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3 Floor, Philippine Nurses Association,

# 1663 F. T. Benitez St, Malate, Manila
CIVIL LAW
Handout No. 28

OBLIGATIONS AND CONTRACTS

It is basic in this jurisdiction that a contract is perfected by mere consent of the parties.

Thus, Article 1315 of the Civil Code provides: Art. 1315. Contracts are perfected by mere consent
and from that moment the parties are bound not only to the fulfilment of what has been
expressly stipulated but also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law. (SM Investments Corporation vs. Posadas, 776 SCRA 219,
G.R. No. 200901 December 7, 2015)

In general, contracts undergo three (3) distinct stages, to wit: negotiation; perfection or birth;
and consummation.

In Swedish Match, AB v. Court of Appeals, 441 SCRA 1 (2004), we explained the stages of a
contract, thus: In general, contracts undergo three distinct stages, to wit: negotiation; perfection
or birth; and consummation. Negotiation begins from the time the prospective contracting
parties manifest their interest in the contract and ends at the moment of agreement of the
parties. Perfection or birth of the contract takes place when the parties agree upon the essential
elements of the contract. Consummation occurs when the parties fulfill or perform the terms
agreed upon in the contract, culminating in the extinguishment thereof. (SM Investments
Corporation vs. Posadas, 776 SCRA 219, G.R. No. 200901 December 7, 2015)

In this jurisdiction, obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith.

Indeed, the letter of SMIC of 27 February 1996 on the increased goodwill money was a post
perfection matter, and clearly, was for the purpose of having the issue of breach of the perfected
contract settled without further ado. In view of the foregoing, we affirm the finding of the Trial
Court that there is a perfected joint venture agreement between the parties for the development
of the Subject Property. Therefore, the said perfected joint venture agreement still stands. In this
jurisdiction, obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. (SM Investments Corporation vs. Posadas, 776
SCRA 219, G.R. No. 200901 December 7, 2015)

In reciprocal obligations, either party may rescind — or more appropriately, resolve — the
contract upon the other party’s substantial breach of the obligation/s he had assumed
thereunder.

This is expressly provided for in Article 1191 of the Civil Code which states: Art. 1191. The power
to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply
with what is incumbent upon him. The injured party may choose between the fulfillment and the

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CIVIL LAW
Handout No. 28

OBLIGATIONS AND CONTRACTS

rescission of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become impossible. The court
shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (Nolasco vs. Cuerpo, 777
SCRA 447, G.R. No. 210215 December 9, 2015)

More accurately referred to as resolution, the right of rescission under Article 1191 is predicated
on a breach of faith that violates the reciprocity between the parties to the contract.

This retaliatory remedy is given to the contracting party who suffers the injurious breach on the
premise that it is ‘unjust that a party be held bound to fulfill his promises when the other violates
his.’” Note that the rescission (or resolution) of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental violations as would defeat the very
object of the parties in making the agreement. Ultimately, the question of whether a breach of
contract is substantial depends upon the attending circumstances. (Nolasco vs. Cuerpo, 777 SCRA
447, G.R. No. 210215 December 9, 2015)

For a contracting party to be entitled to rescission (or resolution) in accordance with Article
1191 of the Civil Code, the other contracting party must be in substantial breach of the terms
and conditions of their contract.

A substantial breach of a contract, unlike slight and casual breaches thereof, is a fundamental
breach that defeats the object of the parties in entering into an agreement. Here, it cannot be
said that petitioners’ failure to undertake their obligation under paragraph 7 defeats the object
of the parties in entering into the subject contract, considering that the same paragraph provides
respondents contractual recourse in the event of petitioners’ nonperformance of the aforesaid
obligation, that is, to cause such transfer themselves in behalf and at the expense of petitioners.
(Nolasco vs. Cuerpo, 777 SCRA 447, G.R. No. 210215 December 9, 2015)

Laches is defined as the failure or neglect for an unreasonable and unexplained length of time,
to do that which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a presumption
that the party entitled to assert it either has abandoned it or declined to assert it.

