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Ust Golden Ntoes Civil Law 2022
Ust Golden Ntoes Civil Law 2022
XPNs:
IV. OBLIGATIONS AND CONTRACTS 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.
A. OBLIGATIONS
Obligations arising from other sources (Art. 1157,
NCC) do not have any form at all. (De Leon, 2010)
1. GENERAL PROVISIONS
Elements of an Obligation
An obligation is a juridical necessity to give, to do, or
not to do. (Art. 1156, NCC) The following are the elements of an obligation (J-
A-P-O):
Obligation as Juridical Necessity
1. Juridical tie or vinculum juris or efficient cause -
It is a juridical necessity because in case of non- the efficient cause by virtue of which the debtor
compliance, the courts of justice may be called upon becomes bound to perform the prestation;
by the aggrieved party to enforce its fulfillment or, (Pineda, 2000)
in default thereof, the economic value that it
represents. (De Leon, 2010) NOTE: The vinculum juris is established by:
a. Law;
It is a juridical relation or necessity that allows one b. Bilateral acts;
person (creditor) to demand the observance of c. Unilateral act. (Tolentino, 2002)
determinative conduct (i.e., giving, doing, or not
doing) from another (debtor), and in case of breach, 2. Active subject (creditor or obligee) - The person
the former can demand satisfaction from the assets demanding the performance of the obligation. It
of the latter. (Makati Stock Exchange v. Campos, G.R. is he in whose favor the obligation is
No. 138814, 16 Apr. 2009) constituted, established, or created;
Art. 1156 refers only to civil obligations that are 3. Passive subject (debtor or obligor) - The person
enforceable in court when breached. It does not bound to perform the prestation to give, to do,
cover natural obligations (Arts. 1423 -1430, NCC) or not to do;
because the latter are obligations that cannot be
enforced in court on equity and natural law and not 4. Object or prestation - The subject matter of the
on positive law. (Pineda, 2000) obligation which has a corresponding economic
value or susceptible of pecuniary substitution
When there is a right, there is a corresponding in case of noncompliance. It is a conduct that
obligation. Right is the active aspect while may consist of giving, doing, or not doing
obligation is the passive aspect. Thus, the concepts something. (Pineda, 2000)
of credit and debt are two distinct aspects of a
unitary concept of obligation. (Ibid.) NOTE: In order to be valid, the object or
prestation must be:
Form of Obligation a. Licit or lawful;
b. Possible, physically, and judicially;
GR: The law does not require any form in c. Determinate or determinable; and
obligations arising from contracts for their validity d. Pecuniary value or possible equivalent in
or binding force. (Art. 1356, NCC) money.
9. Right to choose and substitution NOTE: Actually, there are only two sources (i.e., law
a. Alternative – obligor may choose to and contracts) because obligations arising from
completely perform one out of the several quasi-contracts, delicts, and quasi-delicts are
prestations (Art. 1199, NCC); imposed by law. (Leung Ben v. O’Brien, 38 Phil. 182).
b. Facultative – only one prestation has been
agreed upon, but the obligor may render Time of Perfection
one in substitution of the first one. (Art.
1206, NCC) GR:
1. Law – from the time designated by the law
10. Imposition of penalty creating or regulating them;
a. Simple – there is no penalty imposed for 2. Contracts –from the time of the perfection of the
violation of the terms (Art. 1226, NCC); contract (Art. 1319, NCC) (e.g., meeting of the
b. Obligations with a penal clause – obligation minds).
which imposes a penalty for violation of the
terms. (Art. 1226, NCC) XPNs:
a. When the parties made a stipulation on the
11. Sanction right of the creditor to the fruits of the
a. Civil – gives a right of action to compel their thing;
performance; the sanction is judicial b. When the obligation is subject to a
process; suspensive condition, from which it arises
b. Natural– not based on positive law, but on upon fulfillment of the condition;
equity and natural law; does not grant a c. When the obligation is with a period; there
right of action to enforce their is already an existing obligation, but it is
performance, but after voluntary only demandable when the period expires
fulfillment by the obligor, they authorize or becomes due.
retention of what has been delivered
rendered by reason thereof; the sanction is 3. Quasi-contracts, delicts, quasi-delicts – from the
the law; time designated by the law creating or
c. Moral – cannot be enforced by action but regulating them.
are binding on the party who makes it in
conscience and natural law; the sanction is OBLIGATION EX LEGE
conscience or morality.
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
as to what has not been foreseen by the provisions Binding Force of Obligation Ex Contractu
of Book IV of NCC. (Art. 1158, NCC)
Obligations arising from contracts have the force of
NOTE: If there is conflict between the NCC and a law between the parties and should be complied
special law, the latter prevails unless the contrary with in good faith. (Art. 1159, NCC) This is known as
has been expressly stipulated in the NCC. (Art. 18, the “principle of obligatory force of contracts.”
NCC) (Rabuya, 2017)
2. Solutio indebiti (unjust enrichment) – Takes place NOTE: For further discussion on Quasi-Contracts,
when a person received something from another, please see the discussion thereon under Credit
without any right to demand for it, and the thing was Transactions – page 000.
unduly delivered to him through mistake, thereby
the obligation to return it arises (Art. 2154, NCC) OBLIGATION EX DELICTO
Basis civil action might arise did not exist. (Art. 29,
NCC)
GR: Art. 100 of the RPC provides: “Every person
criminally liable for a felony is also civilly liable.” NOTE: Although an acquittal on reasonable doubt
does not necessarily extinguish civil liability, it also
XPNs: Crimes of treason, rebellion, espionage, does not mean that the civil liability of the acquitted
contempt, and others wherein no civil liability nonetheless automatically survives. (De Leon v.
arises on the part of the offender either because Roqson Industrial Sales, Inc., G.R. No. 234329, 23 Nov.
there are no damages to be compensated or there is 2021)
no private person injured by the crime. (Reyes,
2008) OBLIGATION EX QUASI-DELICTO
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
A: YES. The Civil Code mandates common carriers Instances where the Remedy under Art. 1168 is
to observe extraordinary diligence in caring for the Not Available
goods they are transporting. Common carriers must
ascertain the identity of the recipient. Failing to 1. Where the effects of the act which is forbidden
deliver shipment to the designated recipient are definite in character – Even if it is possible
amounts to a failure to deliver. The shipment shall for the creditor to ask that the act be undone at
then be considered lost, and liability for this loss the expense of the debtor, consequences
ensues. FedEx is unable to prove that it exercised contrary to the object of the obligation will have
extraordinary diligence in ensuring delivery of the been produced which are permanent in
package to its designated consignee. It claimed to character.
have made a delivery but it even admits that it was 2. Where it would be physically or legally
not to the designated consignee. (Federal Express impossible to undo what has been undone –
Corp. v. Antonino, G.R. No. 199455, 27 June 2018) Because of:
1. The very nature of the act itself;
NOTE: Banks are expected to exercise higher degree 2. A provision of law; or
of diligence in their dealings, including those 3. Conflicting rights of third persons.
involving lands. Banks may not rely simply on the
face of the certificate of title. (LBP v. Musni, G.R. No. NOTE: In either case, the remedy is to seek recovery
206343, 22 Feb. 2017) for damages. (Art. 1168, NCC)
1. Voluntary – Debtor is liable for damages if he is Those obliged to deliver or to do something incur in
guilty of: delay from the time the obligee (creditor) judicially
a. Default (mora) or extrajudicially demands from them the
b. Fraud (dolo) fulfillment of their obligation.
c. Negligence (culpa)
d. Breach through contravention of the tenor In reciprocal obligations, neither party incurs in
thereof. (Art. 1170, NCC) delay if the other does not comply or is not ready to
2. Involuntary – Debtor is unable to perform the comply in a proper manner with what is incumbent
obligation due to fortuitous event, thus not upon him. From the moment one of the parties
liable for damages, as a rule. fulfills his obligations, delay by the other begins.
(Art. 1169, NCC)
Effects of Breach of Obligation
Kinds of Delay
If a person obliged to do something fails to do it, the
same shall be executed at his cost. 1. Ordinary delay – This is the mere failure to
perform an obligation at the stipulated time.
This same rule shall be observed if he does it in 2. Extraordinary delay or legal delay – This delay
contravention of the tenor of the obligation. already equates to non-fulfillment of the
Furthermore, it may be decreed that what has been obligation and arises after the extrajudicial or
poorly done be undone. (Art. 1167, NCC) judicial demand has been made upon the
debtor. (Pineda, 2000)
When the obligation consists in not doing, and the
obligor does what has been forbidden him, it shall Kinds of Legal Delay or Default
also be undone at his expense. (Art.1168, NCC)
1. Mora solvendi – Default on the part of the
debtor/obligor
Ex re – Default in real obligations (to give);
Q: American Express Card (AMEX) failed to A: NO. Petitioner defaulted in its obligation. Thus,
approve Pantaleon’s credit card purchases, respondent was within its rights to foreclose the
which urged the latter to commence a complaint property. Under the Civil Code, there is default
for moral and exemplary damages against when a party obliged to deliver something fails to do
AMEX. He said that he and his family so. In Social Security System v. Moonwalk
experienced inconvenience and humiliation due Development & Housing Corp., this Court
to the delays in credit authorization during his enumerated the elements of default:
vacation trip in Amsterdam and in the United
States. Did AMEX commit a breach of its In order that the debtor may be in default, it is
obligations to Pantaleon? necessary that the following requisites be present:
(1) that the obligation be demandable and already
A: YES. Generally, the relationship between a credit liquidated; (2) that the debtor delays performance;
card provider and its cardholders is that of creditor- and (3) that the creditor requires the performance
debtor, with the card company as the creditor judicially and extrajudicially. Default generally
extending loans and credit to the cardholder, who as begins from the moment the creditor demands the
debtor is obliged to repay the creditor. One hour performance of the obligation. (Gotesco Properties,
appears to be patently unreasonable length of time Inc. v. Solid Bank Corporation, G.R. No. 209452, 26
to approve or disapprove a credit card purchase. July 2017)
The culpable failure of AMEX herein is not the
failure to timely approve petitioner’s purchase, but MORA SOLVENDI
the more elemental failure to timely act on the same,
whether favorably or unfavorably. (Pantaleon v. Requisites (P-D-M-J-F)
American Express International, Inc., G.R. No.
174269, 08 May 2009) 1. Obligation Pertains to the debtor;
2. Obligation is Determinate, due and
Elements of Default demandable, and liquidated;
3. Obligation has not been performed on its
Q: Gotesco obtained from Solidbank a term loan Maturity date;
of ₱300 million. To secure the loan, Gotesco was 4. There is Judicial or extrajudicial demand by the
required to execute a Mortgage Trust Indenture creditor; and
naming Solidbank-Trust Division as Trustee. 5. Failure of the debtor to comply with such
The Indenture obliged Gotesco to mortgage demand.
several parcels of land in favor of Solidbank.
When the loan was about to mature, Gotesco
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.
1. Debtor may be liable for damages (Art. 1155, Delay in Reciprocal Obligations
NCC) or interests;
One party incurs in delay from the moment the
NOTE: The interest begins to run from the filing other party fulfills his obligation, while he, himself
of the complaint when there is no extrajudicial does not comply or is not ready to comply in a
demand. proper manner with what is incumbent upon him.
Demand is only necessary for a party to incur delay A: YES. Rescission on account of breach of
when the respective obligations are to be performed reciprocal obligations is provided under Art. 1191
on separate dates. of the NCC. The injured party may choose between
the fulfillment and the rescission of the obligation,
Reciprocal Obligations with the payment of damages in either case. He may
also seek rescission, even after he has chosen
Reciprocal obligations are those which arise from fulfillment, if the latter should become impossible.
the same cause, wherein each party is a debtor and (Camp John Hay Development Corporation v. Charter
a creditor of the other, such the obligation of one id Chemical and Coating Corporation, G.R. No. 19884, 07
dependent upon the obligation of the other. They Aug. 2019)
are to be performed simultaneously such that the
performance of one is conditioned upon the Q: On May 16, 1998, Wellex and U-Land entered
simultaneous fulfillment of the other. (Heirs of Mary into a Memorandum of Agreement (First
Lane R. Kim v. Quicho, G.R. No. 249247, 15 Mar. 2021) Memorandum of Agreement) to expand their
respective airline operations in Asia. The First
Q: Camp John Hay Development entered into a Memorandum of Agreement stated that within
Contractor's Agreement with Charter Chemical. 40 days from its execution date, Wellex and U-
Although the Contractor's Agreement contained Land would execute a share purchase
no date of the units' turnover, it allowed Charter agreement covering U-Land’s acquisition of the
Chemical to choose the units for offsetting under shares of stock of both APIC (APIC shares) and
an offsetting scheme against the 2 Units chosen PEC (PEC shares).
by Charter Chemical.
In this share purchase agreement, U-Land would
The contract price was P13,239,734.16, for purchase from Wellex its APIC shares and PEC
which Camp John Hay Development paid shares. Both parties agreed that the purchase
P7,339,734.16. The balance of P5,900,000.00 price of APIC shares and PEC shares would be
was ought to be settled by offsetting the price of paid upon the execution of the share purchase
the two (2) studio units. Camp John Hay agreement and Wellex’s delivery of the stock
Development had initially estimated that the certificates covering the shares of stock. The
construction would be completed by 2006. transfer of APIC shares and PEC shares to U-
Because of its failure to follow this timetable, the Land was conditioned on the full remittance of
Camp John Hay Suites was estimated to be the final purchase price as reflected in the share
completed by 2012. purchase agreement.
Due to the subsisting construction delay, Further, the transfer was conditioned on the
Charter Chemical, through counsel, wrote Camp approval of the Securities and Exchange
John Hay Development, demanding that it Commission of the issuance of the shares of
transfer the units or pay the value of these units stock, and the approval by the Taiwanese
in the sum of P6,996,517.48. Charter Chemical government of U-Land’s acquisition of these
filed before the Construction Industry shares of stock. Wellex and U-Land agreed that if
Arbitration Commission a Request for they were unable to agree on the terms of the
Arbitration. The arbitral tribunal ruled that share purchase agreement and the joint
Charter Chemical was entitled to its claim for the development agreement within 40 days from
value of the two (2) units because Camp John signing, then the First Memorandum of
Hay Development failed to deliver the units Agreement would cease to be effective.
within the targeted completion date. Is the
remedy of rescission proper? The 40-day period lapsed on June 25, 1998.
Wellex and U-Land were unable to enter into
any share purchase agreement although drafts
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.
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.
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
to causes independent of the will of the obligor. Kristina went back to the shop on February 6,
(Tolentino, 2002) 1999, but she was informed that the ring was
stolen by a thief the night before. Kristina filed
Q: MIAA entered into a compromise agreement an action for damages against the jewelry shop,
with ALA. MIAA failed to pay within the period which put up the defense of force majeure. Will
stipulated. Thus, ALA filed a motion for the action prosper or not? (2000 BAR)
execution to enforce its claim. MIAA filed a
comment and attributed the delays to it being a A: YES. The action will prosper. Since the defendant
government agency and to the Christmas rush. Is was already in default for not having delivered the
the delay of payment a fortuitous event? ring when delivery was demanded by plaintiff at its
due date, the defendant is liable for the loss of the
A: NO. The act-of-God doctrine requires all human thing and even when the loss was due to force
agencies to be excluded from creating the cause of majeure.
the mischief. Such doctrine cannot be invoked to
protect a person who has failed to take steps to Q: AB Corp entered into a contract with XY Corp
forestall the possible adverse consequences of loss for the construction of the research and
or injury. Since the delay in payment in the present laboratory facilities of the XY Corp. XY Corp paid
case was partly a result of human participation - 50% of the 10M contract price on the other hand
whether from active intervention or neglect - the AB agreed to complete the work for 18 months.
whole occurrence was humanized and was After 17 months, work was only 45% completed
therefore outside the ambit of a caso fortuito. as AB Corp experienced work slippage due to
labor unrest.
First, processing claims against the government are
certainly not only foreseeable and expectable, but (a) Can the labor unrest be considered a
also dependent upon the human will. Second, the fortuitous event?
Christmas season is not a caso fortuito, but a (b) Can XY Corp. unilaterally and
regularly occurring event. Third, the occurrence of immediately cancel the contract?
the Christmas season did not at all render (c) Must AB Corp. return the 50% down
impossible the normal fulfillment of the obligation. payment? (2008 BAR)
Fourth, MIAA cannot argue that it is free from any
participation in the delay. It should have laid out on A:
the compromise table the problems that would be (a) NO. Labor unrest is not a fortuitous event that
caused by a deadline falling during the Christmas will excuse AB Corp. from complying with its
season. Furthermore, it should have explained to obligation of constructing the research and
ALA the process involved in the payment of ALA’s laboratory facilities of XY Corp. The labor unrest,
claim. (MIAA v. Ala Industries Corp., G.R. No. 147349, which may even be attributed largely to AB Corp.
13 Feb. 2004) itself, is not the direct cause of non-compliance by
AB Corp. It is independent of its obligation. It does
Effects of Fortuitous Events not excuse compliance with the obligation. (DBP v.
Vda. De Moll, G.R. No. L-25802, 31 Jan. 1972) AB
1. On determinate obligation – The obligation is Corp. could have anticipated the labor unrest
extinguished. caused by delays in paying the laborer’s wages. The
2. On generic obligation – The obligation is not company could have hired additional laborers to
extinguished (genus nun quam peruit – genus make up for the work slowdown.
never perishes).
(b) YES. XY Corp. may unilaterally cancel the
Q: Kristina brought her diamond ring for obligation, but this is subject to the risk that the
cleaning to a jewelry shop that failed to fulfill its cancellation of the reciprocal obligation being
promise to return such ring in February 1, 1999. challenged in court and if AB Corp. succeeds, then
XY Corp. will be declared in default and be liable for 3. Damages, in any case; or
damages.
4. Subsidiary remedies of creditors:
(c) NO. Under the principle of quantum meruit, AB a. Accion subrogatoria
Corp. had the right to retain payment corresponding b. Accion pauliana
to his percentage of accomplishment less the c. Accion directa
amount of damages suffered by XY Corp. because of
the delay or default. SPECIFIC PERFORMANCE
A: NO. Jurisprudence is clear that the following and delivery and rescission in the alternative.
successive measures must be taken by a creditor Jebson, in its defense, claimed that they were not
before he may bring an action for rescission of an able to secure the necessary permits because
allegedly fraudulent contract: Sps. Salonga stubbornly refused to cause the
consolidation and partition of the parcels of
(1) exhaust the properties of the debtor land. Sps. Salonga averred that they were not
through levying by attachment and execution liable to the complainants since there was no
upon all the property of the debtor, except such privity of contract between them, adding that
as are exempt by law from execution; the contracts to sell were unenforceable against
(2) exercise all the rights and actions of the them as they were entered into by Jebson
debtor, save those personal to him (acción without their conformity, in violation of the JVA.
subrogatoria); and HLURB rescinded the Contract to Sell and held
(3) seek rescission of the contracts executed by Sps. Salonga Solidarily liable with Jebson.
the debtor in fraud of their rights HLURB-BOC reversed the former ruling and
(acción pauliana). instead rescinded the swapping arrangement
and maintaining the validity of the Contract to
It is thus, apparent that an action to rescind, or Sell, thereby granting specific performance
an acción pauliana, must be of last resort, availed of instead. Is the grant of the remedy of specific
only after the creditor has exhausted all the performance in Buenviaje's favor proper?
properties of the debtor not exempted from
execution or after all other legal remedies have been A: YES. As between the two remedies made
exhausted and have been proven futile. available to him, Buenviaje, had, chosen the remedy
(Metropolitan Bank and Trust Company v. of specific performance and, therefore, ought to be
International Exchange Bank, G.R. No. 176008, 10 bound by the choice he had made. To add, the
Aug. 2011) fundamental rule is that reliefs granted a litigant are
limited to those specifically prayed for in the
Q: Jebson entered into a Joint Venture complaint. Buenviaje's alternative prayer for
Agreement (JVA) with Sps. Salonga obligated the resolution is textually consistent with that portion
former to construct ten (10) residential units on of Art. 1191 of the NCC provides that an injured
the latter’s three parcels of land. Out of the ten party "may also seek rescission, even after he has
(10) units, seven (7) units will belong to Jebson. chosen fulfillment if the latter should become
It was also allowed to sell its allocated units impossible." Nevertheless, the impossibility of
under such terms as it may deem fit, subject to fulfillment was not sufficiently demonstrated in the
the condition that the price agreed upon was proceedings conducted in this case.
with the conformity of Sps. Salonga. Thereafter,
Jebson entered into a Contract to Sell with Besides, mutual restitution is the proper
Buenviaje over one of its units without the consequence of the remedy of resolution. It cannot
conformity of Sps. Salonga. Buenviaje was able arise - as it is, in fact, theoretically incompatible -
to fully pay for Jebson’s unit through a swapping with the remedy of specific performance, which is
arrangement, which allows the vendee to the relief prayed for and consequently, granted to
convey certain properties as consideration for the injured party herein. (Buenviaje v. Sps. Salonga,
the sale. Despite this full payment, Jebson was GR No. 216023, 05 Oct. 2016)
unable to complete said unit.
