PART I - OBLIGATIONS
Necessarily, the
I. In General
A. Definition, NCC 1156
B. Sources, NCC 1157
MetroBank v. Rosales, G.R. No. 183204, January 13, 2014
The “Hold Out” clause applies only if there is a valid and existing obligation arising
from any of the sources of obligation enumerated in Article 1157 of the Civil Code, to
wit: law, contracts, quasi-contracts, delict, and quasi-delict.— In this case, petitioner
failed to show that respondents have an obligation to it under any law, contract,
quasi-contract, delict, or quasi-delict. And although a criminal case was filed by
petitioner against respondent Rosales, this is not enough reason for petitioner to
issue a “Hold Out” order as the case is still pending and no final judgment of
conviction has been rendered against respondent Rosales. In fact, it is significant to
note that at the time petitioner issued the “Hold Out” order, the criminal complaint had
not yet been filed. Thus, considering that respondent Rosales is not liable under any
of the five sources of obligation, there was no legal basis for petitioner to issue the
“Hold Out” order. Accordingly, we agree with the findings of the RTC and the CA that
the “Hold Out” clause does not apply in the instant case. In view of the foregoing, we
find that petitioner is guilty of breach of contract when it unjustifiably refused to
release respondents’ deposit despite demand. Having breached its contract with
respondents, petitioner is liable for damages.
Bank deposits, which are in the nature of a simple loan or mutuum, must be paid
upon demand by the depositor.
(a) Law, NCC 1158
(b) Contract, NCC 1159
PSBA v CA, GR 84698, Feb. 4, 1992
An academic institution enters into a contract when it accepts students for
enrollment; The contract between school and student is one "imbued with public
interest".— Institutions of learning must also meet the implicit or "built-in" obligation of
providing their students with an atmosphere that promotes or assists in attaining its
primary undertaking of imparting knowledge. Certainly, no student can absorb the
intricacies of physics or higher mathematics or explore the realm of the arts and other
sciences when bullets are flying or grenades exploding in the air or where there
1
looms around the school premises a constant threat to life and limb.
school must ensure that adequate steps are taken to maintain peace and order within
the campus premises and to prevent the breakdown thereof.
A contractual relation is a condition sine qua non to the school's liability. The
negligence of the school cannot exist independently on the contract, unless the
negligence occurs under the circumstances set out in Article 21 of the Civil Code.
Cruz v Gruspe, GR 191431, March 13, 2013
Contracts are obligatory no matter what their forms may be, whenever the essential
requisites for their validity are present. In determining whether a document is an
affidavit or a contract, the Court looks beyond the title of the document, since the
denomination or title given by the parties in their document is not conclusive of the
nature of its contents. In the construction or interpretation of an instrument, the
intention of the parties is primordial and is to be pursued. If the terms of the
document are clear and leave no doubt on the intention of the contracting parties, the
literal meaning of its stipulations shall control. If the words appear to be contrary to
the parties’ evident intention, the latter shall prevail over the former.
In order that the debtor may be in default, it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance
judicially and extrajudicially.—The 15% interest (later modified by the CA to be 12%)
was computed from November 15, 1999—the date stipulated in the Joint Affidavit of
Undertaking for the payment of the value of Gruspe’s car. In the absence of a finding
by the lower courts that Gruspe made a demand prior to the filing of the complaint,
the interest cannot be computed from November 15, 1999 because until a demand
has been made, Cruz and Leonardo could not be said to be in default. Default
generally begins from the moment the creditor demands the performance of the
obligation. In this case, demand could be considered to have been made upon the
filing of the complaint on November 19, 1999, and it is only from this date that the
interest should be computed.
ACE Foods, Inc. v. Micro Pacific,  G.R. No. 200602,  December 11, 2013.
The essential issue in this case is whether ACE Foods should pay MTCL the
purchase price for the subject products. The petition lacks merit.A contract is what
the law defines it to be, taking into consideration its essential elements, and not what
the contracting parties call it. The real nature of a contract may be determined from
the express terms of the written agreement and from the contemporaneous and
subsequent acts of the contracting parties. However, in the construction or
interpretation of an instrument, the intention of the parties is primordial and is to
be pursued. The denomination or title given by the parties in their contract is not
conclusive of the nature of its contents. The very essence of a contract of sale is the
transfer of ownership in exchange for a price paid or promised. This may be
gleaned from Article 1458 of the Civil Code which defines a contract of sale as
follows:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership and to deliver a determinate thing, and the other to pay
therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional. (Emphasis supplied)Corollary
thereto, a contract of sale is classified as a consensual contract, which means that
the sale is perfected by mere consent. No particular form is required for its validity.
Upon perfection of the contract, the parties may reciprocally demand performance,
i.e., the vendee may compel transfer of ownership of the object of the sale, and the
vendor may require the vendee to pay the thing sold. In contrast, a contract to sell is
defined as a bilateral contract whereby the prospective seller, while expressly
reserving the ownership of the property despite delivery thereof to the prospective
buyer, binds himself to sell the property exclusively to the prospective buyer upon
fulfillment of the condition agreed upon, i.e., the full payment of the purchase price. A
contract to sell may not even be considered as a conditional contract of sale where
the seller may likewise reserve title to the property subject of the sale until the
fulfillment of a suspensive condition, because in a conditional contract of sale, the
first element of consent is present, although it is conditioned upon the happening of a
contingent event which may or may not occur.
(c) Quasi-Contract, NCC 1160
Locsin II v. Mekeni Food Corporation, G.R. No. 192105, December 9, 2013.
In the absence of specific terms and conditions governing the car plan arrangement
between the petitioner and Mekeni, a quasi- contractual relation was created
between them. Consequently, Mekeni may not enrich itself by charging petitioner for
the use of its vehicle which is otherwise absolutely necessary to the full and effective
promotion of its business.—Under Article 22 of the Civil Code, “[e]very person who
through an act of performance by another, or any other means, acquires or comes
into possession of something at the expense of the latter without just or legal ground,
shall return the same to him.” Article 2142 of the same Code likewise clarifies that
there are certain lawful, voluntary and unilateral acts which give rise to the juridical
2
relation of quasi-contract, to the end that no one shall be unjustly enriched or
benefited at the expense of another. In the absence of specific terms and conditions
governing the car plan arrangement between the petitioner and Mekeni, a quasi-
contractual relation was created between them. Consequently, Mekeni may not
enrich itself by charging petitioner for the use of its vehicle which is otherwise
absolutely necessary to the full and effective promotion of its business. It may not,
under the claim that petitioner’s payments constitute rents for the use of the company
vehicle, refuse to refund what petitioner had paid, for the reasons that the car plan
did not carry such a condition; the subject vehicle is an old car that is substantially, if
not fully, depreciated; the car plan arrangement benefited Mekeni for the most part;
and any personal benefit obtained by petitioner from using the vehicle was merely
incidental.
(d) Delict, NCC 1161
(d) Quasi-Delict, NCC 1162
Garcia v. Ferro Chemicals, Inc. (2014)
The civil liability asserted by Ferro Chemicals, Inc. before the CA arose from the
criminal act. It is in the nature of civil liability ex delicto. Ferro Chemicals did not
reserve the right to institute the civil action for the recovery of civil liability ex delicto
or institute a separate civil action prior to the filing of the criminal case. Thus, it is an
adjunct of the criminal aspect of the case.
People of the Philippines v. Dionaldo (2015)
The death of the accused pending appeal of his conviction extinguishes his criminal
liability as well as his civil liability ex delicto.
Barredo v Garcia, 73 Phil. 607 (1942)
There are two actions available for parents of Garcia. One is under the A100RPC
wherein the employer is only subsidiarily liable for the damages arising from the
crime thereby first exhausting the properties of Fontanilla. The other action is under
A1903CC (quasi-delict or culpa aquiliana) wherein as the negligent employer of
Fontanilla, Barredo is held primarily liable subject to proving that he exercising
diligence of a good father of the family. The parents simply took the action under the
Civil Code as it is more practical to get damages from the employer bec he has more
money to give than Fontanilla who is yet to serve his sentence.
Obiter: Difference between Crime and Quasi-delict 1) Crimes – public interest;
Quasi-delict – only private interest 2) Penal code punishes or corrects criminal acts;
Civil Code by means of indemnification merely repairs the damage 3) Delicts are not
as broad as quasi-delicts; Crimes are only punished if there is a penal law; Quasi-
delicts include any kind of fault or negligence. (NOTE: Not all violations of penal law
produce civil responsibility, e.g. contravention of ordinances, violation of game laws,
infraction of rules of traffic when nobody is hurt); 4) Crime – guilt beyond reasonable
doubt; Civil – mere preponderance of evidence.
against the employer who is held liable for the negligent act or omission committed
by his employee.”—Once negligence, the damages and the proximate causation are
established, this Court can then proceed with the application and the interpretation of
the fifth paragraph of Article 2180 of the Civil Code. The rationale for these graduated
levels of analyses is that it is essentially the wrongful or negligent act or omission
itself which creates the vinculum juris in extra-contractual obligations.

Gutierrez v Gutierrez, No. 34840, September  23, 1931

BG was an incompetent chauffer as he was driving in an excessive speed. The
guarantee the father gave at the time the son was granted a license to operate motor
vehicles gave the father responsible for the acts of his son. - SCor and AV’s liability is
based on the contract. The position of the truck on the bridge and the speed in
operating the machine and the lack of care employed reached such conclusion. The
fact that 2 drivers were approaching a narrow bridge, neither willing to slow up and
give right of way inevitably resulted to the collision and the accident.

- The contention that there was contributory negligence as the plaintiff kept his foot
outside the truck was not pleaded and was dismissed as speculative. Ratio In the US
it is uniformly held that the head of the house, the owner of the vehicle, who
maintains it for the general use of his family is liable for its negligent operation by one
of his children, whom he designates or permits to run it, where the car is occupied
and being used for the pleasure of the other members of the family, other than the
child driving it.

Llana v. Biong, G.R. No. 182356, December 4, 2013.

Elements of Quasi-Delicts—Article 2176 of the Civil Code provides that “[w]hoever by
act or omission causes damage to another, there being fault or negligence, is obliged
to pay for the damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is a quasi-delict.” Under this provision, the
elements necessary to establish a quasi-delict case are: (1) damages to the plaintiff;
(2) negligence, by act or omission, of the defendant or by some person for whose
acts the defendant must respond, was guilty; and (3) the connection of cause and
effect between such negligence and the damages. These elements show that the
source of obligation in a quasi-delict case is the breach or omission of mutual duties
that civilized society imposes upon its members, or which arise from noncontractual
relations of certain members of society to others.

Under Article 2176 of the Civil Code, in relation with the fifth paragraph of Article
2180, “an action predicated on an employee’s act or omission may be instituted

