because it was just valued by the Land Bank of the
Philippines at P300,000/ha. So, gamay daw so they contested
the valuation. Eventually, the case was decided but only after
how many years.
So take note that before you can take possession, you have to
make a deposit of the just compensation. So Apo Fruits and
Hijo asked for an adjustment of the amount of the just
compensation deposited, applying Article 1250. Kay kato daw
amount of the just compensation deposited at the time of
taking, is already very small because of the extraordinary
inflation or deflation that happened in the meantime, while
the case was pending until the case reached the Supreme
Court.
Would Article 1250 apply? The Supreme Court said no. Because,
Article 1250 applies only to obligations arising from contracts.
Here, the obligation arises not from the contract, but from law,
specifically, the exercise by the government of the right to
expropriate. So Article 1250 has strict application only to
contractual obligations.
Katong mga fluctuations, ma-address to because there was
legal interest imposed 12% per annum before July 1, 2013,
subsequently to be 6% per annum.
Payment by Cession
What is cession? That’s also a form of payment.
Article 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.
How does it work? In cession, there’s also a monetary
obligation. There is one debtor, several creditors. So, plurality
of creditors. The debtor has assets, but his assets are not
sufficient to pay off all his liabilities. So meaning, we have an
insolvent debtor.
Under Cession, his properties shall be ceded to his creditors.
“Ceded” does not mean bahin bahinon sa creditors. The
properties will be sold and then the proceeds of the properties
will be apportioned among all his creditors. This is governed by
the Insolvency Law. That is the concept of cession.
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SPOUSES VILLALUZ, JR. vs. LAND BANK OF THE
PHILIPPINES and the REGISTER OF DEEDS FOR DAVAO
CITY (G.R. No. 192602 January 18, 2017)
The Spouses Villaluz seek to invalidate the Real Estate
Mortgage with LBP for want of consideration. Citing Article
1409(3), which provides that obligations "whose cause or
object did not exist at the time of the transaction" are
void ab initio, the Spouses Villaluz posit that the mortgage
was void because the loan was not yet existent when the
mortgage was executed on June 21, 1996. Since the loan
was released only on June 25, 1996, the mortgage executed
four days earlier was without valuable consideration.
Article 1347 provides that "[a]ll things which are not outside
the commerce of men, including future things, may be the
object of a contract." Under Articles 1461 and 1462, things
having a potential existence and "future goods," i.e., those
that are yet to be manufactured, raised, or acquired, may
be the objects of contracts of sale. The narrow
interpretation advocated by the Spouses Villaluz would
create a dissonance between Articles 1347, 1461, and 1462,
on the one hand, and Article 1409(3), on the other. A literal
interpretation of the phrase "did not exist at the time of the
transaction" in Article 1409(3) would essentially defeat the
clear intent and purpose of Articles 1347, 1461, and 1462 to
allow future things to be the objects of contracts. To
resolve this apparent conflict, Justice J.B.L. Reyes
commented that the phrase "did not exist" should be
interpreted as "could not come into existence" because the
object may legally be a future thing.
One of the basic rules in statutory interpretation is that all
parts of a statute are to be harmonized and reconciled so
that effect may be given to each and every part thereof,
and that conflicting intentions in the same statute are never
to be supposed or so regarded. Thus, in order to give effect
to Articles 1347, 1461, and 1462, Article 1409(3) must be
interpreted as referring to contracts whose cause or object
is impossible of existing at the time of the transaction.
The cause of the disputed Real Estate Mortgage is the loan
to be obtained by Milflores Cooperative. This is clear from
the terms of the mortgage document, which expressly
provides that it is being executed in "consideration of
certain loans, advances, credit lines, and other credit
facilities or accommodations obtained from [Land Bank by
Milflores Cooperative] x x x in the principal amount of
[₱3,000,000]." The consideration is certainly not an
impossible one because Land Bank was capable of granting
the ₱3,000,000 loan, as it in fact released one-third of the
loan a couple of days later.
Although the validity of the Real Estate Mortgage is
dependent upon the validity of the loan, what is essential is
that the loan contract intended to be secured is actually
perfected, not at the time of the execution of the mortgage
contract vis-a-vis the loan contract. In loan transactions, it is
customary for the lender to require the borrower to
execute the security contracts prior to initial drawdown.
This is understandable since a prudent lender would not
want to release its funds without the security agreements
in place. On the other hand, the borrower would not be
prejudiced by mere execution of the security contract,
because unless the loan proceeds are delivered, the
obligations under the security contract will not arise.
In other words, the security contract-in this case, the Real
Estate Mortgage-is conditioned upon the release of the
loan amount. This suspensive condition was satisfied when
Land Bank released the first tranche of the ₱3,000,000 loan
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
to Milflores Cooperative on June 25, 1996, which
consequently gave rise to the Spouses Villaluz's obligations
under the Real Estate Mortgage.
The Spouses Villaluz claim that the Special Power of
Attorney they issued was mooted by the execution of the
Deed of Assignment of the Produce/Inventory by Milflores
Cooperative in favor of Land Bank. Their theory is that the
additional security on the same loan extinguished the
agency because the Deed of Assignment "served as
payment of the loan of the [Milflores] Cooperative.
The assignment was for the express purpose of "securing
the payment of the Line/Loan, interest and charges
thereon. Nowhere in the deed can it be reasonably
deduced that the collaterals assigned by Milflores
Cooperative were intended to substitute the payment of
sum of money under the loan. It was an accessory
obligation to secure the principal loan obligation.
The assignment, being intended to be a mere security
rather than a satisfaction of indebtedness, is not a dation in
payment under Article 1245 and did not extinguish the loan
obligation. "Dation in payment extinguishes the obligation
to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the
parties by agreement-express or implied, or by their silence-
consider the thing as equivalent to the obligation, in which
case the obligation is totally extinguished."
As stated in the second condition of the Deed of
Assignment, the "Assignment shall in no way release the
ASSIGNOR from liability to pay the Line/Loan and other
obligations, except only up to the extent of any amount
actually collected and paid to ASSIGNEE by virtue of or
under this Assignment." Clearly, the assignment was not
intended to substitute the payment of sums of money. It is
the delivery of cash proceeds, not the execution of the
Deed of Assignment, that is considered as payment. Absent
any proof of delivery of such proceeds to Land Bank, the
Spouses Villaluz' s claim of payment is without basis.
Neither could the assignment have constituted payment by
cession under Article 1255 for the plain and simple reason
that there was only one creditor, Land Bank. Article 1255
contemplates the existence of two or more creditors and
involves the assignment of all the debtor's property.
In this case, the Spouses Villaluz executed a real estate
mortgage with the Land Bank of the Philippines. Ang gina-
secure sa real estate mortgage was the debt to be procured by
Miflores Cooperative. So, si Villaluz, dili dyud sila ang debtor.
Mortgagor. Gi-guarantee lang nila ang obligation ni Milflores
Cooperative. The real estate mortgage was executed ahead of
the contract of loan between Milfores and the Land Bank. And
after that, Milfores executed a Deed of Assignment in favor of
Land Bank, wherein the subject of the Deed of Assignment of
the Produced/Inventory, katong mga produce/inventory of
Milfores Cooperative will be assigned in favor of Land Bank.
Also, the subject matter of that Deed of Assignment was the
very same debt which was covered by the real estate
mortgage executed by the Spouses.
There were TWO CONTENTIONS here of the Spouses:
(1) The real estate mortgage was null and void, because
according to the Spouses, citing Article 1409 (3), obligations
whose cause or object did not exist at the time of the
transaction are void.
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So at the time when they executed the real estate mortgage,
there was yet no existing loan agreement. According to them,
mortgage, being an accessory contract, it cannot exist without
a principal obligation.
Would that be correct? The Supreme Court said, no. Even if we
have Article 1403, we also have Article 1347, which provides
that,
“Article 1347. All things which are not outside the
commerce of men, including future things, may be the
object of a contract. All rights which are not
intransmissible may also be the object of contracts.
No contract may be entered into upon future
inheritance except in cases expressly authorized by
law.
All services which are not contrary to law, morals,
good customs, public order or public policy may
likewise be the object of a contract.”
And we also have Articles 1461 and 1462:
“Article 1461. Things having a potential existence may
be the object of the contract of sale.
The efficacy of the sale of a mere hope or expectancy
is deemed subject to the condition that the thing will
come into existence.
The sale of a vain hope or expectancy is void.”
“Article 1462. The goods which form the subject of a
contract of sale may be either existing goods, owned
or possessed by the seller, or goods to be
manufactured, raised, or acquired by the seller after
the perfection of the contract of sale, in this Title called
"future goods.”
There may be a contract of sale of goods, whose
acquisition by the seller depends upon a contingency
which may or may not happen.”
In this particular case, the Supreme Court said that to resolve
the apparent conflict between Article 1409(3) and these
articles, the phrase “did not exist” should be interpreted as
“could not come into existence,” because the object may
legally be a future thing.
So meaning, what is contemplated as a void contract is when
the object did not exist and could not exist at the time when
the obligation is supposed to be enforced, or the thing is to be
delivered. But if it can still come into existence at the time of
delivery, then the contract is valid. Because again, future
things can be the subject of contracts.
In this particular case, the Supreme Court said that even if at
the time when the real estate mortgage was executed, the
loan agreement was not yet in existence, a few days after, the
bank actually released to Milflores the loan.
So although the validity of the real estate mortgage is
dependent upon the validity of the loan, what is essential is
that the loan contract intended to be secured is actually
perfected not at the time of execution of the mortgage
contract vis-à-vis the loan contract, but it was actually still
executed.
In loan transactions, the Supreme Court said:
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
“In loan transactions, it is customary for the lender to require
the borrower to execute the security contracts prior to initial
drawdown. This is understandable since a prudent lender
would not want to release its funds without the security
agreements in place.”
Do you still remember that clause in a mortgage contract
where the mortgage is intended to secure not only present
obligations but also future obligations as well? DRAGNET
CLAUSE. So it can cover future obligations.
How about the other contention?
(2) According to the Spouses, when Milflores Cooperative
executed a Deed of Assignment of Proceeds and Inventory in
favor of Land Bank, there was already an extinguishment of
obligation. That if it was not cession, it was dation in payment.
According to the Supreme Court, let us examine the contents
of the Deed of Assignment. “The assignment was for the
express purpose of "securing the payment of the Line/Loan,
interest and charges thereon. Nowhere in the deed can it be
reasonably deduced that the collaterals assigned by Milflores
Cooperative were intended to substitute the payment of sum
of money under the loan. It was an accessory obligation to
secure the principal loan obligation.”
So, when Milfores executed the Deed of Assignment, it was
not a dation in payment, it was not cession. It was merely an
additional security for the loan. The debt would be
extinguished to the extent that there are proceeds which are
recovered by Land Bank from the deed of assignment
executed by Milflores.
For example, naay farm si Milfores, and under the Deed of
Assignment, tanan proceeds from that farm would be
assigned to Land Bank. By the execution of the Deed of
Assignment alone, it did not mean the extinguishment already
of the obligation. That was just a security. Now, in that farm,
kung nay mga proceeds, that would be paid to Land Bank and
those payments would be credited as part of the payment of
Milflores, hantod na mahurot. Dili pasabot nga pagbuhat pa
lang sa assignment, wala na’y utang kay extinguished na. that
is why the Real Estate Mortgage was not also extinguished,
kay naa pa man principal obligation secured by the mortgage.
Again, the deed of assignment was just an additional security.
Was it a Dation in Payment? No. Because again, when you say
‘dation in payment’, extinguished na to the extent of the value
of the thing delivered. Here, the purpose of the Deed of
Assignment was only for additional security, rather than a
satisfaction of the indebtedness.
Was it Cession? No. Because the requisites of cession are not
present here.
• There was only one creditor (Land Bank), whereas in
cession, it contemplates several creditors.
• And we’re talking only here of the proceeds of a
specific property, whereas in cession we are talking
of all of the debtor’s property which are ceded in
favor of the several creditors.
DISTINCTIONS BETWEEN CESSION AND DATION IN PAYMENT
Cession Dation in Payment
Debtor is insolvent Insolvency not required
That’s why his remaining
assets, tunga-tungaon
nalang sa iyahang several
creditors.
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Several creditors Plurality of creditors not
required
Totality of properties is Specific property is ceded
involved
Property itself is not to be Property itself is paid
paid but the net proceeds
Rules on insolvency apply Law on sales applies
Application of Payment –
Articles 1252-1254
ARTICLE 1252. He who has various debts of the same kind in
favor of one and the same creditor, may declare at the time
of making the payment, to which of them the same must be
applied. Unless the parties so stipulate, or when the
application of payment is made by the party for whose
benefit the term has been constituted, application shall not
be made as to debts which are not yet due.
If the debtor accepts from the creditor a receipt in which an
application of the payment is made, the former cannot
complain of the same, unless there is a cause for
invalidating the contract. (1172a)
When you say ‘application of payment,’ the concept here is
that there is one debtor, one creditor, but there are several
debts due to that one creditor. For example, si debtor, in the
year 2000, nangutang ug 100 Thousand from the creditor, also
due in year 2000. Then in 2001, nangutang na pud siya ug 200
Thousand, due also in the year 2001. Then on year 2002,
nangutang ug 300 Thousand, due in the year 2002.
So there are three different debts. In the year 2005, all of these
debts are already due and demandable. Naa’y kwarta si
debtor, but his money is not sufficient to pay all of his
obligations. 600 Thousand tanan iyahang utang.
Kung naa siya’y 600 Thousand, wala’y problema, we don’t
need to apply these rules on application of payment. Just pay.
Kung wala pud siya’y kwarta, dili pud mag-apply ni nga rules.
So here, what is the rule?
(1) Naa siya’y, let’s say P500K. Iyahang utang, 600K. At the
time of payment, it is the debtor, as a general rule, who
declares to which debt, payment shall apply. If the debtor just
paid without mentioning anything at all as to the application
of payment, it is now the creditor, at the time when he issues
the receipt, who indicates kung asa niya i-apply ang payment.
And then, the law says that when that happens, the debtor
cannot complain anymore, unless there was vitiated consent.
As we said, it is the debtor, at the first instance, who has the
right to make an application of payment. But this is limited by
several provisions of law.
Some Limitations are as follows:
1. He cannot choose to apply the payment to those
debts which are not yet due.
2. He cannot compel the creditor to accept partial
payment.
3. When the debt produces interest, the payment must
be applied first to the interest, before the principal.
ARTICLE 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until the
interests have been covered.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
ARTICLE 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application
cannot be inferred from other circumstances, the debt
which is most onerous to the debtor, among those due,
shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the
payment shall be applied to all of them proportionately.
For example, even if the creditor did not indicate to which debt
the payment is to be applied, the law says that payment shall
be applied to the most onerous or burdensome debt. Kung
halimbawa naman, all the debts are equally burdensome or
onerous, or not onerous at all, PROPORTIONATE na ang
application.
Example:
Kung naa ka’y 500 thousand, then ang mga utang kay 100K,
200K, 300K. How do you apply proportionately? (Maam:
Kabalo na mo ana ha?)
MARQUEZ vs. ELISAN CREDIT CORPORATION
(G.R. No. 194642, April 06, 2015)
On December 16, 1991, Nunelon R. Marquez (Marquez)
obtained a (first loan) from Elisan Credit Corporation (ECC)
for fifty-three thousand pesos (Php 53,000.00) payable in
one-hundred eighty (180) days.
Marquez signed a promissory note which provided that it is
payable in weekly installments and subject to twenty-six
percent (26%) annual interest. In case of non-payment,
Marquez agreed to pay ten percent (10%) monthly penalty
based on the total amount unpaid and another twenty five
percent (25%) of such amount for attorney's fees exclusive
of costs, and judicial and extrajudicial expense.
To further secure payment of the loan, Marquez executed
a chattel mortgage over a motor vehicle. The contract of
chattel mortgage provided among others, that the motor
vehicle shall stand as a security for the first loan and "all
other obligations of every kind already incurred or which
may hereafter be incurred.”
Both Marquez and ECC acknowledged the full payment of
the first loan. Subsequently, Marquez obtained another
loan (second loan) from ECC for fifty-five thousand pesos
(P55,000.00) evidenced by a promissory note and a cash
voucher both dated June 15, 1992. The promissory note
covering the second loan contained exactly the same terms
and conditions as the first promissory note.
When the second loan matured on December 15, 1992,
Marquez had only paid twenty-nine thousand nine hundred
sixty pesos (P29,960.00), leaving an unpaid balance of
twenty five thousand forty pesos (P25,040.00). Due to
liquidity problems, Marquez asked ECC if he could pay in
daily installments (daily payments) until the second loan is
paid. ECC granted Marquez’ request. Thus, as of September
1994 or twenty-one (21) months after the second loan's
maturity, Marquez had already paid a total of fifty-six
thousand four-hundred forty pesos (P56,440.00), an
amount greater than the principal. Despite the receipt of
more than the amount of the principal, ECC filed a
complaint for judicial foreclosure of the chattel mortgage
because Marquez allegedly failed to settle the balance of
the second loan despite demand.
ECC further alleged that pursuant to the terms of the
promissory note, the petitioner's failure to fully pay upon
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maturity triggered the imposition of the ten percent (10%)
monthly penalty and twenty-five percent (25%) attorney's
fees. ECC prayed that Marquez be ordered to pay the
balance of the second loan plus accrued penalties and
interest.
In his Answer, Marquez insists that his daily payments
should be deemed to have been credited against the
principal, as the official receipts issued by the respondent
were silent with respect to the payment of interest and
penalties. He cites Article 1176 of the Civil Code which
ordains that [t]he receipt of the principal by the creditor
without reservation with respect to the interest, shall give
rise to the presumption that the interest has been paid. He
also invokes Article 1235 of the Civil Code which states that
"[w]hen the obligee accepts the performance of an
obligation, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation
is deemed fully complied with." Furthermore, Marquez
denies having stipulated upon and consented to the
twenty-six per cent (26%) per annum interest charge, ten
percent (10%) monthly penalty and twenty-five percent
(25%) attorney's fees. According to him, he signed the
promissory note in blank.
RULING:
HE CONSENTED. The promissory notes securing the first
and second loan contained exactly the same terms and
conditions. They were mirror-image of each other except
for the date and amount of principal. Thus, there is
sufficient basis to believe that the petitioner knew or was
aware of such terms and conditions even assuming that the
entries on the interest and penalty charges were in blank
when he signed the promissory note.
Moreover, it is significant that the petitioner does not deny
the genuineness and due execution of the first promissory
note. Only when he failed to pay the second loan did he
impugn the validity of the interest, penalty and attorney's
fees.
PAYMENT SHOULD BE APPLIED FIRST TO THE INTEREST.
The presumption under Article 1176 does not resolve the
question of whether the amount received by the creditor is
a payment for the principal or interest. Under this article
the amount received by the creditor is the payment for the
principal, but a doubt arises on whether or not the interest
is waived because the creditor accepts the payment for the
principal without reservation with respect to the interest.
Article 1176 resolves this doubt by presuming that the
creditor waives the payment of interest because he accepts
payment for the principal without any reservation.
On the other hand, the presumption under Article 1253
resolves doubts involving payment of interest-bearing
debts. It is a given under this Article that the debt produces
interest. The doubt pertains to the application of payment;
the uncertainty is on whether the amount received by the
creditor is payment for the principal or the interest. Article
1253 resolves this doubt by providing a hierarchy: payments
shall first be applied to the interest; payment shall then be
applied to the principal only after the interest has
been fully-paid.
Correlating the two provisions, the rule under Article 1253
that payments shall first be applied to the interest and not
to the principal shall govern if two facts exist: (1) the debt
produces interest (e.g., the payment of interest is expressly
stipulated) and (2) the principal remains unpaid.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite
the presence of (1) and (2) above. In such case, the
payments shall obviously be credited to the principal.
Since the doubt in the present case pertains to the
application of the daily payments, Article 1253 shall apply.
Only when there is a waiver of interest shall Article 1176
become relevant.
Under this analysis, we rule that the respondent properly
credited the daily payments to the interest and not to the
principal because: (1) the debt produces interest, i.e., the
promissory note securing the second loan provided for
payment of interest; (2) a portion of the second loan
remained unpaid upon maturity; and (3) the respondent did
not waive the payment of interest.
The fact that the official receipts did not indicate whether
the payments were made for the principal or the interest
does not prove that the respondent waived the interest.
The petitioner was already in default of the principal when
he started making the daily payments. The stipulations
providing for the 10% monthly penalty and the additional
25% attorney's fees on the unpaid amount also became
effective as a result of the petitioner's failure to pay in full
upon maturity.
Thus, when the petitioner started making the daily
payments, two types of interest were at the same time
accruing, the 26% stipulated monetary interest and
the interest for default in the form of the 10% monthly
penalty.
Notwithstanding the foregoing, we find the stipulated
rates of interest, penalty and attorney's fees to be
exorbitant, iniquitous, unconscionable and excessive. The
courts can and should reduce such astronomical rates as
reason and equity demand.
Here, Marquez borrowed 53K from ECC, payable 180 days. So
naa siya’y gipirmahan na promissory note, subject to 26%
interest per annum. Naa pa gyud penalty. He executed a
chattel mortgage over the motor vehicle, kay ang iyahang
gigamitan sa money kay ang purchase of the motor vehicle.
And then it says that the motor vehicle shall stand as a security
for the first loan and "all other obligations of every kind
already incurred or which may hereafter be incurred.” So
dragnet clause.
So he already paid the first loan, then he obtained another loan
of 55K, evidenced by a promissory note. And then the contents
of the second promissory note are exactly the same as the
contents of the first promissory note. However, for this
second loan, he failed to pay. Matured supposedly on Dec. 15,
1992, but he only paid 29K, leaving an unpaid balance of about
25K.
He requested ECC if he could pay daily installments after nag-
due na siya. ECC granted the request. After 21 months, he had
already paid a total of about 56K. If you compute it, actually it
already exceeded the principal. However, according to ECC, he
has not yet fully paid the obligation because the loan already
had interest and penalties, and because of failure of payment
despite demand, ECC now failed a complaint for judicial
foreclosure of mortgage.
According to Marquez, “I made daily payments. When you
issued receipts to cover daily payments, you did not mention
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to which portion of the debts shall the daily payments apply,
whether for the principal or interest. And according to Article
1176 of the Civil Code, the receipt of the principal by the
creditor without reservation with respect to interest shall give
rise to the presumption that the interest has been paid. There
is also Article 1235, when the obligee accepts the performance
of an obligation, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the
obligation is deemed fully complied with.”
And he also stated that, “I did not actually agree to the
payment of interest and the penalties, surcharges, because
when I signed the promissory note, the second one, it was
blank.”
As to the question as to whether or not he consented to these
interest, penalties, the Supreme Court said that he clearly
consented because the first and the second promissory notes
had exactly the same provisions. He had no problem with the
first note, in fact he had already fully paid the first loan. He only
raised the issue as to the interests and penalties when he
defaulted in the second promissory note. So he knew and he
consented to the stipulations in the second promissory note.
As to his contention that the daily payments he made were
applied to the principal and because there was no reservation
as to the interest, those interests had already been waived.
The Supreme Court said, he is wrong.
The presumption under Article 1176 does not resolve the
question as to whether the amount received by the creditor is
a payment for the principal or the interest. Meaning, under
Article 1176, wala na’y issue whether the payment is for
principal or interest. Clearly, under Article 1176, what the
creditor received was the payment was for the principal. That’s
why he will issue receipts indicating it is payment for the
principal. Because of that, there is a presumption that if it is
without reservation as to the interest, it means he has already
waived payment for the interest.
Again, Article 1176, resolves this doubt by presuming that the
creditor waives the payment of interest because he accepts
payment for the principal without any reservation. Again, in
Article 1176, there is no doubt that what the creditor received
was payment for the principal. What is in doubt is what
happens to the interest if there is no reservation? Article 1176
resolves that doubt by saying that he already waived the
interest.
In Article 1253, this article resolves doubts involving payment
of interest-bearing debts. What is clear under Article 1253 is
that the debt produces interest. And now, the doubt here is
when the creditor receives money from the debtor, how will
