Professional Documents
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Obligations and Contracts
Obligations and Contracts
By
SECOND EDITION
2003
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PSALMS 115.1
iii
iv
ACKNOWLEDGMENT
v
Finally, last but not the least, to my wife, Professor Amparita
Sta. Maria also of the Ateneo De Manila College of Law, who has
continued to be my principal critic in all my works, Iextend my
dearest appreciation.
vi
PREFACE
For the First Edition
vii
and contracts. For if one is to transact business with other people,
he definitely has to make and observe binding promises, predictable
commitments, documentary formalities, important conditions,
limited periods and prompt payments. Breaches and defaults also
occur. All these entail legal consequences. There is, therefore, a need
for a basic understanding of the legal principles of obligations and
contracts. This work offers a helpful and fundamental starting point
in searching for the right solutions.
I wish to acknowledge, with my sincerest appreciation, the
following for the valuable assistance extended to me in the
preparation of this book:
1) my alma mater, the ATENEO DE MANILA UNIVERSITY,
for awarding to me the Ateneo Law Alumni Foundation
Professorial Chair in Civil Law for school-years 1996-1997
and 1997-1998. This volume is my project for the
professorial chair;
2) my talented student, DOMINIQUE P. GALLEGO (Ateneo
Law Class of ‘98), for patiently proofreading the part of
this text dealing with the law on obligations; and
3) my secretary, MATILDE DOLINA, for partly assisting me
in the encoding and typing of this work.
Finally, I cannot end without expressing my profound gratitude
to my wife, ATTY. AMPARITA S. STA. MARIA, who is teaching
Legal Research and is currently the Thesis Director of the Juris
Doctor (JD) Program at the Ateneo de Manila University School of
Law. She assisted me in my research and patiently showed me
how to maximize the use of my computer. Moreover, her enduring
support and perceptive suggestions have always been a source of
encouragement.
viii
CONTENTS
Title V. Prescription
Title I. Obligations
ix
Title II. Contracts
Title V. Trusts
x
xi
1
PRESCRIPTION
Chapter 1
GENERAL PROVISIONS
1
G.R. No. L-59879, May 13, 1985, 136 SCRA 407.
2
G.R. No. L-52278, May 29, 1980, 97 SCRA 872.
1
2 ObligatiOns and COntraCts art. 1106
Text and Cases
vs. Rodriguez, G.R. No. L-18967, January 31, 1966, 16 SCRA 53.
14
G.R. No. L-16485, January 30, 1965, 13 SCRA 24.
15
G.R. No. L-17467, April 23, 1963, 7 SCRA 692.
16
G.R. No. L-15088, January 31, 1961, 1 SCRA 384.
17
Executive Order No. 209 which took effect on August 3, 1988.
18
Id., Article 57.
art. 1109 PresCriPtiOn 7
General Provisions
The 1950 Civil Code took effect on August 30, 1950. Article 1116
is a transitory provision and the rules are as follows:
1) If the prescriptive period provided under the old law
has already lapsed before the effectivity of the 1950 Civil Code,
such prescriptive period shall apply;27
2) If the prescriptive period under the old law is still
running upon the effectivity of the 1950 Civil Code which however
provides for a different period for the same situation, the 1950
Civil Code shall prevail provided that such period counted from
the effectivity of the 1950 Civil Code has already lapsed, although
Ongsiaco vs. Dallo, G.R. No. L-27451, February 28, 1969, 27 SCRA 161; Joaquin vs.
Cojuangco, G.R. No. L-18060, July 25, 1967, 20 SCRA 769; Laurel-Manila vs. Galvan,
16 ObligatiOns and COntraCts art. 1116
Text and Cases
under the old law the period has not yet lapsed. Thus, if under
an old law previous to the effectivity of the Civil Code in 1950,
X has thirty years within which to file a particular suit and by
the time the 1950 Civil Code takes effect his remaining time,
pursuant to the period provided by the old law, is only 12 years,
he cannot file the case on the 12th or even on the 11th year if the
1950 Civil Code provides only 10 years as prescriptive period for
exactly the same kind of case. This is so because by the 11th year
or 12th year, the prescriptive period of 10 years counted from the
effectivity of the 1950 Civil Code has already lapsed;
3) If the prescriptive period under the old law is still
running upon the effectivity of the 1950 Civil Code and the
remaining balance of such period since the effectivity of the 1950
Civil Code is shorter than that provided in the 1950 Civil Code
for exactly the same situation, the old prescriptive period will
apply. Thus, in the example given in No. 2, if the balance of the
period which started under the old law is 12 years counted from
the time of the effectivity of the 1950 Civil Code and the latter
provides for 15 years as the prescriptive period for exactly the
same case, the prescriptive period under the old law will prevail.28
G.R. No. L-23507, May 24, 1967, 20 SCRA 198; Carillo vs. De Paz, L-22601, October
28, 1966, 18 SCRA 467.
art. 1116 PresCriPtiOn 17
General Provisions
18 ObligatiOns and COntraCts
Text and Cases
Chapter 2
PRESCRIPTION OF OWNERSHIP AND
OTHER REAL RIGHTS
1
G.R. No. L-46768, March 18, 1985, 135 SCRA 351.
18
art. 1117 PresCriPtiOn 19
Prescription of Ownership and Other
Real Rights
while the 5/7 share of the other five children were transferred in
1929 and 1930 to the spouses Domingo Magsumbol and Susana
Magsumbol.
Lot 655 was subdivided on January 30, 1934 with the
approval of the Director of Lands, into Lot 655-A (5/7) and Lot
655-B (2/7). The Bergado heirs ceased to have possession of any
portion of Lot 655 which was occupied by the Magsumbol spouses
and Patalinhug.
In the guardianship proceeding for the children of Miguel
Magsumbol, who inherited Lot 655-A from Domingo, Sr., Judge
Jose M. Mendoza adjudicated to Domingo, Jr. on October 30, 1962
said lot with an area of 7,344 square meters. Domingo, Jr. then
sold Lot 655-A on November 2, 1962, to the brothers Mamerto
and Lorenzo Igot for P10,000 (Exh. D or 2). The Igots continued
the Magsumbols’ possession of Lot No. 655-A.
On May 10, 1967, or 38 years after Judge Pablo rendered his
decision, Judge Mendoza, the same judge who granted Lot 655-
A to Domingo Magsambol, Jr., at the instance of some Bergado
heirs, corrected the clerical errors in Judge Pablo’s decision. As
a result, a decree was issued regarding this matter. Finally on
December 19, 1967, OCT No. 8 was issued for Lot 655. The land
became registered land at last.
In 1970 the Igot brothers sued some Bergado heirs for
the reconveyance of Lot 655-A or 5/7 portion of Lot 655 which
is covered by OCT No. 8. The trial court upheld their claim.
The appellate Court, through Justice Gatmaitan, affirmed said
decision.
In its decision, the court ruled that the Magsumbols had
acquired Lot 655-A by prescription under section 41 of the Code of
Civil Procedure. The right was in turn, transmitted to the Igots.
The petitioners herein, or defendants Godinez and Jayme, had
only acquired a paper title in 1967 when they obtained OCT No.
8.
The petitioners filed an appeal contending that the Appellate
Court erred by not recognizing OCT No. 8 as indefeasible and by
not considering the action of the Igots as barred by res judicata.
The Supreme Court in its decision, held that the Appellate
Court did not err in dismissing the claim of the petitioners for Lot
655-A which has been in the adverse, continuous, uninterrupted
and notorious possession of the Magsumbols and the Igots, in the
concept of owner for more than half a century. The laws as well
as the canons of common sense favored the Igots.
Thus, OCT No. 8 did not nullify the sales made by the five
Bergado children to the Magsumbol spouses in 1929 and 1930.
20 ObligatiOns and COntraCts art. 1118
Text and Cases
2
Cuayong vs. Benedicto, G.R. No. 9989, March 13, 1918, 37 Phil. 781.
3
Harden vs. Harden, G.R. No. L-22174, July 21, 1967, 20 SCRA 706.
4
Marcelo, et al. vs. Court of Appeals, G.R. No. 131803, April 14, 1999, 105 SCAD
561, 305 SCRA 800.
5
G.R. No. L-38185, September 24, 1986, 144 SCRA 292.
art. 1118 PresCriPtiOn 21
Prescription of Ownership and Other
Real Rights
The fact that the possessor holds the property by virtue of the
consent of the owner shows that such possessor acknowledges that
somebody else owns the property. Possession by tolerance therefore
does not imply an assertion of ownership,8 and thus produces no
effect with respect to possession or prescription.9 In Coronado vs.
Court of Appeals,10 where the statutory period for ordinary acquisitive
prescription passed, the Supreme Court rejected the application of
prescription because the possession was merely one of tolerance.
Pertinently, the Supreme Court said:
As found by the respondent appellate court, Monterola never
claimed ownership over the property in question. As a matter of
fact, one of the deeds of donation executed by Monterola in favor
of Leonida Coronado acknowledged that the boundary owner of
the property conveyed to her is JUANA. This is precisely the
reason why during the lifetime of the late Dalmacio Monterola,
JUANA had always been allowed to enter and reap the benefits
or the produce of the said property. It was only after the death of
said Monterola in 1970 that Leonida Coronado prohibited JUANA
from entering it (Ibid., p. 18).
Even assuming arguendo that Monterola was indeed in
continuous possession of the said property for over ten years
since 1934, said possession is insufficient to constitute the
fundamental basis of the prescription. Possession, under the Civil
Code, to constitute the foundation of a prescriptive right, must be
possession under claim of title (en concepto de dueño), or through
the use of common law equivalent to the term, it must be adverse.
Acts of possessory character performed by one who holds by mere
tolerance of the owner are clearly not en concepto de dueño, and
such possessory acts, no matter how long so continued, do not
start the running of the period of pres-cription (Manila Electric
Company v. Intermediate Appellate Court, G.R. No. 71393, June
28, 1989).
In this case, Monterola, as found by the respondent
appellate court as well as the lower court, never categorically
claimed ownership over the property in question, much less his
possession thereof en concepto de dueño. Accordingly, he could
not have acquired said property by acquisitive prescription.
nine (49) years, and where, thereafter, the petitioner filed a case to
recover the property contending that the donation is invalid, the
Supreme Court, despite the fact the property was registered, rejected
the assertion of imprescriptibility of registered property and decided
against the petitioner on the ground that it was guilty of laches. The
Supreme Court pertinently ruled:
The time honored rule (on laches) anchored on public policy
is that relief will be denied to a litigant whose claim or demand
has become “stale” or who has acquiesced for an unreasonable
length of time, or who has not been vigilant or who has slept on
his right either by negligence, folly or inattention. In other words,
public policy requires, for the peace of society, the discourage-
ment of claims grown stale for non-assertion; thus laches is an
impediment to the assertion or enforcement of a right which has
become, under the circumstances, inequitable or unfair to permit.
xxx xxx xxx
In this case, the petitioner filed its complaint in court only
after forty-nine (49) years had lapsed since the donation in its
behalf of the subject property to private respondent’s prede-
cessor-in-interest. There is nary an explanation for the long delay
in the filing by petitioner of the complaint in the case at bench,
and that inaction for an unreasonable and unexplained length of
time constitutes laches. As such, petitioner cannot claim nullity
of the donation as an excuse to avoid the consequences of its own
unjustified inaction and as a basis for the assertion of a right on
which they had slept for so long.
xxx xxx xxx
Finally, we agree with the respondent Court of Appeals
that, while petitioner is admittedly still the registered owner
of the donated property, and jurisprudence is settled as to the
imprescriptibility and indefeasibility of a Torrens Title, there is
equally an abundance of cases in the annals of our jurisprudence
where we categorically ruled that a registered landowner may
lose his right to recover the possession of his registered property
by reason of laches.
15
G.R. No. 112549, November 14, 1996, 76 SCAD 148.
arts. 1127-1128 PresCriPtiOn 29
Prescription of Ownership and Other
Real Rights
Court ruled that knowingly using a forged document to base one’s just
title for purposes of acquisitive prescription is an act of bad faith, thus:
With respect to the second assignment of error, petitioners
contend that even assuming that there was forgery, they have
become absolute owners of the subject property by virtue of
acquisitive prescription citing Articles 1117 and 1134 of the Civil
Code as follows:
“Art. 1117. Acquisitive prescription of dominion and other
real rights may be ordinary or extraordinary.
Ordinary acquisitive prescription requires possession of
things in good faith and with just title for the time fixed by law.
17
G.R. No. L-110207, July 11, 1996, 72 SCAD 126, 258 SCRA 651.
arts. 1127-1128 PresCriPtiOn 31
Prescription of Ownership and Other
Real Rights
action by SOFIA. From the date of the filing of the Affidavit for
Consolidation of Ownership by ZACARIAS with the Register
of Deeds on August 23, 1945 up to the date of the filing of the
complaint by SOFIA on June 18, 1956, or for almost eleven (11)
years, ZACARIAS enjoyed an uninterrupted, adverse, public and
peaceful possession of the litigated property in the concept of
owner, which under Article 1134 of the Civil Code ripened into
ownership by ordinary prescription through possession of at least
ten years. Contrary to SOFIA’s claim, the period of prescription
should be reckoned not merely from the time when she allegedly
came to know of the claim of ownership of ZACARIAS during the
cadastral survey in 1955, but from the date of registration of the
Affidavit for Consolidation with the Register of Deeds because
registration of an instrument in the Office of the Register of Deeds
constitutes constructive notice to the whole world.
18
G.R. No. L-27547, March 31, 1980, 96 SCRA 680.
arts. 1129-1131 PresCriPtiOn 33
Prescription of Ownership and Other
Real Rights
22
G.R. No. 90356, March 18, 1991, 195 SCRA 355.
art. 1132 PresCriPtiOn 35
Prescription of Ownership and Other
Real Rights
The law likewise provides that, with regard to the right of the
owner to recover personal property lost or of which he has been
illegally deprived, as well as with respect to movables acquired in a
public sale, fair or market, or from a merchant’s store the provisions
of Articles 559 and 1505 of this Code shall be observed.
Article 559. The possession of movable property acquired
in good faith is equivalent to a title. Nevertheless, one who has
lost any movable or has been unlawfully deprived thereof, may
recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has
been unlawfully deprived, has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the
price paid therefor.
Article 1505. Subject to the provisions of this Title, where
goods are sold by a person who is not the owner thereof, and
who does not sell them under authority or with the consent of
the owner, the buyer acquires no better title to the goods than
the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller’s authority to sell.
Nothing in this Title, however, shall affect:
(1) The provisions of any factors’ acts, recording laws, or any
other provisions of law enabling the apparent owner of goods
to dispose of them as if he were the true owner thereof;
(2) The validity of any contract of sale under statutory power of
sale or under the order of a court of competent jurisdiction;
(3) Purchases made in a merchant’s store, or in fairs, or
markets, in accordance with the Code of Commerce and
special laws.
During
23
wartime
Atilano vs. where
Atilano, G.R. No. the civilMay
L-22487, courts are 28
21, 1969, closed, there is no
SCRA 231.
way by which any person claiming title over a certain property can
arts. 1135-1137 PresCriPtiOn 37
Prescription of Ownership and Other
Real Rights
file a case to recover the same from the person in adverse possession
of the property. Hence, the possession of the adverse claimant during
that time shall not be counted. However, it must be observed that
the civil courts must be closed. Therefore, even if there is war but the
civil courts are functioning, the possession of the adverse claimant
may be counted in his favor.
The first rule provides that the present possessor may complete
the period necessary for prescription by tacking his possession to that
of his grantor or predecessor in interest. The words “grantor” and
“predecessor in interest” connote a transfer in a manner provided by
law of property from one person to another. Thus, if A donated to B
a property which was previously in the possession of B for 8 years, A
can make use of the said 8 years for purposes of prescription. Hence,
if A already was in possession of the property for three years, the
period of his possession may be considered to have been for 11 years
already. For purposes of ordinary acquisitive prescription, he has
already complied with the statutory period. Also, in South City Homes,
Inc. vs. Republic,26 where a possessor of a strip of land designated as
Lot No. 5005 claimed the same despite the fact that such land was
not transferred to him when he bought two adjacent lands, Lot No.
2381 and Lot No. 2386-A, and where he claimed that his possession
should be tacked in with the possession of the previous possessors,
the Supreme Court rejected such contention and said:
But the more telling consideration, as the Court sees it,
is this. By the testimony of the two witnesses, the petitioner
obviously meant to tack the possession of the two lots by the
previous owners to its own possession. There was no need for
this because the petitioner acquired ownership of Lot No. 2381 by
assignment and Lot No. 2386-A by purchase; and such ownership
includes the right of possession. The petitioner is not claiming
prescriptive rights to these two lots, which have previously been
registered in the name of the transferors. The lot he is claiming
by prescription is Lot No. 5005, which he did not acquire from
the owner of the two other lots, or from any previous private
registered owner of the lot, as there was none.
Neither of the owners of Lots No. 2381 nor 2386-A, in their
respective deeds, transferred Lot No. 5005 to the petitioner; as
already explained, Lot No. 5005 was not part of either of the two
lots. The petitioner merely occupied the disputed strip of land
believing it to be included in the two lots it had acquired from Koo
Jun Eng and the Garcia spouses. However, even if it be conceded
that the previous owners of the other two lots possessed the
art. 1138 PresCriPtiOn 41
Prescription of Ownership and Other
Real Rights
Chapter 3
PRESCRIPTION OF ACTIONS
The law fixes the time within which an action may be filed. If the
period prescribed by law lapses, the action cannot be filed anymore.
The set of provisions dealing with prescription of actions is known
as the Statute of Limitations.
1
G.R. No. 90356, March 18, 1991, 195 SCRA 355.
44
art. 1140 PresCriPtiOn 45
Prescription of Actions
5
Gallar vs. Husain, G.R. No. L-20954, May 24 1967, 20 SCRA 186.
6
Gerona vs. De Guzman, G.R. No. L-19060, May 26, 1964, 11 SCRA 153.
7
Bueno vs. Reyes, G.R. No. L-22587, April 28, 1969, 27 SCRA 1179.
8
Lim Tay vs. Court of Appeals, G.R. No. 126891, August 5, 1998, 97 SCAD 103,
293 SCRA 634.
9
G.R. No. L-44616, June 29, 1985, 137 SCRA 314.
50 ObligatiOns and COntraCts art. 1144
Text and Cases
11
Article 2142 of the 1950 Civil Code.
12
Article 2154 of the 1950 Civil Code.
13
G.R. No. L-21853, February 26, 1968, 22 SCRA 755.
14
G.R. No. L-17447, April 30, 1963, 7 Phil. 970.
52 ObligatiOns and COntraCts art. 1146
Text and Cases
Article 1149. All other actions whose periods are not fixed
in this Code or in other laws must be brought within five years
from the time the right of action accrues. (n)
Article 1150. The time for prescription for all kinds of
actions, when there is no special provision which ordains
otherwise, shall be counted from the day they may be brought.
(1969)
principle that the moment the breach of right or duty occurs, the
right of action accrues and the action from that moment can be
legally instituted (Soriano vs. Sternberg, 41 Phil. 210).
The respondent Court of Appeals, on the other hand, is of
the opinion that the period of prescription should be four (4) years,
since it appears to be an action based on quasi-delict. Whatever
the period, it cannot be denied that the action has long prescribed
whether the cause accrued on April 21, 1945 when the petitioner
and Arturo Tolentino got married, or on August 30, 1950, when
the present Civil Code took effect, or in 1951 when Constancia
Tolentino came to know of the fact that Consuelo David was
still using the surname Tolentino. It is the legal possibility of
bringing the action which determines the starting point for
the computation of the period of prescription (Espanol v. Phil.
Veterans Administration, 137 SCRA 314).
The petitioner should have brought legal action immediately
against the private respondent after she gained knowledge of
the use by the private respondent of the surname of her former
husband. The action was brought only in November 23, 1971 with
only verbal demands in between and an action to reconstitute the
divorce case. The petitioner should have filed her complaint at
once when it became evident that the private respondent would
not accede to her demands instead of waiting for twenty (20)
years.
As aptly stated by the Court of Appeals, “where the plaintiff
fails to go to the court within the prescriptive period, he loses his
cause, but not because the defendant had acquired ownership by
adverse possession over his name but because the plaintiff’s cause
of action had lapsed thru the statute of limitations.”
It is only when the judgment becomes final that the same can
be effectively enforced. Hence, the prescriptive period is not counted
from the time the judgment was rendered but from the time it became
final.24 In Philippine National Bank vs. Bondoc,25 the Supreme Court
stated that “the purpose of the revival of judgment is to give a creditor
a new right of enforcement from the date of revival” and “the rule
seeks to protect judgment creditors from wily and unscrupulous
debtors who, in order to evade attachment and execution, cunningly
58 ObligatiOns and COntraCts art. 1153
Text and Cases
conceal their assets and wait until the statute of limitations set in.”
27
G.R. No. L-97218, May 17, 1993, 222 SCRA 125.
60 ObligatiOns and COntraCts art. 1154
Text and Cases
28
G.R. No. 90365, March 18, 1991, 195 SCRA 355.
art. 1154 PresCriPtiOn 61
Prescription of Actions
29
G.R. No. L-106646, June 30, 1993, 42 SCAD 975, 224 SCRA 175.
art. 1155 PresCriPtiOn 63
Prescription of Actions
In Cabrera vs. Tiano30 where the sale of the real property was
made on July 2, 1947 and where the action was filed on June 20, 1957
66 ObligatiOns and COntraCts art. 1155
Text and Cases
but the summons to the defendant was only served to him on July 2,
1957, the Supreme Court rejected the contention that the action had
already prescribed to wit:
When the sale of the property took place on July 2, 1947,
the ten (10)-year period within which to file the action had not
yet elapsed on June 20, 1957, when the complaint was presented.
While it is true that the sale in question had taken place before
the effectivity of the new Civil Code and the law then on matter
of prescription was Act No. 190, said law, however, contained no
specific provision on the interruption of the prescriptive period;
and the established rule then, as it is the rule now, is that the
commencement of the suit prior to the expiration of the appli-
cable limitation period, interrupts the running of the statute, as
to all parties to the action (34 Am. Jur., Sec. 247, pp. 202-203;
Peralta, et al. vs. Alipio, G.R. No. L-8273, Oct. 24, 1955). The fact
that summons was only served on defendant on July 2, 1957,
which incidentally and/or coincidentally was the end of the ten
(10)-year period, is of no moment, since civil actions are deemed
commenced from the date of the filing and docketing of the
complaint with the Clerk of Court, without taking into account
the issuance and service of summons (Sotelo vs. Dizon, et al., 67
Phil. 573). The contention that the period was not interrupted
until after defendant received the summons is, therefore, without
legal basis.
30
G.R. No. L-17299, July 31, 1963, 8 SCRA 542.
art. 1155 PresCriPtiOn 67
Prescription of Actions
prescription.
31
G.R. No. L-43235, December 20, 1989, 180 SCRA 353.
32
G.R. No. L-24997, July 18, 1968, 24 SCRA 63.
33
G.R. No. L-22072, August 30, 1967, 20 SCRA 1146.
68 ObligatiOns and COntraCts
Text and Cases
BOOK IV
OBLIGATIONS AND CONTRACTS
Title I. — OBLIGATIONS
Chapter 1
GENERAL PROVISIONS
68
art. 1158 ObligatiOns 69
General Provisions
(2) Contracts;
(3) Quasi-Contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)
3
Sagrado Orden vs. Nacoco, G.R. No. L-3756, June 30, 1952, 91 Phil. 503; Navales
vs. Rios, G.R. No. 3489, September 7, 1907, 8 Phil. 508.