3
II. Nature and Effect of Obligations
A. Kinds of Prestations
1. To give, NCC 1163-1166
a. Rules regarding improvement, loss, or deterioration,
NCC 1189, 1190, 1194, 566-571
2. To do, NCC 1167
Chavez v Gonzales, 32 SCRA 547
Under Article 1167 of the Civil Code, a person who is obliged to do something and
fails to do it shall be liable for the cost of executing the obligation in a proper manner.
The cost of execution of the obligation to repair a typewriter is the cost of the labor or
service expended in the repair of the typewriter. In addition, the obligor, under Article
1170 of the Code, is liable for the cost of the missing parts because in his obligation
to repair the typewriter he is bound to return the typewriter in the same condition it
was when he received it.
Tanguilig v CA, 266 SCRA 78 (1997)
Petitioner’s argument that private respondent was already in default in the payment
of his outstanding balance of P15,000.00 and hence should bear his own loss, is
untenable. In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him. When the windmill failed to function properly it became incumbent upon
petitioner to institute the proper repairs in accordance with the guaranty stated in the
contract. Thus, respondent cannot be said to have incurred in delay; instead, it is
petitioner who should bear the expenses for the reconstruction of the windmill. Article
1167 of the Civil Code is explicit on this point that if a person obliged to do something
fails to do it, the same shall be executed at his cost.
Mackay v. Caswell (2014)
For Owen’s failure to provide quality work, he is to reimburse the rectification costs
the Caswells had shouldered as the latter’s actual damages; the unpaid
compensation Owen is claiming shall be set-off from the Caswell’s monetary claims
supported by receipts.
3. Not to do, NCC 1168
4
B. Irregularity in Performance
1. Attributable to Debtor, NCC 1170
(a) Fraud (dolo), NCC 1170, 1171, cf. NCC 1338
Woodhouse v Halili, 93 Phil 526 (1953)
False Representatiom ; Damages, for dolo incident.—Plaintiff is entitled under the
terms of the agreement to 30 per cent of the net profits of the business. Against this
amount of damages, the damage the defendant suffered by plaintiff's
misrepresentation that he had the exclusive franchise, must be set off. (Art. 1101,
Span. Civ. Code.) When the defendant learned, in Los Angeles, California, that
plaintiff did not have the exclusive franchise which he pretended be had and which he
had agreed to transfer to the partnership, his spontaneous reaction was to reduce the
plaintiff's share from 30 per cent to 15 per cent only, to which reduction plaintiff
appears to have readily given his assent. Held: By the misrepresentation of the
plaintiff, he obtained a very high percentage (30%) of share in the profits. Upon
learning of the misrepresentation, defendant reduced plaintiff's share to 15 per cent,
to which defendant assented. The court can do no better than follow such appraisal
of the damages as the parties themselves had adopted.
The causal fraud which may be a ground for the annulment of a contract, and the
incidental deceit which only renders the party who employs it liable for damages. In
order that fraud may vitiate consent, it must be the causal (dolo causante), not merely
the incidental (dole in- cidente), inducement to the making of the contract (art. 1270,
Span. Civ. Code; Hill vs, Yeloso, 31 Phil., 160). In the case at bar, inasmuch as the
principal consideration, the main cause that induced. defendant to enter into the
partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive
franchise to bottle and distribute for the defendant or for the partnership, the false
representation made by the plaintiff was not the casual consideration, or the principal
inducement, that led the defendant to enter into the partnership agreement,.
Geraldez v CA, 230 SCRA 329 (1994)
Under dolo causante or causal fraud (in NCC Art. 1338) are deceptions or
misrepresentations of a party to a contract without which the other party/parties
would not have entered into the contract. The fraud was employed in order to secure
the consent of the defrauded party, thus existing before and during creation of the
contract. The fraud itself is the essential source of the consent. Its effects are nullity
of the contract and indemnification of damages.
On the other hand, dolo incidente or incidental fraud (in NCC Arts. 1170 and 1344) is
of minor character, without which the other party will still enter the contract. The fraud
refers only to some particular or accident of the obligation. Since the fraud did not
vitiate consent of the party while entering in the contract, said contract is valid. The
party who committed dolo incidente is liable for damages as well.
Private respondent committed fraud in the inducement (or dolo causante), with
promising the attendance of a European tour manager that would take care of her
and her sister during the entirety of the tour. The other breaches of contract
committed by private respondent, whether considered as dolo causante or dolo
incidente, likewise will bring about to said respondent the obligation to pay moral and
exemplary damages.
5
Metropolitan v. Prosperity, G.R. No. 154390, March 17, 2014
According to Article 1338 of the Civil Code, there is fraud when one of the contracting
parties, through insidious words or machinations, induces the other to enter into the
contract that, without the inducement, he would not have agreed to. Yet, fraud, to
vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract. In Samson v. Court of Appeals,
238 SCRA 397 (1994), causal fraud is defined as “a deception employed by one
party prior to or simultaneous to the contract in order to secure the consent of the
other.” Fraud cannot be presumed but must be proved by clear and convincing
evidence. Where the consent was given through fraud, the contract was voidable, not
void ab initio.   This is because a voidable or annullable contract is existent, valid and
binding, although it can be annulled due to want of capacity or because of the vitiated
consent of one of the parties.—Contrary to their modified defense of absence of
consent, Vicky Ang’s testimony tended at best to prove the vitiation of their consent
through insidious words, machinations or misrepresentations amounting to fraud,
which showed that the contract was voidable. Where the consent was given through
fraud, the contract was voidable, not void ab initio. This is because a voidable or
annullable contract is existent, valid and binding, although it can be annulled due to
want of capacity or because of the vitiated consent of one of the parties. Article 1390,
in relation to Article 1391 of the Civil Code, provides that if the consent of the
contracting parties was obtained through fraud, the contract is considered voidable
and may be annulled within four years from the time of the discovery of the fraud.
The discovery of fraud is reckoned from the time the document was registered in the
Register of Deeds in view of the rule that registration was notice to the whole world.
Thus, because the mortgage involving the seven lots was registered on September 5,
1984, they had until September 5, 1988 within which to assail the validity of the
mortgage. But their complaint was instituted in the RTC only on October 10, 1991.
Hence, the action, being by then already prescribed, should be dismissed. 
Effects of fraud
i. Specific Performance, NCC 1233
(1) Specific/determinate thing, NCC 1244, 1170, 1165 (1), 11767
(2) Generic thing, NCC 1246
(3) Preserve, NCC 1163
(4) Deliver all its accessions, NCC 1166, 1164
(5) Interest, NCC 1176
(6) Deliver all its accessories, NCC 1166
 (7) Analogous Circumstances
Marquez v. Elisan Credit (2015)
The rule under Art. 1253 that payments shall first be applied to the interest and not to
the principal shall govern if two facts exist: (1) the debt produces interest (i.e. the
payment of interest is expressly stipulated) and (2) the principal remains unpaid.
The exception is a situation covered under Art. 1176, i.e. when the creditor waives
payment of the interest despite the presence of (1) and (2) above. In such case, the
payments shall obviously be credited to the principal.
Since the doubt in the present case pertains to the application of the daily payments,
Art. 1253 shall apply. Only when there is a waiver of interest shall Article 1176
become relevant. Under this analysis, we rule that the respondent properly credited
the daily payments to the interest and not to the principal because: (1) the debt
produces interest, i.e. the PN securing the second loan provided for payment of
interest; (2) a portion of the second loan remained unpaid upon maturity; and (3) the
respondent did not waive the payment of interest.
Surviving Heirs versus Lindo, et al., G.R. No. 208232, March 10, 2014
While the deeds of sale do not explicitly contain the stipulation that the sale is subject
to repurchase by the applicant within a period of five (5) years from the date of
conveyance pursuant to Sec. 119 of CA 141, still, such legal provision is deemed
integrated and made part of the deed of sale as prescribed by law. It is basic that the
law is deemed written into every contract. Although a contract is the law between the
parties, the provisions of positive law which regulate contracts are deemed written
therein and shall limit and govern the relations between the parties. Thus, it is a
binding prestation in favor of Bautista which he may seek to enforce. That is precisely
what he did. He filed a complaint to enforce his right granted by law to recover the lot
subject of free patent. Ergo, it is clear that his action is for specific performance, or if
not strictly such action, then it is akin or analogous to one of specific performance.  property sold is reserved to the seller until the full payment of the price; nor a
Such being the case, his action for specific performance is incapable of pecuniary
estimation and cognizable by the RTC.
ii. Substituted performance, NCC 1165(3)
iii. Rescission, NCC 1191-1192, 1786, 1788,
1484-1486, RA 6552
6
Boysaw v Interphil Promotions, 148 SCRA 364 (1987)
The refusal of appellants to accept a postponement without any other reason but the
implementation of the terms of the original boxing contract entirely overlooks the fact
that by virtue of the violations they have committed of the terms thereof, they have
forfeited any right to its enf orcement. Where a party violates some of the terms of a
contract the other has the right to rescind it or to enforce one particular covenant
thereof.—On the validity of the fight postponement, the violations of the terms of the
original contract by appellants vested the appellees with the right to rescind and
repudiate such contract altogether. That they sought to seek an adjustment of one
particular covenant of the contract, is under the circumstances, within the appellee's
rights.
U.P. v De los Angeles, 35 SCRA 365 (1970)
Effect of unilateral rescission without court intervention.—In the first place, UP and
ALUMCO had expressly stipulated in the “Acknowledgment of Debt and Proposed
Manner of Payment” that, upon default by the debtor ALUMCO, the creditor (UP) has
“the right and the power to consider the Logging Agreement dated 2 December 1960
as rescinded without the necessity of any judicial suit.” As to such special stipulation,
and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs.
Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276: “there is
nothing in the law that prohibits the parties from entering into agreement that violation
of the terms of the contract would cause cancellation thereof, even without court
intervention. In other words, it is not always necessary for the injured party to resort
to court for rescission of the contract.”
Vda. de Mistica v Sps. Naguiat, 418 SCRA 72 (2003)
In a contract of sale, the remedy of an unpaid seller is either specific performance or
rescission.—The transaction between Eulalio Mistica and respondents, as evidenced
by the Kasulatan, was clearly a Contract of Sale. A deed of sale is considered
absolute in nature when there is neither a stipulation in the deed that title to the
stipulation giving the vendor the right to unilaterally resolve the contract the moment
the buyer fails to pay within a fixed period. In a contract of sale, the remedy of an
unpaid seller is either specific performance or rescission. Under Article 1191 of the
Civil Code, the right to rescind an obligation is predicated on the violation of the
reciprocity between parties, brought about by a breach of faith by one of them.
Rescission, however, is allowed only where the breach is substantial and
fundamental to the fulfillment of the obligation.
The failure of the vendee to pay the balance of the purchase price within ten years
from the execution of the Deed does not amount to a substantial breach where in the
contract it was stipulated that payment could be made even after ten years provided
the vendee paid 12 percent interest.—In the present case, the failure of respondents
to pay the balance of the purchase price within ten years from the execution of the
Deed did not amount to a substantial breach. In the Kasulatan, it was stipulated that
payment could be made even after ten years from the execution of the Contract,
provided the vendee paid 12 percent interest. The stipulations of the contract
constitute the law between the parties; thus, courts have no alternative but to enforce
them as agreed upon and written.
Fil-Estate v Vertex, G.R. No. 202079, June 10, 2013
Mutual restitution is required in cases involving rescission under Article 1191” of the
Civil Code; such restitution is necessary to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the amount paid to FEGDI
by reason of the sale should be returned to Vertex. On the amount of damages, the
CA is correct in not awarding damages since Vertex failed to prove by sufficient
evidence that it suffered actual damage due to the delay in the issuance of the
certificate of stock.  cannot be applicable to rescission or resolution under Article 1191. Thus, respondent
BPI v. Sanchez (2014)
Article 1191 of the Civil Code states that rescission is available to a party in a
reciprocal obligation where one party fails to comply therewith. This is understood to
be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law. Article 1385 does
provide that rescission shall not take place if the subject matter of the prior
agreement is already in the hands of a third party who did not act in bad faith.
In the extant case, the failure of TSEI to pay the consideration for the sale of the
subject property entitled the Sanchezes to rescind the Agreement. And in view of the
finding that the intervenors acted in bad faith in purchasing the property, the
subsequent transfer in their favor did not and cannot bar rescission.
Wellex Group v. U-Land Airlines (2015)
For Article 1191 to be applicable, however, there must be reciprocal prestations as
distinguished from mutual obligations between or among the parties. A prestation is
the object of an obligation, and it is the conduct required by the parties to do or not to
do, or to give. Parties may be mutually obligated to each other, but the prestations of
these obligations are not necessarily reciprocal. The reciprocal prestations must
necessarily emanate from the same cause that gave rise to the existence of the
contract. The failure of one of the parties to comply with its reciprocal prestation
7
allows the wronged party to seek the remedy of Article 1191. The wronged party is
entitled to rescission or resolution under Article 1191, and even the payment of
damages. It is a principal action precisely because it is a violation of the original
reciprocal prestation.
Contrary to Wellex’s argument, this is not rescission under Article 1381 of the Civil
Code. This case does not involve prejudicial transactions affecting guardians,
absentees, or fraud of creditors. Article 1381 (3) pertains in particular to a series of
fraudulent actions on the part of the debtor who is in the process of transferring or
alienating property tat can be used to satisfy the obligation of the debtor to the
creditor. The actions of the parties involving the terms of the First Memorandum of
Agreement do not fall under any of the enumerated contracts that may be subject of
rescission.
Rescission or resolution under Article 1191, therefore, is a principal action that is
immediately available to the party at the time that the reciprocal prestation is
breached. Article 1383 mandating that rescission be deemed a subsidiary action
U-Land correctly sought the principal relief of rescission or resolution under Article
1191. The obligation of the parties gave rise to reciprocal prestations, which arose
from the same cause : the desire of both parties to enter into a share purchase
agreement that would allow both parties to expand their respective airline operations
in the Philippines and other neighboring countries.
Swire Realty v. Jayne Yu (2015)
Basic is the rule that the right of rescission of a party to an obligation under Article
1191 of the Civil Code is predicated on a breach of faith by the other party who
violates the reciprocity between them. The breach contemplated in the said provision
is the obligor’s failure to comply with an existing obligation. When the obligor cannot
comply with what is incumbent upon it, the obligee may seek rescission and, in the
absence of any just cause for the court to determine the period of compliance, the
court shall decree the rescission.
In the instant case, the CA aptly found that the completion date of the condominum
unit was Novemeber 1998 but was extended to December 1999. However, at the
time of the ocular inspection conducted by the HLURB ENCRFO, the unit was not yet
completely finished as the kitchen cabinets and fixtures were not yet installed and the
agreed amenities were not yet available. Thus, petition had incurred delay in the
performance of its obligation amounting to breach as it failed to finish and deliver the
unit within the stipulated period.