this money be applied? Will this be applied to the principal or
interest? Article 1253 resolves that doubt by saying that it
should be applied first to the interest, then to the principal.
Again, in Article 1253, it is not stated that the payment is for the
interest. Wala’y nakabutang. Naka-receive lang siya ug
payment without saying that it is for the interest. Payment
lang. So it means that it will be applied first to the interest
before the principal.
So this is where the application of payment comes into the
picture. Apply first to the interest, then to the principal. Only
when the interest is fully paid, shall the payment be now
applied to the principal.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
February 6, 2020 Part 2- Murray
MARQUEZ vs. ELISAN CREDIT CORPORATION (G.R. No.
194642, April 06, 2015)
On December 16, 1991, Nunelon R. Marquez (Marquez)
obtained a (first loan) from Elisan Credit Corporation (ECC)
for fifty-three thousand pesos (Php 53,000.00) payable in
one-hundred eighty (180) days.
Marquez signed a promissory note which provided that
it is payable in weekly installments and subject to twenty-
six percent (26%) annual interest. In case of non-payment,
Marquez agreed to pay ten percent (10%) monthly penalty
based on the total amount unpaid and another twenty five
percent (25%) of such amount for attorney's fees exclusive
of costs, and judicial and extrajudicial expense.
To further secure payment of the loan, Marquez
executed a chattel mortgage over a motor vehicle. The
contract of chattel mortgage provided among others, that
the motor vehicle shall stand as a security for the first loan
and "all other obligations of every kind already incurred
or which may hereafter be incurred.”
Both Marquez and ECC acknowledged the full payment
of the first loan. Subsequently, Marquez obtained another
loan (second loan) from ECC for fifty-five thousand pesos
(P55,000.00) evidenced by a promissory note and a cash
voucher both dated June 15, 1992. The promissory note
covering the second loan contained exactly the same terms
and conditions as the first promissory note.
When the second loan matured on December 15, 1992,
Marquez had only paid twenty-nine thousand nine hundred
sixty pesos (P29,960.00), leaving an unpaid balance of
twenty five thousand forty pesos (P25,040.00). Due to
liquidity problems, Marquez asked ECC if he could pay in
daily installments (daily payments) until the second loan is
paid. ECC granted Marquez’ request. Thus, as of September
1994 or twenty-one (21) months after the second loan's
maturity, Marquez had already paid a total of fifty-six
thousand four-hundred forty pesos (P56,440.00), an
amount greater than the principal. Despite the receipt of
more than the amount of the principal, ECC filed a
complaint for judicial foreclosure of the chattel mortgage
because Marquez allegedly failed to settle the balance of
the second loan despite demand.
ECC further alleged that pursuant to the terms of the
promissory note, the petitioner's failure to fully pay upon
maturity triggered the imposition of the ten percent (10%)
monthly penalty and twenty-five percent (25%) attorney's
fees. ECC prayed that Marquez be ordered to pay the
balance of the second loan plus accrued penalties and
interest.
In his Answer, Marquez insists that his daily payments
should be deemed to have been credited against the
principal, as the official receipts issued by the respondent
were silent with respect to the payment of interest and
penalties. He cites Article 1176 of the Civil Code which
ordains that [t]he receipt of the principal by the creditor
without reservation with respect to the interest, shall give
rise to the presumption that the interest has been paid. He
also invokes Article 1235 of the Civil Code which states that
"[w]hen the obligee accepts the performance of an
obligation, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation
is deemed fully complied with." Furthermore, Marquez
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denies having stipulated upon and consented to the
twenty-six per cent (26%) per annum interest charge, ten
percent (10%) monthly penalty and twenty-five percent
(25%) attorney's fees. According to him, he signed the
promissory note in blank.
RULING:
HE CONSENTED. The promissory notes securing the
first and second loan contained exactly the same terms and
conditions. They were mirror-image of each other except
for the date and amount of principal. Thus, there is
sufficient basis to believe that the petitioner knew or was
aware of such terms and conditions even assuming that the
entries on the interest and penalty charges were in blank
when he signed the promissory note.
Moreover, it is significant that the petitioner does not
deny the genuineness and due execution of the first
promissory note. Only when he failed to pay the second
loan did he impugn the validity of the interest, penalty and
attorney's fees.
PAYMENT SHOULD BE APPLIED FIRST TO THE
INTEREST. The presumption under Article 1176
does not resolve the question of whether the amount
received by the creditor is a payment for the principal or
interest. Under this article the amount received by the
creditor is the payment for the principal, but a doubt arises
on whether or not the interest is waived because the
creditor accepts the payment for the principal without
reservation with respect to the interest. Article 1176
resolves this doubt by presuming that the creditor waives
the payment of interest because he accepts payment for
the principal without any reservation.
On the other hand, the presumption under Article 1253
resolves doubts involving payment of interest-bearing
debts. It is a given under this Article that the debt produces
interest. The doubt pertains to the application of payment;
the uncertainty is on whether the amount received by the
creditor is payment for the principal or the interest. Article
1253 resolves this doubt by providing a hierarchy: payments
shall first be applied to the interest; payment shall then be
applied to the principal only after the interest has
been fully-paid.
Correlating the two provisions, the rule under Article
1253 that payments shall first be applied to the interest and
not to the principal shall govern if two facts exist: (1) the
debt produces interest (e.g., the payment of interest is
expressly stipulated) and (2) the principal remains unpaid.
The exception is a situation covered under Article
1176, i.e., when the creditor waives payment of the interest
despite the presence of (1) and (2) above. In such case, the
payments shall obviously be credited to the principal.
Since the doubt in the present case pertains to the
application of the daily payments, Article 1253 shall apply.
Only when there is a waiver of interest shall Article 1176
become relevant.
Under this analysis, we rule that the respondent
properly credited the daily payments to the interest and not
to the principal because: (1) the debt produces interest, i.e.,
the promissory note securing the second loan provided for
payment of interest; (2) a portion of the second loan
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
remained unpaid upon maturity; and (3) the respondent did
not waive the payment of interest.
The fact that the official receipts did not indicate
whether the payments were made for the principal or the
interest does not prove that the respondent waived the
interest.
The petitioner was already in default of the principal
when he started making the daily payments. The
stipulations providing for the 10% monthly penalty and the
additional 25% attorney's fees on the unpaid amount also
became effective as a result of the petitioner's failure to
pay in full upon maturity.
Thus, when the petitioner started making the daily
payments, two types of interest were at the same time
accruing, the 26% stipulated monetary interest and
the interest for default in the form of the 10% monthly
penalty.
Notwithstanding the foregoing, we find the stipulated
rates of interest, penalty and attorney's fees to be
exorbitant, iniquitous, unconscionable and excessive. The
courts can and should reduce such astronomical rates as
reason and equity demand.
Discussion:
Correlation between 1176 and 1253
The rule under Article 1253 that payment shall first be applied
to the interest before the principal applies if these two facts
exist: (1) the debt produces interest and (2) the principal
remain unpaid.
Now, the exception would be in Article 1176 because when the
creditor waives the payment of the interest despite the
presence of the above two facts, obviously any payment made
by the debtor would now be credited to the principal.
Here, because THE DOUBT is on the application of the daily
payments: Article 1253 applies. Because here, undoubtedly the
debt is interest bearing. The DOUBT here is: “To which would
the payment be applied first in the daily payments? The
principal or the interest?” Article 1253 tells us that interest first.
Only when there is a waiver of interest would Article 1176
become relevant.
Tender of payment and consignation
Arts. 1256-1261
Again, the first rule in payment is that you have to make a
tender of payment. If the creditor, despite the fact that the
creditor made a valid tender of payment, would that
extinguish the obligation of the debtor? (Because of the
refusal of the creditor)
General Rule, it will not extinguish the obligation. Tender of
payment must be followed by consignation in order to have
extinguishment of the obligation.
Below is the procedure.
1. Tender of payment
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To make a valid tender of payment: (1) it must be the very same
thing due, if it is money then it must be in legal tender, (2) it
must be paid at the time when the debt is due and demandable
(3) it must be paid in full, (4) it must be applied to the interest
before applying to the principal.
2. Formal complaint for consignation, not
merely to deposit the amount with the
Clerk of Court (PESANE ANIMAS MONGAO
vs. PRYCE PROPERTIES CORPORATION
(G.R. No. 156474, August 16, 2005);
Consignation is a CASE. It is not enough that you go to the
barangay officials and leave a 1M php payment behind or leave
it to the clerk of court. There must be a formal complaint. Only
then would you deposit the amount with the proper clerk of
court.
3. B.E. SAN DIEGO, INC. vs. ROSARIO T.
ALZUL (G.R. No. 169501, June 8, 2007)
Moreover, in order that consignation may be
effective, the debtor must show that: (a) there was a
debt due;
(b) the consignation of the obligation had been
made because the creditor to whom tender of payment was
made refused to accept it, or because s/he was absent or
incapacitated, or because several persons claimed to be
entitled to receive the amount due or because the title to
the obligation had been lost;
(c) previous notice of the consignation had been
given to the person interested in the performance of
the obligation;
You should notify the creditor that because of your refusal to
accept the valid tender of payment, you are now consigning
with the court. The reason is to give the creditor the
opportunity to accept it and avoid all the necessary expenses
that entails litigation.
(d) the amount due was placed at the disposal of the
court; and
(e) after the consignation had been made, the
person interested was notified of the action.
This includes the guarantors, the sureties, etcs.
MYRNA RAMOS vs. SUSANA S. SARAO [G.R. No.
149756. February 11, 2005]
Concededly, sending to the creditor a tender of payment
and notice of consignation -- which was precisely what
petitioner did -- may be done in the same act.
Because petitioners’ consignation of the amount of
P1,633,034.20 was valid, it produced the effect of payment.
“The consignation, however, has a retroactive effect, and
the payment is deemed to have been made at the time of
the deposit of the thing in court or when it was placed at
the disposal of the judicial authority.” “The rationale for
consignation is to avoid making the performance of an
obligation more onerous to the debtor by reason of causes
not imputable to him.”
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Discussion: Take note that consignation is like labor
(termination law in just causes), there are two notices sent.
The first notice is the intention to consign and the second
notice is the successful consignation.
Here, can the tender of payment and the notice of the
creditor be made in one and the same act. So you like
preempted:
Example: I am tendering this amount of the obligation. If
you will refuse the payment, please be informed that I will
consign this amount to the court.
Is it compliant with the law? Yes.
What is the effect if the creditor refuses without justifiable
reason to accept a valid tender of payment? Will the accrual
of interest be suspended?
By the mere refusal of the creditor, that will not suspend
the accrual of the interest. If the tender of payment is
immediately followed by consignation, that is when the
running of the interest be suspended. When will it stop?
From the time of the tender of payment.
How about the payment? You consigned, but the case is
very long, it took you two years to finish. When will the debt
be considered to be extinguished? The law says, the
consignation has a retroactive effect and the payment is
deemed to have been made at the time of the deposit of
the thing in court or when it was placed at the disposal of
the judicial authority.
Gen. Rule: Consignation alone without a prior tender of
payment is not effective as payment. Exceptions (Art. 1256):
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;
Example: When the creditor becomes insane, you can go
directly to the court. You need not have the tender of
payment to the incapacitated person. If the insane person
tears your money in half or destroys it, there is a chance you
will have to pay again to him. So consignation alone is
enough.
(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.
SPOUSES CACAYORIN vs. ARMED FORCES AND POLICE
MUTUAL BENEFIT ASSOCIATION, INC. (G.R. No. 171298,
April 15, 2013)
Consignation is necessarily judicial. Article 1258 of the
Civil Code specifically provides that consignation shall be
made by depositing the thing or things due at the disposal
of judicial authority. The said provision clearly precludes
consignation in venues other than the courts.
Petitioner Oscar Cacayorin (Oscar) is a member of
respondent Armed Forces and Police Mutual Benefit
Association, Inc. (AFPMBAI), a mutual benefit association
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engaged in the business of developing low-cost housing
projects for personnel of the Armed Forces of the
Philippines, Philippine National Police, Bureau of Fire
Protection, Bureau of Jail Management and Penology, and
Philippine Coast Guard. He filed an application with
AFPMBAI to purchase a piece of property which the latter
owned through a loan facility. Oscar and his wife and co-
petitioner herein, Thelma, on one hand, and the Rural Bank
of San Teodoro (the Rural Bank) on the other, executed a
Loan and Mortgage Agreement with the former as
borrowers and the Rural Bank as lender, under the auspices
of Pag-IBIG or Home Development Mutual Fund’s Home
Financing Program. On the basis of the Rural Bank’s letter
of guaranty, AFPMBAI executed in petitioners’ favor a Deed
of Absolute Sale, and TCT No. 37017 was issued in their
name, with the corresponding annotation of their
mortgage agreement with the Rural Bank.
Unfortunately, the Pag-IBIG loan facility did not push
through and the Rural Bank closed and was placed under
receivership by the Philippine Deposit Insurance
Corporation (PDIC). Meanwhile, AFPMBAI somehow was
able to take possession of petitioners’ loan documents and
TCT No. 37017, while petitioners were unable to pay the
loan/consideration for the property.
AFPMBAI made oral and written demands for
petitioners to pay the loan/ consideration for the property.
Petitioners filed a Complaint for consignation of loan
payment, recovery of title and cancellation of mortgage
annotation against AFPMBAI, PDIC and the Register of
Deeds of Puerto Princesa City before the Regional Trial
Court (RTC). Petitioners alleged in their Complaint that as
a result of the Rural Bank’s closure and PDIC’s claim that
their loan papers could not be located, they were left in a
quandary as to where they should tender full payment of
the loan and how to secure cancellation of the mortgage
annotation on TCT No. 37017.
AFPMBAI filed a Motion to Dismiss claiming that
petitioners’ Complaint falls within the jurisdiction of the
Housing and Land Use Regulatory Board (HLURB) and not
the Puerto Princesa RTC, as it was filed by petitioners in
their capacity as buyers of a subdivision lot and it prays for
specific performance of contractual and legal obligations
decreed under Presidential Decree No. 957 (PD 957). It
added that since no prior valid tender of payment was
made by petitioners, the consignation case was fatally
defective and susceptible to dismissal.
RULING:
The Complaint makes out a case for consignation. The
settled principle is that "the allegations of the Complaint
determine the nature of the action and consequently the
jurisdiction of the courts. This rule applies whether or not
the plaintiff is entitled to recover upon all or some of the
claims asserted therein as this is a matter that can be
resolved only after and as a result of the trial."
From the allegations in the Complaint, it appears that
the petitioners’ debt is outstanding; that the Rural Bank’s
receiver, PDIC, informed petitioners that it has no record of
their loan even as it took over the affairs of the Rural Bank,
which on record is the petitioners’ creditor as per the July
4, 1994 Loan and Mortgage Agreement; that one way or
another, AFPMBAI came into possession of the loan
documents as well as TCT No. 37017; that petitioners are
ready to pay the loan in full; however, under the
circumstances, they do not know which of the two – the
Rural Bank or AFPMBAI – should receive full payment of the
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
purchase price, or to whom tender of payment must validly
be made.
On the question of jurisdiction, petitioners’ case should
be tried in the Puerto Princesa RTC, and not the HLURB.
Consignation is necessarily judicial, as Article 1258 of the
New Civil Code itself provides that consignation shall be
made by depositing the thing or things due at the disposal
of judicial authority. The above provision clearly precludes
consignation in venues other than the courts. Elsewhere,
what may be made is a valid tender of payment, but not
consignation. The two, however, are to be distinguished.
Tender of payment must be distinguished from
consignation. Tender is the antecedent of consignation,
that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation
is necessarily judicial, and the priority of the first is the
attempt to make a private settlement before proceeding to
the solemnities of consignation. (8 Manresa 325).
While it may be true that petitioners’ claim relates to
the terms and conditions of the sale of AFPMBAI’s
subdivision lot, this is overshadowed by the fact that since
the Complaint in Civil Case No. 3812 pleads a case for
consignation, the HLURB is without jurisdiction to try it, as
such case may only be tried by the regular courts.
Finally, the lack of prior tender of payment by the
petitioners is not fatal to their consignation case. They filed
the case for the exact reason that they were at a loss as to
which between the two – the Rural Bank or AFPMBAI – was
entitled to such a tender of payment. Besides, as earlier
stated, Article 1256 authorizes consignation alone, without
need of prior tender of payment, where the ground for
consignation is that the creditor is unknown, or does not
appear at the place of payment; or is incapacitated to
receive the payment at the time it is due; or when, without
just cause, he refuses to give a receipt; or when two or
more persons claim the same right to collect; or when the
title of the obligation has been lost.
Discussion: In this particular case the spouses applied for a
loan with rural bank of San Teodoro. They used the money to
purchase a house from AFPMBAI. Here the house and lot to
secure to payment of the loan with the rural bank, it was
mortgaged. Rural bank became bankrupt and it was taken
over by the PDIC (remember in banking PDIC is the receiver).
For some reason, AFP got hold of the documents over the loan
and the mortgage concurrently with the PDIC. Supposedly the
spouses are obliged to pay the monthly amortization. But it
becomes confusing because two entities are claiming that the
payment must be made to it.
What the spouses did was they filed a case for consignation
before the RTC. The contention of the defendants is that the
complaint should be dismissed because: (it was filed before
the wrong court, it is governed by PD 597 under the
Jurisdiction of the HLURB because it is the house and lot.
(2) second, failure to comply with a condition precedent.
Why? Because they did not made a tender of payment. They
should have made first a tender of payment before going to
court for consignation.
Take note (CIVPRO ISSUE) Jurisdiction over the subject
matter; determined by the allegation in the complaint; it
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sufficiently alleged a case for consignation; CONSIGNATION IS
JUDICIAL IN CHARACTER, this is the by virtue of the law itself.
Consignation is necessarily judicial, as Article 1258 of the New
Civil Code itself provides that consignation shall be made by
depositing the thing or things due at the disposal of judicial
authority. The above provision clearly precludes consignation
in venues other than the courts. Elsewhere, what may be
made is a valid tender of payment, but not consignation. The
two, however, are to be distinguished.
Q: How about the contention that there is failure to do a
condition precent which is tendering payment?
Article 1256 authorizes consignation alone, without
need of prior tender of payment, where the ground
for consignation is that the creditor is unknown, or
does not appear at the place of payment; or is
incapacitated to receive the payment at the time it is
due; or when, without just cause, he refuses to give
a receipt; or when two or more persons claim the
same right to collect; or when the title of the
obligation has been lost.
In this case, we can apply the exceptions because two or
more persons are claiming the right to collect. They need not
go through the process of payment they can just go directly
to consignation.
When will tender of payment alone without
consignation produce legal effect?
- When tender of payment is made in the exercise of a right or
privilege like in case of exercise of the right of redemption or
exercise of an option. When a valid tender of payment is
refused, the right is preserved even if there is no subsequent
consignation.
Example: You are a mortgagor and your property is foreclosed
because you defaulted in payment of your obligation. Under
the law, you have 1 year to redeem the property. So you
offered within that period the redemption price, the correct
and full amount but the buyer of the property refuses to
accept it. You did not also consign.
So example, it is only in the span of 2 years that you filed a case
for legal redemption. Could he say that your right has already
lapsed? It already expired because redemption period is only 1
year. No, because when you tendered the payment within the
period, your right is preserved. That is even when you did not
consign the amount.
The right of redemption is not an obligation. It is a right, so you
have already preserved but of course you have to pay.
Example: You have a valid option contract with someone who
agrees for you to buy his house within 1 month and there is a
valid consideration there. When you paid for the value of the
house, the seller suddenly refuses the payment and you did
not consign the amount but still you preserve your right to the
option.
ARTICLE 1267. When the service has become so difficult as
to be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or in
part.
Here, the obligation is a personal obligation. An obligation to
do. It speaks of service.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
One mode of extinguishing an obligation to do is difficulty in
the performance. This article is taken from the concept in
international law Rebus Sic Stantibus when they enter into
treaties, they consider the circumstances at the time when
they enter into the treaties. For example, over time, these
circumstances are already inexistent because there is already
a change. Under the concept of Rebus Sic Stantibus, the party
state is released from the treaty. This is the basis of the article.
OSMEÑA III, ET. AL. vs. SOCIAL SECURITY SYSTEM OF THE
PHILIPPINES (G.R. No. 165272, September 13, 2007)
Sometime in 2003, SSS took steps to liquefy its long-term
investments and diversify them into higher-yielding and less
volatile investment products. Among its assets determined
as needing to be liquefied were its shareholdings in EPCIB.
Albeit there were other interested parties, only Banco de
Oro Universal Bank (BDO) and its investment subsidiary,
respondent BDO Capital, appeared in earnest to acquire the
shares in question. Following talks between them, BDO and
SSS signed, on December 30, 2003, a Letter- Agreement, for
the sale and purchase of some 187.8 million EPCIB common
shares (the Shares, hereinafter), at P43.50 per share, which
represents a premium of 30% of the then market value of
the EPCIB shares. At about this time, the Shares were
trading at an average of P34.50 @ share. In the same
Letter-Agreement, the parties agreed “to negotiate in good
faith a mutually acceptable Share Sale and Purchase
Agreement and execute the same not later than thirty (30)
business days from [December 30, 2003].”
Supervening events and corporate movements transpired.
BDO and EPCIB merged. It appears that BDO, or BDO-EPCI,
Inc. to be precise, has since issued BDO common shares to
respondent SSS corresponding to the number of its former
EPCIB shareholdings under the ratio and exchange
procedure prescribed in the Plan of Merger. In net effect,
SSS, once the owner of a block of EPCIB shares, is now a
large stockholder of BDO-EPCI, Inc.
We start off with the core subject of this case. As may be
noted, the Letter-Agreement, the SPA, the SSC resolutions
assailed in this recourse, and the Invitation to Bid sent out
to implement said resolutions, all have a common
subject: the Shares – the 187.84 Million EPCIB common
shares. It cannot be overemphasized, however, that the
Shares, as a necessary consequence of the BDO-EPCIB
merger which saw EPCIB being absorbed by the surviving
BDO, have been transferred to BDO and converted into
BDO common shares under the exchange ratio set forth in
the BDO-EPCIB Plan of Merger. As thus converted, the
subject Shares are no longer equity security issuances of
the now defunct EPCIB, but those of BDO-EPCI, which,
needless to stress, is a totally separate and distinct entity
from what used to be EPCIB. In net effect, therefore, the
187.84 Million EPCIB common shares are now lost or
inexistent. And in this regard, the Court takes judicial notice
of the disappearance of EPCIB stocks from the local bourse
listing. Instead, BDO-EPCI Stocks are presently listed and
being traded in the PSE.
At any rate, the moot-and-academic angle would still hold
sway even if it were to be assumed hypothetically that the
subject Shares are still existing. This is so, for the
supervening BDO-EPCIB merger has so effected changes
in the circumstances of SSS and BDO/BDO Capital as to
render the fulfillment of any of the obligations that each
may have agreed to undertake under either the Letter-
Agreement, the SPA or the Swiss Challenge package legally
impossible. When the service has become so difficult as to
be manifestly beyond the contemplation of the parties,
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total or partial release from a prestation and from the
counter-prestation is allowed.
Under the theory of rebus sic stantibus, the parties
stipulate in the light of certain prevailing conditions, and
once these conditions cease to exist, the contract also
ceases to exist. Upon the facts obtaining in this case, it is
abundantly clear that the conditions in which SSS and BDO
Capital and/or BDO executed the Letter-Agreement upon
which the pricing component – at P43.50 per share – of the
Invitation to Bid was predicated, have ceased to
exist. Accordingly, the implementation of the Letter-
Agreement or of the challenged Res. Nos. 428 and 485
cannot plausibly push through, even if the central figures
in this case are so minded.
Discussion: SSS wanted to liquefy its long term investments
with PCIB, so it wants them to be converted to cash because it
has shares of stocks with the PCIB. Now it was BDO which
expressed real interest in acquiring the stocks of SSS. There
were negotiations. There is finally a letter agreement: SSS
agrees to sell and BDO agrees to purchase for a certain amount
per share. They also agreed that after the letter agreement
they will negotiate in good faith a mutually acceptable sell-
share agreement within 30 days. This agreement was actually
questioned because here BDO was given the right to match
the shares of SSS (because these shares are public because
SSS is a government entity).
So here there are some people who contended that the share
of the stocks must undergo public bidding. We cannot allow
BDO to have preferential right, here BDO was actually given a
preferential right because the parties agreed to adopt the
