Obligations and Contracts
XPNs:
IV. OBLIGATIONS AND CONTRACTS
A. OBLIGATIONS
1. GENERAL PROVISIONS
An obligation is a juridical necessity to give, to do, or
not to do. (Art. 1156, NCC)
Obligation as Juridical Necessity
It is a juridical necessity because in case of non-
compliance, the courts of justice may be called upon
by the aggrieved party to enforce its fulfillment or,
in default thereof, the economic value that it
represents. (De Leon, 2010)
It is a juridical relation or necessity that allows one
person (creditor) to demand the observance of
determinative conduct (i.e., giving, doing, or not
doing) from another (debtor), and in case of breach,
the former can demand satisfaction from the assets
of the latter. (Makati Stock Exchange v. Campos, G.R.
No. 138814, 16 Apr. 2009)
Art. 1156 refers only to civil obligations that are
enforceable in court when breached. It does not
cover natural obligations (Arts. 1423 -1430, NCC)
because the latter are obligations that cannot be
enforced in court on equity and natural law and not
on positive law. (Pineda, 2000)
When there is a right, there is a corresponding
obligation. Right is the active aspect while
obligation is the passive aspect. Thus, the concepts
of credit and debt are two distinct aspects of a
unitary concept of obligation. (Ibid.)
Form of Obligation
GR: The law does not require any form in
obligations arising from contracts for their validity
or binding force. (Art. 1356, NCC)
235
1. When the form is essential to the validity of the
contract as required by law. (Art. 1346, NCC)
2. When the contract is unenforceable, unless it is
in a certain form, such as those under the
Statute of Frauds as formulated in Art. 1403.
Obligations arising from other sources (Art. 1157,
NCC) do not have any form at all. (De Leon, 2010)
Elements of an Obligation
The following are the elements of an obligation (J-
A-P-O):
1. Juridical tie or vinculum juris or efficient cause -
the efficient cause by virtue of which the debtor
becomes bound to perform the prestation;
(Pineda, 2000)
NOTE: The vinculum juris is established by:
a. Law;
b. Bilateral acts;
c. Unilateral act. (Tolentino, 2002)
2. Active subject (creditor or obligee) - The person
demanding the performance of the obligation. It
is he in whose favor the obligation is
constituted, established, or created;
3. Passive subject (debtor or obligor) - The person
bound to perform the prestation to give, to do,
or not to do;
4. Object or prestation - The subject matter of the
obligation which has a corresponding economic
value or susceptible of pecuniary substitution
in case of noncompliance. It is a conduct that
may consist of giving, doing, or not doing
something. (Pineda, 2000)
NOTE: In order to be valid, the object or
prestation must be:
a. Licit or lawful;
b. Possible, physically, and judicially;
c. Determinate or determinable; and
d. Pecuniary value or possible equivalent in
money.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

The absence of any of the first three makes the 2. Nature

object void. (Tolentino, 2002) a. Personal – to do; not to do;
b. Real – to give.
NOTE: Some writers add a fifth one: the form in
which the obligation is manifested. This element, 3. Object
however, cannot be considered as essential. There a. Determinate / specific - particularly
is no particular form required to make obligations designated or physically segregated from
binding, except in certain rare cases. (Tolentino, all others of the same class;
1991) b. Generic – designated merely by its class or
genus;
The obligation is constituted upon the concurrence c. Limited generic – generic objects confined
of the essential elements thereof, viz: (a) the to a particular class or source (e.g., an
vinculum juris or juridical tie which is the efficient obligation to deliver one of my horses).
cause established by various sources of obligations (Tolentino, 2002)
(law, contracts, quasi-contracts, delicts and quasi-
delicts); (b) the object which is the presentation or 4. Performance
conduct, required to be observed (to give, to do or a. Positive - to give; to do;
not to do); and (c) the subject-persons who are the b. Negative – not to do.
active (obligee) and the passive (obligor) subjects.
(De Leon v. The Manufacturers Life Insurance 5. Person obliged
Company (Phils.) Inc., G.R. No. 243733, 12 Jan. 2021) a. Unilateral – only one party is bound;
b. Bilateral – both parties are bound.
Different Kinds of Prestation
NOTE : A bilateral obligation may be reciprocal
or non-reciprocal. Reciprocal obligations arise
OBLIGATION OBLIGATION OBLIGATION
from the same cause, wherein each party is a
TO GIVE TO DO NOT TO DO
debtor and a creditor of the other, such that the
As to what the obligation consists of performance of one is conditioned upon the
Rendering of simultaneous fulfillment of the other.
works or Meanwhile, in non-reciprocal obligations,
Delivery of a Refraining from performance by one is independent from the
services,
thing to doing certain other. (Paras, 2008)
whether
creditor acts
physical or
mental 6. Existence of burden or condition
a. Pure – not burdened with any condition or
Examples
term. It is immediately demandable; (Art.
Contract for Negative 1179, NCC)
Sale, deposit, professional easement, b. Conditional – subject to a condition which
pledge, services like restraining may be suspensive (e.g., satisfaction of the
donation, painting, order, or condition gives rise to the obligation) or
antichresis modeling, injunction. resolutory (satisfaction of the condition
singing, etc. (Pineda, 2000) terminates the obligation). (Art. 1181, NCC)

Classification of Obligations 7. Character of responsibility or liability

a. Joint – each debtor is liable only for a part
1. Creation of the whole liability and to each creditor
a. Legal – imposed by law; (Art. 1158, NCC) shall belong only a part of the correlative
b. Conventional – established by the rights (8 Manresa 194; Art. 1207, NCC);
agreement of the parties (e.g., Contracts).

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2022 GOLDEN NOTES
 Obligations and Contracts
b. Solidary – debtor is answerable for the
whole of the obligation without prejudice
to his right to collect from his co-debtors
the latter’s shares in the obligation. (Art.
1207, NCC)
8. Susceptibility of partial fulfillment
a. Divisible – obligation is susceptible of
partial performance (Arts. 1223 & 1224,
NCC);
b. Indivisible – obligation is not susceptible of
partial performance. (Art. 1225, NCC)
9. Right to choose and substitution
a. Alternative – obligor may choose to
completely perform one out of the several
prestations (Art. 1199, NCC);
b. Facultative – only one prestation has been
agreed upon, but the obligor may render
one in substitution of the first one. (Art.
1206, NCC)
10. Imposition of penalty
a. Simple – there is no penalty imposed for
violation of the terms (Art. 1226, NCC);
b. Obligations with a penal clause – obligation
which imposes a penalty for violation of the
terms. (Art. 1226, NCC)
11. Sanction
a. Civil – gives a right of action to compel their
performance; the sanction is judicial
process;
b. Natural– not based on positive law, but on
equity and natural law; does not grant a
right of action to enforce their
performance, but after voluntary
fulfillment by the obligor, they authorize
retention of what has been delivered
rendered by reason thereof; the sanction is
the law;
c. Moral – cannot be enforced by action but
are binding on the party who makes it in
conscience and natural law; the sanction is
conscience or morality.
237
Sources of Obligations (L-C-Q-D-Q)
1. Law;
2. Contracts;
3. Quasi-contracts;
4. Delict;
5. Quasi-delict.
This enumeration is exclusive. No obligation exists
if its source is not one of those enumerated in Art.
1157 of the NCC. (Navales v. Rias, G.R. No. L-3489, 07
Sep. 1907)
NOTE: Actually, there are only two sources (i.e., law
and contracts) because obligations arising from
quasi-contracts, delicts, and quasi-delicts are
imposed by law. (Leung Ben v. O’Brien, 38 Phil. 182).
Time of Perfection
GR:
1. Law – from the time designated by the law
creating or regulating them;
2. Contracts –from the time of the perfection of the
contract (Art. 1319, NCC) (e.g., meeting of the
minds).
XPNs:
a. When the parties made a stipulation on the
right of the creditor to the fruits of the
thing;
b. When the obligation is subject to a
suspensive condition, from which it arises
upon fulfillment of the condition;
c. When the obligation is with a period; there
is already an existing obligation, but it is
only demandable when the period expires
or becomes due.
3. Quasi-contracts, delicts, quasi-delicts – from the
time designated by the law creating or
regulating them.
OBLIGATION EX LEGE
Obligations derived from law are not presumed.
Only those expressly determined in the Code or in
special laws are demandable and shall be regulated
by the precepts of the law that establishes them and
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
as to what has not been foreseen by the provisions
of Book IV of NCC. (Art. 1158, NCC)
NOTE: If there is conflict between the NCC and a
special law, the latter prevails unless the contrary
has been expressly stipulated in the NCC. (Art. 18,
NCC)
Characteristics of a Legal Obligation
1. It does not need the consent of the obligor;
2. It must be expressly set forth in the law creating
it and not merely presumed; and
3. For the law to be a source of obligation, it should
be the creator of the obligation itself. (Art. 1158,
NCC)
Examples:
1. According to Art. 2014 of the NCC, a loser in a
game of chance may recover his loss from the
winner, with legal interest from the time he
paid the amount lost;
2. The obligation of the spouses to support each
other; (Art. 68, FC)
3. The obligation of the employers under the
Worker’s Compensation Act;
4. The obligations of the owners of the dominant
and servient estates in legal easements and
others scattered in the NCC and in special laws;
(Jurado, 2009)
5. The obligation to pay taxes. (Rabuya, 2017)
OBLIGATION EX CONTRACTU
Requisites of a Contractual Obligation
1. It must contain all the essential requisites of a
contract; (Art. 1318, NCC) and
2. It must not be contrary to law, morals, good
customs, public order, and public policy. (Art.
1306, NCC)
Rules governing Obligation Ex Contractu
GR: These obligations arising from contracts shall
be governed primarily by the stipulations, clauses,
terms, and conditions of the parties’ agreements.
XPN: Contracts with prestations that are
unconscionable or unreasonable. (Pineda, 2009)
UNIVERSITY OF SANTO TOMAS
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Binding Force of Obligation Ex Contractu
Obligations arising from contracts have the force of
law between the parties and should be complied
with in good faith. (Art. 1159, NCC) This is known as
the “principle of obligatory force of contracts.”
(Rabuya, 2017)
Good faith is a performance in accordance with the
stipulation, clauses, terms, and conditions of the
contract. (Pineda, 2000)
GR: Neither party may unilaterally evade his
obligation in the contract.
XPNs: Unilateral evasion is allowed when the:
1. Contract authorizes such evasion; or
2. Other party assents thereto.
Q: FBDC entered into a Trade Contract with MS
Maxco Company, Inc. (MS Maxco) for the
execution of the structural and partial
architectural works of one of its condominium
projects. The Trade Contract provided that MS
Maxco is prohibited from assigning or
transferring any of its rights, obligations, or
liabilities under the said Contract without the
written consent of FBDC. FBDC received a letter
from Fong’s counsel, informing it that MS Maxco
had already assigned its receivables from FBDC
to him. Despite Fong’s repeated requests, FBDC
refused to deliver to Fong the amount assigned
by MS Maxco. Is FBDC bound by the assignment
between MS Maxco and Fong?
A: NO. Obligations arising from contracts have the
force of law between the contracting parties and
should be complied with in good faith. The Court
finds that MS Maxco, as the Trade Contractor,
cannot assign or transfer any of its rights,
obligations, or liabilities under the Trade Contract
without the written consent of FBDC. FBDC cannot,
therefore, be bound by the unilateral assignments of
MS Maxco of its receivables from FBDC to Fong.
(Fort Bonifacio Dev. Corp. v. Fong, G.R. No. 209370, 25
Mar. 2015)
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 Obligations and Contracts

OBLIGATION EX QUASI-CONTRACT liberality or some other cause. (Land Bank of the

Quasi-Contract
A juridical relation arising from lawful, voluntary,
and unilateral acts based on the principle that no
one shall be unjustly enriched or benefited at the
expense of another. (Art. 2142, NCC)
Distinguished from “Implied Contracts”
An implied contract requires consent, while a quasi-
contract, being a unilateral contract, does not. The
basis of an implied contract is the will of the parties,
while the basis of a quasi-contract is law, to the end
that there be no unjust enrichment. (Rabuya, 2017)
Characteristics of Quasi-Contract (L-U-V)
Philippines v. BIR, G.R. No. 242319, 16 June 2021)
Solutio Indebiti (SI) v. Accion in Rem Verso (AIRV)
1. Mistake is an essential element in SI which is
not necessary for AIRV;
2. An AIRV is merely an auxiliary action, available
only when there is no other remedy on contract,
quasi-contract, crime, or quasi-delict. (Rabuya,
2017)
Rule in case of Excess Payment of Interest
If the borrower pays interest when there has been
no stipulation therefor, the provisions of the Code
concerning solutio indebiti, or natural obligations,
shall be applied.

1. It must be Lawful; If the payment of interest is made out of mistake,

2. It must be Unilateral; and solutio indebiti applies; hence, the amount must be
3. It must be Voluntary. (Pineda, 2000) returned to the debtor. If the payment was made
after the obligation to pay interest has already
Presumptive Consent prescribed, natural obligation applies; hence, the
creditor is authorized to retain the amount paid.
Since a quasi-contract is a unilateral contract
created by the sole act of the gestor, there is no Contract v. Quasi-Contract
express consent given by the other party. The
consent needed in a contract is provided by law CONTRACT QUASI-CONTRACT
through presumption. (Pineda, 2000)
As to Consent
Principal Forms of Quasi-Contracts There is a meeting of
There is no consent,
the minds or consent;
but the same is
1. Negotiorum gestio (inofficious manager) – Arises the parties must have
supplied by fiction of
when a person voluntarily takes charge of the deliberately entered
law to prevent
management of the business or property of another into a formal
injustice.
without any power from the latter (Art. 2144, NCC); agreement.

2. Solutio indebiti (unjust enrichment) – Takes place
when a person received something from another,
without any right to demand for it, and the thing was
unduly delivered to him through mistake, thereby
the obligation to return it arises (Art. 2154, NCC)
NOTE: For further discussion on Quasi-Contracts,
please see the discussion thereon under Credit
Transactions – page 000.
OBLIGATION EX DELICTO

NOTE: There is solution indebiti when: (1) payment Delict

is made when there exists no binding relation
between the payor, who has no duty to pay, and the An act or omission punishable under the law.
person who received the payment; and (2) the
payment is made through mistake and not through

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FACULTY OF CIVIL LAW
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Basis
GR: Art. 100 of the RPC provides: “Every person
criminally liable for a felony is also civilly liable.”
XPNs: Crimes of treason, rebellion, espionage,
contempt, and others wherein no civil liability
arises on the part of the offender either because
there are no damages to be compensated or there is
no private person injured by the crime. (Reyes,
2008)
Implied Institution of the Civil Action in a
Criminal Case
GR: When a criminal action is instituted, the civil
action for the recovery of the civil liability arising
from the offense charged shall be deemed instituted
with the criminal action. (Rule 111, Sec. 1, Rules of
Court)
XPNs: When the offended party:
1. Waives the civil action;
2. Reserves the right to institute it separately; and
3. Institutes the civil action prior to the criminal
action. (Rule 111, Sec. 1, Rules of Court)
Scope of Civil Liability (R-R-I)
1. Restitution;
2. Reparation for damage caused; and
3. Indemnity for consequential damages. (Art.
104, RPC)
Acquittal in Criminal Case
GR: The acquittal of the accused in criminal case on
the ground of reasonable doubt does not preclude
the filing of a subsequent civil action, and only
preponderance of evidence is required to prove the
latter.
XPNs: When the acquittal is on the basis that:
1. The accused did not commit the crime charged;
or
2. There is a declaration in the decision of
acquittal that no negligence can be attributed to
the accused, and that the fact from which the
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
civil action might arise did not exist. (Art. 29,
NCC)
NOTE: Although an acquittal on reasonable doubt
does not necessarily extinguish civil liability, it also
does not mean that the civil liability of the acquitted
nonetheless automatically survives. (De Leon v.
Roqson Industrial Sales, Inc., G.R. No. 234329, 23 Nov.
2021)
OBLIGATION EX QUASI-DELICTO
Quasi-delict
An act or omission arising from fault or negligence
which causes damage to another, there being no
pre-existing contractual relations between the
parties. (Art. 2176, NCC)
Elements of a Quasi-Delict
1. Negligent or wrongful act or omission;
2. Damage or injury caused to another;
3. Causal relation between such negligence or
fault and damage; and
4. No pre-existing contractual relationship
between the parties. (Art. 2176, NCC)
Instances when Art. 2176 is not applicable
1. When there was a pre-existing contractual
relation because the breach of contract is the
source of the obligation (Robles v. Yap Wing, G.R.
No. L-20442, 04 Oct. 1971)
NOTE: If a contracting party's act that breaches
the contract would have given rise to an extra-
contractual liability had there been no contract,
the contract would be deemed breached by a
tort, and the party may be held liable under
Article 2176 and its related provisions. (Orient
or resFreight Intl. Inc. v. Keihin-Everett
Forwarding Co., Inc., G.R. No. 191937, 09 Aug.
2017);
2. When the fault or negligence is punished by law
as a crime, Art. 100 of RPC shall be applicable;
240
 Obligations and Contracts

3. If the action for quasi-delict is instituted after 2. NATURE AND EFFECT

four years, it is deemed prescribed; (Art. 1146,
NCC) Types of Real Obligations
4. When the injury suffered by a person is the
result of a fortuitous event without human 1. Determinate/specific – Particularly designated
intervention; or physically segregated from all others of the
5. If there is no damage or injury caused to same class;
another. (Art. 2176, NCC) 2. Indeterminate/Generic – Is designated merely
by its class or genus;
Delict v. Quasi-Delict 3. Delimited generic – Generic objects confined to
a particular class (e.g., An obligation to deliver
DELICT QUASI-DELICT one of my horses). (Tolentino, 2002)

As to what must be present Obligations of a Debtor in an Obligation to

Deliver
Presence of criminal or
Only fault or
malicious intent or
negligence. The obligations of the debtor in an obligation to
criminal negligence.
deliver depends upon the kind thing involved:
As to the whether
private or public interest is concerned SPECIFIC GENERIC

Concerned with public Concerned with private What the obligation consists of
interest. interest. Deliver the thing
which is neither of
As to the kind of liability arises superior nor inferior
Deliver the thing
Generally, the act or quality, if quality and
The act or omission agreed upon. (Art.
omission gives rise to circumstances have
gives rise only to civil 1165, NCC)
two liabilities: criminal not been stated by the
liability. parties. (Art. 1246,
and civil liability.
NCC)
As to availability of a compromise Required diligence to be observed

Criminal liability is not Take care of the thing

The civil liability can be
subject to a with the proper
compromised. If the object is generic,
compromise. diligence of a good
but the source is
father of a family unless
specified or delimited,
As to the quantum of evidence is required the law requires or
the obligation is to
parties stipulate
Guilt must be proved Guilt may be proved by preserve the source.
another standard of
beyond reasonable preponderance of care. (Art. 1163, NCC)
doubt. evidence.
What delivery comprises of
NOTE: In as much as civil liability co-exists with Delivery of another
Deliver all accessions,
criminal responsibility in negligence cases, the thing within the same
accessories, and fruits
offended party has the option between an action for genus as the thing
of the thing even
enforcement of civil liability based on culpa criminal promised, if such thing
though they may not
under Art. 100 of the RPC and an action for recovery is damaged due to lack
have been mentioned.
of damages based on culpa aquiliana under Art. of care or a general
(Art. 1166, NCC)
2177, NCC. breach is committed.

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Effect of breach of obligation Right of the Creditor to the Fruits

Pay damages in case of Pay damages in case of
The creditor has a right to the fruits of the thing
breach of obligation by breach of obligation by
from the time the obligation to deliver it arises.
reason of delay, fraud, reason of delay, fraud,
However, he shall acquire no real right over it until
negligence, negligence,
the same has been delivered to him. (Art. 1164, NCC)
contravention of the contravention of the
tenor thereof. (Art. tenor thereof. (Art.
SOURCE OF WHEN OBLIGATION
1170, NCC) 1170, NCC)
OBLIGATION ARISES
Effect of fortuitous event
Law, quasi-delict,
Obligation is not Based on specific
Fortuitous event quasi-contract, or
extinguished (genus provisions of law.
extinguishes the crime.
nunquam peruit – Subject to a
obligation. From the happening of
genus never perishes). suspensive
the condition.
condition.
Remedies of the Creditor in case of Failure to Subject to a From the constitution,
Deliver the thing due (Pineda, 2000) suspensive creation, or perfection of
term/period. obligation.
SPECIFIC GENERIC From the constitution,
Specific performance Pure creation, or perfection of
Specific (delivery of anything the obligation.
performance belonging to the same
species) Nature of the Right of Creditor to Fruits

Ask that the obligation be

Rescission (action 1. Before delivery – Personal right;
complied with at the
to rescind under 2. After delivery – Real right.
debtor’s expense with
Art. 1380, NCC)
right to recover damages.
Personal Right v. Real Right
Resolution (action Resolution or specific
for cancellation performance, with PERSONAL RIGHT REAL RIGHT
under Art. 1191, damages in either case The right or power of a The right or interest of
NCC) (Art. 1191, NCC) person (creditor) to a person over a specific
Damages, in both cases (Art. 1170, NCC) demand from another thing (i.e. ownership,
(debtor), as a definite possession, mortgage),
Principle of “Balancing of Equities” in Actions for passive subject, the without a definite
Specific Performance fulfillment of the subject against whom
latter’s obligation to the right may be
In decreeing specific performance, equity requires give, to do, or not to do. personally enforced.
not only that the contract be just and equitable in its There is a definite
There is only a definite
provisions, but that the consequences of specific active subject and a
active subject without
performance likewise be just and equitable. The definite passive
any passive subject.
general rule is that this equitable relief will not be subject.
granted if, under the circumstances of the case, the Binding and
result of the specific performance of the contract enforceable only Directed against the
would be harsh, inequitable, and oppressive or against a particular whole world.
result in an unconscionable advantage to the person.
plaintiff. (Agcaoili v. GSIS, G.R. No. 30056, 30 Aug.
1988)

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 Obligations and Contracts

Types of Personal Obligations b. Banks require the highest degree of

deligence, being imbued with public
1. Positive - To do; interest.
2. Negative - Not to do.
Diligence of a Good Father of a Family
Remedies in Personal Obligations
That reasonable diligence which an ordinary
1. Positive personal obligations prudent person would have done under the same
a. Not purely personal act – To have obligation circumstances.
executed at debtor's expense plus damages;
b. Purely personal act - Damages only. Q: Great Harvest hired Tan to transport 430 bags
When positive personal obligations of soya beans from Tacoma to Selecta Feeds. At
considered breached: Selecta Feeds, however, the shipment was
a. If the debtor fails to perform the rejected. The truck and its shipment never
obligation; or reached Great Harvest's warehouse. Great
b. Even in the case of performance but Harvest asked Tan about the missing delivery but
the same is done either in a poor to no avail. Is Anita Tan liable for the lost bags of
manner or in contravention of the soya beans?
tenor of the obligation. (Art. 1167, NCC)
A: YES, Annie Tan should be liable. Common
2. Negative personal obligation – To have the carriers are mandated to internalize or shoulder the
prohibited thing undone at the expense of the costs under the contracts of carriage. This is so
debtor plus damages. However, if thing cannot because a contract of carriage is structured so that
be physically or legally undone, only damages passengers or shippers surrender total control over
may be demanded. (8 Manresa 58) their persons or goods to common carriers, fully
trusting that the latter will safely and timely deliver
Specific Performance is Not a Remedy in them to their destination. Here, the petitioner is a
Positive Personal Obligations common carrier obligated to exercise extraordinary
diligence over the goods entrusted to her. Her
If specific performance is allowed, it will amount to responsibility began from the time she received the
involuntary servitude, which is prohibited by the soya beans from the respondent's broker and would
Constitution. (Pineda, 2000) only cease after she has delivered them to the
consignee or any person with the right to receive
BREACHES OF OBLIGATIONS them. (Tan v. Great Harvest Enterprises, Inc., G.R.
No. 220400, 20 Mar. 2019)
Degree of Diligence Required
Q: Eliza, a condo unit owner, delivered thru
1. That agreed upon; FedEx a check to Sison, who will be paying in
2. In the absence of such, that which is required by behalf of Eliza, however, Sison did not receive
the law; the package. Later, it was found out that the
check was delivered to Sison’s neighbor, but
GR: In the absence of the foregoing, diligence of there was no signed receipt. Hence, Eliza sent a
a good father of a family. demand letter to FedEx, the delivery courier, for
payment of damages since the check was
XPNs: supposed to be used to pay the balance for the
a. Common carriers requiring condo unit, which was foreclosed since it was
extraordinary diligence (Arts. 1998- unpaid. FedEx refused, and thus Eliza filed a
2002, NCC); complaint for damages with the Regional Trial
Court. Is FedEx liable?

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 Civil Law
A: YES. The Civil Code mandates common carriers
to observe extraordinary diligence in caring for the
goods they are transporting. Common carriers must
ascertain the identity of the recipient. Failing to
deliver shipment to the designated recipient
amounts to a failure to deliver. The shipment shall
then be considered lost, and liability for this loss
ensues. FedEx is unable to prove that it exercised
extraordinary diligence in ensuring delivery of the
package to its designated consignee. It claimed to
have made a delivery but it even admits that it was
not to the designated consignee. (Federal Express
Corp. v. Antonino, G.R. No. 199455, 27 June 2018)
NOTE: Banks are expected to exercise higher degree
of diligence in their dealings, including those
involving lands. Banks may not rely simply on the
face of the certificate of title. (LBP v. Musni, G.R. No.
206343, 22 Feb. 2017)
Forms of Breach of Obligations
1. Voluntary – Debtor is liable for damages if he is
guilty of:
a. Default (mora)
b. Fraud (dolo)
c. Negligence (culpa)
d. Breach through contravention of the tenor
thereof. (Art. 1170, NCC)
2. Involuntary – Debtor is unable to perform the
obligation due to fortuitous event, thus not
liable for damages, as a rule.
Effects of Breach of Obligation
If a person obliged to do something fails to do it, the
same shall be executed at his cost.
This same rule shall be observed if he does it in
contravention of the tenor of the obligation.
Furthermore, it may be decreed that what has been
poorly done be undone. (Art. 1167, NCC)
When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall
also be undone at his expense. (Art.1168, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Instances where the Remedy under Art. 1168 is
Not Available
1. Where the effects of the act which is forbidden
are definite in character – Even if it is possible
for the creditor to ask that the act be undone at
the expense of the debtor, consequences
contrary to the object of the obligation will have
been produced which are permanent in
character.
2. Where it would be physically or legally
impossible to undo what has been undone –
Because of:
1. The very nature of the act itself;
2. A provision of law; or
3. Conflicting rights of third persons.
NOTE: In either case, the remedy is to seek recovery
for damages. (Art. 1168, NCC)
DELAY (MORA) OR DEBTOR’S DEFAULT
Those obliged to deliver or to do something incur in
delay from the time the obligee (creditor) judicially
or extrajudicially demands from them the
fulfillment of their obligation.
In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent
upon him. From the moment one of the parties
fulfills his obligations, delay by the other begins.
(Art. 1169, NCC)
Kinds of Delay
1. Ordinary delay – This is the mere failure to
perform an obligation at the stipulated time.
2. Extraordinary delay or legal delay – This delay
already equates to non-fulfillment of the
obligation and arises after the extrajudicial or
judicial demand has been made upon the
debtor. (Pineda, 2000)
Kinds of Legal Delay or Default
1. Mora solvendi – Default on the part of the
debtor/obligor
Ex re – Default in real obligations (to give);
244
 Obligations and Contracts
Ex personae – Default in personal
obligations (to do);
2. Mora accipiendi – Default on the part of the
creditor/obligee;
3. Compensatio morae – Default on the part of
both the debtor and creditor in reciprocal
obligations.
Causes of Cessation of the Effects of Mora
1. Renunciation (express/implied); or
2. Prescription.
Q: American Express Card (AMEX) failed to
approve Pantaleon’s credit card purchases,
which urged the latter to commence a complaint
for moral and exemplary damages against
AMEX. He said that he and his family
experienced inconvenience and humiliation due
to the delays in credit authorization during his
vacation trip in Amsterdam and in the United
States. Did AMEX commit a breach of its
obligations to Pantaleon?
A: YES. Generally, the relationship between a credit
card provider and its cardholders is that of creditor-
debtor, with the card company as the creditor
extending loans and credit to the cardholder, who as
debtor is obliged to repay the creditor. One hour
appears to be patently unreasonable length of time
to approve or disapprove a credit card purchase.
The culpable failure of AMEX herein is not the
failure to timely approve petitioner’s purchase, but
the more elemental failure to timely act on the same,
whether favorably or unfavorably. (Pantaleon v.
American Express International, Inc., G.R. No.
174269, 08 May 2009)
Elements of Default
Q: Gotesco obtained from Solidbank a term loan
of ₱300 million. To secure the loan, Gotesco was
required to execute a Mortgage Trust Indenture
naming Solidbank-Trust Division as Trustee.
The Indenture obliged Gotesco to mortgage
several parcels of land in favor of Solidbank.
When the loan was about to mature, Gotesco
245
found it difficult to meet its obligation because
of the 1997 Asian Financial Crisis. Solidbank
sent a demand letter to Gotesco as the loan
became due. Despite having received this
demand letter, Gotesco failed to pay the
outstanding obligation. Solidbank then filed a
Petition for the Extrajudicial Foreclosure of the
lot. Gotesco filed a complaint before the RTC for
Annulment of Foreclosure Proceedings, Specific
Performance, and Damages against Solidbank.
Gotesco assailed the validity of the foreclosure
proceeding, claiming that it was premature and
without legal basis. Was the foreclosure
premature?
A: NO. Petitioner defaulted in its obligation. Thus,
respondent was within its rights to foreclose the
property. Under the Civil Code, there is default
when a party obliged to deliver something fails to do
so. In Social Security System v. Moonwalk
Development & Housing Corp., this Court
enumerated the elements of default:
In order that the debtor may be in default, it is
necessary that the following requisites be present:
(1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance
judicially and extrajudicially. Default generally
begins from the moment the creditor demands the
performance of the obligation. (Gotesco Properties,
Inc. v. Solid Bank Corporation, G.R. No. 209452, 26
July 2017)
MORA SOLVENDI
Requisites (P-D-M-J-F)
1. Obligation Pertains to the debtor;
2. Obligation is Determinate, due and
demandable, and liquidated;
3. Obligation has not been performed on its
Maturity date;
4. There is Judicial or extrajudicial demand by the
creditor; and
5. Failure of the debtor to comply with such
demand.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

Non-Applicability of Mora Solvendi 2. When the obligation has for its object a
determinate thing, the debtor may bear the risk
Mora solvendi does not apply in natural obligations of loss of the thing even if the loss is due to
because performance is optional or voluntary on the fortuitous event; and
debtor’s part. One can never be late in not giving or
doing something. 3. Rescission or resolution.

Instances when Demand by the Creditor is Not Debtor’s Liability may be Mitigated even if he is
necessary in order that Delay may exist Guilty of Delay

GR: No demand = no default. (Art. 1169, NCC) If the debtor can prove that loss would nevertheless
transpire even if he had not been in default, the
XPNs: Demand by the creditor shall not be court may equitably mitigate his liability. (Art.
necessary in order that delay may exist when: 2215(4), NCC)
1. The law expressly so declares; or
2. The contract expressly stipulates that demand MORA ACCIPIENDI
is not necessary; or
3. From the nature and the circumstances of the Requisites (P-C-R)
obligation it appears that, the designation of
time when the thing is to be delivered or the 1. Offer of Performance by a capacitated debtor;
service is to be rendered, was a controlling 2. Offer must be to Comply with the prestation as
motive for the establishment of the contract or it should be performed; and
when time is of the essence; or 3. Refusal of the creditor without just cause.
4. Demand would be useless, as when the obligor (Pantaleon v. Amex, G.R. No. 174269, 08 May
has rendered it beyond his power to perform. 2009)
(Art. 1169, NCC)
Effects of Mora Accipiendi
Q: “A” borrowed P2,000 from “B” on December
1, 1956. He executed a promissory note 1. Responsibility of debtor is limited to fraud and
promising to pay the indebtedness on December gross negligence;
1, 1958. Upon the arrival of the designated date 2. Debtor is exempted from risk of loss of thing;
for payment, is demand necessary in order that creditor bears risk of loss;
“A” shall incur delay? 3. Expenses by debtor for preservation of thing
A: YES. In the first two paragraphs of Art. 1169 of after delay is chargeable to creditor;
the NCC, it is not sufficient that the law or obligation 4. If the obligation bears interest, debtor does not
fixes a date for performance; it must further state have to pay it from time of delay;
expressly that after the period lapses, default will 5. Creditor liable for damages; and
commence. (Rivera v. Sps. Chua, G.R. No. 184472, 14 6. Debtor may relieve himself of obligation by
Jan. 2015) consigning the thing.

Effects of Mora Solvendi COMPENSATIO MORAE

1. Debtor may be liable for damages (Art. 1155,
NCC) or interests;
NOTE: The interest begins to run from the filing
of the complaint when there is no extrajudicial
demand.
Delay in Reciprocal Obligations
One party incurs in delay from the moment the
other party fulfills his obligation, while he, himself
does not comply or is not ready to comply in a
proper manner with what is incumbent upon him.

UNIVERSITY OF SANTO TOMAS 246

2022 GOLDEN NOTES
 Obligations and Contracts
Demand is only necessary for a party to incur delay
when the respective obligations are to be performed
on separate dates.
Reciprocal Obligations
Reciprocal obligations are those which arise from
the same cause, wherein each party is a debtor and
a creditor of the other, such the obligation of one id
dependent upon the obligation of the other. They
are to be performed simultaneously such that the
performance of one is conditioned upon the
simultaneous fulfillment of the other. (Heirs of Mary
Lane R. Kim v. Quicho, G.R. No. 249247, 15 Mar. 2021)
Q: Camp John Hay Development entered into a
Contractor's Agreement with Charter Chemical.
Although the Contractor's Agreement contained
no date of the units' turnover, it allowed Charter
Chemical to choose the units for offsetting under
an offsetting scheme against the 2 Units chosen
by Charter Chemical.
The contract price was P13,239,734.16, for
which Camp John Hay Development paid
P7,339,734.16. The balance of P5,900,000.00
was ought to be settled by offsetting the price of
the two (2) studio units. Camp John Hay
Development had initially estimated that the
construction would be completed by 2006.
Because of its failure to follow this timetable, the
Camp John Hay Suites was estimated to be
completed by 2012.
Due to the subsisting construction delay,
Charter Chemical, through counsel, wrote Camp
John Hay Development, demanding that it
transfer the units or pay the value of these units
in the sum of P6,996,517.48. Charter Chemical
filed before the Construction Industry
Arbitration Commission a Request for
Arbitration. The arbitral tribunal ruled that
Charter Chemical was entitled to its claim for the
value of the two (2) units because Camp John
Hay Development failed to deliver the units
within the targeted completion date. Is the
remedy of rescission proper?
247
A: YES. Rescission on account of breach of
reciprocal obligations is provided under Art. 1191
of the NCC. The injured party may choose between
the fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may
also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
(Camp John Hay Development Corporation v. Charter
Chemical and Coating Corporation, G.R. No. 19884, 07
Aug. 2019)
Q: On May 16, 1998, Wellex and U-Land entered
into a Memorandum of Agreement (First
Memorandum of Agreement) to expand their
respective airline operations in Asia. The First
Memorandum of Agreement stated that within
40 days from its execution date, Wellex and U-
Land would execute a share purchase
agreement covering U-Land’s acquisition of the
shares of stock of both APIC (APIC shares) and
PEC (PEC shares).
In this share purchase agreement, U-Land would
purchase from Wellex its APIC shares and PEC
shares. Both parties agreed that the purchase
price of APIC shares and PEC shares would be
paid upon the execution of the share purchase
agreement and Wellex’s delivery of the stock
certificates covering the shares of stock. The
transfer of APIC shares and PEC shares to U-
Land was conditioned on the full remittance of
the final purchase price as reflected in the share
purchase agreement.
Further, the transfer was conditioned on the
approval of the Securities and Exchange
Commission of the issuance of the shares of
stock, and the approval by the Taiwanese
government of U-Land’s acquisition of these
shares of stock. Wellex and U-Land agreed that if
they were unable to agree on the terms of the
share purchase agreement and the joint
development agreement within 40 days from
signing, then the First Memorandum of
Agreement would cease to be effective.
The 40-day period lapsed on June 25, 1998.
Wellex and U-Land were unable to enter into
any share purchase agreement although drafts
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

were exchanged between the two. Whether or Rules on Compensatio Morae

not the rescission of the First Memorandum of
Agreement can be subject of rescission?
UNILATERAL RECIPROCAL
OBLIGATIONS OBLIGATIONS
A: YES, Respondent U-Land is praying for the
rescission or resolution under Art. 1191 and not Time of delay
rescission under Art. 1381. The failure of one of Default or delay begins
the parties to comply with the reciprocal from extrajudicial or Delay by the other
obligation allows the wronged party to seek the judicial demand – mere party begins from
remedy of Art. 1191. The wronged party is expiration of the period the moment one of
entitled to rescission under Art. 1191 and even fixed is not enough in the parties fulfills his
the payment of damages. It is a principal action order that debtor may obligation.
precisely because it is a violation of the original incur delay.
prestation.
XPNs

Art. 1381 and Art. 1383 pertains to rescission a) The obligation or the
where creditors or even 3rd persons not privy to law expressly so
the contract can file an action due to lesion or dictates;
damage as a result of the contract.
b) Time is of the
Rescission or resolution under Art. 1191, essence;
When different
therefore, is a principal action due to lesion or dates for the
damage because of the contract, and it is a c) Demand would be
performance of
principal action that is immediately available to useless, as debtor has
obligation is fixed by
the party at the time that the reciprocal prestation rendered it beyond
the parties.
was breached. Art. 1383 mandating that his power to perform;
rescission be deemed a subsidiary action cannot or
be applicable to rescission or resolution under
d) Debtor has
Art. 1191.
acknowledged that he
is in default.
Thus, respondent U-Land correctly sought the
principal relief of rescission or resolution under
Fraud (Deceit or Dolo)
Art. 1191. The obligations of the parties gave rise
to reciprocal prestations, which arose from the
It is an intentional evasion of the faithful
same cause: the desire of both parties to enter
performance of the obligation. (8 Manresa 72)
into a share purchase agreement that would allow
both parties to expand their respective airline
Kinds of Fraud
operations in the Philippines and other
neighboring countries. (The Wellex Group, Inc. v.
U-Land Airlines, Co., Ltd., G.R. No. 167519, 14 Jan. FRAUD IN THE FRAUD IN THE
2015) PERFORMANCE PERFECTION

Time of occurrence
Effect of Non-Compliance of Both Parties in
Reciprocal Obligations It occurs after the valid
It occurs before or
execution of the
If neither party complies with his prestation, the simultaneous with the
contract. It is employed
default of one compensates for the default of the creation or perfection
in the performance of a
other. of the obligation.
pre-existing obligation.