This prompted Buenviaje to demand the unit’s Q: While the case was pending, Felix donated his
immediate completion and delivery. Jebson, parcels of land in favor of his children. Judgment
having failed to comply with the demand, was rendered against Felix. Four years after the
Buenviaje filed an action before the HLURB said donation, the sheriff sought to enforce the
against Jebson and Sps. Salonga for specific alias writ of execution and discovered that Felix
performance praying for the unit’s completion no longer had any property and had conveyed
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.
1191 is the obligor’s failure to comply with an of the amounts already paid as well as the
obligation. In this case, Ong’s failure to pay is not remaining post-dated checks issued by
even a breach but merely an event that prevents the respondent representing the remaining
vendor’s obligation to convey title from acquiring monthly amortizations. The CA affirmed. Is the
binding force. (Ong v. CA, G.R. No. 97347, 06 July CA correct?
1999)
A: NO. It cannot be said that petitioners' failure to
Q: Petitioners and respondents entered into a undertake their obligation under paragraph 7 to
Contract to Sell (subject contract) over the cause the transfer of the property to their names
subject land. The subject contract from one Edilberta N. Santos within 90 days from
provides, inter alia, that: (a) the consideration the execution of the said contract defeats the object
for the sale is P33,155,000.00 payable as of the parties in entering into the subject contract,
follows: down payment in the amount of considering that the same paragraph provides
P11,604,250.00 inclusive of the amount of respondents contractual recourse in the event of
P2,000,000.00 previously paid by respondents petitioners' non-performance of the aforesaid
as earnest money/reservation fee, and the obligation, that is, to cause such transfer themselves
remaining balance of P21,550,750.00 payable in in behalf and at the expense of petitioners.
36 monthly installments, each in the amount of Indubitably, there is no substantial breach of
P598,632.00 through post-dated checks; (b) in paragraph 7 on the part of petitioners that would
case any of the checks is dishonored, the necessitate a rescission (or resolution) of the
amounts already paid shall be forfeited in subject contract.
petitioners' favor, and the latter shall be entitled
to cancel the subject contract without judicial Notwithstanding the foregoing facts, the Court
recourse in addition to other appropriate legal cannot grant petitioners' prayer to order the
action; (c) respondents are not entitled to cancellation of the subject contract and the
possess the subject land until full payment of the forfeiture of the amounts already paid by
purchase price; (d) petitioners shall transfer the respondents on account of the latter's failure to pay
title over the subject land from a certain its monthly amortizations, simply because
Edilberta N. Santos to petitioners' names, and, petitioners neither prayed for this specific relief nor
should they fail to do so, respondents may cause argued that they were entitled to the same. Worse,
the said transfer and charge the costs incurred petitioners were declared "as in default" for failure
against the monthly amortizations; and (e) upon to file the required pre-trial brief and, thus, failed to
full payment of the purchase price, petitioners present any evidence in support of their defense.
shall transfer title over the subject land to (Nolasco v. Cuerpo, GR No. 210215, 09 Dec. 2015)
respondents. However, respondents sent
petitioners a letter seeking to rescind the NOTE: If the case involves a contract to sell, wherein
subject contract on the ground of financial full payment of the purchase price is a positive
difficulties. They also sought the return of the suspensive condition, the non-fulfillment of which is
amount they had paid. not a breach of contract, but merely an event that
prevents the seller from conveying title to the
As their letter went unheeded, respondents filed purchaser. (Royal Plains View, Inc. v. Mejia, G.R. No.
a complaint for rescission. Petitioners 230832, 12 Nov. 2018)
countered that respondents' act is a unilateral
cancellation of the subject contract as the Q: Can a contract be rescinded extrajudicially
former did not consent to it. Moreover, the despite the absence of a special contractual
ground of financial difficulties is not a ground to obligation therefor?
effect a valid rescission. The RTC ruled in favor
of respondents and, accordingly, ordered the A: YES. An extrajudicial rescission based on grounds
rescission of the subject contract; and the return not specified in the contract would not preclude a
party to treat the same as rescinded. The rescinding 1300 to 1304. In the latter, there is change of
party, however, by such course of action, subjects creditors, whereas in the former there is no change
himself to the risk of being held liable for damages of creditors; the creditor merely acts in the name
when the extrajudicial rescission is questioned by and for the account of the debtor after exhausting
the opposing party in court. In other words, the the assets of the latter but not enough to satisfy the
party who deems the contract violated may claims of the creditor.
consider it resolved or rescinded, and accordingly,
without previous court action, but it proceeds at its Requisites (I-P-I-N)
own risk. For it is only the final judgment of the
corresponding court that will conclusively and 1. The debtor’s assets must be Insufficient to
finally settle whether the action taken was or was satisfy claims against him;
not correct in law. (Nissan Car Lease Phils, Inc., v. 2. The creditor must have Pursued all
LICA Management and Proton Pilipinas, Inc., G.R. No. properties of the debtor subject to
176986, 13 Jan. 2016) execution;
3. The right of action must Not be purely
DAMAGES personal; and
4. The debtor whose right of action is
Liability for Damages exercised must be Indebted to the creditor.
Those liable under Art. 1170 shall pay damages only Effects of Subrogatory Action
if aside from the breach of contract, prejudice or
damage was caused. (Berg v. Teus, G.R. No. L-6450, 1. The creditor may exercise the subrogatory
30 Oct. 1954) action on behalf of the debtor not only up to the
amount of his credit but in its totality.
NOTE: If action is brought for specific performance,
damages sought must be asked in the same action; NOTE: The excess (if any) must be returned to
otherwise, the damages are deemed waived. the debtor.
(Daywalt v. La Corporacion, G.R. No. L-13505, 04 Feb.
1919) 2. The bringing of action does not entitle the
creditor to preference.
Kinds of Damages (M-E-N-T-A-L)
3. The defendant (the debtor of the debtor) may
1. Moral; avail himself of all defenses available against
2. Exemplary; the creditor.
3. Nominal;
4. Temperate; NOTE: In order to exercise action subrogatoria, a
5. Actual; previous approval of the court is not necessary.
6. Liquidated. (Tolentino, 1991)
Accion Subrogatoria An action where the creditor files in court for the
rescission of acts or contracts entered into by the
An action whereby the creditor, whose claim has not debtor designed to defraud the former. (Art. 1177,
been fully satisfied, may go after the defendant NCC)
debtor’s debtor (third person). (Art. 1177, NCC)
NOTE: When the creditor could not collect in any
Accion subrogatoria is different and distinct from manner, accion pauliana may be resorted by him to
active subjective subrogation governed by Arts. rescind a fraudulent alienation of property.
(Regalado, v. Luchsinger and Co., G.R. No. L-2250, 17 NOTE: Other obligations which are demandable at
Feb. 1906) once are:
1. Obligations with a resolutory condition; and
Requisites (P-A-P-I-L) 2. Obligations with a resolutory term or period.
(Arts. 1179 (2) and 1193 (2), NCC)
1. Defendant must be Indebted to plaintiff;
2. The fraudulent act performed by the debtor The most distinctive characteristic of a pure
subsequent to the contract gives Advantage to obligation is its immediate demandability. This
another; quality, however, must not be understood in such a
3. The creditor is Prejudiced by such act; way as to lead to absurd interpretations which
4. The creditor must have Pursued all properties would literally require the obligor or debtor to
of the debtor subject to execution; and comply immediately with his obligation. A
5. The creditor has no other Legal remedy. distinction must be made between:
Example: Alienations of property, payment of debts 1. The immediate demandability of the obligation;
which are not due, renunciation of rights such as the and
right of usufruct or an inheritance, assignment of 2. Its performance or fulfillment by the obligor or
credit, and remission of debts. debtor. Although the obligee or creditor can
demand the performance of the obligation
Accion Directa immediately, the quality of immediate
demandability is not infringed or violated when
The right of a person to go directly against another a reasonable period is granted for performance.
person who is not privy to the contract. (Arts. 1652, (Jurado, 2009)
1608, 1729 and 1893, NCC)
Conditional Obligation
Kinds:
An obligation subject to a condition and the
1. Subsidiary liability of sublessee for the rent effectivity of which is subordinated to the
(Art. 1652, NCC); fulfillment or non-fulfillment of a future and
2. Right of sellers a retro to redeem the property uncertain event or a past event unknown to the
from persons other than the buyer a retro (Art. parties. (Pineda, 2000)
1608, NCC);
3. Subsidiary liability of owners to laborers and Condition
material men (Art. 1729, NCC); and
4. The principal may sue the substitute of the A condition is an event that is future and uncertain,
agent with respect to the obligations which the upon which the efficacy or extinguishment of an
substitute has contracted under the obligation depends. It has two requisites: (i)
substitution. (Art. 1893, NCC) futurity, and (ii), uncertainty.
PURE AND CONDITIONAL OBLIGATION An uncertain but past event itself can never
constitute a condition because, in order to be
Pure Obligation classified as a condition, the requisites of futurity
An obligation whose performance does not depend and uncertainty are required. Neither can it
upon a future or uncertain event, or upon a past constitute a term or period because, in order to be
event or upon a past event unknown to the parties, classified as a term or period, the requisites of
demandable at once. (Art. 1179, NCC) futurity and certainty are required. However, the
proof or ascertainment of the fact or event, as
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
donation had to be valid before the fulfillment of the potestative to the obligor or debtor. Besides, the
condition. If there was no fulfillment or compliance creditor is naturally interested in the fulfillment of
with the condition, the donation may now be the condition since it is only by such fulfillment that
revoked and all rights which the donee may have the obligation arises or becomes effective. (Jurado,
acquired under it shall be deemed lost and 2009; Art. 1181, NCC)
extinguished. (Central Philippine University v. CA,
G.R. No. 112127, 17 July1995) Causal Condition
If the condition is potestative in the sense that its GR: Impossible conditions annul the obligation
fulfillment depends exclusively upon the will of the which depends upon the parties but not of a third
creditor, the obligation shall be valid. This is so person.
because the provision of the first sentence of Art.
1182 extends only to conditions which are
1. Future;
2. Certain; and
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 It is an obligation where the debtor is alternatively
fulfillment of their respective obligation during the bound by different prestations, but the complete
term or period. performance of one is sufficient to extinguish the
obligation.
Instances where the Court may Fix the Period
(1991, 1997, 2003 BAR) 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)
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
alternatively bound, only one is practicable to make the selection effective because none of
(Art. 1202, NCC); them can extinguish the entire obligation.
If the obligation is solidary and there is no
4. The selection made by the debtor (or the stipulation to the contrary, the choice by one will be
creditor when it has been expressly granted to binding personally upon him; the choice of one will
him) cannot be subjected by him to a be personally binding to him, but not as to the
condition or a term unless the creditor (or others.
debtor in case the choice is with the creditor)
consents thereto. (Tolentino, 2002) Thus, if A and B solidarily bind themselves to deliver
a horse or a carabao to C, the selection of A of the
Effectivity of the Choice in Alternative horse, when communicated to C, will bind him, and
Obligations he cannot, later on, deliver the carabao. It is,
however, not binding on B, who may extinguish the
The choice made takes effect only upon its obligation by delivering the carabao. (Tolentino,
communication to the other party, and from such 2002)
time, the obligation ceases to be alternative. (Art.
1201, NCC; Art. 1205, NCC) Effects of Loss of Objects
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
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:
were in apparent bad condition. Thus, Chua filed Q: Mactan Rock Industries, through its President
with Smith Bell and Co., Inc. (claiming agent of and Chief Executive Officer Tompar, entered
First Insurance Co.) a formal statement of claim into a Technical Consultancy Agreement
for the loss. No settlement of the claim having (TCA) with Germo, whereby the parties
been made, Chua then filed an action. Is Smith, agreed, inter alia, that: (a) Germo shall stand as
Bell, and Co., solidarily liable upon a marine MRII's marketing consultant who shall take
insurance policy with its disclosed foreign charge of negotiating, perfecting sales, orders,
principal? contracts, or services of MRII, but there shall be
no employer-employee relationship between
A: NO. Art. 1207 of the Civil Code clearly provides them; and (b) Germo shall be paid on a purely
that "there is a solidary liability only when the commission basis, including a monthly
obligation expressly so states, or when the law or allowance of P5,000.00. During the effectivity of
the nature of the obligation requires solidarity." The the TCA, Germo successfully negotiated and
well-entrenched rule is that solidary obligation closed with International Container Terminal
cannot lightly be inferred. It must be positively and Services, Inc. (ICTSI) a supply contract of 700
clearly expressed. (Smith, Bell & Co., Inc. v. CA, G.R. cubic meters of purified water per day.
No. 110668, 06 Feb. 1997) Accordingly, MRII commenced supplying water
to ICTSI on February 22, 2007, and in turn, the
Q: The labor arbiter rendered a decision, the latter religiously paid MRII the corresponding
fallo of which states the following respondents monthly fees. Despite the foregoing, MRII
as liable, namely: FCMC, Sicat, Gonzales, Chiu allegedly never paid Germo his rightful
Chin Gin, Lo Kuan Chin, and INIMACO. INIMACO commissions amounting to P2,225,969.56 as of
questions the execution, alleging that the alias December 2009, inclusive of interest. Initially,
writ of execution altered and changed the tenor Germo filed a complaint before the National
of the decision by changing their liability from Labor Relations Commission (NLRC), but the
joint to solidary, by the insertion of the words same was dismissed for lack of jurisdiction due
"AND/OR.” Is the liability of INIMACO pursuant to the absence of employer-employee
to the decision of the labor arbiter solidary or relationship between him and MRII. Germo filed
not? the instant complaint praying that MRII and
Tompar pay him for unpaid commissions with
A: INIMACO's liability is not solidary but merely legal interest from the time they were due until
joint. Well-entrenched is the rule that solidary fully paid, moral damages, exemplary damages,
obligation cannot lightly be inferred. There is a and the costs of suit.
solidary liability only when the obligation expressly
so states, when the law so provides or when the MRII and Tompar averred, among others,
nature of the obligation so requires. that: (a) there was no employer-employee
relationship between MRII and Germo as the
In the dispositive portion of the labor arbiter, the latter was hired as a mere consultant; (b) Germo
word "solidary" does not appear. The said fallo failed to prove that the ICTSI account
expressly states the following respondents therein materialized through his efforts as he did not
as liable, namely: Filipinas Carbon Mining submit the required periodic reports of his
Corporation, Sicat, Gonzales, Chiu Chin Gin, Lo Kuan negotiations with prospective clients;
Chin, and INIMACO. Nor can it be inferred therefrom and (c) ICTSI became MRII's client through the
that the liability of the six respondents in the case efforts of a certain Ed Fornes. Are MRII and
below is solidary; thus, their liability should merely Tompar, as the CEO and President, solidarily
be joint. (INIMACO v. NLRC, G.R. No. 101723, 11 May liable to pay Germo?
2000)
A: NO. It is a basic rule that a corporation is a
juridical entity vested with legal and personality
separate and distinct from those acting for and on 6. In indivisible or joint obligation, the defense of
behalf of, and from the people comprising it. As a res judicata of one does not extend to the others
general rule, directors, officers, or employees of a (8 Manresa, 200-201); or
corporation cannot be held personally liable for the 7. The delay on the part of only one of the joint
obligations incurred by the corporation unless it can debtors does not produce effects with respect
be shown that such director/officer/employee is to the others, and if the delay is produced
guilty of negligence or bad faith and that the same through the acts of only one of the joint
was clearly and convincingly proven. creditors, the others cannot take advantage
thereof.
Before a director or officer of a corporation can be
held personally liable for corporate obligations, the JOINT INDIVISIBLE OBLIGATIONS
following requisites must concur:
The obligation is joint because the parties are
(1) the complainant must allege in the merely proportionately liable. It is indivisible
complaint that the director or officer assented because the object or subject matter is not
to patently unlawful acts of the corporation, or physically divisible into different parts. In other
that the officer was guilty of gross negligence or words, it is joint as to liabilities of the debtors or
bad faith; and rights of the creditors but indivisible as to
(2) the complainant must clearly and compliance. This obligation also constitutes the
convincingly prove such unlawful acts, middle ground between a joint obligation and a
negligence or bad faith. solidary obligation. (De Leon, 2010)
In this case, Tompar's assent to the patently A joint indivisible obligation gives rise to indemnity
unlawful acts of the MRII or that his acts were for damages from the time any one of the debtors
tainted by gross negligence or bad faith was not does not comply with his undertaking. The debtors
alleged in Germo's complaint, much less proven who may have been ready to fulfill their promises
during the course of the trial. Therefore, the shall not contribute to the indemnity beyond the
deletion of Tompar's solidary liability with MRII is corresponding portion of the price of the thing or of
in order. (Mactan Rock Industries v. Germo, G.R. No. the value of the service in which the obligation
228799, 10 Jan. 2018) consists. (Art. 1224, NCC)
1. Each debtor is liable only for a proportionate 1. Obligation is joint, but since it is indivisible,
part of the entire debt; creditor must proceed against all the joint
2. Each creditor, if there are several, is entitled debtors ;
only to a proportionate part of the credit; 2. Demand must be to all debtors ;
2. The demand made by one creditor upon one 3. In case of insolvency of one debtor, others are
debtor, produces effects of default only as not liable for his share ;
between them; 4. If there are joint creditors, delivery must be
3. Interruption of prescription caused by the made to all unless authorized by others; and
demand made by one creditor upon one debtor, 5. Each joint creditor may renounce his share.
will NOT benefit the co-creditors or the co-
debtors; Effects of Different Permutations of Joint
4. Insolvency of a debtor will not increase the Indivisible Obligations
liability of his co-debtor;
5. Vices of each obligation emanating from a 1. If there are two or more debtors, compliance
particular debtor or creditor will not affect the with the obligation requires the concurrence of
others; all the debtors, although each for his own share.
The obligation can be enforced only by everyone what belongs to him; there is no merger,
preceding against all of the debtors; much less a renunciation of rights, but only mutual
2. If there are two or more creditors, the representation. It is thus essentially a mutual
concurrence or collective act of all the creditors, agency. Its juridical effects may be summarized as
although each of his own shares, is also follows:
necessary for the enforcement of the obligation; 1. Since it is a reciprocal agency, the death of a
and solidary creditor does not transmit the
3. Each credit is distinct from one another; solidarity to each of his heirs but to all of them
therefore, a joint debtor cannot be required to taken together;
pay for the share of another with debtor, 2. Each creditor represents the others in the act of
although he may pay if he wants to. receiving payment and in all other acts which
tend to secure the credit or make it more
In case of insolvency of one of the debtors, the advantageous. Hence, if he receives only a
others shall not be liable for his shares. To hold partial payment, he must divide it among the
otherwise would destroy the joint character of the other creditors. He can interrupt the period of
obligation. (Art. 1209, NCC) prescription or render the debtor in default, for
the benefit of all other creditors;
Effect of Breach by a Debtor 3. One creditor, however, does not represent the
others in such acts as novation (even if the
If one of the joint debtors fails to comply with his credit becomes more advantageous),
undertaking and the obligation can no longer be compensation and remission. In these cases,
fulfilled or performed, it will then be converted into even if the debtor is released, the other
one of indemnity for damages. Innocent joint debtor creditors can still enforce their rights against
shall not contribute to the indemnity beyond his the creditor who made the novation,
corresponding share of the obligation. compensation, or remission;
4. The creditor and its benefits are divided equally
SOLIDARY OBLIGATIONS among the creditors, unless there is an
agreement among them to divide differently.
