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I. EXTINGUISHMENT OF OBLIGATIONS a.

) identity of prestation - the very thing or service due must

PAYMENT OR PERFORMANCE be delivered or released

ART 1232 – “Payment means not only the delivery of money b.) integrity – prestation must be fulfilled completely
but also the performance, in any other manner of an
obligation” • Time of payment – the payment or performance must be
on the date stipulated (may be made even on Sundays or
• It is the fulfillment of the prestation due that extinguishes on any holiday, although some states like the Negotiable
the obligation by the realization of the purposes for which Instruments Law states that payment in such case may be
it was constituted made on the next succeeding business day)
• It is a juridical act which is voluntary, licit and made with • The burden of proving that the obligation has been
the intent to extinguish an obligation extinguished by payment devolves upon the debtor who
• Requisites: offers such a defense to the claim of the plaintiff creditor
• The issuance of a receipt is a consequence of usage and
a.) person who pays good faith which must be observed (although our Code has
no provision on this) and the refusal of the creditor to
issue a receipt without just cause is a ground for
b.) the person to whom payment is made
consignation under Art 1256 ( if a receipt has been issued
by payee, the testimony alone of payer would be
c.) the thing to be paid insufficient to prove alleged payments)

d.) the manner, time and place of payment etc ART 1234 – “If the obligation has been substantially
performed in good faith, the obligor may recover as though
• The paying as well as the one receiving should have the there had been a strict and complete fulfillment, less
requisite capacity damages suffered by the obligee”
• Kinds:
• In order that there may be substantial performance of an
a.) normal –when the debtor voluntarily performs the prestation obligation, there must have been an attempt in good faith
to perform, without any willful or intentional departure
therefrom
stipulated
• The non-performance of a material part of a contract will
prevent the performance from amounting to a substantial
b.)abnormal – when he is forced by means of a judicial compliance
• A party who knowingly and willfully fails to perform his
proceeding either to comply with prestation or to pay contract in any respect, or omits to perform a material part
of it cannot be permitted under the protection of this rule
indemnity to compel the other party to perform; and the trend of the
more recent decisions is to hold that the percentage of
ART 1233 – “A debt shall not be understood to have been omitted or irregular performance may in and of itself be
paid unless the thing or service in which the oligatoin sufficient to show that there has not been a substantial
consists has been completely delivered or rendered, as the performance
case may be” • The party who has substantially performed may enforce
specific performance of the obligation of the other party or
may recover damages for their breach upon an allegation
• States 2 requisites of payment:
of performance, without proof of complete fulfillment.
• The other party, on the other hand, may by an • If the debt has been remitted, paid compensated or
independent action before he is sued, or by a counterclaim prescribed, a payment by a third person would constitute a
after commencement of a suit against him, recover from payment of what is not due; his remedy would be against
the first party the damages which he has sustained by the the person who received the payment under such
latter’s failure to completely fulfill his obligation conditions and not against the debtor who did not benefit
from the payment
ART 1235 – “When the oblige accepts the performance, • payment against debtor’s will – even if payment of the
knowing its incompleteness or irregularity, and without third party is against the will of the debtor, upon payment
expressing any protest or objection, the obligation is by the third party, the obligation between the debtor and
deemed fully complied with” creditor is already extinguished

• A person entering into a contract has a right to insist on its ART 1237. Whoever pays on behalf of the debtor without
performance in all particulars, according to its meaning the knowledge or against the will of the latter, cannot
and spirit. But if he chooses to waive any of the terms compel the creditor to subrogate him in his rights, such as
introduced for his own benefit, he may do so. those arising from a mortgage, guaranty or penalty
• But he is not obliged to accept anything else in place of
that which he has contracted for and if he does not waive • This article gives to the third person who paid only a
this right, the other party cannot recover against him simple personal action for reimbursement, without the
without performing all the stipulations on is part securities, guaranties and other rights recognized in the
• To constitute a waiver, there must be an intentional creditor, which are extinguished by the payment
relinquishment of a known right. A waiver will not result
from a mere failure to assert a claim for defective ART 1238. Payment made by a third person who does not
performance/payment. There must have been acceptance intend to be reimbursed by the debtor is deemed to be a
of the defective performance with actual knowledge if the donation, which requires the debtor’s consent/ but the
incompleteness or defect, under circumstances that would payment is in any case valid as to the creditor who has
indicate an intention to consider the performance as accepted it
complete and renounce any claim arising from the defect
• A creditor cannot object because of defects in performance ART 1239. In obligations to give, payment made by one who
resulting from his own acts or directions does not have the free disposal of the thing due and
capacity to alienate it shall not be valied, without prejudice
ART 1236. The creditor is not bound to accept payment or to the provisions of article 1427 under the Title on “Natural
performance by a third person who has no interest in the Obligations”
fulfillment of the obligation, unless there is a stipulation to
the contrary. Whoever pays for another may demand from • consignation will not be proper here. In case the creditor
the debtor what he has paid, except that if he paid without accepts the payment, the payment will not be valid except
the knowledge or against the will of the debtor, he can in the case provided in article 1427
recover only insofar as the payment has been beneficial to
the debtor
ART 1240. Payment shall be made to the person in whose
favor the obligation has been constituted, or his successor
• Reason for this article: whenever a third person pays there in interest, or any person authorized to receive it
is a modification of the prestation that is due.
• Generally, the 3rd person who paid another’s debt is
• the authority of a person to receive payment for the
entitled to recover the full amount he paid. The law,
creditor may be
however limits his recovery to the amount by which the
debtor has been benefited, if the debtor has no knowledge
of, or has expressed his opposition to such payment a.) legal – conferred by law (e.g.,guardian of the incapacitated,
administrator of the estate of the deceased)
b.) conventional – when the authority has been given by the a.) when, without notice of the assignment of credit, he pays to
creditor himself (e.g., agent who is appointed to collect from the the original creditor
debtor
b.) when in good faith he pays to one in possession of the credit
• payment made by the debtor to a wrong party does not
extinguish the obligation as to the creditor (void), if there • even when the creditor receives no benefit from the
is no fault or negligence which can be imputed to the latter payment to a third person, he cannot demand payment
(even when the debtor acted in utmost good faith, or anew, if the mistake of the debtor was due to the fault of
through error induced by the fraud of the 3rd person). It the creditor
does not prejudice the creditor and the accrual of interest
is not suspended by it
Art. 1242. Payment made in good faith to any person in
possession of the credit shall release the debtor. (1164)
Art. 1241. Payment to a person who is incapacitated to
administer his property shall be valid if he has kept the
thing delivered, or insofar as the payment has been • the person in possession of the credit is neither the
beneficial to him. Payment made to a third person shall also creditor nor one authorized by him to receive payment, but
be valid insofar as it has redounded to the benefit of the appears under the circumstances of the case, to be the
creditor. Such benefit to the creditor need not be proved in creditor. He appears to be the owner of the credit,
the following cases: although in reality, he may not be the owner (e.g., an heir
who enters upon the hereditary estate and collects the
credits thereof, but who is later deprived of the inheritance
(1) If after the payment, the third person acquires the
because of incapacity to succeed)
creditor's rights;
• it is necessary not only that the possession of the credit be
legal, but also that the payment be in good faith
(2) If the creditor ratifies the payment to the third person;

Art. 1243. Payment made to the creditor by the debtor after


(3) If by the creditor's conduct, the debtor has been led to the latter has been judicially ordered to retain the debt shall
believe that the third person had authority to receive the not be valid. (1165)
payment. (1163a)

• the payment to the creditor after the credit has been


• payment shall be considered as having benefited the
attached or garnished is void as to the party who obtained
incapacitated person if he made an intelligent and the attachment or garnishment, to the extent of the
reasonable use thereof, for purposes necessary or useful to amount of the judgment in his favor.
him, such as that which his legal representative would
• The debtor upon whom garnishment order is served can
have or could have done under similar circumstances, even
always deposit the money in court by way of consignation
if at the time of the complaint the effect of such use no
and thus relieve himself from further liability
longer exists (e.g., taxes on creditor’s property, money to
extinguish a mortgage on creditor’s property)
• the debtor is not released from liability by a payment to Art. 1244. The debtor of a thing cannot compel the creditor
one who is not the creditor nor one authorized to receive to receive a different one, although the latter may be of the
the payment, even if the debtor believed in good faith that same value as, or more valuable than that which is due. In
he is the creditor, except to the extent that the payment obligations to do or not to do, an act or forbearance cannot
inured to the benefit of the creditor be substituted by another act or forbearance against the
obligee's will. (1166a)
• in addition to those mentioned above, payment to a third
person releases the debtor:
• Upon agreement of consent of the creditor, the debtor may
deliver a different thing or perform a different prestation in
lieu of that stipulated. In this case there may be dation in • Art. 1248. Unless there is an express stipulation to that
payment or novation effect, the creditor cannot be compelled partially to receive
• The defects of the thing delivered may be waived by the the prestations in which the obligation consists. Neither
creditor, if he expressly so declares or if, with knowledge may the debtor be required to make partial payments.
thereof, he accepts the thing without protest or disposes of • However, when the debt is in part liquidated and in part
it or consumes it unliquidated, the creditor may demand and the debtor may
effect the payment of the former without waiting for the
Art. 1245. Dation in payment, whereby property is alienated liquidation of the latter. (1169a)
to the creditor in satisfaction of a debt in money, shall be • The creditor who refuses to accept partial prestations does
governed by the law of sales. (n) not incur delay except when there is abuse of right or if
good faith requires acceptance
• This is the delivery and transmission of ownership of a • This article does not apply to obligations where there are
thing by the debtor to the creditor as an accepted several subjects or where the various parties are bound
equivalent of the performance of the obligation. under different terms and conditions
• The property given may consist not only of a thing but also
of a real right (such as a usufruct) Art. 1249. The payment of debts in money shall be made in
• Considered as a novation by change of the object the currency stipulated, and if it is not possible to deliver
• Where the debt is money, the law on sale shall govern; in such currency, then in the currency which is legal tender in
the Philippines. The delivery of promissory notes payable to
this case, the act is deemed to be a sale with the amount
order, or bills of exchange or other mercantile documents
of the obligation to the extent that it is extinguished being
shall produce the effect of payment only when they have
considered as price
been cashed, or when through the fault of the creditor they
have been impaired.
Art. 1246. When the obligation consists in the delivery of an
indeterminate or generic thing, whose quality and
In the meantime, the action derived from the original
circumstances have not been stated, the creditor cannot
obligation shall be held in the abeyance. (1170)
demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the
obligation and other circumstances shall be taken into • legal tender means such currency which in a given
consideration. (1167a) jurisdiction can be used for the payment of debts, public
and private, and which cannot be refused by the creditor
• If there is disagreement between the debtor and the • so long as the notes were legal tender at the time they
creditor as to the quality of the thing delivered, the court were paid or delivered, the person accepting them must
should decide whether it complies with the obligation, suffer the loss if thereafter they became valueless
taking into consideration the purpose and other • the provisions of the present article have been modified by
circumstances of the obligation RA No. 529 which states that payments of all monetary
• Both the creditor and the debtor may waive the benefit of obligations should now be made in currency which is legal
this article tender in the Phils. A stipulation providing payment in a
foreign currency is null and void but it does not invalidate
the entire contract
Art. 1247. Unless it is otherwise stipulated, the extrajudicial
• A check, whether a manager’s check or an ordinary check
expenses required by the payment shall be for the account
of the debtor. With regard to judicial costs, the Rules of is not legal tender and an offer of the check in payment of
Court shall govern. (1168a) debt is not a valid tender of payment

Art. 1250. In case an extraordinary inflation or deflation of


• This is because the payment is the debtor’s duty and it
the currency stipulated should supervene, the value of the
inures to his benefit in that he is discharged from the
currency at the time of the establishment of the obligation
burden of the obligation
shall be the basis of payment, unless there is an agreement benefit the term has been constituted, application shall not
to the contrary. (n) be made as to debts which are not yet due.

• Applies only where a contract or agreement is involved. It If the debtor accepts from the creditor a receipt in which an
does not apply where the obligation to pay arises from law, application of the payment is made, the former cannot
independent of contracts complain of the same, unless there is a cause for
• Extraordinary inflation of deflation may be said to be that invalidating the contract. (1172a)
which is unusual or beyond the common fluctuations in the
value of the currency, which parties could not have • It is necessary that the obligations must all be due. It is
reasonably foreseen or which was manifestly beyond their only in case of mutual agreement of the parties or upon
contemplation at the time when the obligation was the consent of the party in whose favor the term was
constituted established that payments may be applied to obligations
which have not yet matured
Art. 1251. Payment shall be made in the place designated in • It is also necessary that all the debts be for the same kind,
the obligation. There being no express stipulation and if the generally of a monetary character. This includes obligations
undertaking is to deliver a determinate thing, the payment which were not originally of a monetary character, but at
shall be made wherever the thing might be at the moment the time of application of payment, had been converted
the obligation was constituted. In any other case the place into an obligation to pay damages by reason of breach or
of payment shall be the domicile of the debtor. nonperformance.
• If the debtor makes a proper application of payment but
• If the debtor changes his domicile in bad faith or after he the creditor refuses to accept it because he wants to apply
has incurred in delay, the additional expenses shall be it to another debt, such creditor will incur in delay
borne by him. These provisions are without prejudice to • If at the time of payment, the debtor does not exercise his
venue under the Rules of Court.(1171a) right to apply it to any of his debts, the application shall be
• Since the law fixes the place of payment at the domicile of understood as provided by law, unless the creditor makes
the debtor, it is the duty of the creditor to go there and the application and his decision is accepted by the debtor.
receive payment; he should bear the expenses in this case This application of payment can be made by the creditor
because the debtor cannot be made to shoulder the only in the receipt issued at the time of payment (although
expenses which the creditor incurs in performing a duty the application made by creditor may be contested by the
imposed by law and which is for his benefit. debtor if the latter’s assent to such application was vitiated
• But if the debtor changes his domicile in bad faith or after by such causes as mistake, violence, intimidation, fraud,
etc)
he has incurred in delay, then the additional expenses shall
be borne by him • The debtor and the creditor by agreement, can validly
• When the debtor has been required to remit money to the change the application of payment already made without
prejudice to the rights of third persons acquired before
creditor, the latter bears the risks and the expenses of the
such agreement
transmission. In cases however where the debtor chooses
this means of payment, he bears the risk of loss.
Art. 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until the
APPLICATION OF PAYMENTS
interests have been covered. (1173)

Art. 1252. He who has various debts of the same kind in


favor of one and the same creditor, may declare at the time • Applies both to compensatory interest (that stipulated as
of making the payment, to which of them the same must be earnings of the amount due under the obligation) and to
applied. Unless the parties so stipulate, or when the interest due because of delay or mora on the part of the
application of payment is made by the party for whose debtor
Art. 1254. When the payment cannot be applied in (2) When he is incapacitated to receive the payment at the
accordance with the preceding rules, or if application can time it is due;
not be inferred from other circumstances, the debt which is
most onerous to the debtor, among those due, shall be (3) When, without just cause, he refuses to give a receipt;
deemed to have been satisfied. If the debts due are of the
same nature and burden, the payment shall be applied to all
(4) When two or more persons claim the same right to
of them proportionately. (1174a)
collect;

• As to which of 2 debts is more onerous is fundamentally a


(5) When the title of the obligation has been lost. (1176a)
question of fact, which courts must determine on the basis
of the circumstances of each case
• Example: • Tender of payment : manifestation made by the debtor
to the creditor of his desire to comply with his obligation,
with the offer of immediate performance; preparatory act
PAYMENT BY CESSION which precedes consignation
• Consignation : the deposit of the object of the obligation
Art. 1255. The debtor may cede or assign his property to his in a competent court in accordance with the rules
creditors in payment of his debts. This cession, unless there prescribed by law, after the tender of payment has been
is stipulation to the contrary, shall only release the debtor refused or because of circumstances which render direct
from responsibility for the net proceeds of the thing payment to creditor impossible or inadvisable; constitutes
assigned. The agreements which, on the effect of the payment; must follow, supplement or complete the tender
cession, are made between the debtor and his creditors of payment in order to discharge the obligation
shall be governed by special laws. (1175a) • Tender of payment by certified check is valid; a mere
check would also be valid for tender of payment if the
• Consists of the abandonment of the universality of the creditor makes no prompt objection, but this does not
property of the debtor for the benefit of his creditors in estop the latter from later demanding payment in cash
order that such property may be applied to the payment of • When a tender of payment is made in such a form that the
the credits creditor could have immediately realized payment if he had
• Must be initiated by debtors accepted the tender, followed by a prompt attempt of the
• Such assignment does not have the effect of making the debtor to deposit the means of payment in court by way of
creditors the owners of the property of the debtor unless consignation, the accrual of interest on the obligation will
there is an agreement to that effect be suspended from the date of such tender. But when the
tender of payment is not accompanied by the means of
payment, and the debtor did not take any immediate step
TENDER OF PAYMENT AND CONSIGNATION
to make a consignation, then the interest is not suspended
from the time of such tender.
Art. 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the • Requisites of consignation:
consignation of the thing or sum due.
1.) There was a debt due
Consignation alone shall produce the same effect in the
following cases: 2.) The consignation of the obligation was made because of

(1) When the creditor is absent or unknown, or does not some legal cause provided in the present article
appear at the place of payment;
3.) That previous notice of the consignation has been given to
persons interested in the performance of the obligation Art. 1258. Consignation shall be made by depositing the
things due at the disposal of judicial authority, before
4.) The amount or thing due was placed at the disposal of the whom the tender of payment shall be proved, in a proper
case, and the announcement of the consignation in other
cases.
court

The consignation having been made, the interested parties


5.) After the consignation had been made the persons interested
shall also be notified thereof. (1178)

were not notified thereof


Art. 1259. The expenses of consignation, when properly
made, shall be charged against the creditor. (1179)
• If the reason for consignation is the unjust refusal of the
creditor to accept payment, it must be shown: • The consignation is properly made when:

1.) That there was previous tender of payment, without which the
1.) after the thing has been deposited in court, the creditor
accepts the consignation without objection and without any
consignation is ineffective reservation of his right to contest it because of failure to comply
with any of the requisites for consignation and
2.) That the tender of payment was of the very thing due, or in
2.) when the creditor objects to the consignation but the court,
case of money obligations that legal tender currency was after proper hearing, declares that the consignation has been
validly made *in these cases, the creditor bears the expenses of
offered the consignation

3.) That the tender of payment was unconditional and Art. 1260. Once the consignation has been duly made, the
debtor may ask the judge to order the cancellation of the
obligation. Before the creditor has accepted the
4.) That the creditor refused to accept payment without just consignation, or before a judicial declaration that the
consignation has been properly made, the debtor may
cause withdraw the thing or the sum deposited, allowing the
obligation to remain in force. (1180)
Art. 1257. In order that the consignation of the thing due
may release the obligor, it must first be announced to the • Consignation has a retroactive effect and the payment is
persons interested in the fulfillment of the obligation. The deemed to have been made at the time of the deposit of
consignation shall be ineffectual if it is not made strictly in the thing in court or when it was placed at the disposal of
consonance with the provisions which regulate payment. the judicial authority
(1177) • The effects of consignation are: 1.) the debtor is released
in the same manner as if he had performed the obligation
• The lack of notice does not invalidate the consignation but at the time of the consignation because this produces the
simply makes the debtor liable for the expenses same effect as a valid payment, 2.) the accrual of interest
• The tender of payment and the notice of consignation sent on the obligation is suspended from the moment of
to the creditor may be made in the same act. In case of consignation, 3.) the deteriorations or loss of the thing or
absent or unknown creditors, the notice may be made by amount consigned occurring without fault of the debtor
publication must be borne by the creditor, because the risks of the
thing are transferred to the creditor from the moment of
deposit 4.) any increment or increase in value of the thing On August 4 1952, PNB informed appellant NARIC that its
after the consignation inures to the benefit of the creditor. application for LOC has been approved with the condition that 50%
• When the amount consigned does not cover the entire marginal cash deposit be paid and that drafts are to be paid upon
obligation, the creditor may accept it, reserving his right to presentment. However, NARIC is not in any financial position to
the balance. If no reservations are made, the acceptance meet the condition. Consequently, the credit instrument applied for
by the creditor of the amount consigned may be regarded was opened only on September 8 1952 (more than 2 mos from the
as a waiver of further claims under the contract execution of the contract – after the 15 day grace period). As a
result of the delay, the allocation of appllee’s supplier in Rangoon
was cancelled and the 5% deposit or P200K was forfeited.
Art. 1261. If, the consignation having been made, the
creditor should authorize the debtor to withdraw the same,
he shall lose every preference which he may have over the ISSUE: WON NARIC is liable to pay plaintiff damages
thing. The co-debtors, guarantors and sureties shall be
released. (1181a) HELD:

• When the consignation has already been made and the What singularly delayed the opening the stipulated LOC which in
creditor has accepted it or it has been judicially declared as turn, caused the cancellation of the allocation in Burma (and the
proper, the debtor cannot withdraw the thing or amount forfeiture of the 5% deposit) was the inability of the appellant
deposited unless the creditor consents thereto. If the corporation to meet the condition imposed by the Bank for
creditor authorizes the debtor to withdraw the same, there granting the same. Also, its culpability arises from its willful and
is a revival of the obligation, which has already been deliberate assumption of contractual obligations even as it was well
extinguished by the consignation, and the relationship of aware of its financial incapacity to undertake the prestation
debtor and creditor is restored to the condition in which it (manifested in its letter of application with PNB) Article 1170
was before the consignation. But third persons, solidary provides that those who in the performance of their obligations are
co-debtors, guarantors and sureties who are benefited by guilty of fraud, negligence, or delay and those who in any manner
the consignation are not prejudiced by the revival of the contravene the tenor thereof are liable for damages.
obligation between the debtor and the creditor
*In view of RA 527 which specifically requires the discharge of
CASES obligations only “in any coun or currency which at the time of
payment is legal tender for public and private debt”, the award of
ARRIETA v NATIONAL RICE AND CORN CORP (NARIC) damages in US dollars made by the lower court is modified by
converting it into Philippine pesos at the rate of exchange
prevailing at the time the obligation was incurred or when the
Plaintiff participated in a public bidding called by NARIC for the contract in question was executed.
supply of 20k metric tons of Burmese rice and was awarded the
contract. Subsequently, plaintiff and NARIC entered into a Contract
of Sale of Rice (in which the defendant in turn would commit itself KALALO v LUZ
to pay by means of a letter of credit in US currency in favor of the
plaintiff and/or supplier in Burma. Despite its commitment to pay On November 17 1959, plaintiff-appellee Octavio Kalalo, a licensed
immediately, the defendant took the first step to open the letter of civil engineer entered into an agreement with defendant-appellant
credit one month after the execution of the contract (July 30 Alfredo Luz, a licensed architect whereby the former was to render
1952). It was stated in the application (for the LOC) that they do engineering design services to the latter for fees, as stipulated in
not have a sufficient deposit with PNB to cover the amount the agreement, Kalalo sent to Luz a statement of account to which
required as a condition for the opening of LOC and they were was attached an itemized statement of architect’s account
asking to be treated as a special case in consideration to the fact according to which the total engineering fee asked by engineer
that its supplier has a deadline to meet which is on August 4, amounted to P116,565 from which sum was to be deducted the
1952. previous payments made in the amount of P57K. Luz then sent a
resume of fees to Kalalo (May 18 1962). Said fees, according to
appellant amounted to P10,861.08 instead of the amount claimed
by appellee. On June 14 1962, appellant sent appellee a check for NEW PACIFIC TIMBER & SUPPLY CO INC v SENERIS
said amount which appellee refused to accept as full payment of
the balance of the fees due him. Petitioner is the defendant in a complaint for collection of money
filed by the private respondent. Subsequently, a compromise
Luz contends that some of Kalalo’s services were not in accordance judgment was rendered in accordance with an amicable settlement
with the agreement and his claims were not justified by the entered into by the parties. However, petitioner failed to comply
services actually rendered. Luz also claims that the statement of with his obligation. Because of this, the respondent judge, upon
account given to him by Kalalo barred the latter from asserting any motion of private respondent, issued an order for the issuance of a
claim contrary to what was stated therein. On the other hand, writ of execution for the amount of P63,130. Pursuant to that,
Kalalo asserts that when he prepared the said statement of personal properties of petitioner were also levied upon and set for
account, he was laboring an innocent mistake. Second, Luz was auction sale. Prior to the day of the auction sale, petitioner
aware of the services actually rendered by Kalalo and the fees due deposited with the Clerk of Court the sum of P63,130 consisting of
to the latter under the original agreement and third, appellant did P50k in Cashier’s check and P13,130 in cash. Respondent judge
not rely on the data appearing in the said statement of account declined petitioner’s motion for issuance of certificate of
satisfaction of judgment, relying on Sec 63 of the Central Bank Act
ISSUES: stating that checks representing deposit money do not have legal
tender power
1.) WON Kalalo is barred from soliciting a fee different than that
indicated in the statement of account by means of estoppel (no) ISSUE: WON petitioner’s check payment was a valid tender so as
to extinguish his obligation with the private respondent
2.) WON the lower court erred in holding that the balance from
LUZ on the IRRI project should be paid on the basis of the rate of HELD: SC ordered private respondent to accept the sum of
exchange of the US dollar to the Phil peso at the time of payment P63,130 under deposit as payment of the judgment obligation in
of the judgment (no) his favor

HELD: Court affirmed decision of the lower court stating that the RATIO: Since the check deposited had been certified by the drawee
amount due to Kalalo was $28k as his fee in IRRI Institute Project bank, by the certification, the funds represented by the check are
(to be converted into Phil peso on the basis of the current rate of transferred from the credit of the maker to that of the payee (the
exchange at the time of the payment of the judgment latter becomes the depositor of the drawee bank with rights and
duties of one in such situation). The object of certifying a check, as
regards both parties is to enable the holder to use it as money.
RATIO:

MCLAUGHLIN v CA
1.) Estoppel did not rise in this case because the act of the party
sought to be estopped is due to ignorance founded on innocent
mistake. Also, none of the elements in relation to party claiming Petitioner Mclaughlin and respondent Flores entered into a contract
estoppel are present (elements: 1.) lack of knowledge to the facts of conditional sale of real property. The contract fixed the total
in question, 2.) reliance in good faith upon the conduct or price of the property to P140K payable as follows: a.) 26,550 upon
statements of the party to be estopped 3.) action or inaction based execution of the deed and b.) 113,450 due not later than May 31
thereon 1977. for failure of private respondent to pay the balance due on
May 31, 1977, petitioner filed a complaint for the rescission of the
deed of conditional sale. Subsequently, the parties entered a
2.) RA 529 (requiring payment in foreign currency must be
compromise agreement stating that the indebtedness of private
discharged in Phil currency) does not provide for the rate of
respondent to petitioner amounts to P119,050.71 payable as
exchange for the payment of obligation incurred after the
follows: a.) 50k upon the signing of agreement and b.) 69k+ in 2
enactment of said Act. The logical conclusion is that the rate of
equal installments (one on June and one on December). As agreed
exchange should be that prevailing at the time of payment for such
upon, private respondent paid P50k upon signing the agreement
contracts.
Pursuant to the compromise agreement also, private respondent
agreed to pay P1k monthly rental beginning December 5 1979 another case in RTC Caloocan amounting to P442,750 had been
until the obligation is duly paid. The compromise agreement also garnished. The RTC rendered its decision in favor of plaintiff Tan
stipulates that in the event the private respondent fails to comply ordering the Tibajia spouses to pay her P300K. Eden Tan filed the
with his obligation, plaintiff will be entitled to rescission of the correspondeing motion for execution and the garnished funds at
contract. RTC were levied upon. The Tibajia spouses then delivered to the
deputy sheriff the total money judgment in the ff form: P262k+ in
Petitioner filed a motion for rescission alleging that private cashier’s check and P135k+ in cash. Private respondent Tan
respondent failed to pay the installment due on June 1980 and refused to accept the payment made by the Tibajia spouses and
since June 1980 he had failed to pay a monthly rental of P1k.TC instead insisted that the garnished funds at RTC be withdrawn to
granted the motion. On Nov 1980, private respondent filed a satisfy the judgment obligation.
motion for reconsideration tendering at the same time a Pacific
banking Corp certified manager’s check worth P76,059.71. CA ISSUE: WON the BPI cashier’s check (P262k+) tendered by
nullified orders of the TC petitioners for payment of the judgment debt is legal tender

ISSUES: HELD: Pursuant to RA 529, a check is not legal tender and a


creditor may validly refuse payment by check whether it be a
WON private respondent’s default in payment constitutes a manager’s cashier’s or personal check.
substantial breach of the contract so as to warrant its rescission
(no) ESGUERRA v VILLANUEVA

WON private responden’ts offer of payment by certified check is a Petitioner Esguerra and respondent de Guzman entered into a
valid tender (yes) contract whereby Esguerra leased to de Guzman a portion of his
building for a term of 10 years beginning from July 12 1961 for a
HELD: decision of CA was affirmed. However, since private monthly rental of P300 up to July 11 1962 and P400 thereafter. De
respondent did not deposit said amount with the court, his Guzman failed to pay the rental from February to August 1962
obligation was not paid and he is liable in addition for the payment aggregating P1800, in addition to the sum of P300 (purchase price
of the monthly rental of P1k from Jan 1,1981 until said obligation of equipment bought by him from the Esguerras. Because of this,
is duly paid respondent’s mother, Segunda de Guzman executed in favor of the
esguerras a promissory note for P2,100 (P1000 due on August 12
1962 and P1100 not later than Augus 31 1962, upon default of the
RATIO: Since private respondent as purchaser by installment has
first installment, the entire value becomes due and demandable).
already paid a substantial portion of the purchase price, it would
De Guzman failed to pay both installmnents so the Esguerras
be inequitable to have the amount paid forfeited as liquidated
commenced a civil case against Mrs. De Guzman. They also
damages (as stipulated in the contract), particularly if tender of
instituted a civil case against de Guzman and writs of attachment
payment was made. Also, private respondent’s tender of payment
were issued. Thereafter, the parties reached a compromise
of the amount of P76,059.71 was within the 30-day period granted
agreement wherein defendants admit their indebtedness worth
by law (RA 6552 – a lot installment buyer is given a grace period
P2,260 . This sum was not paid to the Esguerras on or before
to pay installments in arrears)
November 26 1962 as stipulated in the compromise agreement. De
Guzman however alleges that he had delivered to Esguerra
Also, the offer of payment by certified check is a valid tender of through his counsel P800 on December 1962 and P1460 on
payment. January 5 1963 so he filed a motion for the release of the
properties seized. De Guzman maintain and the lower court held
TIBAJIA JR v CA that the receipt of said sums P800 and P1400 by the Esguerras
constituted “acceptance” of the incomplete and irregular
A suit for collection of a sum of money was filed by Eden Tan performance of their obligation, having been made without any
against the Tibajia spouses. A writ of attachment was issued by protest or objection.
the trial court on the deposit made by the Tibajia spouses in
ISSUE: WON Esguerra’s issuance of receipt constituted acceptance (redemption case) against BPI) for refusing to allow them to
so as to release de Guzman from completing his obligation (no) redeem all 3 lots and praying that BPI be ordered to allow the
Tolentinos to redeem their properties and to accept the payment
HELD: decision of lower court was reversed consigned by them. Upon appeal, CA stated that the manner of the
tender of payment made by them through consignation by crossed
check does not satisfy the requirement that payment of debts in
RATIO: The day immediately following the first payment of P800,
money should be made in the currency stipulated
the Esguerras asked Judge Villanueva to issue the corresponding
writs of execution in the 2 cases. Thus, the Esguerras patently
manifested their dissatisfaction with – which necessarily implied an ISSUE: WON BPI was legally justified in refusing the Tolentinos’
objection or protest to- said partial payment demand to be allowed to redeem the lands in question

