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-OBLIGATIONS
AND CONTRACTS
JOEMER C. PEREZ
I
Philippine Copyright 2010
\ TABLE OF CONTENTS
I
'
by
Chapter I: Introduction to Obligations I
Joemer C. Perez
Chapter 2: Nature and Effect of Obligations 10
ISBN 978-971-0ll-217-3
Published by
JCP
2010
\
ToNani
and Alfonso.
·.
Chapter 1
Introduction to Obligations
I. IN GENERAL
Note that the obligation defined under Art. 1156 refers to civil
'
obligations, i.e., obligations which are enforceable by courts
under the law. They are different from natural obligations,
which are not enforceable by the courts under the law, but
when performed, they are binding, under the prh1ciples of
conscience or moral justice. A common example of a natural
obligation is a prescribed debt which cannot be enforced in
courts; however, when it is paid by the debtor, the payment
becomes binding on the said debtor.
1 JBL Reyes, "Observations on the New Civil Code," Lawyers Journal, Vol. XVI, pp. 47-50,
January 31, 1951, p. 47, citing Arias Ramos.
' Id.
A. LAW
2. Debt -duty of another person (debtor) to render a
prestation or observe a particular conduct; and I. Not P resum ed . Obligations derived from law are not
presumed. Only those expressly detem1ined in the Civil
Note that in obligations, the credit is a personal right, Code or in special laws are demandable. (Art. 1 1 58)
in which is enforceable against a particular or definite
person (although it is not necessary that such person be a. A legal norm can reqiiire that a particular party be
presently identified), as opposed to a realright, which chargeable with a prestation or undertaking to give or
is enforceable against the whole world (erga ornnes).' to deliver or to do or to render some service. But it
must be shown that such legal provision in fact exists.5
3. Responsibility-right of the creditor to obtain satisfaction
from the debtor's patrimony in case of the debtor's breach. b. A father-in-law has no legal obligation to support his
daughter-in-law. Such obligation cam10t be
The debtor is liable with all his property, present and presumed.6
future, for the fulfillment of his obligations, subject t�
the exemptions provided by law. (Art. 2236) 2. Applicable Law. Obligations derived from law shall be
regulated by the precepts of the law which establishes
C. ELEMENTS: An obligation is constituted upon the concurrence them; and as to what has not been foreseen, by the
of the following essential elements:4 provisions of Book IV of the Civil Code. (Art. 1 158)
1 . The vinculum juris or juridical tie which is the efficient 3. Examples of Obligations Created By Law:
cause established by the various sources of obligations
(law, contracts, quasi-contracts, delicts and quasi-delicts); a. Obligation between spouses or between parents and
children to provide support under the Family Code;
2. The object which is the prestation or conduct required to
be observed (to give, to do or not to do); and b. Obligation by emplcyer to provide certain benefits to
employees under the Labor Code;
3. The subject-persons who, viewed from the demandabilify
of the obligation, are the active (obligee) and the passive c. Obligation to reimburse necessary expenses under the
(obligor) subjects. law on property;
' See Sps. Adorable v. CA, G.R. No. 1 1 9466, November 25, 1999. 5 Batchelder v. Central Bank, G.R. No. L-25071, July 29, 1972.
•Ang Yu Asuncion v. CA, 238 SCRA 602 (1994). ' Pelayo v. Lauron, 12 Phil. 453 (1909).
2 3
B. CONTRACTS a. . Negotiorum Gestio - Whoever voluntarily takes
charge of the agency or management of the business or
1. Obligations arising from contracts have the force of law property of another, without any power from the latter,
between the contracting parties and should be complied is obliged to continue the same until the termination of
with in good faith. (Art. 1159) .the affair and its incidents, or to require the person
concerned to substitute him, if the owner is in a
2. Definition. A contraci is a meeting of minds between two position to do so. (Art. 2144)
persons whereby one binds himself, with respect to the
other, to give something or to render some service. (Art. . b. Solutio Indebiti - If something is received when there
1305) is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. (Art.
See discussion on Contracts in Chapters 5, et seq. 2152)
l.. Applicable Law. Obligations derived from quasi-contracts 1. Applicable Law. Civil obligations arising from criminal
shall be subject to the provisions of Chapter l , Title XVII, offenses shall be governed by the penal laws, subject to the
of Book IV of the Civil Code. (Art. 1160) following provisions of the Civil Code:
circumstances or factual environment, consent is 2. Civil Lia bil ity Arising From Crime. Under Art. 100 of
presumed, to tho end that a recipient of benefiis or the Revised Penal Code, every person criminally liable for
favors resulting from lawful, voluntary and unilateral a felony is also civilly liable. The Civil Code also provides
acts of. another may not be unjustly enriched at the that in crimes, the defendant shall be liable for all damages
expens� of another.7 which are the natural and probable consequences of the act
or omission complained of.' (Art. 2202) It is not necessary
3. Examples: that such damages have been foreseen or could have
reasonably been foreseen by the defendant. (Art. 2202)
4 5
is possible that an accused wh6 is acquitted because of includes homicide (whether attempted, frustrated
reasonable doubt may nonetheless be held liable civilly or consUmmated). 1 1
based on preponderance of evidence. (Id.)
d. Failure of a policeman or peace officer to render aid or
3. Deemed Instituted. When a criminal action is instituted, protection to any person in case of danger to life or ·
the civil action for the recovery of civil liability arising property. (Art. 34)
from t)ie offense charged shall be deemed instituted with
the criminal action, unless the offended party - The peace officer is primarily liable for damages,
and the city or municipality is subsidiari\y liable.
a. Waives the civil action, (Art. 34)
b. Reserves the right to institute it separately or 5. No Double Recovery. In no case (even in independent
civil actions) may the offended 'party recover damages
c. Institutes the civil action prior to the criminal action.8 twice for the same act or omission charged in the criminal
action. 1 2
4. Independent Civil Action. In the following cases
provided by the Civil Code, the offended party may file an E. QUASI·DELICTS
independent civil action, which shall proceed
·
independently of the criminal action and shall require only 1 . Applicable Law. Obligations derived from quasi-delicts
a preponderance of evidence': shall be governed by the provisions of Chapter 2, Title
XVII of Book IV, and by special laws. (Art. 1 1 62)
a. Civil action based 0n an obligation not arising from the
act or omission complained of as a felony. (Art. 3 1) 2. Definition. Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay
Example: a civil action for breach of contract of for the damage done. Such fault or negligence, if there is
deposit, independent of a criminal action for no pre-existing contractual relation between the parties, is
estafa. 1 0 called a quasi-delict. (Art. 2176)
b. Violation of civil or constitutional rights and liberties. Negligence is defined as the. failure to exercise the
(Art. 32) standard of care that a reasonably prudent person
'
would have exercised in a similar situation.P
c. Defamation, fraud and physical injuries. (Art. 33)
3. Distinguished from Other Sources of Obligation.
"Physical irifuries" is used in the generic sense. It Negligence as a source of obligation may be classified into
is not limited to the crime of physical injuries, but three 1 4:
' Rules of Court, Rule 1 1 1 , Section 1(a). " Carandang vs. Santiago, 97 Phil. 94; Madeja v. Caro, G.R. NO. L-51183, December 21, 1983.
' See also Rules of Court, Rule 1 1 1 , Section 3. "See Rules of Court, Rule 1 1 1 , Section 3.
. 10 I Tolentino 1 27. "Janssen Pharmaceutica v. Silayro, G.R. No.. 172528, February 26, 2008.
6 7
may also be criminally prosecuted for criminal negligence .
a. Culpa contractual - the parties have a pre-existing (this is. culpa criminal), which will also give rise to civil
contractual relations; the negligence is an incident of liability. The acquittal of the accused in the criminal case
the performance of the contractual obligation, and does not carry with it the extinction of the civil liability
serves to increase the liability arising from the based on quasi-delict,19 because they are based on different
contractual obligation.15 sources of obligation.
14 See First Philippine International Bank v. CA, G.R. No. 1 1 5849, January 24, 1996.
15 Sps. Batal v. Sps. Tomina9a, G.R. No. 164601, September 27, 2006.
" Sps. Batal v. Sps. Tominaga, G.R. No. 164601, September 27, 2006.
11 Air France v. Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of the Philippine Islands, 23 ·
SCRA 1 1 1 7 (1968), Coca-Cola Bottlers Philippines, Inc. v. CA, G.R. No. 1 1 0295, October 18, .
1993. " Manliclic v. Calaunan, G.R. No. 150157, January 25, 2007. Safeguard Security Agency v.
" See First Philippine International Bank v. CA, G.R. No. 1 15849, January 24, 1996. . Tangco, G.R; No. 165732, December 14, 2006.
8 9
Chapter 2 ii. Thus, the vendor has the obligation to preserve the
thing from the perfection of the contract until the
Nature and Effect of thing is delivered to the vendee.2°
Obligations b. To deliver the fruits of the thing from the time the
obligation to deliver the thing arises. (Art. 1164)
I
I. OBLIGATION TO GIVE However, the creditor shall acquire no real right
over the thing until the same has been delivered to
A. OBLIGATION TO GIVE A DETERMINATE THING 1 him. (Art. 1164)
1. A determinate thing is one that has been specified or (1) A personal right is the power of one person to
distinguished from others of the same kind. For example, demand of another, as a definite passive
the car with plate number JCP-888. subject, the fulfillment of a prestation to give,
to do, or not to do. On the other hand, a real
2. When what is to be delivered is a determinate thing, the i right is the power belonging to a person over a
creditor may compel the debtor to make the delivery (in specific thing, without a passive subject
addition to damages). (Art. 1165)
b. If the obliger delays, or has promised to deliver the c. To deliver all of the accessions and accessories of the
same thing to two or more persons who do not have the thing, even though they may not have been mentioned.
same interest, he shall be responsible for any fortuitous (Art. 1166)
event until he has effected the delivery. (Art. 1165)
B. OBLIGATION TO GIVE AN INDETERMINATE THING
3. The obligation to give a determinate thing includes the
following accessory obligations: 1. An indeterminate thing is one that is generic or indicated
only by its kind, without being specified or distinguished
a. To take care of the thing with the proper diligence of a from others.ofthe same kind. For example,."a car."
good father ofa family. (Art. 1163)
a. The obligation is satisfied by giving to the creditor a A. GENERAL RULE: All rights acquired in virtue of an obligation
generic thing, at the debtor's expense. This is in are transmissible, subject to laws or stipulations to the contrary.
addition to damages. (Art. 1 178)
Note that the debtor cannot be compelled to do the A. IN GENERAL: The thing or service in which the obligation
thing, since it would violate his personal liberty. He consists must be completely delivered or rendered, as the case
can only be held liable for damages. may be. (Art. 1233) See further discussion regarding Payment.
B. OBLIGATION NOT TO Do: When the obligation consists in not B. RECEIPT OF PRINCIPAL: The receipt of the principal by the
doing, and the obligor does what has been forbidden him, it creditor without reservation with respect to the interest, shall
shall also be undone at his expense. (Art. 1 168) give rise to the presumption that said interest has been paid.
(Art. 1 176)
Thus, constructions which are made despite the prohibition
or restrictions in the Deed of Restrictions may be
demolished.'2
22 C.ajardo Jr. v. Freedom to Build, Inc., G.R. No. 134692, August 1 , 2000. " Estate of Hemady v. Luzon Surety Co., 100 Phil. 388 (1956).
12 13
If the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have A. DELAYORMORA
been covered. (Art. 1253)
1 . Requisites. In order for the debtor to be in default (mora
'9
c. RECEIPT OF LATER INSTALLMENT: The receipt of a later solvendi), the following requisites must be present :
installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such · a. That the obligation be demandable and already
installments have been paid. (Art. 1 176) liquidated;
D. USURIOUS TRANSACTIONS: They are governed by special b. That the debtor delays performance; and
laws. (Art. 1 175)
c. That the creditor requires the performance judicially or
Circular No. 905 of the Central Bank, adopted on extrajudicially (demand).
December 22, l 982, has expressly removed the interest
ceilings prescribed by the Usury Law. Thus, the Usury It is important to determine when the debtor is in
24
·
Law is now "legally inexistent" or "in�ffective." default because the debtor becomes liable from that
30
time for damages (usually in the form of interest).
However, courts may modify interest rates when found (Art. 2209) The debtor also assumes the risk for a thing
to be iniquitous or unconscionable
under the (even for a fortuitous event) from the time of default.
2'
circumstances (such as 66% per annum , 72% per (Art. 1 1 65)
26 27
annum, or 1 08-120% per annum ).
2 . General rule o n demand requirement. Those obliged to
deliver or to do something incur in delay from the time the
V. NON-PERFORMANCE OF OBLIGATION obligee judicially or extrajudicially demands from them the .
(BREACH OR DEFAULT) fulfillment of their obligation. (Art. 1 1 69)
31
Those who in the performance of their obligations are guilty of Filing of case in court is a judicial demand.
fraud, uegligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages. (Art. 1 170) 3. Exceptions to demand requirement. The demand by the
creditor shall not be necessary in order that delay may exist
In general, every debtor who fails in the performance of his in any of the following instances: (Art. 1 1 69)
obligations is bound to indemnify for the losses and damages
28
· caused thereby.
Phil. 962; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v.
" Medel v. CA, G.R. No. 131622, November 27, 1996. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657.
2s Medel v.
CA, G.R. No. 131622, NoVember27, 1998. " Social Security System v. Moonwalk Developmenl and Housing Corp., G.R. No. 73345, April
26 Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 2005. 7, 1993; Santos Ventura Hocorma Foundation, Inc. v. Santos, G.R. No. 153004, November 4,
" Dino v. Jardines, G.R. No. 145671, January 31, 2006. 2004.
" Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964), citing De la Cruz v. Seminary of " Malayan Insurance Co., Inc. v. CA, G.R. No. L·59919, November26, 1 966.
Manila, 18 Phil. 330; Municipality of Moncada v. Cajulgan, 21 Phil. 184; De la Cavada v. Diaz, 37 " United Coconut Planters Bank v. Sps. Beluso, G.R. No. 159912, August 17, 2007.
14 15
a. By express provrswn or stipulation. When the the performance without valid reason. A creditor in default
obligation or the law expressly so declare; or bears the risk of accidental loss due to fortuitous events.34
The fact that the contract fixes the schedule of Such creditor's default is not negated by the debtor's
payment does not dispense with the demand failure io consign the thing to be delivered.35
requirement32 ; the contract must specifically state
that demand is not necessary or that the debtor is 5. In reciprocal obligations, neither party incurs in delay if
waiving the requirement of demand. the other does not comply or is not ready to comply in a
proper manner with what is incumbent upon him. (Art.
b. · Time is of the essence. When from the nature and the 1169)
circumstances of the obligation it appears t_hat the
designation of the. time when the thing is to be From the moment one of the paf\ies fulfills his
delivered or the service is to be rendered was a obligation, delay by the other begins. (Art. 1169)
controlling motive for the establishment of the
contract; .?r In reciprocal obligations, the performance of one is
conditioned on the simultaneous fulfillment of the
i. For example, delivery of wedding cake at a other obligation.36
specified date of the wedding.
B. FRAUD
ii. When a common carrier undertakes to convey ·
goods, they should be delivered at destination · 1. Definition, "Fraud" under Art. 1170 refers to bad faith or
within a reasonable time, in the absence of any . malice in the performance of an obligation which is already
agreement as to the time of delivery.33 existing. It is a conscious and intentional design to evade
the normal fulfillment of existing obligations.37 The
c. Demand is useless. When demand would be useless, as consequence of this "fraud" is liability for damages and
'
when the obliger has rendered it beyond his power to rescission of the obligation.
perform.
It should be differentiated from "fraud" under Art.
For example, when the obliger had already 1338 (contracts) and Art. 839(5) (wills), which refers
disposed of the thing to be delivered. to deceit (dolo) as a vice of consent in the execution of
contract or wills. The consequence of this "fraud" is
4. Creditor's Default. The creditor may also incur default ·
"'Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Vda. De Villaruel v. Manila Motor Co., Inc., 104 Phil. 926 (1958).
" Abaya vs. Standard Vacuum Oil Co., 101 Phil. 1262 (1957). Boysaw v. lnterphil Promotions,
32See Social Security System v. Moonwalk Development and Housing Corp., G.R. No. 73345, Inc., 148 SCRA 643 (1987).
April 7, .1993. "Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., G.R. No. L-
"Maersk Line v. CA, G.R. No. 94761, May 17, 1993. 25885, January 31, 1972, 43 SCRA 93
16 17
the voidability of the contract and invalidity of the b. Culpa aquiliana (or extra-contractual or quasi-delict)
will.38 - the parties generally have no pre-existing contractual
relations; it is the negligence itself which creates the
2. Always Dem a ndable. Responsibility arising from fraud is obligation (and therefore the juridical relation between
demandable in all obligations. (Art. 117 1) the parties).41
a. Any waiver of an action for future fraud is void. (Art. i. However, it has been held that quasi-delict may
1 17 1) arise even if there is pre-existing contractual
relations, as the act which breaks the contract may
b. Thus, it was held that a stipulation completely also be a quasi-delict.42
exempting a party from any liability in case of loss '
notwithstanding its bad faith, fault or negligence is · ii. Note that in culpa aquiliana, the employer may
void.39 avoid liability for the negligence of his employee
by invoking the defense of due diligence of a good
C. NEGLIGENCE father of the family. (Art. 2180) In culpa
contractual, this defense is not available.43
· I. Liability for Negligence. Responsibility ansmg from
negligence in the performance of every kind of obligation c. Culpa criminal - negligence punished by law, as under
is also demandable, but such liability may be regulated by Art. 365 of the Revised Penal Code on criminal
the courts, according to the circumstances. (Art. 1 172) negligence.
2. Definition. The fault or negligence of the obliger consists 3. Negligence with Bad Faith. When negligence shows bad
.
in the omission of that diligence which is required by the faith, the provisions of Articles 1 171 (on fraud) and 2201,
nature of the obligation and corresponds with the paragraph 2 (liability for all damages reasonably
circumstances of the persons, of the time and of the place. attributable to the non-performance), shall apply.
(Art. 1 173) As previously discussed, negligence or culpa
may be of three kinds: Wanton negligence in effecting the plans, designs,
specifications, and construction of a building is
a. Culpa contractual. - the parties have a pre-existing equivalent to bad faith. 44
contractual relations; the negligence is an incident of
the perfonnance ·of the contractual obligation, and
serves to increase the liability arising from . the
contractual obiigation.40
41 Sps. Batai v. Sps. Torninaga, G.R. No. 164601, September 27, 2006.
"Air France v. Carrascoso, 18 SCRA 155 (1966), Singson vs. Bank of !he Philippine Islands, 23
SCRA 1 1 17 (1968),
. Coca-Coia Bottlers Philippines, Inc. v. CA, G.R. No.110295, October 18,
1993.
43 el Pardo v. Manila Eler.lrtc Co., 52 Phil. 900, 904 (1929); De Gula v. Manila Electric Railroad
38 See J.B.L. Reyes, Lawyers' Journal, Jan. 31, 1951, p. 47. and Light Co., 40 Phil. 706, 710 (1920); Manila Railroad Co. v. Compania Transatlanlica, 38 Phil.
39 Philippine Commercial international Bank v. CA, G.R. No. 97785, March 29, 1996. 875, 889-890 (1918); Herbosa v. CA, G.R. No. 1 19086·7, January 25, 2002.
)' Sps. Batai v. Sps. Tominaga, G.R. No. 164601, September 27, 2006. 44 Nakpil & Sons v. CA, G.R. No. L-47851, Oclober3, 1986.
18 19
4. Or dinary Diligence. If the law or contract does not state 5. Extraordinary Diligence. Certain businesses or
the diligence which is to be observed in the performance, professions required the "highest degree of care" because
that which is expected of a goodfather of a family shall be of their nature. Examples:
required. (Art 1173)
a. Common Carriers - for the protection of life and
a. This connotes reasonable care which an ordinarily ' property. 50
prudent person would have observed when confronted
with a similar situation.45 b. Banks -because of ·the fiduciary nature of their
relationship with their depositors.5 1
b. Examples:
c. · Pharmacies - because of their potential harm to human
i. Placing a cellphone in a bag and holding on to that life.52
bag is ordinarily sufficient care of a cellphone
while travelling on board the LRT.46 D. OTHER VIOLATIONS OF THE OBLIGATION
ii. A shipping company exercised due diligence �hen I. The phrase "in any manner contravene the tenor" of the
its vessel sailed only after the main engine, obligation includes any illicit act or omission which
machineries, and other auxiliaries were checked impairs the strict and faithful fulfillment of the obligation
and found to be in good running condition; when and every kind of defective performance.53 Examples:
the vessel was manned by competent and
experienced officers; and when the master ordered a. Supplier failed to deliver the cinema films subject of a
an inspection upon the occurrence ofvibrations.47 booking contract.5"
iii. A store supervisor who did nothing even if it had b. Shipping company failed to deliver the cargo within a
been informed that a counter was unstable and reasonable time (delay of two months from the
posed a danger to C)lStomers, is negligent.48 estimated date of arrival).55
iv. A towing service which failed to ensure that its c. Bank failed to keep a safety deposit box from being
tugboat was free of mechanical problems is flooded and failed to inform the depositor of the flood,
negligent, particularly considering that the barge to
be towed was wholly dependent on the tugboat for
propulsion.49
50 Tiu v. Arriesgado, G.R. No. 138060, September 1, 2004; Calaias v. Court of Appeals, 332
SCRA 356 (2000); Kapalaran Bus Line v. Coronado, 176 SCRA 792 (1 989);
51 Bank of the Philippine islands v. CA, G.R. No. 102383, November 26, 1992, 216 SCRA 51;
Far East Bank and Trust Company v. Quirimil, G.R. No. 148582, January 16, 2002.
45 Crisostomo v. CA, G.R. No. 138334, August 25, 2003. 5 2 Mercury Drug Corp. v. De Leon, G.R. No. 165622, October 17, 2008.
"Cruz v. Gangan, G.R. No. 143403, January 22, 2003. 53 Arrieta vs. National Rice & Corn Corp., 10 SCRA 79 (1964); Magat vs. Medialdea, 121 SCRA
47 Wildvailey Shipping Co. v. CA, G.R. No. 1 19602, October 6, 2000. 418 (1983).
"Jarco Marketing Corp. V. CA, G.R. No. 129792, December 21, 1 999. 54 Acme Films, Inc. vs. Theaters Supply Corporation, 63 Phn. 657 (1936)
" Cargolitt Shipping, Inc. vs. L. Acuario Marketing Corp., G.R. No. 146426, June 27, 2006.
. 55 Maersk Line v. CA, G.R. No. 94761, May 17, 1 993.
20 21
which led to the destruction of the stamp collection VI. EXCUSE FOR NON-PERFORMANCE:
stored therein.56 FORTUITOUS EVENT
d. Supplier stopped deliveries, thereby unilaterally A. DEFINITION: A fortuitous event (also known as force majeure)
terminating an existing distributorship agreement is one which could not be foreseen, or which, though foreseen,
without legal justification.'' was inevitable. (Art. 1174). It may either be -
e. Repairman failed to repair a typewriter and even 1. "Act of God" if caused by nature, such as earthquakes, -
returned it "in shambles.'"' epidemics or pestilence,62 floods or storms,63 fire, etc., or
f. Constructio\l company deviated ·from the plans and 2. "Act of man" if caused by humans (other than the
specification, and architect provided defective plans obligor), such as war,64 robbery, rebellion, etc.
and specifications."
B. GENERAL RULE - No LIABILITY: No person shall be
2. When an obligation, regardless of its source (i.e.,, law, responsible for fortuitous events. (Art. 1174) To exempt the
contracts, quasi-contracts, delicts or quasi-delicts), is obligor from liability for a breach of an obligation due to a
breached, the contravenor can be held liable for fortuitous event, the following requisites must concur:65
damages.60
1. The cause of the breach of the obligation must be'
a. If the obligor acted in goodfaith, he shall be liable for independent of the will of the debtor;
those damages that are the natural and probable
consequences of the breach of the obligation and which 2. The event must be either unforseeable o r unavoidable;
the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted. 3. The event must be such as to render it impossible for the
(Art. 2200) debtor to fulfill his obligation in a normal mauner; and
b. In case of.fraud, badfaith, malice, or wanton attitude, 4. The debtor must be free from any participation 111, or
the guilty party is liable for all damages which may be aggravation of the injury to the creditor.
reasonably attributed to the non-performance of the
obligation.61 (Art. 2201) C. EXCEPTIONS: The obligor is liable for breach even due to
fortuitous events in the following cases:
5. When. the obligor is guilty of contributory fault or v. Tire blow-out is also not a fortuitous event if
n egligence.66 (Art. 1 170) caused by factors which could have been easily
discovered with a thorough check-up of the
2
If upon the happening of a fortuitous event, \here vehicle.7
concurs a corresponding fraud, negligence, delay or
violation or contravention in any manner of the tenor vi. A fire which occurred in a vessel is not a fortuitous
of the obligation, which results in loss or damage, the event where it was shown to have originated from
obligor caimot escape liability.67 a crack in the fuel oil tank which should have been
discovered upon inspection of the vessel.73
i. Street robbery resulting in the loss of jewelry
entrusted to the victim may be considered a vii. A common carrier which proceeds with the sailing
fortuitous event, but the victim must be free of of its vessel despite knowledge of an incoming
contributory fault or negligence (she must have g
typhoon is guilty of ne ligence and cannot invoke
taken the necessary precautions).68 fortuitous event.74
"Nakpil & Sons v. CA, G.R. No. L-47851 , October 3, 1986. " Edgar Cokaliong Shipping Lines, Inc. V. UCPB General Insurance Company, Inc., G.R. No.
"Ausfna v. CA. G.R. No. L-29640, June 10, 1971. 146018, June 25, 2003.
• 69 Jimmy Co v. CA, G.R. No. 124922, June 22, 1998. "Asia Lighterage and Shipping, Inc. v. CA, G.R. No. 147246, August 19, 2003.
24 25
may ask that it be undone at the expense of the debtor.
(Art. 1168)
Chapter 3
26 27
b. Thus, accion subrogatoria and accion pauliana are obligation of the other.79 Example: In a contract of sale, the buyer's
considered "subsidiary remedies m .•
obligation to pay the purchase price and the seller's obligation to
deliver the thing sold are reciprocal.so ·
Reciprocal obligations are defined as those that arise from the "Presbitero, Jr. v. CA, G.R. No. 102432, January 21, 1993.
so Leonardo v. Maravilla, G.R. No. 143369, November 27, 2002.
same cause, and in which each party is a debtor and a creditor of
" Pryce Corporation v. Philippine Amusement and Gaming Corporation, G.R. No. 157480, 6
the other, such that the obligation of one is dependent upon the May 2005; Spouses Francisco v. DEAC Construction, Inc., G.R. No. 171312, February 4, 2008.
" Universal Food Corporation v. CA, G.R. No. L-29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
11
concurring).
JBL Reyes & Ricardo Puna, Outline·of Philippine Civil Law, Vol. IV (1958 ed.) (hereafter "IV "ADR Shipping Services, Inc. v. Gallardo, G.R. No. 134873, September 17, 2002.
Reyes .& Puna"), pp. 34-35. 84 Cruz v. IAC, G.R. No. 72313, December 29, 1989.
78 IV Reyes & Puna 38 (citing Puig Pena and Manresa).
" Almira v. CA, G.R. No. 1 15966, March 20, 2003.
28
29
rescission under Art. 1381, et seq., which is the setting an extended period because Art. 1659 does not give the
aside of contracts due to lesion oi economic damage court such discretion. 89
suffered by the plaintift'6 (e.g., a creditor seeks the
rescission of a fraudulent disposition of property made 4. Generally, the power to rescind must be invoked judicially;
by his insolvent debtor in favor of third persons). it cannot be exercised solely on a party's own judgment
that the other has committed a breach of the obligation.'°
Rescission under Art. 1 191. is a principal action,
while rescission under Art. 1381, et seq. is a. However, the injured party m�y consider the contract
subsidiary (in the latter, the plaintiff must show as rescinded and act accordingly, even without prior.
that he has no other recourse to repair the damage court action or before any judicial. pronouncement of
he suffered). breach. But his unilateral determination is provisional,
since the other party may challenge it by suing him in
c. Rescission presupposes that the obligation or contract court. It is then the court which will finally determine
exists. Thus, one cannot ask for the declaration of if the rescission should be set aside or affirmed.9t
nullity of a contract, and at the same seek its rescission
:
under Art. 1 1 9 1 . 87 b. Practically speaking, extrajudicial rescission is feasible
if the injured party has -not yet performed; he can
2. The injured party may also seek rescission, even after he rescind and simply refuse to perform his own
has chosen specific performance, if the latter should prestation. Thus, a buyer can simply withhold
become impossible. (Art. 1 191) payment if the seller is not ready to deliver. However,
if the injured party has already performed, such as a
3. The court shall decree the rescission claimed, unless there buyer who has already paid the purchase price, he
be just cause authorizing the fixing of a period. (Art. 1 191) would have to seek judicial rescission so the court can
compel the infractor to make him whole (e.g., for the
a. The right to rescind is not absolute. It is not permitted buyer to recover the price he has already paid).92
for a slight or casual breach, but only for such breaches
as are so substantial and fundamental as to defeat the c. Also, in the sale of immovables, a demand for
object of the parties in entering into the agreement. 88 rescission must be made either judicially or by notarial
act, even if it is stipulated that rescission shall take
b. In lease, however, if the lessee fails to pay the rent ' place upon failure to pay on time. (Art. 1 592)
within the stipulated period, the court cannot grant him
"Universal Food Corporation v. CA, G.R. No. L·29155, May 13, 1970, 33 SCRA 1 (JBL Reyes,
concurring); Ong v. CA, G.R. No. 97347, July 6, 1999. " IV Tolentino 180, citing Mina v. Rodriguez, (CA) O.G. Supp., August 30, 1941, p. 65.
" Pan Pacific Industrial Sales Co., Inc. v. CA, G.R. No. 125283, February 10, 2006. '° Tan v. CA, G.R. No. 80479, 28 July 1989, 175 SCRA 656, 661-662. Ong v. Bognalbal, G.R.
"Universal Food Corporation v. Court of Appeals, 33 SCRA 1, May 13, 1 970; Roque v. Lapuz, No. 149140, September 12, 2006.
96 SCRA 741, March 31, 1 980; Multinational Village Homeowners Association, Inc. vs. ARA " UP v. Delos Angeles, 35 SCRA 102 (1970); Cruz v. IAC, G.R. No. 72313, December 29, 1989.
Security & Surveillance Agency, Inc., G.R. No. 154852, October 21, 2004. " IV Tolentino 177-178.