UNIVERSITY OF SANTO TOMAS 248

2022 GOLDEN NOTES
 Obligations and Contracts

Consent the contract or causal fraud. It is the intentional

evasion of the normal fulfillment of the obligation.
Consent is vitiated by
Consent is free and not (Pineda, 2000)
serious deception or
vitiated.
misrepresentation.
Waiver of Action Arising from Future Fraud
Effect
It is not a ground for It is a ground for With respect to fraud that has already been
annulment of the annulment of the committed (past fraud), the law does not prohibit
contract. contract. renunciation of the action for damages based on the
same since such can be deemed an act of generosity.
Remedy What is renounced is the effect of fraud, particularly
Action for damages Action for annulment the right to indemnity.
only. with damages.
However, the law prohibits any waiver of an action
for future fraud since the same is contrary to law
Dolo causante v. Dolo incidente
and public policy. Waiver for future fraud is void.
(Art. 1171, NCC)
DOLO INCIDENTE
DOLO CAUSANTE
(INCIDENTAL Remedies of the Defrauded Party
(CAUSAL FRAUD)
FRAUD)
1. Specific performance (Art. 1233, NCC); or
Nature 2. Resolution of the contract (Art. 1191, NCC); and
This is the essential This is the kind of fraud 3. Damages, in either case.
cause of the consent, that is not the efficient
without which the cause for the giving of CULPA OR NEGLIGENCE
party would not have consent to the contract,
agreed to enter into the as it refers merely to an The fault or negligence of the obligor consists of the
contract. incident therein and, omission of that diligence which is required by the
(Art. 1338, NCC) which even if not nature of the obligation, and corresponds with the
present, the circumstances of the persons, of the time and the
contracting party place.
would have still agreed
to the contract. When negligence shows bad faith, the provisions of
Art. 1171 and 2201, paragraph 2, shall apply. If the
Effect law or contract does not state the diligence which is
to be observed in the performance, that which
It renders the contract
It does not affect the expected of a good father of a family shall be
voidable.
validity of the contract. required. (Art. 1173, NCC)

Remedy Test of Negligence

Annulment with
damages. Contract remains valid. Did the defendant in doing the alleged negligent act
The remedy is a claim use the reasonable care and caution which an
for damages only. ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence.
(Picart v. Smith, G.R. No. L-12219, 15 Mar. 1918)
Fraud as Mentioned in Art. 1171

It is incidental fraud or fraud in the performance of

the obligation and not the fraud in the execution of

249 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law

Fraud v. Negligence XPN: If the negligent act or omission of the creditor

is the proximate cause of the event, which led to the
FRAUD NEGLIGENCE damage or injury complained of, he cannot recover.

As to the intention to cause damage Q: Wenifredo Salvaña was driving the bus
There is deliberate There is no deliberate owned by Bachelor Express, Inc./Ceres Liner,
intention to cause intention to cause Inc. along the national highway when he
damage. damage or injury even overtook a PUJ jeepney while negotiating a blind
if the act was done curve in a descending road causing him to
voluntarily. intrude into the opposite lane and bump the 10-
As to the mitigation of liability wheeler Hino dump truck of petitioner
Cresencio Baño running uphill from the
Liability cannot be Liability may be
opposite direction. The collision resulted in
mitigated. mitigated.
damage to both vehicles, the subsequent death
As to the waiver of future fraud of the truck driver, Amancio Asumbrado, and
Waiver for future fraud GR: Waiver for future serious physical injuries to bus driver Salvaña.
is void. negligence may be
allowed in certain A complaint for quasi-delict was filed against
cases. Salvaña for negligently driving the bus causing it
to collide with the dump truck. Respondents
XPN: Nature of the denied liability, claiming that prior to the
obligation or public collision, the bus was running out of control
policy requires because of a problem in the steering wheel
extraordinary system, which could not have been avoided
diligence. (e.g. common despite their maintenance efforts. Instead, they
carrier). claimed that Asumbrado had the last clear
chance to avoid the collision had he not driven
NOTE: When negligence is so gross that it amounts the dump truck at a very fast speed. Was Salvaña
to wanton attitude on the part of the debtor or such grossly negligent?
negligence shows bad faith, the laws in case of fraud
shall apply. A: YES. When bus driver Salvaña overtook the
jeepney in front of him, he was rounding a blind
Effect of Good Faith or Bad Faith of the Obligor curve along a descending road. Considering the road
condition and that there was only one lane on each
If the obligor acted in good faith, he is responsible side of the center line for the movement of traffic in
for the natural and probable consequences of the opposite directions, it would have been more
breach of contract and which the parties have prudent for him to confine his bus to its proper
reasonably foreseen at the time of the constitution place. Having thus encroached on the opposite lane
of the obligation. in the process of overtaking the jeepney, without
ascertaining that it was clear of oncoming traffic
If the obligor is guilty of fraud, bad faith, malice or that resulted in the collision with the approaching
wanton attitude, he shall be responsible for all dump truck driven by deceased Asumbrado,
damages which may be reasonably attributed to the Salvaña was grossly negligent in driving his bus. He
non-performance of the obligation. was remiss in his duty to determine that the road
was clear and not to proceed if he could not do so in
Contributory Negligence of the Creditor safety. (Baño v. Bachelor Express, GR No. 191703, 12
Mar. 2012)
GR: It reduces or mitigates the damages which he
can recover.

UNIVERSITY OF SANTO TOMAS 250

2022 GOLDEN NOTES
 Obligations and Contracts

CONTRAVENTION OF TENOR OF OBLIGATION foreseen or anticipated, as is commonly believed,

(VIOLATIO)
The act of contravening the tenor or terms or
conditions of the contract is also known as
“violatio,” i.e. failure of common carrier to safely
take its passenger to their destination. (Pineda,
2000)
but it must be one impossible to foresee or to avoid.
The mere difficulty to foresee the happening is not
impossibility to foresee the same. (Metro Concast
Steel Corp. v. Allied Bank Corp., G.R. No. 177921, 04
Dec. 2013)
Liability for Loss due to Fortuitous Event

The phrase “in any manner contravene the tenor” of GR: There is no liability for loss in case of fortuitous
the obligation includes any illicit act which impairs event.
the strict and faithful fulfillment of the obligation, or
every kind of defective performance. Such violation XPNs: (La-N-S-P-C-Ba-G)
of the terms of contract is excused in proper cases
by fortuitous events. (Art. 1170, NCC) 1. Law;
2. Nature of the obligation requires the
FORTUITOUS EVENT OR CASO FORTUITO assumption of risk;
3. Stipulation;
An occurrence or happening which could not be 4. The debtor is guilty of dolo, malice or bad faith
foreseen, or even if foreseen, is inevitable. (Art. has Promised the same thing to two or more
1174, NCC) (2002, 2008 BAR) persons, who does not have the same interest
(Art. 1165, NCC);
Requisites: (C-O-D-E) 5. The debtor Contributed to the loss (Tan v.
Inchausti & Co., G.R. No. 6092, 08 Mar. 1912);
1. Cause of breach is independent of the will of the 6. The possessor is in Bad faith (Art. 552, NCC); or
debtor; 7. The obligor is Guilty of fraud, negligence or
2. The Event is unforeseeable or unavoidable; delay or if he contravened the tenor of the
3. Occurrence renders it absolutely impossible for obligation. (Nakpil v. United Construction Co.,
the debtor to fulfill his obligation in a normal Inc. v. CA, G.R. No. L-47851, 15 Apr. 1988)
manner - impossibility must be absolute not
partial, otherwise not force majeure; and Act of God v. Act of Man
4. Debtor is free from any participation in the
aggravation of the injury to the creditor.
ACT OF GOD ACT OF MAN

NOTE: The fortuitous event must not only be the Fortuitous event Force majeure
proximate cause, but it must also be the only and
sole cause. Contributory negligence of the debtor Event caused by the
renders him liable despite the fortuitous event. Event which is legitimate or
(Pineda, 2000) absolutely independent illegitimate acts of
of human intervention persons other than the
If the negligence was the proximate cause, the obligor
obligation is not extinguished. It is converted into a
e.g. Earthquakes, e.g. Armed invasion,
monetary obligation for damages.
storms, floods, robbery, war. (Pineda,
epidemics 2000)
Difficulty to Foresee

Fortuitous events by definition are extraordinary NOTE: There is no essential difference between
events not foreseeable or avoidable. It is therefore fortuitous event and force majeuere; they both refer
not enough that the event should not have been

251 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
to causes independent of the will of the obligor.
(Tolentino, 2002)
Q: MIAA entered into a compromise agreement
with ALA. MIAA failed to pay within the period
stipulated. Thus, ALA filed a motion for
execution to enforce its claim. MIAA filed a
comment and attributed the delays to it being a
government agency and to the Christmas rush. Is
the delay of payment a fortuitous event?
A: NO. The act-of-God doctrine requires all human
agencies to be excluded from creating the cause of
the mischief. Such doctrine cannot be invoked to
protect a person who has failed to take steps to
forestall the possible adverse consequences of loss
or injury. Since the delay in payment in the present
case was partly a result of human participation -
whether from active intervention or neglect - the
whole occurrence was humanized and was
therefore outside the ambit of a caso fortuito.
First, processing claims against the government are
certainly not only foreseeable and expectable, but
also dependent upon the human will. Second, the
Christmas season is not a caso fortuito, but a
regularly occurring event. Third, the occurrence of
the Christmas season did not at all render
impossible the normal fulfillment of the obligation.
Fourth, MIAA cannot argue that it is free from any
participation in the delay. It should have laid out on
the compromise table the problems that would be
caused by a deadline falling during the Christmas
season. Furthermore, it should have explained to
ALA the process involved in the payment of ALA’s
claim. (MIAA v. Ala Industries Corp., G.R. No. 147349,
13 Feb. 2004)
Effects of Fortuitous Events
1. On determinate obligation – The obligation is
extinguished.
2. On generic obligation – The obligation is not
extinguished (genus nun quam peruit – genus
never perishes).
Q: Kristina brought her diamond ring for
cleaning to a jewelry shop that failed to fulfill its
promise to return such ring in February 1, 1999.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Kristina went back to the shop on February 6,
1999, but she was informed that the ring was
stolen by a thief the night before. Kristina filed
an action for damages against the jewelry shop,
which put up the defense of force majeure. Will
the action prosper or not? (2000 BAR)
A: YES. The action will prosper. Since the defendant
was already in default for not having delivered the
ring when delivery was demanded by plaintiff at its
due date, the defendant is liable for the loss of the
thing and even when the loss was due to force
majeure.
Q: AB Corp entered into a contract with XY Corp
for the construction of the research and
laboratory facilities of the XY Corp. XY Corp paid
50% of the 10M contract price on the other hand
AB agreed to complete the work for 18 months.
After 17 months, work was only 45% completed
as AB Corp experienced work slippage due to
labor unrest.
(a) Can the labor unrest be considered a
fortuitous event?
(b) Can XY Corp. unilaterally and
immediately cancel the contract?
(c) Must AB Corp. return the 50% down
payment? (2008 BAR)
A:
(a) NO. Labor unrest is not a fortuitous event that
will excuse AB Corp. from complying with its
obligation of constructing the research and
laboratory facilities of XY Corp. The labor unrest,
which may even be attributed largely to AB Corp.
itself, is not the direct cause of non-compliance by
AB Corp. It is independent of its obligation. It does
not excuse compliance with the obligation. (DBP v.
Vda. De Moll, G.R. No. L-25802, 31 Jan. 1972) AB
Corp. could have anticipated the labor unrest
caused by delays in paying the laborer’s wages. The
company could have hired additional laborers to
make up for the work slowdown.
(b) YES. XY Corp. may unilaterally cancel the
obligation, but this is subject to the risk that the
cancellation of the reciprocal obligation being
challenged in court and if AB Corp. succeeds, then
252
 Obligations and Contracts
XY Corp. will be declared in default and be liable for
damages.
(c) NO. Under the principle of quantum meruit, AB
Corp. had the right to retain payment corresponding
to his percentage of accomplishment less the
amount of damages suffered by XY Corp. because of
the delay or default.
Q: X, a dressmaker, accepted clothing materials
from Karla to make two dresses for her. On the
day X was supposed to deliver Karla’s dresses, X
had an urgent matter to attend to and told Karla
to deliver those the next day. That night,
however, a robber broke into her shop and took
everything, including Karla’s dresses. X claims
she is not liable to deliver Karla’s dresses nor
pay for the clothing materials considering she,
herself, was a victim of the robbery, which was a
fortuitous event, and over which she had no
control. Do you agree? Why? (2015 BAR)
A: NO. The law provides that except when it is
otherwise declared by stipulation, or when the law
expressly provides, or when the nature of the
obligation requires the assumption of risk, no
person shall be liable for those events which could
not be foreseen or which though foreseen were
inevitable. (Art. 1174, NCC)
In this case, X cannot invoke fortuitous event as a
defense because she had already incurred delay at
the time of the occurrence of the loss. (Art. 1165,
NCC)
REMEDIES
In case of breach of obligation, the following are the
remedies available:
1. Specific performance, or substituted
performance by a third person in case of an
obligation to deliver a generic thing, and in
obligations to do, unless it is a purely personal
act;
2. Rescission (or resolution in reciprocal
obligations);
253
3. Damages, in any case; or
4. Subsidiary remedies of creditors:
a. Accion subrogatoria
b. Accion pauliana
c. Accion directa
SPECIFIC PERFORMANCE
Remedies in connection with Specific
Performance
1. Exhaustion of the properties of the debtor (not
exempt from attachment under the law);
2. Accion subrogatoria (subrogatory action) – An
indirect action brought in the name of the
debtor by the creditor to enforce the former’s
rights except:
a. Personal rights of the debtor;
b. Rights inherent in the person of the debtor;
c. Properties exempt from execution.
e.g., family home
3. Accion pauliana (rescissory action) – An action
to impugn or assail the acts done or contracts
entered into by the debtor in fraud of his
creditor.
NOTE: Resort to the remedies must be in the order
stated above. (Art. 1177, NCC)
Q: Sacramento Steel Corporation (SSC) executed
five separate deeds of chattel mortgage
constituted over various equipment for
International Exchange Bank (IEB) which
subsequently, SSC defaulted in the payment of
its obligations. IEB’s demand for payment went
unheeded. Meanwhile, Metropolitan Bank and
Trust Company (Metro Bank) filed a motion for
intervention as a creditor of SSC. Which it
contends that the mortgage contracts between
IEB and SSC were entered into to defraud the
latter’s creditors. Thus, it prayed for the
rescission of the chattel mortgaged executed by
SSC in favor of IEB. Will the action to rescind the
mortgage prosper?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
A: NO. Jurisprudence is clear that the following
successive measures must be taken by a creditor
before he may bring an action for rescission of an
allegedly fraudulent contract:
(1) exhaust the properties of the debtor
through levying by attachment and execution
upon all the property of the debtor, except such
as are exempt by law from execution;
(2) exercise all the rights and actions of the
debtor, save those personal to him (acción
subrogatoria); and
(3) seek rescission of the contracts executed by
the debtor in fraud of their rights
(acción pauliana).
It is thus, apparent that an action to rescind, or
an acción pauliana, must be of last resort, availed of
only after the creditor has exhausted all the
properties of the debtor not exempted from
execution or after all other legal remedies have been
exhausted and have been proven futile.
(Metropolitan Bank and Trust Company v.
International Exchange Bank, G.R. No. 176008, 10
Aug. 2011)
Q: Jebson entered into a Joint Venture
Agreement (JVA) with Sps. Salonga obligated the
former to construct ten (10) residential units on
the latter’s three parcels of land. Out of the ten
(10) units, seven (7) units will belong to Jebson.
It was also allowed to sell its allocated units
under such terms as it may deem fit, subject to
the condition that the price agreed upon was
with the conformity of Sps. Salonga. Thereafter,
Jebson entered into a Contract to Sell with
Buenviaje over one of its units without the
conformity of Sps. Salonga. Buenviaje was able
to fully pay for Jebson’s unit through a swapping
arrangement, which allows the vendee to
convey certain properties as consideration for
the sale. Despite this full payment, Jebson was
unable to complete said unit.
This prompted Buenviaje to demand the unit’s
immediate completion and delivery. Jebson,
having failed to comply with the demand,
Buenviaje filed an action before the HLURB
against Jebson and Sps. Salonga for specific
performance praying for the unit’s completion
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
and delivery and rescission in the alternative.
Jebson, in its defense, claimed that they were not
able to secure the necessary permits because
Sps. Salonga stubbornly refused to cause the
consolidation and partition of the parcels of
land. Sps. Salonga averred that they were not
liable to the complainants since there was no
privity of contract between them, adding that
the contracts to sell were unenforceable against
them as they were entered into by Jebson
without their conformity, in violation of the JVA.
HLURB rescinded the Contract to Sell and held
Sps. Salonga Solidarily liable with Jebson.
HLURB-BOC reversed the former ruling and
instead rescinded the swapping arrangement
and maintaining the validity of the Contract to
Sell, thereby granting specific performance
instead. Is the grant of the remedy of specific
performance in Buenviaje's favor proper?
A: YES. As between the two remedies made
available to him, Buenviaje, had, chosen the remedy
of specific performance and, therefore, ought to be
bound by the choice he had made. To add, the
fundamental rule is that reliefs granted a litigant are
limited to those specifically prayed for in the
complaint. Buenviaje's alternative prayer for
resolution is textually consistent with that portion
of Art. 1191 of the NCC provides that an injured
party "may also seek rescission, even after he has
chosen fulfillment if the latter should become
impossible." Nevertheless, the impossibility of
fulfillment was not sufficiently demonstrated in the
proceedings conducted in this case.
Besides, mutual restitution is the proper
consequence of the remedy of resolution. It cannot
arise - as it is, in fact, theoretically incompatible -
with the remedy of specific performance, which is
the relief prayed for and consequently, granted to
the injured party herein. (Buenviaje v. Sps. Salonga,
GR No. 216023, 05 Oct. 2016)
Q: While the case was pending, Felix donated his
parcels of land in favor of his children. Judgment
was rendered against Felix. Four years after the
said donation, the sheriff sought to enforce the
alias writ of execution and discovered that Felix
no longer had any property and had conveyed
254
 Obligations and Contracts

the subject properties to his children. Thus, 2. Real obligation:

Philam filed an accion pauliana for rescission of
the donations. Felix countered that an action for
rescission of the donation had already
prescribed since the time of prescription has to
run from the date of registration. Has the action
filed by Philam prescribed?
A: NO. Philam only learned about the unlawful
conveyances made by Felix more than four years
after the donations were effected, when its counsel
accompanied the sheriff to Butuan City to attach the
properties. There they found that he no longer had
any properties in his name. It was only then that
Philam's action for rescission of the deeds of
donation accrued because then it could be said that
Philam had exhausted all legal means to satisfy the
trial court's judgment in its favor. Since Philam filed
its complaint for accion pauliana against petitioners
barely a month from its discovery that Felix had no
other property to satisfy the judgment award
against him, its action for rescission of the subject
deeds clearly had not yet prescribed. (Khe Hong
Cheng v. CA, G.R. No. 144169, 28 Mar. 2001)
a. Generic thing – Substitute
performance; delivery may be made by
a person other than the debtor since
the object is merely designated by its
class or genus. The creditor may ask
that the obligation be complied with at
the expense of the debtor. (Art. 1165,
NCC)
b. Specific thing – Specific performance
may be demanded, that is, the creditor
may compel the debtor to make the
delivery.
RESCISSION (ART. 1191, NCC)
It refers to the cancellation of the contract or
reciprocal obligation in case of breach on the part of
one, which breach is violative of the reciprocity
between the parties. This is properly called
resolution. (2005, 2008 BAR)
NOTE: The rescission under Art. 1380 is rescission
based on lesion or fraud upon creditors.

NOTE: The debtor is liable with all his property, Applicability

present and future, for the fulfillment of his
obligations, subject to the exemptions provided by Rescission or resolution is applicable in reciprocal
law. (De Leon, 2003) obligations, since it is implied therein.

Substitute Performance Characteristics of the Right to Rescind

It is a remedy of the creditor in case of non- 1. It can be demanded only if plaintiff is ready,
performance by the debtor where another party willing, and able to comply with his own
performs the obligation or the same is performed at obligation and defendant is not;
the expense of the debtor. 2. It is not absolute;
3. It needs judicial approval in the absence of a
Applicability of Substitute Performance stipulation allowing for extra-judicial
rescission, in cases of non-reciprocal
1. Positive personal obligation: obligations;
If not purely personal – Substitute 4. It is subject to judicial review if availed of
performance; the obligation shall be extrajudicially;
executed at debtor’s cost if he fails to do it. 5. It may be waived, expressly or impliedly; and
(Art. 1167, NCC) 6. It is implied to exist in reciprocal obligations,
Purely personal – No substitute therefore, need not be expressly stipulated
performance may be demanded because of upon.
the personal qualifications taken into
consideration. The only remedy is
damages.

255 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
Fulfillment or Rescission of the Obligation
GR: The injured party can only choose either
fulfillment or rescission of the obligation, and not
both.
XPN: He may also seek rescission, even after he has
chosen fulfillment, if the latter should become
impossible. (Art. 1191, NCC)
Q: Pikian Mining Company (PMI) entered into an
Operating Agreement (OA) with Golden Valley
Exploration, Inc. (GVEI), granting the latter "full,
exclusive and irrevocable possession, use,
occupancy, and control over the mining claims
and the processing and marketing of the
products for a period of 25 years.” Later, PMC
extra-judicially rescinded the OA upon GVEI’s
violation of Section 5.01, Art. V thereof. GVEI
contested PMC’s extra-judicial rescission of the
OA, averring therein that its obligation to pay
royalties to PMC arises only when the mining
claims are placed in commercial production,
which condition has not yet taken place. PMC no
longer responded to GVEI’s letter. Is the
rescission of the Operating Agreement valid?
A: YES. The rescission is valid. As a general rule, the
power to rescind an obligation must be invoked
judicially and cannot be exercised solely on a party’s
own judgment that the other has committed a
breach of the obligation. This is so because
rescission of a contract will not be permitted for a
slight or casual breach, but only for such substantial
and fundamental violations as would defeat the very
object of the parties in making the agreement. As a
well-established exception, however, an injured
party need not resort to court action to rescind a
contract when the contract itself provides that it
may be revoked or canceled upon violation of its
terms and conditions. PMC’s unilateral rescission of
the Operating Agreement (OA) due to GVEI’s non-
payment of royalties considering the parties’
express stipulation in the OA that said agreement
may be canceled on such ground. (Golden Valley
Exploration, Inc. v. Pinkian Mining Company, G.R. No.
190080, 11 June 2014)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Q: Vermen and Seneca entered into an
"offsetting agreement," where Seneca is obliged
to deliver construction materials to Vermen,
who is obliged to pay Seneca and to deliver
possession of 2 condominium units to Seneca
upon its completion. Seneca filed a complaint for
rescission of the offsetting against Vermen,
alleging that the latter had stopped issuing
purchase orders of construction materials
without a valid reason, thus resulting in the
stoppage of deliveries of construction materials
on its part, in violation of the Offsetting
Agreement. Can the agreement be rescinded?
A: YES, because the provisions of the offsetting
agreement are reciprocal in nature. Art. 1191 of the
Civil Code provides the remedy of rescission (more
appropriately, the term is "resolution") in case of
reciprocal obligations, where one of the obligors
fails to comply with that is incumbent upon him.
(Vermen Realty Development Corp. v. CA, G.R. No.
101762, 06 July 1993)
Q: Ong and spouses Robles executed an
"agreement of purchase and sale" of two parcels
of land. Ong partially paid the spouses by
depositing sums of money with the BPI in
accordance with their stipulation that Ong pay
the loan of the spouse with BPI. To answer for
Ong’s balance, he issued four post-dated checks
which were dishonored. Ong failed to replace
the checks and to pay the loan in full. Can the
contract entered into by Ong and the spouses be
rescinded?
A: NO. The agreement of the parties, in this case,
may be set aside, but not because of a breach on the
part of Ong for failure to complete payment of the
purchase price. Rather, his failure to do so brought
about a situation that prevented the obligation of
the spouses to convey title from acquiring an
obligatory force.
The agreement of purchase and sale shows that it is
in the nature of a contract to sell. Ong’s failure to
complete payment of the purchase price is a non-
fulfillment of the condition of full payment which
rendered the contract to sell ineffective and without
force and effect. The breach contemplated in Art.
256
 Obligations and Contracts
1191 is the obligor’s failure to comply with an
obligation. In this case, Ong’s failure to pay is not
even a breach but merely an event that prevents the
vendor’s obligation to convey title from acquiring
binding force. (Ong v. CA, G.R. No. 97347, 06 July
1999)
Q: Petitioners and respondents entered into a
Contract to Sell (subject contract) over the
subject land. The subject contract
provides, inter alia, that: (a) the consideration
for the sale is P33,155,000.00 payable as
follows: down payment in the amount of
P11,604,250.00 inclusive of the amount of
P2,000,000.00 previously paid by respondents
as earnest money/reservation fee, and the
remaining balance of P21,550,750.00 payable in
36 monthly installments, each in the amount of
P598,632.00 through post-dated checks; (b) in
case any of the checks is dishonored, the
amounts already paid shall be forfeited in
petitioners' favor, and the latter shall be entitled
to cancel the subject contract without judicial
recourse in addition to other appropriate legal
action; (c) respondents are not entitled to
possess the subject land until full payment of the
purchase price; (d) petitioners shall transfer the
title over the subject land from a certain
Edilberta N. Santos to petitioners' names, and,
should they fail to do so, respondents may cause
the said transfer and charge the costs incurred
against the monthly amortizations; and (e) upon
full payment of the purchase price, petitioners
shall transfer title over the subject land to
respondents. However, respondents sent
petitioners a letter seeking to rescind the
subject contract on the ground of financial
difficulties. They also sought the return of the
amount they had paid.
As their letter went unheeded, respondents filed
a complaint for rescission. Petitioners
countered that respondents' act is a unilateral
cancellation of the subject contract as the
former did not consent to it. Moreover, the
ground of financial difficulties is not a ground to
effect a valid rescission. The RTC ruled in favor
of respondents and, accordingly, ordered the
rescission of the subject contract; and the return
257
of the amounts already paid as well as the
remaining post-dated checks issued by
respondent representing the remaining
monthly amortizations. The CA affirmed. Is the
CA correct?
A: NO. It cannot be said that petitioners' failure to
undertake their obligation under paragraph 7 to
cause the transfer of the property to their names
from one Edilberta N. Santos within 90 days from
the execution of the said contract defeats the object
of the parties in entering into the subject contract,
considering that the same paragraph provides
respondents contractual recourse in the event of
petitioners' non-performance of the aforesaid
obligation, that is, to cause such transfer themselves
in behalf and at the expense of petitioners.
Indubitably, there is no substantial breach of
paragraph 7 on the part of petitioners that would
necessitate a rescission (or resolution) of the
subject contract.
Notwithstanding the foregoing facts, the Court
cannot grant petitioners' prayer to order the
cancellation of the subject contract and the
forfeiture of the amounts already paid by
respondents on account of the latter's failure to pay
its monthly amortizations, simply because
petitioners neither prayed for this specific relief nor
argued that they were entitled to the same. Worse,
petitioners were declared "as in default" for failure
to file the required pre-trial brief and, thus, failed to
present any evidence in support of their defense.
(Nolasco v. Cuerpo, GR No. 210215, 09 Dec. 2015)
NOTE: If the case involves a contract to sell, wherein
full payment of the purchase price is a positive
suspensive condition, the non-fulfillment of which is
not a breach of contract, but merely an event that
prevents the seller from conveying title to the
purchaser. (Royal Plains View, Inc. v. Mejia, G.R. No.
230832, 12 Nov. 2018)
Q: Can a contract be rescinded extrajudicially
despite the absence of a special contractual
obligation therefor?
A: YES. An extrajudicial rescission based on grounds
not specified in the contract would not preclude a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
party to treat the same as rescinded. The rescinding
party, however, by such course of action, subjects
himself to the risk of being held liable for damages
when the extrajudicial rescission is questioned by
the opposing party in court. In other words, the
party who deems the contract violated may
consider it resolved or rescinded, and accordingly,
without previous court action, but it proceeds at its
own risk. For it is only the final judgment of the
corresponding court that will conclusively and
finally settle whether the action taken was or was
not correct in law. (Nissan Car Lease Phils, Inc., v.
LICA Management and Proton Pilipinas, Inc., G.R. No.
176986, 13 Jan. 2016)
DAMAGES
Liability for Damages
Those liable under Art. 1170 shall pay damages only
if aside from the breach of contract, prejudice or
damage was caused. (Berg v. Teus, G.R. No. L-6450,
30 Oct. 1954)
NOTE: If action is brought for specific performance,
damages sought must be asked in the same action;
otherwise, the damages are deemed waived.
(Daywalt v. La Corporacion, G.R. No. L-13505, 04 Feb.
1919)
Kinds of Damages (M-E-N-T-A-L)
1. Moral;
2. Exemplary;
3. Nominal;
4. Temperate;
5. Actual;
6. Liquidated.
SUBSIDIARY REMEDIES
Accion Subrogatoria
An action whereby the creditor, whose claim has not
been fully satisfied, may go after the defendant
debtor’s debtor (third person). (Art. 1177, NCC)
Accion subrogatoria is different and distinct from
active subjective subrogation governed by Arts.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
1300 to 1304. In the latter, there is change of
creditors, whereas in the former there is no change
of creditors; the creditor merely acts in the name
and for the account of the debtor after exhausting
the assets of the latter but not enough to satisfy the
claims of the creditor.
Requisites (I-P-I-N)
1. The debtor’s assets must be Insufficient to
satisfy claims against him;
2. The creditor must have Pursued all
properties of the debtor subject to
execution;
3. The right of action must Not be purely
personal; and
4. The debtor whose right of action is
exercised must be Indebted to the creditor.
Effects of Subrogatory Action
1. The creditor may exercise the subrogatory
action on behalf of the debtor not only up to the
amount of his credit but in its totality.
NOTE: The excess (if any) must be returned to
the debtor.
2. The bringing of action does not entitle the
creditor to preference.
3. The defendant (the debtor of the debtor) may
avail himself of all defenses available against
the creditor.
NOTE: In order to exercise action subrogatoria, a
previous approval of the court is not necessary.
(Tolentino, 1991)
Accion Pauliana
An action where the creditor files in court for the
rescission of acts or contracts entered into by the
debtor designed to defraud the former. (Art. 1177,
NCC)
NOTE: When the creditor could not collect in any
manner, accion pauliana may be resorted by him to
rescind a fraudulent alienation of property.
258
 Obligations and Contracts
(Regalado, v. Luchsinger and Co., G.R. No. L-2250, 17
Feb. 1906)
Requisites (P-A-P-I-L)
1. Defendant must be Indebted to plaintiff;
2. The fraudulent act performed by the debtor
subsequent to the contract gives Advantage to
another;
3. The creditor is Prejudiced by such act;
4. The creditor must have Pursued all properties
of the debtor subject to execution; and
5. The creditor has no other Legal remedy.
Example: Alienations of property, payment of debts
which are not due, renunciation of rights such as the
right of usufruct or an inheritance, assignment of
credit, and remission of debts.
Accion Directa
The right of a person to go directly against another
person who is not privy to the contract. (Arts. 1652,
1608, 1729 and 1893, NCC)
Kinds:
1. Subsidiary liability of sublessee for the rent
(Art. 1652, NCC);
2. Right of sellers a retro to redeem the property
from persons other than the buyer a retro (Art.
1608, NCC);
3. Subsidiary liability of owners to laborers and
material men (Art. 1729, NCC); and
4. The principal may sue the substitute of the
agent with respect to the obligations which the
substitute has contracted under the
substitution. (Art. 1893, NCC)
3. KINDS
PURE AND CONDITIONAL OBLIGATION
Pure Obligation
An obligation whose performance does not depend
upon a future or uncertain event, or upon a past
event or upon a past event unknown to the parties,
demandable at once. (Art. 1179, NCC)
259
NOTE: Other obligations which are demandable at
once are:
1. Obligations with a resolutory condition; and
2. Obligations with a resolutory term or period.
(Arts. 1179 (2) and 1193 (2), NCC)
The most distinctive characteristic of a pure
obligation is its immediate demandability. This
quality, however, must not be understood in such a
way as to lead to absurd interpretations which
would literally require the obligor or debtor to
comply immediately with his obligation. A
distinction must be made between:
1. The immediate demandability of the obligation;
and
2. Its performance or fulfillment by the obligor or
debtor. Although the obligee or creditor can
demand the performance of the obligation
immediately, the quality of immediate
demandability is not infringed or violated when
a reasonable period is granted for performance.
(Jurado, 2009)
Conditional Obligation
An obligation subject to a condition and the
effectivity of which is subordinated to the
fulfillment or non-fulfillment of a future and
uncertain event or a past event unknown to the
parties. (Pineda, 2000)
Condition
A condition is an event that is future and uncertain,
upon which the efficacy or extinguishment of an
obligation depends. It has two requisites: (i)
futurity, and (ii), uncertainty.
Uncertain but Past Event as a Condition
An uncertain but past event itself can never
constitute a condition because, in order to be
classified as a condition, the requisites of futurity
and uncertainty are required. Neither can it
constitute a term or period because, in order to be
classified as a term or period, the requisites of
futurity and certainty are required. However, the
proof or ascertainment of the fact or event, as
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

distinguished from the fact or event itself, may Characteristic

either constitute a condition or a term depending
upon the circumstances of each case. (Jurado, 2009) Futurity and
Futurity and certainty.
uncertainty.
Constructive Fulfillment of a Condition
The effect of its happening to the obligation
The condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment. (Art.
May give rise to an
1186, NCC)
No effect upon the obligation
existence of the (suspensive) or the
Q: Ramon, the judicial administrator of the
obligation but only in cessation of one
estate of Juan, found out that Rodriguez had
its demandability. already existing
enlarged the area of the land which he
(resolutory).
purchased from Juan before his death. Thus,
Ramon demanded Rodriguez to vacate the
portion allegedly encroached by him. Rodriguez If fulfillment is dependent upon the sole will of
refused and contested there was indeed a the debtor
conditional sale with the balance of the
purchase price payable within five years from
Valid. But the court is
the execution of the deed of sale. Ramon then
empowered to fix the Annulled
filed an action for recovery of possession of the
duration of the period.
disputed lot. Is the contract of sale a conditional
one?
Retroactivity
A: NO. The stipulation that the "payment of the full The moment the
consideration based on a survey shall be due and condition is fulfilled,
payable in five years from the execution of a formal the effects will retroact
No retroactivity.
deed of sale" is not a condition that affects the on the day of the
efficacy of the contract of sale. It merely provides constitution of the
the manner by which the full consideration is to be obligation.
computed and the time within which the same is to
be paid. But it does not affect in any manner the Suspensive Condition
effectivity of the contract. (Heirs of San Andres v.
Rodriguez, G.R. No. 135634, 31 May 2000) A condition the fulfillment of which will give rise to
the acquisition of a right. While the condition has
Period v. Condition not arrived yet, in the meantime, the rights and
obligations of the parties are suspended.
PERIOD CONDITION
NOTE: A contract to sell is akin to a conditional sale
As to time where the efficacy or obligatory force of the
vendor's obligation to transfer title is subordinated
May refer to past event
to the happening of a future and uncertain event, so
Refers to the future. unknown to the
that if the suspensive condition does not take place,
parties.
the parties would stand as if the conditional
As to fulfillment obligation had never existed. The suspensive
It will happen at an condition is commonly full payment of the purchase
exact date or at an May or may not price. (Sps. Serrano v. Caguiat, G.R. No. 139173, 28
indefinite time but is happen. Feb. 2007)
definite to arrive.

UNIVERSITY OF SANTO TOMAS 260

2022 GOLDEN NOTES
 Obligations and Contracts

Effects of Fulfillment of the Suspensive Effect of Loss, Deterioration and Improvement

Condition (1999 BAR) in an Obligation to Deliver a Determinate Thing
Subject to a Suspensive Condition
1. Real obligations
GR: Retroacts to the day of the constitution of
WITH DEBTOR’S WITHOUT DEBTOR’S
the obligation.
FAULT FAULT
XPNs: There is no retroactive effect with
respect to the fruits and interest: Loss
1. In reciprocal obligations, the fruits and
interests shall be deemed to have been Obligation is not
mutually compensated; and extinguished. Obligation
2. In unilateral obligations, the debtor extinguished.
appropriates the fruits and interest Debtor pays damages.
received before the fulfillment of the
condition unless contrary to the intention Deterioration
of the parties. (Art. 1187, NCC)
Creditor may choose
2. Personal obligations – the court determines the between rescission of
retroactive effect of the condition fulfilled. (Art. obligation or Impairment borne by
1187, NCC) fulfillment (with creditor.
indemnity for damages
Rights of the Parties Before the Fulfillment of in either case).
the Condition
Improvement
1. Creditor – May bring the appropriate actions for
By the thing’s nature or through time – Inure to
the preservation of his right (Art. 1188, NCC),
the benefit of the creditor;
such as:

At the debtor’s expense – Debtor shall have no

a. Action for prohibition/restraining the
alienation of the thing pending the
happening of the suspensive condition;
b. Petition for the annotation of the creditor’s
right with the proper registry;
c. Action to demand security if the debtor has
become insolvent;
d. Action to set aside alienations made by the
debtor in fraud of creditors; or
e. Action against adverse possessors to
interrupt the running of prescriptive
period.
2. Debtor – May recover what, during the same
time, he has paid by mistake in case of a
suspensive condition. (Art. 1188, NCC)
right other than that granted to a usufructuary.
NOTE: The abovementioned do not apply to
indeterminate or generic things on the basis of the
maxim “genus nun quam peruit” (genus never
perishes). It will only apply when the object or thing
to be given is specific.
Requisites for the Application of Art. 1189 (R–S–
Su–F-L-D-I)
1. Must be a Real obligation;
2. Object of the obligation is a Specific thing;
3. Obligation is subject to a Suspensive condition.
4. The condition is Fulfilled; and
5. There is Loss, Deterioration or Improvement
of the thing during the pendency of the
happening of the condition.