*the law does not require the protest or objection of the creditor to HELD: The right of redemption is not an obligation but an absolute
be made in a particular manner or at a particular time. So long as privilege. A bona fide tender of the redemption price and formal
the acts of the creditor at the time of the incomplete or irregular offer to redeem is not essential where the redemption is being
payment by the debtor, or within a reasonable time thereafter, exercised by way of judicial action. A redemption is not rendered
evince that the former is not satisfied with or agreeable to said invalid by the fact that the sheriff accepted check rather than cash.
payment or performance, the obligation shall not be deemed fully The exercise of this right being optional no importance can be
extinguished. attached to the fact that a stop payment order was issued against
the check.
TOLENTINO v CA
FILINVEST CREDIT CORP v PHIL ACETYLENE CO INC
Ceferino dela Cruz died and left his heirs a parcel of land. The dela
Cruzes sold the homestead land to the Tolentino spouses. The Philippine Acetylene Co. Inc purchased from Alexander Lim a
Tolentino spouses constituted a mortgage over the land together motor vehicle. As security for the payment, the appellant executed
with 2 other parcels of land in favor of BPI for a loan of P40k. a chattel mortgage over the same motor vehicle in favor of Lim
Another mortgage was constituted over the said properties in favor Subsequently, Lim assigned to Filinvest all his rights, title and
of BPI. The Tolentinos failed to pay their mortgage indebtedness to interest in the promissory note and chattel mortgage. Appellant
BPI upon maturity. So a judicial foreclosure sale was held wherein failed to comply with the terms and conditions set forth in the
BPI was the highest bidder. Meanwhile, on February 4, 1967, the promissory note since it had defaulted in the payment of 9
dela Cruzes filed an action against the Tolentinos for the successive installments. Appelee sent a demand letter demanding
repurchase of the homestead land on the ground that they tried to that appellant either remit the aforesaid amount in full or return
repurchase said land extrajudicially but the Tolentinos would not the mortgaged property. Replying thereto, appellant wrote back
heed their request. The lower court rendered a decision allowing advising appellee of its decision to return the mortgaged property.
the dela Cruzes to repurchase the land and the possession thereof Accordingly, the mortgaged vehicle was returned. Appellee
was delivered to the dela Cruzes upon payment. When Tolentino informed appellant that the former cannot sell the vehicle as there
went to BPI to redeem the homestead property, she was informed were unpaid taxes so he offered to deliver back the motor to the
that she can no longer do so because the property was already appellant but the latter refused to accept it. CFI and CA adjudged
conveyed to the dela Cruzes. The branch manager of BPI sent a that the appellant (Phil Acetylene) should accept back the motor
letter to Tolentino stating that they can stil redeem the 2 other vehicle.
properties before the expiration of the redemption period upon
payment of the balance remaining (P75,995.07). However, instead ISSUE: WON the mere return of the motor vehicle by appellant
of complyinh with BPI’s advice Tolentino consigned with the Office extinguished his obligation for the unpaid price
of the City Sheriff a crozzed PNB check for P91,995.07. However,
she then issued a stop payment order against the said crossed HELD: Judgment of CA was affirmed
check to protect her rights and prevent BPI from cashing said
check without returning all her properties. Simultaneously with the
RATIO: Mere delivery of mortgaged motor vehicle by mortgagor
consignation of the crossed check, she also filed a complaint
does not mean transfer of ownership to mortgagee without his
consent under the principle of dacion en pago. What is transferred payment was refused although it may serve to indicate the
is merely possession of the property. The evidence on record fails veracity of the desire to comply with the obligation.
to show that the mortgagee, the herein appellee, consented or at
least intended that the mere delivery to and acceptance by him of Doctrine:
the mortgaged motor vehicle be construed as actual payment,
more specifically dation in payment. In the absence of clear
In a sale with pacto de retro a showing that a valid tender
consent of appellee to the proferred special mode of payment,
of payment was made within the period allowed for
there can be mo transfer of ownership of the mortgaged motor
repurchase is sufficient consignation after the tender was
vehicle from appellant to appellee.
refused is not necessary.

LEGASPI v CA
HAHN v CA

(father vs. son-in-law)


(Diamonds are a girl’s bestfriend)

Nature: Action for reconveyance of properties pursuant to a sale


Nature: Action for recovery of two diamond rings or their value.
with pacto de retro

Facts:
Facts:

Santos received two diamond rings with a total value of Php47,000


Bernardo B. Legaspi is the registered owner of two parcels of land
in 1966 from the petitioner. The rings were delivered to her for
which he sold to his son-in-law, Leonardo B. Salcedo on October
sale on commission and that they would be returned upon demand
15, 1965 for the sum of Php25,000 with the right to repurchase
if unsold. The rings were not sold nor were they returned when
the same within 5 years from the execution of the deed of
demanded by Hahn.
sale. Before the expiry date of the repurchase period Legaspi
offered and tendered to Salcedo the amount of Php25,000 for the
repurchase of the two parcels of land; that the tender of payment Issue: WON an offer of payment on installment made by Santos
was refused by Salcedo on the ground that the repurchase price can be validly rejected?
should have been Php42,250 due to extraordinary
inflation. Salcedo, furthermore; refused to convey the property to Held: Yes. Petitioner can validly reject he offer to pay for the rings
Legaspi. As a result of his refusal, Legaspi consigned with the CFI on installment because Hahn was entitled to payment in full. If
of Cavite the amount of Php25,000. such payment could not be made she is obligated to return the
rings. According to Article 1233 of the Civil Code, “a debt shall not
Issue: WON the prior offer and tender of payment of the amount be understood to have been paid unless the thing or service in
of Php25,000 is valid as to warrant reconveyance of the parcels of which the obligation consists has been completely delivered or
land rendered as the case may be.”

Held: YES. Legaspi offered and tendered the amount to Salcedo As for the private respondent’s offer to return the solitaire ring,
within the five year period that he is allowed to repurchase the which was also refused, the pertinent rule is Article 1244,
property. The court held that the argument of Salcedo in refusing providing that “the debtor of a thing cannot compel the creditor to
the payment of Legaspi within the period allowed for him to receive a different one, although the latter may be of the same
repurchase the property is untenable. The case involves the value as, or more valuable than that which is due.” More so in this
exercise of the right to repurchase and a showing that petitioner case where the ring offered ws less valuable than that which is
made a valid tender of payment is sufficient. It is enough that a due.
sincere or genuine tender of payment and not a mock and
deceptive one was made. The fact that he deposited the amount to BARITUA v CA
the clerk of court is merely a security for the petitioner is was not
an essential act that had to be performed after the tender of
(Estranged wife benefits from dead hubby) obligation with Alicia as the widow of Bienvinido and as the natural
guardian of their lone child.
Nature: Complaint for damages.
Neither can respondents seek relief and compensation from the
Facts: petitioners as creditors of Bienvinido. The said purchase price of
the tricycle and the funeral expenses are but money claims against
the estate of their son.
Bienvinido Nacario, tricycle driver, was driving along the national
Highway in Camarines Sur when he met an accident with a bus
driven by petitioner Bitancor and owned and operated by petitioner Doctrine: Mere estrangement is not a legal ground for the
Jose Baritua. Nacario and his passenger died and the tricycle was disqualification of a surviving spouse as an heir of the deceased
damaged. No criminal case arising from the incident was ever spouse.
instituted.
AQUINO v CA
Subsequently, as a consequence of the extra-judicial settlement of
the matter negotiated by the petitioners and the bus insurer Nature: Criminal Case for Illegal Recruitment
Phlippine First Insurance Company (PFICI)—Bienvinido Nacario’s
widow, Alicia received P18500. In consideration of the amount she Facts:
executed a “Release of Claim” in favor of the petitioners and PFICI
releasing and forever discharging them from all actions, claims,
Rodrigo Nicolas, Braulio Sapitula, Aurelio Costales and Benito
and demands arising from the accident. She likewise executed an
Vertudez filed the instanct case against Aurora Aquino for illegal
affidavit of desistance in which she formally manifested her lack of
recruitment.
interest in instituting any case, either civil or criminal against
petitioners.
Rodrigo Nicolasa laborer applied at Aquino’s travel agency for the
position of carpenter. As part of his application he paid the amount
A year and ten months after the accident the parents of Nacario,
of Php1500, of which Php1000 was refunded directly to him by
filed a complaint for damages against the petitioners. They alleged
defendant and the balance of Php500 was included in0 0an alleged
that petitioners failed to fulfill their promise that as extra-judicial
“group refund check” for Php5720 which could not be cashed for
settlement, they shall be indemnified for the death of their son and
lack of funds.
for the damage to the tricycle the purchase price of which they
only loaned to the victim.
Braulio Sapitula on the other hand is also a farmer who likewise
applied for the position of carpenter. He also paid the amount of
Issue: WON, the parents of the victim can sue for damages
Php1500 for his application.
notwithstanding the release of claim and affidavit of desistance
executed by the victim’s wife.
Aurelio Costales likewise applied for a job in Guam and also paid
Php1500. Diappointed for not being able to go to Guam he asked
Held: NO. Obligations are extinguished by various modes among
for a refund. He as paid Php700 and the remaining balance was
them by payment. There is no denying that the petitioner had paid
part of the alleged “group refund check” for Php5270 issued by
their obligation arising from the accident. The only question now is
appellant.
whether or not Alicia, the surviving spouse and the one who
received the petitioner’s payment is entitled to it. Article 1240 of
the civil code enumerates the persons to whom payment to Benito Vertudez also applied for a job in Guam. He was able to
extinguish an obligation should be made. The enumeration in advance the amount of Php1070 the refund of which was also part
Article 1240 includes a successor in interest as the person of the alleged group refund check.
authorized to receive payment. It is patently clear from a reading
of Articles 1240 and 884 that the parents of the deceased succeed Issue: WON the obligation of Aquino was discharged through the
only when the latter dies without a legitimate “group refund check”
descendant. Petitioner therefore acted correctly in settling their
Held: NO. The charges for illegal recruitment filed against Aquino Held: YES. Private respondent’s acceptance of the amount
was dismissed and therefore what remains to be discussed is consigned by the petitioner-debtor with a reservation or
whether or not her liability to refund the amounts paid to her by qualification as to the correctness of the petitioner’s obligation is
the petitioners was likewise discharged. legally permissible. Citing Tolentino (cited 3Llerena 263), the court
said that before a consignation can be judicially declared proper,
The petitioner issued a check to reimburse the complainants for the creditor may prevent the withdrawal of the amount consigned
the sums of money paid by the latter by virtue of the “failed” by the debtor, by accepting the consignation, even with
overseas contract. The controversy arose when the check was reservations.
dishonored by the drawee bank due to lack of funds. The petitioner
claims full satisfaction of the sum owed by her since she already A creditor could accept a valid consignation even with reservation
issued a check in favor of complainants. Her position is as to his right to damages and other claims (Sing Juco v.
untenable. The issuing of a check is not payment until the check Cuaycong, 46 Phil. 81 ).
has been encashed. Although a check, as a negotiable instrument,
is regarded as a substitute or money, it is not money. Hence, its On the contrary, when the creditor’s acceptance of the money
mere delivery does not, by itself, operate as payment. It was consigned is conditional and with reservations, he is not deemed to
therefore, de rigueur for the petitioner to have presented the have waived he claims he reserved against his debtor. Thus, when
check she issued to the complainants which had been honored by the amount consigned does not cover the entire obligation, the
the drawee bank in order to show that the amount covered by the creditor may accept it, reserving his right to the balance.
check has been received evidencing, therefore, full satisfaction of
the sums of money owed to the complainants. The honored check
Doctrine: Acceptance of consignation with reservation to other
was never presented.
claims arising from the obligation is valid.

Doctrine: The issuing of a check is not payment until the check has
Acceptance of money consigned unconditionally and without
been encashed.
reservation stands as a waiver of the creditor’s other claims under
the contract.
To be considered as payment, the check which was subsequently
honored by the drawee bank should be presented as evidence.
CALTEX v IAC

RIESENBACK v CA
Nature: Action for the collection of sum of money.

Nature: Complaint for consignation and damages.


Facts:

Facts:
On January 12, 1978, private respondent Asia Pacific Airways Inc.
entered into an agreement with petitioner Caltex whereby the
On July 27, 1988 petitioner consigned and deposited with the Clerk latter agreed to supply private respondent’s aviation fuel
of Court of RTC Cebu the sum of Php113,750. Respondent requirements for two years from January 1, 1978 until December
subsequently filed a manifestation Accepting Consignation and 31, 1979. Pursuant thereto, Caltex supplied respondent’s fuel
Motion to Dismiss on August 1, 1988. In the manifestation he requirements. As of June 30, 1980 Asia Pacific had a balance of
stated, inter alia, that”without necessarily admitting the Php4,072,682.13 representing the unpaid price of the fuel
correctness of obligation of plaintiff to defendant, the latter hereby supplied. To settle this obligation respondent executed a Deed of
manifests to accept the said amount of Php113750 which is Assignment on June 30, 1980 wherein it assigned to Caltex its
consigned by plaintiff, provided that the present complaint be receivables or refunds of Special Fund Import Payments from the
dismissed outright with costs against plaintiff. National Treasury of the Philippines to be applied as payment for
its balance with Caltex. On February 12, 1981, pursuant to the
Issue: WON the acceptance with reservation made by plaintiff in Deed of Assignment a treasury warrant in the amount of
his manifestation of the consignation is valid? Php5,475,24 was issued to Caltex. Four days later, respondent
having learned that the amount covered by the Deed of
Assignment exceeded the amount of his obligation with Caltex Facts:
asked for a refund of the excess. Caltex made a refund pf
Php900,000 plus in favor of private respondent. The latter On April 11, 1983 defendant spouses Valderrama obtained a P500k
believing itself to be entitled to a larger amount by way of refund loan from Manuel Asencio payable on or before April 12, 1984
demanded the refund of the remaining amount which petitioner secured by a real estate mortgage. Foreseeing that they would not
explained in its letter response that the remaining amount not be able to redeem their property upon maturity of the loan they
returned Php510,550.63 represented interest and service charges scouted for money lenders. Through the help of a loan broker who
at the rate of 18% per annum on the unpaid and overdue account was able to refer them to his aunt plaintiff Teresita Sangrador. The
of respondent from June 1, 1980 to July 31, 1981. sps. Valderama were able to obtain a P1M loan putting up the
previously mortgaged property to Asencio as security. The loan is
Issue: WON the deed of assignment is in fact a dation in payment evidenced by a promissory note providing for the payment of
which totally extinguished the obligation of Asia Pacific and P1.4M. Furthermore, the promissory note also includes a
therefore Caltex will no longer have any right to interests accruing stipulation that should an extraordinary inflation should supervene
after the assignment? the value of the peso at the time of the establishment of the
obligation shall be the basis for payment.
Held: NO. The deed of assignment executed by the parties on July
31, 1980 is not a dation in payment which totally extinguished Issue: WON the stipulation providing for the payment of P1.4M is
respondent’s obligations as stated therein. valid anent evidence showing that the Sps Valderrama received
only P1M?
Dation in payment does not necessarily mean total extinguishment
of the obligation. The obligation is totally extinguished only when Held: NO. The disputed amount was a hidden interest that the
the parties, by agreement express of implied, or by their silence, petitioners had required the respondents to pay at the maturity of
consider the thing as equivalent to the obligation. the loan As can be gleaned from the evidence, the said amount
was not received or delivered to the respondents. This conclusion
In the Deed of Assignment three obligation were contemplated— is strengthened by the fact that the promissory note and the deed
(1) the outstanding obligation; (2) the applicable interest charges of real estate mortgage did not have any stipulation as to the rate
on overdue accounts; and (3) the other avturbo fuel lifting and of interest.
deliveries that assignor may from time to time receive from
assignee. Furthermore, charges for interest were made ever month The rate of interest for loans or forbearance of money, in the
and not once did respondent question such. Thus, a reading of the absence of express contract as to such rate of interest shall be at
deed of assignment and the subsequent acts of the parties clearly 12% per annum. Thus, since no express stipulation as to the rate
show that they did not intend for the assignment to have the effect of interest the Court fixed the amount at 12% (of P1M) per
of totally extinguishing the obligations of private respondent annum.
without payment of the applicable interest charges on the overdue
account. As regards the stipulation providing for a case when an
extraordinary inflation should supervene in the instant case no
Doctrine: showing that such inflation occurred. Petitioners failed to prove the
supervening extraordinary inflation, as contemplated in Article
Dation in payment does not necessarily mean total 1250 of the Civil Code, between April 6, 1984 and December 7,
extinguishment of the obligation. 1984

SANGRADOR v VALDERRAMA LOSS OF THE THING DUE

(Spouses gone broke by a loan broker) Arts 1262-1269

Nature: Action for collection of a sum of money. Art 1262 CC: An obligation which consists in the delivery of
a determinate thing shall be extinguished if it should be lost
or destroyed without the fault of the debtor, and before he NOTE:
has incurred in delay.
* There is no such thing as loss of a generic thing
When by law or stipulation, the obligor is liable even for
fortuitous events, the loss of the thing does not extinguish OCCENA v JABSON
the obligation and he shall be responsible for damages. The
same rule applies when the nature of the obligation
October 29, 1976
requires the assumption of risk.

Tropical Homes Inc. agreed to develop a subdivision on the land


Art 1263 CC: In an obligation to deliver a generic thing, the
owned by Jesus and Efigenia Occeña, wherein Tropical Homes
loss or destruction of anything of the same kind does not
would be paid only 40% of the sale of the subdivision lots.
extinguish the obligation. (n)

Tropical Homes seeks revision of the contract on the Basis of Art


Art. 1264. The courts shall determine whether, under the
1267 of the Civil Code (CC). They are asking for modification of
circumstances, the partial loss of the object of the
the terms and conditions of the subdivision contract, due to
obligation is so important as to extinguish the obligation.
increase in costs.
(n)

Art. 1267 CC: When the service has become so difficult as to be


Art. 1265. Whenever the thing is lost in the possession of
manifestly beyond the contemplation of the parties, the obligor
the debtor, it shall be presumed that the loss was due to his
may also be released therefrom, in whole or in part.
fault, unless there is proof to the contrary, and without
prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood, Held:
storm, or other natural calamity. (1183a)
The CC authorizes the release of an obligor when the service has
Art. 1266. The debtor in obligations to do shall also be become so difficult as to be manifestly beyond the contemplation
released when the prestation becomes legally or physically of the parties but does not authorize the Courts to modify or revise
impossible without the fault of the obligor. (1184a) the subdivision contract between the parties or to fix a different
sharing ratio from that contractually stipulated with the force of
law.
Art. 1267. When the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part. Tropical Homes complaint for modification of the contract has no
(n) basis in law and must be dismissed.

Art. 1268. When the debt of a thing certain and determinate PNCC v CA
proceeds from a criminal offense, the debtor shall not be
exempted from the payment of its price, whatever may be May 5, 1997
the cause for the loss, unless the thing having been offered
by him to the person who should receive it, the latter Philippine National Construction Corporation (PNCC) signed a lease
refused without justification to accept it. (1185) contract on the land owned by the Raymundos for a 5 year term,
to commence when PNCC gets the necessary industrial clearance
Art. 1269. The obligation having been extinguished by the to operate the rock crushing business PNCC intends to put up.
loss of the thing, the creditor shall have all the rights of
action which the debtor may have against third persons by The contract stipulates that PNCC should pay the rental annually
reason of the loss. (1186) (in advance) at the rate of P20,000 per month on the first year
plus 5% every year after (i.e. P21k 2nd yr, P22k 3rd yr).
It was also stipulated the the termination of the lease would only At any rate, the unforeseen event and causes mentioned by the
be by “mutual agreement of the parties” petitioner are not the legal or physical impossibilities contemplated
by said article.
On January 1986, PNCC got a Temporary Use Permit, and so the
Raymundos wrote a letter demanding for the first annual rent Disposition: Petition denied. CA affirmed.
which since the clearance has arrived, commenced the lease
contract. CONDONATION OR REMISSION

PNCC requested to cancel the lease and discontinue the project Arts 1270-1274
“due to financial, as well as technical difficulties.”
Art. 1270. Condonation or remission is essentially
The Raymundos filed a complaint for specific performance, and the gratuitous, and requires the acceptance by the obligor. It
lower court granted them P492,000 rental for 2 years, which CA may be made expressly or impliedly.
affirmed.
One and the other kind shall be subject to the rules which
PNCC thus filed this petition for certiorari. This time, PNCC invokes govern inofficious donations. Express condonation shall,
Art. 1266 of the CC and the principle of rebus sic stantibus to be furthermore, comply with the forms of donation. (1187)
released from the obligatory force of the contract of lease.
Art. 1271. The delivery of a private document evidencing a
Ar. 1266 CC: The debtor in obligations to do shall also be released credit, made voluntarily by the creditor to the debtor,
when the prestation becomes legally or physically impossible implies the renunciation of the action which the former had
without the fault of the obligor. against the latter.

Rebus sic stantibus – a tacit condition, said to attach to all treaties, If in order to nullify this waiver it should be claimed to be
that they shall cease to be obligatory as soon as the state of facts inofficious, the debtor and his heirs may uphold it by
and conditions upon which they were founded has substantially proving that the delivery of the document was made in
changed. (said to be the basis of Art 1267 of CC) virtue of payment of the debt. (1188)

Held: Art. 1272. Whenever the private document in which the


debt appears is found in the possession of the debtor, it
PNCC cannot take refuge in the article, since it is applicable only to shall be presumed that the creditor delivered it voluntarily,
obligations “to do”, and not obligations “to give”. unless the contrary is proved. (1189)

An obligation “to do” includes all kinds of work or service; while an Art. 1273. The renunciation of the principal debt shall
obligation “to give” is a prestation which consists in the delivery of extinguish the accessory obligations; but the waiver of the
a movable or an immovable thing in order to create a real right, or latter shall leave the former in force. (1190)
for the use of the recipient, or for its simple possession, or in order
to return it to its owner. Art. 1274. It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged, after its
Rebus sic stantibus also does not apply because the assassination delivery to the creditor, is found in the possession of the
of Ninoy in 1983 and the announcement of Pres. Marcos of the debtor, or of a third person who owns the thing. (1191a)
snap elections to be held in Feb 1986 which already caused
political turmoil in the country preceded the contract. (i.e. PNCC Trans-Pacific v CA
signed the contract knowing fully well these antecedent events)
August 19, 1994
Trans- Pacific Industrial Supplies Inc. borrowed P1.3M from the obligation. It erases the plurality of subjects of the
Associated Bank, with promissory notes, a chattel mortgage and obligation. Further, the purposes for which the obligation
land mortgaged as security. may have been created are considered as fully realized by
the merger of the qualities of debtor and creditor in the
The mortgaged lands were sold, and the proceeds amounting to same person.
P1,386,614.20 was applied to the re-structured loan; and so the
bank returned the duplicate original copies of the promissory notes • Requisites of merger or confusion are: (1) It must take
with the word “PAID.” place between the creditor and the principal debtor, (2) the
very same obligation must be involved, for if the debtor
However, the bank demanded from Trans-Pacific payment of acquires rights from the creditor, but not the particular
P492,100 representing accrued interest, did not release the obligation in question in question there will be no merger,
mortgage over 2 parcels of land and claimed that the release of (3) the confusion must be total or as regards the entire
the promissory notes were erroneous. obligation.

Initially Trans-Pacific expressed its willingness to pay, but later • The effect of merger is to extinguish the obligation.
refused and instituted an action for specific performance against
the bank to deliver the mortgaged land. Trial Court ruled in favor Art. 1276. Merger which takes place in the person of the
of Trans Pacific. CA reversed. principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the
Art 1271 CC: The delivery of a private document evidencing a latter does not extinguish the obligation. (1193)
credit, made voluntarily by the creditor to the debtor implies the
renunciation of the action which the former had against the latter.
• The extinguishment of the principal obligation through
confusion releases the guarantor’s because the obligation
If in order to nullify this waiver it should be claimed to be of the latter is merely accessory. When the merger takes
inofficious, the debtor and his heirs may uphold it by proving that place in the person of a guarantor, the obligation is not
the delivery of the document was made in virtue of payment of the extinguished.
debt. (1188)
Art. 1277. Confusion does not extinguish a joint obligation
Issue: WON Trans-Pacific’s obligation is fully paid? except as regards the share corresponding to the creditor or
debtor in whom the two characters concur. (1194)
Held:
COMPENSATION
The presumption is art 1271 is not conclusive but merely prima
facie. Trans-Pacific failed to prove that it fully discharged its Art. 1278. Compensation shall take place when two
obligation. There is sufficient evidence to overthrow the persons, in their own right, are creditors and debtors of
presumption of payment generated by the delivery of the each other. (1195)
documents such as Trans-Pacific’s admission in their earlier letter.

• Compensation is a mode of extinguishing to the concurrent


CONFUSION OR MERGER
amount, the obligations of those persons who in their own
right are reciprocally debtors and creditors of each other. It
Art. 1275. The obligation is extinguished from the time the is the offsetting of two obligations which are reciprocally
characters of creditor and debtor are merged in the same extinguished if they are of equal value. Or extinguished to
person. (1192a) the concurrent amount if of different values.

• Merger or confusion is the meeting in one person of the • Kinds of Compensation:


qualities of creator and debtor with respect to the same
• As to their effects (2) That both debts consist in a sum of money, or if the
• compensation may be total (when the two things due are consumable, they be of the same kind, and
obligations are of the same amount); or also of the same quality if the latter has been stated;
• partial (when the amounts are not equal).
(3) That the two debts be due;

• As to origin
(4) That they be liquidated and demandable;
• it may be legal;
• facultative;
(5) That over neither of them there be any retention or
• conventional; controversy, commenced by third persons and
• or judicial. communicated in due time to the debtor. (1196)

• It is legal when it takes place by operation of law because • For compensation to take place, the parties must be
all requisites are present. mutually debtors and creditors (1) in their own right, and
• It is facultative when it can be claimed by one of the (2) as principals. Where there is no relationship of mutual
parties, who, however, has the right to object to it, such as creditors and debtors, there can be no compensation.
when one of the obligations has a period for the benefit of Because the 1st requirement that the parties be mutually
one party alone and who renounces that period so as to debtors and creditors in their own right, there can be no
make the obligation due. compensation when one party is occupying a
• It is conventional when the parties agree to compensate representative capacity, such as a guardian or an
their mutual obligations even if some requisite is lacking. administrator. The 2nd requirement is that the parties
should be mutually debtors and creditors as principals. This
• It is judicial when decreed by the court in a case where
means that there can be no compensation when one party
there is a counterclaim.
is a principal creditor in one obligation but is only a surety
or guarantor in the other.
From Dean Pineda:
• The things due in both obligations must be fungible, or
Compensation Distinguished From Payment. In compensation, things which can be substituted for each other.
there can be partial extinguishment of the obligation; in payment,
• Both debts must be due to permit compensation.
the performance must be completer, unless waived by the creditor.
Payment involves delivery of action, while compensation (legal • Demandable means that the debts are enforceable in
compensation) takes place by operation of law without court, there being no apparent defenses inherent in them.
simultaneous delivery. The obligations must be civil obligations, including those
that are purely natural. An obligation is not demandable,
therefore, and not subject to compensation, in the
Compensation Distinguished from Merger. In compensation,
following cases: (1) when there is a period which has not
there are at least two persons who stand as principal creditors and
yet arrived, including the cases when one party is in a
debtor of each other, in merger, there is only one person involved
state of suspension of payments; (2) when there is a
in whom the characters of creditor and debtor are merged. In
suspensive condition that has not yet happened; (3) when
merger, there is only one obligation, while in compensation, there
the obligation cannot be sued upon, as in natural
are two obligations involved.
obligation.
• A debt is liquidated when its existence and amount is
Art. 1279. In order that compensation may be proper, it is determined. Compensation can only take place between
necessary: certain and liquidated debts.