Where a party sleeps on his rights and allows laches to set in, the same is fatal to his case.
(Department of Agrarian Reform, Quezon City vs. Carriedo, 781 SCRA 301, G.R. No. 176549
January 20, 2016)

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CIVIL LAW
Handout No. 28

OBLIGATIONS AND CONTRACTS

In order that the debtor may be in default, it is necessary that: (a) the obligation be demandable
and already liquidated; (b) the debtor delays performance; and (c) the creditor requires the
performance judicially or extrajudicially, unless demand is not necessary — i.e., when there is
an express stipulation to that effect; where the law so provides; when the period is the
controlling motive or the principal inducement for the creation of the obligation; and where
demand would be useless.
Moreover, it is not sufficient that the law or obligation fixes a date for performance; it must
further state expressly that after the period lapses, default will commence. Thus, it is only when
demand to pay is unnecessary in case of the aforementioned circumstances, or when required,
such demand is made and subsequently refused that the mortgagor can be considered in default
and the mortgagee obtains the right to file an action to collect the debt or foreclose the
mortgage. (Maybank Philippines, Inc. [formerly PNB-Republic Bank] vs. Tarrosa, 772 SCRA 670,
G.R. No. 213014 October 14, 2015)

Requisites for Legal Compensation to take place

Even if we assume that legal compensation was not waived and was otherwise timely raised, we
find that not all requisites of legal compensation are present in this case. Under Article 1279, in
order for legal compensation to take place, the following requisites must concur: (a) that each
one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other; (b) that both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated; (c) that the
two debts be due; (d) that they be liquidated and demandable; and (e) that over neither of them
there be any retention or controversy, commenced by third persons and communicated in due
time to the debtor. (Philippine Trust Company vs. Roxas, 772 SCRA 323, G.R. No. 171897 October
14, 2015)

A breach occurs where the contractor inexcusably fails to perform substantially in accordance
with the terms of the contract.

It is a basic principle in law that contracts have the force of law between the parties and should
be complied with in good faith. In this case, the contract specifically provides the manner of
disposing dredge spoils. Thus, petitioner cannot unilaterally change the manner of disposal
without first amending the contract or obtaining the express consent or approval of respondent
DPWH. Otherwise, petitioner would be guilty of breaching the contract. “[A] breach occurs where
the contractor inexcusably fails to perform substantially in accordance with the terms of the
contract.” Without a doubt, petitioner’s failure to dump the dredge spoils at the designated spoil

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CIVIL LAW
Handout No. 28

OBLIGATIONS AND CONTRACTS

sites constitutes a breach. (Movertrade Corporation vs. Commission on Audit, 771 SCRA 195, G.R.
No. 204835 September 22, 2015)

A contract is perfected by mere consent.

In turn, consent is manifested by the meeting of the offer and the acceptance upon the thing and
the cause which are to constitute the contract. The offer must be certain and the acceptance
seasonable and absolute. If qualified, the acceptance would merely constitute a counter-offer as
what occurred in this case. To reach that moment of perfection, the parties must agree on the
same thing in the same sense, so that their minds meet as to all the terms. They must have a
distinct intention common to both and without doubt or difference; until all understand alike,
there can be no assent, and therefore no contract. The minds of parties must meet at every point;
nothing can be left open for further arrangement. So long as there is any uncertainty or
indefiniteness, or future negotiations or considerations to be had between the parties, there is
not a completed contract, and in fact, there is no contract at all.

The Spouses Gironella’s payments under its original loan account cannot be considered as partial
execution of the proposed restructuring loan agreement. They were clearly made during the
pendency of the negotiations on the restructuring. Such pendency proves, absence, not
presence of an agreement ready for execution. At the time of payments only petitioners’
obligation under the original credit agreements were in existence. Indeed, the payment scheme
under the proposed restructuring was outlined by PNB only in the letter of 25 January 2000.

Further on this, negotiation begins from the time the prospective contracting parties manifest
their interest in the contract and ends at the moment of agreement of the parties. Once there is
concurrence of the offer and acceptance of the object and cause, the stage of negotiation is
finished.22 This situation does not obtain in the case at bar. The letter dated 25 January 2000 of
PNB was qualifiedly accepted by the Spouses Gironella as contained in their 7 February 2000
letter and constituted a counter-offer which PNB ultimately rejected in its 8 March 2000 letter.
The surrounding circumstances clearly show that the parties were not past the stage of
negotiation for the terms and conditions of the restructured loan agreements. There was no
meeting of the minds on the restructuring of the loans. Thus, the Spouses Gironella’s original
Php9,500,000.00 loan agreement subsists. (Ginorella vs. Philippine National Bank, 770 SCRA 551,
G.R. No. 194515 September 16, 2015)

In S.C. Megaworld Construction and Development Corporation v. Parada, 705 SCRA 584 (2013),
the Supreme Court (SC) held that to constitute novation by substitution of debtor, the former
debtor must be expressly released from the obligation and the third person or new debtor must
assume the former’s place in the contractual relations.