Swiss Challenge Method (discussed by Father in Corpo). In this
method, the shares are sold publicly but BDO has the right to
match it. This swiss challenge method was challenged.
After that, there are supervening events and corporate
movements that transpired. Here, you are probably familiar
that BDO and EPCIB merged. So they became one. The shares
of stocks of SSS in PCIB becomes BDO-EPCIB shares.
The supreme court said: cannot be overemphasized, however,
that the Shares, as a necessary consequence of the BDO-EPCIB
merger which saw EPCIB being absorbed by the surviving BDO,
have been transferred to BDO and converted into BDO
common shares under the exchange ratio set forth in the BDO-
EPCIB Plan of Merger. As thus converted, the subject Shares
are no longer equity security issuances of the now defunct
EPCIB, but those of BDO-EPCI, which, needless to stress, is a
totally separate and distinct entity from what used to be
EPCIB. In net effect, therefore, the 187.84 Million EPCIB
common shares are now lost or inexistent. And in this regard,
the Court takes judicial notice of the disappearance of EPCIB
stocks from the local bourse listing. Instead, BDO-EPCI Stocks
are presently listed and being traded in the PSE.
Here, the challenge of those petitioners as to the mode of sale
of the shares of stock has become moot already because these
shares of stock now become inexistent.
Note: Regarding the issue on difficulty in performance, please
refer to the part of the case in BOLD. Ma’am reads them in
toto.
February 13, 2020 Part 1- Murray
Condonation or remission of debt
ARTICLE 1270. Condonation or remission is essentially
gratuitous, and requires the acceptance by the obligor. It
may be made expressly or impliedly.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation.
Q: What is condonation?
Condonation is when you forgive or you remit an
obligation without any remuneration. It is gratuitous.
Ways of Effecting Condonation
1. Express Condonation – Follow the formalities of
donations – Art. 1270, since it is just like a donation
and the latter is a formal contract. Without observing
the proper form, the condonation is not effective.
2. Implied Condonation – Arts. 1271, 1272, 1274, if it is
implied – you do not need to follow the forms of
donation. You just have to gather from the circumstances
that there is a condonation.
a. The delivery of a private document
evidencing a credit, made voluntarily by
the creditor to the debtor, implies the
renunciation of the action which the
former had against the latter (Art. 1271)
Example: A promissory note which is a private
document is already in the possession of the debtor.
Therefore, there is a presumption that the creditor
already condoned the debt if such PN is already in the
possession of the debtor.
b. Whenever the private document in which
the debt appears is found in the possession
of the debtor, it shall be presumed that the
creditor delivered it voluntarily, unless the
contrary is proved (Art. 1272)
c. It is presumed that the accessory
obligation of pledge has been remitted
when the thing pledged, after its delivery
to the creditor, is found in the possession
of the debtor, or of a third person who
owns the thing (Art. 1274)
Since a condonation is essentially like a donation, it is subject
to the rules on inofficious donations. What if the creditor
already died, the heirs will say that the condonation is not valid
because it prejudices the legitime. So the heirs asks to compel
the debtor to return the amount so condoned. The debtor can
actually prove that he is in possession of the promissory note
not because the debt was condoned but it was actually paid.
That is the meaning of the second paragraph.
Take note under Article 1271, the delivery of a private
document evidencing credit, made voluntarily by the creditor
to the debtor, implies the renunciation of the action which the
former had against the latter. Take note that it has to be a
private document, it cannot be a public document. Why? If it is
a public document, the possession of the document is not
exclusively on the part of the creditor. If a document is
notarized which makes it a public instrument, the lawyer also
has a copy of that so we might not know there may be a
connivance from the debtor and the lawyer. It can be procured
from the clerk of court or the archives office, from many
sources. The document did not really came from the creditor.
Hence, it must be a public document which is exclusively in
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possession of the creditor and delivered voluntarily to the
debtor.
Take note under Article 1272, it just gives the presumption that
when the debt instrument is in the possession of the debtor, it
is presumed that the creditor delivered it voluntarily, unless
the contrary is proved.
Take note under Article 1274, It is presumed that the accessory
obligation of pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing. If the thing
pledged is in the possession of the debtor, then the contract
of pledge is remitted. TAKE NOTE. ONLY THE PLEDGE IS
CONDONED, not the principal obligation. It still subsists but it
is no longer secured by the pledge.
RUBEN REYNA and LLOYD SORIA vs. COMMISSION ON
AUDIT (G.R. No. 167219, February 8, 2011)
Write-off is not one of the legal grounds for extinguishing
an obligation under the Civil Code. It is not a compromise
of liability. Neither is it a condonation, since in condonation
gratuity on the part of the obligee and acceptance by the
obligor are required. In making the write-off, only the
creditor takes action by removing the uncollectible account
from its books even without the approval or participation
of the debtor.
Discussion: Here in this case, if you are familiar with write-off -
if an obligation is written off from the books, is it equivalent to
a condonation? Writing off meaning the collection of the debt
is already hopeless, that even if we include this in our balance
sheet it is like only a “palamuti” in reality it is already a bad
debt.
Subsequently, the creditor returns back to the books the
amount as he previously written off. Can he do that? The
Supreme Court said that it can. It is not a condonation since
acceptance by the obligor is required which is not present in a
write-off because it is solely the decision of the creditor.
Therefore, he can always change his mind.
Compensation
ARTICLE 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
each other.
Example: A owes B 5,000. B owes A 6,000. Both debts are due
and demandable. Can there be compensation? Yes, to the
extent of the concurrent amount. Here they are mutually
creditors and debtors of each other. The effect is that A do not
owe B anything anymore but B still owes A 1,000.
Requisites for Legal Compensation
ARTICLE 1279. In order that compensation may be proper,
it is necessary:
(1) That each one of the obligors be bound
principally, and that he be at the same time a principal
creditor of the other;
Example: A owes B 1,000. This debt is guaranteed by G. B owes
G 1,000. Both debts are due and demandable. Can there be
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
compensation? No. Because G is not the principal obligor here,
they must be principally creditors and debtors of each other.
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
Example: If the debt is a sum of money, it is very easy. But if it
is in kind, it depends. A owes B 1 sack of rick. B owes A 2 sacks
of rice. The law says they must be the same kind and quality.
So if they are both NFA rice, then it is okay. But if one is tonner
and the other is NFA rice, then there can be no legal
compensation.
The law says that they must be consumable. However, this
word should be interpreted to mean fungible – fungibility
means they are capable of substitution.
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
Example: A owes B 5,000. B owes A 6,000. But in this case
there is an attachment to the effect that the amount payable
to B should still not be paid to B, because there is a case filed
to B by his own creditors. So that if the creditors will obtain a
favorable judgment, then the amount will not be paid to B but
to the creditors. (I think Ma’am is talking about a Charging
Order). There can be no compensation because if A consider it
condoned, then the amount due is still to be paid to the
creditors and he is still liable to them.
Take note that the requisites of Article 1279 only pertains to
Legal Compensation. There are other kinds of compensation
(conventional, judicial, facultative).
Kinds of Compensation
Arts. 1278, 1279
a. Legal compensation – Arts. 1286-1290 (even if the parties
are unaware)
b. Agreement – Art. 1282 (even if not yet due)
c. Voluntary – Art. 1282 (even if not yet due)
d. Judicial – Art. 1283 (counter-claim)
Example: A files a complaint against B. B files an answer with
a counterclaim. That is subject to judicial compensation. For it
to have a valid counterclaim, it must be alleged as early as in
the filing of the answer.
e. Facultative (only one party may claim compensation, eg.
bailor, depositor)
2. Obligations not compensable – Art. 1287-1288
a. Compensation shall not be proper when one
of the debts arises from a depositum;
b. Obligations of a depositary ;
c. Bailee in commodatum;
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d. Creditor who has a claim for support due by
gratuitous title;
e. Taxes against payables of government.
f. If one of the debts consists in civil liability
arising from a penal offense. (n)
Depositum –
A owes B 1,000. B is the depositary of a necklace owned by A.
So in the first situation A has the obligation to pay B and in the
second situation, it is B who has the obligation to return the
necklace owned by A, they cannot be subject to
compensation. So B cannot say I will not pay you A 1,000 since
I will not return your necklace anymore. This is because deposit
is founded on trust and confidence. This is violated…this is the
same with the bailee in commodatum.
Taxes –
because taxes are the lifeblood of the government.
You cannot say I will not pay my taxes because you
occupied my property and you did not pay me just
compensation. So the government according to you
has that obligation.
Example: The depositor himself would agree to a
compensation that would now be a case of facultative
compensation. The bailor in a commodatum, still it would be
facultative compensation. Only one party can decide if
compensation can take place between the two of them. That
is allowed. But if the depositary or the bailor is the one who
decides the compensation, it is not valid.
Case:
E.G.V. REALTY DEVELOPMENT CORPORATION and
CRISTINA CONDOMINIUM CORPORATION vs. COURT OF
APPEALS and UNISHPERE INTERNATIONAL, INC. (G.R. No.
120236. July 20, 1999)
Petitioner E.G.V. Realty Development Corporation
(hereinafter referred to as E.G.V. Realty) is the
owner/developer of a seven-storey condominium building
known as Cristina Condominium. Cristina Condominium
Corporation (hereinafter referred to as CCC) holds title to
all common areas of Cristina Condominium and is in charge
of managing, maintaining and administering the
condominium’s common areas and providing for the
building’s security.
Respondent Unisphere International, Inc. (hereinafter
referred to as Unisphere) is the owner/occupant of Unit 301
of said condominium.
On November 28, 1981, respondent Unisphere’s Unit 301
was allegedly robbed of various items valued at
P6,165.00. The incident was reported to petitioner CCC.
On July 25, 1982, another robbery allegedly occurred at Unit
301 where the items carted away were valued at P6,130.00,
bringing the total value of items lost to P12,295.00. This
incident was likewise reported to petitioner CCC.
On October 5, 1982, respondent Unisphere demanded
compensation and reimbursement from petitioner CCC for
the losses incurred as a result of the robbery. Petitioner
CCC denied any liability for the losses claimed to have been
incurred by respondent Unisphere, stating that the goods
lost belonged to Amtrade, a third party. As a consequence
of the denial, respondent Unisphere withheld payment of
its monthly dues starting November 1982. On September
13, 1983, respondent Unisphere received a letter from
petitioner CCC demanding payment of past dues.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
On January 28, 1987, petitioners E.G.V. Realty and CCC
jointly filed a petition with the Securities and Exchange
Commission (SEC) for the collection of the unpaid monthly
dues in the amount of P13,142.67 against respondent
Unisphere. In its answer, respondent Unisphere alleged
that it could not be deemed in default in the payment of
said unpaid dues because its tardiness was occasioned by
the petitioners' failure to comply with what was incumbent
upon them, that is, to provide security for the building
premises in order to prevent, if not to stop, the robberies
taking place therein. It asserted as counterclaim that the
amount of P12,295.00 representing the total value of its loss
due to the two robberies be awarded to it by way of
damages for the latter’s failure to secure the premises.
ISSUE: Whether or not set-off or compensation has taken
place in the instant case.
It must be noted that Unisphere just stopped paying its
monthly dues to the Corporation on September 23, 1983
without notifying the latter. It was only on February 24,
1984, or five months after, that it informed the corporation
of its suspension of payment of the condominium dues to
offset the losses it suffered because of the robberies.
In Article 1278 of the Civil Code, compensation is said to take
place when two persons, in their own right, are creditors
and debtors of each other. Compensation is “a mode of
extinguishing to the concurrent amount, the obligations of
those persons who in their own right are reciprocally
debtors and creditors of each other” and “the offsetting of
two obligations which are reciprocally extinguished if they
are of equal value, or extinguished to the concurrent
amount if of different values.” Article 1279 of the same
Code provides:
Article 1279. In order that compensation may be proper, it
is necessary:
(1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor.
Absent any showing that all of these requisites exist,
compensation may not take place.
While respondent Unisphere does not deny its liability for
its unpaid dues to petitioners, the latter do not admit any
responsibility for the loss suffered by the former
occasioned by the burglary. At best, what respondent
Unisphere has against petitioners is just a claim, not a
debt. Such being the case, it is not enforceable in court. It
is only the debts that are enforceable in court, there being
no apparent defenses inherent in them. Respondent
Unisphere’s claim for its loss has not been passed upon by
any legal authority so as to elevate it to the level of a
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debt. So we held in Alfonso Vallarta v. Court of Appeals, et
al., that:
Compensation or offset takes place by operation of law
when two (2) persons, in their own right, are creditor and
debtor of each other. For compensation to take place, a
distinction must be made between a debt and a mere
claim. A debt is a claim which has been formally passed
upon by the highest authority to which it can in law be
submitted and has been declared to be a debt. A claim, on
the other hand, is a debt in embryo. It is mere evidence of
a debt and must pass thru the process prescribed by law
before it develops into what is properly called a debt.
Tested by the foregoing yardstick, it has not been
sufficiently established that compensation or set-off is
proper here as there is lack of evidence to show that
petitioners E.G.V. Realty and CCC and respondent
Unisphere are mutually debtors and creditors to each
other.
Discussion: EGV is the owner/developer of a condo building.
Unisphere is an occupant. There are to occasions of robbery in
the unit of Unisphere, according to it, the reason is the
leniency of the security guards of the condominium. By that
reason, the condominium must indemnify them an amount of
12k pesos which was the value of the items lost. Then, EGC said
they are not liable for the amount. Unisphere said it will not
pay the condo dues despite demand. EGV filed a case for
collection and Unisphere’s defense is compensation. I owe
EGV the dues but Unisphere also owes me the 12k.
For compensation to take place, a distinction must be made
between a debt and a mere claim.
What Unisphere have is only a claim and not a debt. So what is
a debt? A debt is a claim which has been formally passed upon
by the highest authority to which it can in law be submitted
and has been declared to be a debt. It is either the court has
already decided it with finality to be a debt or the other person
admits the debt. So there is no question.
A claim, on the other hand, is a debt in embryo. It is mere
evidence of a debt and must pass thru the process prescribed
by law before it develops into what is properly called a debt.
Novation
Kinds of Novation:
A. Objective or real
(1) Changing their object or principal conditions;
B. Subjective or personal
(2) Substituting the person of the debtor - Passive
(3) Subrogating a third person in the rights of the
creditor – Active
In all cases, these requisites must be present – either it is
objective or subjective.
Requisites of Extinctive novation:
(1) the existence of a previous valid obligation;
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
When we say novation, we are changing the obligation,
creditor or debtor, so essentially there is another obligation
but the old one is extinguished. So in order for a valid novation
to take place, there must be a previous valid obligation
because without it there is nothing to novate.
(2) the agreement of all the parties to the new
contract;
(3) the extinguishment of the old obligation or
contract; and
Meaning, entering into a new obligation will mean the
extinguishment of the old in order for there to be novation.
Since, if the old and the new one is meant to stand together at
the same time, then there can be no novation.
(4) the validity of the new one.
There are two types of novation: express or implied. Express,
meaning there really a statement in the new obligation that it
supersedes, extinguishes the old one: there is no problem. If it
is implied, there is no such statements but the new obligation
cannot co-exist with the terms of the old one. So the
conclusion is that the new one must have superseded the old
one.
In case of doubt: novation is never presumed. There is no
novation. There must be irreconcilable incompatibility
between the two obligations.
The foregoing clearly show that novation is effected only
when a new contract has extinguished an earlier contract
between the same parties. In this light, novation is never
presumed; it must be proven as a fact either by express
stipulation of the parties or by implication derived from an
irreconcilable incompatibility between old and new
obligations or contracts. After a thorough review of the
records, we find this element lacking in the case at bar.
SPOUSES FLORANTE and LAARNI BAUTISTA vs. PILAR
DEVELOPMENT CORPORATION (G.R. No. 135046, August
17, 1999)
The first promissory note was cancelled by the express
terms of the second promissory note. To cancel is to strike
out, to revoke, rescind or abandon, to terminate. In fine,
the first note was revoked and terminated. Simply put, it
was novated. The extinguishment of an obligation by the
substitution or change of the obligation by a subsequent
one which extinguishes or modifies the first is a novation.
The first promissory note was a valid and subsisting
contract when petitioner spouses and Apex executed the
second promissory note. The second promissory note
absorbed the unpaid principal and interest of P142,326.43 in
the first note which amount became the principal debt
therein, payable at a higher interest rate of 21% per
annum. Thus, the terms of the second promissory note
provided for a higher principal, a higher interest rate, and a
higher monthly amortization, all to be paid within a shorter
period of 16.33 years. These changes are substantial and
constitute the principal conditions of the obligation. Both
parties voluntarily accepted the terms of the second note;
and also in the same note, they unequivocally stipulated to
extinguish the first note. Clearly, there was animus novandi,
an express intention to novate. The first promissory note
was cancelled and replaced by the second note. This
second note became the new contract governing the
parties' obligations.
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Discussion: There were two PNs. The first note, there were
principal and interest and the second note was issued wherein
the principal and interest in the first note was merged and
became the principal of the second note. And then the term
became shorter in the second note. The question here is there
novation?
Q: Did the second note supersede the first note?
They have different principals, interests, periods and
the monthly amortization in the second note was
higher. The SC said these changes are substantial
that they constitute the principal conditions of the
obligation. Actually here, there is also a mention in
the second note that it cancels the first one. So this
is a case of express novation.
However, assuming there is no such statements. Still it would
be considered as a novation.
Why would the parties here bother to express novation?
Because if there are guarantors, mortgages, etc are
constituted in the first note, it means that the principal
obligation and the corresponding accessory contracts are
extinguished. The accessory follows the principal. If the first
note is extinguished, it extinguishes. We cannot say that it is
impliedly carried over to the second note. It must be stipulated
expressly to be constituted in the second obligation.
Passive subjective novation
In general, there are two modes of substituting the person of
the debtor: (1) expromision and (2) delegacion.
In expromision:
the initiative for the change does not come from --
and may even be made without the knowledge of --
the debtor, since it consists of a third person’s
assumption of the obligation. As such, it logically
requires the consent of the third person and the
creditor.
What is the rule when it comes to expromision. You remember
Article 1236, Whoever pays for another may demand from the
debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the debtor.
Remember Article 1236, because even if it is a provision under
“Payment”, it can also be a case of expromision, of a passive
subjective novation. Here, when is there a change in the
person of the debtor? When the third person paid.
In delegacion:
The debtor offers, and the creditor accepts, a third
person who consents to the substitution and
assumes the obligation; thus, the consent of these
three persons are necessary.
Here, there must be the consent of the old debtor because he
was the one who initiated the change, there must be consent
of the new debtor and the creditor. So all must consent. This
is compared to expromision where only the consent of the
third person (new debtor) and the creditor are required.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Both modes of substitution by the debtor require the consent
of the creditor.
S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT
CORPORATION vs. ENGR. LUIS U. PARADA (G.R. No.
183804, September 11, 2013)
S.C. Megaworld Construction and Development
Corporation (petitioner) bought electrical lighting
materials from Gentile Industries, a sole proprietorship
owned by Engineer Luis U. Parada (respondent), for its
Read-Rite project in Canlubang, Laguna. The petitioner was
unable to pay for the above purchase on due date, but
blamed it on its failure to collect under its sub-contract with
the Enviro KleenTechnologies, Inc. (Enviro Kleen). It was
however able to persuade Enviro Kleen to agree to settle
its above purchase, but after paying the respondent
P250,000.00 on June 2, 1999, Enviro Kleen stopped making
further payments, leaving an outstanding balance of
P816,627.00. It also ignored the various demands of the
respondent, who then filed a suit in the RTC. The petitioner
in its answer denied liability, claiming that it was released
from its indebtedness to the respondent by reason of the
novation of their contract, which, it reasoned, took place
when the latter accepted the partial payment of Enviro
Kleen in its behalf, and thereby acquiesced to the
substitution of Enviro Kleen as the new debtor in the
petitioner’s place.
Novation is a mode of extinguishing an obligation by
changing its objects or principal obligations, by substituting
a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. It is "the
substitution of a new contract, debt, or obligation for an
existing one between the same or different parties." Article
1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new
debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but
not without the consent of the creditor. Payment by the
new debtor gives him rights mentioned in Articles 1236and
1237.
Thus, in order to change the person of the debtor, the
former debtor must be expressly released from the
obligation, and the third person or new debtor must
assume the former’s place in the contractual relation.
Article 1293 speaks of substitution of the debtor, which may
either be in the form of expromision or delegacion, as
seems to be the case here. In both cases, the old debtor
must be released from the obligation, otherwise, there is
no valid novation.
From the circumstances obtaining below, we can infer no
clear and unequivocal consent by the respondent to the
release of the petitioner from the obligation to pay the cost
of the lighting materials. In fact, from the letters of the
respondent to Enviro Kleen, it can be said that he retained
his option to go after the petitioner if Enviro Kleen failed to
settle the petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made
payments to the respondent and the latter accepted it does
not ipso facto result in novation. Novation to be given its
legal effect requires that the creditor should consent to the
substitution of a new debtor and the old debtor be released
from its obligation (Art. 1293, New Civil Code). A reading of
the letters dated 14 April 1999 (Exh. 1) and dated 16 June
1999 (Exhs. 4 &4-a) sent by the respondent to Enviro Kleen
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Technologies, Inc. clearly shows that there was nothing
therein that would evince that the[respondent] has
consented to the exchange of the person of the debtor
from the petitioner to Enviro Kleen Technologies, Inc.
xxxx
Notably in Exh. 1, albeit addressed to Enviro Kleen
Technologies, Inc., the respondent expressly stated that it
has served notice to the petitioner that unless the overdue
account is paid, the matter will be referred to its lawyers
and there may be a pull-out of the delivered lighting
fixtures. It was likewise stated therein that incident
damages that may result to the structure in the course of
the pull-out will be to the account of the petitioner.
It is evident from the two (2) aforesaid letters that there is
no indication of the respondent’s intention to release the
petitioner from its obligation to pay and to transfer it to
Enviro Kleen Technologies, Inc. The acquiescence of Enviro
Kleen Technologies, Inc. to assume the obligation of the
petitioner to pay the unpaid balance of [P]816,627.00 to the
respondent when there is clearly no agreement to release
the petitioner will result merely to the addition of debtors
and not novation. Hence, the creditor can still enforce the
obligation against the original debtor x x x. A fact which
points strongly to the conclusion that the respondent did
not assent to the substitution of Enviro Kleen Technologies,
Inc. as the new debtor is the present action instituted by
the respondent against the petitioner for the fulfillment of
its obligation. A mere recital that the respondent has
agreed or consented to the substitution of the debtor is not
sufficient to establish the fact that there was a novation. x
x x.32
collect, he should make it to Enviro Kleen since it already
assumed the obligation. In fact Parada already accepted
payment from Enviro Kleen.
The question is: Is there novation in the form of a substitution
in the person of the debtor? And because of that alleged
novation, is SC Megaworld already released and not liable to
pay.
No. In order to change the person of the debtor, the former
debtor must be expressly released from the obligation, and
the third person or new debtor must assume the former’s
place in the contractual relation.
In fact, from the letters of Parada to Envi Kleen it can be seen
that he reserved the option to collect from SC Megaworld in
case Envi Kleen cannot pay him.
What about the fact that Envi Kleen already paid to Parada and
the latter already accepted payments. The SC said, it does not
ipso facto result to novation. In novation, the creditor must
consent to the substitution of the debtor. Here there is
nothing in the letters which show that Parada consented that
SC Megaworld should be released and that he should be
substituted by Envi Kleen.
So what is the situation here? So here, the acquiescence of Envi
Kleen to assume obligation of SC Mega World and the fact that
the creditor already received payment will result merely in the
addition of debtors and not novation, and the creditor may
enforce the obligation against both debtors. If there is no
agreement as to solidarity, the first and new debtors are
considered obligated jointly.