(1) That each one of the obligors be bound principally, and From Dean Pineda:
that he be at the same time a principal creditor of the other;
The five requisites of a legal compensation are enumerated in thing cannot be a subject of compensation if the same had
the Article. All requisites must be present before compensation can been subject of a garnishment of which the debtor was
be effectual. timely notified. When a credit or property had been
properly garnished of attached, it cannot be disposed of
• First Requisite—That each of the obligators be bound without the approval of the court.
principally and that he be at the same time a principal
creditor of the other. >>The parties must be mutual Art. 1280. Notwithstanding the provisions of the preceding
creditor and debtor of each other and their relationship is a article, the guarantor may set up compensation as regards
principal one, that is, they are principal debtor and creditor what the creditor may owe the principal debtor. (1197)
of each other.
• The liability of the guarantor is only subsidiary; it is
• Second Requisite—That both debts consist in such a sum of accessory to the principal obligation of the debtor. If the
money, or if the things due are consumable, they be of the principal debtor has a credit against the creditor, which can
same kind, and also of the same quality if the latter has be compensated, it would mean the extinguishment of the
been stated. >>When the debts consist of money, there is guaranteed debt, either totally or partially. This
not much of a problem when it comes to compensation to extinguishment benefits the guarantor, for he can be held
the concurrent amount. It is a matter of mathematical liable only to the same extent as the debtor.
computation. When the debt consist of things, it is
necessary that the things are consumable which must be From Dean Pineda:
understood as ‘fungible’ and therefore susceptible of
substitution. More than that they must be of the same Exception to the Rule On Compensation; Right of Guarantor to
kind. If the quality has been states, the things must be of Invoke Compensation Against Creditor. The general rule is that for
the same quality. compensation to operate, the parties must be related reciprocally
as principal creditors and debtors of each other. Under the present
• Third Requisite—That the two debts are due. >> A debt is Article, the guarantor is allowed to set up compensation against
‘due’ when its period of performance has arrived. If it is a the creditor.
subject to a condition, the condition must have already
been fulfilled. However, in voluntary compensation, the Art. 1281. Compensation may be total or partial. When the
parties may agree upon the compensation of debts which two debts are of the same amount, there is a total
are not yet due. compensation. (n)

• Fourth Requisite—That they be liquidated and demandable. • Total Compensation—debts are of the same amount.
>> A debt is considered ‘liquidated’ when its amount is • Partial Compensation—Debts are not of the same amount;
clearly fixed. Of if it is not yet specially fixed, a simple operative only up to the concurrent amount.
mathematical computation will determine its amount or
value. It is ‘unliquidated’ when the amount is not fixed
because it is still subject to a dispute or to certain Art. 1282. The parties may agree upon the compensation of
condition. debts which are not yet due. (n)

It is not enough that the debts be liquidated. It is also essential • Voluntary compensation is not limited to obligations which
that the same be demandable. A debt is demandable if it is not yet are not yet due. The parties may compensate by
barred by prescription and it is not illegal or invalid. agreement any obligations, in which the objective
requisites provided for legal compensation are not present.
It is necessary, however, that the parties should have the
• Fifth Requisite—That over neither of them there be any
capacity to dispose of the credits which they compensate,
retention or controversy, commenced by third persons and because the extinguishment of the obligations in this case
communicated in due time to the debtor. >> A debt of a arises from their wills and not from law.
Art. 1283. If one of the parties to a suit over an obligation he informs the assignor that he reserved his right to the
has a claim for damages against the other, the former may compensation.
set it off by proving his right to said damages and the
amount thereof. (n) • Assignment before compensation. The assignment may be
made before compensation has taken place, either because
Art. 1284. When one or both debts are rescissible or at the time of assignment one of the debts is not yet due
voidable, they may be compensated against each other or liquidated, or because of some other cause which
before they are judicially rescinded or avoided. (n) impedes the compensation. As far as the debtor is
concerned, the assignment does not take effect except
• Although a rescissible or voidable debt can be from the time he is notified thereof. If the notice of
compensated before it is rescinded or annulled, the assignment is simultaneous to the transfer, he can set up
moment it is rescinded or annulled, the decree of compensation of debts prior to the assignment. If notice
rescission or annulment is retroactive, and the was given to him before the assignment, this takes effect
compensation must be considered as cancelled. Recission at the time of the assignment; therefore the same rule
of annulment requires mutual restitution; the party whose applies. If he consents to the assignment, he waives
obligation is annulled or rescinded can thus recover to the compensation even of debts already due, unless he makes
extent that his credit was extinguished by the a reservation.
compensation, because to that extent he is deemed to
have made a payment. • But if the debtor was notified of the assignment, but he did
not consent, and the credit assigned to a third person
Art. 1285. The debtor who has consented to the assignment matures after that which pertains to the debtor, the latter
of rights made by a creditor in favor of a third person, may set up compensation when the assignee attempts to
cannot set up against the assignee the compensation which enforce the assigned credit, provided that the credit of the
would pertain to him against the assignor, unless the debtor became due before the assignment. But it f the
assignor was notified by the debtor at the time he gave his assigned credit matures earlier than that of the debtor, the
consent, that he reserved his right to the compensation. assignee may immediately enforce it, and the debtor
cannot set up compensation, because the credit is not yet
If the creditor communicated the cession to him but the due.
debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of • If the debtor did not have knowledge of the assignment,
subsequent ones. he may set up by way of compensation all credits maturing
before he is notified thereof. Hence, if the assignment is
If the assignment is made without the knowledge of the concealed, and the assignor still contracts new obligation in
debtor, he may set up the compensation of all credits prior favor of the debtor, such obligation maturing before the
to the same and also later ones until he had knowledge of latter learns of the assignment will still be allowable by
the assignment. (1198a) way of compensation. The assignee in such case would
have a personal action against the assignor.
• Assignment after Compensation. When compensation has
already taken place before the assignment, inasmuch as it Art. 1286. Compensation takes place by operation of law,
takes place ipso jure, there has already been an even though the debts may be payable at different places,
extinguishment of one of the other of the obligations. A but there shall be an indemnity for expenses of exchange or
subsequent assignment of an extinguished obligation transportation to the place of payment. (1199a)
cannot produce any effect against the debtor. The only
exception to this rule is when the debtor consents to the • This article applies to legal compensation and not to
assignment of the credit; his consent constitutes a waiver voluntary compensation.
of the compensation, unless at the time he gives consent,
Art. 1287. Compensation shall not be proper when one of Art. 1289. If a person should have against him several
the debts arises from a depositum or from the obligations of debts which are susceptible of compensation, the rules on
a depositary or of a bailee in commodatum. the application of payments shall apply to the order of the
compensation. (1201)
Neither can compensation be set up against a creditor who
has a claim for support due by gratuitous title, without • It can happen that a debtor may have several debts to a
prejudice to the provisions of paragraph 2 of Article 301. creditor. And vice versa. Under these circumstances,
(1200a) Articles 1252 to 1254 shall apply.

• The prohibition of compensation when one of the debts Art. 1290. When all the requisites mentioned in Article 1279
arises from a depositum (a contract by virtue of which a are present, compensation takes effect by operation of law,
person [depositary] receives personal property belonging and extinguishes both debts to the concurrent amount,
to another [depositor], with the obligation of safely even though the creditors and debtors are not aware of the
keeping it and returning the same) or commodatum (a compensation.
gratuitous contract by virtue of which one of the parties
delivers to the other a non-consumable personal property • Legal compensation takes place from the moment that the
so that the latter may use it for a certain time and return
requisites of the articles 1278 and 1270 co-exist; its
it) is based on justice. A deposit of commodatum is given
effects arise on the very day which all its requisites concur.
on the basis of confidence in the depositary of the
borrower. It is therefore, a matter of morality, the
• Voluntary of conventional compensation takes effect upon
depositary or borrower performs his obligation. the agreement of the parties.
• Facultative compensation takes place when the creditor
declares his option to set it up.
• With respect to future support, to allow its extinguishment
• Judicial compensation takes place upon final judgment.
by compensation would defeat its exemption from
attachment and execution. , and may expose the recipient • Effects of Compensation.
to misery and starvation. Common humanity and public
policy forbid this consequence. Support under this (1) Both debts are extinguished to the concurrent amount;
provision should be understood, not only referring to legal
support, to include all rights which have for their purpose (2) interests stop accruing on the extinguished obligation of the
the subsistence of the debtor, such as pensions and part extinguished;
gratuities.
(3) the period of prescription stops with respect to the obligation
Art. 1288. Neither shall there be compensation if one of the or part extinguished;
debts consists in civil liability arising from a penal offense.
(n)
(4) all accessory obligations of the principal obligation which has
been extinguished are also extinguished.
• If one of the debts consists in civil liability arising from a
penal offense, compensation would be improper and
• Renunciation of Compensation. Compensation can be
inadvisable because the satisfaction of such obligation is
imperative. renounces, either at the time an obligation is contracted or
afterwards. Compensation rests upon a potestative right,
and a unilateral decision of the debtor would be sufficient
• The person who has the civil liability arising from crime is renunciation. Compensation can be renounced expressly of
the only party who cannot set up the compensation; but impliedly.
the offended party entitled to the indemnity can set up his
claim in compensation of his debt.
• No Compensation. Even when all the requisites for
compensation occur, the compensation may not take place
in the following cases: (1) When there is renunciation of • as to form
the effects of compensation by a party; and (2) when the
law prohibits compensation.
1. Express – parties declare that the old obligation is
substituted by the new
(Unless otherwise indicated, commentaries are sourced from the 2. Implied – an incompatibility exists between the old and the
Civil Code book IV by Tolentino). new obligation that cannot stand together

NOVATION • as to effect

HOW OBLIGATIONS ARE MODIFIED 1. Partial – when there is only a modification or change in
some principal conditions of the obligation
Art 1291. Obligations may be modified by:
1. Total – when the old obligation is completely extinguished
(1) Changing their object or principal condition
• Requisites of Novation:
(2) Substituting the person of the debtor

• A previous valid obligation


(3) Subrogating a third person in the rights of a creditor

• Agreement of all parties


• Novation is the extinguishment of an obligation by a
substitution or change of the obligation by a subsequent
• Extinguishment of the old contract – may be express of
one which extinguishes or modifies the first either by: implied
• Validity of the new one
changing the object or principal conditions
NOVATION IS NOT PRESUMED
by substituting the person of the debtor
Art 1292. In order that an obligation may be extinguished
by another which substitutes the same, it is imperative that
subrogating a third person in the rights of the creditor
it is so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with
• Novation is a juridical act of dual function. At the time it each other
extinguishes an obligation it creates a new one in lieu of
the old
• Novation must be clearly proved since its existence cannot
be presumed.
• Classification of Novation • In an express novation, contracting parties disclose that
• as to nature their object in making the new contract is to extinguish the
1. Subjective or personal – either passive or old contract. Otherwise, the old contract remains in force
active. Passive if there is substitution of the and a new contract is added to it, and each gives rise to an
debtor. Active if a third person is obligation still in force.
subrogated in the rights of the creditor. • In implied novation, all that is required is incompatibility
2. Objective or real – substitution of the between the original and the subsequent contracts. No
object with another or changing the specific form is required. The test of incompatibility is
principal conditions whether they can stand together.
3. Mixed – Combination of subjective and • In order that there may be an implied novation arising
objective
from the incompatibility of the old and the new obligations,
the change must refer to the object, the cause or the substitution in order that it may be binding
principal conditions of the obligation. on him.
• An obligation is not novated by unimportant modifications • The consent of the creditor may be
which do not alter its essence. expressed or implied.
• The determination of whether the changes in any given
contract or obligation are sufficient to bring about a • Consent of debtor. Not necessary in case of expromision.
novation, must depend upon the facts and circumstances Needed in delegacion because the initiative comes from
of each case. The distinction between a principal and an the old debtor. In both cases, the consent of the new
accidental condition in the contract or obligation is relative. debtor is necessary because he is to assume the
obligation.
NOVATION BY SUBSTITUTION OF DEBTOR • The consent of the new debtor is as
essential as that of the creditor for the
Art 1293. Novation which consists in substituting a new novation to become effective.
debtor in the place of the original one, may be made even • Effect on debtors. The novation has the effect of
without the knowledge or against the will of the latter, but releasing the original debtor from the obligation and of
not without the consent of the creditor. Payment by the making the new debtor liable therefor.
new debtor gives him the rights mentioned in Arts 1236 and • Payment by the new debtor gives him
1237. the rights mentioned in 1236 and
1237.
• There are two forms of novation which consist in the • If the novation is by delegacion and
substitution of debtor: expromision and delegacion the new debtor pays the obligation,
he could demand from the old
• Expromision – change does not emanate from the debtor debtor what he has paid.
Subrogation may take place by
and may be made even without his knowledge, since it
virtue of 1302.
consists in a third person assuming the obligation.
Requires the consent of the third person and the creditor. • If the novation is by expromision,
the new debtor can recover only
insofar as the payment has been
• Delegacion – the debtor offers and the creditor accepts beneficial to the old debtor. There
the third person who consents to the substitution. The can be no subrogation because of
consent of these three is necessary. the express provisions of 1237.

• Release of old debtor. It is not enough to extend the PROVISIONS RELEVANT TO ART. 1293
juridical relation to a third person. It is necessary that the
old debtor is released from the obligation and the third
person (the new debtor) takes his place. Without such Art. 1236 The creditor is not bound to accept payment or performance
release, there is no novation. by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary.

• Consent of creditor. An indispensable element whether


Whoever pays for another may demand from the debtor what
in expromision or in delegacion.
he has paid, except that if he paid without the knowledge or
• Substitution of one debtor for another may against the will of the debtor, he can recover only insofar as
delay or prevent the fulfillment of the the payment has been beneficial to the debtor.
obligation by reason of the inability or
insolvency of the new debtor. Hence, the Art 1237 Whoever pays on behalf of the debtor without the knowledge
creditor should agree to accept the or against the will of the latter, cannot compel the creditor to
subrogate him in his rights, such as those arising from a
mortgage, guaranty or penalty. 1. When the insolvency was prior to the delegacion and is
publicly known;
Art 1302 It is presumed that there is legal subrogation:
1. When the old debtor knew of such insolvency at the time
1. When a creditor pays another creditor who is preferred, he delegated the obligation.
even without the debtor’s knowledge

• The knowledge of the creditor that the new debtor was


2. When a third person, not interested in the obligation, pays
insolvent at the time of delegacion, will bar him from
with the express or tacit approval of the debtor.
recovering from the old debtor.

3. When, even without the knowledge of the debtor, a person


EFFECT OF NOVATION TO ACCESSORY OBLIGATIONS
interested in the fulfillment of the obligation pays, without
prejudice to the effects of confusion as to the latter’s share.
Art 1296. When the principal obligation is extinguished in
consequence of a novation, accessory obligations may
SUBSTITUTION BY EXPROMISION subsist only insofar as they may benefit third person who
did not give their consent.
(Without the knowledge of the debtor)
• The extinguishment of the principal obligation by novation
Art 1294. If the substitution is without the knowledge or extinguishes the obligation to pay interests, unless
against the will of the debtor, the new debtor’s insolvency otherwise stipulated.
or non-fulfillment of the obligation shall not give rise to any • This article is specially applicable to substitution of debtors.
liability on the part of the original debtor. • Exemption provided in this article with respect to third
persons. Although technically it is an accessory obligation,
• Intent of the law is to release the old debtor from any it is in reality a distinct obligation in favor of a third person,
further liability in passive subjective novation, except in and cannot be extinguished by novation without the
the exceptional cases in art 1295 which applies to consent of the latter.
delegacion.
• If the novation is by expromision, no liability for the new ORIGINAL OBLIGATION SUBSISTS IF THE NEW
debtor’s insolvency can be enforced against the old debtor, OBLIGATION IS VOID
because the latter did not have the initiative in making the
change, which might have been made without his Art 1297. If the new obligation is void, the original one shall
knowledge. subsist, unless the parties intended that the former
relations should be extinguished in any event.
SUBSTITUTION BY DELEGACION
• If the new obligation is not entirely void but merely
Art 1295. The insolvency of the new debtor, who has been voidable, the novation becomes effective.
proposed by the original debtor and accepted by the • BUT if the action to annul is brought, and the
creditor, shall not revive the action of the latter against the
obligation is set aside, it will be deemed as if there
original obligor, except when said insolvency was already
had been no novation. The original obligation
existing and of public knowledge, or known to the debtor,
subsists, unless the parties intended to definitely
when he delegated his debt.
extinguish it at all events.

• Provides two exemptions by which the creditor is permitted


• If the original obligation is pure and the new obligation is
to sue the old debtor:
subject to a suspensive condition
• If the intention is merely to attach the condition to • If old obligation is conditional and new obligation is pure
the original obligation, then there is no novation. • If the intention is merely to suppress the condition,
• If the new conditional obligation is intended to there is no novation
substitute the original pure obligation, the novation • If the intention is to extinguish the original
itself, and the consequent extinguishment of the obligation itself by the creation of a new obligation,
original obligation, is subject to the condition. If the latter does not arise except from the fulfillment
the condition is not fulfilled before one of the of the condition of the original obligation.
parties withdraws from the proposed conditional • If the suspensive condition of the original
contract, there is no novation at all. obligation is not performed, that obligation
does not come into existence, and the
• After a novation has taken place, thru a change of the cause for the new obligation would then be
object of the obligation, the old obligation can no longer be wanting.
enforced. If the new obligation is extinguished by the loss • If the condition of the old obligation is resolutory,
of the object, the creditor cannot demand the object of the its happening would resolve the old obligation and
original obligation. place it in the same category as a void obligation
or one which has been extinguished.
NOVATION IS VOID IF ORIGINAL OBLIGATION IS VOID • Where the original obligation is conditional,
the novation itself must be held to be
Art 1298. The novation is void if the original obligation was conditional also.
void, except when annulment may be claimed only by the • Note: the parties may by their express will
debtor, or when ratification validates acts which are substitute a pure obligation for a conditional one.
voidable.
• If both obligations are conditional
• When the original obligation has been ratified before • If the conditions in the two obligations are not
novation, the novation is effective. incompatible with each other, and they can stand
• Even if there has been no previous ratification at the time together, they must all be fulfilled in order that the
of novation, if the nullity can be claimed only by the novation may become effective and the new
debtor, the consent of the debtor to the novation will obligation be enforceable.
render the novation effective because such consent is • If only the conditions affecting the old obligation
impliedly a waiver of the action for nullity. are fulfilled, those affecting the new obligation are
• However, the defect is not completely cured if the novation not, or vice-versa, then there is no novation.
takes place by expromision, where the old debtor has not • If the conditions of the old and new obligation are
intervened or consented. incompatible with each other, there is an obvious
• Prescription. When a debt is already barred by intention to substitute the new conditional
prescription, it cannot be enforced by the creditor. obligation for the old conditional obligation.
• BUT a new contract, recognizing and assuming the
prescribed debt, would be valid and enforceable SUBROGATION
• The prescription, being available only to the debtor,
can be waived by him. He does so by voluntarily Art 1300. Subrogation of a third person in the rights of the
promising to pay the prescribed debt. The novation creditor is either legal or conventional. The former is not
of prescribed debt is thus valid. presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it
Art 1299. If the original obligation was subject to a may take effect.
suspensive or resolutory condition, the new obligation shall
be under the same condition, unless it is otherwise
stipulated.
• SUBROGATION is the transfer of all the rights of the LEGAL SUBROGATION
creditor to a third person, who substitutes him in all his
rights. Art 1302. It is presumed that there is legal subrogation:
• Subrogation may either be conventional or legal.
• Conventional (1) When a creditor pays another another creditor who is
• Takes place by agreement of the parties preferred, even without the debtor’s knowledge;
• Requires the intervention and consent of
three persons: the original creditor, the (2) When a third person, not interested in the obligation,
new creditor and the debtor pays with the express or tacit approval of the debtor;
• Legal subrogation
• Takes place without agreement but by (3) When, even without the knowledge of the debtor, a
operation of law because of certain acts person interested in the fulfillment of the obligation pays,
• This is the subrogation referred to in art without prejudice to the effects of confusion as to the
latter’s share
1302

CONVENTIONAL SUBROGATION • Payment to Preferred Creditor


• Example: X has two obligations: (1) a mortgage
Art 1301. Conventional subrogation of a third person debt in favor of Pedro and (2) a simple unsecured
requires the consent of the original parties and of the third obligation in favor of Jose.
person • If Jose pays the mortgage obligation to
Pedro, even without the knowledge of
Juan, then Jose would be subrogated in the
• Consent of all parties is essential
rights of Pedro
• Original creditor – because his right is extinguished • It is not material what amount Jose
• New creditor – because he becomes a party to a actually pays to Pedro; so long as Pedro
new relation accepts such amount as full payment of the
• Debtor – because the old obligation is extinguished mortgage credit, there will be subrogation.
and he becomes liable under the new obligation • However, the debtor in cases like this, can
still set up against the new creditor the
• Under our Code, conventional subrogation is not identical defenses which he could have used against
to assignment of credit. the original creditor, such as:
• Conventional subrogation • Compensation;
• Debtor’s consent is necessary • Payments already made; or
• Extinguishes the obligation and gives rise • Vice or defect of the original
to a new one obligation
• Nullity of the old obligation may be cured
by subrogation such that the new • Payment with Debtor’s Approval
obligation may be perfectly valid • Example: (1) a third person pays the creditor
• Assignment of Credit without the consent of the debtor, he is only
• Debtor’s consent is not required entitled to reimbursement from the debtor for the
• Refers to the same right which passes from amount paid by him.
one to another • If amount paid < credit : even if the
• Nullity of an obligation is not remedied by creditor has accepted it as full payment,
the assignment of the creditor’s right to the third person is entitled to
another
reimbursement only for what he actually • Subrogation transfers to the third person or new creditor
paid. the entire credit, with all the corresponding rights, either
• The third person cannot proceed against the debtor or against third persons.
against sureties, guarantors or • If a suspensive condition is attached to the credit
mortgages and pledges transferred, that condition must be fulfilled in order
that the new creditor may exercise his right. BUT
• Example: (2) a third person pays with the prestations which could not have been required of
consent (expressly or tacitly) of the debtor, the original creditor cannot be demanded of the
• There will be subrogation and the payor new one.
can exercise all the rights of the creditor
rising from the very obligation itself, PARTIAL SUBROGATION
whether against the debtor or against third
persons. Art 1304. A creditor, to whom partial payment has been
made, may exercise his right for the remainder, and he shall
• Payment by Interested Party be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit.
• Persons who have an interest in the fulfillment of
the obligation are those who would be benefited by
the extinguishment of the obligation. Ex: CASES:
• Co-debtors
• Sureties MILLAR v CA
• Guarantors
Millar obtained a favorable judgment ordering respondent Gabriel
• Owners of property mortgaged or pledged
to pay him a certain sum. A writ of execution was issued and the
to secure the obligation
jeep of respondent Gabriel was seized. The parties entered into an
agreement (a chattel mortgage) whereby, to secure the payment
• Example: Solidary debtor pays the obligation, he is of the judgment debt, agreed to mortgage the vehicle in favor of
subrogated in the rights of the creditor. the petitioner. Respondent Gabriel failed to pay. The CA ruled in
• The scope of this subrogation, however, favor of the respondent on the ground that the subsequent
should not be misunderstood. The payor agreement of the parties impliedly novated the judgment
cannot take advantage of the solidarity and obligation.
recover the amount in excess of his share
of the obligation from any of his co- ISSUE: WON the subsequent agreement of the parties impliedly
debtors. novated the judgment obligation.
• The solidarity terminates by his payment
and the obligation among the co-debtors RULING:
becomes joint.
• NO. The subsequent agreement of the parties did not
EFFECT OF SUBROGATION novate the judgment obligation by implication.
• Implied novation entails incompatibility of the old and the
Art 1303. Subrogation transfers to the person subrogated new obligations.
the credit with all the rights thereto appertaining, either • The mere reduction of the amount due does not constitute
against the debtor or against third persons, be they
sufficient incompatibility, especially in the light of the
guarantors or possessors of mortgages, subject to
explanation of the petitioner that the reduced indebtedness
stipulation in a conventional subrogation
was result of the partial payments made by the respondent
before the execution of the subsequent agreement.
• The stipulation for the payment of the obligation under the • The presence of animus novandi (intent) is undeniable for
terms of the chattel mortgage serves only to provide an there is a later decision expressly superseding the earlier
express and specific method for its extinguishment, which one.
is payment in two equal installments. The chattel mortgage • The later decision was the result of a compromise, it had
simply gave a method and more time to enable him to fully the effect of res judicata. The parties, therefore, were
satisfy the judgment indebtedness. bound by it.
• The chattel mortgage agreement in no manner introduced
any substantial modification or alteration of the judgment. Doctrine:
• Instead of extinguishing the obligation of the respondent
arising from the agreement, the deed of chattel mortgage When, after judgment has become final, facts and
expressly ratified and confirmed the existence of the same. circumstances transpire which render its execution
impossible or unjust, the interested party may ask the court
Doctrine: to modify or alter the judgment to harmonize the same with
justice and the facts.
• Only those essential and principal changes
introduced by the new obligation producing an ZAPANTE v DE ROTAECHE
alteration or modification of the essence of the old
obligation result in implied novation. Ramon Echevarria, as legal representative of a commercial firm,
• When the new obligation merely reiterates or ratifies commenced an action against Zapanta for the purpose of
the old obligation, such does not effectuate any recovering a sum of money. Judgment was rendered in favor of
substantial incompatibility between the two plaintiff firm. Zapanta and the firm entered into an agreement
obligations. which contained a provision that “said commercial firm shall be at
liberty to enter suit against him” with reference to the judgment.
DORMITORIO v FERNANDEZ By virtue of the agreement, Zapanta continued to make payments
but left a certain amount of balance. For failure of Zapanta to
comply with the provisions of the agreement, the defendant sued
The case involves two decisions rendered by the respondent Judge
for the purpose of recovering the balance. A writ of execution was
Fernandez. In dispute is a certain lot bought by Lazalita from the
issued. The sheriff attached and sold practically all the property
Municipality of Victorias. Lazalita had been in continuous
which the plaintiff had.
possession of the lot and had introduced valuable improvements
therein. It turned out that the lot bought by Lazalita was converted
into a municipal road and that the lot in his possession is actually Issue: WON the provision of the agreement “said commercial firm
the lot bought by Dormitorio. The first order issued by Respondent shall be at liberty to enter suit against him,” had the effect of
Judge was favorable to Dormitorio. Lazalita appealed and brought extinguishing the rights of the defendant which resulted from the
an action against the Municipality of Victorias. The parties judgment rendered against him.
executed an “Agreed Stipulation of Facts” which provides Lazalita
the option to be paid a just amount to acquire another lot or for Ruling:
Victorias to give Lazalita another lot. In his second order,
respondent Judge set aside the first order on the basis of the • The agreement does not expressly extinguish the
“Agreed Stipulation of Facts.”
obligations existing in said judgment. On the contrary, it
expressly recognizes the obligations existing between the
Ruling: parties in said judgment and expressly provides a method
by which the same shall be extinguished.
• Court upheld the judgment of the respondent Judge in • The contract, instead of containing provisions “absolutely
setting aside his first order in accordance with the Agreed incompatible” with the obligations of the judgment,
Stipulation of Facts. expressly ratifies such obligations and contains provisions
for satisfying them.
• Court ruled in favor of defendant. When the plaintiff failed limited to a bill for the amount of any changes, alterations,
to comply with the conditions of said contract, the or modifications made at defendant’s request.
defendant had a right to resort to the methods provided by • Thus, plaintiff was never released from the original
law for the satisfaction of the obligations created by the contract. He was entitled to recover upon a quantum
judgment. meruit, and as to what was the reasonable value of the
building as it was constructed.
Doctrine:
Doctrine:
• In order that an obligation be extinguished by
novation, the law requires that the novation or • The intention of the parties to novate must be very
extinguishment shall be expressly declared or that clear and expressed.
the old and new obligations shall be absolutely
incompatible. GUERRERO v CA

TAN SIUCO v HABANA Jose Robles borrowed a sum of money from Chan Too, to ensure
payment of which the Alto Surety and Insurance Co. executed a
The plaintiff Tan Siuco entered into a written contract with bond, whereby it bound itself jointly and severally with Robles for
defendant Habana for the construction of a certain building. At the payment of the loan to Chan Too. In consideration of the
different times during the construction, modifications, alterations issuance of the bond, Robles, Vicente Legarda and herein
and changes were requested by the defendant. Before any change petitioner Guerrero executed an “Agreement of Counter-Guaranty
was made, the question of plaintiff’s compensation was mentioned with Mortgage and Pledge,” undertaking jointly and severally to
and that in referring to such changes, the defendant said “pase indemnify ALTO for any damage, loss, payments. The agreement
cuenta” (bring in your bill). After the construction, the plaintiff contains a provision which states: “indemnities will be paid to the
seeks to recover an amount over and above the agreed original surety company as soon as demand is received from the creditor
amount. The trial court ruled in favor of the plaintiff on the ground or as soon as it becomes liable to make payment xxx.” Robles
that, in legal effect, the written contract was annulled and set failed to pay his indebtedness to Chan Too. Judgment was
aside by the action and conduct of the parties. That the whole rendered by the lower court against Robles and ALTO on the basis
combined actions and conduct of the parties amounted to a of a compromise agreement executed by the parties. This case is
novation. For such reason, plaintiff is entitled to recover on a instituted by ALTO against petitioner Guerrero on the basis of the
quantum meruit. “Agreement of Counter-Guaranty with Mortgage and Pledge.”

Issue: WON the actions and conduct of the parties had novated the Issue: WON the petitioner was released from his obligation under
written agreement entered by them the counter-guaranty agreement by virtue of novation.

Ruling: Ruling:

• The law states that there must be an express intention to • NO, the petitioner was not released under his obligation by
novate – animus novandi. A novation is never presumed. virtue of the counter-guaranty agreement.
• When the defendant said “pase cuenta” (bring in your bill), • A perusal of the terms of the counter-guaranty agreement
the court reasoned that defendant intended that plaintiff reveals that it is one of indemnity.
should bring in his bill for the reasonable value of any • Based on the terms of said agreement, the liability of the
alterations and changes which were made at his request. petitioner has likewise matured upon demand. The release
• There is no claim or pretense that anything was said by of his obligation by virtue of novation must be proved by
either party about terminating or rescinding the contract. clear and convincing evidence.
The statement “bring in your bill” was never intended to • In the absence of an express release, nothing less than a
apply to the original contract and should be confined and showing of complete incompatibility between the two
obligations – “agreement of counter-guaranty” and the Petitioners Ligutan obtained a loan from respondent Security Bank
compromise agreement – would justify a finding of and Trust Company. The obligation matured and petitioners failed
novation by implication. to pay. Despite demands, petitioners still defaulted on their
• No such incompatibility exists in this case between the two obligation. The bank filed a complaint for recovery of the due
obligations that would sustain the defense of novation. amount. During the pendency of the case, petitioners executed a
real estate mortgage to secure the existing indebtedness of
petitioners with the bank.
GARCIA JR. v CA

ISSUE: WON the subsequent execution of the real estate mortgage


Western Minolco Corporation (WMC) obtained from Philippine
as security for the existing loan would have resulted in the
Investments Systems Organization (PISO) two loans. Garcia and
extinguishment of the original contract because of novation.
Kahn executed a surety agreement binding themselves jointly and
severally for the payment of the loan. Upon failure of WMC to pay
after repeated demands, demand was made on Garcia pursuant to RULING:
the surety agreement. Garcia likewise failed to pay. Lasal
Development Corporation (to which the credit had been assigned • The subsequent execution of the real estate mortgage did
by PISO) sued Garcia for the recovery of the debt. not result in the extinguishment of the original contract.
• Petitioners acknowledge that the real estate mortgage
RULING: contract does not contain any express stipulation by the
parties intending it to supersede the existing loan
• The Court did not sustain the claim of petitioner that the agreement between the petitioners and the bank.
various communications made by WMC with DBP, together Respondent bank has correctly postulated that the
with the memorandum of agreement, are sufficient to mortgage is but an accessory contract to secure the loan.
establish the new obligation made by WMC with all its
creditors. Doctrine:
• While it is true that, as a general rule, no form of words or
writing is necessary to give effect to a novation. An obligation to pay a sum of money is not extinctively
Nevertheless, since the parties involved are corporations, it novated by a new instrument which merely changes the
must first be proved that that the contracts were executed terms of payment or adding compatible covenants or where
by authorized persons. This point was not sufficiently the old contract is merely supplemented by the new one.
proven. Thus, such communications cannot be considered
to give rise to a valid new obligation. Additional information from the case

DOCTRINE:
• Extinctive novation requires:

• Novation requires the validity of a new obligation.