Each of the debtors is obliged to pay the entire Hence, once the credit is collected, an
obligation, and each one of the creditors has the accounting and a distribution of the amount
right to demand from any of the debtors the collected should follow ;
payment or fulfillment of the entire obligation. 5. The debtor may pay to any solidary creditor,
but if a judicial demand is made on him, he must
Kinds of Solidary Obligation pay only to the plaintiff; and
6. Each creditor may renounce his right even
1. Passive – Solidarity on the part of the debtors. against the will of the debtor, and the latter
2. Active – Solidarity on the part of the creditors. need not thereafter pay the obligation to the
3. Mixed – Solidarity on both sides. former.
4. Conventional – agreed by the parties.
5. Legal – imposed by law. Passive Solidarity
LEGAL EFFECTS OF ACTIVE AND In passive solidarity, the essence is that each debtor
PASSIVE SOLIDARITY (TOLENTINO, 2002) can be made to answer for the others, with the right
on the part of the debtor-payor to recover from the
Active Solidarity others their respective shares. In so far as the
payment is concerned, this kind of solidarity is
The essence of active solidarity consists in the similar to a mutual guaranty. Its effects are as
authority of each creditor to claim and enforce the follows:
rights of all, with the resulting obligation of paying
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
fallen due. The creditor has, however, condoned one year. Because of their lack of business
Jojo's entire share in the debt. Since Jovy has know-how, their business collapsed. Juancho
become insolvent, the creditor makes a demand and Don ended up penniless, but Pedro was able
on Joey to pay the debt. to borrow money and put up a restaurant which
did well. Can Cita demand that Pedro pay the
a. How much, if any, may Joey be compelled to entire obligation since he, together with the two
pay? others, promised to pay the full amount after
b. To what extent, if at all, can Jojo be one year? Defend your answer. (2015 BAR)
compelled by Joey to contribute to such
payment? (1998 BAR) A: NO. The obligation in this case is presumed to be
joint. The concurrence of two or more creditors or
A: two or more debtors in one and the same obligation
a. Joey can be compelled to pay only the does not imply that each one of the former has the
remaining balance of P200,000, in view of the right to demand, or that each one of the latter is
remission of Jojo’s share by the creditor. (Art. bound to render the entire compliance of the
1219, NCC) prestation. (Art. 1207, NCC) In a joint obligation,
b. Jojo can be compelled by Joey to contribute there is no mutual agency among the joint debtors
P50,000. When one of the solidary debtors such that if one of them is insolvent the others shall
cannot, because of his insolvency, reimburse his not be liable for his share.
share to the debtor paying the obligation, such
share shall be borne by all his co-debtors, in To whom payment should be made in a solidary
proportion to the debt of each. (Art. 1217(3)) obligation
Since the insolvent debtor's share, which Joey
paid was P100,000, and there are only two GR: To any of the solidary creditors.
remaining debtors - namely Joey and Jojo -
these two shall share equally the burden of XPN: If demand, judicial or extra-judicial, has been
reimbursement. Jojo may thus be compelled by made by one of the creditors, payment should be
Joey to contribute P50,000. made to him. (Art. 1214, NCC)
Q: Iya and Betty owed Jun P500,000 for In cases of Solidary Creditors, one may act for all
advancing their equity in a corporation they
joined as incorporators. Iya and Betty bound Each one of the solidary creditors may execute acts
themselves solidarily liable for the debt. Later, that may be useful or beneficial to the others, but he
Iya and Jun became sweethearts, so Jun may not do anything which may be prejudicial to
condoned the debt of P500,000. May Iya demand them. (Art. 1212, NCC)
from Betty P250,000 as her share in the debt?
Explain with legal basis? (2015 BAR) NOTE: Prejudicial acts may still have valid legal
effects, but the performing creditor shall be liable to
A: NO. Iya may not demand the P250,000 from Betty his co-creditors. (Pineda, 2000)
because the entire obligation has been condoned by
the creditor Jun. In a solidary obligation, the Effects of Assignment of Rights in a Solidary
remission of the whole obligation obtained by one Obligation
of the solidary debtors does not entitle him to
reimbursement from his co-debtors. (Art. 1220, GR: A solidary creditor cannot assign his right
NCC) because it is predicated upon mutual confidence,
meaning the personal qualification of each creditor
Q: Juancho, Don, and Pedro borrowed P150,000 had been taken into consideration when the
from their friend Cita to put up an internet café, obligation was constituted. (Art. 1213, NCC)
orally promising to pay her the full amount after
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 Obligations deemed Divisible
is not susceptible of partial performance, because
otherwise the essence of the obligation will be When the object of the obligation involves:
changed. 1. Certain number of days of work;
2. Accomplishment of work by metrical unit;
An obligation is indivisible when it cannot be validly and
performed in parts, whatever may be the nature of 3. Analogous things which are by their nature
the thing which is the object thereof. The susceptible of partial performance. (Art.
indivisibility refers to the prestation and not to the 1225, NCC)
object thereof. (Sps. Lam v. Kodak Philippines, Ltd.,
G.R. No. 167615, 11 Jan. 2016) Obligations deemed Indivisible
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
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 Can the debtor just choose penalty over non-
accessory undertaking by virtue of which the fulfillment?
obligor assumes a greater liability in case of breach
of the obligations. (Jurado, 2009) GR: The debtor cannot exempt himself from the
performance of the obligation by paying the penalty.
Penal Clause (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
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)
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;
1. Integrity – The payment of the obligation must GR: Thing paid must be the very thing due and
be completely made; cannot be another thing even if of the same or more
2. Identity – The payment of the obligation must quality and value.
consist in the performance of the very thing
due; XPNs:
3. Indivisibility – The payment of the obligation 1. Dation in payment;
must be in its entirety. 2. Novation of the obligation; and
3. Obligation is facultative.
Integrity
NOTE: In an obligation to do or not to do, an act or
GR: Payment or performance must be complete. forbearance cannot be substituted by another act or
(Art. 1233, NCC) forbearance against the obligee’s will.
XPNs: Indivisibility
1. Substantial performance performed in good
faith; (Art. 1234, NCC) GR: Debtor cannot be compelled by the creditor to
2. When the obligee accepts the performance, perform obligation in parts and neither can the
knowing its incompleteness or irregularity and debtor compel the creditor to accept obligation in
without expressing any protest or objection; parts.
(Art. 1235, NCC) or
3. Debt is partly liquidated and partly XPNs : When:
unliquidated, but the liquidated part of the debt 1. Partial performance has been agreed upon;
must be paid in full. 2. Part of the obligation is liquidated and part
is unliquidated; or
Substantial Performance Doctrine 3. To require the debtor to perform in full is
impractical.
It provides the rule that if a good faith attempts to
perform does not precisely meet the terms of an Acceptance by a Creditor of a Partial Payment
agreement or statutory requirements, the NOT an Abandonment of its Demand for Full
performance will still be considered complete if the Payment
essential purpose is accomplished. (Black’s Law
Dictionary, 2009) When creditors receive partial payment, they are
not ipso facto deemed to have abandoned their prior
Requisites demand for full payment.
1. Attempt in good faith to comply with obligation; To imply that creditors accept partial payment as
2. Slight deviation from the obligation; and the complete performance of their obligation, their
omission or defect of the performance is acceptance must be made under circumstances that
technical and unimportant; and does not indicate their intention to consider the performance
pervade the whole, or is not material that the complete and to renounce their claim arising from
object which the parties intended to accomplish the defect.
is not attained. (Tolentino, 2002)
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)
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. GR: Payment to an unauthorized person is not a
1236 to 1238, NCC) cannot be applied to the case of valid payment. (Art. 1241, NCC)
a third person who pays the redemption price in
sales with right of repurchase. This is so because the XPNs:
1. Payment to an incapacitated person if:
3. Payment in good faith to the possessor of The delivery and transmission of ownership of a
credit. (Art. 1242, NCC) thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. The
NOTE: Payment made to the creditor by the debtor property given may consist not only of a thing but
after the latter has been judicially ordered to retain also of a real right. (Tolentino, 2002) (2009 BAR)
the debt shall not be valid. (Art. 1243, NCC)
Dacion en pago is the delivery and transmission of
ownership of a thing by the debtor to the creditor as
SPECIAL FORMS OF PAYMENT an accepted equivalent of the performance of an
existing obligation. It is a special mode of payment
Dation in Payment where the debtor offers another thing to the
creditor who accepts it as equivalent to the payment
Alienation by the debtor of a particular property of an outstanding debt. (Rockville Excel Intl. Exim
in favor of his creditor, with the latter’s consent, Corp. v. Sps. Culla, G.R. No. 155716, 12 Oct. 2009)
for the satisfaction of the former’s money
obligation to the latter, with the effect of For dacion en pago to exist, the following elements
extinguishing the said money obligation. must concur:
a. existence of a money obligation;
Application of Payment b. the alienation to the creditor of a property by
the debtor with the consent of the former;
and
Designation of the particular debt being paid by c. satisfaction of the money obligation of the
the debtor who has two or more debts or debtor. (Ibid.)
obligations of the same kind in favor of the same
creditor to whom the payment is made. Q: Cebu Asiancars Inc., with the conformity of
the lessor, used the leased premises as collateral
Payment by Cession to secure payment of a loan which Asiancars
may obtain from any bank, provided that the
Debtor cedes his property to his creditors so the proceeds of the loan shall be used solely for the
latter may sell the same and the proceeds realized construction of a building which, upon the
applied to the debts of the debtor. termination of the lease or the voluntary
surrender of the leased premises before the
expiration of the contract, shall automatically of Agreement where they agreed that some
become the property of the lessor. Meeting parcels of the land mortgaged would be released
financial difficulties and incurring an and sold. The proceeds amounting to
outstanding balance on the loan, Asiancars P15,000,000.00 were deposited with
conveyed ownership of the building on the Metrobank. Elite Union and Metrobank entered
leased premises to MBTC, by way of "dacion en into a Loan Sale and Purchase Agreement where
pago." Is the dacion en pago by Asiancars in the latter sold G & P’s loan account to Elite
favor of MBTC valid? Union. Metrobank claims that it is still entitled
to the P15,000,000.00 proceeds despite the sale
A: YES. MBTC was a purchaser in good faith. MBTC of G & P’s loan account to Elite Union. Is
had no knowledge of the stipulation in the lease Metrobank entitled to the P15,000,000.00
contract. Although the same lease was registered deposit?
and duly annotated, MBTC was charged with
constructive knowledge only of the fact of the lease A: NO. Through the assignment of credit, the new
of the land and not of the specific provision creditor is entitled to the rights and remedies
stipulating transfer of ownership of the building to available to the previous creditor. Moreover, under
the Jaymes upon termination of the lease. While the Article 1627 of the Civil Code, "the assignment of a
alienation was in violation of the stipulation in the credit includes all the accessory rights, such as a
lease contract between the Jaymes and Asiancars, guaranty, mortgage, pledge, or preference." The
MBTC’s own rights could not be prejudiced by Loan Sale and Purchase Agreement entitled Elite
Asiancars’ actions unknown to MBTC. Thus, the Union to all the rights and interests that petitioner
transfer of the building in favor of MBTC was valid had as a creditor of respondent G & P, including the
and binding. (Jayme v. CA, G.R. No. 128669, 04 Oct. securities of the loan account. What was sold to Elite
2002) Union under the Loan Sale and Purchase Agreement
was respondent G & P's total loan obligation
Assignment of Credit inclusive of the remaining securities and proceeds
from the sale of some of the securities as stated in
An agreement by virtue of which the owner of a the first MOA. (MBTC v. G & P Builders, Incorporated,
credit, known as the assignor, by a legal cause, such G.R. No. 189509, 23 Nov. 2015)
as sale, dation in payment, exchange or donation,
and without the consent of the debtor, transfers his FORM OF PAYMENT
credit and accessory rights to another, known as the
assignee. The assignee acquires the power to enforce 1. Payment in cash – all monetary obligations
it to the same extent as the assignor could enforce it shall be settled in Philippine currency.
against the debtor. It may be in the form of a sale, However, the parties may agree that the
but at times it may constitute a dation in payment, obligation be settled in another currency at the
such as when a debtor, in order to obtain a release time of payment. (Sec. 1, R.A. No. 8183)
from his debt, assigns to his creditor a credit he has
against a third person. As a dation in payment, the 2. Payment in check or other negotiable
assignment of credit operates as a mode of instrument – not considered payment, they are
extinguishing the obligation; the delivery and not considered legal tender and may be refused
transmission of ownership of a thing (in this case, by the creditor except when:
the credit due from a third person) by the debtor to a. the document has been encashed; or
the creditor is accepted as the equivalent of the b. it has been impaired through the fault of the
performance of the obligation. creditor. (Art. 1249, NCC)
Legal Tender; Payment in Cash (2008 BAR) fair to preserve the real value of the foreign
exchange-incurred obligation to the date of its
Legal tender means such currency which in a given payment. (C.F. Sharp & Cp., Inc. v. Northwest Airlines,
jurisdiction can be used for the payment of debts, Inc., G.R. No. 133498, 18 Apr. 2002).
public and private, and which cannot be refused by
the creditor. (Tolentino, 2002) When Payment by a Negotiable Instrument
produces effect of payment (2008 BAR)
The legal tender covers all notes and coins issued by
the Bangko Sentral ng Pilipinas and guaranteed by (1) Only when it is encashed, or
the Republic of the Philippines. The amount of coins (2) when through the fault of the creditor, they have
that may be accepted as legal tender are: been impaired. [Art. 1249(2), NCC]
1. One-Peso, Five-Pesos, 10-Pesos coins in amount
not exceeding P1,000.00 A check does not constitute as a legal tender, thus a
2. 25 centavos or less in an amount not exceeding creditor may validly refuse it. However, this does
P100. 00. (BSP Circular No. 537, Series of 2006, not prevent a creditor from accepting a check as
18 July 2006) payment – the creditor has the option and the
discretion of refusing or accepting it. (Far East Bank
Q: Northwest Airlines, through its Japan Branch, & Trust Company v. Diaz Realty, Inc., G.R. No. 138588,
entered into an International Passenger Sales 23 Aug. 2001)
Agency Agreement with CF Sharp, authorizing
the latter to sell its air transport tickets. CF NOTE: While it is true that the delivery of a check
Sharp failed to remit the proceeds of the ticket produces the effect of payment only when it is
sales, thus, Northwest Airlines filed a collection cashed, pursuant to Art. 1249 of the Civil Code, the
suit before the Tokyo District Court which rule is otherwise if the debtor is prejudiced by the
rendered judgment ordering CF Sharp to pay creditor's unreasonable delay in presentment. The
83,158,195 Yen and damages for the delay at the acceptance of a check implies an undertaking of due
rate of 6% per annum. Unable to execute the diligence in presenting it for payment, and if he from
decision in Japan, Northwest Airlines filed a case whom it is received sustains loss by want of such
to enforce said foreign judgment with the RTC of diligence, it will be held to operate as actual
Manila. What is the rate of exchange that should payment of the debt or obligation for which it was
be applied for the payment of the amount? given. It has, likewise, been held that if no
presentment is made at all, the drawer cannot be
A: The repeal of R.A. No. 529 by R.A. No. 8183 has held liable irrespective of loss or injury unless
the effect of removing the prohibition on the presentment is otherwise excused. This is in
stipulation of currency other than Philippine harmony with Article 1249 of the Civil Code under
currency, such that obligations or transactions may which payment by way of check or other negotiable
now be paid in the currency agreed upon by the instrument is conditioned on its being cashed,
parties. Just like R.A. No. 529, however, the new law except when through the fault of the creditor, the
does not provide for the applicable rate of exchange instrument is impaired. The payee of a check would
for the conversion of foreign currency-incurred be a creditor under this provision and if its no-
obligations in their peso equivalent. It follows, payment is caused by his negligence, payment will
therefore, that the jurisprudence established in R.A. be deemed effected and the obligation for which the
No. 529 regarding the rate of conversion remains check was given as conditional payment will be
applicable. Thus, in Asia World Recruitment, Inc. v. discharged. (Evangelista v. Screenex, Inc., G.R. No.
NLRC (G.R. No. 113363, 24 Aug. 1999), the SC, 211564, 20 Nov. 2017)
applying R.A. No. 8183, sustained the ruling of the
NLRC that obligations in foreign currency may be Q: Diaz & Company obtained a loan from Pacific
discharged in Philippine currency based on the Banking Corp which was secured by a real estate
prevailing rate at the time of payment. It is just and mortgage. ABC rented an office space in the
building constructed on the properties covered manifestly beyond the contemplation of the parties
by the mortgage contract. The parties then at the time of the establishment of the obligation.
agreed that the monthly rentals shall be paid (Tolentino, 2002)
directly to the mortgagee for the lessor's
account. Thereafter, FEBTC purchased the credit In case an extraordinary inflation or deflation of the
of Diaz & Company in favor of PaBC, but it was currency stipulated should supervene, the value of
only after two years that Diaz was informed the currency at the time of the establishment of the
about it. Diaz asked the FEBTC to make an obligation shall be the basis of payment unless there
accounting of the monthly rental payments is an agreement to the contrary. (Art. 1250, NCC)
made by Allied Bank. Diaz tendered to FEBTC The doctrine of unforeseen risks can be applied
the amount of P1, 450, 000. 00 through an when the currency is devaluated in terms beyond
Interbank check, in order to prevent the what could have been reasonably foreseen by the
imposition of additional interests, penalties and parties, and the effects of the devaluation should not
surcharges on its loan but FEBTC did not accept be borne by the creditor alone. The revaluation of
it as payment, instead, Diaz was asked to deposit the credit in such cases must be made according to
the amount with the FEBTC’s Davao City Branch the principles of good faith and in view of the
Office. Was there a valid tender of payment? circumstances of each particular case, recognizing
the real value of the credit as in consonance with the
A: YES, there was a valid tender of payment. intent of the parties.
Jurisprudence holds that, generally, a check does
not constitute legal tender and that a creditor may NOTE: Requisites for application of Art. 1250, NCC:
validly refuse it. It must be emphasized, however, 1. That there was an official declaration of extra-
that this dictum does not prevent a creditor from ordinary inflation or deflation from the BSP;
accepting a check as payment. In other words, the 2. That the obligation was contractual in nature;
creditor has the option and the discretion of refusing and
or accepting it. (FEBTC v. Diaz Realty Inc., G.R. No. 3. That the parties expressly agreed to consider
138588, 23 Aug. 2001) the effects of the extraordinary inflation or
deflation. (Rabuya, 2017)
Burden of proving payment in an action for sum
of money Place of Payment
In civil cases, the one who pleads payment has the GR: Payment must be made in the place designated
burden of proving payment. The burden of proving in the obligation. (Art. 1251, NCC)
payment, thus, rests on the defendant once proof of
indebtedness is established. When the existence of XPN: If there is no express designation or
a debt is fully established, the burden of proving stipulation in the obligation:
that it has been extinguished by payment devolves 1. At the place where the thing might be at the time
upon the debtor who offers such defense to the the obligation was constituted – If the obligation
claim of the creditor. (Decena v. SPV-AMC, Inc., G.R. is to deliver a determinate thing;
No. 239418, 12 Oct. 2020) 2. At the domicile of the debtor – In any other case
(Art. 1251, NCC)
Extraordinary Inflation or Deflation (2001 BAR)
NOTE: Governs only unilateral obligations since
Extraordinary inflation or deflation exists when reciprocal obligations are governed by special rules.
there is a decrease or increase in the purchasing (Jurado, 2010)
power of the Philippine currency which is unusual
or beyond the common fluctuation in the value of Moreover, if the debtor changes his domicile in bad
said currency, and such decrease or increase could faith or after he has incurred in delay, the additional
not have been reasonably foreseen or was expenses shall be borne by him.