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NOTE: The same conditions apply to an obligor in Suspensive Condition v. Resolutory Condition
obligations subject to a resolutory condition. In such
cases, the third requisite must read, “subject to a
SUSPENSIVE RESOLUTORY
resolutory condition.”
CONDITION CONDITION

Positive Suspensive Condition Effect of fulfillment

Obligation arises or Obligation is

A condition which requires a positive act on the part
of the obligor that gives rise to the acquisition of
rights.
In case of a contract to sell, the obligation to deliver
the subject properties becomes demandable only
upon the happening of the positive suspensive
condition (payment of full purchase price). Without
full payment, there can be no breach of contract to
speak of because the seller has no obligation yet to
turn over the title. (Reyes v. Tuparan, G.R. No.
188064, 01 June 2011)
Resolutory Condition (1999 BAR)
A condition where the rights already acquired are
lost upon fulfillment of the condition. It is also
known as condition subsequent.
Effects of Fulfillment of Resolutory Condition
1. Real obligations:
a. The parties shall return to each other what
they have received (mutual restitution);
b. Obligation is extinguished;
c. In case of loss, deterioration or
improvement of the thing, Art. 1189, NCC,
with respect to the debtor, shall be applied
to the party who is bound to return. (Art.
1190, NCC)
2. Personal obligations – The courts shall
determine, in each case, the retroactive effect of
the condition that has been complied with.
(Arts. 1187 & 1190, NCC)
becomes effective. extinguished.
Effect of non-fulfillment
If not fulfilled, no If not fulfilled, juridical
juridical relation is relation is
created. consolidated.
When rights are acquired
Rights are not yet
Rights are already
acquired, but there is
vested, but subject to
hope or expectancy
the threat or danger of
that they will soon be
extinction.
acquired.
Q: The late Don Lopez, Sr., who was then a
member of the Board of Trustees of CPU,
executed a deed of donation in favor of the latter
involving a parcel of land subject to the
condition that it shall be utilized for the
establishment and use of a medical college.
However, the heirs of Don Lopez, Sr., filed an
action for annulment of the donation,
reconveyance, and damages against CPU,
alleging that CPU did not comply with the
conditions of the donation. Are the conditions
imposed resolutory or suspensive?
A: Under Art. 1181 of the CC, on conditional
obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired,
shall depend upon the happening of the event which
constitutes the condition. Thus, when a person
donates land to another on the condition that the
latter would build upon the land a school, the
condition imposed was not a condition precedent or
a suspensive condition but resolutory. It is not
correct to say that the schoolhouse (or the
establishment and use of a medical college in this
case) had to be constructed before the donation
became effective, that is, before the donee could
become the owner of the land, otherwise, it would
be invading the property rights of the donor. The

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 Obligations and Contracts
donation had to be valid before the fulfillment of the
condition. If there was no fulfillment or compliance
with the condition, the donation may now be
revoked and all rights which the donee may have
acquired under it shall be deemed lost and
extinguished. (Central Philippine University v. CA,
G.R. No. 112127, 17 July1995)
Negative Resolutory Condition
An act, which if not done, would give rise to a cause
of action against the obligor. It contemplates a
situation where rights are already acquired but
subject to an obligation, the non-fulfillment of which
does not affect the rights already acquired but
merely gives a cause of action in favor of the other
party. In a contract of sale, the buyer’s non-payment
of the price is a negative resolutory condition. In
such case, the seller has lost and cannot recover the
ownership of the property, unless he takes action to
rescind or set aside the contract of sale. (Royal
Plains View, Inc. v. Mejia, G.R. No. 230832, 12 Nov.
2018)
Potestative Condition (1997, 2000, 2003 BAR)
A condition that depends upon the will of one of the
contracting parties. (Art. 1182, NCC)
Effects of Potestative Conditions Upon the
Obligation
If the condition is potestative in the sense that its
fulfillment depends exclusively upon the will of
the debtor, and the same is suspensive, both the
condition and obligation are VOID.
However, if the condition is a pre-existing one or the
condition is resolutory, only the condition is void,
leaving the obligation itself valid because what is
left to the sole will of the debtor is not the existence
or the fulfillment of the obligation but merely its
extinguishment.
If the condition is potestative in the sense that its
fulfillment depends exclusively upon the will of the
creditor, the obligation shall be valid. This is so
because the provision of the first sentence of Art.
1182 extends only to conditions which are
263
potestative to the obligor or debtor. Besides, the
creditor is naturally interested in the fulfillment of
the condition since it is only by such fulfillment that
the obligation arises or becomes effective. (Jurado,
2009; Art. 1181, NCC)
Causal Condition
It is the performance or the fulfillment of the
condition which depends upon chance and/or the
will of a third person.
Mixed Condition
It is the performance or fulfillment of the condition
which depends partly upon the will of a party to the
obligation and partly upon chance and/or the will of
a third person.
NOTE: Casual and mixed conditions are valid, unlike
purely potestative conditions.
Q: Suppose that the debtor executed a
promissory note promising to pay his obligation
to the creditor as soon as he has received funds
derived from the sale of his property in a certain
place, is the condition potestative or mixed?
A: The condition is mixed because its fulfillment
depends not only upon the will of the debtor but
also upon the concurrence of other factors, such as
the acceptability of the price and other conditions of
the sale, as well as the presence of a buyer, ready,
able, and willing to purchase the property.
NOTE: The existing rule in a mixed conditional
obligation is that when the condition was not
fulfilled but the obligor did all in his power to
comply with the obligation, the condition should be
deemed satisfied. (Intl. Hotel Corp. v. Joaquin, Jr., G.R.
No. 158361, 10 Apr. 2013)
Impossible Conditions (1997, 2007 BAR)
GR: Impossible conditions annul the obligation
which depends upon the parties but not of a third
person.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

XPNs: 3. Possible, legally, and physically. (Paras, 2008)

1. Pre-existing obligation;
2. Obligation is divisible;
3. In simple or remuneratory donations;
4. In case of conditions not to do an impossible
thing; and
5. In testamentary dispositions.
NOTE: In the foregoing, the obligations remain
valid; only the condition is void and deemed to have
not been imposed. It is applicable only to
obligations, not to do, and gratuitous obligations.
Other Types of Conditions
1. Positive – It involves the doing of an act;
2. Negative –It involves the omission of an act;
3. Divisible – It is susceptible of partial
performance;
4. Indivisible – It is not susceptible of partial
performance;
5. Conjunctive – There are several conditions in an
obligation all of which must be performed;
6. Alternative – There are several conditions in an
obligation but only one must be performed;
7. Possible – It is capable of fulfillment according
to the nature, law, public policy, or good
customs; and
8. Impossible – It is not capable of fulfillment
according to nature, law, public policy, or good
customs. (Art. 1183, NCC)
OBLIGATIONS WITH A PERIOD
Obligation with a Period or a Term
Obligations for whose fulfillment a day certain has
been fixed, shall be demandable only when that day
comes. (Art. 1193, NCC)
Term or Period
A certain length of time which determines the
effectivity or the extinguishment of the obligations.
Requisites of a Valid Period or Term
“Day Certain”
It is understood to be that which must necessarily
come, although it may not be known when.
Kinds of Terms or Periods
1. Ex die – This is a term or period with suspensive
effect. The obligation begins only from a day
certain, in other words, upon the arrival of the
period.
2. In diem – A period or term with a resolutory
effect. Up to a certain extent, the obligation
remains valid, but upon the arrival of said
period, the obligation terminates.
3. Legal – A period granted under the provisions
of the law.
4. Conventional or voluntary – The period agreed
upon or stipulated by the parties.
5. Judicial – The period or term fixed by the courts
for the performance of an obligation or for its
termination.
6. Definite – The exact date or time is known and
given.
7. Indefinite – It is something that will surely
happen, but the date of happening is unknown.
e.g., “I will pay when my means permit me to do
so.”
When the debtor binds himself to pay when his
means permit him to do so, the obligation is deemed
with a period. (Art. 1180, NCC) This is valid because
it is not the payment itself that is dependent upon
the will of the debtor but the moment of payment.
Benefit of the Period
GR: Whenever in an obligation a period is
designated, it is presumed to have been established
for the benefit of both the creditor and the debtor
XPN: When it appears from the tenor of the period
or other circumstances that it was established for
the benefit of one of the parties. (Art 1196, NCC)

1. Future;
2. Certain; and

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Effect of the Term or Period 2. When he does not furnish to the creditor the
guaranties or securities which he has promised;
1. When it is for the benefit of the creditor – 3. When by his own acts he has impaired said
Creditor may demand the performance of the guaranties or securities after their
obligation at any time, but the debtor cannot establishment;
compel him to accept payment before the 4. When through a fortuitous event they
expiration of the period. disappear, unless he immediately gives new
e.g., “on demand” ones or equally satisfactory;
5. When the debtor violates any undertaking, in
2. When it is for the benefit of the debtor – Debtor consideration of which the creditor agreed to
may oppose any premature demand on the the period; and
part of the creditor for performance of the 6. When the debtor attempts to abscond. (Art.
obligation, or if he so desires, he may 1198, NCC)
renounce the benefit of the period by
performing his obligation in advance. ALTERNATIVE, FACULTATIVE, AND
CONJUNCTIVE OBLIGATIONS
Effect of a Fortuitous Event to an Obligation with
a Period Alternative Obligation

It only relieves the contracting parties from the
fulfillment of their respective obligation during the
term or period.
Instances where the Court may Fix the Period
(1991, 1997, 2003 BAR)
It is an obligation where the debtor is alternatively
bound by different prestations, but the complete
performance of one is sufficient to extinguish the
obligation.
Facultative Obligation

1. If the obligation does not fix a period, but from It is an obligation where the debtor, who has a
its nature and circumstances it can be inferred reserved right to choose another prestation or
that a period was intended by the parties; thing, is bound to perform one of the several
prestations due or to deliver a thing as a substitute
2. If the duration of the period depends upon the for the principal.
will of the debtor (1997, 2003 BAR);
Conjunctive Obligation
3. In case of reciprocal obligations, when there is
a just cause for fixing the period; or An obligation where the debtor has to perform
several prestations; it is extinguished only by the
4. If the debtor binds himself when his means performance of all of them.
permit him to do so.
Facultative Obligations v. Alternative
NOTE: Once fixed by the courts, the period cannot Obligations
be changed by the parties. (Art. 1197, NCC)

Instances where the Debtor Loses his Right to FACULTATIVE ALTERNATIVE

make Use of the Period OBLIGATIONS OBLIGATIONS

1. When after the obligation has been contracted, Number of Prestation

he becomes insolvent, unless he gives a
guaranty or security for the debt; Only one object is due. Several objects are due.

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Manner of compliance substitute. validity of the

obligation.
May be complied with May be complied with
by substitution of one by fulfilling any of those Impossibility of Prestation
that is due. alternately due.
If some prestations are
Right to Choose If there is impossibility impossible to perform
to perform or to deliver or to deliver except for
GR: Choice pertains to the principal thing or one - this one must be
debtor. prestation, the delivered.
Choice pertains only to obligation is
debtor. XPN: Expressly granted extinguished, even if If all prestations are
to creditor or a third the substitute impossible to perform,
person. obligation is valid. the obligation is
extinguished.
Effect of Fortuitous Loss
Loss of Substitute
Fortuitous loss of all
Fortuitous loss
prestations will When the choice is
extinguishes the Loss of the substitute
extinguish the given to the creditor,
obligation. before the substitution
obligation. the loss of the
is made through the
alternative through the
Effect of Culpable Loss fault of the debtor
fault of the debtor
doesn’t make him
renders him liable for
Culpable loss obliges liable.
Culpable loss of damages.
the debtor to deliver a
any object due will give
substitute prestation
rise to liability to the
without liability to the Right to Choose Prestation in an Alternative
debtor.
debtor. Obligation

Liability of the Debtor GR: The right of choice belongs to the debtor.

The creditor shall have XPN: Unless it has been expressly given to the
the right of indemnity creditor. (Art. 1200, NCC)
When substitution has
for damages when,
been made and
solely through the fault Limitations on Debtor’s Right to Choose
communicated to the
of the debtor, all things
creditor, the obligor is
which are alternatively 1. The debtor must absolutely perform the
liable for the loss of the
the object of the chosen prestation. He cannot compel the
thing on account of
obligation have been creditor to receive part of one and part of the
delay, negligence, or
lost, or the compliance other undertaking;
fraud.
of the obligation has
become impossible. 2. The debtor shall have no right to choose those
prestations which are impossible, unlawful, or
Void Prestation
which could not have been the object of the
If the principal If one prestation is void, obligation (Art. 1200, NCC);
obligation is void, the the others that are free
creditor cannot compel from any vices of 3. The debtor shall lose the right of choice when
delivery of the consent preserve the among the prestation whereby he is

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 Obligations and Contracts

alternatively bound, only one is practicable
(Art. 1202, NCC);
4. The selection made by the debtor (or the
creditor when it has been expressly granted to
him) cannot be subjected by him to a
condition or a term unless the creditor (or
debtor in case the choice is with the creditor)
consents thereto. (Tolentino, 2002)
Effectivity of the Choice in Alternative
Obligations
The choice made takes effect only upon its
communication to the other party, and from such
time, the obligation ceases to be alternative. (Art.
1201, NCC; Art. 1205, NCC)
to make the selection effective because none of
them can extinguish the entire obligation.
If the obligation is solidary and there is no
stipulation to the contrary, the choice by one will be
binding personally upon him; the choice of one will
be personally binding to him, but not as to the
others.
Thus, if A and B solidarily bind themselves to deliver
a horse or a carabao to C, the selection of A of the
horse, when communicated to C, will bind him, and
he cannot, later on, deliver the carabao. It is,
however, not binding on B, who may extinguish the
obligation by delivering the carabao. (Tolentino,
2002)
Effects of Loss of Objects

NOTE: The notice of selection or choice may be in

DUE TO DUE TO
any form provided it is sufficient to make the other
FORTUITOUS DEBTOR’S
party know that the election has been made.
EVENT FAULT
(Tolentino, 2002)
Choice Belongs to Debtor
When Alternative Obligation becomes a Simple
Obligation Creditor shall
have the right to
1. When the debtor has communicated the choice be indemnified
to the creditor; for damages
2. When debtor loses the right of choice among Debtor is based on the
All are
the prestations whereby the debtor is released from value of the last
lost
alternatively bound, only one is practicable. the obligation. thing which
(Art. 1202, NCC) disappeared or
last service
NOTE: The choice made by the debtor does not which became
require the concurrence of the creditor. Otherwise, impossible.
it would destroy the very nature of the right to select Debtor shall
given to the debtor. Debtor shall
deliver that
deliver that
Some which he shall
Impossibility of Choice Due to Creditor’s Acts which he shall
but not choose from
choose from
all are among the
When the choice is rendered impossible through the among the
lost remainder
creditor’s fault, the debtor may bring an action to remainder.
without
rescind the contract with damages. (Art. 1203, NCC) damages.

Plurality of Parties
Only one
Deliver that which remains.
When there are various debtors or creditors, and remains
the obligation is joint, the consent of all is necessary

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Choice Belongs to Creditor a. Joint solidarily;

b. Jointly and severally; or
Creditor may
c. In solidum.
claim the price or
Debtor is
All are value of any of
released from Joint Obligation v. Solidary Obligation
lost them with
the obligation.
indemnity for
damages.
JOINT OBLIGATION SOLIDARY OBLIGATION
Creditor may
claim any of
Presumption by law
Creditor may those subsisting
choose from OR he may Not presumed. Must be
Some
among the choose any of expressly stipulated by
but not
remainder or those which were the parties, or when the
all are Presumed by law.
that which lost, but it is the law or the nature of the
lost (Art. 1208, NCC)
remains if only price or value of obligation requires
one subsists. with right to solidarity. (Art. 1207,
damages that can NCC)
be claimed.
Deliver that which remains. In case of Liability of each debtor
Only one
fault of debtor, creditor has a right to
remains Proportionate part Obliged to pay the entire
indemnity for damages.
of the entire debt. obligation.

JOINT AND SOLIDARY OBLIGATIONS Right of the creditor

(1992, 2001, 2008 BAR) to the fulfillment of the obligation

Each creditor has the

Joint Obligations Each creditor, if
right to demand from any
there are several, is
of the debtors, the
One where the credit or debt shall be presumed to entitled only to a
payment or fulfillment of
be divided into as many equal shares as there are proportionate part
the entire obligation.
creditors or debtors, the credits or debts being of the credit.
(Tolentino, 1999)
considered distinct from one another. (Art. 1208,
NCC) Each debtor is liable only for a proportionate
Character of an obligation
part of the debt and each creditor to his
proportionate share to the credit.
GR: When two or more creditors or two or more
debtors concur in one and the same obligation, the
Other terms for joint obligations are:
presumption is that the obligation is joint.
a. joint simply;
b. mancomunada; or
XPNs: The obligation shall only be solidary when:
c. pro rata.
(L-E-N)

Solidary Obligations
1. Law requires solidarity;
2. Expressly stipulated that there is solidarity;
It is where each of the debtors obliges to pay the
3. Nature of the obligation requires solidarity. Art.
entire obligation, while each one of the creditors has
1207, NCC)
the right to demand from any of the debtors, the
payment or fulfillment of the entire obligation. (Art.
Q: Chua bought and imported to the Philippines
1207, NCC)
dicalcium phosphate. When the cargo arrived at
the Port of Manila, it was discovered that some
Other terms for solidary obligations are:

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 Obligations and Contracts
were in apparent bad condition. Thus, Chua filed
with Smith Bell and Co., Inc. (claiming agent of
First Insurance Co.) a formal statement of claim
for the loss. No settlement of the claim having
been made, Chua then filed an action. Is Smith,
Bell, and Co., solidarily liable upon a marine
insurance policy with its disclosed foreign
principal?
A: NO. Art. 1207 of the Civil Code clearly provides
that "there is a solidary liability only when the
obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." The
well-entrenched rule is that solidary obligation
cannot lightly be inferred. It must be positively and
clearly expressed. (Smith, Bell & Co., Inc. v. CA, G.R.
No. 110668, 06 Feb. 1997)
Q: The labor arbiter rendered a decision, the
fallo of which states the following respondents
as liable, namely: FCMC, Sicat, Gonzales, Chiu
Chin Gin, Lo Kuan Chin, and INIMACO. INIMACO
questions the execution, alleging that the alias
writ of execution altered and changed the tenor
of the decision by changing their liability from
joint to solidary, by the insertion of the words
"AND/OR.” Is the liability of INIMACO pursuant
to the decision of the labor arbiter solidary or
not?
A: INIMACO's liability is not solidary but merely
joint. Well-entrenched is the rule that solidary
obligation cannot lightly be inferred. There is a
solidary liability only when the obligation expressly
so states, when the law so provides or when the
nature of the obligation so requires.
In the dispositive portion of the labor arbiter, the
word "solidary" does not appear. The said fallo
expressly states the following respondents therein
as liable, namely: Filipinas Carbon Mining
Corporation, Sicat, Gonzales, Chiu Chin Gin, Lo Kuan
Chin, and INIMACO. Nor can it be inferred therefrom
that the liability of the six respondents in the case
below is solidary; thus, their liability should merely
be joint. (INIMACO v. NLRC, G.R. No. 101723, 11 May
2000)
269
Q: Mactan Rock Industries, through its President
and Chief Executive Officer Tompar, entered
into a Technical Consultancy Agreement
(TCA) with Germo, whereby the parties
agreed, inter alia, that: (a) Germo shall stand as
MRII's marketing consultant who shall take
charge of negotiating, perfecting sales, orders,
contracts, or services of MRII, but there shall be
no employer-employee relationship between
them; and (b) Germo shall be paid on a purely
commission basis, including a monthly
allowance of P5,000.00. During the effectivity of
the TCA, Germo successfully negotiated and
closed with International Container Terminal
Services, Inc. (ICTSI) a supply contract of 700
cubic meters of purified water per day.
Accordingly, MRII commenced supplying water
to ICTSI on February 22, 2007, and in turn, the
latter religiously paid MRII the corresponding
monthly fees. Despite the foregoing, MRII
allegedly never paid Germo his rightful
commissions amounting to P2,225,969.56 as of
December 2009, inclusive of interest. Initially,
Germo filed a complaint before the National
Labor Relations Commission (NLRC), but the
same was dismissed for lack of jurisdiction due
to the absence of employer-employee
relationship between him and MRII. Germo filed
the instant complaint praying that MRII and
Tompar pay him for unpaid commissions with
legal interest from the time they were due until
fully paid, moral damages, exemplary damages,
and the costs of suit.
MRII and Tompar averred, among others,
that: (a) there was no employer-employee
relationship between MRII and Germo as the
latter was hired as a mere consultant; (b) Germo
failed to prove that the ICTSI account
materialized through his efforts as he did not
submit the required periodic reports of his
negotiations with prospective clients;
and (c) ICTSI became MRII's client through the
efforts of a certain Ed Fornes. Are MRII and
Tompar, as the CEO and President, solidarily
liable to pay Germo?
A: NO. It is a basic rule that a corporation is a
juridical entity vested with legal and personality
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
separate and distinct from those acting for and on
behalf of, and from the people comprising it. As a
general rule, directors, officers, or employees of a
corporation cannot be held personally liable for the
obligations incurred by the corporation unless it can
be shown that such director/officer/employee is
guilty of negligence or bad faith and that the same
was clearly and convincingly proven.
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the
following requisites must concur:
(1) the complainant must allege in the
complaint that the director or officer assented
to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or
bad faith; and
(2) the complainant must clearly and
convincingly prove such unlawful acts,
negligence or bad faith.
In this case, Tompar's assent to the patently
unlawful acts of the MRII or that his acts were
tainted by gross negligence or bad faith was not
alleged in Germo's complaint, much less proven
during the course of the trial. Therefore, the
deletion of Tompar's solidary liability with MRII is
in order. (Mactan Rock Industries v. Germo, G.R. No.
228799, 10 Jan. 2018)
Consequences of a Joint Obligation
1. Each debtor is liable only for a proportionate
part of the entire debt;
2. Each creditor, if there are several, is entitled
only to a proportionate part of the credit;
2. The demand made by one creditor upon one
debtor, produces effects of default only as
between them;
3. Interruption of prescription caused by the
demand made by one creditor upon one debtor,
will NOT benefit the co-creditors or the co-
debtors;
4. Insolvency of a debtor will not increase the
liability of his co-debtor;
5. Vices of each obligation emanating from a
particular debtor or creditor will not affect the
others;
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
6. In indivisible or joint obligation, the defense of
res judicata of one does not extend to the others
(8 Manresa, 200-201); or
7. The delay on the part of only one of the joint
debtors does not produce effects with respect
to the others, and if the delay is produced
through the acts of only one of the joint
creditors, the others cannot take advantage
thereof.
JOINT INDIVISIBLE OBLIGATIONS
The obligation is joint because the parties are
merely proportionately liable. It is indivisible
because the object or subject matter is not
physically divisible into different parts. In other
words, it is joint as to liabilities of the debtors or
rights of the creditors but indivisible as to
compliance. This obligation also constitutes the
middle ground between a joint obligation and a
solidary obligation. (De Leon, 2010)
A joint indivisible obligation gives rise to indemnity
for damages from the time any one of the debtors
does not comply with his undertaking. The debtors
who may have been ready to fulfill their promises
shall not contribute to the indemnity beyond the
corresponding portion of the price of the thing or of
the value of the service in which the obligation
consists. (Art. 1224, NCC)
Characteristics
1. Obligation is joint, but since it is indivisible,
creditor must proceed against all the joint
debtors ;
2. Demand must be to all debtors ;
3. In case of insolvency of one debtor, others are
not liable for his share ;
4. If there are joint creditors, delivery must be
made to all unless authorized by others; and
5. Each joint creditor may renounce his share.
Effects of Different Permutations of Joint
Indivisible Obligations
1. If there are two or more debtors, compliance
with the obligation requires the concurrence of
all the debtors, although each for his own share.
270
 Obligations and Contracts
The obligation can be enforced only by
preceding against all of the debtors;
2. If there are two or more creditors, the
concurrence or collective act of all the creditors,
although each of his own shares, is also
necessary for the enforcement of the obligation;
and
3. Each credit is distinct from one another;
therefore, a joint debtor cannot be required to
pay for the share of another with debtor,
although he may pay if he wants to.
In case of insolvency of one of the debtors, the
others shall not be liable for his shares. To hold
otherwise would destroy the joint character of the
obligation. (Art. 1209, NCC)
Effect of Breach by a Debtor
If one of the joint debtors fails to comply with his
undertaking and the obligation can no longer be
fulfilled or performed, it will then be converted into
one of indemnity for damages. Innocent joint debtor
shall not contribute to the indemnity beyond his
corresponding share of the obligation.
SOLIDARY OBLIGATIONS
Each of the debtors is obliged to pay the entire
obligation, and each one of the creditors has the
right to demand from any of the debtors the
payment or fulfillment of the entire obligation.
Kinds of Solidary Obligation
1. Passive – Solidarity on the part of the debtors.
2. Active – Solidarity on the part of the creditors.
3. Mixed – Solidarity on both sides.
4. Conventional – agreed by the parties.
5. Legal – imposed by law.
LEGAL EFFECTS OF ACTIVE AND
PASSIVE SOLIDARITY (TOLENTINO, 2002)
Active Solidarity
The essence of active solidarity consists in the
authority of each creditor to claim and enforce the
rights of all, with the resulting obligation of paying
271
everyone what belongs to him; there is no merger,
much less a renunciation of rights, but only mutual
representation. It is thus essentially a mutual
agency. Its juridical effects may be summarized as
follows:
1. Since it is a reciprocal agency, the death of a
solidary creditor does not transmit the
solidarity to each of his heirs but to all of them
taken together;
2. Each creditor represents the others in the act of
receiving payment and in all other acts which
tend to secure the credit or make it more
advantageous. Hence, if he receives only a
partial payment, he must divide it among the
other creditors. He can interrupt the period of
prescription or render the debtor in default, for
the benefit of all other creditors;
3. One creditor, however, does not represent the
others in such acts as novation (even if the
credit becomes more advantageous),
compensation and remission. In these cases,
even if the debtor is released, the other
creditors can still enforce their rights against
the creditor who made the novation,
compensation, or remission;
4. The creditor and its benefits are divided equally
among the creditors, unless there is an
agreement among them to divide differently.
Hence, once the credit is collected, an
accounting and a distribution of the amount
collected should follow ;
5. The debtor may pay to any solidary creditor,
but if a judicial demand is made on him, he must
pay only to the plaintiff; and
6. Each creditor may renounce his right even
against the will of the debtor, and the latter
need not thereafter pay the obligation to the
former.
Passive Solidarity
In passive solidarity, the essence is that each debtor
can be made to answer for the others, with the right
on the part of the debtor-payor to recover from the
others their respective shares. In so far as the
payment is concerned, this kind of solidarity is
similar to a mutual guaranty. Its effects are as
follows:
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

1. Each debtor can be required to pay the entire

As to the requirement of
obligation, but after the payment, he can
plurality of parties or subjects
recover from the co-debtors their respective
shares; Requires the Does not require
plurality of parties or plurality of subjects or
2. The debtor who is required to pay may set up subjects. parties.
by way of compensation his own claim against
As to the effect of breach
the creditor. In this case, the effect is the same
as that of payment; In case of breach, the In case of breach, it is
liability of the converted to one of
3. The total remission of a debt in favor of a debtor solidary debtors indemnity for damages
releases all the debtors; but when this although converted and the indivisibility of
remission affects only the share of one debtor, into one of the the obligation is
the other debtors are still liable for the balance indemnity for terminated and so each
of the obligation; damages remains debtor is liable only for
solidary. his part of the indemnity.
4. All the debtors are liable for the loss of the thing As to the effect of death of a party
due, even if such loss is caused by only one of
Death of solidary
them, or by fortuitous event after one of the
debtors has incurred in delay; debtor terminates Heirs of the debtor
the solidarity, the tie, remain bound to
or vinculum being perform the same
5. The interruption of prescription as to one
debtor affects all the others; but the intransmissible to prestation.
the heirs.
renunciation by one debtor of the prescription
already had does not prejudice the others,
because the extinguishment of the obligation by Rules in Solidary Obligations (1998, 2003 BAR)
prescription extinguishes also the mutual
representation among the solidary debtors; and 1. Anyone of the solidary creditors may collect or
demand payment of the whole obligation; there
6. The interest due by reason of the delay by one is mutual agency among solidary debtors; (Arts.
of the debtors is borne by all of them. 1214 & 1215, NCC)

NOTE: Example of words that connote solidary 2. Any of the solidary debtor may be required to
obligation: a) joint and several; b) in solidum; c) pay the whole obligation; there is mutual
individually and collectively; d) each will pay the guaranty among solidary debtors; (Arts. 1216,
whole value; e) “I promise to pay” and there are two 1217 & 1222, NCC)
or more signatures; and f) juntos o separadamente
(jointly or separately). 3. Each one of solidary creditors may do whatever
may be useful to the others, but not anything
Solidarity v. Indivisibility prejudicial to them (Art. 1212, NCC); however,
any novation, compensation, confusion, or
SOLIDARITY INDIVISIBILITY remission of debt made by any solidary
creditors or with any of the solidary debtors
As to the kind of unity it refers to
shall extinguish the obligation without
Refers to the prejudice to his liability for the shares of other
vinculum existing Refers to the prestation solidary creditors. (Arts. 1215 & 1219, NCC)
between the subjects or object of the contract.
or parties. Q: Joey, Jovy, and Jojo are solidary debtors under
a loan obligation of P300,000.00 which has

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2022 GOLDEN NOTES
 Obligations and Contracts
fallen due. The creditor has, however, condoned
Jojo's entire share in the debt. Since Jovy has
become insolvent, the creditor makes a demand
on Joey to pay the debt.
a. How much, if any, may Joey be compelled to
pay?
b. To what extent, if at all, can Jojo be
compelled by Joey to contribute to such
payment? (1998 BAR)
A:
a. Joey can be compelled to pay only the
remaining balance of P200,000, in view of the
remission of Jojo’s share by the creditor. (Art.
1219, NCC)
b. Jojo can be compelled by Joey to contribute
P50,000. When one of the solidary debtors
cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such
share shall be borne by all his co-debtors, in
proportion to the debt of each. (Art. 1217(3))
Since the insolvent debtor's share, which Joey
paid was P100,000, and there are only two
remaining debtors - namely Joey and Jojo -
these two shall share equally the burden of
reimbursement. Jojo may thus be compelled by
Joey to contribute P50,000.
Q: Iya and Betty owed Jun P500,000 for
advancing their equity in a corporation they
joined as incorporators. Iya and Betty bound
themselves solidarily liable for the debt. Later,
Iya and Jun became sweethearts, so Jun
condoned the debt of P500,000. May Iya demand
from Betty P250,000 as her share in the debt?
Explain with legal basis? (2015 BAR)
A: NO. Iya may not demand the P250,000 from Betty
because the entire obligation has been condoned by
the creditor Jun. In a solidary obligation, the
remission of the whole obligation obtained by one
of the solidary debtors does not entitle him to
reimbursement from his co-debtors. (Art. 1220,
NCC)
Q: Juancho, Don, and Pedro borrowed P150,000
from their friend Cita to put up an internet café,
orally promising to pay her the full amount after
273
one year. Because of their lack of business
know-how, their business collapsed. Juancho
and Don ended up penniless, but Pedro was able
to borrow money and put up a restaurant which
did well. Can Cita demand that Pedro pay the
entire obligation since he, together with the two
others, promised to pay the full amount after
one year? Defend your answer. (2015 BAR)
A: NO. The obligation in this case is presumed to be
joint. The concurrence of two or more creditors or
two or more debtors in one and the same obligation
does not imply that each one of the former has the
right to demand, or that each one of the latter is
bound to render the entire compliance of the
prestation. (Art. 1207, NCC) In a joint obligation,
there is no mutual agency among the joint debtors
such that if one of them is insolvent the others shall
not be liable for his share.
To whom payment should be made in a solidary
obligation
GR: To any of the solidary creditors.
XPN: If demand, judicial or extra-judicial, has been
made by one of the creditors, payment should be
made to him. (Art. 1214, NCC)
In cases of Solidary Creditors, one may act for all
Each one of the solidary creditors may execute acts
that may be useful or beneficial to the others, but he
may not do anything which may be prejudicial to
them. (Art. 1212, NCC)
NOTE: Prejudicial acts may still have valid legal
effects, but the performing creditor shall be liable to
his co-creditors. (Pineda, 2000)
Effects of Assignment of Rights in a Solidary
Obligation
GR: A solidary creditor cannot assign his right
because it is predicated upon mutual confidence,
meaning the personal qualification of each creditor
had been taken into consideration when the
obligation was constituted. (Art. 1213, NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

XPNs: which the obligation seeks to obtain. It is indivisible

1. Assignment to co-creditor; or
2. Assignment is with the consent of co-creditor.
DIVISIBLE AND INDIVISIBLE OBLIGATIONS
Divisible Obligations
if a thing which could be divided into parts and as
divided, its value is impaired disproportionately.
(Pineda, 2000)
Factors to Determine whether an Obligation is
Divisible or Indivisible

Those which have as their object a prestation which 1. The will or intention of the parties (express
is susceptible of partial performance without the or implied);
essence of the obligation being changed. An 2. The objective or purpose of the stipulated
obligation the object of which, in its delivery or prestation;
performance, is capable of partial performance. 3. The nature of the thing; and
4. The provisions of law affecting the
Indivisible Obligations prestation.

Those which have as their object a prestation which
is not susceptible of partial performance, because
otherwise the essence of the obligation will be
changed.
An obligation is indivisible when it cannot be validly
performed in parts, whatever may be the nature of
the thing which is the object thereof. The
indivisibility refers to the prestation and not to the
object thereof. (Sps. Lam v. Kodak Philippines, Ltd.,
G.R. No. 167615, 11 Jan. 2016)
Obligations deemed Divisible
When the object of the obligation involves:
1. Certain number of days of work;
2. Accomplishment of work by metrical unit;
and
3. Analogous things which are by their nature
susceptible of partial performance. (Art.
1225, NCC)
Obligations deemed Indivisible

Kinds of Indivisibility 1. Obligations to give definite things;

2. Those which are not susceptible of partial
1. By operation of law performance; and
2. By will of the parties 3. Even the object or service may be physically
3. By the nature of the obligation divisible, an obligation is indivisible if so
provided (i) by law or (ii) intended by the
Divisible v. Indivisible Obligations parties. (Art. 1225, NCC)

DIVISIBLE INDIVISIBLE NOTE: A pledge or mortgage is one and indivisible

by provision of law, and the rules apply even if the
Non-susceptibility to
Susceptibility of an obligation is joint and not solidary. (Art. 2089, NCC)
be performed partially.
obligation to be
Partial performance is
performed partially. Partial Performance in Indivisible Obligation
tantamount to non-
(Pineda, 2009)
performance.
GR: In indivisible obligations, partial performance is
equivalent to non-performance.
Test of Divisibility

XPNs :
Whether or not the prestation is susceptible of
1. Where the obligation has been substantially
partial performance, not in the sense of
performed in good faith, the debtor may
performance in separate or divided parts, but in the
recover as if there had been complete
sense of the possibility of realizing the purpose

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 Obligations and Contracts

performance, minus the damages suffered by stipulated by the parties, including an act or
the creditor; and abstention.
2. Where the creditor accepts performance
knowing its incompleteness and without Double Functions
protest, the obligation is deemed fully
performed. (Art 1234 and 1235, NCC) 1. To provide for liquidated damages; and
2. To strengthen the coercive force of the obligation
Effect of Illegality of a Part of a Contract by the threat of greater responsibility in case of
breach.
1. Divisible contract – the illegal part is void and
unenforceable, meanwhile, the legal part is Kinds of penalties
valid and enforceable. (Art. 1420, NCC)
2. Indivisible contract – the entire contract is void 1. As to origin
and unenforceable. 1. Legal - it is legal when it is constituted by
law.
2. Conventional - it is constituted by
OBLIGATIONS OBLIGATIONS
agreement of the parties.
TO GIVE TO DO
In obligations to do, 2. As to purpose
In obligations to give, indivisibility is also a. Compensatory - it is compensatory when it
those for the delivery presumed, and it is only is established for the purpose of
of certain objects when they are under the indemnifying the damages suffered by the
such as an animal or a exceptional cases obligee or creditor in case of breach of the
chair are indivisible. mentioned in Art. obligation.
(Art. 1225(1), NCC) 1225(2) of the NCC that b. Punitive - it is punitive when it is
they are divisible. established for the purpose of punishing
the obligor or debtor in case of breach of
Divisibility or indivisibility in Negative the obligation.
obligations
3. As to effect
In negative obligations not to do, the character of a. Subsidiary - it is subsidiary when only the
the prestation in each particular case shall penalty may be demanded in case of breach
determine their divisibility or indivisibility. (Pineda, of the obligation;
2009) b. Joint - it is joint when the injured party may
demand the enforcement of both the
OBLIGATION WITH A PENAL CLAUSE penalty and the principal obligation.