1. a previous valid obligation
• A valid new obligation is an essential requisite for
the novation of a previous valid obligation.
1. the agreement of all parties to the new contract
• In the case of juridical persons particularly a 2. the extinguishment of the obligation
corporation, a valid obligation must be given effect 3. validity of the new obligation
through persons with authority to enter into
contract/agreement in behalf of the corporation.
• In order that an obligation may be extinguished by another
which substitutes the same, it is imperative that it be so
LIGUTAN v CA
declared in unequivocal terms or that the old and the new
obligation be on every point incompatible with each other.
• The incompatibility should take place in any of the • Novation is the extinguishment of an obligation by the
essential elements of the obligation: substitution of that obligation with a subsequent one,
which terminates it, either by:
1. the juridical relation or tie • changing its object or principal conditions; or
• by substituting a new debtor in place of the old
• Ex: from a mere commodatum to a lease of things one; or
• by subrogating a third person to the rights of the
creditor.
1. the object or principal condition

• Novation through a change of the object or principal


• Ex: change of the nature of the prestation
conditions of an existing obligation is referred to as an
objective (or real) novation.
1. the subjects

• If objective novation is to take place, it is essential that the


• Ex: substitution of the debtor or the subrogation of new obligation expressly declare that the old obligation is
the creditor to be extinguished or that the new obligation be on every
point incompatible with the old one.
• Extinctive novation does not necessarily imply that the new
agreement should be complete by itself; certain terms and • The rule that novation is never presumed is not to be
conditions may be carried, expressly or by implication, avoided by merely referring to partial novation. The will to
over to the new obligation. novate, whether totally or partially, must appear by
express agreement of the parties, by their acts which are
BROADWAY CENTRUM v TROPICAL FOOD too clear and unequivocal to be mistaken.

Petitioner Broadway Centrum and private respondent Tropical Hut Applying the law to the case
executed a contract of lease. Tropical Hut was experiencing low
sales volume and was proposing for a reduction in rentals. • The provisional and temporary agreement did not
Broadway, recognizing that the low sales volume was the result of
extinguish or alter the obligations of Tropical and the rights
the temporary closure of a major thoroughfare, executed a
of Broadway under the lease contract.
“provisional and temporary” agreement with Broadway which
temporarily reduced the rentals of Tropical conditioned upon good
faith implementation by Tropical of the six principal suggestions of 1. The agreement was by its own terms a “provisional and
Broadway to improve operations of Tropical. Months after, temporary agreement” conditioned upon good faith
Broadway informed Tropical that rental will be increased gradually. implementation of six suggestions made by Broadway to
Tropical was adamant that it cannot afford any increase in rentals. improve the operations of Tropical. The non-specification
by Broadway of the period of time during which the
reduced rentals would remain in effect, only meant that
Issue: WON the provisional and temporary agreement had novated
Broadway retained for itself the discretionary right to
the contract of lease.
return to the original contractual rates whenever Broadway
felt it appropriate to do so.
Ruling:
1. The formal notarized lease contract made it clear that a
Basis in law temporary and provisional reduction of rentals was not to
be construed as alteration or waiver of any of the terms of
the lease contract itself.
2. The course of negotiations between Broadway and Tropical In the meantime, Emeterio Ramos came in and took control of the
before the execution of the provisional and temporary companies; still it was not viable. Hence, the banks formed a
agreement clearly indicated that what they were consortium to take over the management. Mr. Ramos refused to
negotiating was a temporary and provisional reduction of transfer the management until he is reimbursed for the cash
rentals. advances he made for the companies.
3. The agreement was bereft of any sign of mutual
recognition that the reduced rentals had so permanently The banks and Mr. Ramos reached an agreement that Mr. Ramos
replaced the contract stipulations on rentals. shall be reimbursed with non-interest bearing notes and that the
banks shall discount these notes up to 1/3 of the total verified
• Only evidence of the clearest and most explicit kind will claim. The banks failed; hence a compromise agreement was
suffice for the purpose of novation. entered into with the banks stating that Ramos shall be issued
non-interest bearing notes with the sum of P500,000 and will
discount two-thirds (2/3) of the said notes in 30 days after the
OTHER CAUSES
signing of the compromise agreement. Ramos complied with his
obligations and the banks enabled Ramos to negotiate the said
1. Prescription notes in the sum of P350,000. However, two notes were not
2. Death – applied to purely personal character, apart from its discounted because the banks foreclosed and acquired VISCO’s
extinctive effect in some contract such as partnership and assets and sold them to National Steel Corp.
agency; in general, obligations are transmissible to heirs or
to the estate.
Ramos filed a complaint before RTC for recovery of P1,495,292.70
3. Renunciation on the part of the creditor – as a rule does
as the remaining balance. RTC favored Ramos and ordered the
not extinguish obligations, but in some contracts lack of
banks to pay him. Banks appealed but CA affirmed the RTC ruling.
interest of the creditor amounts to abuse of right; so the
debtor must be relieved.
4. Compromise Issue:
5. Fulfillment of resolutory conditions
6. Arrival of resolutory periods WON there was constructive fulfillment of the condition to grant
7. Rescission & Nullity of contracts 2/3 discount on the notes to Ramos of the compromise agreement.
8. Mutual dissent of the parties
9. Will of one of the parties/Unilateral Dissent – agency & Held:
partnership
10. Change of Civil Status
11. Force Majeure • The SC ruled that the constructive fulfillment in the mind
12. Abandonment – under Art 662 of the banks cannot stand as it was a last ditch effort to
exculpate itself; that instead of rehabilitating the company,
they foreclosed its properties and sold it to National Steel
CASES:
Corp.
• The case is DISMISSED.
INTERNATIONAL CORPORATE BANK v CA1

ACE-AGRO DEVELOPMENT CORP. v CA


Nature: Petition to review the decision of the Court of Appeals

Nature: Petition for review on certiorari of a decision of the Court


Facts (as established by the CA):
of Appeals

VISCO & SIP mortgaged its machineries, plant and equipment to


Facts:
11 banks to continue its operation. Unfortunately, they failed and
defaulted in the payment.
Ace-Agro is engaged in the business of cleaning softdrink bottles
and repairing wooden shells of Cosmos Bottling Corp. Ace-Agro
does this inside Cosmos’ plant in San Fernando, Pampanga. They • Hence, the petition for review is DENIED and the decision
entered into a service contract which they renewed every year. of the CA is AFFIRMED.

Then, a fire broke out in Cosmos’ plant destroying, inter alia, Ace- Doctrine:
Agro’s area. Hence, Ace-Agro could not clean bottles. On May 15,
1990, Ace-Agro asked Cosmos if it could resume its service; but
A force majeure scenario can extinguish an obligation;
petitioner was advised that on account of the fire, which had
however, this was not entirely true to the case due to the
“practically burned all...old softdrink bottles and wooden shells,”
abovementioned reason.
Cosmos was terminating their contract.

II. CONTRACTS
Ace-Agro asked for reconsideration but received no reply. Hence,
Ace-Agro issued a memorandum to their employees stating that
their service with Cosmos is terminated as well as the employment GENERAL PROVISIONS
of its people. The employees filed a complaint for illegal dismissal
before the Labor Arbitrator. Art. 1305. A contract is a meeting of the minds between two
persons whereby one binds himself, with respect to the
Cosmos, in a letter, agreed for the resumption of the other to give something or to render some service.
service. However, Ace-Agro refused to do so due to the pending
labor case and desired to enter into a compromise agreement for * Definition:
its losses for the inactivity. Then, Ace-Agro filed a complaint with
RTC for breach of contract and damages. • Sanchez Roman – a juridical convention manifested in legal
form, by virtue of which one or more persons bind
In the meantime, the labor case was resolved against Cosmos and themselves in favor of another or others, or reciprocally, to
Ace-Agro. the fulfillment of a prestation to give, to do or not to do.

RTC, then, rendered its decision in favor of Ace-Agro; Cosmos * Other Terms:
appealed. The CA reversed the decision finding favor for Cosmos.
• Perfect promise – distinguished from a contract, in that the
Issue: latter establishes and determines the obligations arising
therefrom; while the former tends only to assure and pave
WON there was extinguishment of obligations due to the fire that the way for the celebration of a contract in the future.
occurred in the Cosmos plant. • Imperfect Promise – mere unaccepted offer
• Pact – a special part of the contract, sometimes incidental
Held: and separable for the principal agreement
• Stipulation – similar to a pact; when the contract is an
• No, although force majeure may extinguish a contract, in instrument, it refers to the essential and dispositive part,
this case it is not applicable. as distinguished from the exposition of the facts and
• SC held that the termination of contract that Ace-Agro was antecedents upon which it is based.
speaking of was at most a temporary termination due to
the fact that there were still other bottles to be cleaned * Number of Parties:
and boxes to be repaired.
• The Court found that Ace-Agro’s refusal of the offer of • The Code states “two persons”; what is meant actually is
Cosmos to resume operations because it wanted an “two parties”. For a contract to exist, there must be two
extension of the contract to make up for the period of parties.
inactivity was unjustifiable. Incurrence of additional cost is
• A party can be one or more persons.
no basis for its refusal.
* Husband & Wife: 1. Preparation, conception, or generation – period of negotiation
and bargaining, ending at the moment of agreement of the parties
• Husbands and wives cannot sell to each other as a
protection of the conjugal partnership. 2. Perfection or birth of the contract – the moment when the
• They can however enter into a contract of agency. parties come to agree on the terms of the contract

* Auto-contracts: 3. Consummation or death – the fulfillment or performance of the


terms agreed upon in any contract

• It means one person contracts himself.


CASES:
• As a general rule, it is accepted in our law. The existence
of a contract does not depend on the number of persons
ANG YU ASUNCION, ARTHUR GO & KEH TIONG v CA & BUEN
but on the number of parties.
REALTY DEVELOPMENT CORPORATION
• There is no general prohibition against auto-contracts;
hence, it should be held valid.
Nature: Petition to Review the decision of the Court of Appeals

* Contracts of Adhesion:
Facts:

• Contracts prepared by another, containing provisions that


Asuncion, et al. were tenants or lessees of residential and
he desires, and asks the other party to agree to them if he commercial spaces owned by Cu Unjieng spouses in Ongpin Street,
wants to enter into a contract. Binondo, Manila. They have occupied said spaces since 1935 and
have been religiously paying the rental and complying with all the
Example: transportation tickets conditions of the lease contract

• It is valid contract according to Tolentino because the other On several occasions before October 9, 1986, the spouses
party can reject it entirely. informed Asuncion et al. that they are offering to sell the premises
and are giving them priority to acquire the same. During the
* Characteristics of Contracts: negotiations, Bobby Cu Unjieng offered a price of P6-million while
the other made a counter offer of P5-million.

• 3 elements:
Asuncion, thereafter, asked the defendants to put their offer in
writing to which request defendants acceded and that in reply to
1. Essential elements – without which there is no contract; they defendant's letter, plaintiffs wrote them on October 24, 1986
are a) consent, b) subject matter and c) cause asking that they specify the terms and conditions of the offer to
sell
2. Natural elements – exist as part of the contract even if the
parties do not provide for them, because the law, as suppletory to When Asuncion et al. did not receive any reply, they sent another
the contract, creates them letter dated January 28, 1987 with the same request; that since
defendants failed to specify the terms and conditions of the offer to
3. Accidental elements – those which are agreed by the parties sell and because of information received that the spouses was
and which cannot exist without stipulated about to sell the property, Asuncion et al. were compelled to file
the complaint to compel defendants to sell the property to them. It
* Stages of a Contract: was later sold to Buen Realty.

RTC found that defendants' offer to sell was never accepted by the
• 3 stages:
plaintiffs for the reason that the parties did not agree upon the
terms and conditions of the proposed sale, hence, there was no obligates himself, for a price certain, to deliver and to
contract of sale at all. Nonetheless, the lower court ruled that transfer ownership of a thing or right to another, called the
should the defendants subsequently offer their property for sale at buyer, over which the latter agrees.
a price of P11-million or below, plaintiffs will have the right of first
refusal. * Classification of contracts:

Upon appeal, the CA affirmed RTC with some modifications 1. Degree of dependence – preparatory, principal & accessory
2. Perfection – consensual & real
Issue: 3. Solemnity or Form – common form & special form
4. Purpose – transfer of ownership, conveyance & rendition of
• WON there exists a contract between Asuncion et al. and service
5. Subject-matter – things & services
the Cu Unjieng spouses in relation to the property in
6. Nature of the obligation produced – bilateral & unilateral
Binondo.
7. Cause – onerous & gratuitous or lucrative
8. Name – Nominate & Innominate
Held:
* Kinds of Innominate Contracts
• No, there was no contract as there was no acceptance by
the spouses. 1. do ut des (I give that you may give)
• CA decision is AFFIRMED. 2. do ut facias (I give that you may do)
3. facio ut facias (I do that you may do)
Doctrine: 4. facio ut des (I do that you may give)

1. Among the sources of an obligation is a contract (Art. Art. 1306. The contracting parties may establish such
1157, Civil Code), which is a meeting of minds between stipulations, clauses, terms & conditions as they may deem
two persons whereby one binds himself, with respect to convenient, provided they are not contrary to law, morals,
the other, to give something or to render some service good customs, public order, or public policy.
(Art. 1305, Civil Code).
2. A contract undergoes various stages that include its * Freedom to contract:
negotiation or preparation, its perfection and, finally, its
consummation. Negotiation covers the period from the
• Any person has the liberty to enter into a contract so long
time the prospective contracting parties indicate interest in
the contract to the time the contract is concluded as they are not contrary to law, morals, good customs,
(perfected). The perfection of the contract takes place public order or public policy.
upon the concurrence of the essential elements thereof. A • The legislature, under the constitution, is prohibited from
contract which is consensual as to perfection is so enacting laws to prescribe the terms of a legal contract.
established upon a mere meeting of minds, i.e., the
concurrence of offer and acceptance, on the object and on * Validity of Stipulations:
the cause thereof.
3. A contract which requires, in addition to the above, the
• Any and all stipulations not contrary to law, morals, good
delivery of the object of the agreement, as in a pledge or
customs, public order or public policy is valid
commodatum, is commonly referred to as a real contract.
4. Until the contract is perfected, it cannot, as an
independent source of obligation, serve as a binding * Trust Receipts:
juridical relation. In sales, particularly, to which the topic
for discussion about the case at bench belongs, the • Trust receipts, as contracts, in a certain manner partake of
contract is perfected when a person, called the seller, the nature of a conditional sale as provided by the Chatter
Mortgage Law, that is, the importer becomes the absolute 2. Stipulations to pay usurious interests are void.
owner of the imported merchandise as soon as he had paid 3. A contract between to public service companies to divide
its price. the territory is void because it impairs the control of the
Public Service Commission.
* Other Stipulations: 4. Agreement to declare valid a law or ordinance is void.

• Other valid stipulations: Venue of Action, Escalation CASES:


clauses, & Limitation of carrier’s liability
Associacion de Agricultures de Talisay-SIlay, Inc. Trino
Montinola, Fernando Cuenca, Eduardo Ledesma, Emilio
* Compromises:
Jison, Nilo Lizares, Nicolas Jalandoni & Sec. of Labor

• Compromises create reciprocal concessions so that parties


vs.
avoid litigation.
• The Court must approve it and once approved, the parties
Talisay-Silay Milling Co., Inc., & Luzon Surety Co., Inc., PNB
are enjoined to comply strictly and in good faith with the
& The Sugar Quota Administrator
agreement.

Nature: Appeal from the decision of the Court of First Instance of


* Juridical Qualification:
Manila

• Juridical Qualification is different from validity. It is the law Facts:


that determines juridical qualification.
• The contract is to be judged by its character and courts will In this long and complex case which includes, labor and
look into the substance and nor to the mere from of the constitutional issues, the most important for us is that the Planters
transaction. and the Milling Company entered into a contract prior to RA 809
which was enacted as a social justice measure designed to make
* Limitations on Stipulation: the profits of the sugar industry redound to the laborers.

1. An act or a contract is illegal per se is on that by Prior to the law, the several Planters were under contract with the
universally recognized standards us inherently or by its Milling Company and received higher percentages than the
nature, bad, improper, immoral or contrary to good majority who were not. The law however, provides for a uniform
conscience. sharing between the Planters and the Company in varying degrees
depending on the amount of sugar production every year rather
* Contrary to law: than the base of 60% to the Planters and 40% to the Company
since Planters and Milling Companies are differently situated.
1. Freedom of contract is restricted by law for the good of the
public. Issue:
2. It is fundamental postulate that however broad the
freedom of the contracting parties may be, it does not go • In the multitude of issues raised, the most important for us
so far as to countenance disrespect for or failure to is WON RA 908 can supersede the contracts entered into
observe a legal prescription. The Statute takes precedence. by some Planters and the Milling Company.

Examples: Held:

1. A promissory note which represents a gambling debt is


unenforceable in the hands of the assignee.
• Yes, the SC upheld that the law shall prevail since it was • Public order means the public weal or public policy. It
enacted for social justice and police power measure for the represents the public, social, and legal interest in private
promotion of labor conditions in sugar plantations; hence law that which is permanent and essential in institutions,
whatever rational degree of constraint it exerts on freedom which, even if favoring some individual to whom the right
of contract and existing contractual obligations is pertains, cannot be left to his own will.
constitutionally permissible. • A contract is said to be against public order if the court
• The obvious objective of the Act is more to induce the finds that the contract as to the consideration or the thing
centrals to enter into written agreements with the planters to be done, contravenes some established interest of
in their respective districts providing for better sharing society, or is inconsistent with sound policy and good
ratios than the old 60-40 scheme, rather than to directly morals, or tends clearly to undermine the security of
fix for them such ratio in the manner prescribed in Section individual rights.
1. Were it the intent of the Act to definitely fix said sharing
ratios, without regard to the contractual agreements Examples:
between the parties, it would have been worded
accordingly in the clearest terms, considering that such
1. Common carrier cannot stipulate for exemption for liability
fixing would amount to a curtailment of the freedom of
unless such exemption is justifiable and reasonable and
contract and may, therefore, be upheld only when the
the contract is freely and fairly made.
legislative intent is manifest and the exertion of police
2. Payment to intermediaries in securing import licenses or
power in the premises is reasonably justified.
quota allocations.
• Decision of CFI Manila MODIFIED. RA 809 not
3. Contract of scholarship stipulating that the student must
unconstitutional. remain in the same school and that he waives his right to
transfer to another school without refunding the school
* Contrary to Morals:
CASES:
• Morals mean good customs or those generally accepted
principles of morality which have received some kind of CUI v ARELLANO UNIVERSITY
social and practical confirmation.
Nature: Appeal from the decision of the Court of First Instance of
Examples: Manila

1. a promise to marry or nor to marry, to secure legal Facts:


separation, or to adopt a child
2. a promise to change citizenship, profession, religion or
Emeterio Cui enrolled and got a scholarship from Arellano
domicile
University, College of Law. His uncle was the dean there. He was
3. a promise not to hold public office or which limits the
made to sign a contract that stipulates a waiver to transfer to
performance of official duties
another university without refunding Arellano the equivalent of
4. a promise to enter a particular political party or separate
scholarship cash.
from it
5. contracts which limit in an excessive manner the personal
or economic freedom of a person He had maintained his scholarship until his senior year when his
6. to make an act dependent on money or some pecuniary uncle moved to Abad Santos University to become the Law dean
value, when it is of such a nature that it should not depend there.
thereon; payment to kill another.
Ramos followed suit and graduated in the latter university. To
* Contrary to Public Order: secure permission to take the bar he needed the transcripts of his
records in defendant Arellano University. He petitioned Arellano to
issue to him the needed transcripts. The university refused until
after he had paid back the P1,033 87 which defendant refunded to Art. 1307. Innominate contracts shall be regulated by the
him as above stated. As he could not take the bar examination stipulations of the parties, by the provisions of Titles I & II
without those transcripts, plaintiff paid to defendant the said sum of this Book, by the rules governing the most analogous
under protest. This is the sum which plaintiff seeks to recover from nominate contracts, and by the customs of the place.
defendant in this case.
* Innominate Contracts:
Issue:
do ut des (I give that you may give) – An agreement in which A
WON the above quoted provision of the contract between plaintiff will give one thing to B, so that B will give another thing to A.
and the defendant, whereby the former waived his right to transfer
to another school without refunding to the latter the equivalent of do ut facias (I give that you may do) – An agreement under which
his scholarships in cash, is valid or not. A will give something to B, so that B may do something for A.

Held: facio ut facias (I do that you may do) – An agreement under which
A does something for B, so that B may render some other service
• It is not valid. for A.
• The SC held that inconsistent with sound policy and good
morals or tends clearly to undermine the security of facio ut des (I do that you may give) – An agreement under which
individual rights. The nature of the issue before us, and its A does something for B, so that B may give something to A.
far reaching effects, transcend personal equations and
demand a determination of the case from a high * Analogous contracts:
impersonal plane.
• The decision of the CA is REVERSED. The university was
• Innominate contracts, in the absence of stipulations and
ordered to reimburse Ramos for his payment as well as
specific provisions of law on the matter, are to be governed
other costs.
by rules applicable to the most analogous contracts.

Doctrine:
Art. 1308. The contract must bind both contracting parties;
its validity or compliance cannot be left to the will of one of
Scholarships are awarded in recognition of merit not to them.
keep outstanding students in school to bolster its prestige.
In the understanding of that university scholarships award
* Mutuality of Contract:
is a business scheme designed to increase the business
potential of an education institution. Thus conceived it is
not only inconsistent with sound policy but also good • The binding effect of contract on both parties is based on
morals. the principles:

* Attorney’s Fees: 1. that obligations arising from contracts have the force of
law between the contracting parties
• Even if there is a stipulation, a client can dismiss his
lawyer and the latter can only claim compensation based 1. that there must be mutuality between the parties based on
on quantum meruit. their essential equality, to which is repugnant to have one
• The fees must be reasonable depending on the difficulty of party bound by the contract leaving the other free
therefrom.
the case, the skills involved, etc.
A contract containing a condition which makes its fulfillment • However, when the decision cannot be arrived due to
dependent exclusively upon the uncontrolled will of one of the inequity, the courts shall decide what is equitable for the
contracting parties is void. parties involved.

* Unilateral Cancellation: Art 1311. Contracts take effect only between the parties,
their assigns and heirs, except in case where the rights and
Just as nobody can be forced to enter into a contract, in the same obligations arising from the contracts are not transmissible
manner once a contract is entered into, no party can renounce it by their nature, or by stipulation or by provision of law. The
unilaterally or without the consent of the other. heir is not liable beyond the value of the property he
received from the decedent.
Nobody is allowed to enter into a contract, and while the contract
is in effect, leaves, denounces or disavows the contract to the If a contract should contain some stipulation in favor of
prejudice of the other. a third person, he may demand its fulfillment provided he
communicated his acceptance to the obligor before its
* When Stipulated: revocation. A mere incidental benefit or interest of a person
is not sufficient. The contracting parties must have clearly
and deliberately conferred a favor upon a third person.
• However, when the contract so stipulates that one may
terminate the contract upon a reasonable period is valid.
* Parties bound by contract:
• Judicial action for the rescission of the contract is no longer
necessary when the contract so stipulates that it may be
revoked and cancelled for the violation of any of its terms • Generally, only the parties that agreed on the contracts are
and conditions. This right of rescission may be waived. bound by the contract.
• Transmission is possible to the heirs or assignees if so
* Express Agreement: stipulated and in certain contracts.

* Third persons not bound:


• The article reflects a negative form of rescission as valid.
• Negative Form of Rescission – a case which is frequent in
certain contracts, for in such case neither is the article • It is s general rule that third parties are not bound by the
violated, nor is there any lack of equality of the persons acts of another.
contracting; such as cancellation of a contract due to • A contract cannot be binding upon and cannot be enforced
default or non-payment or failure to do service. against one who is not a party to it, even if he has
knowledge of such contract and has acted with knowledge
Art. 1309. The determination of the performance may be thereof.
left to a third person, whose decision shall not be binding • Important Latin maxim: Res inter alio acta aliis necque
until it has been made known to both contracting parties. nocet prodest.

• A third person may be called upon to decide whether or * Third persons affected:
not performance has been done for the fulfillment of the
contract. Such decision becomes binding when the • There are exceptions to the rule. They are:
contracting parties have been informed of it. 1. A contract creating a real right affects third
persons who may have some right over the thing.
Art. 1310. The determination shall be obligatory if it is (article 1312)
evidently inequitable. In such case, the courts shall decide 2. A contract may reduce the properties of a debtor
what is equitable under the circumstances. and thus diminish the available security for the
claims of creditors. (article 1313)
3. In some cases as in composition in insolvency and * Requisites of Article:
in suspension of payments, certain agreements are
made binding by law on creditors who may not • To apply the second paragraph, the following are
have agreed thereto.
necessary:
1. stipulation in favor of a third persons
* Enforcement of contract: 2. stipulation in favor of a third persons should be a
part, not the whole, of the contract
• Only a party to the contract can maintain an action to 3. clear and deliberate conferment of favor upon a
enforce the obligations arising under said contract. third person by the contracting parties and not a
mere incidental benefit or interest
4. stipulation should not be conditioned or
* Annulment of contracts:
compensated by any kind of obligation whatever
5. that the third person must have communicated his
• A third person cannot ask for a contract’s annulment acceptance to the obligor before its revocation
because he is not party to it. 6. neither of the contracting parties bears the legal
• Exception: when it is prejudicial to his rights, the third representation or authorization of the third party
person may ask for its rescission.
* Beneficiaries:
* Contracts bind heirs:
• A stipulation may validly be made in favor of indeterminate
• General rule: rights and obligations under a contract are persons, provided that they can be determined in some
transmissible to heirs. manner at the time when the prestation from the
• Heirs are not third persons because there is privity of stipulation has to be performed.
interest between them and their predecessor.
* Test of Beneficial Stipulation:
* Intransmissible Contracts:
• To constitute a valid stipulation pour autrui, it must be the
• Exceptions: purpose and intent of the stipulating parties to benefit the
third person, and it is not sufficient that the third person
1. contracts of purely personal in nature – partnership
may be incidentally benefited by the stipulation.
and agency
2. contracts for payment of money debts are charged • Test of Beneficial Stipulation: intention of the parties as
not to the heirs but to the estate of the decedent disclosed by their contract.
• To apply this, it matters not whether the stipulation is in
* Stipulations for Third Parties: the nature of a gift or whether there is an obligation owing
from the promisee to the third person.

• Second paragraph creates an exception to the first.


* Acceptance of Third Party:
• When there is such stipulation pour autrui, it can be
enforced.
• 2 Divisions: • Stipulation pour autrui has no binding effect unless it is
accepted by the third party.
1. those where the stipulation is intended for the sole
benefit of such third person • Acceptance is optional to the third person: he is not
2. those where an obligation is due from the promisee obliged to accept it.
to the third person and the former seeks to • It may be in any form, express or implied, written or oral
discharge it by means of such stipulation • There is no time limit to acceptance until the stipulation is
revoked before the third person’s acceptance.
* Rights of Parties: * Contracts in Fraud of Creditors

• The original parties, before acceptance of the third 1. When a debtor enters into a contract in fraud of his
persons, still have the right to revoke or modify the creditors, such as when he alienated property gratuitously
contract. without leaving enough for his creditors (article 1387), the
creditor may ask for its rescission.
* Dependence on Contract:
Art 1314. Any third person who induces another to violate
his contract shall be liable for damages to the other
• Right of the third person emanates from the contract;
contracting party.
defenses are also available against the contract.
• If after the third person has accepted the stipulation and
* Interference of Third Persons:
the parties failed to perform or defaulted, he can sue
wither for specific performance or resolution, with
indemnity for damages, as authorized by article 1191. 1. If a third person induced a party to violate his side of the
contract, the other party may sue the third person for
damages.
* Who may revoke:
2. Requisites:

• General Rule: it pertains to the other contracting party or 1. the existence of a valid contract
promisee, who may exercise it without the consent of the
promisor. But it may be agreed that the revocation should
1. knowledge by the third person of the existence of a
have the consent of the promisor.
contract
• The right of revocation cannot be exercised by the heirs or
2. interference by the third person in the contractual
assignees of the promisee; they might not want to honor relation without legal justification
the decedent’s promise.
1. Jurisprudential basis: Manila Railroad Co. vs. Compañia
* Collective contracts: Transatlantica

1. Definition: contracts where the law authorizes the will of • ...the process must be accomplished by
the majority to bind a minority to an agreement
distinguishing clearly between the right of action
notwithstanding the opposition of the latter, when all have
arising from the improper interference with the
a common interest in the juridical act.
contract by a stranger thereto, considered as an
independent act generative of civil liability, and the
Art 1312. In contracts creating real rights, third persons right of action ex contractu against a party to the
who come into possession of the object of the contract are contract resulting form the breach thereof.
bound thereby, subject to the provisions of the Mortgage
Law and the Land Registration laws.
* Extent of Liability:

* Real Rights in Property


• The extent of liability of a third person interfering is limited
to the damage that the other party incurred.
1. A real right directly affects property subject to it; hence,
• Liability is solidary, the offending party and the third
whoever is in possession of such property must respect
that real right. person, because in so far as the third person is concerned,
he commits a tortious act or a quasi-delict, for which
solidary responsibility arises.
Art 1313. Creditors are protected in cases of contracts
intended to defraud them.
Art 1315. Contracts are perfected by mere consent, and rate. The lower court further held that the issuance by the CB of a
from that moment the parties are bound not only to the monetary policy creates a contractual obligation with those who
fulfillment of what has been expressly stipulated but also to shall sell or buy dollars.
all the consequences which, according to their nature, may
be in keeping with good faith, usage and law. Issue:

* Perfection of Consensual Contracts: • WON the issuance of a monetary policy by it, thereafter
implemented by the appropriate resolutions, as to the rate
• Perfection of a contract, in general: the moment from of exchange at which dollars after being surrendered and
which it exists; the juridical tie between the parties arises sold to it could be re-acquired, creates a contractual
from that time. obligation.
• Perfection of Consensual Contracts: the mere consent
which is the meeting of the minds of the parties upon the Held:
terms of the contract
• consent may not be expressly given. • No, there was no contract.
• Decision of CFI is REVERSED. and the complaint of the
* Binding Effect of Consensual Contracts: plaintiff dismissed, without prejudice to his taking the
appropriate action to enforce whatever rights he possesses
• The binding force of such contracts are not limited to what against defendant Central Bank in accordance with its valid
is expressly stipulated, but extends to all consequences and binding rules and regulations.
which are the natural effect of the contract, considering its
true purpose, the stipulations it contains, and the object Doctrine:
involved.
All commentators on the Civil Code have agreed that the
CASES: birth or perfection of a consensual contract, Article 1315,
commences from the moment the parties come to an
BATCHELDER v CB agreement on a definite subject matter and valid
consideration
Nature: Appeal from the decision of the Court of First Instance of
Manila What was done by the Central Bank was merely to issue in
pursuance of its rule-making power the resolutions relied
upon by plaintiff, which for him should be impressed with a
Facts:
contractual character.