30 31
5. Rescission may be availed of by the injuredparty. A party cannot demand specific performance (or even rescission
may not seek rescission if he was the one who prevented under Art. 191 1).98
the .other party from fulfillment of the obligation.93
a. Thus, e.g., in a contract to sell a parcel of land, the
6. In exceptional cases, partial rescission may be ordered. obligation to covey title is conditioned upon full
Example: when a construction is already 75% complete, payment of the contract price. Until then, ownership
rescission may be ordered as to the portion which remains remains in the seller. If the · price is not paid, the
unfinished. 94 obligation to convey title does not arise, and the buyer
cannot compel performance.99
implied waiver of the right to rescind on the basis of such opening of a letter of credit, the seller cannot be
each other. what they respectively reserved (less damages, upon the performance of the contract by the defendant, or
1 . Specific performance is a remedy which is alternative to the thing, in accordance with Articles 1385 and 1388 and
rescission. The injured party caunot have both. Thus, e.g., , the Mortgage Law. (Art. 1 191)
the lessor cannot rescind the contract and recover
possession of the leased property, and at the same time Thus, the obligee may no longer demand specific
32 33
C. DAMAGES
Chapter 4
I. Damages shall be awarded in either case of specific
performance or rescission of the obligation. Kinds of Obligations
3. In case both parties have committed a breach 1of the a. A pure obligation is demandable at once. (Art. 1 1 79)
obligation -
This is subject to the discretion of the court on 2 . Cond itio nal - In conditional obligations, the acquisition of
what is equitable under the circumstances. 104 rights, as well as the extinguishment or loss of those
already acquired, depends upon the happening of a
b. If it cannot be determined which of the parties first condition. (Art. 1 1 81)
violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages. a. A condition is a future and uncertain event, or a past
(Art. 1 192) event unknown'to the parties. (Art. 1 1 79)
"' Ong v. Bognalbal, G.R. No. 149140, September 12, 2006. See also art. 2215. '°' Floriano v. Delgado, 1 1 Phil. 154 (1908).
34 35
B. KINDS OF CONDITIONS
Despite the language of Art. 1 179 which refers
to "future or uncertain event," a condition 1 . Suspensive and Resolutory
must be both future and uncertain. If the
element of uncertainty is lacking, it becomes a . a. Suspensive condition (also known as condition
period, which is a "day certain" or that which precedent) - if the acquisition of rights is dependent on
must necessarily come, although it may not be the condition.
known when. (Art. 1 193)
b. Resolutory condition (also known as condition
Thus, a condition is uncertain to hapjJen, while subsequent) - if the extinguishment of rights already
'
a period is certain to come. Passing the bar is acquired is dependent on the condition.
a condition; while death of a particular person
is period. 2. Potestative, Casual or Mixed
ii. "Past event unknown to the parties" a. Potestative Condition - if the fulfillment of the
condition depends on the will of one of the parties.
A past . . event, having happened already, is
always certain. It is only the parties' i. The conditional obligation (not just the condition)
knowledge of that event which may be is void when the fulfillment of the condition
uncertain. Example: after bar exam results depends upon the sole will of the debtor. (Art.
were released but before they were published, 1 1 82)
a father says to his son, "I will give you a car if
you passed the bar exams." (1) E.g., when the obligor says "I will pay you
when I like it (or when I consider it properJi'
b. If the condition is suspensive, the obligation is not In this case, the obligation is illusory or not
demandable until the performance of the condition. meant to be fulfilled.1°'
When the consent of a party to a contract is given An offer to pay the value of the stock
subject to .the fulfillment of a suspensive condition, subscription after the offerer had harvested
the contract is not perfected unless that condition is fish is a condition dependent upon her sole
first complied with.107 will and, therefore, potestative in nature
and renders the obligation void.109
c. If the condition is resolutory, the obligation is
demandable at once, but without prejudice to the (2) However, when the debtor binds himself to
effects of the happening of the event. (Art. 1 179) pay when his means permit him to do so, the
obligation shall be deemed to be one with a
'°' Ruperto v. Kosea, 26 Phil 227, December 4, 1913; Gonzales v. Heirs of Cruz, G.R. No, '°' Vda. De Mistica v. Spouses Nagial, G.R. No. 137909, December 1 1 , 2003.
131784, September 16, 1999. '°'Trillana v. Quezon College, Inc., 93 Phil. 383 (1953).
36 37
.l
period. (Art. 1 1 80) It is subject to the 11. Examples: "I will pay you as soon as I receive the
provision of Art. 1 1 97, i.e., the creditor's proceeds from the sale of my property in Spain",
remedy is to file an action to fix a period. i.e., the debtor had already decided to sell h!s
property, which sale is dependent on external
(3) This rule applies only when the condition is factors like the availability of a buyer.112
suspensive. 110 When the potestative condition
is resolutory, the obligation is valid.111 , "I will give you this ring ifyou marry my son."
Example: "I will allow you to use my house
until I want to get it back." 3. Impossible and Unlawful Conditions
ii. The conditional obligation is valid if the a. . These conditions refer to:
fulfillment of the condition depends on the sole
will of the creditor. i. Conditions which are physically impossible
Example: "I will give you P500 ifyou wart it" Example: condition that a man give birth;
or "I will give you my house if you enter the
priesthood." ii. Conditions which are unlawful or juridically
impossible, because contrary to good customs or
b. Casual Condition - if the fulfillment of the conditi�n public policy or prohibited by law. (Art. 1 1 83)
depends upon chan�e or the will of third persons (not
the will of any of the contracting parties). - Example: payment of money conditioned upon
killing someone or seducing a third person's
i. The conditional obligation is valid. (Art. 1 1 82) wife.
ii. Example: "I will give you my umbrella if it rains b. The impossible or unlawful conditions shall annul the
after our dinner," or "I will give you my car ifyour obligation which depends upon them. (Art. 1 183)
son learns how to drive."
Note that this rule applies only to contracts or
c. Mixed Condition - if the fulfillment of the condition onerous obligations. In gratuitous obligations
depends upon the will of one of the contracting parties (simple/remuneratory donations and testamentary
and other circumstances, including the will of third provisions) with impossible or unlawful condition,
persons. only the condition is void or deemed not imposed.
(Arts. 727, 873) This is because in the latter, the
i. The conditional obligation is valid. (Art. 1 1 82) true consideration is the liberality of the donor or
testator.
110
Vda. De Mistica v. Spouses Nagiat, G.R. No. 137909, December 1 1 , 2003.
111 Taylor vs. Uy Tieng Piao, 43 Phil. 873 (1922).
11' Hermosa v. Longora, 93 Phil. 977 (1953).
38 39
c. If the obligation is divisible, that part thereof which is 2. The condition that some event will not happen at a
not affected by the impossible or unlawful condition determinate time shall render the obligation effective from
shall be valid. (Art. 1183) the moment the time indicated has elapsed, or if it has ·
become evident that the event cannot occur. (Art. 1 1 85)
Example: "I will pay you Pl,000 ifyou give me
your book, and an additional P500 ifyou can make Example: payment of money to X and Y on the
it dance. " The first obligation is valid, but the condition that they will not marry each other. until they
second is not. are both 25 years old - the obligation becomes
effective if they both reach their 25th birthday without
d. The condition not to do an impossible thing shall be marrying each other, or if Y dies before her 25th
considered as not having been agreed upon. (Art. 1 183) birthday.
The obligation remains valid and becomes a pure one.
If no time has been fixed, the condition shall be
Example: "I will pay you Pl, 000 if you do not deemed fulfilled at such time as may have probably
make this car swim." been contemplated, bearing in mind the nature of the
obligation. (Art. 1 1 85) .
e. Art. 1 1 83 refers to the impossibility of condition
existing at the time of the creation of the obligation; in 3 . The condition shall be deemed fulfilled when the obliger
such a case, the obligation is rendered void ab initio. It voluntarily prevents its fulfillment. (Art. 1 1 86)
should not be confused with exfinguishment of the
obligation due to impossibility of performance (Art. a. Example: .the manager under a management contract
1266), or because it has become certain that the - who is unjustly prevented by the other party to perform
condition will not be fulfilled (Art. 1 1 84). 113 his management duties is still entitled to his
management fees.114
C. CONSTRUCTIVE FULFILLMENT
b. The obliger's prevention must be unjustifiable for it to
1. The condition that some event happen at a determinate constitute constructive fulfillment. If there is legal or
time shall extinguish the obligation as soon as the time contractual basis for · the prevention, there is no
expires or if it has become indubitable that the event will constructive fulfillment.115
not take place. (Art. 1 1 84)
Examples: if the owner of the house stops work on
Example: payment of money on the condition that X his house because the contractor violated certain
must pass the bar exams by 2015 the obligation is
- city ordinances, or if the obliger cancels a contract
extinguished if 2015 expires without X passing the bar, upon a an stipulation that he has a right to do so.116
or ifX dies before then.
1 14Nielson & Company, Inc. v. Lepanto Consolidated Mining, G.R. No. L-21601, Decembe r 17,
1966.
m 1v Tolentino 162.
"' IV Tolentino 156·156. 11' Taylo r v. Uy Tieng Piao, 43 Phil. 873 (1922).
40 4t
(a) when it perishes (e.g., house is burned
c. By analogy, if the condition is resolutory and the down), or
obligor voluntarily causes its fulfillment, the condition (b) when it goes out ofcommerce (e.g., land is
is not considered fulfilled. expropriated by the government), or
{c) when it disappears in such a way that its
D. EFFECTS existence is unknown or it cannot be
recovered (e.g., jewelry is stolen).
I. Before Fulfillment of Suspensive Condition. Before the
suspensive condition is fulfilled, the following rules iii. When the thing deteriorates without thefault of the
govern: debtor, the impairment is to be borne by the
creditor; (Art. 1 1 89) -
(2) If the obligation is unilateral, the debtor shall 1. Period or Term. Obligations with a period or term are
appropriate the fruits and interests received. those which become demandable or which terminate upon
(Art. 1 1 87) the arrival of a "day certain". A day certain is that which
must necessarily come, although it may not be known
Exception, if there is a contrary intention, when. (Art. 1 1 93)
whether express or implied from the nature
and circumstances of the obligation. (Art. a. Examples: January 1, 2025 is a day certain because it
1 1 87) must necessarily come. The death of a certain person,
X, is also a day certain, because it must necessarily
b. In obligations to do and not to do, the courts shall come, although it is not known when.
deten,nine, in each case, the retroactive effect of the
condition that has been complied with. (Art. 1 1 87) b. If the uncertainty consists in whether the day will come
or not, the obligation is conditional, and it shall be
regulated by the rules of Art. 1 1 93. Examples: the sale
44 45
by the debtor of his other properties118 or the obtaining arrival of the period, he may recover the thing paid or
of a loan from a bank.1 19 delivered, with the fruits and interests. (Art. 1 195)
Otherwise put, a period is a fature and certain 3. Retroactivity. Unlike a condition, a period has no effect
event, as opposed to a condition which is a future on the existence of the obligation, but only on their
and uncertain event.120 demandability or performance. Thus, the arrival of a
period does not have a retroactive effeci.121
2. Period may be Susp ensive or Resolutory.
C. BENEFIT OF THE PERIOD
a. · Obligations with Suspensive Period (ex die) - they
are obligations for ";hose fulfillment a day certain has I. In General. Whenever in an obligation a period is
been fixed, and shall be demandable only when that designated, it is presumed to have been established for the
day comes. (Art. 1 193) benefit of both the creditor and the debtor. (Art. 1 196)
Examples: A promissory note payable ,on 1 a. Thus, in such a case, the debtor may not be compelled
January 2025; a service which must be performed to perform the obligation before the arrival of the
one year from the execution of the contract. period, and the creditor may not be compelled to
accept performance before the arrival of the period.
b. Obligations with Resolutory Period (in diem)- they
take effect at once, but terminate upon arrival of the b. Also, because the term is generally for the benefit of
day certain. (Art. 1 1 93) both creditor and debtor, a contract whose term has
already expired may only be renewed if both parties
Example: A usufruct that will end on 1 January consent. 122
2025.
2. Exception. The period may be established in favor of
B. EFFECTS either the creditor or the debtor, if it should so appear from
the tenor of the obligation or other circumstances. (Art.
1. Loss, Deterioration or Improvement. In case of loss, 1 1 96)
deterioration or improvement of the thing before the arrival
of the day certain, the rules in Article 1 1 89 on conditional a. If the period is for the benefit of the debtor, he may not
obligations shall be observed. (Art. 1 1 94) be compelled to perform the obligation before the
arrival of the period, but he may validly do so (pre
2. Advance Payment by Mistake. If the obligor is unaware payment) if he so wishes.
of the period or believes that the obligation has become due
and demandable, and thus pays or delivers before the
1 18Dandoy v. CA, G.R. No. 150089, August 28, 2007. 121 IV Tolentino 186-187.
110 Berg v. Magdalena Estate, Inc., 92 Phil. 110. 122 Fernandez v. CA, 166 SCRA 577 (1988); LL and Co. v. Huang Chao Chun, G.R. No. 142378,
120 Dandoy v. CA, G.R. No. 1 50089, August 28, 2007. March 7, 2002; Josefa v. San Buenaventura, G.R. No. 163429, March 3, 2006.
46 47
Example: If the obligation provides that payment
may be made "within" the stipulated period, or "on d. When the debtor violates any undertaking, in
or b�fore" the stipulated date, the period is for the consideration of which the creditor agreed to the
benefit of the debtor. The debtor then has the period; or
right, but not the duty, to pay before the deadline.
e. When the debtor attempts to a.bscond.
b. If the period is for the benefit of the creditor, he may
.not be compelled to accept performance before the D. FIXINGOF PERIOD
arrival of the period, but he may validly demand
performance if he so wishes. I. When Applicable. The courts may fix the duration of the
period in the following cases:
The creditor may decline pre-payment for various
reasons - he may want the interest on his money, a._ If the obligation does not fix a period, but from its
he may want to avoid the risk of holding his nature and the circumstances it can be inferred that a
money, or the risk of near-term deprecia\ion in period was intended. (Art. 1 197)
currency, etc.
'
But if the performance of the obligation depends a. Examples: (i) obligation to deliver a TV or a
upon the sole will of. the debtor (purely refrigerator - it is sufficient for the debtor to deliver
potestative), the obligation is void. (see Art. 1 1 82) either a TV or a refrigerator, not both; (ii) obligation of
a fire insurance company to rebuild the insured house
c. In case of breach of reciprocal obligation, the court destroyed by fire or to pay its value.133
may fix a period '(instead of ordering rescissi<;m) if
' Contrast with Conjunctive Obligation:
there is a just cause for the same. (Art. 1 1 91) b. There are also
several objects, which must all be fulfilled.134
2. Premature Until Period is Fixed. Until the period is first
determined, there can be no breach of contract or failure to Example: Obligation to deliver a TV and a
0
perform the obligation.1 3 Before the fixing of the period, refrigerator - the debtor must deliver both TV and
it would be premature for the creditor to complain of the refrigerator.
debtor's alleged breach.1 3 1
c. Contrast with Facultative Obligation: There is only
3. Standard in Fixing the Period. In every case, the courts one object, but the debtor may substitute another
shall determine such period as may under the , object.
circumstances have been probably contemplated by the
parties. (Art. 1 1 97) 2. Complete Performance. A person altenratively bound by
different prestations shall completely perform one of them.
4. Finality. Once fixed by the courts, the period cannot be (Art. 1 199)
changed by the courts. (Art. 1 197)
The creditor cannot be compelled to receive part of one
and part of the other undertaking. (Art. 1 1 99)
129 SPJ dissent of J. Davide In Central Philippine University v. CA, 246 SCRA 511 (1995).
"' Ungson vs. Lopez, 50 Off. Gaz. 4297; Concepcion vs. People of the Philippines, 74 Phil. 63;
Gonzales vs. De Jose, 66 Phil .. 369; Pages v. Basilan Lumber Company, G.R. No. L-
10679, November29, 1958, "'See Chavez v. PEA-Amari, G.R. No. 133250, May 6, 2003. J. Ynares-Santiago, dissenting.
131 Spouses Vasquez v. Ayala Corp.. G.R. No. 149734, November 19, 2004; Spouses Edrada v. "' Ong Guan Can v. Century Insurance Co., Ltd., 46 Phil. 592 (1924).
Spouses Ramos, G.R. No. 154413, August 31, 2005. "' IV Tolentino 203.
50 51
B. RIGHT TO CHOOSE, BY DEBTOR of the obligation, the latter may rescind the contract with
damages. (Art. 1203)
I. General Rule. The right of choice belongs to the debtor.
(Art. 1200) 5. In Case of Loss of Alternative Prestations.
c. The debtor shall lose the right of choice when among ii. Not Due to Debtor's Fault - If the loss or
the prestations whereby he is alternatively bound, only impossibility is not, due to the debtor's fault (for ·
52 53
choose to rescind the obligation with damages
(A11. 1203). l). lill.C'llLTll.1:WE OBLlGll.TlONS
C. RIGHT TO CHOOSE, BY CREDITOR l. Yacultative Obligation. This is when only otie prestation
has been agreed upon, but the obligor may render another
1. When App licable. The creditor has the right to choose in substitution. (A1t. 1206)
. between alternative prestations only when it is expressly
given to him. (Arts. 1200, 1205) Contrast with Alternative Obligation: In a facultative
obligation, there is only one principal prestation. If the
2. Effectivity. When the choice has been expressly given to said principal prestation is void, or lost, or becomes
the creditor, the obligation shall cease to be alternative impossible, the obligation is extinguished, even if the
from the day when the selection has heen communicated to substitutes are still available. On the other hand, in an
the debtor. (Art. 1205) alternative obligation, the obligation is not
extinguished by the nullity, loss or impossibility of one
2. Pending tlte Creditor's Choice. Until the selection1by the or some of the alternatives, as long as other alternatives
creditor, the responsibility of the debtor shall be governed are still available.
by the following rules:
2. Before Substitution - The loss or deterioration of the
a. If one of the things is lost through a fortuitous event, thing intended as a substitute, through the negligence of the
he shall perform the obligation by delivering that obligor, does not render him liable. (Art. 1 206)
which the creditor should choose from among the
remainder, or that which remains if only one subsists; 3. Upon Substitution - Once the substitution, has been
made, the obligor is liable for the loss of the substitute on
b. If the loss of one of the things occurs through the fault account of his delay, negligence or fraud. (Art. 1206)
of the debtor, the creditor may claim either -
n. The price of that which, through the fault of the A. IN GENERAL: In both joint and solidary obligations, there is a
debtor, has disappeared, with a right to damages;. concurrence or plurality of debtors and/or creditors in the same
obligation. They differ, however, in the extent ofthe obligation
c. If all the things are lost through the fault of the debtor, to which each debtor can be held liable and/or the extent which
the choice by the creditor shall fall upon the price of each creditor can demand. .
any one of them, also with indemnity for damages.
1-. In a joint obligation (mancomunada or pro rata), each of
Note: The same rules shall be applied to obligations to do the debtors is liable only for a proportionate part of the
or not to do in case one, some or all of the prestations debt; and · each of the creditors is entitled only to a
should become impossible. (Art. 1205)
54 55
136
proportionate part of the credit. Otherwise put, each that each of the debtors is liable only for a proportionate
143
creditor can recover only · his share of the obligation, and part of the debt. (Art. 1 207)
137
each debtor can be made to pay only his part.
a. The credit or debt shall be presumed to be divided into
Example: The obligation is joint ifA, B, and C say as many shares as there are creditors or debtors, the
"We promise to pay P300 to X'. A, B, and C are liable credits or debts being considered distinct from one
only for P 100 each. another, subject to the Rules of Court governing the
multiplicity of suits. (Art. 1208)
2. In a solidary obli gati on (joint and several or juntas o
separadamente or in solidum), each of the debtors is liable b. Thus, if the obligation or judgment holding several
for the entire obligation, and each of the creditors is persons liable is silent as to the nature of extent of their
138 144
entitled to demand the whole obligation. Otherwise put, liability, such liability is consideredjoint.
.
B. JOINT OBLIGATION IS THE GENERAL RULE b. When the law requires solidarity,
I . General Rule. In case of concurrence of two or more Examples: Liability for quasi-delict (Art. 2194)
creditors or of two ·or more debtors in one and the same and liability arising from crime (Art. 1 10, RPC).
obligation, the presumption is that the obligation is joint so See also Arts. 927, 1824, 1 9 1 1 , 1915, 2157 of the
Civil Code.
139 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990.
'" Ronquillo v. CA, G.R. No. L-55138, September 28, 1984. 143 Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
"' "Juntos o separadamenre: Parot v. Gemora, 7 Phil. 94 (1906). 1 44Contreras v. Felix, 78 Phil. 570 (1947).
145 Juan Ysmael & Co., Inc. v. Salinas, 73 Phil. 601 (1942).
·
56 57
considered solidary,'46 because a "moral wrong 2. The indivisibility of performance does not prevent the
cannot be divided into parts. "147 Thus: corporal� obligation from being considered joint.
directors and officers are solidarity liable with the
corporation for the te1mination of employees done a. The indivisibility of an obligation does not necessarily
8
with malice or bad faith. 14 give rise to solidarity. Nor does solidarity of itself
imply indivisibility. (Art. 1210)
C. EFFECTS OF JOINT OBLIGATION
b. The indivisible obligation is still presumed joint.
I. In a joint obligation, the debt/credit is legally divided into However, in such a case of joint indivisible obligation
as many shares as there �e creditors or debtors, the credits
or debts being considered distinct from one another. (Art.
1 208) Thus, because tl)e shares are distinct from each other i. The right of the creditors may be prejudiced only
by their collective acts, (Art. 1209) and
a. A joint creditor cannot act in representation , of the ii. The debt can be · enforced only by proceeding
others. Neither can a joint debtor be compelled to against ail the debtors. (Art. 1209)
answer for the liability of the others.149
(1) Since the prestation can only be performed by
b. The effect of a demand or interruption ofprescription all of the debtors, they must all be sued. If one
is limited only to the particular creditor or debtor who of the debtors cannot perform, the prestation
made or received the demand or intefl'\lption.1 50 becomes incapable of performance and is
converted to liability for damages. The
c. The extinguishment of the obligation of one of the debtors are liable only for their proportionate
debtors does not affect the shares of his co-debtors. shares in the damages.
d. The nullity or vices of obligation affecting one of the (2) If one of the debtors should be insolvent, the
debtors do not necessarily extend to the shares of his others shall not be liable for his share. (Art.
co-debtors. 1209)
e. The insolvency of one of the debtors does not increase (3 ) Example: If X, Y and Z are. liable to deliver a
the liability of his co-debtors. (see Art. 1 209) Toyota Altis to A, the obligation is indivisible
(X cannot just deliver a 1/3 Altis), and also
joint (X cannot be compelled to deliver the
"' Worcester v. Ocampo, 22 Phil. 42 (1912). Lafarge Cement v. Continental Cement entire Altis alone). A must sue X, Y, and. Z
Corporation, G.R. No. 155173, November 23, 2004, 443 SCRA 522. together. If Z cannot perform, the obligation is
"' IV Tolentino 222.
"' Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, G.R. No. 1 13907, 20 converted to liability for the value of the Altis,
April 2001, 357 SCRA 77, 93-94. which X, Y, and Z must all pay, but only pro
1" Sembrano v. City of Butuan, G.R. No. 1 63605, September 20, 2006.
58 59
because active solidarity is essentially a mutual
D. EFFECTS OF SOLIDARY OBLIGATION agency, which involves a relation of confidence.
I. Classification a s to S nbj ect. Solidarity may be classified b. Passive Solidarity, or solidarity in the debtors - each
as: of the debtors can be made to answer for the others,
with the resulting right to recover from the other co
a. Active Solidarity, or solidarity in the creditors - each debtors their respective shares; there is a mutual
·creditor has the authority to claim and enforce the guaranty. 153
rights of all, with the resulting o.bligation of paying his
co-creditors their respective shares; there is mutual c. Mixed Solidarity, or solidarity in both the creditors and
representation or agency. 151 the debtors.
i. Each of the solidarity creditors may sue alone, and 2. Varied Solidarity. Solidarity may exist although the
payment to the suing creditor is sufficient to creditors and the debtors may not be bound in the same
discharge the el'.tire obligation.152 manner and by the same periods and conditions. (Art.
, .
1211)
ii. Each of the solidary creditors may do whatever
may be useful to the others, but not anything which Example: X , Y, and Z are solidarily liable t o J for
may be prejudicial to the latter. (Art. 1212) P30,000. X's liability matures in Year l, Y's in Year 2
and Z's in Year 3. Solidarity still exists in such a
(1) Thus, a solidary creditor may interrupt scenario. In Year 1, J may sue X or. Y or Z (because
prescription or make a demand (for the debtor they are solidarily liable), but only for Pl0,000 (the
to be in default and for interest to run), which portion which matures in Year I). In Year 2, J may
is beneficial to his co-creditors. sue X or Y or Z (because they are solidarily liable), but
only for P20,000 (the portion which matures by Year
(2) Note, however, that under Art. 1215, a solidary 2) .1 54
creditor may effect the novation,
compensation, confusion or remission of the 3. Extinguishment of the Obligation, In General
debt, which shall extinguish the obligation.
However, the creditor who extinguished the a. In general, payment of the debt to one of the solidary
obligation shall be liable to the others for the creditors, or made by one of the solidary debtors, is
share in the obligation corresponding to them. sufficient to extinguish the debt. (Arts. 1214, 1217)
111 .. A solidary creditor cannot assign his rights without 1. The paying debtor is generally entitled to
the consent of the others. (Art. 1213) This is reimbursement of t11e shares of his co-debtors.
(Art. 1 217)
151 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990. "' IV Tolentino 228.
152 Quiombing v. CA, 189 SCRA 325, 328, August 30, 1990. "' lnchausti & Co v. Yulo, 34 Phil. 978.
60 61
extinguish the obligation or the solidarity of the
ii. The collecting creditor is generally responsible to obligation.155
give to his co-creditors their corresponding shares.
(Art. 1215) However, in case of suretyship (wherein the
surety is solidarily liable with the principal
b. Novation, compensation, confusion or remission of the debtor), an extension of time granted by the
.
debt, made by any of the solidary creditors or with any creditor to the principal debtor (without
of the solidary debtors, shall extinguish the obligation. consent of surety) will extinguish the liability
(Art. 1215) of the surety.'56 (Art. 2079)
i. With such extinguishment, the debtors are released But mere . delay by the creditor in
from their obligation to the creditors. However - collecting from the debtor is not an
extension which will discharge the
a. As among the creditors, the creditor who may surety.157 (Art. 2079)
have extinguished or collected the debt shall be
liable to the others for their corresp�nding 3. Payment to Solidary Creditors
share in the credit. (Art. 1215)
a. If no demand has been made by the solidary creditors,
b. As among the debtors, the debtor who caused the debtor may pay any one of them (Art. 1214) -
the extinguishment of the obligation is entitled such payment will be sufficient to extinguish the
to recover from his co-debtors their shares in obligation.158
whatever he may have paid. or given up to
extinguish the obligation. (see Art. 1217) b. If any demand, judicial or extrajudicial, has been made
Example: If X, Y and Z are solidarily liable to by one of them, payment should be made to him. (Art.
N for P30,000, which debt is extinguished by 1214)
compensation with X's credit against N for the
same amount, then N is entitled to recover 4. Payment by Solidary Debtors
P l 0,000 each from Y and Z as their share in
the obligation. a. Payment made by one of the solidary debtors
extinguishes the obligation. (Art. 1217)
ii. In case the remission was made after the. debt had
already been totally paid, apply Art. 1219 (infra).
iii. Novation. - generally, a mere extension of time 1'' lnchausti & Co v. Yulo,
34 Phil. 978.
for payment given to some of the solidary debtors "' El Banco Espanol Filipino v. Donaldson Sim & Co., 5 Phil. 418 (1905); Radio· Corp. of the
Philippines v. Roa, G.R. No. 42829, September 30, 1935; Cochingyan v. R & B Surety and
does not constitute a novation which will Insurance Co., 151 SCRA339 (1987). See also Art. 2079. .
157 Palmares v. CA, G.R. No. 126490, March 31, 1998; Filipinas Textile Mills, Inc. v. CA, G.R.
62 63
If two or more solidary debtors offer to pay, the ii. The debtor-payor is not entitled to reimbursement
creditor may choose which offer to accept. (Art. · from his co-debtors if his payment is made after.
1217) the obligation has prescribed or become illegal.
(Art. 1218)
b. Right ofDebtor-Payor to Reimbursement
(1) The debtor-payor is also not entitled to
i. He who made the payment may claim from .his reimbursement if he pays a debt which had
co-debtors only the share which corresponds to already been extinguished (e.g., already paid or
each, with the interest for the payment already remitted)
·
160
Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996.
161Quiombing v. CA, G.R. No. 93219, 30 August 1990, 189 SCRA 331; Amor de Castro v. CA,
1" See Inciong, Jr. v. CA, G.R. No. 96405, June 26, 1996. G.R. No. 1 1 5838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141 538, March 23, 2004.
64 65
Such course of action does not convert the solidary fault of the solidary debtors, the obligation shall be
obligation into a joint one.162 extinguished. (Art. 1221)
iii. The demand made against one of them shall not be b. With Fault or Delay - If there was fault on the part of
an obstacle to those which may suqsequently be any one of them, all shall be responsible to the creditor,
directed against the others, so long as the debt has for the price and the payment of damages and interest.
not been fully collected. (Art. 1 2 1 6) (Art. 1221)
6. Remission of Debt i. But the faultless debtors may recover against the
guilty or negligent debtor. (Art. 1221)
a. Remission of a. Share after Payment. The remission
made by the creditor of the share which affects one of ii. The same rule applies if the thing is lost or the
the solidary debtors does not release the latter from his performance has become impossible after one of
responsibility towards the co-debtors, in case the debt the solidary debtors has incurred in delay through
had been totally paid by anyone of them before the the judicial or extrajudicial demand upon him by
1
remission was effected. (Art. 1219) the creditor, even if the loss or impossibility was
due to fortuitous event. (Art. 1221)
1. . The debtor whose share was "remitted" must still
pay his share to reimburse the debtor-payor. 8. Defenses of Solidary Debtors
ii. Strictly speaking, there can be no "remission" of a a. As mentioned, the creditor may proceed against any
debt which had already been extinguished by one of the solidary debtors or some or all of them
payment · simultaneously. (Art. 1216) The choice is left to the
solidary creditor to determine against whom he will
b. Remission of the Entire Debt. The remission of the enforce collection.163 He need not implead all of them
whole obligation, obtained by one of the solidary . ' 4
· as they are not md'1spensable part1es. 1 6
debtors, does not entitle him to reimbursement from his
co-debtors. (Art. 1 220) b. A so!idary debtor may, in actions filed by the creditor,
avail himself of the following defenses1 65:
Because the debtor who obtained the remission did
not pay or lose anything. i. Defenses which are derivedfrom the nature of the
obligation - these are defenses which pertain to
7. Loss or Impossibility of Performance the validity or enforceability of the obligation.
G.R. No. 1 15838, July 18, 2002; Cerezo v. Tuazon, G.R. No. 141538, March 23, 2004.
'" Lafarge Cement v. Continental Cement Corporation, G.R. No. 1 55173, November 23; 2004,
'" Republic Glass Corp, v. Qua, G.R. No. 144413, July 30, 2004. 443 SCRA 522.