An obligation with a penal clause is one with an
accessory undertaking by virtue of which the
obligor assumes a greater liability in case of breach
of the obligations. (Jurado, 2009)
Penal Clause
Can the debtor just choose penalty over non-
fulfillment?
GR: The debtor cannot exempt himself from the
performance of the obligation by paying the penalty.
(Art. 1227, NCC)

A coercive means to obtain from debtor compliance. XPN: When the right has been expressly reserved to
It is an accessory undertaking to assume greater the debtor. (Art. 1227, NCC)
liability in case of breach. The penalty is generally a
sum of money. But it can also be any other thing

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Distinctions between Obligation with a Penal Creditor Cannot Demand Both the Fulfillment of
Clause and Alternative Obligation the Principal Obligation and the Penalty

Obligation with Penal Alternative GR: The creditor cannot demand the fulfillment of
Clause Obligation the obligation and the satisfaction of the penalty at
the same time. (Art. 1227, NCC)
Number of Obligations
There is only one XPNs:
There are two or more
principal obligation, 1. When the right has been clearly granted to him;
pbligations, the
the non-performance 2. If the creditor has decided to require the
fulfillment of one of
of which makes the fulfillment of the obligation, the performance
which is sufficient to
stipulated penalty thereof should become impossible without his
satisfy the obligation.
enforceable. fault, the penalty may be enforced. (Art. 1227,
Impossibility of Obligation NCC)
The impossibility of
NOTE: The creditor need not present proof of actual
The impossibility of one of the obligations,
damages suffered by him in order that the penalty
the principal obligation without fault of the
may be demanded. (Art. 1228, NCC) In this
extinguishes the debtor, leaves the
jurisdiction, there is no difference between a
penalty other prestation
penalty and liquidated damages, so far as the results
subsisting.
are concerned. Whatever differences exist between
Freedom to Choose them, as a matter of language, they are legally
Obligor cannot choose treated the same. (Rabuya, 2017)
to pay the penalty to
The obligor can choose
excuse himself from Effect of Incorporating a Penal Clause in an
which prestation or
the principal Obligation
obligation to fulfill.
obligation, unless
(Pineda, 2009)
given that right GR: The penalty fixed by the parties is
explicitly. compensation or substitute for damages in case of
breach.
Distinctions between Obligation with a Penal
Clause and Facultative Obligation XPNs: Damages shall still be paid even if there is a
penal clause if:
Obligation with a Facultative 1. There is a stipulation to the contrary;
Penal Clause Obligation 2. The debtor refuses to pay the agreed penalty; or
3. The debtor is guilty of fraud in the fulfillment of
Power to make substitution
the obligation. (Art. 1126, NCC)
The obligor cannot
substitute the payment The power of the NOTE: The nullity of the penal clause does not carry
of penalty for the obligor to make with it that of the principal obligation. For example,
principal obligation, substitution is the penal clause may be void because it is contrary
unless expressly absolute. to law, morals, good custom, public order, or public
allowed. policy. In such case, the principal obligation subsists
Demand for fulfillment of both prestations if valid.
Creditor cannot
The creditor may GR: The nullity of the principal obligation carries
demand both
demand both the with it that of the penal clause. (Art. 1230, NCC)
prestations or
principal and
obligations. (Pineda,
accessory obligations.
2009)

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 Obligations and Contracts

XPNs: The penal clause subsists even if the principal 6. Novation. (Art. 1231, NCC)
obligation cannot be enforced:
1. When the penalty is undertaken by a third 2. Other Modes (P-A-R-F)
person precisely for an obligation which is a. Annulment;
unenforceable, voidable, or natural, in which b. Rescission;
case, it assumes the form of a guaranty which is c. Fulfillment of a resolutory condition;
valid, under Art. 2052 of the NCC; and d. Prescription. (Art. 1231, NCC)
2. When the nullity of the principal obligation itself
gives rise to the liability of the debtor for NOTE: The enumeration is not exclusive.
damages.
3. Other causes not expressly mentioned
Instances where Penalty may be Reduced by the (Rabuya, 2017)
Courts (P-I-U)
a. Death – in obligations which are of purely
1. Partial performance of the obligation; personal character;
2. Irregular performance of the obligation; b. Arrival of resolutory period;
3. Penalty is Unconscionable even if there has c. Mutual dissent;
been no performance. d. Change of civil status; or
e. Happening of unforseen events.
When Creditor can Demand Enforcement of
Penalty Mutual desistance as another mode of
extinguishing obligations
Only when the non-performance is due to the fault
or fraud of the debtor that the creditor can demand It is a concept derived from the principle that since
enforcement of the penalty. But the creditor does mutual agreement can create a contract, mutual
not have to prove that there was fault or fraud of the disagreement by the parties can likewise cause its
debtor. The non-performance gives rise to the extinguishment. (Saura v. Development Bank of the
presumption of fault; and in order to avoid the Phils., G.R. No. L-24968, 27 Apr. 1972)
payment of penalty, the debtor has the burden of
proving an excuse – either that the failure of the PAYMENT OR PERFORMANCE
performance was due to force majeure or to the acts
of the creditor himself. Payment is the fulfillment of the obligation by the
realization of the purposes for which it was
NOTE: When there are several debtors in an constituted. (Jurado, 2010) (1998, 2009 Bar)
obligation with a penal clause, the divisibility of the
principal obligation among the debtors does not Payment is defined as not only the delivery of
necessarily carry with it the divisibility of the money but also the performance, in any other
penalty among them. manner, of an obligation. It is the satisfaction or
fulfillment of a prestation that is due, resulting in the
4. EXTINGUISHMENT extinguishment of the obligation of the debtor.
(Pineda, 2009)
Modes of Extinguishment of an Obligation
Payment may consist not only in the delivery of
1. Principal modes (Pa-Lo-Co3-N) money but also the giving of a thing (other than
1. Payment or performance; money), the doing of an act, or not doing of an act.
2. Loss of the thing due; (Art. 1232, NCC)
3. Condonation or remission of debt;
4. Confusion or merger;
5. Compensation;

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Characteristics of Payment
1. Integrity – The payment of the obligation must
be completely made;
2. Identity – The payment of the obligation must
consist in the performance of the very thing
due;
3. Indivisibility – The payment of the obligation
must be in its entirety.
Integrity
GR: Payment or performance must be complete.
(Art. 1233, NCC)
XPNs:
1. Substantial performance performed in good
faith; (Art. 1234, NCC)
2. When the obligee accepts the performance,
knowing its incompleteness or irregularity and
without expressing any protest or objection;
(Art. 1235, NCC) or
3. Debt is partly liquidated and partly
unliquidated, but the liquidated part of the debt
must be paid in full.
Substantial Performance Doctrine
It provides the rule that if a good faith attempts to
perform does not precisely meet the terms of an
agreement or statutory requirements, the
performance will still be considered complete if the
essential purpose is accomplished. (Black’s Law
Dictionary, 2009)
Requisites
1. Attempt in good faith to comply with obligation;
2. Slight deviation from the obligation; and the
omission or defect of the performance is
technical and unimportant; and does not
pervade the whole, or is not material that the
object which the parties intended to accomplish
is not attained. (Tolentino, 2002)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Identity of the Thing
GR: Thing paid must be the very thing due and
cannot be another thing even if of the same or more
quality and value.
XPNs:
1. Dation in payment;
2. Novation of the obligation; and
3. Obligation is facultative.
NOTE: In an obligation to do or not to do, an act or
forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
Indivisibility
GR: Debtor cannot be compelled by the creditor to
perform obligation in parts and neither can the
debtor compel the creditor to accept obligation in
parts.
XPNs : When:
1. Partial performance has been agreed upon;
2. Part of the obligation is liquidated and part
is unliquidated; or
3. To require the debtor to perform in full is
impractical.
Acceptance by a Creditor of a Partial Payment
NOT an Abandonment of its Demand for Full
Payment
When creditors receive partial payment, they are
not ipso facto deemed to have abandoned their prior
demand for full payment.
To imply that creditors accept partial payment as
complete performance of their obligation, their
acceptance must be made under circumstances that
indicate their intention to consider the performance
complete and to renounce their claim arising from
the defect.
NOTE: While Art. 1248 of the NCC states that
creditors cannot be compelled to accept partial
payments, it does not prohibit them from accepting
the same. (Selegna Management and Development
Corp. v. UCPB, G.R. No. 165662, 03 May 2006)
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 Obligations and Contracts

Requisites of a Valid Payment vendor a retro is not a debtor within the meaning of
the law. (Jurado, 2010)
1. The person who pays the debt must be the
debtor; Rights of a Third Person who made the Payment
2. The person to whom payment is made must be
the creditor; 1. If the payment was made with knowledge and
3. The thing to be paid or to be delivered must be consent of the debtor:
the precise thing or the thing required to be a. Can recover the entire amount paid
delivered by the creditor; (absolute reimbursement); or
4. The manner (if expressly agreed upon), time, b. Can be subrogated to all rights of the
and place of payment, etc.; and creditor.
5. Acceptance by the creditor.
2. If the payment was made without the knowledge
Kinds of payment or against the will of the debtor – Can recover
only insofar as payment has been beneficial to
1. Normal - When the debtor voluntarily performs the debtor (right of conditional
the prestation stipulated; reimbursement).
2. Abnormal - When he is forced by means of a
judicial proceeding, either to comply with the NOTE: Payment made by a third person who does
prestation or to pay the indemnity. (Tolentino, not intend to be reimbursed by the debtor is
1991) deemed to be a donation, which requires the
debtor's consent. But the payment is in any case
Person who pays valid as to the creditor who has accepted it. (Art.
1238, NCC)
The following persons may effect payment and
compel the creditor to accept the payment: Persons to whom payment is made
1. Debtor himself;
2. His heirs and assigns; Persons entitled to receive the payment:
3. His agents and representatives; or 1. The person in whose favor the obligation has
4. Third persons who have a material interest in been constituted;
the fulfillment of the obligation. (Art. 1236(1), 2. His successor in interest; or
NCC) 3. Any person authorized to receive it. (Art. 1240,
NCC)
Payment made by Third Persons
NOTE: Payment made to one having apparent
GR: The creditor is not bound to accept payment or authority to receive the money will, as a rule, be
performance by a third person. treated as though actual authority had been given
for its receipt. Likewise, if payment is made to one
XPNs: who by law is authorized to act for the creditor, it
1. When made by a third person who has will work as a discharge. (Sps. Miniano v. Concepcion,
interest in the fulfillment of the obligation; G.R. No. 172825, 11 Oct. 2012)
and
2. Contrary stipulation. (Art. 1236, NCC) Payment to an Unauthorized person

NOTE: The rules on payment by a third person (Art.
1236 to 1238, NCC) cannot be applied to the case of
a third person who pays the redemption price in
sales with right of repurchase. This is so because the
GR: Payment to an unauthorized person is not a
valid payment. (Art. 1241, NCC)
XPNs:
1. Payment to an incapacitated person if:

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a. He kept the thing delivered; or
b. It has been beneficial to him (Art. 1241,
NCC);
2. Payment to a third person insofar as it
redounded to the benefit of the creditor; and
Benefit to the creditor need not be proved: (R-
R-E)
a. If after the payment, the third person
acquires the creditor’s Rights;
b. If the creditor Ratifies the payment to the
third person; or
c. If by the creditor’s conduct, the debtor has
been led to believe that the third person
had authority to receive the payment
(Estoppel). (Art. 1241, NCC)
3. Payment in good faith to the possessor of
credit. (Art. 1242, NCC)
NOTE: Payment made to the creditor by the debtor
after the latter has been judicially ordered to retain
the debt shall not be valid. (Art. 1243, NCC)
SPECIAL FORMS OF PAYMENT
Dation in Payment
Alienation by the debtor of a particular property
in favor of his creditor, with the latter’s consent,
for the satisfaction of the former’s money
obligation to the latter, with the effect of
extinguishing the said money obligation.
Application of Payment
Designation of the particular debt being paid by
the debtor who has two or more debts or
obligations of the same kind in favor of the same
creditor to whom the payment is made.
Payment by Cession
Debtor cedes his property to his creditors so the
latter may sell the same and the proceeds realized
applied to the debts of the debtor.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Tender of Payment
Voluntary act of the debtor whereby he offers to
the creditor for acceptance the immediate
performance of the former’s obligation to the
latter.
Consignation
Act of depositing the object of the obligation with
the court or competent authority after the
creditor has unjustifiably refused to accept the
same or is not in a position to accept it due to
certain reasons or circumstances.
DATION IN PAYMENT (DACION EN PAGO)
The delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. The
property given may consist not only of a thing but
also of a real right. (Tolentino, 2002) (2009 BAR)
Dacion en pago is the delivery and transmission of
ownership of a thing by the debtor to the creditor as
an accepted equivalent of the performance of an
existing obligation. It is a special mode of payment
where the debtor offers another thing to the
creditor who accepts it as equivalent to the payment
of an outstanding debt. (Rockville Excel Intl. Exim
Corp. v. Sps. Culla, G.R. No. 155716, 12 Oct. 2009)
For dacion en pago to exist, the following elements
must concur:
a. existence of a money obligation;
b. the alienation to the creditor of a property by
the debtor with the consent of the former;
and
c. satisfaction of the money obligation of the
debtor. (Ibid.)
Q: Cebu Asiancars Inc., with the conformity of
the lessor, used the leased premises as collateral
to secure payment of a loan which Asiancars
may obtain from any bank, provided that the
proceeds of the loan shall be used solely for the
construction of a building which, upon the
termination of the lease or the voluntary
surrender of the leased premises before the
280
 Obligations and Contracts
expiration of the contract, shall automatically
become the property of the lessor. Meeting
financial difficulties and incurring an
outstanding balance on the loan, Asiancars
conveyed ownership of the building on the
leased premises to MBTC, by way of "dacion en
pago." Is the dacion en pago by Asiancars in
favor of MBTC valid?
A: YES. MBTC was a purchaser in good faith. MBTC
had no knowledge of the stipulation in the lease
contract. Although the same lease was registered
and duly annotated, MBTC was charged with
constructive knowledge only of the fact of the lease
of the land and not of the specific provision
stipulating transfer of ownership of the building to
the Jaymes upon termination of the lease. While the
alienation was in violation of the stipulation in the
lease contract between the Jaymes and Asiancars,
MBTC’s own rights could not be prejudiced by
Asiancars’ actions unknown to MBTC. Thus, the
transfer of the building in favor of MBTC was valid
and binding. (Jayme v. CA, G.R. No. 128669, 04 Oct.
2002)
Assignment of Credit
An agreement by virtue of which the owner of a
credit, known as the assignor, by a legal cause, such
as sale, dation in payment, exchange or donation,
and without the consent of the debtor, transfers his
credit and accessory rights to another, known as the
assignee. The assignee acquires the power to enforce
it to the same extent as the assignor could enforce it
against the debtor. It may be in the form of a sale,
but at times it may constitute a dation in payment,
such as when a debtor, in order to obtain a release
from his debt, assigns to his creditor a credit he has
against a third person. As a dation in payment, the
assignment of credit operates as a mode of
extinguishing the obligation; the delivery and
transmission of ownership of a thing (in this case,
the credit due from a third person) by the debtor to
the creditor is accepted as the equivalent of the
performance of the obligation.
Q: G & P Builders obtained a loan from
Metrobank and mortgaged parcels of land as
collateral. The parties executed a Memorandum
281
of Agreement where they agreed that some
parcels of the land mortgaged would be released
and sold. The proceeds amounting to
P15,000,000.00 were deposited with
Metrobank. Elite Union and Metrobank entered
into a Loan Sale and Purchase Agreement where
the latter sold G & P’s loan account to Elite
Union. Metrobank claims that it is still entitled
to the P15,000,000.00 proceeds despite the sale
of G & P’s loan account to Elite Union. Is
Metrobank entitled to the P15,000,000.00
deposit?
A: NO. Through the assignment of credit, the new
creditor is entitled to the rights and remedies
available to the previous creditor. Moreover, under
Article 1627 of the Civil Code, "the assignment of a
credit includes all the accessory rights, such as a
guaranty, mortgage, pledge, or preference." The
Loan Sale and Purchase Agreement entitled Elite
Union to all the rights and interests that petitioner
had as a creditor of respondent G & P, including the
securities of the loan account. What was sold to Elite
Union under the Loan Sale and Purchase Agreement
was respondent G & P's total loan obligation
inclusive of the remaining securities and proceeds
from the sale of some of the securities as stated in
the first MOA. (MBTC v. G & P Builders, Incorporated,
G.R. No. 189509, 23 Nov. 2015)
FORM OF PAYMENT
1. Payment in cash – all monetary obligations
shall be settled in Philippine currency.
However, the parties may agree that the
obligation be settled in another currency at the
time of payment. (Sec. 1, R.A. No. 8183)
2. Payment in check or other negotiable
instrument – not considered payment, they are
not considered legal tender and may be refused
by the creditor except when:
a. the document has been encashed; or
b. it has been impaired through the fault of the
creditor. (Art. 1249, NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Legal Tender; Payment in Cash (2008 BAR)
Legal tender means such currency which in a given
jurisdiction can be used for the payment of debts,
public and private, and which cannot be refused by
the creditor. (Tolentino, 2002)
The legal tender covers all notes and coins issued by
the Bangko Sentral ng Pilipinas and guaranteed by
the Republic of the Philippines. The amount of coins
that may be accepted as legal tender are:
1. One-Peso, Five-Pesos, 10-Pesos coins in amount
not exceeding P1,000.00
2. 25 centavos or less in an amount not exceeding
P100. 00. (BSP Circular No. 537, Series of 2006,
18 July 2006)
Q: Northwest Airlines, through its Japan Branch,
entered into an International Passenger Sales
Agency Agreement with CF Sharp, authorizing
the latter to sell its air transport tickets. CF
Sharp failed to remit the proceeds of the ticket
sales, thus, Northwest Airlines filed a collection
suit before the Tokyo District Court which
rendered judgment ordering CF Sharp to pay
83,158,195 Yen and damages for the delay at the
rate of 6% per annum. Unable to execute the
decision in Japan, Northwest Airlines filed a case
to enforce said foreign judgment with the RTC of
Manila. What is the rate of exchange that should
be applied for the payment of the amount?
A: The repeal of R.A. No. 529 by R.A. No. 8183 has
the effect of removing the prohibition on the
stipulation of currency other than Philippine
currency, such that obligations or transactions may
now be paid in the currency agreed upon by the
parties. Just like R.A. No. 529, however, the new law
does not provide for the applicable rate of exchange
for the conversion of foreign currency-incurred
obligations in their peso equivalent. It follows,
therefore, that the jurisprudence established in R.A.
No. 529 regarding the rate of conversion remains
applicable. Thus, in Asia World Recruitment, Inc. v.
NLRC (G.R. No. 113363, 24 Aug. 1999), the SC,
applying R.A. No. 8183, sustained the ruling of the
NLRC that obligations in foreign currency may be
discharged in Philippine currency based on the
prevailing rate at the time of payment. It is just and
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
fair to preserve the real value of the foreign
exchange-incurred obligation to the date of its
payment. (C.F. Sharp & Cp., Inc. v. Northwest Airlines,
Inc., G.R. No. 133498, 18 Apr. 2002).
When Payment by a Negotiable Instrument
produces effect of payment (2008 BAR)
(1) Only when it is encashed, or
(2) when through the fault of the creditor, they have
been impaired. [Art. 1249(2), NCC]
A check does not constitute as a legal tender, thus a
creditor may validly refuse it. However, this does
not prevent a creditor from accepting a check as
payment – the creditor has the option and the
discretion of refusing or accepting it. (Far East Bank
& Trust Company v. Diaz Realty, Inc., G.R. No. 138588,
23 Aug. 2001)
NOTE: While it is true that the delivery of a check
produces the effect of payment only when it is
cashed, pursuant to Art. 1249 of the Civil Code, the
rule is otherwise if the debtor is prejudiced by the
creditor's unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due
diligence in presenting it for payment, and if he from
whom it is received sustains loss by want of such
diligence, it will be held to operate as actual
payment of the debt or obligation for which it was
given. It has, likewise, been held that if no
presentment is made at all, the drawer cannot be
held liable irrespective of loss or injury unless
presentment is otherwise excused. This is in
harmony with Article 1249 of the Civil Code under
which payment by way of check or other negotiable
instrument is conditioned on its being cashed,
except when through the fault of the creditor, the
instrument is impaired. The payee of a check would
be a creditor under this provision and if its no-
payment is caused by his negligence, payment will
be deemed effected and the obligation for which the
check was given as conditional payment will be
discharged. (Evangelista v. Screenex, Inc., G.R. No.
211564, 20 Nov. 2017)
Q: Diaz & Company obtained a loan from Pacific
Banking Corp which was secured by a real estate
mortgage. ABC rented an office space in the
282
 Obligations and Contracts
building constructed on the properties covered
by the mortgage contract. The parties then
agreed that the monthly rentals shall be paid
directly to the mortgagee for the lessor's
account. Thereafter, FEBTC purchased the credit
of Diaz & Company in favor of PaBC, but it was
only after two years that Diaz was informed
about it. Diaz asked the FEBTC to make an
accounting of the monthly rental payments
made by Allied Bank. Diaz tendered to FEBTC
the amount of P1, 450, 000. 00 through an
Interbank check, in order to prevent the
imposition of additional interests, penalties and
surcharges on its loan but FEBTC did not accept
it as payment, instead, Diaz was asked to deposit
the amount with the FEBTC’s Davao City Branch
Office. Was there a valid tender of payment?
A: YES, there was a valid tender of payment.
Jurisprudence holds that, generally, a check does
not constitute legal tender and that a creditor may
validly refuse it. It must be emphasized, however,
that this dictum does not prevent a creditor from
accepting a check as payment. In other words, the
creditor has the option and the discretion of refusing
or accepting it. (FEBTC v. Diaz Realty Inc., G.R. No.
138588, 23 Aug. 2001)
Burden of proving payment in an action for sum
of money
In civil cases, the one who pleads payment has the
burden of proving payment. The burden of proving
payment, thus, rests on the defendant once proof of
indebtedness is established. When the existence of
a debt is fully established, the burden of proving
that it has been extinguished by payment devolves
upon the debtor who offers such defense to the
claim of the creditor. (Decena v. SPV-AMC, Inc., G.R.
No. 239418, 12 Oct. 2020)
Extraordinary Inflation or Deflation (2001 BAR)
Extraordinary inflation or deflation exists when
there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual
or beyond the common fluctuation in the value of
said currency, and such decrease or increase could
not have been reasonably foreseen or was
283
manifestly beyond the contemplation of the parties
at the time of the establishment of the obligation.
(Tolentino, 2002)
In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation shall be the basis of payment unless there
is an agreement to the contrary. (Art. 1250, NCC)
The doctrine of unforeseen risks can be applied
when the currency is devaluated in terms beyond
what could have been reasonably foreseen by the
parties, and the effects of the devaluation should not
be borne by the creditor alone. The revaluation of
the credit in such cases must be made according to
the principles of good faith and in view of the
circumstances of each particular case, recognizing
the real value of the credit as in consonance with the
intent of the parties.
NOTE: Requisites for application of Art. 1250, NCC:
1. That there was an official declaration of extra-
ordinary inflation or deflation from the BSP;
2. That the obligation was contractual in nature;
and
3. That the parties expressly agreed to consider
the effects of the extraordinary inflation or
deflation. (Rabuya, 2017)
Place of Payment
GR: Payment must be made in the place designated
in the obligation. (Art. 1251, NCC)
XPN: If there is no express designation or
stipulation in the obligation:
1. At the place where the thing might be at the time
the obligation was constituted – If the obligation
is to deliver a determinate thing;
2. At the domicile of the debtor – In any other case
(Art. 1251, NCC)
NOTE: Governs only unilateral obligations since
reciprocal obligations are governed by special rules.
(Jurado, 2010)
Moreover, if the debtor changes his domicile in bad
faith or after he has incurred in delay, the additional
expenses shall be borne by him.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
The foregoing are without prejudice, however, to
the venue under the Rules of Court.
APPLICATION OF PAYMENTS
It is the designation of the debt to which the
payment must be applied when the debtor has
several obligations of the same kind in favor of the
same creditor. (Art. 1252, NCC)
Requisites:
1. There is only one debtor and creditor;
2. The debtor owes the creditor two or more
debts;
3. Debts are of the same kind or identical nature;
e.g., both debts are money obligations
obtained on different dates;
4. All debts are due and demandable, except:
a. When there is mutual agreement
between the parties (Tolentino, 2002);
b. The application is made by the party for
whose benefit the term has been
constituted. (Art. 1252(1), NCC)
5. The payment made is not sufficient to cover all
obligations. Right of the debtor in the
application of payments.
GR: The law grants the debtor a preferential right to
choose the debt to which his payment is to be
applied. But the right of the debtor is not absolute;
he cannot impair the rights granted by law to the
creditor. (Tolentino, 2002)
XPN: Debtor’s failure to ascertain which debt his
payment is to be applied. – The right of the debtor
to choose to which debt his payment will be applied
against may be transferred to the creditor when he
fails to make the application, and subsequently, he
accepts a receipt from the creditor evidencing the
latter’s choice of application. Under this
circumstance, the debtor cannot complain of the
application made by the creditor unless there be a
cause for invalidating such act.
The right of the debtor to apply payment is merely
directory in nature and must be promptly exercised,
lest, such right passes to the creditor. (Sps. Tan v.
China Banking Corp., G.R. No. 200299, 17 Aug. 2016)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Limitation upon right to apply payment
If the debt produces interests, payment of the
principal shall not be deemed to have been made
until the interest has been covered. (Art. 1253, NCC)
Legal Application of Payment
If both the creditor and the debtor failed to exercise
the right of application of payment or legal
application of payment will now be governed.
Rules on Legal Application of Payment
The payment should be applied to the more onerous
debts:
1. When a person is bound as principal in one
obligation and as surety in another, the former
is more onerous.
2. When there are various debts, the oldest ones
are more burdensome.
3. Where one bears interest and the other does
not, even if the latter is the older obligation, the
former is considered more onerous.
4. Where there is an encumbrance, the debt with a
guaranty is more onerous than that without
security.
5. With respect to indemnity for damages, the
debt which is subject to the general rules on
damages is less burdensome than that in which
there is a penal clause.
6. The liquidated debt is more burdensome than
the unliquidated one.
7. An obligation in which the debtor is in default is
more onerous than one in which he is not.
(Tolentino, 2002)
NOTE: The payment shall be applied
proportionately if it happens that the debt is of the
same nature and burden.
Effect of Creditor’s Refusal
If the debtor makes a proper application of
payment, but the creditor refuses to accept it
because he wants to apply it to another debt, such
creditor will incur in delay. (Tolentino, 1991)
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 Obligations and Contracts

PAYMENT BY CESSION Extent of the Extinguishment

Cession Payment extinguishes

obligation to the extent Merely releases debtor
Assignment or cession is the abandonment of the of the value of the thing for net proceeds of
universality of the property of the debtor for the delivered as agreed things ceded or
benefit of his creditors in order that such property upon, proved, or assigned, unless there
may be applied to the payment of the credits. implied from the is contrary intention.
conduct of the creditor.
The initiative comes from the debtor, but it must be
Ownership
accepted by the creditors in order to become
effective. A voluntary assignment cannot be Ownership is
imposed upon a creditor who is not willing to accept Ownership is not
transferred to creditor
it. transferred.
upon delivery.

If the offer is not accepted by the creditors, the same Novation

end may be attained by a proceeding in insolvency
instituted in accordance with Insolvency Law. An act of novation. Not an act of novation

Presumption of Insolvency
Circumstances Evidencing Payment by Cession
Does not presuppose Presupposes
Debtor abandons all of his property for the benefit insolvency. insolvency.
of his creditors in order that from the proceeds
thereof, the latter may obtain payment of credits.
Tender of Payment

Requisites:
The definitive act of offering to the creditor what is
due to him together with the demand that the
1. Plurality of debts;
creditor accepts the same. (Cinco v. CA, G.R. No.
2. Partial or relative insolvency of the debtor; and
151903, 09 Oct. 2009)
3. Acceptance of the cession by the creditors.
Tender of payment which is the manifestation by
Dation in Payment v. Payment in Cession
the debtor to the creditor of his desire to comply
with his obligation, with the offer of immediate
PAYMENT IN performance. (Del Carmen v. Sabordo, G.R. No.
DATION IN PAYMENT
CESSION 181723, 11 Aug. 2014)

Number of creditors
NOTE: When a creditor refuses the debtor’s tender
Maybe one creditor. Plurality of creditors. of payment, the law allows the consignation of the
thing or the sum due. (Cinco v. CA, G.R. No. 151903,
Financial condition of the debtor 09 Oct. 2009)
Debtor must be
Not necessarily in state There must be a fusion of intent, ability, and
partially or
of financial difficulty. capability to make good such offer, which must be
relatively insolvent.
absolute and must cover the amount due. (FEBTC v.
Object
Diaz Realty Inc., G.R. No. 138588, 23 Aug. 2001)
Thing delivered is
Universality or
considered as the Tender of payment is a preparatory act which
property of debtor is
equivalent of precedes consignation. The tender of payment by
what is ceded.
performance. itself does not cause the extinguishment of the

285 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
obligation unless completed by consignation.
(Tolentino, 1991)
Consignation
Act of depositing the object of the obligation with
the court or competent authority after the creditor
has unjustifiably refused to accept the same or is not
in a position to accept it due to certain reasons or
circumstances. (Pineda, 2000)
NOTE: Once the consignation has been duly made,
the debtor may ask the judge to order the
cancellation of the obligation. (Art. 1260, NCC)
Requisites of Consignation
1. There was a debt due;
2. The consignation of due obligation was made
because of some legal cause provided under Art.
1256, NCC;
3. The previous notice of the consignation had
been given to the person interested in the
performance of the obligation;
4. The amount or thing due was placed at the
disposal of the court; and
5. That after the consignation had been made, the
persons interested were notified thereof.
NOTE: Requirement No. 5 may be complied
with by the service of summons upon the
defendant creditor together with a copy of the
complaint.
6. After this notice, the creditor may:
(a) Accept the thing or amount deposited,
in which case the matter of the payment is
terminated;
(b) Refuse to accept the thing or amount, in
which case a trial must be held to
determine the validity of consignation.
7. The creditor may neither accept nor refuse in
which case the debtor may ask the court to
cancel the obligation after showing that the
requisites of consignation have been complied
with. (Art. 1260, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: Tender of payment must be valid and
unconditional. (Sps. Rayos v. Reyes, G.R. No. 150913,
20 Feb. 2003)
Substantial compliance is not enough. The giving of
notice to the persons interested in the performance
of the obligation is mandatory. Failure to notify the
persons interested in the performance of the
obligation will render the consignation void. (Dalton
v. FGR Realty and Development Corp., G.R. No.
172577, 19 Jan. 2011)
Consignation is necessarily judicial. Art. 1258 of the
CC specifically provides that consignation shall be
made by depositing the thing or things due at the
disposal of judicial authority. The said provision
clearly precludes consignation in venues other than
the courts. (Sps. Cacayorin v. Armed Forces and
Police Mutual Benefit Association, Inc., G.R. No.
171298, 15 Apr. 2013)
Consignation and tender of payment must not be
encumbered by conditions. (Sps. Rayos v. Reyes, G.R.
No. 150913, 20 Feb. 2003)
Q: Dorotea leased portions of her 2,000 sq. m. lot
to Monet, Kathy, Celia and Ruth for five (5) years.
Two (2) years before the expiration of the lease
contract, Dorotea sold the property to PM Realty
and Development Corp. The following month,
Dorotea and PM Realty stopped accepting rental
payments from all the lessees because they
wanted to terminate the lease contracts. Due to
the refusal to accept rental payments, the
lessees, Ruth, et al., filed a complaint for
consignation of the rentals before the RTC of
Manila without notifying Dorotea. Is the
consignation valid? (2014 BAR)
A: NO, the consignation is not valid. Art. 1257 of the
NCC provides that in order for the consignation of
the thing due to release the obligor, it must first be
announced to the persons interested in the
fulfillment of the obligation. Moreover, Art. 1258 of
the same code provides that consignation having
been made, the interested parties shall also be
notified thereof. In this case, Dorotea, an interested
party, was not notified of the consignation. The
286
 Obligations and Contracts

consignation is therefore not valid for non- Tender of Payment v. Consignation

compliance with Art. 1257, NCC.
TENDER OF
Effectivity of Consignation as Payment CONSIGNATION
PAYMENT

GR: Consignation shall produce effects of payment Nature

only if there is a valid tender of payment. Antecedent of Principal or
consignation or consummating act for the
XPNs: It shall, however, not produce the same effect preliminary act to extinguishment of the
in the following cases. When: (A-R-T-I-T) consignation. obligation.
1. Creditor is Absent or unknown, or doesn’t
Effect
appear at the place of payment;
2. Creditor Refuses to issue a receipt without just It does not by itself It extinguishes the
cause; extinguish the obligation when declared
3. Title of the obligation has been lost; obligation. valid.
4. Creditor is Incapacitated to receive payment at
Character
the time it is due; or
5. Two or more persons claim the right to collect. Judicial for it requires the
(Art. 1256, NCC) Extrajudicial. filing of a complaint in
court. (Pineda, 2000)
NOTE: The expenses of consignation, when
properly made, shall be charged against the Q: In an ejectment case, X refused to vacate the
creditor. (Art. 1259, NCC) land, alleging that Y had sold to him the
additional area, the payment of which would be
Right of the Debtor to Withdraw the Thing effected five years after the execution of a formal
Deposited deed of sale. However, the parties failed to
execute a deed of sale. During the pendency of
Before the creditor has accepted the consignation, the action, X deposited the payment for the
or before a judicial declaration that the consignation additional area with the court. Is there a valid
has been properly made, the debtor may withdraw consignation?
the thing or the sum deposited, allowing the
obligation to remain in force. (Art. 1260, NCC) A: NO, there is no valid consignation. Under Art.
1257 of the CC, consignation is proper only in cases
NOTE: If the consignation having been made, the where an existing obligation is due. In this case, the
creditor should authorize the debtor to withdraw contracting parties agreed that full payment of
the same, he shall lose every preference which he purchase price shall be due and payable within five
may have over the thing. The co-debtors, years from the execution of a formal deed of sale. At
guarantors, and sureties shall be released. (Art. the time Rodriguez deposited the amount in court,
1261, NCC) no formal deed of sale had yet been executed by the
parties, and, therefore, the five-year period during
which the purchase price should be paid had not
commenced. In short, the purchase price was not
yet due and payable. (Heirs of San Andres v.
Rodriguez, G.R. No. 135634, 31 May 2000)

Q: Under a pacto de retro sale, X sold to Y his lot

and the building erected thereon. They agreed
that half of the consideration shall be paid to the
bank to pay off the loan of X. After paying the