This is a suit filed by plaintiff George W. Batchelder to compel


Art 1316. Real contracts, such as deposit, pledge or
defendant Central Bank of the Philippines, now appellant, to resell
commodatum, are not perfected until the delivery of the
to him $170,210.60 at the preferred rate of exchange of two
object of the obligation.
Philippine pesos for one American dollar, more specifically
P2.00375, or, in the alternative, to pay to him the difference
between the peso cost of such amount at the market rate * Perfection of real contracts:
prevailing on the date of the satisfaction of the judgment in his
favor and the peso cost of $170,210.60 at said preferred rate. Real contract is not perfect by mere consent. The delivery of the
thing is required.
The CFI found for Batchelder and order CB to resell the amount
involved at the preferred rate as against RA 2609 which granted Delivery is demanded, neither arbitrary nor formalistic.
CB the power, inter alia, to decontrol the foreign exchange
Art 1317. No one may contract in the name of another (2) Object certain which is the subject matter of the
without being authorized by the latter, or unless he has by contract;
law a right to represent him.
(3) Cause of the obligation which is established. (1261)
A contract entered into in the name of another by one
who has no authority or legal representation, or who has • There must be at least 2 parties to every contract. The
acted beyond his powers, shall be unenforceable, unless it
number of parties, however, should not be confused with
is ratified, expressly or impliedly, by the person on whose
the number of persons.
behalf it has been executed, before it is revoked by the
other contracting party.
• A single person can represent 2 parties, and one party can
be composed of 2 or more persons.
• Consent presupposes capacity. There is no effective
* Ratification necessary:
consent in law without the capacity to give such consent.

• A contract entered into in behalf of another who has not


SECTION 1. – Consent
authorized it is not valid or binding on him unless he
ratifies the transaction.
Art. 1319. Consent is manifested by the meeting of the offer
• When ratified, he is estopped to question the legality of the
and the acceptance upon the thing and the cause which are
transaction.
to constitute the contract. The offer must be certain and the
• Kinds of ratification: acceptance absolute. A qualified acceptance constitutes a
counter-offer.
1. express
Acceptance made by letter or telegram does not bind the
2. implied offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered
• The ratification has a retroactive effect from the moment into in the place where the offer was made. (1262a)
of its celebration, not from its ratification.
• Before ratification, the contract is in a state of suspense; • Consent is the conformity of the parties on the terms of
its effectivity depends on its ratification. The other party the contract, the acceptance by one of the offer made by
must not do anything prior to ratification that shall the other.
prejudice the rights of the other party. • Requisites: 1) plurality of subjects; 2) capacity; 3)
• When not ratified, the person who entered into a contract intelligent and free will; 4) express or tacit manifestation
in behalf of another without authority becomes liable to the of the will; and 5) conformity of the internal will and its
other party, if he did not inform the latter that he does not manifestation.
have any representation or authority. • Forms: Consent may either be express or implied. There is
• When such deficiency or lack of authority has been relayed also a presumptive consent, which is the basis of quasi-
to the other, he cannot claim for damages against he contracts.
person without authority. • Manifestation: Consent is manifested by the concurrence of
offer and acceptance with respect to the object and the
ESSENTIAL REQUISITES OF CONTRACTS cause of the contract. A binding agreement may originate
even from advertisements addressed to the general public,
mostly in the case of the offer or rewards.
Art. 1318. There is no contract unless the following
• A unilateral proposition must be definite (distinguished
requisites concur:
from mere communications), complete (stating the
essential and non-essential conditions desired by the
(1) Consent of the contracting parties; offeror), and intentional (serious) when accepted by
another party for such proposition to form a valid contract.
• According to Tolentino, however, a unilateral promise is not • The general rule, however, is that silence is ambiguous and
recognized by our Code as having obligatory force. To be does not authorize any definite conclusion. Circumstances
so, there must be an acceptance that shall convert it into a will have to be taken into consideration.
contract. • Withdrawal of offer: Both the offer and the acceptance can
• Mental reservation—when a party makes a declaration but be revoked before the contract is perfected.
secretly does not desire the effects of such declaration.
The mental reservation of the offeror, unknown to the Art. 1320. An acceptance may be express or implied. (n)
other, cannot affect the validity of the offer.
• Complex offers: In cases where a single offer involves two
• Implied acceptance may arise from acts or facts which
or more contracts, the perfection where there is only
reveal the intent to accept, such as the consumption of the
partial acceptance will depend upon the relation of the
things sent to the offeree, or the fact of immediately
contracts between themselves, whether due to their
carrying out of the contract offered.
nature, or due to the intent of the offeror.
• Simultaneous offers: As a rule, the offer and the
acceptance must be successive in order that a contract Art. 1321. The person making the offer may fix the time,
may arise. When there are crossed offers, however, no place, and manner of acceptance, all of which must be
contract is formed unless one of the parties accepts the complied with. (n)
offer received by him.
• Acceptance must not qualify the terms of the offer to • The offer with a period lapses upon the termination of the
produce a contract. It should be unequivocal, period. Thus the acceptance, to become effective, must be
• Successive agreements: If the intention of one or both known to the offeror before the period lapses.
parties is that there be concurrence on all points, the
contract is not perfected if there is a point of disagreement Art. 1322. An offer made through an agent is accepted from
—even if there is already agreement on the essential the time acceptance is communicated to him. (n)
elements of the contract.
• Meanwhile, if there is no declaration that agreement on an • An intermediary who has no power to bind either the
accessory or subordinate matter is necessary, the contract offeror or the offeree is not an agent; his situation is
will be perfected as soon as there is concurrence on the similar to that of a letter carrier.
object and the cause.
• Intermediary: If he carries the offer and the acceptance in
Art. 1323. An offer becomes ineffective upon the death, civil
written form, the rule applicable to acceptance by letter interdiction, insanity, or insolvency of either party before
will apply (see illustration below). If carries the offer acceptance is conveyed. (n)
verbally, and the acceptance is also verbal, the perfection
of the contract will be at the moment he makes the
acceptance known to the offeror. • The disappearance of either party or his loss of capacity
• By correspondence: When the offer to buy was written or before perfection prevents the contractual tie from being
prepared in Tokyo, and the acceptance thereof in Manila formed.
was sent by the offeree by airmail to and received by the
offeror in Tokyo, the contract is presumed to have been Art. 1324. When the offerer has allowed the offeree a
entered into in Tokyo. certain period to accept, the offer may be withdrawn at any
• Effect of silence: Modern jurists require the following in time before acceptance by communicating such withdrawal,
order that silence may produce the effect of tacit except when the option is founded upon a consideration, as
acceptance—1) that there is a duty or the possibility to something paid or promised. (n)
express oneself; 2) that the manifestation of the will
cannot be interpreted in any other way; 3) that there is a • It is not the moment of sending but the time of receipt of
clear identity in the effect of the silence and the the revocation or acceptance which is controlling.
undisclosed will.
• The delay in transmission is at the risk of the sender, • Being deaf-mute is not by itself alone a disqualification for
because he is the one who selects the time and the giving consent. The law refers to the deaf-mute who does
manner of making the transmission. not know how to write.
• Contract of Option: This is a preparatory contract in which
one party grants to the other, for a fixed period and under Art. 1328. Contracts entered into during a lucid interval are
specified conditions, the power to decide whether or not to valid. Contracts agreed to in a state of drunkenness or
enter into a principal contract. It must be supported by an during a hypnotic spell are voidable. (n)
independent consideration, and the grant must be
exclusive.
• The use of intoxicants does not necessarily mean a
complete loss of understanding. The same may be said of
Art. 1325. Unless it appears otherwise, business drugs. But a person, under the influence of
advertisements of things for sale are not definite offers, but superabundance of alcoholic drinks or excessive use of
mere invitations to make an offer. (n) drugs, may have no capacity to contract.
• In hypnotism and somnambulism, the utter want of
• Sales advertisements: A business advertisement of things understanding is a common element.
for sale may or may not constitute a definite offer. It is not
a definite offer when the object is not determinate. • Art. 1329. The incapacity declared in Article 1327 is
• When the advertisement does not have the necessary subject to the modifications determined by law, and
specification of essential elements of the future contract, it is understood to be without prejudice to special
cannot constitute of an offer. The advertiser is free to disqualifications established in the laws. (1264)
reject any offer that may be made.

• The Rules of Court provide a list of incompetents who need


Art. 1326. Advertisements for bidders are simply invitations
guardianship: persons suffering from the penalty of civil
to make proposals, and the advertiser is not bound to
interdiction, hospitalized lepers, prodigals, deaf and dumb
accept the highest or lowest bidder, unless the contrary
who are unable to write and read, those of unsound mind
appears. (n)
(even though they have lucid intervals), and persons not
being of unsound mind but by reason of age, disease,
• In judicial sales, however, the highest bid must necessarily weak mind, and other similar causes cannot, without
be accepted. outside aid, take care of themselves and manage their
property—becoming an easy prey for deceit and
Art. 1327. The following cannot give consent to a contract: exploitation.
• Special disqualification: Persons declared insolvent or
(1) Unemancipated minors; bankrupt, husband and wife (incapacity to sell property to
each other).
• The incapacity to give consent to contracts renders the
(2) Insane or demented persons, and deaf-mutes who do
contract merely voidable, while special disqualification
not know how to write. (1263a)
makes it void.

• Unemancipated minors cannot enter into valid contracts,


Art. 1330. A contract where consent is given through
and contracts entered into by them are not binding upon mistake, violence, intimidation, undue influence, or fraud is
them, unless upon reaching majority they ratify the same. voidable. (1265a)
• Insane persons: It is not necessary that there be a
previous of declaration of mental incapacity in order that a
• Requisites of consent: 1) It should be intelligent or with an
contract entered into by a mentally defective person may
be annulled; it is enough that the insanity existed at the exact notion of the matter to which it refers; 2) It should
time the contract was made. be free; and 3) It should be spontaneous.
• Defects of the will: intelligence is vitiated by error; Art. 1333. There is no mistake if the party alleging it knew
freedom by violence, intimidation, or undue influence; and the doubt, contingency or risk affecting the object of the
spontaneity by fraud. contract. (n)

Art. 1331. In order that mistake may invalidate consent, it • To invalidate consent, the error must be excusable. It must
should refer to the substance of the thing which is the be a real error and not one that could have been avoided
object of the contract, or to those conditions which have by the party alleging it. The error must arise from facts
principally moved one or both parties to enter into the unknown to him.
contract. • A mistake that is caused by manifest negligence cannot
invalidate a juridical act.
Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or Art. 1334. Mutual error as to the legal effect of an
qualifications have been the principal cause of the contract. agreement when the real purpose of the parties is
frustrated, may vitiate consent. (n)
A simple mistake of account shall give rise to its correction.
(1266a) • Three requisites under this article: 1) the error must be as
to the legal effect of an agreement; 2) it must be mutual;
• Ignorance and error are 2 different states of mind. and 3) the real purpose of the parties is frustrated.
Ignorance means the complete absence of any notion • The legal effects include the rights and obligations of the
about a particular matter, while error or mistake means a parties, not as stipulated in the contract, but as provided
wrong or false notion about such matter. by the law. The mistake as to these effects, therefore,
• Annulment of contract on the ground of error is limited to means an error as to what the law provides should spring
cases in which it may reasonably be said that without such as consequences from the contract in question.
error the consent would not have been given. • An error as to the nature or character is always essential,
• An error as to the person will invalidate consent when the and makes the act juridically inexistent.
consideration of the person has been the principal cause of
the same. Art. 1335. There is violence when in order to wrest consent,
• Mistake as to qualifications, even when there is no error as serious or irresistible force is employed.
to person, is a cause vitiating consent, if such
qualifications have been the principal cause of the contract. There is intimidation when one of the contracting parties is
• A mistake as to the motive of a party does not affect the compelled by a reasonable and well-grounded fear of an
contract; to give it such effect would destroy the stability imminent and grave evil upon his person or property, or
of contractual relations. When the motive has, however, upon the person or property of his spouse, descendants or
been expressed and was a condition of the consent given, ascendants, to give his consent.
annulment is proper—because an accidental element is, by
the will of the parties, converted into a substantial To determine the degree of intimidation, the age, sex and
element. condition of the person shall be borne in mind.

Art. 1332. When one of the parties is unable to read, or if A threat to enforce one's claim through competent
the contract is in a language not understood by him, and authority, if the claim is just or legal, does not vitiate
mistake or fraud is alleged, the person enforcing the consent. (1267a)
contract must show that the terms thereof have been fully
explained to the former. (n)
• Duress is that degree of constraint or danger either
actually inflicted (violent) or threatened and impending
(intimidation), sufficient to overcome the mind and will of a by one party and the other has merely “to take it or leave
person of ordinary firmness. it.”
• Violence refers to physical force or compulsion, while • A contract of adhesion is construed strictly against the one
intimidation refers to moral force or compulsion. who drew it. Public policy protects the other party against
• Requisites of violence: 1) That the physical force employed oppressive and onerous conditions.
must be irresistible or of such degree that the victim has
no other course, under the circumstances, but to submit; Art. 1338. There is fraud when, through insidious words or
and 2) that such force is the determining cause in giving machinations of one of the contracting parties, the other is
the consent to the contract. induced to enter into a contract which, without them, he
• Requisites of intimidation: 1) that the intimidation must be would not have agreed to. (1269)
the determining cause of the contract, or must have
caused the consent to be given; 2) that the threatened act • Fraud is every kind of deception, whether in the form of
be unjust or unlawful; 3) that the threat be real and insidious machinations, manipulations, concealments, or
serious, there being an evident disproportion between the misrepresentations, for the purpose of leading another
evil and the resistance which all men can offer; and 4) that party into error and thus executing a particular act.
it produces a reasonable and well-grounded fear from the
• Fraud produces qualified error; it induces in the other party
fact that the person from whom it comes has the
an inexact notion of facts. The will of another is maliciously
necessary means or ability to inflict the threatened injury.
misled by means of false appearance of reality.
• “Insidious words or machinations” include false promises;
Art. 1336. Violence or intimidation shall annul the
exaggeration of hopes or benefits; abuse of confidence;
obligation, although it may have been employed by a third
and fictitious names, qualifications, or authority.
person who did not take part in the contract. (1268)
• Kinds of fraud: 1) dolo causante—which determines or is
the essential cause of the consent; 2) dolo incidente—
Art. 1337. There is undue influence when a person takes which does not have such a decisive influence and by itself
improper advantage of his power over the will of another, cannot cause the giving of consent, but refers only to some
depriving the latter of a reasonable freedom of choice. The particular or accident of the obligation.
following circumstances shall be considered: the
• Dolo causante can be a ground for annulment; dolo
confidential, family, spiritual and other relations between
incident cannot be a ground for annulment.
the parties, or the fact that the person alleged to have been
unduly influenced was suffering from mental weakness, or • The result of fraud is error on the part of the victim.
was ignorant or in financial distress. (n) • Requisites of fraud: 1) it must have been employed by one
contracting party upon the other; 2) it must have induced
the other party to enter into the contract; 3) it must have
• In intimidation, there must be an unlawful or unjust act
been serious; 4) and it must have resulted in damage or
which is threatened and which causes consent to be given,
injury to the party seeking annulment.
while in undue influence there need not be an unjust or
unlawful act. In both cases, there is moral coercion.
• Moral coercion may be effected through threats, expressed Art. 1339. Failure to disclose facts, when there is a duty to
reveal them, as when the parties are bound by confidential
or implied, or through harassing tactics.
relations, constitutes fraud. (n)
• Undue influence is any means employed upon a party
which, under the circumstances, he could not well resist,
and which controlled his volition and induced him to give • Silence or concealment, by itself, does not constitute fraud,
his consent to the contract—which otherwise he would not unless there is a special duty to disclose certain facts, or
have entered into. unless according to good faith and the usages of
• A contract of adhesion is one in which one of the parties commerce, the communication should be made.
imposes a ready-made form of contract, which the other • Thus, the innocent non-disclosure of a fact does not affect
party may accept or reject, but which the latter cannot the formation of the contract or operate to discharge the
modify. These are contracts where all the terms are fixed parties from their agreement.
Art. 1340. The usual exaggerations in trade, when the other Incidental fraud only obliges the person employing it to pay
party had an opportunity to know the facts, are not in damages. (1270)
themselves fraudulent. (n)
• Fraud is serious when it is sufficient to impress, or to lead
• Tolerated fraud includes minimizing the defects of the an ordinarily prudent person into error; that which cannot
thing, exaggeration of its good qualities, and giving it deceive a prudent person cannot be a ground for nullity.
qualities that it does not have. This is lawful • Besides being serious, the fraud must be the determining
misrepresentation known as dolus bonus. This is also cause of the contract. It must be dolo causante.
called lawful astuteness. • When both parties use fraud reciprocally, neither one has
• These misrepresentations are usually encountered in fairs, an action against the other; the fraud of one compensates
markets, and almost all commercial transactions. They do that of the other. Neither party can ask for the annulment
not give rise to an action for damages, either because of of the contract.
their insignificance or because the stupidity of the victim is
the real cause of his loss.
Art. 1345. Simulation of a contract may be absolute or
• The thinking is that where the means of knowledge are at relative. The former takes place when the parties do not
hand and equally available to both parties, one will not be intend to be bound at all; the latter, when the parties
heard to say that he has been deceived. conceal their true agreement. (n)

Art. 1341. A mere expression of an opinion does not signify • Simulation is the declaration of a fictitious will, deliberately
fraud, unless made by an expert and the other party has
made by agreement of the parties, in order to produce, for
relied on the former's special knowledge. (n)
the purposes of deception, the appearance of a juridical act
which does not exist or is different from that which was
• An opinion of an expert is like a statement of fact, and if really executed.
false, may be considered a fraud giving rise to annulment.
Art. 1346. An absolutely simulated or fictitious contract is
Art. 1342. Misrepresentation by a third person does not void. A relative simulation, when it does not prejudice a
vitiate consent, unless such misrepresentation has created third person and is not intended for any purpose contrary to
substantial mistake and the same is mutual. (n) law, morals, good customs, public order or public policy
binds the parties to their real agreement. (n)
• The general rule is that the fraud employed by a third
person upon one of the parties does not vitiate consent • In absolute simulation, there is color of a contract, without
and cause the nullity of a contract. any substance thereof, the parties not having any intention
• Exception: If one of the parties is in collusion with the third to be bound.
person, or knows of the fraud by the third person, and he • In relative simulation, the parties have an agreement
is benefited thereby, he may be considered as an which they conceal under the guise of another contract.
accomplice to the fraud, and the contract becomes Example: a deed of sale executed to conceal donation.
voidable. • 2 juridical acts under relative simulation: ostensible act,
that which the parties pretend to have executed; hidden
Art. 1343. Misrepresentation made in good faith is not act, that which consists the true agreement between the
fraudulent but may constitute error. (n) parties.

Art. 1344. In order that fraud may make a contract SECTION 2. - Object of Contracts
voidable, it should be serious and should not have been
employed by both contracting parties.
• The object of a contract is its subject matter. It is the would be valid provided that the testator has already died.
thing, right, or service which is the subject-matter of the The right of a fideicommissary heir comes from the
obligation arising from the contract. testator and not from the fiduciary.
• Requisites: 1) It must be within the commerce of man; 2)
it must be licit, or not contrary to law, morals, good Art. 1348. Impossible things or services cannot be the
customs, public policy, or public order; 3) it must be object of contracts. (1272)
possible ; and 4) it must be determinate as to its kind.
• Things are impossible when they are not susceptible of
Art. 1347. All things which are not outside the commerce of existing, or they are outside the commerce of man.
men, including future things, may be the object of a Personal acts or services impossible when they beyond the
contract. All rights which are not intransmissible may also ordinary strength or power of man.
be the object of contracts. • The impossibility must be actual and contemporaneous
with the making of the contract, and not subsequent
No contract may be entered into upon future inheritance thereto.
except in cases expressly authorized by law. • The impossibility is absolute or objective when nobody can
perform it; it is relative or subjective when due to the
• All services which are not contrary to law, morals, special conditions or qualifications of the debtor it cannot
good customs, public order or public policy may be performed.
likewise be the object of a contract. (1271a) • The absolute or objective impossibility nullifies the
contract; the relative or subjective does not.
• Things which are outside the commerce of man:
Art. 1349. The object of every contract must be determinate
as to its kind. The fact that the quantity is not determinate
1. Services which imply an absolute submission by those who
shall not be an obstacle to the existence of the contract,
render them, sacrificing their liberty, their independence or
provided it is possible to determine the same, without the
beliefs, or disregarding in any manner the equality and
need of a new contract between the parties. (1273)
dignity of persons, such as perpetual servitude or slavery;

• The thing must have definite limits, not uncertain or


1. Personal rights, such as marital authority, the status and
capacity of a person, and honorary titles and distinctions; arbitrary.
2. Public offices, inherent attributes of the public authority, • The quantity of the of the object may be indeterminate, so
and political rights of individuals, such as the right of long as the right of the creditor is not rendered illusory.
suffrage;
3. Property, while they pertain to the public dominion, such SECTION 3. - Cause of Contracts
as the roads, plazas, squares, and rivers;
4. Sacred things, common things, like the air and the sea,
• The cause of the contract is the “why of the contract,” the
and res nullius, as long as they have not been
immediate and most proximate purpose of the contract,
appropriated.
the essential reason which impels the contracting parties to
enter into it and which explains and justifies the creation of
• Even future things can be the object of contracts, as long the obligation through such contract.
as they have the possibility or potentiality of coming into • The cause as to each party is the undertaking or prestation
existence. to be performed by the other. The object of the contract is
the subject matter thereof (e.g., the land which is sold in a
• The law, however, generally does not allow contracts on sales contract). Consideration, meanwhile, is the reason,
future inheritance. A contract entered into by a motive, or inducement by which a man is moved to bind
fideicommissary heir with respect to his eventual rights himself by an agreement.
• Requisites: 1) it must exist; 2) it must be true; and 3) it contrary to law, morals, good customs, public order or
must be licit. public policy. (1275a)

Art. 1350. In onerous contracts the cause is understood to Art. 1353. The statement of a false cause in contracts shall
be, for each contracting party, the prestation or promise of render them void, if it should not be proved that they were
a thing or service by the other; in remuneratory ones, the founded upon another cause which is true and lawful.
service or benefit which is remunerated; and in contracts of (1276)
pure beneficence, the mere liberality of the benefactor.
(1274) • Where the cause stated in the contract is false, the latter
may nevertheless be sustained by proof of another licit
• In onerous contracts, the cause need not be adequate or cause.
an exact equivalent in point of actual value, especially in
dealing with objects which have a rapidly fluctuating price. Art. 1354. Although the cause is not stated in the contract,
There are equal considerations. it is presumed that it exists and is lawful, unless the debtor
• A remuneratory contract is one where a party gives proves the contrary. (1277)
something to another because of some service or benefit
given or rendered by the latter to the former, where such • Unless the contrary is proved, a contract is presumed to
service or benefit was not due as a legal obligation. The have a good and sufficient consideration. This presumption
consideration of one is greater than the other’s. applies when no cause is stated in the contract.
• A gratuitous contract is essentially an agreement to give
donations. The generosity or liberality of the benefactor is
Art. 1355. Except in cases specified by law, lesion or
the cause of the contract. There is nothing to equate.
inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence. (n)
Art. 1351. The particular motives of the parties in entering
into a contract are different from the cause thereof. (n)
• In case of lesion or inadequacy of cause, the general rule is
that the contract is not subject to annulment.
• Cause is the objective, intrinsic, and juridical reason for • In cases provided by law, however, such as those
the existence of the contract itself, while motive is the mentioned in Art 1381, the lesion is a ground for rescission
psychological, individual, or personal purpose of a party to of the contract.
the contract.
• Gross inadequacy naturally suggests fraud and is evidence
• As a general principle, the motives of a party do not affect
thereof, so that it may be sufficient to show it when taken
the validity or existence of a contract. Exceptions: When in connection with other circumstances.
motive predetermines the purpose of the contract, such as

CASES
1. When the motive of a debtor in alienating property is to
defraud his creditors, the alienation is rescissible;
SANCHEZ VS RIGOS
1. When the motive of a person in giving his consent is to
avoid a threatened injury, as in the case of intimidation, June 14, 1972
the contract is voidable; and
2. When the motive of a person induced him to act on the Nicolas Sanchez and Severina Rigos executed an “Option to
basis of fraud or misrepresentation by the other party, the Purchase” whereby Rigos “agreed, promised, and committed’ to
contract is voidable. sell to Sanchez a parcel of land for P1,510. The understanding was
that the Option will be deemed “terminated and elapsed” if
Art. 1352. Contracts without cause, or with unlawful cause, Sanchez fails to exercise his right to buy said property within 2
produce no effect whatever. The cause is unlawful if it is years from the execution of the agreement. Sanchez did tender
several payments within the specified period but Rigos rejected HELD: Granted there was deceit in executing the Promissory Note
said payments, arguing that the Option was a unilateral promise to to Michael & Co., still the deceit and error alleged could not annul
sell and was unsupported by any valuable consideration and by the consent of Veloso nor exempt her from the obligation incurred.
force of the Civil Code. And therefore, pointed out Rigos, the The deceit, in order that it may annul the consent, must be that
Option was null and void. which the law defines as a cause. “There is deceit when by words
or insidious machinations on the part of one of the contracting
HELD: The Option was not a contract to buy and sell. It did not parties, the other is induced to execute a contract which without
impose upon Sanchez the obligation to purchase Rigos’ property. It them he would not have made.” (Art 1269, Civil Code)
merely granted Sanchez an option to buy. There is nothing in the
contract to indicate that Rigos’ agreement or promise was Franco was not one of the contracting parties who may have
supported by a consideration “distinct from the price” stipulated for deceitfully induced the other contracting party, Michael & Co., to
the sale of land. execute the contract. The one and the other of the contracting
parties, to whom the law refers, are the active and passive
Under Arts 1324 and 1479 of the Civil Code, however, a unilateral subjects of the obligation, the party of the first part and the party
promise to sell—although not binding as a contract in itself for lack of the second part who execute the contract. The active subject
of a separate consideration—nevertheless generates a bilateral and the party of the first part of the Promissory Note in question
contract of purchase and sale upon acceptance. was Michael & Co., and the passive subject and party of the second
part were Veloso and Franco. Veloso and Franco, therefore,
composed a single contracting party in contractual relation with or
In other words, since there may be no valid contract without a
against Michael & Co.
cause or consideration, the promisor is not bound by his promise
and may, accordingly, withdraw it. Pending notice of his
withdrawal, his accepted promise partakes of the nature of an offer Franco, like any other person who might have induced Veloso into
to sell which, if accepted as in the case at bar, results in a signing the Promissory Note under the influence of deceit, would
perfected contract of sale. Decision: for Sanchez. be but a third person. Under the Civil Code, deceit by a third
person does not in general annul consent. This deceit may give rise
to more or less extensive and serious responsibility on the part of
“An option implies the legal obligation to keep the offer to sell open
the third person (Franco) and a corresponding right of action for
for the time specified. It could be withdrawn before acceptance, if
the contracting party prejudiced (Veloso). [Veloso will probably
there was no consideration for the option. But once the offer to sell
just have to file an action against the estate of Franco.]
is accepted, a bilateral promise to sell and to buy ensues, and the
offeree ipso facto assumes the obligations of a purchaser.” – J.
Antonio, concurring opinion. Veloso ordered to pay Michael & Co.