The settled rule is that novation is never presumed, but Active subjective novation (subrogation)
must be clearly and unequivocally shown. In order for a
new agreement to supersede the old one, the parties to a Requires the consent of ALL (debtor, old creditor, new
contract must expressly agree that they are abrogating creditor)
their old contract in favor of a new one. Thus, the mere
substitution of debtors will not result innovation, and the
ARTICLE 1300. Subrogation of a third person in the rights of
fact that the creditor accepts payments from a third
the creditor is either legal or conventional. The former is
person, who has assumed the obligation, will result merely
not presumed, except in cases expressly mentioned in this
in the addition of debtors and not novation, and the
Code; the latter must be clearly established in order that it
creditor may enforce the obligation against both debtors.
may take effect.
If there is no agreement as to solidarity, the first and new
debtors are considered obligated jointly.
ARTICLE 1301. Conventional subrogation of a third person
requires the consent of the original parties and of the third
Discussion: It had a construction and it bought electrical
person.
lighting materials from a company owned by Engr. Parada.

ARTICLE 1302. It is presumed that there is legal

subrogation: In active subjective novation, there is a change in the person
of the creditor. There are two types, legal and conventional.
(1) When a creditor pays another creditor who is Let’s first go to conventional, nag-agree lang sila tulo. debtor,
preferred, even without the debtor's old creditor, new creditor.
knowledge;
Legal subrogation
Here the debt of SC Megaworld accumulated since it failed to
pay Parada several times. Parada demanded for the payment.
According to SC Megaworld, the reason for inability to pay is
Take Note: There is no knowledge or even if debtor knows but
due to the fault of Enviro Kleen since the latter fails to pay it by
he did not consent, but here there are two creditors: one is
virtue of a subcontract agreement. In fact, Enviro Kleen
preferred and one is not. So the non preferred creditor pays
agreed to pay the obligation of SC Megaworld. After paying
the preferred. That is the situation here. Why does it happen?
200,000 however, Enviro Kleen stopped paying which left
some balance.
Example: A borrowed 1M from X and to secure the loan, he
mortgaged his land to X. The land is valued at 10M.
When Parada sued SC Megaworld, the latter’s defense is that
Subsequently, A needed another money from Y, 5 M without
there is already a change in the person of the debtor, that
any collateral. Let’s look at A’s standing obligations, from X –
there is already a novation. If Engr Parada would want to
it is smaller but it is secured. From Y – it is bigger but it is
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unsecured. Now, if for example, A becomes insolvent, the
creditor can collect from the debtor. But insofar as the
mortgaged property is concerned, that is reserved to the
mortgagee. Y here feels like lugi sya since the properties left
are all mortgaged. They are preferred. So if I were Y, what he
will do is to pay the first creditor – 1 M thinking that it is okay
to pay 1 M in order to get security to the 5 M debt X have to
him. Of course, the first creditor must consent to such
arrangement. However, what if the debtor did not know or
objects, will it still be valid? Yes. There is legal subrogation.
The second creditor already has 6 M Collectible from A (1M
secured which he paid to X and his 5M original unsecured
debt). What can Y do if A would not really pay him? He can
foreclose on the mortgage constituted on the 1 M. Can he do
that? Yes, because there is subrogation. He assumes all the
rights of the old creditor in the old obligation. So if there is
foreclosure, dili pa kayo lugi si creditor.
(2) When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor;
How is this different from Article 1236? In 1236, a third person
ARTICLE 1303. Subrogation transfers to the persons
subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third
person, be they guarantors or possessors of mortgages,
subject to stipulation in a conventional subrogation.
pays the creditor without the knowledge or against the will
of the debtor. Here, the debtor consents, either express or
tacitly. When there is an agreement, the third person is not
only entitled to beneficial reimbursement. He is entitled to
subrogation to the rights of the creditor.
Example: A pays the debt of the debtor. Debtor consented.
That debt has a mortgage. Now, as a third person who paid, he
has a right to reimbursement. What if dili magbayad si debtor,
he can foreclose the mortgage.
This is actually also similar to delegacion. Why? Because in
delegacion, the third person actually becomes the new debtor.
Pero in subrogation, the third person becomes the new
creditor. GINALIBOG2x lang kamo ani. PAREHA LANG SILAG
EFFECT.
Just take note that in delegacion there is also legal
subrogation. The situation contemplated under delegacion
and Article 1302 (2) are actually the same.
Illustration:
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
(3) When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation pays,
without prejudice to the effects of confusion as to the
latter's share.
Q: What is the difference between this and Article 1236?
In 1236, the person who paid is a third person who
has no interest in the obligation. Here, the person
who paid is a person interested in the fulfillment of
the obligation.
Example: A borrowed 1 M from C, the creditor. The loan is
guaranteed by G, the guarantor. G is a person interested in the
fulfillment of the obligation, since if A will not pay...he will be
held liable. What if G pays the debt? There will be subrogation.
G will be subrogated to the rights of the creditor. So if there is
a mortgage, he can enforce that.
What happens to the guaranty? Of course it will extinguish.
Otherwise, what will happen is, alangan singilin ni Guarantor
ang iyahang kaugalingon? There is a confusion or merger.
These are the three instances when there is legal subrogation.
Consequence of subrogation
Q: How about in conventional subrogation?
The extent of the subrogation will depend on the
agreement of the parties. Not necessarily what is
stated in Article 1303.
FIGUERA vs. ANG (G.R. No. 204264, June 29, 2016)
Maria Remedios Ang (Ang) is the registered owner of a
single proprietorship business named "Enhance
Immigration and Documentation Consultants" (EIDC). On
December 16, 2004, Ang executed a "Deed of Assignment
of Business Rights" (Deed) transferring all of her business
rights over the EIDC to Figuera for One Hundred Fifty
Thousand Pesos (P150,000.00). In addition to the
assignment of rights, the parties also agreed that Ang shall
pay the bills for electricity, telephone, office rentals, and
the employees' salaries up to the month of December 2004.
Without Ang's consent, Figuera paid all the utility bills
amounting to P107,903.21 as of December 2004.
On January 17, 2005, Figuera tendered only the amount of
P42,096.79 to Ang, after deducting the amount paid for the
utility bills from the P150,000.00 consideration of the Deed.
Ang refused to accept Figuera's payment. Figuera mailed
the Formal Tender of Payment and gave Ang five (5) days
to accept the amount. Despite the lapse of the 5-day period,
however, Ang still refused to accept the payment. Thus,
Figuera filed a complaint for specific performance before
the Regional Trial Court (RTC), Branch 9 of Cebu City against
Ang. Figuera consigned the amount of P42,096.79 to the
RTC. In her answer, Ang maintained that the amount due
pursuant to the Deed is P150,000.00 and not just
P42,096.79. She argued that she cannot be compelled to
accept the amount because it is not what was agreed upon.
The RTC ruled in Ang's favor in its decision dated December
28, 2007. The RTC held that the unambiguous language of
the Deed mandates Ang, as the Assignor, to pay the
December 2004 utility bills. Figuera, however, paid the
utility bills without Ang's consent. The RTC explained that
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for the tender of payment and consignation to be valid,
Figuera must tender the full amount of P150,000.00 rather
than just P42,096.79. Ang is not obliged to accept an
amount less than what is agreed upon in the Deed. Figuera
appealed the RTC decision to the Court of Appeals (CA) and
argued that by operation of law, legal subrogation and
compensation had taken place. Consequently, Figuera's
obligation to the extent of the amount of P107,903.21 is
extinguished.
Subrogation of a third person in the rights of a creditor may
either be legal or conventional. There is legal subrogation
when: (a) a creditor pays another preferred creditor, even
without the debtor's knowledge; (b) a third person who is
not interested in the obligation pays with the express or
tacit approval of the debtor; and (c) a person interested in
the fulfilment of the obligation pays, even without the
knowledge of the debtor.
In the present case, Figuera based her claim on the third
type of subrogation. She claims that as the EIDC's new
owner, she is interested in fulfilling Ang's obligation to pay
the utility bills. Since the payment of the bills was long
overdue prior to the assignment of business rights to
Figuera, the failure to settle the bills would eventually result
in "the disconnection of the electricity and telephone
services, ejectment from the office premises, and
resignation by some, if not all, of the company's employees
with the possibility of subsequent labor claims for sums of
money." These utilities are obviously necessary for the
continuation of Figuera's business transactions.
A person interested in the fulfilment of the obligation is one
who stands to be benefited or injured in the enforcement
of the obligation. The Court agrees with Figuera that it
became absolutely necessary for her to pay the bills since
Ang did not do so when the obligation became due.
The, consent or approval of the debtor is required only if a
third person who is not interested in the fulfilment of the
obligation pays such. On the other hand, no such
requirement exists in cases of payment by a creditor to
another creditor who is preferred, and by a person
interested in the fulfilment of the obligation.
Consignation was also proper.
Discussion:
Ang here is an an owner of a business EIDC. He assigned the
business to Figuera by way of a deed of assignment. She
transferred all her business rights for 150k. Under this
agreement, Figuera has an obligation to pay Ang 150k. Now, it
was agreed that the parties (Ang here) she will pay the bills for
the electricity, the telephone, the salaries up to December
2004. Now, Ang did not pay it. So Figuera paid these bills and
utilities amounting to 107k.
Figuera figured, OK. I have obligation to pay Ang 150k. But I
paid the amount that was supposedly paid by Ang. So now I
will deduct this and the balance is only 43k. So there is a tender
of that payment which Ang refused.
Ang contended that Figuera should pay the full amount of
150k. He said that he did not tell Ang to pay the utilities. So
Figuera, because of the refusal of Ang filed a case for
consignation. The RTC said that the consignation is not proper
because it is not for the full amount and he cannot deduct the
107k from the 150k from the Deed of Assignment because they
are not debtors and creditors of each other. According to
Figuera, I became a creditor of Ang because when I paid the
bills, I stepped into the shoes of the creditors of Ang. So I can
exercise the right of legal compensation. It went all the way to
the Supreme Court.
Issues:
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
1. Is there legal subrogation?
As to the subrogation, again we already discussed what the
three instances of legal subrogation are. According to Ang,
there can be no legal subrogation because there is no consent
from here. But the Supreme Court said that it is not the only
instance that there is legal subrogation. (1302 (2)) Review:
Where consent of the DEBTOR is required.
Here Figuera based her right from 1302 (3), “When, even
without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays”.
Can Figuera here be considered as someone interested in the
fulfillment of the obligation?
The Court said “Since the payment of the bills was long
overdue prior to the assignment of business rights to Figuera,
the failure to settle the bills would eventually result in "the
disconnection of the electricity and telephone services,
ejectment from the office premises, and resignation by some,
if not all, of the company's employees with the possibility of
subsequent labor claims for sums of money." These utilities
are obviously necessary for the continuation of Figuera's
business transactions.”
2. Is there legal compensation?
By virtue of the legal subrogation, Figuera became a creditor
of Ang in her own right. Hence, compensation would also be
proper. So the offsetting is valid.
3. Was the consignation proper?
It is also proper to consign the amount since there is refusal on
the part of the creditor.
February 13, 2020 Part 2- Vallente
Contracts
Article 1305. A contract is a meeting of minds between two
persons hereby one binds himself, with respect to the
other, to give something or to render some service.
Essential requisites of a Contract
ARTICLE 1318. There is no contract unless the following
requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Consent, object and cause. But take note that the foregoing
are the essential requisites of consensual contracts. In formal
contracts, the additional essential requisite is form. In real
contracts, the additional essential requisite is delivery. That is
the complete answer. But if the question is “what is the
essential requisites of a consensual contract?”, then you
answer the 3 mentioned in 1318.
Q: When is a contract perfected? (Consensual)
Article 1319. Consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be
certain and the acceptance absolute. A qualified
acceptance constitutes a counter offer.
Acceptance made by letter or telegram does not bind the
offerer except from the time it came to his knowledge. The
contract, in such case, is presumed to have been entered
into in the place where the offer was made.
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In short, when there is a meeting of the minds. When
there is an offer, everything in the offer is accepted.
The offer is absolute and must not vary the terms of
the offer.
Principle 1: The acceptance must be absolute and without
variance of any sort from the offer.
Example: A offered to B the sale of his agricultural land of 5
hectares for P5M, payable in cash. B says that he is interested
to buy but he wanted the payment to be staggered, P2.5M
downpayment and after 30 days the remaining P2.5M.
There is no perfected contract yet because B varied
the term of the offer. B actually made a counter
offer.
Now, If A says that he is amenable to the counter offer of B but
added that the balance which is not yet paid must be imposed
with interest, 1% per month.
Still, there is no perfected contract because A did not
accept everything in the counter offer of B.
Now, B says he is willing to pay the interest but only ½% per
month, not 1%.
Still there is no perfected contract.
But if he says “deal”, there is already a perfected contract.
The acceptance must be made known to the offeror.
4 THEORIES OF PERFECTION
1. Manifestation Theory
There is already perfection of the contract from the
time he manifested his acceptance even if it was not
yet made known to the offeror.
Example: Naghatag og letter si A kay B kay B na ibaligya iyanga
land. Nitubag si B na iyang paliton. Under the manifestation
theory, there is already perfection of contract. Here, once you
say “I accept the offer.” Bisan pag wala pa nakabalo si offeror,
perfection already.
2. Expedition Theory
When the letter accepting the proposal is mailed to
the offeror even if wala pa niabot sa offeror.
3. Reception Theory
Once na-receive n ani offeror ang letter of acceptance,
maski wala pa niya nabasa, basta kay nareceive na
niya, there is already a perfected contract.
4. Cognition Theory
The contract is perfected once the acceptance is
made known to the offeror. This is the theory that
we follow here in the Philippines. Unless the offeror
has made known of the acceptance, there is no
meeting of the minds of the parties. No real
concurrence of the offer and acceptance.
Principle 2: If an offeror prescribes the exclusive manner in
which acceptance of his offer shall be indicated by the
offeree, an acceptance of the offer in the manner prescribed
will bind the offeror. On the other hand, an attempt on the
part of the offeree to accept the offer in a different manner
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
does not bind the offeror as the absence of the meeting of
the minds on the altered type of acceptance.
Example: If the offer was made through a letter. The letter
says “if you are amenable to the letter, kindly indicate your
conformity by signing in the space provided with the date.” Si
offeree after reading the letter, gitawagan niya si offeror, the
acceptance is made known, is there perfection?
Under his principle, there is none. If the offer says
you need to indicate your acceptance by signing in
the space provided with the date, that is the manner
which the offer must be accepted. Any type of
acceptance will not bind the offeror.
SALVADOR P. MALBAROSA vs. CA
(G.R. No. 125761, April 30, 2003)
Under Article 1319 of the New Civil Code, the consent by a
party is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to
constitute the contract. An offer may be reached at any
time until it is accepted. An offer that is not accepted does
not give rise to a consent. The contract does not come into
existence. To produce a contract, there must be
acceptance of the offer which may be express or implied
but must not qualify the terms of the offer. The acceptance
must be absolute, unconditional and without variance of
any sort from the offer.
The acceptance of an offer must be made known to the
offeror. Unless the offeror knows of the acceptance, there
is no meeting of the minds of the parties, no real
concurrence of offer and acceptance. The offeror may
withdraw its offer and revoke the same before acceptance
thereof by the offeree. The contract is perfected only from
the time an acceptance of an offer is made known to the
offeror.
If an offeror prescribes the exclusive manner in which
acceptance of his offer shall be indicated by the offeree,
an acceptance of the offer in the manner prescribed will
bind the offeror. On the other hand, an attempt on the
part of the offeree to accept the offer in a different manner
does not bind the offeror as the absence of the meeting of
the minds on the altered type of acceptance.
An acceptance which is not made in the manner prescribed
by the offeror is not effective but constitutes a counter-
offer which the offeror may accept or reject. The contract
is not perfected if the offeror revokes or withdraws its offer
and the revocation or withdrawal of the offeror is the first
to reach the offeree. The acceptance by the offeree of the
offer after knowledge of the revocation or withdrawal of
the offer is inefficacious. The termination of the contract
when the negotiations of the parties terminate and the
offer and acceptance concur, is largely a question of fact to
be determined by the trial court
In this case, the respondent made its offer through its Vice-
Chairman of the Board of Directors, Senen Valero. On
March 16, 1990, Da Costa handed over the original of the
March 14, 1990 Letter-offer of the respondent to the
petitioner. The respondent required the petitioner to
accept the offer by affixing his signature on the space
provided in said letter-offer and writing the date of said
acceptance, thus foreclosing an implied acceptance or any
other mode of acceptance by the petitioner. However,
when the letter-offer of the respondent was delivered to
the petitioner on March 16, 1990, he did not accept or reject
the same for the reason that he needed time to decide
whether to reject or accept the same. There was no
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contract perfected between the petitioner and the
respondent corporation.
Although the petitioner claims that he had affixed his
conformity to the letter-offer on March 28, 1990, the
petitioner failed to transmit the said copy to the
respondent. It was only on April 7, 1990 when the
petitioner appended to his letter to the respondent a copy
of the said March 14, 1990 Letter-offer bearing his
conformity that he notified the respondent of his
acceptance to said offer. But then, the respondent, through
Philtectic Corporation, had already withdrawn its offer and
had already notified the petitioner of said withdrawal via
respondent’s letter dated April 4, 1990 which was delivered
to the petitioner on the same day. Indubitably, there was
no contract perfected by the parties on the March 14, 1990
Letter-offer of the respondent.
Withdrawal of the offer before acceptance is
made known
ARTICLE 1324. When the offerer has allowed the offeree a
certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
There is already a perfected contract once the acceptance is
made known to the offeror.
Q: What is the effect if prior to the date when the acceptance
came to the knowledge of the offeror, the offeror had already
previously withdrawn the offer? Would there be a perfected
contract?
No. The acceptance of the offeree of the offer after
knowledge of the revocation or withdrawal of the
offer is inefficacious.
Example: January 1, 2020 naay offer. Nangayo siya og time to
think about the offer. January 15 nipirma na si offeree indicating
his acceptance. Iyahang gi-mail padulong kay offeror. Pero
pagbalik niya sa balay nanawag si offeror na “I’m withdrawing
the offer”. There is no perfection of the contract kay nauna ang
knowledge of revocation kaysa sa knowledge of acceptance. It
doesn’t matter na telephone call lang kay it doesn’t say na it can
only be revoked through a letter. He can revoke it at anytime
prior to his knowledge of acceptance.
Q: What happens if there was already acceptance and it was
made known to the offeror, can he still revoke?
There is already a perfected contract. Di na siya
pwede mag-retract sa iyang offer.
Option Contract
ARTICLE 1324. When the offerer has allowed the offeree a
certain period to accept, the offer may be withdrawn at any
time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
Example: A offered his land to B and B said that he is very much
interested and added “Can I have 1 month to think about the
offer?”. Then A said “deal”. Unya nag-hug na sila og beso-beso,
unya lamano. Pero 15 days pa lang gibaligya n ani A to X ang land.
Unya nakabalo si B.
Q: Does B have any cause of action against A?
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
There is none. Even if there was an agreement, it was
not supported by any consideration which is
something paid or promised. It was not a binding
option contract.
Suppose, nisugot na si A na hatagan si B og 1 month pero ana si
A kay B na “musugot ko pero magbayad ka og reservation fee of
P20,000”which is not part of the purchase price. Nakabayad na
si B og reservation fee pero after 15 days, gibaligya ni A kay X.
Q: This time, does B have any cause of action against A?
Yes, because there was a perfected option contract.
This is supported by a consideration.
Q: What is the action, breach of contract of sale? specific
performance?
No, because there was no contract of sale between
them. They only agreed for a future contract.
Q: What now is the action of B?
We have violations of human relations. Damages.
Breach of contract of option, not breach of contract
of sale.
Take note that the option money here does not form part of
the contract of sale. In fact, it is treated separately from the
sale.
Suppose, nagbayad na si B og reservation fee nga P20,000 unya
ang sabot kay “if nakadecide naka, ibawas nato na siya sa
purchase price” . After 15 days gibaligya ni A kay X ang land.
Q: Does B have a right against A?
Take note that what he paid is not an option money.
It is an earnest money. It is an evidence of the
perfection of a contract of sale. There was already a
sale. Therefore, he can sue for specific performance.
As used in the law on sales, an option is a continuing offer or
contract by which the owner stipulates with another that the
latter shall have the right to buy the property at a fixed price
within a certain time, or under, or in compliance with, certain
terms and conditions, or which gives to the owner of the
property the right to sell or demand a sale. It is also sometimes
called an "unaccepted offer."
An option is not of itself a purchase, but merely secures the
privilege to buy. It is not a sale of property but a sale of the
right to purchase. It is simply a contract by which the owner of
property agrees with another person that he shall have the
right to buy his property at a fixed price within a certain time.
He does not sell his land; he does not then agree to sell it; but
he does sell something, that is, the right or privilege to buy at
the election or option of the other party. Its distinguishing
characteristic is that it imposes no binding obligation on the
person holding the option, aside from the consideration for
the offer.
Until acceptance, it is not, properly speaking, a contract, and
does not vest, transfer, or agree to transfer, any title to, or any
interest or right in the subject matter, but is merely a contract
by which the owner of property gives the optionee the right or
privilege of accepting the offer and buying the property on
certain terms.
An option contract needs to be supported by a separate
consideration
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To summarize the rules, an option contract needs to be
supported by a separate consideration. The consideration
need not be monetary but could consist of other things or
undertakings. However, if the consideration is not monetary,
these must be things or undertakings of value, in view of the
onerous nature of the contract of option. Furthermore, when
a consideration for an option contract is not monetary, said
consideration must be clearly specified as such in the option
contract or clause.
TUAZON vs. DEL ROSARIO-SUAREZ, ET. AL.
(G.R. No. 168325, December 8, 2010)
On June 24, 1994, petitioner Roberto D. Tuazon (Roberto)
and Lourdes executed a Contract of Lease over the
abovementioned parcel of land for a period of three years.
The lease commenced in March 1994 and ended in February
1997. During the effectivity of the lease, Lourdes sent a
letter dated January 2, 1995 to Roberto where she offered
to sell to the latter subject parcel of land. She pegged the
price at P37,541,000.00 and gave him two years from
January 2, 1995 to decide on the said offer.
On June 19, 1997, or more than four months after the
expiration of the Contract of Lease, Lourdes sold subject
parcel of land to her only child, Catalina Suarez-De Leon, her
son-in-law Wilfredo De Leon, and her two grandsons,
Miguel Luis S. De Leon and Rommel S. De Leon (the De
Leons), for a total consideration of only P2,750,000.00 as
evidenced by a Deed of Absolute Sale executed by the
parties. TCT No. 177986 was then issued by the Registry of
Deeds of Quezon City in the name of the De Leons.
Roberto claims that Lourdes violated his right to buy
subject property under the principle of “right of first
refusal” by not giving him “notice” and the opportunity to
buy the property under the same terms and conditions or
specifically based on the much lower price paid by the De
Leons. Roberto further contends that he is enforcing his
“right of first refusal” based on Equatorial Realty
Development, Inc. v. Mayfair Theater, Inc. which is the
leading case on the “right of first refusal.”
HELD:
An option contract is entirely different and distinct from a
right of first refusal in that in the former, the option granted
to the offeree is for a fixed period and at a determined
price. Lacking these two essential requisites, what is
involved is only a right of first refusal. In this case, the
controversy is whether the letter of Lourdes to Roberto
dated January 2, 1995 involved an option contract or a
contract of a right of first refusal. In its entirety, the said
letter-offer reads:
Dear Mr. Tuazon,
I received with great joy and happiness the big box of
sweet grapes and ham, fit for a king’s party. Thanks very
much.
I am getting very old (79 going 80 yrs. old) and wish to
live in the U.S.A. with my only family. I need money to buy
a house and lot and a farm with a little cash to start.
I am offering you to buy my 1211 square meter at
P37,541,000.00 you can pay me in dollars in the name of
my daughter. I never offered it to anyone. Please
shoulder the expenses for the transfer. I wish the Lord
God will help you buy my lot easily and you will be very
lucky forever in this place. You have all the time to decide
when you can, but not for 2 years or more.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
I wish you long life, happiness, health, wealth and great
fortune always!
I hope the Lord God will help you be the recipient of
multi-billion projects aid from other countries.
Thank you.
Lourdes Q. del Rosario vda de Suarez
It is clear that the above letter embodies an option contract
as it grants Roberto a fixed period of only two years to buy
the subject property at a price certain of P37,541,000.00. It
being an option contract, the rules applicable are found in
Articles 1324 and 1479 of the Civil Code which provide:
Art. 1324. When the offerer has allowed the offeree a
certain period to accept, the offer may be withdrawn
at any time before acceptance by communicating such
withdrawal, except when the option is founded upon a
consideration, as something paid or promised.
Art. 1479. A promise to buy and sell a determinate thing
for a price certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.
It is clear from the provision of Article 1324 that there is a
great difference between the effect of an option which is
without a consideration from one which is founded upon a
consideration. If the option is without any consideration,
the offeror may withdraw his offer by communicating such
withdrawal to the offeree at anytime before acceptance; if
it is founded upon a consideration, the offeror cannot
withdraw his offer before the lapse of the period agreed
upon. The second paragraph of Article 1479 declares that
“an accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.” Sanchez v. Rigos provided an
interpretation of the said second paragraph of Article 1479
in relation to Article 1324. Thus:
There is no question that under Article 1479 of the new Civil
Code "an option to sell," or "a promise to buy or to sell," as
used in said article, to be valid must be "supported by a
consideration distinct from the price." This is clearly
inferred from the context of said article that a unilateral
promise to buy or to sell, even if accepted, is only binding if
supported by consideration. In other words, "an accepted
unilateral promise can only have a binding effect if
supported by a consideration, which means that the option
can still be withdrawn, even if accepted, if the same is not
supported by any consideration. Hence, it is not disputed
that the option is without consideration. It can therefore be
withdrawn notwithstanding the acceptance made of it by
appellee.
It is true that under Article 1324 of the new Civil Code, the
general rule regarding offer and acceptance is that, when
the offerer gives to the offeree a certain period to accept,
"the offer may be withdrawn at any time before
acceptance" except when the option is founded upon
consideration, but this general rule must be interpreted as
modified by the provision of Article 1479 above referred to,
which applies to "a promise to buy and sell" specifically. As
already stated, this rule requires that a promise to sell to be
valid must be supported by a consideration distinct from
the price.
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In Diamante v. Court of Appeals, this Court further declared
that:
A unilateral promise to buy or sell is a mere offer, which is
not converted into a contract except at the moment it is
accepted. Acceptance is the act that gives life to a juridical
obligation, because, before the promise is accepted, the
promissor may withdraw it at any time. Upon acceptance,
however, a bilateral contract to sell and to buy is created,
and the offeree ipso facto assumes the obligations of a
purchaser; the offeror, on the other hand, would be liable
for damages if he fails to deliver the thing he had offered
for sale.
xxxx
Even if the promise was accepted, private respondent was
not bound thereby in the absence of a distinct
consideration.
In this case, it is undisputed that Roberto did not accept the
terms stated in the letter of Lourdes as he negotiated for a
much lower price. Roberto’s act of negotiating for a much
lower price was a counter-offer and is therefore not an
acceptance of the offer of Lourdes. Article 1319 of the Civil
Code provides:
Consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to
constitute the contract. The offer must be certain and the
acceptance absolute. A qualified acceptance constitutes a
counter-offer.
The counter-offer of Roberto for a much lower price was
not accepted by Lourdes. There is therefore no contract
that was perfected between them with regard to the sale
of subject property. Roberto, thus, does not have any right
to demand that the property be sold to him at the price for
which it was sold to the De Leons neither does he have the
right to demand that said sale to the De Leons be annulled.
It is the position of Roberto that the facts of this case and
that of Equatorial are similar in nearly all aspects. Roberto is
a lessee of the property like Mayfair Theater in Equatorial.
There was an offer made to Roberto by Lourdes during the
effectivity of the contract of lease which was also the case
in Equatorial. There were negotiations as to the price which
did not bear fruit because Lourdes sold the property to the
De Leons which was also the case in Equatorial wherein
Carmelo and Bauermann sold the property to Equatorial.
The existence of the lease of the property is known to the
De Leons as they are related to Lourdes while in Equatorial,
the lawyers of Equatorial studied the lease contract of
Mayfair over the property. The property in this case was
sold by Lourdes to the De Leons at a much lower price
which is also the case in Equatorial where Carmelo and
Bauerman sold to Equatorial at a lesser price. It is Roberto’s
conclusion that as in the case of Equatorial, there was a
violation of his right of first refusal and hence annulment or
rescission of the Deed of Absolute Sale is the proper
remedy.
Roberto’s reliance in Equatorial is misplaced. Despite his
claims, the facts in Equatorial radically differ from the facts
of this case. Roberto overlooked the fact that in Equatorial,
there was an express provision in the Contract of Lease that
–
(i)f the LESSOR should desire to sell the leased
properties, the LESSEE shall be given 30-days exclusive
option to purchase the same
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
There is no such similar provision in the Contract of Lease
between Roberto and Lourdes. What is involved here is a
separate and distinct offer made by Lourdes through a
letter dated January 2, 1995 wherein she is selling the leased
property to Roberto for a definite price and which gave the
latter a definite period for acceptance. Roberto was not
given a right of first refusal. The letter-offer of Lourdes did
not form part of the Lease Contract because it was made
more than six months after the commencement of the
lease.
It is also very clear that in Equatorial, the property was sold
within the lease period. In this case, the subject property
was sold not only after the expiration of the period
provided in the letter-offer of Lourdes but also after the
effectivity of the Contract of Lease.
Moreover, even if the offer of Lourdes was accepted by
Roberto, still the former is not bound thereby because of
the absence of a consideration distinct and separate from
the price. The argument of Roberto that the separate
consideration was the liberality on the part of Lourdes
cannot stand. A perusal of the letter-offer of Lourdes
would show that what drove her to offer the property to
Roberto was her immediate need for funds as she was
already very old. Offering the property to Roberto was not
an act of liberality on the part of Lourdes but was a simple
matter of convenience and practicality as he was the one
most likely to buy the property at that time as he was then
leasing the same.
Discussion: Lourdes and Roberto entered into a contract of
lease for 3 years. During the effectivity of the lease contract,
nag-offer si Lourdes in a letter. She offered the land for sale to
Roberto for P37M. She gave him two years to decide.
Nagrefuse si Roberto kay he could not afford the P37M.
Subsequently, Lourdes sold subject parcel of land to her only
child, Catalina Suarez-De Leon, her son-in-law Wilfredo De
Leon, and her two grandsons, Miguel Luis S. De Leon and
Rommel S. De Leon (the De Leons), for a total consideration of
only P2.7M.
When Roberto learned about the sale, nibagting dayon ang
dalunggan ni Roberto. “Ha? P2.7M lang? Can afford man unta
kayo ko ana oy”. According to Roberto, there was a violation
of his right of first refusal.
According to Roberto, before she could offer the P2.7M
amount to another, she should first offer to me and give me
the chance to refuse.
In the case of Equatorial, Mayfair actually impute the sale
between Equatorial and Carmelo. The SC sustained because
Mayfair had the right of first refusal.
Ang question diri is naa bay right of first refusal si Roberto? The
Sc said we have to make a distinction between right of first
refusal and option.
An option contract is entirely different and distinct from a right
of first refusal in that in the former, the option granted to the
offeree is for a fixed period and at a determined price. Lacking
these two essential requisites, what is involved is only a right
of first refusal.
Q: What is the consequence if it is a right of first refusal?
It is part of the stipulation of the contract. Example
in Equatorial case, whatever the consideration, it is
part of the stipulations of the contract of lease. This
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includes the stipulation of the right of first refusal.
When you violate the right of first refusal, you are
actually violating the contract itself.
Q: What about an option?
An option is separate and distinct from contract of
lease. For that option to be binding, there has to be
a separate consideration.
In this case, there is no consideration that would support the
option. Since it is not binding, Lourdes can withdraw anytime.
It is merely a simple offer that can be withdrawn anytime prior
to acceptance.
PNOC vs. Keppel Philippines Holdings, Inc.
(G.R. No. 202050, July 25, 2016)
5. If within the period of the first [25] years [Keppel]
becomes qualified to own land under the laws of the
Philippines, it has the firm and absolute option to purchase
the above property for a total price of [P-4,090,000.00] at
the end of the 25th year, discounted at 16% annual for every
year before the end of the 25th year, which amount may be
converted into equity of [Keppel] at book value prevailing
at the time of sale, or paid in cash at Lusteveco's option.