287 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
first installment, Y, instead of paying the loan to
the bank, restructured it twice. Eventually, the
loan became due and demandable. Thus, X paid
the bank. On the same day, Y also went to the
bank and offered to pay the loan, but the bank
refused to accept the payment. Y then filed an
action for consignation without notifying X. Is
there a valid consignation by Y of the balance of
the contract price?
A: NO, there is no valid consignation by Y of the
balance of the contract price. Y filed the petition for
consignation against the bank without notifying X,
resulting to the former’s failure to prove the
payment of the balance of the purchase price and
consignation. In fact, even before the filing of the
consignation case, Y never notified X of their offer to
pay. (Sps. Benos v. Sps. Lawilao, G.R. No. 172259, 05
Dec. 2006)
LOSS OF THE THING DUE
Loss here is not contemplated in its strict and legal
meaning and is not limited to obligations to give, but
extends to those which are personal, embracing,
therefore, all causes which may render impossible
the performance of the prestation. In some Codes,
this is designated as impossibility of performance.
NOTE: The impossibility of performance must be
subsequent to the execution of the contract in order
to extinguish the obligation; if the impossibility
already existed when the contract was made, the
result is not extinguishment but inefficacy of the
obligation under Articles 1348 and 1493 of the NCC.
When a Thing is Considered Lost (D-O-P-E)
1. It Disappears in such a way that its existence is
unknown;
2. It goes Out of commerce;
3. It Perishes; or
4. Its Existence is unknown or if known, it cannot
be recovered.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Effect of Loss of the Thing/Object of the
Obligation
If the obligation is a:
1. Determinate obligation to give:
Requisites
a. The thing lost must be determinate;
b. The thing lost is without fault of the debtor;
and
c. The thing is lost before the debtor has
incurred delay. (Art. 1262, NCC)
GR: The obligation is extinguished when the
object of the obligation is lost or destroyed. (Art.
1262, NCC)
XPNs: (L-A-S-C-D-P-C-G)
a. Law provides otherwise (Art. 1262, NCC);
b. Nature of the obligation requires the
Assumption of risk;
c. Stipulation to the contrary;
d. Debtor Contributed to the loss;
e. Loss the of the thing occurs after the debtor
incurred in Delay;
f. When debtor Promised to deliver the same
thing to two or more persons who do not
have the same interest (Art. 1165, NCC);
g. When the debt of a certain and determinate
thing proceeds from a Criminal offense
(Art. 1268, NCC); and
h. When the obligation is Generic. (Art. 1263,
NCC)
2. Generic obligation to give:
GR: The obligation is not extinguished because a
generic thing never perishes (genus nunquam
perit). (Art. 1263, NCC)
XPNs:
a. In case of generic obligations whose object
is a particular class or group with specific
or determinate qualities (delimited generic
obligation);
b. In case the generic thing has already been
segregated or set aside, in which case, it has
become specific.
3. An obligation to do – The obligation is
extinguished when the prestation becomes
288
 Obligations and Contracts
legally or physically impossible without the
fault of the obligor. (Art. 1266, NCC)
Types of Impossibility to Perform an Obligation
To Do
1. Legal impossibility – Act stipulated to be
performed is subsequently prohibited by law.
2. Physical impossibility – Act stipulated could not
be physically performed by the obligor due to
reasons subsequent to the execution of the
contract. (Pineda, 2000)
NOTE: The impossibility must be after the
constitution of the obligation. If it was before,
there is nothing to extinguish.
Effect of Partial Loss
1. Due to the fault or negligence of the debtor –
Creditor has the right to demand the rescission
of the obligation or to demand specific
performance, plus damages, in either case.
2. Due to fortuitous event:
a. Substantial loss – Obligation is
extinguished.
b. Unsubstantial loss – The debtor shall
deliver the thing promised in its impaired
condition. (Art. 1264, NCC)
Effect when the Thing is Lost in the Possession of
the Debtor
GR: It is presumed that loss is due to debtor’s fault.
The obligation is not extinguished.
XPN: Presumption shall not apply in case loss is due
to earthquake, flood, storm, or other natural
calamity. (Art. 1262, NCC)
XPN to the XPN: Debtor still liable even if loss
is due to fortuitous event when:
1. Debtor incurred in delay; or
2. Debtor promised to deliver the thing to two
or more persons with different interests.
(Art. 1165 (3), NCC)
289
Effect of Unforeseen Difficulty of Fulfilment
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. (Art. 1267, NCC) The impossibility
of performance of an obligation to do shall release
the obligor.
Rebus sic stantibus
A principle in international law which means that an
agreement is valid only if the same conditions
prevailing at the time of contracting continue to
exist at the time of performance. It is the basis of the
principle of unforeseen difficulty of service. (Art.
1267, NCC)
NOTE: Principle of unforeseen events applies 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. (Art. 1267, NCC) However, this principle
cannot be applied absolutely in contractual
relations since parties are presumed to have
assumed the risk of unfavorable developments.
(Pineda, 2000) This rule also does not apply to
obligations for the payment of a sum of money when
there is a change in the value of the stipulated
currency. In such case, Art. 1250 will apply.
(Tolentino, 2002)
Requisites in order to Relieve the Debtor from
his Obligation, in whole or in part, based on
Unforeseen Difficulty of Fulfillment
1. Event or change in circumstance could not have
been foreseen at the time of the execution of the
contract;
2. Such event makes the performance extremely
difficult but not impossible;
3. The event must not be due to the act of any of
the parties; and
4. The contract is for a future prestation.
(Tolentino, 2002)
Q: The parties entered into a lease agreement
whereby Santos Car Check Center agreed to
lease a property to Comglasco Corp. for five (5)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
years. However, a year after, Comglasco advised
Santos Car Check Center that it will be pre-
terminating the contract, to which the latter
refused. Despite refusal, Comglasco vacated the
property and stopped paying rentals. Santos Car
Check then filed a suit for breach of contract.
Comglasco relied on the provision of the lease
contract whereby pre-termination is allowed
with cause in the first three years. Citing
business reverses which it ascribed to the 1997
Asian Financial Crisis, Comglasco insists that
under Article 1267 of the NCC, it is exempted
from its obligation, because its business setback
is the “cause” contemplated in their lease. Is
Comglasco correct?
A: NO, Comglasco is not correct. The payment of
lease rentals does not involve a prestation “to do”
envisaged in Arts. 1266 and 1267. Art. 1267 speaks
of a prestation involving service which has been
rendered difficult by unforeseen subsequent events
as to be manifestly beyond the contemplation of the
parties. Additionally, the Asian Currency Crisis
befell from July 1997 and for some time thereafter,
but Comglasco cannot be permitted to blame its
difficulties on the said regional economic
phenomenon because it entered into the subject
lease only on August 2000, more than three years
after it began, and by then Comglasco had known
what business risks it assumed when it opened a
new shop in Iloilo City. (Comglasco Corp. v. Santos
Car Check Center Corp., G.R. No. 202989, 25 Mar.
2015)
Debt which proceeds from a Criminal Offense
GR: Debtor shall not be exempted from the payment
of his obligation regardless of the cause of the loss.
XPN: The thing having been offered by debtor to the
person who should receive it, the latter refused
without justification to accept it. (Art. 1268, NCC)
NOTE: Offer referred in Art. 1268 is different from
consignation, the former refers to the
extinguishment of obligation through loss, while the
latter refers to the payment of the obligation.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Creditor’s Right of Action
The obligation, having been extinguished by the loss
of the thing, the creditor shall have all the rights of
action which the debtor may have against third
persons by reason of the loss. (Art. 1269, NCC)
This refers not only the rights and actions which the
debtor may have against third persons, but also to
any indemnity which the debtor may have already
received.
CONDONATION OR REMISSION OF DEBT (2000
BAR)
An act of liberality by virtue of which the creditor,
without receiving any price or equivalent,
renounces the enforcement of the obligation, as a
result of which it is extinguished in its entirety or in
that part or aspect of the same to which the
condonation or remission refers. (Pineda, 2000)
Requisites of Condonation (G-A-I-D-E)
1. Must be Gratuitous;
2. Acceptance by the debtor;
3. Must not be Inofficious;
4. Formalities provided by law on Donations must
be complied with if condonation is express; and
5. An Existing demandable debt at the time the
remission is made.
NOTE: Remission or condonation of a debt is in
reality a donation. (Jurado, 2010)
Form of Express Remission
It must comply with the forms of donation. (Art.
1270, NCC)
Form of Implied Remission
The Code is silent with respect to the form of
implied remission. There must be acceptance by the
obligor or debtor. (Jurado, 2010)
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 Obligations and Contracts
Manner and Kinds of Remission:
1. Total – Refers to the remission of the whole of
the obligation;
2. Partial – Remission of the part of the obligation:
to the amount of indebtedness or to an
accessory obligation only (such as pledge or
interest), or to some other aspect of the
obligation (such as solidary);
3. Inter vivos - Effective during the lifetime of the
creditor;
4. Mortis causa - Effective upon death of the
creditor. In this case, the remission must be
contained in a will or testament; (Tolentino,
1991)
5. Express – When it is made formally, it should be
in accordance with the forms of ordinary
donations with regard to acceptance, amount,
and revocation; and
6. Implied – When it can be inferred from the acts
of the parties.
Effect of Delivery of Evidence of Credit to Debtor
If the creditor voluntarily delivers the private
document evidencing the credit to the debtor, there
is a presumption that he renounces his right of
action against the latter for the collection of the said
credit. (Jurado, 2010)
NOTE: The presumption here is only prima facie
and may be overcome by contrary evidence.
(Tolentino, 1991)
Requisites
1. The document evidencing the credit must have
been delivered by the creditor to the debtor;
2. The document must be a private document; and
3. The delivery must be voluntary. (Art. 1271, NCC)
NOTE: If the document is public, the presumption
does not arise considering the fact that the public
character of the document would always protect the
interest of the creditor. (Jurado, 2010)
291
Effect of Remission in General
It extinguishes the obligation in its entirety or in the
part or aspect thereof to which the remission refers.
(Jurado, 2010)
Effect of the Remission of the Principal Debt
with respect to the Accessory Obligation and
vice versa
The renunciation of the principal debt shall
extinguish the accessory, but the waiver of the latter
shall leave the former in force. (Art. 1273, NCC)
NOTE: It is presumed that the accessory obligation
of pledge has been remitted when the thing pledged,
after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who
owns the thing. (Art. 1274, NCC)
Effect of Inofficious Condonation
It may be totally revoked or reduced depending on
whether or not it is totally or only partly inofficious.
(Pineda, 2000)
The obligation remitted is considered inofficious if
it impairs the legitime of the compulsory heirs. (Art.
752, NCC)
Acceptance by the Debtor
The acceptance by the debtor is required. There can
be no unilateral condonation. This is because
condonation or remission is an act of liberality. It is
a donation of an existing credit, considered a
property right, in favor of the debtor, it is required
that the debtor gives his consent thereto by making
an acceptance. If there is no acceptance, there is no
condonation. (Pineda, 2009)
CONFUSION OR MERGER OF RIGHTS
There is confusion when there is a meeting in one
person of the qualities of a creditor and debtor of
the same obligation. (4 Sanchez Roman 421)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Requisites of Confusion or Merger of Rights
1. It must take place between the creditor and the
principal debtor; (Art. 1276, NCC)
2. The very same obligation must be involved (for
if the debtor acquires rights from the creditor,
but not the particular obligation in question,
there will be no merger); and
3. The confusion must be total or as regards with
the entire obligation.
Effect of Confusion or Merger of Rights
The creditor and debtor become the same person
involving the same obligation. Hence, the obligation
is extinguished. (Art. 1275, NCC)
There can be partial confusion
It will be definite and complete up to the extent of
the concurrent amount or value, but the remaining
obligation subsists. (Pineda, 2000)
Effect of Confusion or Merger in relation to the
Guarantors
1. Merger which takes place in the person of the
principal debtor or principal creditor benefits
the guarantors. The contract of guaranty is
extinguished;
2. Confusion which takes place in the person of
any of the guarantors does not extinguish the
obligation. (Art. 1276, NCC)
Effect of Confusion or Merger in One Debtor or
Creditor in a Joint Obligation
GR: Joint obligation is not extinguished since
confusion is not definite and complete with regard
to the entire obligation. A part of the obligation still
remains outstanding.
XPN: Obligation is extinguished with respect only to
the share corresponding to the debtor or creditor
concerned. In effect, there is only partial
extinguishment of the entire obligation. (Art. 1277,
NCC; Pineda, 2000)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Effect of Confusion or Merger in One Debtor or
Creditor in a Solidary Obligation
If a solidary debtor had paid the entire obligation,
the obligation is totally extinguished without
prejudice to the rights of the solidary debtor who
paid, to proceed against his solidary co-debtors for
the latter’s individual contribution or liability. (Art.
1215, NCC)
Revocation of Confusion or Merger of Rights
If the act which created the confusion is revoked for
some causes such as rescission of contracts or
nullity of the will or contract, the confusion or
merger is also revoked. The subject obligation is
revived in the same condition as it was before the
confusion.
NOTE: During such interregnum, the running of the
period of prescription of the obligation is
suspended. (Pineda, 2000)
COMPENSATION
It is a mode of extinguishing obligations that take
place when two persons, in their own right, are
creditors and debtors of each other. (Art. 1278, NCC)
It is the offsetting of the respective obligation of two
persons who stand as principal creditors and
debtors of each other, with the effect of
extinguishing their obligations to their concurrent
amount.
Requisites of Compensation (1998, 2002, 2008,
2009 BAR)
For the compensation to be proper, it is necessary
that (Art. 1279, NCC):
1. Each one of the obligors must be bound
principally, and that he be at the same time a
principal creditor of the other except guarantor
who may set up compensation as regards what
the creditor may owe the principal; (Arts. 1279-
1280, NCC)
2. Both debts consist in sum of money, or if the
things due are consumable, they be of the same
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 Obligations and Contracts
kind and also of the same quality if the latter has
been stated;
3. Both debts are due;
4. Both debts are liquidated and demandable;
5. Neither debt must be retained in a controversy
commenced by third person and communicated
in due time to the debtor (neither debt is
garnished); (Art. 1279, NCC) and
6. Compensation must not be prohibited by law.
(Art. 1290, NCC)
NOTE: When all the requisites mentioned in Art.
1279 of the CC are present, compensation takes
effect by operation of law, and extinguishes both
debts to the concurrent amount, even though the
creditors and debtors are not aware of the
compensation. (Art. 1290, NCC)
Effects of compensation
1. Both debts are extinguished;
2. Interests stop accruing on the extinguished
obligation or the part extinguished;
3. The period of prescription stops with respect to
the obligation or part extinguished; and
4. All accessory obligations of the principal
obligation which has been extinguished are also
extinguished. (4 Salvat 353)
Q: Team Image and Solar Team both breached
each other’s duties in their compromise
agreement. As a result, both owe each other
2,000,000. Is compensation proper?
A: YES. In order that compensation may be proper,
it is necessary: (1) That each one of the obligors be
bound principally, and that he be at the same time a
principal creditor of the other; (2) That both debts
consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of
the same quality if the latter has been stated; (3)
That the two debts be due; (4) That they be
liquidated and demandable; (5) That over neither of
them there be any retention or controversy,
commenced by third persons and communicated in
due time to the debtor. (Team Image Entertainment,
Inc., And Felix S. Co. v. Solar Team Entertainment, Inc.,
G.R. No. 191652, 13 Sept. 2017; Solar Team
293
Entertainment, Inc. v. Team Image Entertainment,
Inc., And Felix S. Co, G.R. No. 191658, 13 Sept. 2017)
Q: X, who has a savings deposit with Y Bank in
the sum of P1,000,000.00, incurs a loan
obligation with the said bank in the sum of
P800,000.00 which has become due. When X
tried to withdraw his deposit, Y Bank allowed
only P200,000.00 to be withdrawn, less service
charges, claiming that compensation has
extinguished its obligation under the savings
account to the concurrent amount of X's debt. X
contends that compensation is improper when
one of the debts, as here, arises from a contract
of deposit. Assuming that the promissory note
signed by X to evidence the loan does not
provide for compensation between said loan
and his savings deposit, who is correct? (1998
BAR)
A: Y Bank is correct. All the requisites of Art. 1279,
Civil Code are present. Compensation shall take
place when two persons are reciprocally creditor
and debtor of each other. In this connection, it has
been held that the relation existing between a
depositor and a bank is that of creditor and debtor.
As a general rule, a bank has a right of set off of the
deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. (Gullas
v. PNB, G.R. No. L-43191, 13 Nov. 1935) Hence,
compensation took place between the mutual
obligations of X and Y Bank.
Q: Foodmasters, Inc. (FI) had outstanding loan
obligations to both Union Bank’s predecessor-
in-interest, Bancom Development Corporation
(Bancom), and to DBP. On May 21, 1979, FI and
DBP, among others, entered into a Deed of
Cession of Property in Payment of Debt (dacion
en pago) whereby the former ceded in favor of
the latter certain properties (including a
processing plant in Marilao, Bulacan
[processing plant]) in consideration of the
following: (a) the full and complete satisfaction
of FI’s loan obligations to DBP; and (b) the direct
assumption by DBP of FI’s obligations to Bancom
in the amount of ₱17,000,000.00 (assumed
obligations).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
On the same day, DBP, as the new owner of the
processing plant, leased back for 20 years the
said property to FI (Lease Agreement) which
was, in turn, obliged to pay monthly rentals to be
shared by DBP and Bancom. DBP also entered
into a separate agreement with Bancom
(Assumption Agreement) whereby the former:
(a) confirmed its assumption of FI’s obligations
to Bancom; and (b) undertook to remit up to
30% of any and all rentals due from FI to
Bancom (subject rentals) which would serve as
payment of the assumed obligations, to be paid
in monthly installments.
Claiming that the subject rentals have not been
duly remitted despite its repeated demands,
Union Bank filed, on June 20, 1984, a collection
case against DBP before the RTC, docketed as
Civil Case No. 7648. In opposition, DBP
countered, among others, that the obligations it
assumed were payable only out of the rental
payments made by FI. Thus, since FI had yet to
pay the same, DBP’s obligation to Union Bank
had not arisen. In addition, DBP sought to
implead FW as third party-defendant in its
capacity as FI’s assignee and, thus, should be
held liable to Union Bank. Was there legal
compensation?
A: There was NO legal compensation. The rule on
legal compensation is stated in Article 1290 of the
Civil Code which provides that "when all the
requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law, and
extinguishes both debts to the concurrent amount,
even though the creditors and debtors are not
aware of the compensation." Therefore,
compensation could not have taken place between
these debts for the apparent reason that requisites
3 and 4 under Article 1279 of the Civil Code are not
present. Since DBP’s assumed obligations to Union
Bank for remittance of the lease payments are – in
the Court’s words – “contingent on the prior
payment thereof by FW to DBP," it cannot be said
that both debts are due. (Art. 1279(3), NCC)
Also, the Court observed that any deficiency that
DBP had to make up for the full satisfaction of the
assumed obligations, "cannot be determined until
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
after the satisfaction of FW’s obligation to DBP." In
this regard, it cannot be concluded that the same
debt had already been liquidated, and thereby
became demandable. (4th requisite of Article 1279 of
the Civil Code) Thus, CA correctly upheld the denial
of Union Bank’s motion to affirm legal
compensation. (Union Bank Of The Philippines v.
Development Bank Of The Philippines, G.R. No.
191555, 20 Jan. 2014)
Parties may agree upon the Compensation of
Debts NOT Due
Under Art. 1282, conventional or voluntary
compensation is not limited to obligations which
are not yet due. The parties may compensate by
agreement any obligations, in which the objective
requisites provided for legal compensation are not
present. It is necessary, however, that the parties
should have the capacity to dispose of credits which
they compensate, because the extinguishment of the
obligations in this case arise from their wills and not
from law.
Rescissible or Voidable Debts already
compensated May be Rescinded or Annulled;
Effects
Although a rescissible or voidable debt can be
compensated before it is rescinded or annulled, the
degree of rescission or annulment is retroactive,
and the compensation must be considered as
cancelled. And as rescission or annulment requires
mutual restitution, the party whose obligation is
annulled or rescinded can thus recover to the extent
that his credit was extinguished by the
compensation; because to that extent, he is deemed
to have made a payment.
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 Obligations and Contracts

Compensation v. Payment Compensation v. Confusion

COMPENSATION PAYMENT CONFUSION

COMPENSATION
Definition (Arts. 1275-1277,
(Arts. 1278-1279, NCC)
A mode of NCC)
extinguishing to the
One person where
concurrent amount, Two persons who are
Payment means not qualities of debtor
the obligations of those mutual debtors and
only delivery of money and creditor are
persons who in their creditors of each other.
but also performance merged.
own right are
of an obligation.
reciprocally debtors At least two obligations. One obligation.
and creditors of each
other.
Compensation v. Counterclaim or Set-off
As to the necessity of the capacity of the
parties
COUNTERCLAIM/
COMPENSATION
Debtor must have SET-OFF
Capacity of parties not
capacity to dispose of
necessary. Need not be pleaded;
the thing paid; and
Reason: Compensation and
Creditor must have
operates by law, not by
capacity to receive
the act of the parties. Takes place by
payment.
operation of law and
It must be pleaded to
extinguishes
As the susceptibility of partial extinguishment be effectual.
reciprocally the two
debts as soon as they
The performance must
There can be partial exist simultaneously,
be complete and
extinguishment of the to the amount of their
indivisible unless
obligation. respective sums.
waived by the creditor.
Generally, both debts Does not require that
As to the operation of extinguishing the must be liquidated. debts are liquidated.
obligation Judicial compensation
Legal compensation provided that the
Takes effect by the act Legal or conventional
takes place by requirements of Rules
of the parties and compensation
operation of law of Court, particularly
involves delivery or governed by the Civil
without simultaneous on Counterclaims
action. Code.
delivery. and/or Cross-claims
are observed.
As to the relationship of the parties
Debts or Obligations NOT subject to
It is not necessary that
Parties must be Compensation
the parties be mutually
mutually debtors and
debtors and creditors
creditors of each other. 1. Debts or obligations arising from contracts of
of each other.
depositum (Art. 1287, NCC);
2. Debts arising from obligations of a depositary;
3. Debts arising from obligations of a bailee in
commodatum;
4. Claims for support due by gratuitous title;

295 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
5. Obligations arising from criminal offenses (Art.
1288, NCC); and
6. Certain obligations in favor of government.
e.g., Taxes, fees, duties, and others of a similar in
nature.
There can be no off-setting of taxes against the
claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on
the ground that the government owes him an
amount equal to or greater than the tax being
collected. Internal revenue taxes cannot be the
subject of compensation because government and
taxpayer are not mutually creditors and debtors of
each other. Taxes are not in the nature of contracts
between parties. (Francia v. IAC, G.R. No. L-67649, 28
Jun 1988)
NOTE: Compensation takes place by operation of
law, even though the debts may be payable at
different places, but there shall be an indemnity for
expenses of exchange or transportation to the place
of payment. (Art. 1286, NCC)
If all the requisites under Art. 1279 are present,
compensation takes place by operation of law.
The parties need not to notify each other that they
intend to have thier debts compensated. (Sta. Maria,
2017)
When Compensation NOT Proper
Under Art. 1287, compensation shall not be proper
when one of the debts arises from a depositum or
from the obligations of a depositary or of a bailee in
commodatum. Neither can compensation be set up
against a creditor who has a claim for support due
by gratuitous title without prejudice to the
provisions of Art. 301 (2).
NOTE: Only the depositary and the borrower in
commodatum cannot set up compensation. The
depositor can set up his deposit against the
depositary, and the lender can set up his loan
against a credit of the borrower.
Neither shall there be compensation if one of the
debts consists in civil liability arising from a penal
offense.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
NOTE: The person who has the civil liability arising
from crime is the only party who cannot set up the
compensation; but the offended party is entitled to
indemnity can set up his claim in compensation of
his debt.
KINDS OF COMPENSATION
1. Legal compensation – by operation of law;
2. Conventional – by agreement of the parties;
3. Judicial (set-off) – by judgment of the court
when there is a counterclaim duly pleaded, and
the compensation decreed; and
4. Facultative – may be claimed or opposed by one
of the parties.
Q: De Leon sold and delivered to Silahis various
merchandise. Due to Silahis' default, De Leon
filed a complaint for the collection of said
accounts. Silahis asserts, as affirmative defense,
a debit memo as unrealized profit for a
supposed commission that Silahis should have
received from De Leon from the sale made
directly to DOLE Philippines, Inc. (DOLE). Was
there legal compensation?
A: NONE. Silahis admits the validity of his
outstanding accounts with De Leon. But whether De
Leon is liable to pay Silahis a commission on the
subject sale to DOLE is disputed. This circumstance
prevents legal compensation from taking place.
(Silahis Marketing Corp. v. IAC, G. R. No. L-74027, 7
Dec. 1989)
NOTE: Compensation is not proper where the claim
of the person asserting the set-off against the other
is not clear or liquidated; compensation cannot
extend to unliquidated, disputed claim existing from
breach of contract. (Ibid.)
Q: Atty. Laquihon, in behalf of Pacweld, filed a
pleading addressed to MPCC titled “motion to
direct payment of attorney's fee”, invoking a
decision wherein MPCC was adjudged to pay
Pacweld the sum of P10, 000. 00 as attorney's
fees. MPCC filed an opposition stating that the
said amount is set-off by a like sum of P10, 000.
00, collectible in its favor from Pacweld also by
way of attorney's fees which MPCC recovered
296
 Obligations and Contracts
from the same CFI of Manila in another civil case.
Was there legal compensation?
A: YES. MPCC and Pacweld were creditors and
debtors of each other, their debts to each other
consisting in final and executory judgments of the
CFI in two separate cases. The two obligations,
therefore, respectively offset each other,
compensation having taken effect by operation of
law and extinguished both debts to the concurrent
amount of P10,000.00, pursuant to the provisions of
Articles 1278, 1279 and 1290 of the Civil Code, since
all the requisites provided in Art. 1279 of the said
Code for automatic compensation "even though the
creditors and debtors are not aware of the
compensation" were present. (Mindanao Portland
Cement Corp. v. CA, G.R. No. L-62169, 28 Feb. 1983)
Conventional Compensation
It is one that takes place by agreement of the parties.
Effectivity of Conventional Compensation
For compensation to become effective:
GR: The mutual debts must be both due. (Art. 1279,
NCC)
XPN: The parties may agree that their mutual debts
be compensated even if the same are not yet due.
(Art. 1282, NCC)
Judicial Compensation
If one of the parties to a suit over an obligation has
a claim for damages against the other, the former
may set it off by proving his right to said damages
and the amount thereof. (Art. 1283, NCC)
NOTE : For judicial set-off to apply, the amount of
damages or the claim sought to be compensated
must be duly proven. (Ong v. CA, G.R. No. 75819, 08
Sept. 1989)
All the requisites mentioned in Art. 1279 must be
present, except that at the time of filing the pleading,
the claim need not be liquidated. The liquidation
must be made in the proceedings.
297
Facultative Compensation
One of the parties has a choice of claiming or
opposing the compensation but waives his
objection thereto such as an obligation of such party
is with a period for his benefit alone and he
renounces the period to make the obligation
become due.
Facultative compensation is unilateral and does not
require mutual agreement; voluntary or
conventional compensation requires mutual
consent.
Example: X owes Y P100,000 demandable and due
on April 1, 2012. Y owes X P100, 000 demandable
and due on or before April 15, 2012. Y, who was
given the benefit of the term, may claim
compensation on April 1, 2012. On the other hand,
X, who demands compensation, can be properly
opposed by Y because Y could not be made to pay
until April 15, 2012.
NOTE: Compensation can be renounced either at
the time an obligation is contracted or afterwards.
(Tolentino, 1991) It can be renounced expressly or
impliedly.
Examples of Implied Renunciation:
1. By not setting it up in the litigation;
2. By consenting to the assignment of credit under
Art. 1285 of the NCC; or
3. By paying debt voluntarily, with knowledge
that it has been extinguished by compensation.
(Tolentino, 1991)
Q: Eduardo was granted a loan by XYZ Bank for
the purpose of improving a building which XYZ
leased from him. Eduardo executed the
promissory note in favor of the bank, with his
friend Ricardo as cosignatory. In the PN, they
both acknowledged that they are “individually
and collectively” liable and waived the need for
prior demand. To secure the PN, Ricardo
executed a real estate mortgage on his own
property. When Eduardo defaulted on the PN,
XYZ stopped payment of rentals on the building
on the ground that legal compensation had set
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
in. Since there was still a balance due on the PN
after applying the rentals, XYZ foreclosed the
real estate mortgage over Ricardo’s property.
Ricardo opposed the foreclosure on the ground
that he is only a co-signatory; that no demand
was made upon him for payment, and assuming
he is liable, his liability should not go beyond
half of the balance of the loan. Further, Ricardo
said that when the bank invoked compensation
between the rentals and the amount of the loan,
it amounted to a new contract or novation, and
had the effect of extinguishing the security since
he did not give his consent (as owner of the
property under the real estate mortgage)
thereto.
a. Can XYZ Bank validly assert legal
compensation?
b. Can Ricardo’s property be foreclosed to
pay the full balance of the loan?
c. Does Ricardo have basis under the Civil
Code for claiming that the original
contract was novated? (2008 Bar)
A:
a. NO. XYZ Bank may validly assert the partial
compensation of both debts, but it should be
facultative compensation because not all of the
five requisites of legal compensation are
present. (Art. 1279, NCC) The payment of the
rentals by XYZ Bank is not yet due, but the
principal obligation of loan where both
Eduardo and Ricardo are bound solidarily and
therefore any of them is bound principally to
pay the entire loan, is due and demandable
without need of demand. XYZ Bank may declare
its obligation to pay rentals as already due and
demand payment from any of the two debtors.
b. NO, because there was no prior demand on
Ricardo, depriving him of the right to
reasonably block the foreclosure by payment.
The waiver of prior demand in the PN is against
public policy and violates the right to due
process. Without demand, there is no default
and the foreclosure is null and void. Since the
mortgage, insofar as Ricardo is concerned is not
violated, a requirement under Art. 3135 for a
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
valid foreclosure of real estate mortgage is
absent.
In the case of DBP v. Licuanan (G.R. No. 150097,
26 Feb. 2007), it was held that: “the issue of
whether demand was made before the
foreclosure was effected is essential. If demand
was made and duly received by the respondents
and the latter still did not pay, then they were
already in default and foreclosure was proper.
However, if demand was not made, then the
loans had not yet become due and demandable.
This meant that the respondents had not
defaulted in their payment and the foreclosure
was premature.”
c. NO. Since none of the three kinds of novation is
applicable. There is no objective novation,
whether express or implied, because there is no
change in the object or principal conditions of
the obligation. There is no substitution of
debtors, either. Compensation is considered as
abbreviated or simplified payment and since
Ricardo bound himself solidarily with Eduardo,
any facultative compensation which occurs
does not result in partial legal subrogation.
Neither Eduardo nor Ricardo is a third person
interested in the obligation under Art. 1302,
NCC.
Obligations subject to Facultative Compensation
When one of the debts arises from:
1. Depositum;
2. Obligations of a depositary;
3. Obligations in commodatum;
4. Support
GR: Claim of support due to gratuitous title.
XPN: Future support; and
5. Civil liability from a crime.
NOTE: Art. 1288 of the NCC prohibits compensation
if one of the debts consists in civil liability arising
from a penal offense. However, the victim is allowed
to claim compensation.
298
 Obligations and Contracts
If one or both Debts are Rescissible or voidable
When one or both debts are rescissible or voidable,
they may be compensated against each other before
they are judicially rescinded or avoided. (Art. 1284,
NCC) If the prescriptive period had already lapsed,
there is automatic compensation and the same will
not be disturbed anymore. Whereas, if the debt is
rescinded or annulled, compensation shall be
restitution of what each party had received before
the rescission or annulment.
Effects of Assignment on Compensation of Debts
1. After the compensation took place
GR: Ineffectual; useless act since there is
nothing more to assign.
XPN: When the assignment was made with the
consent of the debtor.
NOTE: Such consent operates as a waiver of the
rights to compensation.
XPN to the XPN: At the time he gave his
consent, he reserved his right to the
compensation.
2. Before compensation took place
a. With the consent of the debtor –
Compensation cannot be set up except
when the right to compensation is
reserved.
b. With the knowledge but without consent of
the debtor – Compensation can be set up
regarding debts previous to the cession or
assignment but not subsequent ones.
c. Without the knowledge of debtor - Can set
up compensation as a defense for all debts
maturing prior to his knowledge of the
assignment.
NOVATION (1994, 2008 BAR)
It is the substitution or change of an obligation by
another, resulting in its extinguishment or
modification, either by changing the object or
principal conditions, or by substituting another in
299
the place of the debtor or by subrogating a third
person to the rights of the creditor. (Pineda, 2000)
Requisites of Novation (O-I-C-S-N)
1. Valid Old obligation;
XPNs:
a. When the annulment may be claimed
only by the debtor and he consented to the
novation; and
b. When ratification validates acts which
are voidable.
2. Intent to extinguish or to modify the old
obligation;
3. Capacity and consent of all the parties to the
new obligation (except in case of expromission
where the old debtor does not participate);
4. Substantial difference of the old and new
obligation – on every point incompatible with
each other (implied novation); and
5. Valid New obligation.
NOTE: Subsequent Void Obligation – A subsequent
void obligation intended to novate an old one has no
legal effect and is considered as if the parties have
not agreed upon it in the first place. The original
obligation shall subsist.
However, if in coming up with the new but void
obligations, parties agree that it shall in any event
extinguish the old obligation, such old obligation
will not be revived. (Art. 1297, NCC)
Presumption of Novation
Novation is never presumed; it must be proven as a
fact either by:
1. Explicit declaration – If it be so declared in
unequivocal terms; or
2. Material incompatibility – That the old and the
new obligations be on every point incompatible
with each other. (Art. 1292, NCC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

Express Novation b. Subjective or personal novation – Change of

the parties.
Takes place only when the intention to effect a
novation clearly results from the terms of the i. Substituting the person of the debtor
agreement or is shown by a full discharge of the (passive novation) – may be made
original debt. (Jurado, 2010) without the knowledge of or against
the will of the latter, but not without
Implied Novation the consent of the creditor.

Implied novation necessitates that the a. Delegacion – The substitution is

incompatibility between the old and new obligation initiated by the old debtor
be total on every point such that the old obligation himself (delegante) by
is completely superseded by the new one. The test convincing another person
of incompatibility is whether they can stand (delegado) to take his place and
together, each one having an independent to pay his obligation to the
existence; if they cannot and are irreconcilable, the creditor. (1996, 2001 Bar)
subsequent obligation would also extinguish the b. Expromission – The substitution
first. (Interport Resources Corp. v. Securities of the old debtor by a new debtor
Specialist, Inc., G.R. No. 154069, 06 June 2016) is upon the initiative or proposal
of a third person. (1996, 2001
NOTE: Novation is never presumed and the animus Bar)
novandi (intent to make a new obligation) whether c. Mixed – Combination of the
totally or partially, must appear by express objective and subjective
agreement of the parties or by their acts that are too novation.
clear and unequivocal to be mistaken.
ii. Subrogating a third person to the rights
Two-fold Functions of Novation of the creditor (active novation).

1. It extinguishes the old obligation; and NOTE: If it is the creditor who initiated
2. Creates a new obligation in lieu of the old one. the change of debtor, it is considered
expromission.
Kinds of Novation
2. As to form of their constitution
1. As to essence a. Express – The parties declared in
a. Objective or real novation – Changing the unequivocal terms that the obligation is
object or principal conditions of the extinguished by the new obligation.
obligation. (Art. 1291, NCC) b. Implied – No express declaration that the
old obligation is extinguished by the new
NOTE: In payment of sum of money, the one. The old and new obligations are
first obligation is not novated by a second incompatible on every material point. (Art.
obligation that: 1292, NCC)

1. Expressly recognizes the first 3. As to extent of their effects

obligation; a. Total or extinctive – Obligation is originally
2. Changes only the terms of payment; extinguished.
3. Adds other obligation not incompatible
with the old ones; or NOTE: Four requisites of extinctive
4. Merely supplements the first one. novation:

UNIVERSITY OF SANTO TOMAS 300

2022 GOLDEN NOTES
 Obligations and Contracts
1. A previous valid obligation;
2. An agreement of all parties concerned
to a new contract;
3. The extinguishment of the old
obligation; and
4. The birth of a valid new obligation.
(Sps. Celones v. Metropolitan Bank and
Trust Co., G.R. No. 215691, 21 Nov. 2018)
The extinctive novation would thus have
the twin effects of first, extinguishing an
existing obligation and second, creating a
new one in its stead.
b. Partial or modificatory – Original obligation
is not extinguished but merely modified.
4. As to their origin
a. Legal novation – By operation of law. (Arts.
1300 and 1302, NCC)
b. Conventional novation – By agreement of
the parties. (Arts. 1300-1301, NCC)
5. As to presence of absence of condition
a. Pure – New obligation is not subject to a
condition.
b. Conditional – When the creation of the new
obligation is subject to a condition.
Rights of the new debtor
1. With the debtor’s consent – Right of
reimbursement and subrogation.
2. Without the consent of the old debtor or against
his will – Right to beneficial reimbursement.
Novation by Substitution of Debtor
The consent of the creditor is mandatory both in
delegacion and expromission. (Art. 1293, NCC) It may
be expressed or implied from his acts but not from
his mere acceptance of payment by a third party, for
there is no true transfer of debt.
NOTE: Creditor’s consent or acceptance of the
substitution of the old debtor by a new one may be
given at any time and in any form while the
agreement of the debtor subsists. (Babst v. CA, G.R.
No. 99398, 26 Jan. 2001)
301
Requisites of delegación
1. Substitution is upon the initiative or proposal of
the old debtor himself by proposing to the
creditor the entry of another (third person) as
the new debtor who will replace him in
payment of the obligation;
2. The creditor accepts and the new debtor agrees
to the proposal of the old debtor; and
3. The old debtor is released from the obligation
with the consent of the creditor.
Insolvency of the New Debtor in delegación
GR: Insolvency of the new debtor (delegado), who
has been proposed by the original debtor
(delegante) and accepted by the creditor
(delegatario), shall not revive the action of the latter
against the original obligor. (Art. 1295, NCC)
XPNs: Original debtor shall be held liable; if:
1. Insolvency was already existing and of public
knowledge or known to the debtor. (Art. 1295,
NCC); or
2. Insolvency of the new debtor was already
existing and known to the original debtor at the
time of the delegation of the debt to the new
debtor. (Art. 1295, NCC)
NOTE: In both cases, the creditor must NOT know
that the new debtor is insolvent; otherwise, the
creditor would be considered estopped.
In both cases, the insolvency must have existed at
the time the old debtor delegated his debt. (Sta.
Maria, 2017)
Requisites of expromission
1. Substitution is upon the initiative or proposal of
a third person who will step into the shoes of the
debtor;
2. Creditor must give his consent to the proposal
of the third person; and
3. Old debtor must be released from the obligation
with the consent of the creditor.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Insolvency of the New Debtor in expromission
If substitution is without the knowledge or against
the will of the debtor, the new debtor’s insolvency
or non-fulfillment of the obligation shall not give
rise to any liability on the part of the original debtor.
(Art. 1294, NCC)
NOTE: If the old debtor gave his consent and the
new debtor could not fulfill the obligation, the old
debtor should be liable for the payment of his
original obligation.
Q: The Arco and Lim allegedly agreed that Arco
would either pay Lim the value of the raw
materials or deliver to him their finished
products of equivalent value. Lim alleged that
when he delivered the raw materials, Arco
issued a post-dated check as partial payment.
When he deposited the check, however, it was
dishonored for being drawn against a closed
account. Thereafter, Arco and Sy executed a
memorandum of agreement where Arco bound
themselves to deliver their finished products to
Megapack Container Corporation owned by Sy.
According to the memorandum, the raw
materials would be supplied by Lim. Was the
obligation between Arco and Lim novated
because of the agreement entered into by Arco
and Sy?
A: NO. Novation must be stated in clear and
unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if the
old and new contracts are incompatible on every
point. In this case, Lim was not privy to the
memorandum of agreement, thus, his conformity to
the contract need not be secured. If the
memorandum of agreement was intended to novate
the original agreement between the parties, Lim
must have first agreed to the substitution of Sy as
his new debtor. The memorandum of agreement
must also state in clear and unequivocal terms that
it has replaced the original obligation of petitioner
Arco to Lim. Neither of these circumstances is
present in this case. Since there was no novation,
petitioner Arco’s obligation to respondent remains
valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
(Arco Pulp and Paper Co., Inc. v. Lim, G.R. No. 206806,
25 June 2014)
Q: DBP guaranteed Galleon’s foreign loans. In
return, Galleon undertook to secure a first
mortgage on its five new vessels and two
second-hand vessels. Pursuant to Letter of
Instructions No. 1155, Galleon's stockholders
and NDC entered into a Memorandum of
Agreement, where NDC and Galleon undertook
to prepare and sign a share purchase agreement
covering 100% of Galleon's equity for
P46,740,755.00. The share purchase agreement
also provided for the release of Sta. Ines, Cuenca,
Tinio and Construction Development
Corporation of the Philippines from the
personal counter-guarantees they issued in
DBP's favor under the Deed of Undertaking. Sta.
Ines, Cuenca, Tinio, Cuenca Investment, and
Universal Holdings claimed that DBP can no
longer go after them for any deficiency
judgment since NDC had been subrogated in
their place as borrowers, hence the Deed of
Undertaking between Sta. Ines, Cuenca
Investment, Universal Holdings, Cuenca, and
Tinio and DBP had been extinguished and
novated." Did the Memorandum of Agreement
novate the Deed of Undertaking executed
between DBP and Sta. Ines, Cuenca Investment,
Universal Holdings, Cuenca, and Tinio?
A: NO. It should be noted that in order to give
novation its legal effect, the law requires that the
creditor should consent to the substitution of a new
debtor. The general rule is that, “in the absence of an
authority from the board of directors, no person, not
even the officers of the corporation, can validly bind
the corporation.” Aside from Ongpin being the
concurrent head of DBP and NDC at the time the
Memorandum of Agreement was executed, there
was no proof presented that Ongpin was duly
authorized by the DBP to give consent to the
substitution by NDC as a co-guarantor of Galleon’s
debts. Ongpin is not DBP, therefore, it is wrong to
assume that DBP impliedly gave its consent to the
substitution simply by virtue of the personality of its
Governor.
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 Obligations and Contracts

Novation is never presumed. The animus

Insolvency or Nonfulfillment of the obligation
novandi, whether partial or total, “must appear by
of the New debtor
express agreement of the parties, or by their acts
which are too clear and unequivocal to be With the debtor’s
mistaken.” There was no such animus novandi in consent - If the old
the case at bar between DBP and respondents, thus, Shall not revive the debtor gave his
respondents have not been discharged as Galleon’s action of the latter consent and the new
co-guarantors under the Deed of Undertaking and against the original debtor could not fulfill
they remain liable to DBP. (Development Bank of the obligor. the obligation, the old
Philippines v. Sta. Ines Melale Forest Products Corp., debtor should be liable
G.R. No. 193068, 01 Feb. 2017) Original debtor shall be for the payment of his
held liable. original obligation.