4
Article 1423 of the 1950 Civil Code.
5
Article 195 of Executive Order No. 209 which took effect on August 3, 1988.
6
Lakas ng Manggagawang Makabayan (LMM) vs. Abiera, G.R. No. L-29474,
70 ObligatiOns and COntraCts art. 1159
Text and Cases
the injured party, the written express consent of the insurer was first
to be obtained. The Supreme Court, in ruling that the lower court
could not change the import or extent of the liability of the insurer
as indicated in the insurance contract, stated, thus:
Clearly, the fundamental principle that contracts are
respected as the law between the contracting parties finds
application in this case. Thus, it was error on the part of the trial
and appellate courts to have disregarded the stipulations of the
parties and to have substituted their own interpretation of the
insurance policy. In Philippine American and General Insurance
Co., Inc. vs. Mutuc, we ruled that contracts which are the private
laws of the contracting parties should be fulfilled according to
the literal sense of their stipulations, if their terms are clear and
leave no room for doubt as to the intention of the contracting
parties, for contracts are obligatory, no matter what form they
may be, whenever the essential requirements for their validity
are present.
Chapter 2
NATURE AND EFFECT OF OBLIGATIONS
This article involves the prestation “to give.” The word “some-
thing” connotes a determinate object which is definite, known, and
has already been distinctly decided and particularly specified as the
matter to be given from among the same things belonging to the
same kind. Hence, for example, if the object is a computer, it does not
involve any kind of computer but a very particular computer such as
the computer with serial number 7777. Once the determinate thing
becomes the specified object of the prestation, the person who has the
duty to give, must take care of it in order that it can be delivered to
the recipient in good condition. The phrase characterising the kind of
diligence required in the situation is “the proper diligence of a good
father of a family.” The reference point is “the father” because it is
a commonly-accepted notion that a father will always do everything
to take care of his concerns. If the law or contract does not state
the diligence which is supposed to be observed in the performance
of an obligation, that which is expected of a good father of a family
is required.1 The law, however, states that the kind of diligence
required can vary if either “the law or the stipulation of the parties
requires another standard of care.” In case of a contrary stipulation
of the parties, such stipulation should not be one contemplating a
relinquishment or waiver of the most ordinary diligence.
An example where the law requires another standard of care is
that which involves common carriers. Common carriers are persons,
corporations, firms or associations engaged in the business of carrying
or transporting passengers or goods or both, by land, water, or air,
for compensation, offering their services to the public.2 Common
1
Article 1173 of the 1950 Civil Code.
75
76 ObligatiOns and COntraCts art. 1164
Text and Cases
carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance
over the goods and for the safety of the passengers transported by
them, according to all the circumstances of each case.3
This article involves the prestation “to give.” After the right to
deliver the object of the prestation has arisen in favor of the creditor
but prior to the delivery of the same, there is no real right enforceable
or binding against the whole world over the object and its fruits in
favor of the person to whom the same should be given. The acquisition
of a real right means that such right can be enforceable against the
whole world and will prejudice anybody claiming the same object of
the prestation. The real right only accrues when the thing or object
of the prestation is delivered to the creditor.
He only has a personal right over the same if it is enforceable
only against the debtor who is under an obligation to give. This means
that the personal right of the creditor can be defeated by a third person
in good faith who has innocently acquired the property prior to the
scheduled delivery regardless of whether or not such third person
acquired the property after the right to the delivery of the thing has
accrued in favor of the creditor. In this case, however, the aggrieved
creditor can go against the debtor for damages as the debtor should
have known that the fruits should have been delivered to the creditor
alone.
A personal right is the power of one person to demand
of another, as a definite passive subject, the fulfillment of a
prestation to give, to do, or not to do. On the other hand, a real
right is the power belonging to a person over a specific thing,
without a passive subject individually determined, against whom
such right may be personally exercised.4
only on April 1, 1990, A can nevertheless ask that the fruits accruing
since March 1, 1990 be likewise delivered to him. X cannot resist by
saying that he is entitled to the fruits before the actual delivery on
April 1, 1990. If, however, X sells the fruits on March 20, 1990 to
B who does not know the previous sale to A and who immediately
takes possession of the fruits, B shall have a better right over the
said fruits. Considering that there is no delivery of the property to A
on March 20, 1990, A has no real right over the said property at that
time binding upon the whole world. A’s remedy is to seek damages
from X in connection with the fruits. If however, the mango orchard
has already been delivered, A already has a real right binding upon
the whole world. If X sells to B the fruits after delivery to A, A can
recover from B who in turn can seek damages from X.
This provision involves the prestation “to give.” The object of the
prestation can either be determinate or generic. A generic object can
be any object belonging to the same kind. In the event that there is
non-delivery of a generic thing, the creditor may have it accomplished
or delivered in any reasonable and legal way charging all expenses in
connection with such fulfillment to the debtor. The creditor can ask
a third party to deliver the same thing of the same kind with all the
expenses charged to the debtor.
In case of non-delivery of a determinate thing, the remedy is to
file an action to compel the debtor to make the delivery. This action
is called specific performance. If the debtor is guilty of fraud,
negligence, delay or contravention in the performance of the
obligation, the creditor can likewise seek damages against the debtor.5
A fortuitous event is an event which “could not be foreseen, or
which though foreseen, were inevitable.”6 As a general rule, a debtor
is relieved from his obligation “to give” if the object of such prestation
is lost through a fortuitous event. The last paragraph of Article 1165
78 ObligatiOns and COntraCts arts. 1166-1168
Text and Cases
however provides that a fortuitous event will not excuse the obligor
from his obligation in two cases namely: 1) if the obligor delays; and
2) if he has promised to deliver the same thing to two or more persons
who do not have the same interest. In both cases, the obligor will be
liable for damages or will be bound to replace the lost object of the
prestation in cases when the obligee agrees to the replacement.
This article still deals with the prestation “to give.” The principal
always includes it accessories and accessions which the law likewise
gives to the creditor as part of what he should receive.
The articles deal with the obligations “to do” and “not to do.”
The creditor can ask any third person to perform the obligation due
from the debtor should the latter fail to do the same. The debtor
will be liable for all expenses in connection with the performance or
fulfillment of the obligation undertaken by the third person. The words
“at his cost” imply both the right to have somebody else perform the
obligation and the right to charge the expenses thereof to the debtor.
With respect to the situation wherein the debtor poorly
undertook the obligation, the creditor has the right to have everything
be undone at the expense of the debtor. The reason for this rule is
to prevent the debtor from taking his obligation lightly. He must
exercise due diligence and prudence to see to it that the prestation
is properly performed. In case the prestation is for the debtor not to
do a particular act or service and he nevertheless performs it, it shall
likewise be undone at his own expense.
6
Article 1174 of the 1950 Civil Code.
7
G.R. No. 27454, April 30, 1970, 32 SCRA 547.
arts. 1167-1168 ObligatiOns 79
Nature and Effect of Obligations
debtor in default upon his failure to pay on the particular date. Also,
the law expressly declares that taxes to be paid to the government
should be paid on a particular date. Taxes, being the chief source
of revenue for the Government to keep it running, must be paid
immediately and without delay.17
The second case when demand is not necessary is when time is
of the essence in a particular contract. Delay constitutes a material
breach of the contract where time is of the essence.18 In stock market
transactions made in the stock exchange, time is of the essence such
that there is no need of demand before the delivery of the shares of
stock ought to be made by the seller. Also, if a contract stipulates that
a particular and special car is to be delivered to the obligee to be used
specially and solely for a particular parade at a particular time, such
as an exhibit in a one-day car fair to be held on a particular date,
there is no need for demand because the manufacturer of the said
car knows that had it not been for the time when the car would be
exhibited, the obligee would not have ordered the special car. In the
case of Barzaga vs. Court of Appeals19 where a contract was entered
into for the delivery of materials on December 22, 1990 in time for
the construction of a niche of the aggrieved party’s wife who expressly
wished that she be buried before Christmas day, and where, despite
knowing this timetable and having been paid for the materials,
the supplier failed to make the delivery despite pleas and earnest
follow-ups by the widower, the Supreme Court ruled that time is of
the essence of such contract and the supplier should be liable for the
delay and the breach, thus:
The appellate court appears to have belittled petitioner’s
submission that under the prevailing circumstances time was
of the essence in the delivery of the materials to the grave site.
However, we find petitioner’s assertion to be anchored on solid
ground. The niche had to be constructed at the very least on the
twenty-second of December considering that it would take about
two (2) days to finish the job if the interment was to take place
on the twenty-fourth of the month. Respondent’s delay in the
delivery of the construction materials wasted so much time that
construction of the tomb could start only on the twenty-third. It
could not be ready for the scheduled burial of petitioner’s wife.
This undoubtedly prolonged the wake, in addition to the fact that
work at the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal
19
G.R. No. 115129, February 12, 1997, 79 SCAD 378.
20
Article 1198 of the 1950 Civil Code.
21
Vermen Realty Development vs. Court of Appeals, G.R. No. 101762, July 6,
1993, 43 SCAD 369, 224 SCRA 549.
84 ObligatiOns and COntraCts art. 1169
Text and Cases
30
G.R. No. 115129, February 12, 1997, 79 SCAD 378.
31
Corliss vs. Manila Railroad Company, G.R. No. L-21291, March 28, 1969, 27
SCRA 674.
32
Id.
88 ObligatiOns and COntraCts art. 1170
Text and Cases
The law likewise provides that when negligence shows bad faith,
the provisions of Articles 1171 and 2201, paragraph 2, shall apply.
In Samson vs. Court of Appeals,36 the Supreme Court, in discussing
bad faith, said:
Bad faith is essentially a state of mind affirmatively
operating with furtive design or with some motive of ill-will. It
does not simply connote bad judgment or negligence. It imports a
dishonest purpose or some moral obliquity and conscious doing of
wrong. Bad faith is thus synonymous with fraud and involves a
design to mislead or deceive another, not prompted by an honest
mistake as to one’s rights or duties, but by some interested or
sinister motive.
The general rule is that “no one should be held to account for
fortuitous cases”37 which are those situations that could not be fore-
seen, or which though foreseen, were inevitable. An act of God has
been defined as an accident, due directly and exclusively to natural
causes without human intervention, which by no amount of foresight,
pains or care, reasonably to have been expected, could have been
prevented.38 In Nakpil vs. Court of Appeals,39 the Supreme Court again
reiterated the elements for an event to be considered fortuitous, to
37
Lawyers Cooperative Publishing Company vs. Tabora, G.R. No. L-21263, 13
SCRA 762; Dioquino vs. Laureano, G.R. No. L-25906, May 28, 1970; Crame Sy Panco
vs. Gonzaga, 10 Phil. 646; Keep vs. Chan Gioco, 14 Phil. 5 (1909); Novo & Co. vs.
92 ObligatiOns and COntraCts art. 1174
Text and Cases
wit:
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 either be unforeseeable 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.40
Thus, if upon the happening of a fortuitous event or an act
of God, there concurs a corresponding fraud, negligence, delay
or violation or contravention in any manner of the tenor of the
obligation as provided for in Article 1170 of the Civil Code, which
results in damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly
requires that the act must be one occasioned exclusively by the
violence of nature and all human agencies are to be excluded
from creating or entering into the cause of the mischief. When
the effect, the cause of which is to be considered, is found to
be in part the result of the participation of man, whether it be
from active intervention or neglect, or failure to act, the whole
occurrence is thereby humanized, as it were, and removed from
the rules applicable to the acts of God.41
Thus it has been held that when the negligence of a person
concurs with an act of God in producing a loss, such person is
not exempt from liability by showing that the immediate cause
of the damage was the act of God. To be exempt from liability for
loss because of an act of God, he must be free from any previous
negligence or misconduct by which that loss or damage may have
been occasioned.42
The law can provide that, even if there is a fortuitous event, the
obligor can still be liable. An example of this is the third para-graph of
Article 1165 which provides that if the obligor delays, or has promised
to deliver the same thing to two or more persons who do not have
the same interest, he shall be responsible for any fortuitous event
until he has effected delivery. Also, Article 1268 provides that when
the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price,
whatever may be the cause for the loss, unless the thing having been
offered by him to the person who should receive it, the latter refused
without justification to accept it. Article 552 of Book II on property
of the Civil Code pertinently provides that a possessor in bad faith
shall be liable for deterioration or loss in every case, even if caused
by a fortuitous event. In the liquidation of the conjugal partnership of
gains, Article 129(6) of the Family Code of the Philippines49 likewise
provides that, unless the owner had been indemnified from whatever
source, the loss or deterioration of movables used for the benefit of
the family, belonging to either spouse, even due to fortuitous event,
shall be paid to said spouse from the conjugal funds, if any.
Article 1935 of the 1950 Civil Code provides that a bailee in commodatum is
50
one who acquires the use of the thing loaned but not its fruits; if any compensation is
art. 1174 ObligatiOns 97
Nature and Effect of Obligations
force majeure or government order loses the thing and receives money
or another thing in its place, he shall deliver the sum or other thing
to the depositor.
When the parties declare that they shall be liable even for loss
due to a fortuitous event, they shall be so liable. An example would
be a contract providing that the obligor shall, within 10 days, deliver
a particular transistor with serial number 1234 and shall be liable
even if the transistor shall be destroyed by an Act of God for the value
of the same.
When the nature of the obligation requires the assumption of
risk, the person obliged to perform the obligation shall likewise not
be excused should a fortuitous event occur. In Republic vs. Luzon
Stevedoring,51 by a towed barge, which usually traversed the Pasig
river passing the Nagtahan bridge, rammed against one of the wooden
piles of the bridge, smashing the posts and causing the bridge to list.
The accident occurred at a time when the river was swollen and the
current swift on account of heavy downpour in Manila. The barge
owner contended that it should not be held liable for the damage on
the bridge as such damage was caused by fortuitous event or force
majeure. The Supreme Court rejected such contention by ruling, thus:
The appellant stresses the precautions taken by it on the
day in question: that it assigned two of its most powerful tug-
boats to tow down river its barge L-1892; that it assigned to the
task the more competent and experienced among its patrons,
had the towlines, engines and equipment double-checked and
inspected; that it instructed its patrons to take extra precautions;
and concludes that it had done all it was called to do, and that
the accident, therefore, should be held due to force majeure or
fortuitous event.
These very precautions, however, completely destroy the
appellant’s defense. For caso fortuito or force majeure (which in
law are identical in so far as they exempt an obligor from liabi-
lity) by definition, are extraordinary events not foreseeable or
avoidable, events that could not be foreseen, or which, though
foreseen, were inevitable (Article 1174, Civil Code of the Philip-
pines). It is therefore not enough that the event should not have
been foreseen or anticipated, as is commonly believed, but it must
be one impossible to foresee or to avoid. The mere difficulty to
to be paid by him who acquires the use, the contract ceases to be a commodatum.
51
G.R. No. L-21749, September 29, 1967, 21 SCRA 279.
52
G.R. No. L-16477, May 31, 1961, 2 SCRA 549.
53
Adorable vs. Court of Appeals, G.R. No. 119466, November 25, 1999, 116 SCAD
98 ObligatiOns and COntraCts art. 1174
Text and Cases
55
Artales vs. Urbi, G.R. No. L-29421, January 30, 1971, 37 SCRA 395.
102 ObligatiOns and COntraCts art. 1178
Text and Cases
103
Chapter 3
DIFFERENT KINDS OF OBLIGATIONS
SECTION 1. — Pure and Conditional Obligations
refund the money. However, if the purchaser does not do anything and
once the government comes up with a law disallowing such a refund,
then the obligation to refund on the part of the seller is extinguished.
Also, it has been likewise held by the Supreme Court that, in case a
contract involves a reciprocal obliga-tion, the obligation of one is a
resolutory condition of the obligation of the other, the non-fulfillment
of which entitles the other party to rescind the contract.5 Likewise,
when a person donates land to another on the condition that the
latter would build upon the land a school, the condition im-posed
was not a condition precedent or a suspensive condition but a
resolutory one. 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, other-wise, it
would be invading the property rights of the donor. The donation
had to be valid before the fulfillment of the condition. If there
was no fulfillment or compliance with the condition, x x x the
donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.6
Rotterdam, Inc. vs. River Brand Ice Mills, Inc., 259 F.2d 137 (2nd Cir. 1958), certiorari
denied 358 U.S. 946, 79 S.Ct. 352, 3 L. Ed.2d 352 (1959); Ross vs. Harding, 64 Wn.2d
108 ObligatiOns and COntraCts arts. 1180-1181
Text and Cases
231, 391 P.2d 398, 261 P.2d 394 (1953); Restatement, Contracts 250(a).
17
Id., Page 439.
art. 1182 ObligatiOns 109
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
In this Lao Lim case, it must be observed that the birth of the
new lease contract (the renewed lease) also depends upon the sole
will of the lessee. Hence, according to Article 1308, this is likewise
prohibited and may make the whole contract invalid. However, if the
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.20 Thus, in Trillana vs. Quezon College,21 where the full
payment of the shares in a certain school was to be made only after
the obligor had harvested fish (“babayaran kong lahat pagkatapos na
ako ay makapaghuli ng isda”), the Supreme Court likewise held that
the condition was solely dependent on obligor and therefore void.
Moreover, it was a condition imposed upon the birth or creation of
the obligation, in that the obligation to pay would only arise or exist
after harvesting of fish, thereby voiding not only the condition but
also the whole obligation. This was a suspensive condition facultative
as to the debtor22 contemplated in Article 1182.
However, a condition at once facultative and resolutory may be
valid even though the condition is made to depend upon the will of the
obligor.23 For example, if a person promises to put in the possession
of his friend a house while he (the giver) is abroad but requires that
the house be returned to his possession in the event that he returns
to the Philippines, the condition is valid as it is resolutory in nature.
When the potestative condition is imposed on the fulfillment of
the obligation, the condition alone is voided but not the obligation. This
can be seen in the case of Osmeña vs. Ramos,24 where the Supreme
Court held that, in the following provision of a promissory note, the
potestative condition is void but the whole obligation to pay still
subsists:25
On this date, I hereby promise, in the presence of two
214 SCRA 665.
24
G.R. No. 4437, September 9, 1909, 14 Phil. 99.
25
This was the explanation given when this case was compared by the Supreme
Court with the case of Trillana vs. Quezon Colleges, 93 Phil. 383 in the latter case.
26
G.R. No. 117009, October 11, 1995, 64 SCAD 962.
27
G.R. No. L-4433, May 29, 1953, 93 Phil. 218; See also Angeles vs. Court of
art. 1182 ObligatiOns 111
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
In the event that the condition is declared void but the obligation
is still valid, should the obligation be declared pure and uncondi-
tional? This is the exact query answered in the negative by the
Supreme Court in Patente vs. Omega.27 In the said case, the Supreme
Court ruled that, in converting it into a pure and demandable
obligation, an arrangement might be enforced which is not within
the contemplation of the parties. Hence, according to the Supreme
Court, the best solution is to consider the parties as having intended
a period within which the valid obligation is to be complied such that
the creditor should ask the court to fix a period for compliance.
Mixed obligations are those which depend not only upon the
will of the debtor but also upon chance and some other factors.28 In
Romero vs. Court of Appeals29 where the contract stipulates that the
downpayment made by the buyer to the seller regarding the sale of
a property shall be returned in the event that the seller “shall not
be able to remove the squatters from the property” within 60 days
from the execution of the contract, the Supreme Court held that such
provision is not a potestative void condition
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.
31
G.R. No. L-58286, May 16, 1983, 122 SCRA 280.
32
Taylor vs. Uy Tieng Piao and Tan Liuan, 43 Phil. 873.
33
Ibid.
34
G.R. No. 96053, March 3, 1993, 219 SCRA 480; see also Coronel vs. Court of
Appeals, G.R. No. 103577, October 7, 1996, 75 SCAD 141.
art. 1183 ObligatiOns 113
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
Article 1185. The condition that some event will not happen
at a determinate time shall render the obligation effective from
the moment the time indicated has elapsed, or if it has become
evident that the event cannot occur.
If no time has been fixed, the condition shall be deemed
fulfilled at such time as may have probably been contemplated,
bearing in mind the nature of the obligation. (1118)
parties, the fruits and interests during the pendency of the condition
shall be deemed to have been mutually compensated. Hence, if Juan
promises to give a mango orchard to Pedro, on the one hand, and Pedro
promises to give Juan P50,000 and both obligations shall take effect
only if it rains on the first Saturday of June, any fruit of the mango
orchard and any interest on the money shall mutually compensate
each other. Hence, Juan will not get the interest on the money, and
Pedro will not get the fruits of the orchard once the condition is
fulfilled, even though technically their right to the fruits and interest
retroacts to the date the obligation has been constituted.
In obligations to do and not to do, the courts shall determine,
in each case, the retroactive effect of the condition that has been
complied with.
In Tan vs. Court of Appeals,46 where the seller failed to clear the
lot for a few days and failed to cause the cancellation of the mortgage
lien on the property on the date set for the execution of the deed of
sale, despite having already done everything to effect the cancellation,
and where it was the bank which delayed the cancel-lation (which
cancellation nevertheless was effected 12 days after the supposed
date of execution), and where there was also a failure to obtain the
approval of the Secretary of Natural Resources on time, the Supreme
Court rejected the prayer for rescission based on the said failures by
stating:
A thorough review of the records clearly indicates that
private respondents had substantially complied with their
undertaking of clearing the title to the property which has a total
land area of 886 square meters. It must be pointed out that the
subject lot consists of private land, with an area of 548 square
meters, covered by TCT No. T-13826 and of a portion of the public
land which has been awarded to the private respondents under
Townsite Sales Application No. 7-676-A. While TCT No. T-13826
was subject to a mortgage in favor of DBP. Private respondents,
upon receipt of the earnest money paid by petitioner, utilized the
same to settle its obligations with DBP thus enabling them to
secure a cancellation of the existing mortgage, which was duly
noted in the title to the property [See Original Records, p. 94].
It is a settled principle of law that rescission will not be
permitted for a slight or casual breach of the contract but only
for such breaches as are so substantial and fundamental as to
defeat the object of the parties in making the agreement [Uni-
versal Food Corporation vs. Court of Appeals, G.R. No. L-29155,
May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises,
Inc. vs. Natividad, supra; Roque vs. Lapuz, G.R. No. L-32811,
March 31, 1990, 96 SCRA 741]. A court, in determining whether
rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is
substantial depends upon the attendant circumstances [Corpus
vs. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January 17,
1968, 22 SCRA 104].
48
Sonf Fo & Co. vs. Hawaiian-Philippines Co., 47 Phil. 821.
49
Zepeda vs. Court of Appeals, 216 SCRA 293.
50
Tan vs. Court of Appeals, G.R. No. L-80479, July 28, 1989, 175 SCRA 656.
51
Froilan vs. Pan Oriental Shipping Co., G.R. No. L-11897, October 31, 1964.
52
Areola vs. Court of Appeals, G.R. No. 95641, September 22, 1994, 55 SCAD
478, 236 SCRA 643.
124 ObligatiOns and COntraCts art. 1191
Text and Cases
private respondents since 1972 and all the requirements of the law
for the purchase of public land were subsequently complied with,
private respondents, as owners of said property, can properly
convey title thereto to petitioner.