However, if after the first [25] years, [Keppel] is still not
qualified to own land under the laws of the Republic of the
Philippines, [Keppel's] lease of the above stated property
shall be automatically renewed for another [25] years,
under the same terms and conditions save for the rental
price which shall be for the sum of P4,090,000.00... and
which sum may be totally converted into equity of [Keppel]
at book value prevailing at the time of conversion, or paid
in cash at Lusteveco's option.
If anytime within the second [25] years up to the [30th] year
from the date of this agreement, [Keppel] becomes
qualified to own land under the laws of the Republic of the
Philippines, [Keppel] has the firm and absolute option to
buy and Lusteveco hereby undertakes to sell the above
stated property for the nominal consideration of
[P100.00.00]...
Keppel counters that a separate consideration is not
necessary to support its option to buy because the option
is one of the stipulations of the lease contract. It claims that
a separate consideration is required only when an option to
buy is embodied in an independent contract.
When the written agreement itself does not state the
consideration for the option contract, the offeree or
promisee bears the burden of proving the existence of a
separate consideration for the option.81 The offeree
cannot rely on Article 1354 of the Civil Code,82 which
presumes the existence of consideration, since Article 1479
of the Civil Code is a specific provision on option contracts
that explicitly requires the existence of a consideration
distinct from the purchase price.
In the present case, none of the above rules were observed.
We find nothing in paragraph 5 of the Agreement indicating
that the grant to Lusteveco of the option to convert the
purchase price for Keppel shares was intended by the
parties as the consideration for Keppel's option to buy the
land; Keppel itself as the offeree presented no evidence to
support this finding. On the contrary, the option to convert
the purchase price for shares should be deemed part of the
consideration for the contract of sale itself, since the shares
are merely an alternative to the actual cash price.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
For uniformity and consistency in contract interpretation,
the better rule to follow is that the consideration for the
option contract should be clearly specified as such in the
option contract or clause. Otherwise, the offeree must
bear the burden of proving that a separate consideration
for the option contract exists.
Given our finding that the Agreement did not categorically
refer to any consideration to support Keppel's option to
buy and for Keppel's failure to present evidence in this
regard, we cannot uphold the existence of an option
contract in this case.
Discussion: Here, Keppel entered into a contract of lease with
Lusteveco. 25 years ang period sa contract. Ang naabutang sa
contract kay if Keppel becomes qualified to own land under the
laws of the Philippines, kay foreign owned man ni si Keppel.
Pero king ma-qualify na daw siya, the contract says that it has
the firm and absolute option to purchase the above property
for a total price of [P-4,090,000.00] at the end of the 25th year.
There was an assignment form Lustevo to PNOC. Si PNOC na
nag gunit sa contract, Eventually, Keppel already became
qualified to own. Karon, i-exercise n ani Keppel iyang right sa
contract. But the new owner said we will not sell the property.
Keppel said na we have an option. Then PNOC said it is not
supported by a consideration. Therefore, we are not bound by
that option.
There is no question here that what is stated in the contract is
an option and not a first refusal. Ang question nalang kay kung
nay bay separate consideration.
According to Keppel naa. Lusteveo can convert the equity of
Keppel at book value prevailing at the time of sale or paid in
cash. Mao dawn a siya kay not necessarily monetary.
SC said When the written agreement itself does not state the
consideration for the option contract, the offeree or
promisee bears the burden of proving the existence of a
separate consideration for the option.81 The offeree cannot
rely on Article 1354 of the Civil Code,82 which presumes the
existence of consideration, since Article 1479 of the Civil Code
is a specific provision on option contracts that explicitly
requires the existence of a consideration distinct from the
purchase price.
On the contrary, the option to convert the purchase price for
shares should be deemed part of the consideration for the
contract of sale itself, since the shares are merely an
alternative to the actual cash price.
For uniformity and consistency in contract interpretation, the
better rule to follow is that the consideration for the option
contract should be clearly specified as such in the option
contract or clause. Otherwise, the offeree must bear the
burden of proving that a separate consideration for the
option contract exists.
February 20, 2020- Devilleres
Kinds of contract
We discussed before what are the kinds of contracts
As to perfection:
1. Consensual contracts
2. Formal Contracts
3. Real Contracts
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Again, consensual contracts are those perfected by mere
consent. We already learned what would constitute consent
that would give rise the perfection of the contract. Formal
Contract are those which are perfected by observing the
proper forms and solemnities. Real contracts, contracts which
are perfected by delivery.
General Rule: Contracts are perfected by mere consent. Rare
lang ang contracts which would require forms and solemnities
or delivery.
Exception: Formal and Real contracts.
The contract is valid but cannot be enforced because the form
is not observed.
Form is a requirement merely for convenience –
The contract is valid; it is enforceable, but it just has to observe
the proper form à e.g. A Deed of Sale – under the Statute of
Frauds (SOF) it must be in writing to be enforceable.
Now if you have a private deed of sale, it’s already valid and
enforceable. But, you cannot cause the transfer of registration
from the name of the seller to the name of the buyer if it’s not
in a public document. So that’s why you need a public
document for convenience. But still, the contract is valid.
If for example the seller does not want to reduce it into a
public document, as a buyer, you can file a case to reduce it
into a public document.
Formal or solemn contracts
These are the contracts where form is a requirement for
validity. So just take note, we have:
CONTRACTS WHERE FORM IS ESSENTIAL FOR VALIDITY
1.) Donations (Article 748 and 749) – it matters if the
property donated is personal property the value of
which is more than P5k – so you have to observe the
proper form.
Article 748. Movable property, the law says donations may be
made orally or in writing. But if it is oral, it requires the
simultaneous delivery of the thing or of the document
representing the right donated. If the value of the personal
property donated exceeds five thousand pesos, the donation
and the acceptance shall be made in writing. Otherwise, the
donation shall be void. Take note, sa movable, it is only
required to be in writing, need not be notarized to be valid.
If it is a real property, then the acceptance and donation must
be in a public document.
Article 749. In order that the donation of an
immovable(regardless of the value that involves real rights
or real property) may be valid, it must be made in a public
document,( meaning, acknowledged before a notary
public), specifying therein the property donated and the
value of the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation
or in a separate public document, but it shall not take effect
unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the
donor shall be notified thereof in an authentic form, and
this step shall be noted in both instruments.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
2.) Partnership where real property is contributed
(Article 1771 and 1773) – when there is an immovable
property or a real right which is contributed, a public
instrument is necessary.
Article 1771. A partnership may be constituted in any form,
except where immovable property or real rights are
contributed thereto, in which case a public instrument shall
be necessary.
Article 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory
of said property is not made, signed by the parties, and
attached to the public instrument. (1668a)
3.) Antichresis (Article 2134) – what is an antichresis?
Article 2134. The amount of the principal and of the
interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.
So, it does not have to be in a public document but in
writing for it to be valid.
4.) Agency to sell real property or interest therein
(Article 1874) – so here, the authority must be in
writing, otherwise the sale shall be void.
Art. 1874. When a sale of a piece of land or any interest
therein is through an agent, the authority of the latter shall
be in writing; otherwise, the sale shall be void.
Now if you remember, unenforceable contracts. When you say
unenforceable, one of them is the agent is authorized but he
exceeded his authority. E.g., He is authorized to mortgage but
he sold it. So what is the status of the sale? It is unenforceable.
Or maybe, he’s not authorized at all but he enters into a
contract in representation of another. The contract is also
unenforceable. But here, even if in reality the agent has an
authority to sell but the authority is not in writing, it’s not
merely unenforceable but the resulting sale is null and void.
5.) Stipulation to pay interest (Article 1956)
Art. 1956. No interest shall be due unless it has been
expressly stipulated in writing.
So it has to be in in writing (the interest), otherwise, it is null
and void.
6.) Stipulation limiting common carrier’s duty of
extraordinary diligence to ordinary diligence
(Article 1744)
Art. 1744. A stipulation between the common carrier and the
shipper or owner limiting the liability of the former for the
loss, destruction, or deterioration of the goods to a degree
less than extraordinary diligence shall be valid, provided it be:
(1) In writing, signed by the shipper or owner;
(2) Supported by a valuable consideration other than the
service rendered by the common carrier; and
(3) Reasonable, just and not contrary to public policy.
Diba we discussed before that liability for negligence can be
mitigated or reduced. So we have the Article that governs that.
These are the requirements for that stipulation to be valid:
a.) In writing;
b.) There’s a valuable consideration; and
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c.) Reasonable, just and not contrary to public
policy.
7.) Chattel Mortgage – So there are several
requirements for a chattel mortgage.
REQUIREMENTS UNDER THE CHATTEL MORTGAGE LAW FOR
THE VALIDITY OF A CHATTEL MORTGAGE:
a.) Substantial compliance with form in Sec. 5 of the
Chattel Mortgage Law;
b.) The deed of mortgage must be signed by at least 2
witnesses;
c.) Deed must contain an affidavit of good faith;
d.) Deed must be accompanied by a certificate of oath
[notarial acknowledgment];
e.) Must be recorded in the Chattel Mortgage Register
in order to bind third persons.*
*Now for a chattel mortgage to bind 3rd parties, although
bisag wala ning number 5, 1-4 kinahanglan for validity; but as
to bind 3rd parties, kinahanglan ang number 5 – must be
recorded in the Chattel Mortgage Register.
8.) Sale of Large Cattle under Act No. 1147—So there are
certain formal requisites that must be complied with
under Section 13 & 14.
Act No. 1147 provides, in section 13, that municipal
treasurers shall enter in a book, duly prepared and kept for
the purpose, all transfers of large cattle, which entry shall
set forth the name and residence of the owner, the name
and residence of the purchaser, the purchase price of the
animal or the consideration for the sale, the class, sex, age,
brands, and others marks of identification of the animal,
and a reference by number to the original certificate of
ownership, with the name of the municipality which issued
it.
Section 14 provides that on making the entry of transfer
prescribed by the preceding section, the municipal
treasurer shall issue to the purchaser of the animal a
certificate of transfer expressing the details set forth in the
said article, etc.
Section 22 of the said Act provides that:
No transfer of large cattle shall be valid unless registered
and a certificate of transfer secured as herein provided.
Register ang name residence of the purchaser, etc. Way labot
ang name sa animal ha.
So these are contracts where form is required for validity, and
the transfer shall be registered.
BASIC PROVISION IN CONTRACTS: Whatever form the
contract may be in, it is valid and binding, as long as all the
essential requisites are present.
Under Article 13572, this also refers to contracts where form is
merely required for convenience. So if the law says na there’s
a form required, for as long as that form is not essential for
validity or not essential for enforceability, but that form is not
observed, you can file an action to observe that proper form.
It can be filed simultaneously with an action on the contract.
Like, sold a parcel of land but it’s in a private document,
2 ARTICLE 1357. If the law requires a document or other special form, as
in the acts and contracts enumerated in the following article, the contracting
parties may compel each other to observe that form, once the contract has been
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
handwritten lng and walay notarization. You already fully paid
the purchase price, but the seller did not yet deliver the land.
Here, you can file two (2) cases:
1.) Specific performance to compel the delivery of the land,
and also
2.) To have the document be reduced into a public document.
So that’s under Article 1357.
ARTICLE 1358. The following must appear in a public
document:
(1) Acts and contracts which have for their
object the creation, transmission,
modification or extinguishment of real rights
over immovable property; sales of real
property or of an interest therein are
governed by articles 1403, No. 2, and 1405;
(2) The cession, repudiation or renunciation of
hereditary rights or of those of the conjugal
partnership of gains;
(3) The power to administer property, or any
other power which has for its object an act
appearing or which should appear in a public
document, or should prejudice a third
person;
(4) The cession of actions or rights proceeding
from an act appearing in a public document.
All other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one.
But sales of goods, chattels or things in action are governed
by articles, 1403, No. 2 and 1405.
These are the contracts which require a certain form. Actually
the law says, “xxx must appear in a public document”, but it is
merely for convenience. All these contracts in Article 1358
must be in a public document but for convenience. Meaning,
they’re valid, they’re enforceable, but you have to observe the
proper form.
NOTE: Just take note of these contracts. What is important is
you memorize what are those contracts which form is
required for validity? What are those contracts where form is
required for enforceability? All other contracts are valid and
enforceable even if you don’t observe xx for example even if
they are merely not in writing or merely in a private
document. So all other contracts are valid and enforceable.
So just memorize those.
Now, the last portion says, “All other contracts where the
amount involved exceeds five hundred pesos must appear in
writing, even a private one.” The law says, must appear in
writing, but still it is only for convenience.
“But sales of goods, chattels or things in action are governed by
articles, 1403, No. 2 and 1405.” Meaning, when we go to the
Statute of Frauds, where it involved chattels, for it to be
enforceable, it has to be in writing. Otherwise, kung dili
chattel; kung dili goods or things in action, even if they’re not
in writing, they’re valid and enforceable.
Defective contracts
perfected. This right may be exercised simultaneously with the action upon the
contract.
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There are four (4) defective contracts. And, they are discussed
in the New Civil Code in the order of severity. Meaning, the
least severe must 1st cya and then graduated cya. Ang
pinakagrave ang void contract. So we start with…
Rescissible contracts3
When we speak of rescissible contracts, we also speak of
rescission under Article 1191. But I believe that, if you still
remember, we’ve distinguished, rescission under 1191 and
rescission of a defective contract under Article 1381. So let us
review what are these contracts which the law declares to be
rescissible. These are the one’s mentioned under Article 1381.
Article 1381 Article 1191
1.) BASIS: Lesion or 1.) BASIS: Only breach –
economic injury basta substantial
breach
ARTICLE 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 –
Example: The guardian sold the property of his ward, the value
of the property is P1M supposedly but he sold it only for P600.
Is there lesion? Yes, because naay economic injury. Naay
difference between the actual value and the selling price.
Would it authorize rescission? Yes, because the lesion here is
more than ¼. What is ¼ of P1M? P250k, so more than ¼. So ang
pinakababa na value na mabaligya ang property in P750k.
(2) Those agreed upon in representation of absentees, if
the latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter
cannot in any other manner collect the claims due them
Mao ni and mas sikat2x na case. Actually we also discussed this
in the subsidiary remedies of the creditor (accion pauliana).
So here, there’s still lesion because the transaction prejudiced
the creditors.
Example: A borrowed money from B. B lent him the money kay
daghan mag assets si A. But after A received the money, he sold
all of his properties to his bestfriend. Wala nay nabilin. So now,
if the creditor cannot in any manner collect his credit from the
debtor, he can go against which was presumed to be sold in
fraud of creditors. So that is an accion pauliana – the creditor
can impugn the sale between A and A’s bestfriend.
Now let’s discuss the case of…
METROPOLITAN BANK AND TRUST COMPANY,
SUBSTITUTED BY MERIDIAN CORPORATION vs.
INTERNATIONAL EXCHANGE BANK/CHUAYUCO STEEL
3 ARTICLE 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;
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
MANUFACTURING vs. INTERNATIONAL EXCHANGE BANK
(G.R. No. 176008/G.R. No. 176131, August 10, 2011)
So this is an illustration of what constitutes accion pauliana.
Ang title sa action diri was Annulment of Chattel Mortgage
(CM).
Facts:
In this case, Metrobank filed a case against SSC for the
annulment of the CM which was executed by SSC.
According to Metrobank, that mortgage was prejudicial to
the rights of Metrobank as the creditor of SSC.
Held:
The following successive measures must be taken by a
creditor before he may bring an action for rescission of an
allegedly fraudulent contract: (1) exhaust the properties of
the debtor through levying by attachment and execution
upon all the property of the debtor, except such as are
exempt by law from execution; (2) exercise all the rights
and actions of the debtor, save those personal to him
(accion subrogatoria); and (3) seek rescission of the
contracts executed by the debtor in fraud of their rights
(accion pauliana).
It does not appear that Metrobank sought other properties
of SSC other than the subject lots alleged to have been
transferred in fraud of creditors. Neither is there any
showing that Metrobank subrogated itself in SSC's
transmissible rights and actions. Without availing of the
first and second remedies, Metrobank simply undertook
the third measure and filed an action for annulment of the
chattel mortgages. This cannot be done. Article 1383 of the
New Civil Code is very explicit that the right or remedy of
the creditor to impugn the acts which the debtor may have
done to defraud them is subsidiary in nature. It can only be
availed of in the absence of any other legal remedy to
obtain reparation for the injury.
Discussion:
Even if the title of the case was Annulment of Chattel
Mortgage (CM), but the body was in the nature of an accion
pauliana, because Metrobank wanted to impugn the mortgage
made by SSC. So these are the measures:
a) Exhaust the properties of the debtor through
levying by attachment and execution upon all the
property of the debtor, except such as are exempt
by law from execution – file an action for collection.
In an action for collection, if you win you can secure
a writ of execution. For example, dili voluntarily
mubayad si debtor, then attach his properties, levy. If
that is not possible anymore, then you proceed to
number 2.
b) Exercise all the rights and actions of the debtor,
save those personal to him (accion subrogatoria)
o Succession – that debtor is an heir who
stands to receive P10M. He owes you P2M,
but he repudiated his inheritance. What
(3) Those undertaken in fraud of creditors when the latter cannot in any
other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been entered
into by the defendant without the knowledge and approval of the litigants or of
competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
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can you do as the creditor? You can petition
the court to receive the inheritance –
“Kung di ka mudawat, ako nalay mudawat,
kay naa man kay utang saakoa hilas haayu ka
magrepudiate2x pajud ka di pa gani ka
kabayad saakoa. So dawatonnalang nako
imung inheritance pero dli tanan. Not the
entire P10M but only the P2M.” So that’s an
example of accion subrogatoria.
o Insurance – Naay claim sa insurance si
debtor na di niya gusto iclaim, then the
creditor can exercise that right of the
debtor. and
c) Seek rescission of the contracts executed by the
debtor in fraud of their rights (accion pauliana) – So
again, it is the last resort. Here, it does not appear
that Metrobank exercised the first 2 options. It just
immediately sought the annulment of the mortgage
entered into by SSC. So the SC said, “This cannot be
done. The right or remedy of the creditor to impugn
the acts which the debtor may have done to defraud
them is subsidiary in nature. It can only be availed of in
the absence of any other legal remedy to obtain
reparation for the injury.”
So pls remember the distinctions which I discussed to you
before when we discussed Article 1191 and Article 1381.
(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.
Voidable contracts –
The second in the order of severity of the defect. When you
say voidable contracts, the contract is still valid. It can be
enforced, but it can be annulled by the aggrieved party. On
what basis?
o Vitiated consent (VICES OF CONSENT) – so fraud,
violence, mistake, intimidation, undue influence.
Take note, the consent was vitiated. That was the
reason why the parties entered into the contract.
It was the main reason ngano nagarise ang
contract.
o Minority – that could also be a ground for
annulment.
o Insanity – but the law says that contracts entered
into during a lucid interval are valid. Again, it’s a
matter of proving na “This contract was entered
into during a state of insanity or during a lucid
interval.”
o Contracts entered into in a state of drunkenness
(Article 1328) – so it also depends on the kinds of
drunkenness kay naa may puy uban diri na
paghubog mas ganahan sila mutake ug exam kay
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
mas bright sila – Drunken Master.
o Hypnotic spell (Article 1328) – so na hypnotize ka.
So the law reconizes na tinuod jud siguro nang
hypnotism. They’re voidable under Article 1328.
VICES OF CONSENT:
a) Mistake:
ARTICLE 1331. In order that mistake may invalidate consent,
it should refer to the substance of the thing which is the
object of the contract, or to those conditions which have
principally moved one or both parties to enter into the
contract.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or
qualifications have been the principal cause of the contract –
Like you had him because you thought cya si Piolo Pascual.
Gipaconcert nimu cya, and then kanawong ra diay to. So it
goes into the very reason why you entered into the contract.
Pero kung nagpalit lng kag saging kay pagtuo nimo na cya kay
si Piolo Pascual, it doesn’t really matter. So it’s not material to
the contract.
A simple mistake of account shall give rise to its correction.
Now let’s discuss this case of…
THE ROMAN CATHOLIC CHURCH vs. PANTE (G.R. No.
174118, April 11, 2012)
This case illustrates mistake.
FACTS:
The Church, represented by the Archbishop of Caceres,
owned a 32-square meter lot that measured 2x16 meters
located in Barangay Dinaga, Canaman, Camarines Sur. On
September 25, 1992, the Church contracted with
respondent Regino Pante for the sale of the lot on the
belief that the latter was an actual occupant of the lot. On
June 28, 1994, the Church sold in favor of the spouses
Nestor and Fidela Rubi (spouses Rubi) a 215-square meter
lot that included the lot previously sold to Pante. The
spouses Rubi asserted their ownership by erecting a
concrete fence over the lot sold to Pante, effectively
blocking Pante and his family’s access from their family
home to the municipal road. As no settlement could be
reached between the parties, Pante instituted with the RTC
an action to annul the sale between the Church and the
spouses Rubi, insofar as it included the lot previously sold
to him.
The Church filed its answer with a counterclaim, seeking the
annulment of its contract with Pante. The Church alleged
that its consent to the contract was obtained by fraud when
Pante, in bad faith, misrepresented that he had been an
actual occupant of the lot sold to him, when in truth, he was
merely using the 32-square meter lot as a passageway from
his house to the town proper. It contended that it was its
policy to sell its lots only to actual occupants. Since the
spouses Rubi and their predecessors-in-interest have long
been occupying the 215-square meter lot that included the
32-square meter lot sold to Pante, the Church claimed that
the spouses Rubi were the rightful buyers.
RULING:
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Not every mistake renders a contract voidable. For mistake
as to the qualification of one of the parties to vitiate
consent, two requisites must concur:
1. The mistake must be either with regard to the identity
or with regard to the qualification of one of the contracting
parties; and
2. The identity or qualification must have been the
principal consideration for the celebration of the contract.
In the present case, the Church contends that its consent to
sell the lot was given on the mistaken impression arising
from Pante’s fraudulent misrepresentation that he had
been the actual occupant of the lot. Willful
misrepresentation existed because of its policy to sell its
lands only to their actual occupants or residents. Thus, it
considers the buyer’s actual occupancy or residence over
the subject lot a qualification necessary to induce it to sell
the lot. Contrary to the Church’s contention, the actual
occupancy or residency of a buyer over the land does not
appear to be a necessary qualification that the Church
requires before it could sell its land. Had this been indeed
its policy, then neither Pante nor the spouses Rubi would
qualify as buyers of the 32-square meter lot, as none of
them actually occupied or resided on the lot. We note in
this regard that the lot was only a 2x16-meter strip of rural
land used as a passageway from Pante’s house to the
municipal road. We find well-taken Pante’s argument that,
given the size of the lot, it could serve no other purpose
than as a mere passageway; it is unthinkable to consider
that a 2x16-meter strip of land could be mistaken as
anyone’s residence. In fact, the spouses Rubi were in
possession of the adjacent lot, but they never asserted
possession over the 2x16-meter lot when the 1994 sale was
made in their favor; it was only then that they constructed
the concrete fence blocking the passageway. We find it
unlikely that Pante could successfully misrepresent himself
as the actual occupant of the lot; this was a fact that the
Church (which has a parish chapel in the same barangay
where the lot was located) could easily verify had it
conducted an ocular inspection of its own property. The
surrounding circumstances actually indicate that the
Church was aware that Pante was using the lot merely as a
passageway. The above facts, in our view, establish that
there could not have been a deliberate, willful, or
fraudulent act committed by Pante that misled the Church
into giving its consent to the sale of the subject lot in his
favor. That Pante was not an actual occupant of the lot he
purchased was a fact that the Church either ignored or
waived as a requirement. In any case, the Church was by no
means led to believe or do so by Pante’s act; there had been
no vitiation of the Church’s consent to the sale of the lot to
Pante.
From another perspective, any finding of bad faith, if one is
to be made, should be imputed to the Church. Without
securing a court ruling on the validity of its contract with
Pante, the Church sold the subject property to the spouses
Rubi. Article 1390 of the Civil Code declares that voidable
contracts are binding, unless annulled by a proper court
action. From the time the sale to Pante was made and up
until it sold the subject property to the spouses Rubi, the
Church made no move to reject the contract with Pante; it
did not even return the down payment he paid. The
Church’s bad faith in selling the lot to Rubi without
annulling its contract with Pante negates its claim for
damages.
In the absence of any vitiation of consent, the contract
between the Church and Pante stands valid and existing.
Any delay by Pante in paying the full price could not nullify
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
the contract, since (as correctly observed by the CA) it was
a contract of sale. By its terms, the contract did not provide
a stipulation that the Church retained ownership until full
payment of the price. The right to repurchase given to the
Church in case Pante fails to pay within the grace period
provided would have been unnecessary had ownership not
already passed to Pante.
Discussion:
Here the church sold a parcel of land measuring 2x16 meters
to Pante. Subsequently, the church sold a bigger portion of lot
measuring 215 sqm. to the Sps. Rubi. But that 215 sqm included
the one that was previously sold to Pante. So Pante
complained, that’s why he instituted an action to annul the
sale of the church to the Sps Rubi insofar as it included the
portion which was sold to him.
Contention of the church: Actually, our consent was vitiated
by mistake and fraud. Why mistake? Because we thought that
Pante was an actual occupant of the lot. It is our policy that we
can only sell our lots to persons who are already occupying the
property. We thought that such qualifications. So Pante also
misrepresented his qualifications that’s why there was also
fraud.
Now the SC said, not every mistake renders a contract
voidable. When will it make a contract voidable? These two (2)
requisites must concur:
1.) The mistake must be either with regard to the
identity or with regard to the qualification of one of
the contracting parties; and
2.) The identity or qualification must have been the
principal consideration for the celebration of the
contract.
Now, would the status of being an actual possessor of the land
material to the consent of the church into entering into a
contract with Pante? Kay ang iyang ginaingon kay di diay
qualified si Pante because he is not in reality an actual
occupant.
Now, the SC said, it is not believable that it was a qualification
for you to enter into a contract with Pante. Note: Ma’am here
enumerated the instances wherein the SC refuted the church’s
contention:
1.) Even if the Sps Rubi are not actual occupants of the
215 sqm lot which you sold to them. So it’s not
correct na it’s a qualification.
2.) There’s no misrepresentation – you can actually go
to the area and verify for yourself if indeed Pante was
an actual occupant of the land before you sold the
lot to him.
3.) The very size of land sold to Pante which is 2x16 sqm,
it’s not appropriate for actual possession – it can only
be used as a passage way. So your allegation na he
should be in actual possession before you sold the
land to him, it’s not a real qualification that would
vitiate your consent.
So, the SC said that if anybody is guilty of fraud then it
would be the church. Why? Because if you think that your
contract with Pante is voidable because of vitiated
consent, a voidable contract is valid until annulled. So you
have to wait first for the annulment of your contract to
Pante before you disregard the contract.
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(Case not cited by Ma’am)
FACTS:
In this particular case, the same noh, mistake was alleged which
vitiated the consent of the parties. The SC said, the relief sought
by respondent was for a refund, and he continued to occupy
the properties after he found that the same were smaller in
area. Because when he bought the property, according to him,
ingani daw ang sqm dapat sa property – let’s say 1,000 sqm. but
then, he found out later on that it was of a smaller area. He also
did not abandon the property, but he continued to possess the
property. But he wanted to annul because there was vitiated
consent. He also alleged that he was unable to read and the
contract was not in a language understood by him, and there
was mistake or fraud.
RULING:
The person enforcing the contract must show that the terms of
the contract have been fully explained to the other person who
alleged that he was not able or that he could not read. So the
SC said that these Articles are not applicable to this case. The
mistake must be so material as to the essence of a contract.
That without the mistake, the agreement would not have been
made. In this particular case, the SC said that you could not
have been mistaken. Because again, even if you alleged that the
area was not the one which you agreed to enter into, you
continued possessing the property.
Before one could invoke that provision under the Civil Code na,
for example, the buyer in this particular case, it is the burden of
the buyer to show that he explain the contract to the seller if the
seller alleges na:
1.) He is unable to read, and
2.) The contract is not in a language which is known to
him.
But before he can even apply, you must first prove that you are
unable to read. Before the burden of the other party arises, you
must first have the burden of showing na not only that xx you
must be able to prove that you are not able to read and that the
contract is not in a language or dialect known to you. So here,
these are not present.
In mistake also, pls remember the principle of CAVEAT
EMPTOR (buyers beware).
CAVEAT EMPTOR
The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are not
in themselves fraudulent.
There’s no mistake if the party alleging knew the doubt,
contingency or risk affecting the object of the contract. There
is something there that would arouse your suspicion na you
should make investigation.
Examples:
-You’re buying a parcel of land and A represents that
he’s the owner of the land. But when you went to the
property, there were occupants of the land which is
not A – they are not at all related to A. In that
particular scenario you would know that there is
some risk in that particular transaction.
4 Atty. LCYE said to take note of the difference between violence and intimidation.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
-In normal circumstances when you go to the grocery
when you buy shampoo like Rejoice, Palmolive, etc.
kay gwapo kaayu ang buhok sa model na naa sa
commercial. Then, pagshampoo nimo ngano di man
gihapon ni straight akng buhok? Ngano buhaghag
raman gihapon? So that’s another example.
b) Mutual error: Has a legal effect in an agreement
when the legal purpose of the parties of the parties
is frustrated may vitiate consent.
Now remember ha, both parties to the contract committed an
error and the mistake it to the legal effect of the agreement.
But what is important here is the real purpose of the parties is
frustrated. Here, the law says, “it may vitiate consent.” So
meaning, your remedy here would be an ANNULMENT OF THE
CONTRACT, because there is vitiated consent.
What if you entered into a mortgage contract with me? So that
was the intention – a mortgage contract. And then, as written,
it was actually a pacto de retro sale, and then you signed it.
What is your remedy here? Because thought that it was a
mortgage contract.
Q: Would it be annulment?
No, your remedy there would be REFORMATION.
Q: What’s the difference?
Because in reformation, there’s actually a meeting
of the minds. Both of you agreed on a mortgage. It
just so happen that maybe, not your fault but the
fault of the one who drafted the document, or
maybe the fault of imong kapartner diadto na wa cya
nagsaba na ang gidraft kay pacto de retro sale. Your
remedy is reformation. But here, there’s no meeting
of the minds because the real purpose of the parties
was frustrated. Wala sila nagkasinabot. Maybe ikaw
gusto nimo kay mortgage unya cya kay gusto niya ug
pacto de retro sale. So jud mo nagkasinabot in the
first place.
REFORMATION ANNULMENT
- There’s actually a meeting -The real purpose of the
of the minds but it was not parties is frustrated (no
reflected on the contract. meeting of the minds).
-There’s no vitiation of -There is vitiation of
consent. consent.
c) Violence4: Just remember the definition. Here, there
is physical compulsion. Gilaparo ka, cge kng di ka
numpirma ani. So there is violence.
What if the violence was committed by a 3rd person? Can
the aggrieved party file a case for annulment? YES! It
doesn’t matter if it’s a 3rd person.
d) Intimidation: Here the compulsion is moral and not
physical. Wala man ka gipusil pero gianaan mn pud
kag armalite saimong ulo. “Mupirma ka or dili?” Pero
kng gidukol ka ato, then that’s violence. Just
remember what are the definitions.
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What if the intimidation was committed by a 3rd person?
Can the aggrieved party file a case for annulment? YES! It
doesn’t matter if it’s a 3rd person.
e) Undue Influence: There is undue influence when a
person takes improper advantage of his power over
the will of another, depriving the latter of a
reasonable freedom of choice. The following
circumstances shall be considered: the confidential,
family, spiritual and other relations between the
parties, or the fact that the person alleged to have
been unduly influenced was suffering from mental
weakness, or was ignorant or in financial distress.
Here, walay physical and moral compulsion, but the other
party took advantage of his power over the will of another.
parties are partners in a partnership. There’s
somebody outside the partnership interested to buy
the partnership property. Let’s say P10M, and ang
nakabalo kay si A. giingnan niya si B na “Partner,
pwede nako paliton imung share sa partnership?
Bayaran tika ug P5M.” Nisugot pud si partner not
knowing na naay gusto mupalit at P10M. so here, the
act of A is fraudulent. It is fraud.
2.) The usual exaggerations in trade, when the other
party had an opportunity to know the facts, are not
in themselves fraudulent. “Caveat emptor” – So di
ka mutuo nang mga storya lng. Kabalo mn ta unsay
tinuod. Kng nagpaatik gihapon ka, then it’s your
fault.