The foregoing are without prejudice, however, to Limitation upon right to apply payment
the venue under the Rules of Court.
If the debt produces interests, payment of the
APPLICATION OF PAYMENTS principal shall not be deemed to have been made
until the interest has been covered. (Art. 1253, NCC)
It is the designation of the debt to which the
payment must be applied when the debtor has Legal Application of Payment
several obligations of the same kind in favor of the
same creditor. (Art. 1252, NCC) If both the creditor and the debtor failed to exercise
the right of application of payment or legal
Requisites: application of payment will now be governed.
1. There is only one debtor and creditor; Rules on Legal Application of Payment
2. The debtor owes the creditor two or more
debts; The payment should be applied to the more onerous
3. Debts are of the same kind or identical nature; debts:
e.g., both debts are money obligations
obtained on different dates; 1. When a person is bound as principal in one
4. All debts are due and demandable, except: obligation and as surety in another, the former
a. When there is mutual agreement is more onerous.
between the parties (Tolentino, 2002); 2. When there are various debts, the oldest ones
b. The application is made by the party for are more burdensome.
whose benefit the term has been 3. Where one bears interest and the other does
constituted. (Art. 1252(1), NCC) not, even if the latter is the older obligation, the
5. The payment made is not sufficient to cover all former is considered more onerous.
obligations. Right of the debtor in the 4. Where there is an encumbrance, the debt with a
application of payments. guaranty is more onerous than that without
security.
GR: The law grants the debtor a preferential right to 5. With respect to indemnity for damages, the
choose the debt to which his payment is to be debt which is subject to the general rules on
applied. But the right of the debtor is not absolute; damages is less burdensome than that in which
he cannot impair the rights granted by law to the there is a penal clause.
creditor. (Tolentino, 2002) 6. The liquidated debt is more burdensome than
the unliquidated one.
XPN: Debtor’s failure to ascertain which debt his 7. An obligation in which the debtor is in default is
payment is to be applied. – The right of the debtor more onerous than one in which he is not.
to choose to which debt his payment will be applied (Tolentino, 2002)
against may be transferred to the creditor when he
fails to make the application, and subsequently, he NOTE: The payment shall be applied
accepts a receipt from the creditor evidencing the proportionately if it happens that the debt is of the
latter’s choice of application. Under this same nature and burden.
circumstance, the debtor cannot complain of the
application made by the creditor unless there be a Effect of Creditor’s Refusal
cause for invalidating such act.
If the debtor makes a proper application of
The right of the debtor to apply payment is merely payment, but the creditor refuses to accept it
directory in nature and must be promptly exercised, because he wants to apply it to another debt, such
lest, such right passes to the creditor. (Sps. Tan v. creditor will incur in delay. (Tolentino, 1991)
China Banking Corp., G.R. No. 200299, 17 Aug. 2016)
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
obligation unless completed by consignation. NOTE: Tender of payment must be valid and
(Tolentino, 1991) unconditional. (Sps. Rayos v. Reyes, G.R. No. 150913,
20 Feb. 2003)
Consignation
Substantial compliance is not enough. The giving of
Act of depositing the object of the obligation with notice to the persons interested in the performance
the court or competent authority after the creditor of the obligation is mandatory. Failure to notify the
has unjustifiably refused to accept the same or is not persons interested in the performance of the
in a position to accept it due to certain reasons or obligation will render the consignation void. (Dalton
circumstances. (Pineda, 2000) v. FGR Realty and Development Corp., G.R. No.
172577, 19 Jan. 2011)
NOTE: Once the consignation has been duly made,
the debtor may ask the judge to order the Consignation is necessarily judicial. Art. 1258 of the
cancellation of the obligation. (Art. 1260, NCC) CC specifically provides that consignation shall be
made by depositing the thing or things due at the
Requisites of Consignation disposal of judicial authority. The said provision
clearly precludes consignation in venues other than
1. There was a debt due; the courts. (Sps. Cacayorin v. Armed Forces and
2. The consignation of due obligation was made Police Mutual Benefit Association, Inc., G.R. No.
because of some legal cause provided under Art. 171298, 15 Apr. 2013)
1256, NCC;
3. The previous notice of the consignation had Consignation and tender of payment must not be
been given to the person interested in the encumbered by conditions. (Sps. Rayos v. Reyes, G.R.
performance of the obligation; No. 150913, 20 Feb. 2003)
4. The amount or thing due was placed at the
disposal of the court; and Q: Dorotea leased portions of her 2,000 sq. m. lot
5. That after the consignation had been made, the to Monet, Kathy, Celia and Ruth for five (5) years.
persons interested were notified thereof. Two (2) years before the expiration of the lease
contract, Dorotea sold the property to PM Realty
NOTE: Requirement No. 5 may be complied and Development Corp. The following month,
with by the service of summons upon the Dorotea and PM Realty stopped accepting rental
defendant creditor together with a copy of the payments from all the lessees because they
complaint. wanted to terminate the lease contracts. Due to
the refusal to accept rental payments, the
6. After this notice, the creditor may: lessees, Ruth, et al., filed a complaint for
(a) Accept the thing or amount deposited, consignation of the rentals before the RTC of
in which case the matter of the payment is Manila without notifying Dorotea. Is the
terminated; consignation valid? (2014 BAR)
(b) Refuse to accept the thing or amount, in
which case a trial must be held to A: NO, the consignation is not valid. Art. 1257 of the
determine the validity of consignation. NCC provides that in order for the consignation of
the thing due to release the obligor, it must first be
7. The creditor may neither accept nor refuse in announced to the persons interested in the
which case the debtor may ask the court to fulfillment of the obligation. Moreover, Art. 1258 of
cancel the obligation after showing that the the same code provides that consignation having
requisites of consignation have been complied been made, the interested parties shall also be
with. (Art. 1260, NCC) notified thereof. In this case, Dorotea, an interested
party, was not notified of the consignation. The
first installment, Y, instead of paying the loan to Effect of Loss of the Thing/Object of the
the bank, restructured it twice. Eventually, the Obligation
loan became due and demandable. Thus, X paid
the bank. On the same day, Y also went to the If the obligation is a:
bank and offered to pay the loan, but the bank 1. Determinate obligation to give:
refused to accept the payment. Y then filed an Requisites
action for consignation without notifying X. Is a. The thing lost must be determinate;
there a valid consignation by Y of the balance of b. The thing lost is without fault of the debtor;
the contract price? and
c. The thing is lost before the debtor has
A: NO, there is no valid consignation by Y of the incurred delay. (Art. 1262, NCC)
balance of the contract price. Y filed the petition for
consignation against the bank without notifying X, GR: The obligation is extinguished when the
resulting to the former’s failure to prove the object of the obligation is lost or destroyed. (Art.
payment of the balance of the purchase price and 1262, NCC)
consignation. In fact, even before the filing of the
consignation case, Y never notified X of their offer to XPNs: (L-A-S-C-D-P-C-G)
pay. (Sps. Benos v. Sps. Lawilao, G.R. No. 172259, 05 a. Law provides otherwise (Art. 1262, NCC);
Dec. 2006) b. Nature of the obligation requires the
Assumption of risk;
LOSS OF THE THING DUE c. Stipulation to the contrary;
d. Debtor Contributed to the loss;
Loss here is not contemplated in its strict and legal e. Loss the of the thing occurs after the debtor
meaning and is not limited to obligations to give, but incurred in Delay;
extends to those which are personal, embracing, f. When debtor Promised to deliver the same
therefore, all causes which may render impossible thing to two or more persons who do not
the performance of the prestation. In some Codes, have the same interest (Art. 1165, NCC);
this is designated as impossibility of performance. g. When the debt of a certain and determinate
thing proceeds from a Criminal offense
NOTE: The impossibility of performance must be (Art. 1268, NCC); and
subsequent to the execution of the contract in order h. When the obligation is Generic. (Art. 1263,
to extinguish the obligation; if the impossibility NCC)
already existed when the contract was made, the
result is not extinguishment but inefficacy of the 2. Generic obligation to give:
obligation under Articles 1348 and 1493 of the NCC. GR: The obligation is not extinguished because a
generic thing never perishes (genus nunquam
When a Thing is Considered Lost (D-O-P-E) perit). (Art. 1263, NCC)
1. Total – Refers to the remission of the whole of It extinguishes the obligation in its entirety or in the
the obligation; part or aspect thereof to which the remission refers.
2. Partial – Remission of the part of the obligation: (Jurado, 2010)
to the amount of indebtedness or to an
accessory obligation only (such as pledge or Effect of the Remission of the Principal Debt
interest), or to some other aspect of the with respect to the Accessory Obligation and
obligation (such as solidary); vice versa
3. Inter vivos - Effective during the lifetime of the
creditor; The renunciation of the principal debt shall
4. Mortis causa - Effective upon death of the extinguish the accessory, but the waiver of the latter
creditor. In this case, the remission must be shall leave the former in force. (Art. 1273, NCC)
contained in a will or testament; (Tolentino,
1991) NOTE: It is presumed that the accessory obligation
5. Express – When it is made formally, it should be of pledge has been remitted when the thing pledged,
in accordance with the forms of ordinary after its delivery to the creditor, is found in the
donations with regard to acceptance, amount, possession of the debtor, or of a third person who
and revocation; and owns the thing. (Art. 1274, NCC)
6. Implied – When it can be inferred from the acts
of the parties. Effect of Inofficious Condonation
Effect of Delivery of Evidence of Credit to Debtor It may be totally revoked or reduced depending on
whether or not it is totally or only partly inofficious.
If the creditor voluntarily delivers the private (Pineda, 2000)
document evidencing the credit to the debtor, there
is a presumption that he renounces his right of The obligation remitted is considered inofficious if
action against the latter for the collection of the said it impairs the legitime of the compulsory heirs. (Art.
credit. (Jurado, 2010) 752, NCC)
NOTE: The presumption here is only prima facie
and may be overcome by contrary evidence. Acceptance by the Debtor
(Tolentino, 1991)
The acceptance by the debtor is required. There can
Requisites be no unilateral condonation. This is because
condonation or remission is an act of liberality. It is
1. The document evidencing the credit must have a donation of an existing credit, considered a
been delivered by the creditor to the debtor; property right, in favor of the debtor, it is required
2. The document must be a private document; and that the debtor gives his consent thereto by making
3. The delivery must be voluntary. (Art. 1271, NCC) an acceptance. If there is no acceptance, there is no
condonation. (Pineda, 2009)
NOTE: If the document is public, the presumption
does not arise considering the fact that the public CONFUSION OR MERGER OF RIGHTS
character of the document would always protect the
interest of the creditor. (Jurado, 2010) 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)
It will be definite and complete up to the extent of NOTE: During such interregnum, the running of the
the concurrent amount or value, but the remaining period of prescription of the obligation is
obligation subsists. (Pineda, 2000) suspended. (Pineda, 2000)
kind and also of the same quality if the latter has Entertainment, Inc. v. Team Image Entertainment,
been stated; Inc., And Felix S. Co, G.R. No. 191658, 13 Sept. 2017)
3. Both debts are due;
4. Both debts are liquidated and demandable; Q: X, who has a savings deposit with Y Bank in
5. Neither debt must be retained in a controversy the sum of P1,000,000.00, incurs a loan
commenced by third person and communicated obligation with the said bank in the sum of
in due time to the debtor (neither debt is P800,000.00 which has become due. When X
garnished); (Art. 1279, NCC) and tried to withdraw his deposit, Y Bank allowed
6. Compensation must not be prohibited by law. only P200,000.00 to be withdrawn, less service
(Art. 1290, NCC) charges, claiming that compensation has
extinguished its obligation under the savings
NOTE: When all the requisites mentioned in Art. account to the concurrent amount of X's debt. X
1279 of the CC are present, compensation takes contends that compensation is improper when
effect by operation of law, and extinguishes both one of the debts, as here, arises from a contract
debts to the concurrent amount, even though the of deposit. Assuming that the promissory note
creditors and debtors are not aware of the signed by X to evidence the loan does not
compensation. (Art. 1290, NCC) provide for compensation between said loan
and his savings deposit, who is correct? (1998
Effects of compensation BAR)
1. Both debts are extinguished; A: Y Bank is correct. All the requisites of Art. 1279,
2. Interests stop accruing on the extinguished Civil Code are present. Compensation shall take
obligation or the part extinguished; place when two persons are reciprocally creditor
3. The period of prescription stops with respect to and debtor of each other. In this connection, it has
the obligation or part extinguished; and been held that the relation existing between a
4. All accessory obligations of the principal depositor and a bank is that of creditor and debtor.
obligation which has been extinguished are also As a general rule, a bank has a right of set off of the
extinguished. (4 Salvat 353) deposits in its hands for the payment of any
indebtedness to it on the part of a depositor. (Gullas
Q: Team Image and Solar Team both breached v. PNB, G.R. No. L-43191, 13 Nov. 1935) Hence,
each other’s duties in their compromise compensation took place between the mutual
agreement. As a result, both owe each other obligations of X and Y Bank.
2,000,000. Is compensation proper?
Q: Foodmasters, Inc. (FI) had outstanding loan
A: YES. In order that compensation may be proper, obligations to both Union Bank’s predecessor-
it is necessary: (1) That each one of the obligors be in-interest, Bancom Development Corporation
bound principally, and that he be at the same time a (Bancom), and to DBP. On May 21, 1979, FI and
principal creditor of the other; (2) That both debts DBP, among others, entered into a Deed of
consist in a sum of money, or if the things due are Cession of Property in Payment of Debt (dacion
consumable, they be of the same kind, and also of en pago) whereby the former ceded in favor of
the same quality if the latter has been stated; (3) the latter certain properties (including a
That the two debts be due; (4) That they be processing plant in Marilao, Bulacan
liquidated and demandable; (5) That over neither of [processing plant]) in consideration of the
them there be any retention or controversy, following: (a) the full and complete satisfaction
commenced by third persons and communicated in of FI’s loan obligations to DBP; and (b) the direct
due time to the debtor. (Team Image Entertainment, assumption by DBP of FI’s obligations to Bancom
Inc., And Felix S. Co. v. Solar Team Entertainment, Inc., in the amount of ₱17,000,000.00 (assumed
G.R. No. 191652, 13 Sept. 2017; Solar Team obligations).
On the same day, DBP, as the new owner of the after the satisfaction of FW’s obligation to DBP." In
processing plant, leased back for 20 years the this regard, it cannot be concluded that the same
said property to FI (Lease Agreement) which debt had already been liquidated, and thereby
was, in turn, obliged to pay monthly rentals to be became demandable. (4th requisite of Article 1279 of
shared by DBP and Bancom. DBP also entered the Civil Code) Thus, CA correctly upheld the denial
into a separate agreement with Bancom of Union Bank’s motion to affirm legal
(Assumption Agreement) whereby the former: compensation. (Union Bank Of The Philippines v.
(a) confirmed its assumption of FI’s obligations Development Bank Of The Philippines, G.R. No.
to Bancom; and (b) undertook to remit up to 191555, 20 Jan. 2014)
30% of any and all rentals due from FI to
Bancom (subject rentals) which would serve as Parties may agree upon the Compensation of
payment of the assumed obligations, to be paid Debts NOT Due
in monthly installments.
Under Art. 1282, conventional or voluntary
Claiming that the subject rentals have not been compensation is not limited to obligations which
duly remitted despite its repeated demands, are not yet due. The parties may compensate by
Union Bank filed, on June 20, 1984, a collection agreement any obligations, in which the objective
case against DBP before the RTC, docketed as requisites provided for legal compensation are not
Civil Case No. 7648. In opposition, DBP present. It is necessary, however, that the parties
countered, among others, that the obligations it should have the capacity to dispose of credits which
assumed were payable only out of the rental they compensate, because the extinguishment of the
payments made by FI. Thus, since FI had yet to obligations in this case arise from their wills and not
pay the same, DBP’s obligation to Union Bank from law.
had not arisen. In addition, DBP sought to
implead FW as third party-defendant in its Rescissible or Voidable Debts already
capacity as FI’s assignee and, thus, should be compensated May be Rescinded or Annulled;
held liable to Union Bank. Was there legal Effects
compensation?
Although a rescissible or voidable debt can be
A: There was NO legal compensation. The rule on compensated before it is rescinded or annulled, the
legal compensation is stated in Article 1290 of the degree of rescission or annulment is retroactive,
Civil Code which provides that "when all the and the compensation must be considered as
requisites mentioned in Article 1279 are present, cancelled. And as rescission or annulment requires
compensation takes effect by operation of law, and mutual restitution, the party whose obligation is
extinguishes both debts to the concurrent amount, annulled or rescinded can thus recover to the extent
even though the creditors and debtors are not that his credit was extinguished by the
aware of the compensation." Therefore, compensation; because to that extent, he is deemed
compensation could not have taken place between to have made a payment.
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)
5. Obligations arising from criminal offenses (Art. NOTE: The person who has the civil liability arising
1288, NCC); and from crime is the only party who cannot set up the
6. Certain obligations in favor of government. compensation; but the offended party is entitled to
e.g., Taxes, fees, duties, and others of a similar in indemnity can set up his claim in compensation of
nature. his debt.
NOTE: Only the depositary and the borrower in Q: Atty. Laquihon, in behalf of Pacweld, filed a
commodatum cannot set up compensation. The pleading addressed to MPCC titled “motion to
depositor can set up his deposit against the direct payment of attorney's fee”, invoking a
depositary, and the lender can set up his loan decision wherein MPCC was adjudged to pay
against a credit of the borrower. Pacweld the sum of P10, 000. 00 as attorney's
fees. MPCC filed an opposition stating that the
Neither shall there be compensation if one of the said amount is set-off by a like sum of P10, 000.
debts consists in civil liability arising from a penal 00, collectible in its favor from Pacweld also by
offense. way of attorney's fees which MPCC recovered
from the same CFI of Manila in another civil case. Facultative Compensation
Was there legal compensation?
One of the parties has a choice of claiming or
A: YES. MPCC and Pacweld were creditors and opposing the compensation but waives his
debtors of each other, their debts to each other objection thereto such as an obligation of such party
consisting in final and executory judgments of the is with a period for his benefit alone and he
CFI in two separate cases. The two obligations, renounces the period to make the obligation
therefore, respectively offset each other, become due.
compensation having taken effect by operation of
law and extinguished both debts to the concurrent Facultative compensation is unilateral and does not
amount of P10,000.00, pursuant to the provisions of require mutual agreement; voluntary or
Articles 1278, 1279 and 1290 of the Civil Code, since conventional compensation requires mutual
all the requisites provided in Art. 1279 of the said consent.
Code for automatic compensation "even though the
creditors and debtors are not aware of the Example: X owes Y P100,000 demandable and due
compensation" were present. (Mindanao Portland on April 1, 2012. Y owes X P100, 000 demandable
Cement Corp. v. CA, G.R. No. L-62169, 28 Feb. 1983) and due on or before April 15, 2012. Y, who was
given the benefit of the term, may claim
Conventional Compensation compensation on April 1, 2012. On the other hand,
X, who demands compensation, can be properly
It is one that takes place by agreement of the parties. opposed by Y because Y could not be made to pay
until April 15, 2012.
Effectivity of Conventional Compensation
NOTE: Compensation can be renounced either at
For compensation to become effective: the time an obligation is contracted or afterwards.
GR: The mutual debts must be both due. (Art. 1279, (Tolentino, 1991) It can be renounced expressly or
NCC) impliedly.
XPN: The parties may agree that their mutual debts Examples of Implied Renunciation:
be compensated even if the same are not yet due.