Fong v. Duenas (2015)
Duenas’ breach justified Fong’s rescission of the joint venture agreement under
Article 1191 by the former’s failure to deliver the valuation documents of the Danton
and Backom shares to prove that the combined values of their capital contributions
amounted to P32.5M. However, the Court also notes that Fong breached his
obligation in the agreement by reneging on his original promise to contribute P32.5M.
Fong’s dimunition of his capital share to P5M amounted to a substantial breach as
well which occured before Fong decided to rescind his JVA with Duenas. Thus, Art.
1192 applies.
Cupino v. Pacific Rehouse (2015)
The obligation of the petitioners under the Deed of Conditional Sale is to “guarantee
removal of tenants” and not merely to pay disturbance compensation. It is an
undertaking specifically given to petitioners under the Deed, considering that Pacific
is not yet the owner of the property and will have no personality to evict the property’s
present occupants. Petitioners failed to fulfill this obligation, as well as the obligation
to deliver the necessary documents to complete the sale.
iv. Damages, NCC 1170
(1) Unilateral obligations, NCC 1171
(2) Reciprocal obligations, NCC 1192
(b) Negligence (culpa), NCC 1173, 1172,
Effects of Negligence, 1170, 2201, 2202, 1233,
1191, 1170
Gutierrez v Gutierrez, 56 Phil 177 (1932)
The head of a house, the owner of an automobile, who maintains it for the general
use of his family, is liable for its negligent operation by one of his children, whom he
designates or permits to run it, where the car is occupied and being used at the time
of the injury for the pleasure of other members of the owner's family than the child
driving it.
Vasquez v Borja, 74 Phil 560 (1944)
We think both the trial court and the Court oi Appeals erred in law in so holding. They
have manifestly failed to distinguish a contractual from an extracontractual obligation,
or an obligation arising from contract from an obligation arising from culpa aquiliana.
The fault and negligence referred to in articles 1101-1104 of the Civil Code are those
8
incidental to the fulfilment or nonfulfilment of a contractual obligation; while the fault
or negligence referred to in article 1902 is the culpa aquiliana of the civil law,
homologous but not identical to tort of the common law, which gives rise to an
obligation independently of any contract. (Cf. Manila R. R. Co. vs. Cia. Trasatlantica,
38 Phil., 875, 887-890; Cangco vs. Manila R. R. Co., 38 Phil., 768.) The fact that the
corporation, acting thru Vazquez as its manager, was guilty of negligence in the
fulfilment of the contract, did not make Vazquez principally or even subsidiarily liable
for such negligence. Since it was the corporation's contract, its nonfulfilment, whether
due to negligence or.fault or to any other cause, made the corporation and not its
agent liable.
On the other hand, if independently of the contract Vazquez by his fault or negligence
caused damage to the plaintiff, he would be liable to the latter under article 1902 of
the Civil Code. But then the plaintiff's cause of action should be based on culpa
aquiliana and not on the contract alleged in his complaint herein; and Vazquez
liability would be principal and not merely subsidiary, as the Court of Appeals has
erroneously held.
Federal Builders v Foundation Specialists, GR 194507, Sept. 8, 2014
When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
When an obligation, not constituting a loan or forbearance of money, is breached, an
interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages, except when or until the demand can be established
with reasonable certainty.
(v) Delay (mora), NCC 1169
SSS v Moonwalk, G.R. No. 73345. April 7, 1993
A penal clause is an accessory undertaking to assume greater liability in case of
breach. It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach. From the foregoing, it is clear that a penal clause is intended to
prevent the obligor from defaulting in the performance of his obligation. Thus, if there
should be default, the penalty may be enforced.
To be in default “x x x is different from mere delay in the grammatical sense, because
it involves the beginning of a special condition or status which has its own peculiar
effects or results.” In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires
the performance judicially and extrajudicially. Default generally begins from the
moment the creditor demands the performance of the obligation. Nowhere in this
case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the
stipulated penalty upon the failure of Moonwalk to meet its monthly amortization.
What the complaint itself showed was that SSS tried to enforce the obligation
sometime in September, 1977 by foreclosing the real estate mortgages executed by
Moonwalk in favor of SSS. But this foreclosure did not push through upon
Moonwalk’s requests and promises to pay in full. The next demand for payment
happened on October 1, 1979 when SSS issued a Statement of Account to
Moonwalk And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalk was never in default because SSS never
compelled performance.
Rivera v. Sps. Chua (2015)
The parties stipulated that in case of default, Rivera will pay interest at the rate of 5%
a month or 60% per annum. It bears emphasizing that the undertaking based on the
promissory note clearly states the date of payment to be 31 December 1995.
Therefore, demand by the creditor is no longer necessary in order that delay may
exist since the contract itself expressly so declares. The mere failure of Spouses
Chua to immediately demand or collect payment of the value of the note does not
exonerate Rivera from his liability therefrom.
Maybank Philippines v. Sps. Tarrosa (2015)
In order that the debtor may be in default, it is necessary that: (a) the obligation be
demandable and already liquidated; (b) the debtor delays performance; and (c)
creditor requires the performance judicially or extrajudicially, unless demand is not
necessary – i.e. when there is an express stipulation to that effect; where the law so
provides; when the period is the controlling motive or the principal inducement for the
creation of the obligation; and where demand would be useless. Moreover, it is not
sufficient that the law or obligation fixes a date for performance; it must further state
expressly that after the period lapses, default will commence.
9
Paragraph 5 of the REM merely articulated Maybank’s right to elect foreclosure upon
Tarrosa’s failure or refusal to comply with the obligation secured, which is one of the
rights duly accorded to mortgagess in a similar situation. In no way did it affect the
general paramateres of default, particularly the need of prior demand under Art. 1169
of the NCC. In the absence of showing that demand is unnecessary for the loan
obligation to become due and demandable, Maybank’s right to foreclose the REM
accrued only after the lapse of 5 days from receipt of the final demand letter.
Maybank’s right to foreclose had not yet prescribed.
(vi) Kinds of delay
(A) mora solvendi, NCC 1169
Abella v Gonzaga, 55 Phil 447 (1931)
Having agreed that the selling price (even supposing it was a contract of sale) would
be paid not later than December, 1928, and in view of the fact that the vendor
executed said contract in order to pay off with the proceeds thereof certain
obligations which fell due in the same month of December, it is held that the time
fixed for the payment of the selling price was essential in the transaction, and,
therefore, the vendor, under article 1124 of the Civil Code, is entitled to resolve the
contract for failure to pay the price within the time specified.
Foundation v Santos, GR 153004, November 4, 2004
Delay as used in Art. 1169 of the New Civil Code is synonymous to default or mora
which means delay in the fulfillment of obligations—it is the non-fulfillment of the
obligation with respect to time.—Article 1169 of the New Civil Code provides: Those
obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation. In order for the
debtor to be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance judicially or
extrajudicially.
Vasquez v Ayala Corp., GR 149734, November 19, 2004
In order that the debtor may be in default it is necessary that the following requisites
be present: (1) that the obligation be demandable and already liquidated; (2) that the
debtor delays performance; and (3) that the creditor requires the performance
judicially or extrajudicially.
Agner v BPI, G.R. No. 182963. June 3, 2013
Prior demand is not a condition precedent to an action for a writ of replevin, since
there is nothing in Section 2, Rule 60 of the Rules of Court that requires the applicant
to make a demand on the possessor of the property before an action for a writ of
replevin could be filed.
In civil cases, one who pleads payment has the burden of proving it; the burden rests
on the defendant to prove payment, rather than on the plaintiff to prove non-payment.
Settled is the principle which the Supreme Court has affirmed in a number of cases
that stipulated interest rates of three percent (3%) per month and higher are
excessive, iniquitous, unconscionable, and exorbitant.
(B) mora accipiendi
Vda. de Villaruel v Manila Motor Co., 104 Phil 926 (1958)
Importer Refusal to Accept Rents Places Lessors in Default; Liability for Supervening
Risk.—Since the lessee was exempt from paying the rents for the period of its ouster,
the insistence of the lessors to collect the rentals, corresponding to said period was
unwarranted and their refusal to accept the current rents tendered by the lessee was
unjustified. Such refusal places the lessors in default (mora) and they must shoulder
the subsequent accidental loss of the premises leased.
Mora of Lessors Not Cured by Failure of Lessee to Consign Rents in Court.—T’he
mora of the lessors was not cured by the failure of the lessee to make the
consignation of the rejected payments, but the lessee remained obligated to pay the
amounts tendered and not consigned by it in court.
Tengco v CA, GR 49852, October 19, 1989
Under the circumstances, the refusal to accept the proffered rentals is not without
justification. The ownership of the property had been transferred to the private
respondent and the person to whom payment was offered had no authority to accept
payment. It should be noted that the contract of lease between the petitioner and
Lutgarda Cifra, the former owner of the land, was not in writing and, hence,
unrecorded. The Court has held that a contract of lease executed by the vendor,
unless recorded, ceases to have effect when the property is sold, in the absence of a
contrary agreement. The petitioner cannot claim ignorance of the transfer of ownerhip
of the property because, by her own account, Aurora Recto and the private
respondent, at various times, had informed her of their respective claims to
ownership of the property occupied by the petitioner. The petitioner should have
10
tendered payment of the rentals to the private respondent and if that was not
possible, she should have consigned such rentals in court.
(C) compensatio morae
Central Bank v CA, 139 SCRA 46 (1985)
Where the bank failed to release the entire approved loan, but the borrower also
failed to pay the partial loan release he got after it fell due, both are in default and
their respective liability for damages shall be offset equitably, exclusive of the interest
due on the overdue loan portion.—Article 1192 of the Civil Code provides that in case
both parties have committed a breach of their reciprocal obligations, the liability of the
first infractor shall be equitably tempered by the courts, WE rule that the liability of
Island Savings Bank for damages in not furnishing the entire loan is offset by the
liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges,
for not paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for
interest on his P17,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of the
P17,000.00, it is just that he should account for the interest thereon.
(b) Not attributable to the debtor
(i) Fortuitous event, NCC 1174, 1221, 1165(2)
Nakpil v CA, L-47851, October 3, 1986
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach
of an obligation due to an “act of God,’ the following must concur: (a) the cause of the
breach of the obligation must be independent of the will of the debtor; (b) the event
must be either unforseeable or unavoidable; (c) the event must be such as to render
it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the
debtor must be free from any participation in, or aggravation of the injury to the
creditor.
Having made substantial deviations from plans and specifications, having failed to
observe requisite workmanship in construction, and the architect made plans that
contain defects and inadequacies, both contractor and architect cannot escape
liability for damages sustained by the building that collapsed in the wake of an
earthquake on Aug. 2, 1968
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379,
4380) which may be in point in this case, reads: “One who negligently creates a
dangerous condition cannot escape liability for the natural and probable
consequences thereof, although the act of a third person, or an act of God for which
he is not responsible, intervenes to precipitate the loss.” As already discussed, the
destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in
the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal
difference; gross negligence and evident bad faith, without which the damage would
not have occurred.
Fil-Estate v Ronquillo, GR 185789, Jan. 13, 2014
The non-performance of petitioners’ obligation entitles respondents to rescission
under Article 1191 of the New Civil Code which states: Article 1191. The power to
rescind obligations is implied in reciprocal ones, in case one of the obligors should
not comply with what is incumbent upon him. The injured party may choose between
the fulfillment and the rescission of the obligation, with payment of damages in either
case. He may also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible. More in point is Section 23 of Presidential Decree No.
957, the rule governing the sale of condominiums, which provides: Section 23. Non-
Forfeiture of Payments.—No installment payment made by a buyer in a subdivision
or condominium project for the lot or unit he contracted to buy shall be forfeited in
favor of the owner or developer when the buyer, after due notice to the owner or
developer, desists from further payment due to the failure of the owner or developer
to develop the subdivision or condominium project according to the approved plans
and within the time limit for complying with the same. Such buyer may, at his option,
be reimbursed the total amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate.
(c) Other Provisions, NCC 1175, 1957, 1413, 1961, 1176
(d) Remedies of creditors
(i). Levy and execution, NCC 1177, 2236
(ii). Accion Subrogatoria, NCC 1177, 772
(iii). Accion Pauliana, NCC 1177, 1380-1389
Khe Hong Cheng v CA, 355 SCRA 701 (2001)
Article 1383 of the Civil Code provides as follows: Art. 1383. An action for rescission
is subsidiary; it cannot be instituted except when the party suffering damage has no
other legal means to obtain reparation for the same. It is thus apparent that an action
to rescind or an accion pauliana must be of last resort, availed of only after all other
11
legal remedies have been exhausted and have been proven futile. For an accion
pauliana to accrue, the following requisites must concur: 1) That the plaintiff asking
for rescission has a credit prior to the alienation, although demandable later; 2) That
the debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; 3) That the creditor has no other legal remedy to satisfy his claim, but would
benefit by rescission of the conveyance to the third person; 4) That the act being
impugned is fraudulent; 5) That the third person who received the property conveyed,
if by onerous title, has been an accomplice in the fraud.
Siguan v Lim, 318 SCRA 725 (1999)
The action to rescind contracts in fraud of creditors is known as accion pauliana. For
this action to prosper, the following requisites must be present: (1) the plaintiff asking
for rescission has a credit prior to the alienation, although demandable later; (2) the
debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act
being impugned is fraudulent; (5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist
prior to the fraudulent alienation, the date of the judgment enforcing it is immaterial—
even if the judgment be subsequent to the alienation, it is merely declaratory, with
retroactive effect to the date when the credit was constituted.
(iv). Accion Directa, NCC 1652, 1729, 1608, 1893
3. Transmissibility, NCC 1178
II. KINDS OF OBLIGATIONS
A. According to demandability, NCC 1179-1192
1. Pure obligations
2. Conditional obligations
Gaite v Fonacier, 2 SCRA 830 (1961)
What characterizes a conditional obligation is the fact that its efficacy or obligatory
force is subordinated to the happening of a future and uncertain event; so that if the
suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.
Gonzales v Heirs of Thomas, 314 SCRA 585 (1999)
Because the ninth clause required respondents to obtain a separate and distinct TCT
in their names and not in the name of petitioner, it logically follows that such
undertaking was a condition precedent to the latter’s obligation to purchase and pay
for the land. Put differently, petitioner’s obligation to purchase the land is a
conditional one and is governed by Article 1181 of the Civil Code.
Types of Conditions
a. As to effect on obligation -
i. Suspensive (condition precedent)
Gonzales v Heirs of Thomas, supra
When the consent of a party to a contract is given subject to the fulfillment of a
suspensive condition, the contract is not perfected unless that condition is first
complied with.—Condition has been defined as “every future and uncertain event
upon which an obligation or provision is made to depend. It is a future and uncertain
event upon which the acquisition or resolution of rights is made to depend by those
who execute the juridical act.” Without it, the sale of the property under the Contract
cannot be perfected, and petitioner cannot be obliged to purchase the property.
“When the consent of a party to a contract is given subject to the fulfillment of a
suspensive condition, the contract is not perfected unless that condition is first
complied with.”
The obligatory force of a conditional obligation is subordinated to the happening of a
future and uncertain event, so that if that event does not take place, the parties would
stand as if the conditional obligation had never existed. There can be no rescission of
an obligation as yet non-existent, because the suspensive condition has not
happened.
Coronel v CA, 253 SCRA 15 (1996)
In a conditional contract of sale, however, upon the fulfillment of the suspensive
condition, the sale becomes absolute and this will definitely affect the seller’s title
thereto. In fact, if there had been previous delivery of the subject property, the seller’s
ownership or title to the property is automatically transferred to the buyer such that,
the seller will no longer have any title to transfer to any third person. Applying Article
1544 of the Civil Code, such second buyer of the property who may have had actual
or constructive knowledge of such defect in the seller’s title, or at least was charged
with the obligation to discover such defect, cannot be a registrant in good faith. Such
second buyer cannot defeat the first buyer’s title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property subject of the
12
sale.
In a contract to sell, upon the fulfillment of the suspensive condition, ownership will
not automatically transfer to the buyer  — the prospective seller still has to convey
title to the prospective buyer by entering into a contract of absolute sale.
(ii) Resolutory (condition subsequent)
Parks v Prov of Tarlac, 49 Phil 142 (1926)
The characteristic of condition precedent is that the acquisition of the right is not
effected while said condition is not complied with or is not deemed complied with.
Meanwhile nothing is acquired and there is only an expectancy of right.
Consequently, when a condition is imposed, the compliance of which cannot be
effected except when the right is deemed acquired, such condition cannot be a
condition precedent.
Central Philippines v CA, 246 SCRA 511 (1995)
If there is no fulfillment or compliance with the resolutory condition, the donation may
now be revoked and all rights which the donee may have acquired under it shall be
deemed lost and extinguished.—It is not correct to say that the schoolhouse had to
be constructed before the donation became effective, that is, before the donee could
become the owner of the land, otherwise, it would be invading the property rights of
the donor. The donation had to be valid before the fulfillment of the condition.
Quijada v CA, 299 SCRA 695 (1998)
It has been ruled that when a person donates land to another on the condition that
the latter would build upon the land a school, the condition imposed is not a condition
precedent or a suspensive condition but a resolutory one.—In this case, that
resolutory condition is the construction of the school. It has been ruled that when a
person donates land to another on the condition that the latter would build upon the
land a school, the condition imposed is not a condition precedent or a suspensive
condition but a resolutory one. Thus, at the time of the sales made in 1962 towards
1968, the alleged seller (Trinidad) could not have sold the lots since she had earlier
transferred ownership thereof by virtue of the deed of donation. So long as the
resolutory condition subsists and is capable of fulfillment, the donation remains
effective and the donee continues to be the owner subject only to the rights of the
donor or his successors-in-interest under the deed of donation. Since no period was
imposed by the donor on when must the donee comply with the condition, the latter
remains the owner so long as he has tried to comply with the condition within a
reasonable period.
b. As to cause or origin -
i. Potestative
Lim v CA, 191 SCRA 156 (1990)
The disputed stipulation “for as long as the defendant needed the premises and can
meet and pay said increases” is a purely potestative condition because it leaves the
effectivity and enjoyment of leasehold rights to the sole and exclusive will of the
lessee. It is likewise a suspensive condition because the renewal of the lease, which
gives rise to a new lease, depends upon said condition. It should be noted that a
renewal constitutes a new contract of lease although with the same terms and
conditions as those in the expired lease. It should also not be overlooked that said
condition is not resolutory in nature because it is not a condition that terminates the
lease contract. The lease contract is for a definite period of three (3) years upon the
expiration of which the lease automatically terminates.
Silos v PNB, G.R. No. 181045, July 2, 2014
Escalation clauses are not basically wrong or legally objectionable so long as they
are not solely potestative but based on reasonable and valid grounds. Here, as
clearly demonstrated above, not only [are] the increases of the interest rates on the
basis of the escalation clause patently unreasonable and unconscionable, but also
there are no valid and reasonable standards upon which the increases are anchored.
In loan agreements, it cannot be denied that the rate of interest is a principal
condition, if not the most important component. Thus, any modification thereof must
be mutually agreed upon; otherwise, it has no binding effect.
ii. Casual
Naga Telephone v CA, 230 SCRA 351 (1994)
A potestative condition is a condition, the fulfillment of which depends upon the sole
will of the debtor, in which case, the conditional obligation is void. Based on this
definition, respondent court’s finding that the provision in the contract, to wit:
“(a) That the term or period of this contract shall be as long as the party of the first
part (petitioner) has need for the electric light posts of the party of the second part
(private respondent) x x x.”
is a potestative condition, is correct. However, it must have overlooked the other
conditions in the same provision, to wit:
13
“x x x it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part (private respondent) is forced to
stop, abandoned (sic) its operation as a public service and it becomes necessary to
remove the electric light post (sic);” which are casual conditions since they depend on
chance, hazard, or the will of a third person. In sum, the contract is subject to mixed
conditions, that is, they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the aforementioned
provision.
iii. Mixed
Osmena v Rama, 14 Phil 99 (1909)
A condition imposed upon a contract by the promisor, the performance of which
depends upon his exclusive will, is void, in accordance with the provisions of article
1115 of the Civil Code.
Smith Bell v Sotelo Matti, 44 Phil 874 (1922)
Where the fulfillment of the condition does not depend on the will of the obligor, but
on that of a third person who can in no way be compelled to carry it out, the obligor's
part of the contract is complied with, if he does all that is in his power, and it then
becomes incumbent upon the other contracting party to comply with the terms of the
contract.
Rustan Pulp v IAC, 214 SCRA 665 (1992)
It is a truism in legal jurisprudence that a condition which is both potestative (or
facultative) and resolutory may be valid even though the saving clause is left to the
will of the obligor.—A purely potestative imposition of this character must be
obliterated from the face of the contract without affecting the rest of the stipulations
considering that the condition relates to the fulfillment of an already existing
obligation and not to its inception (Civil Code Annotated, by Padilla, 1987 Edition,
Volume 4, Page 160).
Romero v CA, 250 SCRA 223 (1995)
The undertaking required of private respondent does not constitute a “potestative
condition dependent solely on his will” that might, otherwise, be void in accordance
with Article 1182 of the Civil Code but a “mixed” condition “dependent not on the will
of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned.” We must hasten to add, however, that where
the so-called “potestative condition” is imposed not on the birth of the obligation but
on its fulfillment, only the condition is avoided, leaving unaffected the obligation itself.
c. As to possibility
Roman Catholic Archbishop v CA, 198 SCRA 100 (1991)
Donation, as a mode of acquiring ownership, results in an effective transfer of title
over the property from the donor to the donee. Once a donation is accepted, the
donee becomes the absolute owner of the property donated. Although the donor may
impose certain conditions in the deed of donation, the same must not be contrary to
law, morals, good customs, public order and public policy. The condition imposed in
the deed of donation in the case before us constitutes a patently unreasonable and
undue restriction on the right of the donee to dispose of the property donated, which
right is an indispensable attribute of ownership. Such a prohibition against alienation,
in order to be valid, must not be perpetual or for an unreasonable period of time.
The prohibition in the deed of donation against the alienation of the property for an
entire century, being an unreasonable emasculation and denial of an integral attribute
of ownership, should be declared as an illegal or impossible condition within the
contemplation of Article 727 of the Civil Code. Consequently, as specifically stated in
said statutory provision, such condition shall be considered as not imposed. No
reliance may accordingly be placed on said prohibitory paragraph in the deed of
donation.
d. As to mode – Positive and Negative
e. As to expression – Express and Implied
(v) Positive
(vi) Negative
(vii) Divisible
(viii) Indivisible
(ix) Conjunctive
(x) Alternative
(xi) Express
(xii) Implied
3. Obligations with a term, NCC 1193-1198
1. Types of Period/Term
(a) As to effect on obligation - Suspensive (ex die) and Resolutory (in
diem)
14
(b) As to source - Legal, Voluntary, and Judicial, NCC 1197, 1191,
1687 (2,3,4 sentences), 1180
Araneta v Phil Sugar Estate, 20 SCRA 330 (1967)
Where the issue raised in the pleadings was whether the seller of the land was given
in the contract of sale a reasonable time within which to construct the streets around
the perimeter of the land sold, the court, in an action for specific performance to
compel the construction of said streets or for recovery of' damages, cannot fix a
period within which the seller should construct the streets. The court should
determine whether the parties had agreed that the seller should have reasonable
time to perform its part of the bargain. If the contract so provided, then there was a
period fixed, a "reasonable time", and all that the court should have done was to
determine if that reasonable time had already elapsed when the suit was filed. If it
had passed, then the court should' declare that the petitioner had breached the
contract, as averred in the complaint and fix the resulting damages. On the other
hand, if the reasonable time had not yet elapsed, the court perforce was bound to
dismiss the action for being premature. But in no case can it be logically held that,
under the pleadings, the intervention of the court to fix the period for performance
was warranted, for Article 1197 of the New Civil Code is precisely predicated. On the
absence of any period fixed by the parties.
Article 1197 of the New Civil Code involves a two-step process. The court must first
determine that the obligation does not fix a period (or that the period depends upon
the debtor's will) and that the intention of the parties, as may be inferred from the
nature and circumstances of the obligation, is to have a period for its performance.
The second step is to ascertain the period probably contemplated by the parties. The
court cannot arbitrarily fix a period out of thin air.
Central Philippines v CA, supra
(c) As to expression - Express and Implied
(d) As to definiteness - Definite and Indefinite
(e) OriginalPeriod and Grace Period
B. According to Plurality of Object, NCC 1199-1206
1. Alternative Obligations, NCC 199-1206
(a). Kinds
 that they fail to recognize that the basis of the present action is tort. They fail to
(i.) Simple alternative, NCC 1199 recognize the universal doctrine that each joint tort feasor is not only individually
(ii.) Facultative, NCC 1206 liable for the tort in which he participates, but is also jointly liable with his tort feasors.
x x x “It may be stated as a general rule that joint tort feasors are all the persons who
(b). Right to choose command, instigate, promote, encourage, advise, countenance, cooperate in, aid or
abet the commission of a tort, or who approve of it after it is done, if done for their
(i.) In general, NCC 1200-1201, 1205 benefit. They are each liable as principals, to the same extent and in the same
(ii.) Loss of right, NCC 1200, 1202-1203 manner as if they had performed the wrongful act themselves. x x x “Joint tort feasors
are jointly and severally liable for the tort which they commit. The persons injured
(c). Loss/Impossibility may sue all of them or any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole damage. It is no defense
(i.) Liability for loss of thing/impossibility of for one sued alone, that the others who participated in the wrongful act are not joined
performance, NCC 1205 with him as defendants; nor is it any excuse for him that his participation in the tort
(ii.) Creditor’s right to indemnity for damages, was insignificant as compared to that of the others. x x x “Joint tort feasors are not
NCC 1204 liable pro rata. The damages can not be apportioned among them, except among
themselves. They cannot insist upon an apportionment, for the purpose of each
C. According to Plurality of Subjects, NCC 1207-1222 paying an aliquot part. They are jointly and severally liable for the whole amount. x x
x
A. Single
B. Joint In a “joint” obligation, each obligor answers only for a part of the whole liability; in a
“solidary” or “joint and several” obligation, the relationship between the active and the
(a) General rule, NCC 1207 passive subjects is so close that each of them must comply with or demand the
(b) Presumption, NCC 1208 fulfillment of the whole obligation.
(c) Indivisibility, NCC 1209
Sinamban v. China Banking Corp. (2015)
C. Solidary According to Article 2047 of the Civil Code, if a person binds himself solidarily with
the principal debtor, the provisions of Articles 1207 to 1222 of the Civil Code on joint
(a) When solidary, NCC 1207 and solidary obligations shall be observed. Thus, where there is a concurrence of two
(b) Kinds or more creditors or two or more debtors in one and the same obligation, Article 1207
provides that among them, “there is a solidary liability only when the obligation
Lafarge Cement v Continental Cement, 443 SCRA 522 (2004) expressly so states, or when the law or the nature of the obligation requires
Obligations may be classified as either joint or solidary. “Joint” or “jointly” or “conjoint” solidarity.” It is settled that when the obligor or obligors undertake to be “jointly and
means mancum or mancomunada or pro rata obligation; on the other hand, “solidary severally” liable, it means that the obligation is solidary. In this case, the spouses
obligations” may be used interchangeably with “joint and several” or “several.” Thus, Sinamban expressly bound themselves to be jointly and severallt, or solidarily liable
petitioners’ usage of the term “joint and solidary” is confusing and ambiguous. with the principal makers of the PNs, spouses Manalastas.