Example: 3.) A mere expression of an opinion does not signify

fraud, unless made by an expert and the other party
a.) In Succession – Priest unya nagconfess si testator
has relied on the former's special knowledge –
before the priest after his last confession, during his
Opinion itself even if it wrong does not constitute
last illness and then after his confession he made a
fraud. Delikado bya ni saatong profession kay we
will and he gave his building in Jacinto St., to the
give legal opinions, and then kng mamali diay ta kay
priest. Dba the priest is disqualified? Why? Because
nagrely diadto atong client, are we liable for fraud?
the law says there is undue influence there. In fact,
As long as naay legal basis ang imung opinion. You
the presumption is conclusive. You cannot prove
can always jusitify your opinion.
otherwise. Even if at the time na nagconfess wala
man siguro nagingon si Fr. Na, “Unsa man pusilon
4.) Misrepresentation by a third person does not vitiate
tika?” Wala man siguro. Pero dba, the power. Siguro
consent, unless such misrepresentation has created
nagpadungog dungog lng cya na “Mas maayo jud
substantial mistake and the same is mutual – Now
siguro na at least man lng makahatag kag building kay
pls remember that when it comes to
para malangit pud siguro ka.” Pero walay violence ha
misrepresentation, if it is a 3rd person who
or any any moral pressure.
committed the misrepresentation as a general rule,
it will not be a ground for annulment of the contract.
f) Fraud: There is fraud when, through insidious words
But if the misrepresentation has created a
or machinations of one of the contracting parties,
substantial mistake on both parties, then it’s a
the other is induced to enter into a contract which,
ground for annulment.
without them, he would not have agreed to.
*NOTE:
We discussed already before what is this fraud which
would vitiate consent. Dba there are 2 kinds of fraud?
a) Remedy is annulment of contract
a.) Fraud in the execution (dolo causante); and
b) Can be availed of by the innocent party.
b.) Fraud in the performance (dolo incidente) c) Cannot be assailed by 3rd parties

What is the fraud that we are referring to here?