(Art. 1282, NCC) 1. By not setting it up in the litigation;
2. By consenting to the assignment of credit under
Judicial Compensation Art. 1285 of the NCC; or
3. By paying debt voluntarily, with knowledge
If one of the parties to a suit over an obligation has that it has been extinguished by compensation.
a claim for damages against the other, the former (Tolentino, 1991)
may set it off by proving his right to said damages
and the amount thereof. (Art. 1283, NCC) Q: Eduardo was granted a loan by XYZ Bank for
the purpose of improving a building which XYZ
NOTE : For judicial set-off to apply, the amount of leased from him. Eduardo executed the
damages or the claim sought to be compensated promissory note in favor of the bank, with his
must be duly proven. (Ong v. CA, G.R. No. 75819, 08 friend Ricardo as cosignatory. In the PN, they
Sept. 1989) both acknowledged that they are “individually
and collectively” liable and waived the need for
All the requisites mentioned in Art. 1279 must be prior demand. To secure the PN, Ricardo
present, except that at the time of filing the pleading, executed a real estate mortgage on his own
the claim need not be liquidated. The liquidation property. When Eduardo defaulted on the PN,
must be made in the proceedings. XYZ stopped payment of rentals on the building
on the ground that legal compensation had set
in. Since there was still a balance due on the PN valid foreclosure of real estate mortgage is
after applying the rentals, XYZ foreclosed the absent.
real estate mortgage over Ricardo’s property.
Ricardo opposed the foreclosure on the ground In the case of DBP v. Licuanan (G.R. No. 150097,
that he is only a co-signatory; that no demand 26 Feb. 2007), it was held that: “the issue of
was made upon him for payment, and assuming whether demand was made before the
he is liable, his liability should not go beyond foreclosure was effected is essential. If demand
half of the balance of the loan. Further, Ricardo was made and duly received by the respondents
said that when the bank invoked compensation and the latter still did not pay, then they were
between the rentals and the amount of the loan, already in default and foreclosure was proper.
it amounted to a new contract or novation, and However, if demand was not made, then the
had the effect of extinguishing the security since loans had not yet become due and demandable.
he did not give his consent (as owner of the This meant that the respondents had not
property under the real estate mortgage) defaulted in their payment and the foreclosure
thereto. was premature.”
a. Can XYZ Bank validly assert legal c. NO. Since none of the three kinds of novation is
compensation? applicable. There is no objective novation,
b. Can Ricardo’s property be foreclosed to whether express or implied, because there is no
pay the full balance of the loan? change in the object or principal conditions of
c. Does Ricardo have basis under the Civil the obligation. There is no substitution of
Code for claiming that the original debtors, either. Compensation is considered as
contract was novated? (2008 Bar) abbreviated or simplified payment and since
Ricardo bound himself solidarily with Eduardo,
A: any facultative compensation which occurs
a. NO. XYZ Bank may validly assert the partial does not result in partial legal subrogation.
compensation of both debts, but it should be Neither Eduardo nor Ricardo is a third person
facultative compensation because not all of the interested in the obligation under Art. 1302,
five requisites of legal compensation are NCC.
present. (Art. 1279, NCC) The payment of the
rentals by XYZ Bank is not yet due, but the Obligations subject to Facultative Compensation
principal obligation of loan where both
Eduardo and Ricardo are bound solidarily and When one of the debts arises from:
therefore any of them is bound principally to 1. Depositum;
pay the entire loan, is due and demandable 2. Obligations of a depositary;
without need of demand. XYZ Bank may declare 3. Obligations in commodatum;
its obligation to pay rentals as already due and 4. Support
demand payment from any of the two debtors.
GR: Claim of support due to gratuitous title.
b. NO, because there was no prior demand on XPN: Future support; and
Ricardo, depriving him of the right to
reasonably block the foreclosure by payment. 5. Civil liability from a crime.
The waiver of prior demand in the PN is against
public policy and violates the right to due NOTE: Art. 1288 of the NCC prohibits compensation
process. Without demand, there is no default if one of the debts consists in civil liability arising
and the foreclosure is null and void. Since the from a penal offense. However, the victim is allowed
mortgage, insofar as Ricardo is concerned is not to claim compensation.
violated, a requirement under Art. 3135 for a
If one or both Debts are Rescissible or voidable the place of the debtor or by subrogating a third
person to the rights of the creditor. (Pineda, 2000)
When one or both debts are rescissible or voidable,
they may be compensated against each other before Requisites of Novation (O-I-C-S-N)
they are judicially rescinded or avoided. (Art. 1284,
NCC) If the prescriptive period had already lapsed, 1. Valid Old obligation;
there is automatic compensation and the same will
not be disturbed anymore. Whereas, if the debt is XPNs:
rescinded or annulled, compensation shall be a. When the annulment may be claimed
restitution of what each party had received before only by the debtor and he consented to the
the rescission or annulment. novation; and
b. When ratification validates acts which
Effects of Assignment on Compensation of Debts are voidable.
1. After the compensation took place 2. Intent to extinguish or to modify the old
obligation;
GR: Ineffectual; useless act since there is
nothing more to assign. 3. Capacity and consent of all the parties to the
new obligation (except in case of expromission
XPN: When the assignment was made with the where the old debtor does not participate);
consent of the debtor.
4. Substantial difference of the old and new
NOTE: Such consent operates as a waiver of the obligation – on every point incompatible with
rights to compensation. each other (implied novation); and
XPN to the XPN: At the time he gave his
consent, he reserved his right to the 5. Valid New obligation.
compensation.
NOTE: Subsequent Void Obligation – A subsequent
2. Before compensation took place void obligation intended to novate an old one has no
a. With the consent of the debtor – legal effect and is considered as if the parties have
Compensation cannot be set up except not agreed upon it in the first place. The original
when the right to compensation is obligation shall subsist.
reserved.
b. With the knowledge but without consent of However, if in coming up with the new but void
the debtor – Compensation can be set up obligations, parties agree that it shall in any event
regarding debts previous to the cession or extinguish the old obligation, such old obligation
assignment but not subsequent ones. will not be revived. (Art. 1297, NCC)
c. Without the knowledge of debtor - Can set
up compensation as a defense for all debts Presumption of Novation
maturing prior to his knowledge of the
assignment. Novation is never presumed; it must be proven as a
fact either by:
NOVATION (1994, 2008 BAR)
1. Explicit declaration – If it be so declared in
It is the substitution or change of an obligation by unequivocal terms; or
another, resulting in its extinguishment or 2. Material incompatibility – That the old and the
modification, either by changing the object or new obligations be on every point incompatible
principal conditions, or by substituting another in with each other. (Art. 1292, NCC)
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)
Insolvency of the New Debtor in expromission (Arco Pulp and Paper Co., Inc. v. Lim, G.R. No. 206806,
25 June 2014)
If substitution is without the knowledge or against
the will of the debtor, the new debtor’s insolvency Q: DBP guaranteed Galleon’s foreign loans. In
or non-fulfillment of the obligation shall not give return, Galleon undertook to secure a first
rise to any liability on the part of the original debtor. mortgage on its five new vessels and two
(Art. 1294, NCC) second-hand vessels. Pursuant to Letter of
Instructions No. 1155, Galleon's stockholders
NOTE: If the old debtor gave his consent and the and NDC entered into a Memorandum of
new debtor could not fulfill the obligation, the old Agreement, where NDC and Galleon undertook
debtor should be liable for the payment of his to prepare and sign a share purchase agreement
original obligation. covering 100% of Galleon's equity for
P46,740,755.00. The share purchase agreement
Q: The Arco and Lim allegedly agreed that Arco also provided for the release of Sta. Ines, Cuenca,
would either pay Lim the value of the raw Tinio and Construction Development
materials or deliver to him their finished Corporation of the Philippines from the
products of equivalent value. Lim alleged that personal counter-guarantees they issued in
when he delivered the raw materials, Arco DBP's favor under the Deed of Undertaking. Sta.
issued a post-dated check as partial payment. Ines, Cuenca, Tinio, Cuenca Investment, and
When he deposited the check, however, it was Universal Holdings claimed that DBP can no
dishonored for being drawn against a closed longer go after them for any deficiency
account. Thereafter, Arco and Sy executed a judgment since NDC had been subrogated in
memorandum of agreement where Arco bound their place as borrowers, hence the Deed of
themselves to deliver their finished products to Undertaking between Sta. Ines, Cuenca
Megapack Container Corporation owned by Sy. Investment, Universal Holdings, Cuenca, and
According to the memorandum, the raw Tinio and DBP had been extinguished and
materials would be supplied by Lim. Was the novated." Did the Memorandum of Agreement
obligation between Arco and Lim novated novate the Deed of Undertaking executed
because of the agreement entered into by Arco between DBP and Sta. Ines, Cuenca Investment,
and Sy? Universal Holdings, Cuenca, and Tinio?
A: NO. Novation must be stated in clear and A: NO. It should be noted that in order to give
unequivocal terms to extinguish an obligation. It novation its legal effect, the law requires that the
cannot be presumed and may be implied only if the creditor should consent to the substitution of a new
old and new contracts are incompatible on every debtor. The general rule is that, “in the absence of an
point. In this case, Lim was not privy to the authority from the board of directors, no person, not
memorandum of agreement, thus, his conformity to even the officers of the corporation, can validly bind
the contract need not be secured. If the the corporation.” Aside from Ongpin being the
memorandum of agreement was intended to novate concurrent head of DBP and NDC at the time the
the original agreement between the parties, Lim Memorandum of Agreement was executed, there
must have first agreed to the substitution of Sy as was no proof presented that Ongpin was duly
his new debtor. The memorandum of agreement authorized by the DBP to give consent to the
must also state in clear and unequivocal terms that substitution by NDC as a co-guarantor of Galleon’s
it has replaced the original obligation of petitioner debts. Ongpin is not DBP, therefore, it is wrong to
Arco to Lim. Neither of these circumstances is assume that DBP impliedly gave its consent to the
present in this case. Since there was no novation, substitution simply by virtue of the personality of its
petitioner Arco’s obligation to respondent remains Governor.
valid and existing. Petitioner Arco Pulp and Paper,
therefore, must still pay respondent the full amount.
of credit, and trust receipts have already been declaration, or by material incompatibility. There is
extinguished? no doubt that the upgrading was a novation of the
original agreement covering the first credit card
A: NO. Art. 1231 of the NCC states that obligations issued to Danilo Alto, basically since it was
are extinguished either by payment or performance, committed with the intent of cancelling and
the loss of the thing due, the condonation or replacing the said card. However, the novation did
remission of the debt, the confusion or merger of the not serve to release Jeanette from her surety
rights of creditor and debtor, compensation or obligations because in the surety undertaking she
novation. Starpeak and Metro’s agreement is a sale expressly waived discharge in case of change or
of assets contract, while Metro’s obligations to novation in the agreement governing the use of the
Allied Bank arose from various loan transactions. first credit card. (Molino v. Security Diners
Absent any showing that the terms and conditions International Corp., G.R. No. 136780, 16 Aug. 2001)
of the latter transactions have been, in any way,
modified or novated by the terms and conditions in Q: J.C. Construction bought steel bars from
the Starpeak-Metro agreement, said contracts Matibay Steel Industries (MSI) which is owned
should be treated separately and distinctly from by Buddy Batungbacal. J.C. failed to pay the
each other, such that the existence, performance or purchased materials worth P500,000 on due
breach of one would not depend on the existence, date. J.C. persuaded its client Amoroso with
performance or breach of the other. The whom it had receivables to pay its obligation to
performance or breach of the agreement bears no MSI. Amoroso agreed and paid MSI the amount
relation to the performance or breach of the subject of P50,000. After 2 other payments, Amoroso
loan transactions, they being separate and distinct stopped making further payments.
sources of obligations. Metro’s loan obligations to
Allied Bank remain subsisting for the basic reason Buddy filed a complaint for collection of the
that the former has not been able to prove that the balance of the obligation and damages against
same had already been paid or, in any way, J.C. J.C. denied any liability claiming that its
extinguished. (Metro Concast Steel Corporation, obligation was extinguished by reason of
Spouses Dychiao v. Allied Bank Corporation, G.R. No. novation which took place when MSI accepted
177921, 04 Dec. 2013) partial payments from Amoroso on its behalf.
Was the obligation of JC to MSI extinguished by
Q: SDIC issued to Danilo a Diners Card (credit novation? Why? (2014 Bar)
card) with Jeannete as his surety. Danilo used
this card and initially paid his obligations to A: NO. Under Art. 1292 of the NCC, in order that an
SDIC. Thereafter, Danilo wrote SDIC a letter obligation may be extinguished by another which
requesting it to upgrade his Regular Diners Club substitute the same, it is imperative that it be so
Card to a Diamond (Edition) one. As a declared in unequivocal terms, or that the old and
requirement of SDIC, Danilo secured from the new obligations be on every point be
Jeanette her approval and the latter obliged. incompatible with each other. Novation by
Danilo's request was granted and he was issued substitution of the debtor requires the consent of
a Diamond (Edition) Diners Club Card. Danilo the creditor as provided in Art. 1293. This
had incurred credit charges plus appropriate requirement is not present in this case.
interest and service charge. However, he
defaulted in the payment of this obligation. Was It was ruled that the mere fact that the creditor
the upgrading a novation of the original received payment from a third person does not
agreement governing the use of Danilo Alto's constitute novation and does not extinguish the
first credit card, as to extinguish that obligation? obligation of the original debtor. Thus, the
obligation of JC to MSI subsists. (Magdalena Estates
A: YES. Novation, as a mode of extinguishing Inc., v. Rodriguez, G.R. No. L-18411, 17 Dec. 1966)
obligations, may be done in two ways: by explicit
3. If old obligation is conditional and the new Furthermore, a surety is not released by a change in
obligation is pure: the contract, which does not have the effect of
a. If resolutory and it occurred – Old obligation making its obligation more onerous. (Stronghold
already extinguished; no new obligation Insurance Company, Inc. v. Tokyu Construction
since nothing to novate. Company, G.R. Nos. 158820-21, 05 June 2009) As
b. If suspensive and it did not occur – It is as if such, a contract is only extinguished by novation
there is no obligation; thus, there is nothing when there is a material alteration in the principal
to novate. contract or if it has the effect of making the
obligation more onerous.
4. If the new obligation is:
a. Void – Original one shall subsist, unless the Subrogation
parties intended that the former relation
should be extinguished in any event. (Art. It is the active subjective novation characterized by
1297, NCC) the transfer to a third person of all rights
b. Voidable – Novation can take place, except appertaining to the creditor in the transaction
when such new obligation is annulled. In concerned including the right to proceed against the
such case, old obligation shall subsist. guarantors or possessors of mortgages and similar
c. Pure obligation – Conditions of old others subject to any applicable legal provision or
obligation deemed attached to the new, any stipulation agreed upon by the parties in
unless otherwise stipulated. (Tolentino, conventional subrogation.
1999)
d. Conditional Obligation: NOTE: Whoever pays on behalf of the debtor
i. If resolutory – Valid until the happening without the knowledge or against the will of the
of the condition. (NCC, Art. 1181) (Art. latter cannot compel the creditor to subrogate him
1181, NCC)
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
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)
Obligation v. Contract
2. Perfection or Birth – Here, the parties had a i. Donations of real estate or of movables if
meeting of minds as to the object, cause or the value exceeds P5,000;
consideration and other terms and conditions of ii. Partnership to which immovables are
the contract. contributed;
iii. Contract of antichresis – requires that the
3. Consummation or fulfillment – This the last amount of principal and interest be
stage which consists in their performance or specified;
fulfillment by the parties of their obligations iv. Sale of piece of land or interest therein is
under the term of the perfected contract. through an agent;
v. Stipulation to charge interest;
CLASSIFICATION OF CONTRACTS vi. Stipulation limiting common carrier's
duty of extraordinary diligence to
1. According to their names: ordinary diligence;
vii. Chattel mortgage; or
a. Nominate – Those which have been given viii. Transfer of large cattle. (Sec. 22, R.A. No.
particular names or denominations by law. 1147; Art. 1581, NCC)
b. Innominate – Those which have not been
given any particular name and not 4. According to cause:
regulated by special provision of law.
a. Onerous – Those contracts providing for
2. According to their subject matter: exchange of valuable considerations such
as sale where the seller delivers the object
a. Contracts covering things – Such a contract of the contract and the buyer pays the
of sale, deposit, pledge. purchase price therefor.
b. Contracts covering services – Such as
contract of carriage whether common or b. Gratuitous – Those contracts where one of
simple ; agency, deposit the parties give something or renders
c. Contract covering transmissible rights or service to the other without receiving any
credits – Such as a contract of usufruct, equivalent or compensation such as pure
assignment of credits. donation and commodatum. This is also
called a lucrative contract because it
3. According to formation or perfection: provides a gain to the other party for free.
c. Formal – Those which cannot be perfected a. Unilateral – Those where only one of the
without compliance with the special parties is bound to fulfill an obligation such
formalities required by law such as as:
donations and mortgages of real property. (i) commodatum where the borrower
They are also called solemn contracts must preserve the property and return
because they have to comply with the it to the lender at the appointed time ;
formalities or solemnities required by law, and
otherwise, they are void.
(ii) a promissory note where only the b. Accessory – Those contracts which cannot
promisor had signed it. exist alone but must depend upon another
contract such as mortgage, which depends
b. Bilateral – Those where both parties have upon the existence of a contract of loan. The
reciprocally bound themselves to fulfill principal contract is the loan while the
their obligations in favor of the other such mortgage is the accessory contract.
as sale. These are also known as
synallagmatic contracts. c. Preparatory – Those contracts entered into
for the creation of another contract such as
6. According to the certainty of fulfillment: a contract of agency, as agency does not
stop with the agency because the purpose
a. Commutative – Those contracts where the is to enter other contracts (Rabuya, 2017).
contracting parties contemplate the A partnership is also an example of
assured fulfillment of the terms and preparatory contract.
conditions of their agreement such as
contracts of mortgage and pledge. 9. According to the number of person/s actually
Generally, there is no risk to anticipate. participating in the contract:
b. Aleatory – Those contracts where the a. Ordinary – Those contracts where two (or
fulfillment is dependent upon chance or more) parties are represented by different
event which may not happen within the persons such as in sale. There is a seller and
period stipulated such as an insurance a buyer.
contract. Here, the loss contemplated may
or may not happen. If it happens, the b. Auto-Contracts – Where the two opposite
insurance company shall pay. parties are represented by the one and the
same person, who represents and acts in
7. According to completion of performance: different capacities-such as an agent
representing his principal who authorized
a. Executed – Those contracts which are him to borrow money, may himself lend the
already completed when formally entered money but not the other way around. The
into such as a sale of a thing which has agent, if authorized to lend money, cannot
already been delivered and paid for. There be the borrower without the consent of the
can be a partially executed contract when principal. (Art. 1890, NCC) Auto-contracts
there was already partial payment. are allowed, unless there is a specific law
prohibiting them.
b. Executory – Those contracts where the
prestation promised by the parties have yet 10. According to the dignity accorded by law:
to be fulfilled at some future date such as a
unilateral promise to sell which has been a. Institutional – Those contracts which are
accepted. The sale is not yet executed. given special dignity by law such as a
contract of marriage which is considered a
8. According to the dependence of one contract "social inviolable institution" and as such is
upon the other: considered as the foundation of the family
by the Constitution (Sec. 2, Art. XV, 1987
a. Principal – Those contracts which can exist Constitution) and the Family Code (Art. 1,
by themselves alone without depending FC).
upon another such as sale, lease, deposit,
commodatum. b. Ordinary – Those which are not
institutional such as sale, lease, deposit, etc.