DELEGACION EXPROMISSION Insolvency of the new Without the consent of

Person who Initiated the Substitution debtor was already the old debtor or
existing and of public against his will – the
Old debtor Third person knowledge or known new debtor’s
to the original debtor insolvency or non-
Consent of the Creditor at the time of the fulfillment of the
delegation of the debt obligation shall not
It may be express or implied from his acts but not
to the new debtor. give rise to any liability
from his mere acceptance of payment by a third
on the part of the
party.
original debtor.
Consent of the Old debtor
Q: Metro Corporation obtained a loan from
With the consent of the With or without the Allied Bank covered by promissory notes,
old debtor (since he knowledge of the letters of credit, and trust receipts. By way of
initiated the debtor or against the security, Metro’s officers individually executed a
substitution). will of the old debtor. continuing guaranty in favor of Allied Bank.
Consent of Third Person Metro’s officers failed to settle their obligations
prompting Allied Bank to demand for payment
Consent is needed but to no avail. In order to settle their debts, they
it need not be given Consent is needed. offered the sale of Metro’s remaining assets
simultaneously. (machines and equipment) to the Bank which
Intention of Substitution the latter refused. Meanwhile, Starpeak
Corporation, acting through Allied Bank’s
Released from the obligation with the consent of counsel, entered into an agreement with Metro
the creditor. to buy the machines that were reduced to mere
Rights of the New debtor scraps of metals. Starpeak, unfortunately,
reneged on its obligation to Metro. In this
With the debtor’s regard, Metro asseverates that their failure to
consent – right of pay their outstanding loan obligations to Allied
reimbursement and Bank must be considered as force majeure, and
With the debtor’s subrogation. since Allied Bank was the party, through their
consent – right of counsel, that accepted the terms and conditions
reimbursement and Without the consent of of payment proposed by Starpeak, petitioners
subrogation. the old debtor or must therefore be deemed to have settled their
against his will – right
obligations to Allied Bank. Were the loan
to beneficial obligations under the promissory notes, letters
reimbursement.

303 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
of credit, and trust receipts have already been
extinguished?
A: NO. Art. 1231 of the NCC states that obligations
are extinguished either by payment or performance,
the loss of the thing due, the condonation or
remission of the debt, the confusion or merger of the
rights of creditor and debtor, compensation or
novation. Starpeak and Metro’s agreement is a sale
of assets contract, while Metro’s obligations to
Allied Bank arose from various loan transactions.
Absent any showing that the terms and conditions
of the latter transactions have been, in any way,
modified or novated by the terms and conditions in
the Starpeak-Metro agreement, said contracts
should be treated separately and distinctly from
each other, such that the existence, performance or
breach of one would not depend on the existence,
performance or breach of the other. The
performance or breach of the agreement bears no
relation to the performance or breach of the subject
loan transactions, they being separate and distinct
sources of obligations. Metro’s loan obligations to
Allied Bank remain subsisting for the basic reason
that the former has not been able to prove that the
same had already been paid or, in any way,
extinguished. (Metro Concast Steel Corporation,
Spouses Dychiao v. Allied Bank Corporation, G.R. No.
177921, 04 Dec. 2013)
Q: SDIC issued to Danilo a Diners Card (credit
card) with Jeannete as his surety. Danilo used
this card and initially paid his obligations to
SDIC. Thereafter, Danilo wrote SDIC a letter
requesting it to upgrade his Regular Diners Club
Card to a Diamond (Edition) one. As a
requirement of SDIC, Danilo secured from
Jeanette her approval and the latter obliged.
Danilo's request was granted and he was issued
a Diamond (Edition) Diners Club Card. Danilo
had incurred credit charges plus appropriate
interest and service charge. However, he
defaulted in the payment of this obligation. Was
the upgrading a novation of the original
agreement governing the use of Danilo Alto's
first credit card, as to extinguish that obligation?
A: YES. Novation, as a mode of extinguishing
obligations, may be done in two ways: by explicit
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
declaration, or by material incompatibility. There is
no doubt that the upgrading was a novation of the
original agreement covering the first credit card
issued to Danilo Alto, basically since it was
committed with the intent of cancelling and
replacing the said card. However, the novation did
not serve to release Jeanette from her surety
obligations because in the surety undertaking she
expressly waived discharge in case of change or
novation in the agreement governing the use of the
first credit card. (Molino v. Security Diners
International Corp., G.R. No. 136780, 16 Aug. 2001)
Q: J.C. Construction bought steel bars from
Matibay Steel Industries (MSI) which is owned
by Buddy Batungbacal. J.C. failed to pay the
purchased materials worth P500,000 on due
date. J.C. persuaded its client Amoroso with
whom it had receivables to pay its obligation to
MSI. Amoroso agreed and paid MSI the amount
of P50,000. After 2 other payments, Amoroso
stopped making further payments.
Buddy filed a complaint for collection of the
balance of the obligation and damages against
J.C. J.C. denied any liability claiming that its
obligation was extinguished by reason of
novation which took place when MSI accepted
partial payments from Amoroso on its behalf.
Was the obligation of JC to MSI extinguished by
novation? Why? (2014 Bar)
A: NO. Under Art. 1292 of the NCC, in order that an
obligation may be extinguished by another which
substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and
the new obligations be on every point be
incompatible with each other. Novation by
substitution of the debtor requires the consent of
the creditor as provided in Art. 1293. This
requirement is not present in this case.
It was ruled that the mere fact that the creditor
received payment from a third person does not
constitute novation and does not extinguish the
obligation of the original debtor. Thus, the
obligation of JC to MSI subsists. (Magdalena Estates
Inc., v. Rodriguez, G.R. No. L-18411, 17 Dec. 1966)
304
 Obligations and Contracts
Effects of Novation
1. Extinguishment of principal also
extinguishes the accessory, except:
a. Mortgagor, pledgor, surety or guarantor
agrees to be bound by the new obligation
(Tolentino, 1999); or
b. Stipulation made in favor of a third person
such as stipulation pour autrui (Art. 1311,
NCC) unless beneficiary consents to the
novation. Art. 1296, NCC)
2. If old obligation is:
a. Void – Novation is void. (Art. 1298, NCC)
b. Voidable – Novation is valid provided that
the annulment may be claimed only by the
debtor or when ratification validates acts.
(Art. 1298, NCC)
c. If the old obligation was subject to a
suspensive or resolutory condition, the
new obligation shall be under the same
condition, unless it is otherwise stipulated.
(Art. 1299, NCC)
3. If old obligation is conditional and the new
obligation is pure:
a. If resolutory and it occurred – Old obligation
already extinguished; no new obligation
since nothing to novate.
b. If suspensive and it did not occur – It is as if
there is no obligation; thus, there is nothing
to novate.
4. If the new obligation is:
a. Void – Original one shall subsist, unless the
parties intended that the former relation
should be extinguished in any event. (Art.
1297, NCC)
b. Voidable – Novation can take place, except
when such new obligation is annulled. In
such case, old obligation shall subsist.
c. Pure obligation – Conditions of old
obligation deemed attached to the new,
unless otherwise stipulated. (Tolentino,
1999)
d. Conditional Obligation:
i. If resolutory – Valid until the happening
of the condition. (NCC, Art. 1181) (Art.
1181, NCC)
305
ii. If suspensive and did not materialize –
No novation, old obligation is enforced.
(Art. 1181, NCC)
NOTE: Novation is not a mode of extinguishing
criminal liability under the penal laws of the
country. (Degaños v. People, G.R. No. 162826, 14 Oct.
2013)
Q: Will a contract of suretyship, which is
secondary to a principal obligation, be
extinguished when novation occurs?
A: It depends. A surety is released from its
obligation when there is a material alteration of the
principal contract in connection with which the
bond is given, such as a change which imposes a new
obligation on the promising party, or which takes
away some obligation already imposed, or one
which changes the legal effect of the original
contract and not merely its form. (Philippine Charter
Insurance Corporation v. Petroleum Distributors &
Service Corporation, G.R. No. 180898, 18 Apr. 2012)
Furthermore, a surety is not released by a change in
the contract, which does not have the effect of
making its obligation more onerous. (Stronghold
Insurance Company, Inc. v. Tokyu Construction
Company, G.R. Nos. 158820-21, 05 June 2009) As
such, a contract is only extinguished by novation
when there is a material alteration in the principal
contract or if it has the effect of making the
obligation more onerous.
Subrogation
It is the active subjective novation characterized by
the transfer to a third person of all rights
appertaining to the creditor in the transaction
concerned including the right to proceed against the
guarantors or possessors of mortgages and similar
others subject to any applicable legal provision or
any stipulation agreed upon by the parties in
conventional subrogation.
NOTE: Whoever pays on behalf of the debtor
without the knowledge or against the will of the
latter cannot compel the creditor to subrogate him
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

in his rights, such as those arising from a mortgage, 2. When a third person, not interested in the
guaranty, or penalty. (Art. 1237, NCC) obligation, pays with the express or tacit
approval of the debtor; or
Kinds of subrogation 3. When, even without the knowledge of the debtor,
a person interested in the fulfillment of the
1. As to their creation obligation pays, without prejudice to the effects
a. Legal subrogation – constituted by virtue of of confusion as to the latter’s share. (Art. 1302,
a law and does not proceed from an NCC)
agreement of the parties; (Arts. 1300 &
1302, NCC) Conventional Subrogation v. Assignment of
b. Voluntary or conventional subrogation – Credits
created by the parties by their voluntary
agreement; (Art. 1300, NCC)
CONVENTIONAL ASSIGNMENT OF
SUBROGATION CREDITS OR RIGHTS
NOTE: In legal subrogation, the law which
forms the basis of the subrogation must be Governing Law
clearly identified and invoked to enforce
the rights pertinent thereto. (Sta. Maria, Article 1300-1304 Article 1624-1627
2017)
Effect
c. Conventional subrogation of a third person The transfer of the
requires the consent of the original parties credit or right does not
and of the third person. (Art. 1301, NCC) It extinguishes the extinguish or modify
original obligation and the obligation. The
2. As to their extent creates a new one. transferee becomes the
a. Total subrogation – credits or rights of the new creditor for the
creditor in the transaction are totally same obligation.
transferred to the third person.
b. Partial subrogation – only part of the credit Need for Consent of Debtor
or rights of the creditor in the transaction
The consent of the
are transferred to the third person.
debtor is not
The consent of the necessary. Notification
NOTE: A creditor, to whom partial payment
debtor is necessary. is enough for the
has been made, may exercise his right for
(NCC, Art. 1301) validity of the
the remainder and he shall be preferred to
assignment. (NCC, Art.
the person who has been subrogated in his
1626)
place in virtue of the partial payment of the
same credit. (Art. 1304, NCC) Effectivity

Presumption of Legal Subrogation Begins from the Begins from

moment of notification of the
GR: Legal subrogation is not presumed. (Art. 1300, subrogation. debtor.
NCC)
Curability of Defect or Vice
XPN: In cases expressly mentioned in the law: The defect in the old
The defect in the credit
1. When a creditor pays another creditor who is obligation may be
or rights is not cured
preferred, even without the debtor’s cured such that the
by its mere assignment
knowledge; new obligation
to a third person.
becomes valid.

UNIVERSITY OF SANTO TOMAS 306

2022 GOLDEN NOTES
 Obligations and Contracts

Defense
B. CONTRACTS
Debtor cannot set up a
The debtor can still set
defense against the
up the defense
new creditor which he
(available against the 1. GENERAL PROVISIONS
could have availed
old creditor) against
himself of against the
the new creditor. A contract is a meeting of minds between two
old creditor.
persons whereby one binds himself, with respect to
the other, to give something or to render some
NOTE: In the law of subrogation, active subjective
service. (Art. 1305, NCC)
novation is stricter than passive subjective
novation. In the latter, the consent of the old debtor
A contract is a meeting of the minds between two or
is not even required in expromission.
more parties, whereby one party binds himself with
respect to the other, or where both parties bind
themselves reciprocally, in favor of one another, to
fulfill a prestation to give, to do or not to do. (Pineda,
2009)

Meeting of the minds

Speaks of the intention of the parties in entering

into the contract respecting the subject matter and
the consideration thereof. As a rule therefore, a
contract is perfected by mere consent. It does not
require any special form, as a rule, and is binding
from the moment that the essential requisites are
present. Thus, the meeting of the minds between the
parties rise to the binding contract although they
have not affixed their signature to its written form.
(Rabuya, 2017)

Obligation v. Contract

While a contract is one of the sources of obligations,

an obligation is the legal tie or relations itself that
exists after a contract has been entered into. Hence,
there can be no contract if there is no obligation. But
an obligation may exist without a contract. (De Leon,
2010)

Stages in the Making of a Contract

Three stages in the making of a contract (C-P-C):

1. Conception or Generation – the first stage

where the parties begin their initial negotiation
and bargaining for the formation of the contract
ending at the moment of agreement of the
parties.

307 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
2. Perfection or Birth – Here, the parties had a
meeting of minds as to the object, cause or
consideration and other terms and conditions of
the contract.
3. Consummation or fulfillment – This the last
stage which consists in their performance or
fulfillment by the parties of their obligations
under the term of the perfected contract.
CLASSIFICATION OF CONTRACTS
1. According to their names:
a. Nominate – Those which have been given
particular names or denominations by law.
b. Innominate – Those which have not been
given any particular name and not
regulated by special provision of law.
2. According to their subject matter:
a. Contracts covering things – Such a contract
of sale, deposit, pledge.
b. Contracts covering services – Such as
contract of carriage whether common or
simple ; agency, deposit
c. Contract covering transmissible rights or
credits – Such as a contract of usufruct,
assignment of credits.
3. According to formation or perfection:
a. Consensual – Those perfected by mere
consent such as sale and lease. (Art. 1305,
NCC) (2005 BAR)
b. Real – Those which cannot be perfected
without delivery such as commodatum,
depositum, pledge and loan.
c. Formal – Those which cannot be perfected
without compliance with the special
formalities required by law such as
donations and mortgages of real property.
They are also called solemn contracts
because they have to comply with the
formalities or solemnities required by law,
otherwise, they are void.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
i. Donations of real estate or of movables if
the value exceeds P5,000;
ii. Partnership to which immovables are
contributed;
iii. Contract of antichresis – requires that the
amount of principal and interest be
specified;
iv. Sale of piece of land or interest therein is
through an agent;
v. Stipulation to charge interest;
vi. Stipulation limiting common carrier's
duty of extraordinary diligence to
ordinary diligence;
vii. Chattel mortgage; or
viii. Transfer of large cattle. (Sec. 22, R.A. No.
1147; Art. 1581, NCC)
4. According to cause:
a. Onerous – Those contracts providing for
exchange of valuable considerations such
as sale where the seller delivers the object
of the contract and the buyer pays the
purchase price therefor.
b. Gratuitous – Those contracts where one of
the parties give something or renders
service to the other without receiving any
equivalent or compensation such as pure
donation and commodatum. This is also
called a lucrative contract because it
provides a gain to the other party for free.
c. Remunerative – Those contracts where one
party gives something or renders service to
another in consideration of a previous or
past deeds of the other.
5. According to the vinculum produced or
according to the party or parties obligated:
a. Unilateral – Those where only one of the
parties is bound to fulfill an obligation such
as:
(i) commodatum where the borrower
must preserve the property and return
it to the lender at the appointed time ;
and
308
 Obligations and Contracts
(ii) a promissory note where only the
promisor had signed it.
b. Bilateral – Those where both parties have
reciprocally bound themselves to fulfill
their obligations in favor of the other such
as sale. These are also known as
synallagmatic contracts.
6. According to the certainty of fulfillment:
a. Commutative – Those contracts where the
contracting parties contemplate the
assured fulfillment of the terms and
conditions of their agreement such as
contracts of mortgage and pledge.
Generally, there is no risk to anticipate.
b. Aleatory – Those contracts where the
fulfillment is dependent upon chance or
event which may not happen within the
period stipulated such as an insurance
contract. Here, the loss contemplated may
or may not happen. If it happens, the
insurance company shall pay.
7. According to completion of performance:
a. Executed – Those contracts which are
already completed when formally entered
into such as a sale of a thing which has
already been delivered and paid for. There
can be a partially executed contract when
there was already partial payment.
b. Executory – Those contracts where the
prestation promised by the parties have yet
to be fulfilled at some future date such as a
unilateral promise to sell which has been
accepted. The sale is not yet executed.
8. According to the dependence of one contract
upon the other:
a. Principal – Those contracts which can exist
by themselves alone without depending
upon another such as sale, lease, deposit,
commodatum.
309
b. Accessory – Those contracts which cannot
exist alone but must depend upon another
contract such as mortgage, which depends
upon the existence of a contract of loan. The
principal contract is the loan while the
mortgage is the accessory contract.
c. Preparatory – Those contracts entered into
for the creation of another contract such as
a contract of agency, as agency does not
stop with the agency because the purpose
is to enter other contracts (Rabuya, 2017).
A partnership is also an example of
preparatory contract.
9. According to the number of person/s actually
participating in the contract:
a. Ordinary – Those contracts where two (or
more) parties are represented by different
persons such as in sale. There is a seller and
a buyer.
b. Auto-Contracts – Where the two opposite
parties are represented by the one and the
same person, who represents and acts in
different capacities-such as an agent
representing his principal who authorized
him to borrow money, may himself lend the
money but not the other way around. The
agent, if authorized to lend money, cannot
be the borrower without the consent of the
principal. (Art. 1890, NCC) Auto-contracts
are allowed, unless there is a specific law
prohibiting them.
10. According to the dignity accorded by law:
a. Institutional – Those contracts which are
given special dignity by law such as a
contract of marriage which is considered a
"social inviolable institution" and as such is
considered as the foundation of the family
by the Constitution (Sec. 2, Art. XV, 1987
Constitution) and the Family Code (Art. 1,
FC).
b. Ordinary – Those which are not
institutional such as sale, lease, deposit, etc.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
11. According to the freedom of bargain:
a. Ordinary – Those where both parties are
place on equal footing in the negotiation
and perfection of the contract.
b. Contracts of adhesion – Those where one of
the parties had drafted the contract for the
other party to accept or not to accept such
as an insurance contract which is already
printed.
12. According to the evidence needed to prove their
existence:
a. Contracts covered by Statute of Frauds –
Those contracts which require a written
evidence, note or memorandum to prove
their existence. (Art. 1403(2), NCC)
b. Contracts which can be proven by oral or
parol evidence such a lease contract for a
period of less than one year; a contract of
sale where there was already full or partial
payment.
13. According to the personality of the parties:
a. Personal – Those contracts where the
person of the party is essential to the
existence of the contract such as a contract
for life insurance where the contract shall
cease to exist upon the death of the insured.
b. Impersonal – Those contracts where the
person/s of a part or parties are not
essential to the continuity of the contract
such as contract of lease. The death of the
lessor or the lessee will not necessarily
terminate the contract. The heirs may
continue the contract.
14. According to the manner the consent is given:
a. Express – Those contracts where the
consent of the parties is given expressly in
writing or verbally.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
b. Implied – Those contracts where the
consent of the parties is not given expressly
but is deducible from the conduct or acts of
the parties such as an implied agency when
the principal fails to repudiate the acts of
the person acting in his behalf, knowing
such a situation. (Art. 1869, NCC)
c. Presumed – Those contracts where the
consent was not given by the parties but is
presumed or provided by the law itself, to
prevent unjust enrichment on the part of
one party to the prejudice of the other, such
as quasi-contracts. (Pineda, 2009)
CHARACTERISTICS OF A CONTRACT
The following are the characteristics of a
contract (A-M-O-R-C):
1. Autonomy; (Art. 1306, NCC)
2. Mutuality; (Art. 1308, NCC)
3. Obligatoriness; (Art. 1315, NCC)
4. Relativity; (Art. 1311, NCC)
5. Consensuality. (Art. 1315, NCC)
Autonomy (or Freedom to Contract) (1996,
2004 BAR)
The contracting parties may establish such
stipulations, clauses, terms, and conditions as they
may deem convenient, provided they are not
contrary to law, morals, good customs, public order,
or public policy. (Art. 1306, NCC)
If the stipulation which violates the limitations set
forth in the foregoing provision constitute the cause,
object, or purpose of the contract, such contract is
denied legal existence, and thus, shall be deemed
void from the beginning. (Casis, 2016)
Contracting parties may establish any agreement,
term, and condition they may deem advisable,
provided they are not contrary to law, morals, or
public policy. The right to enter lawful contracts
constitutes one of the liberties guaranteed by the
Constitution. It cannot be struck down or arbitrarily
interfered with without violating the freedom to
enter into lawful contracts. (Gateway Electronics
310
 Obligations and Contracts
Corporation v. Land Bank, G.R. No. 155217 and
156393, 30 July 2003)
It is necessary for the existence of a contract that
two distinct parties enter it (auto-contracts). The
existence of a contract is not determined by the
number of persons who intervene in it, but by the
number of parties; not by the number of individual
wills but by the number of declarations of will. As
long as there are two distinct patrimonies, even if
they are represented by the same person, the
contract will be valid, e.g., an agent representing
both the buyer and the seller.
NOTE: Courts cannot make for the parties better or
more equitable agreements than they themselves
have been satisfied to make, or rewrite contracts
because they operate harshly or inequitably as to
one of the parties, or alter them for the benefit of
one party and to the detriment of the other, or by
construction, relieve one of the parties from terms
which he voluntarily consented to, or impose on him
those which he did not. (Ka Kuen Chua v. Colorite
Mktg. Corp., G.R. No. 193969-193970, 05 July 2017)
Mutuality
The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of
one of them. (Art. 1308, NCC) (2001, 2004, 2008
BAR)
Applicability to Contract Modifications:
Contract changes must be made with the consent of
the contracting parties. The minds of all the parties
must meet as to the proposed modification,
especially when it affects and important aspect of
the agreement. Thus, any change must be mutually
agreed upon; otherwise, it produces no binding
effect. (Lara’s Gifts & Decors, Inc. v. Midtown
Industrial Sales, Inc., G.R. No. 225433, 28 Aug. 2019)
GR: Any contract which appears to be heavily
weighed in favor of one of the parties so as to lead
to an unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties is
311
likewise invalid. (Sps. Limso v. PNB, G.R. No. 158622,
27 Jan. 2016)
XPN: The legality of contracts which is left to the
will of either of the parties may be upheld if there
was a finding of the presence of essential equality of
the parties to the contracts, thus preventing the
perpetration of injustice on the weaker party. (GF
Equity v Valenzona, G.R. No. 156841, 30 June 2005)
The determination of the performance may be left
to a third party as long as:
1. The decision has been made known to booth
contracting parties. (Art. 1309, NCC); and
2. The determination is not evidently inequitable
(Art. 1310, NCC). If it is inequitable, the court
shall decide what is equitable under the
circumstances.
If a party alleges defects in the contract so that it
could be set aside, he must prove conclusively the
existence of the defects because the validity and
fulfillment of the contract cannot be left to the will
of one of the contracting parties. (Pineda, 2009)
The binding effect of any agreement between
parties to a contract is premised on two settled
principles: (1) that any obligation arising from
contract has the force of law between the parties;
and (2) that there must be mutuality between the
parties based on their essential equality. Any
contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an
unconscionable result is void. Any stipulation
regarding the validity or compliance of the contract
which is left solely to the will of one of the parties, is
likewise, invalid. (Sps. Limso v. PNB, G.R. No. 158622,
27 Jan. 2016)
NOTE: A contract containing a condition whose
efficacy or fulfillment is dependent solely on the
uncontrolled will of one of the parties is void.
(Floirendo, Jr. v. Metropolitan Bank and Trust Co., G.R.
No. 03 Sept. 2007)
However, the termination of the contract does not
necessarily require mutuality, and it can even be
validly left to one party by agreement or under a
resolutory facultative condition. (Vitug, 2006)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Obligatory Force
Obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith. (Art. 1159, NCC)
The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of
one of them. (Art. 1308, NCC)
Contracts are perfected by mere consent and from
that moment, the parties are bound not only to the
fulfillment of what has been expressly stipulated
but also to all consequences which according to
their nature may be keeping in good faith, usage,
and law. (Art. 1315, NCC)
Contracts shall be obligatory, in whatever form they
may have been entered into, provided all the
essential requisites for validity are present. (Art.
1356, NCC)
Requisites for the Application of the Principle
Before a contract may be considered obligatory, it is
necessary that:
1. It is perfected;
2. It is valid; and
3. It is enforceable. (Rabuya, 2017)
Persons affected by a Contract
GR:
1. Parties to the contract; and
2. Their corresponding successors.
XPNs:
1. Contracts containing a stipulation in favor of
a third person (pour autrui); (Art. 1311, NCC)
2. Contracts containing real rights; (Art. 1312,
NCC)
3. Contracts entered into to defraud creditors;
(Art. 1313, NCC)
4. Contracts which have been violated at the
inducement of 3rd persons; (Art. 1314, NCC)
5. Quasi-contract of negotiorum gestio. (Art.
2150, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Liability of heirs for the obligation contracted by
the decedent
The heirs are liable for the obligation contracted by
the decedent when the rights and obligations
arising from the contract are transmissible:
1. By their nature;
2. By stipulation; or
3. By provision of law. (Art. 1311, NCC)
Requisites in order that a Third Person may
Demand the Fulfillment of the Contract
1. The contracting parties must have clearly and
deliberately conferred a favor upon the third
person;
2. The third person’s interest or benefit in such
fulfillment must not be merely incidental; and
3. Such third person communicated his
acceptance to the obligor before the
stipulations in his favor are revoked.
Principle of Relativity or Principle of Limited
Effectivity of Contracts (2011 BAR)
GR: Contracts take effect only between the parties
or their assigns and heirs.
Res inter alios acta aliis neque nocit prodest (a thing
done between others does not harm or benefit
others) – a contract can only obligate the parties
who entered into it, or their successors who
assumed their personalities, and that,
concomitantly, a contract can neither favor nor
prejudice third persons. (Vitug, 2006)
NOTE: With respect to the heir, he shall not be liable
beyond the value of the property he received from
the decedent. (Art. 1311, NCC)
Contracts take effect only between parties, their
assigns and heirs, EXCEPT in case where the rights
and obligations arising from the contract are not
transmissible by their:
(1) nature;
(2) by stipulation; or
312
 Obligations and Contracts
(3) by provision of law. The heir is not liable
beyond the value of the property he received
from the decedent. (Art. 1311, Par. 1, NCC)
No one may contract in the name of another without
being authorized by the latter, or unless he has by
law a right to represent him. (Art. 1317, NCC)
A contract entered in the name of another by one
who has no authority or legal representation or who
has acted beyond his powers, shall be
unenforceable, unless it is ratified expressly or
impliedly by the person on whose behalf it has been
executed, before it is revoked by the other
contracting party. (Art. 1317, NCC)
Exceptions to Relativity
Contracts may bind and affect strangers in the
following cases:
1. Stipulations Pour Autrui (Art. 1311, par. 2,
NCC) (stipulation in favor of a third
person) – benefits clearly and deliberately
conferred by parties to a contract upon
third persons and which stipulation is
merely part of a contract entered into by
the parties, neither of whom acted as
agents of the third person and which favor
can be demanded by the third person if
duly accepted by him before it could be
revoked.
Requisites of stipulation pour atrui:
a. Stipulation in favor of a third person;
b. Stipulation is just part and not the
whole obligations of the contract;
c. Contracting parties must have clearly
and deliberately conferred a favor
upon a third person;
d. Favor or benefit conferred is not just
an incidental benefit or interest;
e. Third person must have
communicated his acceptance; and
f. Neither of the contracting parties
bears the legal representation or
authorization of the third person.
(OSPA v. CA, G.R. No. 156660, 24 Aug.
2009)
313
NOTE: The fairest test to determine
whether the interest of third person in a
contract is a stipulation pour autrui or
merely an incidental interest, is to rely
upon the intention of the parties as
disclosed by their contract. In applying this
test, it matters not whether the stipulation
is in the nature of a gift or whether there is
an obligation owing from the promise to
the third person. (Rabuya, 2017)
2. Accion directa – the creditor is authorized by
the statute to sue on his debtor’s contract
Examples:
a) Lessor against Sublessee (Arts. 1651, 1652,
NCC)
b) Laborers of Contractor against Owner of
the work (Art. 1729, NCC)
3. Third Person in Possession of Object of Contract
(Art. 1312, NCC)
In contracts creating real rights, third persons
who come into possession of the object of the
contract are bound thereby, subject to the
provisions of the Mortgage Law and the Land
Registration Laws.
4. Fraud of Creditors by Contracting Parties
(Accion Pauliana) (Art. 1313, NCC)
Creditors are protected in cases of contracts
intended to defraud them. Creditors of the
contracting parties may rescind contracts
intended to defraud them although they did not
intervene therein. (Reyes and Puno, 1964)
5. Tortious Interference (Art. 1314, NCC) (1991,
1998 BAR)
Any third person who induces another to
violate his contract shall be liable for damages
to the other contracting party (even though the
third person is not bound by the stipulations).
NOTE: This tort or wrongful conduct is known
as “interference with contractual relations.”
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
The word "induce" refers to situations where a
person causes another to choose one course of
conduct by persuasion or intimidation.
Requisites:
1. Existence of a valid contract
2. The third person’s knowledge of the third
person of the existence of the contract
NOTE: Knowledge alone is not sufficient to
make a third person liable for tortuous
interference. To sustain a case for tortuous
interference, the defendant must have acted
with malice or must have been driven by purely
impious reasons to injure the plaintiff.
NOTE: A third person can be held liable for tort
interference even if he does not know the
identity of one of the contracting parties. The
interference with lawful contracts by strangers
thereto gives rise to an action for damage in
favor of the injured person. The law does not
require that the responsible person shall have
known the identity of the injured person.
(Rabuya, 2017)
3. Interference by third person without legal
justification or excuse. (Inocencio v. Hospicio De
San Jose, G.R. No. 201787, 25 Sept. 2013)
Q: PCGG filed a complaint for reconveyance,
reversion, accounting, restitution, and damages
before the Sandigan Bayan against Ferdinand
and Imelda Marcos, and several of their cronies
including Benedicto and Africa. PCGG, through
its Chairman, David M. Castro, entered into a
Compromise Agreement with Benedicto where
the latter undertook to cede to the government
properties listed in the agreement and transfer
to the government whatever rights he may have
in the assets of the corporations listed in the
same agreement. The SB dismissed the case
against Africa and ruled that since that act being
complained of constituted a quasi-delict or tort
and the obligation of the defendants were
solidary therefore the obligation of Africa has
been extinguished by the Compromise
Agreement. Did the Compromise Agreement
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
between PCGG and Benedicto extinguish the
liability of Africa?
A: NO. A stipulation pour autrui to be appreciated, it
is indispensable that there be a stipulation
deliberately conferring a benefit or favor to a third
person. The requisites of a stipulation pour autrui
are the following:
1. There is a stipulation in favor of a third person;
2. The stipulation is a part, not the whole, of the
contract;
3. The contracting parties clearly and deliberately
conferred a favor to the third person — the
favor is not an incidental benefit;
4. The favor is unconditional and uncompensated;
5. The third person communicated his or her
acceptance of the favor before its revocation;
and
6. The contracting parties do not represent, or are
not authorized by, the third party.
The Compromise Agreement executed between
Benedicto and PCGG does not contain any express
stipulation that confers the benefit of absolute
immunity to Africa. Absent any express stipulation
in favor of a third person, the rule on relativity of
contract must be applied i.e., that the contract only
takes effect between the parties, their assigns or
heirs. (Republic v. Legal Heirs of Jose L. Africa, G.R.
No. 205722, 19 Aug. 2015)
Consensual
GR: Contracts are perfected by mere consent and
from that moment, the parties are bound not only to
the fulfillment of what has been expressly stipulated
but also to all consequences which according to
their nature may be keeping in good faith, usage,
and law. (Art. 1315, NCC)
XPN: Real contracts, such as deposit, pledge and
commodatum, are not perfected until the delivery of
the object of the obligation (Art. 1316, NCC). And
solemn contracts, which are perfected by
compliance with the formalities required by law.
314
 Obligations and Contracts
2. ESSENTIAL REQUISITES (2005 BAR)
The following are the essential requisites of
contracts: (C-O-C)
1. Consent;
2. Object certain or subject matter; and
3. Cause or consideration. (Art 1318, NCC)
NOTE : These three requisites are, therefore, the
essential elements of a consensual contract. In real
contracts, however, in addition to the above, the
delivery of the object of the contract is required as a
further requisite. Solemn or formal contracts
require compliance with the formalities provided
by law.
Elements of a Contract
1. Natural Elements – Those which are
derived from the very nature of the
contract, and as a consequence, ordinarily
accompany the same.
2. Essential Elements – Those without which
there can be no contract.
3. Accidental Elements – those which exist
only when the contracting parties
expressly provide for them. (De Leon, 2010)
Q: MRT thru Parsons Inc., had invited Gammon
Philippines to bid on the construction of the
Podium structure of the MRT 3 and it later won
the bidding. Then the 2 parties signed the
contract where it stated that there would be
three notices that would be sent to Gammon for
the project to proceed. But later on Parsons
informed Gammon that MRT was temporarily
rescinding the Third Notice to Proceed, noting
that it remained unaccepted by Gammon. On
June 19, 1998, Gammon qualifiedly accepted the
Fourth Notice to Proceed. MRT treated
Gammon's qualified acceptance as a new offer.
In a Letter dated June 22, 1998, MRT rejected
Gammon's qualified acceptance and informed
Gammon that the contract would be awarded
instead to Filsystems if Gammon would not
accept the Fourth Notice to Proceed within five
(5) days. In a Letter dated July 8, 1998, Gammon
wrote MRT, acknowledging the latter's intent to
315
grant the Fourth Notice to Proceed to another
party despite having granted the First Notice to
Proceed to Gammon. Thus, it notified MRT of its
claims for reimbursement for costs, losses,
charges, damages, and expenses it had incurred
due to the rapid mobilization program in
response to MRT's additional work instructions,
suspension order, ongoing discussions, and the
consequences of its award to another party. In a
letter dated July 15, 1998, MRT expressed its
disagreement with Gammon and its amenability
to discussing claims for reimbursement.
Whether or not there is a perfected contract
between MRT and Gammon Philippines?
A: YES, there is a perfected contract between MRT
and Gammon. MRT has already awarded the
contract to Gammon, and Gammon's acceptance of
the award was communicated to MRT before MRT
rescinded the contract. The first Letter shows that
Gammon fully consented to the contents and
accepted the prestations of the First Notice to
Proceed. Gammon's acceptance is also manifested in
its undertakings to mobilize resources, to prepare
the Performance and Advance Payment Bonds, and
to procure materials necessary for the Project. All
that remained was the formality of returning the
contract documents and the Letter of Comfort,
which eventually was complied with by Gammon.
Thus, there is already mutual consent on the object
of the contract and its consideration, and an
absolute acceptance of the offer. (Metro Rail Transit
Development Corporation v. Gammon Philippines
Inc., G.R. No. 200401, 17 Jan. 2018)
CONSENT (2005 BAR)
Consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must
be certain and the acceptance absolute. A qualified
acceptance constitutes a counter-offer. (Art. 1319,
NCC)
It is the concurrence of the wills of the contracting
parties with respect to the object and cause, which
shall constitute the contract. (De Leon, 2010)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
NOTE: Consent is essential to the existence of a
contract; and where it is wanting, the contract is
non-existent.
Requisites of Consent (L-M-C-R)
1. Legal capacity of the contracting parties;
NOTE: The parties must have full civil capacity.
Hence, if any one party to a supposed contract
was already dead at the time of its execution,
such contract is undoubtedly simulated and
false and, therefore, null and void by reason of
its having been made after the death of the
party who appears as one of the contracting
parties therein. The death of a person
terminates contractual capacity. Vda. De Cabalu.
v. Sps. Tabu, G.R. No. 188417, 24 Sept. 2012)
2. Manifestation of the conformity of the
contracting parties;
NOTE: Manifestation may be in writing bearing
the signature or marks of the parties, or it may
be implied from the conduct of the parties like
the acceptance of payment.
3. Parties’ Conformity to the object, cause, terms
and condition of the contract must be
intelligent, spontaneous and free from all vices
of consent; and
NOTE: Intelligence in consent is vitiated by
error; freedom by violence, intimidation or
undue influence; and spontaneity by fraud.
4. The conformity must be Real, not simulated or
fictitious.
Offer
An offer is defined as an expression of willingness to
contract on certain terms, made with the intention
that it shall become binding as soon as it is accepted
by the person to whom it is addressed. (Rabuya,
2017)
NOTE: The offerer will not be bound by an
acceptance made by the acceptor in any other
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
manner than that specified by the offerer, unless the
offerer acquiesces in the change. (Sta. Maria, 2017)
Elements of a Valid Offer and Acceptance
1. Definite – unequivocal;
2. Intentional ; and
3. Complete – unconditional.
NOTE: It must be so complete that its absolute
acceptance will form an agreement containing all
the terms necessary and intended by the parties.
(Sta. Maria, 2017)
Requisites of an Effective Offer
1. The one offering must have a serious intention
to become bound by his offer;
2. The terms of the offer must be reasonably
certain, definite and complete, so that the
parties and the court can ascertain the terms of
the offer; and
3. The offer must be communicated by the offeror
to the offeree, resulting in the offeree’s
knowledge of the offer. (Rabuya, 2017)
Q: The husband assumed sole administration of
the family’s mango plantation since his wife
worked abroad. Subsequently, without his
wife’s knowledge, the husband entered into an
antichretic transaction with a company, giving it
possession and management of the plantation
with power to harvest and sell the fruits and to
apply the proceeds to the payment of a loan he
got. What is the standing of the contract? (2011
BAR)
A: It is considered a continuing offer by the parties;
perfected only upon the wife’s acceptance or the
court’s authorization.
NOTE: The person making the offer may fix the
time, place and manner of acceptance, all of which
must be complied with. (Art. 1321, NCC)
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 Obligations and Contracts
Rules on Advertisements as Offers
1. Business advertisements – not a definite offer,
but mere invitation to make an offer, unless it
appears otherwise. (Art. 1325, NCC)
NOTE: If the advertisement contains all the
necessary date need in a contract, it is a definite
offer for the sale of the thing advertised.
Otherwise, it is not a definite offer, it is a mere
invitation to make offer.
2. Advertisement for bidders – simply invitation to
make proposals and advertiser is not bound to
accept the highest or lowest bidder, unless the
contrary appears. (Art. 1326, NCC)
Grounds rendering the Offer Ineffective
1. Death, civil interdiction, insanity or insolvency
of either party before acceptance is conveyed;
(Art. 1323, NCC)
2. Express or implied revocation of the offer by the
offeree;
3. Qualified or conditional acceptance of the offer,
which becomes counter-offer;
4. Subject matter becomes illegal or impossible
before acceptance is communicated; and
5. Period given to the offeree to signify his
acceptance has already lapsed.
Requisites of a Valid Acceptance
1. Must be absolute; a qualified acceptance
constitutes a counter-offer; (Art. 1319, NCC)
2. No specified form but when the offeror specifies
a particular form, such must be complied with.
NOTE: Offer or acceptance, or both, expressed in
electronic form, is valid, unless otherwise agreed by
the parties (electronic contracts).
Acceptance not made in a manner as directed by the
offeror constitutes a counter-proposal which
extinguishes the offer and this may not be accepted
by the original offeror. (Pineda, 2009)
317
A conditional acceptance is a counter-offer which
extinguishes the offer. If not accepted by the offeror,
there is no contract.
An acceptance may be express or implied. (Art.
1320, NCC)
Mirror Image Rule in Law on Contracts
This is a common law concept which states that in
order for there to be an acceptance, the offeree must
accept the terms as stated in the offer. Our courts
also adhere to the “mirror-image rule.” Thus, it has
been ruled that acceptance must be identical in all
respects with that of the offer so as to produce
consent of meeting of the minds. (Rabuya, 2017)
Period for Acceptance
1. Stated fixed period in the offer:
a. Must be made within the period given by
the offeror.
b. As to withdrawal of the offer:
GR: It can be made by communicating such
withdrawal at any time before the
acceptance is made
XPN: When the option is founded upon a
consideration (something paid or
promised, since partial payment of the
purchase price is considered as proof of the
perfection of the contract (Art 1324, NCC)
2. No stated period:
a. Offer is made to a person present –
acceptance must be made immediately.
b. Offer is made to a person absent –
acceptance may be made within such time
that, under normal circumstances, an
answer can be expected from him.
NOTE: If there was an acceptance already, the
offeror cannot just withdraw his offer unilaterally.
He will be liable for damages. (Pineda, 2009)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