The injured party may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible. In Ayson
Simon vs. Adamos,53 the buyer of certain lots filed a case against
the seller for delivery of the same. However, a case was previously
filed by the heirs of the deceased original owner against the seller
for delivery of the same properties to them. The heirs won and the
properties were reconveyed to them. In the other case, the buyer also
won against the seller. However, the delivery of the properties to the
winning buyer had become impossible considering that the properties
were already validly in the possession of the heirs who won in the
previous case. Hence, the buyer filed another suit for rescission and
damages against the seller. The Supreme Court held that the course
of action undertaken by the buyer in filing a rescission case with
damages against the seller was correct as fulfillment of the contract
had become an impossibility in accordance with Article 1191 of the
Civil Code. In Siy vs. Court of Appeals,54 the Supreme Court said that
the law however does not authorize the injured party to rescind the
obligation and at the same time seek its partial fulfillment under
the guise of recovering damages. Thus, in the Siy case, the Supreme
Court disallowed the recovery of penalty charges stipulated in the
contract which was sought to be rescinded.
The power to rescind need not be implied in all cases. It can be
expressly stipulated in the contract. The law does not prohibit parties
from entering into an agreement providing that the violation of the
terms of the contract shall cause the cancellation, termination or
rescission thereof even without court intervention.55 The stipulation
is in the nature of a facultative resolutory condition which in many
cases has been upheld by the courts.56 Also, notice must always be
given to the defaulter before rescission can take effect.57
Also in University of the Philippines vs. De Los Angeles,58 the
Supreme Court made a further explanation of the consequences of
this express unilateral extra-judicial stipulation to rescind, to wit:
Of course, it must be understood that the act of a party
in treating a contract as cancelled or resolved on account of
infractions by the other contracting party must be made known
vs. Pan Oriental Shipping, et al., L-11879, October 31, 1964, 12 SCRA 276; Torralba
vs. De los Angeles, 96 SCRA 69; Luzon Brokerage Co., Inc. vs. Maritime Building Co.,
43 SCRA 93, 86 SCRA 305; Lopez vs. Commissioner of Customs, 37 SCRA 327; UP
vs. De los Angeles, 35 SCRA 102; Ponce Enrile vs. Court of Appeals, 29 SCRA 504;
Taylor vs. Uy Tieng Piao, 43 Phil. 873.
art. 1191 ObligatiOns 127
Different Kinds of Obligations
Sec. 1 — Pure and Conditional Obligations
exercised, the court shall decree the rescission claimed, unless there
be just cause authorizing the fixing of a period. In Roman vs. Court
of Appeals,60 the contract stipulated that the buyer shall pay the
purchase price within 60 days from receipt of the notice that the
properties have already been titled. Notice was accordingly sent on
October 11, 1958. Payment however was not made. An action was
filed for rescission. The buyer claimed that he was not given notice
and prayed for a period within which to pay. The Supreme Court did
not allow the granting of the period by saying thus:
Moreover, there would be no “just cause,” a requirement
in Article 1191, for fixing a period. After institution of the action
against him, what Roman should have done, which he did not do,
was to pay Sarangaya within 60 days after service of summons.
It would not have been just to grant him an extension of more
than six (6) years, from October 11, 1958 to January 9, 1965, to
comply with his 60-day obligation.
Also, in the case of Palay, Inc. vs. Clave64 where the parties
entered into a contract to sell a parcel of land where it was expressly
stipulated that the seller “shall have the right to declare this contract
canceled and of no effect without notice” to the buyer in case the
latter fails to pay his installment, and where the seller did indeed
cancel the contract without notice upon failure of the buyer to pay
the installment, the Supreme Court invalidated the cancellation on
the ground that there was no notice sent to the defaulter informing
him of the termination. Hence, the provision allowing cancellation
“without notice” was disregarded by the Supreme Court. With respect
to the importance of making a notice of cancellation regarding real
estate sold in installment, the Supreme Court in Jison vs. Court of
Appeals65 said:
The indispensability of notice of cancellation to the buyer
was to be later underscored in Republic Act No. 6552 entitled “An
Act to Provide Protection to Buyers of Real Estate on Installment
Payments” which took effect on September 14, 1972, when it
specifically provided:
Sec. 3(b) x x x the actual cancellation of the contract shall
130 ObligatiOns and COntraCts art. 1192
Text and Cases
take place thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value
to the buyer.
132
arts. 1194-1195 ObligatiOns 133
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
Otherwise, the debtor has the right to recover what he has given or
paid with fruits and interest. Hence, if John, on October 1, 1997,
promises to deliver to Jane a Mango orchard on December 1, 1997,
and, on November 1, 1997, John delivers the Mango orchard believing
that it is due and demandable on that date, he can recover what he
has delivered together with fruits and interest. Prior to December
1, 1997, Jane obviously has no right to possess the Mango orchard.
However, if Jane is in the possession of the mango orchard by Decem-
ber 1, 1997, John can only recover the fruits and interest accruing
from the time he delivered the property up to December 1, 1997.
4
Id., Pages 378-379.
5
G.R. No. L-22558, May 31, 1967, 20 SCRA 330.
136 ObligatiOns and COntraCts art. 1197
Text and Cases
G.R. No. 138739, July 6, 2000, 129 SCAD 527, 335 SCRA 288.
6
art. 1197 ObligatiOns 137
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
The very last sentence of Article 1197 states that “once fixed by
the courts, the period cannot be changed by them.” The objective of
this is precisely to put a sense of definiteness in an otherwise highly
ambiguous situation and to finally put the parties in a position where
their obligations are predictable.
Article 1198. The debtor shall lose every right to make use
of the period:
(1) When after the obligation has been contracted, he
becomes insolvent, unless he gives a guaranty or
security for the debt:
(2) When he does not furnish to the creditor the
guaranties or securities which he has promised;
138 ObligatiOns and COntraCts art. 1198
Text and Cases
The law provides five instances when the debtor loses every
right to the period whether the period has been contracted for the
benefit of the debtor alone or of both the debtor and the creditor. The
first one is when after the obligation has been contracted, he becomes
insolvent, unless he gives a guaranty or security for the debt. Hence,
if a debtor has been given up to January 8, 1996 to pay his obligation
and he becomes insolvent, the creditor need not wait up to January
8, 1996 to demand payment. However, if the debtor has asked a third
person to guarantee his debt or if the debtor puts up his house as
collateral for the debt, he will again have the benefit of the period.
Insolvency here need not be judicially declared. By putting up the
guarantee or the collateral, the interest of the creditor is safeguarded
as he will have other means to satisfy his claim.
The second instance is when he does not furnish the creditor
the guaranties or securities which he has promised. The guaranties
and securities will further protect the interest of the creditor. Usually,
in the event the debtor fails to pay the creditor and the latter has
exhausted all avenues to satisfy his claim against the debtor without
any favorable result, the creditor can turn to the guarantor for
payment. If the guarantor has committed himself solidarily, the
creditor can even go against the guarantor immediately without
need of going against the principal debtor. Securities can take
the form of real-estate mortgages or pledges. Hence, if the loan is
collateralized through the mortgage of a house and the debtor does
not pay, the mortgage will be foreclosed, and the house will be sold
in a public bidding and a sufficient amount of the proceeds to satisfy
the indebtedness of the debtor will go to the creditor.
The third instance is when, by his own acts, the debtor impairs
said guaranties or securities after their establishment, and when
through a fortuitous event they disappear, unless he immediately
gives new ones equally satisfactory. In Gaite vs. Fonacier7 where
the payment of the obligation was secured by two surety bonds:
art. 1198 ObligatiOns 139
Different Kinds of Obligations
Sec. 2 — Obligations with a Period
It must be noted that, in this third instance, the debtor loses the
benefit of the period even if the guaranties or securities disappear
through a fortuitous event unless new ones equally satisfactory are
immediately given. Hence, if the house used as collateral is hit by
lightning, the debtor will still lose the right to the period unless he
gives another house of the same quality as collateral.
The fourth instance is when the debtor violates any
undertaking, in consideration of which the creditor agreed to the
period. Thus, if the debtor persuaded the creditor to allow him to pay
his indebtedness on March 7, 1998 instead of on January 30, 1998
7
G.R. No. L-11827, July 31, 1961, 2 SCRA 830.
and the creditor agrees because the debtor, who is a singer, promises
140 ObligatiOns and COntraCts art. 1198
Text and Cases
the creditor that he (the debtor) will sing in his nightclub for three
consecutive nights for only half his talent fee, and the debtor fails to
sing as promised, the debtor loses his right to the period. The creditor
can immediately demand payment of the obligation.
In Allen vs. Province of Albay,8 the Supreme Court ruled that,
if through the act of the owner in a construction contract, the con-
tractor has been or will be prevented from finishing the works on
the contractual completion date, the owner shall be deemed to have
waived the time limit or the period and the contractor is bound only
to finish the construction within a reasonable time, and if there are
liquidated damages provided for in the contract in case of delay,
a claim for such damages cannot be sustained; and neither could
the liquidated damages be restored to be made applicable to an
unreasonable length of time.
The fifth instance is when the debtor attempts to abscond. If
the debtor attempts to flee from his obligations, or to move away to
evade payment of his indebtedness, the debt can be demanded from
him immediately. Otherwise, if the debtor absconds, he may not be
heard of again and the creditor cannot effectively collect his credit.
8
G.R. No. 11433, December 20, 1916, 35 Phil. 826.
141
Under the Civil Code, there are only three prestations namely:
to give, to do and not to do. Strictly speaking therefore, when the
Code speaks of different prestations, it refers only to these three
prestations. Hence, technically speaking, a person who is bound to
give either a house, a car or a truck has only one prestation which
is “to give.” But a person who is obliged to either deliver a house or
to paint a picture has two prestations, namely: “to give” and “to do.”
It appears however that the phrase “different prestations” in the
law refers to both the strict sense and the loose sense of the word
“prestation.”
Partial performance of the different prestations cannot be
considered fulfillment of the obligation and therefore cannot be done
unless the creditor accepts such partial performance as complete
performance. Hence, if the obligor or debtor can either give a house
and a car or paint two murals for the satisfaction of his obligation,
he cannot give the car and one mural. The creditor cannot even be
compelled to accept such kind of satisfaction. It will be considered
an incomplete satisfaction which is not acceptable. The debtor must
make a choice and when he does, it should either be the delivery of
the house and car or the painting of two murals. The obligation will
not be satisfied through partial fulfillment of several prestations.
If all but one of the alternatives become legally impossible to
fulfill, the obligation will cease to be alternative. Thus, in a case where
a loan was payable in Philippine Peso or in United States Dollars, the
alternative obligation ceased to exist when, at the time the amount
became due during the Japanese Occupation, payment in United
States Dollars was prohibited.1
141
142 ObligatiOns and COntraCts arts. 1200-1201
Text and Cases
Article 1202. The debtor shall lose the right of choice when
among the prestations whereby he is alternatively bound, only
arts. 1202-1203 ObligatiOns 143
Different Kinds of Obligations
Sec. 3 — Alternative Obligations
The New Lexicon Webster’s Dictionary of the English Language, 1987 edition,
3
Page 787.
144 ObligatiOns and COntraCts art. 1204
Text and Cases
In this case, the debtor can ask for the rescission of the contract with
damages. If, despite, the act of the creditor, the debtor still wants to
maintain the contract, said debtor can make his selection from the
remaining choices.
It must be pointed out that the debtor will not be liable in any way
for reducing the alternatives from three to two alternatives, provided
what remains are lawful, practicable, possible or consistent with the
object of the obligation. Likewise, the debtor will not even be
liable for converting his alternative obligation to a sim- ple
one where there is only one lawful and possible prestation. The debtor
may even cause the loss of the thing, or render the service impossible.
When the debtor is responsible for losing or rendering impossible
all his alternative prestations, the creditor is entitled to damages.
Hence, if the debtor has the following alternative prestations: to
give a car worth P50,000 or to paint a portrait in a special canvass
worth P25,000, he will be liable for damages to the creditor if he (the
debtor) willfully destroys the car and willfully destroys the special
canvass where the portrait is to be painted, thereby rendering both
alternatives impossible. If the special canvass were first destroyed
and thereafter the car, the damages to be paid to the creditor will be
the value of said car which is P50,000. This is so because, had the car
not been destroyed, the debtor could have delivered the car, being the
only remaining choice. This is pursuant to the law which provides
that the indemnity shall be fixed, taking as a basis the value of the
last thing which disappeared, or that of the service which last become
impossible. Also damages other than the value of the last thing or
service may also be awarded.
2001.
2
Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998, 93 SCAD
209, 288 SCRA 422.
3
Ibid.
148
art. 1207 ObligatiOns 149
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
12
Section 9, Rule 130 of the Rules of Court; Gaw vs. IAC, G.R. No. 70451, March
152 ObligatiOns and COntraCts art. 1207
Text and Cases
are now estopped from claiming any other debtor or creditor. Once the
terms of an agreement have been reduced into writing, it is deemed
to contain all the terms agreed upon by the parties and no evidence
of such terms other than the contents of the written agreement shall
be admissible.12 Accordingly, Mr. M and Mr. N should be treated as
mere witnesses in the promissory note especially because to have
witnesses in a promissory note is usually done in ordinary business
transactions particularly where the creditors are banking institutions
and professional lenders.
However, even if the parties stipulated in their contract that
the obligation of the obligor is joint and solidary but such contract
was superseded by a judicial decision arising from the said contract
between the parties judicially declaring the obligation to be merely
joint, the said decision must be enforced in a joint manner.13 Also, if
a decision does not state that the obligation of the judgment debtors
is solidary, the writ of execution enforcing such a decision cannot be
implemented in a solidary manner among the judgment debtors.14
The law can likewise provide for a solidary nature of the
obligation. Thus, the last paragraphs of Articles 94 and 121 of the
Family Code of the Philippines15 provide that, except for certain
specified exceptions, if the absolute community or conjugal property
is insufficient to cover the liabilities for which the absolute community
of property or the conjugal partnership of gains is liable, the spouses
shall generally be solidarily liable for the unpaid balance with their
separate properties. If the property arrangement of the spouses is the
separation of property regime, Article 145 of the Family Code provides
that the liability of the spouses to creditors for family expenses shall
be solidary. In case of inheritance, Article 927 of the Civil Code
provides that if two or more heirs take possession of the estate (of the
deceased), they shall be solidarily liable for the loss or destruction of
a thing devised or bequeathed, even though only one of them should
have been negligent. Article 1824 of the Civil Code also provides that
all partners are solidarily liable with the partnership for everything
chargeable to the partnership in cases provided in Articles 1822
and 1823 of the Civil Code.16 In Article 1894 of the Civil Code, two
or more agents may agree to bind themselves solidarily and, under
24, 1993, 220 SCRA 405.
13
Oriental Philippines Company vs. Abeto, 60 Phil. 723.
14
Industrial Management International Development Corporation vs. National
Labor Relations Commission, G.R. No. 101723, May 11, 2000, 126 SCAD 283, 331
SCRA 640.
15
Executive Order No. 209 as amended which took effect on August 3, 1988.
16
Article 1822. Where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority of his co-
art. 1207 ObligatiOns 153
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
Article 1895, if solidarity has been agreed upon, each of the agents
is responsible for the non-fulfillment of the agency, and for the fault
or negligence of his fellow agents, except in the latter case when the
fellow agents acted beyond the scope of their authority. With respect
to bailees in commodatum, Article 1945 provides that when there are
two or more bailees to whom a thing is loaned in the same contract,
they are liable solidarily. In the quasi-contract known as negotiorum
gestio, Article 2146 pertinently provides that the responsibility of two
or more officious managers shall be solidary, unless the management
was assumed to save the thing or business from imminent danger.
Article 2157 provides that the responsibilities of two or more payees,
when there is payment of what is not due, is solidary. Article 2194
provides that the responsibility of two or more persons who are liable
for quasi-delict is solidary.
Solidary obligations shall likewise exist if the nature of the
obligation requires it. It has been opined that some provisions in the
Preliminary Title, Chapter 2 on Human Relations of the Civil Code,
particularly Articles 19 to 22,17 though not expressly providing for
solidary liability, nevertheless should give rise to solidary obligations
if violated by two or more persons.18
19
G.R. No. 3128, December 19, 1907, 9 Phil. 381.
20
Article 1224 of the Civil Code.
21
Id.
arts. 1209-1210 ObligatiOns 155
Different Kinds of Obligations
Sec. 4 — Joint and Solidary Obligations
and the debtors may not be bound in the same manner and by
the same periods and conditions. (1140)
as the demand will effectively make the prescriptive period for the
fulfillment of the obligation run anew.
The solidary creditor however should not do anything which
may be prejudicial to the other solidary creditors. For example, if the
solidary obligation has become due and the debtor decides to make
complete payment to one of the solidary creditors, such solidary
creditor must accept payment. Non-acceptance is clearly prejudicial
to the other solidary creditors, as it would lead to a delay or default
on the part of the creditors for which said creditors may be liable.
Also, if one of the solidary creditors remits the obligation in favor of
one of the solidary debtors, the whole obligation is extinguished. This
is prejudicial to the other solidary creditors because they could not
anymore collect from any of the solidary debtors what should be due
them. The fact that these other solidary creditors were prejudiced will
not invalidate the extinguishment of the obligation. Their remedy is
to collect their share of the indebtedness from the solidary creditor
who made the remission. They can likewise ask for damages for what
ever they may have lost as a result of the remission, such as interest
which should have been earned had it not for the remission.
Article 1214. The debtors may pay any one of the solidary
creditors; but if any demand, judicial or extra-judicial, has
been made by one of them, payment should be made to him.
(1142a)
Anyone of the solidary creditors may accept full performance
of the obligation. However, if one of the solidary creditors makes the
demand, whether judicially or extra-judicially, payment must be
made to such solidary creditor. Consequently, once a court case has
been filed by one solidary creditor, the debtor cannot pay the other
solidary creditor who is not included in the case. There are authorities
to the effect that, if payment is made to the other creditors who are
not included in the suit or who did not make a demand, the payment
158 ObligatiOns and COntraCts art. 1214
Text and Cases
24
G.R. No. L-32425, November 21, 1984, 133 SCRA 317.
25
G.R. No. L-22366, October 30, 1969, 29 SCRA 791.
160 ObligatiOns and COntraCts art. 1216
Text and Cases
prejudice the other solidary creditors (namely: E and F), D must pay
each of them P500. This should be the case because the law clearly
provides that the creditor who may have executed any of these acts
of novation, compensation, merger or confusion, as well as he who
collects the debt, shall be liable to the others for the share in the
obligation corresponding to them.
Dimayuga vs. Philippine Commercial Bank, G.R. No. 42542, August 5, 1991,
27
200 SCRA 143; Philippine National Bank vs. Independent Planters Association, Inc.,
162 ObligatiOns and COntraCts art. 1217
Text and Cases
liable for P250 and B shall also be liable for P250. Considering that
A, in effect, initially shouldered C’s obligation of P500 when A paid
the whole obligation in full in favor of D, A can ask reimbursement
of P250 from B.
extinguishes the whole obligation and benefits not only A but also B
and C. A therefore cannot collect P500 each from B and C as he (A)
never paid anything to D. However, if C, after the debt becomes due,
pays the whole indebtedness and A, after such payment made by C,
convinces D to condone the debt, the said condonation or remission
has no effect because by the time the remission was made, D’s credit
has already been extinguished. C can still claim from A, the latter’s
share of the indebtedness.
It must be pointed out that, in so far as Article 1219 is concerned,
it is applicable only when there is one creditor. If there are many
solidary creditors involved, remission of the debt by one of the said
creditors without the consent of the others will constitute an act which
is prejudicial to the other solidary creditors and therefore, according
to Article 1212, cannot be done. If the remission is done, the solidary
creditor who made the remission shall be liable for the share which
the other creditors should receive and also for damages which the
other solidary creditors may suffer as a result of the remission. For
example, if A, B and C are solidary creditors of X in the amount of
P1,500 payable on December 30, 2001 with an interest of 15% per
annum, and B remitted or condoned the debt on April 1, 2001 just
one day after it was incurred, B shall be liable to A in the amount of
P500 and to C in the amount of P500 also plus damages equivalent
to the interest which A and C would have gotten had the obligation
not been condoned and had it been paid on December 30, 2001.
While the whole debt may be collected from one of the solidary
debtors, he can nevertheless pay less than the whole amount of
indebtedness to the creditor in the event that there are defenses he
can set up. He may set up defenses personal to him or to his co-debtor
with respect to the whole obligation or to only a part thereof which
pertains to the respective share(s) of the co-debtor(s) in the obligation.
Also, defenses relative to the nature of the obligation can be set up.
Thus if A, B, and C are indebted to G in the amount of P1,500 but B
shall only pay if he passes the bar examination for lawyers in 1996
and C shall pay only on January 2, 1997, and A when he reaches the
age of 18, and if G sues B in 1996 after he passes the bar, B can set
up the defense that C’s obligation is subject to a period which has
not yet arrived, and also the defense that A’s contract is voidable
considering that he was a minor at the time he (A) contracted the
solidary obligation. If B is successful in claiming said defenses, he
will nevertheless pay the amount of P500 which pertains to his share
because there is no impediment in collecting the same from him.
166 ObligatiOns and COntraCts art. 1222
Text and Cases
167
167
168 ObligatiOns and COntraCts art. 1225
Text and Cases
170
art. 1227 ObligatiOns 171
Different Kinds of Obligations
Sec. 6 — Obligations with a Penal Clause
2
26 Phil. 588.
3
Navarro vs. Mallari, 45 Phil 242.
4
Article 1169 of the Civil Code; SSS vs. Moonwalk, G.R. No. L-73345, April 7,
1993, 221 SCRA 119.
5
Id., Page 127.
172 ObligatiOns and COntraCts art. 1228
Text and Cases
Article 1230. The nullity of the penal clause does not carry
with it that of the principal obligation.
The nullity of the principal obligation carries with it that
of the penal clause.
14
Ibarra vs. Aveyro, 37 Phil. 273.
15
SSS vs. Moonwalk, G.R. No. L-73345, April 7, 1993, 221 SCRA 119.
176 ObligatiOns and COntraCts
Text and Cases
Chapter 4
EXTINGUISHMENT OF OBLIGATIONS
General Provisions
176
art. 1231 ObligatiOns 177
Extinguishment of Obligations
extinguished by the death of the lessor, and therefore, being the new
owners of the property, they can now eject the lessee. In such a case,
death of a party does not excuse non-performance of a contract
which involves a property right, and the rights and obligations
thereunder pass to the personal representatives of the deceased.
Similarly, nonperformance is not excused by the death of the
party when the other party has a property interest in the subject
matter of the contract.1
604.
2
Article 1176 of the 1950 Civil Code.
3
Id.
4
G.R. No. 43503, October 31, 1990, 191 SCRA 50.
179
180 ObligatiOns and COntraCts arts. 1233-1234
Text and Cases
G.R. No. 108630, April 2, 1996, 78 SCAD 37, 256 SCRA 44.
6
art. 1234 ObligatiOns 181
Extinguishment of Obligations
Sec. 1 — Payment or Performance
7
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition,
1987, West Publishing Company, St. Paul Minn., Page 462, citing Mac Pon Co. vs.
Vinsoni Painting & Decorating Co., 423 So.2d 216 (Ala. 1982); E. Martin Schaeffer
vs. Kelton, 95 N.M. 182, 619 P.2d 1226 (1980); Klug & Smith Co. vs. William Sommer
and Richard Gebhardt, 83 Wis. 2d 378, 265 N.W. 2d 269 (1978).