Obligations arising from tort are, by their nature, always solidary. LBP v. Belle (2015)
There is no legal provision nor jurisprudence in our jurisdiction, which makes a third
We have assiduously maintained this legal principle as early as 1912 in Worcester v. person who secures the fulfillment of another’s obligation by mortgaging his own
Ocampo, in which we held: “x x x The difficulty in the contention of the appellants is property to be solidarily bound with the principal obligor. The signatory to the principal

15
contract – loan – remains to be primarily bound. It is only upon default of the latter
that the creditor may have recourse on the mortgagors by foreclosing the mortgaged
properties in lieu of an action for the recovery of the amount of the loan. And the
liability of the third-party mortgagors extends only to the property mortgaged. Should
there be any deficiency, the creditor has recourse on the principal debtor.
4. According to Performance, NCC 1223-1225
A. Divisible/Indivisible Obligations
5. According to Sanction for Breach, NCC 1226-1230
Rivelisa Realty v. First Sta. Clara Builders,  G.R. No. 189618. January 15, 2014.
First Sta. Clara is entitled to be compensated for the development works it had
accomplished on the project based on the principle of quantum meruit. Case law
instructs that under this principle, a contractor is allowed to recover the reasonable
value of the thing or services rendered despite the lack of a written contract, in order
to avoid unjust enrichment. Quantum meruit means that, in an action for work and
labor, payment shall be made in such amount as the plaintiff reasonably deserves.
The measure of recovery should relate to the reasonable value of the services
performed because the principle aims to prevent undue enrichment based on the
equitable postulate that it is unjust for a person to retain any benefit without paying
for it.  vendee Millan. In fact the clause is so worded as to work to the advantage of
A. Obligations with a Penal Clause, 2226-2228
Lambert v Fox, G.R. No. L-7991, January 29, 1914
In this jurisdiction contracts are enforced as they read; and parties who are
competent to contract may make such agreements within the limitations of the law
and public policy as they desire, and the courts will enforce them according to their
terms. A penalty imposed for the breach of a contract not to sell shares of stock for
one year will be enforced if the agreement is broken, no matter whether the person
seeking to enforce the penalty has suffered damages or not.
The only case in which the courts are authorized to intervene for the reduction of a
penalty stipulated in a contract is when the principal obligation has been partly or
irregularly fulfilled and the court can see that the party demanding the penalty has
received the benefits of such part or irregular performance. In such case the court is
authorized to reduce the penalty to the extent of the benefits received by the party
seeking to enforce the penalty.
16
In enforcing a contract which provides a penalty in case of breach, the party
enforcing the penalty is entitled to recover the sum stipulated without proving
damages.
SSS v Moonwalk, supra
A penal clause is an accessory undertaking to assume greater liability in case of
breach. It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility in
the event of breach. From the foregoing, it is clear that a penal clause is intended to
prevent the obligor from defaulting in the performance of his obligation. Thus, if there
should be default, the penalty may be enforced.
Robes-Francisco v. CFI, G.R. No. L-41093 October 30, 1978
A contract of sale which stipulate payment of interest at 4% per annum in case
vendor fails to issue a certificate of title to vendee is not a penal clause because
even without it vendee would be entitled to interest at the legal rate of 6% per
annum.— The subject clause does not convey any penalty, for even without it,
pursuant to Article 2209 of the Civil Code, the vendee would be entitled to recover
the amount paid by her with legal rate of interest which is even more than the 4%
provided for in the clause. It is therefore inconceivable that the aforecited provision in
the deed of sale is a penal clause which will preclude an award of damages to the
petitioner corporation.
Rivera v. Chua (2015)
The SC did not consider the stipulation on payment of interest in this case as a penal
clause although Rivera, as obligor, assumed to pay additional 5% monthly interest on
the principal amount of P120K upon default.
The penal clause is generally undertaken to insure performance and works as either,
or both, punishment and reparation. It is an exception to the general rules on
recovery of losses and damages. As an exception to the general rule, a penal clause
must be specifically set forth in the obligation. In high relief, the stipulation in the
Promissory Note is designated as payment of interest, not as a penal clause, and is
simply an indemnity for damages incurred by the Spouses Chua because Rivera
defaulted in the payment of P120K. The measure of damages for the Rivera’s delay
is limited to the interest stipulated in the PN. In apt instances, in default of stipulation,
the interest is that provided by law.
 New World Developers and Management v. AMA (2015)
The resolution of whether a penalty is reasonable, or iniquitous or unconscionable
would depend on factors including but not limited to the type, extent and purpose of
the penalty; the nature of the obligation; the mode of the breach and its
consequences; the supervening realities; and the standing and relationship of the
parties. The appreciation of these factors is essentially addressed to the sound
discretion of the court.

Under the terms of the contract, and in light of the failure of AMA to show that it is
deserving of this Court’s indulgence, the payment of liquidated damages in an
amount equivalent to six months’ rent is proper.

B. Characteristics of penal clause

(a) Subsidiary or alternative, NCC 1227

(b) Exclusive, NCC 1226

D. Extinguishment of Obligations, NCC 1231

Metro Concast Steel Corp., et al. v. Allied Bank Corporation, G.R. No. 177921,
December 4, 2013.
Article 1231 of the Civil Code states that obligations are extinguished either by
payment or performance, the loss of the thing due,  the condonation or remission of
the debt,  the confusion or merger of the rights of creditor and debtor, compensation
or novation.

Arco Pulp v Lim, June 2014

Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor.

A. Payment or performance, NCC 1232-1251

1. As to prestation

(a) Identity

Exceptions:

17
 (i) Dacion en pago, NCC 1245
PNB v Dee, GR182128, Feb. 19, 2014
Dacion en pago or dation in payment is the delivery and transmission of ownership of
a thing by the debtor to the creditor as an accepted equivalent of the performance of
the obligation. It is a mode of extinguishing an existing obligation and partakes the
nature of sale as the creditor is really buying the thing or property of the debtor, the
payment for which is to be charged against the debtor’s debt. Dation in payment
extinguishes the obligation to the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless the parties by agreement —
express or implied, or by their silence — consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.  purchase price therefor within 30 days from delivery – already arose and
(ii) Novation
Magbanua v Uy, G.R. No. 161003.  May 6, 2005
The principle of novation supports the validity of a compromise after final judgment.  obligation by a subsequent one which extinguishes or modifies the first, either by
Novation, a mode of extinguishing an obligation,is done by changing the object or
principal condition of an obligation, substituting the person of the debtor, or
surrogating a third person in the exercise of the rights of the creditor.
For an obligation to be extinguished by another, the law requires either of these two
conditions: (1) the substitution is unequivocally declared, or (2) the old and the new
obligations are incompatible on every point. A compromise of a final judgment
operates as a novation of the judgment obligation, upon compliance with either
requisite. In the present case, the incompatibility of the final judgment with the
compromise agreement is evident, because the latter was precisely entered into to
supersede the former.
Phil. Charter v Petroleum, G.R. No. 180898, April 18, 2012
In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and
new obligation be in every point incompatible with each other. Novation of a contract
is never presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point.
Undoubtedly, a surety is released from its obligation when there is a material
alteration of the principal contract in connection with which the bond is given, such as
a change which imposes a new obligation on the promising party, or which takes
away some obligation already imposed, or one which changes the legal effect of the
18
original contract and not merely its form. In this case, however, no new contract was
concluded and perfected between PDSC and FCC.
ACE Foods, Inc. v. Micro Pacific Technologies Co., Ltd., G.R. No. 200602, 
December 11, 2013.
The parties have agreed to a contract of sale and not to a contract of sell as
adjudged by the RTC. Bearing in mind its consensual nature, a contract of sale had
been perfected at the precise moment ACE Foods, as evinced by its act of sending
MTCL the Purchase Order, accepted the latter’s proposal to sell the subject products
in consideration of the purchase price – i.e., on the one hand, of MTCL to deliver the
said products to ACE Foods, and, on the other hand, of ACE Foods to pay the
consequently may be demanded.
BPI v. Domingo (2015)
Novation is the extinguishment of an obligation by the substitution or change of the
changing the object or principal conditions, or by substituting the person of the
debtor, or by subrogating a third person to the rights of the creditor. Unlike other
modes of extinction of obligations, novation is a juridical act with a dual function - it
extinguishes an obligation and creates a new one in lieu of the old.
Under this provision, there are two forms of novation by substituting the person of the
debtor, and they are: (1) expromision and (2) delegacion. In the former, the initiative
for the change does not come from the debtor and may even be made without his
knowledge, since it consists in a third person assuming the obligation. As such, it
logically requires the consent of the third person and the creditor. In the latter, the
debtor offers and the creditor accepts a third person who consents to the substitution
and assumes the obligation, so that the intervention and the consent of these three
persons are necessary. In these two modes of substitution, the consent of the
creditor is an indispensable requirement.
As a general rule, since novation implies a waiver of the right the creditor had before
the novation, such waiver must be express. The Court notes that the documents of
BPI concerning the car loan and chattel mortgage are still in the name of the spouses
Domingo. No new promissory note or chattel mortgage had been executed between
BPI (or FEBTC) and Carmelita. Even the account itself is still in the names of the
spouses Domingo. The absence of objection on the part of BPI (or FEBTC) cannot
be presumed as consent. Jurisprudence requires presentation of proof of consent,
not mere absence of objection.
 Arco Pulp v Lim, June 2014
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.

Novation may also be extinctive or modificatory. It is extinctive when an old obligation

is terminated by the creation of a new one that takes the place of the former. It is
merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to
as objective or real novation; or by substituting the person of the debtor or
subrogating a third person to the rights of the creditor, an act known as subjective or
personal novation. For novation to take place, the following requisites must concur:

1) There must be a previous valid obligation.

2) The parties concerned must agree to a new contract.
3) The old contract must be extinguished.
4) There must be a valid new contract.

Novation may also be express or implied. It is express when the new obligation
declares in unequivocal terms that the old obligation is extinguished. It is implied
when the new obligation is incompatible with the old one on every point. The test of
incompatibility is whether the two obligations can stand together, each one with its
own independent existence.

(b) Integrity, NCC 1233, cf. 1234, 1235, 1254(2)

(c) Indivisibility, cf. 1248, 1225(2), 1248, 1208, 1211,
1290, 1720, 2065.

(2) As to parties

(a) Payor, Obligor, Debtor

Effect if Third Person, NCC 1236-1238, 1427

(b) Payee, Obligee, Creditor, NCC 1240, 1626

Effect if Third Person, NCC 1241-1242

(c) As to time and place of performance, NCC 1251, 1169

19
PCIB v Franco, G.R. No. 180069, March 5, 2014
one who pleads payment has the burden of proving it. Even where the plaintiff must
allege nonpayment, the general rule is that the burden rests on the defendant to
prove payment, rather than on the plaintiff to prove nonpayment. When the creditor is
in possession of the document of credit, he need not prove nonpayment for it is
presumed. The creditor’s possession of the evidence of debt is proof that the debt
has not been discharged by payment.
NOTE: Special forms of payment
(1). Dacion en pago, NCC 1245
Filinvest v Philippine Acetylene, 111 SCRA 421 (1982)
Dacion en pago, according to Manresa, is the transmission of the ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of an
obligation. In dacion en pago, as a special mode of payment, the debtor offers
another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor’s debt. As such, the essential elements of a
contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as an accepted equivalent
of the performance of an obligation is considered as the object of the contract of sale,
while the debt is considered as the purchase price.
Mere delivery of mortgaged motor vehicle by mortgagor does not mean transfer of
ownership to mortgagee without his consent under the principle of dacion en pago;
What is transferred is merely possession of the property.
Tan Shuy v Sps Maulawin, GR 190375, February 2012
There is dation in payment when property is alienated to the creditor in satisfaction of
a debt in money; Dation in payment extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement—express or implied, or by their silence—
consider the thing as equivalent to the obligation, in which case the obligation is
totally extinguished.
20
Dation in payment exists when there was partial payment every time Guillermo
delivered copra to petitioner, chose not to collect the net proceeds of his copra
deliveries, and instead applied the collectible as installment payments for his loan
from Tan Shuy.
(2). Application of payments, NCC 1252-1254
Reparations Commission v Universal Deep Sea Fishing, 83 SCRA 764 (1978)
The rules contained in Articles 1252 and 1254 of the Civil Code apply to a person
owing several debts of the same kind to a single creditor. They cannot be made
applicable to a person whose obligation as a mere surety is both contingent and
singular, which in this case is the full and faithful compliance with the terms of the
contract of conditional purchase and sale of reparations goods. The obligation
included the payment, not only of the first installment in the amount of P53,643.00,
but also of the ten (10) equal yearly installments had also accrued; hence, no error
was committed in holding the surety company to the full extent of its undertaking.
Finally, We find no merit in the claim of the third-party defendant Pablo S, Sarmiento
that he is not personally liable having merely executed the indemnity agreements in
his capacity as acting general manager of UNIVERSAL. Pablo S. Sarmiento appears
to have signed the indemnity agreement twice—the first, in his capacity as acting
general manager of UNIVERSAL, and the second in his individual capacity. xxx
Paculdo v Regalado, 345 SCRA 134 (2000) The right to specify which among his
various obligations to the same creditor is to be satisfied first rests with the debtor, as
provided by law.
Under the law, if the debtor did not declare at the time he made the payment to which
of his debts with the creditor the payment is to be applied, the law provided the
guideline—no payment is to be made to a debt that is not yet due and the payment
has to be applied first to the debt most onerous to the debtor.
(3). Cession, NCC 1255
(4). Tender of payment and consignation, NCC 1256-1261
Meat Packing Corp. v Sandiganbayan, 359 SCRA 409 (2001)
Distinction Between Consignation and Tender of Payment.—Consignation is the act
of depositing the thing due with the court or judicial authorities whenever the creditor
cannot accept or refuses to accept payment, and it generally requires a prior tender
of payment. It should be distinguished from tender of payment. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which is
the principal, and from which are derived the immediate consequences which the
debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while
consignation is necessarily judicial, and the priority of the first is the attempt to make
a private settlement before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and extinguishes
the obligation.
Sps. Cacyurin v AFPMB, GR No. 171298, April 15, 2013
Under Article 1256 of the Civil Code, the debtor shall be released from responsibility
by the consignation of the thing or sum due, without need of prior tender of payment,
when the creditor is absent or unknown, or when he is incapacitated to receive the
payment at the time it is due, or when two or more persons claim the same right to
collect, or when the title to the obligation has been lost. Applying Article 1256 to the
petitioners’ case as shaped by the allegations in their Complaint, the Court finds that
a case for consignation has been made out, as it now appears that there are two
entities which petitioners must deal with in order to fully secure their title to the
property: 1) the Rural Bank (through PDIC), which is the apparent creditor under the
July 4, 1994 Loan and Mortgage Agreement; and 2) AFPMBAI, which is currently in
possession of the loan documents and the certificate of title, and the one making
demands upon petitioners to pay. Clearly, the allegations in the Complaint present a
situation where the creditor is unknown, or that two or more entities appear to
possess the same right to collect from petitioners. Whatever transpired between the
Rural Bank or PDIC and AFPMBAI in respect of petitioners’ loan account, if any, such
that AFPMBAI came into possession of the loan documents and TCT No. 37017, it
appears that petitioners were not informed thereof, nor made privy thereto.
Article 1256 authorizes consignation alone, without need of prior tender of payment,
where the ground for consignation is that the creditor is unknown, or does not appear
at the place of payment; or is incapacitated to receive the payment at the time it is
due; or when, without just cause, he refuses to give a receipt; or when two or more
persons claim the same right to collect; or when the title of the obligation has been
lost.―The lack of prior tender of payment by the petitioners is not fatal to their
consignation case. They filed the case for the exact reason that they were at a loss
as to which between the two―the Rural Bank or AFPMBAI―was entitled to such a
tender of payment.
Bonrostro v Juan, G.R. No. 172346, JUL 24 2013
Tender of payment “is the manifestation by the debtor of a desire to comply with
21
orpay an obligation. If refused without just cause, the tender of payment will
discharge the debtor of the obligation to pay but only after a valid consignation of the
sum due shall have been made with the proper court.” “Consignation is the deposit of
the [proper amount with a judicial authority] in accordance with rules prescribed by
law, after the tender of payment has been refused or because of circumstances
which render direct payment to the creditor impossible or inadvisable.” “Tender of
payment, without more, produces no effect.” “To have the effect of payment and the
consequent extinguishment of the obligation to pay, the law requires the companion
acts of tender of payment and consignation.”
When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the
date of such tender.
Del Carmen v Sabordo, GR 181723, Aug. 11, 2014
It is settled that  compliance with the requisites of a valid consignation is mandatory.
Failure to comply strictly with any of the requisites will render the consignation void.
One of these requisites is a valid prior tender of payment.
Under Article 1256, the only instances where prior tender of payment is excused are:
(1) when the creditor is absent or unknown, or does not appear at the place of
payment; (2) when the creditor is incapacitated to receive the payment at the time it
is due; (3) when, without just cause, the creditor refuses to give a receipt; (4) when
two or more persons claim the same right to collect; and (5) when the title of the
obligation has been lost. None of these instances are present in the instant case. 
Hence, the fact that the subject lots are in danger of being foreclosed does not
excuse petitioner and her co-heirs from tendering payment to respondents, as
directed by the court.
B. Loss of Thing Due, NCC 1262-1269
a. Impossibility of Performance
(i) Original
(ii) Supervening
C. Condonation or remission of the debt, NCC 1270-1274
Yam v CA, GR 104726, February 11, 1999
The appointment of a receiver operates to suspend the authority of a corporation and
of its directors and officers over its property and effects, such authority being reposed
in the receiver.—It is to be noted that the alleged agreement to condone the amount
in question was supposedly entered into by the parties sometime in July 1986, that is,
after respondent corporation had been placed under receivership on November 4,
1985. As held in Villanueva v. Court of Appeals “the appointment of a receiver
operates to suspend the authority of a corporation and of its directors and officers
over its property and effects, such authority being reposed in the receiver.” Thus,
Sobrepeñas had no authority to condone the debt.
Golez v. Nemeño, G.R. No. 178317, September 23, 2015
The subject building was gutted down by fire. However, the destruction of the building
should not in any way be made a basis to exempt petitioners from paying rent for the
period they made use of the leased property. Otherwise, this will be a clear case of
unjust enrichment.
D. Confusion or merger of rights of the creditor, NCC 1275-
1277
E. Compensation, NCC 1278-1290
Gan Tion v CA, 28 SCRA 235 (1969)
An award for attorney's fees is a proper subject of legal compensation. Xxx An award
for attorney's fees is made in favor of the litigant, not of his counsel, and the litigant,
not his counsel, is the judgment creditor who may enforce the judgment for attorney's
fees for execution.
Mirasol v CA, 351 SCRA 44 (2001)
Set-off or compensation cannot take place between the parties because: First,
neither of the parties are mutually creditors and debtors of each other. Under P.D.
No. 579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols
in the price of sugar sold by the two firms. P.D. No. 579 prescribed where the profits
from the sales are to be paid, to wit:
“SECTION 7. x x x After deducting its commission of two and one-half (2-
1/2%) percent of gross sales, the balance of the proceeds of sugar trading
operations for every crop year shall be set aside by the Philippine Exchange
Company, Inc., as profits which shall be paid to a special fund of the National
Government subject to the disposition of the President for public purposes.”
22
There was nothing with which PNB was supposed to have off-set Mirasols’ admitted
indebtedness.
Second, compensation cannot take place where one claim, as in the instant case, is
still the subject of litigation, as the same cannot be deemed liquidated.
Montemayor v Millora, G.R. No. 168251, July 27, 2011
A debt is liquidated when its existence and amount are determined; A debt is
considered liquidated, not only when it is expressed already in definite figures which
do not require verification, but also when the determination of the exact amount
depends only on a simple arithmetical operation.
Union Bank v DBP, G.R. No. 191555, Jan 20 2014
Compensation is defined as a mode of extinguishing obligations whereby two
persons in their capacity as principals are mutual debtors and creditors of each other
with respect to equally liquidated and demandable obligations to which no retention
or controversy has been timely commenced and communicated by third parties. The
requisites therefor are provided under Article 1279 of the Civil Code which reads as
follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That
each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other; (2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and also of the same quality if
the latter has been stated; (3) That the two debts be due; (4) That they be liquidated
and demandable; (5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor. 
First United v. Bayanihan, G.R. No. 164985, January 15, 2014.
Legal compensation takes place when the requirements set forth in Article 1278 and
Article 1279 of the Civil Code are present, to wit: Article 1278. Compensation shall
take place when two persons, in their own right, are creditors and debtors of each
other. Article 1279. In order that compensation may be proper, it is necessary: (1)
That each of the obligors be bound principally, and that he be at the same time a
principal creditor of the other; (2) That both debts consists in a sum of money, or if
the things due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated; (3) That the two debts be due; (4) That they be
liquidated and demandable; (5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the
debtor.