66 67
They are total defenses (the debtor cannot be held and a partial defense). As to the share of Z, X
liable at all). can raise the derense that it has not yet become
due (a defense pertaining to Z's share, and a
ii. Defenses which are personal to him or pertain to partial defense).
his own share;
(c) lfZ is sued in Year 2, he can be held liable
(1) Defenses which are personal to the defendant for P l 0,000 corresponding to X, which had
debtor. (such as minority, insanity or vitiated already. become due. As to the share of Y, Z
consent) are total defenses. can invoke Y's insanity (a defense personal to
Y, and a partial defense). As to . his own share,
(2) Defenses which pertain to the share of the Z can rais"e the defense that it has not yet
defendant-debtor (e.g., that his share is not yet become due (a .defense pertaining to his own
due or has. already been extinguished) are share, and a partial defense).
. partial defenses, i.e., the defendant cannot be
held liable for the portion correspondipg to
him, but he can still be held liable for the V. DIVISIBLE AND INDIVISIBLE OBLIGATIONS
shares of his co-debtors.166 .
A. IN GENERAL
iii. Defenses which personally belong to the other
debtors (or pertain to their shares) - these are 1. Indivisible Obligation. An obligation is indivisible when
partial defenses, i.e., the defendant-debtor cannot it cannot be validly performed in parts, whatever may be
be held liable for the portions corresponding to the the nature of the thing which is the object thereof. 168
debtor with the defense.167 (Art. 1 222)
2. Divisible Obligation. An obligation is divisble when it can
Example: X, Y, and Z are solidarily liable to J be validly performed in parts.
for P30,000. X's liability matures in Year l , '
Y ' s in Year 2 and Z's in Year 3. Y was insane B. DISTINGUISHED FROM DIVISIBILITY OF THING
at the time the obligation was contracted.
I. The divisibility of the obligation refers to the prestation,
(a) If Y is sued, he can invoke his insanity and and not to the object thereof.169 Divisibility of obligation
be excused altogether (a defense personal to refers to its susceptibility of partial performance.
him, and a total defense). Divisibility of the object refers to its capacity to be
divided into .parts without diminishing its value
(b) If X is sued in Year 2, he can only be held disproportionately.
liable for P l0,000. As to the share ofY, X can
invoke Y's insanity (a defense personal to Y,
16'
"' lnchausti & Co v. Yulo, 34 Phil. 978. Nazarenov. CA, G.R. No. 138842; October 18, 2000.
169
"' lnchausti & Co v. Yulo, 34 Phil. 978. Nazareno v. CA, G.R. No. 138842, October 18, 2000.
68 69
An obi igation may be considered indivisible even D. DETERMINING DIVISIBILITY
when its object is divisible. For example, the
obligation to pay insurance premium is generally · 1 . Indivisible. (a) Obligations to give definite things and (b)
considered indivisible/70 even if the sum of money to those which are not susceptible of partial performance
be paid is divisible. shall be deemed to be indivisible (see Art. 1233)
2. The divisibility or indivisibility of the things that are · the 2. Divisible. When the obligation has for its object the
object of obligations in which there is only one debtor and execution of a certain number of days of work, the
only one creditor does not alter or modify the nature or accomplishment of work by metrical units, or analogous
effects of the obligation. (Art. 1223) things which by their nature are susceptible of partial
performance, it shall be divisible. (Art. 1225)
c. JOINT INDIVISIBLE OBLIGATION: A joint indivisible
obligation is an obligation of several debtors where each debtor However, even though the object or service may be
is liable only for his part (joint) but the obligation cannot be physically divisible, an obligation is indivisible if so
validly performed in part .(indivisible). Thus, it must be provided by law or intended by the parties. (Art. 1 225)
performed by all of the debtors, and it can be enforced �nly by
proceeding against all of them. (Art. 1209) 3. in obligations not to do, divisibility or indivisibility shall
be determined by the character of the prestation in each
If any of the debtors does not comply with his undertaking, the particular case. (Art. 1225)
joint indivisible obligation gives rise to indemnity for damager..
The debtors who may have been ready to fulfill their promises
shall not contribute to the indemnity beyond the corresponding VI. OBLIGATIONS WITH A PENAL CLAUSE
portion of the price of the thing or of the value of the service in
which the obligation consists. (Art. 1 224) A. IN GENERAL
Example: A, B, and C are jointly liable to deliver a laptop 1 . Definition. A penal clause is an accessory obligation
computer valued at P30,000 to X. The delivery can only be which the parties attach to· a principal obligation for the
done by all of the debtors. If C cannot deJiver, the obligation to purpose of insuring the performance thereof by imposing
deliver the laptop gives rise to an obligation to indemnify X for on the debtor a ·special prestation (generally consisting in
P30,000. A and B, who were ready to perform, can only be the payment of a sum of mon�y) in case the obligation is
held liable for P l 0,000 each. not fulfilled or is irregularly or inadequately fulfilled.171
171
Pryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
172Country Bankers Insurance Corp. v. Court of Appeals, G.R. No. 85161, 9 September 1991,
"'.Makati Tuscany Condominium Corp. v. Court of Appeals, G.R. No. 95546, 6 November 1992, 201 SCRA 458, 464-465; Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No.
215 SCRA 462, 466. 158997, October 6, 2008. ·
70 71
should pay the rentals corresponding to the rema1rung b. The penalty may be enforced only when it is
period of the lease.173 A stipulation for attorney's fees is demandable in accordance with the provisions of the
also considered a penal clause.114 Civil Code. (Art. 1226)
2. Functions. A penal clause serves (a) to strengthen the 2. Exceptions: Penalty as Cumulative Remedy. Damages
coercive force of the obligation; (b) to provide for may still be demanded. (in addition to the penalty178) in the
liquidated damages resulting from a breach of following exceptional cases;
obligation;175 and (c) to punish the obligor.176
a. If there is stipulation for this;
3. Effect of Nullity. The nullity of the.penal clause does not b. If the obligor refuses to pay the penalty; or
carry with it that of the principal obligation. (Art. 1 230) c. If the obligor is guilty of fraud in the fulfillment of the
obligation. (Art. 1226)
a. But the nullity of the principal obligation carries with it
that of the penal clause. (Art. 1230) In the foregoing cases, the purpose of the pen�lty is to
punish the obligor for the breach. rn
b. This is because the penal clause is just an accessory .
obligation. 3. Limitations.
a. Proof of actual damages suffered by the creditor is not b. The creditor cannot demand the . fulfillment of the
necessary in order that the penalty may be demanded. obligatio.n and the satisfaction of the penalty at the
(Art. 1228) same time. (Art. 1227)
Thus, there is no difference between penalty and a. Except in case this right has been clearly granted to
liquidated damages in terms of their legal the creditor. (Art. 1 227)
results.177
b. However, if after the creditor has decided to
require the fulfillment of the obligation, the
"' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005. performance thereof should become impossible
m Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929).
m Llgutan v. CA, G.R. No. 138671, Februaiy 12, 2002.
1 76 Pamintuan v. CA, G.R. No. L·26339, December 14, 1979. m Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No.
m Lambert vs. Fox, 26 Phil. 588 (1914); Yap Tico & Co. v. Alejano, 53 Phil. 986 (1929); 138671, Februaiy 12, 2002.
Pamintuan v. CA, G.R. No. L-26339, December 14, 1979. 17' Piyce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005.
i2 73
without his fault, the penalty may be enforced.
(Art. 1227)
Chapter 5
2. Iniquitous or Unconscionable Penalty. Even if there has A. Art. 123 1 enumerates the following causes of extinguishment
been no performance, the penalty may also be reduced by of obligations which are governed by Chapter 4, Title V of
the courts if it is iniquitous or unconscionable. (Art. 1 228) Book IV of the Civil Code:
181 Lapuz Sy v. Eufemlo, 43 SCRA 177, January 31, 1972; Javier Security Special Watchman
1aoPryce Corporation v. PAGCOR, G.R. No. 157480, May 6, 2005, citing Ligutan v. CA, G.R. No. Agency v. Shell.Craft & Button Corp., 1 1 7 Phil. 218, January 31, 1963.
138677, February 12, 2002. "' Republic v. Cojuangco, Jr., G.R. No. 139930, April 17, 2006.
74 75
·
2. Arrival of resolutory period;
B. PAYMENT BY THE PROPER PERSON
3. Mutual desistance - since mutual agreement can create a
contract, mutual desistance by the parties can cause its I . In General. The obligation must be paid by the debtor, and
extinguishment1 83; the creditor is entitled to demand payment by the debtor.
(see Art. 1236)
4. Unilateral desistance - some contracts, such as agency and
partnership, may be terminated by the will of one of the Moreover, in obligations to give, the payment must be
parties. made by one who has: (a) the free disposal of the thing
due; and (b) capacity to alienate. (A1t. 1239)
II. PAYMENT OR PERFORMANCE Without these two requisites, the payment shall not
be valid. (Art. 1 239185)
A. IN GENERAL
2. Third Party Payor. The creditor is not bound to accept
I . Definition. Payment means not only the delivery of payment or performance by a third person who has no
money but also the performance, in any other manner, of interest in the fulfillment of the obligation. (Art. 1236)
.
an obligation. (Art. 1232)
a. Exception: If there is a stipulation to the contrary.
2. Requisites. A debt shall not be understood to have been (Art. 1236)
paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the b. A partial payment made by a stranger to the obligation
case may be. (Art. 1233) without the authorization of the debtor will not stay the
running of the period of prescription with respect to the
Requisites for the payment to extinguish the obligation (see . remainder of the debt. 186
discussion below):184 ·
d. Payee payment must be made to the proper person. '" Art. 1239 provides that the rule is without prejudice to Art. 1427, which provides for payments
-
made by a "minor between 18 and 21 years of age." Since the age of minority is now 18 years,
1" Saura Import & Export Co., Inc. v. DBP, G.R. No. L-24968 April 27, 1972.
.• Art. 1427 may be considered inoperative.
"' See Alonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005. 186 Agoncillo v. Javier, 38 Phil. 424 (1918).
76 77
If the payor does not intend to be reimbursed disobeyed the latter's instruction or exceeded
by the debtor, the payment is deemed to be a his · authority), but such agent may get
donation, which requires the debtor's consent. reimbursement from the insurer insofar as the
But the payment is in any case valid as to the latter was benefited by the payment (under Art.
creditor who has accepted it. (Art. 1238) 1236, 2nd par.).190
The intent not to be reimbursed must be ii. The payor cannot compel the creditor to subrogate
proven; it is not presumed.1 87 him in his rights, such as those arising from a
mortgage, guaranty, or penalty. (Art. 1237)
ii. The payor is legally subrogated to the rights of the
creditor, such as those arising from a mortgage, Actually, even if the creditor is willing to
guaranty, or penalty. (Art. 1237; see also Art. subrogate the payor, this cannot be done
1302[1]) without the debtor's consent.191
b. If the payment was without the knowledge or qgainst C, PAYMENT TO THE PROPER PERSON
'
"' Carandang v. Heirs ofDe Guzman. G.R. No. 160347, November 29, 2006.
"' PCIB v. CA, G.R. No. 121989, January 31, 2006; Phil. Export and Foreign Loan Guarantee 190 Dominion Insurance Corp. v. CA, G.R. No. 129919, February 6, 2002.
191 IV TolentirlJl 283.
Corp.v. V. P. Eusebio Construction, Inc.. G.R. No. 140047, July 13, 2004.
192
'" PCIB v. CA, G.R. No. 121989, January 31, 2006. Allied Banking Corp. v. Lim Sia Wan, G.R. No. 133179, March 27, 2008.
78 79
thing delivered, or insofar as the payment has been (2) Other examples 194 : (a) heir who collects the
beneficial to him. (Art. 1241) credits of the estate but is later found to be
incapacitated to succeed; (b) assignee of a
3. Payment to a Third Pa!ty. In general, payment to a third credit who collects it, but the assignment is
party is void and will not extinguish the obligation. later rescinded or annulled; and (c) holder of
However - an instrument payable to bearer, who merely
found it.
a. Payment made to a third person shall be valid insofar
as it has redounded to the benefit of the creditor. (Art. ii. Possession of the credit is not the same as
1241) possession of the document evidencing the credit.
Thus, the physical holder of a promissory note is
Such benefit to the creditor need not be proved in the not necessarily in possession of the credit, if such
following cases: holder is not the creditor named in the note.
i. �f after the payment, the third person acquir�s the 4. Judicial Order to Retain the Debt. Payment made to the
'
creditor's rights; creditor by the debtor after the latter has been judicially
ordered to retain the debt sh�ll not be valid. (Art. 1243)
ii. If the creditor ratifies the payment to the third
person; This refers to a situation where the credit has been
garnished by a court (by virtue of a writ of execution or
iii. If by the creditor's conduct, the debtor has been led preliminary attachment) to answer for the creditor's
to believe that the third person had authority to liability in a case or litigation.
receiv� the payment. (Art. 1241)
Example: J has a credit of P l ,000 against K. J is
b. Payment made in good faith to any person in then sued by X, who obtained a writ of preliminary
possession of the credit shall release the debtor. (Art. attachment on J's properties. Thus, the sheriff
1242) garnished J's credit by notifying K. K should
refrain from paying the P l ,000. IfK pays J despite
1. The "person in possession of the credit" refers to the garnishment, such payment would not be valid
the person who, under the circumstances, appears as far as X is concerned, and X may hold K liable
to be entitled to the payment. · (assuming X eventually obtains a judgment against
J) 195
.
(1) Example: The lessee may pay rentals to the
registered owner of the leased premises.193 D. IDENTITY OF PRESTATION
'" See National Bank v. Olatunga Lumber Co., 54 Phil .. 346 (1930);Tec Bi & Co. v. Chartered
"' Orala v. IAC, G.R. No. 73471, May 8, 1 990. Bank of India, 41 Phil. 819(1917).
80 81
1 . In General. For payment to be valid, the very thing due may agree to a dation in payment or dacion en pago,
must be delivered or released.196 (Art. 1233) whereby property is alienated to the creditor in satisfaction
of a debt in money. (Art. 1245). Dati6n in payment
a. In obligations to give a determinate thing- the debtor requires delivery and transmission of ownership of a thing
of a . thing cannot compel the creditor to receive a owned by the debtor to. the creditor as an accepted
different one, althcugh the latter may be of the same equivalent of the performance of the obligation.197
value as, or more valuable than that which is due. (Art.
. 1244) a. Dation in payment is governed by the law on sales.
(Art. 1245) The creditor is deemed to be buying the
Example: If X is obligated to deliver his Toyota Altis thing or property of the debtor, the payment for which
(Plate Number JCP 888) to Y, X cannot compel Y to is to be charged against the debtor's debt.198
accept another Toyota Altis, or even a Mercedes Benz.
i. In its modern concept, what actually takes place in
b. In obligations to give an indeterminate or generic dacion en pago is an objective novation of the
thing- obligation where the thing accepted as an
equivalent of the performance of an obligation is
I. The debtor must deliver must deliver a thing considered as the object of the contract of sale,
which meets the quality and circumstances while the debt is considered as ·the purchase
stipulated. (Art. 1246)
·
price.199
ii. If the quality and circumstances have not been ii. In any case, common consent is an essential
stated, the creditor cannot demand a thing of prerequisite, be it sale or novation, to have the
superior quality. Neither can the debtor deliver a . effect of totally extinguishing the debt or
thing of inferior quality. (Art. 1246) obligation.'00 ·
The purpose of the obligation and other b. There is no dation in payment when there is no
circumstances shall be taken into transfer of ownership in the creditor's favor, as when
consideration. (Art. 1246) the possession of the thing is merely given to the
creditor by way of security2°1 (e.g., as pledge,
b. In obligations to do or not to do - an act or mortgage,202 or under trust receipts arrangement203).
forbearance cannot be substituted by another act or
forbearance against the obligee's will. (Art. 1244)
197 Fort Bonifacio Development Corp. v. Yllas Lending Corp., G.R. No. 158997, October 6, 2008,
citin!lfhilippine National Bank v. Pineda, G.R. No. 46656, 13 May 1991, 197 SCRA 1 .
2. Dation in Payment. While the debtor is required to 196 Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1 982.
deliver or perform the very thing due, the debtor and '" Filinvest Credit Association v. Philippine Acetylene Co., G.R. No. L-50449, January 30, 1982.
200
creditor may of course agree otherwise. For instance, they Filinvest Credit Association v. Philippine Acetylene Go., G.R. No. L-50449, January 30, 1982.
201 Philippine National Bank v. Pineda, G.R. No. 46658, 13 May 1991, 197 SCRA 1 .
202
DBP v. CA, G.R. No. 1 1 8342, January 5, 1998.
203 See also Vintola v. Insular Bank of Asia and America, G.R. No. L-73271 , 29 May 1987, 150
196 A!onzo v. Sps. San Juan, G.R. No. 137549, February 11, 2005. SCRA 578; Landi & Co. (Phil.) Inc. v. CA, G.R. No. 159622. July 30, 2004.
82 83
2. Exceptions/Qualifications.
c. Requisites for dation in payment:204
a. When there is a stipulation to the contrary. (Art. 1248)
1. There must be a perfonnance of the prestation in
lieu of payment (animo solvendz) which may b. When the debt is in part liquidated and in part
consist in the delivery of a corporeal thing or a real unliquidated, the creditor may demand and the debtor
right or a credit against the third person; may effect the payment of the fonner without waiting
for the liquidation of the latter. (Art. 1 248)
ii. There must be some difference between the
prestation due and that which is given in c. Substantial Performance. When the obligation has
substitution (aliudpro alio); and been substantially performed in good faith, the obligor
may recover as though there had been a strict and
iii. There must be an agreement between the creditor complete fulfillment, Ii:ss damages suffered by the
and debtor that the obligation is immediately obligee. (Art. 1234)
extinguished by reason of the perfonnanc,e of a
'
prestation different from that due. i. Example: A construction · which is 97 ,5%
complete.207
E. lNTEGRITY OF THE PRESTATION
ii. There must be an attempt in good faith to perform
I. In General. The prestation must be fulfilled completely.205 the obligation, without any willful or intentional
8
A person entering into a contract has a right to insist on its departure therefrom. 20
perfonnance in all particulars.206
iii. Where there has been substantial perfonnance,
a. Partial perfonnance is generally not allowed. The rescission under Art, 1 1 9 1 is not proper.209
creditor cannot be compelled partially to receive the
prestations in which the obligation consists. Neither d. Acceptance Without Protest. When the obligee accepts
may the debtor be required to make partial payments. the perfonnance, . knowing its incompleteness or
(Art. 1248) irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied
b. Examples: In an obligation to pay certain amount of with. (Art. 1235)
money, the full amount must be paid; in aiJ. obligation
to construct a house, the construction must be i. This is based on ·the principles of waiver and
completed. estoppel.
20• 207 Diesel Conslruclion Co., Inc. v. UPSI Property Holdings, Inc. G.R. No. 1 54885, March 24,
Aquintey v. Sps, Tibong, G.R. No. 1 66704, December 20, 2006.
20sAlonzo v. Sps. San Juan, G.R. No. 137549, February 1 1 , 2005, 2008.
200 Palmares v. CA, G.R. No. 126490, March 31, 1998. Empire East Land Holdings, Inc. v. we See Sps, Buenaflorv. CA, G.R. No. 142021, November29, 2000.
..
84 85
ii. The law does not require the protest or objection of contractor, and hired another contractor - the
the creditor to be made in a particular manner or at obligee may no longer recover from the previous
a particular time. So long as the acts of the contractor the cost to finish the construction.213
creditor, at the time of the incomplete or irregular
. payment or within a reasonable time thereafter, (c) The obligee, knowing that the construction is
evince that the creditor is not satisfied with said unfinished, barred the contractor's workers and
payment or performance, the· obligation shall not stopped payment of the progress billings but did
be deemed fully extinguished.210 not demand completion of the work - the obligee
cannot demand the cost of the completion works.2.14
iii. An obligee is deemed to have waived strict
complianc·e when the following elements are F. 0THER PROVISIONS
present:
I. Expenses. Unless it is otherwise stipulated, the
(I) An intentional acceptance of the defective or extrajudicial expenses required by the payment shall be for
incomplete performance; the account of the debtor. With regard to judicial costs, the
Rules of Court shall govern. (Art. 1247)
(2) With actual knowledge of the incompleteness
or defect; and 2. Currency. The payment of debts in money shall be made
in the currency stipulated, and if it is not possible to deliver
(3) Under circumstances that would indicate an . such currency, then in the currency which is legal tender in
intention to consider the performance as the Philippines. (Art. 1249)
complete and renounce any claim arising from
the defect a. R.A. 529 prohibited the stipulation of a currency other
than Philippine currency, but R.A. 8 i 83 removed this
Mere receipt of partial payment is not per prohibition. Thus, obligations or transactions may now
se equivalent to a waiver of the balance or g
be paid in the currency a reed upon by the parties.215
acceptance of incomplete performance.211 '
b. Obligations in foreign currency may be discharged in
iv. Examples: (a) the bank accepted delayed payments Philippine currency based on the prevailing rate at the
6
of a loan on several occasions without objection.212 time ofpayment. 21
(b) The obligee, without protest, took over an "' Empire East Land Holdings, Inc. v. Capitol Industrial Construction Groups, Inc., G.R. No.
168074, September 26, 2008.
unfinished construction, deducted the value of the
'" Hanjin Heavy Industries & Construction Co., Ltd. v. Dynamic Planners & Construction Corp.,
unfinished work from the payment to the G.R. Nos. 169408 & 170144, April 30, 2008
215 C.F. Sharp & Co. v. Northwest Airlines, Inc., G.R. No. 133498, 18 April 2002, 381 SCRA 314;
canton, Ltd., 179 SCRA 530 11989]; Republic Resources and Development Corporation v. CA,
203 SCRA 164 [1991]; San Buenaventura v. CA, 181 SCRA 197 11990]; Philippine Manpower
Services, inc. v. NLRC, 224 SCRA 691 [1993]. 210 National Marketing Corp. v. Federation of United NAMARCO Distributors, Inc., G.R. · No. L-
211 Philippine Airlines, Inc. v. Court of Appeals, .G.R. No. 49188, 30 January 1990, 181 SCRA
22578. January 31, 1973, citing Compania General de Tabacos v. Molina, 5 Phil. 142.
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006. '" Quiros v. Tan-Guinlay, 5 Phil. 675 (1906). See, however, Papa v. A. U. Valencia & Co., G.R.
'" Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA No. 105188, January 23, 1998, involving checks drawn by the debtor himself.
557, 568; Citibank, N.A. v. Sabeniano, G.R. No. 156132, October 16, 2006. 221 Siana v. Gimenez, G.R. No, 132768, September 9, 2005; Fortunado vs. CA, 196 SCRA 269,
'" Papa v. A. U. Va�ncla & Co., G.R. No. 105188, January 23, 1998. 279 (1991).
88
89
obligation.223 It does not include a normal "erosion" in i. . If the undertaking is to deliver a determinate thing,
the value of the currency which is a universal trend.224 the payment shall be made wherever the thing
might be at the moment the obligation was
b. For Art. 1250 to apply, the inflation (or deflation) must constituted. (Art. 1251)
be extraordinary, such as in Germany where the
deutschemark went from 4.2 to the U.S. dollar in 1921 , ii. In any other case, the place of payment shall be the
to 4.2 trillion to the U.S. dollar in 1923.
225 domicile of the debtor. (Art. 1251)
c. The economic crisis in the 1980's (50.34% inflation If the debtor changes his domicile in bad faith
rate in 1984), or in 1997 (the Asian financial crisis, or after he has incurred in delay, the additional
where there was a drop in the dollar-peso exchange expenses shall be borne by him. (Art. 1251)
rate by l 7 points), does · not constitute extraordinary
inflation.'26 G. APPLICATION OF PAYMENTS
d. The existence of extraordinary inflation m,ust be 1 . In General. The rules on application of payments apply to
officially proclaimed by competent authorities, i.e., the a person owing several debts of the same kind of a single
Bangko Sentral.227 creditor. (Art. 1252)
vs. Court of Appeals, 173 SCRA 675; Filipino Pipe and Foundry Corporation vs. NAWASA, 161
SCRA32.
,,. Fiiipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32; Singson v. Caltex, G.R. Exceptions/Limitations:
No. 137798, October 4, 2000; Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007.
220 Filipino Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 32.
a. If the parties stipulate otherwise. (Art.
.
"' Singson v. Caltex, G.R. No. 137798, October 4, 2000; Citibank, N.A. v. Sabenlano, G.R. No. 1252)
156132, February 6, 2007.
221 Citibank, N.A. v. Sabeniano, G.R. No. 156132, February 6, 2007; Telengtan Bros. & Sons v.
U.S. Lines, Inc., G.R. No. 132284, February 28, 2006; Ramos v. Court of Appeals, G.R. No.
1 1 9872, 7 July 1997, 275 SCRA 167, 175; Mobil Oil Philippines, Inc. v. Court of Appeals, 180 2" Magdalena Estates, Inc. v. Rodriguez, G.R. No. L-1841 1 , December 17, 1966.
SCRA 651 (1989). 229 Paculdo v. CA, G.R. No. 123855, November 20, 2000.
90 91
b. Application shall not be made as to debts which are not
yet due. (Art. 1252) ii. An interest-bearing debt is more onerous than one
without interest.231
The debtor is deemed to have waived his right to payment shall be applied to all of them proportionately.
apply payments and acquiesced to the creditor's (Art. 1253)
application.
H. PAYMENT BY CESSION
Thus, if the creditor agrees to apply a payment to a. This cession is voluntary on the part of the debtor. It is
the principal, it may be assumed that the interest also subject to the acceptance by the creditors.
3. In Default of the Foregoing Rules. When the payment assigned (unlike in dation in payment). The creditors
carmot be applied in accordance with the preceding roles, merely become authorized to convert the property · into
or if application can not be inferred from other cash, which will be used to pay their credits.
a. The debt which is most onerous to the debtor, ·among the debtor's property.235
93
2. Effect. This cession, unless there is stipulation to the creditor cannot accept or refuses to accept payment.140
contrary, shall only release the debtor from responsibility (Art. 1258)
for the net proceeds of the thing assigned. (Art. 1255)
i. If the tender of payment (which has been refused)
'
The agreements which, on the effect of the cession, are is not followed by consignation, the debtor is not
made between the debtor and his creditors shall be discharged from the obligation.241
governed by special laws. (Art. 1255)
ii. Tender of payment must be distinguished from
I. TENDER OF PAYMENT AND CONSJGNATION consignation. Tender is the antecedent of
consignation, that is, an act preparatory to the
I . In General. consignation, which is the principal act with results
in the discharge of the obligation. Tender of
a. Tender ofpayment is the manifestation by the debtor payment may be extrajudicial, while consignation
of his desire to comply with or to pay the obligation.236 is necessarily judicia!.242
If the creditor to whom tender of payment has been
made refuses without just cause to accept it, !lie debtor 2. Consignation Without Prior Tender. As a rule,
shall be released from responsibility by the consignation must be preceded by tender of payment to
consignation of the thing or sum due. (Art. 1256) discharge the obligation. However, in the following cases
specified by Art. 1256, consignation alone shall discharge
i. Tender of payment must be made in legal tender to the obligation:
be valid. 237
a. When the creditor is absent or unknown, or does not
However, payment in check may be considered appear at the place of payment;
valid, if no prompt objection to said form of
. . 8
payment 1s made.23 b. When he is incapacitated to receive the payment at the
time it is due;
ii. A letter merely expressing intent to pay, but not
accompanied by payment, is not equivalent to c. When, without just cause, he refuses to give a receipt;
tender of payment.239
d. When two or more persons claim the same right to
b. Consignation is the act of depositing the thing due · collect;
with the court or judicial authorities whenever the
e. When the title of the obligation has been lost. (Art.
236 Ramos v. Sarao, G.R. No. 149756, 1 1 February 2005, 451 SCRA 103, 118·119. 1256)
'" Sooo v. Militante, 208 Phil. 151, 160 (1983); see also Philippine Airlines, Inc. v. Court of
Appeals, G.R. No. 49188, 30 January 1990, 181 SCRA 557, 568; Citibank, N.A. v. Sabeniand,
G.R. No. 156132, October 16, 2006.
23e Saco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwanl, G.R. No. 156846,
"' Pabugais v. Sahijwanl, G.R. No. 156846, February 23, 2004.
February 23, 2004. 241 Solid Homes, Inc. v. Laserna, G.R. No. 166051, April 8, 2008.
.
239 Vda. De Zuluela v. Octaviano, G.R. No. L-55350, March 28, 1983.
. 242 Saco v. Militante, 208 Phil. 151, 160 (1983).
94 95
3. Requisites. In order that consignation may be effective, the payment thereby avoiding consignation and the
debtor must show compliance with the following subsequent litigation. 249
reqllisites:243
d. The amount due was placed at the disposal of the
a. There was a debt due
244; court; (Art. 1258) and
Consignation is not necessary where the payor e. After the consignation had been made,. the person
seeks to exercise a right (such as the right of interested was notified thereof. (Art. 1258)
redemption245 or repurchase246 or option247),
instead of performing an obligation. Tender of Two notices are required: prior to and after the
payment is sufficient for such exercise of right. consignation. The reason for the second notice is to
enable the creditor to withdraw the goods or
b. The consignation of the obligation had been made money deposited, to avoid risk of deterioration,
50
because the creditor to whom tender of payment was depreciation or loss. 2
made r�fused to accept it without just cause, or �ecause
of any of the grounds in Art. 1256 which dispenses Notes:
with the need for tender of payment; (Arts. 1256, 1258) i. Strict compliance. The foregoing reqms1tes and
mandatory and must be strictly complied with.m
If the creditor justly refused to accept the. payment
because it was not in legal tender, consignation is ii. Inejfectuar consignation. The consignation shall be
not proper.248 ineffectual (a) if there is failure in any of the
foregoing requisites252; or (b) if the consignation is
c. Previous notice of the consignation had been given to not made strictly in.consonance with the provisions
the person interested in the performance of the which regulate payment. (Art. 1257)
obligation; (Art. 1257)
iii. Applicability. The . foregoing reqnisites do not
This is to give the creditor an opportunity to strictly apply to debts pursuant to a judgment. In
reconsider his unjustified refusal and to accept such a case, if the judgment creditor refuses to
accept the payment of the amount due on the
judgment, the court may direct the money to be
243 Soco v. Militante, 208 Phil. 151, 160 (1983); Pabugais v. Sahijwani, G.R. No. 156846,
February 23, 2004.
244 Ascue v. CA, G.R. No. 84330, May 8, 1991.
245 Villanueva v. Malaya, G.R. No. 94617, April 12, 2000, citing Co. vs. Philippine National Bank,
1 14 SCRA 842; De Castro vs. Intermediate Appellate Court, 165 SCRA 654; Enage vs. De
Escano, 38 Phil. 687.
246 Legaspi v. CA, 142 SCRA 82, 88 (1986), citing Asturias Sugar Central v. .Pure Cane 249 Cabanos v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Limkako vs. Teodoro.
Molasses Co., 60 Phil. 255 (1934), Villegas v. Capistrano, 9 Phil. 416; Rosales v. Reyes, et al., 74 Phil. 313; Socov. Militante, 208 Phil. 151, 160 (1983).