Option Contract this requirement is not complied with, the result is

a defective contract. If only one of the contracting
It is a contract between the offeror and the offeree parties is incapacitated to give his consent, the
whereby the former grants the latter, for a valuable contract is voidable. If both of them are
consideration, the privilege to buy or not to buy incapacitated to give their consent, the contract is
certain objects at anytime within a specified period unenforceable. (Art. 1390(1) & 1403(3), NCC)
and for a fixed price.
Vices of Consent (M-I-V-U-F)
NOTE: The privilege granted to the offeree must be
supported by a consideration, the option is just 1. Mistake
considered an “offer to sell” to the offeree which is 2. Intimidation
not binding until accepted. (Pineda, 2009) 3. Violence
4. Undue influence
Earnest Money 5. Fraud

It is the payment made to a seller by the buyer to
show his good faith. It will constitute as part of the
purchase price, if the sale is finally consummated. If
the sale is not concluded, the earnest money shall be
returned to the would-be-buyer unless there is a
contrary stipulation.
Persons Incapacitated to Give Consent (D-I-M)
1. Deaf-mutes who do not know how to read and
write (illiterates);
2. Insane or demented persons, unless the
contract was entered into during a lucid
interval;
3. Minors (Art. 1327, NCC) except:
a. Contracts for necessaries ; (Art. 1489,
NCC);
b. Contracts by guardians or legal
representatives and the court having
jurisdiction had approved the same;
c. When there is active misrepresentation on
the part of the minor (minor is estopped);
d. Contracts of deposit with the Postal
Savings Bank provided that the minor is
over 7 years of age;
e. Contract of an insurance for life, health and
the accident on the minor’s life;
f. Upon reaching age of majority, they ratify
the same.
NOTE: A threat to enforce a just or legal claim
through a competent authority does not amount to
intimidation nor vitiate consent. (Art. 1335, NCC)
Mistake
GR: Mistake as a vice of consent refers to mistake of
facts and not of law, thus rendering the contract
voidable. (Jurado, 2010)
XPN: When mistake of law involves mutual error as
to the legal effect of an agreement when the real
purpose of the parties is frustrated. (Art. 1334, NCC)
Mistake distinguished from Ignorance
Mistake is a false impression on something, while
Ignorance is absence of any notion or impression
about a particular thing.
Requisites
1. Mistake must be with respect to the legal effect
of the agreement;
2. It must be mutual; and
3. Real purpose of the parties must have been
frustrated.
Kinds of Mistakes of Fact which Vitiate Consent

NOTE: Because the law incapacitates them to give 1. Mistake as to the nature of the contract;
their consent to a contract, the only way by which 2. Mistake as to object of the contract;
any one of those enumerated above can enter into a 3. Mistake as to the quality or principal conditions
contract is to act through a parent or guardian. If of the thing;

UNIVERSITY OF SANTO TOMAS 318

2022 GOLDEN NOTES
 Obligations and Contracts
4. Mistake or error in quantity;
5. Mistake as to identity of the person; and
6. Mistake as to the identity or qualifications of
one of the parties will vitiate consent only when
such identity or qualifications have been the
principal cause of the contract.
For mistake (as to the qualification of one of the
parties) to vitiate consent, two requisites must
concur:
a. The mistake must be either regarding the
identity or with regard to the qualification of
one of the contracting parties; and
b. The identity or qualification must have been
the principal consideration for the celebration
of the contract. (The Roman Catholic Church v.
Pante, G.R. No. 174118, 11 Apr. 2012)
Q: Leonardo is the only legitimate child of the
late spouses Tomasina and Balbino. She only
finished Grade Three and did not understand
English. The Sebastians, on the other hand, are
illegitimate children. Leonardo filed an action to
declare the nullity of the extrajudicial
settlement of the estate of her parents, which
she was made to sign without the contents
thereof, which were in English, explained to her.
She claims that her consent was vitiated because
she was deceived into signing the extrajudicial
settlement. Is the extra-judicial settlement of
estate of Tomasina valid?
A: NO. 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 (Art.
1332). Leonardo was not in a position to give her
free, voluntary and spontaneous consent without
having the document, which was in English,
explained to her. Therefore, the consent of
Leonardo was invalidated by a substantial mistake
or error, rendering the agreement voidable. The
extrajudicial partition between the Sebastians and
Leonardo should be annulled and set aside on the
ground of mistake. (Leonardo v. CA, G.R. No. 125485,
13 Sept. 2004)
319
NOTE: Burden rests upon the party who seeks to
enforce the contract to show that the other party
fully understood the contents of the document. If he
fails to discharge this burden, the presumption of
mistake, if not, fraud, stands unrebutted and
controlling. (Mayor v. Belen, G.R. No. 151035, 03 June
2004)
Mutual Error
Mutual error as to the legal effect of an agreement
when the real purpose of the parties is frustrated,
may vitiate consent. (Art. 1334, NCC)
Intimidation
There is intimidation when one of the contracting
parties is compelled by a reasonable 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. (Art. 1335(2), NCC)
Requisites of Intimidation (C-I-C-U)
1. One of the parties is compelled to give his
Consent by a reasonable and well-grounded
fear of an evil;
2. The evil must be Imminent and grave;
3. It must be Unjust; and
4. The evil must be the determining Cause for the
party upon whom it is employed in entering
into the contract. (Art. 1335, NCC)
NOTE: To determine the degree of the intimidation,
the age, sex and condition of the person shall be
borne in mind. (Art. 1335, NCC)
A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not vitiate
consent. (Sta. Maria, 2017)
Validity of a Contract if Consent is Reluctant
A contract is valid even though one of the parties
entered into it against his wishes and desires or
even against his better judgment. Contracts are also
valid even though they are entered into by one of the
parties without hope of advantage or profit.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW

(Martinez v. HSBC Corp., G.R. No. L-5496, 19 Feb.
1910)
Violence
There is violence when in order to wrest consent,
serious or irresistible force is employed. (Art. 1335,
NCC)
Requisites of Violence
1. Physical force employed must be serious or
irresistible; and
2. The determining cause for the party upon
whom it is employed in entering into the
contract.
A threat to enforce one’s claim through competent
authority, if the claim is just or legal, does not vitiate
consent. (NCC, Art. 1335(4))
NOTE: Violence or intimidation shall annul the
obligation, although it may have been employed by
a third person who did not take part in the contract.
(Art. 1336, NCC)
The contracting party who is not the subject of the
violence or the intimidation may not even know that
the other party has been coerced. (Sta. Maria, 2017)
Undue Influence
There is undue influence when a person takes
improper advantage of his power over the will of
another, depriving the latter of a reasonable
freedom of choice. (Art. 1337, NCC)
It must in some measure destroy the free agency of
a party and interfere with the exercise of that
independent discretion. (Tolentino, 2002)
Circumstances to be Considered for
Existence of Undue Influence
1. Confidential, family, spiritual and
relations between the parties;
2. Mental weakness;
3. Ignorance; and
4. Financial distress. (Art. 1337, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Civil Law
NOTE: The enumeration is NOT exclusive. Moral
dependence, indigence, mental weakness, tender
age or other handicap are some of the
circumstances to consider undue influence.
Determination of Undue Influence
The test to determine whether there is undue
influence which will invalidate a contract is to
determine whether or not the influence exerted has
so overpowered and subjugated the mind of the
contracting party as to destroy his free agency,
making him express the will of another rather than
his own. (Jurado, 2011)
Due Influence does NOT Vitiate Consent
When influence consists in persuasive arguments or
in appeals to the affections which are not prohibited
by law or morals, the consent is not vitiated at all.
(Pineda, 2009)
Influence obtained by persuasion or argument or by
appeals to the affections is not prohibited either by
law or morals and is not obnoxious even in courts of
equity. Such may be termed “due influence.” (Bañez
v. CA, G.R. No. L-30351, 11 Sept. 1974)
Reverential Fear
The fear of displeasing persons to whom respect
and obedience are due does not vitiate consent.
Fraud
There is fraud when through the insidious words or
machinations of one of the contracting parties, the
other is induced to enter a contract which, without
them, he would not have agreed to. (Art. 1338, NCC)
NOTE: The term “insidious words” refers to a
deceitful scheme or plot with an evil design, or a
the fraudulent purpose. (Pineda, 2000)
Failure to disclose facts, when there is a duty to
other reveal them, as when the parties are bound by
confidential relations, constitutes fraud. (Art. 1339,
NCC)
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 Obligations and Contracts
NOTE: There is fraud under the special and
particular circumstances of the following:
1. When a legal or equitable duty is imposed upon
the dominant party to reveal certain facts
material to the transaction; and
2. When there is a confidential relationship
between the parties. (Sta. Maria, 2017)
Requisites of Fraud to Vitiate Consent (in the
sense of Dolo Causante)
1. It was applied or utilized by one contracting
party upon the other;
2. It must be serious deception;
3. It must have induced the victim to enter the
contract without which he would not have
agreed to;
4. It must have induced the victim to enter the
contract, which he would not have agreed to,
absent the employment of such fraud; and
5. It must have resulted in damage or injury.
Kinds of Fraud
1. Fraud in the perfection of the contract:
a. Causal fraud (dolo causante) – It is
employed by one party prior to or
simultaneous with the creation or
perfection of the contract to secure the
consent of the other.
b. Incidental fraud (dolo incidente) – It is
the fraud committed in the in the
performance of an obligation, and its
existence merely results in breach of an
already existing contract, which entitles
the injured party to damages.
2. Fraud in the performance of an obligation. (Art.
1170, NCC)
Q: Santos’ lease contract was about to expire but
it was extended, thus, he continued to occupy
the leased premises beyond the extended term.
Samson offered to buy Santos’ store and his right
to the lease. Santos stated that the lease contract
between him and the lessor was impliedly
321
renewed, and that the formal renewal thereof
would be made upon the arrival of a certain
Tanya Madrigal, based on the letter to him given
by the lessor. When Samson occupied the
premises, he was forced to vacate due to Santos’
failure to renew his lease. Samson filed an action
for damages against Santos for fraud and bad
faith, claiming that the misrepresentation
induced him to purchase the store and the
leasehold right. Decide.
A: Santos was not neither guilty of fraud nor bad
faith in claiming that there was implied renewal of
his contract of lease with his lessor. The letter given
by the lessor led Santos to believe and conclude that
his lease contract was impliedly renewed, and that
the formal renewal thereof would be made upon the
arrival of Tanya Madrigal. Thus, from the start, it
was known to both parties that, insofar as the
agreement regarding the transfer of Santos’
leasehold right to Samson was concerned, the object
thereof relates to a future right. It is a conditional
contract, the efficacy of which depends upon an
expectancy of the formal renewal of the lease
contract between Santos and lessor. The efficacy of
the contract between the parties was thus made
dependent upon the happening of this suspensive
condition. (Samson v. CA, G.R. No. 108245, 25 Nov.
1994)
Acts considered NOT Fraudulent
1. Principle of Tolerated Fraud – the usual
exaggerations in trade and when the other
party had an opportunity to know the facts are
not in themselves fraudulent (Art. 1340, NCC);
2. Expert Opinion – a mere expression of an
opinion does not signify fraud, unless made by
an expert and the other party has relied on the
former’s special knowledge (Art. 1341, NCC);
3. Misrepresentation by a third person does not
vitiate consent, unless such misrepresentation
has created substantial mistake and the same is
mutual (Art. 1342, NCC);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
4. Misrepresentation made in good faith is not
fraudulent but may constitute error. (Art. 1343,
NCC)
NOTE: The contract just the same is voidable, not
because of the misrepresentation but because of
substantial error. In order that fraud may make a
contract voidable, it should be serious, and should
not have been employed by both contracting
parties. (Art 1344, NCC)
Q: Alejandro filed several Complaints against
respondents to have the promissory note he
executed in favor of Sterling Shipping Lines, Inc.
to be declared as null and void and that he be
absolved from any liability. According to him,
Ruperto exercised deceit and fraud in causing
him to bind himself jointly and severally to pay
DBP the amount of the mortgage loan.
Additionally, when he was made director and
stockholder of SSL, he was invited to attend the
board meeting only once and he was never
compensated. Furthermore, none of the
conditions he set were complied with. Can the
promissory note be declared null and void on
the grounds of deceit and fraud?
A: NO. The promissory note Alejandro executed
cannot be declared null and void as only incidental
fraud exists in this case. There was no dolo causante
or fraud used to obtain the petitioner's consent to
enter the contract. Petitioner had the opportunity to
become aware of the facts that attended the signing
of the promissory note. He even admitted that he
has a lawyer-son who the petitioner had hoped
would assist him in the administration of Sterling
Shipping Lines, Inc. The totality of the facts on
record belies petitioner's claim that fraud was used
to obtain his consent to the contract given his
personal circumstances and the applicable law.
However, in refusing to allow petitioner to
participate in the management of the business,
respondent Ruperto V. Tankeh was liable for the
commission of incidental fraud. In Geraldez, this
Court defined incidental fraud as "those which are
not serious in character and without which the
other party would still have entered into the
contract."
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Although there was no fraud that had been
undertaken to obtain petitioner's consent, there
was fraud in the performance of the contract. The
records showed that petitioner had been unjustly
excluded from participating in the management of
the affairs of the corporation. This exclusion from
the management in the affairs of Sterling Shipping
Lines, Inc. constituted fraud incidental to the
performance of the obligation. (Alejandro Tankeh v.
DBP, et al., G.R. No. 171428, 11 Nov. 2013)
Simulation of Contract
It is the declaration of a fictitious will, deliberately
made by agreement of the parties to produce, for the
purpose of deception, the appearance of a juridical
act which does not exist or is different from that
which was executed. (Tolentino, 2002)
Kinds of Simulation of Contract
1. Absolute (simulados) – The contracting parties
do not intend to be bound by the contract at all,
thus the contract is void (Arts. 1345-1346, NCC).
In absolute simulation, there is a colorable
contract but it has no substance as the parties
have no intention to be bound by it. The main
characteristic of an absolute simulation is that
the apparent contract is not desired or intended
to produce legal effect or in any way alter the
juridical situation of the parties. As a result, a
simulated or fictitious contract is void, and the
parties may recover from each other what they
may have given under the contract. (G. Holdings,
Inc. v. CEPALCO, G.R. No. 226213, 27 Sept. 2017)
NOTE: Absolutely simulated contracts lack the
element of true consent.
2. Relative (disimulados) – The contracting
parties conceal their true agreement (NCC, Art.
1345); (Art. 1345, NCC); and the parties are
bound by their real agreement when it does not
prejudice third persons or is not intended for
any purpose contrary to law, morals, good
customs, public order or public policy. (Art.
1346, NCC)
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 Obligations and Contracts
If the concealed contract is lawful, it is absolutely
enforceable, provided it has all the essential
requisites: consent, object, and cause. (Arts. 1345-
1346, NCC)
As to third persons without notice, the apparent
contract is valid for purposes beneficial to them. As
to third persons with notice of the simulation, they
acquire no better right to the simulated contract
than the original parties to the same.
The primary consideration in determining the true
nature of a contract is the intention of the parties.
Such intention is determined from the express
terms of their agreement as well as from their
contemporaneous and subsequent acts. (Liam v.
UCPB, G.R. No. 194664, 15 June 2016)
NOTE: If the parties state a false cause in the
contract to conceal their real agreement, the
contract is only relatively simulated, and the parties
are still bound by their real agreement. Hence,
where the essential requisites of a contract are
present and the simulation refers only to the
content or terms of the contract, the agreement is
absolutely binding and enforceable between the
parties and their successors in interest.
Q: May the owner-simulator recover?
A: If the absolutely simulated contract does not have
any illegal purpose, the interested party may prove
the simulation in order to recover whatever he
might have given under the fictitious contract. In the
event it is intended for an illegal purpose, the
contract is void and the parties have no cause of
action. (Pineda, 2009)
Q: Private respondent Tiro is a holder of an
ordinary timber license issued by the Bureau of
Forestry. He executed a deed of assignment in
favor of the petitioners Javiers. At the time the
said deed of assignment was executed, Tiro had
a pending application for an additional forest
concession. Hence, they entered into another
agreement. Afterwards, the Javiers, now acting
as timber license holders by virtue of the deed of
assignment, entered into a forest consolidation
agreement with other ordinary timber license
323
holders. For failure of the Javiers to pay the
balance due under the two deeds of assignment,
Tiro filed an action against them. Are the deeds
of assignment null and void for total absence of
consideration and non-fulfillment of the
conditions?
A: NO. They are not null and void per se. The parties
are to be bound by their real agreement. The true
cause or consideration of said deed was the transfer
of the forest concession of private respondent to
petitioners for P120,000.00. This finding is
supported by the following considerations, viz:
1. Both parties, at the time of the execution of the
deed of assignment knew that the
Timberwealth Corporation stated therein was
non-existent;
2. In their subsequent agreement, private
respondent conveyed to petitioners his
inchoate right over a forest concession covering
an additional area for his existing forest
concession, which area he had applied for, and
his application was then pending in the Bureau
of Forestry for approval;
3. Petitioners, after the execution of the deed of
assignment, assumed the operation of the
logging concessions of private respondent;
4. The statement of advances to respondent
prepared by petitioners stated: "P55,186.39
advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay
P10,000.00 every after (sic) shipment. We had
only 2 shipments”; and
5. Petitioners entered into a Forest Consolidation
Agreement with other holders of forest
concessions on the strength of the questioned
deed of assignment.
The contemporaneous and subsequent acts of Tiro
and the Javiers reveal that the cause stated in the
first deed of assignment is false. It is settled that the
previous, simultaneous and subsequent acts of the
parties are properly cognizable indicia of their true
intention. Where the parties to a contract have given
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
it a practical construction by their conduct as by acts
in partial performance, such construction may be
considered by the court in construing the contract,
determining its meaning and ascertaining the
mutual intention of the parties at the time of
contracting.
The first deed of assignment is a relatively
simulated contract which states a false cause or
consideration, or one where the parties conceal
their true agreement. A contract with a false
consideration is not null and void per se. Under Art.
1346 of the Civil Code, a relatively simulated
contract, when it does not prejudice a third person
and is not intended for any purpose contrary to law,
morals, good customs, public order or public policy
binds the parties to their real agreement. (Javier v.
CA, G.R. No. L-48194, 15 Mar. 1990)
OBJECT
It is the subject matter of the contract. It can be a
thing, right or service arising from a contract.
NOTE: Only rights which are not intransmissible
can be the object of the contract. (Art. 1347, NCC)
Requisites of an Object (D-E-Li-C-T-G)
1. Determinate as to kind (even if not
determinate, provided it is possible to
determine the same without the need of a new
contract);
NOTE: To qualify as an object for purposes of a
contract to exist:
1. The object must at least be Generic.
2. Existing or has the potential to exist
subsequent to the contract;
3. Must be Licit;
4. Within the Commerce of man; and
5. Transmissible.
Object of Contracts
GR: All things or services may be the object of
contracts.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
XPNs:
1. Things outside the commerce of men (Art.
1347, NCC);
2. Intransmissible rights;
3. Future inheritance, except in cases expressly
authorized by law;
4. Services which are contrary to law, morals,
good customs, public order or public policy;
5. Impossible things or services; and
6. Objects which are not possible of
determination as to their kind.
NOTE: The most evident and fundamental requisite
in order that a thing, right or service may be the
object of a contract is that it should be in existence
at the moment of the celebration of the contract, or
at least, it can exist subsequently or in the future. (De
Leon, 2010)
Future Inheritance
GR: Future inheritance cannot be the object of a
contract because its extent, amount and quantity
cannot be determined. (Sta. Maria, 2017)
XPNS:
1. Under Art. 130 of the FC, which allows the
future spouses to give or donate to each other
in their marriage settlement their future
property to take effect upon the death of the
donor and to the extent laid down by the
provisions of the NCC relating to testamentary
succession; and
2. Under Art. 1080 of the NCC, which allows a
person to make a partition of his estate among
his heirs by an act inter vivos, provided that the
legitime of the compulsory heirs is not
prejudiced. (Jurado, 2009; De Leon 2010).
NOTE: Except in cases authorized by law, future
inheritance cannot be an object of contract because
its extent, amount or quantity is not determinable.
(Sta. Maria, 2003)
CAUSE
Cause is the essential or more proximate purpose
reason which moves the contracting parties to enter
324
 Obligations and Contracts

into the contract. It is the immediate and direct As to the Legal Effect
which justifies the creation of an obligation through
Legality or illegality of Legality or illegality of
the will of the contracting parties. (SM Land, Inc. v.
cause affects the motive does not affect
BCDA, G.R. No. 203655, 18 March 2015)
existence or validity of the existence or validity
the contract. of contract.
Requisites of a Cause:
As to the Parties
It must: (L-E-T) Cause is always the same
1. Exist; Motive differs for each
for each contracting
2. Be True; and contracting party.
party.
3. Be Licit.
NOTE: Although the cause is not stated in the As to its Knowability
contract, it is presumed that it exists and is lawful May be known to the
Always known
unless the debtor proves the contrary. (Art. 1354, other
NCC)
NOTE: The motive may be regarded as the cause
Kinds of Cause when the realization of such motive or particular
purpose has been made a condition upon which the
1. Cause of onerous contracts – the cause is contract is made to depend. (Phil. National Const.
understood to be for each contracting party, the Corp. v. CA, G.R. No. 116896, 05 May 1997)
prestation or promise of a thing or service by
the other. E.g., Contract of Sale False Cause

2. Cause of remuneratory contracts – the service or
benefit remunerated. E.g., Donation in
consideration of a past service which does not
constitute a demandable debt
3. Cause of gratuitous contracts – the mere
liberality of the donor or benefactor; it does not
involve any material thing but rather it involves
only the generosity of the benefactor.
4. Accessory – identical with cause of principal
contract, from which the accessory derived its
life and existence. E.g., mortgage or pledge
Cause v. Motive
GR: A false cause in a contract makes the contract
void.
XPN: If it is proven that the false cause were
founded upon another cause which is true and
lawful. (Art. 1353, NCC)
Example: When a contract, through stating a false
consideration, has in fact a real consideration, the
contract is not void, and is considered valid.
Rules relating to Cause on Contracts
1. Absence of cause – confers no right and
produces no legal effect.

CAUSE MOTIVE 2. Failure of cause – does not render the contract

void.
As to Proximate Reason
Direct and most
Indirect or remote 3. Illegality of cause – contract is null and void.
proximate reason of a
reason
contract
4. Falsity of cause – contract is void; unless the
As to the Kind of Reason parties show that there is another cause which
is true and lawful.
Objective and juridical Psychological or purely
reason of a contract personal reason

325 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law
5. Lesion or inadequacy of cause – does not
invalidate the contract, unless:
a. there is fraud, mistake, or undue
influence;
b. when the parties intended a donation or
some other contract; or
c. in cases specified by law
e.g., contracts entered by guardian with
court approval, when the ward suffers
lesion of more than 25%. If there is no
court approval, the contract is void
regardless of the amount of lesion.
Q: May a moral obligation constitute a sufficient
cause to support an onerous contract?
A: Where the moral obligation arises wholly from
ethical considerations, unconnected with any civil
obligation, and as such is demandable only in
conscience, and not in law, it cannot constitute a
cause to support an onerous contract. Where such
moral obligation, however, is based upon a previous
civil obligation which has already been barred by
the statute of limitations at the time when the
contract is entered into, it constitutes a sufficient
cause or consideration to support said contract.
(Villaroel v. Estrada G.R. No. L-47362, 19 Dec. 1940)
FORM
Rules on the Form of Contracts
GR: Form is not required in consensual contracts.
(Provided, all the essential requisites for their validity
are present.)
XPNs: When the law requires a contract be in
writing for its:
1. Validity (formal contracts);
2. Enforceability (under Statute of Frauds); or
3. For the convenience of the parties.
NOTE: The parties may compel each other to reduce
the verbal agreement into writing. (2006 BAR)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The Parties may be Required to Observe the
Form Required for their Convenience
The contracting parties may compel each other to
observe the required form once the contract has
been perfected and is enforceable under the statute
of frauds. This is one of the rights of the creditor.
The right to demand the execution of the document
required under Art. 1358 is not imprescriptible. It is
subject to prescription. It must be pursued within
the period prescribed by law, which is five (5) years.
(Pineda, 2009)
NOTE: The right must be exercised once the
contract has been perfected, otherwise, the exercise
will be considered as premature.
Formalities required in Specific Contracts
1. Donations:
a. Personal property – if the value exceeds
P5,000, the donation and acceptance must
both be written. (Art. 748, NCC)
b. Real property:
i. Donation must be in a public
instrument, specifying therein the
property donated and value of
charges which donee must satisfy.
ii. Acceptance must be written, either in
the same deed of donation or in a
separate instrument.
iii. Acceptance may either be in the same
deed of donation, or in a separate
public instrument, but it shall not take
effect unless it is done during the
lifetime of the donor.
iv. If acceptance is in a separate
instrument, the donor shall be
notified thereof in an authentic form,
and this step shall be noted in both
instruments. (Art. 749, NCC)
2. Partnership where real property contributed:
a. There must be a public instrument
regarding the partnership.
326
 Obligations and Contracts
b. The inventory of the realty must be made,
signed by the parties, and attached to the
public instrument. (Art. 1773, NCC)
3. Antichresis – the amount of the principal and
interest must be in writing. (NCC, Art. 2134)
4. Agency to sell real property or an interest
therein – authority of the agent must be in
writing; otherwise, the sale shall be void. (Art.
1874, NCC)
5. Stipulation to charge interest – interest must be
stipulated in writing. (Art. 1956, NCC)
6. Stipulation limiting common carrier's duty of
extraordinary diligence to ordinary diligence:
a. Must be in writing, signed by shipper or
owner;
b. Supported by valuable consideration
other than the service rendered by the
common carrier; and
c. Reasonable, just, and not contrary to
public policy. (Art. 1744, NCC)
Contracts which must be In Writing to be Valid
1. Donation of personal property whose value
exceeds five thousand pesos. (Art. 748, NCC) –
the donation and acceptance must be in writing.
2. Sale of a piece of land or any interest therein
through an agent (Art. 1874, NCC) – the
authority of the agent shall appear in writing.
3. Agreements regarding payment of interest in
contracts of loan. (Art. 1956, NCC)
4. Antichresis – the amount of the principal and
the interest shall be specified in writing. ( Art.
2134, NCC)
327
Contracts which must Appear in a Public
Document
1. Donation of real properties (Art. 719-749, NCC);
2. Partnership where immovable property or real
rights are contributed to the common fund
(Arts. 1171 & 1773, NCC);
3. Acts and contracts which have for their object
the creation, transmission, modification or
extinguishment of real rights over immovable
property; sale of real property or of an interest
therein is governed by Arts. 1403, No. 2, and
1405 (Art. 1358(1), NCC);
4. The cession, repudiation, or renunciation of
hereditary rights or of those of the conjugal
partnership of gains (Art. 1358(2), NCC);
5. The power to administer property or any other
power which has for its object an act appearing
or which should appear in a public document or
should prejudice a third person (Art. 1358(3),
NCC); and
6. The cession of actions or rights proceeding
from an act appearing in a public document.
(Art. 1358(4), NCC)
NOTE: Art. 1358 of the Civil Code which requires
the embodiment of certain contracts in a public
instrument, is only for convenience, and
registration of the instrument only adversely affects
third parties. Formal requirements are, therefore,
for the benefit of third parties. Non-compliance
therewith does not adversely affect the validity of
the contract nor the contractual rights and
obligations of the parties thereunder. (Fule v. CA,
G.R. No. 112212, 02 Mar. 1998)
Contracts that Must be Registered
1. Real Estate Mortgage (Art. 2125, NCC)
2. Sale or transfer of large cattle. (Cattle
Registration Act)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

3. REFORMATION OF INSTRUMENTS Distinctions between Reformation and

Annulment
It is a remedy to conform to the real intention of the
parties due to mistake, fraud, inequitable conduct, REFORMATION ANNULMENT
accident. (Art. 1359, NCC) There is meeting of the
minds between the There is no meeting of
It is a remedy of amending or rectifying the parties as to the object the minds. Consent is
instrument which purports to be the agreement of and cause of the vitiated.
the parties to express their real intention, when the contract.
same is not expressed therein by reason of mistake,
The meeting of the
fraud, inequitable conduct, or accident.
The instrument failed to minds was prevented
express the true by reason of mistake,
Reformation is a remedy in equity by means of
intention of the parties fraud, inequitable
which a written instrument is made or construed to
due to mistake, fraud, conduct or accident
express or confirm the real intention of the parties
inequitable conduct or perpetrated by one
when some error or mistake is committed. (Pineda,
accident. party against the
2009)
other.

Rationale: It would be unjust and inequitable to The purpose of

The purpose of
allow the enforcement of a written instrument reformation is to
annulment is to
which does not reflect or disclose the real meeting establish the true
render inefficacious
of the minds of the parties. (Report of the Code agreement of the
the contract in
Commission) parties, and not to
question.
create a new one.
Requisites in Reformation of Instruments
NOTE: When there is no meeting of the minds, the
1. There is meeting of the minds of the parties to proper remedy is annulment, and not reformation.
the contract; (Pineda, 2000)
2. The parties’ true intention is not expressed in
the instrument; The fundamental distinction between reformation
3. Such failure of the instrument to express the of an instrument and annulment of a contract is that
parties’ intention is by reason of: (M-A-R-F-I) the first presupposes a perfectly valid contract in
a. Mistake; which there has been a valid meeting of the minds
b. Accident; of the contracting parties, while the second is based
c. Relative simulation; on a defective contract in which there has been no
d. Fraud; or meeting of the minds because the consent is
e. Inequitable conduct vitiated. (Jurado, 2010)
4. The facts upon which relief by way of
reformation of the instrument is sought are put Q: Multi-Realty Development Corporation
in issue by the pleadings; and (Multi-Realty) built Makati Tuscany, a 26-storey
5. There is strong, clear, and convincing proof of condominium building located at the corner of
M-A-R-F-I. Ayala Avenue and Fonda Street, Makati City.
Makati Tuscany had a total of 160 units, with
156 ordinary units from the 2nd to the 25th
floors and four (4) penthouse units on the 26th
floor. It also had 270 parking slots which were
apportioned as follows: one (1) parking slot for
each ordinary unit; two (2) parking slots for