A debt is liquidated when its existence and amount are determined. Accordingly, an
unliquidated claim set up as a counterclaim by a defendant can be set off against the
plaintiff’s claim from the moment it is liquidated by judgment. Article 1290 of the Civil
Code provides that when all the requisites mentioned in Article 1279 of the Civil
Code are present, compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount. With petitioners’ expenses for the repair of the
dump truck being already established and determined with certainty by the lower
courts, it follows that legal compensation could take place because all the
requirements were present. Hence, the amount of P71,350.00 should be set off
against petitioners’ unpaid obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to respondent.
Philippine Trust Company vs. Sps. Roxas, G.R. No. 171897, October 14, 2015
Under Article 1279, in order for legal compensation to take place, the following
requisites must concur: (a) that each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the other; (b) that both debts
consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated; (c) that the two debts
are due; (d) that they be liquidated and demandable; and (e) that over neither of them
there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
Here, the fourth requisite is absent. A debt is liquidated when its existence and
amount are determined. Compensation can only take place between certain and
liquidated debts; it cannot extend to unliquidated, disputed claims. Since the loan’s
obligation, including its amount and demandability, is still being disputed, PTC’s
credit card cannot be considered liquidated as of yet. Consequently, no legal
compensation could have taken place between PTC’s loan credit and the Spouses
Roxas’ judgment credit.
F. Novation, NCC 1291 – 1304
a. Subjective or Personal
Starbright Sales v Philippine Realty Corporation, G.R. No. 177936, January 18,
2012
A subjective novation results through substitution of the person of the debtor or
through subrogation of a third person to the rights of the creditor. To accomplish a
subjective novation through change in the person of the debtor, the old debtor needs
23
to be expressly released from the obligation and the third person or new debtor
needs to assume his place in the relation.
 
Novation serves two functions – one is to extinguish an existing obligation, the other
to substitute a new one in its place – requiring concurrence of four requisites: 1) a
previous valid obligation; 2) an agreement of all parties concerned to a new contract;
3) the extinguishment of the old obligation; and 4) the birth of a valid new obligation.
S.C. Megaworld Construction vs. Engr. Luis U. Parada, G.R. No. 183804.
September 11, 2013
Novation is a mode of extinguishing an obligation by changing its objects or principal
obligations, by substituting a new debtor in place of the old one, or by subrogating a
third person to the rights of the creditor. It is “the substitution of a new contract, debt,
or obligation for an existing one between the same or different parties.” Article 1293
of the Civil Code defines novation as follows: Art. 1293. Novation which consists in
substituting a new debtor in the place of the original one, may be made even without
the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and
1237.
In order to change the person of the debtor, the former debtor must be expressly
released from the obligation, and the third person or new debtor must assume the
former’s place in the contractual relation. Article 1293 speaks of substitution of the
debtor, which may either be in the form of expromision or delegacion, as seems to be
the case here. In both cases, the old debtor must be released from the obligation,
otherwise, there is no valid novation. As explained in Garcia: In general, there are
two modes of substituting the person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the change does not come from—and
may even be made without the knowledge of—the debtor, since it consists of a third
person’s assumption of the obligation. As such, it logically requires the consent of the
third person and the creditor. In delegacion, the debtor offers, and the creditor
accepts, a third person who consents to the substitution and assumes the obligation;
thus, the consent of these three persons are necessary. Both modes of substitution
by the debtor require the consent of the creditor.
Magbanua v Uy, G.R. No. 161003.  May 6, 2005
The principle of novation supports the validity of a compromise after final judgment. 
Novation, a mode of extinguishing an obligation, is done by changing the object or
principal condition of an obligation, substituting the person of the debtor, or
surrogating a third person in the exercise of the rights of the creditor.

For an obligation to be extinguished by another, the law requires either of these two
conditions: (1) the substitution is unequivocally declared, or (2) the old and the new
obligations are incompatible on every point. A compromise of a final judgment
operates as a novation of the judgment obligation, upon compliance with either
requisite. In the present case, the incompatibility of the final judgment with the
compromise agreement is evident, because the latter was precisely entered into to
supersede the former.
Phil. Charter v Petroleum, G.R. No. 180898, April 18, 2012
In order that an obligation may be extinguished by another which substitutes the
same, it is imperative that it be so declared in unequivocal terms, or that the old and
new obligation be in every point incompatible with each other. Novation of a contract
is never presumed. In the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on every point.
Undoubtedly, a surety is released from its obligation when there is a material
alteration of the principal contract in connection with which the bond is given, such as
a change which imposes a new obligation on the promising party, or which takes
away some obligation already imposed, or one which changes the legal effect of the
original contract and not merely its form. In this case, however, no new contract was
concluded and perfected between PDSC and FCC.
Arco Pulp v Lim, June 2014
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if the old and new contracts are
incompatible on every point.
b. Objective or real
c. Mixed
G. Invalid payment, NCC 1243
H. Annulment
I. Rescission
J. Fulfillment of a Resolutory Condition
K. Prescription
L. Death in certain Instances
M. Renunciation by the creditor, NCC 6
24
N. Compromise
O. Arrival of a Resolutory Term
P. Mutual Desistance
Saura v DBP, April 27, 1972
Where after approval of his loan, the borrower, instead of insisting for its release,
asked that the mortgage given as security be cancelled and the creditor acceded
thereto, the action taken by both parties was in the nature of mutual desistance—
what Manresa terms “mutuo disenso”—which is a mode of extinguishing obligations.
It is a concept that derives from, the principle that since mutual agreement can create
a contract, mutual disagreement by the parties can cause its extinguishment.
Talampas vs. Moldex Realty, G.R. No. 170134, June 17, 2015
No such meeting of the minds between the parties on the matter of termination ever
occurred because of petitioner’s acceptance of the respondet’s offer to terminate was
not absolute.
To terminate their contract, the respondent offered to pay the petitioner billings for
accomplished works, unrecouped costs of equipment mobilization and
demobilization, unrecouped payment of insurance bond, and the release of all
retention fees and payments that the petitioner accepted or received. But despite
receipt of payments, no absolute acceptance of the respondent’s offer took place
because the petitioner still demanded the payment of equipment rentals, cost of
opportunity lost, among others.
Q. Unilateral Withdrawal
GBMLT Manpower vs. Malinao, G.R. No. 189262, July 6, 2015
When a person executing a waiver or quitclaim has done so voluntarily with a full
understanding of its terms and conditions, coupled with the other person’s payment
of credible and reasonable consideration, there is no choice but to uphold the
transaction as valid and binding.
R. Change of Civil Status
S. Rebus Sic Stantibus, NCC 1267
Naga TelCo v CA, GR 107112, February 24, 1994
Article 1267 speaks of “service” which has become so difficult. Taking into
consideration the rationale behind this provision, the term “service” should be
understood as referring to the “performance” of the obligation. In the present case,
the obligation of private respondent consists in allowing petitioners to use its posts in
Naga City, which is the service contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a requirement thereunder that the contract
be for future service with future unusual change. According to Senator Arturo M.
Tolentino, Article 1267 states in our law the doctrine of unforeseen events. This is
said to be based on the discredited theory of rebus sic stantibus in public
international law; under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist the contract also
ceases to exist. Considering practical needs and the demands of equity and good
faith, the disappearance of the basis of a contract gives rise to a right to relief in favor
of the party prejudiced.
PNCC v CA, GR 116896, May 5, 1997
It is a fundamental rule that contracts, once perfected, bind both contracting parties,
and obligations arising therefrom have the force of law between the parties and
should be complied with in good faith. But the law recognizes exceptions to the
principle of the obligatory force of contracts. One exception is laid down in Article
1266 of the Civil Code, which reads: “The debtor in obligations to do shall also be
released when the prestation becomes legally or physically impossible without the
fault of the obligor.” Petitioner cannot, however, successfully take refuge in the said
article, since it is applicable only to obligations “to do,” and not obligations “to give.”
An obligation “to do” includes all kinds of work or service; while an obligation “to give”
is a prestation which consists in the delivery of a movable or an immovable thing in
order to create a real right, or for the use of the recipient, or for its s imple poss
ession, or in order to return it to its owner.
The obligation to pay rentals or deliver the thing in a contract of lease falls within the
prestation “to give”; hence, it is not covered within the s cope of Article 1266. At any
rate, the unforeseen event and causes mentioned by petitioner are not the legal or
physical impossibilities contemplated in the said article. Besides, petitioner failed to
state specifically the circumstances brought about by “the abrupt change in the
political climate in the country” except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist, the contract also ceases to exist. This theory is said
to be the basis of Article 1267 of the Civil Code, which provides: “ART. 1267. When
25
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.”
Anent petitioner’s alleged poor financial condition, the same will neither release
petitioner from the binding effect of the contract of lease. As held in Central Bank v.
Court of Appeals, cited by private respondents, mere pecuniary inability to fulfill an
engagement does not discharge a contractual obligation, nor does it constitute a
defense to an action for specific performance.
Osmena v SSS, GR 165272, Sept. 13, 2007
Under the law on obligations and contracts, the obligation to give a determinate thing
is extinguished if the object is lost without the fault of the debtor. And per Art. 1192
(2) of the Civil Code, a thing is considered lost when it perishes or disappears in such
a way that it cannot be recovered. In a very real sense, the interplay of the ensuing
factors: a) the BDO-EPCIB merger; and b) the cancellation of subject Shares and
their replacement by totally new common shares of BDO, has rendered the erstwhile
187.84 million EPCIB shares of SSS “unrecoverable” in the contemplation of the
adverted Civil Code provision.
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, total or partial release from a prestation and from the
counter-prestation is allowed; Under the theory of rebus sic stantibus, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease
to exist, the contract also ceases to exist. Upon the facts obtaining in this case, it is
abundantly clear that the conditions in which SSS and BDO Capital and/or BDO
executed the Letter-Agreement upon which the pricing component—at P43.50 per
share—of the Invitation to Bid was predicated, have ceased to exist. Accordingly, the
implementation of the Letter-Agreement or of the challenged Res. Nos. 428 and 485
cannot plausibly push through, even if the central figures in this case are so minded.
So v FoodFest, GR 183268, April 7, 2010
The parties to the contract must be presumed to have assumed the risks of
unfavorable developments.—As for Food Fest’s invocation of the principle of rebus
sic stantibus as enunciated in Article 1267 of the Civil Code to render the lease
contract functus officio, and consequently release it from responsibility to pay rentals,
the Court is not persuaded. Article 1267 provides: Article 1267.
When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or
in part. This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus, which would
endanger the security of contractual relations. The parties to the contract must be
presumed to have assumed the risks of unfavorable developments. It is, therefore,
only in absolutely exceptional changes of circumstances that equity demands
assistance for the debtor.
Comglasco Corporation v. Santos Car Check Center, G.R. No. 202989, March
25, 2015
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing conditions, and once
these conditions cease to exist, the contract also ceases to exist. This theory is said
to be the basis of Article 1267 of the Civil Code. This article, which enunciates the
doctrine of unforeseen events, is not, however, an absolute application of the
principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of
unfavorable developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
The unilateral suspension of the construction had preceded the worsening of
economic conditions in 1983; hence, the latter could not reasonably justify the
petitioner's plea for release from its statutory and contractual obligations to its lot
buyers, particularly the respondent. Besides, the petitioner had the legal obligation to
complete the amenities within one year from the issuance of the license (under
Section 20 of Presidential Decree No. 957), or within two years from July 15, 1976
(under the express undertaking of the petitioner). Hence, it should have complied
with its obligation by July 15, 1978 at the latest, long before the worsening of the
economy in 1983.
T. Want of Interest
U. Judicial Insolvency

In this case, petitioner wants this Court to believe that the abrupt change in the
political climate of the country after the EDSA Revolution and its poor financial
condition “rendered the performance of the lease contract impractical and inimical to
the corporate survival of the petitioner.”

This Court cannot subscribe to this argument. The aforesaid reasoning will neither
release petitioner from the binding effect of the contract of lease. Mere pecuniary
inability to fulfill an engagement does not discharge a contractual obligation, nor does
it constitute a defense to an action for specific performance.

Tagaytay Realty v. Gacutan, G.R. No. 160033, July 01, 2015

For Article 1267 to apply, the following conditions should concur, namely: (a) the
event or change in circumstances could not have been foreseen at the time of the
execution of the contract; (b) it makes the performance of the contract extremely
difficult but not impossible; (c) it must not be due to the act of any of the parties; and
(d) the contract is for a future prestation. The requisites did not concur herein
because the difficulty of performance under Article 1267 of the Civil Code should be
such that one party would be placed at a disadvantage by the unforeseen event.
Mere inconvenience, or unexepected impediments, or increased expenses did not
suffice to relieve the debtor from a bad bargain.