25 Phil. 495; Paez, eta\. v. Magno, 46 O.G.,p, 5425. �° Cabanas v. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058; Saco v: Militante, 208
247 Vda. de Quirino v. Pa\arca, 29 SCRA 1 [196g] citing Asturias Sugar Central v. Pure Cane Phil. 151, 160 (1 g83).
Molasses Co., 60 Phil. 255 and Conejero v. CA, L-21812, April 29, 1966. 251 Saco v. Militante, 208 Phil. 151, 160 (1983);
"' Roman Catholic Bishop of Malolos, Inc. v. \AC, G.R. No. 72110, November 16, 1990. 252 Pabugais v. SShijwanl, G.R. No. 156846, February 23, 2004.
96 97
paid in court and when this is done, order even before the actual approval of the
'53 '55
satisfaction of the judgment to be entered. court or acceptance by the creditor.
4. Effect of Consignation. ii. After the creditor has already accepted the
consignation, or after the . court has already
a. Cancellation or Discharge of the Obligation. Once the declared that consignation is proper .- the debtor
consignation has been duly made, the debtor may ask may withdraw the thing or sum deposited only if
· the judge to order the cancellation of the obligation. the 'creditor consents.
(Art. 1 260)
If the creditor should consent or authorize the
b. Expenses. The expenses of consignation, when withdrawal -
properly made, shall be charged against the creditor.
(Art. 1259) (a) The creditor shall lose every preference
which he may have over the thing. (Art.
c. Withdrawal. 1261)
1. Before the creditor has accepted the consignation, (b) The co-debtors, guarantors and sureties
or before a judicial declaration that the shall be released. (Art. 1261)
consignation has been properly made - the debtor
may withdraw the thing or the sum deposited,
allowing the obligation to remain in force. (Art. ill . LOSS OF THE THING DUE
1260)
A. IN GENERAL - IN 0BLIGATIONS TO GIVE A
At this point, the debtor is still the owner of the DETERMINATE THING
property deposited and may thus withdraw
254
it. 1. General Rule. An obligation to deliver a determinate thing
shall be extinguished if it should be lost or destroyed
It has been held, however, that when all without the fault of the debtor, and before he has incurred
the requisites for consignation are in delay. (Art. 1262)
complied with (and there is no reason to
disapprove the consignation), the property a. Broadly speaking, loss (as a cause for extinguishment
deposited becomes for the account of the of the obligation) refers to the impossibility of
creditor, who must bear .the risk of loss, performance of the prestation.
98 99
the obligation. If the impossibility existed at the d. When the obligor is guilty of contributory fault or
time of the creation of the obligation, it is void ctb negligence.256 (Arts. 1262, 1 1 70)
initio. (Art. 1348)
Presumption Whenever the thing is lost in the
-
b. A thing is considered Jost when it: (i) perishes; (ii) possession of the debtor, it shall be presumed that
goes out of commerce; or (iii) disappears in such a way the Joss was due to his fault:
that its existence is unlmown or it cannot be recovered
· (Art. 1 1 89, S;tpra). (1) unless there is proof to the contrary, and
without prejudice to the provisions of article
c. Partial Loss If the Joss is partial, the courts shall
- 1 165 (Art. 1265).
determine whether, under the circumstances, the partial
loss is so important as to extinguish the obligation. (2) except in case of earthquake, flood, storm, or
(Art. 1264) other natural calamity. (Art. 1265)
d. The extinguishment of an obligation which has ,become e. When the Joss or impossibility occurred after the
impossible to perform follows from the principle that obligor has incurred in delay. (Arts. 1262, 1 1 65)
no person shall be liable for fortuitous events, or those
which could not be foreseen, or which, though f. When the obligor has promised to deliver the same
foreseen, were inevitable. (Art. 1 1 74, supra). · thing to two or more persons who do not have the same
interest. (Art. 1 1 65)
2. Exceptions. The obligation is not extinguished, and the
debtor is thus liable for damages, in any of the following g. When the obligation to give the thing due arose from a
cases: criminal offense. (Art. 1268)
a. When, by law, the obligor is liable even for fortuitous When debt of a thing certain and determinate
events. (Arts. 1262, 1 174) proceeds from a criminal offense, the debtor shall
not be exempted from the payment of . its price,
The bailee (Art. 1 942), depositary (Art. 1 979) and whatever may be the cause for the loss. (Art. 1268)
the officious manager (Art. 2147) are, by law,
liable for fortuitous events under certain Unless the thing having been offered by him to
· circumstances. the person who should receive i� the latter
refused without justification to accept it. (Art.
b. When, by stipulation, the obligor is liable even for 1268)
fortuitous events. (Arts. 1262, 1 174)
3. Creditor's Remedy. The obligation having . been
c. When the nature of the obligation requires the extinguished by the loss of the thing, the creditor shall have
· assumption ofrisk. (Arts. 1262, 1 1 74) : ;
100 101
all the rights of action which the debtor may have against a. Physical impossibility arises when the prestation, by its ·
third persons by reason of the loss. (Art. 1 269) nature, cannot be accomplished or performed.
Under this provision, the creditor may seek recourse to Impossibility refers to the nature of the thing to be
the insurance indenmity for the thing lost.257 done, and not to the inability of the obligor to do it.
If others can perform the prestation, it is not
4. Effect on Reciprocal Obligations. In reciprocal impossible.'"
obligations, the release of the debtor due to loss or
impossibility also releases the creditor from the counter b. Legal impossibility arises when the prestation becomes
prestation, because each obligation depends on the other.258 illegal or prohibited by law.
B. IN OBLIGATIONS TO GIVE A GENERIC THING 2. Extreme Difficulty Due to Unforeseen Events When the .
Enneccerus1 Kipp & Wolff.· b. If performance has become impossible altogether, Art.
259 Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,
2006, citing Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91
1266 should be applied.
Phil. 861, 865 (1952).
"" Gaisano Gagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8,, "' Reyes v..Caltex (Philippines), Inc., 84 Phil. 654 (1949).
2006, citing Ramirez v. Court of Appeals, 98 Phil. 225, 228 (1956). "' Phil. National Construction Co. v. CA, G.R. No. 1 1 6896, May 5, 1997.
i02 103
donations with respect . to acceptance, amount, and
revocation:265
IV. CONDONATION OR REMISSION OF THE DEBT
a. Condonation must be accepted by the debtor. (Art.
A. IN GENERAL 1 270)
l. Definition. Condonation or remission is an act of liberality If the debtor refuses to accept the condonation, but
wlrereby the creditor, without receiving any equivalent, the creditor still does not enforce the debt, the debt
renounces the enforcement of the · obligation, which is may eventually be extinguished by prescription.
accordingly extinguished in its entirety or in that part
23
remitted. 6 b. The condonation is subject to the rule on inofficious
donations, i.e., the amount condoned cannot be more
2. Gratuitous. Condonation or rem1ss10n · is essentially . than what the creditor may give by will. (Art. 1 270, in
gratuitous, and requires the acceptance by the obligor. (Art. rel. to Art. 752)
1 270)
4. Effect on Accessory Obligation. The renunciation of the
It is an essential characteristic of remission that it be principal debt shall extinguish the accessory obligations.
gratuitous, that there is no equivalent received for the (Art. 1273)
benefit given; once such equivalent exists, the nature of
the act changes.264 a. But the waiver of the accessory obligation shall leave
. the principal obligation in force. (Art. 1273 ) Thus, the
i. It may become dation in payment when the accessory obligation of pledge may be waived without
creditor receives a thing different from that affecting the principal debt previously secured by the
stipulated; or pledge.
ii. It may become a novation, when the object or b. It is presumed that the accessory obligation of pledge
principal conditions of the obligation should be has been remitted when the thing pledged, after its
changed; or delivery to the creditor, is found in the possession of
'
the debtor, or of a third person who owns the thing.
iii. It may become a compromise, when the matter (Art. 1274)
renounced is in litigation or dispute and in
exchange of some concession which the creditor B. MANNER OF CONDONATION: Condonation may be made
receives. expressly or impliedly. (Art. 1 270)
3 . Governing Rules. Condonation i s essentially a donation l. Express condonation - shall comply with the forms of
of the credit to the debtor, and is thus subject to the rule on donation. (Art. 1271)
104 105
V. CONFUSION OR MERGER OF RIGHTS
If the condonation is made mortis causa, the forms of a
will must be followed. A. CONCEPT
2. · Implied con dona tion. The Civil Code provides two 1 . The obligation i s extinguished from the time the characters
instances where condonation is implied: of creditor and debtor are merged in the same person. (Art.
1275)
a. · The delivery of a private document evidencing a credit,
made voluntarily by the creditor to the debtor, implies 2. Confusion or merger usually takes place when the debtor
· the renunciation of the action which the former had acquires the credit. Example: X borrowed Pl0,000 from
against the latter. (Art. 1271) his father, who subsequently died and left X as his sole
heir. X thus succeed to his father's credit of Pl0,000
1. Whenever the private document in which the debt against X. Thus, as far as the Pl 0,000 credit is concerned,
appears is found in the possession of the debtor, it the characters of creditor and debtor have become merged
shall be presumed that the creditor delivered it in the person of X.
�
vo I untarily, unless the contrary is prov d. (Art.
1272) 3. Confusion or merger may also take place when the creditor
acquires an encumbered property. Example: when the
ii. The waiver may be nullified if inofficious, but the mortgagee acquires the mortgaged property, the mortgage
debtor and his heirs may uphold it if they can obligation is extinguished266 (but not necessarily the
prove that the delivery of the document was made principal obligation secured by the mortgage).
in virtue of payment of the debt. (Art. 1271)
B. EFFECT AND EXTENT
b. An implied condonation may also result from the
presun1ption that the accessory obligation ofpledge has 1. Confusion or merger which takes place in the person of the
been remitted when the thing pledged, after its delivery principal debtor or creditor �enefits the guarantors. (Arf.
to the creditor, is found in the possession of the debtor, 1276)
or of a third person who owns the thing. (Art. 1274)
a. But merger which takes place in the person of any of
However, being a mere presumption, it may be the guarantors does not extinguish the obligation. (Art.
overcome by proof that no condonation was 1276)
intended.
b. Example: X is indebted to Y, which debt is guaranteed
by J. If X's debt to Y is extinguished due to merger,
J's obligation as guarantor (which is merely accessory)
is also extinguished. But if J acquires Y's credit
'" Yek Tong Lin Fire & Marine Insurance v. Yusingco, 64 Phil. 473 (1937).
106 107
thereby extinguishing J's obligation as guarantor, this b. According to Cause
does not affect X's . obligation. J can still collect from
x. i. Legal -takes place by operation of law when all
the requisites . are present.'68 (infra)
2. Confusion does not extinguish a joint obligation except as
regards the share corresponding to the creditor or debtor in ii. Conventional takes place when the parties agree
-
whom the two characters concur. (Art. 1277) to compensate their mutual obligations even in the
absence of some requisites.269 (A1't. 1 282) (il)jra)
If the obligationis solidary, it may be extinguished by
the confusion or merger between any of the creditors In certain cases, compensation may be claimed
with any of the debtors. (see Art. 1215) by only one of the parties, by waiving his right
to object to it. This is calledfacultative
compensation. Example: if X's debt to Y is
V. COMPENSATION ·pure, while Y's debt to X is with a term for
Y's benefit and has not yet become due, Y
A. IN GENERAL may object to the compensation, but Y may
also choose to waive the term and claim
! . Definition. Compensation (or offsetting) is a mode of compensation.
extinguishing (to the concurrent amount) the obligations of
persons who, in their own right and as principals, are iii. Judicial compensation decreed by a court in a
-
reciprocally debtors and creditors of each other.267 (Art. case where the defendant has counterclaims against
1278) the plaintiff.
ii. Partial when the two debts are not of the same
- I. In General. Legal compensation takes place by operation
amount, in which case the debts are extinguished of law (ipso Jure) when all the requisites are present 270 It
only to the concurrent amount. (Art. 1281)
168
PNB Madecor v. Uy, G.R. No. 129598, Augusl 15, 2001; Francia v. IAC, G.R. No. L-67649,
June 28, 1968.
169 PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; Francia v. IAC, G.R. No. L-67649,
201
PNB Madecor v. Uy, G.R. No. 129596, August 15, 2001; see also Francia v. IAC, G.R No. L· June 26, 1988.
67649, June 26, 1968. 11o PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001.
108 109
occurs even without the awareness of the parties, (Art.
1290) or even against their will or without their consent.271 (4) Taxes cannot be compensated with the
Its effects arise at the moment when all the requisites taxpayer's claim against the Government,
concur.272 because taxes are not "debts" and · the
Government and the taxpayer cannot be
2. Requisites. In order that (legal) compensation may be considered creditor and debtor to each other.277
proper, the following five requisites are necessary (Art.
1279): b. That both debts consist in a sum of money, or if the
. things due are consumable, they be of the same kind, ·
a. That each one of the obligors be bound principally, and also of the same quality if the latter has been
and that he be at the same time a principal creditor of stated;
the other;
Compensation is also possible for fungible things
The parties must be mutually debtors and creditors (not necessarily consumable) because, by their
in their own right and as principals.273 very nature, fungible things may be substituted for
each other.'78 .
(1) Thus, X corporation's debt to Y cannot be
offset with Y's debt to a stockholder of X, c. That the two debts be due;
because the corporation is distinct from its
stockholder.'74 · d. That they be liquidated and demandable;
(2) Also, the debt of partnership ABC to X cannot i. "Liquidated" means that the existence and amount
be offset with X's debt to B (a partner in of the debt are determined, as opposed to
ABC).275 "unliquidated" claims (such as damages) which are
still disputed and whose amount is not yet
(3) A share of stock is not a credit against the determined. Compensation cannot extend to
corporation, and stockholders, as such, are not unliquidated, disputed claim existing from brea:ch
creditors of the corporation. Thus, a of contract.'79
corporation's credit against its stockholder
cannot be offset with the latter's share of ii. "Demandable" means that the debt is legally
stock.276 enforceable, i.e., it is a civil (and not natural
obligation), it has not yet prescribed, it is not
subject to a suspensive period or condition which
211 Bank of the Philippine Island v. Court of Appeals, 325 Phil. 930, 938 (1996).
212 Republicv. Court of Appeals, G.R. No. 25012, July22, 1975, 65 SCRA 186, 190. has not yet.happened, and it is not unenforceable.
2n
PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; see also Francia v. IAC, G.R. No. L·
67649, June 28, 1988.
211
274 See CKH Industrial and Development Corp. v. CA, G.R. No. 1 1 1890, May 7, 1997, 272 SCRA Francia v. IAC, G.R. No. L·67649, June 28, 1988.
21s
333. See IV Tolentino 369-370,
210 Escano v. Heirs of Escano, 28 Phil. 73 (1914). 279 Silahis Marketing Corp. v. IAC, G.R. No, 74027, December 7, 1989. See also Sps. Mirasol v.
276 Garcia v. Lim Chu Sing, 59 Phil. 562 (1934). CA, G.R. No. 128448, Februaiy 1, 2001.
110 . 1il
a. Ifcompensation has already taken place before the
Note, _however, that when one or both debts are assignment - the obligation is deemed extinguished
rescissib/e or voidable, they may be by operation of Jaw, and the debtor is thus discharged
compensated against each other before they are of liability by invoking the compensation.
judicially rescinded or avoided. (Art. 1284)
'
They are considered valid until annulled or Exception: if the debtor consented to the
rescinded. assignment, this is considered a waiver of the
compensation.
iii. · Legal compensation is possible even though the
debts may be payable at different places, but there b. Ifcompensation has not yet taken place before the
shall be an indemnity for expenses of exchange or assignment (because, e.g., the debts are not yet mature
transportation to the place of payment. (Art. 1286) or liquidated) -
e. That over neither of them there be any retention or i. If the debtor consented - he cannot set up against
controversy, commenced by third perspns and the assignee the compensation which would pertain
communicated in due time to the debtor. (1196) to him against the assignor. (Art. 1285)
Example: When a credit is garnished by court Unless the assignor was notified by the debtor
(execution or attachment). at the time he gave his consent, that he
reserved his right to the compensation. (Art.
2. Who May Invoke . Generally, compensation may be 1285)
invoked or claimed by the principal debtor (who is also at
the same time a principal creditor). ii. Jf the debtor was informed of the assignment, but
did not consent thereto -he may set up the
However, the guarantor may also set up compensati,on compensation of debts before the assignment, but
as regards what the creditor may owe the principal not of subsequent ones. (Art. 1285)
debtor. (Art. 1280) That is, the guarantor may invoke
any available compensation between the principals, iii. If the debtor was not informed of the assignment
and thus benefit from the extinguishment of the - he may set up the compensation of all credits
principal obligation which results from such prior to the assignment and also later ones until he
compensation. had knowledge of the assignment. (Art. 1285)
3. Assignment of Credit.280 In case the creditor assigned his Note: The reason for the foregoing rules is to protect a
credit to a third party, who then attempts to enforce it, the party from being fraudulently deprived of the benefits
debtor has the foJlowing rights: of compensation.281
''° IV Tolentino 374-375, citing Manresa. '" IV Reyes & Puno 155, citing Manresa.
112 1 13
4. Plurality of Debts. If a persou should have agaiust him · a. That each of the parties can dispose of the credit he
several debts which are susceptible of compensation, the seeks to compensate, and
rules on the application of payments shall apply to the
order of the compensation. (Art. 1289) b. That they agree to the mutual extinguishment of their
credits.
Thus, the debt which is most onerous to the debtor,
among those due, shall be deemed to have been offset. D. LIMITATIONS: The following debts cannot be compensated-
If the debts due are of the same nature and burden, the
offsetting shall be applied to all of them I. Debts arising from a contract of depositum; (A . � 1287)
proportionately. (Art. 1289 in rel. to Art. 1253)
2. Debts arising from a contract of commodatum; (Art. 1287)
5. Effect of Compensation. When all the requisites
mentioued in Article 1279 are present, compensation talces a. Both depositurn and commodatum are based on the
effect by operation of law, and extinguishes both ciebts to trust and confidence of the depositor or bailor
' that the
the concurrent amount, even though the cred tors and i thing deposited or lent will be returned.
debtors are not aware of the compensation. (Art. 1290)
b. The prohibition is against the depositary and the
C. CONVENTIONAL COMPENSATION borrower, in favor of the depositor and bailor. The
depositor and bailor may choose to waive the benefit
I. In General. Conventional (or voluntary) compensation is and set up compensation (facultative).
compensation by agreement; it takes place when the parties
agree to compensate their mutual obligations even in the c. Note that bank deposits (whether fixed, savings or
absence of some requisites.'" current deposits) are considered simple loans (Art.
1 980), and are therefore subject to compensation or ·
Thus, the parties may agree upon the compensation of set-off against the depositor's obligations to the
debts which are not yet due. (Art. 1282) bank.'85
2. Requisities. Conventional compensation is possible only 3. Claims for support due by gratuitous title; (Art. 1287)
when the parties are mutual creditors and debtors of each
l
other.283 Aside from this, the requ rements of conventional a. Allowing compensation may defeat the purpose of
co1npensation are:284 support, which is to maintain the person to be
supported and answer his needs. It may also defeat the
exemption of support from attachment and execution.
(FC, Art. 205)
282 PNB Madecor v. Uy, G.R. No. 129598, August 15, 2001; Francia v. IAC, G.R. No. L·67649,
June 28, 1988.
283 CKH Industrial and Development Corp. v. CA, G.R. No. 1 11890, Mar 7, 1997, 272 SCRA
333.
'" CKH Industrial and Development Corp. v. CA G.R No. 111890. May 7, 1997, 272 SCRA
333. 285 Sps. Nlsce v. Equitable PC/ Bank, G.R. No. 167434, February 19, 2007,
1 14 115
b. Support in arrears may be subject to compensati: lb.at ta¥;,es t'tl.e \)\ace cit t'tl.e fo=et. h ne>'1at\C>n t\\at .\s
because the need for the same has already passed. (M ,, mete\1 modif\catory (;<:ies n<:i\ <:a'll'Oe t'tl.e e'!,.\\n'i!,'l.\�\\m.en\
301, par. 2, in rel. to Art. 1287) <:>1.1\\.e <:i\:1\\1!,a\\<:it\, \.e., \\\.e <:>\(; <:i\)\\1!,a\\<:in s'l.\:ls\s\s \ci ,fue
e'!,.\.ent \na\ \\ tema'm.s com\la\\'o\e 'W\.\b. \b.e amencl.atot'j
"'
4. Debts consisting of civil liability arising from a penal aiteement.
a. In order that an obligation may be extinguished by The test of incompatibility is whether the two
another which substitutes the same, it is imperative: (i) obligations can stand together, each one having
that it be so declared in unequivocal terms, or (ii) that an independent existence; if they cannot and
the old and the new obligations be on every point are the subsequent obligation
irreconcilable,
1
incompatible with each other. (Art. 1292) would extinguish the first. 29
i 16 117
1
b. According to Cause b e c\a\me<': on\'j b'f tbe llebtor, anll be \m"Q\\el\\'f
waives it by agreeing to tb.e new ob\igation?-94
1. Objective - novation caused by change in the
object or principal conditions (Art. 1291 [l])
b. The parties concerned must agree to a new contract.
'" Garcia v. Llamas, G.R. No. 154127, December 8, 2003; Sueno v. Land Bank, G.R. No.
174711, September 17, 2008.
294 Estrada v. Villaroel, (CA) 40 O.G. (5th Supp.)
201, cited in IV Tolentino 398.
293 Villaroel v. Estrada, 71 Phil. 140 (1940).
"' Sueno v. Land Bank, G.R. No. 17471 1 , Seplember 17, 2008.
118
1 19
iv. If the new contract is unenforceable (because it is
not in writing, ·per the Statute of Frauds), novation In other words, there must be essential change.301
296
cannot be proven. Changes that breed incompatibility must be essential in
nature and not merely accidental.302 Even if there is no
4. Not Pres u med . Novation is never presumed, and the express novation, such essential change would cause an
animus novandi (intent to novate), whether totally or implied novation by creating an incompatibility between
partially, must appear by express agreement of the parties, the old and the new obligations.
or by their acts that are clear and unmistakable.297
On the other hand, accidental changes - or changes
5. Effect on Accessory Obligation. When the principal which are merely incidental to the main obligation, or refer
obligation is extinguished in consequence of a novation, merely to secondary agreements - do not cause extinctive
accessory obligations are also extinguished. {Art. 1296) novation.303 The novation is merely modificatory, in which
This is because the accessory obligations (e.g., mortgage case the new agreement will not have the effect of
and pledge) were given to secure · a particular obligation extinguishing the first but would merely supplement it or
and the solvency of a particular debtor; thus, a cqange in supplant some but not all of its provisions.304
the obligation or debtor destroys the basis of the consent to
. .
give the accessory obl"1gatlons.298 2. Determination of the Natµre of Change. It is thus
important to determine if the change refers to the object or
"Exception": accessory obligations may subsist only the principal conditions (essential change), or merely to
insofar as they may benefit third persons who did not incidental conditions (accidental change). The
give their consent. (Art. 1296) However, these determination is factual in nature, and relative to the
obligations for the benefit of third persons are in reality circumstances of the case, the intention of the parties, the
distinct obligations.299 economic importance of the modification, and other similar
factors.305
B. OBJECTIVE NOVATION
3. Examples of essential changes.
I. Essential Change vs. Accidental Change. Objective
novation is caused by change in the object or in the a. Change in the price.306
principal conditions of the obligation. (Art. 1291) Changes
in the juridical relation300 (from ccimmodatum to lease of b. Reduction of the period or duration of an easement of
things, or from negotiorum gestio to agency, or from a right of way. 307
mortgage to antichresis, or from a sale to a loan) may also
be subsumed under this category.
301 Young v. CA, G.R. No. 83271, May 8, 1991.
"' Pilipinas Bank v. Ong, G.R. No. 1 33176, August 8, 2002; California Bus Lines, Inc. v. State
"' Evadel Realty & Dev't Corp. v. Sps. Soriano, G.R. No. 144291, April 20, 2001. Investment House, Inc., G.R. No. 147950, December 1 1, 2003.
"' Philippine Savings Bank v. Manalac, Jr., G.R. No. 145441, 26 April 2005, 457 SCRA 203, io3 Young v. CA, G.R. No. 83271 , May 8, 1991; lloilo Traders Finance, Inc. v. Heirs of Sps.
218. Oscar Soriano, Jr., 452 Phil. 82 (2003); Young v. CA, G.R. No. 83271, May 8, 1991.
'" IV Tolentino 395. . '°' lloilo Traders Finance, Inc. v. Heirs of Sps. Oscar Soriano, Jr., 452 Phil. 82 (2003).
299 IV Tolentino 396. "5 IV Tolentino 389, citing Castan.
'" See Ligutan v. CA, G.R. No. 138677, February 12, 2002. 306 Matute v. Hernandez, 66 Phil. 68 (1938).
120 .
121
c. Change from a contract to sell (written) to a contract of i. Extension of the period315 - the period affects
lease (even if merely verbal).308 only the performance of the obligation and does
not create a new one.
d. Change from a sale of real estate to a conditional sale
of real estate.309 ii. Restructuring of the payment scheme (e.g., from
repayment in one year to repayment in twenty
In a contract of sale, the title to the property passes quarterly instalhnents31 6, or providing for a new
to the vendee upon the delivery of the thing sold; schedule ofpayments and additional security"')
in a contract to sell, ownership is, by agreement,
reserved in the vendor and is not to pass to the iii. Change or reduction in the interest rate.318
vendee until full payment of the purchase price;
It has been held that an obligation to pay
e. Change from trust receipt agreement to a simple money is not novated by an instrument that
loan.'10 expressly recognizes or ratifies the old,
changes only tile terms of payment, and adds
'
f. Change from a mortgage to antichresis.311 other obligations not incompatible with the old
ones, or where , the new contract merely
g. Change from a sale to a loan.312 supplements the old one.'19
'" Jagunap vs. Mirasol, [CA], 48 O.G. 3911, cited in Ugutan v, CA, G.R. No. 138677, February 381, 385 (1956).
316 Sps. Reyes v. BPI Family Savings Ban� G.R. Nos. 149840-41, March 31, 2006.
12, 2002.
" 7 California Bus Lines, lnc.. v. State Investment House, Inc., G.R. No. 147950, December 1 1
"' Soncuya vs. Azarraga, 65 Phil. 635 (1938), cited In Llgutan v. CA, G.R. No. 138677, February '
12, 2002. . 2003.
'" Ugutan v. CA, G.R. No. 138677, February 12, 2002. Asia Banking Corp. v, Lacson Company, "' Bank of P.I. vs. Abaladejo, No. 30490, 27 March 1929, 53 Phil. 14; Sps. Aguilar v. Manila
Inc., 48 Phil. 482 (1926), . Banking Corp., G.R. No. 1579 1 1 , September 19, 2006. '
319 Sps. Reyes v. Court of Appeals, G.R. No. 147758, 26 June 2002, 383 SCRA 471, 482.
314 Magdalena Estates, Inc. vs. Rodnguez, 18 SCRA 967, as reiterated in Velasquez vs. Court of
Ar peals, 309 SCRA 539, 320 Gammon Phil., Inc. v. MRTDC, G.R. No. 1 44792, January 31, 2006.
122 123
1. Change in the Debtor
iii. The consent of the old debtor is not always
a. Necessity of Consent required. (Art. 1293) Thus, substitution of the
debtor may be classified into two kinds, depending
i. The consent of the creditor .to the change in the on whether the old debtor has given consent:326
debtor is always required. (Art. 1293)
(1) Expromision - the initiative for the change
(1) The consent may be express or implied, and does not come from (and may even be made
may be given at any time while the agreement without the knowledge or against the will of)
with the debtor subsists.'21 the debtor, since it consists of a third person's
assumption of the obligation. As such, it
(2) For novation to take place, the creditor milst requires the consent of the thi.rd person and the
consent (expressly or impliedly322) to the creditor.
release of the old debtor. 323
(2) Deliigacion - the debtor offers, and the
The mere fact that the creditor receives a creditor accepts, a third person who consents
guaranty or accepts payments from a third to the substitution and assumes the obligation; ·
person does not constitute a novation and thus, the consent of these three persons are
does not extinguish the obligation of the necessary.'27
original debtor. 324
b. Effect ofInsolvency ofNew Debtor
(3) Without the creditor's consent to release the
old debtor, there is no novation; the third i. In expromision (substitution is without the
person who has assumed the obligation of t,he knowledge or against the will of the old debtor) -
debtor merely becomes a co-debtor or a surety. the new debtor's insolvency or non-fulfillment of
325 the obligations shall not give rise to any liability on
the part of the original debtor (i.e., the old
ii. The consent of the new debtor is aiso always obligation shall not be revived). (Art. 1294)
required.
ii. In delegacion (substitution is proposed by the
321
Asia Banking Corp. v. Elser, 54 Phil. 994 (1929). original debtor and accepted by the creditor) - the
322 Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Babst v. Court of new debtor's insolvency shall not revive the action
Appeals, 403 Phil. 244, 259-260 (2001).
323 Aquintey v. Sps. Tibong, G.R. No. 166704, December 20, 2006, citing Lopez v. Court of ·
of the latter against the original obligor, but (unlike
Appeals, L·33157, June 29, 1982, 1 1 4 SCRA 671, 688. in expromision) it is subjection to the following
'" Magdalena Estates Inc. v. Rodriguez, 125 Phil. 151, 157 (1966). Quinto v. People, G.R. No. exceptions -
126712, April 14, 1999, citing Rios vs. Jacinto, etc., 49 Phil. 7; Garcia vs. Khu Yek Ching, 65
Phil. 466; La Campana Food Products, Inc. vs. Philippine Commercial and Industrial Bank, 142
SCRA 394.
325 Ajax Marketing Corp. v. CA, G.R. No. 118585, September 14, 1995; Aquintey v. Sps. Tibong,
326 Garcia v. Llamas, G.R. No. 154127, December 8, 2003.
G.R. No. 166704, December 20, 2006. '" Garcia v. Llamas, G.R. No. 154127, December 8, 2003.
124 125
(I) when said insolvency was already existing and 2. Change in the Creditor or Subrogation.
of public knowledge, when the debtor
delegated his debt, or
a. Jn General. Subrogation is the transfer of all the rights
of the creditor to a third person, who substitutes him in
(2) when said insolvency was already existing all his rights.328 It transfers to the persons subrogated
and known to the debtor, when he delegated
the credit with all the rights thereto appertaining, either
his debt. (Art. 1295)
againsi the debtor or against third person, be they
guarantors or possessors of mortgages, subject to
c. Right ofNew Debtor stipulation in a conventional subrogation. (Art. 1303)
ii. In delegacion (with the knowledge and consent of (1) Conventional s�brogation:
the old debtor) -
3i9 Astra Electronics Corp. vs. Philippine Export and Foreign loan Guarantee Corp., G.R. No.
cured ·by subrogation, such that the new expressly mentioned in the Civil Code. (Art. 1 300)
obligation will be perfectly valid;
ii. There is legal subrogation in the following cases:
128 129
insurer may then seek to recover from the
person who is liable for the loss.334
Chapter 6
d. Effect of Partial Payment. - A creditor, to. whom
Introduction to Contracts
partial payment has been made, may exercise his right
for the remainder, and he shall be preferred to the
person who has been subrogated in his place in virtue
of the partial payment of the same credit (Art. 1304) I. IN GENERAL
"' Federal Express Corp. v. American Home Assurance Co., G.R. No. 150094, August 18, 2004. "' National Irrigation Administration v. Gamit. G.R. No. 85869, November 6, 1992.
citing Philippine Americen General Insurance Co., Inc. v. Sweet Lines, Inc., 212 SCRA 194. 3" A. Magsaysay. Inc. v. Cebu Portland Cement Co., 1.00 Phil. 351 (1956).