HILL VS VELOSO MAPALO VS MAPALO

July 24, 1915 May 19, 1966

Maximina Veloso claimed that she was tricked by her son-in-law Spouses Miguel and Candida Mapalo—simple and illiterate farmers
Domingo Franco into signing a blank document, unknowingly —donated the eastern half of their property to Maximo Mapalo,
binding her to a debt of P6,319 to Michael & Co. She thought, Miguel's brother, who was about to get married. Maximo, however,
according to her, she was made to sign to acknowledge an deceived Miguel and Maxima into signing a deed of absolute sale
obligation to pay for the guardianship of the minor children of over the entire property in his favor. Maximo and his notary public
Potenciano Veloso (her brother?). And that she learned of the true led the spouse to believe that the deed of sale covered only the
nature of the document (a promissory note to Michael & Co.) only eastern half of the property. The deed even stated an alleged
after Franco’s death. But, clearly, her signatures on the promissory consideration of P500, which the spouses never received. Thirteen
note were obtained by means of fraud. years later, Maximo sold the entire property to Evaristo, Petronila,
Pacifico, and Miguel Narciso—who first took possession of the
eastern half and later demanded Miguel and Candida to vacate the
western half. The spouses moved to declare the deeds of sale over breach, casual or serious, but a situation that prevents the
the western half of the property null and void. obligation of the vendor to convey title from acquiring an
obligatory force. Thus, if the vendor should eject the vendee for
HELD: Consent in the case at bar was admittedly given, albeit failure to meet the condition precedent, he is enforcing the
under the influence of fraud. Accordingly, said consent, although contract and not rescinding it.
defective, did exist. In such case, the defect in the consent would
provide a ground for annulment of a voidable contract, not a For comparative purposes, in a contract of sale, non-payment of
reason for nullity ab initio. the price is a negative resolutory condition. The vendor has lost
ownership of the thing sold and cannot recover it unless the
As for the cause or consideration, liberality did not exist as regards contract is rescinded and set aside.
the western portion of the Mapalo property. There was no donation
with regard to the same. Under the Civil Code, contracts without a Decision: For Santos.
cause or consideration produce no effect whatsoever. The alleged
consideration of P500 in the deed of sale was totally absent as it SANTOS VS HEIRS OF JOSE MARIANO AND ERLINDA
was not received by the spouses. Decision: for Miguel and MARIANO-VILLANUEVA
Candida.
October 24, 2000
SANTOS VS COURT OF APPEALS
Spouses Macario Mariano and Irene Peña-Mariano owned 6 parcels
August 1, 2000 of land. When Macario died and left no will, his share over the
properties passed on to his children and Irene. Irene, who was
Rosalinda Santos sold her property in Parañaque to Carmen appointed the heirs’ lawful representative and agent, subsequently
Caseda. Caseda gave an initial payment and took possession of the executed an Affidavit of Merger whereby she merged unto her
property, which she then leased out. Caseda, however, suffered name the land titles covering all the properties in question. Over
from bankruptcy and failed to pay the remaining balance. Santos the years, she remarried and disposed of all 6 parcels of land in
re-possessed the property and collected the rentals from the favor of one Raul Santos. The children learned of all this only after
tenants thereof. Caseda sold her fishpond in Batangas and raised Irene’s death.
money enough to pay the balance. Santos, however, wanted a
higher price now taking into consideration the real estate boom in ISSUE: Whether the supposed contracts of sale of various pieces of
Metro Manila. Caseda filed a petition either to have Santos execute real property entered into between Irene as vendor and the
the final deed of conveyance over the property or, in default respective vendees were bona fide contracts, legal, and binding
thereof, to reimburse the amount she had already paid. upon the children—who were registered co-owners of said real
properties.
HELD: Taking into consideration the essential requisites of a
contract, the Court concluded that there was no transfer of HELD: Even with a duly executed written document purporting to
ownership simultaneous with the delivery of the property be a contract of sale, the Court cannot rule that the subject
purportedly sold to Caseda. The records clearly showed that, contracts of sale are valid, when the evidence presented in the
notwithstanding the fact that Caseda took possession of the courts below show that there had been no meeting of the minds
property, the title had remained always in the name of Santos. between the supposed seller and corresponding buyers of the
Thus, the contract between Santos and Caseda was a contract to parcels of land in the case at bar.
sell—ownership is reserved by the vendor and is not to pass until
full payment of the purchase price.
The case is replete with evidence tending to show that there was
really no intention to sell the subject properties as far as the
Since the case at bar involves a contract to sell, a judicial children were concerned.
rescission of the agreement is not necessary. In a contract to sell,
the payment of the purchase price is a positive suspensive
MMDA vs JANCOM
condition. Failure to pay the price agreed upon is not a mere
Facts: Jancom won the bid to operate the waste disposal site in 4. Despite the lack of valid notice of award, the defect was cured
San Mateo, Rizal under the Build-Operate-Transfer (BOT) by the subsequent execution of the contract entered into and
scheme.Aafter a series of meetings and consultations between the signed by authorized representatives of the parties;
negotiating teams of EXECOM and JANCOM, the BOT Contract for
the waste-to-energy project was signed between JANCOM and the 5. In any event, petitioners, as successors of those who previously
Philippine Government, represented by the Presidential Task Force acted for the government (Chairman Oreta, et al), are estopped
on Solid Waste Management through DENR Secretary Victor from assailing the validity of the notice of award issued by the
Ramos, CORD-NCR Chairman Dionisio dela Serna, and MMDA latter. As private respondents correctly observed, in negotiating on
Chairman Prospero Oreta. The BOT contract was submitted to the terms and conditions of the BOT contract and eventually
President Ramos for approval but this was too close to the end of signing said contract, the government had led private respondents
his term which expired without him signing the contract. President to believe that the notice of award given to them satisfied all the
Ramos, however, endorsed the contract to incoming President requirement of the law.
Joseph E. Estrada. However, due to the clamor of residents of Rizal
province, President Estrada had, in the interim, also ordered the
6. There being a perfected contract, MMDA cannot revoke or
closure of the San Mateo landfill. Due to these circumstances, the
renounce the same without the consent of the other. From the
Greater Manila Solid Waste Management Committee adopted a
moment of perfection, the parties are bound not only to the
resolution not to pursue the BOT contract with JANCOM. MMDA
fulfillment of what has been expressly stipulated but also to all the
decided to hold a new bidding for other waste management in
consequences which, according to their nature, may be in keeping
other locations. Jancom won a court order compelling the MMDA to
with good faith, usage, and law (Article 1315, Civil Code). The
push through with their contract.
contract has the force of aw between the parties and they are
expected to abide in good faith by their respective contractual
Issue: Was there a valid contract despite the lack of signature by commitments, not weasel out of them. Just as nobody can be
the President and valid notice of award? forced to enter into a contract, in the same manner, once a
contract is entered into, no party can renounce it unilaterally or
Held: Yes without the consent of the other. It is a general principle of law
that no one may be permitted to change his mind or disavow and
Ratio: go back upon his own acts, or to proceed contrary thereto, to the
prejudice of the other party. Nonetheless, it has to be repeated
that although the contract is a perfected one, it is still ineffective
1. Article 1315 of the Civil Code, provides that a contract is
or unimplementable until and unless it is approved by the
perfected by mere consent. Consent, on the other hand, is
President.
manifested by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the contract (See
Article 1319, Civil Code). Palma vs Canizares

2. In the case at bar, the signing and execution of the contract by Facts:
the parties clearly show that, as between the parties, there was a
concurrence of offer and acceptance with respect to the material Saturnina Salazar and Juan Canizares took part in a game of
details of the contract, thereby giving rise to the perfection of the chance. Canizares lost and as a result thereof, became indebted to
contract. Salazar in the amount of $5,000. This was evidenced in a
promissory note signed by the brother-in-law of Canizares.
3. To illustrate, when petitioners accepted private respondents’ bid Canizares paid 500, leaving a balance of 4500. Salazar meanwhile,
proposal (offer), there was, in effect, a meeting of the minds upon received 4500 from Palma. She indorsed the note to Palma who
the object (waste management project) and the cause (BOT demanded the sum from Canizares.
scheme). Hence, the perfection of the contract.
Issue: Is Canizares under obligation to pay Palma?

Held: No
Ratio: Held: NO

It is indubitable that the indebtedness of 5,000 pesos expressed in Ratio:


the note referred to arose in a monte game, a game of chance,
and therefore expressly prohibited by law. As the law does not The amount of monthly salary base was a prime consideration of
allow an action for the recovery of money won in such games (art. the parties in signing the employment contract. Mutual mistake,
1798 of the Civil Code), it follows that the action brought by Palma however, prevented the proposed contract from arising.
can not be maintained, nor can any judgment be rendered by the
courts directing the payment of the sum claimed in the complaint.
The mutual mistake here should be distinguished from a mistake
which vitiates consent in a voidable contract.
The undertaking expressed in the note executed by a third person
in favor of the woman, Salazar, by order of Cañizares does not
The element of consent was not present at all in this case. There
constitute a ratification or confirmation of the obligation contracted
was no concurrence of the offer and acceptance upon the subject
to pay the sum lost in a monte game.
matter and the cause which are to constitute the contract.

Furthermore, it has not been proven that Canizares gave his


In a situation wherein one or both parties consider that certain
consent to the subrogation
matters or specifics, in addition to the subject matter and the
causa should be stipulated and agreed upon, the area of
Thus, the obligation of the supposed debtor, because of its vicious agreement must extend to all points that the parties deem
origin, is not enforceable in court, it follows that no recovery can material or there is no contract.
be had in this suit.
Somoso vs. CA
Dumez vs. NLRC
Facts:
Facts:
The spouses Somosa purchased from Conpinco one unit VHS (23k)
Petitioner is a French company which hires Filipino workers with accessories and one unit Cinema Vision (124.5k) with
through a ECCOI, a company existing in the Philippines. Dumez complete accessories. They made partial payments which were
needed 4 Senior Draftsmen who were willing to work for evidenced by provisional receipts. However, by Aurgust 27, 1979,
$600/month at Saudi Arabia. Private respondent Jose was among no further payments were made. On November of the same year,
the draftsmen that were hired by ECCOI in behalf of Dumez. The petitioner demanded that Conpinco pull out the VHS unit because
employment agreement of Jose showed that his monthly base “it was not the unit requested for demonstration.” Petitioner also
salary would be $680. This discrepancy was discovered when requested the return of the 15k deposit. In response, conpinco
Dumez began preparing the papers related to respondent’s first sent petitioners a collection letter for the Cinema Vision and for the
month salary. The discrepancy was reported to ECCOI who in turn National VHS. Petitioners are claiming that there was no perfected
claimed that it was a mere typographical error. Meanwhile, Jose contract of sale between them and respondent Conpinco as there
insisted on being paid $680 per month as stated in his was no meeting of the minds of the parties upon the thing which is
employment agreement. Dumez eventually dismissed Jose on the the object of the contract and upon the price of the said
grounds of “surplus employee, excess of manpower and thing. Petitioners claim they only requested a demonstration.
retrenchment.” A case was filed by Jose before the POEA and then
before the NLRC who ordered Dumez to pay the respondent’s
Issue: WON there was a contract?
salary for the unexpired portion of 1 year.

Held: YES
Issue: WON there existed a valid contract between Dumez and
Jose?
Ratio:
The claims of petitioners are belied by the two documents of sale There was a failure of any meeting of the minds of the parties. It
signed by the spouses as buyers which documents were notarized. was because of their past failure to arrive at an agreement that
petitioners had to put an end to the uncertainty by writing the
The acts of petitioners before and after the delivery of the National letter dating July 12, 1978.
VHS negates any claim that the set was delivered for
demonstration purposes only and that there was no meeting of the FORM OF CONTRACTS
minds between the parties as to the subject of the sale and its
price. (delivery of checks as partial downpayment etc.) Dauden-Hernaez vs. De los Angeles (1969)

Yuvienco vs. Dacuycuy This is a petition for a writ of certiorari to set aside certain orders
of the CFI of Quezon City dismissing a complaint for breach of
Facts: contract and damage, etc.

Petitioners were selling a parcel of land located in Tacloban. They Facts:


expressed willingness to sell the property at 6.5M to private
respondents as long as the latter would make known its decision to • Marlene Dauden-Hernaez is a motion picture actress who
buy not later than July 31, 1978. The private respondents reply,
has filed a complaint against private resp Hollywood Far
thru a letter stated “we agree to buy property proceed to Tacloban
East Productions Inc and its President Ramon Valuenzela to
to negotiate details.” The respondents are now filing a complaint
recover P14, 700 representing a balance due to said
for specific performance which the petitioners want dismissed on
actress for her services as leading actress in two motion
the ground of lack of cause of action. The judge ruled negatively
pictures produced by the company and to recover
on the motion to dismiss.
damages.
• Her petition was dismissed by the lower court because “it
Issue: WON the facts show the existence of a perfected contract of was defective because not evidenced by any written
sale? document, either public or private considering that the
claim is more than P500 ” thereby violating Article 1356
Held: NO and 1358 of the Civil Code.

Ratio: Issue:

Art. 1319 CC: Consent is manifested by the meeting of the offer WON the court below abused its discretion in ruling that a contract
and the acceptance upon the thing and the cause which are to for personal services involving more than P500 was either invalid
constitute the contract. The offer must be certain and the or unenforceable under the last par of 1358 of the CC.
acceptance absolute. A qualified acceptance constitutes a counter-
offer. Acceptance made by letter or telegram does not bind the Held:
offerer except from the time it came to his knowledge. The
contract, in such a case, is presumed to have been entered into in
the place where the offer was made. • Yes. The court below abused its discretion. There was a
misunderstanding of the role of the written form in
contracts, as ordained in the present CC.
The telegram instructing Atty Gamboa to “proceed to Tacloban to
negotiate details” is the key that negates and makes it legally
impossible for the court to hold that respondents’ acceptance of • The contractual system of our CC still follows that of the
petitioners offer, was the “absolute” one that Art. 1319 requires. Spanish Code of 1889 and of the “Ordenamiento de Alcala”
(ah so Leghis) of upholding the spirit and intent of the
“to negotiate” is practically the opposite of the idea that an parties over formalities, hence, in general, contracts are
agreement has been reached. valid and binding from their perfection regardless of the
form, whether they be oral of written as provided by Art a. Contracts that the law requires to be proved by some
1315 (Contracts are perfected by mere consent xxx) and writing (memorandum) of its terms as in those covered by
by 1356 ( Contracts shall be obligatory in whatever form the old Statute of Frauds, now Art. 1403(2) of the CC.
they may have been entered into xxx). (This is needed for enforceability of the contract by an
• The essential requisites are present in the contract- action in court).
C-O-C.
• However 1356 also provides two exceptions: • The basis error in the court’s decision lies in overlooking
that in our contractual system it is not enough that the law
a. Contracts for which the law itself requires that they be in should require that the contract be in writing, as it does in
some particular form (writing) in order to make them valid Art. 1358. The law MUST further PRESCRIBE that without
and enforceable (the so-called solemn contracts). the writing the contract is not valid or enforceable by
action.
Ex.
• Order set aside and case remanded to court of origin for
1. donation of immovable property (in public ins) (Art. 749) further proceedings.

2. donation of movables worth more than P5,000 (Art. 748) Alano et al vs. Babasa (1908)

3. contracts to pay interest in loans (mutuum) (Art. 1956). Facts:

4. agreements contemplated in: • Juana Cantos assisted by her husband Jose Alano filed a
complaint against the defendant Jose Babasa alleging that
4.1. Art 1744: Stipulation bet the common carrier and the shipper the complainant Cantos has the right to repurchase the
or the owner limiting the liability of the former for the loss land which her father pledged to guarantee a debt of
destruction or deterioration of the goods to a degree less than P1300 in favor of Fulgencio Babasa and Maria Cantos, the
extraordinary diligence xxx parents of the defendant (relative siguro ng complainant
yung defendant, pinsan siguro).
• The contract entered into on July 18, 1883 stipulated a
4.2. Art 1773: A contract of partnership is void, whenever
condition that the creditors should enjoy the usufruct of
immovable property is contributed thereto, if an inventory of said
said land from the date of contract and that for seven
property is not made, signed by the parties, and attached to the
years to take possession of the land as if their own and
public instrument.
that after 7 years, the debtor is entitled to redeem the land
by paying the debt.
4.3. Art. 1874: When a sale of a piece of land or any interest • Petitioner claims that they talked to defendant and that in
therein is through an agent, the authority of the latter shall be in
the beginning engaged to permit its redemption later on
writing; otherwise, the sale shall be void.
offered to definitely purchase said land at an increase price
but plaintiff did not agree.
4.4. Art. 2134: The amount of the principal and of the interest • Defendant made a general denial and alleged that the land
shall be specified in writing; otherwise the contract of antichresis described had been sold with right of repurchase and that
shall be void. the parents of the plaintiff had lived years after the
expiration of the 7-year period provided and that they
Note: Antichresis: a contract whereby the creditor acquires the never exercised the right to repurchase.
right to receive the fruits of an immovable of his debtor, with the
obligation to apply them to the payment of the interest, if owing Issue:
and thereafter to the principal of his credit (Art. 2132).
WON the plaintiff can repurchase the said land taking into REFORMATION OF INSTRUMENTS
consideration that the Civil Code was enacted in Dec. 1889 which
provides a different prescriptive period. Atilano vs. Atilano (1969)

Held: Facts:

No. Her action has already prescribed. • In 1916, Eulogio Atilano I acquired by purchase from
Villanueva lot no. 535 in Zamboanga, obtained the transfer
• The contract was entered into on July 18, 1883 and the 7 certificate of title in his name and in 1920 divided the said
year expiration has commenced on June 19, 1890 and at lot into 5 parts identified as lots Nos. 535-A, 535-B, 535-C,
that time the CC became effective already thus the 535-D, 535-D, 535-E.
provisions of the Code can be applied on the case. • On May 18, after the subdivision of the said lot, he
• Art. 1939 shall be the applicable to the case which states executed a deed of sale cover lot E in favor of his brother
that: Prescription, which began to run before the Eulogio Atiliano II, who obtained lot E, and the three other
publication of this code, shall be governed by the prior lots were sold to other persons. Atilano I retained for
laws; but if, after this code became operative, all the time himself only the remaining portion of the land presumably
required in the same for prescription has elapsed, it shall Lot A.
be effectual, even if according to said prior laws a longer • In 1952, Atilano II died, thus his widow and children
period of time may be required. obtained the transfer certificate over E in their names as
• Excerpt from the contract: “it has been agreed to between co-owners but in 1959 they decided to subdivide the lot
us that we shall convey to him the said land from this day, and they then discovered upon the results of the survey
and that he will cause the same to be worked from this that the land they were actually occupying was lot A and
date as if it were his own property for a period of seven not E.
years; that we shall have the right to redeem it for the said • Because of this, they demanded that Lot E be surrendered
sum of P1,000 at the expiration of seven years in such a to them and offered to surrender Lot A to the descendants
manner that said land shall be under his care as long as of Atilano I but they refused. It is understandable that they
we do not pay the redemption money”. wanted Lot E because it has an area of 2612 sqm as
• In the absence of an express agreement, the right to compared to 1808 sqm of lot A.
redeem the thing sold shall only last and may only be • Defendants (Atilano II descendants) answered that it was
exercised within 4 years counted from the date of the just an involuntary error and that the intention of the
contract (in this case, it shall be counted from 1889 when parties was to convey the lot correctly identified as A.
the said code went into effect). It has already expired Atilano I had been possessing and had his house on the
when the action was brought in 1907. portion designated as E and in fact increased the area by
• Relevance of case under the title: It is a contract of sale purchasing the adjacent lot from its owner Carpio.
with right to repurchase and it is valid, perfect and efficient • RTC rendered judgment for the plaintiff on the sole ground
because the three requisites are present and is also that since the property was registered under the Land
binding notwithstanding the fact that it has been drawn up Registration Act, the defendants could not acquire it
as a private document, and the legalization of a contract through prescription.
by means of a public writing and its entry in the register
are not essential solemnities or requisites for its validity
Issue:
and efficacy as between the contracting parties, but just
conditions of form which the law imposes in order that it
may be effective and recorded agreement may be WON the lower court was correct in rendering the judgment for the
respected by the latter. plaintiff.

• Judgment affirmed. Held:


No. One sells or buys the property as he sees it, in its actual • Richmann also applied for and was granted credit financing
setting and by its physical metes and bounds, and not by the mere facilities by petitioner in the amount of almost 1M payable
lot number assigned to it in the certificate or title. in installments.
• Private respondents defaulted in their respective
• The portion correctly referred to as lot A was already in the obligations. FNCB demanded for the obligations to be
possession of Atilano II who had constructed his residence fulfilled and thereafter filed a complaint for seizure.
therein even before the sale in his favor. • A writ of replevin was issued for the seizure of the heavy
• The sale was a simple mistake in the drafting of the equipment and machineries subject of the lease agreement
document. The mistake did not vitiate the consent of the and when served upon the Pajarillaga’s, they panicked and
parties or affect the validity and binding effect of the proceeded to the office of the FNCB and its counself and
contract between them. thereafter signed a Compromise agreement which states
• The new CC provides a remedy for such a situation by among others that the Pajarillaga’s acknowledge that
means of reformation of the instrument. This remedy is plaintiff is the owner of all the properties and that they
available when, there having been a meeting of the minds have been allowed to temporarily operated the properties
of the parties to a contract, their true intention is not under the direct control and supervision of plaintiff and/or
expressed in the instrument purporting to embody the its representatives with the express understanding that
agreement by reason of mistake, fraud, inequitable defendants acknowledge and recognize plaintiff’s
conduct or accident (1359). ownership and right to repossess and take custody of said
• In this case, the deed of sale executed in 1920 need no properties.
longer be reformed. The parties have retained possession • This agreement was approved by Branch XXI of this Court
of their respective properties conformably to the real and a decision was rendered enjoining the parties thereto
intention of the parties to that sale, and all they should do to faithfully comply with the terms and conditions. But the
is to execute mutual deeds of conveyance. Pajarillaga’s still did not comply with the compromise
agreement thus the sheriff levied on 27 pieces of heavy
equipment.
Investors Finance Corporation vs. CA (1991)
• The Pajarillaga’s claim that there was fraud because they
signed the Compromise agreement without the help of
Facts: their counsel and that it was just one-sided in favor of
FNCB, thus, filed for an annulment of the compromise
• Before April 30, 1974 resp Richmann Tractors Inc, with agreement and the simulated lease agreement. (RTC and
Pajarillaga as president were the owners of certain CA ruled in favor of the Pajarilla’s)
construction equipment and being in need of financing (for
operation of their construction and logging business) went Issue:
to Investor’s Finance Corporation (or FNCB Finance) with
their equipment as collateral. In the documents which were
WON annulment should be the proper remedy for the Pajarillaga
executed, it was made to appear that FNCB was the owner
spouses.
of the equipments and that private resp were merely
leasing them. As a consideration for the lease, private resp
were to pay monthly amortizations over a period of 36 Held:
mos).
• On April 30, 1974, petitioner FNCB Finance and respondent • No. According to the Court, their action for annulment of
Richmann Tractors executed a Lease Agreement covering the simulated lease agreement was seasonably filed in
various properties described in the Lease Schedules 1979, within 10 years from the date of its execution in
attached to the Lease Agreement. As security for the 1974 (1144 CC). However the trial court and the CA should
payment of resp Richmann’s obligations under the Lease have treated it as an action for reformation of contract.
Agreement, resp Pajarillaga’s executed a Continuing • For when the true intention of the parties to a contract is
Guaranty dated April 30, 1974. not expressed in the instrument purporting to embody
their agreement by reason of mistake, fraud, inequitable the prescriptive period of ten years is susceptible to the
conduct or accident, the remedy of the aggrieved party is construction that only after the lapse thereof could the demand be
to ask for the reformation, not annulment, of the made for the payment of the obligation.
instrument to the end that their true agreement may be
expressed therein. Prescriptive period to file action thus started to run only after ten
• If the true transaction between FNCB and Pajarillaga or years had lapsed. This is consistent with the actions and intent of
Richman Tractors—an loan with chattel mortgage—had the two parties.
been reflected in the documents, instead of a simulated
financial leasing, the creditor-mortgagee (FNCB), upon the In declaring the said contract to be void, CA ran counter to the
mortgagor’s default in paying the debt, would have been well-settled maxim that between two possible interpretations, that
entitled to seize the mortgaged machinery and equipment which saves rather than destroys is to be preferred.
from Pajarillaga for the purpose of foreclosing the chattel
mortgage therein. The mortgagors would have had no
cause of action for actual, moral and exemplary damages Lim Yhi Luya v CA 1980
arising from the replevin of their mortgaged machinery and
equipment by the creditor, FNCB. Facts: Lim Yhi Luya entered into a contract of sale with private
respondent, Hind Sugar Company, wherein the latter sold to the
INTERPRETATION OF CONTRACTS former 4,085 piculs of sugar. The terms of the contract which was
drawn by the respondent company explicitly stated “cash upon
signing of this contract”. Much of the sugar was properly delivered
Borromeo v CA 1972 to the plaintiff in the next few months except for a remaining 350
piculs of sugar. When plaintiff filed an action to compel the delivery
Facts: Jose A. Villamor, the debtor, borrowed from Canuto O. of the remaining 350 piculs, private respondent company
Borromeo, the original creditor, a large sum of money for which he contended that no payment had yet been made by the plaintiff,
mortgaged his house and lot. Said mortgage, however, was not contrary to the terms stipulated in their contract. Plaintiff had no
properly drawn up and registered, so that the mortgaged house receipt to prove that payment had been made but contends that
and lot ended up attached to a separate civil action initiated by a the terms stipulated in the contract is sufficient proof that payment
certain Mr. Miller against Villamor. When Villamor was being had been made at around the time the contract was signed.
pressed to settle his obligation with Borromeo, the former assured
his creditor that he would still pay the debt and executed a written Issue: WON the statement “cash upon signing of this contact” in
document promising to pay his debt to Borromeo even after the the contract of sale drawn up by the respondent company may be
lapse of ten years, the legal prescriptive period for recovery of interpreted as sufficient proof that payment had in fact been
debts. The creditor never instituted any action against the debtor made.
within the ten years following the execution of the said document
Action to recover the sum from the debtor was filed only after ten
years and was rejected by CA for 2 main reasons: (1)ten-year Held: Yes. Although the contract is ambiguous enough to admit of
prescriptive period for recovery of debts had elapsed, (2) several valid interpretations, the interpretation to be taken shall
document promising to pay even after ten years was void because not favor the respondent company since it is the party who caused
promise was illegal, it being violative of principle “that a person the ambiguity in its preparation. (see Art 1377) The ambiguity
cannot renounce future prescription”. raised by the use of the words or phrases in the questioned
provision must be resolved and interpreted against the respondent
company.
Issue: WON written document promising to pay after ten years is
void for being illegal.
Respondent company's act of delivering to the petitioner four
delivery orders covering all the 4,035 piculs of sugar, viewed in the
Held: No. In the interpretation of the written document or contract light of the established fact that all sugar transactions between
wherein Villamor promised to pay his debt even after ten years, CA petitioner and respondent are always in cash.. is a clear
relied too heavily on the words employed in said document without confirmation of the fact that petitioner paid in cash the cost of the
taking the intention of the parties into consideration. Reference to sugar.. on the very day that the contract was signed..
Riviera Filipina v CA 2002 (1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more than
Facts Riviera Filipina, Inc. entered into a contract of lease with one-fourth of the value of the things which are the object
Juan Reyes involving 1,018 square meters of real property owned thereof;
by Reyes. Paragraph 11 of the lease contract expressly provided
that “lessee shall have the right of first refusal should the lessee (2) Those agreed upon in representation of absentees, if
decide to sell the property during the term of the lease.” When the latter suffer the lesion stated in the preceding number;
Reyes decided to sell the property in 1988, he entered into a series
of negotiations with Riviera Filipina but the parties failed to agree (3) Those undertaken in fraud of creditors when the latter
on the price for the subject property. Riviera Filipina, Inc. clearly cannot in any other manner collect the claims due them;
expressed its refusal to go beyond the price of 5,000 per square
meter. Another interested party offered to purchase the same
(4) Those which refer to things under litigation if they have
property for 5,300 per square meter. Riviera Filipina was well-
been entered into by the defendant without the knowledge
informed that there were other interested buyers but did not know
and approval of the litigants or of competent judicial
of specific price offered by other party. Riviera Filipina now filing
authority;
suit against Reyes and 3rd party purchaser, contending that their
right of first refusal was violated because they were not given the
opportunity to match the offer of 5,300 per square meter. (5) All other contracts specially declared by law to be
subject to rescission. (1291a)
Issue WON right of first refusal in the contract of lease may be
interpreted as to require that the lessee have specific knowledge of Art. 1382. Payments made in a state of insolvency for
the price offered by other interested parties, thereby amounting to obligations to whose fulfillment the debtor could not be
a right to match. compelled at the time they were effected, are also
rescissible. (1292)
Held No. “Intention of the parties shall be accorded primordial
consideration and in case of doubt, their contemporaneous and Art. 1383. The action for rescission is subsidiary; it cannot
subsequent acts shall be principally considered.” be instituted except when the party suffering damage has
no other legal means to obtain reparation for the same.
(1294)
The actions of the two principal parties involved in the contract of
lease shaped their understanding and interpretation of the “right of
first refusal” to mean simply that should Reyes decide to sell the Art. 1384. Rescission shall be only to the extent necessary
property during the term of the lease, such sale should first be to cover the damages caused. (n)
offered to Riviera. Riviera's stubborn approach in its negotiations
with Reyes showed crystal clear that there was never any need to Art. 1385. Rescission creates the obligation to return the
disclose such information. things which were the object of the contract, together with
their fruits, and the price with its interest; consequently, it
DEFECTIVE CONTRACTS: can be carried out only when he who demands rescission
can return whatever he may be obliged to restore.
RESCISSIBLE CONTRACTS
Neither shall rescission take place when the things which
are the object of the contract are legally in the possession
Art. 1380. Contracts validly agreed upon may be rescinded
of third persons who did not act in bad faith.
in the cases established by law. (1290)

In this case, indemnity for damages may be demanded from


Art. 1381. The following contracts are rescissible:
the person causing the loss. (1295)
Art. 1386. Rescission referred to in Nos. 1 and 2 of Article May 13, 1970
1381 shall not take place with respect to contracts
approved by the courts. (1296a) Magdalo V. Francisco, Sr. invented the Mafran sauce, a food
seasoning made out of banana (ketchup?) and had the formula
Art. 1387. All contracts by virtue of which the debtor patented and the name registered as his own trademark.
alienates property by gratuitous title are presumed to have
been entered into in fraud of creditors, when the donor did In May 1960, Francisco Sr. entered into a contract with Universal
not reserve sufficient property to pay all debts contracted Food Corporation entitled “Bill of Assignment” wherein Francisco
before the donation. assigned the USE of the Mafran sauce formula to UFC (right to
mass produce and sell) in exchange for a permanent assignment
Alienations by onerous title are also presumed fraudulent as Second Vice President and Chief Chemist with a salary of
when made by persons against whom some judgment has P300/month, and becoming a member of the Board of Directors.
been issued. The decision or attachment need not refer to
the property alienated, and need not have been obtained by On November 30, 1960 UFC dismissed Francisco and the staff
the party seeking the rescission. working on the Mafran sauce on the pretense of scarcity and high
prices of raw materials; but 5 days later, the President and General
In addition to these presumptions, the design to defraud Manager of UFC Tirso T. Reyes, ordered the
creditors may be proved in any other manner recognized by Auditor/Superintendent and the Assistant Chief Chemist to produce
the law of evidence. (1297a) the Mafran sauce in full swing, to recall the laborers dismissed
(except for Francisco Sr.) and to hire additional daily laborers. The
Art. 1388. Whoever acquires in bad faith the things Mafran sauce produced was of inferior quality because of the
alienated in fraud of creditors, shall indemnify the latter for absence of Francisco Sr. who alone knew the exact formula.
damages suffered by them on account of the alienation,
whenever, due to any cause, it should be impossible for him GM Reyes also admitted that “I consider the two months we paid
to return them. him (Francisco Sr.) is the separation pay.”

If there are two or more alienations, the first acquirer shall Thus Francisco Sr. filed an action for Rescission of the contract.
be liable first, and so on successively. (1298a) Lower court dismissed the case. CA reversed: rescinded the
contract and ordered UFC to 1. Return the Mafran Sauce formula
Art. 1389. The action to claim rescission must be and trademark 2. Pay Francisco Sr. his salary since Dec 1960 until
commenced within four years. the return of the Mafran formula and trademark and 3. Pay
attorney’s fees and costs.
For persons under guardianship and for absentees, the
period of four years shall not begin until the termination of Held: CA correctly observed that UFC schemed and maneuvered to
the former's incapacity, or until the domicile of the latter is ease out and dismiss Francisco Sr. from the service as chief
known. (1299) chemist, in flagrant violation of the Bill of Assignment; and that
the notice of recall was to placate Francisco Sr. Therefore in
addition UFC is 4. Enjoined from using in any manner said Mafran
Notes:
sauce trademark and formula and 5. pay legal interest on
Francisco Sr.’s salary.
* 4 years from when? Example insane , from lucid interval ba?
Doctrine:
* 1st remedy (since subsidiary action ang rescission) is to ask for
the amount of lesion to be repaired.
The general rule is that rescission of a contract will not be
permitted for a slight or casual breach, but only for such
UFC V CA substantial and fundamental breach as would defeat the very
object of the parties making the agreement. The question of
whether a breach of a contract is substantial depends upon the Equitorial V Mayfair, ibid. (case #14 sa page 1 syllabus)
attendant circumstances.
Nov. 21, 1996
Recall: Art 1191 CC: The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with In 1967, Carmelo entered a contract of lease with Mayfair Theater
what is incumbent upon him. for a portion of Carmelo’s property with a stipulation (par. 8) of an
exclusive option by Mayfair to purchase the property in case
The injured party may choose between the fulfillment and the Carmelo decides to sell it.
rescission of the obligation with the payment of damages in either
case. He may also seek rescission even after he has chosen In 1974, Mr. Pascal of Carmelo called Mr. Yang of Mayfair because
fulfillment, if the latter should become impossible. another party was willing to buy the property.