8
Id., Page 463, citing Vencenzi vs. Cerro, 186 Conn. 612, 442 A.2d. 1352, 1354
(1982).
9
G.R. No. 90169, April 7, 1993, 221 SCRA 202.
182 ObligatiOns and COntraCts art. 1234
Text and Cases
The obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee. Thus in
the Pagsibigan11 case, the substantial compliance in the payment of
the loan warranted the cancellation and release of his mortgaged
properties after he was still required to pay some penalties. Also, it has
been held that the difference between the value of the house as
built and the value it would have had had it been constructed strictly
according to the contract was the measure of damages.12 Other cases
state that the defaulting party will be allowed to recover the contract
price less the cost of correction of the defects of the unfinished work.13
In J.M. Tuason & Co., Inc. vs. Javier,14 the Supreme Court upheld
the decision of the lower court in giving the defaulting-purchaser an
extension of time to pay all his obligations to the seller-plaintiff by
applying Article 1234 to the situation of the defaulting purchaser, to
wit:
10
G.R. No. L-42283, March 18, 1985, 135 SCRA 323.
11
G.R No. 90169, April 7, 1993, 221 SCRA 202.
12
John D. Calamari and Joseph M. Perillo, The Law on Contracts, Third Edition,
1987, West Publishing Company, St. Paul, Minn., Page 463 in footnote 75, citing White
vs. Mitchell, 123 Wash. 630, 213 P. 10 (1923); Venzke vs. Magdanz, 243 Wis. 155, 9
N.W.2d 604 (1943).
13
Id., Page 464 in footnote 75, citing Bellizzini vs. Huntley Estates, Inc., N.Y.2d
112, 164 N.Y.S.2d 395, 143 N.E.2d 802 (1957).
art. 1235 ObligatiOns 183
Extinguishment of Obligations
Sec. 1 — Payment or Performance
14
G.R. No. L-28569, February 27, 1970, 31 SCRA 829; See also Legarda Hermanos
vs. Saldana, G.R. No. L-26578, January 28, 1974, 55 SCRA 324.
15
G.R. No. L-23191, December 19, 1967, 21 SCRA 1314.
184 ObligatiOns and COntraCts art. 1235
Text and Cases
September 30, 1971, 41 SCRA 105; Pan Pacific Company vs. Philippine Advertising
Corporation, G.R. No. L-22050, June 13, 1968; Brillo Handicrafts, Inc. vs. Court of
Appeals, 73 SCAD 122, 260 SCRA 383.
186 ObligatiOns and COntraCts arts. 1236-1238
Text and Cases
made without knowledge or against the will of the debtor. Hence, the
following situations can arise:
1) If a third person pays the creditor without the
knowledge or against the will of the debtor, the third person
can only recover from the debtor to the extent that the debtor
has been benefited. As to what is beneficial to the debtor can be
invoked only by such debtor and not the creditor. Whether or not
it is beneficial to the debtor is determined by the law and not the
will of the debtor. The beneficial effects must be determined at the
time the payment was made.18 The third person cannot compel
the creditor to subrogate him in his rights, such as those arising
from a mortgage, guaranty or penalty. Hence, if A is indebted to
B in the amount of P500,000 secured by a real estate mortgage
on the house of A, and X pays B the said indebtedness in the
amount of P500,000 without the knowledge or against the will
of A, X can only recover the amount of P500,000 but he cannot
compel the creditor to transfer the mortgage to him. Hence, in case
A does not pay X, X cannot fore-close on the mortgage to satisfy
his claim. However, if the third party who paid is interested in
the obligation, such as a gua-rantor, surety, or co-debtor, legal
subrogation is presumed19 and therefore such interested third
party-payor can have the right even as to the accessory obligations
such as a mortgage. However, the presumption is rebuttable.
Legal subrogation transfers to the person subrogated the credit
with all the rights thereto appertaining, either against the debtor
or against third persons, be they guarantors, or possessors of
mortgages.20
2) If a third person pays the creditor with the know-ledge
of the debtor, but over the latter’s objection, then the effect is the
same as in No. 1 because the situation is clearly against the will
of the debtor.
3) If the third person pays the creditor with the know-
ledge and consent of the debtor, the third person can recover from
the debtor the amount he paid to the creditor. He can likewise
compel the creditor to transfer to him any mortgage, guaranty or
penalty. In this case there is legal subrogation which transfers
to the person subrogated the credit with all the rights thereto
appertaining, either against the debtor or against third persons,
be they guarantors, or possessors of mortgages.21 In the example
given in No. 1, X can recover P500,000. X can likewise compel
the creditor to transfer to him the real estate mortgage of A so
that, if the latter does not pay, X can foreclose on the mortgage
18
RFC vs. Court of Appeals, 94 Phil. 984.
19
Article 1302(3) of the 1950 Civil Code.
20
Article 1303 of the 1950 Civil Code.
arts. 1236-1238 ObligatiOns 187
Extinguishment of Obligations
Sec. 1 — Payment or Performance
Normally, one has the free disposal of the thing due and capacity
to alienate it only if he is the owner of the thing or at least he has
been given authority by the owner to use the property as payment
for the obligation “to give.” Article 1239 contains a clause which says
“without prejudice to the provisions of Article 1427 under the Title
on “Natural Obligations.” This article provides that
23
Executive Order No. 209 which took effect on August 3, 1988.
art. 1240 ObligatiOns 189
Extinguishment of Obligations
Sec. 1 — Payment or Performance
24
Haw Pia vs. China Banking Corporation, G.R. No. L-554, April 9, 1948, 80
Phil. 605, citing Manresa, Civil Code, 4th ed., p. 254.
25
7 Phil 477.
26
G.R. No. L-108630, April 2, 1996, 70 SCAD 37, 256 SCRA 44.
27
G.R. No. 104612, May 10, 1994, 51 SCAD 188, 232 SCRA 302.
190 ObligatiOns and COntraCts art. 1241
Text and Cases
herein was paid to persons who were not the creditors or at least
successors-in-interest of the same, ruled that there was therefore no
payment effected to extinguish the obligation as the withdrawal was
not proper. Specifically, the Supreme Court said:
Because the ownership of the deposit remained
undetermined, BPI, as the debtor with respect thereto had no
right to pay persons other than those in whose favor the obligation
was constituted or whose right or authority to receive payment is
indisputable. The payment of the money deposited with BPI that
will extinguish its obligation to the creditor-depositor is payment
to the person of the creditor or to one authorized by him or by
the law to receive it. Payment made by the creditor to the wrong
party does not extinguish the obligation as to the creditor who
is without fault or negligence, even if the debtor acted in utmost
good faith and by mistake as to the person of the creditor, or
through error induced by fraud of a third person. The payment
then by BPI to the heirs of Velasco, even if done in good faith,
did not extinguish its obligation to the true depositor, Eastern.
28
Article 225 of Executive Order No. 209 which took effect on August 3, 1988,
otherwise known as the Family Code of the Philippines.
29
Article 1387 of the 1950 Civil Code.
30
Article 1399 of the 1950 Civil Code.
192 ObligatiOns and COntraCts art. 1241
Text and Cases
Under the old Republic Act 529, otherwise known as the Uni-
form Currency Act, it was prohibited to use foreign currency in con-
nection with certain contracts in the Philippines. In General Insurance
40
G.R. No. L-41607, August 21, 1990, 188 SCRA 812.
200 ObligatiOns and COntraCts art. 1249
Text and Cases
However, in Far East Bank and Trust Company vs. Diaz Realty
Inc.,47 the Supreme Court said that, if payment by way of a fully-
funded check were offered or tendered and the obligee accepts the
check as payment after the obligor’s manifestation that it had been
given to settle an obligation, such obligee shall be estopped from later
on denouncing the efficacy of such tender of payment. This is especially
41
G.R. No. 126486, February 9, 1998, 91 SCAD 509, 286 SCRA 96.
42
G.R. Nos. 30475-76, November 22, 1989, 179 SCRA 530.
art. 1249 ObligatiOns 201
Extinguishment of Obligations
Sec. 1 — Payment or Performance
true when the said check was in fact deposited by the obligee and was
converted in cash.
In National Marketing Corporation vs. Federation of United
Namarco Distributors, Inc.,48 the phrase “when through the fault of
the creditor they have been impaired” was explained by the Supreme
Court, thus
x x x The clause of Article 1249 relative to the impairment
of the negotiable character of the commercial paper by the fault
of the creditor, is applicable only to instruments executed by third
persons and delivered by the debtor to the creditor, and does not
apply to instruments executed by the debtor himself and delivered
to the creditor.
Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966,
60
18 SCRA 967.
206 ObligatiOns and COntraCts art. 1251
Text and Cases
61
Magdalena Estates, Inc. vs. Rodriguez, G.R. No. L-18411, December 17, 1966,
207
207
208 ObligatiOns and COntraCts art. 1253
Text and Cases
the creditor still claimed interest from the debtor who resisted paying
such interest on the ground that, in accepting payment of the principal
from the surety in the amount only of P5,000, the creditor waived his
right to Article 1253, the Supreme Court allowed the claim of interest
by the creditor and stated that Article 1253 is not applicable in the
case as the liability of the surety does not extend beyond the terms
of the agreement and that the provision on application of payment
cannot be made applicable to a person whose obligation as a mere
surety is both contingent and singular; his liability is confined
to such obligation, and he is entitled to have all payments made
applied exclusively to said application and to no other. Besides,
Article 1253 of the Civil Code is merely directory, and not
mandatory. Inasmuch as the appellee (creditor) cannot protest
for non-payment of the interest when it accepted the amount of
P5,000.00 from the Luzon Surety Co., nor apply a part of that
amount for the interest, we cannot now say that there was a
waiver or condonation on the interest due.
66
G.R. No. 116805, June 22, 2000, 128 SCAD 312, 334 SCRA 186.
67
Lopez vs. Court of Appeals, G.R. No. L-33157, June 29, 1982, 114 SCRA 671.
68
Article 155 of Executive Order No. 209 which took effect on August 3, 1988,
otherwise known as the Family Code of the Philippines.
210 ObligatiOns and COntraCts art. 1254
Text and Cases
credit will apply.70 The creditors then will administer the totality of
the ceded property without the ownership being transferred to them.
They will be authorized to sell or alienate the property for purpose
of obtaining enough resources or money to pay off their respective
debts. Once cession is made, the obligation of the debtor shall only be
extinguished up to the extent that the proceeds are able to satisfy the
claims of the creditors. Hence, it is possible that the money obtained
from the alienation of the property is not enough to satisfy the claims
of the creditors. In such case, the creditors can still demand payment
for the deficiency. The agreements on the effect of the cession made
between the debtor and his creditors shall be governed by special laws.
One of the special laws is the Insolvency Law which, if applicable,
shall place the assets of the debtor for judicial liquidation for the
purpose of paying off his obligations.
74
G.R. No. 138588, August 23, 2001.
75
G.R. No. L-58961, June 28, 1983, 123 SCRA 160.
214 ObligatiOns and COntraCts
Text and Cases
214
arts. 1256-1258 ObligatiOns 215
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
In Far East Bank & Trust Company vs. Diaz Realty, Inc.74 where
the issue was whether or not the tender of a check is a valid tender
of payment, the Supreme Court ruled:
For a valid tender of payment, it is necessary that there be
a fusion of intent, ability and capability to make good such offer,
which must be absolute and must cover the amount due. Though
a check is not legal tender, and a creditor may validly refuse to
accept it if tendered as payment, one who in fact accepted a fully
funded check after the debtor’s manifestation that it had been
given to settle an obligation is estopped from later on denouncing
the efficacy of such tender of payment.
In the case of Soco vs. Militante,75 the Supreme Court had the
opportunity to discuss the requirements of law for an effective tender
and consignation, thus:
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. (Limkako vs. Teodoro, 74 Phil. 313).
In order that consignation may be effective, the debtor
must first comply with certain requirements prescribed by law.
The debtor must show: (1) that there was a debt due; (2) that
the consignation of the obligation had been made because the
creditor to whom tender of payment was made refused to accept
it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due (Article
1176, Civil Code); (3) that previous notice of the consignation had
been given to the person interested in the performance of the
obligation (Art. 1177, Civil Code); (4) that the amount due was
placed at the disposal of the court (Art. 1178, Civil Code); and (5)
76
Id., Page 178.
77
Id., Page 181.
78
G.R. Nos. 106467-68, October 19, 1999, 114 SCAD 475, 317 SCRA 24.
215
216 ObligatiOns and COntraCts arts. 1256-1258
Text and Cases
that after the consignation had been made the person interested
was notified thereof (Art. 1178, Civil Code). Failure in any of these
requirements is enough to render a consignation ineffective. (Jose
Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).
Without the notice first announced to the persons inte-
rested in the fulfillment of the obligation, the consignation as a
payment is void. (Limkako vs. Teodoro, 74 Phil. 313)
In order to be valid, the tender of payment must be made
in lawful currency. While payment in check by the debtor may
be acceptable as valid, if no prompt objection to said payment is
made (Desbarats vs. Vda. De Mortera, L-4915, May 25, 1956),
the fact that in previous years payment in check was accepted
does not place its creditor in estoppel from requiring the debtor
to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30,
1958). Thus, tender of a check to pay for an obligation is not a
valid tender of payment thereof (Desbarats vs. Vda. De Mortera,
supra). See Annotation, The Mechanics of Consignation by Atty.
S. Tabios, 104 SCRA 174-179.
Tender of payment must be distinguished from con-
signation. 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
extra-judicial, while consignation is necessarily judicial and the
priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation. (8 Manresa
325)
In the same Soco case, the Supreme Court likewise stated the
reason for giving the first notice and the second notice, to wit:
In this connection, the purpose of the notice is in order to
give the creditor the opportunity to reconsider his unjustified
refusal and to accept payment thereby avoiding consignation and
the subsequent litigation. This previous notice is essential to the
validity of the consignation and its lack invalidates the same.
(Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil.
313)76
The reason for the notification to the persons interested
in the fulfillment of the obligation after consignation had been
made, which is separate and distinct from the notification which
is made prior to the consignation is stated in Cabanos vs. Calo,
G.R. No. L-10927, October 30, 1958, 104 Phil. 1058, thus: “There
79
G.R. No. L-24791, August 29, 1969, 29 SCRA 160.
80
Riesenbeck vs. Court of Appeals, G.R. No. 90359, June 9, 1992.
arts. 1256-1258 ObligatiOns 217
Extinguishment of Obligations
Subsec. 3 — Tender of Payment and Consignation
81
G.R. No. L-17076, January 29, 1962, 4 SCRA 40.
218 ObligatiOns and COntraCts arts. 1256-1258
Text and Cases
accepted the tender and consequently litigated the case, the Supreme
Court ruled on the validity of the consignation and said:
The law must be reasonably interpreted and the realities of
the situation in each case taken into account so that the purpose
of the law may not be defeated. It is true the defendant sent
his letter of acceptance on September 24, 1964, but it was not
received by the plaintiffs until September 29. In the meantime the
redemption period of one year was about to expire. The plaintiffs,
therefore, did the most prudent thing under the circumstances by
filing the action and depositing the redemption money in court.
The defendant bewails this step as “unduly dragging x x x (him)
to an expensive and protracted litigation.” This is a pharisaical
attitude to adopt. If the litigation has become expensive and
protracted the defendant has nobody to blame but himself, for
the consignation was no less an effective and timely tender of
payment than the one which had been extrajudicially made, and
all that the defendant had to do was to withdraw the amount
deposited, without going through the rigmarole of filing an answer
and contesting the validity of the deposit just because there had
been no unjustified refusal to accept the said tender.
an answer stating that the money was not enough, and that he was
willing to accept the money as partial payment and likewise sought
the nullification of the withdrawal as he was not given notice of the
motion regarding the same, the Supreme Court ruled that the with-
drawal was proper as it was pursuant to the second paragraph of
Article 1260 and said:
We think the above article gives the depositor the right to
withdraw the amount deposited at any time before the creditor
accepts it (not to speak of the court’s order declaring it to be
proper). Such right is clear in this case, because the statement
of the creditor came late, and, what is more, the acceptance was
partial. This last consideration renders unnecessary to discuss
the effect of failure to give the creditor any notice of withdrawal,
since Cancio’s statement was practically a rejection of the offer
of payment.
82
G.R. No. 90359, June 9, 1992.
222 ObligatiOns and COntraCts art. 1261
Text and Cases
223
1
G.R. No. L-17819, March 31, 1962, 4 SCRA 867.
2
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
223
224 ObligatiOns and COntraCts art. 1263
Text and Cases
same thing to two or more persons who do not have the same interest.
In any event, the presumption does not apply even if the loss happens
at the time the thing is in the possession of the debtor if, at the time
of the loss, an earthquake, storm, or other natural calamity exists.
Difficulty alone does not excuse the debtor from fulfilling his
prestation. This has been referred to as “subjective impossibility”
which means that “a promissor’s duty is never discharged by the mere
fact that the supervening events deprive him of the ability to perform,
if they are not such as to deprive other persons, likewise, of ability
to render such a performance.”4 However, Article 1267 creates a new
norm by providing that 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 is still within
the penumbra of the rule on impossibility of performance although
the obligation may not technically and necessarily be impossible. The
law lays down the requisite for this article to apply and they are the
following: a) the prestation has become so difficult to render, and b)
the service has become manifestly beyond the contemplation of the
parties. These requirements must exist together. This is an innovation
under the 1950 Civil Code and its rationale has been aptly stated as
follows:
Cases and Materials on Contracts, by E. Allan Farnsworth and William F. Young, 3rd
edition, Mineola New York, The Foundation Press, Inc., 1980, Page 953.
4
United States vs. Wegematic Corp., 360 F.2d 674, cited in Cases and Materials
on Contracts, by E. Allan Farnsworth and William F. Young, 3rd edition, Mineola New
York, The Foundation Press, Inc., 1980, Page 972.
5
Naga Telephone Co. vs. Court of Appeals, G.R. No. L-107112, February 24,
1994, 48 SCAD 539, 230 SCRA 351.
6
G.R. No. 116896, May 5, 1997, 82 SCAD 377.
228 ObligatiOns and COntraCts art. 1267
Text and Cases
contract was entered into between the petitioner and the respondent
where they agreed that the petitioner shall use the electrical posts
of the respondent in Naga City free of charge, but the contract
can be terminated if the respondent is forced to stop its business.
As consideration, the petitioner agreed to install free of charge 10
telephone connections to the respondent. At the time of the execution
of the contract, it was the contemplation of the parties that the posts
were only to be used in Naga City because, at that time the capability
of respondent was very limited. This was so even if at that time there
were many subscribers in Naga City for telephone lines, who cannot
be served because of this contemplated limited capability. After
11 years of the effectivity of the contract, the contract became so
burdensome to the petitioner. This fact was shown by the following:
the telephone cables strung by the respondent had become heavier
with the increase in the volume of their subscribers, worsened by
the fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons, and that a post costs
as much as P2,630. While there was an increased use of the posts,
there was no corresponding increase in the telephone connections to
the respondent. Petitioners also began using respondent’s telephone
posts outside Naga City. The contract became so one-sided to the
prejudice of the respondent. The Supreme Court agreed with the
lower court and the Court of Appeals, that Article 1267 was applicable
under the situation as the continued enforcement of the contract had
manifestly gone beyond the contemplation of the parties so much so
that the respondent should be released from the contract to avoid
petitioner’s unjust enrichment at respondent’s expense. With respect
to petitioner’s contention that, because the contract did not involve
the rendition of service or a personal prestation and it was not for
future service with future unusual change, Article 1267 should not
apply and therefore the ruling in the Occena vs. Jabson8 case should
be followed, the Supreme Court said:
Article 1267 speaks of “service” which has become
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
art. 1267 ObligatiOns 231
Extinguishment of Obligations
Sec. 2 — Loss of the Thing Due
1
G.R. No. L-25350, October 4, 1988, 166 SCRA 219.
239
240 ObligatiOns and COntraCts art. 1277
Text and Cases
Joint debtors owe the creditor only their share in the whole
indebtedness and the creditor can only collect from a joint debtor
his share in the total indebtedness. Thus, if A, B and C jointly owe
X P3,000 and there is a merger of the characters of X and C, the
obligation is extinguished in so far as the P1,000 share of C in the
indebtedness is concerned but not as to the rest. X can still collect
P1,000 each from A and B. If the obligation of the debtors is solidary
and there is merger of the characters of C and X, the obligation is
extinguished.2 However, if A pays the whole indebtedness to X prior
to the merger of the characters of C and X, A can still collect from X
and likewise from B their respective shares in the indebtedness which
is P1,000 each.3
SECTION 5. — Compensation
241
242 ObligatiOns and COntraCts arts. 1278-1279
Text and Cases
The first requisite for legal compensation is that each one of the
obligors be bound principally and that each of them be at the same
time a principal creditor of the other. The parties must be mutual
creditors and debtors of each other. Thus in Soriano vs. Compana
General de Tabacos de Filipinas1 where the defendant extended a
crop loan to the plaintiff who secured payment of the loan by, among
others, the sugarcane crops that would be planted and harvested,
and where the defendant, after receipt of some export sugar from the
plaintiff, shipped the same to the United States for it’s (defendant’s)
own account and benefit, and where, later on, the defendant resisted
the claim of the plaintiff to be credited an amount of P51,528.01
representing the amount of the sugar it delivered to the defendant,
by invoking automatic compensation because the plaintiff was its
debtor due to his crop loan account, and at the same time a creditor
of the defendant for the proceeds of the sale of plaintiff’s sugar. The
Supreme Court rejected the theory of legal compensation because
the parties were not mutual debtors and creditors of each other
considering the fact that, by its own admission, the sugar was sold
not for the account of the plaintiff but for the account of the defendant
and therefore defendant could not have been a debtor of the plaintiff.
Also in Republic vs. Mambulao Lumber Company,2 where the said
company contended that the reforestation charges collected under
Republic Act No. 115 and not used in the area subject of its timber
license, could be applied in compensation of the sum due from it as
forest charges, the Supreme Court ruled that the reforestation charges
were in the nature of taxes and therefore can never be refunded even
if the reforestation charges were not actually used in the area subject
of its timber license, and, because they were taxes, the reforestation
charges were not debts for purposes of legal compensation to make
the parties therein mutual creditors and debtors of each other. The
Supreme Court even quoted tax authorities to prove its point, thus:
“A claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of set-off,
which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality
for taxes. Neither are they proper subject of recoupment since
they do not arise out of contract or transaction sued on x x x.” (80
C.J.S. 73-74)
“The general rule, based on grounds of public policy is well-
G.R. No. L-17392, December 17, 1966, 18 SCRA 999.
1
3
G.R. No. 75819, September 8, 1989, 177 SCRA 402.
244 ObligatiOns and COntraCts arts. 1278-1279
Text and Cases
The third requisite is that the two debts be due. However, the
debts need not be contracted or incurred at the same time.4 A debt
cannot be demanded if it is not yet due. Hence, this requisite is very
important. However, the parties can agree that compensation can be
made even as to the debts which are not yet due. In Perez vs. Court of
Appeals,5 where a finance company was indebted to an investor with
respect to two debts due originally on August 6, 1974 and August
13, 1974 respectively and which debts were rolled-over so that their
maturity dates were extended to October 4, 1974 and October 11,
1974, respectively, and where the finance company was the creditor
with respect to a certain obligation to mature on August 5, 1994 as
against a certain company to whom the two credits of the investor,
which were to mature on October 4 and 11, 1974 respectively, were
assigned on September 9, 1974, the Supreme Court said that:
Since, on the respective dates of maturity, specifically,
August 6, 1974 and August 13, 1974, respectively, Ramon C.