26
Part II - CONTRACTS
A. General Provisions
1. Definition, NCC 1305
Heirs of Intac v CA, G.R. No. 17321, Oct 11, 2012
A contract, as defined in the Civil Code, is a meeting of minds, with respect to the
other, to give something or to render some service. –Article 1318 provides: Art. 1318.
There is no contract unless the following requisites concur: (1) Consent of the
contracting parties; (2) Object certain which is the subject matter of the contract; (3)
Cause of the obligation which is established. Accordingly, for a contract to be valid, it
must have three essential elements: (1) consent of the contracting parties; (2)
object certain which is the subject matter of the contract; and (3) cause of the
obligation which is established.
If the parties state a false cause in the contract to conceal their real agreement, the
contract is only relatively simulated and the parties are still bound by their real
agreement. Hence, where the essential requisites of a contract are present and the
simulation refers only to the content or terms of the contract, the agreement is
absolutely binding and enforceable between the parties and their successors in
interest.
MIAA v Avia, G.R. No. 180168, February 27, 2012
Article 1306 of the Civil Code provides that “the contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy.” Moreover, Article 1374 of the Civil Code clearly provides that “[t]he various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly.” Indeed, in construing a
contract, the provisions thereof should not be read in isolation, but in relation to each
other and in their entirety so as to render them effective, having in mind the intention
of the parties and the purpose to be achieved. In other words, the stipulations in a
contract and other contract documents should be interpreted together with the end in
view of giving effect to all.
Heirs of Uy v Castillo, G.R. No. 176425, June 5, 2013
Defined as a meeting of the minds between two persons whereby one binds himself,
with respect to the other to give something or to render some service, a contract
requires the concurrence of the following requisites: (a) consent of the contracting
27
parties; (b) object certain which is the subject matter of the contract; and, (c) cause of
the obligation which is established.—Although executed on the same day, it cannot
likewise be gainsaid that the Agreement and the Kasunduan are independent
contracts, with parties, objects and causes different from that of the other. Executed
in exchange for the legal services of Atty. Zepeda and the financial assistance to be
extended by Manuel, the Agreement concerned respondents’ transfer of 40% of the
avails of the suit, in the event of a favorable judgment in Civil Case No. 8085. While
concededly subject to the same suspensive condition, the Kasunduan was, in
contrast, concluded by respondents with Manuel alone, for the purpose of selling in
favor of the latter 60% of their share in the subject parcels for the agreed price of
P180,000.00. Given these clear distinctions, petitioners correctly argue that the CA
reversibly erred in not determining the validity of the Kasunduan independent from
that of the Agreement.
When the terms of the contract are clear and leave no doubt as to the intention of the
contracting parties, the rule is settled that the literal meaning of its stipulations should
govern
2. Characteristics
a. Obligatory force, NCC 1315, 1314
R.S. Tomas, Inc. v Rizal, G.R. No. 173155, March 21, 2012
We find that there was not only delay but non-completion of the projects undertaken
by petitioner without justifiable ground. Undoubtedly, petitioner is guilty of breach of
contract. Breach of contract is defined as the failure without legal reason to comply
with the terms of a contract. It is also defined as the failure, without legal excuse, to
perform any promise which forms the whole or part of the contract. In the present
case, petitioner did not complete the projects. This gives respondent the right to
terminate the contract by serving petitioner a written notice.
b. Mutuality, NCC 1308-1310
PNB v Manalo, GR 174433, Feb. 24, 2014
Contract of Adhesion—The Court has declared that a contract where there is no
mutuality be tween the parties partakes of the nature of a contract of adhesion, and
any obscurity will be construed against the party who prepared the contract, the latter
being presumed the stronger party to the agreement, and who caused the obscurity.
PNB should then suffer the consequences of its failure to specifically indicate the
rates of interest in the credit agreement.
Silos v PNB, G.R. No. 181045, July 2, 2014
PNB successively increased the interest from 18% to 32%, then to 41% and then to
48%. This Court declared the increases unilaterally imposed by [PNB] to be in
violation of the principle of mutuality as embodied in Art. 1308 of the Civil Code,
which provides that “[t]he contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.”
It is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting on
the part of the one who contracts, his act has no more efficacy than if it had been
done under duress or by a person of unsound mind.
Similarly, contract changes must be made with the consent of the contracting parties.
The minds of all the parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In the case of loan contracts, it
cannot be gainsaid that the rate of interest is always a vital component, for it can
make or break a capital venture. Thus, any change must be mutually agreed upon,
otherwise, it is bereft of any binding effect.
We cannot countenance petitioner bank’s posturing that the escalation clause at
bench gives it unbridled right to unilaterally upwardly adjust the interest on private
respondents’ loan. That would completely take away from private respondents the
right to assent to an important modification in their agreement, and would negate the
element of mutuality in contracts.
c. Relativity, NCC 1311
PNB v. Dee, et al., G.R. No. 182128, February 19, 2014.
Principle of Relativity of Contracts—The petitioner is correct in arguing that it is not
obliged to perform any of the undertaking of respondent PEPI and AFP-RSBS in its
transactions with Dee because it is not a privy thereto. The basic principle of relativity
of contracts is that contracts can only bind the parties who entered into it, and cannot
favor or prejudice a third person, even if he is aware of such contract and has acted
with knowledge thereof. “Where there is no privity of contract, there is likewise no
obligation or liability to speak about.”
28
Based on the final contract of sale between them, the obligation of PEPI, as owners
and vendors of Lot 12, is to transfer the ownership of and to deliver Lot 12, to Dee,
who, in turn, shall pay, and has in fact paid, the full purchase price of the property.
There is nothing in the decision of the HLURB, as affirmed by the OP and the CA,
which shows that the petitioner is being ordered to assume the obligation of any of
the respondents.
Exceptions:
(i) Accion Pauliana
(ii). Accion Directa
(iii) Article 1312
(iv) Stipulation pour autrui, NCC 1311(2)
d. Autonomy of will, NCC 1306
Malbarosa v CA, GR 125761, 2003 (case focused on acceptance rather than
1306)
Unless the offeror knows of the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance; contract is perfected only from
the time an acceptance of an offer is made known to the offeror; An acceptance
which is not made in the manner prescribed by the offeror is not effective but
constitutes a counter-offer which the offeror may accept or reject; Acceptance by the
offeree of the offer after knowledge of the revocation or withdrawal of the offer is
inefficacious.
The petitioner’s plaint that he was not accorded by the respondent reasonable time to
accept or reject its offer does not persuade. It must be underscored that there was no
time frame fixed by the respondent for the petitioner to accept or reject its offer.
When the offeror has not fixed a period for the offeree to accept the offer, and the
offer is made to a person present, the acceptance must be made immediately.
Capalla v COMELEC, GR 201112, June 2012 (concurring of J. Sereno)
The Civil Code is quite emphatic about respecting the autonomy of the wills of the
parties: “Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public policy. Among the stipulations that
the parties can agree on is an “option” granted by one party in favor of the other (Art.
1324, Civil Code). Samples of such contractually created options can be found in
some articles of the Civil Code, such as: (a) an option to buy, which is embedded in a
lease of personal property (Art. 1485) and (b) sales on consignment in which the
buyer has the option to return the goods or pay the price thereof (Art. 1502).
The termination of a contract is not like the death of a natural being. It is the will and
the mutual understanding of the parties, rather than the form and solemnities, that
prevail in contract interpretation. Thus, a contract that on its face expires can, by the
mutual contracting action of the parties, even be pronounced by the court to be
continuing simply because the parties consider it to be so continuing.
3. Elements of a Contract
a. Essential, NCC 1318
(i) Consent of the contracting parties, NCC 1319
Sierra v PAIC, G.R. No. 197857, September 10, 2014
One who alleges any defect or the lack of a valid consent to a contract must establish
the same by full, clear, and convincing evidence, not merely by preponderance of
evidence. Where mistake or error is alleged by parties who claim to have not had the
benefit of a good education, as in this case, they must establish that their personal
circumstances prevented them from giving their free, voluntary, and spontaneous
consent to a contract.
Petitioners’ claim of lack of “proper instruction on the intricacies in securing [the] loan
from the bank” is further belied by the fact that petitioners Francisco and Rosario
Sierra had previously mortgaged two (2) of the subject properties twice to the Rural
Bank of Antipolo. Moreover, petitioners did not: (a) demand for any loan document
containing the details of the transaction, i.e., monthly amortization, interest rate,
added charges, etc., and the release of the remaining amount of their alleged loan;
and (b) offer to pay the purported partial loan proceeds they received at any time,
complaining thereof only in 1991 when they filed their complaint. Indeed, the
foregoing circumstances clearly show that petitioners are aware that they were mere
accommodation mortgagors, debunking their claim that mistake vitiated their consent
to the mortgage.
(ii) Offer, NCC 1321, 1323-1326
(iii) Acceptance, NCC 1320, 1322, 1319
29
Rosenstock v Burke, 46 Phil 217 (1924)
"Necessity and effect of acceptance.—From the discussion in reference to the right to
revoke an offer, it is apparent that the acceptance of an offer is essential. To
constitute a contract there must be an acceptance of the offer, because until the offer
is accepted both parties have not assented to the contract, or, in the figurative
language frequently used by the courts, their minds have not met. The effect of
acceptance is to convert the offer into a binding contract.
A contract may be formed by accepting a paper containing terms. If an offer is made
by delivering to another a paper containing the terms of a proposed contract, and the
paper is accepted, the acceptor is bound by its terms; and this is true as a rule
whether he reads the paper or not.
The letter of the plaintiff not containing a definite offer but a mere invitation to an offer
being made to him, the acceptance of the defendant placed at the bottom of this
letter has no other meaning than that of accepting the proposition to make this offer,
as must have been understood by the plaintiff.
Sanchez v Rigos, 45 SCRA 368 (1972)
Offeror cannot withdraw offer arbitrarily,—While the law permits the offeror to
withdraw the offer at any time before acceptance even before the period has expired,
some writers hold the view, that the offeror can not exercise this right in an arbitrary
or capricious manner. This is upon the principle that an offer implies an obligation on
the part of offeror to maintain it for such length of time as to permit the offeree to
decide whether to accept or not, and therefore cannot arbitrarily revoke the offer
without being liable for damage which the offeree may suffer. A contrary view would
remove the stability and security of business transactions.
Capalla v COMELEC, GR 201112, June 2012 (concurring of J. Sereno)
In the present case, COMELEC and SMARTMATIC-TIM’s intention to extend an
already expired option period could not have validly gone past the negotiation stage.
Specifically, SMARTMATIC-TIM formally made an offer to the COMELEC to extend
the original period and, upon its lapse, to provide for a new period to exercise the
same option; these, COMELEC simply ignored. Thus, this offer is merely an
imperfect promise (politacion) that, by reason of lack of acceptance before the
expiration of the period, did not give rise to any binding commitment.
Malbarosa v CA, 402 SCRA 108 (2003)
Unless the offeror knows of the acceptance, there is no meeting of the minds of the
parties, no real concurrence of offer and acceptance; contract is perfected only from
the time an acceptance of an offer is made known to the offeror; An acceptance
which is not made in the manner prescribed by the offeror is not effective but
constitutes a counter-offer which the offeror may accept or reject; Acceptance by the
offeree of the offer after knowledge of the revocation or withdrawal of the offer is
inefficacious.
The petitioner’s plaint that he was not accorded by the respondent reasonable time to
accept or reject its offer does not persuade. It must be underscored that there was no
time frame fixed by the respondent for the petitioner to accept or reject its offer.
When the offeror has not fixed a period for the offeree to accept the offer, and the
offer is made to a person present, the acceptance must be made immediately.
Traders Royal Bank v Cuison, June 5, 2009
Under the law, a contract is perfected by mere consent, that is, from the moment that
there is a meeting of the offer and the acceptance upon the thing and the cause that
constitute the contract. The law requires that the offer must be certain and the
acceptance absolute and unqualified. An acceptance of an offer may be express and
implied; a qualified offer constitutes a counter-offer. Case law holds that an offer, to
be considered certain, must be definite, while an acceptance is considered absolute
and unqualified when it is identical in all respects with that of the offer so as to
produce consent or a meeting of the minds. We have also previously held that the
ascertainment of whether there is a meeting of minds on the offer and acceptance
depends on the circumstances surrounding the case.
(iv) Object, NCC 1347 – 1349
Blas v Santos, 1 SCRA 899 (1961)
A document signed by the testator's wife, promising that she would respect and obey
all the dispositions in the latter's will, and that she would hold one-half of her share in
the conjugal assets in trust for the heirs and legatees of her husband in his will, with
the obligation of conveying the same to such of his heirs or legatees as she might
choose in her last will and testament, is a compromise and at the same time a
contract with sufficient cause or consideration.
We do not think that Exhibit "A" is a contract on future inheritance. It is an obligation
or promise made by the maker to transmit one-half of her share in the conjugal
properties acquired with her husband, which properties are stated or declared to be
conjugal properties in the will of the husband. The conjugal properties were in
existence at the time of the execution of Exhibit "A".
30
Tanedo v CA, 252 SCRA 80 (1996)
In context, the assailed Decision conceded “it may be legally correct that a contract of
sale of anticipated future inheritance is null and void.” But to remove all doubts, we
hereby categorically rule that, pursuant to Article 1347 of the Civil Code, “(n)o
contract may be entered into upon a future inheritance except in cases expressly
authorized by law.” Consequently, said contract made in 1962 is not valid and cannot
be the source of any right nor the creator of any obligation between the parties.
(v) Cause, NCC 1350 – 1355
Liguez v CA, 102 Phil 577 (1957)
Under Article 1274, of the Civil Code of 1889, liberality of the donor is deemed causa
only in those contracts that are of "pure" beneficence; that is to say, contracts
designed solely and exclusively to procure the welfare of the beneficiary, without any
intent of producing any satisfaction for the donor; contracts, in other words, in which
the idea of self-interest is totally absent on the part of the transferor. For this very
reason, the same Article 1274 provides that in remuneratory contracts, the
consideration is the service or benefit for which the remuneration is given; causa is
not liberality in these cases because the contract or conveyance is not made out of
pure beneficence, but "solvendi animo".
The motive of the parties may be regarded as causa when it predetermines the
purpose of the contract.
Carantes v CA, 76 SCRA 524 (1977)
It is total absence of cause or consideration that renders a contract absolutely void
and inexistent. In the case at bar consideration was not absent. The sum of P1.00
appears in the document as one of the considerations for the assignment of
inheritance. In addition—and this of great legal import—the document recites that the
decedent Mateo Carantes had, during his lifetime, expressed to the signatories to the
contract that the property subject-matter thereof rightly and exclusively belonged to
the petitioner Maximino Carantes. This acknowledgment by the signatories definitely
constitutes valuable consideration for the contract.
Sps. Buenaventura v CA, 416 SCRA 263 (2003)
If there is a meeting of the minds of the parties as to the price, the contract of sale is
valid despite the manner of payment, or even the breach of that manner of payment.
It is not the act of payment of price that determines the validity of a contract of sale.
Payment of the price has nothing to do with the perfection of the contract. Payment of
the price goes into the performance of the contract. Failure to pay the consideration
is different from lack of consideration. The former results in a right to demand the f. According to the Nature of the Obligation
fulfillment or cancellation of the obligation under an existing valid contract while the
latter prevents the existence of a valid contract. (i) Bilateral
(ii) Unilateral
NOTE; Natural Elements
g. According to Cause
(1) Right to resolve, NCC 1191
(2) Warranties in sales contracts (i) Onerous
(ii) Gratuitous
4. Stages of a Contract, NCC 1315, 1316
h. According to Risk
5. Classification of Contracts
(i) Commutative
a. According to degree of dependence (ii) Aleatory

(i) Preparatory i. According to Name

(ii) Principal
(iii) Accessory (i) Nominate
(ii) Innominate, NCC 1307
b. According to Perfection

(i) Consensual Tinsay v. Yusay, 47 Phil. 639 (1925)

(ii) Real A died leaving a widow, B. After his death his descendants made a partition by a
private instrument of certain lands, community property of his marriage to B. Though
c. According to their Form B took no part in the partition her interest in the land was nevertheless distributed
among the descendants. On the strength of the partition the descendants, among
(i) Common or informal them the appellants, went into possession of the respective portions allotted to them
(ii) Special or formal in said partition. Some years later the portions of the appellants were registered in
their names in a cadastral proceeding. Upon the subsequent death of the widow B,
d. According to purpose the appellants as heirs of the widow claimed a share of her interest in the land. Held:
(a) That, B not being a party to the partition agreement, the agreement standing
(i) Transfer of ownership alone was ineffective as to her interest in the property partitioned; (b) that the
(ii) Conveyance of use partition of her interest among her heirs before her death constituted a partition of a
(iii) Rendition of service future inheritance and was therefore invalid under the second paragraph of article
1271 of the Civil Code; (c) that, nevertheless, if the appellants have accepted the
e. According to Subject Matter benefit of the partition agreement to the prejudice of the other heirs and refuse to
make restitution of the property received by them by virtue of said agreement, they
(i) Things are estopped from repudiating the agreement and from claiming an interest in the
(ii) Services property allotted to the other heirs.