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CIVIL LAW
Handout No. 28

OBLIGATIONS AND CONTRACTS

Moreover, the Court ruled that the “fact that the creditor accepts payments from a third person,
who has assumed the obligation, will result merely in the addition of debtors and not novation.”
At its core, novation is never presumed, and the animus novandi, whether totally or partially,
must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken. Here, the intent to novate was not satisfactorily proven by
respondent. At best, petitioner only manifested her desire to shoulder the debt of her parents,
which, as above discussed, does not amount to novation. Thus, the courts a quo erred in holding
petitioner liable for the debts obtained by her deceased parents on account of novation by
substitution of the debtor. (Odiamar vs. Valencia, 795 SCRA 18, G.R. No. 213582 June 28, 2016)

Article 1956 of the Civil Code provides that “[n]o interest shall be due unless it has been
expressly stipulated in writing.”

It is fundamental that for monetary interest to be due, there must be an express written
agreement therefor. Article 1956 of the Civil Code provides that “[n]o interest shall be due unless
it has been expressly stipulated in writing.” In this relation, case law states that the lack of a
written stipulation to pay interest on the loaned amount bars a creditor from charging monetary
interest and the collection of interest without any stipulation therefor in writing is prohibited by
law. (Odiamar vs. Valencia, 795 SCRA 18, G.R. No. 213582 June 28, 2016)

The ruling of the trial court and the Court of Appeals (CA) to offset the amount of damages
awarded to respondent against that claimed by petitioner is supported by law pursuant to
Article 1283 of the New Civil Code.

Article 1283 of the New Civil Code states that: “If one of the parties to a suit over an obligation
has a claim for damages against the other, the former may set it off by proving his right to said
damages and the amount thereof.” This provision has been applied in the cases of Chung v.
Ulanday Construction, Inc., 632 SCRA 485 (2010), and Ortiz v. Kayanan, 92 SCRA 146 (1979),
where the Court allowed the amount due one party to be offset against that claimed by and due
the other party. (Republic vs. Looyuko, 794 SCRA 230, G.R. No. 170966 June 22, 2016)

The Civil Code uses rescission in two (2) different contexts, namely: (1) rescission on account of
breach of contract under Article 1191; and (2) rescission by reason of lesion or economic
prejudice under Article 1381.

The legal remedy of rescission, however, is by no means limited to the situations covered by the
above provisions. The Civil Code uses rescission in two different contexts, namely: (1) rescission
on account of breach of contract under Article 1191; and (2) rescission by reason of lesion or
economic prejudice under Article 1381. While the term “rescission” is used in Article 1191,
“resolution” was the original term used in the old Civil Code, on which the article was based.

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Handout No. 28

OBLIGATIONS AND CONTRACTS

Resolution is a principal action based on a breach by a party, while rescission under Article 1383
is a subsidiary action limited to cases of rescission for lesion under Article 1381 of the New Civil
Code. (Poon vs. Prime Savings Bank, 793 SCRA 141, G.R. No. 183794 June 13, 2016)

The period during which the bank cannot do business due to insolvency is not a fortuitous event,
unless it is shown that the government’s action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the regulatory body has acted without
jurisdiction.

There is no indication or allegation that the BSP’s action in this case was tainted with arbitrariness
or bad faith. Instead, its decision to place respondent under receivership and liquidation
proceedings was pursuant to Section 30 of Republic Act No. 7653. Moreover, respondent was
partly accountable for the closure of its banking business. It cannot be said, then, that the closure
of its business was independent of its will as in the case of Provident Savings Bank. The legal
effect is analogous to that created by contributory negligence in quasi-delict actions. The period
during which the bank cannot do business due to insolvency is not a fortuitous event, unless it is
shown that the government’s action to place a bank under receivership or liquidation
proceedings is tainted with arbitrariness, or that the regulatory body has acted without
jurisdiction. (Poon vs. Prime Savings Bank, 793 SCRA 141, G.R. No. 183794 June 13, 2016)

It is settled that a provision is a penal clause if it calls for the forfeiture of any remaining deposit
still in the possession of the lessor, without prejudice to any other obligation still owing, in the
event of the termination or cancellation of the agreement by reason of the lessee’s violation of
any of the terms and conditions thereof.