Mojica was still the holder of those bills, it can be safely assumed
that it was he who had asked for the roll-overs on the said dates.
MEVER was bound by the roll-overs since the assignment to it
was made only on September 9, 1974. The inevitable result of
the roll-overs of the principals was that Bill No. 1298 and Bill
No. 14129 were not yet due and demandable as of the date of
their assignment by MOJICA to MEVER on September 9, 1974,
nor as of October 3, 1974 when MEVER surrendered the Bills to
CONGENERIC. As a consequence, no legal compensation could
have taken place because, for it to exist, the two debts, among
other requisites, must be due and demandable.
Also, in PNB Madecor vs. Uy6 where one of the debts was payable
only upon demand and there was no demand made, the Supreme
Court ruled that there can be no compensation because such debt is
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
4
PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
9
See PNB Madecor vs. Uy, G.R. No. 129598, August 15, 2001.
10
arts. 1281-1283 ObligatiOns 247
Extinguishment of Obligations
Sec. 5 — Compensation
pensation. (n)
The trouble is that Fermin has not proved the right to any
damage as a result of the claimed retention of the zippers by
Mariano. There was also no proof of the amount of such damages
as he could not even say how many of the zippers had been earlier
withdrawn by him.
11
G.R. No. 75819, September 8, 1989, 177 SCRA 402.
art. 1285 ObligatiOns 249
Extinguishment of Obligations
Sec. 5 — Compensation
12
G.R. No. L-56101, February 20, 1984, 127 SCRA 636.
250 ObligatiOns and COntraCts art. 1285
Text and Cases
13
G.R. No. L-89252, May 24, 1993, 222 SCRA 466.
14
Articles 1962 and 1972 of the 1950 Civil Code.
art. 1285 ObligatiOns 251
Extinguishment of Obligations
Sec. 5 — Compensation
18
Executive Order No. 209 as amended which took effect on August 3, 1988.
19
Metropolitan Bank and Trust Company vs. Tonda, G.R. No. 134436, August
16, 2000, 132 SCAD 111, 338 SCRA 254.
20
G.R. No. L-62169, February 20, 1983, 120 SCRA 930.
256 ObligatiOns and COntraCts art. 1290
Text and Cases
SECTION 6. — Novation
G.R. No. 118585, September 14, 1995, 64 SCAD 311, 248 SCRA 222.
1
Garcia, Jr. vs. Court of Appeals, G.R. No. 80201, November 20, 1990, 191 SCRA
2
262
art. 1291 ObligatiOns 263
Extinguishment of Obligations
Sec. 6 — Novation
708.
9
Bautista vs. Pilar Development Corporation, G.R. No. 135046, August 17, 1999,
110 SCAD 964, 312 SCRA 611.
10
Espina vs. Court of Appeals, G.R. No. 116805, June 22, 2000, 128 SCAD 312,
334 SCRA 186.
11
G.R. No. L-80201, November 20, 1990, 191 SCRA 493.
12
G.R. No. L-22366, October 30, 1969, 29 SCRA 791, citing Martinez vs. Cavives,
266 ObligatiOns and COntraCts art. 1292
Text and Cases
14
G.R. No. L-47369, June 30, 1987, 151 SCRA 339.
268 ObligatiOns and COntraCts art. 1292
Text and Cases
16
G.R. No. 138544, October 3, 2000, 135 SCAD 98, 341 SCRA 781.
270 ObligatiOns and COntraCts art. 1292
Text and Cases
In Lim Tay vs. Court of Appeals17 the Supreme Court held that
a dacion en pago is a form of novation in which a change takes place
in the object involved in the original contract.
no legal effect and will be considered as not having been agreed upon
in the first place. Hence, the original obligation shall subsist. However,
if in coming up with the new but void obligation, the parties agree
that it shall in any event extinguish the old obligation, then such old
obligation will not be revived. Hence, if X is bound to give Y a car and
this is novated by binding X to give instead his future inheritance
to Y, which he will get upon the death of his father, the latter new
obligation is void because, according to the law, future inheritance
cannot be the object of a contract.20 This new void obligation will not
be deemed to have been entered into and the old obligation will be
revived. However, if the parties agree that the act of entering into
the new but void obligation will in any event extinguish the old one,
then the latter will not be revived.
his law course and thereafter the obligation is novated such that
X instead is bound to give Y a car without any statement as to the
suspensive condition, it shall be deemed that the giving of the car is
likewise subject to Y passing his law course. In order not to subject
the obligation to the previous suspensive condition, there must be an
express statement to that effect in the new obligation as novated.
to subrogate him (third party) in his rights, such as those arising from
mortgage, guaranty, or penalty.23
23
Article 1237 of the 1950 Civil Code.
24
Article 2241(3) of the 1950 Civil Code.
25
G.R. Nos. 112438-39, December 12, 1995, 66 SCAD 557, 251 SCRA 257.
278 ObligatiOns and COntraCts art. 1302
Text and Cases
Chapter 1
GENERAL PROVISIONS
1
Jardine Davies vs. Court of Appeals, G.R. No. 128066, June 19, 2000, 128 SCAD
20, 333 SCRA 684, citing Sanchez Roman, 148-149.
2
William F. Elliott, Commentaries on the Law of Contracts, Volume I, Indianapolis
The Bobbs-Merrill Company, 1913 Edition, Page 2.
282
art. 1306 COntraCts 283
General Provisions
3
Ang vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57 SCAD 163,
238 SCRA 602; Soler vs. Court of Appeals, G.R. No. 123892, May 21, 2001.
4
Republic vs. PLDT, G.R No. L-18841, January 27, 1969, 26 SCRA 620.
5
Id.
6
G.R. No. 116665, March 20, 1996, 69 SCAD 643, 255 SCRA 215.
284 ObligatiOns and COntraCts art. 1306
Text and Cases
G.R. No. 110015, July 11, 1995, 62 SCAD 485, 245 SCRA 715.
8
art. 1306 COntraCts 287
General Provisions
9
G.R. No. L-19632, November 13, 1974, 61 SCRA 22.
288 ObligatiOns and COntraCts art. 1306
Text and Cases
Innominate contracts under the Civil Code are those which are
not specifically governed by any provision in the Civil Code or special
law but which likewise involve the fulfillment or accomplishment of
some prestations. They are governed by the following:
1) Stipulation of the parties. The parties may have some
arrangements which they feel should bind them but which
nevertheless do not have any exact legal provisions in the
Civil Code to govern the nature of the obligation apper-
taining to it. Following the general rule on contracts, they
can therefore stipulate any provision, term and condition
that will govern the enforceability of their agreement
provided they are not contrary to law, morals, good customs,
public order, or public policy;
2) Provisions in the law of obligations and contracts under
Title I and II of the Civil Code. Innominate contracts still
involve prestations which are to be accomplished by the
parties. Though they may be innominate, they are still
contracts which are sources of obligations. Hence, they
should likewise follow the general rule on obligations and
contracts;
3) Rules governing the most analogous nominate contracts.
The Civil Code provides for various types of nominate
contracts, namely: sale,15 barter or exchange,16 lease,17
partnership,18 agency,19 loan,20 deposit,21 aleatory contracts,22
compromises, 23 guaranty, 24 pledge, 25 mortgage, 26 and
antichresis.27 Other special laws govern some other types of
contracts like insurance, real estate mortgage, and charter
party;
4) Customs of the place. Custom is a rule of conduct formed
13
Ibid.
14
Ibid.
15
Book IV Title VI of the 1950 Civil Code, Articles 1458 to 1637.
16
Book IV Title VII of the 1950 Civil Code, Articles 1638 to 1641.
17
Book IV Title VIII of the 1950 Civil Code, Articles 1642 to 1766.
290 ObligatiOns and COntraCts art. 1307
Text and Cases
Supreme Court ruled that such provision did not violate Article 1308
and explained:
The above legal provision is a virtual reproduction of Article
1256 of the old Civil Code but it was so phrased as to emphasize
the principle that the contract must bind both parties. This, of
course, is based firstly, on the principle that obligations arising
from contracts have the force of law between the contracting
parties and secondly, that there must be mutuality between
parties based on their essential equality to which is repugnant
to have one party bound by the contract leaving the other free
therefrom (8 Manresa 556). Its purpose is to render void a contract
containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting
parties. x x x
The above stipulation, to our mind, merely gives the vendor
“the right to declare this contract cancelled and of no effect” upon
fulfillment of the conditions therein set forth. It does not leave
the validity or compliance of the contract “entirely to the will
of one of the contracting parties;” the stipulation or agreement
simply says that in case of default in the payment of installments
by the vendee, he shall have (1) “a month of grace,” and that (2)
should said month of grace expire without the vendee paying
his arrears, he shall have another “period of 90 days” to pay “all
the amounts he should have paid,” etc., then the vendor “has the
right to declare this contract cancelled and of no effect.” We have
heretofore upheld the validity of similar stipulations. In Taylor vs.
Ty Tieng Piao, etc. (43 Phil. 873, 876-878) the ruling was that a
contract expressly giving to one party the right to cancel the same
if a resolutory condition therefor agreed upon — similar to the one
under consideration — is not fulfilled, is valid, the reason being
that when the contract is thus cancelled, the agreement of the
parties is in reality being fulfilled. Indeed, the power thus granted
can not be said to be immoral, much less unlawful, for it could be
exercised — not arbitrarily — but only upon the other contracting
party committing the breach of contract of non-payment of the
installments agreed upon. Obviously, all that said party had to
do to prevent the other from exercising the power to cancel the
contract was for him to comply with his part of the contract. And
in this case, after the maturity of any particular installment and
its non-payment, the contract gave him not only a month of grace
but an additional period of 90 days.
31
Mendoza vs. Court of Appeals, G.R. No. 116710, June 25, 2001.
32
G.R. No. L-20175, October 30, 1967, 21 SCRA 555; See also Philippine Banking
Corporation vs. Lui She, G.R. No. L-17587, September 12, 1967, 21 SCRA 52.
33
G.R. No. 124290, January 16, 1998, 90 SCAD 325, 284 SCRA 357.
art. 1308 COntraCts 293
General Provisions
X two days before the performance, and any violation renders the
contract ineffectual entitling B not to pay A any consideration as
a penalty. They sign the contract. Later, X makes a determination
that A is to sing 20 songs, selected by X continually without a break
starting from 6:00 in the evening to 2:00 the next morning; and, if
the nightclub is filled with people, A will give an encore three times
divided into 30 minutes each time. A shall only sing those specifically
requested by the audience, and in case he does not know the song,
his fee is to be reduced. X notified A two days before the performance
that the latter will sing 15 English rock songs and 5 Norwegian songs
which obviously A does not know. This is clearly a situation where
the performance is so inequitable. In fact the contract itself and not
merely the determination of its performance is almost left to the will
of the third party and it greatly favors the nightclub owner. Also, it
tends to destroy the basic equality of the contracting parties. A can go
to court which will decide what is equitable under the circumstances.
Court intervention is necessary in order that the intent of the parties
will not be rendered nugatory by the inequitable terms and conditions
of a third party.
38
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Page 717.
39
Id.
40
Id.
41
G.R. No. 118248, April 5, 2000, 124 SCAD 464, 329 SCRA 666.
art. 1311 COntraCts 297
General Provisions
did not err in deleting the damages awarded by the trial court to
petitioner.
48
Young vs. Court of Appeals, G.R. No. 79518, January 13, 1989, 169 SCRA 213.
49
G.R. No. L-79734, December 8, 1988, 168 SCRA 373.
50
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
300 ObligatiOns and COntraCts art. 1311
Text and Cases
55
Id., citing North Alabama Development Co. vs. Orman, 55 Fed. 18, 5 C.C.A. 22;
McCoy vs. McCoy, 32 Ind. App. 38, 69 N.E. 193, 102 Am. St. 223; Coppage vs. Gregg,
127 Ind. 359, 26 N.E. 903; Copeland vs. Summers, 138 Ind. 219, 35 N.E. 514, 37 N.E.
971; Motley vs. Manufacturers’ Ins. Co., 29 Maine 337, 50 Am. Dec. 591; Stariha vs.
Greenwood, 28 Minn 521, 11 N.W. 76; Campbell vs. Smith, 71 N.Y. 26, 27 Am. Rep.,
5; Blake vs. Atlantic Nat. Bank, 33 R.I. 464, 82 Atl. 225.
56
G.R. No. 119850, June 20, 1996, 71 SCAD 255, 257 SCRA 538.
57
G.R. No. 79518, January 13, 1989, 169 SCRA 213.
58
Equitable PCI Bank vs. Rosita Ku, G.R. No. 142950, March 26, 2001; Oro Cam
Enterprises, Inc. vs. Court of Appeals, 116 SCAD 419, 319 SCRA 444.
59
Asuncion vs. Evangelista, G.R. No. 133491, October 13, 1999, 316 SCRA 848.
60
William F. Elliott, Commentaries on the Law of Contracts, Volume II, 1913
Edition, Indianapolis, The Bobbs-Merrill Company, Pages 663-665.
61
G.R. No. 120554, September 21, 1999, 314 SCRA 751.
art. 1311 COntraCts 305
General Provisions
In Young vs. Court of Appeals,57 the Supreme Court also had the
opportunity to decide on the matter of “communication of acceptance.”
The pertinent portions of the case are as follows:
Defendant Philippine Holding, Inc. is the former owner of
a piece of land located at Soler St., Sta. Cruz, Manila, and a two
storey building erected thereon, consisting of six units; Unit 1350
which is vacant, Unit 1352 occupied by Antonio Young, Unit 1354
by Rebecca C. Young, Unit 1356 by Chui Wan and Felisa Tan Yu,
Unit 1358 by Fong Yook Lu and Ellen Yee Fong and Unit 1360
by the Guan Heng Hardware (Rollo, pp. 14-15).
The owner Philippine Holding, Inc. secured an order from
the City Engineer of Manila to demolish the building. Antonio
Young, then a tenant of said Unit 1352, filed an action to annul the
city Engineer’s demolition Order (Civil Case No. 123883) entitled
Antonio S. Young vs. Philippine Holding, Inc. before the then
Court of First Instance of Manila, Branch XXX. As an incident
in said case, the parties submitted a Compromise Agreement to
the Court on September 24, 1981. Paragraph 3 of said agreement
provides that plaintiff (Antonio S. Young) and Rebecca Young
and all persons claiming rights under them bind themselves to
voluntarily and peacefully vacate the premises which they are
occupying as lessees (Units 1352 and 1354, respectively) which
are the subject of the condemnation and demolition order and to
surrender possession thereof to the defendant Philippine Holding,
Inc. within sixty (60) days from written notice, subject to the
proviso that should defendant decide to sell the subject property
or portion thereof, “plaintiff and Rebecca C. Young have the right
of first refusal thereof.” (Rollo, p. 49).
62
29 Phil. 542.
63
Article 1163 of the 1950 Civil Code.
306 ObligatiOns and COntraCts art. 1311
Text and Cases
the following can likewise be ejected despite the fact that they were
not made parties to the ejectment suit: a) trespassers, squatters, or
agents of the defendant-lessee fraudulently occupying the property
to frustrate the judgment; b) guest or other occupants of the premises
with the permission of the defendant-lessee; c) transferees pendente
lite; d) sub-lessees; e) co-lessees; f) members of the family, relatives
and other privies of the defendant-lessee.58
Also, a property mortgaged as a collateral of a debt and recorded
in the Registry of Property shall bind any subsequent possessor-owner
of the same.59
and instead asked the lessor for the execution of formal contracts of
lease with his own corporation. The lessor agreed. The lease contracts
were executed. Tek Hua Enterprises sued for the nullification of
the lease contracts on the ground of contractual interference under
Article 1314 of the Civil Code. Tek Hua Enterprises won but did not
order So Ping Bun and his company to pay damages. They were only
ordered to pay attorney’s fees. Trendsetter Marketing and the son
of the deceased managing partner of Tek Hua Enterprises contend
that since no award of damages were imposed, they were not liable
for attorneys fees. The Supreme Court rejected this contention by
explaining the concept of tort interference, thus:
The foregoing issues involve, essentially, the correct
interpretation of the applicable law on tortuous conduct,
particularly unlawful interference with contract. We have to
begin, obviously, with certain fundamental principles on torts
and damages.
Damage is the loss, hurt, or harm which results from in-jury,
and damages are the recompense or compensation awarded for
the damage suffered. One becomes liable in an action for damages
for a non-trespassory invasion of another’s interest in the private
use and enjoyment of asset if: (a) the other has property rights
and privileges with respect to the use or enjoyment interfered
with, (b) the invasion is substantial, (c) the defendant’s conduct
is a legal cause of the invasion, and (d) the invasion is either
intentional and unreasonable or unintentional and actionable
under general negligence rules.
The elements of tort interference are: (1) existence of a
valid contract; (2) knowledge on the part of the third person of
the existence of contract; and (3) interference of the third person
is without legal justification or excuse.
A duty which the law of torts is concerned with is respect
for the property of others, and a cause of action ex delicto may be
predicated upon an unlawful interference by one person of the
enjoyment by the other of his private property. This may pertain
to a situation where a third person induces a party to renege on
or violate his undertaking under a contract. In the case before
us, petitioner’s Trendsetter Marketing asked DCCSI to execute
lease contracts in its favor, and as a result petitioner deprived
respondent corporation of the latter’s property right. Clearly, and
as correctly viewed by the appellate court, the three elements of
tort interference above-mentioned are present in the instant case.
Article 1475 of the New Civil Code.
68
Heirs of Quirico Seraspi vs. Court of Appeals, G.R. No. 135602, April 28, 2000,
125 SCAD 749.
69
Articles 1868 to 1932 of the 1950 Civil Code.
art. 1314 COntraCts 311
General Provisions
70
Article 1868 of the 1950 Civil Code.
312 ObligatiOns and COntraCts art. 1315
Text and Cases
and the cause which are to constitute the agreement. The offer,
however, must be certain and the acceptance seasonable and
absolute; if qualified, the acceptance would merely constitute a
counter-offer.
In this instance, the addendum was flatly rejected by the
respondent on the theses (a) that he did not give his consent
thereto nor authorized anyone to enter into the agreement, and
(b) that it contained provisions grossly disadvantageous to him.
The outright rejection of the addendum made known to the other
ended the offer. When respondent later filed his Manifestation,
stating that he was, after all, willing to honor the addendum,
there was nothing to still accept.
Verily, consent could be given not only by the party himself
but by anyone duly authorized and acting for and in his behalf.
But by respondent’s own admission, the addendum was entered
into without his knowledge and consent. A contract entered into
in the name of another by one who ostensibly might have but
who, in reality, had no real authority or legal representation,
or who, having such authority, acted beyond his powers, would
be unenforceable. The addendum, let us then assume resulted
in an unenforceable contract, might it not then be susceptible
to ratification by the person on whose behalf it was executed?
The answer would obviously be in the affirmative; however, that
ratification should be made before its revocation by the other
contracting party. The adamant refusal of respondent to accept
the terms of the addendum constrained petitioner, during the
preliminary conference held on 23 June 1996, to instead express
its willingness to release respondent from his contracts prayed
for in his complaint and to thereby forego the rejected addendum.
Respondent’s subsequent attempt to ratify the addendum came
much too late for, by then, the addendum had already been
deemed revoked by petitioner.
art. 1317 COntraCts 321
General Provisions
322 ObligatiOns and COntraCts
Text and Cases
Chapter 2
ESSENTIAL REQUISITES OF CONTRACTS
General Provisions
When the law uses the word “concur,” it means that all the
three (3) requisites must be present. The absence of one requisite
negates the existence of a contract. The requisites are discussed in
more detail in the next sections. Absence of any one of the requisites
creates an inexistent contract. It produces no effect.
So also, inexistent contracts can be invoked by any person
whenever juridical effects founded thereon are asserted against
him. A transferor can recover the object of such contract by accion
reinvidicatoria and any possessor may refuse to deliver it to the
transferee, who cannot enforce the transfer.1
The rule on pari delicto as between the parties does not apply
in cases of inexistent contracts.2
1
Modina vs. Court of Appeals, G.R. No. 109355, October 29, 1999, 115 SCAD
130, 317 SCRA 696.
2
Ibid.
322
323
SECTION 1. — Consent
323
324 ObligatiOns and COntraCts arts. 1319-1320
Text and Cases
3
Ang Yu Asuncion vs. Court of Appeals, G.R. No. 109125, December 2, 1994, 57
SCAD 163, 238 SCRA 602.
4
G.R. No. L-47088, July 10, 1981, 105 SCRA 359.
5
Limson vs. Court of Appeals, G.R. No. 135929, April 20, 2001, 147 SCAD 887.
6
G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
7
William F. Elliott, Commentaries on the Law of Contracts, Volume 1,
arts. 1319-1320 COntraCts 325
Essential Requisites of Contracts
Sec. 1 — Consent
Article 1321. The person making the offer may fix the time,
place, and manner of acceptance, all of which must be complied
with. (n)
The offerer can indicate the manner of acceptance and the time
when and the place where it should be made. The offerer will not be
bound by an acceptance made by the acceptor in any other manner
than that specified by the offerer unless the latter acquiesces in the
change.13 In Matias vs. Court of Appeals14 where a subsequent new
owner of a leased property offered to sell to the lessee the property
subject of the lease but which offer was ignored by the lessee who
instead filed a suit to compel the new subsequent owner to sell
the property in an amount and in a manner which the lessee feels
reasonable, the Supreme Court rejected the appeal of the lessee after
he lost in the lower court by stating:
During the early stages of the negotiations, petitioners
have already been in arrears in the payment of rentals, which
delinquency lasted up to the time of the consummation of the sale
of the Hacienda. In spite of such failure, the new owner of the
Hacienda gave them top priority to purchase their respective lots.
This is a clear indication that the partnership complied with the
conditions attached to the sale; otherwise, it could have right then
and there demanded the ejectment of petitioners as delinquent
tenants. Instead of discussing with the new owner the terms and
conditions they wish to impose on the projected sale, petitioners
insist on their claim that the price of the lots are exorbitant; and
that their right to purchase the lot at a price fixed in the complaint
was disregarded. Petitioners’ insistence as to the price of the lot
rests on the false assumption that the fixing of the price of the
lot they wanted to purchase is one of the rights granted to them
by law. To sustain such idea would run counter to the provision
of Article 1321 of the New Civil Code which states that
“The person making the offer may fix the time,
place and manner of acceptance, all of which must be
complied with.”
if, before such mail is received and actually read by the offeror, either
the offeror or the acceptor died, there is still no contract because the
offer has become ineffective.
In Villanueva vs. Court of Appeals22 where a person offered to
a particular bank the purchase of a certain foreclosed property, and
where such offer was accepted by the bank through a board resolution
which however was not relayed to the person making the offer, and
which the latter was able to know after the bank was placed under
receivership by the Central Bank as said bank became insolvent, the
Supreme Court ruled that, in this particular case the offer became
ineffective and therefore there was no contract created. Pertinently,
the Supreme Court said:
There is no doubt that the approval of Ong’s offer constitutes
an acceptance, the effect of which is to perfect the contract of sale
upon notice thereof to Ong. The peculiar circumstances in this
case, however, pose a legal obstacle to his claim of a better right
and deny support to the conclusion of the Court of Appeals.