31
Dizon v Gaborro, 83 SCRA 688 (1978)
We find that the agreement between petitioner Dizon and respondent Gaborro is one
of those innominate contracts under Art. 1307 of the New Civil Code whereby
petitioner and respondent agreed “to give and to do” certain rights and obligations
respecting the lands and the mortgage debts of petitioner which would be acceptable
to the bank, but partaking of the nature of antichresis insofar as the principal parties,
petitioner Dizon and respondent Gaborro, are concerned.
B. Form of Contracts, NCC 1356-1358
Hernaez v de Los Angeles, 27 SCRA 1276 (1969)
The court below abused its discretion in ruling that a contract for personal services
involving more than P500.00 was either invalid or unenforceable under the last
paragraph of Article 1358 of the Civil Code of the Philippines. In the matter of
formalities, the contractual system of the Civil Code still follows that of the Spanish
Civil Code of 1889 and of the “Ordenamiento de Alcala” (Law 1, Title I, Book X, of the
Novisima Recopilacion) of upholding the spirit and intent of the parties over
formalities: since, in general, contracts are valid and binding from their perfection
regardless of form, whether they be oral or written. This is plain from Articles 1315
and 1356 of the present Civil Code.
The contract sued upon by petitioner herein does not come under the exceptions in
Article 1356 of the Civil Code. It is true that it appears included in Article 1358, last
clause, providing that “all other contracts where the amount involved exceeds five
hundred pesos must appear in writing, even a private one.” But Article 1358 nowhere
provides that the absence of written form in this case will make the agreement invalid
or unenforceable. On the contrary, Article 1357 clearly indicates that contracts
covered by Article 1358 are binding and enforceable by action or suit despite the
absence of writing.
Zamora v Miranda, G.R. No. 162930, Dec. 5, 2012
Article 1358 of the Civil Code provides that acts and contracts which have for their
object the transmission of real rights over immovable property or the sale of real
property must appear in a public document. If the law requires a document or other
special form, the contracting parties may compel each other to observe that form,
once the contract has been perfected.
In Fule v. Court of Appeals, 286 SCRA 698 (1998), the Court held that Article 1358 of
the Civil Code, which requires the embodiment of certain contracts in a public
32
instrument, is only for convenience, and registration of the instrument only adversely
affects third parties. Formal requirements are, therefore, for the benefit of third
parties. Non-compliance therewith does not adversely affect the validity of the
contract nor the contractual rights and obligations of the parties thereunder.
1. For validity
2. For enforceability
3. For registrability
C. Reformation of Instruments, NCC 1359-1369
Garcia v Bisaya, 97 Phil 609 (1955)
Reformation of instrument; prescription.—An action to correct an alleged mistake in a
deed of sale covering a piece of land, prescribes in ten years counted from the day it
could have been instituted. There being nothing in the pleadings to show that the
error was discovered more than ten years before the present action was filed the
action should not have been dismissed as having already prescribed before the
factual basis for prescription had been established and clarified by evidence.
Appellant's complaint states no cause of action, for it fails to allege that the
Instrument to be reformed does not express the real agreement or intention of the
parties. Such allegation is essential since the object sought in an action for
reformation is to make an instrument conform to the real agreement or intention of
the parties. It is not the function of the remedy to make a new agreement, but to
establish and perpetuate the true existing one.
Bentir v Leande, 330 SCRA 591 (2000)
The remedy of reformation of an instrument is grounded on the principle of equity
where, in order to express the true intention of the contracting parties, an instrument
already executed is allowed by law to be reformed. The right of reformation is
necessarily an invasion or limitation of the parol evidence rule since, when a writing is
reformed, the result is that an oral agreement is by court decree made legally
effective. Consequently, the courts, as the agencies authorized by law to exercise the
power to reform an instrument, must necessarily exercise that power sparingly and
with great caution and zealous care. The prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten (10) years under Article
1144 of the Civil Code.
Sarming v Dy, 383 SCRA 131 (2002)
Reformation of Contracts.—The test of sufficiency of the facts found in a complaint as
constituting a cause of action is whether or not, admitting the facts alleged, the court
can render a valid judgment upon the same in accordance with the prayer in the
complaint.
Reformation is that remedy in equity by means of which a written instrument is made
or construed so as to express or conform to the real intention of the parties.
An action for reformation of instrument under this provision of law may prosper only
upon the concurrence of the following requisites: (1) there must have been a meeting
of the minds of the parties to the contact; (2) the instrument does not express the true
intention of the parties; and (3) the failure of the instrument to express the true
intention of the parties is due to mistake, fraud, inequitable conduct or accident.
Where the designation of the lot in the deed of sale was a mistake in the preparation
of the document, reformation of the instrument is proper.
D. Interpretation of Contracts, NCC 1370 – 1379, Rule 130, Secs. 10-19, Rules of
Court
E. Defective Contracts
1. Rescissible Contracts, NCC 1380-1389
Oria v McMicking, 21 Phil 243 (1912)
While, in an action to set aside a conveyance, on the ground that it is made in fraud
of creditors, it is not necessary to prove the issuance and return of an execution nulla
bona, nevertheless, it is necessary to show clearly that the alleged fraudulent vendor
has no property with which to pay the suing creditor.
Siguan v Lim, 318 SCRA 725 (1999)
The action to rescind contracts in fraud of creditors is known as accion pauliana. For
this action to prosper, the following requisites must be present: (1) the plaintiff asking
for rescission has a credit prior to the alienation, although demandable later; (2) the
debtor has made a subsequent contract conveying a patrimonial benefit to a third
person; (3) the creditor has no other legal remedy to satisfy his claim; (4) the act
being impugned is fraudulent; (5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud.
33
The general rule is that rescission requires the existence of creditors at the time of
the alleged fraudulent alienation, and this must be proved as one of the bases of the
judicial pronouncement setting aside the contract. Without any prior existing debt,
there can neither be injury nor fraud. While it is necessary that the credit of the
plaintiff in the accion pauliana must exist prior to the fraudulent alienation, the date of
the judgment enforcing it is immaterial. Even if the judgment be subsequent to the
alienation, it is merely declaratory, with retroactive effect to the date when the credit
was constituted.
Velarde v CA, 361 SCRA 56 (2001)
The right of rescission of a party to an obligation under Article 1191 of the Civil Code
is predicated on a breach of faith by the other party who violates the reciprocity
between them. The breach contemplated in the said provision is the obligor’s failure
to comply with an existing obligation. When the obligor cannot comply with what is
incumbent upon it, the obligee may seek rescission and, in the absence of any just
cause for the court to determine the period of compliance, the court shall decree the
rescission.
Rescission creates the obligation to return the object of the contract. It can be carried
out only when the one who demands rescission can return whatever he may be
obliged to restore. To rescind is to declare a contract void at its inception and to put
an end to it as though it never was. It is not merely to terminate it and release the
parties from further obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract has been made.
Miguel v Montanez, G.R. No. 191336, January 25, 2012
If the amicable settlement is repudiated by one party, either expressly or impliedly,
the other party has two options, namely, to enforce the compromise in accordance
with the LGC or ROC as the case may be, or to consider it rescinded and insist upon
his original demand. This is in accord with Article 2041 of the Civil Code, which
qualifies the broad application of Article 2037, viz.: If one of the parties fails or
refuses to abide by the compromise, the other party may either enforce the
compromise or regard it as rescinded and insist upon his original demand.
In the case of Leonor v. Sycip: It is worthy of notice, in this connection, that, unlike
Article 2039 of the same Code, which speaks of “a cause of annulment or rescission
of the compromise” and provides that “the compromise may be annulled or
rescinded” for the cause therein specified, thus suggesting an action for annulment or
rescission, said Article 2041 confers upon the party concerned, not a “cause” for
rescission, or the right to “demand” the rescission of a compromise, but the authority,
not only to “regard it as rescinded”, but, also, to “insist upon his original demand”.
The language of this Article 2041, particularly when contrasted with that of Article
2039, denotes that no action for rescission is required in said Article 2041, and that
the party aggrieved by the breach of a compromise agreement may, if he chooses,
bring the suit contemplated or involved in his original demand, as if there had never
been any compromise agreement, without bringing an action for rescission thereof.
He need not seek a judicial declaration of rescission, for he may “regard” the
compromise agreement already “rescinded”.
Ada v Baylon, G .R. No. 182435, Aug. 13, 2012
Rescission is a remedy granted by law to the contracting parties and even to third
persons, to secure the reparation of damages caused to them by a contract, even if it
should be valid, by means of the restoration of things to their condition at the moment
prior to the celebration of said contract. It is a remedy to make ineffective a contract,
validly entered into and therefore obligatory under normal conditions, by reason of
external causes resulting in a pecuniary prejudice to one of the contracting parties or
their creditors.
The rescission of a contract under Article 1381(4) of the Civil Code only requires the
concurrence of the following: first, the defendant, during the pendency of the case,
enters into a contract which refers to the thing subject of litigation; and second, the
said contract was entered into without the knowledge and approval of the litigants or
of a competent judicial authority. As long as the foregoing requisites concur, it
becomes the duty of the court to order the rescission of the said contract.
2. Voidable Contracts, NCC 1390 – 1402
Caldwallader v Smith, Bell, 7 Phil 461 (1907)
The consignee who by means of misrepresentation of the condition of the market
induces his consignors to sell to him the property consigned, at a price less than that
for which he has already contracted to sell part of it. and who thereafter disposes of
the whole at an advance, must answer for the difference. Such conduct on the part of
the agent constitutes fraud, entitling the principal to annul the contract of sale.
PNB v Phil. Vegetable, G.R. No. L-25400, January 14, 1927
Furthermore, any unfulfilled promise made to the defendant by the general manager
of the plaintiff, without the authorization of the latter, does not constitute such fraud
and cause for the annulment of the contract. Upon this theory, at most, it might be an
34
incidental fraud committed by a third party, which is not sufficient cause for the
annulment of a contract, but only for an action for damages against the said third
party. (Art. 1270, Civil Code.) At any rate, the appellant-intervenor cannot seek the
annulment of this mortgage under the provisions of article 1302 of the Civil Code,
according to which only those persons who are principally or subsidiarily bound by
the contract may bring the action. The appellant, not having been a party to this
mortgage and not being a representative of any of those who have intervened
therein, is not, principally or subsidiarily, bound by virtue thereof, and, consequently,
has no action and cannot impugn its validity. (Avacena, concurring and dissenting in
part)
Singsong v Isabela Sawmill, 88 SCRA 623 (1979)
As a rule, a contract cannot be assailed by one who is not a party thereto. However,
when a contract prejudices the rights of a third person, he may file an action to annul
the contract. This Court has held that a person, who is not a party obliged principally
or subsidiarily under a contract, may exercise an action for nullity of the contract if he
is prejudiced in his rights with respects to one of the contracting parties, and can
show detriment which would positively result to him from the contract in which he has
no intervention. The plaintiffs-appellees were prejudiced in their rights by the
execution of the chattel mortgage over the properties of the partnership “Isabela
Sawmill” in favor of Margarita G. Saldajeno by the remaining partners, Leon Garibay
and Timoteo Tubungbanua. Hence, said appellees have a right to file the action to
nullify the chattel mortgage in question.
Metropolitan v. Prosperity, G.R. No. 154390, March 17, 2014
Contrary to their modified defense of absence of consent, Vicky Ang’s testimony
tended at best to prove the vitiation of their consent through insidious words,
machinations or misrepresentations amounting to fraud, which showed that the
contract was voidable. Where the consent was given through fraud, the contract was
voidable, not void ab initio. This is because a voidable or annullable contract is
existent, valid and binding, although it can be annulled due to want of capacity or
because of the vitiated consent of one of the parties.
Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent
of the contracting parties was obtained through fraud, the contract is considered
voidable and may be annulled within four years from the time of the discovery of the
fraud. The discovery of fraud is reckoned from the time the document was registered
in the Register of Deeds in view of the rule that registration was notice to the whole
world. Thus, because the mortgage involving the seven lots was registered on
September 5, 1984, they had until September 5, 1988 within which to assail the
validity of the mortgage. But their complaint was instituted in the RTC only on
October 10, 1991. Hence, the action, being by then already prescribed, should be
dismissed.  Evidence shows that respondent proceeded to sign the Contract to Sell despite
Ratification, NCC 1392-1396:
Uy Soo Lim v Tan Unchuan, 38 Phil 552 (1918)
The right of a minor to rescind, upon attaining his majority, a contract entered into
during his minority is subject to the conditions (1) that the election to rescind must be
made within a reasonable time after majority and (2) that all of the consideration
which was in the minor's possession upon his reaching majority must be returned.
The disposal of any part of the consideration after the attainment of majority imports
an affirmance of the contract.
Not only should plaintiff have refunded all moneys in his possession upon filing his
action to rescind, but, by insisting upon receiving and spending such consideration
after reaching majority, knowing the rights conferred upon him by law, he must be
held to have forfeited any right to bring such action.
Viloria v CAI, G.R. No. 188288, Jan. 16, 2012
Article 1390, in relation to Article 1391 of the Civil Code, provides that if the consent
of the contracting parties was obtained through fraud, the contract is considered
voidable and may be annulled within four (4) years from the time of the discovery of
the fraud. Once a contract is annulled, the parties are obliged under Article 1398 of
the same Code to restore to each other the things subject matter of the contract,
including their fruits and interest.
On the basis of the foregoing and given the allegation of Spouses Viloria that
Fernando’s consent to the subject contracts was supposedly secured by Mager
through fraudulent means, it is plainly apparent that their demand for a refund is
tantamount to seeking for an annulment of the subject contracts on the ground of
vitiated consent. Even on the assumption that CAI may be held liable for the acts of
Mager, still, Spouses Viloria are not entitled to a refund. Mager’s statement cannot be
considered a causal fraud that would justify the annulment of the subject contracts
that would oblige CAI to indemnify Spouses Viloria and return the money they paid
for the subject tickets.
35
ECE Realty v Mandap, G.R. No. 196182, September 1, 2014
The CA erred in ruling that there was fraud in the execution of the subject contract to
sell and declaring the same as annulled and ordering petitioner ECE to refund all
payments made by respondent.
information contained therein that the condominium is located in Pasay City. This
only means that she still agreed to buy the subject property regardless of the fact that
it is located in a place different from what she was originally informed. If she had a
problem with the property's location, she should not have signed the Contract to Sell
and, instead, immediately raised this issue with petitioner. But she did not. As
correctly observed by the Office of the President, it took respondent more than two
years from the execution of the Contract to Sell to demand the return of the amount
she paid on the ground that she was misled into believing that the subject property is
located in Makati City. In the meantime, she continued to make payments.
a. Incapable of giving consent, NCC 1327
b. Insanity, NCC 1328-1329
c. Mistake, NCC 1330-1343
d. Violence, NCC 1335(1)
e. Intimidation, NCC 1335(2)
f. Undue influence, NCC 1337
g. Fraud, NCC 1332, 1338-1344
Roman Catholic Church v Pante, April 11, 2012
Consent is an essential requisite of contracts as it pertains to the meeting of the offer
and the acceptance upon the thing and the cause which constitute the contract. To
create a valid contract, the meeting of the minds must be free, voluntary, willful and
with a reasonable understanding of the various obligations the parties assumed for
themselves. Where consent, however, is given through mistake, violence,
intimidation, undue influence, or fraud, the contract is deemed voidable. However, not
every mistake renders a contract voidable. The Civil Code clarifies the nature of
mistake that vitiates consent: “Article 1331. In order that mistake may invalidate
consent, it should refer to the substance of the thing which is the object of the
contract, or to those conditions which have principally moved one or both parties to
enter into the contract. Mistake as to the identity or qualifications of one of the
parties will vitiate consent only when such identity or qualifications have been
the principal cause of the contract. A simple mistake of account shall give rise to
its correction.”
In the present case, the Church contends that its consent to sell the lot was given on
the mistaken impression arising from Pante’s fraudulent misrepresentation that he
had been the actual occupant of the lot. Willful misrepresentation existed because of
its policy to sell its lands only to their actual occupants or residents. Contrary to the
Church’s contention, the actual occupancy or residency of a buyer over the land does
not appear to be a necessary qualification that the Church requires before it could
sell its land.
ECE Realty and Development Inc. v Rachel Mandap, G.R. No. 196182,
September 1, 2014
Jurisprudence has shown that in order to constitute fraud that provides basis to annul
contracts, it must fulfill two conditions. First, the fraud must be dolo causante or it
must be fraud in obtaining the consent of the party. This is referred to as causal
fraud. The deceit must be serious. The fraud is serious when it is sufficient to
impress, or to lead an ordinary prudent person into error; that which cannot deceive a
prudent person cannot be a ground for nullity. The circumstances of each case
should be considered, taking into account the personal conditions of the victim.
Second, the fraud must be proven by clear and convincing evidence and not merely
by a preponderance thereof.
In the present case, this Court finds that petitioner is guilty of false representation of a
fact. This is evidenced by its printed advertisements indicating that its subject
condominium project is located in Makati City when, in fact, it is in Pasay City.
However, insofar as the present case is concerned, the Court agrees with the
Housing and Land Use Arbiter, the HLURB Board of Commissioners, and the Office
of the President, that the misrepresentation made by petitioner in its advertisements
does not constitute causal fraud which would have been a valid basis in annulling the
Contract to Sell between petitioner and respondent.
Metropolitan v. Prosperity, G.R. No. 154390, March 17, 2014
According to Article 1338 of the Civil Code, there is fraud when one of the contracting
parties, through insidious words or machinations, induces the other to enter into the
contract that, without the inducement, he would not have agreed to. Yet, fraud, to
vitiate consent, must be the causal (dolo causante), not merely the incidental (dolo
incidente), inducement to the making of the contract. In Samson v. Court of Appeals,
238 SCRA 397 (1994), causal fraud is defined as “a deception employed by one
party prior to or simultaneous to the contract in order to secure the consent of the
other.”
36
Fraud cannot be presumed but must be proved by clear and convincing evidence.
Whoever alleges fraud affecting a transaction must substantiate his allegation,
because a person is always presumed to take ordinary care of his concerns, and
private transactions are similarly presumed to have been fair and regular. To be
remembered is that mere allegation is definitely not evidence; hence, it must be
proved by sufficient evidence.
3. Unenforceable Contract, NCC 1403 – 1408, 1317
PNB v Phil. Vegetable Oil, 49 Phil 857 (1927)
The broad view is that the Statute of Frauds applies only to agreements not to be
performed on either side within a year from the making thereof. Agreements to be
fully performed on one side within the year are taken out of the operation of the
statute. The Statute of Frauds was enacted for the purpose of preventing frauds. It
should not be made the instrument to further them. As intervenor's theory proceeds
on the assumption that Mr. Whitaker has entirely performed his part of the
agreement, equity would argue that all evidence be admitted to prove the alleged
agreement. Surely since the Statute of Frauds was enacted for the purpose of
preventing frauds, it should not be made the instrument to further them.
Carbonnel v Poncio, 103 Phil 655 (1958)
The Statute of Frauds is applicable only to executory contracts, not to contracts that
are totally or partially performed. The reason is simple. In executory contracts there is
a wide field for fraud because, unless they be in writing there is no palpable evidence
of the intention of the contracting parties. However, if a contract has been totally or
partially performed, the exclusion of parol evidence would promote fraud or bad faith,
for it would enable the defendant to keep the benefits already derived by him from the
transaction in litigation, and, at the same time, evade the obligations, responsibilities
or liabilities assumed or contracted by him thereby. So that when the party concerned
has pleaded partial performance, such party is entitled to a reasonable chance to
,establish by parol evidence the truth of this allegation, as well as the contract itself.
"The recognition of the exceptional effect of part performance in taking an oral
contract out of the statute of frauds involves the principle that oral evidence is