11. According to the freedom of bargain: b. Implied – Those contracts where the
consent of the parties is not given expressly
a. Ordinary – Those where both parties are but is deducible from the conduct or acts of
place on equal footing in the negotiation the parties such as an implied agency when
and perfection of the contract. the principal fails to repudiate the acts of
the person acting in his behalf, knowing
b. Contracts of adhesion – Those where one of such a situation. (Art. 1869, NCC)
the parties had drafted the contract for the
other party to accept or not to accept such c. Presumed – Those contracts where the
as an insurance contract which is already consent was not given by the parties but is
printed. presumed or provided by the law itself, to
prevent unjust enrichment on the part of
12. According to the evidence needed to prove their one party to the prejudice of the other, such
existence: as quasi-contracts. (Pineda, 2009)
13. According to the personality of the parties: Autonomy (or Freedom to Contract) (1996,
2004 BAR)
a. Personal – Those contracts where the
person of the party is essential to the The contracting parties may establish such
existence of the contract such as a contract stipulations, clauses, terms, and conditions as they
for life insurance where the contract shall may deem convenient, provided they are not
cease to exist upon the death of the insured. contrary to law, morals, good customs, public order,
or public policy. (Art. 1306, NCC)
b. Impersonal – Those contracts where the
person/s of a part or parties are not If the stipulation which violates the limitations set
essential to the continuity of the contract forth in the foregoing provision constitute the cause,
such as contract of lease. The death of the object, or purpose of the contract, such contract is
lessor or the lessee will not necessarily denied legal existence, and thus, shall be deemed
terminate the contract. The heirs may void from the beginning. (Casis, 2016)
continue the contract.
Contracting parties may establish any agreement,
14. According to the manner the consent is given: term, and condition they may deem advisable,
provided they are not contrary to law, morals, or
a. Express – Those contracts where the public policy. The right to enter lawful contracts
consent of the parties is given expressly in constitutes one of the liberties guaranteed by the
writing or verbally. Constitution. It cannot be struck down or arbitrarily
interfered with without violating the freedom to
enter into lawful contracts. (Gateway Electronics
Corporation v. Land Bank, G.R. No. 155217 and likewise invalid. (Sps. Limso v. PNB, G.R. No. 158622,
156393, 30 July 2003) 27 Jan. 2016)
It is necessary for the existence of a contract that XPN: The legality of contracts which is left to the
two distinct parties enter it (auto-contracts). The will of either of the parties may be upheld if there
existence of a contract is not determined by the was a finding of the presence of essential equality of
number of persons who intervene in it, but by the the parties to the contracts, thus preventing the
number of parties; not by the number of individual perpetration of injustice on the weaker party. (GF
wills but by the number of declarations of will. As Equity v Valenzona, G.R. No. 156841, 30 June 2005)
long as there are two distinct patrimonies, even if
they are represented by the same person, the The determination of the performance may be left
contract will be valid, e.g., an agent representing to a third party as long as:
both the buyer and the seller.
1. The decision has been made known to booth
NOTE: Courts cannot make for the parties better or contracting parties. (Art. 1309, NCC); and
more equitable agreements than they themselves 2. The determination is not evidently inequitable
have been satisfied to make, or rewrite contracts (Art. 1310, NCC). If it is inequitable, the court
because they operate harshly or inequitably as to shall decide what is equitable under the
one of the parties, or alter them for the benefit of circumstances.
one party and to the detriment of the other, or by
construction, relieve one of the parties from terms If a party alleges defects in the contract so that it
which he voluntarily consented to, or impose on him could be set aside, he must prove conclusively the
those which he did not. (Ka Kuen Chua v. Colorite existence of the defects because the validity and
Mktg. Corp., G.R. No. 193969-193970, 05 July 2017) fulfillment of the contract cannot be left to the will
of one of the contracting parties. (Pineda, 2009)
Mutuality
The binding effect of any agreement between
The contract must bind both contracting parties; its parties to a contract is premised on two settled
validity or compliance cannot be left to the will of principles: (1) that any obligation arising from
one of them. (Art. 1308, NCC) (2001, 2004, 2008 contract has the force of law between the parties;
BAR) and (2) that there must be mutuality between the
parties based on their essential equality. Any
Applicability to Contract Modifications: contract which appears to be heavily weighed in
favor of one of the parties so as to lead to an
Contract changes must be made with the consent of unconscionable result is void. Any stipulation
the contracting parties. The minds of all the parties regarding the validity or compliance of the contract
must meet as to the proposed modification, which is left solely to the will of one of the parties, is
especially when it affects and important aspect of likewise, invalid. (Sps. Limso v. PNB, G.R. No. 158622,
the agreement. Thus, any change must be mutually 27 Jan. 2016)
agreed upon; otherwise, it produces no binding NOTE: A contract containing a condition whose
effect. (Lara’s Gifts & Decors, Inc. v. Midtown efficacy or fulfillment is dependent solely on the
Industrial Sales, Inc., G.R. No. 225433, 28 Aug. 2019) uncontrolled will of one of the parties is void.
(Floirendo, Jr. v. Metropolitan Bank and Trust Co., G.R.
GR: Any contract which appears to be heavily No. 03 Sept. 2007)
weighed in favor of one of the parties so as to lead
to an unconscionable result is void. Any stipulation However, the termination of the contract does not
regarding the validity or compliance of the contract necessarily require mutuality, and it can even be
which is left solely to the will of one of the parties is validly left to one party by agreement or under a
resolutory facultative condition. (Vitug, 2006)
(3) by provision of law. The heir is not liable NOTE: The fairest test to determine
beyond the value of the property he received whether the interest of third person in a
from the decedent. (Art. 1311, Par. 1, NCC) contract is a stipulation pour autrui or
merely an incidental interest, is to rely
No one may contract in the name of another without upon the intention of the parties as
being authorized by the latter, or unless he has by disclosed by their contract. In applying this
law a right to represent him. (Art. 1317, NCC) test, it matters not whether the stipulation
is in the nature of a gift or whether there is
A contract entered in the name of another by one an obligation owing from the promise to
who has no authority or legal representation or who the third person. (Rabuya, 2017)
has acted beyond his powers, shall be
unenforceable, unless it is ratified expressly or 2. Accion directa – the creditor is authorized by
impliedly by the person on whose behalf it has been the statute to sue on his debtor’s contract
executed, before it is revoked by the other
contracting party. (Art. 1317, NCC) Examples:
a) Lessor against Sublessee (Arts. 1651, 1652,
Exceptions to Relativity NCC)
b) Laborers of Contractor against Owner of
Contracts may bind and affect strangers in the the work (Art. 1729, NCC)
following cases:
3. Third Person in Possession of Object of Contract
1. Stipulations Pour Autrui (Art. 1311, par. 2, (Art. 1312, NCC)
NCC) (stipulation in favor of a third
person) – benefits clearly and deliberately In contracts creating real rights, third persons
conferred by parties to a contract upon who come into possession of the object of the
third persons and which stipulation is contract are bound thereby, subject to the
merely part of a contract entered into by provisions of the Mortgage Law and the Land
the parties, neither of whom acted as Registration Laws.
agents of the third person and which favor
can be demanded by the third person if 4. Fraud of Creditors by Contracting Parties
duly accepted by him before it could be (Accion Pauliana) (Art. 1313, NCC)
revoked. Creditors are protected in cases of contracts
intended to defraud them. Creditors of the
Requisites of stipulation pour atrui: contracting parties may rescind contracts
a. Stipulation in favor of a third person; intended to defraud them although they did not
b. Stipulation is just part and not the intervene therein. (Reyes and Puno, 1964)
whole obligations of the contract;
c. Contracting parties must have clearly 5. Tortious Interference (Art. 1314, NCC) (1991,
and deliberately conferred a favor 1998 BAR)
upon a third person;
d. Favor or benefit conferred is not just Any third person who induces another to
an incidental benefit or interest; violate his contract shall be liable for damages
e. Third person must have to the other contracting party (even though the
communicated his acceptance; and third person is not bound by the stipulations).
f. Neither of the contracting parties
bears the legal representation or NOTE: This tort or wrongful conduct is known
authorization of the third person. as “interference with contractual relations.”
(OSPA v. CA, G.R. No. 156660, 24 Aug.
2009)
The word "induce" refers to situations where a between PCGG and Benedicto extinguish the
person causes another to choose one course of liability of Africa?
conduct by persuasion or intimidation.
A: NO. A stipulation pour autrui to be appreciated, it
Requisites: is indispensable that there be a stipulation
deliberately conferring a benefit or favor to a third
1. Existence of a valid contract person. The requisites of a stipulation pour autrui
2. The third person’s knowledge of the third are the following:
person of the existence of the contract
1. There is a stipulation in favor of a third person;
NOTE: Knowledge alone is not sufficient to 2. The stipulation is a part, not the whole, of the
make a third person liable for tortuous contract;
interference. To sustain a case for tortuous 3. The contracting parties clearly and deliberately
interference, the defendant must have acted conferred a favor to the third person — the
with malice or must have been driven by purely favor is not an incidental benefit;
impious reasons to injure the plaintiff. 4. The favor is unconditional and uncompensated;
5. The third person communicated his or her
NOTE: A third person can be held liable for tort acceptance of the favor before its revocation;
interference even if he does not know the and
identity of one of the contracting parties. The 6. The contracting parties do not represent, or are
interference with lawful contracts by strangers not authorized by, the third party.
thereto gives rise to an action for damage in
favor of the injured person. The law does not The Compromise Agreement executed between
require that the responsible person shall have Benedicto and PCGG does not contain any express
known the identity of the injured person. stipulation that confers the benefit of absolute
(Rabuya, 2017) immunity to Africa. Absent any express stipulation
in favor of a third person, the rule on relativity of
3. Interference by third person without legal contract must be applied i.e., that the contract only
justification or excuse. (Inocencio v. Hospicio De takes effect between the parties, their assigns or
San Jose, G.R. No. 201787, 25 Sept. 2013) heirs. (Republic v. Legal Heirs of Jose L. Africa, G.R.
No. 205722, 19 Aug. 2015)
Q: PCGG filed a complaint for reconveyance,
reversion, accounting, restitution, and damages Consensual
before the Sandigan Bayan against Ferdinand
and Imelda Marcos, and several of their cronies GR: Contracts are perfected by mere consent and
including Benedicto and Africa. PCGG, through from that moment, the parties are bound not only to
its Chairman, David M. Castro, entered into a the fulfillment of what has been expressly stipulated
Compromise Agreement with Benedicto where but also to all consequences which according to
the latter undertook to cede to the government their nature may be keeping in good faith, usage,
properties listed in the agreement and transfer and law. (Art. 1315, NCC)
to the government whatever rights he may have
in the assets of the corporations listed in the XPN: Real contracts, such as deposit, pledge and
same agreement. The SB dismissed the case commodatum, are not perfected until the delivery of
against Africa and ruled that since that act being the object of the obligation (Art. 1316, NCC). And
complained of constituted a quasi-delict or tort solemn contracts, which are perfected by
and the obligation of the defendants were compliance with the formalities required by law.
solidary therefore the obligation of Africa has
been extinguished by the Compromise
Agreement. Did the Compromise Agreement
2. ESSENTIAL REQUISITES (2005 BAR) grant the Fourth Notice to Proceed to another
party despite having granted the First Notice to
The following are the essential requisites of Proceed to Gammon. Thus, it notified MRT of its
contracts: (C-O-C) claims for reimbursement for costs, losses,
charges, damages, and expenses it had incurred
1. Consent; due to the rapid mobilization program in
2. Object certain or subject matter; and response to MRT's additional work instructions,
3. Cause or consideration. (Art 1318, NCC) suspension order, ongoing discussions, and the
consequences of its award to another party. In a
NOTE : These three requisites are, therefore, the letter dated July 15, 1998, MRT expressed its
essential elements of a consensual contract. In real disagreement with Gammon and its amenability
contracts, however, in addition to the above, the to discussing claims for reimbursement.
delivery of the object of the contract is required as a Whether or not there is a perfected contract
further requisite. Solemn or formal contracts between MRT and Gammon Philippines?
require compliance with the formalities provided
by law. A: YES, there is a perfected contract between MRT
and Gammon. MRT has already awarded the
Elements of a Contract contract to Gammon, and Gammon's acceptance of
the award was communicated to MRT before MRT
1. Natural Elements – Those which are rescinded the contract. The first Letter shows that
derived from the very nature of the Gammon fully consented to the contents and
contract, and as a consequence, ordinarily accepted the prestations of the First Notice to
accompany the same. Proceed. Gammon's acceptance is also manifested in
2. Essential Elements – Those without which its undertakings to mobilize resources, to prepare
there can be no contract. the Performance and Advance Payment Bonds, and
3. Accidental Elements – those which exist to procure materials necessary for the Project. All
only when the contracting parties that remained was the formality of returning the
expressly provide for them. (De Leon, 2010) contract documents and the Letter of Comfort,
which eventually was complied with by Gammon.
Q: MRT thru Parsons Inc., had invited Gammon Thus, there is already mutual consent on the object
Philippines to bid on the construction of the of the contract and its consideration, and an
Podium structure of the MRT 3 and it later won absolute acceptance of the offer. (Metro Rail Transit
the bidding. Then the 2 parties signed the Development Corporation v. Gammon Philippines
contract where it stated that there would be Inc., G.R. No. 200401, 17 Jan. 2018)
three notices that would be sent to Gammon for
the project to proceed. But later on Parsons CONSENT (2005 BAR)
informed Gammon that MRT was temporarily
rescinding the Third Notice to Proceed, noting Consent is manifested by the meeting of the offer
that it remained unaccepted by Gammon. On and the acceptance upon the thing and the cause
June 19, 1998, Gammon qualifiedly accepted the which are to constitute the contract. The offer must
Fourth Notice to Proceed. MRT treated be certain and the acceptance absolute. A qualified
Gammon's qualified acceptance as a new offer. acceptance constitutes a counter-offer. (Art. 1319,
In a Letter dated June 22, 1998, MRT rejected NCC)
Gammon's qualified acceptance and informed
Gammon that the contract would be awarded It is the concurrence of the wills of the contracting
instead to Filsystems if Gammon would not parties with respect to the object and cause, which
accept the Fourth Notice to Proceed within five shall constitute the contract. (De Leon, 2010)
(5) days. In a Letter dated July 8, 1998, Gammon
wrote MRT, acknowledging the latter's intent to
NOTE: Consent is essential to the existence of a manner than that specified by the offerer, unless the
contract; and where it is wanting, the contract is offerer acquiesces in the change. (Sta. Maria, 2017)
non-existent.
Elements of a Valid Offer and Acceptance
Requisites of Consent (L-M-C-R)
1. Definite – unequivocal;
1. Legal capacity of the contracting parties; 2. Intentional ; and
3. Complete – unconditional.
NOTE: The parties must have full civil capacity.
Hence, if any one party to a supposed contract NOTE: It must be so complete that its absolute
was already dead at the time of its execution, acceptance will form an agreement containing all
such contract is undoubtedly simulated and the terms necessary and intended by the parties.
false and, therefore, null and void by reason of (Sta. Maria, 2017)
its having been made after the death of the
party who appears as one of the contracting Requisites of an Effective Offer
parties therein. The death of a person
terminates contractual capacity. Vda. De Cabalu. 1. The one offering must have a serious intention
v. Sps. Tabu, G.R. No. 188417, 24 Sept. 2012) to become bound by his offer;
2. The terms of the offer must be reasonably
2. Manifestation of the conformity of the certain, definite and complete, so that the
contracting parties; parties and the court can ascertain the terms of
the offer; and
NOTE: Manifestation may be in writing bearing 3. The offer must be communicated by the offeror
the signature or marks of the parties, or it may to the offeree, resulting in the offeree’s
be implied from the conduct of the parties like knowledge of the offer. (Rabuya, 2017)
the acceptance of payment.
Q: The husband assumed sole administration of
3. Parties’ Conformity to the object, cause, terms the family’s mango plantation since his wife
and condition of the contract must be worked abroad. Subsequently, without his
intelligent, spontaneous and free from all vices wife’s knowledge, the husband entered into an
of consent; and antichretic transaction with a company, giving it
possession and management of the plantation
NOTE: Intelligence in consent is vitiated by with power to harvest and sell the fruits and to
error; freedom by violence, intimidation or apply the proceeds to the payment of a loan he
undue influence; and spontaneity by fraud. got. What is the standing of the contract? (2011
BAR)
4. The conformity must be Real, not simulated or
fictitious. A: It is considered a continuing offer by the parties;
perfected only upon the wife’s acceptance or the
Offer court’s authorization.
An offer is defined as an expression of willingness to NOTE: The person making the offer may fix the
contract on certain terms, made with the intention time, place and manner of acceptance, all of which
that it shall become binding as soon as it is accepted must be complied with. (Art. 1321, NCC)
by the person to whom it is addressed. (Rabuya,
2017)
1. Death, civil interdiction, insanity or insolvency 1. Stated fixed period in the offer:
of either party before acceptance is conveyed; a. Must be made within the period given by
(Art. 1323, NCC) the offeror.
2. Express or implied revocation of the offer by the
offeree; b. As to withdrawal of the offer:
3. Qualified or conditional acceptance of the offer,
which becomes counter-offer; GR: It can be made by communicating such
4. Subject matter becomes illegal or impossible withdrawal at any time before the
before acceptance is communicated; and acceptance is made
5. Period given to the offeree to signify his
acceptance has already lapsed. XPN: When the option is founded upon a
consideration (something paid or
Requisites of a Valid Acceptance promised, since partial payment of the
purchase price is considered as proof of the
1. Must be absolute; a qualified acceptance perfection of the contract (Art 1324, NCC)
constitutes a counter-offer; (Art. 1319, NCC)
2. No specified form but when the offeror specifies 2. No stated period:
a particular form, such must be complied with. a. Offer is made to a person present –
acceptance must be made immediately.
NOTE: Offer or acceptance, or both, expressed in b. Offer is made to a person absent –
electronic form, is valid, unless otherwise agreed by acceptance may be made within such time
the parties (electronic contracts). that, under normal circumstances, an
answer can be expected from him.
Acceptance not made in a manner as directed by the
offeror constitutes a counter-proposal which NOTE: If there was an acceptance already, the
extinguishes the offer and this may not be accepted offeror cannot just withdraw his offer unilaterally.
by the original offeror. (Pineda, 2009) He will be liable for damages. (Pineda, 2009)
It is the payment made to a seller by the buyer to NOTE: A threat to enforce a just or legal claim
show his good faith. It will constitute as part of the through a competent authority does not amount to
purchase price, if the sale is finally consummated. If intimidation nor vitiate consent. (Art. 1335, NCC)
the sale is not concluded, the earnest money shall be
returned to the would-be-buyer unless there is a Mistake
contrary stipulation.
GR: Mistake as a vice of consent refers to mistake of
Persons Incapacitated to Give Consent (D-I-M) facts and not of law, thus rendering the contract
voidable. (Jurado, 2010)
1. Deaf-mutes who do not know how to read and
write (illiterates); XPN: When mistake of law involves mutual error as
2. Insane or demented persons, unless the to the legal effect of an agreement when the real
contract was entered into during a lucid purpose of the parties is frustrated. (Art. 1334, NCC)
interval;
3. Minors (Art. 1327, NCC) except: Mistake distinguished from Ignorance
a. Contracts for necessaries ; (Art. 1489,
NCC); Mistake is a false impression on something, while
b. Contracts by guardians or legal Ignorance is absence of any notion or impression
representatives and the court having about a particular thing.
jurisdiction had approved the same;
c. When there is active misrepresentation on Requisites
the part of the minor (minor is estopped);
d. Contracts of deposit with the Postal 1. Mistake must be with respect to the legal effect
Savings Bank provided that the minor is of the agreement;
over 7 years of age; 2. It must be mutual; and
e. Contract of an insurance for life, health and 3. Real purpose of the parties must have been
the accident on the minor’s life; frustrated.
f. Upon reaching age of majority, they ratify
the same. 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;
4. Mistake or error in quantity; NOTE: Burden rests upon the party who seeks to
5. Mistake as to identity of the person; and enforce the contract to show that the other party
6. Mistake as to the identity or qualifications of fully understood the contents of the document. If he
one of the parties will vitiate consent only when fails to discharge this burden, the presumption of
such identity or qualifications have been the mistake, if not, fraud, stands unrebutted and
principal cause of the contract. controlling. (Mayor v. Belen, G.R. No. 151035, 03 June
2004)
For mistake (as to the qualification of one of the
parties) to vitiate consent, two requisites must Mutual Error
concur:
a. The mistake must be either regarding the Mutual error as to the legal effect of an agreement
identity or with regard to the qualification of when the real purpose of the parties is frustrated,
one of the contracting parties; and may vitiate consent. (Art. 1334, NCC)
b. The identity or qualification must have been
the principal consideration for the celebration Intimidation
of the contract. (The Roman Catholic Church v.