Ong did not receive any notice of the approval of his offer.
It was only sometime in mid-April 1985 when he returned from
the United States and inquired about the status of his bid that
he came to know of the approval.
It must be recalled that the PVB was placed under
receivership pursuant to the MB Resolution of 3 April 1985 after
a finding that it was insolvent, illiquid, and could not operate
profitably, and its continuance in business would involve probable
loss to its depositors and creditors. x x x
Under Article 1323 of the Civil Code, an offer becomes
ineffective upon the death, civil interdiction, insanity, or
insolvency of either party before acceptance is conveyed. The
reason for this is that:
The contract is not perfected except by the
concurrence of two wills which exist and continue
until the moment that they occur. The contract is
not yet perfected at any time before acceptance is
conveyed; hence, the disappearance of either party
or his loss of capacity before perfection prevents the
contractual tie from being formed. x x x
In a nutshell, the insolvency of a bank and the consequent
appointment of a receiver restrict the bank’s capacity to act
especially in relation to its property. Applying Article 1323 of
23
Spouses Buot vs. Court of Appeals, G.R. No. 119679, May 18, 2001; Laforteza
330 ObligatiOns and COntraCts art. 1324
Text and Cases
the Civil Code, Ong’s offer to purchase the subject lots became
ineffective because the PVB became insolvent before the Bank’s
acceptance of the offer came to his knowledge. Hence, the
purported contract of sale between them did not reach the stage
of perfection. Corollarily, he cannot invoke the resolution of the
bank approving his bid as basis for his alleged right to buy the
disputed properties.
vs. Machuca, G.R. No. 137552, June 16, 2000, 127 SCAD 798.
24
G.R. No. 109125, December 2, 1994, 57 SCAD 163, 238 SCRA 602.
25
G.R. No. 103338, January 4, 1994, 47 SCAD 55, 229 SCRA 60; See also Adelfa
art. 1324 COntraCts 331
Essential Requisites of Contracts
Sec. 1 — Consent
Properties, Inc. vs. Court of Appeals, G.R. No. 111238, January 25, 1995, 58 SCAD
462, 240 SCRA 565.
26
San Miguel Properties Philippines, Inc. vs. Huang, G.R. No. 137290, July 31,
2000, 130 SCAD 713, 336 SCRA 737.
332 ObligatiOns and COntraCts art. 1325
Text and Cases
period stipulated.
34
Id.
35
Id., Article 236.
36
Article 1397 of the 1950 Civil Code.
37
Article 1399 of the 1950 Civil Code.
334 ObligatiOns and COntraCts art. 1327
Text and Cases
38
G.R. No. L-12471, April 13, 1959, 105 Phil. 456.
39
G.R. No. 11872, December 1, 1917, 37 Phil. 215.
40
William F. Elliott, Commentaries on the Law of Contracts, Volume 1, 1913
edition, Indianapolis, The Bobb-Merrill Company, Pages 469-470.
41
Id., Page 575.
art. 1327 COntraCts 335
Essential Requisites of Contracts
Sec. 1 — Consent
to them by Villa Abrille were used for their support during the
Japanese occupation. Such being the case, it is but fair to hold
that they had profited to the extent of the value of such money,
which value has been authoritatively established in the so-called
Ballantine Schedule: in October 1944, P40.00 Japanese notes were
equivalent to P1 of current Philippine money. Wherefore, as the
shares of these minors was 2/3 of P70,000 or P46,666.66, they
should now return P1,166.67. Their promise to pay P10,000 in
Philippine currency (Exhibit A), can not be enforced, as already
stated, since they were minors incapable of binding themselves.
Their liability, to repeat, is presently declared without regard of
said Exhibit A, but solely in pursuance of Article 1304 of the Civil
Code.
influence.40
Moreover, the insanity alleged must have a direct bearing
on the agreement. A monomania or delusion unconnected with
the subject-matter of the contract or which does not prompt the
agreement does not destroy its binding force. On the other hand,
if the insane delusion is so connected with the subject-matter of
the agreement as to render one of the parties thereto incapable
of understanding the nature or effect of the contract, it is thereby
rendered voidable at the option of the party so afflicted.41
42
Id., Pages 575-576.
43
Id., Pages 650-651.
44
Id., Pages 651-652.
338 ObligatiOns and COntraCts art. 1328
Text and Cases
Sherwood vs. Walker, 66 Mich. 568, 33 N.W. 919, 11 Am. St. 531 cited in
49
Thus, where the contract for the sale of a cow was entered
into, both parties believing her to be barren, which supposition
proved to be untrue, it was held that mistake was not as to the
mere quality of the animal sold, but went to the very nature of the
thing and that the vendor had a right to rescind the agreement.49
54
Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD
342 ObligatiOns and COntraCts art. 1332
Text and Cases
However, the Article 1332 provides that, when one of the parties
is unable to read, or if the contract is in a language not understood
by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained
to the former.
Before the benefits of Article 1332 can be availed of, the person
invoking the same must first prove that he has the conditions
described in Article 1332. Thus, if he is unable to read or he does not
understand the language of the contract, he must first prove such fact
or circumstance. Only after sufficiently adducing evidence proving the
fact that he cannot read or that he does not understand the language
of the contract will the burden of proof shift to the one enforcing the
contract to show that the terms thereof have been explained to the
person who is unable to read or who does not understand the language
of the contract.56
In Lustan vs. Court of Appeals,57 where the dispute was whether
or not the Deed of Definite Sale was in reality an equitable mortgage
wherein the subject property was merely intended to secure an
existing debt by way of mortgage, the Supreme Court ruled that the
document was an equitable mortgage based on the clear evidence
supporting such contract and based on the finding that the illiterate
owner of the same was made to understand that the deed of sale
signed by her merely evidenced an indebtedness to the creditor, to
wit:
Petitioner had no knowledge that the contract she signed
is a deed of sale. The contents of the same were not read nor
explained to her so that she may intelligently formulate in her
mind the consequences of her conduct and the nature of the
rights she was ceding in favor of Parangan. Petitioner is illiterate
and her condition constrained her to merely rely on Parangan’s
assurance that the contract only evidenced her indebtedness to
the latter. When one of the contracting parties is unable to read,
or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to
the former. Settled is the rule that where a party to a contract is
illiterate or cannot read or cannot understand the language in
which the contract is written, the burden is on the party interested
in enforcing the contract to prove that the terms thereof are fully
explained to the former in a language understood by him. To our
mind, this burden has not been satisfactorily discharged.
Petitioners alleged that the Deed was signed by the late Cresencia
due to mistake, fraud or undue influence. They postulated that
respondent Lorenzo took advantage of the late Cresencia’s trust
and confidence. Testifying on the trust of the late Cresencia on
respondent Lorenzo, petitioner Jose Lim declared:
xxx
“Q. Now, will you tell the Court how the relation between your
mother and your uncle Lorenzo Tan before September 1967?
A. My mother was so close to this brother, Lorenzo Tan. My
mother always asked him advice because he is considered by my
mother as God to her. x x x.”
Considering the circumstance, the burden was on private
respondents to prove that the content of the Deed was explained
to the illiterate Crescencia before she signed it. In this regard,
the evidence adduced by the respondents failed to discharge this
burden.
63
G.R. No. L-12035, March 29, 1961, 1 SCRA 876.
art. 1333 COntraCts 345
Essential Requisites of Contracts
Sec. 1 — Consent
entered into could be annulled. Hence, if the deed was null, the
reconstituted title and transfer titles arising therefrom were also
void.
and well-grounded fear of an imminent and grave evil upon his person
or property, or upon the person or property of his spouse, descendants
or ascendants, to give his consent. To determine the degree of the
intimidation, the age, sex and condition of the person shall be borne
in mind. It is necessary that the threats and circum-stances be of a
character as to excite the reasonable apprehensions of a person of
ordinary courage, and that the agreement be made under the influence
of such threats or menace; the threat must be tangible and direct.62
Thus in Vda. De Lacson vs. Granada63 where it was contended that
a contract entered into during the Japanese occupation should be
nullified because one of the parties was constrained to enter the
contract and to accept Japanese currency for fear that, if he would not
do so, he might endanger his life and the life of his family, the Supreme
Court rejected the notion that there was legally an intimidation
enough to annul the contract because
the duress or intimidation must be more than the “general feeling
of fear” on the part of the occupied over the show of might by the
occupant. In other words, aside from such “general” or “collective
apprehension,” there must be specific acts or instances of such
nature and magnitude as to have, of themselves, inflicted fear or
terror upon the subject thereof that his execution of the questioned
deed or act can not be considered voluntary. No such specific act of
duress was cited — and none could be found — in the case at bar.
The law recognizes the practice in trade that there are usual
exaggerations employed by the parties to consummate a particular
transaction. If a party is induced by such usual exaggerations, there
may be fraud amounting to active misrepresentation. If it is within
the means of the other party to investigate the truthfulness of such
exaggeration and he does not do so, there will be no fraud despite the
exaggerations.
75
Elliott, supra, Page 135.
76
Id.
77
Id.
arts. 1340-1341 COntraCts 353
Essential Requisites of Contracts
Sec. 1 — Consent
78
G.R. No. 89561, September 13, 1990, 189 SCRA 529.
79
G.R. No. 48194, March 15, 1990, 183 SCRA 1990.
80
See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115
SCAD 522, 318 SCRA 373.
arts. 1343-1344 COntraCts 355
Essential Requisites of Contracts
Sec. 1 — Consent
81
Ibid.
82
Tongoy vs. Court of Appeals, 123 SCRA 99.
83
See also J.R. Blanco vs. Quasha, G.R. No. 133148, November 17, 1999, 115
356 ObligatiOns and COntraCts arts. 1345-1346
Text and Cases
In Pua vs. Court of Appeals84 where it was proven that the person
who allegedly entered into the contract was not even conceived at
the time the contract was executed, the Supreme Court said that the
contract was definitely absolutely simulated.
In Velasquez vs. Court of Appeals,85 a debtor was lured by the
creditor to make it appear that the debtor sold to the creditor the
collateralized property of the debtor. The creditor told the debtor that
this scheme was necessary so that the creditor can borrow money
from a certain bank and make use of the property as collateral.
After the loan was obtained, the creditor was supposed to execute a
reconveyance of the property to the debtor who would then assume
the loan from the bank and use the proceeds of the loan to pay off
his loan to the creditor. In the implementation of the scheme, three
documents were executed on the same day namely: 1) a deed of
cancellation of the mortgage made by the debtor to the creditor; 2)
a deed of sale of the property from the debtor to the creditor; and 3)
a document purporting to re-sell the property to the debtor. It was
contended by the creditors that the sale of the property was authentic
after the debtor filed a case to annul all the said documents. The
Supreme Court rejected the said contention of the creditor and stated
the contract of sale was clearly simulated to facilitate the transaction
with the bank as there was absolutely no consideration at all and the
parties clearly did not intend to be bound by the deed of sale and its
86
G.R. No. 138774, March 8, 2001.
358 ObligatiOns and COntraCts art. 1346
Text and Cases
accompanying documents.
In Francisco vs. Francisco-Alfonso86 where the two illegitimate
daughters claimed that they bought the two properties in 1983 from
their deceased father via a “Kasulatan sa Ganap na Bilihan” in the
total amount of P25,000 but evidence showed that, even with what
they claimed as their respective jobs at that time, they could not
possibly have any income to be able to have such amount of money
at the time of the sale, the Supreme Court declared the contract as
void for being simulated because there was no consideration for the
same. In concluding that the sale was void, the Supreme Court said
that it was impossible for one of the illegitimate daughters to have
money on hand in the amount of P15,000 just selling goto or lugaw
at the time of the sale. Likewise, the Supreme Court said that it was
incredible for the other illegitimate daughter, who was engaged in
the buying and selling of RTW, to have money on hand in the amount
of P10,000 at the time of the sale. Aside from the fact that a family
friend testified that the illegitimate daughters had no source of income
at the time of the sale, they likewise did not even present any single
witness to prove that the seller received the purchase price.
art. 1346 COntraCts 359
Essential Requisites of Contracts
Sec. 1 — Consent
360 ObligatiOns and COntraCts
Text and Cases
Article 1347. All things which are not outside the commerce
of men, including future things, may be the object of a contract.
All rights which are not intransmissible may also be the object
of contracts.
No contract may be entered into upon future inheritance
except in cases expressly authorized by law.
All services which are not contrary to law, morals, good
customs, public order or public policy may likewise be the object
of a contract. (1271)
360
art. 1347 COntraCts 361
Essential Requisites of Contracts
Sec. 2 — Object of Contracts
1
Republic vs. Cloribel, G.R. No. L-27905, December 28, 1970, 36 SCRA 534.
2
Torres vs. Court of Appeals, G.R. No. 134559, December 9, 1999, 117 SCAD
94, 320 SCRA 428.
3
Ibid.
4
G.R. No. L-49539, September 14, 1987, 153 SCRA 712.
363
364 ObligatiOns and COntraCts art. 1351
Text and Cases
prohibited by law (par. [7], Art. 1409, Civil Code of the Philip-
pines). Furthermore, as will be shown later, the Management
contract is the direct result of a previous illegal contract and,
therefore, is itself null and void under Article 1422 of the Civil
Code.
Petitioners attempt to evade the consequences of the
Romualdez connection by alleging that the 60% equity of
petitioner E. Razon, Inc. was obtained thru force and duress
and without any monetary consideration whatsoever. Otherwise
stated, the transfer of the shares of stock to persons close to
President Marcos, later disclosed to be Alfredo “Bejo” Romualdez
was, at the very least, voidable for lack of consent, or altogether
void for being absolutely fictitious or simulated.
Verily, the transfer of the shares of stocks of petitioner
E. Razon, Inc. representing 60% equity to persons fronting for
Alfredo “Bejo” Romualdez was null and void. The invalidity
springs not from vitiated consent nor absolute want of monetary
consideration, but for its having had an unlawful cause-that of
obtaining a government contract in violation of law. While the
general rule is that the causa of the contract must not be confused
with the motives of the parties, this case squarely fits into the
exception that the motives may be regarded as causa when it
predetermines the purpose of the contract. (Liguez vs. Court of
Appeals, 102 Phil. 577). On the part of Romualdez, the motive
was to be able to contract with the government which he was then
prohibited by law from doing, and on petitioner Razon’s part,
to be able to renew his management contract. For it is scarcely
disputable that Enrique Razon would not have transferred said
shares of stock to Romualdez without an assurance from the
latter that he would be unduly favored with a renewal of the
Management Contract. Thus, it came to pass that by transferring
60% of the shares in his company to Romualdez, petitioner
Enrique Razon was able to secure an eight-year contract with
respondent PPA and for six years before its cancellation benefit
from the proceeds thereof.
Petitioners’ attempt to dissociate or divorce themselves
from the illegality of the transfer and, consequently, of the mana-
gement contract, as well as their claim of innocence or being a
victim of the Marcos regime must fail for the “view has been
taken x x x that a party is a participant in the unlawful intention
where he knows and intends that the subject matter will be used
for an illegal purpose and there would seem to be no doubt that
one may be deemed to be a participant in the other’s unlawful
design if he shares in the benefits of the violation of law. However,
whether he is to derive any benefit from the unlawful use of the
subject matter is not the sole test. A test which has been said to
art. 1351 COntraCts 367
Essential Requisites of Contracts
Sec. 3 — Cause of Contracts
condition for the NHA to enter into the contract. On the part
of the NHA, therefore, the motive was the cause for its being a
party to the sale.11
The general rule provided by the law is that a false cause stated
in a contract makes the contract void. Thus, a contract of sale, which
states that the price of the object for sale is P500 when in fact no such
price has been paid at all, is void.12 However, when a contract, though
stating a false consideration, has in fact a real consideration, the
contract is not void. Thus, when a contract stating the consideration
of a ball pen is P1,000 but it is only sold for P500 which the seller
accepted, the contract is valid. At the least, the contract is a relatively
simulated one.
11
G.R. No. 120465, September 9, 1999, 112 SCAD 63, 314 SCRA 69.
12
See Mapalo vs. Mapalo, G.R. No. L-21489, May 19, 1966, 17 SCRA 114.
art. 1355 COntraCts 369
Essential Requisites of Contracts
Sec. 3 — Cause of Contracts
that the tobacco was really worth P7,000,000, then there will be
another cause for forfeiture which would be petitioner’s filing a
false declaration under Section 2530(m) of the Tariff and Customs
Code.
We cannot say that the appraisal of the value of the tobacco
was incorrect. According to the Tax Court, the Collector of Customs
took precautionary measures to insure a correct appraisal of the
tobacco. The appraisal was made by a competent appraiser of
the Bureau of Customs, and both the Commissioner of Customs
and the Secretary of Finance, who exercise supervisory authority
over the Collector of Customs and who were consulted on the
matter, approved the sale, or at least, interposed no objection to
the sale. Anent this matter it has been said that an appraisal
made by the Commissioner of Customs under Section 1377 of the
Revised Administrative Code is presumed to be correct, unless
the contrary is proven by the importer. (Lazaro vs. Commissioner
of Customs, L-22511 and L-22343, May 16, 1966, 17 SCRA 36,
41 and cases cited there-in.)
But, assuming arguendo, that the consideration paid for the
forfeited tobacco was inadequate, such inadequate consideration
is not a ground for the invalidity of a contract. Anent this matter
Article 1355 of the Civil Code provides:
“Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue
influence.”
Petitioner has not shown that the instant sale is a case
exempted by law from the operation of Art. 1355; neither has
petitioner shown that there was fraud, mistake or undue influence
in the sale. Hence, this Court cannot but conclude with the Court
of Tax Appeals that “in these circumstances, we find no reason
to invalidate the sale of said tobacco to Consolidated Tobacco
Industries of the Philippines.”
Chapter 3
FORMS OF CONTRACTS
G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688.
2
372
art. 1356 COntraCts 373
Forms of Contracts
G.R. No. 132474, November 19, 1999, 115 SCAD 798, 318 SCRA 688.
5
art. 1357 COntraCts 375
Forms of Contracts
6
Tapec vs. Court of Appeals, G.R. No. 111952, October 26, 1994, 56 SCAD 356,
376 ObligatiOns and COntraCts art. 1358
Text and Cases
Chapter 4
REFORMATION OF INSTRUMENTS (n)
379
380 ObligatiOns and COntraCts art. 1359
Text and Cases
Article 1362. If one party was mistaken and the other acted
fraudulently or inequitably in such a way that the instrument
does not show their true intention, the former may ask for the
reformation of the instrument.
384 ObligatiOns and COntraCts arts. 1362-1364
Text and Cases
Procedure; Rosello-Bentir vs. Leanda, G.R. No. 128891, April 12, 2000, 125 SCAD 322,
330 SCRA 591.
20
Section 1, Rule 63 of the 1997 New Rules of Civil Procedure.
21
Section 6, Rule 63 of the 1997 New Rules of Civil Procedure.
388 ObligatiOns and COntraCts
Text and Cases
Chapter 5
INTERPRETATION OF CONTRACTS
1
Huibonhoa vs. Court of Appeals, G.R. No. 95897, December 14, 1999, 117 SCAD
281, 320 SCRA 625; National Irrigation Administration vs. Gamit, G.R. No. 85869,
November 6, 1992, 215 SCRA 436.
2
Oil & Natural Gas Commission vs. CA, G.R. No. 114323, July 23, 1998, 96
SCAD 480, 293 SCRA 26.
3
G.R. No. 100970, September 2, 1992.
4
Hanil Development Company vs. Court of Appeals, G.R. No. 113176, July 30,
388
art. 1370 COntraCts 389
Interpretation of Contracts
2001, 152 SCAD 47; Capital Insurance vs. Central Azucarera, G.R. No. 30770, April
7, 1993, 221 SCRA 98; Gonzales vs. Court of Appeals, 124 SCRA 630.
5
G.R. No. L-111238, January 25, 1995, 58 SCAD 462, 240 SCRA 565.
6
G.R. No. 70451, March 24, 1993, 220 SCRA 405.
7
G.R. No. L-40242, December 15, 1982, 119 SCRA 245.
8
G.R. No. 93625, November 8, 1993, 227 SCRA 541.
390 ObligatiOns and COntraCts art. 1370
Text and Cases
G.R. No. 136913, May 12, 2000, 126 SCAD 492, 332 SCRA 151.
10
art. 1370 COntraCts 391
Interpretation of Contracts
intention of the parties. The fact that the lessee was allowed to make
improvements on the property was not indicative of the intention to
automatically renew the lease. Since the contract was also unclear
as to who may exercise the option to renew, the Supreme Court said
that the period of the lease must be construed to be for the benefit of
both parties and further stated:
12
17 Am Jur 2d 627-629.
394 ObligatiOns and COntraCts art. 1371
Text and Cases
13
Gonzales vs. Court of Appeals, G.R. No. 122611, March 8, 2001, 145 SCAD
384; Ridjo Tape & Chemical Corp. vs. Court of Appeals, 91 SCAD 892, 286 SCRA 544.
14
G.R. No. 102909, September 6, 1993, 44 SCAD 498, 226 SCRA 118.
15
G.R. No. 109680, July 14, 1995, 62 SCAD 801, 246 SCRA 323.
16
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
art. 1371 COntraCts 395
Interpretation of Contracts
19
Gonzales vs. Previsora Filipina, 74 Phil. 165.
398 ObligatiOns and COntraCts art. 1371
Text and Cases
20
Cebu Institute of Technology, et al. vs. Ople, G.R. No. L-58870, December 18,
1987.
21
John H. Jackson and Lee C. Bollinger, Contract Law in Modern Society, 1980
edition, St. Paul Minn., West Publishing Company, Page 1025; See also Go Tiaco vs.
Hermanos vs. Union Insurance Society of Canton, 40 Phil. 40.
22
17 Am Jur 2d 639.
23
G.R. No. 87047, October 31, 1990, 191 SCRA 150.
400 ObligatiOns and COntraCts art. 1373
Text and Cases
the Supreme Court ruled that the said provision can be interpreted
as involving a potestative suspensive condition making the defendant
stay in the premises for as long as he needed the same, but examining
the provision in its entirety, the said provision
is actually to the effect that the last portion thereof, which gives
the private respondent sixty (60) days before the expiration of
the term the right to give notice of his intent to renew, is subject
to the first portion of said paragraph that “the term of the lease
shall be renewed every three (3) years,” thereby requiring the
mutual agreement of the parties. The use of the word “renew”
and the designation of the period of three (3) years clearly confirm
that the contract of lease is limited to a specific period and that it
is not a continuing lease. The stipulation provides for a renewal
of the lease every three (3) years; there could not be a renewal
if said lease did not expire, otherwise there is nothing to renew.
Resultantly, the contract of lease should be and is hereby
construed as providing for a definite period of three (3) years and
that the automatic increase of rentals by twenty percent (20%) will
take effect only if the parties decide to renew the lease. A contrary
interpretation will result in a situation where the continuation
and effectivity of the contract will depend only upon the will of
the lessee, in violation of Article 1308 of the Civil Code x x x. The
compromise agreement should be understood as bearing that
import which is most adequate to render it effectual. Where the
instrument is susceptible of two interpretations, one which will
make it invalid and illegal and another which will make it valid
and legal, the latter inter-pretation should be interpreted.
24
G.R. No. 72703, November 13, 1992, 215 SCRA 580.