UNIVERSITY OF SANTO TOMAS 328

2022 GOLDEN NOTES
 Obligations and Contracts
each penthouse unit; and the balance of 106
parking slots were allocated as common areas.
Pursuant to R.A. No. 4726, or the Condominium
Act, Multi-Realty created and incorporated
Makati Tuscany Condominium Corporation
(MATUSCO) to hold title over and manage
Makati Tuscany's common areas. That same
year, Multi-Realty executed a Deed of Transfer
of ownership of Makati Tuscany's common
areas to MATUSCO.
Multi-Realty filed a complaint for damages
and/or reformation of instrument with prayer
for TRO and/or preliminary injunction against
MATUSCO. Multi-Realty alleged in its complaint
that of the 106 parking slots designated in the
Master Deed as part of the common areas, only
eight (8) slots were intended to be guest parking
slots; thus, it retained ownership of the
remaining 98 parking slots.
Multi-Realty claimed that its ownership over the
98 parking slots was mistakenly not reflected in
the Master Deed "since the documentation and
the terms and conditions therein were all of first
impression," considering that Makati Tuscany
was one of the first condominium developments
in the Philippines. Is there is a need to reform
the Master Deed and the Deed of Transfer?
A: NO. Reformation of an instrument is a remedy in
equity where a valid existing contract is allowed by
law to be revised to express the true intentions of
the contracting parties. The rationale is that it
would be unjust to enforce a written instrument
which does not truly reflect the real agreement of
the parties. In reforming an instrument, no new
contract is created for the parties, rather, the
reformed instrument establishes the real
agreement between the parties as intended, but for
some reason, was not embodied in the original
instrument.
MATUSCO does not deny that it stayed silent when
Multi-Realty sold the parking slots on several
occasions or that it offered to buy the parking slots
from Multi-Realty on at least two (2) occasions. It
excuses itself by saying that just like Multi-Realty, it
329
"also labored under a mistaken appreciation of the
nature and ownership of the ninety-eight (98)
parking slots in question."
Both parties recognized Multi-Realty's ownership of
the parking slots. MATUSCO initially respected
Multi-Realty's ownership despite the Master Deed's
and Deed of Transfer's stipulations. It was
MATUSCO that changed its position decades after it
acted as if it accepted Multi-Realty's ownership.
(Makati Tuscany Condominium Corporation v. Multi-
Realty Development Corporation, G.R. 185530, 18
Apr. 2018)
Operation and Effect of Reformation
It relates back to, and takes effect from, the time of
its original execution, especially as between the
parties. (Tolentino, 2002)
Reformation of instruments may be availed of
judicially or extrajudicially.
Basis and Nature of the Remedy
The remedy of reformation of an instrument is
based on the principle of equity where, to express
the true intention of the contracting parties, an
instrument already executed is allowed by law to be
reformed. The right of reformation is necessarily an
invasion or limitation of the parol evidence rule,
since, when a writing is reformed, the result is that
an oral agreement is by court decree, made legally
effective. The remedy, being an extraordinary one,
must be subject to the limitations as may be
provided by law. A suit for reformation of an
instrument must be brought within the period
prescribed by law, otherwise, it will be barred by
the mere lapse of time. (Bentir v. Leanda, G.R.
128991, 12 Apr. 2000)
When Remedy Allowed
1. Mutual mistake – When the mutual mistake of
the parties causes the failure of the instrument
to disclose their agreement (Art. 1361, NCC)
Requisites:
a. The mistake should be of fact;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
b. The same should be proved by clear and
convincing evidence;
c. The mistake should be common to both
parties to the instrument. (BPI v. Fidelity
Surety, Co. G.R. No. L-26743, 19 Oct. 1927)
2. Mistake on one party and fraud on the other – In
such a way that the instrument does not show
their true intention, the party mistaken or
defrauded may ask for the reformation of the
instrument (Art. 1362, NCC);
3. Mistake on one party and concealment on the
other – When one party was mistaken and the
other knew or believed that the instrument did
not state their real agreement, but concealed
that fact from the former (Art. 1363, NCC);
4. Ignorance, lack of skill, negligence or bad faith –
When through the ignorance, lack of skill,
negligence or bad faith on the part of the person
drafting the instrument or of the clerk or typist,
the instrument does not express the true
intention of the parties (Art. 1364, NCC);
5. Right of repurchase – If the parties agree upon
the mortgage or pledge of real or personal
property, but the instrument states that the
property is sold absolutely or with a right of
repurchase. (Art. 1365, NCC)
When Remedy NOT Allowed
1. Simple, unconditional donations inter vivos;
2. Wills;
3. When the agreement is void; (Art. 1366, NCC)
4. When an action to enforce the instrument is
filed (by doctrine of estoppel) ;
5. If mistake, fraud, inequitable conduct, or
accident has prevented a meeting of the minds
of the parties; and
NOTE: The remedy here is annulment of
contract.
6. When the contract is unenforceable because of
failure to comply with the statute of frauds.
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Prescriptive Period
Within 10 years from the date of the execution of the
instrument, since the suit is based on a written
document.
Persons who can Ask for the Reformation of the
Instrument
It may be ordered at the instance of:
1. If the mistake is mutual: either party or his
successor-in-interest may file an action.
2. If the cause of reformation is on some other
ground (such as vitiated consent or fraud): the
injured party or his heirs and assigns are the
only person given legal standing to sue.
NOTE: In reformation of contracts, what is
reformed is not the contract itself, but the
instrument embodying the contract. It follows that
whether the contract is disadvantageous or not, is
irrelevant to reformation and therefore, cannot be
an element in the determination of the period for
prescription of the action to reform. (Pineda, 2000)
4. INTERPRETATION OF CONTRACTS
If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident
intention of the parties, the latter shall prevail over
the former. (Art. 1370, NCC)
In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered. (Art. 1371, NCC)
However general the terms of a contract may be,
they shall not be understood to comprehend things
that are distinct and cases that are different from
those upon which the parties intended to agree.
(Art. 1372, NCC)
If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing
330
 Obligations and Contracts
that import which is most adequate to render it
effectual. (Art. 1373, NCC)
Duty of Courts in Interpreting Contracts
It is not the province of the court to alter a contract
by construction or to make a new contract for the
parties. Its duty is confined to the interpretation of
the one which they have made for themselves
without regard to its wisdom or folly as the court
cannot supply material stipulations or read into the
contract words which it does not contain. (Sps.
Pascual v. Ramos, G.R. No. 144712, 04 July 2002)
Q: Federico Alferez died without leaving any
will. He was survived by his spouse Teodora, and
their children, namely: Ma. Concepcion, Antonio,
and Esperanza. Since Alferez left several bank
debts, Ma. Concepcion, as Alferez's daughter and
administratrix of his estate, filed a motion to sell
a part of the estate of Alferez. The Deed of Sale
executed by Ma. Concepcion with Spouses
Canencia shows that Ma. Concepcion, without
qualification, sold, transferred, and conveyed to
respondents the parcels of land, without any
mention of their alleged intention to only offer
half of the said property.
Ma. Concepcion filed action for Annulment
and/or Declaration of Nullity of Deed of Sale,
among others, asserting that during
negotiations with Spouses Canencia, they were
clear that the land forming part of Alferez’s
estate was not entirely for sale; what they
intended to sell was only the half of Federico.
The Spouses Canencia argued that the
provisions of the Deed did not even remotely
suggest that Ma. Concepcion was only selling
half of the parcels of land thereof; in fact, there
were no doubtful provisions therein that could
have indicated a different intention on the part
of the petitioners. Thus, Ma. Concepcion should
be bound by the terms and conditions of the
Deed and should not be allowed to escape the
obligatory force of their contractual
commitment by contending that the Deed failed
to correctly embody their true intention. Is the
contention of the Spouses correct?
331
A: YES. It is basic that a contract is the law between
the parties. Obligations arising from contracts have
the force of law between the contracting parties and
should be complied with in good faith. Unless the
stipulations in a contract are contrary to law,
morals, good customs, public order or public policy,
the same are binding as between the parties. Being
the law between the parties, courts have no choice
but to enforce such contracts. Simply put, courts
cannot stipulate for the parties or amend the latter's
agreement, for to do so would be to alter the real
intention of the contracting parties when the
contrary function of courts is to give force and effect
to the intention of the parties.
It can be seen from the Deed that Ma. Concepcion
without qualification, sold, transferred, and
conveyed to the Spouses the parcels of land, without
any mention of their alleged intention to only offer
half of the said property. The provisions thereof are
categorical and admits of no other interpretation;
the sale, transfer, and conveyance of the parcels of
land covered by the aforementioned titles appear
absolute, there being no reservation of ownership of
half of the lots therein described, nor a stipulation
making mention of Teodora' specific share of the
said properties.
As mandated by Art. 1370 of the Civil Code, if the
terms of the contract are clear and leave no doubt,
the literal meaning of its stipulations shall control.
The Deed, as the agreement between the parties, is
the formal expression of the parties' rights, duties,
and obligations. It is the best evidence of the
intention of the parties. Thus, when the terms of an
agreement have been reduced to writing, it is
considered as containing all the terms agreed upon
and there can be no evidence of such terms other
than the contents of the written agreement between
the parties and their successors in interest. (Alferez
v. Spouse Canencia, G.R. No. 244542, 28 June 2021)
Disfavor of Interpretation leading to Loss of
Rights
The construction of the terms of a contract leading
to the impairment or loss of the right is not favored.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Principle of Effectiveness
Pursuant to this principle, where two (2)
interpretations of the same contract language are
possible, one interpretation having the effect of
rendering the contract meaningless (and one of the
parties merely dishonest for receiving
consideration thereunder without parting with
any), while the other interpretation would give
effect to the contract as a whole, the latter
interpretation must be adopted. (PNB v. Utility
Assurance & Surety, Co., Inc., G.R. No. L-39215, 01
Sept. 1989)
The various stipulations of a contract shall be
interpreted together, attributing to the doubtful
ones that sense which may result from all of them
taken jointly. (Art. 1374, NCC)
The various stipulations in a contract must be read
together to give effect to all. (North Negros Sugar Co.
v. Compania Gen. De Tabacos, G.R No. L-9277, 29 Mar.
1957)
Complementary-Contracts-Construed-Together
Doctrine
The various stipulations of a contract shall be
interpreted together, attributing to the doubtful
ones that sense which may result from all of them
taken jointly. (Art. 1374, NCC)
When there are several provisions in a contract, the
construction to be adopted should be that one
which will give effect to all provisions. A contract
must be read in its entirety (BPI v. Sabrino, G.R. No.
L-36524, 06 Feb. 1933). Piecemeal interpretation
must be avoided.
Under this doctrine, an accessory contract must be
read in its entirety and together with the principal
agreement. (Rabuya, 2017)
E.g., A promissory note and a deed of chattel
mortgage must be construed together; and the
surety contract, being an accessory contract, must
be interpreted with its principal contract, for
instance, a loan agreement. (Ibid.)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Words which may have different significations shall
be understood in that which is most in keeping with
the nature and object of the contract. (Art. 1375,
NCC)
The usage or custom of the place shall be borne in
mind in the interpretation of the ambiguities of a
contract, and shall fill the omission of stipulations
which are ordinarily established. (Art. 1376, NCC)
The interpretation of obscure words or stipulations
in a contract shall not favor the party who caused
the obscurity. (Art. 1377, NCC)
When it is absolutely impossible to settle doubts by
the rules established in the preceding articles, and
the doubts refer to incidental circumstances of a
gratuitous contract, the least transmission of rights
and interest shall prevail. If the contract is onerous,
the doubt shall be settled in favor of the greatest
reciprocity of interests.
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.
The principles of interpretation stated in Rule 123
of the Rules of Court shall likewise be observed in
the construction of contracts. (Art. 1378, NCC)
NOTE: The provisions of Rule 123 of the Rules of
Court referred to are Secs. 58-67, now Secs. 8-17,
Rule 130, Revised Rules of Court.
Q: In response to Araneta Center Inc.’s (“ACI”)
invitation to bid on the design and construction
of the Gateway Mall under a lump-sum, fixed
price arrangement, CE Construction
Corporation (“CECON”) submitted its proposal
on 30 August 2002, which bid was made valid for
acceptance only for ninety days. However, ACI
informed CECON that the contract was being
awarded to it only at such time that the bid had
already expired, and instructed it to proceed
with excavation work.
While no formal documents were prepared for
the contract although construction was already
332
 Obligations and Contracts

underway, ACI introduced major changes in the
plans and specifications, changing it into a
straight construction contract from a former
design-and-construct scheme. ACI decided to
change and take over the design, such as the
change from concrete to structural steel
framing, and took out certain equipment from
the scope of the contract.
Meanwhile, the price levels of cement and steel
products had increased, of which CECON
notified ACI, with a stern warning that further
delays in the formal award of the contract might
affect the contract sum. It was only on 2 June
2003 that ACI finally wrote a letter to CECON,
indicating its acceptance of the latter’s 30
August 2002 tender, but still no formal contracts
were executed. With the many changes to the
project coupled with ACI’s delays in delivering
drawings and specifications, CECON
increasingly found itself unable to complete the
project on time, noting that it had to file a total
of 15 requests for time extension, all of which
ACI failed to timely act on.
as to comply with the essential requisite of consent
in the perfection of a contract.
In order to judge the intention of the contracting
parties, their contemporaneous and subsequent
acts shall be principally considered. It should be
mentioned that ACI had drastically changed the
scope and character of the agreement. To tie down
CECON to the unit prices for the proposal for a
different scope of work would be grossly unfair.
Reference to prevailing industry practices in the
valuation of the project cost was also warranted and
necessary because of the absence of definitive
governing instruments. Under Arts. 1375 and 1376
of the NCC, the nature and object of the contract as
well as the usage or custom of the place shall be
borne in mind in the interpretation of the
ambiguities of the contract, and shall fill the
omission of stipulations which are ordinarily
established. (CE Construction Corp. v. Araneta
Center, Inc., G.R. 192735, 09 Aug. 2017)

Exasperated, CECON filed with the Construction

Industry Arbitration Commission (“CIAC”) its
request for adjudication, praying for project
cost adjustment. In the meantime, CECON
completed the project and turned over Gateway
Mall to ACI, which had its blessing on 26
November 2004. Could ACI insist on the initial
bid price of CECON under the supposed lump-
sum fixed price arrangement of the construction
contract?

A: NO. CECON and ACI should not be bound by the

supposed lump-sum fixed price arrangement. There
was never a meeting of minds on the contract price,
and the contention of ACI with regard to supposed
immutability of the stipulated contract sum should
fall. Advertisements for bidders are simply
invitations to make proposals, and the advertiser is
not bound to accept the highest or lowest bidder,
unless the contrary appears. The exchanges of offers
between CECON and ACI failed to satisfy the
requirement of absolute and unqualified acceptance

333 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law

RESCISSIBLE VOIDABLE UNENFORCEABLE VOID/ INEXISTENT

Origin of the Defect
Entered without
Economic damage or
authority or in excess
lesion to either one of the Incapacity of one of Illegality (void) or
thereof; non-compliance
parties or to the 3rd parties to give consent or absence of any of
with Statute of Frauds;
persons; declaration vitiated consent essential requisites of a
incapacity of both parties
by law contract (inexistent)
to give consent
Necessity of Damage/ Prejudice

As to the other
Suffered by – either one
contracting party – Not necessary Not necessary
of parties or 3rd person
not necessary
Curable by Prescription
Curable Curable Not curable Not Curable
Legal Effect
Inoperative until ratified;
Valid & legally Valid & legally
not enforceable in court
enforceable until enforceable until None
without proper
judicially rescinded judicially annulled
ratification
Remedy
Rescission or Declaration of nullity of
Annulment of contract Only personal defense
rescissory action. contract
Nature of Action
Can be attacked directly
Must be a direct action Direct action needed Indirect attack allowed
or indirectly
Who Can File the Action
GR: Contracting party; 3rd persons cannot file
XPN: Defrauded Contracting party Contracting party unless their interest are
Creditors directly affected
Susceptibility of Ratification
Susceptible but not of
Susceptible Susceptible Not Susceptible
ratification proper

Susceptibility of Prescription
Action for recovery,
specific performance, or Action for declaration of
Action for rescission Action for annulment damages prescribes in 10 nullity or putting of
prescribes after 4 years prescribes after 4 years years if based on a defense of nullity does
written contract; 6 years NOT prescribe
if unwritten

UNIVERSITY OF SANTO TOMAS 334

2022 GOLDEN NOTES
 Obligations and Contracts
5. RESCISSIBLE CONTRACTS
Rescissible Contracts
These are contracts which contain all the essential
requisites of a contract which make it valid, but by
reasons of injury or damage to either of the
contracting parties or to third persons such as
creditors, may be rescinded. (Pineda, 2009)
In a rescissible contract, all of the essential
requisites of a contract exist and the contract is
valid, but by reason of injury or damage to either of
the contracting parties or to third persons, such as
creditors, it may be rescinded. (Jurado, 2010)
Requisites for Rescission
1. There must be, at the beginning, either a valid
or voidable contract;
2. There is an economic or financial prejudice to
someone; and
3. Requires mutual restitution. (Paras, 2016)
Two (2) Kinds of Rescission
1. The rescission mentioned in Art. 1380 of the
New Civil Code
2. The rescission mentioned in Art. 1391 of the
New Civil Code as the new Code used the term
"resolution." (Paras, 2016)
These are contracts validly constituted but
nevertheless maybe set aside due to a particular
economic damage or lesion caused to either to one
of the parties or to a third person. It may be set aside
in whole or in part, or up to the extent of the damage
caused. (Art. 1381, NCC)
Contracts that May be Rescinded
1. Under Art. 1381, those –
a. Entered into by guardians whenever the
wards whom they represent suffer lesion
by more than ¼ of value of the property;
(Art. 1381(1), NCC)
If a guardian alienates properties of the
ward without judicial approval, the
335
contract is “unenforceable” for lack of
authority. (Art. 1403(1), NCC)
b. Agreed upon in representation of
absentees, if absentee suffers lesion by
more than ¼ of value of property; (Art.
1381(2), NCC)
c. Contracts where rescission is based on
fraud committed on creditor and cannot
collect the claim due (accion pauliana);
(Art. 1381(3), NCC)
NOTE: Contracts which are rescissible
under the third paragraph of Art. 1381 are
valid contracts, although undertaken in
fraud of creditors. If the contract is
‘‘absolutely simulated’’, the contract is not
merely rescissible but inexistent, although
undertaken as well in fraud of creditors. In
the former, the remedy is rescission; in the
latter, the remedy is an action to declare the
contract inexistent which action is
imprescriptible. (Rabuya, 2017)
d. Contracts where the object involved is the
subject of litigation; contract entered into
by defendant without knowledge or
approval of litigants or judicial authority;
(Art. 1381(4), NCC)
e. Payment by an insolvent – on debts which
are not yet due; prejudices the claim of
others; (Art. 1382, NCC)
f. Provided for by law. (Arts. 1526, 1534, 1538,
1539, 1542, 1556, 1560, 1567 & 1659, NCC)
NOTE: Items c, d, and e are contracts which
are not necessarily entered into by persons
exercising fiduciary capacity. In Art. 1381
(1 & 2), the contract must be of
administration and representation.
2. Payments made in state of insolvency; (Art. 1382,
NCC):
a. Plaintiff has no other means to maintain
reparation;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
b. Plaintiff must be able to return whatever he
may be obliged to return due to rescission;
c. The things must not have been passed to
third persons in good faith;
d. It must be made within 4 years. (Art 1382,
NCC)
Characteristics of Rescissible Contract
1. It has all the elements of a valid contract.
2. It has a defect consisting of an injury (generally
in the form of economic damage or lesion, fraud,
and alienation of the property) to one of the
contracting parties or to a third person.
3. It is valid and effective until rescinded.
4. It can be attacked only directly.
5. It is susceptible of convalidation only by
prescription. (De Leon, 2010)
Nature of an Action for Rescission
The action for rescission is subsidiary. It cannot be
instituted except when the party suffering damage
has no other legal means to obtain reparation for
the same (Art. 1383, NCC). Hence, it must be availed
of as the last resort, availed only after all legal
remedies have been exhausted and proven futile.
(Anchors Savings Bank v. Furigay, G.R. No. 191178, 13
Mar. 2013)
Rationale: In order not to disturb other contracts
and to comply with the principle of relativity of
contracts.
However, if it can be proven that the property
alienated was the only property of the debtor at the
time of the transaction, the action for rescission is
certainly maintainable because it is clear that the
creditor has no other remedy under the
circumstances. (Pineda, 2009)
NOTE: Rescission shall be only to the extent
necessary to cover the damages. (Art. 1384, NCC)
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
Persons who may Institute an Action for the
Rescission of a Rescissible Contract
The action for rescission may be instituted by the:
1. Injured party;
2. Contracts entered into by guardians – by the
ward, or by the guardian ad litem of ward
during the latter’s incapacity in an action
against the original guardian;
3. Contracts in representation of absentees – by
the absentee;
4. Contracts defrauding creditors – by the
creditors;
5. Contracts referring to things in litigation – by
the party litigant;
6. Their representatives;
7. Their heirs; and
8. Their creditors by virtue of subrogatory action
defined in Art. 1177, NCC. (Jurado, 2009)
Prescriptive Period of Action for Rescission
1. Under Art. 1381, no. 1 – within 4 years from the
time the termination of the incapacity of the
ward;
2. Under Art. 1381, no. 2 – within 4 years from the
time the domicile of the absentee is known; or
3. Under Art. 1381, nos. 3 & 4 & Art. 1382 – within
4 years from the time of the discovery of fraud.
(Art. 1389, NCC)
Requisites that must Concur before a Contract
May be Rescinded on the ground of Lesion
Whether the contract is entered into by a guardian
in behalf of his ward or by a legal representative in
behalf of an absentee, before it can be rescinded on
the ground of lesion, it is indispensable that the
following requisites must concur:
1. The contract must be entered into by the
guardian in behalf of his ward or by the legal
representative in behalf of an absentee.
2. The ward or absentee suffered lesion of more
than 1/4 of the value of the property which is
object of the contract.
3. The contract must be entered into without
judicial approval.
336
 Obligations and Contracts
4. There must be no other legal means for
obtaining reparation for the lesion.
5. The person bringing the action must be able to
return whatever he may be obliged to restore.
6. The object of the contract must not be legally in
the possession of a third person who did not act
in bad faith.
Statutory Presumptions of Fraud in Art. 1387
1. Alienation by gratuitous title – When a debtor
donates his property without reserving
sufficient property to pay all his pre-existing
debts, the law presumes that the gratuitous
dispositions are made in fraud of creditors.
2. Alienation by onerous title – The contract is
presumed fraudulent if at the time of alienation,
some judgement has been rendered against
him, whether it is on appeal or has already
become final and executory; or some writ of
attachment has been issued against him in any
case.
NOTE: The decision or writ of attachment need not
refer to the very property subject of alienation. The
person who obtained the judgement or writ of
attachment need not be the same person seeking
the rescission.
These presumptions are rebuttable, which means,
they may be overcome by clear, strong and
convincing evidence.
An alienation made during the pendency of a suit is
not enough. There must be a decision or a writ of
attachment.
Requisites before a Contract Entered into in
Fraud of the Creditors may be Rescinded
1. There must be a credit existing prior to the
constitution of the said fraudulent contract;
2. There must be fraud, or at least, the intent to
commit fraud to the prejudice of the creditor
seeking rescission;
3. The creditor cannot in any legal manner collect
his credit (subsidiary character of rescission);
337
4. The object of the contract must not be legally in
possession of a third person in good faith.
NOTE: If the object of the contract is legally in the
possession of a third person who did not act in bad
faith, the remedy available to the creditor is to
proceed against the person causing the loss for
damages. Such person is solidarily liable with that of
transferring creditor as both of them are guilty of
fraud.
The action to rescind contracts in fraud of creditors
is known as accion pauliana. For this action to
prosper, the following requisites must be present:
1. The plaintiff asking for rescission has a credit
prior to the alienation;
2. The debtor has made a subsequent contract
conveying a patrimonial benefit to a third
person;
3. The creditor has no other legal remedy to
satisfy his claim;
4. The act being impugned is fraudulent;
5. The third person who received the property
conveyed, if it is by onerous title, has been an
accomplice in fraud. (Sps. Lee v. Bangkok Bank,
G.R. No. 173349, 09 Feb. 2011)
Badges of Fraud
1. Consideration for the conveyance of the
property is inadequate or fictitious;
2. Transfer was made by the debtor after a suit has
commenced and during its pending against him;
3. Sale upon credit by an insolvent debtor;
4. The presence of evidence of large indebtedness
or complete insolvency of the debtor;
5. Transfer of all his property by a debtor when he
is financially embarrassed or insolvent;
6. Transfer is made between father and son, where
there are present some or any of the above
circumstances; and
7. Failure of the vendee to take exclusive
possession of the property. (Pioneer Insurance
Surety Corp. v. Morning Star Travel & Tours, Inc.,
G.R. No. 198436, 08 July 2015)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

Resolution v. Rescission NOTE: While Art. 1191 uses the term “rescission,”
the original term which was used in the old Civil
RESOLUTION RESCISSION Code, from which the article was based, was
(ART. 1191, NCC) (ART. 1381, NCC) “resolution.” (The Wellex Group, Inc., v. U-Land
Airlines, Co., Ltd., G.R. No. 167519, 14 Jan. 2015)
Both presuppose contracts validly entered into
and subsisting and both require mutual
Effect of Rescission
restitution when proper.
Nature
1. Obligation of mutual restitution (but not
Principal action;
absolute);
Retaliatory in Subsidiary remedy
2. Abrogation of contract (absolute);
character
3. Obligation of third person to restore (if third
Grounds
person has nothing to restore, Article does not
5 grounds under Art.
apply). (De Leon, 2016)
Non-performance of 1381. (lesions or
obligation (only fraud of creditors);
Mutual Restitution
ground) Non-performance is
not important.
Rescission of contract creates an obligation of
Applicability mutual restitution of the objects of the contract,
Applies to both their fruits, and the price with interest.
Only to reciprocal
unilateral and
obligations
reciprocal obligations NOTE: Rescission is possible only when the person
demanding rescission can return whatever he may
Prescriptive Period
be obliged to restore. A court of equity will not
10 years from accrual
rescind a contract unless there is restitution, that is,
of right of action for
the parties are restored to the status quo ante. (Art.
written contracts; 4 years
1385, NCC)
6 years for verbal (Art. 1389, NCC)
contracts (Arts. 1144
Mutual restitution is NOT applicable when:
(2) and 1145 (1), NCC)
1. Creditor did not receive anything from
Person who can Initiate the Action
contract; or
Even third persons 2. Thing already in possession of third persons
Only the injured party
prejudiced by the in good faith; subject to indemnity only, if
to the contract
contract there are two or more alienations – liability of
Fixing of Period by the Court first infractor.
Court may fix a period
or grant extension of Q: Reyes (seller) and Lim (buyer) entered into a
time for the fulfillment contract to sell a parcel of land. Harrison
Court cannot grant
of the obligation when Lumber occupied the property as lessee. Reyes
extension of time
there is sufficient offered to return the P10 million downpayment
reason to justify such to Lim because Reyes was having problems in
extension removing the lessee from the property. Lim
Purpose rejected Reyes’ offer. Lim learned that Reyes
had already sold the property to another.
Reparation for
damage or injury,
Cancellation of the Both Reyes and Lim are now seeking rescission
allowing partial
contract of the contract to sell. However, Reyes does not
rescission of contract.
want to deposit the 10M to the court because
(Pineda, 2000)
according to him, he has the “right to use,

UNIVERSITY OF SANTO TOMAS 338

2022 GOLDEN NOTES
 Obligations and Contracts
possess and enjoy” of the money as its owner
before the contract to sell is rescinded. Is Reyes’
contention correct?
A: NO. There is also no plausible or justifiable
reason for Reyes to object to the deposit of the P10
million down payment in court. The contract to sell
can no longer be enforced because Reyes himself
subsequently sold the property. Both Lim and Reyes
are seeking for rescission of the contract. By seeking
rescission, a seller necessarily offers to return what
he has received from the buyer. Such a seller may
not take back his offer if the court deems it
equitable, to prevent unjust enrichment and ensure
restitution, to put the money in judicial deposit.
NOTE: In this case, it was just, equitable and proper
for the trial court to order the deposit of the down
payment to prevent unjust enrichment by Reyes at
the expense of Lim. Depositing the down payment in
court ensure its restitution to its rightful owner.
Lim, on the other hand, has nothing to refund, as he
has not received anything under the contract to sell.
(Reyes v. Lim, Keng, G.R. No. 134241, 11 Aug. 2003)
Q: Goldenrod offered to buy a mortgaged
property owned by Barreto Realty to which it
paid an earnest money amounting to P1 million.
It was agreed upon that Goldenrod would pay
the outstanding obligations of Barreto Realty
with UCPB. However, Goldenrod did not pay
UCPB because of the bank’s denial of its request
for the extension to pay the obligation.
Thereafter, Goldenrod, through its broker,
informed Barreto Realty that it could not go
through with the purchase of the property and
also demanded the refund of the earnest money
it paid.
In the absence of a specific stipulation, may the
seller of real estate unilaterally rescind the
contract and, as a consequence, keep the earnest
money to answer for damages in the event the
sale fails due to the fault of the prospective
buyer?
A: NO. Goldenrod and Barretto Realty did not intend
that the earnest money or advance payment would
be forfeited when the buyer should fail to pay the
339
balance of the price, especially in the absence of a
clear and express agreement thereon.
Moreover, Goldenrod resorted to extrajudicial
rescission of its agreement with Barretto Realty.
Under Art. 1385, rescission creates the obligation to
return the things which were the object of the
contract together with their fruits and interest.
Therefore, by virtue of the extrajudicial rescission of
the contract to sell by Goldenrod without opposition
from Barretto Realty, which in turn, sold the
property to other persons, Barretto Realty, had the
obligation to return the earnest money which
formed part of the purchase price plus legal interest
from the date it received notice of rescission. It
would be most inequitable if Barretto Realty would
be allowed to retain the money at the same time
appropriate the proceeds of the second sale made to
another. (Goldenrod, Inc. v. CA, G.R. No. 126812, 24
Nov. 1998)
6. VOIDABLE CONTRACTS (BAR 2004)
Voidable contracts are those where consent is
vitiated either by the incapacity of one of the
contracting parties or by mistake, violence,
intimidation, undue influence or fraud. These
contracts are binding, unless they are annulled by a
proper action in court. It is susceptible of
ratification. (Art. 1390, NCC)
NOTE: Annulment may be had even if there be no
damage to the contracting parties.
Characteristics of a Voidable Contract
1. Effective until set aside;
2. Can be ratified;
3. Can be assailed only by the party whose consent
was defective or his heirs or assigns.
4. A voidable contract, unlike unenforceable and
void contracts may be attacked indirectly or
collaterally, by way of defense to an action
under the contract by way of a counterclaim.
(De Leon, 2016)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law
Classes of Voidable Contracts
1. Those where one of the parties is incapable of
giving consent; and
NOTE: If both parties are incapacitated to give
consent, the contract is unenforceable and not
merely voidable.
2. Those where the consent is vitiated by mistake,
violence, intimidation, undue influence or
fraud. (Art. 1390, NCC)
Q: Sometime in March 2001, Poole-Blunden
came across an advertisement of Unit 2-C of T-
Tower Condominium. The Unit was advertised
to have an area of 95 square meters (sqm).
Thinking that it was sufficient and spacious
enough for his residential needs, Poole-Blunden
won the bid and entered into a Contract to Sell
with Union Bank. Poole-Blunden started
occupying. Thereafter, he decided to construct
two (2) additional bedrooms in the Unit. Upon
examining it, he noticed apparent problems in
its dimensions. He took rough measurements of
the Unit, which indicated that its floor area was
just about 70 sqm, not 95 sqm, as advertised by
Union Bank. Poole-Blunden wrote to Union
Bank, informing it of the discrepancy. He asked
for a rescission of the Contract to Sell, along with
a refund of the amounts he had paid, in the event
that it was conclusively established that the area
of the unit was less than 95 sqm, but the same
was denied by the Union Bank. Aggrieved, he
filed an action for rescission of the Contract to
Sell under Art. 1390 of the Civil Code. Will the
action prosper?
A: YES. Art. 1390 of the NCC stipulates that a
contract is voidable or annullable even if there is no
damage to the contracting parties where "consent is
vitiated by mistake, violence, intimidation, undue
influence or fraud." Under Art. 1338 of the NCC,
"[t]here is fraud when, through insidious words or
machinations of one of the contracting parties, the
other is induced to enter into a contract which,
without them, he would not have agreed to."
UNIVERSITY OF SANTO TOMAS
2022 GOLDEN NOTES
The fraud required to annul or avoid a contract
"must be so material that had it not been present,
the defrauded party would not have entered into the
contract." Poole-Blunden's contention on how
crucial the dimensions and area of the Unit are to his
decision to proceed with the purchase is well-taken.
As he emphasized, he opted to register for and
participate in the auction for the Unit only after
determining that its advertised area was spacious
enough for his residential needs. Therefore, there is
fraud for the reason that had Poole-Blunden been
informed by the Union Bank that the floor area was
actually less than the stipulated, he would not have
entered the Contract to Sell. (Poole-Blunden v. UBP,
G.R. No. 205838, 29 Nov. 2017)
Who may Institute an Action for Annulment
1. Real party in interest – All who are principally
or subsidiarily liable; and
2. One not responsible for the defect of the
contract.
NOTE: An action for annulment may be instituted
by all who are thereby obliged principally or
subsidiarily. He who has capacity to contract may
not invoke the incapacity of the party with whom he
has contracted nor can those who exerted
intimidation, violence or undue influence or
employed fraud or caused mistake base their action
upon these flaws of the contract.
Effects of Annulment of a Contract
1. If contract not yet consummated – parties shall
be released from the obligations arising
therefrom.
2. If contract has already been consummated –
rules provided in Arts. 1398-1402 shall govern.
a. Restitution
GR: Mutual restitution – the contracting
parties shall restore to each other things
which have been the subject matter of the
contract, with their fruits and the price with
its interest except in case provided by law.
In an obligation to render services, the
340
 Obligations and Contracts
value thereof shall be the basis for
damages. (Art. 1398, NCC)
NOTE: No restitution – The party
incapacitated is not obliged to make any
restitution except insofar as he has been
benefited by the thing or the price received
by him. (Art. 1399, NCC)
XPN : If and when the application of mutual
restitution will result in unjust enrichment
of one party at the expense of another.
(Tolentino, 1991)
b. Whenever the person obliged by the decree
of annulment to return the thing cannot do
so because it has been lost through his fault,
he shall return the fruits received and the
value of the thing at the time of the loss, with
interest from the same date. (Art. 1400,
NCC)
Causes of Extinction of Action to Annul
1. Prescription – the action for annulment must be
commenced within 4 years depending on the
ground stated.
2. Ratification – cleanses the contract of its defects
from the moment it was constituted. (Art. 1396,
NCC)
3. By loss of the thing which is the object of the
contract through fraud or fault of the person
who is entitled to annul the contract. (Art. 1401,
NCC)
NOTE: If the right of action is based upon the
incapacity of any one of the contracting parties, the
loss of the thing shall not be an obstacle to the
success of the action, unless it took place through
the fraud or fault of the plaintiff. (Art. 1401, NCC)
Prescriptive Period for an Annulment of a
Voidable Contract
The action for annulment shall be brought within 4
years, reckoned from:
341
1. In cases of intimidation, violence or undue
influence, from the time the defect of the
consent ceases;
2. In case of mistake or fraud, from the time of the
discovery of the same; and
3. When the action refers to contracts entered into
by minors or other incapacitated persons, from
the time the guardianship ceases. (Art. 1391,
NCC)
Ratification
Ratification may be effected expressly or tacitly. It is
understood that there is a tacit ratification if, with
knowledge of the reason which renders the contract
voidable and such reason having ceased, the person
who has a right to invoke it should execute an act
which necessarily implies an intention to waive his
right. (Art. 1393, NCC)
NOTE: Ratification extinguishes the action to annul
a voidable contract. (Art. 1392, NCC)
Requisites of Ratification
1. The contract involved must be voidable;
2. Person ratifying must know the reason for the
voidability;
3. The cause for the voidability must immediately
cease after the ratification; and
4. Ratification must be express or through an act
implying a waiver of the action to annul;
NOTE: Ratification entered into by the
incapacitated person may be effected by the
guardian of the incapacitated person. (NCC, Art.
1394) However, this rule does not pertain to a
rescissible contract entered into by the
guardian in behalf of his ward. The right to
ratify is transmitted to the heirs of the party
entitled to such right. (Tolentino, 2002)
Party who may Ratify
1. In contracts entered into by incapacitated
persons –
a. Guardian; and
b. Injured party himself, provided he is
already capacitated.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 Civil Law

2. In contracts voidable on the ground of mistake of Escalona, as Senior Vice President of TERP
– party whose consent was vitiated. (De Leon, Corp. binding upon it?
2016)
A: YES. Here, TERP Corp.'s subsequent act of twice
Kinds of Ratification paying the additional interest Escalona committed
to Banco Filipino Bank is considered a ratification of
1. Express –the desire of the innocent party to Escalona's acts. Moreover, Escalona likewise had
convalidate the contract, or his waiver or apparent authority to transact on behalf of
renunciation of his right to annul the contract is petitioner. Here, Banco Filipino Bank relied on
clearly manifested verbally or formally in Escalona’s apparent authority to promise interest
writing. (Pineda, 2000) payments, considering that Escalona was TERP
Corp.’s then Senior Vice President. His apparent
2. Implied (tacit) – it is the knowledge of the authority was further demonstrated by TERP Corp.
reason which renders the contract voidable and paying Banco Filipino Bank after Escalona promised
such reason having ceased, the person who has it. (Terp Construction Corporation v. Banco Filipino
a right to invoke it should execute an act which Savings and Mortgage Bank, G.R. No. 221771, 18 Sept.
necessarily implies an intention to waive his 2019)
right. (Art. 1393, NCC)
Confirmation v. Recognition
Effects of Ratification
CONFIRMATION RECOGNITION
Ratification cleanses the contract from all its defects
It is an act whereby a
from the moment it was constituted, thereby
defect of proof is cured
extinguishing the action to annul a voidable
such as when an oral
contract. It results therefore that after a contract is
It is an act by which contract is put into
validly ratified, no action to annul the same can be
a voidable contract writing or when a private
maintained based upon defects relating to its
is cured of its vice or instrument is converted
original validity. (Rabuya, 2017)
defect. into a public instrument.
(Luna v. Linatoc, G.R. No.
Retroactivity in Ratification of Contracts
L-48403, 28 Oct. 1942)

GR: Retroactivity applies in ratification of contracts.

Voidable Contract v. Rescissible Contract

XPN: When the rights of innocent third persons will

be prejudiced, ratification will not take effect. VOIDABLE RESCISSIBLE
As to the Kind of Defect Present
NOTE: Ratification does not require the conformity
Defect is intrinsic. Defect is external.
of the contracting party who has no right to bring
the action for annulment. As to the Source of Defect
The damage or prejudice
Q: The Senior Vice President of TERP Vitiated consent suffered by one of the
Construction Corp., Escalona, made a makes the contract contracting parties or a
commitment to Banco Filipino Savings and voidable. third person makes the
Mortgage Bank that TERP Corp. would pay contract rescissible.
interest differentials to the same. However,
after TERP Corp. subsequently paid the interests As to the Necessity of Damage
as agreed upon, it thereafter refused to pay its Damage / prejudice
unpaid balance arguing that Escalona was not Damage is immaterial.
is material.
authorized to make such commitment. Is the act

UNIVERSITY OF SANTO TOMAS 342

2022 GOLDEN NOTES
 Obligations and Contracts

As to the Source of Remedy Kinds of Unenforceable Contracts

Annullability of the Rescissibility of the
contract is based contract is based The following contracts are unenforceable unless
on law. on equity. they are ratified:

As to the Kind of Interest Predominates 1. Those entered into the name of another person
Public interest Private interest by one who has been given no authority/legal
predominates predominates. representation or acted beyond his powers;
As to the Susceptibility of Ratification “Unauthorized contracts”;

Susceptible of Not susceptible of

NOTE: A contract of sale over a piece of land
ratification ratification
entered by an agent whose authority is not in
As to Sanction or Remedy writing, even if he acted beyond the scope of his
It is a sanction. It is a remedy. authority is void, not merely unenforceable.
As to Who Can Avail the Remedy (Art. 1874, NCC)

Third persons who are

Only parties to the 2. Those that do not comply with the Statute of
affected may file
contract can assail it. Frauds; and
the action.
3. Those where both parties are incapable of
As to the Kind of Sanction giving consent to a contract. (Art. 1403, NCC)
It is a principal action. It is a subsidiary action.
8. VOID OR INEXISTENT CONTRACTS

7. UNENFORCEABLE CONTRACTS A void or inexistent contract is one which has no

Unenforceable contracts are those contracts which
cannot be enforced by action or complaint, unless
they have been ratified by the party or parties who
did not give consent thereto. (Jurado, 2009)
Characteristics of Unenforceable Contracts
1. It cannot be enforced by a proper action in
court;
2. It may be ratified;
3. It cannot be assailed by third person;
4. May only be assailed as a way of defense, not by
direct action; and
5. The defect of an unenforceable contract is of a
permanent nature and it will exist as long as the
contract is not duly ratified. The mere lapse of
time cannot give efficacy to the contract.
(Rabuya, 2017)
NOTE: An unenforceable contract is valid although
it produces no legal effect. (Tolentino, 2002)
force and effect from the very beginning, as if it had
never been entered into, and which cannot be
validated by either by time or ratification. This
definition includes not only those contracts in which
one of the essential requisites is totally wanting, but
also those which are declared by positive provision
of law or statute. A void or inexistent contract is
equivalent to nothing; it is absolutely wanting in
civil effects. (Tolentino, 2002)
The Following Contracts are Inexistent and Void
from the Beginning
1. Those whose cause, object or purpose is
contrary to law, morals, good customs, public
order or public policy;
2. Those which are absolutely simulated or
fictitious;
3. Those whose cause or object did not exist at the
time of the transaction;
4. Those whose object is outside the commerce of
men;
5. Those which contemplate an impossible
service;

343 UNIVERSITY OF SANTO TOMAS

FACULTY OF CIVIL LAW
 Civil Law

6. Those where the intention of the parties

relative to the principal object of the contract C. NATURAL OBLIGATIONS
cannot be ascertained;
7. Those expressly prohibited or declared void by
law.
Natural obligations, not being based on positive
law but on equity and natural law, do not grant a
Characteristics of Void Contracts
right of action to enforce their performance, but
after voluntary fulfillment by the obligor, they
1. The contract produces no effect whatsoever
authorize the retention of what has been delivered
either against or in favor of anyone; hence it
or rendered by reason thereof. (Art. 1423, NCC)
does not create, modify, or extinguish the
juridical relation to which it refers;
Rationale (1947 Code Commission)
2. No action for annulment is necessary, because
the nullity exists ipso jure; a judgment of nullity
1. On the part of the payor – It gives rise to a
would merely be declaratory;
moral, rather than a legal duty to pay or
3. It cannot be confirmed or ratified; and
perform, but the person performing feels that
4. If it has been performed, the restoration of what
in good conscience he should comply with his
has been given is in order. (Tolentino, 2002)
undertaking, which is based on moral grounds.

NOTE: The defect of inexistence of a contract is

2. On the part of the payee – The payee is obliged
permanent. It cannot be cured by ratification nor
to return the amount received by him because
prescription.
the payor was not legally bound to make the
payment.
Parties Affected

NOTE: The foundation of natural law are equity,

Any person may invoke the inexistence of the
morality and natural justice. (Sta. Maria, 2017)
contract whenever juridical effects founded thereon
are asserted against him. (Tolentino, 2002)
Examples of Natural Obligations

1. Paying despite extinctive prescription.

When a right to sue upon a civil obligation has

lapsed by extinctive prescription, the obligor
who voluntarily performs the contract cannot
recover what he has delivered or the value of
the service he has rendered. (Art. 1424, NCC)

e.g., The prescriptive period to file a case based

on a written agreement is 10 years from the
time the right of the action accrues. If the
creditor does not collect the amount of the loan
after 10 years from the time it should be paid,
such creditor can no longer collect from the
debtor.

If the debtor, despite the lapse of the period

and knowing that the debt has already
prescribed, pays the creditor, such debtor can
no longer recover the payment. (Sta. Maria,

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2022 GOLDEN NOTES