Pante, G.R. No. 174118, 11 Apr. 2012) There is intimidation when one of the contracting
parties is compelled by a reasonable and well-
Q: Leonardo is the only legitimate child of the grounded fear of an imminent and grave evil upon
late spouses Tomasina and Balbino. She only his person or property, or upon the person or
finished Grade Three and did not understand property of his spouse, descendants or ascendants,
English. The Sebastians, on the other hand, are to give his consent. (Art. 1335(2), NCC)
illegitimate children. Leonardo filed an action to
declare the nullity of the extrajudicial Requisites of Intimidation (C-I-C-U)
settlement of the estate of her parents, which
she was made to sign without the contents 1. One of the parties is compelled to give his
thereof, which were in English, explained to her. Consent by a reasonable and well-grounded
She claims that her consent was vitiated because fear of an evil;
she was deceived into signing the extrajudicial 2. The evil must be Imminent and grave;
settlement. Is the extra-judicial settlement of 3. It must be Unjust; and
estate of Tomasina valid? 4. The evil must be the determining Cause for the
party upon whom it is employed in entering
A: NO. When one of the parties is unable to read, or into the contract. (Art. 1335, NCC)
if the contract is in a language not understood by
him, and mistake or fraud is alleged, the person NOTE: To determine the degree of the intimidation,
enforcing the contract must show that the terms the age, sex and condition of the person shall be
thereof have been fully explained to the former (Art. borne in mind. (Art. 1335, NCC)
1332). Leonardo was not in a position to give her
free, voluntary and spontaneous consent without A threat to enforce one’s claim through competent
having the document, which was in English, authority, if the claim is just or legal, does not vitiate
explained to her. Therefore, the consent of consent. (Sta. Maria, 2017)
Leonardo was invalidated by a substantial mistake
or error, rendering the agreement voidable. The Validity of a Contract if Consent is Reluctant
extrajudicial partition between the Sebastians and
Leonardo should be annulled and set aside on the A contract is valid even though one of the parties
ground of mistake. (Leonardo v. CA, G.R. No. 125485, entered into it against his wishes and desires or
13 Sept. 2004) 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.
(Martinez v. HSBC Corp., G.R. No. L-5496, 19 Feb. NOTE: The enumeration is NOT exclusive. Moral
1910) dependence, indigence, mental weakness, tender
age or other handicap are some of the
Violence circumstances to consider undue influence.
A threat to enforce one’s claim through competent When influence consists in persuasive arguments or
authority, if the claim is just or legal, does not vitiate in appeals to the affections which are not prohibited
consent. (NCC, Art. 1335(4)) by law or morals, the consent is not vitiated at all.
(Pineda, 2009)
NOTE: Violence or intimidation shall annul the Influence obtained by persuasion or argument or by
obligation, although it may have been employed by appeals to the affections is not prohibited either by
a third person who did not take part in the contract. law or morals and is not obnoxious even in courts of
(Art. 1336, NCC) equity. Such may be termed “due influence.” (Bañez
v. CA, G.R. No. L-30351, 11 Sept. 1974)
The contracting party who is not the subject of the
violence or the intimidation may not even know that Reverential Fear
the other party has been coerced. (Sta. Maria, 2017)
The fear of displeasing persons to whom respect
Undue Influence and obedience are due does not vitiate consent.
NOTE: There is fraud under the special and renewed, and that the formal renewal thereof
particular circumstances of the following: would be made upon the arrival of a certain
Tanya Madrigal, based on the letter to him given
1. When a legal or equitable duty is imposed upon by the lessor. When Samson occupied the
the dominant party to reveal certain facts premises, he was forced to vacate due to Santos’
material to the transaction; and failure to renew his lease. Samson filed an action
2. When there is a confidential relationship for damages against Santos for fraud and bad
between the parties. (Sta. Maria, 2017) faith, claiming that the misrepresentation
induced him to purchase the store and the
Requisites of Fraud to Vitiate Consent (in the leasehold right. Decide.
sense of Dolo Causante)
A: Santos was not neither guilty of fraud nor bad
1. It was applied or utilized by one contracting faith in claiming that there was implied renewal of
party upon the other; his contract of lease with his lessor. The letter given
2. It must be serious deception; by the lessor led Santos to believe and conclude that
3. It must have induced the victim to enter the his lease contract was impliedly renewed, and that
contract without which he would not have the formal renewal thereof would be made upon the
agreed to; arrival of Tanya Madrigal. Thus, from the start, it
4. It must have induced the victim to enter the was known to both parties that, insofar as the
contract, which he would not have agreed to, agreement regarding the transfer of Santos’
absent the employment of such fraud; and leasehold right to Samson was concerned, the object
5. It must have resulted in damage or injury. thereof relates to a future right. It is a conditional
contract, the efficacy of which depends upon an
Kinds of Fraud expectancy of the formal renewal of the lease
contract between Santos and lessor. The efficacy of
1. Fraud in the perfection of the contract: the contract between the parties was thus made
dependent upon the happening of this suspensive
a. Causal fraud (dolo causante) – It is condition. (Samson v. CA, G.R. No. 108245, 25 Nov.
employed by one party prior to or 1994)
simultaneous with the creation or
perfection of the contract to secure the Acts considered NOT Fraudulent
consent of the other.
1. Principle of Tolerated Fraud – the usual
b. Incidental fraud (dolo incidente) – It is exaggerations in trade and when the other
the fraud committed in the in the party had an opportunity to know the facts are
performance of an obligation, and its not in themselves fraudulent (Art. 1340, NCC);
existence merely results in breach of an
already existing contract, which entitles 2. Expert Opinion – a mere expression of an
the injured party to damages. opinion does not signify fraud, unless made by
an expert and the other party has relied on the
2. Fraud in the performance of an obligation. (Art. former’s special knowledge (Art. 1341, NCC);
1170, NCC)
3. Misrepresentation by a third person does not
Q: Santos’ lease contract was about to expire but vitiate consent, unless such misrepresentation
it was extended, thus, he continued to occupy has created substantial mistake and the same is
the leased premises beyond the extended term. mutual (Art. 1342, NCC);
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
4. Misrepresentation made in good faith is not Although there was no fraud that had been
fraudulent but may constitute error. (Art. 1343, undertaken to obtain petitioner's consent, there
NCC) was fraud in the performance of the contract. The
records showed that petitioner had been unjustly
NOTE: The contract just the same is voidable, not excluded from participating in the management of
because of the misrepresentation but because of the affairs of the corporation. This exclusion from
substantial error. In order that fraud may make a the management in the affairs of Sterling Shipping
contract voidable, it should be serious, and should Lines, Inc. constituted fraud incidental to the
not have been employed by both contracting performance of the obligation. (Alejandro Tankeh v.
parties. (Art 1344, NCC) DBP, et al., G.R. No. 171428, 11 Nov. 2013)
If the concealed contract is lawful, it is absolutely holders. For failure of the Javiers to pay the
enforceable, provided it has all the essential balance due under the two deeds of assignment,
requisites: consent, object, and cause. (Arts. 1345- Tiro filed an action against them. Are the deeds
1346, NCC) of assignment null and void for total absence of
consideration and non-fulfillment of the
As to third persons without notice, the apparent conditions?
contract is valid for purposes beneficial to them. As
to third persons with notice of the simulation, they A: NO. They are not null and void per se. The parties
acquire no better right to the simulated contract are to be bound by their real agreement. The true
than the original parties to the same. cause or consideration of said deed was the transfer
of the forest concession of private respondent to
The primary consideration in determining the true petitioners for P120,000.00. This finding is
nature of a contract is the intention of the parties. supported by the following considerations, viz:
Such intention is determined from the express
terms of their agreement as well as from their 1. Both parties, at the time of the execution of the
contemporaneous and subsequent acts. (Liam v. deed of assignment knew that the
UCPB, G.R. No. 194664, 15 June 2016) Timberwealth Corporation stated therein was
non-existent;
NOTE: If the parties state a false cause in the
contract to conceal their real agreement, the 2. In their subsequent agreement, private
contract is only relatively simulated, and the parties respondent conveyed to petitioners his
are still bound by their real agreement. Hence, inchoate right over a forest concession covering
where the essential requisites of a contract are an additional area for his existing forest
present and the simulation refers only to the concession, which area he had applied for, and
content or terms of the contract, the agreement is his application was then pending in the Bureau
absolutely binding and enforceable between the of Forestry for approval;
parties and their successors in interest.
3. Petitioners, after the execution of the deed of
Q: May the owner-simulator recover? assignment, assumed the operation of the
logging concessions of private respondent;
A: If the absolutely simulated contract does not have
any illegal purpose, the interested party may prove 4. The statement of advances to respondent
the simulation in order to recover whatever he prepared by petitioners stated: "P55,186.39
might have given under the fictitious contract. In the advances to L.A. Tiro be applied to succeeding
event it is intended for an illegal purpose, the shipments. Based on the agreement, we pay
contract is void and the parties have no cause of P10,000.00 every after (sic) shipment. We had
action. (Pineda, 2009) only 2 shipments”; and
It is the subject matter of the contract. It can be a GR: Future inheritance cannot be the object of a
thing, right or service arising from a contract. contract because its extent, amount and quantity
cannot be determined. (Sta. Maria, 2017)
NOTE: Only rights which are not intransmissible
can be the object of the contract. (Art. 1347, NCC) XPNS:
1. Under Art. 130 of the FC, which allows the
Requisites of an Object (D-E-Li-C-T-G) future spouses to give or donate to each other
in their marriage settlement their future
1. Determinate as to kind (even if not property to take effect upon the death of the
determinate, provided it is possible to donor and to the extent laid down by the
determine the same without the need of a new provisions of the NCC relating to testamentary
contract); succession; and
NOTE: To qualify as an object for purposes of a 2. Under Art. 1080 of the NCC, which allows a
contract to exist: person to make a partition of his estate among
his heirs by an act inter vivos, provided that the
1. The object must at least be Generic. legitime of the compulsory heirs is not
2. Existing or has the potential to exist prejudiced. (Jurado, 2009; De Leon 2010).
subsequent to the contract;
3. Must be Licit; NOTE: Except in cases authorized by law, future
4. Within the Commerce of man; and inheritance cannot be an object of contract because
5. Transmissible. its extent, amount or quantity is not determinable.
(Sta. Maria, 2003)
Object of Contracts
CAUSE
GR: All things or services may be the object of
contracts. Cause is the essential or more proximate purpose
reason which moves the contracting parties to enter
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 GR: A false cause in a contract makes the contract
benefit remunerated. E.g., Donation in void.
consideration of a past service which does not
constitute a demandable debt XPN: If it is proven that the false cause were
founded upon another cause which is true and
3. Cause of gratuitous contracts – the mere lawful. (Art. 1353, NCC)
liberality of the donor or benefactor; it does not
involve any material thing but rather it involves Example: When a contract, through stating a false
only the generosity of the benefactor. consideration, has in fact a real consideration, the
contract is not void, and is considered valid.
4. Accessory – identical with cause of principal
contract, from which the accessory derived its Rules relating to Cause on Contracts
life and existence. E.g., mortgage or pledge
1. Absence of cause – confers no right and
Cause v. Motive produces no legal effect.
5. Lesion or inadequacy of cause – does not The Parties may be Required to Observe the
invalidate the contract, unless: Form Required for their Convenience
a. there is fraud, mistake, or undue
influence; The contracting parties may compel each other to
b. when the parties intended a donation or observe the required form once the contract has
some other contract; or been perfected and is enforceable under the statute
c. in cases specified by law of frauds. This is one of the rights of the creditor.
e.g., contracts entered by guardian with
court approval, when the ward suffers The right to demand the execution of the document
lesion of more than 25%. If there is no required under Art. 1358 is not imprescriptible. It is
court approval, the contract is void subject to prescription. It must be pursued within
regardless of the amount of lesion. the period prescribed by law, which is five (5) years.
(Pineda, 2009)
Q: May a moral obligation constitute a sufficient
cause to support an onerous contract? NOTE: The right must be exercised once the
contract has been perfected, otherwise, the exercise
A: Where the moral obligation arises wholly from will be considered as premature.
ethical considerations, unconnected with any civil
obligation, and as such is demandable only in Formalities required in Specific Contracts
conscience, and not in law, it cannot constitute a
cause to support an onerous contract. Where such 1. Donations:
moral obligation, however, is based upon a previous a. Personal property – if the value exceeds
civil obligation which has already been barred by P5,000, the donation and acceptance must
the statute of limitations at the time when the both be written. (Art. 748, NCC)
contract is entered into, it constitutes a sufficient
cause or consideration to support said contract. b. Real property:
(Villaroel v. Estrada G.R. No. L-47362, 19 Dec. 1940) i. Donation must be in a public
instrument, specifying therein the
FORM property donated and value of
charges which donee must satisfy.
Rules on the Form of Contracts ii. Acceptance must be written, either in
the same deed of donation or in a
GR: Form is not required in consensual contracts. separate instrument.
(Provided, all the essential requisites for their validity iii. Acceptance may either be in the same
are present.) deed of donation, or in a separate
public instrument, but it shall not take
XPNs: When the law requires a contract be in effect unless it is done during the
writing for its: lifetime of the donor.
1. Validity (formal contracts); iv. If acceptance is in a separate
2. Enforceability (under Statute of Frauds); or instrument, the donor shall be
3. For the convenience of the parties. notified thereof in an authentic form,
and this step shall be noted in both
NOTE: The parties may compel each other to reduce instruments. (Art. 749, NCC)
the verbal agreement into writing. (2006 BAR)
2. Partnership where real property contributed:
a. There must be a public instrument
regarding the partnership.
b. The inventory of the realty must be made, Contracts which must Appear in a Public
signed by the parties, and attached to the Document
public instrument. (Art. 1773, NCC)
1. Donation of real properties (Art. 719-749, NCC);
3. Antichresis – the amount of the principal and
interest must be in writing. (NCC, Art. 2134) 2. Partnership where immovable property or real
rights are contributed to the common fund
4. Agency to sell real property or an interest (Arts. 1171 & 1773, NCC);
therein – authority of the agent must be in
writing; otherwise, the sale shall be void. (Art. 3. Acts and contracts which have for their object
1874, NCC) the creation, transmission, modification or
extinguishment of real rights over immovable
5. Stipulation to charge interest – interest must be property; sale of real property or of an interest
stipulated in writing. (Art. 1956, NCC) therein is governed by Arts. 1403, No. 2, and
1405 (Art. 1358(1), NCC);
6. Stipulation limiting common carrier's duty of
extraordinary diligence to ordinary diligence: 4. The cession, repudiation, or renunciation of
a. Must be in writing, signed by shipper or hereditary rights or of those of the conjugal
owner; partnership of gains (Art. 1358(2), NCC);
b. Supported by valuable consideration
other than the service rendered by the 5. The power to administer property or any other
common carrier; and power which has for its object an act appearing
c. Reasonable, just, and not contrary to or which should appear in a public document or
public policy. (Art. 1744, NCC) should prejudice a third person (Art. 1358(3),
NCC); and
Contracts which must be In Writing to be Valid
6. The cession of actions or rights proceeding
1. Donation of personal property whose value from an act appearing in a public document.
exceeds five thousand pesos. (Art. 748, NCC) – (Art. 1358(4), NCC)
the donation and acceptance must be in writing.
NOTE: Art. 1358 of the Civil Code which requires
2. Sale of a piece of land or any interest therein the embodiment of certain contracts in a public
through an agent (Art. 1874, NCC) – the instrument, is only for convenience, and
authority of the agent shall appear in writing. registration of the instrument only adversely affects
third parties. Formal requirements are, therefore,
3. Agreements regarding payment of interest in for the benefit of third parties. Non-compliance
contracts of loan. (Art. 1956, NCC) therewith does not adversely affect the validity of
the contract nor the contractual rights and
4. Antichresis – the amount of the principal and obligations of the parties thereunder. (Fule v. CA,
the interest shall be specified in writing. ( Art. G.R. No. 112212, 02 Mar. 1998)
2134, NCC)
Contracts that Must be Registered
each penthouse unit; and the balance of 106 "also labored under a mistaken appreciation of the
parking slots were allocated as common areas. nature and ownership of the ninety-eight (98)
parking slots in question."
Pursuant to R.A. No. 4726, or the Condominium
Act, Multi-Realty created and incorporated Both parties recognized Multi-Realty's ownership of
Makati Tuscany Condominium Corporation the parking slots. MATUSCO initially respected
(MATUSCO) to hold title over and manage Multi-Realty's ownership despite the Master Deed's
Makati Tuscany's common areas. That same and Deed of Transfer's stipulations. It was
year, Multi-Realty executed a Deed of Transfer MATUSCO that changed its position decades after it
of ownership of Makati Tuscany's common acted as if it accepted Multi-Realty's ownership.
areas to MATUSCO. (Makati Tuscany Condominium Corporation v. Multi-
Realty Development Corporation, G.R. 185530, 18
Multi-Realty filed a complaint for damages Apr. 2018)
and/or reformation of instrument with prayer
for TRO and/or preliminary injunction against Operation and Effect of Reformation
MATUSCO. Multi-Realty alleged in its complaint
that of the 106 parking slots designated in the It relates back to, and takes effect from, the time of
Master Deed as part of the common areas, only its original execution, especially as between the
eight (8) slots were intended to be guest parking parties. (Tolentino, 2002)
slots; thus, it retained ownership of the
remaining 98 parking slots. Reformation of instruments may be availed of
judicially or extrajudicially.
Multi-Realty claimed that its ownership over the
98 parking slots was mistakenly not reflected in Basis and Nature of the Remedy
the Master Deed "since the documentation and
the terms and conditions therein were all of first The remedy of reformation of an instrument is
impression," considering that Makati Tuscany based on the principle of equity where, to express
was one of the first condominium developments the true intention of the contracting parties, an
in the Philippines. Is there is a need to reform instrument already executed is allowed by law to be
the Master Deed and the Deed of Transfer? reformed. The right of reformation is necessarily an
invasion or limitation of the parol evidence rule,
A: NO. Reformation of an instrument is a remedy in since, when a writing is reformed, the result is that
equity where a valid existing contract is allowed by an oral agreement is by court decree, made legally
law to be revised to express the true intentions of effective. The remedy, being an extraordinary one,
the contracting parties. The rationale is that it must be subject to the limitations as may be
would be unjust to enforce a written instrument provided by law. A suit for reformation of an
which does not truly reflect the real agreement of instrument must be brought within the period
the parties. In reforming an instrument, no new prescribed by law, otherwise, it will be barred by
contract is created for the parties, rather, the the mere lapse of time. (Bentir v. Leanda, G.R.
reformed instrument establishes the real 128991, 12 Apr. 2000)
agreement between the parties as intended, but for
some reason, was not embodied in the original When Remedy Allowed
instrument.
1. Mutual mistake – When the mutual mistake of
MATUSCO does not deny that it stayed silent when the parties causes the failure of the instrument
Multi-Realty sold the parking slots on several to disclose their agreement (Art. 1361, NCC)
occasions or that it offered to buy the parking slots
from Multi-Realty on at least two (2) occasions. It Requisites:
excuses itself by saying that just like Multi-Realty, it a. The mistake should be of fact;
2. Mistake on one party and fraud on the other – In Persons who can Ask for the Reformation of the
such a way that the instrument does not show Instrument
their true intention, the party mistaken or
defrauded may ask for the reformation of the It may be ordered at the instance of:
instrument (Art. 1362, NCC);
1. If the mistake is mutual: either party or his
3. Mistake on one party and concealment on the successor-in-interest may file an action.
other – When one party was mistaken and the 2. If the cause of reformation is on some other
other knew or believed that the instrument did ground (such as vitiated consent or fraud): the
not state their real agreement, but concealed injured party or his heirs and assigns are the
that fact from the former (Art. 1363, NCC); only person given legal standing to sue.