August 5, 1992 337 A. Magsaysay, Inc. v. Cebu Portland Cement Co., 100 Phil. 351 (1956).
130 131
autocontrac.ts are permissible if not expres �ly ii. However, some contracts are real contracts, i.e., they
8
prohibited.33 Express prohibitions may be found in are not perfected until the delivery of the object of the
Article 1941 (sales) and Article .1890 (agency). obligation. (Art. 1 3 1 6) Examples: deposit, pledge and
commodatum.
However, this rule does not apply to administrators
of decedent's estates, in view of the fiducia1y m. In a solemn orformal contract, compliance with certain
relationship that they occupy with respect to the . formalities prescribed by law is essential in order to
heirs of the deceased and their responsibilities make the act valid, the prescribed form being an
toward the probate court. An administrator is not essential element thereof. Example: donation of real
permitted to deal with himself as an individual in property. .
any transaction concerning trust property. 339
c. Consummation begins when the parties perform their
c. "One binds himself, with respect to the other" - the respective undertakings under the contract culminating in
contract may .also be reciprocal, wherein both parties are the extinguishment thereof.
obliged to perform a prestation.
3. Classification of Contracts. The following are some of the
2. Stages of Contract.340 common classifications of contracts341 -
a. Negotiation covers the period from the time the a. According to dependence:
prospective contracting parties indicate interest in the
contract to the time the contract is concluded (perfected). i. principal - may exist alone (e.g., lease, sale or loan)
ii. accessory existence. depends on another contract
-
b. Perfection of the contract takes place upon the concurrnnce (e.g., pledge, mortgage, or suretyship)
of the essential elements thereof. Until the contract is
perfected, it cannot, as an independent source of obligation, b. According to perfection:
serve as a bindingjnridical relation.
i. consensual - perfected upon consent (e.g., sale);
i. In general, contracts are consensual, i.e., perfected by ii. real - perfected upon delivery, in addition to consent
mere consent (Art. 1 315), or upon a mere meeting of (e.g., commo.datum or pledge);
minds, i.e., the concurrence of offer and acceptance, on iii. formal - perfected upon execution of required
the object and on the cause thereof. Example: sale formalities (e.g., donation or mortgage of real
(Art. 1 458). property)
c. According to cause:
d. According to the parties obliged: (3) Contracts which do not strictly conform to the
standard contracts ·. are allowed and may be
i. bilateral - both parties are required to perform considered innominate contracts. 344
e. According to name: The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they
i. nominate (those with particular names, like s�le, lease, are not contrary to law, morals, good customs, public order, or
(1) Innominate contracts are traditionally divided inio liberty of the individual under the Constitution. However, this
four types: freedom is not absolute and must yield to the common good.345
Thus, stipulations which are contrary to law, morals, good customs,
(a) Do ut des (I give and you give); public order or public policy are void.
(2) Innominate contracts are regulated by the without needfor any express reference.346
(Contracts) of Book !Vof the Civil Code; appropriate the things given by way of pledge or
134 135
mortgage, or dispose of them. Any stipulation to the
contrary is null and void. (Art. 2088) b. Contracts for domestic. services without payment of
wages are void. 357
b. Stipulation in contract of employment discriminatirig
against women (Labor Code, Art. 135) or prohibitirig C. PUBLIC POLICY OR PUBLIC ORDER
them from gettirig married.347 (Labor Code, Art. 136)
1 . Public policy or public order refers to the public good or
c. An agreement :o deprive a court of jurisdiction the interest of the society. No person can lawfully do that
conferred on it by law is void.348 Jurisdiction over an which has a tendency to be injurious to the public or
action is conferred by law, and may not be changed by against the public good. 358
.
mere agreement ofthe parties.349
2. Examples:
B. MORALS AND GOOD CUSTOMS
a. Void: stipulation that a credit card holder who reported
I. Morals and good customs refer to general prii:iciples of the loss/theft of his credit card continues to be liable
morality which have received a good measure' of social for unauthorized charges until the credit company
acceptance.350 According to the Code Commission, morals notifies .its member establishments. Such clause leaves
and good customs are distinct concepts, but some the holder at the mercy of the credit card company.359
commentators disagree.351
b. Void: stipulation which repudiates the existence of
2. Examples: employer-employee relationship to circumvent the
compulsory coverage of the employee under the Social
a. Iniquitous, exorbitant and unconscionable stipulations Security law. 360 The employment status of a person is
on interest rates, penalties and attorney's fees,352 such defined and prescribed by law and not by what the
as interest rates of 66% per armum,353 72% per parties say it should be. 36 1
armum,354 or 108-120% per armum.355 Note, however,
that there is no fixed mle on what is unconscionable; in c. Void: agreement to stifle prosecution of a crime.362 It
one case, interest rate of 7% per month (or 84% per . would be detrimental to the administration ofjustice.
armum) was upheld.356
'" Phil. Telephone and.Telegraph v. NLRC, G.R. No. 1 1 8978, May 23, 1997.
"' Principe v. Philippine-Singapore Transport Services, Inc., G.R. No. 80918, August 16, 1989. 351 See De las Reyes v. Alo]ado, 1 6 Phil. 499 (1910).
'" Calimlim, et al. vs. Ramirez, et al., 118 SCRA 399; De Jesus, et al. vs. Garcia, et al., 19 "' Ferrazzini v. Gsell, 34 Phil. 697 (1916).
SCRA554. '" Ermitano v. Court of Appeals, 365 Phil. 671 (1999); Acol v. Phn. Commercial Credit Card,
350 IV Tolentino 418. Inc.. G.R. No. 1.35149, July 25, 2006.
351 See, e.g., IV Tolentino 418. "' Republic v. Asiapro Cooperative, G.R. No. 172101, �ovember 23, 2007.
'" Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004, 427 SCRA 517, 519. '" Republic v. Aslapro Cooperative, G.R. No. 172101, November 23, 2007, citing Chavez v.
'" Medel v. CA, 359 Phil. 820 (1998). National Labor Relations Commission, supra note 26 a.I 493; Lopez v. Metropolitan Wateiworks
354 Carpo v. Chua, G.R. Nos. 150773 & 153599, September30, 2005. and Sewerage System, G.R. No. 154472, 30 June 2005, 462 SCRA 428, 445·446.
'" Dino v. Jardines, G.R. No. 145871, January 31, 2006. "' Arroyo vs. Berwln, 36 Phil. 386 (1917); Monterey vs. Gomez, et al., 104 Phil. 1059 (1958);
356 Sps. Pascual v. Ramos, G.R. No. 144712, July4, 2002. United General Industries, Inc. v. Pa�r; G.R. No. L-30205, March 15, 1982.
136 137
d. Void: a stipulation by a common carrier exempting h. Valid: automatic forfeiture clause in sale by
itself from liability or limiting its liability for injury or installment, which deems any previous payments
363 forfeited and the contract automatically rescinded upon
loss caused by its own negligence. (see Art. 1745)
the failure of the buyer to pay three successive monthly
i. However, a stipulation fixing the sum that may be installments or any one yearend lump sum payment.368
recovered from a common. carrier is valid if it is
reasonable and just under the circumstances, and i. Valid - provision in deed of restrictions that a buyer of
has been fairly agreed upon. (Art. 1750) a parcel of land automatically becomes member of the
homeowners' association and must pay association
ii. In a contract of private carriage, the parties may dues.369
validly stipulate that the shipowner is not liable for
loss of or damage to the cargo caused even by the j. Valid: stipulation in the sale of soCialized housing that
negligence of the ship captain. As the contract is the buyer must be in a.ctual possession of the house at
not of common carriage, public interest is not all times and cannot dispose of the same within 5
strictly involved.364 years.370
e. Void: stipulation for the commission of an agent in the k. Valid: stipulation that the creditor may apply any of the
prosecution or following-up of applications for import debtor's moneys in the creditor's hands for the
allocations or foreign exchange allocations from the payment of the debtor's obligation.371
365
govenunent.
3. "Non-involvement clauses" are those which prevent an
f. Valid: provision in a construction contract providing employee from working for another employer. In general,
for a I -year period during which the contract is liable they are valid if there are reasonable limitations as to time,
for defects. Contractor cannot be expected to make a trade and place, and if they .are not greater than is necessary
perpetual guarantee on all materials and to afford a fair and reasonable protection to the
366
workmanship. employer.372 Examples:
g. Valid: fixed-period employment contracts, unless the a. Clause prohibiting the employee from working for any
period was purposely intended to circumvent the company or business in the Philippines for 5 years -
employee's right to his security of tenure. 367 void, as there is no limitation as to trade.373
363 Ysmael & Co. v. Barretto, 51 Phil. 90. "' Valarao v. CA0G.R. No. 130347, March 3, 1999.
36" Valenzuela Hardwood and Industrial Supply, Inc. v. CA, G.R. No. 102316, June 30, 1997. 369 Cariday Investment Corporation v. Court of Appeals, 176 SCRA 31 (1989); Bel Air Village
365 Tee v. Tacloban Electrlc and Ice Plant Co., 105 Phil. 168 (1959); Sy Suan v. Regala, 105 fhil. Association, Inc. v. Dionisio, 174 SCRA589 (1989).
1024 (1959). 3;o Republic v. David, G.R. No. 155634, August 16, 2004.
366 William GolangcO Construction Corporation, v. Philippine Commercial International Bank, 371 National Sugar Trading v. PNB, G.R. No. 151218, January 28, 2003.
G. R. No. 142830, March 24, 2006. "'Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, February 28, 2007.
367 Brent School vs. Zamora, 181 SCRA 702 [1990]. 373 Ferrazziniv. Gsell, 34 Phil. 697, 714 (1916).
138 139
b. Clause prohibiting the employee from working for any also required. In real contracts (e.g., commodaturn;
company engaged in the same businesses of his former pledge), delivery of the object is also required.
employer for I year void, as the limitation as to
-
trade is not reasonable; the employee only worked in C. OBLIGATORINESS: Obligations arising from contracts have the
the abaca business of the employer, and not in. any of force of law between the contracting parties and should be
its numerous other businesses.374 complied with in good faith. (Art. 1 1 59)
d. Clause prohibiting an independent agent for 1 year 2. The mere fact that one has made a poor bargain may not be
from engaging directly or indirectly in actiyities of a ground for setting aside the agreement. 378 The law does
other companies that compete with the business of her not relieve a party from the effects of an unwise, foolish or
principal valid.316
-
disastrous contract, entered into with full awareness of
what he was doing and entered into and carried out in good
e. Clause prohibiting employee from engaging in any pre faith. Courts have no jurisdiction to look into the wisdom
need business akin to her employer's within 2 years - of the contract entered into by the parties or to render a
valid.371 decision different therefrom. 3 79
3. Escalation clauses which grant the creditor an absolute a. Where the rights and obligations are not transmissible
right to adjust the interest independently and upwardly, by their nature.
without the consent of the debtor, is void.'82
This refors to rights and obligations which are
E. RELATIVITY: Contracts take effect only between the parties, strictly personal (intuitu personae). Examples:
-
their assigns and heirs. (Art. 1 3 1 1)
. (1) Those relating to family relations (such as
1 . Not Binding on Third Parties. Contracts can only
'
bind parental authority, action for nullity or
the parties who entered into it, and it generally cannot annulment of marriage or for legal separation,
favor or prejudice a third person, even if he is aware of cohabitation);
such contract and has acted with knowledge thereof. Since
a contract may be violated only by the parties thereto as (2) Those arising from public law (such as
against each other, a party who has not taken part in it suffrage or public office);
cannot sue for performance, unless he shows that he has a
real interest affected thereby.383 (3) Those which involve or require the personal
skills, characteristics, qualifications or
a. A party who is not privy to the contract cannot sue circumstances of a particular individual (such
upon breach thereof.384 Similarly, a person who is not as a contract for a concert by a famous singer,
privy to a contract cannot be sued or held liable for or a portrait commissioned from a
breach thereof.385 distinguished painter);
.
Examples: usufruct (Art. 603); agency (Art. 1919) i. There _must be a stipulation ·in favor of a third
commodatum (Art. 1939) person;
Note: The heir is not liable beyond the value of the ii. The stipulation in favor of a third person should be
property he received from the decedent. (Art. 1 3 1 1) a part, not the whole, of the contract;
Money debts left by the decedent are not transmissible
in the sense that they are paid from the estate of the iii. The contracting parties must have clearly and
decedent, and only the net estate or remainder goes to deliberately conferred a favor upon a third person,
the heirs. If the decedent's estate is not sufficient to not a mere incidental benefit or interest;
'
pay his debts, his heirs cannot be held liable for said
debts in their personal capacity.389 (1) There must be an intent to benefit a third party,
and to recognize Ilim as the primary party-in
3 . Qualifications to the Principle of Relativity. In the interest and privy in the promise. Put
following cases, a contract may be said to affect even non otherwise, the contracting parties must have
parties390: (a) stipulation pour autrui (Art. 131 1); (b) intended to create a cause of action in favor of
contracts creating real rights (Art. 1 3 1 2); (c) creditors' the beneficiary.392
right to rescind contracts which defraud them (Art. 1313);
..
(d) stranger's liability for unlawful interference with a (2) An agent who stands to receive a commission
contract (Art. 1 3 14); (e) accion decreta (Art. 1729). under a contract to sell a property is not a
beneficiary of a stipulation pour autrui and
These are further discussed below. thus cannot enforce the contract. His interest
is merely incidental.393
4. Stipulation Pour Autrui. If a contract should contain
some stipulation in favor of a third person (stipulation pour iv. The third person must have communicated his
autrui), he may d.emand its fulfillment provided he acceptance to the obliger before its revocation; and
communicated his acceptance to the obliger before its
revocation. (Art. 1 3 1 1) (1) Acceptance may be in any form. Even if the
benefit amounts to a donation, the acceptance
a. To constitute a valid stipulation pour ·autrui, a mere
incidental benefit or interest of a person is not
391 Baluyot v. CA, G.R. No, 122947, July 22, 1999; Sps. Ramos v. CA, G.R. No. 132196,
December 9, 2005.
"' See Rules of Court, Rules 88-90. 392 Limitless Potentials, Inc. v, Quilala, G.R. No. 157391, July 15, 2005.
390 Sps. Lagandaon v. CA, G.R. Nos. 102526-31, May 21, 1998. J. Vitug, dissenting. 393 Uy v, CA, G.R. No, 120465, September 9, 1999.
144 145
need not follow the fonnalities required for the provisions of the Mortgage Law and the Land Registration
acceptance of a donation.394 Laws. (Art. 1312)
(2) Acceptance may be implied from the third A real right directly affects the property subject to it;
party's enjoyment of benefits under the thus, whoever comes into possession of such property
stipulation,395 or from his perfonnance of his must respect that real right.401
obligations under the stipulation.396
Example: a registered mortgage over a property is
(3) Before acceptance by the third party, the binding even on a third person who subsequently
original contracting parties may revoke the acquires it, even if he was not party to the
stipulationpour autrui. mortgage.402
'
v. Neither of the contracting parties bears the legal 6. Contracts to Defraud Creditors. Creditors are protected
. representation or authorization of the third party. in cases of contracts intended to defraud them. (Art. 1313)
c. Examples: (i) a stipulation in a sublease contract that a. Example: contracts of the debtor disposing his property
the sublessee should directly pay rent to the principal gratuitously, without reserving sufficient property to
lessor391; (ii) a stipulation in a deed of donation pay off his previous debts. (Art. 1387)
requiring the donee to transfer title over a portion of
the subject property to the present occupants of the said b. The defrauded creditor may sue for the resc1ss1on
portion398; (iii) a stipulation in a deed of partition that (accion pau/iana) of the contract intended to defraud
the frnits of a particular parcel of land will be given to him. (Art.13 81, par. 3 ; Art. 1 1 77)
the Church to defray certain religious expenses399; (iv)
a stipulation in a contract between BANKARD, a 7. Unlawful Interference with Contracts. Any third person
credit card company, and its affiliated establishment who induces another to violate his contract shall be liable
that the latter will honor the BANKARD credit card for damages to the other contracting party. (Art. 1 314)
offered by a cardholder.400
a. Elements of unlawful or tortious interference403:
5. Contracts Creating Real Rights. In contracts creating
real rights, third persons who come into possession of the i. Existence of a valid contract;
object of the contract are bound thereby, . subject to the ii. Knowledge on the part of the third person of the
existence of contract; and
iii. Interference of the third person is without legal
394 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1 977, 79 SCRA 193;
Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005. justification or excuse.
"' Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193.
"' Tabar v. Becada, 44 Phil 619 (1923).
397 Limitless Potentials, Inc. v. Ouilala, G.R No. 157391, July 15, 2005.
"' Baluyot v. CA, G.R. No. 122947, July 22, 1999. '°' IV Tolentino 438.
399 Florentino v. Encarnacion, Sr., G.R. No. L-27696, 30 September 1977, 79 SCRA 193. 4o2 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
<00 403
Mandarin Villa, Inc. v. CA,.G.R. No. 1 19850, June 20, 1996. So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.
146 147
b. Examples.\ (a) X induced the owner· to lease a building
to him, knowing that said building had already been
Unless it is ratified, expressly or impliedly, by the
leased to another person, y4°4; (b) J induced the owner person on whose behalf it has been executed, before it
of a cinema film to break his contract of lease with a
is revoked by the other contracting party. (Art. 13 17)
theater owner, K, and lease the film to J, for the
purpose of exhibiting it in another theater in the same
Ratification is generally retroactive. It is as though
city.405
authority to do the act had been previously given,
except where the rights of third parties have
c. Remedies:
intervened between the act and the ratification.'0'
404 So Ping Bun v. CA, G.R. No. 120554, September 21, 1999.
Note that for formal contracts, compliance with special formalities 2. Certain. The offer must be certain. (ii.rt. 13 19)
is additionally required. For real contracts, delivery of the
object is additionally required. There is an offer in the context ofArticle 1 3 1 9 only if
the contract caii come into existence by the mere
acceptance of the offeree, without any further act on
II. CONSENT the part of the offerer. Hence, the offer must be
.
definite, complete and intentional.412
A. IN GENERAL .
An. invitation to negotiate,4" or an offer to
I. Concept. Consent is the conformity of the parties to the "entertain" or deliberate on whether to purchase a
terms of the contract; the acceptance by one of the offer yacht,414 is not a definite offer.
made by the other; the concurrence of the minds of the
parties on the objeCt and the cause which shall constitute 3 . Effectivity. An offer is effective until either party becomes
the contract. 409 incapacitated, or until the offer is withdrawn by the offerer.
413 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005.
4°'
Greater Metropolitan Manila Solid Waste Management Committee v. JANCOM Environmental
Corp., G.R. No. 163663, June 30, 2006. 41 4 Rosenstock v. Burke, 46 Phil. 217
150 151
a. Incapacity. . An offer becomes ineffective upon the
death, civil interdiction, insanity, or insolvency of (2) Also, a unilateral promise to sell must be
either party before acceptance is conveyed. (Art. 1323) distinguished from a bilateral promise to buy
and sell which, as long as the object is
"Conveyed" means the time when the offerer determinate and the price certain, is
learns of the acceptance by the offeree. reciprocally demandable.41 8 (Art. 1479, first
par.)
i. As a general rule, the offer may still be withdrawn (2) Withdrawal of the offer or option would be a
at any time before acceptance by communicating breach of the option contract, which would
such withdrawal. (Art. 1324) .Thus, a unilateral render the offerer liable for damages.421
promise to sell under Art. 1479 may be withdrawn
at any time.416 In case of . breach, the remedy of the
offeree/optionee is damages for breach of
(1) However, this right should not be exercised the option contract,. and not damages or
whimsically or arbitrarily, as it could give rise specific performance of the contract which
to a claim for damages under Art. 1 9 on abuse is the object of the option. The option
ofrights.417 contract is distinct from the main contract
4" Laudico v. Anas, 43 Phil. 270 (1922). 416 Ang Yu Asuncion v. CA, 238 SCRA 602, 612 (1994).
41' Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958); Ang Yu Asuncion v. CA, 238 SCRA 602, 613 419 Atkins, Kroll & Co. v. Cua, 102 Phil. 948 (1958).
420 Beaumont v. Pneto, 41 Phil. 670 (1916).
(1994).
421 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1 994).
417 Ang Yu Asuncion v. CA, 238 SCRA 602, 613 (1994).
152 153
(e.g., sale) which is the object of the seek specific performance of the owner' s
option.422 obligation to grant him the right of first
refusal427 (by allowing the right-holder to .
(3) If the consideration given is really intended as buy the property at the same terms and
part of the consideration for the main contract, conditions at which it was sold to the third
the main contract conld be deemed party).
perfected.423 Thus, an "earnest money" in a
contract of sale is evidence of its perfection. 4. Advertisements.
(Art. 1482)
a. Unless it appears otherwise, business advertisements of
(4) A "right offirst refusar' (where X gives Y the things for sale are not definite offers, but mere
right to buy a property should X decide.to sell invitations to make an offer. (Art. 1325)
it) is not an option contract because it depends
on whether X will decide to sell the property b, Advertisements for bidders are simply invitations to
. 2
and on terms that are not yet determm�te.4 4 make proposals, and the advertiser is not bound to
accept the highest or lowest bidder, unless the contrary
Since it is not an option contract, a right of appears. (Art. 1326)
first refusal does not need separate
consideration to be valid. The right of first c. Public advertisements offering rewards or prizes, such
refusal may be a clause in a principal as in contests or competitions, constitute unilateral
contract (e.g., lease), in which case the promise. When a member of the public performs an
consideration for the right of first refusal act pursuant to the offer (e.g., participates in the
forms part of the consideration for the contest), such action constitutes an acceptance which
. .
prmc1pa1 contract.'2' converts the promise into a contract binding on the
advertiser.428
In case the right of first refusal is violated
- i.e., the owner sells the property to a
third person without first allowing the
right-holder to purchase it - the right of Appeals, G.R. No. 1 173!i5, Aprtl 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
holder may: (a) seek the rescission of the and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
421 Equatorial Realty Developmen\ Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 509-10 (1996);
sale as a rescissible contract426; and (b)
Paranaque Kings Enterprises, Inc. v. CA, 268 SCRA 727 (1997); Riviera Filipina, Inc. vs, Court
of Appeals, G.R. No. 117355, April 5, 2002, 380 SCRA 245, 259-260; Tanay Recreation Center
and Development Corp. v. Fausto, G.R. No. 140182. April 12, 2005.
"' Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994). Note that in Ang Yu Asuncion v. CA, 238 SCRA 602, 614·615 (1994), the Supreme Court
423 Ang Yu Asuncion v. CA, 238 SCRA 602, 614 (1994); Sps. Co v, CA, G.R. No. 1 12330, (through J. Vitug) held that a right of first refusal is not governed by the law of contracts, and
August 17, 1999. violation cannot give rtse to action for specific pertormance. It Is covered by the provisions of
42• Ang Yu Asuncion v. CA, 238 SCRA 602, 614-615 (1994). Equatortal Realty Development, Inc. human relations and violation may give rtse to damages for abuse of rights under Art. 19. In
v. Mayfair Theater, Inc,, 264 SCRA 483, 500 (1996).
·
Equatortal, J. Vitug dissented and reiterated that a right of first refusal cannot be considered a
"" Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 264 SCRA 483, 505 (1996). contract because the basic terms (particularly the consideration for the future sale) wou1d have
426 Equatorial Realty Development, In� v. Mayfair Theater, Inc,, 264 SCRA 483, 510 (1996);
·
154 155
C. ACCEPTANCE knows of the acceptance, there is no meeting of the minds
of the parties, no real concurrence · of offer and
1. Definition. Acceptance is the conformity by the offeree to acceptance.433
the proposition of the offerer.
a. The offerer may withdrriw his offer before he learns of
2. Absolute. the acceptance thereof by the offeree.434 The contract is
not perfected if the offerer withdraws his offer, and the
a. The acceptance must be absolute. (Art. 1319) withdrawal is made before he learns of the
acceptance.435
To produce a contract, the acceptance must not
qualify, modify or vary the terms of the offer. b. Acceptance made by letter or telegram does not bind
There is no acceptance sufficient to produce the offerer except from the time it came to his
consent, when a condition in the offer is removed, knowledge. (Art. 13 19)
.or a pure offer is accepted with· a· condition, or
when a term is established, or changed, in the The contract,' in such a case (acceptance by letter
acceptance, or when a simple obligation is · or telegram), is presumed to have been entered into
converted by the acceptance into an alternative in the place where the offer was made. (Art. 1 3 1 9)
one; in other words, when something is desired
which is not exactly what is proposed in the c. An offer made through an agent is accepted from the
offer.429 time acceptance is communicated to him (i.e., the
agent). (Art. 1 322)
b. A qualified acceptance constitutes a counter-offer.
(Art. 1 3 1 9) A messenger or intermediary or Jetter-earner who
brings the offer is not necessarily an agent. The
Any modification or variation from the terms of contract is not perfected by communicating the
the offer annuls the latter and frees the offerer.430 acceptance to a messenger.
The original offerer is free to accept or refuse the
counter-offer. 4. Express or Implied. An acceptance may be express or
·
42' Sps. P.aderes v. CA, G.R. No. 1 47074, July 15, 2005.
430 Sps. Paderes v. CA, G.R. No. 147074, July 15, 2005. "' Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Enriquez v. Sun Life Assurance, 41
'" Malbarosa v. CA, G.R. No. 125761, April 30, 2003, citing Jardine Davies, Inc. v. Court of Phil. 269. Laudico v. Arias, 43 Phil. 270 (1922).
Appeals, et al., 333 SCRA 689 (2000). "4 Laudico v. Arias, 43 Phil. 270 (1922).
432 Malbarosa v. CA, G.R. No. 125761, April 30, 2003. 4" Laudico v. Arias, 43 Phil. 270 (1922); Malbarosa v: CA, G.R. No. 125761, April 30, 2003.
i56 157
counter-offer" amounts to acceptance of said counter D. CAPACITY TO GIVE CONSENT
offer. 436
I . Capacity. As a general rule, any person of legal age can
b. In general, the offeree is not bound to answer a give consent to a contract unless there is a ground for his
proposal, and his silence per se cannot be construed as incapacity provi_ded by law.
warranted by the circumstances. (see Art. 1 870) incapacity of a certain person has the burden to prove ·
a. An acceptance which is not made in the manner, place to distinguish them from minors who had been
or period prescribed by the offerer is not effective but emancipated by marriage (under the Civil Code,
constitutes a counter-offer, which the offerer may . persons below 1 8 years old could marry). With the
accept or reject. 438 Family Code setting the age of consent for
marriage to 18 years old, which is also the age of
b. In general, when the offerer has not fixed a period for majority, there is no longer a possibility of an
the offeree to accept the offer, and the offer is made to emancipated minor.
a person present, the acceptance must be made
immediately. 439 n. A minor (near the adult _age) who misrepresented
that he was of legal age may be deemed estopped
6. Revocation of Acceptance. Acceptance may be revoked, to deny his lack of capacity.44 1 This doctrine,
but the revocation must be niade known to the offerer however, has been criticized on the ground that a
before he learns of the acceptance. For as soon as the minor cannot be bound by his representations in
offerer learns of the acceptance, the contract is deemed the same way that he cannot be bound by his
·
44° Calalan v. Basa, G.R. No. 159567, July 31, 2007, citing Miguela Carillo v. Justimiano Jaojoco
46 Phil. 957, 960 (1924), Vitalista, el al. v. Perez, et al., G.R. No. 164147, June 16, 2006, 49 {
436 JardineDavis, Inc. v. CA, G.R. No. 1 28066, June 19, 2000. SCRA 127.
441 Mercado v. Espiritu, 37 Phil. 215 (1917); Suan v. Alcantara, 85 Phil. 669 (1950).
'" Mendoza v. CA, G.R. No. 116710, June 25, 2001.
438 Malbarosa v. CA, G.R. No. 125761, April 30, 2003.
442 J. Padilla, concurring, in Suan v. Alcantara, 85 Phil. 669 (1950). J. Padilla cited Young vs.
439 Malbarosa v. CA, G.R. No. 125761, April 30, 2003. Tecson, 39 O.G. 953.
158 159
b. Insane or demented persons; (Art. 1 327) Note that in this case, the burden of proof
has shifted to the party alleging sanity or
1. Contracts entered into during a lucid interval are lucidity.
valid. (Art. 1328)
c. Deaf-mutes who do not know how to write. (Art.
ii. Contracts agreed to in a state of drunkenness or 1327)
during a hypnotic spell are voidable. (Art. 1328)
3. Other Grounds for Incapacity/Disqualification. The
Notes: incapacity declared in Article 1327 .is subject to the
(!) The person who questions the sanity of a party modifications determined by law, and is understood to be
to a contract must prove that such party was of without prejudice to special disqualifications established in
unsound mind at the time of the making of the the laws. (Art. 1329)
contract.443
a. The Rules of Court provide that an "incompetent"
(a) It is not sufficient to show ,that the person may be placed 6n guardianship. The word
'
contracting party was judicially declared "incompetent" includes:446
incompetent several days after the
execution of the contract444 i. Persons suffering the penalty of civil interdiction;
(2) A person who has been judicially declared vi. Persons not of unsound mind, but by reason of age,
mentally incapacitated and placed on disease, weak mind, an.d other similar causes,
guardianship may still validly enter into cannot, without outside aid, take care of
contracts if it can be shown that he had a lucid themselves and manage their property, becoming
interval at the time of execution. thereby an easy prey for deceit arid exploitation. .
"' Carrillo v. Jao]oco, 46 Phil. 597 (1924); C•talan v. Basa, G.R. No. 159567, July 31 , 2007.
444 Carrillo v. Jaojoco, 46 Phil. 597 (1924).
445 Catalan v. Basa, G.R. No. 159567, July 31, 2007. "' Rule 92, Section 2.
.
160 161
b. The law also provides for specific disqualifications, by error; freedom is vitiated by violence, intimidation
. or undue
such as the disqualification of foreigners to acquire il:ifluence; spontaneity is, vitiated by fraud.449
a: If one of the parties to a contract is incapacitated, the private transactions have been fair and regnlar.451
If a party is disqualified by law, the cqntract is i. The substance of the thing which is the object of
void, the contract (Art. 1 3 3 1), or
Consent has the following requisites: (1) it should be intelligent Identity or qualifications can usually
or with an exact notion of the matter to which it refers; (2) it become material in obligations to do (e.g.,
should be free; and (3) it should be spontaneous.448 These to perform in a concert or paint a portrait).
requisite characteristics are vitiated by the aforementioned
vices or defects of consent � intelligence in consent is vitiated (2) A simple mistake of account shall give rise to
its correction. (Art. 1331)
'"Amado v. Salvador, G.R. No. 171401, December 13, 2007. '" Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106-107; Leonardo v.
"' Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102, 106·107; Leonardo v. CA, G.R. No. 125485, 13 September 2004; Vda. De Ape v. CA, G.R. No. 133638, April 15, 2005.
450 Lim, Jr. v. San, G.R. No. 159723, 9 September 2004, 438 SCRA 102; Acabal v. Acabal, G.R.
CA, G.R. No. 125485, 13 Seplember2004; Vcia. De Ape v. CA, G.R. No. 133638, April 15, 2005;
Catalan v. Basa, G.R. No. 1 59567, July 31, 2007; Espino v. Vicente, G.R. No. 168396, June 22, No. 148376, March 31, 2005.
451 Heirs of Zamba�s v. CA, G.R. No. L-54070, February 28, 1983.
2006; Amado v. Salvador, G.R. No. 171401, December 13, 2007.
162 163
This refers to error in mathematical be considered valid even if there is a mistake
computation. The amount intended will in the designation of its lot number or TCT
govern. number.456 The remedy here is reformation of
instrument.
Notes:
(1) The concept of error in Art. 1331 includes b. There is no mistake if the party alleging it knew the
both: (a) ignorance, which is the absence of doubt, contingency or risk affecting the object of the
knowledge with respect to a thing, and (b) contract. (Art. 1333)
mistake properly speaking, which is a wrong
conception about said thing, or a belief in the i. To invalidate consent, the error must be real and
existence of some circumstance, fact, or event, not one that could have been avoided by the party
which in reality does not exist. In both cases, alleging it. An error so patent and obvious that
there is a lack of full and correct knowledge nobody could have made it, or one which could
about the thing.452 have been avoided by ordinary prudence, cannot be
invoked by the one who made it in order to annul
Examples of mistake proper: (a) ale of a d his contract.457
parcel of land which the seller mistakenly
thought he owned453; (b) sale a parcel of ii. Alleged mistake as to the area of the land or
land which the seller thought and encroachments thereon may be considered
represented to be 30 hectares, but turned inexcusable as it could be avoided through a
out to be only 18 hectares454• geodetic survey.458
(2) The error must be the . causal, not merely c. Mutual error as to the legal effect of an agreement
incidental, factor that induced the complaining when the real purpose of the parties is frustrated, may
ss
party to enter into the contract. 4 vitiate consent. (Art. 1334)
iii. Art. 1334 may encompass mistake as to the nature e. If a party signed a contract without knowing what it
.
of the contract.461 Thus, if A promises to lend B a was, there is no consent, and the contract is
' vo1' d.465
particular thing, and B agrees in the belief that it is ·
d. When one of the parties is unable to read, or if the a. There is violence when in order to wrest consent,
contract is in a language not understood by him, and serious or irresistibleforce is employed. (Art. 1335)
mistake or fraud is alleged, the person enforcing the Requisites of violence as a vice of consent:
contract must show that the terms thereof have been .
fully explained to the former. (Art. 1332) i. The force must be: the determining cause of the
contract, or. must have caused the consent to be
(i) Note that Art. 1332 creates a presumption of given;
mistake and fraud, upon a showing that: (!) one of
the parties is unable to read, or (2) the contract is in ii, The force must be serious or irresistible.
a language not understood by him. If these
circumstances .are shown,. the burden shifts to the b. Violence shall annul the obligation, although it may
other party (who seeks to enforce the contract) to have been employed by a third person who did not
rebut the presumption of mistake and fraud463 (by take part in the contract. (Art. 1336)
showing that the contract was fully explained to
the disadvantaged party and was freely consented 3. Intimidation.
to).464
(c) Thus, a threat to file a case for immorality c. Intimidation shall annul the obligation, although it may
against a bar candidate if he does not have been employed by a third person who did not
marry a girl he had sex with, does not take part in the contract. (Art. 1336)
vitiate consent. 47 1
4. Undne lnflnence.
iii. The threat must be real and serious, there being an
evident disproportion between the evil and the a. There is undue influence when a person takes improper
resistance which all men can offer, leading to the advantage of his power over the will of another,
choice of the contract as the lesser evil; and depriving the latter of a reasonable freedom of choice.
. (Art. 1337)
"' Lee v. CA. G.R. No. 90423, September 6, 1991, Berg v. National City Bank of New York, 102 Undue influence is any means employed upon .a
Phil. 309, 316. party which, under the circumstances, he could not
466 Callanta v. NLRC, G.R. No. 105083, August 20, 1993.
i. The confidential, family, spiritual and other iii. Note, however, that contracts of adhesion are not
.relations between the parties, or invalid per se and not strictly against the law; they
'
are as binding as ordinary contracts.481 This is
ii. The fact that the person alleged to have been particularly so in contracts entered into ·by
unduly influenced was suffering from mental educated persons or by seasoned businessmen,
weakness, or was ignorant or in financial distress. since they are presumed to have acted with due
care and to have signed the contracts with full
However, financial distress per se cannot be knowledge of its import.482 The court may also .
equated with undue influence.475 consider the nature of the transaction and the
amount of money involved; major transactions
c. Contracts ofAdhesion - A contract of adhesion is one involving huge sums of money are naturally
wherein almost all of the provisions are drafted by one deemed to have· b.een entered only with care,
party. The participation of the other party is limited to deliberation and diligent study.483
affixing his signature or his 'adhesion' to the
contract.476
170 171
d. Undue influence shall annul the obligation, although it
may have been employed by a third person who did b. Classification. The fraud or dolo which is present at
not take part in the contract. (by analogy with Art. the time of birth or perfection of a contract may either
1336) be dolo causante or dolo incidente.
488
iii. Good faith is presumed, and allegations of fraud ii. Dalo inc/dente or incidental fraud - fraud which
must be proved .
by clear and convincing is not serious in character and without which the
evidence.487 other party would still have entered into the
contract. 491
what Bank thought. It was held that there was indirectly the purchase of consumer products or services.
An advertisement shall be false, deceptive or misleading if it is not in conformity with the
no fraud in Z's failure to disclose the real provisions of this Act or if it is misleading in a material respect. - In determining whether any
consideration for the sale, as Z had no duty to advertisement Is false, deceptive or misleading, there shall be taken into account, among other
things, not only representations made or any combination thereof, but also the extent to which
make such disclosure; the bank security
the advertisement fails to reveal material facts in the light of such representations, or materials
with respect to consequences which may result from the use or application of consumer products
4" Geraldez v. CA, G.R. No. 108253, February 23, 1994. or services to which the advertisement relates under the condition� prescribed in said
493 Strong v. Gutierrez Replde, 41 Phil. 947; 213 U.S. 419. advertisement, or under such conditions as are customaiy or usual."
174 t75
iii. A mere expression of an opinion does not signify ii. Dalo incidente only obliges the person employing
fraud. (Art. 1341) it to pay damages. (Art. 1344)
Unless (!)' made by an expert and (2) the other F. SIMULATED CONTRACT
party has relied on the former's special
knowledge. (Art. 1341) 1 . Definition. Simulation occurs when an apparent contract is
a declaration of a fictitious wil� deliberately made by
iv. Misrepresentation by a third person does not vitiate agreement of the parties, in order to produce, for the
consent. (Art. 1342) purpose of deception, the appearance of a juridical act
which does not exist or is different from that which was
0
Unless (1) such misrepresentation has created really executed. 5 0
substantial mistake and (2) the same is mutual.
(Art 1342) 2. Requisites of simulation501:
The deceived person has a cause of action a. An outward declaration of will different from the will
against the third p�rson who aeceived of the parties;
him.497
b. The false appearance must have been intended by
v. Misrepresentation made in good faith is not mutual agreement; and
fraudulent but niay constitute error. (Art. 1343)
c. The purpose is to deceive third persons.
d. Effects of Fraud.
3. Types of Simulation. Simulation of a contract may be
i. Dula causante makes the t<Ontract voidable, absolute or relative. (Art. 1345)
provided that it is: (a) serious, an4 (b) has not been
employed by both. contracting parties. (Art. 1344) · a. Absolute simulation - when the parties do not intend
to be bound at all. (Art. 1345)
Dalo causante also renders the person
employing it liable for damages. 498 i. Example: When X and Y enters into a sale of land,
but did not really intend it; no consideration was
The fraud is serious when it is sufficient , to given and the land was not delivered.
impress, or to lead an ordinarily prudent
person into error.499 n. An absolutely simulated or fictitious contract is
void (Art. 1346), because consent is totally absent.
500 Villaflor v. Court of Appeals, 280 SCRA 297, 337 (1997): Mendezona v. Ozamiz, G.R. No.
"' Hill v. Veloso, 31 Phil. 160 (1915). 143370, February 6, 2002; Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.
498 Geraldez v. CA, G.R No. 108253, February 23, 1994. 501 Loyola v. Court of Appeals, 326 SCRA 285, 294 (2000); Penalosa v. Santos;363 SCRA 545,
'" Sierra v. CA, G.R. No. 90270, July 24, 1992. 556 (2001); Sps. Payongayong v. CA, G.R. No. 144576, May 28, 2004.
176 177
Ill. OBJECT OF CONTRACTS
iii. An absolutely simulated contract must be
distinguished from a fraudulent contract or "Object" is the thing, right or service which is the subject matter of
alienation. 502 the contract. (see Arts. I 3 1 8 and 1347)
(I) In absolutely simulated- contract, no contract The following are the requisites for a thing, right or service to be an
really exists or was intended; it may thus be object of contracts:
attacked by any creditor, at any time, and even
if the debtor is not insolvent. A. WITIDN THE COMMERCE OF MAN
(2) In fraudulent alienation, a contract exists and I. All things which are not outside the commerce of man,
was intended to take effect (for a fraudulent including futUre things, may be the object of contracts.
purpose). If intended to defraud a creditor, it (Art. 1347)
may be rescinded by creditors prior ·to the
contract, upon showing that the debtor is a. Things "outside the commerce ofman" are those which
insolvent, and within a prescription1 period of are not susceptible of appropriation or private
four years. ownership. 503
b. Relative Simulation - when the parties conceal their b. Examples: (i) public office'04 and political rights; (ii)
true agreement. (Art. 1345) purely personal rights, such as those arising from
family relations; and (iii)
properties of public
i. Example: When X and Y enters into a purported dominion, such town plaza,'05 airport lands and
8
sale of land, but their real intent is for it to be buildings,'06 forest lands,5 07 roads and highways,50
0 1
donation, or equitable mortgage. foreshore land,'09 watershed,'1 submerged lands. 51
ii. The real or true agreement is binding on the c. Even fature things may be the object of contracts. (Art.
parties, provided that: 1 347) Future things are those which are not yet
existing, or not yet owned by the obligor at the time of
( I) It does not prejudice a third person, and the contract.
(2) It is not intended for any purpose contrary to 503 See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA. G.R.
law, morals, good customs, public order or No. 126316, June 25, 2004.
504 Collantes v. CA, G.R. No. 169604, March 6, 2007.
public policy. (Art. 1346)
505 Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil.
866 (1958).
5" Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.
"' Land Bank v. Republic, G.R. No. 150824, February4, 2008.
50• Villarico v. Sarmiento, G.R. No. 136438, November 1 1 , 2004.
178 179
(2) That the object of the contract forms part of.the
Thus, a person may sell "future goods", i.e., those inheritance; and ·
(1) A renunciation of the right to inherit from 2. All rights which are not intransmissible may also be the
someone who is still alive is void.m object of contracts. (Art. 1 347)
(2) A partition by the heirs of the property they 3. All services which are not contrary to law, morals, good
expect to inherit frorn some.one who is still customs, public order or public policy may likewise be the
alive is void.514 object ofa contract. (Art. 1347) ·
512 Blas v. Santos, 1 1 1 Phil. 503 (1961); J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March
1 1 , 2005.
"' Uson v. Del Rosario, G.R. No. L-4963, January 29, 1953.
514 Tordilla v. Tordilla, 60 Phil. 162 (1934). 517 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005.
515 J.L.T. Agro, Inc. v. Balansag, G.R. No. 141882, March 1 1 , 2005. '" Guevent Industrial .Dev't Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279, July
. 11,
51' Osorio v. Osorio, 41 Phil. 531 (1921). 2006.
180 181
•
The object may be generic (a car, a dog). (see Art. 2. Cause of Contracts.
1 1 65)
a. In onerous contracts, the cause is understood to be, for
2. As to Quantity. The fact that the quantity is not each contracting party, the prestation or promise of a
determinate shall not be an obstacle to the existence of the thing or service by the other. (Art. 1350)
.
contract, provided it is possible to determine the same,
without the need of a new contract between the parties. i. In a sale, the cause consists of the seller's
(Art. 1349) undertaking to deliver the property and the buyer's
undertaking to pay the purchase price. The cause
The quantity must at least be determinable, based on should not be confused with the object, which is
circumstances stipulated in the contract. the thing sold.
I. Definition. Cause i s the essential reason which moves the This is true even if the mortgagor, surety,
contracting parties to enter into it. In other words, the cause guarantor or accommodating party is a third
is the immediate, direct and proximate reason which party or stranger to the principal obligation.522
justifies the creation of an obligation through the will of the
51
contractmg parties. 9
• .
121
Pyle v. Johnson, 9 Phil. 249 (1907); China Banking Corporation v. Lichauco, 46 Phil. 460
(1924); Acuna v. Veloso, 50 Phil. 241 (1927); Severino v. Severino, 56 Phil. 185 (1931); Sps.
'" General Enterprises Inc. vs. Lianga Bay Logging Co., 1 1 SCRA 733 (1964); Basic Books Carpo v. Chua, G.R. Nos. 150773 & 153599, September 30, 20Q5: ·
(Phil.), Inc. vs. Lopez, et al., 1 6 SCRA 291 (1966); Uy v. CA, G.R. No. 120465, September 9, 522 China Banking Corporation v. Lichauco, 46 Phil. 460 (1924); Acuna v. Veloso, 50 Phil. 241
1999; Roxas v. De Zuzuarregui, Jr., G.R. No. 152072, January 31, 2006, 481 SCRA 258, 276; (1927);
Camacho v. CA, G.R. No. 127520, February 9, 2007. '" Philippine Long Distance Co. vs. Jeturlan, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
520 IV Tolentino 530-531.
102 Phil. 577 (1957).
182 183
a. Example I: In a case where the National Housing
i. This covers contracts designed solely and Authority bought lands to be used for housing, there is
exclusively to procure the welfare of the a failure of cause when it turned out that the lands are
beneficiary, without any intent of producing any not suitable for housing.528
satisfaction for the donor or without serving the
self-interest of the donor.524 b. Example 2: Where the owner of a company transferred
his shares to a government. crony with the motive of
ii. Examples: commodatum; donation.525 obtaining a government contract, the motive was
deemed the (illegal) cause.529
B. DISTINGUISHEJJ FROM MOTIVE: The particular motives of the
parties in entering into a contract are different from the cause c. Example 3: Where a man donated land to a woman
thereof. (Art. 1 351) While cause is the essential reason for the with the motive of getting her to agree to have sexnal
contract, motive is the particular reason of a party in entering relations with him, the motive was deemed the (illegal)
into a contract and which does not affect the other party.526 cause.530
I. Example: In the sale o f a computer, the cause for0the buyer C. EXISTENCE OF CAUSE: Contracts must have a cause, as it is an
is the seller's undertaking to deliver a computer to him. essential requisite. Contracts without cause produce no effect
The buyer' s motive may be different, e.g., to be able to surf whatever (Art 1352), i.e., void.
the internet, or edit his photos, or start an online business.
I. Presumption. Although the cause is not stated in the
2. Ordinarily, a party's motives for entering .into the contract contract, it is presumed that it exists (and is lawful), unless
do not affect the contract. A party's motive does not even the debtor proves the contrary. (Art. 1354)
have to be known to the other party.
2. Distinguished from Failure to Pay the Consideration.
3. However, as an exception, the motive may be regarded as Lack of consideration is different from failure to pay the
the cause "'V11hen the motive predetermines the cause", i.e., consideration. The former prevents the existence of a valid .
when the contract is conditioned upon the attainment of the contract, while the latter results in a right to demand the
motives of one of the contracting parties. 527 fulfillment or cancellation of the obligation under an
existing valid contract.531
5" Philippine Long Distance Co. vs. Jeturian, G. R. L-7756, July 30, 1955, cited in Liguez v. CA,
102 Phil. 577 (1957).
52' Although donation is referred to as an act of liberality under Art. 725, it Is actually a contract,
since it requires the consent of both parties. See concurring opinion of J. Antonio In Alejandro v.
Geraldez, G.R. No. L-33849, August 18, 1977. 528 Uyv. CA, G.R. No. 120465, September9, 1999.
5" Republic vs. Claribel, 36 SCRA534 (1970); Uyv. CA, G.R. No. 120465, September 9, 1999. '" E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA 233 (1987).
527 Llguez v. CA, 102 Phil. 577 (1957); E. Razon Inc. vs. Philippine Ports Authority, 151 SCRA "' Liguez v. CA, 102 Phil. 577 (1957).
233 (1987); Philippine National Construction Corp. vs. Court of Appeals, 272 SCRA 183 (1997); 53 1 San Miguel Properties Philippines., inc. v. Huang, 336 SCRA 737 (2000); Montecillo v.
Uyv. CA, G.R. No. 120465, September9, 1999. Reynes, G.R. No. 13801 B, July 26, 2002.
184 185
Where the deed of sale states that the purchase price consideration, is contrary to public policy and the due
has been paid but in fact has never been paid, the d�ed administration ofjustice.536
Savings and Mortgage Bank, G.R. No. 161524, 27 January 2006, 480 SCRA 399, 408; Co v. 53 S Arroyo v. Berwin, 36 Phil. 386 (1917).
Court of Appeals, G.R. No. 123908, 9 February 1998, 286 SCRA 76, 85; Velasco v. Court of 151 SCRA233 (1987).
537 E. Razon Inc. vs. Philippine Ports Authority,
Appeals, 151-A Phil. 868, 887 (1973). 536 Liguez v. CA, 102 Phil. 577 (1957).
534 Amado v. Salvador, G.R. No. 171401, .December 13, 2007, citing Toyota Shaw, Inc. v. Court 539 Sps. Buenaventura v. Court of Appeals, G.R. No. 126376,
20 November 2003, 416 SCRA
of Appeals, G.R. No, 1 1 6650, 23 May 1995, 244 SCRA 320, 328; R.F. Navarro and Co. v. Sugar 263; People's Air Cargo & Warehousing Co., Inc. v. CA, G.R. No. 1 17847, October 7, 1998;
Producers Cooperative Marketing Association, 1 1 1 Phil. 820, 828 (1961). Sps. Paguyo v. Astorga, G.R. No. 130982, September 16, 2005.
'35 De Leon v. CA, G.R. No, 80965, June 6, 1990. ''° Vales v. Villa, 35 Phil. 769 (1916).
186 187
. 1. Under Art. 1381, contracts which are entered into
Chapter 8
in behalf of wards or absentees are rescissible if
they suffer lesion by more than one-fourth of the Form of Contracts
value of the things which are the object of the
· contracts.
I. IN GENERAL
ii. Also, inadequacy of price may indicate an intent to
defraud creditors, which may render the contract A. GENEJµl, RULE: FORM NOT NECESSARY. Contracts shall be
rescissible under Art. 1381. obligatory, in whatever form they may have beetr entered into,
provided all the essential. requisites for their validity are
b. If there has been fraud, mistake or undue influence. present. (Art. 1356)
(Art. 1355)
1. Our contractual system upholds the spirit and intent of the
i. Le.\·ion or inadequacy of price may indicate, that the contracting parties over the formalities. Contracts are
consent (of the party suffering lesion) was' vitiated
generally deemed perfected by mere consent. (Art. 13 15)
by fraud, mistake or undue influence, which
renders the contract voidable.
2. Thus, the general rule is that the form (oral or written) is
irrelevant to the binding effect inter partes of a contract
ii. Gross inadequacy of price does not affect a
that possesses the three validating elements of consent,
contract of sale, except as may indicate a defect in
subject matter, and causa.541
the consent, or that the parties really intended a
donation or some other act or contract (Art. 1470) For example, the following contracts are consensual,
and are thus valid even if they are merely oral:
i. sale; 542
ii. lease;543
..
in. contract fior services;
· 544
iv. partition;'" .
541 Dauden-Hernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.
s.:1 Yaneza v.CA, G.R. No. 149322, November 28, 2008. See also Carbonell v. CA, G.R. No. L·
29972, January 26, 1976; Delos Reyes v. CA, G.R. No. 129103, September 3, 1999.
54J See Pagurayan v. Reyes, G.R. No. 154577, July 23, 2008; Pasricha v. Don Luis Dison
Really, G.R. No. 136409, March 14, 2008: Chua Tee Dee v. CA, G.R. No. 135721, May 27,
2004.
'
.
544 Dauden·Hernaez v. Delos Angeles, G.R. No. L-27010, April 30, 1969.
545 Chavez v. lntennedlate Appellate Court, G.R. No. 68282. November 8, 1990, 191 SCRA 211,
216; Tan v. Lim, G.R. No. 128604, Seplember 25, 1998, 296 SCRA 455, 474-475: Hernandez v.
·
However, the binding . effect o f oral contracts i s generally contributed there must be an inventory of the
3. -
limited to the contracting parties (inter partes). The law property, signed by the parties, and attached to the
usually requires registration for a contract to be binding on public instrument (Art. 1773);
third persons, and an oral contract cannot be registered
unless it is reduced into a public document.546 (6) Real estate mortgage (Art. 1 874); and
B. EXCEPTIONS: WHEN FORM IS NECESSARY. Article 1356 of (7) Contract of antichresis, wherein the amount of
the Code establishes only two exceptions, to wit: principal and interest must be specified in writing.
(Art. 2134)
I. When Required B y Law for Validity o r Enforceability.
Form is necessary for contracts for which the law itself 2. When Required by Law to Prove the Contract. Form is
requires that they be in some particular form (writing) in necessary for contracts that the law requires to be proved
order to make them valid and enforceable. by some writing (memorandum) of its terms, as in those
covered by the old Statute of Frauds, now Article 1403(2)
·I
These are called solemn or formal contracts. The of the Civil Code . .
following are examples:
a. Their existence is not provable by mere oral testimony
(!) Donation of immovable property, which the law or para! evidence.
(Art. 749) requires to be embodied in a public
instrument in order "that the donation may be b. The form required is for evidentiary purposes only.
valid," i.e., existing or binding. Thus, the Statute of Frauds would not apply if:
(2) Donation of movables worth more than P5,000.00 i. The contr�ct is wholly or partly executed, or
which must be in writing, "otherwise the donation
shall be void" (Art. 748); ii. The parties permit a contract to be proved, without
any objection.547
(3) Contracts to pay interest on loans (mutuum) which
must be ''expressly stipulated in writing" (Art. Note: In the foregoing exception cases, the requirement of form
1956); and is absolute and indispensable. (Art. 1356) If the formal
requirement has not been complied with, a party cannot
(4) Stipulation limiting the liability of carrier to · a seek its enforcement or compel compliance with the formal
degree less than extraordinary diligence, which requirement (Art. 1356), because the law does not
must be in writing and signed by the shipper/owner recognize any existing or enforceable contract to begin
of the goods (Art. 1744); with.
Domalagan v. Bolifer, 33 Phil. 471 (1915-1916); Swedish Match, AB v. CA, G.R. No. 128120,
547
'" See Campillo v. CA, G.R. No. 56483, May 29, 1984. October 20, 2004.
190 191
II. FORMAL REQUIREMENT c. The power to administer property, or any other power
AS A MATTER OF CONVENIENCE which has for its object an act appearing or which
should appear in a public document, or should
A. IN GENERAL: [f the law requires a document or other special prejudice a third person;
fonn, such as in the acts and contracts enumerated in Article
1 358 (infra), the contracting parties may compel each other to d. The cession of actions or rights proceeding from an act
observe that fonn, once the contract has been perfected. (Art. appearing in a public document.
1357)
2. The foregoing requirement of a public document in Art.
1. This right may be exercised simultaneously with the action 1358 is only for convenience, not for validity or
upon the contract. (Art. 1357) enforceability. 549
2. This right presupposes the existence of a valid contract.548 . Thus, failure to follow the proper fonn (e.g., non
It is not available or cannot be exercised for contracts appearance before the notary public) does not
where form is necessary for validity/enforceabil ty (i.e., i invalidate the contract. The parties can simply compel
solemn contracts) or for proving the contracts (i.e., each other to observe that fonn, once the contract has
contracts covered by the Statute of Frauds). (Art. 1356, been perfected.550
supra)
c. PRIVATE DOCUMENT (AT LEAST): Contracts Art. 1358
B. PUBLIC DOCUMENT REQUIREMENT provides that "all other contracts where the amount involved
exceeds five hundred pesos must appear in writing, even a
1. Under Art. 1358, the following must appear in a pnblic private one. But sales of goods, chattels or things in action are
document: governed by Articles, 1403, No. 2 and 1405." (Art. 1358)
a. Acts and contracts which have for their· object the This does not mean that contracts involving more than
creation, transmission, modification or extinguishment P500 are void or unenforceable if not in writing. It is
of real rights over immovable property; not enough that the law should require that the contract
be in writing, as it does in Art. 1 358. The law must
Sales of real property or of an interest therein are further prescribe that without the writing the contract is
governed by Articles 1403, No. 2, and 1405, i.e., not valid or not enforceable by action.'5 1
they must appear in writing (even a private
document) to be enforceable;
some mistake, fraud, inequitable conduct or accident has of the parties. It involves a question of fact and not a
occurred or been committed. In granting reformation, the court mere question of law, and is different from mere
is not making a new contract for the parties, but establishing interpretation of the contract.555
Art. 1359 provides that when, there having been a meeting of would be unjust and inequitable' to allow the enforcement of a
the minds of the parties to a contract, their true intention is not written instrument which does not reflect or disclose the real
expressed in the instrument purporting to embody the meeting of the minds of the parties.556
·
2. Reformation is an exception to theparol evidence rule, i.e.,
that "when the terms of an agreement have been reduced to
553 Rule 130, Section 9. National lrngation Administration v. Gamit, G.R. No. 85869, November 6,
writing, it is considered as containing all the terms agreed 1992.
upon and there can be, between the parties and their 554 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Quiros v.
Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; MulU-Ventures Capital & Mgl Corp.
successors in interest, no evidence of such tenns other than
. v. Stalwart Mgt. Services Corp., G.R. No. 157439, July 4, 2007.
555 National Irrigation Administration v. Gamit, G. R. No. 85869, November 6, 1992.
556 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992.
ss2 Quiros
v. Arjona, G.R. No. 158901, March 9, 2004, 425 SCRA 57, 65; Multi·Ventures Capital 557 National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992; Tuazon v.
& Mgl Corp. v. Stalwart Mgt. Seivices Corp., G.R. No. 157439, July4, 2007. CA, G.R. No. 1 19794, October 3, 2000.
194 195
The presumption is that an instrument sets out the true (who did not understand the language in which the
agreement of the parties thereto558; thus, the.burden of contract was written).561
proving otherwise is on the party who insists that the
contract should be reformed. 559 2. Mistake By One Party; Concealment By the Other.
When one party was mistaken and the other knew or
3. The failure of the instrument to express the true intention believed that the instrument did not state their real
of the parties is due to mistake, fraud, inequitable conduct agreement, but concealed that fact from the fonner, the
or accident. instrument may be reformed. (Art. 1363)
b. Example 2: When the parties agreed to a sale subject to 1. Simple <;ionations inter vivas wherein no c.ondition is
repurchase, but the defendant did not include the imposed; and
condition of repurchase unbeknownst to the plaintiff
2. Wills.
Att. 789 provides that "when there is an imperfect 2. The principles of the general law on the reformation of
description, or when no person or property ·exactly instruments are adopted insofar as they are not in conflict
answers the description, mistakes and omissions with the provisions of the Civil Code. (Art. 1 360)
must be corrected, if the error appears from the
context of the will or from extrinsic evidence." This B. PROCEDURE
· refers merely to errors or imperfections in the
description, not to the manner of disposition.562 I. D'eclaratory Relief. The procedure for ·the reformation of
instrument shall be governed by rules of court to be
:B. Vorn AGREEMENTS: There shall be no reformation when the promulgated by the Supreme Court. (Art. 1369)
real agreement is void (Art. 1 366)
Under the Rules of Court, the ruies on declaratory
Reformation would be useless if the actual agre�ment is relief apply to actions for reformation of instrument.564
'
void and cannot be enforced.
2. Real Party in Interest. Reformation may be ordered at the
C. ESTOPPEL: When one of the parties has brought an action to instance of either party or his successors in interest, if the
enforce the instrument, he cannot subsequently ask for its mistake was mutual; otherwise, upon petition of the injured
reformation. (Art. 1367) party, or his heirs and assigns. (Art. 1368)
But a party who is sued on a contract may file a 3 . Prescription. The prescriptive period for reformation is
counterclaim for its reformation. '63 10 years (Art. 1 144), counted from the time the right of
action accrues, i.e., the time the other party manifests an
D. NO MEETING OF MINDS: If mistake, fraud, inequitable intention (by overt acts) not to abide by the true agreement
conduct, or accident has prevented a me.eting of the minds of of the parties (not necessarily the time of execution of the
the parties, the proper remedy is not reformation of the · contract). 565
instrument but annulment of the contract.
Telephone Co., Inc. v. CA, G.R. No. 107112, February 24, 1994, 230 SCRA 351; Pilipinas Shell
Pelroleum Corporation v. John Bordman Ltd. of lloilo, Inc., G.R. No. 1 59831, October 14, 2005,
473 SCRA 151; Multi-Realty Development Corp. v. �akati Tuscany Condominium Corp., G.R.
'" IV Tolentino 556. No. 146726, June 16, 2006. See, however, Rosello·Bentirv. Leanda, G.R. No. 128991, Apnl 12,
"' See Gojo v. Goyala, G.R. No. L-26768, October 30, 1 970 and Cebu Contractors Consortium 2000 and Cebu Contractors Consortium Co. v. CA, G.R. No. 107199, July 22, 2003, .which
Co. v. CA, G.R. No. 107199, July 22, 2003. counted the prescriptive period from the time of execution of the contract
198 l99
parties, the literal meaning of its stipulations shall control.
(Art. 1370)
Chapter 10
"Interpretation" is the act of making intelligible what was before understood in a different sense.570
contract is the determmation of the meaning attached to the words the evident intention of the parties, the l�tter shall prevail
written or spoken which make the contract. 566 over the former. (Art. 1370)
Where the language of a written contract is clear and unambiguoi'.is' B. DETERMINING THE INTENTION
'
. there is generally no room for construction· or interpretation.567
Interpretation comes into play when the court finds, upon a 1 . Contemporaneous and Subsequent Acts. In order to
preliminary inquiry, that the contract is ambiguous, i.e., susceptible judge the intentipn of the contracting parties, their
of two or more reasonable alternative interpretations. Where the contemporaneous and subsequent acts. shall be principally
·
written terms of the contract are n.ot ambiguous and can only be considered. (Art. 1371)
read one way, the court will interpret the contract that way as a
matter of law. If the contract is determined to be ambiguous, then a. Note that by this principle, the court can look into
the interpretation of the contract is left to the court, to· resolve the extrinsic evidence, outside the four corners of the
IT. PRINCIPLES. OF INTERPRETATION rule." Under Rule 130, Section 9, when the terms of
an agreement have been reduced to writing, it is
1 . Plain Meaning Rule. If the terms of a contract are clear successors-in-interest, no evidence of such terms other
and leave no doubt upon the intention of the contracting than the contents of the written agreement.