o It is FRAUD IN THE EXECUTION OR DOLO
CAUSANTE. Meaning, you employed fraud precisely
to secure the consent of the other party to enter into Unenforceable contracts
the contract. That is a ground for ANNULMENT. This (Arts. 1403-1407, 1317) –
vitiates consent and the contract is voidable.
We have three (3) kinds of unenforceable contracts:
o Katong FRAUD IN THE PERFORMANCE OR DOLO 1.) Unauthorized contracts;
INCIDENTE, that is a ground to recover damages but 2.) Those which do not comply with the
not to annul the contract. Statute of Frauds;
3.) Both parties are incapable of giving
*NOTE: You should remember the distinctions.
IN FRAUD, YOU SHOULD REMEMBER THESE PARTICULAR consent to a contract
PROVISIONS:
Let’s discuss them one by one…
1.) Failure to disclose facts, when there is a duty to
1.) UNAUTHORIZED CONTRACTS – This would be under
reveal them, as when the parties are bound by
Article 1317 and Article 1403 (1).
confidential relations, constitutes fraud – Di man
siguro tanan kinahanglan nimu iingon. Nakaplait ka ARTICLE 1317. No one may contract in the name of another
ug car and you bought it for P200k. then now you’re without being authorized by the latter, or unless he has by
selling it for P500k. Are you in an obligation to tell the law a right to represent him.
buyer na “P200k ragud akng palit ani unya ibaligya
nako saimo for P500k.”? No, you’re not under any A contract entered into in the name of another by one who
obligation. Unless, you’re bound by the confidential has no authority or legal representation, or who has acted
relations. Like in one example given in one case: The beyond his powers, shall be unenforceable, unless it is
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ratified, expressly or impliedly, by the person on whose
behalf it has been executed, before it is revoked by the other
contracting party.
ARTICLE 1403. The following contracts are unenforceable,
unless they are ratified:
(1) Those entered into in the name of another person by one
who has been given no authority or legal representation, or
who has acted beyond his powers;
Discussion:
So the same lng ilang concept – the person acted in
representation of another, although in reality he’s not
authorized or he exceeded his authority. So the contract is
unenforceable.
Examples:
a.) A sold to B a parcel of land, the land belongs to X. in
the contract of sale, it is stated, “X represented by A,
hereinafter known as the seller, and B as the buyer.”
So in the contract, nakabutang didto ang pangalan ni
X represented by his atty-in-fact, A. although in
reality, wa kabalo si X na nabaligya na ang iyang yuta.
Wa niya giauthorize si A. That is an unenforceable
contract. That falls under Article 1317.
b.) What if in the contract, X is the seller and B as the
buyer. Then there’s a signature above the name of X.
but it turns out that it is not the signature of X. what
is the status of the contract? Si A ang nagpirma. Ana
cya na gibaligya ni ni X, pero way giingon na X is
represented by A; si X lng diretso, selling the land to
B. what is the status of the contract? It is void,
because there’s no consent on the part of X.
c.) What if A seller and B as buyer, pero land na gibaligya
kay X. what is the status of that contract? Also, it is
void because A is not the owner of the land. If you
remember, the object of the contract does not exist
at the time of the transaction. But if you remember
under Article 1409, it could still be valid kay what if
gipalit diay ni A later on ang yuta kay X. So what is the
important point in time that you have to remember?
At the time when there is supposed to be
performance or delivery wala gyuy mahatag si A. So
here, the contract is void.
2.) THOSE WHICH DO NOT COMPLY WITH THE
STATUTE OF FRAUDS
Art. 1403 xxx
(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;
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
(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 sufficient 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.
Discussion:
So unsa man tung importance sa SOF? Under the SOF, these
contracts must be in writing. Otherwise, these contracts
cannot be enforced. Although they are valid contracts but you
cannot enforce them.
Q: What’s the difference between a void contract and an
unenforceable contract?
VOID CONTRACT UNENFORCEABLE CONTRACT
-Similarity: Cannot be -Similarity: Cannot be
enforced enforced
-Cannot be ratified at all. -Can be ratified à There’s a
chance na pwede pa diay cya
matagaan ug effect.
*NOTE: Pls. MEMORIZE these contracts enumerated under the
SOF.
a.) An agreement that by its terms is not to be performed
within a year from the making thereof – Like construction
agreement. Nagsabot namo karon na magpabuhat kog balay
P2M. Sugot mo unya nagshake hands namo ni contractor. Pero
buhaton na cya next yr pa. Pwede pa mubackout ana si
contractor because it is unenforceable.
What if the agreement is, “Ok, within a year from now you will
not pass by my estate. Di ka pwede muagi dri.” Is that covered
by letter a? No, because it is not something which is not to be
performed within a year. Actually, karon na mag arise imung
obligation which is an obligation not to do. So it is immediately
enforced.
b.) A special promise to answer for the debt, default, or
miscarriage of another – Guarantee, for example. So if it’s not
in writing, it’s not enforceable.
c.) An agreement made in consideration of marriage, other
than a mutual promise to marry – Prenup agreement à it has
to be in writing for it to be enforceable. So you know unsay
difference ani with breach of promise to marry. Like nagbuhat
mog kasulatan na magpakasal mo unya wala diay nisipot ang
isa. It’s not actionable, unless there’s a violation of the
Principles of Human Relations.
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d.) An agreement for the sale of goods, chattels or things in
action, at a price not less than five hundred pesos – So kung
P500 ang imung presyo, you have to put it in writing.
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
– More than 1 yr ang duration sainyong lease, dapat it has to
be in writing.
f.) A representation as to the credit of a third person – How
different is this from letter b? in letter b, you promise to
answer for the debt. Ang sa letter f, muingon lng ka na “He can
pay his debt.” If it is not in writing, then you’re not liable for
your representation.
Q: WHAT IS THE SIGNIFICANCE OF THE SOF?
When you say SOF, the law says, “it is descriptive of
statutes that require certain classes of contracts to be
in writing; and that do not deprive the parties of the
right to contract with respect to the matters therein
involved, but merely regulate the formalities of the
contract necessary to render it enforceable.” (THE
MUNICIPALITY OF HAGONOY, BULACAN vs. HON.
SIMEON P. DUMDUM, JR. (G.R. No. 168289, March 22,
2010)
Meaning, it is a valid contract. You can still enter into that
contract, but can you prove that contract? That is another
question. If it is not in writing, you cannot prove it. Although
there are still possibilities that you can still prove it, as we will
discuss later.
Now, under the SOF xx so the contract must be in writing or at
least evidenced by a memorandum or note of a transaction
subscribed by the party charged, meaning gipirmahan. But is
there a requirement na everything must be in one document
or a set of documents like deed of sale. So dapat isa lng jud na
cya? How about separate documents, would that be allowed?
Dba we discussed before offer, counter-offer. So A offered to
B his land, unya B made a counter-offer. Unya A made a
counter-offer. Siguro nakaexchange silag mga pulo (10) ka
letters before they agreed. Wala sila nagexecute ug any other
document like a formal deed of sale. It’s a real property which
is involved. Is that compliant with the SOF?
RULE ON PAPERS CONNECTED
(Answer to the query in the preceding paragraph)
Under the SOF, no particular form of language or instrument
is necessary to constitute a memorandum or note. Any
document or writing, formal or informal may be allowed. The
note or memorandum required by the statute of fraud
required need not be contained in a single document, nor,
when contained in two or more papers, need each paper to
be sufficient as to contents and signature to satisfy the
statute. Two or more writings properly connected may be
considered together, matters missing or uncertain in one may
be supplied or rendered certain by another, and their
sufficiency will depend on whether, taken together, they
meet the requirement of the statute as to contents and the
requirements of the statute as to signature.*
*As long as you can connect all those documents to show all
the requisites of that contract and the signatures, then that
would be sufficient compliance with the SOF.
Q: CAN THE DEFENSE UNDER THE SOF BE WAIVED OR
RATIFIED?
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Yes. Even if it is unenforceable, it doesn’t mean na
wala nakay pag-asa kung nakapalit kag yuta unya
verbal ln gang inyong agreement.
Example: A and B entered into a contract of sale over a parcel
of land owned by A. so ang ilahang sabot P1M pero 10 ha. So
lipay kaayu si A kay jackpot cya. K, nagshake hands sila,
nagbeso2x again. So didto sila sa sari2x store nagtransact. So
nagsabot sila na “Tomorrow, I will pay you A the P1M.” So pagka
ugma nagdala ug bayong si B with P1M. iyaha nang gibayad kay
A pero di na mudawat si A kay naa nay gusto mupalit at P10M.
Suko kaayu si B, he filed an action for specific performance.
If you’re the lawyer of A, what will you do? (Side comment: Ah,
wala nay motion to dismiss under the Rules of Civil Procedure.
Ang iyaha untang idefense dha would be that the contract is
unenforceable under the SOF. So dili cya pwede. Even if,
assuming for the sake of argument na there was really a
contract, but it is unenforceable under the SOF. So kung sa daan
pata na rules, if ikaw ang lawyer ni A, you would file a MTD
alleging that as your ground, or you can file an answer with
affirmative defense interposing that as a ground also. Again,
under the new rules, sa answer nana cya as affirmative defense.
Pero inig Bar ninyo di paman na cya effective, so iignore sako.)
What if nakalimot man si lawyer ni A saiyang Oblicon giingon
niya na “Hubog man ko at that time we agreed.” So vitiated
consent ang iyahang ground.
Q: Can you still invoke that?
No, it is already waived. So that’s one, waiver. Under the
OMNIBUS MOTION RULE, defenses or objections not
raised in the MTD are barred. So that’s one. OR
Si lawyer ni A nagfile ug answer and he interposed that as an
affirmative defense, so wala cya nawaive. During the
presentation of evidence, si B called to the witness stand the
owner of the sari2x store. The purpose is that one this
particular date, A and B entered into a contract of sale. So ang
lawyer ni seller A wala cya nag object. Dba you know na
objections to testimonial evidence shall be made at the time it
is offered. So pagoffer wala cya nagobject, so nagtestify so
owner of the sari2x store. Worse, nagcross-examine pajud si
lawyer. The defect is now waived. So that is failure to object
to the presentation of oral evidence. OR
By the acceptance of benefit under them. Halimbawa
nagdownpayment diay to si buyer ug P100k kay seller. Then,
even if it is not in writing, even if it is verbal, it is already taken
out of the coverage of the SOF. It can already be proved by
oral/parol evidence. So here, waived na.
An example is in the case of…
San Miguel Properties v. BF Homes
HELD: The SOF is applicable only to contracts which are
executory and not to those which are already consummated,
either totally or partially. If a contract has been totally or
partially performed, the exclusion of parol evidence would
promote fraud or bad faith, for it would enable the defendant
to keep the benefits already derived from by him from the
transaction in litigation, at the same time evade the
obligations, responsibilities and liabilities assumed and
contracted by him.
Discussion:
Instead of preventing fraud, you are actually allowing fraud to
be perpetrated if you will not allow the contract to be proved
by oral evidence despite acceptance of benefits.
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In this particular case, a certain Mr. Orendain entered into a
contract of sale in representation of BF Homes.
Now, BF Homes was placed under receivership, so Mr.
Orendain was the receiver for BF Homes. But according to BF
Homes, the contract was unenforceable. Why? B’coz Orendain
was already substituted as a receiver at the time when he
signed the deed of sale. Actually, it was true that Orendain was
already substituted at the time when he entered into a deed of
sale. Ang bag-o na receiver is FBO Networks Management Inc.,
but Mr. Orendain was the President of FBO and he signed as
President of FBO. So FBO was the receiver. Actually, it was
signed by the receiver just represented by Orendain.
So, as to the lack of authority, the SC said na he was
authorized. Now, assuming for the sake of argument that
there was really no authority on the part of Orendain to sign
the deed to sale. But the SC said, “BF Homes ratified the DOS
when it accepted full payments of the purchase price for the
lots.” So if you invoke Article 1403 that the contract was
unenforceable xx actually the contract is unenforceable
because the one who signed had no authority, still there was
ratification.
*NOTE: So remember those ways na the contract under the
SOF may be ratified.
Let’s go to the 3rd kind of unenforceable contract…
3.) BOTH PARTIES ARE INCAPABLE OF GIVING
CONSENT TO THE CONTRACT
Situations:
a.) So isa ka minor ug is aka buang – they entered
into a contract. What is the status of that
contract? It is unenforceable.
b.) What if si buang naayo na cya? What if si minor,
minor lng gihapon? The contract is now elevated
into the status of a voidable contract.
c.) Kung si minor legal age napud cya and he did not
do anything to impugn the contract, then the
contract is now perfectly valid.
Void contracts
Arts. 1409, 1346
ARTICLE 1409. The following contracts are inexistent
and void from the beginning:
(1) Those whose cause, object or purpose is
contrary to law, morals, good customs,
public order or public policy;
(2) Those which are absolutely simulated or
fictitious;
(3) Those whose cause or object did not exist at
the time of the transaction;
(4) Those whose object is outside the commerce
of men;
(5) Those which contemplate an impossible
service;
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
(6) Those where the intention of the parties
relative to the principal object of the
contract cannot be ascertained;
(7) Those expressly prohibited or declared void
by law.
These contracts cannot be ratified. Neither can the right to
set up the defense of illegality be waived.
Examples:
a.) You’re familiar with the homestead dba? So within 5
years from the award, you cannot sell the land
subject of the mortgage. So that’s void because of
an express prohibition by law.
b.) Absolutely simulated contracts are also declared
void by law – because again, it’s either there’s no
consent or there’s no object. Know the distinctions
between ABSOLUTE SIMULATION and RELATIVE
SIMULATION.
ABSOLUTE SIMULATION RELATIVE SIMULATION
Not valid at all. The parties are bound to
their real agreement, as long
as their real agreement is not
contrary to law, morals,
good customs, public order
and public policy.
Q: CAN YOU GIVE EXAMPLES OF A VOID STIPULATION/S IN A
CONTRACT, WHAT ARE SOME OF THE VOID STIPULATIONS
UNDER THE NEW CIVIL CODE?
1. Pactum commissorium - Arts. 2088, 2130, 1390
Art. 2088.
The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
-You know what’s pactum commissorium dba? When a
property is pledged or mortgaged, the creditor cannot
automatically appropriate those collaterals. It has to follow
the procedures which is sale at foreclosure, sale at public
auction. Why? Because kung automatic forfeiture, for
example, mas dako diay ang proceeds sa property kaysa sa
utang. Mabalik bya na cya sa creditor. If it is automatic
forfeiture, wala na; or redemption. Wala napud if it is
automatic forfeiture. Any stipulation to the contrary is null and
void.
2. Pactum de non alienando – Art. 2130
A stipulation forbidding the owner from alienating
the immovable mortgaged shall be void.
-Because the mortgagor still remains to be the owner.
3. Pactumleonina – Art. 1799
A stipulation which excludes one or more partners
from any share in the profits or losses is void.
-Di na cya pwede. If you’re partners, you should share
everything – the profits and the losses.
In this case of…
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FUENTES vs. ROCA (G.R. No. 178902, April 21, 2010)
This case is about a husband’s sale of conjugal real
property, employing a challenged affidavit of consent from
an estranged wife. The buyers claim valid consent, loss of
right to declare nullity of sale, and prescription.
HELD: Contrary to the ruling of the Court of Appeals, the
law that applies to this case is the Family Code, not the Civil
Code. Although Tarciano and Rosario got married in 1950,
Tarciano sold the conjugal property to the Fuentes spouses
on January 11, 1989, a few months after the Family Code
took effect on August 3, 1988.
When Tarciano married Rosario, the Civil Code put in place
the system of conjugal partnership of gains on their
property relations. While its Article 165 made Tarciano the
sole administrator of the conjugal partnership, Article 166
prohibited him from selling commonly owned real property
without his wife’s consent. Still, if he sold the same without
his wife’s consent, the sale is not void but merely voidable.
Article 173 gave Rosario the right to have the sale annulled
during the marriage within ten years from the date of the
sale. Failing in that, she or her heirs may demand, after
dissolution of the marriage, only the value of the property
that Tarciano fraudulently sold. But, as already stated, the
Family Code took effect on August 3, 1988. Its Chapter 4 on
Conjugal Partnership of Gains expressly superseded Title VI,
Book I of the Civil Code on Property Relations Between
Husband and Wife. Further, the Family Code provisions
were also made to apply to already existing conjugal
partnerships without prejudice to vested rights.
Consequently, when Tarciano sold the conjugal lot to the
Fuentes spouses on January 11, 1989, the law that governed
the disposal of that lot was already the Family Code.
In contrast to Article 173 of the Civil Code, Article 124 of the
Family Code does not provide a period within which the
wife who gave no consent may assail her husband’s sale of
the real property. It simply provides that without the other
spouse’s written consent or a court order allowing the sale,
the same would be void.
Under the provisions of the Civil Code governing contracts,
a void or inexistent contract has no force and effect from
the very beginning. And this rule applies to contracts that
are declared void by positive provision of law, as in the case
of a sale of conjugal property without the other spouse’s
written consent. A void contract is equivalent to nothing
and is absolutely wanting in civil effects. It cannot be
validated either by ratification or prescription.
But, although a void contract has no legal effects even if no
action is taken to set it aside, when any of its terms have
been performed, an action to declare its inexistence is
necessary to allow restitution of what has been given under
it. This action, according to Article 1410 of the Civil Code
does not prescribe. Here, the Rocas filed an action against
the Fuentes spouses in 1997 for annulment of sale and
reconveyance of the real property that Tarciano sold
without their mother’s (his wife’s) written consent. The
passage of time did not erode the right to bring such an
action.
Discussion:
I think you’re familiar with this case already. You discussed this
in your Persons and Family Relations also. CPG ang nag govern
sailing property regime because they were married before the
Family Code. So when it is CPG, dili tanan inyuha. The question
here was as to the sale because the property was sold.
However, the property was sold during the effectivity of the
Family Code (FC). Previous to the FC, dli na cya void but just
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
voidable. Pero under the FC, void na cya. Ang question karon
is, What is the status of the sale?
Contention of the seller: Voidable lng cya because even if it
was made during the effectivity of the FC, but the property
belongs to the CPG.
But the SC said that, the same is void not merely voidable
under the FC. It will be the FC that will govern because the sale
was made during the effectivity of the FC.
Q: What is the status of a void contract?
The SC said that of course, a void contract has no
legal effect. It is as if there is no contract. If that is
the case, is there a need to declare the contract as
null and void? If there is no performance yet on the
part of either party, you don’t have to file an action
to declare the contract as null and void. A void
contract has no legal effects even if no action is taken
to set it aside, when any of its terms have been
performed, an action to declare its inexistence is
necessary to allow restitution of what has been given
under it – So there’s a need to declare it as null and
void. You cannot take the law into your own hands
now.
Q: How about the prescriptive period?
Well, you know that an action to declare a contract
as null and void does not prescribe. So the passage
of time did not erode the right to bring such an action.
But when we discussed prescription before, even if
the contract is null and void, your action to declare it
as null and void can be barred by laches, although it
is imprescriptible.
G. Holdings, Inc. vs. Cagayan Electric Power and Light
Company, Inc. (CEPALCO) and Ferrochrome Philippines, Inc.
(G.R. No. 226213, Sept. 27, 2017)
(Doctrine: You cannot have a rescissible and a void contract
at the same time)
Naa lay discussion here because there’s a collection case filed
by Sepalco against FPI. Then judgment was rendered against
FPI. So the sheriff levied the properties of FPI. But now, a
sister company of FPI said, “Hoy, dli na kay FPI, akoa nang
property. You should not levy that because you can only levy
properties belonging to the debtor.” According to GHI, there
was a Deed of Assignment in my favor over those properties.
Now the contract between FPI and GHI according to the CA
is inexistent because it was absolutely simulated, and it was
rescissible at the same time because it was intended to
defraud the creditor which was Sepalco.
Discussion:
I) Can there be a contract which is inexistent and rescssible at
the same time?
SC said, no. Rescission and nullity can be
distinguished in the ff. manner: (Dli sila pwede
magconcur. They’re mutually exclusive. )
By reason of the:
1.) BASIS:
a.) Rescission is based on prejudice; while
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b.) Nullity is based on a vice or defect of one of the
essential elements of a contract
Vicente Manzano, Jr. vs. Marcelino Garcia (G.R. No.
2.) PURPOSE: 179323, November 28, 2011)

a.) Reparation of damages ang purpose sa rescission;
while
b.) Nullity is a sanction
3.) EFFECTS:
a.) Rescission affects private interest; while
b.) Nullity affects public interest
4.) NATURE OF THE ACTION:
a.) Rescission is subsidiary; while
b.) Nullity is a principal action
5.) PARTY WHO CAN BRING THE ACTION:
There are two types of void contracts: (1) those where one
of the essential requisites of a valid contract as provided for
by Article 1318 of the Civil Code is totally wanting; and (2)
those declared to be so under Article 1409 of the Civil Code.
[C]onveyances by virtue of a forged signature x x x are void
ab initio. At this point, however, we should clarify that the
proper basis for the nullity of the forged pacto de retro sale
is not Article 1409 (which enumerates examples of void
contracts) in relation to Article 1505 (which refers to an
unenforceable contract and is applicable only to goods) of
the Civil Code as stated by the Court of Appeals, but Article
1318 of the Civil Code, which enumerates the essential
requisites of a valid contract:
Article 1318. There is no contract unless the following
requisites concur:

a.) Rescission can be brought by a 3rd person; while
b.) Nullity can only be brought by a party. (Side
comment: Actually, di kayo ni accurate ha. Even if
you’re a 3rd party, as long as your rights are directly
affecte3d, you can file an action for the declaration of
nullity of a contract).
6.) SUSCEPTIBILITY TO RATIFICATION:
a.) Rescissible contracts need not be ratified; while
b.) Void contracts cannot be ratified.
So the SC also distinguished them as to defect, effect and as to
prescriptibility of action or defense, as to susceptibility of
ratification, as to who may assail the contract and as to how
the contract may be assailed. So here, just read the case noh
so that you will get all these distinctions.
The enumerations and distinctions indicate that they belong to
two (2) mutually exclusive groups. So they cannot at the same
time be a rescissible contract and null and void contracts.
(II) Are void and inexistent contracts the same?
How about void and inexistent contracts, are they the same?
Usahay muingon tag the same. But the SC said that there’s a
distinction between inexistent contracts and void ones as to
their effects.
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the
contract;
(3) Cause of the obligation which is established.
The absence of the essential [requisites] of consent and
cause or consideration in these cases rendered the contract
inexistent. x x x.
Discussion:
This is in relation to what I mentioned before. The signature of
the seller in the contract was forged.
Q: When the signature is forged, what is the status of the
contract? Definitely, it is void. But what kind of void? Asa siya
ma fall? In this case, the SC said,
“There are two types of void contracts: (1) those where one of
the essential requisites of a valid contract as provided for by
Article 1318 of the Civil Code is totally wanting; and (2) those
declared to be so under Article 1409 of the Civil Code.” So if the
signature is forged, asa mana cya ma belong? It belongs to the
void contracts which lacks those any essential requisites under
Article 1318 – lack of consent on the part of the party.

INEXISTENT CONTRACTS VOID CONTRACTS

Produces no legal effect When the nullity proceeds

whatsoever in
accordance with the
principle quod nullum es
nullum producit effectum.
Dri, wla jud cyay effect at
all. As if walay nahitabo.
from the illegality of the cause
of object when executed, they
have the effect of barring any
action by the guilty to recover
what he has already given
under the contract.
So here, naa nay performance;
naa nay gihatag. So naan a
cyay consequence – it bars
recovery.

In this particular case, the SC said that the contract is null and
void because it was absolutely simulated. There was really no
intention on the part of FPI and GHI to be bound by that
contract. The circumstances in this case would show that FPI
still retained control over the property. So, it was void; it was
not rescissible because again, YOU CANNOT HAVE A
RESCISSIBLE AND A VOID CONTRACT AT THE SAME TIME.

A transcription of the 2020 lectures of Atty. Yangyang- Espejo

BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE

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DISTINCTIONS BETWEEN THE 4 DEFECTIVE CONTRACTS ARTICLE 1310. The determination shall not be obligatory if it
is evidently inequitable. In such case, the courts shall decide
Rescissible Voidable Unenforceable Void what is equitable under the circumstances.
Existence Valid Valid Valid Does not
exist
Enforceability Enforceable Enforceable Not Not If you enter into a contract, both of you are bound by your
Susceptibility Yes Yes Yes No contract. You cannot unilaterally change, modify or amend any
to provision of your contract. You cannot unilaterally pre-
Ratification terminate your contract. You cannot decide alone whether or
or Waiver
Action by Yes No No Yes, as long not this contract is valid. So that’s the principle of mutuality.
Third as directly
Persons affected Examples:
Readily No. It is Yes Yes Yes
invoked? subsidiary
a.) In a lease contract, there’s a stipulation that, “This
Prescription Prescribes Prescribes No No
in 4 years in 4 years prescription prescription contract is for a 5-year period subject to an option to
renew.” Ang question, kung di cya klaro, kinsa man
ang naay option to renew? Is it the lessor or the
Comments: lessee? Under the principle of mutuality of contracts,
both parties must agree. One cannot just decide na
*ACTION BY 3RD PERSONS: that contract is already renewed.
a.) Rescissible – Yes. For example, accion pauliana.
The creditor whose rights are prejudiced can assail the How about here in…
contract between the debtor and the 3rd party.
ALLIED BANKING CORPORATION vs. COURT OF APPEALS
b.) Voidable – Only the parties to the contract can (G.R. No. 124290 January 16, 1998)
assail the contract, not 3rd persons. Why? Remember the
contracts are susceptible to ratification. What if one of them ISSUE: Whether a stipulation in a contract of lease to the
will ratify, so unsay labot sa 3rd party. effect that the contract "may be renewed for a like term at
the option of the lessee" is void for being potestative or
c.) Unenforceable – Only the parties to the contract violative of the principle of mutuality of contracts under
can assail the contract , not 3rd persons. Why? Remember the Art. 1308 of the Civil Code.
contracts are susceptible to ratification. What if one of them
will ratify, so unsay labot sa 3rd party. HELD: It is valid.

d.) Void – Can be assailed by a 3rd person whose
rights are directly affected. E.g. A sold to B his land covered by
a homestead patent. He sold it within the prohibitory period
(like 2 yrs gibaligya niya.
NOTE: A lot subject to a homestead patent cannot be alienated
within the 5-yr period from the time that such homestead patent
was granted. Any such alienation is deemed void). Void na cya.
A after 5 yrs sold his land to X. So valid tung sale kay X. Can X
assail the previous contract between A and B? Yes, because it
directly affects his rights. Even if he’s not a party to that first
contract. 30.15
Effects in contracts
Article 1308 of the Civil Code expresses what is known in
law as the principle of mutuality of contracts. It provides
that "the contract must bind both the contracting parties;
its validity or compliance cannot be left to the will of one of
them." This binding effect of a contract on both parties is
based on the principle that the obligations arising from the
contracts have the force of law between the contracting
parties, and there must be mutuality between them based
essentially on their equality under which it is repugnant to
have one party bound by the contract while leaving the
other free therefrom. The ultimate purpose is to render
void a contract containing a condition which makes its
fulfillment dependent solely upon the uncontrolled will of
one of the contracting parties.

Basic principles of contracts that you need to remember:
1.) FREEDOM TO STIPULATE – LIMITATION: You can include all
terms as long as it is not contrary to law, morals, good
customs, etc.
ARTICLE 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
2.) MUTUALITY OF CONTRACTS – This is important. These are
the provisions relevant to the principle of mutuality of
contracts.
ARTICLE 1308. The contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
ARTICLE 1309. The determination of the performance may be
left to a third person, whose decision shall not be binding
until it has been made known to both contracting parties.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
An express agreement which gives the lessee the sole
option to renew the lease is frequent and subject to
statutory restrictions, valid and binding on the parties. This
option, which is provided in the same lease agreement, is
fundamentally part of the consideration in the contract and
is no different from any other provision of the lease
carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely
executory contract and at most confers a right to obtain a
renewal if there is compliance with the conditions on which
the rights is made to depend. The right of renewal
constitutes a part of the lessee's interest in the land and
forms a substantial and integral part of the agreement.
The fact that such option is binding only on the lessor and
can be exercised only by the lessee does not render it void
for lack of mutuality. After all, the lessor is free to give or
not to give the option to the lessee. And while the lessee
has a right to elect whether to continue with the lease or
not, once he exercises his option to continue and the lessor
accepts, both parties are thereafter bound by the new lease
agreement. Their rights and obligations become mutually
fixed, and the lessee is entitled to retain possession of the
property for the duration of the new lease, and the lessor