4. Ignorance, lack of skill, negligence or bad faith – NOTE: In reformation of contracts, what is
When through the ignorance, lack of skill, reformed is not the contract itself, but the
negligence or bad faith on the part of the person instrument embodying the contract. It follows that
drafting the instrument or of the clerk or typist, whether the contract is disadvantageous or not, is
the instrument does not express the true irrelevant to reformation and therefore, cannot be
intention of the parties (Art. 1364, NCC); an element in the determination of the period for
prescription of the action to reform. (Pineda, 2000)
5. Right of repurchase – If the parties agree upon
the mortgage or pledge of real or personal 4. INTERPRETATION OF CONTRACTS
property, but the instrument states that the
property is sold absolutely or with a right of If the terms of a contract are clear and leave no
repurchase. (Art. 1365, NCC) doubt upon the intention of the contracting parties,
the literal meaning of its stipulations shall control.
When Remedy NOT Allowed
If the words appear to be contrary to the evident
1. Simple, unconditional donations inter vivos; intention of the parties, the latter shall prevail over
2. Wills; the former. (Art. 1370, NCC)
3. When the agreement is void; (Art. 1366, NCC)
4. When an action to enforce the instrument is In order to judge the intention of the contracting
filed (by doctrine of estoppel) ; parties, their contemporaneous and subsequent
5. If mistake, fraud, inequitable conduct, or acts shall be principally considered. (Art. 1371, NCC)
accident has prevented a meeting of the minds
of the parties; and However general the terms of a contract may be,
they shall not be understood to comprehend things
NOTE: The remedy here is annulment of that are distinct and cases that are different from
contract. those upon which the parties intended to agree.
(Art. 1372, NCC)
6. When the contract is unenforceable because of
failure to comply with the statute of frauds. If some stipulation of any contract should admit of
several meanings, it shall be understood as bearing
that import which is most adequate to render it A: YES. It is basic that a contract is the law between
effectual. (Art. 1373, NCC) the parties. Obligations arising from contracts have
the force of law between the contracting parties and
Duty of Courts in Interpreting Contracts should be complied with in good faith. Unless the
stipulations in a contract are contrary to law,
It is not the province of the court to alter a contract morals, good customs, public order or public policy,
by construction or to make a new contract for the the same are binding as between the parties. Being
parties. Its duty is confined to the interpretation of the law between the parties, courts have no choice
the one which they have made for themselves but to enforce such contracts. Simply put, courts
without regard to its wisdom or folly as the court cannot stipulate for the parties or amend the latter's
cannot supply material stipulations or read into the agreement, for to do so would be to alter the real
contract words which it does not contain. (Sps. intention of the contracting parties when the
Pascual v. Ramos, G.R. No. 144712, 04 July 2002) contrary function of courts is to give force and effect
to the intention of the parties.
Q: Federico Alferez died without leaving any
will. He was survived by his spouse Teodora, and It can be seen from the Deed that Ma. Concepcion
their children, namely: Ma. Concepcion, Antonio, without qualification, sold, transferred, and
and Esperanza. Since Alferez left several bank conveyed to the Spouses the parcels of land, without
debts, Ma. Concepcion, as Alferez's daughter and any mention of their alleged intention to only offer
administratrix of his estate, filed a motion to sell half of the said property. The provisions thereof are
a part of the estate of Alferez. The Deed of Sale categorical and admits of no other interpretation;
executed by Ma. Concepcion with Spouses the sale, transfer, and conveyance of the parcels of
Canencia shows that Ma. Concepcion, without land covered by the aforementioned titles appear
qualification, sold, transferred, and conveyed to absolute, there being no reservation of ownership of
respondents the parcels of land, without any half of the lots therein described, nor a stipulation
mention of their alleged intention to only offer making mention of Teodora' specific share of the
half of the said property. said properties.
Ma. Concepcion filed action for Annulment As mandated by Art. 1370 of the Civil Code, if the
and/or Declaration of Nullity of Deed of Sale, terms of the contract are clear and leave no doubt,
among others, asserting that during the literal meaning of its stipulations shall control.
negotiations with Spouses Canencia, they were The Deed, as the agreement between the parties, is
clear that the land forming part of Alferez’s the formal expression of the parties' rights, duties,
estate was not entirely for sale; what they and obligations. It is the best evidence of the
intended to sell was only the half of Federico. intention of the parties. Thus, when the terms of an
The Spouses Canencia argued that the agreement have been reduced to writing, it is
provisions of the Deed did not even remotely considered as containing all the terms agreed upon
suggest that Ma. Concepcion was only selling and there can be no evidence of such terms other
half of the parcels of land thereof; in fact, there than the contents of the written agreement between
were no doubtful provisions therein that could the parties and their successors in interest. (Alferez
have indicated a different intention on the part v. Spouse Canencia, G.R. No. 244542, 28 June 2021)
of the petitioners. Thus, Ma. Concepcion should
be bound by the terms and conditions of the Disfavor of Interpretation leading to Loss of
Deed and should not be allowed to escape the Rights
obligatory force of their contractual
commitment by contending that the Deed failed The construction of the terms of a contract leading
to correctly embody their true intention. Is the to the impairment or loss of the right is not favored.
contention of the Spouses correct?
The various stipulations of a contract shall be When it is absolutely impossible to settle doubts by
interpreted together, attributing to the doubtful the rules established in the preceding articles, and
ones that sense which may result from all of them the doubts refer to incidental circumstances of a
taken jointly. (Art. 1374, NCC) gratuitous contract, the least transmission of rights
and interest shall prevail. If the contract is onerous,
The various stipulations in a contract must be read the doubt shall be settled in favor of the greatest
together to give effect to all. (North Negros Sugar Co. reciprocity of interests.
v. Compania Gen. De Tabacos, G.R No. L-9277, 29 Mar.
1957) If the doubts are cast upon the principal object of the
contract in such a way that it cannot be known what
Complementary-Contracts-Construed-Together may have been the intention or will of the parties,
Doctrine the contract shall be null and void.
The various stipulations of a contract shall be The principles of interpretation stated in Rule 123
interpreted together, attributing to the doubtful of the Rules of Court shall likewise be observed in
ones that sense which may result from all of them the construction of contracts. (Art. 1378, NCC)
taken jointly. (Art. 1374, NCC)
NOTE: The provisions of Rule 123 of the Rules of
When there are several provisions in a contract, the Court referred to are Secs. 58-67, now Secs. 8-17,
construction to be adopted should be that one Rule 130, Revised Rules of Court.
which will give effect to all provisions. A contract
must be read in its entirety (BPI v. Sabrino, G.R. No. Q: In response to Araneta Center Inc.’s (“ACI”)
L-36524, 06 Feb. 1933). Piecemeal interpretation invitation to bid on the design and construction
must be avoided. of the Gateway Mall under a lump-sum, fixed
price arrangement, CE Construction
Under this doctrine, an accessory contract must be Corporation (“CECON”) submitted its proposal
read in its entirety and together with the principal on 30 August 2002, which bid was made valid for
agreement. (Rabuya, 2017) acceptance only for ninety days. However, ACI
informed CECON that the contract was being
E.g., A promissory note and a deed of chattel awarded to it only at such time that the bid had
mortgage must be construed together; and the already expired, and instructed it to proceed
surety contract, being an accessory contract, must with excavation work.
be interpreted with its principal contract, for
instance, a loan agreement. (Ibid.) While no formal documents were prepared for
the contract although construction was already
underway, ACI introduced major changes in the as to comply with the essential requisite of consent
plans and specifications, changing it into a in the perfection of a contract.
straight construction contract from a former
design-and-construct scheme. ACI decided to In order to judge the intention of the contracting
change and take over the design, such as the parties, their contemporaneous and subsequent
change from concrete to structural steel acts shall be principally considered. It should be
framing, and took out certain equipment from mentioned that ACI had drastically changed the
the scope of the contract. scope and character of the agreement. To tie down
CECON to the unit prices for the proposal for a
Meanwhile, the price levels of cement and steel different scope of work would be grossly unfair.
products had increased, of which CECON Reference to prevailing industry practices in the
notified ACI, with a stern warning that further valuation of the project cost was also warranted and
delays in the formal award of the contract might necessary because of the absence of definitive
affect the contract sum. It was only on 2 June governing instruments. Under Arts. 1375 and 1376
2003 that ACI finally wrote a letter to CECON, of the NCC, the nature and object of the contract as
indicating its acceptance of the latter’s 30 well as the usage or custom of the place shall be
August 2002 tender, but still no formal contracts borne in mind in the interpretation of the
were executed. With the many changes to the ambiguities of the contract, and shall fill the
project coupled with ACI’s delays in delivering omission of stipulations which are ordinarily
drawings and specifications, CECON established. (CE Construction Corp. v. Araneta
increasingly found itself unable to complete the Center, Inc., G.R. 192735, 09 Aug. 2017)
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 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
b. Plaintiff must be able to return whatever he Persons who may Institute an Action for the
may be obliged to return due to rescission; Rescission of a Rescissible Contract
c. The things must not have been passed to
third persons in good faith; The action for rescission may be instituted by the:
d. It must be made within 4 years. (Art 1382,
NCC) 1. Injured party;
2. Contracts entered into by guardians – by the
Characteristics of Rescissible Contract ward, or by the guardian ad litem of ward
during the latter’s incapacity in an action
1. It has all the elements of a valid contract. against the original guardian;
2. It has a defect consisting of an injury (generally 3. Contracts in representation of absentees – by
in the form of economic damage or lesion, fraud, the absentee;
and alienation of the property) to one of the 4. Contracts defrauding creditors – by the
contracting parties or to a third person. creditors;
3. It is valid and effective until rescinded. 5. Contracts referring to things in litigation – by
4. It can be attacked only directly. the party litigant;
5. It is susceptible of convalidation only by 6. Their representatives;
prescription. (De Leon, 2010) 7. Their heirs; and
8. Their creditors by virtue of subrogatory action
Nature of an Action for Rescission defined in Art. 1177, NCC. (Jurado, 2009)
The action for rescission is subsidiary. It cannot be Prescriptive Period of Action for Rescission
instituted except when the party suffering damage
has no other legal means to obtain reparation for 1. Under Art. 1381, no. 1 – within 4 years from the
the same (Art. 1383, NCC). Hence, it must be availed time the termination of the incapacity of the
of as the last resort, availed only after all legal ward;
remedies have been exhausted and proven futile. 2. Under Art. 1381, no. 2 – within 4 years from the
(Anchors Savings Bank v. Furigay, G.R. No. 191178, 13 time the domicile of the absentee is known; or
Mar. 2013) 3. Under Art. 1381, nos. 3 & 4 & Art. 1382 – within
4 years from the time of the discovery of fraud.
Rationale: In order not to disturb other contracts (Art. 1389, NCC)
and to comply with the principle of relativity of
contracts. Requisites that must Concur before a Contract
May be Rescinded on the ground of Lesion
However, if it can be proven that the property
alienated was the only property of the debtor at the Whether the contract is entered into by a guardian
time of the transaction, the action for rescission is in behalf of his ward or by a legal representative in
certainly maintainable because it is clear that the behalf of an absentee, before it can be rescinded on
creditor has no other remedy under the the ground of lesion, it is indispensable that the
circumstances. (Pineda, 2009) following requisites must concur:
NOTE: Rescission shall be only to the extent 1. The contract must be entered into by the
necessary to cover the damages. (Art. 1384, NCC) 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.
4. There must be no other legal means for 4. The object of the contract must not be legally in
obtaining reparation for the lesion. possession of a third person in good faith.
5. The person bringing the action must be able to
return whatever he may be obliged to restore. NOTE: If the object of the contract is legally in the
6. The object of the contract must not be legally in possession of a third person who did not act in bad
the possession of a third person who did not act faith, the remedy available to the creditor is to
in bad faith. proceed against the person causing the loss for
damages. Such person is solidarily liable with that of
Statutory Presumptions of Fraud in Art. 1387 transferring creditor as both of them are guilty of
fraud.
1. Alienation by gratuitous title – When a debtor
donates his property without reserving The action to rescind contracts in fraud of creditors
sufficient property to pay all his pre-existing is known as accion pauliana. For this action to
debts, the law presumes that the gratuitous prosper, the following requisites must be present:
dispositions are made in fraud of creditors.
1. The plaintiff asking for rescission has a credit
2. Alienation by onerous title – The contract is prior to the alienation;
presumed fraudulent if at the time of alienation, 2. The debtor has made a subsequent contract
some judgement has been rendered against conveying a patrimonial benefit to a third
him, whether it is on appeal or has already person;
become final and executory; or some writ of 3. The creditor has no other legal remedy to
attachment has been issued against him in any satisfy his claim;
case. 4. The act being impugned is fraudulent;
5. The third person who received the property
NOTE: The decision or writ of attachment need not conveyed, if it is by onerous title, has been an
refer to the very property subject of alienation. The accomplice in fraud. (Sps. Lee v. Bangkok Bank,
person who obtained the judgement or writ of G.R. No. 173349, 09 Feb. 2011)
attachment need not be the same person seeking
the rescission. Badges of Fraud
These presumptions are rebuttable, which means, 1. Consideration for the conveyance of the
they may be overcome by clear, strong and property is inadequate or fictitious;
convincing evidence. 2. Transfer was made by the debtor after a suit has
commenced and during its pending against him;
An alienation made during the pendency of a suit is 3. Sale upon credit by an insolvent debtor;
not enough. There must be a decision or a writ of 4. The presence of evidence of large indebtedness
attachment. or complete insolvency of the debtor;
5. Transfer of all his property by a debtor when he
Requisites before a Contract Entered into in is financially embarrassed or insolvent;
Fraud of the Creditors may be Rescinded 6. Transfer is made between father and son, where
there are present some or any of the above
1. There must be a credit existing prior to the circumstances; and
constitution of the said fraudulent contract; 7. Failure of the vendee to take exclusive
2. There must be fraud, or at least, the intent to possession of the property. (Pioneer Insurance
commit fraud to the prejudice of the creditor Surety Corp. v. Morning Star Travel & Tours, Inc.,
seeking rescission; G.R. No. 198436, 08 July 2015)
3. The creditor cannot in any legal manner collect
his credit (subsidiary character of rescission);
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,
possess and enjoy” of the money as its owner balance of the price, especially in the absence of a
before the contract to sell is rescinded. Is Reyes’ clear and express agreement thereon.
contention correct?
Moreover, Goldenrod resorted to extrajudicial
A: NO. There is also no plausible or justifiable rescission of its agreement with Barretto Realty.
reason for Reyes to object to the deposit of the P10 Under Art. 1385, rescission creates the obligation to
million down payment in court. The contract to sell return the things which were the object of the
can no longer be enforced because Reyes himself contract together with their fruits and interest.
subsequently sold the property. Both Lim and Reyes Therefore, by virtue of the extrajudicial rescission of
are seeking for rescission of the contract. By seeking the contract to sell by Goldenrod without opposition
rescission, a seller necessarily offers to return what from Barretto Realty, which in turn, sold the
he has received from the buyer. Such a seller may property to other persons, Barretto Realty, had the
not take back his offer if the court deems it obligation to return the earnest money which
equitable, to prevent unjust enrichment and ensure formed part of the purchase price plus legal interest
restitution, to put the money in judicial deposit. from the date it received notice of rescission. It
would be most inequitable if Barretto Realty would
NOTE: In this case, it was just, equitable and proper be allowed to retain the money at the same time
for the trial court to order the deposit of the down appropriate the proceeds of the second sale made to
payment to prevent unjust enrichment by Reyes at another. (Goldenrod, Inc. v. CA, G.R. No. 126812, 24
the expense of Lim. Depositing the down payment in Nov. 1998)
court ensure its restitution to its rightful owner.
Lim, on the other hand, has nothing to refund, as he 6. VOIDABLE CONTRACTS (BAR 2004)
has not received anything under the contract to sell.
(Reyes v. Lim, Keng, G.R. No. 134241, 11 Aug. 2003) Voidable contracts are those where consent is
vitiated either by the incapacity of one of the
Q: Goldenrod offered to buy a mortgaged contracting parties or by mistake, violence,
property owned by Barreto Realty to which it intimidation, undue influence or fraud. These
paid an earnest money amounting to P1 million. contracts are binding, unless they are annulled by a
It was agreed upon that Goldenrod would pay proper action in court. It is susceptible of
the outstanding obligations of Barreto Realty ratification. (Art. 1390, NCC)
with UCPB. However, Goldenrod did not pay
UCPB because of the bank’s denial of its request NOTE: Annulment may be had even if there be no
for the extension to pay the obligation. damage to the contracting parties.
Thereafter, Goldenrod, through its broker,
informed Barreto Realty that it could not go Characteristics of a Voidable Contract
through with the purchase of the property and
also demanded the refund of the earnest money 1. Effective until set aside;
it paid. 2. Can be ratified;
3. Can be assailed only by the party whose consent
In the absence of a specific stipulation, may the was defective or his heirs or assigns.
seller of real estate unilaterally rescind the 4. A voidable contract, unlike unenforceable and
contract and, as a consequence, keep the earnest void contracts may be attacked indirectly or
money to answer for damages in the event the collaterally, by way of defense to an action
sale fails due to the fault of the prospective under the contract by way of a counterclaim.
buyer? (De Leon, 2016)
value thereof shall be the basis for 1. In cases of intimidation, violence or undue
damages. (Art. 1398, NCC) influence, from the time the defect of the
consent ceases;
NOTE: No restitution – The party 2. In case of mistake or fraud, from the time of the
incapacitated is not obliged to make any discovery of the same; and
restitution except insofar as he has been 3. When the action refers to contracts entered into
benefited by the thing or the price received by minors or other incapacitated persons, from
by him. (Art. 1399, NCC) the time the guardianship ceases. (Art. 1391,
NCC)
XPN : If and when the application of mutual
restitution will result in unjust enrichment Ratification
of one party at the expense of another.
(Tolentino, 1991) Ratification may be effected expressly or tacitly. It is
understood that there is a tacit ratification if, with
b. Whenever the person obliged by the decree knowledge of the reason which renders the contract
of annulment to return the thing cannot do voidable and such reason having ceased, the person
so because it has been lost through his fault, who has a right to invoke it should execute an act
he shall return the fruits received and the which necessarily implies an intention to waive his
value of the thing at the time of the loss, with right. (Art. 1393, NCC)
interest from the same date. (Art. 1400,
NCC) NOTE: Ratification extinguishes the action to annul
a voidable contract. (Art. 1392, NCC)
Causes of Extinction of Action to Annul
Requisites of Ratification
1. Prescription – the action for annulment must be
commenced within 4 years depending on the 1. The contract involved must be voidable;
ground stated. 2. Person ratifying must know the reason for the
voidability;
2. Ratification – cleanses the contract of its defects 3. The cause for the voidability must immediately
from the moment it was constituted. (Art. 1396, cease after the ratification; and
NCC) 4. Ratification must be express or through an act
implying a waiver of the action to annul;
3. By loss of the thing which is the object of the
contract through fraud or fault of the person NOTE: Ratification entered into by the
who is entitled to annul the contract. (Art. 1401, incapacitated person may be effected by the
NCC) guardian of the incapacitated person. (NCC, Art.
1394) However, this rule does not pertain to a
NOTE: If the right of action is based upon the rescissible contract entered into by the
incapacity of any one of the contracting parties, the guardian in behalf of his ward. The right to
loss of the thing shall not be an obstacle to the ratify is transmitted to the heirs of the party
success of the action, unless it took place through entitled to such right. (Tolentino, 2002)
the fraud or fault of the plaintiff. (Art. 1401, NCC)
Party who may Ratify
Prescriptive Period for an Annulment of a
Voidable Contract 1. In contracts entered into by incapacitated
persons –
The action for annulment shall be brought within 4 a. Guardian; and
years, reckoned from: b. Injured party himself, provided he is
already capacitated.
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)
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”;