'" National Irrigation Administration v. Gamit, G.R. No. 85869, November 6, 1992. 569 Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, citing Heirs of the Late Spouses
'" Olivares v. Sarmiento, G.R. No. 158384, June 12, 2008, c1ling Heirs of the Late Spouses Aurelio and Esperanza Bal:te v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56;
Aurelio and Esperanza Balite v. Lim, G.R. No. 152168, 10 December 2004, 446 SCRA 56: Tuazon v. Court of Appeals, 396 Phil. 32 (2000)..
Tuazon v. Court of Appeals, 396 PM. 32 (2000).. "' Bautista v. CA, 379 Phil. 386, 399 (2000): Abad v. Goldloop Properties, Inc., G.R. No.
'"Abad v. Goldloop Properties, Inc., G.R. No. 168108, April 13, 2007. 168108, April 13, 2007.
200 201
However, a party may present evidence to modify, a contract, and shall fill the omission of stipulations which
explain or add to the terms of the written agreement if are ordinarily established. (Art. 1 376)
he puts in issue in his pleading:
C. CONTRA PROFERENTUM: The interpretation of obscure words
i. An intrinsic ambiguity, mistake or imperfection in or stipulations in a contract shall not favor the party who
the written agreement; caused the obscurity. (Art. 1377)
ii. The failure of the written agreement to express the 1. Any ambiguity is to be taken contra proferentum, i.e.,
true intent and agreement of the parties thereto; construed against the party who drafted the contract and
caused the ambiguity which could have been avoided by
iii. The validity of the written agreement; or the exercise of a little more care. 571
iv. The existence of other terms agreed to by the 2. Thus, any ambiguity, obscurity or doubt in a contract of
parties or their successors-in-interest after the adhesion is construed or resolved strictly against the party
execution of the written agreement. who prepared it.'72 But where no such ambiguity,
obscurity or doubt exists, no such construction is
2. Scope of Terms. However general the terms of a contract warranted.573
may lie, they shall not be understood to comprehend things
that are distinct and cases that are different from those D. IMPOSSIBILITY OF SETTLING DOUBTS: When it is absolutely
upon which the parties intended to agree. (Art. 1372) impossible to settle doubts by the rules established in articles
· 1 370-1377, the following rules apply (Art. 1378):
3. Most Effectual Interpretation. If some stipulation of any
contract should admit of several meanings, it shall be 1. If the doubts refer to incidental circumstances -
Nacu vs. Court of Appeals, 231 SCRA 237 [1994]; De Leon vs. Court of Appeals, 186 SCRA 345
5. Consistency with the Nature and Object. Words which [1990]; Equitable Banking Corporation vs. Intermediate Appellate Court, 161 SCRA 518 [1988];
may have different significations shall be understood in Eastern Assurance and Surety Corp. vs. IAC, 179 SCRA 562 [1989]; Prudential Bank v. Alviar,
G.R. No. 150197, July 28, 2005.
that which is most in keeping with the nature and object of 512 Sps. Panlilio v. Citibank, NA, G.R. No. 156335, November 28, 2007, citing Bay View Hotel v.
the contract. (Art. 1375) Ker and Co., Ltd., G.R. No. L·28237, Atigust 31, 1982, 116 SCRA 327, 334; Eastern Shipping
Lines Inc. v. Margartne.Verkaufs-Union GmbH, G.R. No. L·31087, September 27, 1979, 93
SCRA 257, 262; Eastern Assurance and Surety Corp. v. Intermediate Appellate Court, G.R. No.
6. Usage or Custom. The usage or custom of the place shall 69450, November 22, 1989, 179 SCRA 561, 568; Orient Air Services and Hotel Representatives
be borne in mind in the interpretation of the ambiguities of v. Court of Appeals, G.R. No. 76931, May 29, 1991, 197 SCRA645, 655.
"' Sps. Panlilio v. Citibank, N.A., G.R. No. 156335, November 28, 2007.
202 203
b. Where contract is onerous, the doubt shall be settled in instrument, the intention of the parties is to be pursued.; and.
favor of the greatest reciprocity of interests. (Art. · when a general and a particular provision are inconsistent,
1378) the latter is paramount to the former. So a particular intent
'
will control a general one that is inconsistent with it. (Sec.
A contract which may be interpreted as either a 12)
sale with repurchase or a loan with mortgage
should be construed as the latter, as it involves the 4. Interpretation according · to circumstances. For the
. . . .
greatest rec1proc1ty of mterests.574 proper construction of an instrument, the circumstances
under which it was made, including the situation of the
2. If the doubts are cast upon the principal object of the subject thereof and of the parties to it, may be shown, so
contract in such a way that it cannot be known what may that the judge may be placed in the position of those whose
have been the intention or will of the parties - the contract language he is to interpret. (Sec. 13)
shall be null and void. (Art. 1378)
5. Peculiar signification of terms. The terms of a writing are
presumed to have been used in their primary and general
III. RULES OF COURT PROVISIONS acceptation, but evidence is admissible to show that they
· have a local, technical, or otherwise peculiar signification,
The principles of interpretation stated in the Rules of Court shall and were so used and understood in the particular instance,
likewise be observed in the construction of contracts. (Art. 1379) in which case the agreement must be construed
accordingly. (Sec. 14)
Rule 130 provides for the following rules in the interpretation of
documents: 6. Written words control printed. When an instrument
consists partly of written words and partly of a printed
I. Interpretation of a writing according to its legal form, and the two are inconsistent, the former controls the
meaning. The language of a writing is to be interpreted latter. (Sec. 15)
according to the legal meaning it bears in the place of its
execution, unless the parties intended otherwise. (Sec. 10) 7. Experts and interpreters to be used in explaining
certain writings. When the characters in which an
2. Instrument construed so as to give effect to all instrunient is written are difficult to be deciphered, or the
provisions. In the construction of an instrument where language is not understood by the court, the evidence of
there are several provisions or particulars, such a persons skilled in deciphering the characters, or who
construction is, if possible, to be adopted as will give effect understand the language, is admissible to declare the
to all. (Sec. 1 1) characters or the meaning of the language. (Sec. 16)
3. Interpretation according to intention; general and 8. Of two constructions, whic.h preferred, When the terms
particular · provisions. In the construction of an of an agreement have been intended in a different sense by
the different parties to it, that sense is to prevail against
either party in which he supposed the other understood it,
"' Olina vs. Medina, 13, Phil. 379; Labasan v. Lacuesta, G.R. No. L·25931, October 30, 1978.
204 205
and when different constructions of a provision are
otherwise equally proper, that is to be taken which is the Chapter 11
most favorable to the party in whose favor the provision
was made. (Sec. 17) Defective Contracts
10. Interpretation according to usage. An instrument may be A. RESCISSIBLE CONTRACTS: They are the least infirm .contracts.
construed according to usage, in order to determine its true Though valid and possessing all the essential requisites of
character. (Sec. 19) contracts, they may be set aside forhaving caused economic
damage to one of the contracting parties or to a third party.
'" See J. Vilug's dissent in Equalorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001). See also Balane, Defective Contracts in Philippine Civil Law, Journal of the
IBP, Vol. 30, No. 2 (3rd and 4th Quarters 2004).
206 207
II. RESCISSIBLE CONTRACTS th� plaintiff must show that he has no other recourse to
repair the damage he suffered).
A. IN GENERAL
c. Prescription for rescission under Art. \ 1 9 1 is 10 years
I. In terms of their efficaciousness, resCissible contracts are . for written contracts (Art. 1 144) or 6 years for oral
regarded, among the four types of defective contracts, as contracts (Art. 1 1 45), while prescription for rescission
being the closest to perfectly executed contracts: A under Art. 1381 is 4 years. (Art. 1389)
rescissible contract contains all the requisites of a valid
contract and is considered legally binding, but by reason of B. CAUSES: Contracts validly agreed upon may be rescinded in
injury or damage to either of the contracting parties or to the cases established by law. (Art. 1380) Under Art. 1 3 8 1 , the
third persons, such as creditors, it is susceptible to following contracts are rescissible:
rescission at the instance of the party who may be
prejudiced thereby.576 I. Lesion to Wards. Those contracts which are entered into
by guardians whenever the wards whom they represent
2. A rescissible contract is valid, binding and effective until it suffer lesion by more than one-fourth of the value of the
is rescinded. The proper way by which it can be a�sailed is things which are the object thereof; (Art. 1381)
by an action for rescission based on any of the causes
expressly specified by law.577 2. Lesion to Absentees. Those contracts agreed upon in
representation of absentees, if the latter suffer lesion by
3. The rescission of rescissible contracts (under Art. 1381, et more than one-fourth of the value of the things which are
seq.) should be distinguished from "rescission" or the object thereof; (Art. 1381)
"resolution" under Art. 1 1 9 1 .578
a. "Lesion" means the damage caused to the ward or
a. Rescission under Art. 1 1 9 1 is a remedy for breach of absentee due to the discrepancy between the
obligations, while rescission under Art. 1381 is a consideration received and the value of the things
remedy for the economic injury caused by a contract. . alienated.
Thus, rescission under Art. 1 191 may be filed only b. Rescission referred to in the first two items (contracts
by a contracting party; rescission under Art. 13 8 1 by guardians, or for absentees) shall not take place
may be filed even by a third party. with respect to contracts· approved by the courts. (Art.
1386)
b. Rescission under Art. 1 191 is a principal action, while
rescission under Art. 1381 is subsidiary (in the latter, c. Court approval is required for acts of ownership (as
distinguished from mere acts of administration)
srs See J. Vitug's dissent in Equatorial R,ealty Development, Inc. v. Mayfair Theater, Inc., 370 executed by guardians or representatives of absentees.
SCRA 56, 90 (2001 ). If court approval is lacking, the contract is
577 See J. Vitug's dissent in Equatorial Realty Development, Inc. v. Mayfair Theater, Inc., 370
SCRA 56, 90 (2001). .
·
unenforceable for lack of authority (Art. 1403, par. 1 ),
'" Universal Food Corporation v. CA, 144 Phil. 1 (1970); lringan v. Court of Appeals, 418 Phil. even if lesion is not shown.
286, 296·297 (2001); Rivera v. Del Rosario, G.R. No. 144934, January 15, 2004.
208 209
iv. Evidence of large indebtedness or complete
3. Fraud of Creditors. Those contracts undertaken in fraud insolvency.
of creditors when the latter cannot in any other manner
collect the claims due them; (Art. 1381) v. The transfer of all or nearly all of his property by a ·
debtor, especially when he is insolvent or greatly
a. All contracts by virtue of which the debtor alienates embarrassed financially.
property by gratuitous title are presumed to have been
entered into in fraud of creditors, when the donor did vi. The fact that the transfer is made between father
not res.erve sufficient property to pay all debts and son, when there are present other of the above
contracted before the donation. (Art. 1387) circumstances.
b. Alienations by onerous title are also presumed vii. The failure of the vendee to take exclusive
fraudulent when made by persons against whom some possession of all of the property.
judgment or writ of attachment has been issued. (Art.
1387) 4. Things Under Litigation. Those contracts which refer to
things under litigation if they have been entered into by the
The decision or attachment need not refer to the defendant without the knowledge and approval of the
property alienated, and need not have been litigants or of competent judicial authority; (Art. 1381)
obtained by the party seeking the rescission. (Art.
1387) 5 . By Provision of Law. All other contracts specially
declared by law to be subject to rescission. (Art. 1381)
c. In addition to these presumptions, the design to defraud
creditors may be proved in any other manner Payments made in a state of insolvency for obligations
recognized by the law of evidence. (Art. 1387) The to whose fulfillment the debtor could not be compelled
following circumstances are considered badges of at the time they were effected, are also rescissible.
fraud in a sale579: (Art. 1382)
i. The fact that the consideration of the conveyance is For Art. 1382 to apply, it is required that: (a) the
fictitious or is inadequate. payment is made in a state of insolvency; and (b)
the obligation paid was not yet due at the time of
ii. A transfer made by a debtor after suit has been the payment.
begun and while it is pending against him.
C. WHO MAY FILE: The action for rescission may be filed by the
iii. A sale upon credit by an insolvent debtor. following persons580:
a. Rescissi·on must be for a cause provided by law. (Arts. For persons under guardianship and for absentees,
1380, 1381) the period of four years shall not begin until the
termination of the farmer's incapacity, or until the
b. Since rescission is a subsidiary action, it can be domicile of the latter is known. (Art. 1389)
instituted only when the party sufferin& damage has no
other legal means to obtain reparation for the same. 2. Requisites for Rescission of Contracts in Fraud of
(Art. 1383) Creditors (Accion Pauliana)581 -
c. Rescission shall be only to the extent necessary to a. That the plaintiff asking for rescission, has a credit
cover the damages caused. (Art. 1384) prior to the alienation, although demandable later;
d. Rescission can be carried out only when · he who If the plaintiff has no credit at the time the
demands rescission can return whatever he may be defendant entered into a transaction, the latter
obliged to restore. (Art. 1385) could not have intended to defraud him.
This applies to contracts which are rescissible due b. That the debtor has made a subsequent contract
to lesion suffered by the ward or absentee. conveying a patrimonial benefit to a third person;
e. Rescission shall not take place when the things which c. That the creditor has no other legal remedy to satisfy
are the object of the contract are legally in the his claim, but would benefit by rescission of the
possession of third persons who did not act in b�d conveyance to the third person;
faith. (Art. 1 3 85)
2i2 2i3
i. As a subsidiary remedy (Art. 1383), an accion good faith, and (2) for a sufficient and valuable
pauliana presupposes the following: · I) a consideration.'87
judgment; 2) the issuance by the trial court of a
writ of execution for the satisfaction of the e. That the third person who received the property
judgment, and 3) the failure of the sheriff to conveyed, if by onerous title, has been an accomplice
enforce and satisfy the judgment of the court. 582 in thefraud.
ii. If a creditor seeks to rescind ·a transaction before For a·contract to be rescinded for being in fraud of
he has exhausted all the properties of the debtor, creditors, both contracting parties must be shown
the action to rescind may be dismissed as to have acted maliciously so as to prejudice the
premature. 583 creditors.588
If the debtor has other properties available, it E. EFFECTS: Rescission creates the obligation to return the things
would be premature to even consider if the which were the object of the contract, together with their fruits,
subject transaction is ftaudulent.584 and the price with its interest. (Art. 1385)
iii. Thus, the 4-year prescription period commences to I. Consequently, it can be carried out 011ly when he who
run only upon discovery by the judgment creditor demands rescission can return whatever he may be obliged
that the debtor no longer had any properties to to restore. (Art. 1385)
satisfy the debt.585 (The period is not reckoned
from the date of the rescissib!e transaction or the 2. Neither shall rescission take place when the things which
registration thereof.) are the object of the contract are legally in the possession
ofthirdpersons who did not act in badfaith. (Art. 1385)
d. That the act being impugned isfraudulent;
a. In this case, indemnity for damages )Jlay be demanded
i. The creditor seeking rescission has the burden of from the person causing the loss. (Art. 1385)
proving fraud, although he may rely on certain
disputable presumptions under Art. 1387 b. If the buyer acted in good faith in purchasing a
'
(supra).586 property (particularly if he relied on a certificate of title
which has no adverse annotations), i.e., he did not
ii. To' overcome the presumption of fraud, it must be know of the seller's debts, the · sale cannot be
established that the conveyance was made (I) in rescinded.589 ·
'" Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28. 2001. "' China Banking Corp. v. CA, G.R. No. 129644, September 7, 2001; MR Holdings v. Bajar,
"' Siguan v. Lim. G.R. No. 134685, November 19, 1 999. G.R.No. 138104, April 1 1 , 2002.
"' Khe Hong Cheng v. CA, G.R. No. 144169, March 28, 2001. "'Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21; 2006.
'" Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006. "' Union Bank of the Philippines v. Sps. Ong, G.R. No. 152347, June 21, 2006.
2i4 215
3. Whoever acquires in bad faith the things alienated in fraud
of creditors, shallindemnify the latter for damages suffered b. If both parties lack capacity, the contract is
by them on account
of the alienation, whenever, due to any unenforceable. (Art. 1403, par. 3)
cause, it should be impossible for him to return them. (Art.
1 388) c. Lack of capacity is different from lack of authority. If
the contract is entered into in the name of another
If there are two or more alienations, the first acquirer person by one who has been given no authority or
. shall be liable first, and so on successively. (Art. 1388) legal representation, or who has acted beyond his
powers, the contract is unenforceable. (Art. 1403, par.
l ; Art. 1 3 1 7)
III. VOIDABLE CONTRACTS
2. Vitiated Consent. Those where the consent is vitiated by
A. IN GENERAL mistake, violence, intimidation,_ undue influence or fraud.
(Art. 1391)
I. Voidable or anullable contracts are existent, valid, and
binding, although they can be annulled because oi want of See discussion on these vices of consent supra.
capacity or vitiated consent of one of the parties.590
C. ACTION FOR ANNULMENT
2. Voidable contracts are valid and binding until set aside in
an aciion for that purpose (Art. 1 390). Before annulment, 1 . Direct Action. The validity of a voidable contracts may be
they are effective and obligatory between parties.591 assailed only by a ''proper action in court" (Art. 1 390), i.e.,
through an action for that purpose.592
3. They can be confinned or ratified (Art. 1 390).
The validity of voidable contracts cannot be attacked
4. A contract may be voidable even though there may have collaterally (like voidable marriages593 or voidable
been no damage to the contracting parties. (Art. 1390) judgments594). This differentiates them from void
contracts (or marriages or judgments), the validity of
B. CAUSES : The following contracts are voidable or annullable which can be attacked collaterally.
216 217
1. Strangers to a contract cannot sue to annul and set i. Persons who are capable cannot allege the
. aside the same. incapacity of those with whom they contracted.
(Art. 1397)
Thus, a squatter or trespasser cannot annul the
contract of sale of a land to which he was not a ii. Persons who exerted intimidation, violence, or
party ,595 undue influence, or employed fraud, or caused
mistake cannot base their action upon these flaws
· n. "Exception": There have been cases holding that a of the contract. (Art. 1397)
stranger may sue for annulment when he is
prejudiced in his rights with respect to one of the 3.. Prescription. The action for annuhnent shall be brought
contracting parties and can show detriment which within four years. (Art. 1391)
. would positively result to him from the contract in
6
which he has no intervention.59 · This period shall begin:
Note, however, that the exception , giving a. In cases of intimidation, violence or undue influence -
strangers the standing to set aside a contract from the time the defect of the consent ceases. (Art.
usually rests on a basis other than the 1391)
voidability cif!'·a contract. For instance, 'a
creditor may set aside a contract defrauding A contract executed under the pressure of the
him (for being rescissible)591 ; a co-owner may President/dictator may be annulled within four
6
set aside a sale made by another co-owner in years from his deposition. 00
excess of his portion (for being void insofar as
it affected the portion of the · plaintiff b. In case of mistake or fraud - from the time of the
owner).'98 · discovery of the same. (Art. 1391)
b. The plaintiff must be the injured party or victim, and i. Discovery commences from the date of the
not the party responsible for the defect. 599 execution of the contract601 or, at the very least,
from the date of registration thereof with the
Register of Deeds, as registration is constructive
60
notice to the world. 2
005
Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.
603 Fi•Estate Golf & Development, Inc. v. Navarro, G.R. No. 152575, June 29, 2007, citing Heirs 606 MWSS vs. Court of Appeals, 297 SCRA 287, 307 (1998); Francisco v. Herrera, G.R. No.
of Rosa Dumaliang v. Damiano Serban, G.R. No. 155133, 21 February 2007 and Baranda v. 139982, November 21, 2002.
Baianda, G.R. No. L-73275, 20 May 1987, 150 SCRA 59. 607 Phil. Free Press Inc. v. CA, G.R. No. 132864, October 24, 2005.
6"' Maglucot·Aw vs. Maglucot. 329 SCRA 78, 94 (2000). 606 Sps. Alfredo v. Sps. Borras, G.R. No. 144225. June 17, 2003.
220 221
Ratification retroacts to the time the contract was except insofar as he has been benefited by the thing or
made. price received by him. (Art. 1399)
1. I n General. The effect o f annulment of the contract i s to a. Due to Loss of the Thing Caused by Plaintiff. - The
wipe it out of existence, and to restore the parties, insofar action for annulment of contracts shall be extinguished
as legally and equitably possible, to their original situation when the thing which is the object thereof is lost
before the contract was entered into. If a voidable contract through the fraud or fault of the person who has a right
is annulled, the restoration of what has been given is to institute the proceedings. (Art. 1401)
proper.609
If the right of action is based upon the incapacity
2. General Rule: Restitution. An obligation having been of any one of the contracting parties, the loss of the
annulled, the contracting parties shall restore to each other thing shall not be an obstacle to the success of the
the things which have been the subject matter of the action, unless said loss took place through the
contract, with their fruits, and the price with its nterest, i fraud or fault of the plaintiff. (Art. 1401)
except in cases provided by law. (Art. 1398)
b. Due to Loss of the Thing Caused by Defendant.
a. In obligations to render service, the value thereof shall Whenever the person obliged by the decree of
be the basis for damages. (Art. 1398) annulment to return the thing can not do so because it
has been lost through his fault, he shall returri the fruits
b. As long as one of the contracting parties does not received and the value of the thing at the time of the
restore what in virtue of the decree of annulment he is loss, with interest from the same date. (Art. 1400)
bound to return, the other cannot be compelled to
comply with what is incumbent upon him. (Art. 1402) c. Restatement of the Rule. - In case the thing which is
the object of the contract has been lost (regardless of
c. The principle of unjust enrichment applies here. Thus, the cause of voidability of the contract - whether due
if a lease is annulled, the lessee cannot demand the to incapacity or vice of consent), the following rules
return of past rentals which correspond to the period apply:
0 '
that he was in possession.of the property.61
i. If loss is through the fraud or fault of the plaintiff
3. Exception: Incapacity. When the defect of the contract (the party who has the right to institute the action)
consists in the incapacity of one of the parties, the - the action for annulment is barred (Art. 1401);
incapacitated person is not obliged to make any restitution
ii. If loss is through the fraud orfault ofthe defendant
� the action is not barred; the defendant must pay
'°' Katipunan v. Katipunan, Jr., G.R. No. 132415, January 30, 2002; Villanueva v. Ctiiong, G.R. the value of the thing at the time of the loss (with
No. 159889, June 5, 2008.
"' IV Tolentino 607·608.
222 223
interest from the same date) as well as the fruits defective act, which would otherwise not be binding on
received. (see Art. 1400); him.613
iii. If loss is not due to thefraud or fault of any party a. Ratification may be express or implied. (see Art. 1 3 1 7)
(such as by fortuitous event) - the action is not Implied ratification may take various forms - like
barred; restitution may still be effected by paying silence or acquiescence, acts showing approval or
the value of the thing at the time of loss, but adoption of the act, or acceptance and retention of
without interest (since the payer was not at fault). benefits flowing therefrom.614
. . ' 15
b. Rat1'fi1catton 1 s generaIIy retroact1ve.6
IV. UNENFORCEABLE CONTRACTS
3. Who May Assail. Unenforceable contracts cannot be
A. IN GENERAL assailed by third persons. (Art. 1408)
I . Concept. Unenforceable contracts are those which cannot 4. Types. There are three categories of unenforceable
be enforced in court (unless they are ratified) becatlse they contracts (Art. 1403):
are entered · into without or in excess of authority, or they
do not comply with the statute of frauds, or both of the a. Those entered into in the name of another person by
contracting parties do not possess the required legal one who has been given no authority or legal
capacity.611 representation, or who has acted beyond his powers;
a. Unenforceable contracts cannot serve as basis for a suit b. Those that do not comply with the Statute of Frauds;
or action; the courts will refuse to enforce them and and
dismiss the suit. '
613
Ma9lucol-Aw vs. Maglucot, 329 SCRA 78, 94 (2000).
611 Mercado v. Allied Banking Corp., G.R. No. 171460, July 27, 2007. 014
Koji Yasuma v. Heirs of De Villa, G.R. No. 150350, August 22, 2006.
612 Rule 16, Section 1 (i). '"De Jesus v. Daza, 77 Phil. 170 (1946).
·
224 225
who has been given no authority or legal representation, or the party with whom he has contracted (Art. 1 897),
who has acted beyond his pow,ers. unless -
c. The unauthorized sale by a co-owner of the entire co I. Noncompliance with the Statute o f Frauds. The second
owned property is unenforceable as to the pro-indiviso type of unenforceable contracts are those that do not
shares of his co-owners who did not consent.61 6 comply with the Statute of Frauds as set forth in Art. 1403.
I
2. Governing Law. Unauthorized contracts are governed by a. The Statute of Frauds refers to the law which requires
Article 1 3 1 7 and the principles of agency under the Civil certain contracts or transactions to be put in writing
Code. (Art. 1404) and signed by the party charged thereby. Its purpose is
to prevent fraud and perjury in the enforcement of
a. Under Art. 1 3 17, no one may contract in the name of obligations depending for their evidence on the
another without being authorized by the latter, or unassisted memory of witnesses. 6 17
unless he has by law a right to represent him. A
contract entered into in the name of another by one b. Contracts covered by the Statute of Frauds cannot be
who has no authority or legal representation, or who proven without the writing or through oral evidence
has acted beyond his powers, shall be unenforceable. (Art.1403), unless the other party fails to object (Art.
(Art. 1 3 17) 1405).
Unless it is ratified, expressly or impliedly, by the 2. Contracts Covered by the Statute of Frauds. In the
person on whose behalf it has been executed, following cases an agreement shall be unenforceable by
before it is revoked by the other contracting party. action, unless the same, or some note or memorandum
(Art. 1317) thereof, be in writing, and subscribed by the party charged,
or by his .agent:
· b. Under the principles of agency, if the agent exceeds the
scope of his authority, the agent is personally liable to
617 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004; Sps. Torcuator v. Sps.
"' Cabales v. CA, G.R. No. 162421, August 31, 2007. Bernabe, G.R. No. 134219, June 8, 2005.
226 227
a. An agreement that by its terms is not to be performed b. A special promise to answer for the debt, default, or
within a year from the making thereof; (Art. 1403, par. miscarriage of another; (Art. 1403, par. 2, subpar. b)
2, subpar. a)
This applies to the ·obligation of the defendant as a
'
I. The statute of frauds applies if the agreement is; by guarantor of a third party. If the obligation is the
its own terms, not to be perfonned within 1 year. principal debt of the defendant (e.g., supplier
It does not apply if the agreement is merely silent provided lumber to the defendant for his account,
on the time ofperfonnance.618 and not for the account of the defendant's
contractor who took delivery of the lumber), the
23
ii. The statute of frauds applies if the agreement is not Statute of Frauds does not apply . 6
to be perfonned on both sides within 1 year. It
does not apply if the agreement is to be fully c. An agreement made in consideration of marriage,
perfonned on one side within 1 year.619 other than a mutual promise to marry; (Art. 1403, par.
2, subpar. c)
iii. The statute of frauds applies only to executory
contracts. It does not apply to contracts w ich had � a. Thus, the father of the groom-to-be may not sue
already been executed (whether fully or partially, the father of the bride-to-be on an oral agreement
and whether on one or both sides).620 that the fonner would improve the latter's house in
4
consideration of the marriage of their children.62
a. Thus, it does not apply to a contract of sale
5
which had been partially executed by the b. A mutual promise to marry is not enforceable, 62
parties, with the transfer of the possession of even if written. However, a breach thereof may
the property to the buyer and the partial give rise to liability for damages if attended with
6
payments of the purchase price thereof.621 bad faith, 62 or an action to recover money or
property advanced on account of the promise.627
b. If a contract has been totally or partially
perfonned, the exclusion of parol evidence d. An agreement for the sale ofgoods, chattels or things
would promote fraud or bad faith, for it would in action, at a price not less than five hundred pesos.
enable the defendant to keep the benefits (Art. 1403, par. 2, subpar. d)
already derived by him from the transaction,
and at the same time, evade the obligations i. The Statute of Frauds does not apply (no writing
assumed or contracted by him thereby.622 required) if:
b. the buyer pays at the time some part of the f. A representation as to. the credit of a third person.
purchase money. (Art. 1403, par. 2, subpar. d) (Art. 1403, par. 2, subpar. f)
ii. When a sale is made by auction and entry is made This person who makes a representation as to the
by the auctioneer in his sales book, at the time of credit of a third person is actually a stranger to the.
the sale, of the amount and kind of property sold, contract between that third person and the person
terms of sale, price, names of the purchasers and who relies on the representation. Thus, the liability
person on whose account the sale is made, it is a of the person who makes the representation is
sufficient memorandum: (Art. 1403, par. 2, subpar. actually not ex contractu but arising from tort.
d) Thus, it has been said that this category of
unenforceable contracts was improperly
Note that in such an exceptional situ�iion, the included.631
signature of the party charged is not required.
3. Requirement of Note or Memorandum. If a contract is
e. An agreement of the leasing for a longer period. than covered by the Statute of Frauds under Art. 1403, par. 2,
one year, or for the sale of real property or of an "the same, or some note or memorandum thereof, [must]
interest therein; (Art. 1403, par. 2, subpar. e) be in writing, and subscribed by the party charged."
However, for a note or memorandum to satisfy the Statute
1. A right of first refusal is different from a contract
of Frauds, it must be complete in itself and cannot rest
of sale of real property, and is not covered by the
partly in writing �nd partly ii;i parol (oral) evidence.632
statute of frauds.628
634 Swedish Match, AB v. CA, G.R. No. 128120, October 20, 2004.
"' Limketkai Sons Milling, Inc. v. CA, G.R. No. 1 1 8509, December 1, 1995.
636 City of Cebu v. Heirs of Rubi, 306 SCRA 408 (1999).
"'Abrenica vs. Gonda, 34 Phil. 739 (1916); Taloslg vs. Vda. de Nieba, 43 SCRA 472 (1972);
Limkelkai Sons Milling, Inc. v. CA, G.R. No. 1 18509, December 1, 1995. '" Sps. Camara v. Sps. Maiabao, G.R. No. 154650, July 31, 2003.
.
232 233
D. lNCAPACITY OF BOTH PARTIES b. Technically, "inexistent" contracts are those in which
an essential element is lacking (as opposed to contracts
1 . Incapacity of Both Parties. The third type of where the elements are present, but illegal). 641
unenforceable contracts are those where both parties are
. incapable of giving consent to a contract. 2. Ratification. A void contract cannot be ratified (Art
.
1409).