The Court shall decree the rescission claimed, unless there be just Despite Mayfair giving notice of interest to buy; Carmelo sold the
cause authorizing the fixing of a period. property to Equatorial on 1978.

This is understood to be without prejudice to the rights of third Mayfair then brought suit for the annulment of the sale of the
persons who have acquired the thing, in accordance with Art 1385 leased premises to Equatorial.
and Art 1388 of the Mortgage Law.
RTC dismissed the petition and found par. 8 to be an option clause
Tolentino: Art 1191 Rescission is used, instead of Resolution which that cannot bind Carmelo for lack of separate and distinct
is more apt. consideration.

Difference of Art 1191 to Art 1381: CA reversed; par. 8 – right of first refusal according to art. 1479
par. 2.
J. J.B.L. Reyes:
Held: Par. 8 is a right of first refusal, so the contract between
A rescission for breach of contract under Art 1191 CC is not Carmelo and Equatorial must be rescinded.
predicated on injury to economic interests of the party plaintiff, but
on the breach of faith by the defendant, that violates the Ratio: the right was incorporated for Mayfair’s protection; Mayfair
reciprocity between the parties. It is not a subsidiary action, and should be given the right to match the P11.3M price. Equatorial is
Art 1191 may be scanned without disclosing anywhere that the a buyer in bad faith.
action for rescission thereunder is subordinated to anything other
than the culpable breach of his obligations by the defendant. This
Doctrine: same with Guzman, Bocaling V Bonnevie
rescission is a principal action retaliatory in character, it being
unjust that a party be held bound to fulfill his promise, when the
other violates his. Hence the reparation of damages for the breach Guzman, Bocaling V Bonnevie
is purely secondary.
March 2, 1992
In Art 1381, the cause of action is subordinated to the existence o
f that prejudice because it is the raison d’ etre as well as the Africa Valdez de Reynoso, the administratrix of a parcel of land
measure of the right to rescind. Hence, when the defendant makes leased it to the Bonnevies for P4,000 per month with a stipulation
good the damage caused, the action cannot be maintained or that the Bonnevies will be given first priority to purchase the land
continued, as expressly provided in Art. 1383 and 1384. But the should Reynoso decide to sell it.
operation of these 2 articles is limited to the cases of rescission for
lesion enumerated in Article 1381 of the CC, and does not apply to According to Reynoso, she notified the Bonnevies via registered
cases under Art. 1191. mail on Nov 3, 1976 her intention to sell the property for P600K,
giving them 30 days to exercise their right, which she failed to Binding, unless annulled by a proper court action
prove. The Bonnevies allege that they didn’t receive any letter. Ratifiable (Art. 1390)
• Prescription for action of annulment: 4 years to
Reynoso sold the land to Guzman, Bocaling and Co. for P400K. begin:
when vice is due to intimidation, violence or undue
The Bonnevies filed an action for annulment of the sale, and that influence – from the time defect of consent ceases
Reynoso be required to sell the property to them which CFI mistake or fraud – from the time of discovery
granted and CA affirmed. entered into by minors or those incapable of giving
consent – the moment guardianship ceases (Art.
1391)
Held: The CA correctly held that the Contract of Sale was not
• Ratification
voidable but Rescissible.
extinguishes action for annulment (Art. 1392)
may be express or tacit (Art. 1393)
Doctrine: • tacit ratification – the execution of an act
which necessarily implies an intention to
Under Art. 1380 to 1381 (3) of the Civil Code, a contract otherwise waive his right by the party, who, knowing
valid may nonetheless be subsequently rescinded by reason of of the reason which renders the contract
injury to third persons like creditors. The status of creditors could voidable, has a right to invoke annulment.
be validly accorded the Bonnevies for they had substantial may be effected by the guardian of the
interests that were prejudiced by the sale of the subject property incapacitated person (Art. 1394)
to the petitioner without recognizing their right of first priority does not require the conformity of the person who
under the Contract of Lease. does not have a right to bring an action for
annulment (Art. 1395)
According to Tolentino, rescission is a remedy granted by law to cleanses the contract from all its defects from the
the contracting parties and even to third persons, to secure moment it was constituted (Art. 1396)
reparation for damages caused to them by a contract, even if this • Annulment
should be valid, by means of the restoration of things to their Who may institute (Art. 1397)
condition at the moment prior to the celebration of said contract. • By all who are obliged principally or
subsidiarily
It is a relief allowed for the protection of one of the contracting • Exceptions:
parties and even third persons from all injury and damage the • Persons capable cannot allege
contract may cause, or to protect some incompatible and preferent the incapacity of those with
right created by the contract. whom they contracted
• Persons who exerted violence,
Rescission implies a contract which, even if initially valid, produces undue influence, who employed
a lesion or pecuniary damage to someone that justifies its fraud or caused mistake – action
invalidation for reasons of equity for annulment cannot be based on
these flaws
Voidable Contracts Gives rise to the responsibility of restoring to each
other things subject matter of the contract, with
Voidable Contracts fruits, price with its interest, except in cases
provided by law (Art. 1398)
• Service – value thereof will serve as the
• Contracts that are voidable or annullable:
basis for damages
a. When either party is incapable of giving consent to
a contract
• Incapacitated persons not obliged to make
b. When consent is vitiated by mistake, violence, restitutions except insofar as he has been
intimidation, undue influence, fraud
benefited by the thing or price received by • Francisca and Concepcion – that Uy Soo Lim was
him (Art. 1399) not entitled for not being a son, legitimate or
• If objects cannot be returned because illegitimate
these were lost through his fault, he shall • Chan Quieg – ½ as widow (their marriage was
return the fruits received and the value of valid under the laws of China)
the thing at the time of the loss, with • Uy Soo Lim appointed Choa Tek Hee as adviser and agent
interests from the same date (Art. 1400) and executed a power of attorney in favor of him to
• As long as one of the contracting parties represent him in the negotiations
does not restore what in virtue of the • Compromise was reached – Uy Soo Lim to divest his
annulment decree he is bound to return, interest in the estate for P82,000.00, Francisca declared
the other cannot be compelled to comply the sole owner of all the properties.
with what is incumbent upon him. (Art.
• Uy Soo Lim filed a case to annul the contract alleging that
1402)
undue influence was exerted on him, and that his youth
Extinguishment of action (Art. 1401)
was taken advantage of.
• if object is lost through the fault or fraud of
person who has the right to institute the
proceedings Issue: WON Uy Soo Lim can file for annulment
• if action based on incapacity of any one of
contracting parties, loss of thing shall not Held: No.
be an obstacle to the success of action,
unless loss or fraud took place through the Ratio:
plaintiff’s fault
• Although he was a minor at the time of the execution of
CASES the contract, he failed to repudiate it immediately upon
reaching the age of majority
Uy Soo Lim v. Tan Unchuan • He also tacitly ratified the contract when he disposed of the
greater part of the proceeds when he became of age and
Facts: after he had full knowledge of facts upon which he is trying
to disclaim
• An action for annulment of a contract whereby Uy Soo Lim
• If he were seeking to annul the contract, he would also
have asked that payments to him by the defendants be
sold to Pastrano all his interest in the estate of the late
stopped. Instead, he proceeded to secure, spend and
Santiago Pastrano
dispose of every cent of the proceeds)
• Santiago migrated to the Philippines when he was
• Art. 1393 – express or tacit ratification
13. Married Candida Vivares, had two children with her –
Francisca (defendant in the suit and wife of co-defendant) • Art. 1398 – responsibility of restoring to each other things
and Concepcion. subject matter of the contract
• Santiago returned to China and had illicit relations with • Art. 1401 – extinguishment of action for annulment: if
Chan Quieg. Came back to the Philippines and never saw object is lost through the fault or fraud of person who has
her again. Received a letter from her saying that she borne the right to institute the proceedings
him a son named Uy Soo Lim.
• Believing that Uy Soo Lim being his only son, he dictated Sps. Theis v. CA
his will leaving to him 7/9 of his properties to the son.
• Claimants to the estate: Facts:
• Candida – ½ as widow
• Carlsons Dev’t. Corp. owned three adjacent lots
1. Lot covered by TCT 15515 • Maxima Castro, accompanied by Valencia, applied to RBC
for an industrial loan of 3 thousand
2. Lot covered by TCT 15516 • The Valencia spouses applied for a 3 thousand peso loan as
well, which was also granted
3. Lot covered by TCT 15684 • Both loans being granted, Castro was made to sign a
promissory note, as a principal in the first, and as a co-
• A fourth lot was adjacent to Lot 15684, which was not maker in the Valencia note. They were secured by a real-
estate mortgage on Castro’s house and lot.
owned by Carlsons Dev’t.
• Castro received a Notice of Sheriff’s Sale in satisfaction of
• 1985: Carlsons constructed a two-storey house on the
the obligation covering the two promissory notes
third lot (erroneously indicated to be covered by TCT
15515) • Only then did she realize that the mortgage was
• Lots 15515 and 15516 mistakenly surveyed to be located encumbrance not just for her 3k loan, but also for
the 3k loan of the Valencias; she was made to sign
on lot number 4
without knowledge of this fact
• The fourth lot was sold to Sps. Theis by Carlsons Dev’t.,
• She filed a suit for annulment from the second
covered by said TCTs. The Theis did not immediately
promissory note and the mortgage covering this,
occupy the lot; went to Germany instead. Upon return,
and the annulment of the foreclosure sale.
they discovered that the lot was owned by another
• Theis insisted on buying lot number 4, which was not
possible as it was not owned by Carlsons; instead, Issue: WON fraud can be alleged to free Castro from responsibility
Carlsons Dev’t. offered lots 1 and 2, which was refused. with respect to the 2nd promissory note
• This time, Theis insisted on lot number 3; counter-offer by
Carlson to return purchase price x 2, refused. Held: Yes
• Carlsons filed an action for annulment on the ground of
mistake Ratio:

Issue: WON Carlsons can seek for annulment on the ground of • The mistake committed by both Castro and the bank which
mistake led to the vitiation of consent is due to the Valencias fraud
and misrepresentation
Held: Yes • A contract may be annulled on the ground of vitiated
consent due to fraud by a third person even without the
Ratio: connivance with one of the contracting parties
• The bank committed a mistake in not ensuring the extent
of the coverage of the mortgage.
• Carlsons’ mistake was made in good faith
• When mistake was discovered, offers were made to
MWSS v. CA
offset the damage caused by the mistake
• The nature of mistake as to vitiate consent must be that
Facts:
which speaks of the substance of the contract
• Consent being an essential element of contracts,
when it is given by mistake, the validity of • 1965: MWSS leased around 128 hectares of land to
contractual relations becomes legally impaired CHGCCI for 25 years renewable for another 15 years with
a stipulation allowing for the exercise of a right of first
refusal should it be put up for sale
Rural Bank of Caloocan v. CA
• President Marcos issued an LOI directing MWSS to cancel
the lease and to dispose the property. MWSS and CHGCCI
Facts:
agreed on the sale
• MWSS approved the sale in favor of Silhouette, CHGCCI’s (2) Those that do not comply with the Statute of Frauds as
assignee for 25M. set forth in this number. In the following cases an
• Silhouette entered a deed of sale with Ayala (1984) agreement hereafter made shall be unenforceable by action,
unless the same, or some note or memorandum, thereof, be
• 1993: MWSS filed an action seeking the declaration of
in writing, and subscribed by the party charged, or by his
nullity of the MWSS-Silhouette sale due to Silhouette’s
agent; evidence, therefore, of the agreement cannot be
fraudulent acts and Marcos’s undue influence over MWSS
received without the writing, or a secondary evidence of its
contents:
Issue: WON the sale can be declared null and void
(a) An agreement that by its terms is not to be performed
Held: No. within a year from the making thereof;

Ratio: (b) A special promise to answer for the debt, default, or


miscarriage of another;
• All the essential requisites being present, the contract can
only be voidable, and not void, as all the essential (c) An agreement made in consideration of marriage, other
requisites of the contract are present. than a mutual promise to marry;
• Being voidable at the most, prescriptive period of four
years from the time of the discovery of the mistake and (d) An agreement for the sale of goods, chattels or things in
from the time the undue influence ceases should be action, at a price not less than five hundred pesos, unless
observed. the buyer accept and receive part of such goods and
• If the vice of consent is based on Marcos’s undue influence, chattels, or the evidences, or some of them, of such things
the four years should be counted from the moment the in action or pay at the time some part of the purchase
undue influence ceased, which is in 1986 money; but when a sale is made by auction and entry is
• If mistake is alleged, prescriptive period of four years to made by the auctioneer in his sales book, at the time of the
begin from the discovery of the same, it should’ve begun sale, of the amount and kind of property sold, terms of sale,
from the date of the execution of the sale of documents, price, names of the purchasers and person on whose
deemed to have taken place on the date of registration of account the sale is made, it is a sufficient memorandum;
the deeds with the Register of Deeds as registration is
constructive notice to the world (e) An agreement of the leasing for a longer period than
• Furthermore, there was ratification on the part of MWSS, one year, or for the sale of real property or of an interest
both impliedly (making demands for payment) and therein;
expressly (signing of the contract of sale itself) made.
(f) A representation as to the credit of a third person.
UNENFORCEABLE CONTRACTS2
(3) Those where both parties are incapable of giving
UNENFORCEABLE CONTRACTS consent to a contract.

Art. 1403. The following contracts are unenforceable, • Unenforceable contracts cannot be enforced unless it is
unless they are ratified: first ratified in the manner provided by law. An
unenforceable contract does not produce any effect unless
(1) Those entered into in the name of another person by it is ratified. Unenforceable contracts cannot be sued upon
one who has been given no authority or legal unless ratified (Paras, 2003).
representation, or who has acted beyond his powers; • As to defectiveness, an unenforceable contract is nearer to
absolute nullity than voidable or rescissible contracts.
• There are 3 kinds of unenforceable contracts:
a) unauthorized contracts; executory contracts which can only be prevented by
requiring them to be in writing, a fact which is reduced to a
b) those that fail to comply with the Statute of Frauds; minimum in executed contracts because the intention of
the parties becomes apparent by their execution, and
execution concludes, in most cases, the rights of the
c) those where both parties are incapable of giving consent to a
parties.
contract.
• A note or memorandum is evidence of the agreement, and
is used to show the intention of the parties. No particular
UNAUTHORIZED CONTRACTS form of language or instrument is necessary to constitute a
memorandum or note as a writing under the Statute of
• When a person enters into a contract for and in the name Frauds.
of the another, without authority to do so, the contract
does not bind the latter, unless he ratifies the same. The General Rules of Application (mainly Paras):
agent, who has entered into the contract in the name of
the purported principal, but without authority from him, is
1. Applies only to executory contracts. But it is not enough
liable to third persons upon the contract; it must have
for a party to allege partial performance in order to render
been the intention of the parties to bind someone, and, as
the Statute inapplicable; such partial performance must be
the principal was not bound, the agent should be. Ex:
duly proved, by either documentary or oral evidence;
Without my authority, my brother sold my car, in my name
2. Cannot apply if the action is neither for damages because
to X. The contract is unauthorized and cannot affect me
of the violation of an agreement nor for the specific
unless I ratify the same expressly or implicitly, as by
performance of said agreeement;
accepting the proceeds of the sale. (Paras)
3. Exclusive, i.e. it applies only to the agreements or
contracts enumerated herein;
• Mere lapse of time, no matter how long, is not the 4. Defense of the Statute may be waived;
ratification required by law of an unenforceable contract 5. Personal defense, i.e. a contract infringing it cannot be
(Tipton v. Velasco, 6 Phil 67, as cited in Paras). assailed by third persons;
6. contracts infringing the Statute are not void; they are
STATUTE OF FRAUDS merely unenforceable;
7. The Statute of Frauds is a rule of exclusion, i.e. oral
evidence might be relevant to the agreements enumerated
• Meaning: descriptive of statutes which require certain therein and might therefore be admissible were it not for
classes of contracts to be in writing. the fact that the law or the statute excludes oral evidence;
• Purpose: to prevent fraud and perjury in the enforcement 8. The Statute does not determine the credibility or weight of
of obligations depending for their evidence upon the evidence. It merely concerns itself with the admissibility
unassisted memory of witnesses by requiring certain thereof;
enumerated contracts and transactions to be evidenced by 9. The Statute does not apply if it is claimed that the contract
a writing signed by the party to be charged. does not express the true agreement of the parties. As
• Application: This statute does not deprive the parties the long as true or real agreement is not covered by the
right to contract with respect to matters therein involved, Statute, it is provable by oral evidence.
but merely regulates the formalities of the contract
necessary to render it unenforceable. The statute of THE SPECIFIC AGREEMENTS UNDER THE STATUTE OF FRAUDS
frauds, however, simply provides for the manner in which
contracts under it shall be proved. It does not attempt to 1. Performance within a year. The 'making' of an agreement,
make such contracts invalid if not executed in writing but for the purpose of determining WON the period for
only makes ineffective the action for specific performance. performance brings the agreement within the Statute,
The statute of frauds is not applicable to contracts which means the day on which the agreement is made, and the
are either totally or partially performed, on the theory that time begins to run from the day the contract is entered
there is a wide field for the commission of frauds in into, and not from the time that performance of it is
entered upon. There must be intention that the • Art. 1317. No one may contract in the name of
performance should not be performed within a year. another without being authorized by the latter, or
2. Guaranty of Another's Debt. Test as to whether a promise unless he has by law a right to represent him.
is within the Statute: lies in the answer to the question
whether the promise is an original or a collateral one. If
the promise is original or independent, as to when the
• A contract entered into in the name of another by one who
promisor is primarily liable, it is outside the Statute. If the has no authority or legal representation, or who has acted
promise is collateral, the promise must be in writing. beyond his powers, shall be unenforceable, unless it is
3. Consideration of marriage. Applies to promises by a 3rd ratified, expressly or impliedly, by the person on whose
person to one of the parties contemplating the marriage. behalf it has been executed, before it is revoked by the
Thus, a promise made by the father of a prospective bride other contracting party. (1259a)
to give a gift to the prospective husband is covered by the
statute. • Requisites for a Person to contract in the name of another:
4. Sale of personalty. Price of the property must be at least a) he must be duly authorized (expressly or impliedly) or
P500 and covers both tangible and intangible property. The b) he must have by law a right to represent him (like the
Statute will not apply where there has been part payment guardian, or the administrator) or c) the contract must be
of the purchase price. If there is more than one item, subsequently ratified (expressly or impliedly, by word or by
which exceeds P500, the operation of the statute depends deed). (Paras).
upon WON there is a single inseparable contract or several
one. If inseparable, Statute applies. If the contract is Art. 1405. Contracts infringing the Statute of Frauds,
separable, then each article is taken separately, and the referred to in No. 2 of Article 1403, are ratified by the
application of the statute to it depends upon its price. failure to object to the presentation of oral evidence to
Meaning of “things in action”: incorporated or intangible prove the same, or by the acceptance of benefit under
personal property (Paras) them.
5. Lease or sale of realty. Evidence to prove an oral contract
of sale of real estate must be disregarded if timely
objections are made to its introduction. But the statute • Two ways of ratification of contracts infringing the Statute
does not forbid oral evidence to prove a consummated sale are: a) failure to object to the presentation of oral
of real property. evidence; b) acceptance of benefits under them, since the
6. Representation as to Credit. Limited to those which operate Statute does not apply to contracts which are partially
to induce the person to whom they are made to enter into executed. Cross examination of the witnesses testifying
contractual relations with the 3rd person, but not those orally on the contract amounts to a waiver or to a failure to
representations tending to induce action for the benefit of object. (Abrenica v. Gonda,as cited by Paras; Maam Rowie
the person making them. The statute does not cover also made reference to this in one of her short kwentos).
representations deceitfully made.
Art. 1406. When a contract is enforceable under the Statute
INCAPACITATED PARTIES of Frauds, and a public document is necessary for its
registration in the Registry of Deeds, the parties may avail
themselves of the right under Article 1357.
• Ratification by one party converts the contract into a
voidable contract- voidable at the option of the party who
has not ratified. • Art. 1357. If the law requires a document or other
special form, as in the acts and contracts
Art. 1404. Unauthorized contracts are governed by Article enumerated in the following article, the contracting
1317 and the principles of agency in Title X of this Book. parties may compel each other to observe that
form, once the contract has been perfected. This
right may be exercised simultaneously with the
action upon the contract. (1279a)
• The right of one party to have the other execute the public Doctrine:
document needed for convenience in registration, is given
only when the contract is both valid and enforceable. In any sale of real property on installments, the Statute of
(Paras) Frauds read together with the perfection requirements of
Article 1475 of the Civil Code must be understood and
Art. 1407. In a contract where both parties are incapable of applied in the sense that the idea of payment on
giving consent, express or implied ratification by the installments must be in the requisite of a note or
parent, or guardian, as the case may be, of one of the memorandum therein contemplated. Under the Statute of
contracting parties shall give the contract the same effect Frauds, the contents of the note or memorandum, whether
as if only one of them were incapacitated. in one writing or in separate ones merely indicative for an
adequate understanding of all the essential elements of the
entire agreement, may be said to the contract itself, except
If ratification is made by the parents or guardians, as the
as to the form.
case may be, of both contracting parties, the contract shall
be validated from the inception.
Coronel v. Constantino, 2003
• Self-explanatory, hehe. Both Paras and Tolentino, walang
comments. However, we should take note of the Honoria Aguinaldo owned real property. When she died, ½ of the
retroactive effect of a ratified contract. property was inherited by Emilia Meking vda. De Coronel and sons-
Benjamin, Catalino and Ceferino; the other half by Florentino
Constantino and Aurea Buensuceso. Emilia Meking sold the
Art. 1408. Unenforceable contracts cannot be assailed by property to Jess Santos and Priscilla Bernardo, who later sold it to
third persons. Constantino. In 1991, Constantino filed a complaint for declaration
of ownership, quieting of title and damages. CA ruled for
• The defense of the Statute is personal to the party to the Constantino.
agreement. Thus, it cannot be set up by strangers to the
agreement. Issues/Held:

• Just as strangers cannot attack the validity of voidable 1) WON the contract of sale executed by Emilia, in her own behalf
contracts, so also can they not attack a contract because is unenforceable with respect to the shares of her co-heirs-children
of its unenforceability. Indeed the Statute of Frauds cannot
be set up as a defense by strangers to the transaction. Yes. It has been shown that the contract was not signed by
(Ayson v. CA, 97 Phil. 965). petitioner Benjamin and the shares of Catalino and Cferino in the
subject property were not sold by them. Since it cannot be
CASES: disputed that Benjamin did not sign the document, the contract is
unenforceable against him.
Yuvienco v. Dacuycuy, 1981
2) WON the minor children can ratify unauthorized actions of their
See facts in previous discussion. Under this heading, the question parents.
is WON the claim for specific performance of the private
respondents is enforceable under the Statute of Frauds. Yes. But in this case, no evidence was presented to show that the
3 brothers were aware of the sale made by their mother. Unaware
Held: No, since the agreement does not appear in any note or of such sale, the 3 could not be considered to have remained silent
writing or memorandum signed by either of the petitioners or any and knowingly chose not to file an action for annulment of the
of the respondents. Thus, such oral contract involving the “sale of sale. Their alleged silence and inaction may not be interpreted as
real property” comes squarely under the Statute of Frauds. an act of ratification on their part. And there is also no evidence
that the 3 brothers benefited from the sale.
Doctrine: Yes. But ratification should be made before its revocation by the
other contracting party.
Ratification means that one under disability voluntarily
adopts and gives sanction to some unauthorized act or National Power Corp v. National Merchandising Corp., 1982
defective proceeding, which without his sanction would not
be binding on him. It is this voluntary choice, knowingly In 1956, National Power Corp (NPC) and National Merchandising
made, which amounts to a ratification of what was Corp (Namerco), the latter as representative of the International
theretofore unauthorized, and becomes the authorized act Commodities Corp of New York, entered into a contract for the
of the party so making the ratification. purchase by the NPC of from the New York firm of 4 thousand long
tons of crude sulfur. A performance bond was executed by
Regal Films,Inc. v. Concepcion, 2001 Domestic Insurance Company (DIC) to guarantee Namerco's
obligation. Under the contract, seller would deliver the sulfur within
Gabby Concepcion, thru his manager Lolit Solis, entered into a 60 days from notice of establishment in its favor of a letter of
contract with Regal for services to be rendered by respondent in credit. Failure to do would make the seller and surety liable for
petitioner's movies. Petitioner undertook to give 2 parcels of land damages. The New York firm advised Namerco that it might not
of land to respondent, on top of talent fee. In 1994, actor, and secure the availability of a vessel and DIC disclaimed responsibility
manager, filed an action against the movie outfit, alleging that he for the terms of the contract. Namerco did not disclose such
was entitled to rescind the contract, owing to Regal's failure to instructions from its principal and proceeded with the perfection of
honor the contract. Petitioner alleged that there was an the contract. When the sulfur was not delivered, NPC sued DIC and
agreement, and an addendum to the original contract. In Namerco. The court dismissed the action against DIC for lack of
September 1994, Solis moved for the dismissal of the complaint jurisdiction.
averring that there already was an amicable settlement.
Concepcion opposed saying that he had no consent and the Issue:
contract was grossly disadvantageous to him. By 1995, and after
the confluence of events (read: Manila Filmfest scam), Regal 1) WON Namerco exceeded its authority and in effect, acted in its
intimated that it was willing to release Concepcion from the own name
contracts rather than pursue the addendum. Concepcion then filed
a motion indicating that he was willing to honor the addendum.
Yes. The agent took chances, despite the principal's instructions
The Court held that Concepcion's attempt to ratify the addendum
and thus, it acted on its own name.
came too much late as Regal already revoked it.

2) WON the stipulation for liquidated damages is unenforceable


Issue3:
since the contract was allegedly unenforceable

1) WON a contract entered into in the name of another is


No. Article 1403 refers to unenforceability of the contract against
unenforceable if consent was not given by the party in whose
the principal. In this case, the contract containing the stipulation
behalf it was executed
for liquidated damages is not being enforced against its principal
but against the agent and its surety. Article 18974 implies that the
Yes. A contract entered into in the name of another by one who agent who acts in excess of his authority is personally liable to the
ostensibly might have but who in reality, had no real authority or party with whom he contracted. Since Namerco exceeded the
legal representation, or who having such authority, acted beyond limits of its authority, it virtually acted in its own name and it is
his powers, would be unenforceable. therefore, bound by the contract of sale, which, however is not
enforceable against its principal.
2) Assuming that the addendum was unenforceable, WON it is
susceptible to ratification by the person in whose behalf it was Jovan Land v. CA, 1997
executed
Eugenio Quesada owns Q Building in Manila and wanted to sell it. contracts must be in a public document. Under Art. 1403, sales of
Thru co-petitioner Mendoza, Jovan Land Pres. Joseph Sy learned of real property must be in writing. Since the Pagpapatunay is in
this development and sent offers to Quesada. The owner rejected writing, it is enforceable under the Statute. But since it is not a
the offers. In his third written offer, Sy enclosed a check worth public document, it does not comply with Art. 1358. However, the
P12M with a similar check for P1M as earnest money. Annotated on requirement of Art. 1358 is not for the validity but for its efficacy.
this 3rd letter-offer was the phrase 'received original, '9-4-89'
beside which appears the signature of Quesada. Petitioner then Villanueva v. CA, 1997
filed action for specific performance.
The Villanuevas are the tenants of the Dela Cruzes. In 1986, the
Issue: WON the 'contract of sale' as alleged by Sy was latter proposed the sale of the property and they agreed at the
unenforceable price of P550,000. The Dela Cruzes asked for P10,000 which would
form part of the sale price. Sometime thereafter, the Dela Cruzes
Held: No. The document was merely a memorandum of the receipt told the Villanuevas that they are selling the other half of the
by the former of the latter's offer. The requisites of a valid contract property to the Sabios, another tenant of the Dela Cruzes. The
of sale are lacking in said receipt and therefore the 'sale' is neither Villanuevas agreed to such an arrangement and they, together
valid nor enforceable. No written agreement was reached. Under with the Sabios, decided to pay only P265,000 each corresponding
the Statute of Frauds, an agreement for the sale of real property to the value of ½ of the property. In 1987, the Dela Cruzes sold
or of an interest therein, to be enforceable, must be in writing and the portion which the Villanuevas were supposed to buy to the
subscribed by the party charged or by an agent therof. spouses Pile. The Villanuevas then instituted this action.

Cenido v. Apacionado, 1999 Issue: 1) WON there was a perfected contract of sale between the
petitioners and the Dela Cruzes
Bonifacio Aparato owns a parcel of unregistered land. He sold it to
spouses Apacionado, who took care of him for 20 years prior to his Held: No. Sale is a consensual contract. In this case, what is clear
death. In the contract (Pagpapatunay) purporting to the sale, it from the evidence is that there was no meeting of the minds as to
can be gleaned that because the Apacionados took care of him, the price, expressly or impliedly, directly or indirectly. No contract
Bonifacio sold it for P10,000 and her signed it with his full was presented in evidence.
knowledge and consent, and there were 2 witnesses to the signing
of the contract. It was not notarized. One Renato Cenido claimed 2) WON the Statute of Frauds is applicable though it was a
ownership over the property and alleged that he was Aparato's contract of sale that was partly executed
illegitimate son and he was recognized as such by Bonifacio's
brother, Gavino, and the two partitioned his estate among
No. The Statute applies only to executory contracts, but there is no
themselves. Cenido caused the issuance to his name of a Tax
perfected contract in this case, therefore there is no basis for the
Declaration over the subject property.
application of the Statute. The application of such statute
presupposes the existence of a perfected contract and requires
Issue: only that a note or memorandum be executed in order to compel
judicial enforcement thereof. What took place was only prolonged
1) WON the document is valid negotiation to buy and sell.