This kind of agreement may be validly entered into by the parties. The clause is an accessory
obligation meant to ensure the performance of the principal obligation by imposing on the
debtor a special prestation in case of nonperformance or inadequate performance of the
principal obligation. (Poon vs. Prime Savings Bank, 793 SCRA 141, G.R. No. 183794 June 13, 2016)

The general rule is that courts have no power to ease the burden of obligations voluntarily
assumed by parties, just because things did not turn out as expected at the inception of the
contract.

We have no reason to doubt that the forfeiture provisions of the Contract were deliberately and
intelligently crafted. Under Article 1196 of the Civil Code, the period of the lease contract is
deemed to have been set for the benefit of both parties. Its continuance, effectivity or fulfillment
cannot be made to depend exclusively upon the free and uncontrolled choice of just one party.
Petitioners and respondent freely and knowingly committed themselves to respecting the lease
period, such that a breach by either party would result in the forfeiture of the remaining advance

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Handout No. 28

OBLIGATIONS AND CONTRACTS

rentals in favor of the aggrieved party. If this were an ordinary contest of rights of private
contracting parties, respondent lessee would be obligated to abide by its commitment to
petitioners. The general rule is that courts have no power to ease the burden of obligations
voluntarily assumed by parties, just because things did not turn out as expected at the inception
of the contract. (Poon vs. Prime Savings Bank, 793 SCRA 141, G.R. No. 183794 June 13, 2016)

Under the Statute of Frauds, an agreement to convey real properties shall be unenforceable by
action in the absence of a written note or memorandum thereof and subscribed by the party
charged or by his agent.

Suffice it to say that there is no partial execution of any contract, whatsoever, because petitioners
failed to prove, in the first place, that there was a verbal agreement that was entered into. Even
granting that such an agreement existed, the CA did not commit any error in ruling that the
assignment of the shares of Sergio in the subject properties in petitioners’ favor as payment of
Sergio’s obligation cannot be enforced if there is no written contract to such effect. Under the
Statute of Frauds, an agreement to convey real properties shall be unenforceable by action in the
absence of a written note or memorandum thereof and subscribed by the party charged or by
his agent. As earlier discussed, the pieces of evidence presented by petitioners, consisting of
respondents’ acknowledgment of Sergio’s loan obligations with DBP as embodied in the
Extrajudicial Settlement Among Heirs, as well as the cash voucher which allegedly represents
payment for taxes and transfer of title in petitioners’ name do not serve as written notes or
memoranda of the alleged verbal agreement. (Heirs of Leandro Natividad and Juliana V.
Natividad vs. Mauricio-Natividad, 785 SCRA 239, G.R. No. 198434 February 29, 2016)

A contract of adhesion is as binding as ordinary contracts, the reason being that the party who
adheres to the contract is free to reject it entirely.

The CA is correct that no prior demand was necessary to make petitioners’ obligation due and
payable. The Promissory Note with Chattel Mortgage clearly stipulated that “[i]n case of my/our
[petitioners’] failure to pay when due and payable, any sum which I/We x x x or any of us may
now or in the future owe to the holder of this note x x x then the entire sum outstanding under
this note shall immediately become due and payable without the necessity of notice or demand
which I/We hereby waive.” Petitioners argue that such stipulation should be deemed invalid as
the document they executed was a contract of adhesion. It is important to stress the Court’s
ruling in Dio v. St. Ferdinand Memorial Park, Inc., 509 SCRA 453 (2006), to wit: A contract of
adhesion, wherein one party imposes a ready-made form of contract on the other, is not strictly
against the law. A contract of adhesion is as binding as ordinary contracts, the reason being that
the party who adheres to the contract is free to reject it entirely. Contrary to petitioner’s
contention, not every contract of adhesion is an invalid agreement. (People vs. Gonzales, Jr., 784
SCRA 251, G.R. No. 201927 February 17, 2016)

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