admissible in such cases to prove both the contract and the part performance of the
contract"
Limketkai v CA, March 29, 1996
Moreover, petitioner’s case failed to hurdle the strict requirements of the Statute of
Frauds. In this case there is a patent absence of any deed of sale categorically
conveying the subject property from respondent BPI to petitioner. Exhibits “E,” “G,” “I”
which petitioner claims as proof of perfected contract of sale between it and
respondent BPI were not subscribed by the party charged and did not constitute the
memoranda or notes that the law speaks of. To consider them sufficient compliance
with the Statute of Frauds is to betray the avowed purpose of the law to prevent fraud
and perjury in the enforcement of obligations.
“In adherence to the provisions of the Statute of Frauds, the examination and
evaluation of the notes or memoranda adduced by the appellee was confined and
limited to within the four corners of the documents. To go beyond what appears on
the face of the documents constituting the notes or memoranda, stretching their
import beyond what is written in black and white, would certainly be uncalled for, if
not violative of the Statute of Frauds and opening the doors to fraud, the very evil
sought to be avoided by the statute. In fine, considering that the documents adduced
by the appellee do not embody the essentials of the contract of sale aside from not
having been subscribed by the party charged or its agent, the transaction involved
definitely falls within the ambit of the Statute of Frauds.
Dissenting Opinion (Melo): The contention of respondents that a formal deed of sale
is essential before the contract may be perfected and proved indicates a
misapprehension of the Statute of Frauds. As emphasized in the decision, a sale of
land is valid regardless of the form it may have been entered into (Claudel vs. Court
of Appeals, 199 SCRA 113, 199 [1991]). The fact that the deed of sale still had to be
signed and notarized does not mean that no contract was perfected. If the law
requires a document or special legal form, the contracting parties may require each
other to observe the formality after the contract is perfected.
Even assuming for purposes of argument that the perfected contract infringes the
Statute of Frauds, in Abrenica vs. Gonda (34 Phil. 379 [1916]), this Court ruled that
the questioned contract is ratified when the defense fails to object or asks questions
on cross-examination. As decided in Abrenica and later cases such as Talosig vs.
Vda. de Nieba (43 SCRA 472 [1972]), assuming that parole evidence was initially
inadmissible, the same became competent and admissible because of the cross-
examination. The cross-examination on the contract is deemed a waiver of the
defense of the statute of frauds.
Swedish Match v CA, 441 SCRA 1 (2004)
The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil Code
requires certain contracts enumerated therein to be evidenced by some note or
memorandum in order to be enforceable. The term “Statute of Frauds” is descriptive
37
of statutes which require certain classes of contracts to be in writing. The Statute
does not deprive the parties of the right to contract with respect to the matters therein
involved, but merely regulates the formalities of the contract necessary to render it
enforceable. Evidence of the agreement cannot be received without the writing or a
secondary evidence of its contents. The Statute, however, simply provides the
method by which the contracts enumerated therein may be proved but does not
declare them invalid because they are not reduced to writing. By law, contracts are
obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. However, when the law requires that
a contract be in some form in order that it may be valid or enforceable, or that a
contract be proved in a certain way, that requirement is absolute and indispensable.
Consequently, the effect of non-compliance with the requirement of the Statute is
simply that no action can be enforced unless the requirement is complied with.
Clearly, the form required is for evidentiary purposes only. Hence, if the parties
permit a contract to be proved, without any objection, it is then just as binding as if
the Statute has been complied with.
For a note or memorandum to satisfy the Statute, it must be complete in itself and
cannot rest partly in writing and partly in parol.
Neri v Heirs of Uy, GR 194366, October 2012
Thus, a father or mother, as the natural guardian of the minor under parental
authority, does not have the power to dispose or encumber the property of the latter.
Such power is granted by law only to a judicial guardian of the ward’s property and
even then only with courts’ prior approval secured in accordance with the
proceedings set forth by the Rules of Court.
Consequently, the disputed sale entered into by Enrique in behalf of his minor
children without the proper judicial authority, unless ratified by them upon reaching
the age of majority,15 is unenforceable in accordance with Articles 1317 and 1403(1)
of the Civil Code.
Iglesia v Heirs Of Bernardino Taeza, G.R. No. 179597, Feb. 3, 2014
Unenforceable contracts are those which cannot be enforced by a proper action in
court, unless they are ratified, because either they are entered into without or in
excess of authority or they do not comply with the statute of frauds or both of the
contracting parties do not possess the required legal capacity.—The Court finds it
erroneous for the CA to ignore the fact that the laymen’s committee objected to the
sale of the lot in question. The Canons require that ALL the church entities listed in
Article IV (a) thereof should give its approval to the transaction. Thus, when the
Supreme Bishop executed the contract of sale of petitioner’s lot despite the
opposition made by the laymen’s committee, he acted beyond his powers. This case
clearly falls under the category of unenforceable contracts mentioned in Article 1403,
paragraph (1) of the Civil Code, which provides, thus: Art. 1403. The following
contracts are unenforceable, unless they are ratified: (1) Those entered into in the
name of another person by one who has been given no authority or legal
representation, or who has acted beyond his powers.
In the present case, however, respondents’ predecessor-in-interest, Bernardino
Taeza, had already obtained a transfer certificate of title in his name over the
property in question. Since the person supposedly transferring ownership was not
authorized to do so, the property had evidently been acquired by mistake. The
applicable provision of law in such cases is Article 1456 of the Civil Code which
states that “if property is acquired through mistake or fraud, the person obtaining it is,
by force of law, considered a trustee of an implied trust for the benefit of the person
from whom the property comes.”
4. Void Contracts, NCC 1409-1410, 1411-1412, 1413-1416, 1417-
1419, 1420- 422
a. NCC 1345-1346
b. NCC 1490-1491
c. NCC 1378
d. NCC 1409
Ureta v Ureta, Sept. 14, 2011
In absolute simulation, there is a colorable contract but it has no substance as the
parties have no intention to be bound by it. The main characteristic of an absolute
simulation is that the apparent contract is not really desired or intended to produce
legal effect or in any way alter the juridical situation of the parties. As a result, an
absolutely simulated or fictitious contract is void, and the parties may recover from
each other what they may have given under the contract. However, if the parties
state a false cause in the contract to conceal their real agreement, the contract is
relatively simulated and the parties are still bound by their real agreement. Hence,
where the essential requisites of a contract are present and the simulation refers only
to the content or terms of the contract, the agreement is absolutely binding and
enforceable between the parties and their successors in interest. Lacking, therefore,
in an absolutely simulated contract is consent which is essential to a valid and
enforceable contract. Thus, where a person, in order to place his property beyond the
reach of his creditors, simulates a transfer of it to another, he does not really intend to
38
divest himself of his title and control of the property; hence, the deed of transfer is but
a sham. Similarly, in this case, Alfonso simulated a transfer to Policronio purely for
taxation purposes, without intending to transfer ownership over the subject lands.
The most protuberant index of simulation of contract is the complete absence of an
attempt in any manner on the part of the ostensible buyer to assert rights of
ownership over the subject properties.
For guidance, the following are the most fundamental characteristics of void or
inexistent contracts: 1) As a general rule, they produce no legal effects whatsoever in
accordance with the principle “quod nullum est nullum producit effectum.” 2) They are
not susceptible of ratification. 3) The right to set up the defense of inexistence or
absolute nullity cannot be waived or renounced. 4) The action or defense for the
declaration of their inexistence or absolute nullity is imprescriptible. 5) The
inexistence or absolute nullity of a contract cannot be invoked by a person whose
interests are not directly affected.
It is well-settled in a long line of cases that where a deed of sale states that the
purchase price has been paid but in fact has never been paid, the deed of sale is null
and void for lack of consideration.
Formaran vs Ong, G.R. No. 186264, July 8 2013
The Court believes and so holds that the subject Deed of Sale is indeed simulated,
as it is: (1) totally devoid of consideration; (2) it was executed on August 12, 1967,
less than two months from the time the subject land was donated to petitioner on
June 25, 1967 by no less than the parents of respondent Glenda Ong; (3) on May 18,
1978, petitioner mortgaged the land to the Aklan Development Bank for a P23,000.00
loan; (4) from the time of the alleged sale, petitioner has been in actual possession of
the subject land; (5) the alleged sale was registered on May 25, 1991 or about twenty
four (24) years after execution; (6) respondent Glenda Ong never introduced any
improvement on the subject land; and (7) petitioner’s house stood on a part of the
subject land.
The amplitude of foregoing undisputed facts and circumstances clearly shows that
the sale of the land in question was purely simulated. It is void from the very
beginning.
Constantino v Heirs of Constantino, G.R. No. 181508, Oct. 2 201
Finding the inapplicability of the in pari delicto doctrine, We find occasion to stress
that Article 1412 of the Civil Code that breathes life to the doctrine speaks of the
rights and obligations of the parties to the contract with an illegal cause or object
which does not constitute a criminal offense. It applies to contracts which are void for
illegality of subject matter and not to contracts rendered void for being simulated, or
those in which the parties do not really intend to be bound thereby. Specifically, in
pari delicto situations involve the parties in one contract who are both at fault, such
that neither can recover nor have any action against each other.
Latin for “in equal fault,” in pari delicto connotes that two or more people are at fault
or are guilty of a crime. Neither courts of law nor equity will interpose to grant relief to
the parties, when an illegal agreement has been made, and both parties stand in pari
delicto. Under the in pari delicto doctrine, the parties to a controversy are equally
culpable or guilty, they shall have no action against each other, and it shall leave the
parties where it finds them.
THE CPG of the SP. Cadavedo v Lacaya, G.R. No. 173188, January 15, 2014
The core issue for our resolution is whether the attorney’s fee consisting of one-half
of the subject lot is valid and reasonable, and binds the petitioners.
An agreement between the lawyer and his client, providing for the former’s
compensation, is subject to the ordinary rules governing contracts in general.  As the
rules stand, controversies involving written and oral agreements on attorney’s fees
shall be resolved in favor of the former. Hence, the contingency fee of P2,000.00
stipulated in the amended complaint prevails over the alleged oral contingency fee
agreement of one-half of the subject lot.
Granting arguendo that the spouses Cadavedo and Atty. Lacaya indeed entered into
an oral contingent fee agreement securing to the latter one-half of the subject lot, the
agreement is nevertheless void.
In their account, the respondents insist that Atty. Lacaya agreed to represent the
spouses Cadavedo in Civil Case No. 1721 and assumed the litigation expenses,
without providing for reimbursement, in exchange for a contingency fee consisting of
one-half of the subject lot. This agreement is champertous and is contrary to public
policy.
De Leon v. Dela Llana (2015)
The contract, as gathered from the MCTC-Nabunturan-Mawab’s ratiocination, should
be considered as an absolutely and not a relatively simulated contract.
39
In spite of the undeniable fact that Robert and Gil have failed to pay their monthly
rentals, there was not any effort exerted by Gilbert to collect the same prior to the
filing of the action.
Failure of other parties to demand performance of the obligation of the other for
unreasonable length of time renders the contract ineffective. In a simulated contract,
the parties do not intend to be bound by the same.
Tolentino v. Latagan (2015)
A forged deed of sale is null and void and conveys no title, for it is a well-settled
principle that no one can give what one does not have; nemo dat quod non habet.
Due to the forged Deed of Absolute Sale dated January 14, 1970, Servillano acquired
no right over the subject property which he could convey to his daughter, Maria. All
the transactions subsequent to the falsified sale between the Servillano and his
daughter are likewise void, namely, the Deeds of Absolute Sale of the subject
property that Servillano executed on May 25, 1971 and November 24, 1977 in favor
his daughter, as well as the Self-Adjudication of Real Property.
However, it has also been consistently ruled that that a forged or fraudulent
document may become the root of a valid title, if the property has already been
transferred from the name of the owner to that of the forger,68 and then to that of an
innocent purchaser for value.69 This doctrine emphasizes that a person who deals
with registered property in good faith will acquire good title from a forger and be
absolutely protected by a Torrens title. This is because a prospective buyer of a
property registered under the Torrens system need not go beyond the title, especially
when she has no notice of any badge of fraud or defect that would place her on
guard.
Tingalan v. Sps. Melliza (2015)
The contract of sale entered into between petitioner Anastacio and respondent-
spouses on March 28, 1977 is null and void from inception for being contrary to law
and public policy. As a void contract – it is imprescriptible and not susceptible of
ratification.
The law is clear under Section 118 of the Public Land Act, as amended, that unless
made in favor of the government or any of its branches, units or institutions, lands
acquired under free patent or homestead provisions shall not be subject to any form
of encumbrance for a term of five years from and after the date of issuance of the
patent or grant. Following Section 118, the subject land could not have been validly
alienated or encumbered on March 28, 1977 which was way within five years from
the date of the issuance of the free patent under the name of petitioner Anastacio on
October 4, 1976.
Clemente v. CA (2015)
As one of the essential elements, consent when wanting makes the contract non-
existent. Consent is manifested by the meeting of the offer and the acceptance of the
thing and the cause, which are to constitute the contract.44 A contract of sale is
perfected at the moment there is a meeting of the minds upon the thing that is the
object of the contract, and upon price. Here, there was no valid contract of sale
between petitioner and Adela because their consent was absent. The contract of sale
was a mere simulation.
Simulation takes place when the parties do not really want the contract they have
executed to produce the legal effects expressed by its wordings. The evidence
presented below prove that Adela did not intend to alienate the Properties in favor of
petitioner, and that the transfers were merely a sham to accommodate petitioner in
her travel abroad.
e. NCC 1422
f. NCC 1782
g. FC 87
Liguez v CA, supra
In our opinion, the Court of Appeals erred in applying to the present case the pari
delicto rule. First, because it can not be said that both parties here had equal guilt
when we consider that as against the deceased Salvador P. Lopez, who was a man
advanced in years and mature experience, the appellant was a mere minor, 16 years
of age, when the donation was made; that there is no finding made by the Court of
Appeals that she was fully aware of the terms of the bargain entered into by and
between Lopez and her parents; that her acceptance in the deed of donation (which
was authorized by Article 626 of the old Civil Code) did not necessarily imply
knowledge of conditions and terms not set forth therein; and that the substance of the
testimony of the instrumental witnesses is that it was the appellant's parents who
insisted on the donation before allowing her to live with Lopez. These facts are more
suggestive of seduction than of immoral bargaining on the part of appellant. It must
not be forgotten that illegality is not presumed, but must be duly and adequately
proved.
40
In the second place, the rule that parties to an illegal contract, if equally guilty, will not
be aided by the law but will both be left where it finds them, has been interpreted by
this Court as barring the party from pleading the illegality of the bargain either as a
cause of action or as a defense.
Rellosa v Gaw Cheen Hum, 93 Phil 827 (1953)
Exception to "Pari Delicto” Doctrine, Explained.—The doctrine of Tani delicto is
subject to one important limitation, namely, "whenever public policy is considered as
advanced by allowing either party to sue for relief against the transaction" (3
Pomeroy's Equity Jurisprudence, 5th ed., p. 733). But not all contracts which are
illegal for being opposed to public policy come under this limitation. The cases in
which this limitation may apply, only "include the class of contracts which are
intrinsically contrary to public policy,—contracts in which the illegality itself consists in
their opposition to public policy, and any other species of illegal contracts in which,
from their particular circumstances, incidental and collateral motives of public policy
require relief." Examples of this class of contracts are usurious contracts, marriage-
brokerage contracts and gambling contracts. (Mem, pp. 735-737.) A sale of
residential land executed during the Japanese military occupation wherein both
parties were in pari delicto does not come under this exception because it is not
intrinsically contrary to public policy, nor one where the illegality itself consists in its
opposition to public policy. It is illegal not because it is against public policy but
because it is against the Constitution.
Frenzel v Catito, 406 SCRA 55 (2003)
Even if, as claimed by the petitioner, the sales in question were entered into by him
as the real vendee, the said transactions are in violation of the Constitution (aliens
disqualified from acquiring lands of public domain); hence, are null and void ab initio.
A contract that violates the Constitution and the law, is null and void and vests no
rights and creates no obligations. It produces no legal effect at all. The petitioner,
being a party to an illegal contract, cannot come into a court of law and ask to have
his illegal objective carried out. One who loses his money or property by knowingly
engaging in a contract or transaction which involves his own moral turpitude may not
maintain an action for his losses. To him who moves in deliberation and
premeditation, the law is unyielding. The law will not aid either party to an illegal
contract or agreement; it leaves the parties where it finds them.
Gonzalo v Tarnate, Jr., G.R. No. 160600, Jan. 15 2014
There is no question that every contractor is prohibited from subcontracting with or
assigning to another person any contract or project that he has with the DPWH
unless the DPWH Secretary has approved the subcontracting or assignment
pursuant to Sec. 6 of P.D. No. 1594.
Gonzalo, who was the sole contractor of the project in question, subcontracted the
implementation of the project to Tarnate in violation of the statutory prohibition. Their
subcontract was illegal, therefore, because it did not bear the approval of the DPWH
Secretary. Necessarily, the deed of assignment was also illegal, because it sprung
from the subcontract. Under Article 1409 (1) of the Civil Code, a contract whose
cause, object or purpose is contrary to law is a void or inexistent contract. As such, a
void contract cannot produce a valid one. To the same effect is Article 1422 of the
Civil Code, which declares that “a contract, which is the direct result of a previous
illegal contract, is also void and inexistent.”
However, the letter and spirit of Article 22 of the Civil Code command Gonzalo to
make a full reparation or compensation to Tarnate. The illegality of their contract
should not be allowed to deprive Tarnate from being fully compensated through the
imposition of legal interest. As regards damages claimed by Tarnate, the Court ruled
that o damages may be recovered under a void contract, which, being nonexistent,
produces no juridical tie between the parties involved.
Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance
Company, 551 SCRA 1 (2008), this Court ruled — It must be remembered that an
insurance contract is a contract of adhesion which must be construed liberally in
favor of the insured and strictly against the insurer in order to safeguard the latter’s
interest.
Ejercito v. Oriental Assurance Corp. (2015)
Contracts of adhesion are not invalid per se and that their binding effects have been
upheld on numerous occasions. The pretension that petitioners did not consent to the
renewal of the bond is belied by the fact that the terms of the contract which they
voluntarily entered into contained a clause granting authority to the Company to grant
or consent to the renewal of the bond. Having entered into the contract with full
knowledge of its terms and conditions, petitioners are estopped from asserting that
they did so under the ignorance of the legal effect of the contract or the undertaking.
One of the petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of
the legal effect of his undertaking. Petitioners could have easily inserted a remark in
the clause granting authority to the Company to renew the original bond, if the
renewal thereof was not their intention.

Contracts of Adhesion

Piltel v Tecson, May 7, 2004

The contract herein involved is a contract of adhesion. But such an agreement is not
per se inefficacious. The rule instead is that, should there be ambiguities in a contract
of adhesion, such ambiguities are to be construed against the party that prepared it.
If, however, the stipulations are not obscure, but are clear and leave no doubt on the
intention of the parties, the literal meaning of its stipulations must be held controlling.
A contract of adhesion is just as binding as ordinary contracts. It is true that this Court
has, on occasion, struck down such contracts as being assailable when the weaker
party is left with no choice by the dominant bargaining party and is thus completely
deprived of an opportunity to bargain effectively. Nevertheless, contracts of adhesion
are not prohibited even as the courts remain careful in scrutinizing the factual
circumstances underlying each case to determine the respective claims of
contending parties on their efficacy.

Alpha Insurance v Castor, G.R. No. 198174, Sept 2, 2013

A contract of insurance is a contract of adhesion. So, when the terms of the
insurance contract contain limitations on liability, courts should construe them in such
a way as to preclude the insurer from non-compliance with his obligation. Thus, in

41