Yes. The private conveyance of the house and lot is therefore valid VOID OR INEXISTENT CONTRACTS
between Aparato and the spouses. It is a private document but
this fact does not detract from its validity. Generally, contracts are What contracts are void or inexistent?
obligatory, in whatever form such contracts may have been
entered into, provided all the essential requisites for their validity
The following contracts are void or inexistent from the beginning:
are present. When however the law requires that a contract be in
some form for it to be valid or enforceable, that requirement must
be complied with. Under Article 1358 requires that certain acts and
• Those whose cause, object or purpose is contrary to law, The right of the husband to donate community property is strictly
morals, good customs, public order or public policy; limited by law. However, donation made in contravention of the law
• Those which are absolutely simulated or fictitious; is not void in its entirety, but only in so far as it prejudices the
interest of the wife, whether donation is gratuitous or onerous.
• Those whose cause or object did not exist at the time of
the transaction;
• Those whose object is outside the commerce of men; Rellosa vs Gaw Chee Hun
• Those which contemplate an impossible service;
Petitioner Dionisio Rellosa sold to Gaw Chee Han a parcel of land
• Those where the intention of the parties relative to the
together with the house erected thereon situated in Manila. The
principal object cannot be ascertained; vendor remained in possession of property under a contract of
• Those expressly prohibited or declared void by law. (a-g, lease. Alleging that the sale was executed subject to the condition
Art 1409, NCC). that the vendee (Chinese) would obtain the Japanese Military
• Those which are the direct results of previous illegal Administration’s approval, and that even if said condition was met,
contracts (Art 1422, NCC). the sale would still be void under article XIII of the Constitution,
the vendor prayed for annulment of the contracts of sale and
Cases lease. Defendant answered the complaint putting up the defense of
estoppel and that the sale was binding not being contrary to public
policy, law and morals. TC declared the contracts valid and binding
Liguez vs Hon. Court of Appeals
and dismissed complaint. CA affirmed decision in toto.

Petitioner Conchita Liguez was the recipient of a donation of the


The SC sustained that the sale in question was indeed entered into
parcel of land subject of this petition. Donation was allegedly made
in violation of the Constitution, what’s left to be determined is, can
by and in view of the desire of one Salvador Lopez, a married man
petitioner have the sale declared null and void and recover the
of mature years, to have sexual relations with her, Liguez back
property considering the effect of the law governing rescission in
then a minor, only 16 years of age. After the donation, Liguez and
contracts? SC answered in the negative. The sale in question is null
Lopez cohabited and lived as husband and wife until Lopez was
and void, but plaintiff is barred from taking the present action
killed. It was found that the donation was part of the land
under the principle of pari delicto.
belonging to the conjugal partnership of Lopez and his legal wife
Maria Ngo. CA held that the donation was inoperative and null and
void because (1) the husband had no right to donate conjugal Doctrine: The contracting parties here were prevented from
property to Liguez; and (2) because the donation was tainted with seeking relief because they both have voluntarily entered into the
illegal causa or consideration, of which the donor and donee were contract knowing that what they were doing violated the
participants. Constitution (they are presumed to know the law). Well established
is the doctrine that where the parties are in pari delicto, no
affirmative relief of any kind will be given to one against the other.
SC reversed CA decision.
It is true that this doctrine is subject to one important limitation,
namely, “whenever public policy is considered as advanced by
Doctrine: SC held that the CA erred in applying the pari delicto rule allowing either party to sue for relief against the transaction.” The
in this case. Both parties to donation here not having equal guilt; cases in which this limitation may apply only “include the class of
there had been no finding that Liguez had full knowledge of the contracts which are intrinsically contrary to public policy—contracts
terms of the bargain entered into by and between Lopez and her in which the illegality itself consists in their opposition to public
parents. Moreover, the rule that parties to illegal contracts will not policy, and any other species of illegal contracts (example:
be aided by the law should also be understood as barring the usurious contracts, marriage-brokerage contracts). The present
parties from pleading illegality of the bargain either as a cause of case does not fall under the exception because it is not intrinsically
action or as a defense. Thus, the heirs of Lopez cannot set up this contrary to public policy as its illegality consists in its being against
plea, as Lopez himself, even if he were living, had no right to such the Constitution.
pleading.
Phil Banking Corp vs Lui She
Justina Santos and her sister Lorenza were the owners of a piece he was afflicted with senile dementia, characterized by
of land in Manila. The sisters lived in one of the houses while they deteriorating mental and physical condition.
leased the other house to a Chinese named Wong Heng and his
family. When Lorenza died with no other heir, Justina became the TC, later on affirmed by CA, declared the contract to be null and
sole owner of the property. As she was then already about 90 void, ordered Francisco to return the lots in question and the
years, Wong was her trusted man, trusting him with receiving Herreras to return to the former the purchase price paid. Francisco
rentals for her other properties and paying for her other expenses. appealed, contesting that the CA erred in completely ignoring the
In grateful acknowledgement, Justina entered into a number of basic difference between a void and merely voidable contract.
contracts with Wong (a lease covering more than the current Issue before the SC thereby is: whether the assailed contracts of
portion occupied by Wong, a contract of option to buy leased sale are void or merely voidable and hence capable of being
premises payable in ten years, another contract extending the ratified.
lease term to 99 years, and another fixing the term of the option
to 50 years).
SC reversed the CA decision, the assailed contracts are only
voidable and were in fact ratified, therefore valid and binding.
This petition was filed alleging that the contracts were obtained by
Wong “through fraud, misrepresentation, inequitable conduct,
Doctrine: A void or inexistent contract is one which has no force
undue influence and abuse of confidence…” and the Court was
and effect from the beginning. These are of two types:
asked to cancel the registration of the contracts.

(1) those where one of the essential requisites as provided for by


TC rendered decision declaring all of the contracts null and void
Art 1318 is wanting;
except for the first contract of lease. Both parties appealed.

(2) those declared to be so under Art 1409.


SC modified TC’s decision in that it also declared the first contract
of lease as null and void along with the rest.
By contrast, a voidable or annullable contract is one in which the
essential requirements for validity under Art 1318 are present, but
Doctrine: SC cancelled the contract of lease in this case not on the
vitiated. Such contracts may be rendered perfectly valid by
basis of it allegedly being contrary to the expressed will of one of
ratification, which can be express or implied.
the contracting parties (Santos’), rather it was voided because of
its illegal causa. Based on the testimonies gathered, the contracts
were entered into in an effort to circumvent the Constitutional Art 1327 provides that insane or demented persons cannot enter
prohibition against the transfer of lands to aliens. It became clear into contracts, But, if ever they do, the legal effect is that the
that the arrangement was a virtual transfer of ownership whereby contract is voidable or annullable as provided for in Art 1390.
the owner divests himself in stages not only of the right to enjoy Hence, the contract in above case is merely voidable. Ratification
the land, but also of the right to dispose of it—rights the sum total in this case is implied and consisted in Eligio’s children receiving
of which is ownership. Thus, this illicit purpose became the illegal payments on behalf of their father and their non-immediate filing
causa rendering the contracts void. of an action for reconveyance as in fact they only filed it after
Francisco did not agree to them increasing the purchase price.
Francisco vs. Herrera
Agan, Jr. vs Philippine International Air Terminals Co., Inc.
Eligio Herrera Sr., father of respondent is the owner of two parcels
of land. Petitioner Julian Francisco brought from said land owner Petitioner seek to prohibit the Manila International Airport
the first parcel, and later on, also the second. Contending that the Authority (MIAA) and the Dept of Transportation and
contract price was inadequate, the children of Herrera tried to Communications (DOTC) from implementing contracts and
negotiate to increase the purchase price. When Francisco refused, agreements executed by the Philippine Givernment through the
the Herreras filed a complaint for annulment of sale alleging that DOTC and the MIAA and the Phil Intl Air Terminals Co., Inc
the sale was null and void on the ground that at the time of sale, (PIATCO).
Eligio Sr was incapacitated to give consent to the contract because
DOTC engaged the services of Aeroport de Paris (ADP) to conduct sanction, susceptible of voluntary performance, but not through
a comprehensive study of the Ninoy Aquino Intl Airport (NAIA) and compulsion by legal means.
determine whether the present airport can cope with the traffic
development up to 2010. A group of business leaders formed 2. vs Civil Obligations
Asia’s Emerging Dragor Corp (AEDC) to explore the possibility of
investing in the construction and operation of a new airport
terminal. AEDC submitted an unsolicited proposal to the Natural Obligations Civil Obligations
Government through DOTC/MIAA for the development of NAIA Basis Equity and natural law Positive law
International Passenger Terminal III (NAIA IPT III). A committee
called the Prequalification Bids and Awards Committee (PBAC) was Enforceability Not enforceable by Enforceable by court
constituted by the DOTC for the implementation of the NAIA IPT III court action action
project. A consortium headed by People’s Air Cargo and
Warehousing Co., Inc. (Paircargo), among others, submitted their 3. vs Moral Obligations
proposal to PBAC. PBAC found Paircargo as the most qualified to
undertake the project. Sometime after this determination,
Paircargo incorporated with PIATCO. AEDC, along with a slew of Natural Obligations Moral Obligations
other petitioners, filed with the RTC Pasig a petition to declare the Existence of juridical There exists a juridical No juridical tie
1997 Concession Agreement between the Government and PIATCO tie tie between the parties whatsoever.
null and void for being contrary to the Constitution, the BOT not enforceable by
(Build-Operate-Transfer) Law and its Implementing Rules and court action.
Regulations.
Effect of fulfillment Voluntary fulfillment Voluntary fulfillment
produces legal effects does not produce legal
SC declared the assailed agreement as void for being contrary to which the courts effects which the courts
public policy. A close comparison of the draft Concession recognize and protect. recognize and protect.
Agreement attached to the Bid Documents and the 1997
Concession Agreement reveals that the documents differ in at least
two very important respects. While the Court concedes that a 4. Example
winning bidder is not precluded from modifying certain provisions
of the contract bidded upon, such changes must not constitute One example would be the one that is regulated in Art 1424 of the
substantial or material amendments that would alter the basic NCC. According to this article, when a right to sue upon an
parameters of the contract and would constitute a denial to the obligation has lapsed by extinctive prescription, the obligor who
other bidders of the opportunity to bid on the same terms voluntarily performs the contract cannot recover what he has
delivered or the value of the service he has rendered.
Doctrine: It is inherent in public biddings that there shall be fair
competition among the bidders. Any contract that circumvents this IV. TRUSTS
concept shall be declared null as being contrary to public policy.
What is a trust?
III. NATURAL OBLIGATIONS
1. Trust is a legal relationship between one person having an
1. Definition equitable ownership in property and another person
owning the legal title to such property, the equitable
Natural obligations are those based on equity and natural law, ownership of the former entitling him to the performance
which are not enforceable by means of court action, but which, of certain duties and the exercise of certain powers by the
after voluntary fulfillment by the obligor, authorize the retention by latter (Tolentino)
the oblige of what has been delivered or rendered by reason
thereof. In other words, they refer to those obligations without 1. It is the right to beneficial enjoyment of property, the legal
title of which is vested in another. It is a fiduciary
relationship concerning property which obliges the person 1. parties to the trust
holding it to deal with the property for the benefit of 2. the trust property or the trust estate or the subject matter
another (Paras). of the trust.

Characteristics of a Trust (Paras) Note: cf this with the ratio of the Mindanao Development Authority
v. CA & Ang Bansing case below
1. It is a fiduciary relationship.
2. Created by law or agreement. 1. Express Trusts—created by the parties, or by intention of
3. Where the legal title is held by one, the equitable title or the trustor
beneficial title is held by another. 2. Implied Trusts—created by operation of the law; two kinds
a. Resulting trust (also bare or passive trusts)—there
Trust distinguished from Guardianship or Executorship: is intent to create a trust but it is not effective as
an express trust (cf Art. 1451).
b. Constructive Trust—no intention to create a trust is
• In a trust, the trustee or holder has LEGAL title to the present, but a trust is nevertheless created by law
property. to prevent unjust enrichment or oppression (cf
• A guardian, administrator or executor does not have. 1456)

Trust distinguished from a Stipulation Pour Autrui • The law of trusts has been much more frequently applied
in England and in the US than in Spain, so we may draw
• A trust may exist because of a legal provision or because freely from American precedents in determining the effects
of an agreement; a stipulation pour autrui can arise only in of trusts.
the case of contracts.
• A trust refers to specific property; a stipulation pour autrui CHAPTER 2
refers to a specific property or to other things.
EXPRESS TRUSTS
Co-Ownership as Trust
Formalities Re Express Trusts:
• A Co-Ownership is a form of trust, with each co-owner
being a trustee for each of the others. 1. Express trusts are to be written for enforceability and not
for validity as to between the parties; hence, by analogy,
CHAPTER 1 can be included under the Statute of Frauds.
2. By implication, since the article applies to immovable
property only, trust over personal property on oral
GENERAL PROVISIONS agreement is valid and enforceable between the parties.
3. 3rd Persons—trust must be made in a public instrument
Parties to a Trust and REGISTERED in the Registry of Property, if it concerns
Real Property.
1. trustor or settler –he establishes the trust (may at the
same time be the beneficiary) How an Express Trust is Created:
2. trustee –hold the property in trust for the benefit of
another 1. By conveyance to the trustee by an act inter vivos or
3. beneficiary or cestui que trust –the person for whose mortis causa (as in a will).
benefit the trust has been created. 2. By admission of the trustee that he holds the property,
only as a trustee.
Elements of a Trust:
3. Clear Intent—there must be a clear intention to create a 8. Accomplishment of the purpose of the trust.
trust.
4. Capacity—The trustor must be capacitated to convey CHAPTER 3
property (hence, a minor cannot create an express or
conventional trust of any kind).
IMPLIED TRUSTS
5. Administration of the trust. The trustee must:
a. File a bond
b. Make an inventory of the real and personal • Trusts are recognized only if they are not in conflict with
property in trust the Civil Code, Code of Commerce, Rules of Court and
c. Manage and dispose of the estate and faithfully Special Laws.
discharge his trust in relation thereto, according to
the law or terms of the trust as long as they are • This is a resulting trust because a trust is intended.
legal and possible.
d. Render a true and clear account. • Example:
e. Not acquire property held in trust by prescription • A buys a piece of land from B. A pays the
as long as the trust is admitted. price so that he (A) may have the
beneficial interest in the land BUT the legal
Effect if Trustee Declines title is given to C. C is the trustee and A is
the beneficiary.

• The trust ordinarily continues even if the trustee


• This is again a resulting trust where the donee becomes
declines. Why? The Court will appoint a new trustee unless
otherwise provided for in the trust instrument (Sec. 3, Rule the trustee of the real beneficiary.
98, Rules of Court). A new trustee has to be appointed; • Example:
otherwise the trust will not exist. • A donated land to B. But it was agreed that
B is supposed to have only 1/3 of the
• Beneficiary necessarily has to accept either expressly, products of said land. There is a trust here
and B is the trustee.
impliedly or presumably. Acceptance is presumed if the
granting of benefit is purely gratuitous (no onerous • This is a constructive trust, the reason of the law being to
condition). prevent unjust enrichment.

How Express Trusts are ended: • Example:

1. Mutual agreement by all parties. • A wants to buy land from B but A has no
money. So A asks C to pay for the
2. Expiration of the Term land. The land is then given in C’s
name. This is supposed to be C’s security
until the debt of A is paid. Here, an implied
3. Fulfillment of the resolutory condition
trust is created. C is a trustee and the
beneficiary is A. When A has the money, he
4. Rescission or annulment may redeem the property from C and
compel a conveyance to A.
5. Loss of subject matter of the trust
NOTE: This is not the same as mortgage. Mortgage is when
6. Order of the court A borrows money from C and A later buys land in his own
name. A then executes a mortgage on the land in favor of
7. Merger C. This is not an implied trust.
Trust Receipts • This is a constructive trust the purpose of the law to
prevent unjust enrichment to the prejudice of the true
• Partakes of a nature of a conditional sale…the importer owner.
being the absolute owner of the imported merchandise as • Example:
soon as he has paid its price; until the owner or the person • A owe’s B. To guarantee his debt, A sold
who advanced payment has been paid in full, or if the her parcel of land to B. Here, a trust is
merchandise has already been sold, the proceeds turned created. If A pays his debt when it
over to him, the ownership continues to be vested in such becomes due, A may demand the resale of
person.” property to her.

• This is a resulting trust for a trust is intended. • This is a constructive trust and this article applies to any
trustee, guardian or persons holding a fiduciary
• Example: relationship (eg, an agent).
• Example:
• A inherited a piece of land from his father,
• An agent using his principal’s money
purchases land in his own name. He also
but A caused the legal title to be put in the
registers it under his name. Here, he will
name of X, a brother. Here a trust is
only be considered a trustee and the
impliedly established, with X as trustee and
principal is the beneficiary. The principal
A as beneficiary.
can bring an action for conveyance of the
property to himself, so long as the rights of
• This is a resulting trust in view of the intent to create a innocent third persons are not adversely
trust. affected.
• Example:
• A group of Chinese wanted to buy a lot • This is a constructive trust.
with a house on it to be used a • Example:
clubhouse. The name of the property was
• A was given a car by B although it should
registered under only one of them. The
have been given to C. A is considered
registered owner leased the property,
merely a trustee of the car for the benefit
collected rents and when asked for
of C.
accounting, refused to on account that he
was the owner. Nope, he is a mere trustee
and is therefore obliged render proper NOTE: The mistake referred to in this article is one made
accounting. The beneficiaries are all my a third person, not one who is a party to the contract. If
members of the club. made by any of the parties, then no trusts is created.

• This is a resulting trust in view of the owner’s intention to DO TRUSTS PRESCRIBE?


create a trust.
• Example: • Express trusts DO NOT. Implied Trusts—resulting trusts do
• A bought from B a parcel of land and it was not prescribe but constructive trusts do prescribe (see
conveyed to A on A’s statement or Salao v. Salao in the cases below)
declaration that he would hold it in behalf
of C. Here, A is merely a trustee and C is • This article applies whether it is real or personal
the beneficiary. property. Even if it is oral evidence, said evidence must be
trustworthy oral evidence, for oral evidence may be easily
fabricated.
CASES • How about an implied trust? It was not proven by any
competent evidence. It is quite improbable because the
Salao v. Salao alleged estate of Manuel Salao was likewise not
satisfactorily proven. The Court found it incredible that 47
Facts: hectares of Calunuran fishpond would be adjudicated
merely by word of mouth. The plaintiffs also never
bothered (for nearly 40 years) to procure any documentary
• Spouses Manuel Salao and Valentina Ignacio has 4 children evidence to establish their supposed interest or
—Patricio (who died survived by son Valentin), Alejandra, participation in the two fishponds. Prescription and laches
Juan and Ambrosia. Spouses died leaving partition of applies.
different fishponds to the three surviving children and • There was no resulting trusts because there was never any
nephew Valentin. intention on the part of Juan Salao, Ambrosia and Valentin
• Main contention in this case is the Calunuran fishpond to create a trust—the registration of the fishpond were
which the plaintiffs assert were co-owned by Juan, registered in the names of Juan and Ambrosia and was not
Ambrosia and Valentin and that Juan and Ambrosia were vitiated by fraud or mistake.
just holding in trust the part of Valentin. Plaintiffs here are • Even if there was an implied trust, laches and prescription
the heirs of Valentin against the heirs of Juan and has barred their action—they slept on their rights (vigilanti
Ambrosia. Plaintiffs say that they are enforcing a trust that prospiciunt jura or the law protects him who is watchful of
Juan Salao violated. his rights). There was not mention of a period for laches or
prescription to apply.
Issue: • Plaintiffs failed to measure up to the yardstick that a trust
must be proven by clear, satisfactory and convincing
• WON there was a trust between Juan and Ambrosia Salao evidence. It cannot rest on vague and uncertain evidence
with Valentin Salao? or on loose, equivocal or indefinite declarations.

Held: Doctrine:

• No, there was no trust—either express or implied (resulting • Prescription applies to constructive trusts. Parol evidence
and constructive trust) cannot be accepted in an express trust but can be
accepted in an implied trust if it is trustworthy.
Ratio:
Fabian v. Fabian
• A trust is defined as the right, enforceable solely on equity,
to the beneficial enjoyment of property, the legal title to Facts:
which is vested in another, but the word “trust” is
frequently employed to indicate duties, relations and • Pablo Fabian bought Lot 164 from the Phil. Gov’t. He died
responsibilities which are not strictly technical trusts. leaving four children who are the plaintiffs in this
• Not a scintilla of documentary evidence was presented by case. Silbina Fabian and Teodora Fabian, niece of Pablo
the plaintiffs to prove that there was an express trust over Fabian, executed an affidavit saying that they are legal
the Calunuran fishpond in favor of Valentin Salao. Purely heirs and as such a sale certificate was issued to them. In
parol evidence was offered by them to prove the alleged 1929, they took physical possession of the land, enjoyed
trust. Their claim that in the oral partition in 1919 of the its fruits and from 1929 to present (1960), has been
two fishponds was assigned to Valentin Salao is legally paying real estate taxes thereon.
untenable—Article 1443—parol evidence cannot be used to • Plaintiffs filed this action for reconveyance averring that
prove an express trust. the certificate of sale was gained through
fraud. Defendants aver that Pablo did not really own the
land in question at the time of his death and the present • Plaintiffs’ action has prescribed and defendants have
action for reconveyance has already prescribed. acquired the land by acquisitive prescription.

Issue: Doctrine/s:

• WON defendants have acquired the property by acquisitive • Prescription bars an action for constructive trusts—within 4
prescription? years, and actual possession and occupancy of land
entitles one to acquire such land.
Held: Yes • Property gained through fraud is considered held in trust
(Art. 1456)
Ratio:
Bueno v. Reyes
• The Friar Lands Act governs the sale of land to Pablo
Fabian wherein title of the land sold is reserved to the Facts
Gov’t until the purchaser makes full payment of all
required installments and the interest thereon. The • Francisco H. Reyes claimed property in Laoag as belonging
equitable and beneficial title really went to the purchaser to him and his two brothers—Juan and Mateo (defendants
the moment he paid the first installment and was given a herein). Plaintiffs are the heirs of Jorge Bueno whom they
certificate of sale. Pending the completion of the purchase say was the original owner. One of his children is Eugenia
price, the purchaser is entitled to all the benefits and who was supposedly the wife of Francisco Reyes.
advantages which may accrue to the land as well as suffer
• Francisco Reyes was entrusted to file an answer in a
the loss. He was therefore the owner of the land and as
cadastral proceeding in acquiring that certain property in
such the legal rights to the land passed onto his four
Laoag. He was entrusted with obtaining a title thereto for
daughters. Therefore, Silbina and Teodora were just
and in behalf of all the heirs of Jorge Bueno, including the
trustees of the land in question upon the principle that if
wife Eugenia Bueno.
property is acquired through fraud, the person obtaining it
is considered a trustee of an implied trust for the benefit of • Plaintiffs say that either in bad faith or by mistake,
the person from whom the property comes. Francisco Reyes filed an answer and obtained title to the
• However, laches may bar an action to enforce a property in his name and the defendant’s. Plaintiffs allege
that they only have discovered these things this year.
constructive trust such as the one in the case at
bar. Defendants herein have been in possession of the land • CFI and defendants proceeded on the theory that the
in question since 1928 up to present publicly and action for reconveyance was predicated on an implied trust
continuously under claim of ownership; they have and as such, the action prescribes in 10 years (1936—
cultivated it, harvested and appropriated the fruits for Francisco Reyes acquired title on the land; 1962—time of
themselves. The statute of limitations is within four years the petition of reconveyance, total of 23 years).
from the discovery of the fraud—this may start when they
first registered the land (not mentioned in the case when). Issues:
• The court also used sec. 41 of Act 190 saying that 10 years
of actual adverse possession by any person claiming to be • WON the trust was express or implied. WON the action for
the owner for that time of any land or interest in land, reconveyance has prescribed.
uninterruptedly continued for ten years by occupancy,
descents, grants, or otherwise, in whatever way such
occupancy may have commenced or continued shall vest in Held:
every actual occupant or possessor of such land in full and
complete title. • The trust was implied and remanded to lower court for
further proceedings to determine whether there has been
constructive notice.
Ratio Domantay but the action for reconveyance has already
prescribed in 10 years (1915—when title was issued to
• The trust given to Francisco Reyes was supposed to be an him; this case was instituted 1952).
express trust but it never materialized. This was an implied
trust arising by operation of the law. This was specifically a Issue:
constructive trust since the allegation avers that the
property was taken by mistake or fraud (Art. • WON the action for reconveyance has prescribed.
1456). Hence, prescription can supervene. Remember that
an express trust is imprescriptible. Under Sec. 40 of the
Held: No
Old CivPro, action for recovery of property prescribes in 10
years.
• From what time should the prescriptive period start? The Ratio:
cadastral proceeding where Reyes and his brothers
obtained title thereto cannot be taken as constructive • While it may have been a constructive, implied trust, its
notice since it is an action in rem. Case remanded to trail substance was substantially affected when Mariano Tamayo
court for further proceedings to establish when the and Domantay executed a public instrument whereby
prescriptive period started. Mariano explicitly acknowledged that his parents had sold
to Domantay the parcel of land and stipulating that
Doctrine/s: Domantay is the absolute owner. This action made it an
express trust which is subsisting, not subject to the statute
of limitations until repudiated, in which event the period of
• Constructive implied trusts prescribe 10 years from the
prescription begins to run only from the time of the
time defendants are given constructive notice. Express repudiation. This took place in June 1952 when Mariano
trusts do not prescribe. Constructive notice can be the rejected Callejo’s demand. Prescription does not attach
actual registration of the land since this is a notice to the since the action for reconveyance was instituted a few days
whole world. after the express trust was repudiated.

Tamayo v. Callejo Doctrine:

Facts
• Express trusts do not prescribe unless repudiated in which
event the period of prescription starts from the
• Mariano and Marcos Tamayo appealed from the decision of repudiation.
the CA granting the petition of Aurelio Callejo that a certain
piece of land belonged to Callejo. Mindanao Dev’t Authority v. CA & Ang Bansing
• Spouses Vicente and Cirila Tamayo owned a piece of land
in Pangasinan. Vicente died leaving to his sons the
Facts
property (wife waived her portion). Before he died, he sold
part of the land to Domantay who in turn subsequently
sold it to Aurelio Callejo. When Mariano sold a part of his • Francisco Ang Bansing owned a 300,000 sq.m. piece of
land to someone and a surveyor went to check it out, the land in Davao wherein he sold part of it to Juan Cruz who
surveyor was denied access by Callejo, saying that that subsequently sold it also to the Commonwealth of the
part of the land is his. Thus, this petition. Philippines. In the contract between Juan Cruz and Ang
• Mariano Tamayo’s defense is that the land in dispute is Bansing, it is stipulated that Juan Cruz will agree to work
outside the perimeter of the certificate of title and he also for the titling of the entire area of land under his own
alleged prescription. Tamayo argues that if the land bought expenses and the expenses for the titling of the portion
by Domantay was erroneously included in his certificate of sold to him.
title, then it created an implied trust between him and
• The President of the Philippines issued Proclamation no. Tala Realty v. Banco Filipino Savings and Mortgage Bank
459 transferring the ownership of certain parcels of lands
in Davao to the Mindanao Dev’t Authority (MDA) subject to Facts
private rights, if any. MDA filed a complaint against Ang
Bansing for reconveyance alleging that the stipulation in
• Tala Realty Services is the absolute owner of several
the contract between Juan Cruz and Ang Bansing made
parcels of land by virtue of a Deed of Sale executed
Ang Bansing a trustee thereby obligating Ang Bansing to
between Tala and respondent Bank. At issue here is one of
deliver the portion of land sold to Juan Cruz.
those parcels of land-the Bulacan property. On the same
• Ang Bansing alleges that any ownership right over the
day that Tala acquired the property, Tala and the Bank
property has prescribes since it has already been 30 years. executed a lease contract renewable in 20 years and
• CFI found that there was an express trust. CA says there subsequently changed to 11 years, renewable for 9
was no express trust. years. After 11 years, Tala reminded the Bank that the
contract will expire soon and negotiated for a renewable of
Issue: the lease agreement.
• There was no final agreement and in the end when the
• WON there was an express trust created between Juan Bank was not able to comply with the requirements of Tala,
Cruz and Ang Bansing. Tala filed complaints for ejectment and/or unlawful
detainer.
• The Bank’s defense story was that it undertook an
Held: Nada
expansion program where they will buy a head office but if
they do so, they would exceed the limit of real estate
Ratio: investment set by the General Bankings Act. To avoid the
limit set by law, they reduced their branch site holdings by
• Trusts are either express or implied. A trusts necessarily leasing instead of owning branch sites. Thus they entered
includes the following: (1) competent trustor and trustee, into a “warehousing agreement” with Tala wherein it is
(2) an ascertainable trust res, and (3) sufficiently certain stipulated that the properties will be reconveyed to the
beneficiaries. Bank at the Bank’s demand or pleasure. This was not
• The stipulation alluded to is nothing but a condition that written in the contract but the Bank was confident that Tala
will honor this agreement.
Ang Bansig shall pay the expenses for the registration of
his land and for Juan Cruz to shoulder the expenses for the
registration of the land sold to him. The stipulation does Issue:
not categorically create an obligation on the part of Ang
Bansing to hold the property in trust for Juan Cruz. • WON the conveyance of property was a trust under the
• There is no express trust as there was no unequivocal “warehousing agreement.”
disposition of property making himself a trustee for the
benefit of another. The intent to create a trust must be
Held: No
definitive and particular.
• Even if we consider it as an implied trust, it has already
Ratio:
prescribed because more than 28 years has passed. Acton
for reconveyance has prescribed.
• It is clear that the Bank transferred ownership to Tala
Doctrine: when the former sold it to the latter. The Bank counters
that it was not really a sale because what Tala paid was
actually the advance rentals that the Bank gave to Tala and
• Trusts are created unequivocally and with the clear intent therefore the contract should be understood as a
to create a trust. “warehousing agreement” whereby Tala holds the property
for the bank (just like a trust). Not meritorious.
• While there may have been a contract of sale and lease
back of the property which created an implied trust
“warehousing agreement” for the reconveyance of the
property, under the law, this implied trust is inexistent and
void for being contrary to law (the “warehousing
agreement” was meant to curtail the limitations set by the
General Bankings Act which prohibits a Bank from owning
more than the limit of real estate investment).
• An implied trust could not have been formed between the
Bank and Tala “where the purchase is made in violation of
an existing statute and in evasion of its express provision,
no trust can result in favor of the party who is guilty of the
fraud.
• Using Ramos v. CA, the Court held that “if the purpose of
the payor of the consideration having title placed in the
name of the another was to evade some rule of common or
statute law, the Courts will not assist the payor in
achieving his improper purpose by enforcing a resultant
trust for him in accordance with the ‘clean hands’
doctrine.”

Doctrine:

• Implied trusts as a result of controverting the law are


inexistent and void.