25
G.R. No. 126074, February 24, 1998, 91 SCAD 892, 286 SCRA 544.
art. 1373 COntraCts 401
Interpretation of Contracts
26
De Leon vs. Court of Appeals, G.R. No. 95511, January 30, 1992.
402 ObligatiOns and COntraCts art. 1374
Text and Cases
27
G.R. No. L-24016, July 31, 1960, 34 SCRA 83.
28
G.R. No. L-10231, October 18, 1988, 166 SCRA 577.
29
G.R. No. 121158, December 5, 1996, 77 SCAD 125.
art. 1374 COntraCts 403
Interpretation of Contracts
31
G.R. No. L-32162, September 28, 1984, 132 SCRA 156.
32
William F. Elliott, Commentaries on the Law of Contracts, Volume 2, 1913
art. 1374 COntraCts 405
Interpretation of Contracts
It was the contention of the petitioner in the said case that the
first clause was independent from the second clause such that after
December 31, 1985, the contract is deemed terminated. Hence, the
notice of termination given to the respondent nine days after Decem-
ber 31, 1985 was a compliance in good faith of the above-mentioned
agreement. Petitioner likewise contended that, even before the
expiration of the contract, it had served the respondent notice on
December 26, 1985. It was shown however by concrete evidence that,
since 1981, the practice of the petitioner and the respondent was that,
without renegotiation, the consultancy contract was con-tinuously
renewed so that the respondent continued to serve the petitioner even
after the expiry date with the renewal-contract signed in the first few
months of the year. Accordingly, applying Article 1374 of the Civil
Code and the rule in contract interpretation that several provisions
in a contract must be given a construction that will give effect to
all, the Supreme Court ruled that the petitioner failed to comply
with the 30-day notice requirement for terminating the contract
and therefore, also considering the yearly practice of the petitioner
and the respondent in the implementation and the renewal of their
consultancy agreement, the said agreement must be deemed renewed.
The Supreme Court said that the first clause relating to the term of
the contract must be construed together with the second clause on
the 30-day notice-requirement. The 30-day notice therefore should be
30
G.R. No. 118972, April 3, 1998, 93 SCAD 378, 288 SCRA 617.
408 ObligatiOns and COntraCts art. 1375
Text and Cases
given prior to the expiration date of the contract which was December
31, 1985. This becomes more imperative especially considering that
the notice relates to the termination of the contract. “Thus, the
requirements of contract as to notice — as to the time of giving, form
and manner of service thereof — must be strictly observed because
in an obligation where a period is designated, it is presumed to have
been established for the benefit of both the contracting parties. Thus,
the unilateral termination of the contract in question by the herein
petitioners is violative of the principle of mutuality of contracts
ordained in Article 1308 of the Civil Code.”
34
Keating on Building Contracts, by The Hon. Sir Anthony May, M.A., Sweet
and Maxwell, London, 1995 Page 47.
35
G.R. No. L-18857, December 11, 1967, 21 SCRA 1183; see also Nacu vs. Court of
Appeals, G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 237; Coscolluela
vs. Valderrama, L-13757, August 31, 1961, 2 SCRA 1095; Solis vs. Salvador, G.R. No.
L-17022, August 14, 1965; Halili vs. Lloret, 95 Phil. 78.
36
G.R. No. L-108638, March 11, 1994, 49 SCAD 598, 231 SCRA 1994.
37
G.R. No. 112127, July 17, 1995, 63 SCAD 72, 246 SCRA 511.
38
G.R. No. 96372, May 22, 1995, 61 SCAD 175, 244 SCRA 180.
412 ObligatiOns and COntraCts art. 1378
Text and Cases
39
G.R. No. L-11827, July 31, 1961, 2 SCRA 830.
40
G.R. No. L-60174, February 16, 1983, 120 SCRA 628.
art. 1378 COntraCts 413
Interpretation of Contracts
The law likewise provides that if the doubts are cast upon
the principal object of the contract in such a way that it cannot be
known what may have been the intention or will of the parties, the
contract shall be null and void. Hence, if the object of the contract
is a particular house of the seller in Quezon City and he owns two
houses in the said locality, the contract will be considered void if it
cannot be determined which house is the object of the contract.
Rule 123 of the Rules of Court is now Rule 130 of the New Rules
414 ObligatiOns and COntraCts art. 1379
Text and Cases
Chapter 6
RESCISSIBLE CONTRACTS
The rescissible contracts under Article 1380 are valid, but may
subsequently be terminated on legal grounds. Their being rescissible
is not principally premised on a breach of trust by the other party,
but on some economic damage as a result of inequitable conduct by
one party. If the contract is in fraud of creditors, which is a ground
for rescission, but it is likewise simulated in that there is absolutely
no consideration, the contract is not rescissible under this chapter
but clearly void ab initio. In Dilag vs. Court of Appeals,1 a contract
in fraud of creditors but completely simulated was considered void
and not merely rescissible, thus:
The appellate court ruled that the deed of sale was simulated
since it was executed in fraud of creditors having been entered into
during the pendency of Civil Case No. 8714. Said contract, being
fictitious, is according to the appellate tribunal, inexistent and
necessarily the adverse claim of private respondents is likewise a
nullity because an inexistent contract cannot give life to anything
at all. Hence, the filing of the present petition for certiorari by
the Dilag children with the following issues:
1. Whether or not petitioners as plaintiffs below, are the
owners of Lots 288 and 1927, of the Dumangas Cadastre at the
time of the levy on execution in Civil Case No. 8714.
2. Whether or not the decision and the consequent writ of
execution in Civil Case No. 8714 of the court below are operative
against petitioners who admittedly were not parties to said civil
case.
Petitioners’ contentions do not hold water.
It is not disputed that, at the time of the levy on execution
1
G.R. No. L-72727, July 30, 1987, 152 SCRA 459.
417
418 ObligatiOns and COntraCts art. 1380
Text and Cases
in Civil Case No. 8714, the Dilag spouses were still the registered
owners of Lot 288 as shown in TCT No. 30137 and they were also
the declared owners of Lot 1827 as shown in Tax Declaration
No. 411900-3039. On the other hand, it is alleged by private
respondent herein and not refuted by petitioners herein that the
title in the name of herein petitioners was issued on August 14,
1981, several days ahead of the deed of sale, dated August 26,
1981 on which the new title in the name of the petitioners was
based, and inscribed on August 27, 1981. Clearly, the Deed of
Absolute Sale in favor of petitioners herein executed in 1974 after
the filing of Civil Case No. 8714 was a simulated and fictitious
transaction to defraud Arellano who obtained a money judgment
against the parents of petitioners.
The supposed sellers, spouses Pablo and Socorro Dilag who
sold the lot in question to their children (petitioners herein) for an
insufficient consideration continued exercising acts of ownership
over Lot No. 288 by leasing the same to David Diancin and
turning over material possession thereof to the latter as lessee.
In fact, when the deed of sale in favor of Arellano was executed
on August 30, 1982, by virtue of the failure of the former owners
to redeem the property within the period prescribed by law, the
actual possessor was David Diancin. He, however, recognized
Arellano’s right of ownership when he was notified of the delivery
of possession to Arellano by the Provincial Sheriff as evidenced
by a signed delivery receipt, dated December 12, 1983. Diancin
ceased performing acts of cultivation on the fishpond situated
within the lot in question and he merely requested for an
extension of his stay while he looked for another place to stay.
Subsequently, Arellano sold the lot to Marcelino Florete and Leon
Coo. When Diancin was paid the value of the fish fry he placed
in the fishpond, he executed a Discharge and Release Claim in
favor of Florete, one of the vendees, on July 2, 1983. When the
Dilag children (petitioners herein) filed Civil Case No. 15085
on July 5, 1983, they were not in possession of the property in
question. There was therefore no factual and legal basis for the
restraining order dated July 8, 1983 of the lower court ordering
Arellano and/or his agents to desist from entering Lot No. 288.
Thus Rule 39, Sec. 13 relied upon by petitioners will not apply
in the case at bar.
Likewise it cannot be denied that in securing the can-
cellation of TCT No. 30137 covering Lot No. 288 in the names
of Pablo and Socorro Dilag, petitioners had to rely on an another
deed of absolute sale supposedly executed by their parents in their
favor in 1981, instead of relying on the first deed of sale executed
in 1974, an indication that petitioners do not really consider the
1974 Deed of Sale valid and legal.
The records of the case do not support petitioners’ contention
art. 1381 COntraCts 419
Rescissible Contracts
that the obligation of spouses Pablo and Socorro Dilag was already
extinguished when Arellano acknowledged the receipt of payment
of the money judgment, by virtue of their own admission thru
counsel in Civil Case No. 12832 that payment was only partial
and did not cover the whole amount of the money judgment
in Civil Case No. 8714. It is also an indisputable fact that the
compromise agreement in Civil Case No. 8714 was denied by the
trial court in its order of October 24, 1979. This order of denial
had become final and executory because no appeal was taken by
petitioners’ predecessors-interest. Furthermore, even assuming
that petitioners became the valid and legal owners of the lot in
question by virtue of the deed of sale executed in their favor in
1981, they nonetheless failed to avail themselves of their right
as registered owners to redeem the property from the private
respondent herein (buyer in the sale by public auction) within
the period provided for by law.
2
Article 381 of the 1950 Civil Code.
3
Articles 383 and 387 of the 1950 Civil Code.
4
G.R. No. L-29838, March 18, 1983, 121 SCRA 28.
5
G.R. No. L-19160, December 26, 1963, 9 SCRA 783.
art. 1381 COntraCts 421
Rescissible Contracts
A debtor whose liabilities already exceed his assets and who can
barely pay off his debts is considered in a state of insolvency. If he pays
off a creditor whose credit has not yet become due, that payment can
be rescinded. It is not necessary here that a prior judicial declaration
of insolvency of the debtor is obtained. In De La Paz vs. Garcia8 where
the transfer of property was made after an insolvency proceeding
was filed with the competent court, and where such transfer was
also claimed as in fraud of creditors, the Supreme Court held that
the transfer was not rescissible under the Civil Code but void under
the Insolvency Law.
and heirs of Tan Sin An, the present suit to rescind the sale in
question is not maintainable, even if the fraud charged actually
did exist.
if a father, with the intention to put beyond reach, his properties from
his creditors, sold the property to his son for a valuable consi-deration
but below the fair market value of the same, such a sale is valid and
not even rescissible if the son was without any knowledge of the
ulterior motive of his father to defraud his creditors. Mere inadequacy
of price does not invalidate a contract. For the son therefore the
consideration can still be considered a fair price. In short, the son
was clearly in good faith and therefore the contract of sale cannot be
rescinded.
It is axiomatic that good faith is always presumed unless
contrary evidence is adduced. A purchaser in good faith is one
who buys the property of another without notice that some other
person has a right or interest in such a property and pays a full
and fair price at the time of the purchase or before he has notice
of the claim or interest of some other person in the property.14
Approval by the courts implies that the parties were given their
day in court to justify to the court the necessity and reasonableness
of the contract to be entered into. Hence, once judicially approved,
such contract cannot anymore be the subject of rescission.
14
Rosencor Development Corporation vs. Inquing, G.R. No. 140479, March 8,
2001, 145 SCAD 484.
15
G.R. No. L- 25152, February 26, 1968, 22 SCRA 798.
16
Khe Hong Cheng vs. Court of Appeals, G.R. No. 144169, March 28, 2001, 146
art. 1387 COntraCts 427
Rescissible Contracts
subsequent buyer who is likewise in bad faith, the latter shall have
the obligation to return said property if it is still possible to do so. If
not, he shall be liable for damages. However, if such buyer is in good
faith, his purchase of the property is perfectly valid, thereby making
it impossible for the first transferee to return the property, in which
case such first transferee shall be liable for damages.
17
Article 234 of the Family Code of the Philippines, Executive Order No. 209 as
amended by Republic Act 6809.
18
Article 50 of the 1950 Civil Code.
art. 1389 COntraCts 431
Rescissible Contracts
19
Article 51 of the 1950 Civil Code.
432 ObligatiOns and COntraCts
Text and Cases
Chapter 7
VOIDABLE CONTRACTS
432
art. 1391 COntraCts 433
Voidable Contracts
of the same.
And when the action refers to contracts entered into
by minors or other incapacitated persons, from the time the
guardianship ceases. (1301a)
2
G.R. No. L-23002, July 31, 1967, 20 SCRA 908.
434 ObligatiOns and COntraCts art. 1391
Text and Cases
Ratification is the act of curing the defect which made the contract
annullable. It may be expressly or tacitly given. It extinguishes the
action to annul a voidable contract. Hence, if A is coerced by B to
lease the latter’s property and if, after the reason for the coercion
ceased, A writes B a letter that he (A) will continue the lease, the
defective contract will be considered as expressly ratified. If instead
of writing B a letter, A willingly and continuously pays the rentals for
the subject leased premises to be able to live in the same, the defect of
the contract is tacitly cured. In both cases, there is ratification which
completely erases the infirmity in the contract. An action therefore
by A to annul the agreement, based on force and intimidation will
not prosper even if it is filed within the four-year prescriptive period.
In Yao Ka Sin Trading vs. Court of Appeals,6 the Supreme
Court ruled that there can be no ratification by a corporation of acts
performed by an officer if he has not been given apparent authority by
the corporation, or if his acts are not later validated by the corporation.
The Supreme Court likewise differentiated the case from another case
which clearly shows ratification, thus:
7
G.R. Nos. 74938-39, January 17, 1990, 181 SCRA 84.
436 ObligatiOns and COntraCts arts. 1392-1393
Text and Cases
provision of law,” and that “the heir is not liable beyond the value
of the property he received from the decedent.” Plaintiff is not
a forced heir. He is not obliged principally or subsidiarily under
the contract. Marta Armentia did not transmit to him by devise
or otherwise any right to the property, the subject thereof. On
the contrary, Marta voluntarily disposed of it. No creditors are
defrauded; there are none. No legitimes are impaired. Therefore,
plaintiff has no cause of action to annul or to rescind the sale.
In point is Concepcion vs. Sta. Ana, 87 Phil. 787. The
facts there may well be analogized with those of the present. In
the Concepcion case, plaintiff Monico Concepcion was the only
surviving legitimate brother of Perpetua Concepcion, who died
without issue and without leaving any will. In her lifetime, or
more precisely, on June 29, 1945, said Perpetua Concepcion, “in
connivance with the defendant and with intent to defraud the
plaintiff, sold and conveyed three parcels of land for a false and
fictitious consideration to the defendant, who secured transfer
certificate of title of said lands issued under her name; and that
the defendant has been in possession of the properties sold since
the death of Perpetua Concepcion, thereby causing damages to
the plaintiff in the amount of not less than two hundred (P200)
pesos.” On motion to dismiss, the lower court threw the com-plaint
out of court upon the ground that the “plaintiff is not a party to
the deed of sale executed by Perpetua Concepcion in favor of the
defendant;” that even on the assumption “that the consideration
of the contract is fictitious, the plaintiff has no right of action
against the defendant;” that under Article 1302 of the old Civil
Code, “the action to annul a contract may be brought by any
person principally or subsidiarily bound thereby;” that “plaintiff
is not bound by the deed of sale executed by the deceased in favor
of the defendant;” and that he has “no obligations under the deed.”
The following reproduced in haec verba from the Concepcion
opinion is illuminating:
“(2) As to the appellant’s second and last contention,
under the law action to annul a contract entered into with all
the requisites mentioned in Article 1261 whenever they are
tainted with the vice which invalidate them in accordance with
law, may be brought not only by any person principally bound
or who made them, but also by his heir to whom the right and
obligation arising from the contract are transmitted. Hence, if no
such rights, actions or obligations have been transmitted to the
heir, the latter can not bring an action to annul the contract in
representation of the contracting party who made it. In Wolfson
vs. Estate of Martinez, 20 Phil. 340, this Supreme Court quoted
with approval the judgment of the Supreme Court of Spain of
April 18, 1901, in which it was held that ‘he who is not a party
442 ObligatiOns and COntraCts art. 1397
Text and Cases
have been the subject matter of the contract, with their fruits,
and the price with its interest, except in cases provided by law.
In obligations to render service, the value thereof shall be
the basis for damages. (1303a)
11
Braganza vs. De Villa Abrille, G.R. No. L-12471, April 13, 1959, 105 Phil. 456.
446 ObligatiOns and COntraCts arts. 1400-1401
Text and Cases
Chapter 8
UNENFORCEABLE CONTRACTS (n)
A contract may have all the requisites for perfection but it may
still be unenforceable. These unenforceable contracts are the ones
treated in this chapter. Thus, if a contract has been entered into
without authority, it cannot be enforced. This has been discussed
under Article 1317. Non-authority is also governed by the principles
of agency which are provided for in Article 1868 up to Article 1932 of
the Civil Code of 1950.1 Another case of an unenforceable contract is
when a contract is entered into by parties who are both incapacitated
to enter into a contract. Hence, if a contract is entered into by a
minor and by a deaf-mute who cannot read and write, such contract
is unenforceable. If only one is incapacitated, the contract will only
be voidable.
Another instance of an unenforceable contract is when the
contract does not comply with the Statute of Frauds. Basically, this
statute mandates that for certain executory contracts to be enforceable
in a court of law, the only evidence that can prove such contract is
a written proof of the agreement like some notes or memoranda.
The reason for this requirement is precisely to prevent fraud or
perjury2 as it has always been regarded that “a written document
speaks a uniform language but the spoken word could be notoriously
unreliable.”3 The written evidence of the contract may not necessarily
be in one document but in two or more notes or memoranda, which
taken together or by reference with other writings, clearly reveal
the essential requisites for the existence of a contract and also the
signature of the party or parties charged or their agent.4 In Berg vs.
Magdalena,5 the Supreme Court, citing jurisprudence in the United
1
Book IV, Title 10 of the 1950 Civil Code.
2
Shoemaker vs. La Tondeña, 68 Phil. 24.
3
Air France vs. Carrascoso, G.R. No. L-21438, September 28, 1966, 18 SCRA
155.
Berg vs. Magdalena Estate, G.R. No. L-3784, October 17, 1952, 92 Phil. 110.
4
450 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
Thus, in Paredes vs. Espino,6 where the record shows that the
defendant wrote the plaintiff a letter stating that he (the defendant)
accepted the offer of the plaintiff as to the price and the object of the
contract and that this was followed up by telegrams, the Supreme
Court said that the documents presented constituted adequate
memoranda of the transaction and therefore was removed from the
operation of the Statute of Frauds. Also in Limketkai Sons Milling,
Inc. vs. Court of Appeals,7 it was held:
Moreover, under Article 1403 of the Civil Code, an excep-
tion for the unenforceability of contracts pursuant to the Statute
of Frauds is the existence of a written note or memorandum
evidencing the contract. The memorandum may be found in
several writings, not necessarily in one document. The memo-
randum or memoranda is/are evidence that such a contract was
entered into.
xxx xxx xxx
While there is no written contract of sale of the Pasig
property executed by BPI in favor of plaintiff, there are abundant
notes and memoranda extant in the records of this case evidencing
the elements of a perfected contract. There is Exhibit P, the
letter of Kenneth Richard Awad addressed to Roland Aromin,
authorizing the sale of the subject property at the price of
P1,000.00 per square meter giving 2% commission to the broker
and instructing that the sale be on cash basis. Concomitantly, on
the basis of the instruction of Mr. Awad, (Exh. P), an authority to
sell (Exh. B), was issued by BPI to Pedro Revilla, Jr., representing
Assetrade Co., authorizing the latter to sell the property at the
initial quoted price of P1,000.00 per square meter which was
altered on an unaccepted offer by Technoland. After the letter
authority was issued to Mr. Revilla, a letter authority was signed
by Mr. Aromin allowing the buyer to enter the premises of the
property to inspect the same (Exh. C). On July 9, 1988, Pedro
Revilla, Jr., acting as agent of BPI, wrote a letter to BPI informing
it that he had procured a buyer in the name of Limketkai Sons
Milling, Inc. with offices at Limketkai Bldg., Greenhills, San
Juan, Metro Manila, repre-sented by its Exec. Vice President,
Alfonso Lim (Exh. D). On July 11, 1988, the plaintiff, through
Alfonso Lim, wrote a letter to the bank, through Merlin Albano,
confirming their transaction regarding the purchase of the subject
property (Exh. E). On July 18, 1988, the plaintiff tendered upon
the officials of the bank a check for P33,056,000.00 covered by
Check No. CA510883, dated July 18, 1988. On July 1, 1988, Alfoso
8
Vda. De Espiritu vs. Court of First Instance, G.R. No. L-30486, October 31,
1972, 47 SCRA 354.
9
Iñigo vs. Estate of Maloto, G.R. No. L-24383, September 28, 1967, 21 SCRA
452 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
fully accomplished after one year from the same, it will fall within
the Statute of Frauds. Thus, if the parties in January 1997 sign a
contract for one of them to build a seven-story building to commence
on November 1997, it cannot obviously be fully finished by January
1998. It can only be finished beyond the said period, and therefore this
contract falls within the Statute of Frauds. However, if a contract is
entered into where one party fully completed his undertaking within
one year and the other party could only finish his undertaking beyond
one year, the said contract shall be considered as removed from the
ambit of the Statute of Frauds.19 Hence, in the example given, if one of
the parties already fully paid the builder of the building the complete
consideration for the construction of the same six months after the
making of the contract, such contract does not anymore fall within
the statute. In the case of Babao vs. Perez,20 the Supreme Court stated
the rule thus:
x x x Thus, the rule on this point is well settled in Corpus
Juris in the following wise: “Contracts which by their terms are
not to be performed within one year, may be taken out of the
statute through performance by one party thereto. All that is
required in such case is complete performance within one year
by one party, however many years may have to elapse before the
agreement is performed by the other party. But nothing less than
full performance by one party will suffice, and it has been held
that, if anything remains to be done after the expiration of the
year besides the mere payment of money, the statute will apply.
(Italics supplied). x x x
“When, in an oral contract which, by its terms,
is not to be performed within one year from the
execution thereof, one of the contracting parties has
complied within the year the obligations imposed on
him by said contract, the other party cannot avoid the
fulfillment of those incumbent on him under the same
contract by invoking the statute of frauds because
the latter aims to prevent and not to protect fraud.”
(Shoemaker vs. La Tondeña, Inc., 68 Phil. 24)
“The broad view is that the statute of fraud
applies only to agreements not to be performed on
either side within a year from the making thereof.
20
Id.
21
Arthur Corbin, Corbin on Contracts, One Volume Edition, 1952, St. Paul
Publishing Co., Page 399.
22
Id., 400.
23
Id.
24
Id., 399.
458 ObligatiOns and COntraCts arts. 1403-1404
Text and Cases
25
Id., 404.
26
Lawrence P. Simpson, Handbook of the Law of Contracts, St. Paul Publishing
Co., 1954, Page 160.
27
Id., Page 169.
arts. 1403-1404 COntraCts 459
Unenforceable Contracts (n)
Belknap vs. Bender, 6 Thomp & C. [N.Y.], 611; Jefferson County vs.
Slagle, 66 Pa. St., 97; Haverly vs. Mercur, 78 Pa. St., 257; Weyand
vs. Critchfield, 3 Grant [Pa.] 113; Lakeman vs. Mountstephen, L.