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may hold him liable for the rent therefor. The lessee cannot
thereafter escape liability even if he should subsequently
decide to abandon the premises. Mutuality obtains in such
a contract and equality exists between the lessor and the
lessee since they remain with the same faculties in respect
to fulfillment.
The case of Lao Lim v. Court of Appeals relied upon by the
trial court is not applicable here. In that case, the stipulation
in the disputed compromise agreement was to the effect
that the lessee would be allowed to stay in the premises "as
long as he needs it and can pay the rents." In the present
case, the questioned provision states that the lease "may
be renewed for a like term at the option of the lessee." The
lessor is bound by the option he has conceded to the lessee.
The lessee likewise becomes bound only when he exercises
his option and the lessor cannot thereafter be executed
from performing his part of the agreement.
With respect to the meaning of the clause "may be
renewed for a like term at the option of the lessee," we
sustain petitioner's contention that its exercise of the
option resulted in the automatic extension of the contract
of lease under the same terms and conditions. The subject
contract simply provides that "the term of this lease shall
be fourteen (14) years and may be renewed for a like term
at the option of the lessee." As we see it, the only term on
which there has been a clear agreement is the period of the
new contract, i.e., fourteen (14) years, which is evident
from the clause "may be renewed for a like term at the
option of the lessee," the phrase "for a like term" referring
to the period. It is silent as to what the specific terms and
conditions of the renewed lease shall be. Shall it be the
same terms and conditions as in the original contract, or
shall it be under the terms and conditions as may be
mutually agreed upon by the parties after the expiration of
the existing lease?
In Ledesma v. Javellana this Court was confronted with a
similar problem. In the case the lessee was given the sole
option to renew the lease, but the contract failed to specify
the terms and conditions that would govern the new
contract. When the lease expired, the lessee demanded an
extension under the same terms and conditions. The lessor
expressed conformity to the renewal of the contract but
refused to accede to the claim of the lessee that the
renewal should be under the same terms and conditions as
the original contract.
The settled rule is that in case of uncertainty as to the
meaning of a provision granting extension to a contract of
lease, the tenant is the one favored and not the landlord.
"As a general rule, in construing provisions relating to
renewals or extensions, where there is any uncertainty, the
tenants is favored, and not the landlord, because the latter,
having the power of stipulating in his own favor, has
neglected to do so; and also upon the principle that every
man's grant is to be taken most strongly against himself (50
Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599).
Besides, if we were to adopt the contrary theory that the
terms and conditions to be embodied in the renewed
contract were still subject to mutual agreement by and
between the parties, then the option which is an integral
part of the consideration for the contract would be
rendered worthless. For then, the lessor could easily defeat
the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the
parties from reaching an agreement, as in the case at bar.
As in a statute no word, clause, sentence, provision or part
of a contract shall be considered surplusage or superfluous,
meaningless, void, insignificant or nugatory, if that can be
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
reasonably avoided. To this end, a construction which will
render every word operative is to be preferred over that
which would make some words idle and nugatory.
Discussion:
It says in the stipulation, "may be renewed for a like term at the
option of the lessee". Gihatag niya kay lessee ang option to
renew. Is it valid? It was alleged na void cya for being
potestative or violative of the principle of mutuality. However,
the SC said that this was actually valid. Why? Because there
was mutuality when you negotiated as to what will be the
terms and provisions and contents of your contract, when you
agreed that it is subject to renewal at the option of the lessee.
So there was mutuality. It was not the sole decision of the
lessee na naa cyay option to renew. It was agreed also by the
lessor. There’s also mutuality because if the lessee exercises
the right/option to renew, the lessee is also bound by that
exercise. He cannot later on say, na “I change my mind, di nako
gusto magrenew.” There is mutuality because he (lessee) is
bound by such exercise.
GF EQUITY, INC., Petitioner, v. ARTURO VALENZONA,
Respondent.
[G.R. NO. 156841 : June 30, 2005]
FACTS:
Here, Valenzona was hired as a basketball coach and then
there was a period stipulated. But under the contract, it
says, “If at any time during the contract, the coach in the sole
opinion of the corporation, fails to exhibit sufficient skill or
competitive ability to coach the team, the corporation may
terminate his contract.” Before he signed the contract,
Valenzona actually consulted his lawyer and his lawyer
warned him na it’s somewhat one-sided, but still he signed.
He was advised later on by mgt that his services were
already terminated saying na “We are invoking our rights
specified in par. 3.” Valenzona here filed an action for
Payment of Compensation arising from the arbitrary and
unilateral termination of employment.
GF Equity’s Contention: It invoked its right in the contract
na actually Valenzona you signed the contract and you
agreed that this will be part of the stipulations.
ISSUE: Is there mutuality?
HELD:
There’s none. The contract incorporates the right GF
Equity’s to pre-terminate the contract if in the sole opinion
of the corporation, he fails to exhibit sufficient skill or
competitive ability. It leaves the determination of whether
Valenzona failed to exhibit sufficient skill or competitive
ability solely to the opinion of GF Equity. So it requires
judgment exclusively on the part of GF Equity. It’s given an
unbridled authority to pre-terminate the contract.
Discussion:
So the SC is saying that actually, a pre-termination clause can
be stipulated. But to say na the reason is solely to the opinion
of GF Equity, this would open the gate for arbitrary and illegal
dismissals because here, void contractual stipulations will be
used as a justification. So it is null and void because it violates
the principle of mutuality.
The SC said, actually the nullity of the stipulation
notwithstanding, GF Equity was not precluded from the right
to pre-terminate the contract. But the pre-termination must
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have a legal basis, not merely solely based on the opinion of
GF Equity. So here, aside from its sole opinion, GF Equity was
not able to advance any other valid grounds to justify the
termination of Valenzona. Ingon lng cya na “Naa sa contract.”
Mao lng na cya. So it is not valid.
Principle of Mutuality in loans
ESCALATION CLAUSES
Another important application of the principle of mutuality in
loans. Diba usually pag magloan ka sa bank, naa tay ginatawag
na escalation clauses. Because pag long-term ang loan, if you’re
the creditor, ngano magpautang man diay ka na di man diay ka
maka-earn ug interest? What if sa katas sainyong period of pre-
payment nagafluctuate ang interest? How would you safeguard
yourself as the creditor from those fluctuating interest?
Imohang interest kay 1% lng unya ang legal rate is 20% na. So
there’s really a necessity to place an escalation clause in the
contract.
EQUITABLE PCI BANK,AIMEE YU AND BEJAN LIONEL
APAS VS. NG SHEUNG NGOR DOING BUSINESS UNDER
THE NAME AND STYLE "KEN MARKETING," KEN
APPLIANCE DIVISION, INC. AND BENJAMIN E. GO (G.R.
No. 171545, December 19, 2007)
Provision in the promissory note: If subject promissory note
is extended, the interest for subsequent extensions shall be
at such rate as shall be determined by the bank.
A contract of adhesion is a contract whereby almost all of
its provisions are drafted by one party. The participation of
the other party is limited to affixing his signature or his
"adhesion" to the contract. For this reason, contracts of
adhesion are strictly construed against the party who
drafted it.
It is erroneous, however, to conclude that contracts of
adhesion are invalid per se. They are, on the contrary, as
binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void
only when the dominant party takes advantage of the
weakness of the other party, completely depriving the
latter of the opportunity to bargain on equal footing.
That was not the case here. As the trial court noted, if the
terms and conditions offered by Equitable had been truly
prejudicial to respondents, they would have walked out and
negotiated with another bank at the first available instance.
But they did not. Instead, they continuously availed of
Equitable's credit facilities for five long years.
Escalation clauses are not void per se. However, one "which
grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the
debtor of the right to assent to an important modification
in the agreement" is void. Clauses of that nature violate the
principle of mutuality of contracts. Article 1308 of the Civil
Code holds that a contract must bind both contracting
parties; its validity or compliance cannot be left to the will
of one of them.
For this reason, we have consistently held that a valid
escalation clause provides:
that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by law or
by the Monetary Board; and
that the stipulated rate of interest will be reduced if
the applicable maximum rate of interest is reduced by law
or by the Monetary Board (de-escalation clause).
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Equitable dictated the interest rates if the term (or period
for repayment) of the loan was extended. Respondents
had no choice but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore, the assailed
escalation clause did not contain the necessary provisions
for validity, that is, it neither provided that the rate of
interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these
reasons, the escalation clause was void.
Discussion:
The stipulation in the PN says, “If subject promissory note is
extended, the interest for subsequent extensions shall be at
such rate as shall be determined by the bank.” This is an
escalation clause. Ayaw mog ka confuse sa escalation clause ug
acceleration clause kay lahi na sila. Valid bani cyan a stipulation?
The SC said no. It violates the principle of mutuality. It leaves
to the discretion of the creditor the increase of the interest
rates. Here, we cannot sustain that. But it does not mean that
we cannot place an escalation clause in the contract.
Escalation clauses are not void per se. However, one "which
grants the creditor an unbridled right to adjust the interest
independently and upwardly, completely depriving the
debtor of the right to assent to an important modification in
the agreement" is void.
Q: How can you make an escalation clause valid?
You have to comply with these two (2) requisites. So
if you’re the lawyer for the creditor, make sure na if
naa kay escalation clause na ibutang sa contract, there
is a corresponding de-escalation clause.
For this reason, we have consistently held that a valid
escalation clause provides:
1. that the rate of interest will only be increased if the
applicable maximum rate of interest is increased by
law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if
the applicable maximum rate of interest is reduced
by law or by the Monetary Board (de-escalation
clause).
Partner na silang duha – requisites 1 and 2.
However, in this case of…
SPOUSES JUICO vs. CHINA BANKING CORPORATION
(G.R. No. 187678, April 10, 2013)
Spouses Ignacio F. Juico and Alice P. Juico (Spouses Juico)
obtained a loan from China Banking Corporation (China
Bank) as evidenced by two Promissory Notes both dated
October 6, 1998 and numbered 507-001051-3 and 507-
001052-0, for the sums of P6,216,000 and P4, 139,000,
respectively. The loan was secured by a Real Estate
Mortgage (REM) over Spouses Juico’s property located at
49 Greensville St., White Plains, Quezon City covered by
Transfer Certificate of Title (TCT) No. RT-103568 (167394)
PR-41208 of the Register of Deeds of Quezon City. The two
promissory notes signed by Spouses Juico provide:
“I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may be,
the interest rate/service charge presently stipulated in this
note without any advance notice to me/us in the event a
law or Central Bank regulation is passed or promulgated by
the Central Bank of the Philippines or appropriate
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government entities, increasing or decreasing such interest
rate or service charge.”
When Spouses Juico failed to pay the monthly
amortizations due, China Bank demanded the full payment
of the outstanding balance with accrued monthly interests.
On September 5, 2000, Spouses Juico received China Bank’s
last demand letter dated August 29, 2000.
As of February 23, 2001, the amount due on the two
promissory notes totaled P19,201,776.63 representing the
principal, interests, penalties and attorney’s fees. On the
same day, the mortgaged property was sold at public
auction, with China Bank as highest bidder for the amount
of P10,300,000.
On May 8, 2001, Spouses Juico received a demand letter
dated May 2, 2001 from China Bank for the payment of
P8,901,776.63, the amount of deficiency after applying the
proceeds of the foreclosure sale to the mortgage debt. As
its demand remained unheeded, China Bank filed a
collection suit in the trial court. In its Complaint, China Bank
prayed that judgment be rendered ordering the Spouses
Juico to pay jointly and severally: (1) P8,901,776.63
representing the amount of deficiency, plus interests at the
legal rate, from February 23, 2001 until fully paid; (2) an
additional amount equivalent to 1/10 of 1% per day of the
total amount, until fully paid, as penalty; (3) an amount
equivalent to 10% of the foregoing amounts as attorney’s
fees; and (4) expenses of litigation and costs of suit.
In their Answer, Spouses Juico admitted the existence of
the debt but interposed, that the interest rates imposed by
China Bank are not valid as they were not by virtue of any
law or Bangko Sentral ng Pilipinas (BSP) regulation or any
regulation that was passed by an appropriate government
entity. They insist that the interest rates were unilaterally
imposed by the bank and thus violate the principle of
mutuality of contracts. They argue that the escalation
clause in the promissory notes does not give China Bank the
unbridled authority to increase the interest rate
unilaterally. Any change must be mutually agreed upon.
The trial court found as valid the stipulation in the
promissory notes that interest will be based on the
prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the
bank but was the rate offered daily by all commercial banks
as approved by the Monetary Board. Having signed the
promissory notes, the trial court ruled that Spouses Juico
are bound by the stipulations contained therein.
HELD:
Escalation clauses are not basically wrong or legally
objectionable as long as they are not solely potestative but
based on reasonable and valid grounds. Obviously, the
fluctuation in the market rates is beyond the control of
private respondent.
In interpreting a contract, its provisions should not be read
in isolation but in relation to each other and in their entirety
so as to render them effective, having in mind the intention
of the parties and the purpose to be achieved. The various
stipulations of a contract shall be interpreted together,
attributing to the doubtful ones that sense which may
result from all of them taken jointly.
Here, the escalation clause in the promissory notes
authorizing the respondent to adjust the rate of interest on
5 So naay escalation and de-escalation clause.
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BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
the basis of a law or regulation issued by the Central Bank
of the Philippines, should be read together with the
statement after the first paragraph where no rate of
interest was fixed as it would be based on prevailing market
rates. While the latter is not strictly an escalation clause, its
clear import was that interest rates would vary as
determined by prevailing market rates. Evidently, the
parties intended the interest on petitioners’ loan, including
any upward or downward adjustment, to be determined by
the prevailing market rates and not dictated by
respondent’s policy. It may also be mentioned that since
the deregulation of bank rates in 1983, the Central Bank has
shifted to a market-oriented interest rate policy.
There is no indication that petitioners were coerced into
agreeing with the foregoing provisions of the promissory
notes. In fact, petitioner Ignacio, a physician engaged in the
medical supply business, admitted having understood his
obligations before signing them. At no time did petitioners
protest the new rates imposed on their loan even when
their property was foreclosed by respondent.
This notwithstanding, we hold that the escalation clause is
still void because it grants respondent the power to impose
an increased rate of interest without a written notice to
petitioners and their written consent. Respondent’s
monthly telephone calls to petitioners advising them of the
prevailing interest rates would not suffice. A detailed billing
statement based on the new imposed interest with
corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to
make an informed decision. An appropriate form must also
be signed by the petitioners to indicate their conformity to
the new rates. Compliance with these requisites is essential
to preserve the mutuality of contracts. For indeed, one-
sided impositions do not have the force of law between the
parties, because such impositions are not based on the
parties’ essential equality.
Modifications in the rate of interest for loans pursuant to
an escalation clause must be the result of an agreement
between the parties. Unless such important change in the
contract terms is mutually agreed upon, it has no binding
effect. In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the
adjusted rates cannot bind them. Hence, we consider as
invalid the interest rates in excess of 15%, the rate charged
for the first year.
Discussion:
In their contract, actually naay escalation ug naay de-
escalation. It says, “I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease 5as the case may be, the
interest rate/service charge presently stipulated in this note
without any advance notice to me/us in the event a law or
Central Bank regulation is passed or promulgated by the Central
Bank of the Philippines or appropriate government entities,
increasing or decreasing such interest rate or service charge.”
Pursuant to this provision, the bank charged interest to the
sps. The sps. contested the interest. According to them, the
interest violated the principle of mutuality of contracts
because the bank unilaterally imposed. Is there violation here
of the principle of mutuality? The SC said, yes. Because even if
there was an escalation, coupled with a de-escalation, the
contract stipulated na without any notice to ask. Dli pwede na
you just impose or charge interest without notifying the
debtor.
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Here, the SC said, there has to be a written notice.
Respondent’s monthly telephone calls to petitioners advising
them of the prevailing interest rates would not suffice. A
detailed billing statement based on the new imposed interest
with corresponding computation of the total debt should have
been provided by the respondent to enable petitioners to make
an informed decision. An appropriate form must also be signed
by the petitioners to indicate their conformity to the new rates.
Compliance with these requisites is essential to preserve the
mutuality of contracts.
(Case not cited by ma’am)
In that case there’s an escalation then there’s a de-
escalation and there’s a provision that the debtors will be
notified.
Held:
Void ang interest because even if naay provision na inotify,
in reality wala ginotify si debtor. So still void.
Lastly, we have the…
3.) PRINCIPLE OF RELATIVITY OF CONTRACTS – Which is in
Article 1311 or we call this privity of contracts.
ARTICLE 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 fulfillment provided he
communicated his acceptance to the obligor before its
revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.
General Rule: Contracts take effect only between the parties,
their assigns and heirs.
Remember ha, this is not the Einstein relativity. This is the
Oblicon relativity. Basig pangutan-on mo unsa na siya.
Meaning, only the parties to the contract can enforce the
contract. They can enforce rights or obligations under the
contract – the parties, their heirs and assigns.
Q: What are exceptions to the PRINCIPLE OF RELATIVITY? We
have the 2nd paragraph (Article 1311):
1.) Stipulation pour atrui –
The contract contains a stipulation in favor of a 3rd
person, even if a 3rd person is not a party, he can invoke
rights like what we discussed in Mandarin Villa v. CA –
katong sa credit card.
2.) In contracts creating real rights, third persons who
come into possession of the object of the contract
are bound thereby, subject to the provisions of the
Mortgage Law and the Land Registration Laws (Art.
1312) –
For example, A mortgaged his land to B. After that, A sold
his land to X. so si X na karon ang tag-iya. What is the
general rule? What if nag-default si A unya iforeclose na
karon ni B, the creditor? Unya pagforeclose niya, ang
tagiya naman diay kay si X. can X say, “Wa koy labot dha.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
Di ako ang nagpirma sa contract.” Under the PRINCIPLE OF
RELATIVITY, X the new owner is bound, because when he
bought a land, he bought all the rights and obligations of
the seller to the land, subject to the provisions of the land
registration law. Under the land registration law, pag
mortgage, pag titled ang land, iannotate nimo dapat ang
mortgage so that 3rd parties may be bound.
Q: What if wala gi-annotate ni B ang mortgage unya gipalit
karon ni X ang land unya nagdefault si debtor? Can X be
liable to observe the mortgage contract? Maforeclose baa
ng land?
No, because X as an innocent purchaser for value
only has notice of all those encumbrances and liens
appearing on the title of the land (MIRROR
DOCTRINE). So kung unsa lang ang nakasulat didto,
mao lng na cya ang akoang bantayan. Kung wala
naka-annotate ang mortgage, it’s as if walay
mortgage as far as I’m concerned.
3.) Creditors are protected in cases of contracts
intended to defraud them (Art. 1313) – ACCION
PAULIANA –
Balik2x nlng jud ning accion pauliana. Subsidiary remedy
of the creditor and then rescission under Article 1381, and
then naa napud cya dri under Article 1313. Why is this an
exception to the rule of relativity or privity? Again let’s go
back, even if the creditor is not a party between his
debtor and iyahang (debtor) kapartner in crime, he can
assail the contract between his debtor and that debtor’s
partner in crime.
4.) Any third person who induces another to violate his
contract shall be liable for damages to the other
contracting party (Art. 1314) – PRINCIPLE OF
TORTOUS INTERFERENCE
This case of Gilchrist noh, dugay nana cya, but even in the
recent jurisprudence, ang principle gihapon ni Gilchrist
ang ilang gina-balik2x. so pls remember the principle in
that case.
SO PING BUN vs. COURT OF APPEALS, TEK HUA
ENTERPRISING CORP. and MANUEL C. TIONG (G.R. No.
120554, September 21, 1999)
(Cited Gilchrist vs. Cuddy)
In 1963, Tek Hua Trading Co, through its managing partner,
So Pek Giok, entered into lease agreements with lessor Dee
C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease
contracts were premises located at Nos. 930, 930-Int., 924-
B and 924-C, Soler Street, Binondo, Manila. Tek Hua used
the areas to store its textiles. The contracts each had a one-
year term. They provided that should the lessee continue
to occupy the premises after the term, the lease shall be on
a month-to-month basis. When the contracts expired, the
parties did not renew the contracts, but Tek Hua continued
to occupy the premises. In 1976, Tek Hua Trading Co. was
dissolved. Later, the original members of Tek Hua Trading
Co. including Manuel C. Tiong, formed Tek Hua Enterprising
Corp., herein respondent corporation. So Pek Giok,
managing partner of Tek Hua Trading, died in 1986. So Pek
Giok’s grandson, petitioner So Ping Bun, occupied the
warehouse for his own textile business, Trendsetter
Marketing.
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On August 1, 1989, lessor DCCSI sent letters addressed to
Tek Hua Enterprises, informing the latter of the 25%
increase in rent effective September 1, 1989. The rent
increase was later on reduced to 20% effective January 1,
1990, upon other lessees’ demand. Again on December 1,
1990, the lessor implemented a 30% rent increase. Enclosed
in these letters were new lease contracts for signing. DCCSI
warned that failure of the lessee to accomplish the
contracts shall be deemed as lack of interest on the lessee’s
part, and agreement to the termination of the
lease. Private respondents did not answer any of these
letters. Still, the lease contracts were not rescinded.
On March 1, 1991, Private respondent Tiong sent a letter to
petitioner, which reads as follows:
March 1, 1991
“Mr. So Ping Bun
930 Soler Street
Binondo, Manila
Dear Mr. So,
Due to my closed (sic) business associate (sic) for three
decades with your late grandfather Mr. So Pek Giok and late
father, Mr. So Chong Bon, I allowed you temporarily to use
the warehouse of Tek Hua Enterprising Corp. for several
years to generate your personal business.
Since I decided to go back into textile business, I need a
warehouse immediately for my stocks. Therefore, please
be advised to vacate all your stocks in Tek Hua Enterprising
Corp. Warehouse. You are hereby given 14 days to vacate
the premises unless you have good reasons that you have
the right to stay. Otherwise, I will be constrained to take
measure to protect my interest.
Please give this urgent matter your preferential attention
to avoid inconvenience on your part.
Very truly yours,
(Sgd) Manuel C. Tiong
MANUEL C. TIONG
President”
Petitioner refused to vacate. On March 4, 1992, petitioner
requested formal contracts of lease with DCCSI in favor
Trendsetter Marketing. So Ping Bun claimed that after the
death of his grandfather, So Pek Giok, he had been
occupying the premises for his textile business and
religiously paid rent. DCCSI acceded to petitioner’s
request. The lease contracts in favor of Trendsetter were
executed.
In the suit for injunction, private respondents pressed for
the nullification of the lease contracts between DCCSI and
petitioner. They also claimed damages.
RULING: The foregoing issues involve, essentially, the
correct interpretation of the applicable law on tortuous
conduct, particularly unlawful interference with
contract. We have to begin, obviously, with certain
fundamental principles on torts and damages.
Damage is the loss, hurt, or harm which results from injury,
and damages are the recompense or compensation
awarded for the damage suffered. One becomes liable in an
action for damages for a nontrespassory invasion of
another’s interest in the private use and enjoyment of asset
if (a) the other has property rights and privileges with
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE
respect to the use or enjoyment interfered with, (b) the
invasion is substantial, (c) the defendant’s conduct is a legal
cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and
actionable under general negligence rules.
The elements of tort interference are: (1) existence of a
valid contract; (2) knowledge on the part of the third
person of the existence of contract; and (3) interference of
the third person is without legal justification or excuse.
A duty which the law of torts is concerned with is respect
for the property of others, and a cause of action ex delicto
may be predicated upon an unlawful interference by one
person of the enjoyment by the other of his private
property. This may pertain to a situation where a third
person induces a party to renege on or violate his
undertaking under a contract. In the case before us,
petitioner’s Trendsetter Marketing asked DCCSI to execute
lease contracts in its favor, and as a result petitioner
deprived respondent corporation of the latter’s property
right. Clearly, and as correctly viewed by the appellate
court, the three elements of tort interference above-
mentioned are present in the instant case.
Authorities debate on whether interference may be
justified where the defendant acts for the sole purpose of
furthering his own financial or economic interest. One view
is that, as a general rule, justification for interfering with the
business relations of another exists where the actor’s
motive is to benefit himself. Such justification does not
exist where his sole motive is to cause harm to the
other. Added to this, some authorities believe that it is not
necessary that the interferer’s interest outweigh that of the
party whose rights are invaded, and that an individual acts
under an economic interest that is substantial, not merely
de minimis, such that wrongful and malicious motives are
negatived, for he acts in self-protection. Moreover,
justification for protecting one’s financial position should
not be made to depend on a comparison of his economic
interest in the subject matter with that of others. It is
sufficient if the impetus of his conduct lies in a proper
business interest rather than in wrongful motives.
As early as Gilchrist vs. Cuddy, we held that where there was
no malice in the interference of a contract, and the impulse
behind one’s conduct lies in a proper business interest
rather than in wrongful motives, a party cannot be a
malicious interferer. Where the alleged interferer is
financially interested, and such interest motivates his
conduct, it cannot be said that he is an officious or malicious
intermeddler.
In the instant case, it is clear that petitioner So Ping Bun
prevailed upon DCCSI to lease the warehouse to his
enterprise at the expense of respondent
corporation. Though petitioner took interest in the
property of respondent corporation and benefited from it,
nothing on record imputes deliberate wrongful motives or
malice on him.
Section 1314 of the Civil Code categorically provides also
that, “Any third person who induces another to violate his
contract shall be liable for damages to the other
contracting party.” Petitioner argues that damage is an
essential element of tort interference, and since the trial
court and the appellate court ruled that private
respondents were not entitled to actual, moral or
exemplary damages, it follows that he ought to be
absolved of any liability, including attorney’s fees.
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It is true that the lower courts did not award damages, but
this was only because the extent of damages was not
quantifiable. We had a similar situation in Gilchrist, where
it was difficult or impossible to determine the extent of
damage and there was nothing on record to serve as basis
thereof. In that case we refrained from awarding
damages. We believe the same conclusion applies in this
case.
While we do not encourage tort interferers seeking their
economic interest to intrude into existing contracts at the
expense of others, however, we find that the conduct
herein complained of did not transcend the limits
forbidding an obligatory award for damages in the absence
of any malice. The business desire is there to make some
gain to the detriment of the contracting parties. Lack of
malice, however, precludes damages. But it does not
relieve petitioner of the legal liability for entering into
contracts and causing breach of existing ones. The
respondent appellate court correctly confirmed the
permanent injunction and nullification of the lease
contracts between DCCSI and Trendsetter Marketing,
without awarding damages. The injunction saved the
respondents from further damage or injury caused by
petitioner’s interference.
Q: But another question here is, would X be liable for damages
because he is a malicious interferer? Liable for damages to B?
Well the SC said, in cases of tortious interference, if
the interferer was motivated by business, gain or
some business interest, it would actually be a
justification. He would not be liable for damages.
Q: So when would the interferer be liable for damages?
The SC said, if his sole purpose in interfering with the
contract was prompted by pure malice. Wala cyay
laing purpose but purely to cause harm. No other
business or financial interest on his part which would
justify his interference. So here, that would make the
interferer liable for damages. So the same principle
in Gilchrist v. Cuddy.
Ok so we’re done with Oblicon. J
“Once you know what failure feels like, determination
chases success.” – Kobe Bryant

(Illustration on the board)

Contract of Lease between A and B

Situation: A entered into a contract of lease with B. Compound

and iyahang gi-lease. In this compound, naa si X. Gi-occupy niya
ang warehouse. Sauna ok pa kay ang papa ni X, isa mna pud sa
tag-iya sa B Corp. nga naglease aning entire compound. But later
on namatay ang papa ni X, gi-advisan cya ni B na pangita nag lain
na warehouse because we will now be using this warehouse.
Instead of vacating the warehouse, si X karon giduol niya si A,
they entered into a contract of lease again over this compound.
So reklamo si B kay why would you enter into a contract with this
compound when there is already an existing contract within this
compound between us? So, he was sued for tortuous
interference. B ask to cancel the contract between A and X over
this warehouse.

Q: Is this a case of tortuous interference?

Yes, because X induced A to violate A’s contract with

B. So that’s one. Actually the SC here ordered the
cancellation of the contract between A and X.
A transcription of the 2020 lectures of Atty. Yangyang- Espejo
BORBE. DEVILLERES. MURRAY. PABLEO. VALLENTE

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