If only one of the contracting parties is incapacitated,
· the contract is voidable. (Art. 1391) · 3 . Waiver. The right to set up the defense of illegality of a
contract cannot be waived. (Art. 1409)
2. Ratification. Ratification may be made by the parent or
guardian, as the case may be, of the capacitated parties. 4. lmprescriptible. The action or defense for.the declaration
(Art. 1407) of the inexistence of a contract does not prescribe. (Art.
1410)
a. If the contract is ratified by the parent/guardian of one
of the contracting parties, the effect is to make the 5. Who can Invoke. The right to set up the nullity of a void
contract voidable ("as if only one of the parti'es were or non-existent contract is not limited to the parties; it is
incapacitated"). (Art. 1407) extended to third persons who are directly affected by the
contract, whenever juridical effects founded thereon are
42
b. If the contract is ratified by the parent/guardian of both asserted against him. 6
contracting parties, the effect is to make the contract
valid ("the contract shall be validated from the But the defense of illegality of contract is not available
inception"). (Art. 1407) to third persons whose interests are not directly
affected. (Art. 1421)
1 . Concept. A void or inexistent contract is one which. has no a. Rescissible contracts - valid and binding until
force and effect from the very beginning. Hence, it is as if rescinded, as all the essential elements are present; they
it has never been entered into.639 are rescissible only because of an economic injury
suffered by another person.
a. It produces no civil effect and does not create, modify Void contracts -void from the beginning because one
or extinguish a juridical relation.640 of the essential elements is lacking.
'" Francisco v. Herrera, G.R. No. 139982, November 21, 2002. 641 See Gonzales vs. Trinidad, 67 Phil. 682 (1939).
"' Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007. . 642 Arsenal v. IAC, 227 Phil. 36 (1986).
234 ·235
b. Rescissib/e contracts - can be attacked onl y by the Void contracts - can be attacked directly or
persons injured thereby. coJlateraJly.
Void contracts - can be attacked by any person
·
c. · Voidable contracts - annulment prescribes in four C. TYPES OF. VOID OR INEXISTENT CONTRACTS: In general,
years. void or inexistence ·contracts are those where one of the
Void contracts - the action for declaration of nullity is essential requisites of a valid contract (consent, object and
imprescriptible. cause) is totaJly absent. The absence may be in a legal sense,
e.g., a cause may be actuaJly present but if it is illegal or
d. Voidable contracts - can be attacked directly (in an immoral, it may be considered legally absent.
'
action for annulment).
More specifically, Art. 1409 provides that the following
contracts are inexistent and void from the beginning -
'" See Leonardo v. CA, G.R. No. 125485, September 13, 2004.
236 2'37
1 . Those whose cause, object or purpose is contrary to law,
morals, good customs, public order or public policy; a. A person·who has leased his property to another person
cannot lease it again to a third party while the original
a. The cause for a contract is presumed lawful. (Art. lease was still valid and subsisting.648
1354)
b. Note that things having a potential existence may be
b. Examples of unlawful cause. the object of the contract of sale. (Art. 1461) What is
necessary is that the vendor can transfer ownership of
i. The termination of marital relations is an unlawful the thing sold at the time it is delivered. (Art. 1459)
consideration which renders the contract void.644
4. Those whose object is outside the commerce of men;
ii. An agreement to stifle the prosecution of a person
charged with a crime, for a pecuniary or other a. Things "outside the commerce of man" are those
valuable consideration, is contrary to public policy which are . not susceptible of appropriation or private
and the due administration ofjustice.645 ownership. 649
iii. Where the owner of a company transferred his b. Examples: (i) public office650 and political rights; (ii)
shares to a government crony with the motive of ·purely personal rights; such as those arising from
obtaining a government contract, the motive was family relations; and (iii) properties of public
deemed the (illegal) cause.646 dominion, such town plaza,651 airport lands and
buildings, 652 forest lands,'53 roads and highways,654
iv. Where a man donated land to a woman with the foreshore land,'55 watershed,'56 snbmerged lands.657
motive of getting her to agree to have sexual
relations with him, the motive was deemed the 5. Those which contemplate an impossible service;
(illegal) cause. 647
Impossible things or services cannot be the object of
2. Those which are absolutely simulated or fictitious; contracts. (Art. 1348) Example: It is impossible for a
lessor to undertake the maintenance of the public
An absolutely simulated or fictitious contract is void
(Art. 1 346), because consent is totally absent. The
648 Bercero v. Capitol Dev'\ Corp., G.R. No. 154765, March 29, 2007.
parties do not intend to be bound at all. (Art. 1345)
"' See Land Bank v. Republic, G.R. No. 150824, February 4, 2008 and Republic v. CA, G.R.
No. 126316, June 25, 2004.
3 . Those whose cause o r object did not exist at the time of 650 Collantes v. CA, G.R. No. 169604, March 6, 2007, ,
55' Municipality of Cavite v. Rojas, 30 Phil. 602 (1915); Espiritu v. Municipal Council, 102 Phil .
• # '
the transaction;
866 (1958).
552 Manila International Airport Authority v. CA, G.R. No. 155650, July 20, 2006.
238 239
drainage system; he can only maintain the private pipes the parties are in pari delicto, no affirmative relief of any
'8 kind will be given to one against the other.661
or drainage of the leased premises. 6
6. Those where the intention of the parties relative to the In case· of pari delicto, the defendant is in a better position
principal object of the contract cannot be ascertained; because the court refuses to give judicial relief to the
plaintiff. However, the court's refusal to lend aid to the
Nullity results if the uncertainty refers to the principal plaintiff is not intended to benefit the defendant. It is
object of the contract, in such a way that it cannot be intended to deter illegality.662
known what may have been the intention or will of the
parties. (Art. 1378) If the uncertainty refers merely to Exceptions:
incidental circumstances, the contract is valid; the
rules in Art. 1378 apply to resolve the uncertainty. a. The pari delicto rule does not apply to inexistent
contracts, i. e., contracts which are void because of the
7. Those expressly prohibited or declared void by law. absence of an essential element (as opposed to
contracts which are void because of illegality of the
Example: The law generally generally �rohibits cause or subject matter).663
contracts uponfuture inheritance. (Art. 1347)
Example: The pari delicto rule does not apply to
Note: A contract which is the direct result of a previous absolutely simulated contracts or (o contracts
(Art. 1422)
illegal contract, is also void and inexistent. without consideration (even if they may have been
entered for an illegal motive or purpose664).
D. RULES ON RECOVERY
b. The pari delicto rule does not apply ,if it would violate
1. General Rule. Parties to a void agreement cannot expect public policy.665
the aid of the law; the courts leave them as they are,
because they are deemed in pari delicto or "in equal a. Example 1: A squatter who had been ousted by a
fault."6" Each must bear the consequences of his own fellow squatter is · not barred from filing an
acts.660 ej ectment suit on .the ground that they are both
squatters and in pari delicto. To deny a squatter
No action arises from an illegal contract; no suit can be
maintained for its specific performance, or to recover the
property agreed to be sold or delivered, or the money
agreed to be paid, or damages for its violation; and where
661 Silagan v. Intermediate Appellate Court, 196 SCRA 774, 765 (1991); Acabal v. Acabal, G.R.
No. 148376, March 31, 2005; Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007;
Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
656 Guevent Industrial Dev'! Corp. v. Phil. Lexus Amusement Corp., G.R. No. 159279,j July 1 1 , 662 Acabal v. Acabal, G.R. No. 146376, March 31, 2005.
2006. "' Gonzales vs. Trinidad, 67 Phil. 682 (1939); Vasquez v. Porta, 98 Phil. 490 (1956); Madina v.
65' Bercero v. Capitol D,ev't Corp., G.R. No. 154765, March 29, 2007; Hulst v. P.R. Builders, Inc., CA, G.R. No. 109355, October 29, 1999
G.R. No. 156364, September 3, 2007. 664 Gonzales vs. Trinidad, 67 Phil. 662 (1939); Vasquez v. Porta, 96 Phil. 490 (1956).
660 Bercero v. Capitol Dev't Corp., G.R. No. 154765, March 29, 2007. 6" Silagan v. IAC, 274 Phil. 182 (1991); Acierto v. De las Santos, 95 Phil. 887, 889 (1954).
240 241
the right to sue for ejectment would invite mayhem 2. lllegal Cause or Object. When the nullity proceeds from
·
and lawlessness.666 the illegality of the canse or object of the contract, the
following rules apply:
b. Example 2: The pari delicto rule does not apply to
disbarment proceedings, as they are intended to a. If the act constitutes a criminal offense:
protect the public and the courts.667
i. When both parties are in pari delicto - they shall
c. The law permits the return of that which may have
·
have no action against each other, and both shall be
been given under a void contract to: prosecuted. (Art. 1411) "In pari de/icto non oritur
actid. ,,
i. The innocent party (Arts. 141 1-1412);
Moreover, the provisions of the Revised Penal
ii. The debtor who pays usurious interest (Art. 1413); Code relative to the disposal ·of effects or
instruments of a crime shall be applicable to
iii. The party repudiating the void contract before the the things or the price of the contract. (Art.
illegal purpose is accomplished or before damage 141 1)
is caused to a third person.and if public interest is
' ii. When only one of the parties is guilty - they shall
subserved by allowing recovery (Art. 1414);
have no action against each other, and the guilty ·
iv. The incapacitated party if the interest of justice so party shall be prosecuted. However, the innocent
demands (Art. 1415); party may claim what he has given, and shall not
be bound to comply with his promise. (Art. 1 4 1 1)
v. The party for whose protection the prohibition by
law is intended, if the agreement is not illegal per b. If the act does not constitute a criminal offense:
se but merely prohibited and if public policy would
be enhanced by permitting recovery (Art. 1416); i. When both parties' are at fault - neither may
and recover what he has given by virtue of the contract,
or demand the performance of the other's
vi. The party for whose benefit the law has been undertaking. (Art. 1412)
intended such as in price ceiling laws (Art. 1417)
and labor laws (Arts. 1418-1419). ii.. When only one of the parties is at fault - (1) The
party at fault cannot recover what he has given by
The foregoing instances are further discussed reason of the contract, or ask for the fulfillment of
below. what has been promised him. (2) The party who is
aot at fault may demand the return of what he has
given without any obligation to comply with his
promise. (Art. 1412)
"' Pajuyo v. CA, G.R. No. 146364, June 3, 2004.
"' Mortel v. Aspiras, 100 Phil. 586, 592 (1956).
242 143
Notes: The rule bars the party from pleading the
illegality of the contract either as a cause of action a. Thus, an alien who enters into a contract to buy a
or as a defense. Where the plaintiff can establish a land but rescinds the same before transfer of title
cause of action without exposing its illegality, the may be allowed to recover the purchase price he
vice does not affect his right to recover. 668 paid (but not damages).671
Thus, e.g., where a married man donated a b. In· an agreement where the mother-in-law agreed to
land to his paramour, who was minor at the transfer certain properties to her daughter-in-law in
time, the paramour may later seek recovery of consideration of the termination of marital
the land on the strength of a donation regular relations with her son, the court allowed the
on its face. To defeat its effect, the donor (or mother-in-law to recover the properties since the
his heirs) may plead and prove that the same is agreement was repudiated before the purpose has
illegal. But if the donor is the guilty party or is been accomplished:612
equally guilty with the donee, he is barred
. 9
from settmg up sueh 1· 11egal'tty.66 4. Illegal Contract by an Incapacitated Person. Where one
of the parties to an illegal contract is incapable of giving
· E.g., where the father falsified a deed of consent, the courts may, · if the interest of justice . so
donation to her daughter (making it appear that demands, allow recovery of money or property delivered
the donation was made jointly with his wife, by the incapacitated person. (Art. 1415)
who was actually deceased, to avoid
inheritance taxes and costs of publication), the 5. Prohibited Contracts. When the agreement is not illegal
father/donor and the daughter/donee are in pari per se but is merely prohibited, and the prohibition by the
de/icto. The father/donor cannot be allowed to law is designated for the protection of the plaintiff, he may,
· file an action for annulment of the donation.670 if public policy is thereby enhanced, recover what he has
paid or delivered. (Art. 1416)
3 . Illegal Purpose. When money i s paid or property delivered
for an illegal purpose, the contract may be repudiated by 6. Excess Interest or Price. ,
one of the parties before the purpose has been
accomplished, or before any damage has been caused to a a. Interest paid in excess of the interest allowed by the ·
third person. usury laws may be recovered by the debtor, with
interest .thereon from the date of the payment. (Art.
In such case, the courts may, if the public interest will 1413)
thus be subserved, allow the party repudiating the
contract to recover the money or property. (Art. 1414) Circular No. 905 of the Central Bank, adopted on
December 22, J 982, has expressly removed the
"' Uguez v. CA, 1 02 Phil. 577 (1957). See, however, Tala Realty Services Corp. v. Banco interest ceilings prescribed by the Usury Law.
Filipino Savings and Mortgage Bank. G.R. No. 137533, November 22, 2002.
'" Liguez v. CA, 102 Phil. 577 (1957). 671 Hulst v. P.R. Builders, Inc., G.R. No. 156364, September 3, 2007.
010 Ramirez v. Ramirez, G.R. No. 165088, March 17, 2006.
'" De Leon v. CA, G.R. No. 60965, June 6, 1990.
244 245
Thus, the U sucy Law is now "legally inexistent" or
"ineffective."673 Chapter 1 2
a. When the Jaw fixes, or authorizes the fixing of the Obligations are civil or natural. Civil obligations give a right of
maximum number of hours of labor, and a contract is action to compel their performance. (Art. 1423)
entered into whereby a laborer undertakes to work
longer than the maximum thus fixed, he may demand Natural obligations, not being based on positive Jaw but on
additional compensation for service rendered _):ieyond equity and natural law, do not grant a right of action to enforce
the time limit. (Art. 1418) their performance, but , after voluntary fulfillment by the
obligor, they authorize the retention of what has been delivered
b. When the iaw sets, or authorizes the setting of a or rendered by reason thereof. (Art. 1423)
minimum wage for laborers, and a contract is agreed
upon by which a laborer accepts a 19wer wage, .he shall B. RATIONALE
be entitled to recover the deficiency. (Art. 1419)
.
The law recognizes certain instances wherein there is a moral,
E. SEPARABILITY OF ILLEGAL TERMS: In case of a divisible but not a lega� duty to perform or pay. If the obligor performs
contract, if the illegal terms can be separated from the. legal or pays, out of his honor or conscience, he will not be
ones, the latter may be enforced. (Art. 1420) permitted to change his mind and recover what he has paid.
The law requires him to abide by his honor or conscience. 674
C. VOLUNTARINESS
"' Medel v. CA, G.R. No. 131622, November27, 1998. "' Report of the Code Commission, pp. 58-59.
246 247
2. A natural obligation does not arise if performance is not a contract without the consent of the parent or guardian,
voluntary but was compelled by coercive processes (such voluntarily pays a sum of' money or delivers a fungible
of the service he has rendered. (Art. 1424) Against Him. When, after an action to enforce a civil
obligation has failed, the defendant voluntarily performs
2. Reimbursement of Payments for Pre�cribed the obligation, he cannot demand the return of what he has
Obligations. When without the knowledge or ag�inst the delivered or the payment of the value of the service he has
will of the debtor, a third person pays a debt which the rendered. (Art. 1428)
obliger is not legally bound to pay because the action
thereon has prescribed, but the debtor later voluntarily . D. VOLUNTARY PERFORMANCE BY HEIR
reimburses the third person, the obliger cannot recover
what he has paid. (Art. 1425) I. Payment By Heir In Excess of His Inheritance. When a
•
testate or intestate heir voluntarily pays a debt of the
1 . Return b y "Minor" of Thing or Price Received. When a of the deceased, the payment is valid and cannot be
minor between eighteen and twenty-one years of age who rescinded by the payer. (Art.' 1429)
the fact that he has not been benefited thereby, there is no accordance with the formalities required by law, but one of
right to demand the thing or price thus returned. (Art. the intestate heirs, after the settlement of the debts of the
"' Manila Surety & Fidelity Co. v. Lim, 106 Phil. 771 (1959).
248 249
b. Reliance by Party Invoking Estoppel - the other
Chapter 13 person in fact relies, and relies reasonably or
justifiably, upon that communication;
Estoppel
The party invoking the doctrine must have been
misled to his prejudice. This is the most important
I. IN GENERAL element of equitable estoppel.679
In the law of evidence, whenever a party has, by his 4. Estoppel cannot be predicated on an illegal act. As between
· own declaration, act, or omission, intentionally and the parties to a contract, validity cannot be given to it by
deliberately led another to believe a particular thing estoppel if it is prohibited by law or is against public
true, and to act upon such belief, he cannot, in any policy.680
litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 677 B. KINDS OF ESTOPPEL: Estoppel may be in pais or by deed.
(Art. 1433) Jurisprudence also recognizes estoppel by !aches.
3. The elements of estoppel are: 678
I. Estoppel in pais or equitable estoppel - arises when
a. Representation by Estopped Party - the actor who one, by his acts, representations or admissions or by his
usually must have knowledge, notice or suspicion of silence when he ought to speak out, intentionally or
the true facts, communicates something to another in a through culpable negligence, induces another to believe
misleading way, either by wprds, conduct or silence; certain facts to exist and such other party rightfully relies
616 Philippine National Bank vs. Intermediate Appellate Court, et al., 189 SCRA 680 (1990); 679 Philippine Savings Bank v. Chowklng Food Corp., G.R. No. 177526, July 4, 2008, citing Vega
Caltex v. CA, G.R. No. 97753, August 10, 1992. v. San Ca�os Milling Company Limited, G.R. No. 21549, October 22, 1924.
m Rules of Court, Rule_131, Sec. 2(a). Caltex v. CA, G.R. No. 97753, August 10, 1992. 680 United Coconut Planters Bankv. Beluso, G.R. No. ,159912, August 17, 2007 citing Eugenio v.
"' British American Tobacco v. Camacho, G.R. No. 163583, August 20, 2008, citing Philippine Perdido, 97 Phil. 41, 44 (1955); Auyong Hian v. Court of Tax Appeals, G.R. No. L-26782, 12
·
Bank of Communications v. Court of Appeals, 352 Phil. 1, 9 (1998). September 1974, 59 SCRA 110, 133-134.
250 251
· and acts on such belief so that he will be prejudiced if the reasonable time, warranting a presumption that the
former is permitted to deny the existence of such facts.681 party entitled to assert it either has abandoned it or
declined to assert it. 687
.
2. Estoppel by deed or by record - occurs when a party to
a deed and. his privies are precluded from denying any b. The essential elements 'of !aches are688:
material fact stated in the said deed as against the other
2
party and his privies. 68 i. Conduct on the part of defendant or one under
whom he claims, giving rise to the sitnation
a. When a person has entered into a solemn engagement complained of;
by deed, he shall not be permitted to deny any matter
which he has asserted therein.683 Thus, e.g., in a deed ii. Delay in asserting 'complainant's right after he had
of mortgage which states that the mortgagor owns the knowledge of the defendant's conduct and after he
property, the mortgagee cannot subsequently assert has an opportnnity to sue;
4 I
title. to the same.68
iii. Lack of knowledge or notice on the part of the
b. A void deed, however, may not be the basi� of, an defendant that the complainant would assert the
estoppel. 685 Thus, where an extra-judicial partition and right on which he bases his suit; and
special power of attorney were void due to lack of an
object certain, such deeds cannot be the basis . of iv. Injury or prejudice to the defendant in the event
6
estoppel. 68 relief is accorded to the complainant.
252 253
landlord and tenant between them.693 The tenant can assert
D. GOVERNING LAW: The principles of estoppel are adopted title against his landlord if he acquired t11e property after
insofar as they are not in conflict with the provisions of the fue commencement of their lease.
Civil Code, the Code of Commerce, the Rules of Court and
special laws. (Art. 1432) 2. Lessees are estopped to deny their landlord's title, or to
'
assert a better title not only in themselves, but also in some
third person, while they remain in possession of the leased
II. EXAMPLES OF ESTOPPEL premises and until they surrender possession to the
landlord. 694
A. SELLER ACQUIRES TITLE TO THING SOLD: When a person
who is not the owner of a thing sells or alienates and delivers it, D. OWNER MISLEADS BUYER OF lMMOVABLE: When in a
and later the seller or grantor acquires title thereto, such title contract between third persons concerning immovable
passes by operation of law to the buyer or grantee. (Art. 1434) property, one of them is misled by a person with re.spec! to the
ownership or real right over , the real estate, the latter is
1. Thus, e.g., if. at the time of the sale, the seller ownyd only precluded from asserting his legal title or interest therein,
1/3 of the thing sold, but he later acquired the remaining provided aU these requisites are present:
2/3, such acquisition validates the entire transaction and
title to the whole thing passes to the buyer.691 I. There must be fraudulent representation or wrongful
concealment of facts known to fue party estopped;
2. In one case, it was held ihat if at the time of the sale, the
seller was not yet the owner of the thing sold, but he later 2. The party precluded must intend that the other should act
inherits it, the title passes by operation of Jaw to the upon the facts as misrepresented;
buyer.692 However, this appears contrary to the prohibition
against contracts uponfature inheritance. (Art. 1347) 3. The party misled must have been unaware of the true facts;
and .
B. AGENT OF SELLER ACQUIRES TITLE TO THING SOLD: If ,a
person in representation of another sells or alienates a thing, the 4. The party defrauded must have acted in accordance with
former cannot subsequently set up his own title as against the the misrepresentation. (Art. 1437)
buyer or grantee. (Art. 1435)
E. OWNER MISLEADS PLEDGEE: One who has allowed another
C. LESSEE OR BAILEE: A lessee or a bailee is estopped from to assume apparent ownership of personal property for the
asserting title to the thing leased or received, as against the purpose of making any transfer of it, cannot, if he received the
lessor or bailor. (Art. 1436)
693 Rules of Court, Rule 131, Sec. 2(b).
694 Julag-ay v. Estate of Buenaventura, Sr., G.R. No. 149788, May 31, 2006, citing VSC
I. The tenant i s not permitted to deny the title of his landlord
Commercial Enterprises, Inc. v. Court of Appeals, Oscar Estopace and Jose Silapan, G.R. No.
at the time of the commencement of the relations of
121159, December 16, 2002, 394 SCRA 74; Geminian'o v. Court of Appeals, G.R. No. 120303,
July 24, 1996, 259 SCRA 344, 351, citing Borre v. Court of Appeals, 158 SCRA 560, 566;
"' Estoque v. Pajimula, G.R. No. L·24419, July 15, 1968. Manuel v. Court of Appeals, G.R. No. 95469, July 25, 1991, 199 SCRA 603, 607; Munarv. Court
692 of Appeals, G.R. No. 100740, November 25, 1994, 238 SCRA372, 380.
Pisuena v. Heirs of Unating, G.R. No. 132803; August 31, 1999.
254 255
sum for which a pledge has been constituted, set up his own
title to defeat the pledge of the property, made by the other to a Chapter 1 4
pledgee who received the same in good faith and for value.
(Art. 1438) Trusts
I. GENERAL PROVISIONS
B. PARTIES TO A TRUST
'" Caneza v. Rojas, G.R. No. 148788, November 23, 2007, citing Tigno v. Court of Appeals, 345
Phil. 486, 497 (1997) and Morales v. Court of Appeals, 274 SCRA 282 (1997).
"' Caneza v. Rojas, G.R. No. 148788, November 23, 2007
697 Tala Really Services Corp. v. Banco Filipino Savings & Mortgage Bank, 392 SCRA 506
(2002), citing Huang v. CA, 236 SCRA 420 (1994).
256 257
3. Beneficiary - the person for whose benefit the trust has of Commerce, the Rules of Court and special laws are adopted.
been created. (Art. 1440) He is also called cestui que trust. (A1t. 1442)
258 259
condition upon the beneficiary, his acceptance shall be c. KINDS OF IMPLIED TRUST: Implied trusts are : either resulting
presumed, if there is no proof to the contrary. (Art. 1446) or constructive trusts -
D. PRESCRIPTION: In . express trusts, a trustee cannot, by 1 . Resulting trusts are based on the doctrine that valuable
prescription, acquire ownership over property entrusted to him consideration, and not legal title, determines the equitable
until and unless he repudiates the trust.705 title or interest to a property, and are presumed always to
have been contemplated by the parties.709
1. This is because the possession of a trustee is not adverse706
(at least until repudiated). a. Thus, e.g., there is a resulting trust when a property is
purchased by X but the consideration or purchase price
2. In case of repudiation, the action prescribes in 10 years is paid by Y for the purpose of having the beneficial
from repudiation. 707 interest over it.
A. CONCEPT: Implied trusts are created by operation of law. (Art. 2. Constructive trust is created, not by any word evincing a
1441) They come into being even in the absence of an express direct intention to create a trust, but by operation of law in
,. intent by the parties to create a trust. order to satisfy the demands of justice and to prevent unjust
enrichment. It is raised by equity in respect of property,
B. PROOF: An implied trust may be proved by .oral evidence. which has been acquired by fraud, or where although
(Art. 1457) This rule applies whether the implied trust. acquired originally without fraud, it is against equity that it
should be retained by the person holding it.
711
concerns movables or immovables.
However, the evidence must be trustworthy and received a. E.g., when a trustee reg'isters the trust property in his
by the courts with extreme caution, and should not be made name by fraud or mistake, there is constructive trust.712
to rest on loose, equivocal or indefinite declarations.708
b. In express or resulting tiust, when the trustee dies, the
trust relations (being personal to the trustee) are
terminated. If the property is retained by the trustee's
705 Palma vs. Cristobal, 77 Phil. 712; Manalang vs. Canlas, 94 Phil. 776; Cristobal vs. Gomez, 50
Phil. 810; Sevilla vs. de los Angeles, 97 Phil. 875; Marabil�s vs. Quito, 100 Phil. 64; Bancairen
vs. Diones, 98 Phil. 122, 126; Juan vs: Zuniga, 62 O.G. 1351; 4 SCRA 1221; Jacinto vs. Jacinto,
L-17957, May 31, 1962. See Tamayo vs. ·callejo, 147 Phil. 31, 37; Canezo v. Rojas, G.R. No.
148788, November 23, 2007. 709 Morales v. CA, G.R. No. 117228, June 19, . 1997, 274 SCRA 282; Aznar Brothers Realty
1oe Diaz vs. Gorricho and Aguado, 103 Phil. 261, 266; Laguna vs. Levantino, 71 Phil. 566; Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
157784, December 16, 2008. '
Sumira vs. Vistan, 74 Phil . .138; Golfeo vs. Court of Appeals, 63 O.G. 4895, 12 SCRA 199;
710 Lopez v. CA, G.R. No. 157784, December 16, 2008.
Caladiao vs. Santos, 63 0.G. 1956, 10 SCRA 691.
101 Diaz v. Gorricho, 54 O.G. p. 8429; Escay v. CA, G.R. No. L-37504, December 18, 1974, 61 711
Morales v. CA, G.R. No. 1 1 7228, June 19, 1997, 274 SCRA 282; Aznar Brothers Realty
SCRA 369, 388; Secuya v. De Selma, G.R. No. 136021, February 22, 2000, 326 SCRA 244, Company v. Aying, G.R. No. 144773, 16 May 2005, 458 SCRA 496; Lopez v. CA, G.R. No.
.
254. 157784, December 16, 2008.
100 Canazo v. Rojas, G.R. No. 148788, November 23, 2007. 712 Lopez v. CA, G.R. No. 157784, December 16, 2008.
260 261
heirs (who actually have no right to do so), a
constructive trust is created.713 b. An action for reconveyance based on constructive trust
prescribes in ten years (Art. l 144[b]), which begins to
c. Constructive trusts are illustrated iu Arts. 1450, 1454, run from the date of registration of the deed or the date
1455 and 145.6 (infra).114 of the issuance of the certificate of title over the
property.7 19 Such registration/ issuance is constructive
D. PRESCRIPTION notice that the registrant claims the property as his.720
I. In Resulting Trusts - the trustee cannot, by prescription, But if the person claiming to be the owner thereof
acquire ownership over the property entrusted to him until is in actual possession of the property, the right to
and unless he repudiates the trust. 715 seek reconveyance, which in effect seeks to quiet
title to the property, does not prescribe.121
This rule is similar to that in express trusts, and is
based on .the principle that the trustee's possession is The one who is in actual possession of the land
not adverse. claiming to be its owner may wait until his
possession is disturbed or his title is attacked
2. In Constructive Trusts - prescription may run or before taking steps to vindicate his right 722
supervene even if the trustee does not repudiate the
relationship.716 c. Note, however, that whether the trust is resnlting or
constructive, its enforcement may be barred by
a. This is because in constructive trust, no fiduciary /aches. 723
relation actually exists and the trustee does not
recognize the trust at all.717 The so-called trustee E. EXAMPLES OF RESULTING TRUSTS: The following
neither accepts any trust nor intends holding the enumeration of examples of resulting trusts is not exhaustive724
property for the beneficiary. The holding of a (Art. 1447) -
constructive trust is for the trustee liirnself, and
therefore, at all times adverse.
118 I. Beneficiary Pays the Purchase Price (also known as
"purchase money resulting trust"125). There is an implied
Companyv. Aying, G.R. No. 144773, May 16, 2005, 458 SCRA496, 508. 12s Morales v. CA, G.R. No. 117228, June 19, 1997.
2. Donee Has no Beneficial Interest. There is also an 2. Conveyance as Security for Obligation. If an absolute
d
implied trust when a donation is made to a pers n but it conveyance of property is ·made in order to secure the
appears that although the legal estate is transmitted to the performance of an obligation of the granter toward the
donee, he nevertheless is either. to have no beneficial grantee, a trnst by virtue of law is established. If the
interest or only a part thereof. (Art. 1449) fulfillment of the obligation is offered by the granter when
it becomes due, he. may demand the reconveyance of the
3 . Inherited Property Titled in Trustee;s Name. When land property to him. (Art. 1454)
passes by succession to any person and he causes the legal
title to be put in the name of another, a trusris established 3 . Purchase Using Trust Funds. When any trustee, guardian
by implication of law for the benefit of the true owner. or other person holding a fiduciary relationship uses trnst
(Art. 1451) funds for the purchase of property and causes the
conveyance to be made to him or to a third person, a trust
4 . Co-purchased PropertyTitled in Trustee's Name. Iftwo
. is established by operation of law in favor of the person to
or more persons agree to purchase property and by whom the funds belong. (Art. 1455)
common consent the legal title is taken in the name of' one
of them for the benefit of all, a trust is created by force of 4. AcquisitiOn Through Mistake or Fraud. If property is
law in favor of the others in proportion to the interest" of acquired through mistake or fraud, the person obtaining it
each. (Art. 1452) is, by force o.f law, considered a trustee of an implied trust
for the benefit of the person from whom the property
5. Property Conveyed to Trustee For Another. When comes. (Art. 1456)
property is conveyed to a person in reliance upon his
declared intention to hold it for, or transfer it to another or
the granter, there is an implied trust in favor of the person
whose benefit is contemplated. (Art. 1453)
264 265
a. Example J : X borrowed the c·ertificate of title from Y,
tricked Y into sig1.1ing a deed of transfer and obtained a
26
transfer certificate ohitle in his (X's) name. 7