R. 7 H. L., 17)
Taking into consideration all the circumstances of the case
at bar, we are satisfied that the credit for the lumber delivered
by the plaintiffs to defendant’s contractor was extended solely
and exclusively to the defendant under the verbal agreement
had with him, and therefore, that the provisions of the statute
did not require that it should be made in writing. Defendant
admitted on the stand that his contractor had no commercial
credit or standing in the community, and it appears that plaintiffs,
after investigation, absolutely refused to extend him any credit
whatever upon any conditions and that the defendant was well
aware of that fact. From the testimony of the contractor himself,
it seems clear that when the agreement for the delivery of lumber
was made, the credit was extended not to the contractor but to
the defendant. It appears that both plaintiffs and defendant
exercised special precautions to see that all the lumber was
delivered on defendant’s lot, and that before each bill of lumber
was delivered, defendant carefully examined the invoice, which
by agreement was submitted to him, and that no lumber was
delivered without his approval. The precise language in which
the verbal agreement was made does not appear from the
evidence, and while it is true that one of the plaintiffs in his
deposition, made in the United States, refers to the agreement
as one whereby defendant “guaranteed” payment for the lumber,
we are satisfied from all the evidence that the word was not
used by this witness in its technical sense, and that he did not
mean thereby to say that defendant guaranteed payment by the
contractor, but rather that after satisfying plaintiffs as to his
own financial responsibility, he obligated himself to pay for the
lumber delivered to his contractor for use in his house. The only
evidence in the whole record which tends to put our conclusion in
this regard in doubt, is the testimony of plaintiffs’ acting manager
during plaintiffs’ absence in the United States who stated that
he sent a statement of account and a bill for the lumber to the
contractor; but this fact, which under ordinary circumstances
would be strong evidence that the credit was originally extended
to the contractor and merely guaranteed by the defendant, was
satisfactorily and sufficiently explained by proof that the plaintiff
were compelled to leave for the United States quite unexpectedly,
with no opportunity to go over the accounts with their acting
manager, who was left in charge, so that the latter having no
knowledge whatever as to plaintiffs’ agreement with defendant,
and learning that lumber had been delivered to the contractor,
arts. 1403-1404 COntraCts 465
Unenforceable Contracts (n)
supposed that it had been sold to him, and only discovered his
mistake on later investigation and correspondence with his
principals, after the contractor had notified him as to the true
nature of the transaction.
The judgment appealed from should be affirmed with the
costs of this instance against the appellant. So ordered.
other to observe that form, once the contract has been perfected.
Their right may be exercised simultaneously with action upon the
contract (Article 1359, Civil Code).
Regarding the admissibility and competence of the evidence
adduced by petitioner, respondent Court of Appeals ruled that
because the sale involved real property, the statute of frauds is
applicable.
In any event, petitioner cites Abrenica vs. Gonda (34 Phil.
739 [1916]) wherein it was held that contracts infringing the
Statute of Frauds are ratified when the defense fails to object,
or asks questions on cross-examination. The succinct words of
Justice Araullo still ring in judicial cadence.
As no timely objection or protest was made to
the admission of the testimony of the plaintiff with
respect to the contract; and as the motion to strike
out said evidence came to late, and furthermore, as
the defendants themselves, by the cross-questions
put by their counsel to the witnesses in respect to
said contract, tacitly waived their right to have it
stricken out, that evidence, therefore, cannot be
considered either inadmissible or illegal, and court,
far from having erred in taking it into consideration
and basing his judgment thereon, notwithstanding
the fact that it was ordered to be stricken out during
the trial, merely corrected the error he committed in
ordering it to be so stricken out and complied with
the rules of procedure hereinbefore cited. (at p. 748)
In the instant case, counsel for respondents cross-examined
petitioner’s witnesses at length on the contract itself, the
purchase price, the tender of cash payment, the authority of
Aromin and Revilla, and other details of the litigated contract.
Under the Abrenica rule (reiterated in a number of cases, among
them Talosig vs. Vda. De Nieba, 43 SCRA 472 [1972]), even
assuming that parol evidence was initially inadmissible, the
same became competent and admissible because of the cross-
examination, which elicited evidence proving the evidence of
a perfected contract. The cross-examination on the contract is
deemed a waiver of the defense of the Statute of Frauds (Vitug,
Compendium of Civil Law and Jurisprudence, 1993 Revised
Edition, supra, p. 563).
The reason for the rule is that as pointed out in Abrenica
“if the answers of those witnesses were stricken out, the cross-
468 ObligatiOns and COntraCts art. 1405
Text and Cases
Chapter 9
VOID AND INEXISTENT CONTRACTS
1
G.R. No. 80965, June 6, 1990, 186 SCRA 345.
471
472 ObligatiOns and COntraCts art. 1409
Text and Cases
was the termination of the marriage by the parties, which they cannot
do on their own and without any legal basis.
In Gardner vs. Court of Appeals,2 where a contract purporting to
be a sale of land was really without consideration, but was actually
intended merely to protect a party to a joint venture for the cash
advances he was to make for the realty subdivision that the parties
wanted to put up, the Supreme Court ruled that the contract was
absolutely simulated and therefore null and void. A similar finding
was also stated in Carino vs. Court of Appeals.3
In Prudential Bank vs. Panis4 where a grantee of a government
sales patent mortgaged the same within the prohibition provided by
the Public Land Act that no encumbrance or alienation should be
made of the property subject of the patent within 5 years from the
issuance thereof, the Supreme Court ruled that the mortgage was
null and void for being in violation of law.
In Maharlika Publishing Corporation vs. Tagle5 where the wife of
a GSIS official, acting for her husband who was an influential Division
Chief of the GSIS, was allowed to bid on a foreclosed property, and
where she eventually won the bidding, the Supreme Court declared
the bidding and the contract of sale resulting therefrom as null
and void as they violated Article 1491 of the Civil Code prohibiting
public officers and employees from purchasing property under their
administration in an auction sale. The Supreme Court pertinently
said:
A Division Chief of the GSIS is not an ordinary employee
without influence or authority. The mere fact that he exercises
ample authority with respect to a particular activity, i.e.,
retirement, shows that his influence cannot be lightly regarded.
The point is that he is a public officer and his wife acts for
and his name in any transaction with the GSIS. If he is allowed
to participate in the public bidding of properties foreclosed or
confiscated by the GSIS, there will always be the suspicion among
other bidders and the general public that the insider official
had access to information and connections with his fellow GSIS
officials as to allow him to eventually acquire the property. It
2
G.R. No. L-59952, August 31, 1984, 131 SCRA 585.
3
G.R. No. L-47661, July 31, 1987, 152 SCRA 529.
4
G.R. No. L-50008, August 8, 1987, 153 SCRA 390; Heirs of Leandro Oliver vs.
Court of Appeals, G.R. No. L-107069, July 21, 1994, 53 SCAD 453, 234 SCRA 367.
5
G.R. No. L-65594, July 9, 1986, 142 SCRA 553; Rubias vs. Batiller, G.R. No.
L-35702, May 29, 1973, 51 SCRA 120.
art. 1409 COntraCts 473
Void and Inexistent Contracts
74.
Peñalosa vs. Santos, G.R. No. 133749, August 23, 2001.
9
Chavez vs. PCGG, G.R. No. 130716, May 19, 1999, 106 SCAD 752, 307 SCRA
10
394.
11
Ibid.; Yuchengco, Inc. vs. Velayo, 115 SCRA 307; Tongoy vs. Court of Appeals,
123 SCRA 99.
12
Development Bank of the Philippines vs. Court of Appeals, G.R. No. 110053,
October 16, 1995, 65 SCAD 82, 249 SCRA 331.
13
G.R. No. L-66693, July 14, 1986, 143 SCRA 40.
14
E. Razon, Inc. vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1997,
476 ObligatiOns and COntraCts art. 1409
Text and Cases
is guilty; but the innocent one may claim what he has given,
and shall not be bound to comply with his promise. (1305)
21
G.R. No. L-45255, November 14, 1986, 145 SCRA 541.
480 ObligatiOns and COntraCts art. 1412
Text and Cases
any kind will be given to one against the other.” Although certain
exceptions to the rule are provided by law, We see no cogent reason
why the full force of the rule should not be applied in the instant
case.
22
G.R. No. 59534, May 10, 1990, 185 SCRA 284.
23
G.R. No. L-23002, July 31, 1967, 20 SCRA 908.
art. 1413 COntraCts 481
Void and Inexistent Contracts
G.R. No. L-23303, September 25, 1968, 25 SCRA 153; See also Philippine
26
National Bank vs. De Los Reyes, G.R. Nos. 46898-99, November 28, 1989, 179 SCRA
619.
arts. 1415-1416 COntraCts 483
Void and Inexistent Contracts
correct.
In the first place, it is worthwhile to note that, unlike in a
transfer of the applicant’s rights made before the award or signing
of the contract of sale, which is specifically declared null and void
and disqualifies such applicant from further acquiring any land
from the NAFCO, Republic Act 477 is silent as to the consequence
of the alienation or encumbering of the land after the execution
of the contract of sale, but within 10 years from the issuance of
the corresponding certificate of title. Considering that the aim of
the government in allowing the distribution or sale of disposable
public lands to deserving applicants is to enable the landless
citizens to own the land they could work on, and the reversion
of these lands to the government is penal in character, reversion
cannot be construed to be implied from the provision making
certain acts prohibited. Whereas in this case, the interest of the
individual outweighs the interest of the public, strict construction
of a penal provision is justified. Article 1416 of the Civil Code of
the Philippines prescribes as follows:
Article 1416. When the agreement is not illegal per
se but is merely prohibited, and the prohibition by
the law is designed for the protection of the plaintiff,
he may, if public policy is thereby enhanced, recover
what he has paid or delivered.
Secondly, under Section 9, Republic Act No. 477, the
disposition of lands by the NAFCO (National Abaca and Other
Fibers Corporation) is to be governed by Public Land Act (C.A.
141); and it has been ruled, in connection with the same, that
a disregard or violation of the conditions of the land grant does
not produce automatic reversion of the property to the State, nor
work to defeat the grantee’s right to recover the property he had
previously disposed of or encumbered. This was made clear by
this Court when it said:
“x x x Similar contentions were made in the case
of Catalina de los Santos vs. Roman Catholic Church
of Midsayap, et al., 94 Phil. 405, 50 Off. Gaz. 1588,
but they were overruled, this Court holding that the
pari delicto doctrine may not be invoked in a case of
this kind since it would turn counter to an avowed
fundamental policy of the State that the forfeiture
of the homestead is a matter between the State and
the grantee or his heirs, and that until the State has
27
Olea vs. Court of Appeals, G.R. No. 109696, August 14, 1995, 63 SCAD 579,
274 SCRA 247.
28
Bañez vs. Court of Appeals, G.R. No. L-30351, September 11, 1974, 59 SCRA
arts. 1417-1418 COntraCts 485
Void and Inexistent Contracts
15.
E. Razon vs. Philippine Ports Authority, G.R. No. L-75197, June 22, 1987, 133
29
SCRA 515.
art. 1422 COntraCts 487
Void and Inexistent Contracts
488 ObligatiOns and COntraCts
Text and Cases
The 1947 Code Commission which inserted this Title in the Civil
Code stated the rationale of the provisions on natural obligations in
its report, thus:
In all the specific cases of natural obligation recognized by
the present Code, there is a moral but not a legal duty to perform
or pay, but the person thus performing or paying feels that in good
conscience he should comply with his undertaking which is based
on moral grounds. Why should the law permit him to change his
mind, and recover what he has delivered or paid? Is it not wiser
and more just that the law should compel him to abide by his
honor and conscience? Equity, morality, natural justice — these
are, after all, the abiding foundations of a positive law. A broad
policy justifies a legal principle that would encourage persons to
fulfill their moral obligations.
Furthermore, when the question is viewed from the side of
the payee, the incorporation of natural obligations into the legal
system becomes imperative. Under the laws in force, the payee
is obliged to return the amount received by him because the
payor was not legally bound to make the payment. But the payee
knows that by all considerations of right and justice he ought to
keep what has been delivered to him. He is therefore dissatisfied
over the law, which deprives him of that which in honor and fair
dealing ought to pertain to him. Is it advisable for the State thus
to give grounds to the citizens to be justly disappointed?
To recapitulate: because they rest upon morality and
because they are recognized in some leading civil codes, natural
obligations have again become part and parcel of the Philippine
488
arts. 1424-1427 Natural ObligatiOns 489
law.1
492
art. 1431 estOPPel (n) 493
G.R. No. L-12721, February 28, 1961, 1 SCRA 639, citing Canlubang Sugar
6
Estate vs. Standard Alcohol Co. (Phil.), Inc., G.R. No. L-10887, April 16, 1958; Philippine
American Drug Co. vs. Collector of Internal Revenue, et al., G.R. No. L-13032, August
31, 1959; Teodore Lewin vs. Emilio Galang, G.R. No. L-15253, October 31, 1960.
7
Tañada vs. Cuenco, G.R. No. L-10520, February 28, 1957.
8
Kalalo vs. Luz, G.R. No. 27782, July 31, 1970, 34 SCRA 337, citing Ramiro vs.
Grano, 54 Phil. 744, 750; Coleman vs. Southern Pacific Co., 141 Cal App 2d 121, 296
P2d 386.
9
28 Am Jur 2d 602-603.
494 ObligatiOns and COntraCts arts. 1432-1433
Text and Cases
10
Id., Pages 627-628.
arts. 1432-1433 estOPPel (n) 495
of the true facts and who had a right to rely upon such word or
conduct, to believe and act upon them thereby, as a consequence
reasonably anticipated, changing his position in such a way that
he would suffer injury if such denial or contrary assertion was
allowed. In the final analysis, however, an equitable estoppel
rests upon the facts and circumstances of the particular case in
which it is urged, considered in the framework of the elements,
requisites, and grounds of equitable estoppel, and consequently,
any attempted definition usually amounts to no more than a
declaration of an estoppel under those facts and circumstances.
The cases themselves must be looked to and applied by way of
analogy rather than rule.10
facts; and
(4) The party defrauded must have acted in accordance
with the misrepresentation.
Chapter 1
GENERAL PROVISIONS
501
502 ObligatiOns and COntraCts arts. 1440-1441
Text and Cases
2
G.R. No. 107797, August 26, 1996, 73 SCAD 586, 261 SCRA 45.
504 ObligatiOns and COntraCts art. 1442
Text and Cases
Chapter 2
EXPRESS TRUSTS
505
506 ObligatiOns and COntraCts arts. 1444-1446
Text and Cases
Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA 1192.
3
507
Chapter 3
IMPLIED TRUSTS
1
Saltiga vs. Court of Appeals, G.R. No. 109307, November 25, 1999, 116 SCAD
170, 319 SCRA 180.
2
Ibid.
3
Ibid.
507
508 ObligatiOns and COntraCts art. 1447
Text and Cases
4
Cuaycong vs. Cuaycong, G.R. No. L-21616, December 11, 1967, 21 SCRA
1192.
5
Id.
6
Article 1442 of the 1950 Civil Code.
7
G.R. No. 116211, March 7, 1997, 80 SCAD 302.
8
G.R. No. L-31569, September 28, 1973, 53 SCRA 168.
9
Castrillo vs. Court of Appeals, G.R. No. L-18046, March 31, 1964, 10 SCRA
art. 1447 trust (n) 509
Implied Trusts
549.
arts. 1449-1450 trust (n) 511
Implied Trusts
owner, but it was the third-party-buyer who paid the price in order
that his purchase of the same will push through. Subsequently, the
original owners confirmed their sale to the third-party buyer. The
Supreme Court ruled that under this situation an implied or resulting
trust existed, thus:
x x x If the resale by the Government Service Insurance
System upon payment of the price of redemption by Nadera was
made in favor of the Padilla spouses, it was purely a matter of
form since they were the mortgage debtors, and the least that can
be said under the circumstances is that they should be considered
as trustees under an implied or resulting trust for the benefit of
the real owner, namely, respondent Nadera. Article 1448 of the
Civil Code says that “there is an implied trust when property is
sold, and the legal estate is granted to one party but the price is
paid by another for the purpose of having the beneficial interest
of the property . . . “The concept of implied trusts is that from the
facts and circumstances of a given case the existence of a trust
relationship is inferred in order to effect the presumed (in this
case it is even expressed) intention of the parties or to satisfy the
demands of justice or to protect against fraud.
This was done so that X will have an assurance that the debt of A can
be paid. In this case, the trustee is the lender. A can later redeem the
property by paying X the money paid for the property. Thereafter, A
can compel X to convey the property.
April 28, 1969, 27 SCRA 1179; De Ocampo vs. Zaporteza, 53 Phil. 442; Gayondato vs.
Treasurer of the P.I., 49 Phil. 244; Gemora vs. De Guzman, G.R. No. L-19060, May
29, 1964.
11
Ramos vs. Ramos, G.R. No. L-19872, December 3, 1974, 61 SCRA 284.
514 ObligatiOns and COntraCts art. 1457
Text and Cases
Chapter 1
QUASI-CONTRACTS
1
G.R. No. 13602, April 6, 1918, 38 Phil. 182.
515
516 ObligatiOns and COntraCts art. 2143
Text and Cases
517
518 ObligatiOns and COntraCts art. 2144
Text and Cases
were entitled, and where the uncle of the said minors took upon
himself to deposit the redemption price in court so that the period to
redeem will not prescribe, and where the authority of the said uncle
was questioned, the Supreme Court ruled that there was a quasi-
contract created, and therefore the act of the uncle in preserving the
property of the minors was valid. Pertinently, the Supreme Court
ruled:
In the lamentable situation in which these poor children
were left from the 2nd of May, when their guardian Isidro
Azarraga died, until the 17th of the same month, on which date
the period for redemption expired, the law was not obliged to
abandon them to their faith. Leodegario Azarraga was reduced to
the expedient of voluntarily undertaking to carry out a business
matter for another and effected the redemption by depositing the
price thereof.
“The following are circumstances under which one may
undertake to carry out a business matter for another (gestion
de negocios ajenos)” says Manresa, “and complete the juridic
conception which we have just given of such undertaking: (1)
That they relate to determined things or affairs, and that there
be no administrator or representative of the owner who is charged
with the management thereof; (2) that it be foreign to all idea of
express or tacit mandate on the part of the owner, for it very often
may happen even without his knowledge; it is authorized by Law
26, title 12, of the 5th Partida and continues to be authorized by
the Code, which latter, in fulfillment of base 21, aforecited, of the
law of May 18, 1888, maintained the doctrine sanctioned by the
old law; and (3) that the actor be inspired by the beneficent idea
of averting losses and damages to the owner or to the interested
party through the abandonment of the things that belong to him
or of the business in which he may be interested, that is, that
administration is not for profit, or, as stated in Law 29, of the title
and Partida cited, with the avaricious idea of gain. ‘Without these
circumstances,’ says Sanchez Roman, ‘the quasi-contract with
which we are now dealing does not exist; and, on the contrary,
reduced to its just and natural limits, it is of unquestionable
utility’ (12 Manresa, 547 and 548).’ ”
On the following page, 549, he adds:
“And as the law cannot and should not presume
that the administrator undertakes the venture for
unlawful and immoral purposes, but simply for the
good of the owner or of the persons who are interested
in the things or affairs affected, it confers upon the
administrator the capacity of mandatory, and in
such capacity requires of him that he fulfills his trust
art. 2144 extra-COntraCtual ObligatiOns 519
Quasi-Contracts
Sec. 1 — Negotiorum Gestio
management.
The courts may, however, increase or moderate the
indemnity according to the circumstances of each case. (1889a)
owner;
(3) If he fails to return the property or business after
demand by the owner;
(4) If he assumed the management in bad faith. (1891a)
that it will not be foreclosed, the owner must reimburse the officious
manager for the payment made by the latter. Even if no benefit has
been derived but the officious manager takes over to save the property
or business from imminent loss, the officious manager should likewise
be reimbursed for obligations incurred for the owner’s interest,
including useful and necessary expenses.
Article 2151. Even though the owner did not derive any
benefit and there has been no imminent and manifest danger
to the property or business, the owner is liable as under the
first paragraph of the preceding article, provided:
(1) The officious manager has acted in good faith, and
(2) The property or business is intact, ready to be
returned to the owner. (n)
decoration is the very object of the business of the owner, the owner
shall be liable.
527
528 ObligatiOns and COntraCts art. 2154
Text and Cases
In City of Cebu vs. Judge Piccio, etc. & Caballero,2 the Supreme
Court again had the occasion to restate the indispensable requisites
of the juridical relation of solutio indebiti as follows:
a) he who paid was not under obligation to do so; and (b)
that the payment was made by reason of an essential mistake of
fact (Hoskyn vs. The Goodyear Tire, etc., CA, 40 Off. Gaz., Supp.
11, 245; Velez vs. Balzarza, 73 Phil. 630).
of his (X’s) watch. X must claim the watch within one month from the
advice. If X does not claim the watch, B is excused from all liability
if, A, because of solutio indebiti, claims back the watch, and B gives
back the watch to A. However, if at the time A gives the watch of B,
the latter has reasonable grounds to believe that it has been acquired
unlawfully, B can return the same to A. The above situation is
pursuant to Article 1984 of the 1950 Civil Code which provides:
Article 1984. The depositary cannot demand that the
depositor prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been
stolen and who its true owner is, he must advise the latter of the
deposit.
If the owner, in spite of such information, does not claim it
within the period of one month, the depositary shall be relieved of
all responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the
thing has not been lawfully acquired by the depositor, the former
may return the same.
If the creditor knows that the payment is not yet due and
payment is tendered to him, he must inform the debtor that payment
is not yet due. Should the creditor accept such premature payment,
he is therefore in bad faith and shall be liable for interest from the
time he accepts payment up to the time he returns it upon demand
of the debtor.
Article 2160. He who in good faith accepts an undue
payment of a thing certain and determinate shall only be res-
ponsible for the impairment or loss of the same or its acces-
sories and accessions insofar as he has thereby been benefited.
If he has alienated it, he shall return the price or assign the
action to collect the sum. (1897)
the value they may have at the time he enters into possession.
Article 550. The costs of litigation over the property shall
be borne by every possessor.
Article 551. Improvements caused by Nature or time shall
always inure to the benefit of the person who has succeeded in
recovering possession.
Article 552. A possessor in good faith shall be liable for
the deterioration or loss of the thing possessed, except in cases
in which it is proved that he has acted with fraudulent intent or
negligence, after the judicial summons.
A possessor in bad faith shall be liable for deterioration or
loss in every case, even if caused by fortuitous event.
Article 553. One who recovers possession shall not be obliged
to pay for improvements which have ceased to exist at the time
he takes possession of the thing.
on the fifth year, he has six years from such payment within which
to file an action against A, the principal debtor. This is so because,
considering that a quasi-contract prescribes after six years from the
time the cause of action accrues, the action to collect from A is still
effective.
1
Executive Order No. 209 which took effect on August 3, 1988.
2
49 Phil. 489 cited in Persons and Family Relations Law by Melencio S. Sta.
Maria, Jr., 2nd edition, Rex Printing Company, Inc., 84 P. Florentino St., Quezon City,
page 530.
3
Article 195 of the Family Code of the Philippines, Executive Order No. 209
539
540 ObligatiOns and COntraCts art. 2165
Text and Cases
Article 2166 has been adopted by Article 207 of the Family Code
of the Philippines which provides:
Article 207. When the person obliged to support another
unjustly refuses or fails to give support when urgently needed
by the latter, any third person may furnish support to the needy
individual, with right of reimbursement from the person obliged to
give support. This Article shall particularly apply when the father
or mother of a child under the age of majority unjustly refuses to
support or fails to give support to the child when urgently needed.